INTEGRATED HEALTH SERVICES INC
8-K, 1997-11-12
SKILLED NURSING CARE FACILITIES
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                           -------------------------

                                    FORM 8-K

                           -------------------------



                                 CURRENT REPORT
                     PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


Date of Report (Date of earliest event reported)           November 3, 1997
                                                 --------------------------


                        INTEGRATED HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
               (Exact Name of Registrant as Specified in Charter)


        Delaware                      1-12306            23-2428312
- --------------------------------------------------------------------------------
(State or Other Jurisdiction        (Commission         (IRS Employer
     of Incorporation)              File Number)      Identification No.)



  10065 Red Run Boulevard, Owings Mills, Maryland                       21117
- --------------------------------------------------                    ----------
(Address of Principal Executive Offices)                              (Zip Code)



Registrant's telephone number, including area code:       (410) 998-8400
                                                     ---------------------------


                                 Not Applicable
- --------------------------------------------------------------------------------
         (Former Name or Former Address, if Changed Since Last Report)





<PAGE>



ITEM 5.  OTHER EVENTS

     On  November  3,  1997,  Integrated  Health  Services,   Inc.  ("IHS")  and
HEALTHSOUTH  Corporation  ("HEALTHSOUTH")  entered into an agreement pursuant to
which IHS  agreed to  acquire  from  HEALTHSOUTH  139  owned,  leased or managed
long-term care facilities,  12 specialty hospitals,  a contract therapy business
having over 1,000  contracts  and an  institutional  pharmacy  business  serving
approximately  38,000 beds.  The  businesses  being  acquired,  which had annual
revenues of approximately  $925 million for the 12 months ended August 31, 1997,
were acquired by HEALTHSOUTH in its recent acquisition of Horizon/CMS Healthcare
Corporation.

         Under the terms of the  agreement,  IHS will pay $1.15  billion in cash
and assume  approximately $100 million in debt. IHS will fund the purchase price
with available cash from term loan borrowings under its $1.75 billion  revolving
credit and term loan  facility  and the sale of its 9 1/4%  Senior  Subordinated
Notes due 2008 and  borrowings  under the  revolving  credit  portion of the new
credit facility.  On a pro forma basis after giving effect to the acquisition of
these  businesses  from  HEALTHSOUTH  and  the  acquisition  of  RoTech  Medical
Corporation,  Community Care of America,  Inc. and the  lithotripsy  division of
Coram  Healthcare  Corporation,  IHS' total  debt,  including  current  portion,
accounted  for  approximately  74% of its total pro forma  capitalization  as of
September 30, 1997. Consummation of the transaction,  which is expected to close
by December 31, 1997,  is subject to,  among other  things,  receipt of required
regulatory  approvals,  consent  of IHS'  senior  lenders  and  other  customary
conditions. IHS has deposited with HEALTHSOUTH $50 million, which amount will be
credited  against the purchase  price at the closing or retained by  HEALTHSOUTH
under certain circumstances if the transaction is not consummated.

         There can be no assurance that this  transaction will be consummated on
these terms, on different terms or at all.

         Donaldson Lufkin & Jenrette  Securities  Corporation and Morgan Stanley
Dean  Witter  Discover  &  Co.  acted  as  financial  advisors  to  IHS  in  the
transaction.

ITEM 7.  FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.

         (C)  EXHIBITS.

         2        Purchase  and Sale  Agreement,  entered into as of November 3,
                  1997, between HEALTHSOUTH Corporation,  Horizon/CMS Healthcare
                  Corporation and Integrated Health Services, Inc.




                                       -2-

<PAGE>




                                   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.



                                      INTEGRATED HEALTH SERVICES, INC.



Date: November 12, 1997               By: /s/ W. Bradley Bennett
                                          --------------------------------------
                                              Name: W. Bradley Bennett
                                              Title: Executive Vice President -
                                                     Chief Accounting Officer






                                       -3-



<PAGE>


                                  EXHIBIT INDEX

         2        Purchase  and Sale  Agreement,  entered into as of November 3,
                  1997, between HEALTHSOUTH Corporation,  Horizon/CMS Healthcare
                  Corporation and Integrated Health Services, Inc.



                                       -4-




                           PURCHASE AND SALE AGREEMENT
                           ---------------------------

         This PURCHASE AND SALE AGREEMENT (the  "Agreement") is made and entered
into on the 3rd day of November, 1997, by and between HEALTHSOUTH CORPORATION, a
Delaware corporation  ("HEALTHSOUTH"),  HORIZON/CMS  HEALTHCARE  CORPORATION,  a
Delaware  corporation  ("Seller"),  and  INTEGRATED  HEALTH  SERVICES,  INC.,  a
Delaware corporation ("Buyer"), with reference to the following facts:

         A.       Seller is a wholly-owned subsidiary of HEALTHSOUTH.

         B. Directly or through wholly-owned  subsidiary corporations identified
on  Schedule  A-1  hereto  (each,   a   "Subsidiary"   and   collectively,   the
"Subsidiaries"),  Seller engages in the business of delivering  long-term  care,
diagnostic,  institutional  pharmacy and contract therapy services to the public
through  the  facilities   and  businesses   identified  in  Schedule  A-2  (the
"Facilities").

         C. Buyer desires to purchase from Seller and the  Subsidiaries,  either
directly or through wholly-owned  subsidiaries of the Buyer (any such subsidiary
which is purchasing any of the Transferred  Assets hereunder being herein called
a "Buyer Subsidiary" and such purchasing  subsidiaries being collectively called
the "Buyer  Subsidiaries"),  and  HEALTHSOUTH  desires  to cause  Seller and the
Subsidiaries to sell to Buyer, such Facilities together with related assets (the
"Transactions").

         NOW,  THEREFORE,  in  consideration  of the foregoing  recitals and the
agreements contained herein, and for other good and valuable consideration,  the
receipt and  sufficiency of which are hereby  acknowledged,  the parties hereto,
intending to be legally bound, do hereby agree as follows:


                                    ARTICLE 1
                                   DEFINITIONS

         Section 1.1 Certain Defined Terms. For purposes of this Agreement,  the
following terms shall have the following meanings:

                  "Affiliate" of a specified  person shall mean any corporation,
partnership,  sole  proprietorship  or other person or entity which  directly or
indirectly through one or more intermediaries  controls,  is controlled by or is
under common control with the person  specified.  The term  "control"  means the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person or entity.

                  "Cost Report" means the cost report  required to be filed,  as
of the end of a  provider  cost  year or for any  other  required  period,  with
cost-based Payors with respect to cost reimbursement.

                  "knowledge" of a party shall mean the collective  knowledge of
the  persons  who  serve as of the date of this  Agreement  as the duly  elected
officers of such party.



<PAGE>

                  "Laws"   shall   mean  all   statutes,   rules,   regulations,
ordinances,  orders, codes, permits, licenses and agreements with or of federal,
state, local and foreign governmental and regulatory  authorities and any order,
writ,  injunction  or decree  issued by any court,  arbitrator  or  governmental
agency or in connection with any judicial,  administrative or other non-judicial
proceeding (including, without limitation, arbitration or reference).

                  "Licenses"  shall mean  certificates of need,  accreditations,
registrations, licenses, permits and other consents or approvals of governmental
agencies or accreditation organizations.

                  "Payor" shall mean Medicare,  Medicaid,  CHAMPUS and Medically
Indigent Assistance  programs,  Blue Cross, Blue Shield or any other third party
payor (including an insurance  company),  or any health care provider (such as a
health maintenance  organization,  preferred provider organization,  peer review
organization, or any other managed care program).

                  "Taxes"  shall mean (i) all federal,  state,  county and local
sales, use, property, payroll, recordation and transfer taxes, (ii) all federal,
state, county and local taxes, levies, fees,  assessments or surcharges (however
designated,  including  privilege taxes,  room or bed taxes and user fees) which
are based on the gross receipts,  net operating revenues,  net income or patient
days of a Facility for a period  ending on, before or including the Closing Date
(as defined in Section 2.13) or a formula  taking any one of the foregoing  into
account, and (iii) any interest,  penalties and additions to tax attributable to
any of the foregoing,  but shall not include income and other taxes described in
Sections 2.4(a) and (b).

         Section 1.2 Index of Other  Defined  Terms.  In addition to those terms
defined  above,  the following  terms shall have the  respective  meanings given
thereto in the sections indicated below:

                  Defined Term                             Section
                  --------------------------------------------------
                  Adjustment Sections                      2.14
                  Agreement                                Preamble
                  Allocation Schedule                      2.7
                  Assigned Stock                           2.1(c)
                  Assumed Contracts                        2.3(a)
                  Assumed Guarantees                       2.3(a)
                  Assumed Liabilities                      2.3
                  Balance Sheet                            3.17(b)
                  Buyer                                    Preamble
                  Buyer's Affidavit                        2.15(d)
                  Buyer's Subsidiaries                     Recitals
                  Charter Documents                        3.4
                  Claim Notice                             11.6
                  Closing                                  2.13
                  Closing Date                             2.13
                  COBRA                                    2.10(d)
                  Code                                     3.11


                                       -2-

<PAGE>

                  Consents                                 8.4
                  Delivery Date                            2.15(d)
                  EBITDA                                   3.17(a)
                  EBITDA Statements                        3.17(a)
                  Employee Benefit Arrangements            3.19(d)
                  Environmental Regulations                3.16(a)
                  Equipment                                2.1(e)
                  ERISA                                    2.10(a)
                  Escrow Agent                             2.13(c)
                  Excluded Assets                          2.2
                  Excluded Liabilities                     2.4
                  Execution Fee                            2.6(a)
                  Facilities                               Recitals
                  Facility Records                         5.7(a)
                  Final Delivery Date                      2.15(e)
                  Final Net Book Values                    2.6(d)
                  Financial Schedule                       3.17
                  Hazardous Materials                      3.16
                  Headquarters Assets                      2.1(q)
                  Headquarters Liabilities                 2.3(o)
                  HEALTHSOUTH                              Preamble
                  Hired Employees                          2.10(c)
                  HSR Act                                  3.4
                  Indemnitee                               11.5
                  Indemnitor                               11.5(a)
                  Intercompany Transactions                2.1(g)(ii)
                  Inventory                                2.1(f)
                  Leased Real Property                     2.1(b)
                  Losses                                   11.3(a)
                  Management Agreement                     2.15
                  Material Adverse Change                  8.9
                  Material Adverse Effect                  3.4
                  Measurement Date                         2.8
                  Multiemployer Plans                      2.10(a)
                  Other Assigned Contracts                 2.1(g)
                  Owned Real Property                      2.1(a)
                  Panel                                    2.12(b)
                  Patient Records                          5.7(a)
                  Pension Plans                            2.10(a)
                  Permitted Encumbrances                   3.8
                  Prepayments                              2.1(l)
                  Purchase Price                           2.5
                  Real Property Leases                     2.1(b)
                  Receivables                              2.1(m)
                  Related Agreements                       3.4
                  Retained Employees                       2.10(b)
                  Seller                                   Preamble
                  Seller's Affidavit                       2.15(d)


                                       -3-

<PAGE>



                  Subsidiaries                              Recitals
                  Termination Fee                           10.3
                  Third Party Claims                        11.5(a)
                  Title Insurer                             8.6
                  Title Policies                            8.6
                  Topping Fee                               10.4
                  Transactions                              Recitals
                  Transferred Business Names                2.1(j)
                  Transferred Records                       5.7
                  Transferred Subsidiaries                  2.1(a)
                  Venture Agreements                        2.1(d)
                  WARN Act                                  2.10(e)


                                   ARTICLE 2
                               BASIC TRANSACTIONS

         Section  2.1  Purchased  Assets.  On  the  terms  and  subject  to  the
conditions  contained  in this  Agreement,  including,  but not  limited to, the
provisions of Section 2.15, at the Closing (as defined in Section  2.13),  Buyer
shall purchase from Seller and each relevant  Subsidiary,  and HEALTHSOUTH shall
cause Seller and each relevant Subsidiary to sell, convey, assign,  transfer and
deliver to Buyer, the following assets, and only the following assets, of Seller
and such Subsidiary as of the Closing (the "Transferred  Assets"), but excluding
all  Excluded  Assets  as  defined  in  Section  2.2,  and in the  case of items
identified  in  Section  2.1(b) -- (q),  only to the  extent  that such sale and
purchase is not  encompassed  by the sale and purchase of the Assigned Stock (as
defined in Section 2.1(a):

                  (a) All of  Seller's  or the  Subsidiary's  right,  title  and
interest in and to the shares of the capital stock of the Subsidiaries  shown on
Schedule  2.1(a) that are owned by Seller or the  Subsidiary  (such shares being
referred to as the "Assigned Stock",  and such Subsidiaries and the wholly owned
subsidiaries  of  such   Subsidiaries   being  referred  to  individually  as  a
"Transferred Subsidiary" and collectively as the "Transferred Subsidiaries");

                  (b) All of  Seller's  or the  Subsidiary's  right,  title  and
interest in and to the real  property  owned in fee (the "Owned Real  Property")
that is identified in Schedule 2.1(b) on which Facilities are located,  together
with the Facilities, construction work-in-progress,  and all other buildings and
improvements  thereon,  and  all  rights,  privileges,   permits  and  easements
appurtenant thereto,  subject,  however, to the mortgages and capitalized leases
identified on Schedule 2.1(b) relating to certain of the Owned Real Property;

                  (c) All of  Seller's  or the  Subsidiary's  right,  title  and
interest in and to the leasehold  estates (the "Real Property  Leases") in land,
Facilities and real property improvements (whether owned or leased) (the "Leased
Real Property")  identified in Schedule  2.1(c),  together with all construction
work-in-progress  in respect of same and all rights,  privileges  and  easements
appurtenant thereto,  subject,  however, to the mortgages and capitalized leases
identified on Schedule 2.1(b) relating to certain of the Leased Real Property;


                                       -4-

<PAGE>

                  (d) All of  Seller's  or the  Subsidiary's  right,  title  and
interest in and to the joint  ventures or  partnerships  identified  in Schedule
2.1(d) hereto that relate to  partnerships  or joint  ventures that own or lease
Facilities  or other  Transferred  Assets,  together with all of Seller's or the
Subsidiary's  right,  title  and  interest  in  and  to  the  joint  venture  or
partnership   agreements,   also  identified  in  such  Schedule  (the  "Venture
Agreements"), that govern such partnerships or joint ventures;

                  (e) All of  Seller's  or the  Subsidiary's  right,  title  and
interest in and to fixed  machinery and equipment,  other fixtures and fittings,
moveable plant, machinery,  equipment and furniture,  trucks, tractors, trailers
and other vehicles,  tools and other similar items of tangible personal property
(collectively  "Equipment")  (i) that are not consumed,  disposed of or held for
sale or as inventory in the ordinary course of business,  (ii) that are owned or
leased by or consigned to Seller or the Subsidiary as of the Closing,  and (iii)
that are used solely with respect to the operation of Facilities;

                  (f) All of  Seller's  or the  Subsidiary's  right,  title  and
interest in and to inventories of supplies,  drugs, food,  janitorial and office
supplies,  maintenance  and shop  supplies,  and other similar items of tangible
personal property  intended to be consumed,  disposed of or sold in the ordinary
course  of  business  (collectively,  the  "Inventory")  that  are  owned  by or
consigned  to Seller or the  Subsidiary  as of the  Closing and that are used by
Seller or the Subsidiary solely with respect to the operation of the Facilities;

                  (g) All of  Seller's  or the  Subsidiary's  right,  title  and
interest  in and  to  all  contracts  and  agreements  to  which  Seller  or the
Subsidiary is a party at the Closing,  other than the Real  Property  Leases and
the  Venture  Agreements,  to the  extent  the  same are  transferable  to Buyer
(whether  by action of the  Subsidiary  or  Seller  or, in the case of  Medicare
provider agreements,  the Health Care Finance Administration),  and which, or to
the extent,  the same relate solely to the operations of Facilities  operated by
Seller or the Subsidiary (the "Other Assigned  Contracts"),  including,  but not
limited to, the contracts  identified on Schedule 2.1(g),  which contains a list
of the following categories of Other Assigned Contracts:  construction contracts
relating to construction  work-in-progress  at the Facilities;  Equipment leases
(whether  operating or capitalized  leases) and installment  purchase  contracts
where the annualized lease or installment payments exceed $100,000; contracts or
arrangements  binding on a Facility which contain any covenant not to compete or
otherwise  significantly restrict the nature of the business activities in which
the Facility may engage;  employment  contracts,  if any,  between  Seller,  the
Subsidiary or a Facility and the chief executive or chief  financial  officer of
such Facility;  collective bargaining agreements,  if any; Medicare and Medicaid
provider numbers and provider  agreements with other Payors; any other contracts
relating  solely to the  Facilities  pursuant to which Seller or the  Subsidiary
paid or received over  $100,000  during its last fiscal year or is due to pay or
receive over $100,000  during any  subsequent  fiscal year,  including,  but not
limited to, any employment  contracts relating solely to the Facilities pursuant
to which Seller or the Subsidiary paid or received over $100,000 during its last
fiscal year or is obligated to pay over $100,000 in any subsequent  fiscal year;
and any contracts which will be binding on Buyer or any  Transferred  Subsidiary
after the Closing pursuant to which Seller or the Subsidiary has agreed with any
third party that such third party shall be the  exclusive or preferred  provider
of goods or  services to a Facility,  pursuant to which  Seller or a  Subsidiary
paid over  $100,000  during  its last  fiscalyear  or is  obligated  to pay over
$100,000 in any subsequent fiscal year; provided that


                                       -5-

<PAGE>

Schedule  2.1(g)  need not  list an  Other  Assigned  Contract  if all  material
obligations of Seller or the Subsidiary  thereunder  have been, or, prior to the
Closing,  will be completed,  or Seller or the Subsidiary is entitled, or has or
by the Closing will have  exercised a right,  to terminate the contract  without
penalty on 90 days' notice or less.  Notwithstanding  the  foregoing,  the Other
Assigned Contracts shall not include:

                           (i) Except for instruments of  indebtedness  relating
         to those  mortgages  and  capitalized  leases  identified  on  Schedule
         2.1(b), any contract which evidences indebtedness for money borrowed or
         the deferred  portion of the purchase price for Owned Real Property and
         is  therefore an Excluded  Liability  under the  provisions  of Section
         2.4(g),  unless the parties  mutually  agree,  in  accordance  with the
         provisions  of such  Section  2.4(g),  that such  indebtedness  will be
         assumed by Buyer,  in which case the contract or  contracts  evidencing
         such indebtedness will be Transferred Assets; and

                           (ii)  Any   contract   respecting   an   intercompany
         transaction  between  Seller or the  Subsidiary,  on the one hand,  and
         HEALTHSOUTH or an Affiliate of  HEALTHSOUTH,  on the other,  whether or
         not such  transaction  relates to the  provision  of goods and services
         (except  as  set  forth  in  the   following   proviso),   tax  sharing
         arrangements,  payment arrangements,  intercompany charges or balances,
         or the like  ("Intercompany  Transactions");  provided,  however,  that
         contracts  relating  to the  provision  of goods or  services  (such as
         laboratory services, contract therapy services or pharmacy services) by
         Seller to a Subsidiary, or by a Subsidiary to a Seller, with respect to
         the  operations  of Facilities  shall not be deemed to be  Intercompany
         Transactions and shall be included in the Other Assigned Contracts.

                  (h) All of  Seller's  or the  Subsidiary's  right,  title  and
interest in and to the right to receive mail and other communications  addressed
to Seller or the Subsidiary insofar as such mail or other communication  relates
to the operation of the Facilities after the Closing;

                  (i) All of  Seller's  or the  Subsidiary's  right,  title  and
interest in and to the business names utilized in the businesses  represented by
the Transferred  Assets,  other than the names  "Horizon/CMS"  and  "Continental
Medical Systems" (the "Transferred Business Names");

                  (j) All of  Seller's  or the  Subsidiary's  right,  title  and
interest  in and to  Licenses  in favor of  Seller or the  Subsidiary  as of the
Closing  that  are  directly  related  to,  necessary  for,  or used  solely  in
connection with the operation of the Facilities as presently  operated by Seller
or the  Subsidiary,  provided that Licenses in favor of Seller or the Subsidiary
shall be included in the Transferred Assets only to the extent they are lawfully
transferable,  and,  to the extent a  Facility  is the  subject of a  Management
Agreement by virtue of Section  2.15(i),  Seller or the Subsidiary  shall remain
the licensee of such Facility under those Licenses contained on Schedule 3.19(f)
to the extent contemplated by the Management Agreement;

                  (k) All of  Seller's  or the  Subsidiary's  right,  title  and
interest in and to unexpired  warranties as of the Closing that are transferable
to Buyer which Seller or the  Subsidiary  has received  from third  parties with
respect to the Transferred Assets, including,


                                       -6-

<PAGE>

but not  limited  to,  such  warranties  as are set  forth  in any  construction
agreement, lease agreement,  equipment purchase agreement,  consulting agreement
or agreement for architectural and engineering services;

                  (l) To the extent lawfully and contractually transferable, all
of  Seller's or the  Subsidiary's  right,  title and  interest in and to advance
payments,  prepayments,  prepaid  expenses,  deposits  and the like  made by the
Subsidiary or Seller on its behalf in the ordinary  course of business  prior to
the Closing,  which exist as of the Closing and with respect to which Buyer will
receive  the benefit  after the  Closing,  and other  items  recorded as prepaid
expenses by Seller and the Subsidiaries (collectively, "Prepayments");

                  (m) All of  Seller's  or the  Subsidiary's  right,  title  and
interest as of the Closing in and to accounts  receivable  recorded by Seller or
the Subsidiary as an account  receivable  from Payors,  patients and other third
parties with respect to services  provided at or by the  Facilities,  including,
but not  limited  to,  amounts  receivable  under  Cost  Reports  (collectively,
"Receivables"),  and,  subject to the  provisions of Section  2.2(a) and Section
2.2(h),  all other items of working  capital  relating solely to the Facilities,
including cash and cash equivalents not to exceed $10,000,000, securities, other
current  assets,  all rights under that  certain  Note dated  February 11, 1994,
given by B&G  Partners  Limited  Partnership  in favor of Seller in the original
principal  amount of  $20,000,000  and under any  guaranty  or other  instrument
related  thereto  (the current  outstanding  balance of which is included in the
Headquarters  Assets) including any cash proceeds therefrom received between the
date hereof and the Closing  Date,  and all claims  (including  claims under any
insurance  policies  retained  by Seller or any  Subsidiary),  choses in action,
rights of recovery,  rights of set-off,  rights to refunds,  and similar rights,
whether or not  included  in working  capital,  but only to the extent that such
claims,  choses in action,  rights of  recovery,  rights of  set-off,  rights to
refunds,  and similar rights are related to the  Transferred  Assets (other than
those described in this subsection (m)) and the Assumed Liabilities;

                  (n) All of  Seller's  or the  Subsidiary's  right,  title  and
interest in and to the goodwill of the businesses  evidenced by the  Transferred
Assets,  and, except for Excluded Assets,  any and all other assets of Seller or
the Subsidiary  utilized solely in the operations of the Facilities as conducted
prior to the  Closing  Date,  whether  or not such  assets  have any  value  for
accounting purposes;

                  (o) Subject to  applicable  law and the  provisions of Section
5.7, any and all business and patient  records of or related to the operation of
the Facilities which are maintained at the Facilities;

                  (p) All proprietary materials, documents,  information, media,
methods and processes  owned by Seller or a Subsidiary  and used  exclusively in
connection with the businesses  represented by the Transferred  Assets,  and any
and all rights to use the same,  including,  but not limited to, all  intangible
assets of an intellectual  property nature such as  trademenarks,  service marks
and trade names (whether or not registered),  proprietary computer software, all
proprietary  procedures and manuals, and all promotional or marketing materials,
including all marketing computer hardware and software; and


                                       -7-

<PAGE>

                  (q) All right,  title and interest of Seller or any Subsidiary
in those assets identified under the third column under the heading "Albuquerque
Corporate"  on the Balance  Sheet,  which  assets  relate to Seller's  corporate
headquarters in Albuquerque, New Mexico (the "Headquarters Assets").

         Section 2.2 Excluded  Assets.  The parties  hereto agree that assets of
Seller and the  Subsidiaries  not  expressly  described  in Section  2.1 are not
intended to be part of the Transferred Assets and are excluded from the purchase
and sale contemplated hereby.  Without limiting the generality of the foregoing,
such excluded assets (the "Excluded Assets") include the following:

                  (a)  All  cash  and  cash   equivalents   of  Seller  and  the
Subsidiaries relating to the Facilities in excess of $10,000,000;

                  (b)  [Intentionally omitted.];

                  (c) The rights of Seller or any Subsidiary under any insurance
policy, if any, included in the Transferred Assets which relates to any Excluded
Asset or Excluded  Liability  (as defined in Section 2.4) (it being  understood,
however,  that Buyer shall have no  obligation to take any action under any such
policy to seek any recovery  except at the reasonable  request,  and at the sole
expense,  of Seller or a Subsidiary (other than a Transferred  Subsidiary) or to
continue any such policies in force);

                  (d) The rights of Seller or of any  Subsidiary to receive mail
and other  communications  addressed  to any of them with  respect  to  Excluded
Assets or Excluded Liabilities;

                  (e) All property, plant, equipment and other assets pertaining
to any facility,  business or operations of HEALTHSOUTH,  Seller or any of their
respective Affiliates not included in the Facilities;

                  (f) Any and all rights respecting computer and data processing
hardware,  software  or  firmware  that is  proprietary  to  HEALTHSOUTH  or any
Affiliate of HEALTHSOUTH  (other than a Transferred  Subsidiary,  and other than
Seller or a Subsidiary  but only to the extent that such  hardware,  software or
firmware is used solely in connection  with the  operations of the  Facilities),
and any  computer  and data  processing  hardware  or  firmware,  whether or not
located at a Facility,  that is part of a computer system the central processing
unit for which is not located at a Facility

                  (g)  All  amounts  due  to  the   Subsidiaries   arising  from
Intercompany Transactions;

                  (h) Such other assets,  if any, as are specifically  described
in Schedule  2.2(h) and assets which would be Transferred  Assets except for the
operation of Sections 2.12, 2.15, 8.5, 8.6 or 9.5; and

                  (i) All capital stock of Subsidiaries that are not Transferred
Subsidiaries.


                                       -8-

<PAGE>

To the extent that any items which  constitute  Excluded  Assets are Assets of a
Transferred Subsidiary, Seller shall cause such Transferred Subsidiary to convey
such items to Seller by dividend, distribution or otherwise immediately prior to
the Closing.  Buyer  acknowledges and agrees that Seller shall have the right to
remove,  and may  remove at any time  prior to or within 30 days  following  the
Closing Date (in each case, at Seller's expense, but without charge by Buyer for
storage),  from  time  to  time  any and all of the  Excluded  Assets  from  the
Facilities, provided that Seller shall do so in a manner that does not unduly or
unnecessarily disrupt Buyer's normal business activities at the Facilities.

         Section 2.3 Assumed  Liabilities.  Subject to the terms and  conditions
set  forth  in this  Agreement,  Buyer  shall  assume  at the  Closing  and pay,
discharge and perform as and when due the following obligations and liabilities,
in each case only to the extent that such  assumption is not  encompassed by the
sale and  purchase of the  Assigned  Stock (as defined in Section  2.1(a)),  but
excluding  all  Excluded  Liabilities  as defined in Section  2.4 (the  "Assumed
Liabilities"):

                  (a)  All   liabilities   and  obligations  of  Seller  or  the
Subsidiaries  which  arise  under  any  contract,  license,  permit,  agreement,
arrangement,  understanding or undertaking  included in the Transferred  Assets,
including the Real Property Leases, the Venture  Agreements,  the Other Assigned
Contracts  and the  Licenses,  and any  obligation  or liability  (the  "Assumed
Guarantees")  of HEALTHSOUTH or Seller or any Affiliate of HEALTHSOUTH or Seller
(including  letters of credit and performance bonds) which is in the nature of a
guaranty  of the  foregoing  or of  other  liabilities  and  obligations  of the
Subsidiaries  or of others in connection  with the  operation of the  Facilities
(together,   the  "Assumed  Contracts"),   including  without  limitation,   any
capitalized lease liabilities and obligations;

                  (b) Without  affecting the  provisions of Sections  2.1(l) all
liabilities and obligations under open purchase orders that were entered into by
Seller or a  Subsidiary  in the  ordinary  course of  business  with  respect to
operation  of a Facility on or prior to the Closing  Date and which  provide for
the delivery of goods or services subsequent to the Closing Date;

                  (c) All obligations and liabilities to the Hired Employees (as
defined in Section  2.10(c)) for paid time off  (including,  for all purposes of
this  Agreement,  vacation pay) through the Closing Date in accordance  with the
employment  policies  of  Seller  as they  exist on the date of this  Agreement;
provided  that  except as may be  expressly  set forth  herein,  nothing in this
Agreement  shall be deemed  to  require  Buyer to  continue  to follow  any such
employment  policies of Seller with respect to services of Hired Employees after
the  Closing  Date;  provided,  however  that Buyer shall have no  liability  or
obligation  with  respect  to  any of  Seller's  employees  at  its  Albuquerque
corporate  headquarters  except for liabilities  with respect to Hired Employees
accruing  after the Closing and  liabilities  pursuant to Section  2.3(n) not to
exceed $19,000,000 in the aggregate.

                  (d)  [Intentionally omitted.];

                  (e) Subject to the provisions of Sections 3.16 and 6.2(c), all
liabilities  arising out of or in  connection  with the  existence  of Hazardous
Materials  (as defined in Section  3.16) upon,  about,  beneath or  migrating or
threatening to migrate to or from the Owned Real


                                       -9-

<PAGE>

Properties  or the Leased Real  Properties  or the existence of any violation of
any  Environmental  Regulations  (as defined in Section 3.16)  pertaining to any
such Owned Real Properties or Leased Real Properties or the businesses  operated
therefrom;

                  (f) All liabilities and obligations  respecting any changes or
improvements  needed to the  Facilities  for them to be in  material  compliance
following the Closing with safety,  building,  fire, land use, access (including
without  limitation  the  Americans  With  Disabilities  Act)  or  similar  Laws
respecting the physical condition of the Facilities;

                  (g)  All  liabilities  and  obligations   respecting  employee
matters assumed by Buyer pursuant to the provisions of Section 2.10(a);

                  (h) All  liabilities,  obligations  and expenses of Seller and
the Subsidiaries  arising from, or connected with, any determination by Medicare
or any other Payor to seek to recapture any costs  reimbursed or reimbursable to
Seller or any  Subsidiary  with  respect  to the  Facilities  as a result of the
purchases  and  sales   contemplated   hereby  (including  any  gain  from  sale
liability);

                  (i) Any  liability  or  obligation  which  becomes  an Assumed
Liability by operation of Section 2.4(g);

                  (j) Any accrued or unpaid liabilities  (whether or not due) of
Seller or the  Subsidiaries in existence on the Closing Date which relate to the
Facilities,  which were incurred in the ordinary  course of the operation of the
Facilities and which represent (i) trade payables incurred to suppliers of goods
or services;  (ii) water,  gas,  electricity  and other utility  charges;  (iii)
license fees; (iv) rent, common area maintenance charges, operating expenses and
other charges arising under the Real Property  Leases;  (v) insurance  premiums;
(vi) accrued salaries,  benefits  (including  accrued vacation and sick pay) and
payroll taxes respecting Hired Employees;  (vi) Taxes relating to the Facilities
or the Transferred  Subsidiaries to the extent that such Taxes relate to periods
after the Closing Date; and (vii) similar  liabilities  incurred in the ordinary
course of the operation of the Facilities and customarily  recorded as a current
liability,   other  than  the  current  portion  of  long-term  liabilities  and
obligations;

                  (k) Any liability or obligation owed by Seller or a Subsidiary
as a result of determinations with respect to Cost Reports filed with respect to
a Facility before or after the Closing Date;

                  (l) Liabilities of Seller and the Subsidiaries arising from or
in  connection  with  litigation  described  in  Section  3.14,  or  from  or in
connection with any other litigation,  whether or not pending or threatened,  to
which Seller or any  Subsidiary or any Affiliate of Seller or any  Subsidiary is
or may become a party with respect to causes of action against them in existence
(i.e., all elements of the claim are complete) prior to the Closing, but only to
the  extent  that  such  litigation  relates  to the  Transferred  Assets or the
businesses or operations represented thereby;

                  (m)  Liabilities or obligations of Seller or the  Subsidiaries
now existing or which may hereafter exist by reason of any alleged  violation of
Laws by Seller or any of the


                                      -10-

<PAGE>

Subsidiaries  on or prior to the Closing Date,  but only to the extent that such
alleged violation of Laws relates to the Transferred Assets or the businesses or
operations represented thereby;

                  (n)  Liabilities or obligations of Seller or the  Subsidiaries
arising under the employment, change-of-control, retention bonus and pay-to-stay
agreements described on Schedule 2.3(n); provided,  however, that if HEALTHSOUTH
or  Seller  shall  have paid any  amounts  in  respect  of such  liabilities  or
obligations  prior to the Closing Date,  Buyer shall  reimburse  HEALTHSOUTH  or
Seller for the amounts so paid upon demand on or after the Closing Date; and

                  (o)  All   obligations   and  liabilities  of  Seller  or  any
Subsidiary in those assets  identified  under the third column under the heading
"Albuquerque  Corporate" on the Balance  Sheet,  which assets relate to Seller's
corporate   headquarters   in   Albuquerque,   New  Mexico  (the   "Headquarters
Liabilities")  not to exceed,  in the aggregate with  liabilities  under Section
2.3, $19,121,000.

         Section  2.4  Excluded  Liabilities.  The  parties  hereto  agree  that
liabilities  and  obligations  of  Seller  and the  Subsidiaries  not  expressly
described in Section 2.3 are not intended to be part of the Assumed Liabilities,
and  Buyer  shall  not  assume or become  obligated  with  respect  to any other
obligation  or  liability  of  HEALTHSOUTH,  Seller  or  any  Subsidiary  or any
Affiliate of any of them (collectively, "Excluded Liabilities"),  including, but
not limited to, the liabilities and obligations  described in this Section,  all
of which  shall  remain  the sole  responsibility  of  Seller  or the  pertinent
Subsidiary (other than a Transferred  Subsidiary) or Affiliate,  as the case may
be, it being understood,  however,  that, as between Seller and the Subsidiaries
(other than the  Transferred  Subsidiaries),  on the one hand, and Buyer, on the
other,  Buyer  shall  bear  the  risk  of and be  responsible  for  the  ongoing
operations of the Facilities  after the Closing,  including the  continuation or
performance  by Buyer  after the  Closing of any  agreement  or  practice of the
Subsidiaries.  Without limiting the generality of the foregoing, Buyer shall not
assume and shall have no liability or obligation of any kind for or with respect
to any of the  following,  except to the extent  expressly  set forth in Section
2.3:

                  (a) Any of Seller's or any of the Subsidiaries' liabilities or
obligations (including, but not limited to, any liabilities or obligations under
any tax sharing  agreements) with respect to franchise taxes and with respect to
foreign, federal, state or local taxes and other Taxes imposed upon or measured,
in whole or in part,  by the net income for any period ending on or prior to the
Closing Date of Seller and/or such  Subsidiaries  or any member of a combined or
consolidated group of companies of which Seller and/or such Subsidiaries are, or
were at any time, a part, or with respect to interest, penalties or additions to
any of such  taxes,  it being  understood  that Buyer  shall not be deemed to be
Seller's or any Subsidiary's transferee with respect to any such tax liability;

                  (b) Any of Seller's or any of its Subsidiaries' liabilities or
obligations  with respect to the recapture of foreign,  federal,  state or local
tax  deductions  or credits  taken by Seller or such  Subsidiary  for any period
ending  on or prior to the  Closing  Date  imposed  upon,  or any  taxable  gain
recognized  by,  Seller  or  such  Subsidiary  on  account  of the  Transactions
contemplated hereby;


                                      -11-

<PAGE>

                  (c) Liabilities or obligations of Seller or its Affiliates now
existing or which may hereafter exist by reason of any alleged violation of Laws
(as defined in Section  1.1) by Seller or any of its  Affiliates  on or prior to
the  Closing  Date  which  does not  relate  to the  Transferred  Assets  or the
businesses or operations represented thereby;

                  (d) Liabilities or obligations of Seller or a Subsidiary under
any Assumed  Contract which would be included in the Transferred  Assets but for
the  provisions  of Section  2.12,  unless  Buyer is provided  with the benefits
thereunder as contemplated in such Section;

                  (e) Liabilities of Seller and the Subsidiaries arising from or
in connection  with  litigation  not relating to the  Transferred  Assets or the
businesses or operations represented thereby;

                  (f) Subject to Section 2.12(b),  liabilities of Seller and the
Subsidiaries   incurred  in  connection   with  their   obtaining  any  consent,
authorization or approval necessary for them to sell, convey,  assign,  transfer
or deliver any Transferred Asset to Buyer hereunder;

                  (g) Except  with  respect  to the  mortgages  and  capitalized
leases identified on Schedule 2.1(b) and the indebtedness evidenced thereby, all
liabilities and obligations (including interest, penalties and other amounts due
in respect thereof) with respect to which shall constitute Assumed  Liabilities,
any  liability of Seller or a  Subsidiary  representing  indebtedness  for money
borrowed  or the  deferred  portion  of the  purchase  price for any Owned  Real
Property  (and  any  refinancing  thereof),  including  without  limitation  the
indebtedness identified on Schedule 2.4(g) and all interest, penalties and other
amounts due in respect thereof;  provided that if, prior to Closing, the parties
mutually agree that any such indebtedness or obligation will be assumed by Buyer
and  further  agree  upon an  equitable  reduction  in the cash  portion  of the
Purchase Price (as defined in Section 2.5) to reflect Buyer's assumption of such
indebtedness  or obligation,  then any such  indebtedness  or obligation will be
deemed to  constitute an Assumed  Liability for all purposes of this  Agreement;
and provided  further that with respect to any such  indebtedness  or obligation
not so  assumed  by  Buyer  that  constitutes  a lien or  encumbrance  upon  any
Transferred Asset,  Seller agrees that substantially  concurrently with or prior
to the Closing it will either pay or discharge such indebtedness or liability in
full or  otherwise  cause  such  lien or  encumbrance  to be  removed  from such
Transferred Asset, so that such Transferred Asset is sold,  conveyed,  assigned,
transferred and delivered to Buyer at the Closing free and clear of such lien or
encumbrance;

                  (h)  Such  other   liabilities   and   obligations,   if  any,
specifically described in Schedule 2.4(h) and liabilities which would be Assumed
Liabilities but for the provisions of Sections 2.12, 2.15, 8.5, 8.6 or 9.5;

                  (i) Amounts due from Seller or the  Subsidiaries  arising from
Intercompany Transactions;

                  (j) Any liabilities or obligations of HEALTHSOUTH, Seller or a
Subsidiary to employees who are not Hired Employees;


                                      -12-

<PAGE>

                  (k) Any  liabilities of HEALTHSOUTH or Seller to  stockholders
of HEALTHSOUTH or Seller (solely in their capacity as  stockholders) as a result
of the acquisition of Seller by HEALTHSOUTH;

                  (l)  Any   liability   for  workers'   compensation,   general
liability,  professional  liability  or  automobile  liability  arising  out  of
occurrences prior to the Closing;

                  (m) Any liability  arising out of the termination by Seller or
any Subsidiary of any of the Pension Plans;

                  (n) Any obligation of Seller or any Subsidiary with respect to
"earn-out"  or  similar   contingent  or  deferred   payments  relating  to  the
acquisition of assets or businesses prior to the Closing Date;

                  (o) Any liability of Seller or any Subsidiary  with respect to
their  respective  employees  arising out of  occurrences  prior to the Closing,
except as otherwise expressly provided herein; and

                  (p) Any  liabilities in connection  with Seller's  Albuquerque
corporate headquarters (including liabilities under Section 2.3(n)) in excess of
$19,121,000.

With respect to Transferred Subsidiaries, Seller shall assume, immediately prior
to the Closing,  all  liabilities  of such  Transferred  Subsidiaries  which are
Excluded Liabilities.

         Section 2.5 Purchase Price.  The purchase price (the "Purchase  Price")
in the aggregate for all of the Transferred Assets shall be $1,250,000,000.

         Section 2.6  Payment of  Purchase  Price.  The  Purchase  Price for the
Transferred Assets shall be paid as follows:

                  (a)  Execution  Fee.  Buyer  acknowledges  that Seller and the
Subsidiaries will incur substantial damage that may be impossible to quantify in
the event the  Transactions  are not  consummated.  In order to induce Seller to
enter into this  Agreement and to terminate its  discussions  with other parties
with respect to the sale of the Transferred Assets, Buyer is,  contemporaneously
with the execution of this Agreement, paying to Seller, in immediately available
funds,  the sum of $50,000,000 as an earnest money deposit (the "Execution Fee")
to be applied  against the Purchase Price due in the event of a Closing.  In the
event that (i) this Agreement is terminated by Buyer because of HEALTHSOUTH's or
Seller's  material breach of their  obligations  hereunder,  or (ii) there is no
Closing prior to the Termination  Date (as defined in Section  10.1(b))  because
(A) the express  conditions in Article 8 to the obligations of Buyer are not met
or waived  (except,  in the case of the conditions  specified in Section 8.5, if
any such action,  suit or proceeding therein described shall have been commenced
or  threatened  by  Buyer  or  any  of  its  Affiliates,  associates,  officers,
directors,  stockholders,  creditors, or prospective or actual financing sources
in respect of the Transactions), or (B) the express conditions in Section 9.5 to
the  obligations  of  HEALTHSOUTH  and Seller are not met or waived and any such
action,  suit or  proceeding  therein  described  shall have been  commenced  or
threatened  by  HEALTHSOUTH,  Seller  or any  Subsidiary  or any of its or their
Affiliates, associates, officers, directors, stockholders or creditors, then and
in

                                      -13-

<PAGE>

either of such  events,  within  two  business  days  after the  earlier of such
termination  or the  occurrence  of the  Termination  Date,  as the case may be,
Seller shall return the  Execution  Fee to Buyer with interest at the rate of 5%
per annum, and less any costs of Seller and the Subsidiaries to be reimbursed by
Buyer pursuant to Section 5.5, via wire transfer of immediately available funds.
In all other  cases,  the  Execution  Fee shall be retained by Seller,  and such
retention  shall not relieve Buyer of its  obligations to reimburse any costs of
Seller and the Subsidiaries  pursuant to Section 5.5. In the event of any breach
of this  Agreement  or other  liability  of Buyer to Seller,  unless the Closing
occurs, retention of the Execution Fee by Seller and, as applicable,  payment by
Buyer to or on behalf of HEALTHSOUTH,  Seller and the  Subsidiaries  the amounts
reimbursable  by Buyer to Seller pursuant to Section 5.5 and the Termination Fee
shall  constitute the sole and exclusive  remedy of HEALTHSOUTH,  Seller and the
Subsidiaries  against  Buyer with  respect to such breach or  liability.  In the
event of any breach of this Agreement or other liability of HEALTHSOUTH,  Seller
or the Subsidiary to Buyer,  unless the Closing occurs,  return of the Execution
Fee to Buyer and, as applicable,  payment of the Topping Fee,  shall  constitute
the sole and  exclusive  remedy of Buyer  against  HEALTHSOUTH,  Seller  and the
Subsidiaries with respect to such breach or liability.

                  (b) Payment of Remaining Purchase Price. At the Closing, Buyer
shall  deliver  to Seller an amount  equal to the  Purchase  Price  less (i) the
Execution  Fee  plus  accrued  interest  thereon  at 5% per  annum  and (ii) the
principal  amount of any  indebtedness,  any accrued but unpaid interest thereon
and the balance of any  capitalized  leases assumed by Buyer pursuant to Section
2.1(b), subject to adjustment as provided in Section 2.14.

                  (c) Seller as Agent of  Subsidiaries.  Seller shall,  prior to
the Closing,  cause each Subsidiary to irrevocably designate Seller as its agent
to receive on its behalf  delivery of that portion of all payments made by Buyer
hereunder to which such Subsidiary may be entitled, including without limitation
that portion of the Purchase Price  attributable to the Transferred  Assets sold
to Buyer by it, and to acknowledge that delivery of such payments, including the
Purchase  Price,  to Seller in accordance with the terms of this Agreement shall
be conclusive  and binding  evidence  against such  Subsidiary  that, as between
Buyer and such Subsidiary,  any payments or consideration due to such Subsidiary
in respect of the Transferred Assets sold to Buyer by it, or in respect of other
payments  due to it from  Buyer  under  the terms of this  Agreement,  have been
delivered.

         Section  2.7  Allocation  of Purchase  Price.  Within 90 days after the
Closing Date,  HEALTHSOUTH and Seller,  on the one hand, and Buyer, on the other
hand,  shall agree to an allocation of the Purchase Price among the  Transferred
Assets and shall prepare a written  schedule  reflecting  such  allocation  (the
"Allocation  Schedule").  Seller and Buyer  shall,  and Seller  shall  cause the
Subsidiaries  to,  allocate the Purchase Price in accordance with the Allocation
Schedule,  to be bound by such allocations for all purposes,  to account for and
report the purchases and sales contemplated hereby for all purposes  (including,
without limitation,  financial,  accounting,  Medicare reimbursement and federal
and state tax purposes) in accordance with such allocations, and not to take any
position  (whether in financial  statements,  Cost  Reports,  tax returns,  Cost
Report or tax audits, or otherwise), including without limitation any claim to a
step up in the basis of such assets by Buyer or its  successors  and assigns for
Medicare  purposes which is inconsistent with such allocations in the Allocation
Schedule  without the prior  written  consent of the other party,  except to the
extent,  if any,  required by applicable  Law or generally  accepted  accounting
principles. Without limiting the

                                      -14-

<PAGE>

generality of the foregoing,  Buyer agrees to indemnify and hold harmless Seller
and the  Subsidiaries,  in accordance with the provisions of Sections 11.4, 11.5
and 11.6, from and against any and all Losses arising from or connected with any
determination  by  Medicare or any other  Payor to seek to  recapture  any costs
reimbursed  or  reimbursable  to  Seller  or any  Subsidiary  as a result of the
purchases  and  sales   contemplated   hereby  (including  any  gain  from  sale
liability).

         Section 2.8  [Intentionally omitted.]

         Section   2.9   Remittances,   Mail  and  Other   Communications.   All
remittances,  mail and other  communications  relating to the Excluded Assets or
Excluded  Liabilities  received by Buyer at any time after the Closing  shall be
immediately turned over by Buyer to the addressee  thereof,  or if the addressee
is no longer affiliated with Seller, to Seller, and pending such delivery, Buyer
shall have no  interest  in the same and shall hold such  remittances,  mail and
other  communications  in trust for the benefit of Seller and the  Subsidiaries.
All  remittances,  mail and other  communications  relating  to the  Transferred
Assets or the Assumed  Liabilities  received by Seller or any  Subsidiary at any
time  after  the  Closing  shall be  immediately  turned  over by Seller or such
Subsidiary to the addressee thereof, or if the addressee is no longer affiliated
with Buyer, to Buyer, and pending such delivery, Seller or such Subsidiary shall
have no  interest  in the same and shall hold such  remittances,  mail and other
communications in trust for the benefit of Buyer.

         Section 2.10  Employee Matters.

                  (a)  Pension  Plans.  Schedule  2.10(a)  lists  all  "employee
pension benefit plans"  ("Pension  Plans") within the meaning of Section 3(2) of
the Employee  Retirement Income Security Act of 1974, as amended ("ERISA"),  and
any  "multiemployer  plans"  within  the  meaning  of  Section  3(37)  of  ERISA
("Multiemployer  Plans"),  in which Retained Employees (as defined in Subsection
(b) below)  directly  employed  to work at the  Facilities  participate.  Seller
shall, or shall cause the  Subsidiaries to, (i) terminate as of the Closing Date
all Pension Plans relating solely to the Transferred Subsidiaries,  terminate as
of the  Closing  Date the  active  participation  of all such  employees  in the
Pension Plans who  constitute  Hired  Employees  (as defined in  Subsection  (c)
below),  (ii) cause the Pension Plans to make timely appropriate  distributions,
to the extent required,  to such employees in accordance with, and to the extent
permitted  by, the terms and  conditions  of such  Pension  Plans,  and (iii) in
connection  with  the  termination  of the  active  participation  of  all  such
employees in such Pension Plans,  comply, and cause each Pension Plan to comply,
with all applicable Laws.  Prior to the Closing,  Seller shall have delivered to
Buyer,  for  information  purposes  only,  forms of any letters or other written
communications  which Seller or the Subsidiaries  shall distribute  generally to
such employees  notifying them of their rights in respect of their  cessation of
active  participation  in the Pension Plans.  With respect to the  Multiemployer
Plans, Buyer agrees that Buyer shall contribute to such Multiemployer Plans with
respect to the operations  covered thereby for  substantially the same number of
contribution base units for which Seller and/or the pertinent  Subsidiaries have
an obligation to contribute to such  Multiemployer  Plans.  Buyer shall take all
action  necessary  to comply  with  Section  4204 of ERISA,  including,  without
limitation, posting, prior to the Closing Date, a bond or escrow for each of the
Multiemployer  Plans for which a bond or escrow is required,  in an amount,  for
the period of time and in a form which  complies with Section  4204(a)(1)(B)  of
ERISA, or, prior to the Closing Date,


                                      -15-

<PAGE>

obtaining a variance from such bonding or escrow requirement from the applicable
Plan or  Plans or from  the  Pension  Benefit  Guaranty  Corporation,  so that a
transfer  of  contribution  obligations  to Buyer as set forth  herein  does not
result in a complete or partial  withdrawal of Seller or any Subsidiary from any
of such Plans under ERISA,  and Buyer shall furnish  Seller proof  thereof.  The
cost of each bond or escrow required under Section  4204(a)(1)(B) of ERISA shall
be paid by Buyer and Buyer shall be the sole obligor thereunder.  Buyer shall in
accordance with the provisions of Sections 11.4,  11.5, and 11.6,  indemnify and
hold  harmless  HEALTHSOUTH,   Seller  and  the  Subsidiaries  (other  than  the
Transferred  Subsidiaries) for any Losses (including any secondary  liability of
the Seller or any such  Subsidiary  as a result of  Buyer's  failure to make any
withdrawal  liability  payment when due) arising from or in connection  with the
Multiemployer  Plans,  and any  change  or  termination  of, or any  partial  or
complete  withdrawal from, any of such Plans, which might accrue to HEALTHSOUTH,
Seller and the Subsidiaries (other than the Transferred  Subsidiaries) from acts
or omissions  occurring or required on or after the Closing Date,  including but
not limited to, any liability associated with any continuation of coverage under
such Plans on or after the Closing Date required by Law or contract.

                  (b)  Retained  Employees.  Except with  respect to  Facilities
which are the subject of a Management Agreement,

                           (i) Buyer  shall offer to hire at the  Closing,  on a
                  probationary  basis, each of the direct employees of Seller or
                  a Subsidiary (other than a Transferred  Subsidiary) who, as of
                  the Closing, work at the Facilities (including any such direct
                  employees  who are on medical  disability or leaves of absence
                  and who  worked at the  Facilities  immediately  prior to such
                  disability or leave).

                           (ii)  Buyer  shall  retain   immediately   after  the
                  Closing,  in  accordance  with their  then-existing  terms and
                  conditions of employment,  each of the direct employees of the
                  Transferred  Subsidiaries who, as of the Closing,  work at the
                  Facilities  (including  any such direct  employees  who are on
                  medical  disability or leaves of absence and who worked at the
                  Facilities immediately prior to such disability or leave).

                           (iii)  All such  direct  employees  to whom  Buyer is
                  required to make offers of employment or to retain pursuant to
                  clauses  (i) and (ii)  above  are  herein  referred  to as the
                  "Retained Employees."

                           (iv)  Any  such  offer of  employment  to a  Retained
                  Employee by Buyer shall be to perform comparable services,  in
                  such  position as is  comparable to the position such Retained
                  Employee held with Seller or any of its subsidiaries as of the
                  Closing,  provided that Buyer may offer  compensation  to such
                  Retained  Employees at levels  commensurate  with compensation
                  levels paid to other  employees  of Buyer  holding  comparable
                  positions,   and   provided   further   that  any   change  in
                  compensation  levels  does  not  result  in  any  constructive
                  discharge  of  any  such  Retained  Employee,  breach  of  any
                  employment contract assumed by Buyer


                                      -16-

<PAGE>

                  hereunder   or  any  other   liability   of  Seller   and  the
                  Subsidiaries.   HEALTHSOUTH,   Seller   or  their   respective
                  Affiliates  shall have the right (but not the  obligation)  to
                  employ or offer to employ any  Retained  Employee who declines
                  Buyer's offer of employment.

                    (c) Hiring of  Retained  Employees.  Buyer shall hire at the
Closing,  on a probationary  basis, each Retained Employee referred to in clause
(b)(i)  above who elects to accept  employment  with Buyer and shall retain each
Retained  Employee referred to in clause (b)(ii) in accordance with the terms of
such  clause  (all of such  employees  who accept  employment  with Buyer or who
remain employed by the Transferred  Subsidiaries  being herein called the "Hired
Employees")  and  shall  indemnify  and  hold  HEALTHSOUTH,   Seller  and  their
Affiliates  harmless,  in accordance with Sections 11.4, 11.5 and 11.6, from and
against any Losses arising from or relating to any subsequent termination of any
such employee by Buyer.  Subject to the proviso to Section 2.3(c),  Buyer agrees
to give such Hired  Employees  hired by it full credit for the paid time off and
sick pay earned or accrued by them  during,  and to which they are entitled as a
result  of,  their  employment  by Seller  and/or  the  Subsidiaries,  either by
allowing  such  employees  such  paid  time off and  sick  pay as to which  such
employees would have been entitled as of their termination date by Seller and/or
the  Subsidiaries  under the policies of Seller and/or the  Subsidiaries  (as in
effect on the date of this  Agreement) if such employees had remained  employees
of Seller and/or the Subsidiaries or, upon termination of employment,  by making
full payment to such  employees of the paid time off that such  employees  would
have  received  had they taken such paid time off, and Buyer  further  agrees to
reimburse  Seller for any payments made by Seller and/or the  Subsidiaries  with
respect to such accrued or earned paid time off or sick pay.

                  (d) Health Benefits. Buyer shall provide the Hired Employees a
program of health care  benefits  which is  equivalent  to the program of health
care benefits currently provided by Buyer to its existing  employees,  provided,
however,  that such health care benefits shall be immediately  available to such
Hired Employees as of their  respective hire dates by Buyer,  and such employees
shall become as of their respective hire dates participants thereunder,  without
regard to any  applicable  waiting  period or any  limitation  with  respect  to
preexisting  conditions;  provided,  however,  that such covenant of Buyer shall
apply only with respect to Hired Employees who were covered by health  insurance
provided by HEALTHSOUTH,  Seller or a Subsidiary  immediately  prior to Closing.
Buyer acknowledges and agrees that Buyer is a successor employer for purposes of
the  Consolidated  Omnibus  Budget   Reconciliation  Act  of  1985,  as  amended
("COBRA"),  that the Retained  Employees  hired by it will not, as a result,  be
deemed to have had a termination  of  employment  for purposes of COBRA and that
any COBRA  notices or  coverages  required to be given or made  available to any
Retained  Employee  hired  by it  shall  be  given  or  made  by  Buyer  and not
HEALTHSOUTH,  Seller  or  the  Subsidiaries  (other  than,  as  applicable,  the
Transferred Subsidiaries), provided that Buyer does not assume, and shall not be
deemed to have assumed, any COBRA obligations which Seller or any Subsidiary may
have to former  employees  of Seller or such  Subsidiary  whose  employment  was
terminated on or prior to the Closing Date, or to any Retained  Employees who do
not accept employment with Buyer. Notwithstanding the foregoing, HEALTHSOUTH and
Seller will provide the Hired Employees with COBRA continuation  coverage for 90
days after the Closing Date at the expense  (including  any claims  expense with
respect to self-insured claims) of Buyer.


                                      -17-

<PAGE>

                  (e) Acknowledgment of  Responsibility.  Buyer acknowledges and
agrees  that as of the  date  and  time  the  Closing  is  effective,  Buyer  is
considered for purposes of the Worker Adjustment and Retraining Notification Act
(the "WARN Act") the employer of the Retained  Employees and that Buyer (and not
HEALTHSOUTH,  Seller or the  Subsidiaries)  shall  thereupon be responsible  for
complying  with the WARN Act with  respect to the  Retained  Employees  and that
prior to such time none of the  Retained  Employees  shall be, nor shall they be
deemed to be, terminated. Buyer shall indemnify and hold HEALTHSOUTH, Seller and
their Affiliates harmless, in accordance with Sections 11.4, 11.5 and 11.6, from
and against all Losses (i) resulting from any compliance obligation  (including,
without  limitation,  the obligation to give notice or pay money) HEALTHSOUTH or
Seller  or its  Affiliates  or Buyer has  under  the WARN Act  arising  from the
termination of any Retained  Employee,  or (ii) resulting from any claims of the
Hired Employees (including,  without limitation, claims for health care coverage
or benefits).

                  (f) To the extent  that Buyer does not hire as of the  Closing
Date  Retained  Employees  with  respect to a Facility  that is the subject of a
Management  Agreement,  the  provisions of this Section 2.10 shall apply at such
time, if any, as Buyer acquires ownership of such Facility.

Notwithstanding  the foregoing,  nothing in this Section 2.10 shall, or shall be
deemed to,  create  any  rights in favor of any person not a party  hereto or to
constitute an employment  agreement or condition of employment  for any employee
of  HEALTHSOUTH  or  Seller or any  Affiliate  of  HEALTHSOUTH  or Seller or any
Retained Employee.

         Section 2.11  [Intentionally omitted.]

         Section 2.12 No  Assignment  If Breach;  Seller's  Discharge of Assumed
Liabilities.

                  (a)  Notwithstanding  anything  contained in this Agreement to
the contrary,  this  Agreement  shall not  constitute an agreement to assign any
Transferred Asset, or assume any Assumed Liability,  if the attempted assignment
or  assumption  of the  same,  as a result  of the  absence  of the  consent  or
authorization  of a third party,  would constitute a breach or default under any
lease, agreement, encumbrance or commitment or would in any way adversely affect
the rights, or increase the obligations,  of Buyer,  HEALTHSOUTH,  Seller or any
Subsidiary with respect  thereto;  provided that the assignment of any contract,
including without limitation Medicare, Medicaid and similar provider agreements,
which may lawfully be made subject to customary  conditions  subsequent (such as
needs   surveys,   evaluations   of  Buyer  or  other   determinations   by  the
counterparties  to such agreements)  shall be deemed not to constitute a default
under, or to in any way adversely  affect the rights or increase the obligations
of Buyer with  respect to, such lease,  agreement,  encumbrance  or  commitment,
unless the  counterparty  indicates  prior to the Closing that such condition or
conditions  subsequent  are  not  likely  to be  met.  If any  such  consent  or
authorization is not obtained, or if an attempted assignment or assumption would
be ineffective or would adversely  affect the rights or increase the obligations
of HEALTHSOUTH,  Seller, a Subsidiary or Buyer,  with respect to any such lease,
agreement,  encumbrance or commitment, so that Buyer would not, in fact, receive
all such rights, or assume the obligations, of Seller or Subsidiary with respect
thereto as they exist prior to such attempted assignment or assumption, then, in
accordance  with the  procedures  described in Section 2.14,  but subject to the
Management Agreement


                                      -18-

<PAGE>

provisions of Section 2.15,  Seller and Buyer shall, and Seller shall cause each
Subsidiary to, enter into such  reasonable  cooperative  arrangements  as may be
reasonably  acceptable to both Buyer and Seller (including  without  limitation,
sublease, agency, partial closing, management, indemnity or payment arrangements
and  enforcement  at the cost and for the benefit of Buyer of any and all rights
of Seller and the  Subsidiaries  against an involved third party) to provide for
Buyer the  benefits  of such  Transferred  Asset or to  relieve  Seller  and the
Subsidiaries from the obligations of such Assumed Liability, and any transfer or
assignment to Buyer by Seller or a Subsidiary of any such Transferred  Asset, or
any assumption by Buyer of any such Assumed Liability,  which shall require such
consent or  authorization  of a third party that is not  obtained  shall be made
subject  to  such  consent  or  authorization  being  obtained.  Subject  to the
provisions of Section 2.15, if the parties cannot agree on any such arrangement,
or any such arrangement  would not be reasonably  practicable,  to provide Buyer
with materially all the benefits of such Transferred Asset or materially all the
obligations of such Assumed  Liability,  then such Transferred  Asset or Assumed
Liability, as the case may be, shall be excluded from the Transactions and shall
be deemed to be an Excluded Asset or an Excluded Liability,  as the case may be,
and Buyer and Seller shall  negotiate in good faith an equitable  adjustment  in
the Purchase Price, or resolve any disagreement  respecting such adjustment,  in
accordance with the procedures of Section 2.14.

                  (b)  Notwithstanding  any other  provision of this  Agreement,
during the period  between the date hereof and the  Closing,  Seller may (or, at
Buyer's request and expense, will), for the purpose of facilitating consummation
of  the  Transactions,  cause  any  Subsidiary  to  acquire  (on  customary  and
reasonable  terms,  conditions and purchase prices) a fixed asset, or any direct
or indirect interest therein, that results in the simultaneous  discharge of the
effective  cost of all or any part of a  liability  that  exists  as of the date
hereof which, but for such acquisition,  would be an Assumed Liability; provided
that in each such case it gives prompt notice of such  acquisition to Buyer.  In
the event of any such  acquisition,  Buyer and Seller  shall  negotiate  in good
faith an equitable adjustment to the Purchase Price, or resolve any disagreement
respecting such adjustment, in accordance with the procedures of Section 2.14.

         Section 2.13 Closing.  Subject to the terms and conditions  hereof, the
consummation  of the  Transactions  (the  "Closing")  shall  occur at a mutually
agreeable  time and place or places  within five  business  days after the first
date on which all of the  conditions set forth in Article 8 and Article 9 hereof
are  satisfied,  but in no event  later than the  Termination  Date set forth in
Section  10.1(b).  The date on which the Closing  actually occurs is referred to
herein as the "Closing Date". The Closing shall be effective for all purposes as
to each Facility (and the  Transferred  Assets and Assumed  Liabilities  related
thereto) at 11:59 p.m. on the Closing  Date,  as  determined by reference to the
local time zone in which the Facility is located.  At the Closing and subject to
the terms and conditions hereof, the following will occur:

                  (a) Deliveries by Seller.  Seller shall deliver,  or cause the
Subsidiaries to deliver, to Buyer:

                           (i) Stock powers properly  executed and  acknowledged
         by  Seller   or  the   relevant   Subsidiary   (or  by  Seller  as  its
         attorney-in-fact) with respect to the Assigned Stock;


                                      -19-

<PAGE>

                           (ii) A Bill of Sale and  Assignment in  substantially
         the form of Exhibit A executed by Seller or the relevant Subsidiary (or
         by Seller as its  attorney-in-fact)  with  respect  to the  Transferred
         Assets of Seller or such Subsidiary  (other than shares of the Assigned
         Stock) covered thereby;

                           (iii)  Special or limited  warranty  deeds,  properly
         executed and  acknowledged by Seller or the relevant  Subsidiary (or by
         Seller  as  its  attorney-in-fact)  with  respect  to  the  Owned  Real
         Properties  of Seller or such  Subsidiary  included in the  Transferred
         Assets;

                           (iv) Assignments in substantially the form of Exhibit
         B executed by Seller or the  relevant  Subsidiary  (or by Seller as its
         attorney-in-fact)  with  respect to Real  Property  Leases of Seller or
         such Subsidiary included in the Transferred Assets;

                           (v)  Instruments of transfer,  sufficient to transfer
         personal property  interests of Seller or the relevant  Subsidiary that
         are included in the Transferred Assets but not otherwise transferred by
         the Bills of Sale and  Assignment  referred  to in clause  (ii)  above,
         executed  by Seller  or the  relevant  Subsidiary  (or by Seller as its
         attorney-in-fact)   in  the  form   customarily   used  in   commercial
         transactions  in the areas in which such  other  personal  property  of
         Seller or such Subsidiary is located;

                           (vi) Such other instruments of transfer,  executed by
         Seller  and each of the  relevant  Subsidiaries  (or by  Seller  as its
         attorney-in-fact)  necessary  to  transfer  to and vest in Buyer all of
         Seller's and the Subsidiaries' rights, title and interest in and to the
         Transferred Assets;

                           (vii) An Assumption  Agreement,  in substantially the
         form of  Exhibit  C, in favor of Buyer  with  respect  to all  Excluded
         Liabilities of the Transferred Subsidiaries; and

                           (viii) Possession of the Transferred Assets.

                  (b) Deliveries by Buyer. Buyer shall deliver to Seller:

                           (i)  Immediately  available  funds,  by way  of  wire
         transfer to an account or accounts  designated by Seller,  in an amount
         determined pursuant to Section 2.6(b), less any adjustments pursuant to
         Section 2.14; and

                           (ii)   An   Assumption    Agreement   or   Assumption
         Agreements,  in substantially the form of Exhibit D, in favor of Seller
         and each of the Subsidiaries.

                  (c) Escrow. If either of the parties desires to consummate the
Closing through an escrow,  an escrow shall be opened with, and the escrow agent
shall be, Fidelity National Title Company (the "Escrow Agent"),  by depositing a
fully  executed  copy of this  Agreement  with  Escrow  Agent to serve as escrow
instructions. This Agreement shall be considered the primary escrow instructions
between the parties,  but the parties  shall  execute such  additional  standard
escrow instructions as Escrow Agent shall require in order to clarify the duties
and  responsibilities of Escrow Agent. In the event of any conflict between this
Agreement and


                                      -20-

<PAGE>

such additional standard escrow  instructions,  this Agreement shall prevail. If
the Closing is to be consummated  through the Escrow Agent,  then on or prior to
the Closing  Date,  Buyer shall cause the funds  required by  Subsection  (b)(i)
above to be wired to Escrow Agent, and the parties shall deliver the instruments
of sale, assignment, conveyance and assumption called for by Subsections (a) and
(b) above to the Escrow Agent,  and on the Closing Date,  the Escrow Agent shall
close the escrow by:

                           (i) Causing the deeds for the Owned Real  Properties,
         the  assignments of the Real Property  Leases,  and any other documents
         which the parties may mutually designate to be recorded in the official
         records of the appropriate counties in which the pertinent  Transferred
         Assets are located;

                           (ii)   Delivering  to  Seller  by  wire  transfer  of
         immediately  available  funds, to an account or accounts  designated by
         Seller, the amounts called for by Subsection (b)(i) above; and

                           (iii) Delivering to Buyer or Seller,  as the case may
         be, the other instruments referred to in Subsections (a) and (b) above.

         Section 2.14  Purchase Price Adjustment.

                  (a) In the event that  circumstances  exist that  require  the
parties to negotiate in good faith cooperative  arrangements  under Section 2.12
or  potential  amendments  to this  Agreement  pursuant to Sections  8.5 and 9.5
(dealing  with possible  subsequent  transfers of  Transferred  Assets after the
Closing in the event of certain  injunctions)  or  potential  amendments  to the
Management  Agreement referred to in Section 2.15, or to negotiate in good faith
equitable  adjustments  in the Purchase  Price pursuant to the provisions of the
foregoing  Sections,  or the provisions of Section 8.6 (respecting the condition
of title to interests in real property)  (Sections 2.12,  2.15, 8.5, 8.6 and 9.5
being collectively referred to as the "Adjustment Sections"), then and in any of
such events,  such  negotiations,  and the resolution of  disagreements  arising
therefrom,  shall be conducted in accordance with the provisions of this Section
2.14.  The parties shall  negotiate  such  cooperative  arrangements,  potential
amendments  and equitable  adjustments in the Purchase Price in good faith prior
to any  scheduled  Closing  Date (as may be extended by mutual  agreement of the
parties),  and, in connection  with an adjustment to the Purchase  Price,  shall
also  negotiate  appropriate  amendments  to  the  Allocation  Schedule  arising
therefrom,  provided  that  any  adjustment  in  the  Purchase  Price  shall  be
consistent with the original Allocation  Schedule.  If the parties are unable to
agree by the day prior to such  scheduled  Closing  Date,  then  such  scheduled
Closing Date (and the Termination  Date, if necessary)  shall be extended for up
to 15 business days to provide for the opportunity to resolve such  disagreement
pursuant to the  provisions  of this Section  2.14. On the day the Closing would
have occurred but for the absence of agreement  between the parties,  each party
shall  designate  an  individual  (who may not be a present  or former  officer,
director,  partner  or  employee  of the  party  or of  any  present  or  former
investment  banker,  accounting firm, law firm or attorney regularly used by the
party) to mediate  such  disagreement,  and advise the other party in writing of
the identity of such individual,  which advice shall be accompanied by a list of
up to ten  suggested  neutral  individuals  to  serve as a third  mediator.  The
mediators  originally  designated by each party shall promptly  confer about the
selection of a third  mediator  from such lists,  and within five  business days
following the originally


                                      -21-

<PAGE>

scheduled Closing Date (or Termination Date, as the case may be), the originally
designated  mediators shall agree upon and (subject to availability)  select the
third  mediator from the lists  submitted by the parties or otherwise,  provided
that if the originally  designated  mediators cannot agree upon a third mediator
by such date, the third mediator shall be designated by the Alternative  Dispute
Resolution Service of NHLA/AAHA, Inc. The three mediators so selected are herein
referred to as the "Panel".  Within two business days following the  designation
of the third  mediator,  each party shall submit to the Panel,  in writing,  its
proposed cooperative arrangements,  amendments to this Agreement,  amendments to
the Management  Agreements and/or equitable adjustments in the Purchase Price in
the absence of any such cooperative arrangements or amendments,  except that the
parties need only submit their  proposed  adjustments to the Purchase Price (and
proposed  amendments to the  Allocation  Schedule) in the case of  disagreements
about  adjustments  for certain  acquisitions  and  modifications  under Section
2.12(b),  or  imperfections of title under Section 8.6). Such proposals shall be
materially in accordance with the last proposals made by such party to the other
party during the course of the aforementioned  good faith  negotiations  between
the parties.  The parties shall additionally  submit such memoranda,  arguments,
briefs and evidence in support of their respective positions,  and in accordance
with such  procedures,  as a majority of the Panel may  determine.  Within seven
business days following the designation of the third mediator,  the Panel shall,
by majority vote, select the proposed  cooperative  arrangements,  amendments or
adjustments of the Purchase  Price,  as the case may be,  proposed by one of the
parties,  it being  agreed  that the Panel may modify  such  proposal in any way
which  is  not  otherwise   inconsistent  with  the  terms  of  this  Agreement.
Thereafter,  the  parties  shall,  subject to the terms and  conditions  of this
Agreement, consummate the Transactions on the basis of such selected cooperative
arrangements,  amendments or adjustments at a mutually  agreeable time and place
or places,  in accordance with the provisions of Section 2.13, which shall be no
later than the 15th business day following the originally scheduled Closing Date
or such later date as the parties may agree upon. Subject to the foregoing,  the
Panel may determine the issues in dispute following such procedures,  consistent
with  the  language  of  this  Agreement,   as  it  deems   appropriate  to  the
circumstances  and  with  reference  to the  amounts  in  issue.  No  particular
procedures are intended to be imposed upon the Panel, it being the desire of the
parties  that any such  disagreement  shall be  resolved  as  expeditiously  and
inexpensively as reasonably  practicable.  No member of the Panel shall have any
liability  to the  parties in  connection  with  service  on the Panel,  and the
parties shall provide such indemnities to the members of the Panel as they shall
request.

                  (b) Notwithstanding the foregoing,  or any other provisions of
this  Agreement,  unless the  parties  otherwise  agree,  no  adjustment  to the
Purchase Price (except in connection with an adjustment made pursuant to Section
2.15) shall be made which exceeds,  individually or in the aggregate of all such
adjustments,  50% of the original  Purchase  Price,  it being agreed that if the
conditions  to  consummation  of the  Transactions  are  otherwise  met  but for
Purchase Price adjustments  contemplated by the Adjustment Sections in excess of
such percentage,  then the conditions to consummation of the Transactions  shall
be deemed not to have been met.  In such  event,  Buyer  shall be  entitled to a
refund of the Execution Fee and accrued  interest  thereon and the parties shall
be deemed to have been released from their  obligations  under Sections 10.3 and
10.4.

         Section 2.15 Management Agreements. In the event that the conditions to
consummation of the Closing have otherwise been met or waived, but:


                                      -22-

<PAGE>

                           (i) Buyer has not been issued Licenses referred to in
                  Section 8.4(d)  respecting the conduct of business from one or
                  more Facilities, and the absence of such Licenses would result
                  in a Material Adverse Effect upon the conduct of such business
                  from any such Facility by Buyer following the Closing; or

                           (ii) Seller has not received one or more Consents (as
                  defined in Section  8.4)  necessary to  effectively  assign to
                  Buyer (A) a Real Property Lease (and/or  agreements  which, by
                  the terms of the Real  Property  Lease in  question,  are tied
                  thereto,  such as certain service contracts,  subordination or
                  security agreements,  parking leases or equipment leases), the
                  lack of which  assignment would have a Material Adverse Effect
                  on a Facility,  or (B) any other Assumed Contracts  identified
                  by  Buyer in  writing  to  Seller,  and the  parties  have not
                  entered into an  alternative  arrangement  pursuant to Section
                  2.12;

then and in either of such events the parties shall nevertheless  consummate the
Transactions in accordance with the provisions of this Agreement, as modified by
the following provisions:

                  (a) At the  Closing,  the  parties  shall  execute one or more
management agreements (each a "Management Agreement"), substantially in the form
of Exhibit E hereto,  pursuant  to which Buyer  shall  undertake  to manage such
Facilities under Licenses held by Seller and the Subsidiaries and/or pending the
receipt of such Consents, as the case may be.

                  (b) The  instruments  of transfer and  assumption set forth in
Sections  2.13(a) and  2.13(b)(ii)  respecting each such Real Property Lease (or
related or other  agreement),  and/or  respecting those  Transferred  Assets and
Assumed  Liabilities  that may not be lawfully  transferred or assumed until the
requisite  Licenses  are  obtained,  as the  case  may be,  shall  be  delivered
(together with a fully  executed copy of this  Agreement) by the parties to, or,
in the  event an escrow  has been  established  pursuant  to the  provisions  of
Section 2.13(c), retained by, the Escrow Agent until they are to be delivered in
accordance with the terms hereof. This Agreement shall be considered the primary
escrow  instructions  between the parties,  but the parties  shall  execute such
additional  standard escrow  instructions as Escrow Agent shall require in order
to clarify the duties and  responsibilities of Escrow Agent. In the event of any
conflict   between  this   Agreement  and  such   additional   standard   escrow
instructions,  this Agreement shall prevail.  All other  instruments of transfer
and assumption  shall be delivered in accordance  with Section 2.13, so that the
Buyer will become the owner of the  Transferred  Assets,  and the  obligor  with
respect to Assumed  Liabilities,  not  described  in the first  sentence of this
Section 2.15(b).

                  (c) The  provisions  of Sections 5.1, 5.2 and 5.3 shall remain
in effect pending the receipt of such Licenses by Buyer, and/or such Consents by
the Seller, as the case may be.

                  (d) With respect to each such Facility, the Escrow Agent shall
deliver  the  aforementioned   instruments  of  assumption  to  Seller  and  the
aforementioned instruments of transfer to Buyer (and cause to be recorded any of
such instruments as are contemplated by Section  2.13(c)(i)) upon the date (each
such date being a "Delivery Date") that the Escrow


                                      -23-

<PAGE>

Agent has received,  if the provisions of clause 2.15(i) apply,  an affidavit of
Buyer (a "Buyer's  Affidavit"),  executed by a duly authorized officer of Buyer,
to the effect that:

                  (x) Such Licenses  respecting such Facility have been obtained
         by Buyer; and

                  (y) There is not in effect a temporary  restraining order or a
         preliminary or permanent injunction or other order, decree or ruling by
         a court of competent  jurisdiction  or by a  governmental  agency which
         restrains or prohibits such  deliveries,  or any threat by governmental
         authorities to exact any penalty or impose any economic  detriment upon
         Buyer if such  deliveries  are made that would have a Material  Adverse
         Effect  upon  Buyer,  provided  that the  parties  will use their  best
         efforts to litigate  against the entry of, or to obtain the lifting of,
         any such order or injunction or potential  penalty or  imposition,  and
         the  existence of any such  temporary  restraining  order,  preliminary
         injunction or potential  penalty or imposition  shall  operate,  at the
         option of Seller,  only to delay the delivery of such  instruments  and
         extend the Final  Delivery Date (as defined  below) until the fifth day
         following the lifting of any such order or injunction or threat;

and, in any event,  unless such requirement is waived by Buyer, the Escrow Agent
has also received an additional affidavit (a "Seller's  Affidavit") addressed to
the Escrow Agent and Buyer and executed by a duly  authorized  officer of Seller
to the effect that:

                           (i)  There is not in effect a  temporary  restraining
         order or a preliminary or permanent  injunction or other order,  decree
         or ruling by a court of  competent  jurisdiction  or by a  governmental
         agency which restrains or prohibits such  deliveries,  or any threat by
         governmental  authorities  to exact any penalty or impose any  economic
         detriment  upon  Seller if such  deliveries  are made that would have a
         Material Adverse Effect upon Seller, provided that the parties will use
         their best  efforts to litigate  against the entry of, or to obtain the
         lifting  of,  any such  order or  injunction  or  potential  penalty or
         imposition,  and the existence of any such temporary restraining order,
         preliminary   injunction  or  potential  penalty  or  imposition  shall
         operate,  at the option of Seller,  only to delay the  delivery of such
         instruments and extend the Final Delivery Date (as defined below) until
         the fifth day  following the lifting of any such order or injunction or
         threat;

                           (ii) Since the Closing  Date,  neither the Seller nor
         the  Subsidiaries  have  sold,  conveyed,   assigned,   transferred  or
         delivered  any  Transferred  Asset to any third  party,  or created any
         lien,  charge,   claim,   pledge,   security  interest  or  encumbrance
         respecting any Transferred Asset except for Permitted  Encumbrances (as
         defined in Section 3.8),  without the consent of, or  participation  in
         such  transaction  by,  Buyer in its role as manager of the Facility or
         Facilities in question; and

                           (iii) If the provisions of clause 2.15(ii) apply, the
         requisite  Consents necessary to assign such Real Property Lease(s) (or
         related or other agreement(s)) have been obtained.


                                      -24-

<PAGE>

Each party covenants and agrees not to intentionally  take (or omit to take) any
action if such action (or omission)  would prevent it from being able to provide
its respective Affidavit.

                  (e) Subject to the provisions of this Subsection 2.15(e),  all
of the aforementioned deliveries of instruments of transfer and assumption shall
be  completed  on or before  June 30,  1998 (or such  later  date upon which the
parties  may agree  upon)  (such  date,  or any date to which it may be extended
pursuant to any of the provisions of this Section 2.15, being referred to as the
"Final Delivery Date"),  provided that if, in the reasonable judgment of Seller,
Buyer is diligently continuing to pursue the receipt of any such Licenses, or in
the reasonable judgment of Buyer, Seller is diligently  continuing to pursue the
receipt of such Consents,  as the case may be, then Seller and/or Buyer,  as the
case may be,  shall  deposit  into  escrow  its  agreement  to extend  the Final
Delivery Date for an additional 90 days. On the Final  Delivery Date  (including
any date to which it may be  extended),  the Escrow Agent shall close the escrow
by delivering to Buyer all instruments of transfer, and delivering to Seller all
instruments of assumption,  remaining in escrow,  provided that the Escrow Agent
shall have  received a Seller's  Affidavit  effective as of such Final  Delivery
Date. In the event that a Seller's Affidavit is not provided to the Escrow Agent
effective  as of such  Final  Delivery  Date,  then and in such event the Escrow
Agent shall provide  notice of such fact to Buyer and Seller.  In the event that
(i) a  Seller's  Affidavit  cannot  be  delivered  with  respect  to  any of the
Transferred  Assets and (ii) that  parties are unable to agree upon  appropriate
amendments  to the  Management  Agreement  to provide  Buyer  with the  economic
benefits and risk of ownership of such Transferred Assets as contemplated by the
following  sentence,  the parties  shall  thereupon  attempt to negotiate  for a
period of 30 days an equitable  adjustment in the Purchase Price  respecting the
Transferred  Assets and the  Assumed  Liabilities  that  remain in escrow.  Such
appropriate amendments to the Management Agreement shall extend the term thereof
for at least 25 years (or the  remaining  terms of the Real  Property  Leases in
question,  including extensions,  if shorter); shall prohibit the Seller and the
Subsidiaries during such period from transferring or encumbering the Transferred
Assets not delivered to Buyer without  Buyer's  written  consent;  shall require
Seller, to the extent Buyer has not obtained the requisite Licenses respecting a
Facility,  to exercise its best efforts to maintain or cause its Subsidiaries to
maintain Licenses in force as will permit the Facilities to be operated in their
current  status;  shall  provide  Buyer with the right to control any  elections
relating  to  extensions  or  renewals of any Real  Property  Leases;  and shall
otherwise provide the Buyer with  substantially all of the economic benefits and
risks arising from the operation of the Facilities;  provided that to the extent
any such  amendments  shall not be consistent  with  applicable law, or shall be
prohibited by the terms of any  injunction or order or result in the  imposition
of any  material  penalty upon Seller or Buyer , or not be permitted by the Real
Property  Leases  in  question,  then to  such  extent  and in lieu of any  such
amendment,  the parties shall negotiate an equitable  adjustment in the Purchase
Price respecting the Transferred Assets and the Assumed  Liabilities that remain
in escrow.  In the event the parties cannot agree within such 30-day period upon
such amendments to the Management  Agreement and/or  adjustments to the Purchase
Price, as the case may be, then such disagreement  shall be resolved pursuant to
the  provisions  of Section 2.14  (without  regard to the  provisions of Section
2.14(b))  as though  the day after the  expiration  of such  30-day  negotiating
period was the scheduled  Closing Date or Termination  Date referred to therein.
Upon  agreement  of the  parties,  or  resolution  of any such  disagreement  in
accordance  with the  provisions  of Section 2.14, as the case may be, Buyer and
Seller shall  deposit into escrow  executed  counterparts  of  amendments to the
Management Agreement, if any, and Seller shall


                                      -25-

<PAGE>

deposit into escrow,  in  immediately  available  funds,  an amount equal to the
adjustment of the Purchase  Price if any (without  interest),  as agreed upon by
the parties or determined  under the provisions of Section 2.14, and, subject to
receipt of such deposits into escrow, the Escrow Agent shall:

                           (i)  Deliver  such  funds,  if any,  to Buyer by wire
         transfer of immediately available funds;

                           (ii) Deliver to Buyer all  instruments  of assumption
         remaining  in  escrow  and a  counterpart  of  the  amendments  to  the
         Management Agreement, if any, executed by Seller; and

                           (iii) Deliver to Seller all  instruments  of transfer
         remaining  in  escrow  and a  counterpart  of  the  amendments  to  the
         Management Agreements, if any, executed by Buyer.

                  (f)  Unless  amended  pursuant  to the above  provisions,  the
Management  Agreement  shall be terminated,  in accordance  with its provisions,
with respect to any Facility with respect to which  instruments  of transfer and
assumption  have been  delivered out of escrow,  and the escrow shall close when
all such  instruments  of transfer and  assumption  have been  delivered  out of
escrow.

                  (g)  Notwithstanding  the  foregoing,  the  provisions of this
Section 2.15 shall not apply (i) to circumstances  described in Section 2.15(i),
to  the  extent  that  applicable  laws  or  rules  of  accreditation  governing
healthcare facility Licenses held by Seller or a Subsidiary would not permit the
Management Agreement arrangements  contemplated hereby, or (ii) to circumstances
described in Section  2.15(ii),  to the extent that the Real  Property  Lease or
Leases in question would not permit such Management Agreement  arrangements.  In
either  of such  events,  and to  such  extent,  the  other  provisions  of this
Agreement  shall  be  unaffected  by this  Section  2.15 and the  parties  shall
negotiate an  appropriate  adjustment to the Purchase Price as  contemplated  by
Section 2.14.

                  (h) Notwithstanding this Section 2.15 and without limiting the
generality of the introductory paragraph of this Section 2.15, the provisions of
Section 2.5 through  2.11 shall be fully  operative  as though all  Licenses and
Consents had been received as of the Closing and all  Transactions  scheduled to
occur at the Closing had occurred  without  regard to this Section 2.15,  except
that Buyer shall, with respect to Receivables not assigned to it at Closing as a
result of the  provisions  of this Section  2.15,  collect such  Receivables  at
managed  Facilities  in its  capacity as manager of the  Facilities  in question
rather than as principal, and shall retain such collections as a management fee.

         Section   2.16.   Assignment  of  Rights  and   Obligations   to  Buyer
Subsidiaries.  Notwithstanding  any contrary  provisions  contained herein,  the
parties  hereto  agree  that,  prior to the  Closing  Date,  Buyer,  in its sole
discretion,  may assign any or all of its rights and obligations with respect to
the  Transferred  Assets  and  the  Assumed  Liabilities  to one or  more  Buyer
Subsidiaries,  provided  that no such  assignment  shall  relieve  Buyer  of any
obligation  or liability  to Seller  hereunder,  and  provided  further that the
following shall apply:


                                      -26-

<PAGE>

                  (a) Buyer will  provide  HEALTHSOUTH  and Seller  with  prompt
written notice of any such assignment.

                  (b) No such assignment  shall be effected if the making of the
assignment  will result in Seller's  inability to obtain any Consent  reasonably
needed to  consummate  the  Transactions  or to avoid any economic  detriment to
HEALTHSOUTH or Seller arising from the consummation of the Transactions.

                  (c) Each such Buyer  Subsidiary  that is an  assignee of Buyer
shall  irrevocably  appoint Buyer as its sole and exclusive  representative  and
agent authorized to act for and to receive notices and payments on behalf of the
Buyer  Subsidiaries in all matters arising from or related to this Agreement and
the Transactions.

                  (d) As a condition to HEALTHSOUTH's and Seller's  agreement to
such  assignments,  Buyer  hereby  agrees  that  Buyer  will at all times be the
ultimate parent entity of the consolidated  group of companies of which Buyer is
a group member or that, in the event of any  reorganization  involving Buyer and
its  subsidiaries,  the  ultimate  parent  entity of the  consolidated  group of
companies  emerging  from  such  reorganization  that  includes  Buyer  and  its
successors and assigns  shall,  prior to any such  reorganization,  execute such
documents as are reasonably necessary to confirm the assumption by such ultimate
parent entity of Buyer's obligations to HEALTHSOUTH and Seller hereunder.

                  (e)  Buyer  shall  remain  jointly  and  severally  liable  to
HEALTHSOUTH,   Seller  and  the   Subsidiaries   (other  than  the   Transferred
Subsidiaries)  and to third  parties  with  respect to any  Assumed  Liabilities
transferred to a Buyer  Subsidiary,  and, without limiting the generality of the
foregoing, hereby absolutely and unconditionally guarantees the full, prompt and
faithful  performance by each Buyer  Subsidiary of all covenants and obligations
to be performed by such Buyer  Subsidiary  under this  Agreement and any Related
Agreement which are assigned to such Buyer Subsidiary, including but not limited
to, the  payment  of all sums  stipulated  to be paid by such  Buyer  Subsidiary
pursuant to such  assignment,  it being  understood  that each such covenant and
obligation   constitutes  the  direct  and  primary   obligation  of  Buyer,  is
independent of the covenants and obligations of the Buyer  Subsidiaries and that
a separate action or actions may be brought and prosecuted against Buyer whether
action is brought against the pertinent  Buyer  Subsidiary or whether such Buyer
Subsidiary  is joined in any such action or actions  (Buyer  hereby  waiving any
right to require Seller or a Subsidiary to proceed against a Buyer  Subsidiary).
Buyer  hereby  authorizes  HEALTHSOUTH  and Seller,  without  notice and without
affecting  Buyer's  liability  hereunder,  from  time  to  time  to  (x)  renew,
compromise,  extend, accelerate, or otherwise change the terms of any obligation
of a Buyer Subsidiary hereunder with the agreement of such Buyer Subsidiary, (y)
if agreed to by the Buyer Subsidiary, take and hold security for the obligations
guaranteed, and exchange,  enforce, waive and release any such security, and (z)
apply such  security and direct the order or manner of sale thereof as Seller in
its discretion may determine. Buyer hereby further waives:

                           (i)  Any   right   to   subrogation,   reimbursement,
         exoneration  or  contribution  or any other rights that would result in
         Buyer being deemed a creditor of a Buyer  Subsidiary  under the federal
         Bankruptcy Code or any other law, in each case arising


                                      -27-

<PAGE>

         from  the  existence  or  performance   of  Buyer's   guaranty  of  the
         obligations of a Buyer Subsidiary hereunder;

                           (ii) Any  defense  that may  arise by  reason  of the
         incapacity or lack of authority of any Buyer Subsidiary;

                           (iii) Any defense based upon a statute or rule of law
         which provides that the  obligations of a surety must be neither larger
         in amount  nor in other  respects  more  burdensome  than  those of the
         principal; and

                           (iv) Any duty on the part of HEALTHSOUTH, Seller or a
         Subsidiary  to disclose to Buyer any facts that Seller or a  Subsidiary
         may now or hereafter know about a Buyer Subsidiary,  since Buyer hereby
         acknowledges  that  it is  fully  responsible  for  being  and  keeping
         informed of the financial  condition of each Buyer  Subsidiary  and all
         circumstances  bearing on the risk of  non-payment  of any  obligations
         assigned to such Buyer Subsidiary.


                                    ARTICLE 3
            REPRESENTATIONS AND WARRANTIES OF HEALTHSOUTH AND SELLER

         HEALTHSOUTH  and Seller,  jointly and severally,  hereby  represent and
warrant to Buyer,  as of the date  hereof,  as follows,  except as  disclosed in
Schedule 3:

         Section 3.1 Organization and Corporate Power; Related Matters.  Each of
Seller and HEALTHSOUTH is a corporation  duly  incorporated and validly existing
under the laws of, and is authorized to exercise its  corporate  powers,  rights
and  privileges  and is in good  standing in, the State of Delaware and has full
corporate  power to carry on its business as presently  conducted  and to own or
lease and operate its  properties and assets now owned or leased and operated by
it.  HEALTHSOUTH owns all of the issued and outstanding  shares of capital stock
of  Seller.  Seller  is  duly  qualified  and  in  good  standing  as a  foreign
corporation  in all  jurisdictions  in which such  qualification  is required by
reason  of its  business,  properties  or  activities  in or  relating  to  such
jurisdictions  (which, in the case of Subsidiaries  existing on the date of this
Agreement,  is likewise  indicated on Schedule A-1), except where the failure to
be so qualified  will not have a Material  Adverse Effect (as defined in Section
3.4) on the Transferred  Assets.  The Transferred Assets (including the Assigned
Stock) constitute all of the assets of Seller and the Subsidiaries  encompassing
the Facilities and the operations  thereof (except for the Excluded Assets) and,
except to the extent that such  businesses  are  Excluded  Assets  which will be
retained by Seller at Closing,  the Facilities and their  operations  constitute
the  only  businesses  represented  by the  Transferred  Assets  (including  the
Assigned Stock).

         Section 3.2  Subsidiaries.

                  (a) Each Subsidiary is a corporation  duly organized,  validly
existing  and in good  standing  under  the laws of its  state of  incorporation
(which, in the case of Subsidiaries  existing on the date of this Agreement,  is
indicated  on  Schedule  A-1) and is duly  qualified  and in good  standing as a
foreign corporation in all jurisdictions in which such qualification is


                                      -28-

<PAGE>

required by reason of its  business,  properties or activities in or relating to
such jurisdictions  (which, in the case of Subsidiaries  existing on the date of
this Agreement, is likewise indicated on Schedule A-1), except where the failure
to be so qualified will not have a Material  Adverse  Effect on the  Transferred
Assets.  Each  Subsidiary has all requisite  power and authority  (corporate and
otherwise)  to  perform  the  transactions  on its  part  contemplated  by  this
Agreement and all other agreements contemplated hereby.

                  (b) All of the  outstanding  capital stock of each  Subsidiary
has been duly  authorized and is validly  issued,  fully paid and  nonassessable
and, except as indicated on Schedule A-1, is owned beneficially and of record by
Seller or another  wholly-owned  subsidiary  of Seller as  indicated on Schedule
A-1. There are no rights, subscriptions, warrants, options, conversion rights or
agreements of any kind  outstanding to purchase or otherwise  acquire any shares
of capital stock of or securities or obligations of any kind convertible into or
exchangeable for any shares of capital stock of any Subsidiary, and the Assigned
Stock  constitutes  all of the  issued  and  outstanding  capital  stock  of the
Transferred Subsidiaries.

                  (c) Upon consummation of the Transactions,  Buyer will acquire
valid title to the Assigned Stock, free and clear of all liens, charges, pledges
or security  interests  (except  for those  created or allowed to be suffered by
Buyer)  and free of any  restrictions  on voting and  transfer  except as may be
disclosed on Schedule A-1. The Assigned Stock is validly issued,  fully paid and
non-assessable.

                  (d)  The  board  of  directors  of  each  Subsidiary  and,  if
required, its stockholders, have duly and effectively authorized (i) the sale of
the Transferred  Assets to be sold by such  Subsidiary;  and (ii) the execution,
delivery and  performance of the Related  Agreements (as defined in Section 3.4)
and  all  other  agreements  contemplated  hereby  and  thereby  to  which  such
Subsidiary is a party.  No other  corporate act or proceeding on the part of any
Subsidiary, its board of directors or its stockholders is necessary to authorize
any Related Agreement or other agreement  contemplated hereby and thereby or the
transactions contemplated hereby and thereby.

         Section  3.3  Authority  Relative  to this  Agreement.  The  execution,
delivery and performance of this Agreement and all other agreements contemplated
hereby and the consummation of the transactions  contemplated hereby and thereby
have been duly and effectively  authorized by the boards of directors of each of
HEALTHSOUTH  and Seller;  no other  corporate  act or  proceeding on the part of
HEALTHSOUTH,  Seller,  their respective  boards of directors or their respective
stockholders is necessary to authorize this Agreement,  any such other agreement
or the transactions  contemplated  hereby and thereby.  This Agreement has been,
and each of the other  agreements  contemplated  hereby will, as of the Closing,
have been,  duly executed and delivered by each of HEALTHSOUTH  and Seller,  and
this  Agreement  constitutes,  and each such other  agreement  when executed and
delivered  will  constitute,  a valid and binding  obligation of  HEALTHSOUTH or
Seller,  as the case may be,  enforceable  against them in  accordance  with its
terms,  except that the remedy of specific  performance and injunctive and other
forms of  equitable  relief  may be  subject to  equitable  defenses  and to the
discretion of the court before which any proceeding may be brought.

         Section 3.4 Absence of Breach.  Subject to the  provisions  of Sections
3.5 and 3.6 below regarding private party and governmental  consents, and except
for compliance with the


                                      -29-

<PAGE>

requirements of the  Hart-Scott-Rodino  Antitrust  Improvements  Act of 1976, as
amended (the "HSR Act"),  and any regulatory or licensing Laws applicable to the
businesses and assets  represented  by the  Transferred  Assets,  the execution,
delivery and  performance  by  HEALTHSOUTH  and Seller of this Agreement and all
other  agreements  contemplated  hereby or executed in connection  herewith (the
"Related   Agreements"),   and  the  performance  by  the  Subsidiaries  of  the
transactions  contemplated  by this  Agreement and the Related  Agreements to be
performed by the  Subsidiaries,  do not, (a) conflict with or result in a breach
of any of the provisions of the Articles or  Certificates  of  Incorporation  or
Bylaws or similar  charter  documents (the "Charter  Documents") of HEALTHSOUTH,
Seller  or of any of the  Subsidiaries,  (b)  contravene  any Law or  cause  the
suspension or revocation  of any License  presently in effect,  which affects or
binds HEALTHSOUTH,  Seller or any of the Subsidiaries,  or any of their material
properties,  except where such contravention,  suspension or revocation will not
have a Material  Adverse  Effect (as defined below) on any Facility and will not
affect  the  validity  or  enforceability  of this  Agreement  and  the  Related
Agreements or the validity of the Transactions  contemplated hereby and thereby,
or (c) conflict  with or result in a breach of or default under any indenture or
loan  or  credit  agreement  or any  other  agreement  or  instrument  to  which
HEALTHSOUTH, Seller or any of the Subsidiaries is a party or by which it or they
or any of their  properties  may be  affected  or  bound,  the  effect  of which
conflict,  breach  or  default  would  be  a  Material  Adverse  Effect  on  the
Transferred  Assets or on the ability of HEALTHSOUTH,  Seller or a Subsidiary to
consummate the Transactions.  As used herein, a "Material  Adverse Effect":  (a)
when used with  respect to the  Transferred  Assets,  means a  material  adverse
effect on the  Transferred  Assets  and on the  businesses  operated  therefrom,
including  their  condition  (financial or otherwise) and results of operations,
taken as a whole;  (b) when used with respect to any portion of the  Transferred
Assets,  means a material  adverse  effect on such  portion  of the  Transferred
Assets and on the  businesses  operated  therefrom,  including  their  condition
(financial or otherwise)  and results of operations,  taken as a whole;  and (c)
when used with  respect to an entity,  such as Seller,  a  Subsidiary  or Buyer,
means a  material  adverse  effect  on the  business,  condition  (financial  or
otherwise) and results of operations of such entity taken as a whole  (including
any subsidiaries of such entity).

         Section  3.5  Private  Party  Consents.  The  execution,  delivery  and
performance  by Seller of this  Agreement  and the Related  Agreements,  and the
performance  by  the  Subsidiaries  of the  transactions  contemplated  by  this
Agreement and the Related Agreements to be performed by the Subsidiaries, do not
require the  authorization,  consent or approval of any  non-governmental  third
party of such a nature that the failure to obtain the same would have a Material
Adverse Effect on the Transferred Assets.

         Section  3.6  Governmental  Consents.   The  execution,   delivery  and
performance  by Seller of this  Agreement  and the Related  Agreements,  and the
performance  by  the  Subsidiaries  of the  transactions  contemplated  by  this
Agreement and the Related Agreements to be performed by the Subsidiaries, do not
require the authorization,  consent, approval,  certification,  license or order
of, or any filing with, any court or  governmental  agency of such a nature that
the  failure to obtain the same  would  have a  Material  Adverse  Effect on the
Transferred  Assets,  except for compliance with the HSR Act and except for such
governmental authorizations,  consents, approvals, certifications,  licenses and
orders that customarily accompany the transfer of health care facilities such as
the Facilities.


                                      -30-

<PAGE>

         Section 3.7 Brokers. No broker, finder, or investment banker other than
Smith  Barney  Inc.  is  entitled  to any  brokerage,  finder's  or other fee or
commission in connection  with this Agreement or the  Transactions  contemplated
hereby based upon any  agreements or  arrangements  or  commitments,  written or
oral, made by or on behalf of HEALTHSOUTH, Seller or any of their Affiliates.

         Section  3.8  Title  to  Personal  Property.  Seller  or  the  relevant
Subsidiary,  as the case may be,  has good and  defensible  title,  or valid and
effective  leasehold  rights in the case of  leased  property,  to all  tangible
personal  property  included  in the  Transferred  Assets to be sold,  conveyed,
assigned,  transferred and delivered to Buyer by Seller or such Subsidiary, free
and clear of all liens, charges, claims, pledges,  security interests,  equities
and encumbrances of any nature  whatsoever,  except for those created or allowed
to be  suffered  by  Buyer  and  except  for  the  following  (individually  and
collectively,  the "Permitted Encumbrances"):  (a) the lien of current taxes not
delinquent,  (b)  matters  that do not have a  Material  Adverse  Effect  on the
Transferred   Assets,   (c)  the  Assumed   Liabilities,   (d)  such   consents,
authorizations,  approvals and licenses referred to in Sections 3.5 and 3.6, and
(e)  liens,  charges,   claims,  pledges,   security  interests,   equities  and
encumbrances   which  will  be  discharged  or  released  either  prior  to,  or
substantially simultaneously with, the Closing.

         Section 3.9 Assumed Contracts. Except for such matters that do not have
a Material Adverse Effect on the Transferred  Assets,  (a) there is no liability
to any  person by  reason of the  default  by Seller or a  Subsidiary  under any
Assumed Contract,  (b) neither Seller nor any Subsidiary has received written or
other  notice  that any  person  intends  to cancel  or  terminate  any  Assumed
Contract,  (c) all of the Assumed  Contracts  are in full force and effect,  (d)
subject to the  provisions  of Sections  3.5 and 3.6,  the  consummation  of the
transactions contemplated by this Agreement will not constitute and, to the best
of Seller's  current  actual  knowledge,  no event has occurred  which,  with or
without the passage of time or the giving of notice,  would  constitute a breach
or default by Seller or a Subsidiary of such Assumed Contract or would cause the
acceleration  of any  obligation of Seller or any  Subsidiary or the creation of
any lien (except for Permitted  Encumbrances)  upon any Transferred  Asset,  (e)
neither  Seller  nor any  Subsidiary  has  waived  any right  under any  Assumed
Contract,  and (f)  Seller  has no  knowledge  of any  material  default  by any
counterparty to any such Assumed Contract.

         Section  3.10  Licenses  and  Related  Regulatory  Matters.  Except for
matters  associated with the significant  legal  proceedings and  investigations
referred to in Seller's Annual Report on Form 10-K for the fiscal year ended May
31, 1997, as amended, and its Quarterly Report on Form 10-Q for the three months
ended August 31, 1997,  and except for such matters which do not have a Material
Adverse  Effect on the  Transferred  Assets,  (a) the  Subsidiaries  possess all
Licenses necessary for their operation of the Facilities at the locations and in
the manner presently operated,  (b) if required,  such Facilities are accredited
by  applicable  accrediting  agencies as necessary  for their  operations in the
manner presently  operated,  (c) such Facilities are certified for participation
in the Medicare program and have current and valid provider  contracts with such
program,  and (d) to the current actual knowledge of Seller,  there is no matter
which would  adversely  affect the  maintenance  of any such  Licenses,  program
participations or accreditations  other than matters that have been disclosed in
writing to Buyer.


                                      -31-

<PAGE>

         Section  3.11 U.S.  Person.  Neither  Seller  nor any  Subsidiary  is a
"foreign  person" for purposes of Section  1445 of the Internal  Revenue Code of
1986,  as amended  (the  "Code"),  or any other Laws  requiring  withholding  of
amounts paid to foreign persons.

         Section  3.12  Employee   Relations.   With  respect  to  the  Retained
Employees:

                  (a) Neither  Seller,  nor any Subsidiary nor any Facility is a
party to any  agreement  with any  union,  trade  association  or other  similar
employee  organization,  no written  demand has been made for  recognition  by a
labor  organization,  and to the best of Seller's  current  actual  knowledge no
union organizing  activities by or with respect to any such employees are taking
place; and

                  (b) There are no controversies (including, without limitation,
any unfair labor practice  complaints,  labor strikes,  arbitrations,  disputes,
work slowdowns or work  stoppages)  affecting a material number of such Retained
Employees  pending,  or to  the  best  of  Seller's  current  actual  knowledge,
threatened.

         Section  3.13  Employee  Plans.  None  of  Seller  or the  Subsidiaries
maintains  or makes  contributions  to any Pension  Plans as to which Buyer will
assume any  liability  as a result of the  Transactions.  With  respect to those
Pension Plans maintained or contributed to by Seller or the  Subsidiaries,  such
Pension Plans have been operated and  administered  in all material  respects in
acordance  with,  all  applicable  Laws. No act or failure to act by Seller or a
Subsidiary has resulted in a "prohibited transaction" (as defined in ERISA) with
respect to any Pension  Plan which is not subject to a statutory  or  regulatory
exception.  No "reportable  event" (as defined in ERISA, but excluding any event
for which  notice is waived  under the  ERISA  regulations)  has  occurred  with
respect to any  Pension  Plan which is subject to Title IV of ERISA.  No Pension
Plan has any accumulated  funding deficiency or liability to the Pension Benefit
Guaranty  Corporation.  With  respect  to each  Multiemployer  Plan,  there  has
occurred no "complete withdrawal" or "partial withdrawal," as each is defined in
Sections 4203 and 4205, respectively,  of ERISA, and all payments required to be
made to such Multiemployer Plans by a Subsidiary under any collective bargaining
agreement have been made.

         Section  3.14  Litigation.  Except  for  matters  associated  with  the
significant legal proceedings and investigations  referred to in Seller's Annual
Report on Form 10-K for the fiscal year ended May 31, 1997, as amended,  and its
Quarterly  Report on Form 10-Q for the  three  months  ended  August  31,  1997,
ordinary routine claims and litigation incidental to the businesses  represented
by the  Facilities  (including,  but not  limited to,  actions  for  negligence,
professional    malpractice,    workers'    compensation    claims,    so-called
"slip-and-fall"  claims and the like), and governmental  inspections and reviews
customarily made of businesses such as those operated from the Facilities, there
are no actions,  suits, claims or proceedings  pending, or to the current actual
knowledge of Seller,  threatened  against or affecting the Transferred Assets or
relating to the operations of the Facilities,  at law or in equity, or before or
by any federal, state, municipal or other governmental  department,  commission,
agency or instrumentality.

         Section 3.15 Tax  Returns.  All tax  returns,  statements,  reports and
forms or extensions  ("Returns")  with respect thereto required to be filed with
any federal,  state or local taxing authority on or before the Closing Date have
been or will be timely filed by Seller and


                                      -32-

<PAGE>

each Subsidiary and will be prepared in accordance in all material respects with
all  applicable  Laws.  Seller and each  Subsidiary  have timely  paid,  or have
obtained  extensions  to pay, all amounts shown as due by such Returns which are
required  to have been paid  before  the date  hereof  and will  timely  pay all
amounts  shown as due by such Returns which are required to be paid on or before
the Closing Date. No audits of any material Returns filed by or on behalf of the
Transferred  Subsidiaries  is pending or, to the  knowledge  of  HEALTHSOUTH  or
Seller, threatened.

         Section 3.16 Hazardous  Substances.  Except for matters which would not
have a Material Adverse Effect on the Transferred  Assets and matters  disclosed
by the environmental  surveys which have been made available to Buyer for review
prior to the execution and delivery hereof:

                  (a) Other than normal  amounts  incidental to the operation of
businesses such as the Facilities (to the extent stored, used and disposed of in
substantial  compliance  with  all  applicable  Laws),  there  are no  Hazardous
Materials (as defined below) upon, about, beneath or migrating or threatening to
migrate to or from the Owned Real  Properties  or the Leased Real  Properties or
the existence of any  violation in any material  respect of any Laws relating to
industrial   hygiene,   Hazardous   Materials   and   environmental   protection
("Environmental Regulations"); and

                  (b) There is no proceeding or action  pending or threatened by
any person or  governmental  agency  regarding  the  environmental  condition or
occupational safety of the Facilities.

"Hazardous Materials" shall mean any substance  (including,  without limitation,
any asbestos, formaldehyde, radioactive substance, hydrocarbons, polychlorinated
biphenyls,  industrial solvents, flammables,  explosives and any other hazardous
substance or toxic material) which, in any material respect,  is known to cause,
as of the date of this Agreement,  a health,  safety or environmental hazard and
require remediation at the behest of any governmental agency.

         Section 3.17  Financial Information.

                  (a)  Attached  hereto  as  Schedule  3.17(a)  is an  unaudited
statement of certain  combined  earnings from the operations of the  Transferred
Assets and Assumed  Liabilities (as they were constituted on the "as of" date of
such schedule)  before  interest,  income taxes,  depreciation  and amortization
("EBITDA")  for the fiscal  year ended May 31,  1997 and for the fiscal  quarter
ended August 31, 1997 (the "EBITDA  Statements").  The EBITDA Statements present
fairly the combined EBITDA of such operations, taken as a whole, as of the dates
and for the periods shown,  and were derived from and are in accordance with the
internal  books and  records of Seller and the  Subsidiaries  and the  regularly
prepared unaudited internal  financial  statements of the Facilities,  which are
prepared  on a basis  materially  in  accordance  with  the  generally  accepted
accounting  principles  utilized in the  preparation of the published  financial
statements of Seller.

                  (b)  Attached  hereto  as  Schedule  3.17(b)  is  a  regularly
prepared  internal  unaudited  combined  balance  sheet of the  Facilities as of
August 31, 1997 (the "Balance  Sheet";  collectively,  the Balance Sheet and the
EBITDA Statement are the "Financial Schedule"). The


                                      -33-

<PAGE>

Balance Sheet has been prepared  from,  and is in accordance  with, the internal
books and  records  of Seller  and the  Subsidiaries  and  presents  fairly  the
financial  condition of the Facilities,  taken as a whole, as of the date shown.
The Balance  Sheet was prepared in accordance  with  Seller's  practices for the
preparation  of internal  financial  statements,  consistently  applied,  and is
materially  in  accordance  with the generally  accepted  accounting  principles
utilized in the preparation of the published financial statements of Seller.

                  (c) Notwithstanding the foregoing, the Financial Schedule does
not (i) reflect allocations of indirect costs and overhead (other than benefits,
insurance   (including   workers'   compensation)   and  legal   costs)  or  the
corresponding  cost  reimbursement  impact of claiming  such costs in a Facility
cost  report,  (ii)  reflect  all  intercompany  eliminations,  adjustments  and
accruals  that are reflected in financial  statements  of Seller,  (iii) contain
footnotes or other  explanatory  material  associated with financial  statements
prepared in accordance with generally accepted  accounting  principles,  or (iv)
contain  normal  year-end  adjustments  with  respect  to  interim  periods.  In
addition,  the  Financial  Schedule is to be read in  conjunction  with,  and is
subject to, all notes and other explanatory material set forth therein.

                  (d) Nothing in Section  4.10  hereof  shall be deemed to limit
the representations made in this Section 3.17.

                  Section 3.18 Changes  Since Balance  Sheet.  Since the date of
the Balance Sheet and up to and including the date of this Agreement, other than
as contemplated or permitted by this Agreement, Seller and the Subsidiaries have
conducted  the  businesses  represented  by the  Transferred  Assets only in the
ordinary  and  normal  course,   except  for  matters  in  anticipation  of  the
divestiture of the Transferred Assets, and there has not been:

                  (a) Any entry into or termination by Seller or a Subsidiary of
any material commitment,  contract, agreement or transaction (including, without
limitation, any borrowing or lending transaction or capital expenditure) related
to the  Transferred  Assets except for  transactions  in the ordinary  course of
business and  renegotiation of credit  agreements to which Seller and certain of
its subsidiaries are parties;

                  (b) Any casualty,  physical  damage,  destruction  or physical
loss respecting,  or change in the physical condition of, the Facilities and the
Equipment that has had a Material Adverse Effect on the Transferred Assets;

                  (c) Any transfer of or rights granted under any contract which
would have been an Assumed Contract on the date of the Balance Sheet;

                  (d) Other than in the ordinary course of business, any sale or
other  disposition of any fixed asset included in the Balance Sheet having a net
book value in excess of $100,000 or any material mortgage,  pledge or imposition
of any lien or other  encumbrances  on any such asset,  or sales or dispositions
of, or the imposition of material encumbrances on, fixed assets included in such
Balance Sheet having a net book value that exceeds  $5,000,000 in the aggregate,
or any sale or other disposition of Inventories included in the Balance Sheet;

                  (e) Any  amendment  (other than general  amendments  which the
carrier makes for a category of policy) or termination  of any insurance  policy
or failure to renew any


                                      -34-

<PAGE>

insurance  policy  covering  the  Transferred  Assets,  except  for  amendments,
terminations or failures to renew that do not have a Material  Adverse Effect on
the Transferred Assets;

                  (f) Any default or breach by Seller or a Subsidiary  under any
contract  that would have been an Assumed  Contract  on the date of the  Balance
Sheet which,  when viewed  individually or in the aggregate of all such breaches
or defaults, has had a Material Adverse Effect on the Transferred Assets; or

                  (g) Any increase made in the compensation levels of any member
of senior  management  of any  Facility,  or any  general  increase  made in the
compensation  levels of the other  Retained  Employees,  except in the  ordinary
course of business.

         Section 3.19 Lists of Other Data.  Except for contracts and  agreements
already listed in Schedule 2.1(g),  Schedules 3.19(a) through (g) contain lists,
complete and correct as of the dates shown thereon, of the following:

                  (a) The most recent regularly generated depreciation schedules
related to tangible  personal  property  constituting  Equipment,  together with
copies of such schedules;

                  (b) Each lease  constituting an Other Assigned  Contract as of
such date  (whether  an  operating  or a capital  lease)  under  which  tangible
personal  property  was  leased,  where the  annualized  lease  payments  exceed
$100,000;

                  (c) A brief  description  of insurance in force covering fixed
assets that would constitute Transferred Assets as of such date;

                  (d) All compensation,  bonus,  incentive,  deferred  payments,
retirement, pension, severance,  profit-sharing, stock purchase and stock option
plans, group life, automobile,  medical,  dental,  disability,  welfare or other
employee  benefit plans or insurance  policies,  and other similar  arrangements
(collectively,  "Employee  Benefit  Arrangements")  generally  applicable to the
Retained  Employees or a  substantial  part thereof or generally  applicable  to
members of senior management of the Facilities as of such date;

                  (e) The aggregate  accrued paid time off  (including  vacation
time) and earned or available sick pay for all employees at each Facility, as of
the date shown; and

                  (f) Material Licenses of Seller and the Subsidiaries in force,
as of the date shown,  with respect to the health care facilities to be included
in the Transferred Assets.

         3.20  Compliance  with Laws in General.  Except for  matters  disclosed
pursuant  to or  described  in  Sections  3.10,  3.14 and 3.16,  Seller  and the
Subsidiaries  have not  received  any  notices  of  violations  of any Laws with
respect  to  the  businesses   represented  by  the  Transferred  Assets,  which
violations,  if  established,  would  have  a  Material  Adverse  Effect  on the
Transferred Assets.




                                      -35-

<PAGE>

                                    ARTICLE 4
                     REPRESENTATIONS AND WARRANTIES OF BUYER

         Buyer hereby  represents and warrants to HEALTHSOUTH and Seller,  as of
the date hereof, as follows:

         Section 4.1 Organization  and Corporate  Power.  Buyer is a corporation
duly  incorporated  and validly existing under the laws of, and is authorized to
exercise its corporate powers, rights and privileges and is in good standing in,
the State of Delaware and has full  corporate  power to carry on its business as
presently  conducted and to own or lease and operate its  properties  and assets
now owned or leased and operated by it.

         Section  4.2  Authority  Relative  to this  Agreement.  The  execution,
delivery and  performance of this  Agreement and the Related  Agreements and the
consummation of the transactions  contemplated hereby and thereby have been duly
and  effectively  authorized  by the  board  of  directors  of  Buyer;  no other
corporate act or proceeding on the part of Buyer,  its board of directors or its
stockholders  is  necessary  to  authorize  this  Agreement,  any  such  Related
Agreement or the transactions  contemplated  hereby and thereby.  This Agreement
has been, and each of the Related Agreements contemplated hereby will, as of the
Closing,  have been,  duly  executed and  delivered by Buyer and this  Agreement
constitutes,  and each such Related  Agreement  when executed and delivered will
constitute,  a valid and binding obligation of Buyer,  enforceable against Buyer
in accordance with its terms, except that the remedy of specific performance and
injunctive  and other  forms of  equitable  relief may be  subject to  equitable
defenses and to the  discretion of the court before which any  proceeding may be
brought.

         Section 4.3 Absence of Breach.  Subject to the  provisions  of Sections
4.4 and 4.5 below regarding private party and governmental  consents, and except
for  compliance  with  the  requirements  of the HSR Act and any  regulatory  or
licensing  Laws  applicable  to the  businesses  and assets  represented  by the
Transferred  Assets,  the execution,  delivery and  performance by Buyer of this
Agreement  and the Related  Agreements  do not, (a) conflict with or result in a
breach of any of the  provisions of Charter  Documents of Buyer,  (b) contravene
any Law or cause the  suspension  or  revocation  of any  License  presently  in
effect, which affects or binds Buyer or any of its material  properties,  except
where such contravention,  suspension or revocation will not affect the validity
or enforceability  of this Agreement and the Related  Agreements or the validity
of the  Transactions  contemplated  hereby and thereby,  or (c) conflict with or
result in a breach of or default under any indenture or loan or credit agreement
or any other agreement or instrument to which Buyer is a party or by which it or
any of its  properties may be affected or bound,  the effect of which  conflict,
breach or default would be a Material  Adverse Effect on Buyer or on its ability
to consummate the Transactions.

         Section  4.4  Private  Party  Consents.  The  execution,  delivery  and
performance by Buyer of this Agreement and the Related Agreements do not require
the  authorization,  consent or approval of any  non-governmental  third  party,
other than the consent of the required  lenders under Buyer's  principal  credit
agreement.

         Section  4.5  Governmental  Consents.   The  execution,   delivery  and
performance by Buyer of this Agreement and the Related Agreements do not require
the authorization,

                                      -36-

<PAGE>

consent, approval,  certification,  license or order of, or any filing with, any
court or governmental agency,  except for compliance with the HSR Act and except
for  such  governmental  authorizations,  consents,  approvals,  certifications,
licenses  and orders  that  customarily  accompany  the  transfer of health care
facilities such as the Facilities.

         Section 4.6 Brokers.  Other than Donaldson Lufkin & Jenrette Securities
Corporation ("DLJ"), no broker,  finder, or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with this Agreement
or  the   transactions   contemplated   hereby  based  upon  any  agreements  or
arrangements or  commitments,  written or oral, made by or on behalf of Buyer or
any of its Affiliates.  Buyer shall be solely responsible for the payment of any
such fee or commission to DLJ.

         Section 4.7 Qualified for Licenses.  To the current actual knowledge of
Buyer,  Buyer is qualified  to obtain any  Licenses  and program  participations
necessary for the operation by Buyer of the Transferred  Assets in substantially
the same manner as the Transferred  Assets are presently  operated by Seller and
the Subsidiaries.

         Section 4.8 Financial  Ability to Perform.  Buyer has liquid capital or
committed  sources  therefor  sufficient  to permit  it to  perform  timely  its
obligations  hereunder,  including,  but not  limited  to,  the  payment  of the
Tentative  Purchase  Price to Seller at the  Closing  and the other  payments to
Seller required hereunder.

         Section 4.9  [Intentionally omitted.]

         Section 4.10 "AS IS" Purchase. Except as set forth in Sections 3.16 and
6.2.(c),   Buyer  acknowledges  and  agrees  (and  upon  which  Seller  and  its
Subsidiaries  shall have materially relied in selling the Transferred  Assets to
Buyer at the  Purchase  Price and on the other terms and  conditions  herein set
forth)  that Seller  makes no  representation  or  warranty,  either  express or
implied, with respect to the physical condition of the Transferred Assets, their
fitness or suitability  for any particular  purpose,  or their  compliance  with
applicable  local  building  codes,  safety,  fire,  land  use  or  access  laws
(including,  without  limitation,  the Americans With Disabilities  Act), or any
similar  Law.  In this  respect,  Buyer  confirms  that it is  relying  upon its
investigation of the Transferred Assets to purchase the same on an "AS IS" basis
and in "WITH ALL FAULTS"  condition.  Without  limiting  the  generality  of the
foregoing,  Buyer hereby  acknowledges  that,  except as otherwise  specifically
provided in this Agreement,  neither Seller, nor any of its officers,  employees
or  agents,  has made any  warranty  regarding  the  physical  condition  of the
Transferred Assets,  including, but not limited to, any warranty of habitability
or warranty of  merchantability  or warranty  of  suitability  for a  particular
purpose,   and  Buyer  hereby  expressly   disclaims  the  implied  warranty  of
habitability,  the implied warranty of merchantability,  the implied warranty of
fitness  for a  particular  purpose,  and all  expressed  or implied  warranties
relating to the quality of or otherwise  relating to the  physical  condition of
the Transferred Assets.

         Section 4.11 No Assurance. Buyer acknowledges and agrees that the rates
or bases  used in  calculating  payments  or  reimbursements  to it by any Payor
(including but not limited to Medicare) may differ from the rates and bases used
in calculating such payments or  reimbursements  to Seller and the Subsidiaries.
Buyer  further  acknowledges  and agrees that the  Financial  Schedule  has been
prepared based upon the records and historical methodology of


                                      -37-

<PAGE>

Seller as described in Section 3.17, and that HEALTHSOUTH has not  independently
verified  the  information  contained  therein;  provided,   however,  that  the
foregoing  clause  shall not impair  Buyer's  right to the  satisfaction  of the
condition set forth in Section 8.2.


                                    ARTICLE 5
                             COVENANTS OF EACH PARTY

         Section 5.1 Efforts to  Consummate  Transactions.  Subject to the terms
and  conditions  herein  provided,  each of the parties hereto agrees to use its
reasonable  commercial  efforts to take, or to cause to be taken, all reasonable
actions  and to do, or to cause to be done,  all  reasonable  things  necessary,
proper or advisable under  applicable Laws to consummate and make effective,  as
soon as reasonably practicable,  the Transactions contemplated hereby, including
the satisfaction of all conditions thereto set forth herein.  Such actions shall
include,  without  limitation,  exerting their reasonable  efforts to obtain the
consents,  authorizations  and approvals of all private parties and governmental
authorities whose consent is reasonably necessary to effectuate the Transactions
contemplated  hereby,  and  effecting  all  other  necessary  registrations  and
filings,  including  but not  limited to  filings  under  Laws  relating  to the
transfer or  obtaining of  necessary  Licenses,  under the HSR Act and all other
necessary filings with governmental authorities.  The foregoing notwithstanding,
it shall be the responsibility of Buyer to use its reasonable commercial efforts
and to act diligently and at its expense to obtain any authorizations, approvals
and consents in connection  with acquiring  Licenses and program  participations
that will permit it to operate the Facilities  after the Closing,  provided that
Buyer will seek to obtain  Licenses  and program  participations  subject to the
existing conditions under which the Subsidiaries operate the Facilities and will
not seek to change the same until the Transferred Assets and Assumed Liabilities
respecting  the  Facilities in question have been  transferred to and assumed by
Buyer.  Subject  to  Sections  2.6(a)  and 5.5,  neither  party  shall  have any
liability to the other if, after using its reasonable  commercial  efforts (and,
in the case of Buyer's efforts to obtain requisite Licenses, acting diligently),
it is unable to obtain any consents,  authorizations or approvals  necessary for
such party to consummate the Transactions. As used herein, the terms "reasonable
commercial efforts" or "reasonable  efforts" do not include the provision of any
consideration to any third party or the suffering of any economic detriment to a
party's   ongoing   operations   for  the   procurement  of  any  such  consent,
authorization  or approval  except for the costs of gathering and supplying data
or other  information  or making any  filings,  fees and expenses of counsel and
consultants and for customary fees and charges of  governmental  authorities and
accreditation organizations.

         Section 5.2  Cooperation.  Prior to and after the  Closing,  upon prior
reasonable  written  request,  each party agrees to cooperate  with the other in
every reasonable commercial way to consummate the Transactions.  Notwithstanding
the foregoing,  all analyses,  appearances,  presentations,  memoranda,  briefs,
arguments,  opinions and  proposals  made or submitted by or on behalf of either
party hereto in connection with proceedings  under or relating to the HSR Act or
any other federal or state  antitrust or fair trade law, or made or submitted by
or on behalf of Buyer in connection with  proceedings to obtain the Licenses and
program  participations  referred to in Section 5.1 hereof,  shall be subject to
the joint  approval or  disapproval  and the joint  control of Buyer and Seller,
acting with the advice of their respective  counsel,  it being the intent of the
foregoing that the parties hereto will consult and cooperate


                                      -38-

<PAGE>

with one  another,  and  consider  in good  faith the views of one  another,  in
connection with any such analysis,  presentation,  memorandum,  brief, argument,
appearance,  opinion or proposal;  provided  that nothing  herein shall  prevent
either  party   hereto  or  any  of  their   Affiliates   or  their   authorized
representatives  from (a) making or submitting  any such  analysis,  appearance,
presentation,  memorandum, brief, argument, opinion or proposal in response to a
subpoena  or  other  legal  process  or as  otherwise  required  by Law,  or (b)
submitting factual  information to the United States Department of Justice,  the
Federal  Trade  Commission,  any  other  governmental  agency  or any  court  or
administrative  law judge in  response  to a request  therefor  or as  otherwise
required by Law.

         Section 5.3 Further  Assistance.  From time to time,  at the request of
either party,  whether on or after the Closing,  without further  consideration,
either  party,  at its  expense  and  within a  reasonable  amount of time after
request hereunder is made, shall execute and deliver such further instruments of
assignment,  transfer  and  assumption  and take  such  other  action  as may be
reasonably  required to more  effectively  assign and transfer  the  Transferred
Assets to,  and vest the  Assumed  Liabilities  in,  Buyer,  deliver or make the
payment of the Purchase Price to Seller or any amounts due from one party to the
other pursuant to the terms of this Agreement or confirm  Seller's  ownership of
the Excluded Assets and obligations with respect to the Excluded Liabilities.

         Section 5.4 Cooperation Respecting Proceedings. After the Closing, upon
prior reasonable written request,  each party shall cooperate with the other, at
the requesting  party's  expense (but including only  out-of-pocket  expenses to
third  parties  and not the costs  incurred  by any party for the wages or other
benefits  paid  to  its  officers,   directors  or  employees),   in  furnishing
information,  testimony and other  assistance in connection  with any inquiries,
actions,  tax or cost  report  audits,  proceedings,  arrangements  or  disputes
involving  either of the parties hereto (other than in connection  with disputes
between the parties  hereto) and based upon  contracts,  arrangements or acts of
Seller or any of the  Subsidiaries  which were in effect or occurred on or prior
to the Closing and which relate to the Transferred  Assets,  including,  without
limitation, arranging discussions with (and the calling as witness of) officers,
directors, employees, agents, and representatives of Buyer.

         Section  5.5  Expenses.  Whether or not the  Transactions  contemplated
hereby are  consummated,  except as otherwise  provided in this  Agreement,  all
costs  and  expenses   incurred  in  connection  with  this  Agreement  and  the
transactions  contemplated  hereby  shall be paid by the  party  incurring  such
expenses. Notwithstanding the foregoing:

                  (a) Costs associated with preliminary  title reports and title
policies  shall be borne by Seller up to the costs that would have been incurred
had the title policies been standard coverage  policies of title insurance,  and
the remaining  costs,  if any,  including all costs of any surveys in connection
therewith, shall be borne by Buyer;

                  (b) All escrow charges, and charges of any neutral independent
public  accountant or mediator,  and related  costs,  shall be borne one-half by
Buyer and  one-half  by Seller (it being  agreed  that each party shall bear the
costs of its own independent public accountant or designated mediator);


                                      -39-

<PAGE>

                  (c) All recording  costs and charges  respecting real property
will be allocated between Buyer and Seller in accordance with the customs of the
counties in which the pertinent real property is located;

                  (d) All transfer taxes  respecting real property will be borne
by Buyer;

                  (e) All fees  and  charges  of  governmental  authorities  and
accreditation   agencies  in   connection   with  the   transfer,   issuance  or
authorization of any License,  accreditation or program  participation  shall be
borne by Buyer;

                  (f) All fees or costs associated with the issuance of any bond
or the establishment of any escrow required by Section 2.10(a) shall be borne by
Buyer;

                  (g) All fees,  charges or costs,  including  auditing fees and
expenses,  incurred  as a result  of  Buyer's  compliance  with  the  Securities
Exchange  Act of 1934,  as amended,  and the rules and  regulations  thereunder,
shall be borne by Buyer; and

                  (h) Costs not to exceed  $6,000,000  incurred by  HEALTHSOUTH,
Seller and the Subsidiaries in connection with investment  banking and financial
advisory  services  relating to the  Transactions  rendered by Smith Barney Inc.
shall be borne by Buyer.

All such charges and expenses shall be promptly  settled  between the parties at
the Closing or upon termination or expiration of further  proceedings under this
Agreement,  or with respect to such charges and  expenses not  determined  as of
such time, as soon thereafter as is reasonably practicable.

         Section 5.6 Announcements;  Confidentiality. Prior to the Closing Date,
no press or other  public  announcement,  or  public  statement  or  comment  in
response to any  inquiry,  relating  to the  transactions  contemplated  by this
Agreement  shall be issued or made by Buyer or Seller or any Subsidiary  without
the joint  approval of Buyer and Seller;  provided that a press release or other
public announcement, statement or comment made without such joint approval shall
not be in  violation  of this  Section  if it is made in  order to  comply  with
applicable  securities  Laws or stock  exchange  policies and in the  reasonable
judgment of the party making such release or announcement,  based upon advice of
independent counsel, prior review and joint approval, despite reasonable efforts
to obtain the same, would prevent  dissemination of such release or announcement
in a timely enough  fashion to comply with such Laws or policies,  provided that
in all  instances  prompt notice from one party to the other shall be given with
respect to any such release, announcement,  statement or comment. Subject to the
foregoing,  the  parties  hereto  recognize  and  agree  that  all  information,
instruments,  documents and details  concerning the businesses of Buyer,  Seller
and the Subsidiaries are strictly  confidential,  and Seller and Buyer expressly
covenant and agree with each other that,  prior to and after the  Closing,  they
will not,  nor will  they  allow any of their  respective  officers,  directors,
employees,  representatives  or  agents  (including  professional  advisors)  to
disclose or publicly  comment  upon any matters  relating to the business of the
other or relating to this Agreement,  including,  without limitation, the terms,
timing or progress of the transactions  contemplated hereby, or its negotiation,
terms, provisions or conditions, including Purchase Price, except for disclosure
to their respective  professional  advisors (who shall agree not to disclose the
same) which is reasonably necessary to effectuate


                                      -40-

<PAGE>

the  Transactions  contemplated  hereby  and in a  manner  consistent  with  the
provisions  of  this  Agreement.  Notwithstanding  anything  contained  in  this
Agreement to the contrary,  except in connection with filings to obtain Licenses
necessary for consummation of the Transactions  (but subject to Section 5.2) and
except as may be required by any Laws (based on advice of independent  counsel),
Buyer  shall  not  (nor  shall  Buyer  allow  any  of its  officers,  directors,
employees,  representatives  or agents to), without the prior written consent of
Seller (in  Seller's  sole and  absolute  discretion),  disclose to or otherwise
discuss with any person,  regulatory board,  fiscal intermediary or other entity
Buyer's proposed purchase of the Transferred  Assets,  Seller's proposed sale of
the  Transferred  Assets,  the contents of this Agreement or the  negotiation of
this Agreement.  Each party shall keep all  information  obtained from the other
either  before or after the date of this  Agreement  confidential,  and  neither
party  shall  reveal  such  information  to, nor  produce  copies of any written
information  for,  any  person  outside  its  management  group or its  lenders,
attorneys,  accountants,  investment  bankers  and other  professional  advisors
without  the prior  written  consent of the other  party,  unless  such party is
compelled to disclose such information by judicial or administrative  process or
by any other  requirements  of Law.  If the  Transactions  contemplated  by this
Agreement  should fail to close for any reason,  each party shall  return to the
other as soon as  practicable  all originals  and copies of written  information
provided  to such  party by or on  behalf  of the  other  party and none of such
information  shall be used by  either  party,  or  their  employees,  agents  or
representatives in the business  operations of any person.  Notwithstanding  the
foregoing,  each party's  obligations  under this Section shall not apply to any
information or document  which is or becomes  available to the public other than
as a result of a disclosure by the other party in violation of this Agreement or
other obligation of confidentiality  under which such information may be held or
becomes available to the party on a  non-confidential  basis from a source other
than the other party or its officers, directors,  employees,  representatives or
agents.   The  parties'   obligations  under  this  Section  shall  survive  the
termination of this Agreement. Nothing in this Section shall, or is intended to,
impair or modify any of the  rights or  obligations  of Buyer or its  Affiliates
under that certain confidentiality agreement dated ______________,  1997, all of
which remain in effect until  termination of such letter agreement in accordance
with its  terms.  Notwithstanding  the  foregoing,  however,  Buyer may  provide
information    concerning   the   Transferred   Assets   constituting   Seller's
institutional pharmacy business to potential purchasers thereof so long as Buyer
obtains a confidentiality  agreement (which shall name HEALTHSOUTH and Seller as
third  party  beneficiaries)  containing  substantially  the  same  terms as the
confidentiality agreement between HEALTHSOUTH and Buyer.

         Section 5.7 Access to Certain Records. Buyer shall provide HEALTHSOUTH,
Seller and the  Subsidiaries  with access upon  reasonable  notice to any or all
portion of the  medical,  clinical  and other  records  directly  or  indirectly
associated with the admission, care and treatment of patients on or prior to the
closing date (the "Patient  Records") and all financial and other records of the
Facilities  for the period  ending on or prior to the Closing  Date (the Patient
Records and such other  records are  collectively  referred to as the  "Facility
Records") for such proper  purposes as HEALTHSOUTH,  Seller or the  Subsidiaries
may require. HEALTHSOUTH,  Seller and the Subsidiaries shall utilize such access
to  Facility  Records  in  accordance  with all  applicable  provisions  of law,
including, but not limited to, provisions relating to confidentiality of Patient
Records.  HEALTHSOUTH  shall provide Buyer with access upon reasonable notice to
such records of Seller and the  Subsidiaries  which are not transferred to Buyer
hereunder for such proper purposes as Buyer may require.


                                      -41-

<PAGE>

         Section 5.8 Tax  Election.  Buyer is  eligible  to make,  and Buyer and
Seller will jointly  make, a timely  election  under  Section  338(h)(10) of the
Internal  Revenue Code of 1986, as amended with respect to the shares of capital
stock of National Institutional Pharmacy Services, Inc. included in the Assigned
Stock.  At the  Closing,  Buyer  and  Seller  will  jointly  execute a Form 8023
reflecting such election,  and therafter  Seller will timely file such form with
the Internal Revenue Service and will provide proof of such filing to Buyer.


                                    ARTICLE 6
                 ADDITIONAL COVENANTS OF SELLER AND HEALTHSOUTH

         Seller and HEALTHSOUTH hereby additionally covenant,  promise and agree
as follows:

         Section 6.1  Conduct  Pending  Closing.  Prior to  consummation  of the
Transactions  contemplated  hereby  or the  termination  or  expiration  of this
Agreement  pursuant  to its  terms,  unless  Buyer  shall  otherwise  consent in
writing, which consent shall not be unreasonably withheld or delayed, and except
for  actions  taken  pursuant to Assumed  Contracts,  or which arise from or are
related to the anticipated  transfer of the Transferred  Assets, or as otherwise
contemplated by this Agreement,  HEALTHSOUTH and Seller shall,  and Seller shall
cause the Subsidiaries to:

                  (a) Conduct the business  represented  by, and otherwise  deal
with, the Transferred  Assets only in the usual and ordinary course,  materially
consistent with practices followed prior to the execution of this Agreement;

                  (b) Use  reasonable  efforts to keep  intact  the  Transferred
Assets and the business they represent and to preserve relationships  beneficial
to such business that doctors,  patients, Payors, suppliers and others have with
the Facilities;

                  (c) Except as required by their terms,  not amend,  terminate,
renew,  fail to  renew or  renegotiate  any  material  contract,  except  in the
ordinary course of business and consistent with practices of the recent past, or
default (or take or omit to take any action that,  with or without the giving of
notice or passage of time, would constitute a default) in any of its obligations
under any such  contracts,  that  would be an  Assumed  Contract  as of the date
hereof;

                  (d) Not sell, lease, mortgage,  encumber, or otherwise dispose
of or  grant  any  interest  in,  or  permit  or  suffer  to  exist  any lien or
encumbrance  upon or the  disposition of, any Facility,  Inventory,  or items of
Equipment  having an  undepreciated  book value in excess of $50,000,  including
without limitation any of its leasehold interests therein, whether by the taking
of action or the failure to take  action,  except for (i) sales of  Inventory in
the ordinary course, (ii) liens constituting  Permitted  Encumbrances,  or (iii)
sales or  dispositions  of Equipment in the ordinary course of business that are
consistent with practices of the recent past;

                  (e)  Maintain  in force  and  effect  the  insurance  policies
identified in Section 3.19(c);


                                      -42-

<PAGE>

                  (f) Not  enter  into any  contract  that  will  constitute  an
Assumed Contract as of the Closing except in the ordinary course of business and
consistent with practices of the recent past; or

                  (g) Not grant any general or uniform  increase in the rates of
pay or benefits to Retained  Employees  (or a class  thereof) or any increase in
salary or benefits of any senior  management  personnel of any Facility,  except
for  compensation  previously  agreed  to  prior to the date  hereof  or  normal
year-end merit increases consistent with HEALTHSOUTH's general practices;

provided  that  nothing  in  this  Section  shall  (i)  obligate  Seller  or any
Subsidiary to make  expenditures  other than in the ordinary  course of business
and  consistent  with  practices of the recent past or to  otherwise  suffer any
economic  detriment,  (ii) preclude  Seller from paying,  prepaying or otherwise
satisfying any liability  which, if outstanding as of the Closing Date, would be
an Assumed  Liability or an Excluded  Liability,  or (iii) preclude  Seller from
incurring any  liabilities or obligations to any third party in connection  with
obtaining such party's consent to any transaction contemplated by this Agreement
or the Related  Agreements  provided such liabilities and obligations under this
clause (iii) shall be Excluded Liabilities pursuant to Section 2.4(h) hereof.

         Section 6.2 Access and  Information.  Subject to the  restrictions  set
forth in Section 5.6  respecting  confidentiality  and  provided  that Buyer has
complied with each and every provision  thereof,  Seller shall,  and shall cause
the  Subsidiaries  to,  afford  Buyer,  and the counsel,  accountants  and other
representatives of Buyer, reasonable access, throughout the period from the date
hereof to the Closing,  to the Transferred  Assets and the employees,  personnel
and medical staff associated therewith and all the properties, books, contracts,
commitments,   cost  reports  and  records  respecting  the  Transferred  Assets
(regardless  of where such  information  may be  located).  Such access shall be
afforded  after no less than 24  hours'  prior  written  notice,  during  normal
business hours whenever reasonably possible and only in such manner so as not to
disturb  patient  care  or to  interfere  with  the  normal  operations  of  the
Facilities;  provided,  however, that, notwithstanding the foregoing and subject
to the provisions  concerning  nondisclosure  set forth in Section 5.6,  without
first  obtaining the written  consent of the  Executive  Vice  President,  Chief
Financial  Officer and Treasurer of HEALTHSOUTH or the Senior Vice President and
Corporate  Counsel  of  HEALTHSOUTH,  which  consent  shall not be  unreasonably
withheld,  neither Buyer nor its counsel,  accountants and other representatives
shall tour or visit the Facilities or contact any of the employees, personnel or
medical  staff  thereof;  and provided  further that until the first to occur of
November 3, 1998 or the Closing,  under no circumstances shall Buyer solicit the
employment  of any  employees  of  Seller or its  Subsidiaries,  except as Hired
Employees  pursuant to the terms hereof or except as may be  permitted  with the
prior written  consent of a responsible  officer of Seller.  Seller's  covenants
under this Section are made with the understanding that Buyer shall use all such
information in compliance with all Laws.  Buyer shall not have access to patient
or  employee  records or any other  records  the  disclosure  of which  would be
prohibited by any Law, accreditation standards, or rule or agreement (express or
implied) of  confidentiality,  except  that Buyer may be granted  access to such
records to the extent they are  appropriately  redacted and in  conformity  with
such  other  reasonable  procedures  as may be  required  to conform to any such
requirements   of  Law,   accreditation   standards  or  rule  or  agreement  of
confidentiality.


                                      -43-

<PAGE>

         Section 6.3 Updating.  HEALTHSOUTH and Seller shall notify Buyer of any
changes or  additions  to any of Seller's  Schedules  to this  Agreement  by the
delivery of updates  thereof,  if any, not later than two business days prior to
the Closing. Subject to the provisions of Sections 4.9 and 4.10, no such updates
made  pursuant  to this  Section  shall  be  deemed  to cure any  breach  of any
representation  or warranty made in this  Agreement,  unless Buyer  specifically
agrees  thereto in writing,  nor shall any such  notification  be  considered to
constitute  or give rise to a waiver by Buyer of any condition set forth in this
Agreement. In addition,  HEALTHSOUTH and Seller shall provide Buyer with monthly
updated financial  information in substantially the form heretofore  provided by
HEALTHSOUTH  to Buyer  within 25 days after the close of each month prior to the
Closing Date.

         Section 6.4 No Solicitation.  HEALTHSOUTH will not, and shall cause the
Seller and the  Subsidiaries  not to, and will use its best efforts to cause its
and  their  officers,  employees,  agents  and  representatives  (including  any
investment  banker),  in their capacity as such, not to, directly or indirectly,
solicit,  encourage or initiate any  discussions  with, or, subject to fiduciary
duties to  stockholders,  negotiate  or  otherwise  deal with,  or  provide  any
information to, any corporation,  partnership,  person or other entity or group,
other than Buyer and its officers,  employees and agents, concerning any sale of
or similar  transactions  involving the  Transferred  Assets or the stock of the
Subsidiaries.  None of the foregoing shall prohibit the provision of information
to others in a manner in keeping  with the  ordinary  conduct of  HEALTHSOUTH's,
Seller's or the Subsidiaries' businesses.

         Section 6.5 Name Changes. To the extent that the corporate names of any
of the Subsidiaries  incorporate or are substantially similar to the Transferred
Business  Names,  Seller  agrees to cause the  Subsidiaries  promptly  after the
Closing  to  take  all  action  necessary  to  change  such  names  so as not to
incorporate or be substantially similar to the Transferred Business Names.

         Section  6.6  Use of  Controlled  Substance  Licenses.  To  the  extent
permitted by Law, Buyer shall have the right,  either as purchaser or as manager
under a  Management  Agreement,  for a period not to exceed the later of (a) 120
days following the Closing and (b) the termination of the applicable  Management
Agreement,  to operate under the Licenses of Seller or the Subsidiaries relating
to controlled substances and the operation of pharmacies, until Buyer is able to
obtain such Licenses for itself. Seller shall execute and deliver, and cause the
pertinent  Subsidiaries  to execute  and deliver to Buyer any powers of attorney
and other  instruments  which Buyer or the appropriate  governmental  agency may
reasonably  require in  connection  with  Buyer's  use of such  Licenses.  Buyer
acknowledges  that it shall apply for all such  Licenses  as soon as  reasonably
possible and diligently pursue such applications in accordance with Section 5.1.

         Section 6.7 Letters of Intent. Promptly after execution and delivery of
this Agreement,  Seller shall provide Buyer with copies of all letters of intent
or similar  non-binding  expressions of intent or understanding  with respect to
the acquisition or divestiture of any Facility,  and, to the extent such letters
of intent  are  terminable,  will give any  required  notice of  termination  if
directed in writing by Buyer to do so.




                                      -44-

<PAGE>

                                    ARTICLE 7
                          ADDITIONAL COVENANTS OF BUYER

         Section  7.1  Waiver  of Bulk  Sales  Law  Compliance.  Subject  to the
indemnification  provisions of Section  11.3(a)(iii) hereof, Buyer hereby waives
compliance  by Seller and the  Subsidiaries  with the  requirements,  if any, of
Article  6 of the  Uniform  Commercial  Code as in force  in any  state in which
Transferred  Assets are located and all other  similar laws  applicable  to bulk
sales and transfers.

         Section 7.2 Resale  Certificate.  Buyer agrees to furnish to Seller and
the  Subsidiaries  any  resale  certificate  or  certificates  or other  similar
documents  reasonably requested by Seller to comply with pertinent sales and use
tax laws.

         Section  7.3  Release of Assumed  Guarantees.  Buyer shall use its best
efforts to obtain the release of HEALTHSOUTH, Seller and the Subsidiaries (other
than the  Transferred  Subsidiaries,  from the Assumed  Guarantees and any other
Assumed Liabilities for which HEALTHSOUTH,  Seller or any Subsidiary (other than
a  Transferred  Subsidiary)  remains  contingently  liable  after  the  Closing;
provided,  however,  that "best efforts" shall not be deemed to require Buyer to
pay more than $500,000 in the aggregate as consideration for the granting of the
release of HEALTHSOUTH,  Seller and the Subsidiaries (other than the Transferred
Subsidiaries)  from such  liabilities  (exclusive of any amounts paid to satisfy
the underlying obligations).

         Section 7.4 Tax Matters.  Buyer  acknowledges that either as manager or
assignee of the Assigned  Stock,  Buyer shall be responsible for the preparation
of tax returns for the Transferred  Subsidiaries.  It is further acknowledged by
Buyer that,  subject to the provisions of Section 2.4(a) regarding income taxes,
Taxes  (including,  without  limitation,  the Florida indigent care tax) imposed
upon the right or privilege to do business from the Facilities after the Closing
shall  be  Buyer's  responsibility  even if  measured  by  gross  receipts,  net
operating  revenues or patient days for a period  ending on, before or including
the Closing Date.

         Section  7.5  Letters  of Credit.  Subject to the terms and  conditions
hereof,  at the Closing,  Buyer shall cause  letters of credit and  indemnity or
performance  bonds to be provided to substitute  for those letters of credit and
bonds  listed in Schedule  7.5, so that at and as of the Closing  Seller and its
Affiliates shall have no further  obligation to provide such designated  letters
of credit or bonds.


                                    ARTICLE 8
                          BUYER'S CONDITIONS TO CLOSING

         The obligations of Buyer to consummate the  Transactions at the Closing
shall be subject to the  fulfillment at or prior to the Closing of the following
conditions, unless Buyer waives such fulfillment:

         Section 8.1 Performance of Agreement. HEALTHSOUTH and Seller shall have
performed in all material  respects its agreements and obligations  contained in
this Agreement required to be performed on or prior to the Closing.


                                      -45-

<PAGE>

         Section 8.2  Accuracy of  Representations  and  Warranties.  Subject to
Sections 4.9 and 4.10, the representations and warranties of Seller set forth in
Article 3 of this Agreement shall be true in all respects as of the date of this
Agreement  (unless the matters that caused the inaccuracy or inaccuracies  which
would  otherwise  result in a failure of this  condition  have been cured by the
Closing)  and  as of the  Closing  (as  updated  by the  revising  of  Schedules
contemplated  by Section 6.3, to the extent that Buyer shall have  accepted such
updates in writing) as if made as of such time,  except where such inaccuracy or
inaccuracies  would not  individually  or in the aggregate  result in a Material
Adverse  Effect  on  the  Transferred   Assets;   provided,   however  that  any
representation or warranty that is qualified by reference to a "Material Adverse
Effect" shall be true and correct as of the Closing in all respects.

         Section  8.3  Officer's  Certificate.  Buyer shall have  received  from
HEALTHSOUTH and Seller an officer's  certificate,  executed on HEALTHSOUTH's and
Seller's behalf by each of their respective chief executive officer,  president,
chief financial  officer or treasurer (in his or her capacity as such) dated the
Closing Date and stating that to the actual knowledge of such individual,  after
inquiry of the other officers  identified in this Section 8.3, the conditions in
Sections 8.1 and 8.2 above have been met.

         Section 8.4 Consents.  The waiting  period under the HSR Act shall have
expired or been  terminated,  and,  subject to the  provisions of Sections 2.12,
2.14  and  2.15,  all  approvals,  consents,  authorizations  and  waivers  from
governmental and accreditation agencies and from other third parties required to
consummate the Transactions shall have been obtained, except for such approvals,
consents,  authorizations  and  waivers,  the  failure to obtain  which will not
result in a Material  Adverse Effect on the  Transferred  Assets.  The foregoing
notwithstanding,  the  obtaining of any of the  following  approvals,  consents,
authorizations  and waivers  (collectively,  "Consents")  shall not constitute a
condition to Buyer's consummation of the Transactions:

                  (a) Any  Consent,  if the result of the failure to obtain same
is either a Purchase  Price  adjustment or the parties' entry into a cooperative
arrangement  pursuant  to the  provisions  of  Sections  2.12(a)  or  2.14  or a
Management Agreement pursuant to Section 2.15; and

                  (b) Any Consent to the sale and  assignment  of a  Transferred
Asset, such as a Medicare or Medicaid provider  agreement,  or the assumption of
an Assumed  Liability,  if such sale,  assignment or assumption  may lawfully be
made subject to a customary condition subsequent that a Consent be obtained from
a third party based upon  determinations of such third party,  including without
limitation  needs surveys or  evaluations  of Buyer,  to be completed  after the
Closing,  unless such third party  indicates  prior to the Closing that any such
Consent is not likely to be given.

         Section  8.5  Absence of  Injunctions.  There  shall not be in effect a
temporary  restraining  order or a preliminary or permanent  injunction or other
order,  decree  or  ruling  by  a  court  of  competent  jurisdiction  or  by  a
governmental   agency  which  restrains  or  prohibits  Buyer's  acquisition  or
operation of the Transferred  Assets, or any threat by governmental  authorities
to exact any  penalty  or  impose  any  economic  deteriment  upon  Buyer or the
Transferred  Assets  following  the Closing,  provided that the parties will use
their  reasonable  efforts to  litigate  against  the entry of, or to obtain the
lifting of, any such order or injunction,


                                      -46-

<PAGE>

and the  existence  of any  such  temporary  restraining  order  or  preliminary
injunction  shall  operate,  at the  option  of the  parties,  only to delay the
Closing  (and  extend the  Termination  Date) until the 30th day  following  the
lifting of any such order or  injunction,  except that such delay may not extend
the original  Termination  Date for more than nine months.  Notwithstanding  the
foregoing, in the event that any such order or injunction affects only a portion
of the  Transferred  Assets,  then the parties (x) shall  negotiate an equitable
adjustment  in the Purchase  Price so as to  consummate  the  Transactions  with
respect to  Transferred  Assets and Assumed  Liabilities  relating to Facilities
that are not  affected by such order or  injunction,  and (y) shall either agree
upon appropriate amendments to this Agreement to effect further transfers of the
remaining   Transferred   Assets  and  assumptions  of  the  remaining   Assumed
Liabilities  when and if they are no longer  subject to such order or injunction
or, if no such amendments are agreed upon, such remaining Transferred Assets and
Assumed  Liabilities  shall  be  deemed  to  be  Excluded  Assets  and  Excluded
Liabilities for all purposes of this Agreement; provided that if the parties are
unable  to  agree  upon  an  equitable  adjustment  of the  Purchase  Price,  or
appropriate  amendments  to effect  further  transfers,  prior to any  scheduled
Closing  Date,  then  such  disagreement  shall  be  resolved  pursuant  to  the
provisions of Section 2.14.

         Section  8.6  Title  to Real  Property.  Title  to  Transferred  Assets
consisting  of  interests  in real  property  shall have been  evidenced  by the
willingness  of Fidelity  National  Title  Insurance  Company  (or an  Affiliate
thereof) (the "Title Insurer") to issue ALTA (or the local equivalents  thereof)
owner's  extended  coverage  policies of title  insurance  (latest  Form B) (the
"Title  Policies") in amounts equal to the  respective  portions of the Purchase
Price allocated to such interests,  showing title to such interests in such real
property vested in Buyer subject to transfer of such interests to Buyer, subject
only to the following conditions of title:

                  (a) A lien or liens to secure  payment of real  estate  taxes,
not delinquent;

                  (b) Exceptions, disclosed by current standard ALTA Preliminary
Title  Reports,  delivered  to Buyer  within 15 days  after the date  hereof and
approved by Buyer  within 15 days after the date of delivery  (as  indicated  by
Buyer's  signature of approval  appended  thereto)  together  with copies of all
documents underlying the exceptions contained therein; and

                  (c) Other possible minor matters that in the aggregate are not
substantial in amount and do not  materially  detract from or interfere with the
present or intended use of such real property.

The  willingness  of the Title  Insurer  to issue the  Title  Policies  shall be
evidenced either by the issuance  thereof or the written  commitments or binders
of the Title Insurer to issue such Title Policies within a reasonable time after
the Closing Date,  subject to actual  transfer of the real property in question.
If the Title  Insurer is unwilling to issue any such Title  Policy,  it shall be
required to provide  Buyer and  Seller,  in writing,  notice  setting  forth the
reason(s) for such  unwillingness  on or before the Closing  Date.  Seller shall
have  the  right  to seek to cure  any  defect  which  is the  reason  for  such
unwillingness,  and, if such notice by the Title  Insurer is given less than ten
business days prior to the then  scheduled  Closing Date,  then the Closing Date
(and, to the extent  necessary,  the  Termination  Date) shall be extended for a
period of up to ten business days to provide to Seller such opportunity to cure.
In the event that,  despite  Seller's efforts to cure, the Title Insurer remains
unwilling to issue any such


                                      -47-

<PAGE>

Title Policy on the Closing Date (as may be extended as provided herein),  then,
at the election of Buyer,  and without  affecting  the other  conditions  of the
parties to consummation of the  Transactions,  such real property  interests not
covered by such a Title Policy shall not be included in the  Transferred  Assets
and shall be deemed to be Excluded Assets, and liabilities  associated therewith
that would  otherwise  be  Assumed  Liabilities  shall be deemed to be  Excluded
Liabilities;  and Buyer and Seller  shall  negotiate  in good faith prior to the
Closing an equitable  adjustment in the Purchase  Price.  If the parties  cannot
agree upon such equitable adjustment, then the disagreement shall be resolved in
accordance with Section 2.14.  Notwithstanding  the foregoing,  Buyer may accept
such title to any such  interests  as the  pertinent  Subsidiary  may be able to
convey,  and such title  insurance with respect to the same as the Title Insurer
is willing to issue,  in which case such interests  shall be conveyed as part of
the Transferred  Assets without reduction of the Purchase Price or any credit or
allowance against the same and without any other liability on the part of Seller
or the Subsidiaries.

         Section 8.7 Receipt of Other  Documents.  Buyer shall have received the
following:

                  (a)  Certified  copies of the  resolutions  of  HEALTHSOUTH's,
Seller's and each Subsidiary's board of directors respecting this Agreement, the
Related  Agreements and the Transactions,  together with certified copies of any
stockholder  resolutions  which are  necessary  to  approve  the  execution  and
delivery of this Agreement and any Related  Agreements and/or the performance of
the  obligations  of  HEALTHSOUTH,  Seller and the  Subsidiaries  hereunder  and
thereunder;

                  (b)  Certified  copies  of  HEALTHSOUTH's,  Seller's  and each
Subsidiary's  Charter  Documents,  together with a certificate  of the corporate
secretary or an assistant  secretary  of each that none of such  documents  have
been amended;

                  (c)  One or more  certificates  as to the  incumbency  of each
officer of Seller or of any Subsidiary who has signed the Agreement, any Related
Agreement or any certificate,  document or instrument  delivered pursuant to the
Agreement or any Related Agreement;

                  (d) Good standing  certificates  for  HEALTHSOUTH,  Seller and
each of the  Subsidiaries  from the  Secretaries  of  State of their  respective
states of  incorporation  dated as of a date not earlier  than 30 business  days
prior to the Closing Date;

                  (e)  Copies of all  third  party  and  governmental  consents,
permits  and  authorizations  that  HEALTHSOUTH,  Seller or any  Subsidiary  has
received  in  connection  with the  Agreement,  the Related  Agreements  and the
Transactions; and

                  (f) Certificates of non-foreign status in the form required by
Section 1445 of the Code duly executed by Seller and the Subsidiaries.

         Section 8.8 Lenders' Consent.  Buyer shall have received the consent of
the required lenders under its principal credit agreement to the Transactions.

         Section 8.9 Absence of Material Adverse  Changes.  There shall not have
occurred  or been  discoverd  any change (a  "Material  Adverse  Change") in the
business,  operations,  financial  condition  or  prospects  of  the  businesses
represented by the Transferred Assets the


                                      -48-

<PAGE>

effect of which has been to cause a Material  Adverse Effect on the  Transferred
Assets,  taken as a whole, and HEALTHSOUTH and Seller shall have furnished Buyer
with the certificate of an executive  officer of each to such effect;  provided,
however,  that no Material  Adverse Change shall be deemed to have occurred as a
result of matters  arising or  resulting  from (i) matters  generally  affecting
businesses  of the type  represented  by the  Transferred  Assets  which are not
peculiar  to Seller or the  Subsidiaries,  (ii)  changes in  generally  accepted
accounting  principles,  (iii)  public  announcement  of  the  Transactions  and
compliance with the provisions of this Agreement,  or (iv) acts taken or omitted
by  HEALTHSOUTH,  Seller or a  Subsidiary  at the written  direction or with the
express written consent of Buyer.


                                    ARTICLE 9
                HEALTHSOUTH'S AND SELLER'S CONDITIONS TO CLOSING

         The   obligations   of   HEALTHSOUTH   and  Seller  to  consummate  the
Transactions  at the Closing shall be subject to the  fulfillment at or prior to
the Closing of the following  conditions,  unless  HEALTHSOUTH  and Seller waive
such fulfillment:

         Section 9.1 Performance of Agreement. Buyer shall have performed in all
material  respects its  agreements and  obligations  contained in this Agreement
required to be performed on or prior to the Closing.

         Section  9.2   Accuracy  of   Representations   and   Warranties.   The
representations and warranties of Buyer set forth in Article 4 of this Agreement
shall be true in all material  respects as of the date of this Agreement (unless
the inaccuracy or inaccuracies which would otherwise result in a failure of this
condition have been cured by the Closing) and as of the Closing as if made as of
such time.

         Section 9.3  Officer's  Certificate.  Seller shall have  received  from
Buyer  an  officers'  certificate,  executed  on  Buyer's  behalf  by its  chief
executive  officer,  president,  chief financial officer or treasurer (in his or
her  capacity  as such) dated the  Closing  Date and stating  that to the actual
knowledge of such individual  after inquiry of the other officers  identified in
this Section 9.3, the conditions in Sections 9.1 and 9.2 above have been met.

         Section 9.4 Consents.  The waiting  period under the HSR Act shall have
expired or been  terminated,  and,  subject to the  provisions of Sections 2.12,
2.14  and  2.15,  all  approvals,  consents,  authorizations  and  waivers  from
governmental  and  accreditation  agencies and from other third parties required
for Seller to consummate the Transactions  shall have been obtained,  except for
such approvals, consents, authorizations and waivers the failure to obtain which
will not, individually or in the aggregate,  result in a Material Adverse Effect
on Seller following the Closing. The foregoing notwithstanding, the obtaining of
any of the  following  Consents  shall not  constitute  a condition  to Seller's
consummation of the Transactions:

                  (a) Any  Consent,  if the result of the failure to obtain same
is either a Purchase  Price  adjustment or the parties' entry into a cooperative
arrangement  pursuant  to the  provisions  of  Sections  2.12(a)  or  2.14  or a
Management Agreement pursuant to Section 2.15;


                                      -49-

<PAGE>

                  (b) Any Consent to the sale and  assignment  of a  Transferred
Asset, such as a Medicare or Medicaid provider  agreement,  or the assumption of
an Assumed  Liability,  if such sale,  assignment or assumption  may lawfully be
made subject to a customary condition subsequent that a Consent be obtained from
a third party based upon  determinations of such third party,  including without
limitation  needs surveys or  evaluations  of Buyer,  to be completed  after the
Closing, whether or not such third party indicates prior to the Closing that any
such Consent is likely or not likely to be given.

         Section  9.5  Absence of  Injunctions.  There  shall not be in effect a
temporary  restraining  order or a preliminary or permanent  injunction or other
order,  decree  or  ruling  by  a  court  of  competent  jurisdiction  or  by  a
governmental  agency which restrains or prohibits  Seller's  consummation of the
Transactions,  or any threat by governmental authorities to exact any penalty or
impose any economic  detriment upon  HEALTHSOUTH or Seller if it consummates the
Transactions  that would have a Material  Adverse  Effect  upon  HEALTHSOUTH  or
Seller  following  the  Closing,  provided  that  the  parties  will  use  their
reasonable  efforts to  litigate  against the entry of, or to obtain the lifting
of, any such order,  injunction  or  potential  penalty or  imposition,  and the
existence of any such temporary  restraining  order,  preliminary  injunction or
potential  penalty  or  imposition  shall  operate,  at  the  option  of  Buyer,
HEALTHSOUTH  and Seller,  only to delay the Closing (and extend the  Termination
Date)  until the  thirtieth  day  following  the  lifting  of any such  order or
injunction  or  threat,  except  that such  delay may not  extend  the  original
Termination Date for more than nine months.  Notwithstanding  the foregoing,  in
the event  that any such  order or  injunction  affects  only a  portion  of the
Transferred Assets, then, at the election of Buyer,  HEALTHSOUTH and Seller, the
parties (x) shall negotiate an equitable  adjustment in the Purchase Price so as
to consummate the  Transactions  with respect to Transferred  Assets and Assumed
Liabilities  relating  to  Facilities  that are not  affected  by such  order or
injunction,  and (y) shall  either  agree upon  appropriate  amendments  to this
Agreement to effect further  transfers of the remaining  Transferred  Assets and
assumptions of the remaining Assumed  Liabilities when and if they are no longer
subject to such order or injunction  or, if no such  amendments are agreed upon,
such remaining  Transferred Assets and Assumed Liabilities shall be deemed to be
Excluded  Assets and Excluded  Liabilities  for all purposes of this  Agreement;
provided that if the parties are unable to agree upon an equitable adjustment of
the Purchase Price, or appropriate amendments to effect further transfers, prior
to any  scheduled  Closing  Date,  then  such  disagreements  shall be  resolved
pursuant to the provisions of Section 2.14.

         Section 9.6 Receipt of Other  Documents.  HEALTHSOUTH  and Seller shall
have received the following:

                  (a) Certified  copies of the  resolutions  of Buyer's and each
Buyer  Subsidiary's  board of directors  respecting this Agreement,  the Related
Agreements and the Transactions;

                  (b)  Certified  copies of Buyer's and each Buyer  Subsidiary's
Charter  Documents,  together  with a  certificate  of  Buyer's  and each  Buyer
Subsidiary's corporate secretary that none of such documents have been amended;


                                      -50-

<PAGE>

                  (c)  One or more  certificates  as to the  incumbency  of each
officer of Buyer who has signed the  Agreement,  any Related  Agreement,  or any
certificate,  document or instrument  delivered pursuant to the Agreement or any
Related Agreement;

                  (d) Good  standing  certificates  for Buyer and for each Buyer
Subsidiary  from  the  Secretaries  of  State  of  their  respective  states  of
incorporation  dated as of a date not earlier than 30 business days prior to the
Closing Date;

                  (e)  Copies of all  third  party  and  governmental  consents,
permits  and  authorizations  that Buyer has  received  in  connection  with the
Agreement, the Related Agreements and the Transactions; and

                  (f) A  certificate  of  Buyer  executed  on its  behalf  by an
Executive  Vice  President of Buyer stating that to the best of their  knowledge
and belief,  specifying in reasonable  detail their basis for same, after giving
effect  to the  Transactions,  neither  Buyer  nor  any of its  Subsidiaries  is
insolvent or will be rendered  insolvent by  obligations  incurred in connection
therewith,  or will be left with unreasonably small capital with which to engage
in their businesses,  or will have incurred  obligations beyond their respective
abilities to perform the same as and when due.


                                   ARTICLE 10
                                   TERMINATION

         Section  10.1   Termination.   This  Agreement  and  the   transactions
contemplated hereby may be terminated at any time prior to the Closing:

                  (a)  By mutual consent of HEALTHSOUTH and Buyer; or

                  (b) By either Buyer or HEALTHSOUTH  upon written notice to the
         other party, if (i) the Closing shall not have occurred by the later of
         March 31, 1998,  the fifth business day following the expiration of the
         HSR waiting  period,  or such later date as may be provided for in this
         Agreement or agreed upon by the parties (the  "Termination  Date");  or
         (ii)(A) in the case of termination by  HEALTHSOUTH,  the conditions set
         forth in Article 9 cannot  reasonably be met by the  Termination  Date,
         and (B) in the case of termination  by Buyer,  the conditions set forth
         in Article 8 cannot  reasonably be met by the Termination  Date, unless
         in either of the cases  described in clauses (A) or (B), the failure of
         the condition is the result of the material breach of this Agreement by
         the party seeking to terminate.

Each party's right of  termination  hereunder is in addition to any other rights
it may have hereunder or otherwise.

         Section 10.2 Effect of Termination. In the event of termination of this
Agreement as provided above,  there shall be no liability on the part of a party
to  another  under  and  by  reason  of  this  Agreement  or  the   transactions
contemplated  hereby except as set forth in Sections 2.6(a),  5.5, 5.6, 10.3 and
10.4 and Articles 11 and 12 and except for fraudulent acts


                                      -51-

<PAGE>

by a party,  the  remedies for which shall not be limited by the  provisions  of
this Agreement.  The foregoing provisions shall not, however,  limit or restrict
the availability of specific performance or other injunctive or equitable relief
to the extent that specific  performance or such other relief would otherwise be
available to a party hereunder.

         Section  10.3  Wrongful  Termination  by Buyer.  If Buyer  purports  to
terminate  this  Agreement  otherwise than pursuant to Section 10.1, or if Buyer
shall otherwise fail to consummate the  Transactions by the Termination Date for
any  reason  other  than  a  material  breach  by  HEALTHSOUTH,  Seller  or  the
Subsidiaries  of their  obligations  hereunder or a failure of the condition set
forth in Section  8.8 to be  satisfied,  then in such event  Buyer  shall pay to
Seller,  upon demand, a termination fee (the "Termination Fee") in the amount of
$50,000,000 in immediately  available funds.  Buyer acknowledges and agrees that
such Termination Fee represents the parties' best estimate of the  out-of-pocket
costs  incurred by  HEALTHSOUTH,  Seller and the  Subsidiaries  and the value of
management time,  overhead,  opportunity  costs and other  unallocated  costs of
HEALTHSOUTH,   Seller  and  the  Subsidiaries   incurred  by  or  on  behalf  of
HEALTHSOUTH,  Seller and the  Subsidiaries  in connection  with this  Agreement.
Buyer  further   acknowledges  that  the  provisions  for  the  payment  of  the
Termination  Fee  contained  in this  Section  10.3 are an integral  part of the
Transactions and that,  without these  provisions,  HEALTHSOUTH and Seller would
not have entered into this Agreement.  Accordingly, if the Termination Fee shall
become due and payable and Buyer shall fail to pay such amount when due, and, in
order to obtain such  payment,  suit is  commenced  which  results in a judgment
against  Buyer  therefor,  Buyer  shall pay all  reasonable  costs and  expenses
(including  reasonable  attorneys'  fees incurred by HEALTHSOUTH  and Seller) in
connection  with such suit,  together  with  interest  computed  on the  amounts
determined to be due pursuant to this Section (computed from the date upon which
such  amounts  were due and  payable  pursuant to this  Section)  and such costs
(computed from the date  incurred) at the prime rate of interest  announced from
time to time by NationsBank, N.A. (South).

         Section 10.4 Wrongful  Termination by Seller. If HEALTHSOUTH and Seller
purport to terminate this Agreement  otherwise than pursuant to Section 10.1, or
if HEALTHSOUTH and Seller shall otherwise fail to consummate the Transactions by
the Termination Date for any reason other than a material breach by Buyer of its
obligations  hereunder or a failure by Buyer to obtain the consent  described in
Section 8.8, then in such event  HEALTHSOUTH and Seller shall pay to Buyer, upon
demand,  a fee (the "Topping  Fee") in the amount of  $50,000,000 in immediately
available funds.  HEALTHSOUTH and Seller acknowledge and agree that such Topping
Fee represents the parties' best estimate of the out-of-pocket costs incurred by
Buyer and the value of management time,  overhead,  opportunity  costs and other
unallocated  costs of Buyer incurred by or on behalf of Buyer in connection with
this Agreement.  HEALTHSOUTH and Seller further  acknowledge that the provisions
for the  payment  of the  Topping  Fee  contained  in this  Section  10.4 are an
integral part of the  Transactions  and that,  without these  provisions,  Buyer
would not have  entered  into this  Agreement.  Accordingly,  if the Topping Fee
shall become due and payable and  HEALTHSOUTH  and Seller shall fail to pay such
amount when due, and, in order to obtain such payment,  suit is commenced  which
results in a judgment against  HEALTHSOUTH and Seller therefor,  HEALTHSOUTH and
Seller  shall  pay all  reasonable  costs  and  expenses  (including  reasonable
attorneys' fees incurred by Buyer) in connection  with such suit,  together with
interest computed on the amounts determined to be due pursuant to this


                                      -52-

<PAGE>

Section  (computed  from the date upon which such  amounts  were due and payable
pursuant to this Section) and such costs  (computed  from the date  incurred) at
the prime rate of  interest  announced  from time to time by  NationsBank,  N.A.
(South). If the Topping Fee becomes due and payable, HEALTHSOUTH and Seller will
also return the Execution Fee with interest as provided in Section 2.6(a).


                                   ARTICLE 11
                     SURVIVAL AND REMEDIES; INDEMNIFICATION

         Section 11.1 Survival.  None of the  representations  and warranties of
Buyer,  HEALTHSOUTH  and Seller set forth in this  Agreement,  or in any writing
required to be delivered in connection  with this  Agreement,  shall survive the
Closing and the consummation of the  Transactions.  The covenants and agreements
of Buyer,  HEALTHSOUTH and Seller set forth in this Agreement, or in any writing
required to be delivered in connection  with this  Agreement,  shall survive the
Closing and the  consummation of the  Transactions  only to the extent expressly
specified in this Agreement.

         Section 11.2 Exclusive Remedy. Absent fraud, if the Closing occurs, the
sole  exclusive  remedy  for  damages  of a party  hereto  for any breach of the
covenants and agreements of the other party  contained in this Agreement and the
Related Agreements shall be the remedies contained in this Article 11.

         Section 11.3 Indemnity by HEALTHSOUTH and Seller.

                  (a)  HEALTHSOUTH  and  Seller,  jointly and  severally,  shall
indemnify  Buyer and hold  Buyer  harmless  from and  against  any and all loss,
liability, damage and expense, including reasonable attorneys' fees and costs of
investigation,  litigation,  settlement  and judgment  (collectively  "Losses"),
which  Buyer may  sustain or suffer or to which  Buyer may  become  subject as a
result of:

                           (i) The  nonperformance  or breach of any covenant or
         agreement  made or  undertaken  by  Seller  in this  Agreement  or in a
         Related Agreement;

                           (ii) The  existence  of, or the  failure of Seller or
         any  Subsidiary  to discharge or perform as and when due, any liability
         relating to the Excluded Assets; and

                           (iii) The  existence  of, or the failure of Seller or
         any Subsidiary to pay, discharge or perform as and when due, any of the
         Excluded Liabilities  (including,  without limitation,  any Losses as a
         result  of  or in  connection  with  the  failure  of  Seller  and  the
         Subsidiaries  to comply with any Bulk Sales Laws referred to in Section
         7.1).

                  (b) The  indemnification  obligations of Seller provided above
shall,  in addition to the  qualifications  and conditions set forth in Sections
11.5 and 11.6,  be subject to the following  qualifications:  Buyer shall not be
entitled  to  indemnity  under   Subsections   (a)(i)-(iii)   above  except  for
out-of-pocket  Losses actually  suffered or sustained by Buyer or to which Buyer
may become subject as a result of  circumstances  described in such  Subsections
(a)(i)-


                                      -53-

<PAGE>

(iii),   and  such  indemnity   shall  not  include  Losses  in  the  nature  of
consequential  damages, lost profits,  diminution in value, damage to reputation
or the like.

         Section 11.4  Indemnity by Buyer.

                  (a)  Buyer  shall  indemnify   HEALTHSOUTH,   Seller  and  the
Subsidiaries and hold HEALTHSOUTH, Seller and the Subsidiaries harmless from and
against any and all Losses which they may sustain or suffer or to which they may
become subject as a result of:

                           (i) The  nonperformance  or breach of any covenant or
         agreement made or undertaken by Buyer in this Agreement or in a Related
         Agreement, including the indemnity obligations of Buyer in Sections 2.7
         and 2.10;

                           (ii) The  existence  of, or the  failure  of Buyer to
         pay,  discharge  or  perform  as and  when  due,  any  of  the  Assumed
         Liabilities; and

                           (iii)  The   ongoing   operations   of   Buyer,   the
         Transferred Assets and the Facilities after the Closing Date; provided,
         however,  that  HEALTHSOUTH,  Seller and the  Subsdiaries  shall not be
         entitled  to  indemnification  under  this  Section  11.4(a)(iii)  with
         respect to  liabilities  to third  parties  arising out of matters that
         constitute   breaches  of   representations   or  warranties   made  by
         HEALTHSOUTH or Seller herein.

                  (b) The  indemnification  obligations  of Buyer provided above
shall,  in addition to the  qualifications  and conditions set forth in Sections
11.5 and 11.6,  be  subject  to the  following  qualifications:  If the  Closing
occurs,  Seller and the  Subsidiaries  shall not be entitled to indemnity  under
Subsections (a)(i)-(iii) above except for out-of-pocket Losses actually suffered
or  sustained  by them or to  which  they may  become  subject  as a  result  of
circumstances  described in such  Subsections  (a)(i)-(iii),  and such indemnity
shall not include Losses in the nature of consequential  damages,  lost profits,
diminution in value, damage to reputation or the like.

         Section 11.5 Further  Qualifications  Respecting  Indemnification.  The
right of a party (an  "Indemnitee")  to indemnity  hereunder shall be subject to
the following additional qualifications:

                  (a) The Indemnitee  shall promptly upon its discovery of facts
or circumstances giving rise to a claim for  indemnification,  including receipt
by it of notice of any demand, assertion, claim, action or proceeding, judicial,
governmental  or  otherwise,  by any third party (such third party actions being
collectively referred to herein as "Third Party Claims"), give notice thereof to
the indemnifying party (the "Indemnitor"),  such notice in any event to be given
within 60 days from the date the  Indemnitee  obtains  actual  knowledge  of the
basis or alleged basis for the right of indemnity or such shorter  period as may
be necessary to avoid material prejudice to the Indemnitor;  provided,  however,
that the failure to give such notice shall not limit the  Indemnitee's  right to
indemnification  except to the extent  that such  failure to timely  give notice
results in damages or irremediable prejudice to the Indemnitor; and

                  (b) In computing Losses, such amounts shall be computed net of
any related  recoveries  to which the  Indemnitee  is entitled  under  insurance
policies or other related


                                      -54-

<PAGE>

payments  received or receivable  from third parties and net of any tax benefits
actually  received by the  Indemnitee  or for which it is eligible,  taking into
account the income tax treatment of the receipt of indemnification.

         Section 11.6  Procedures  Respecting  Third Party Claims.  In providing
notice to the  Indemnitor  of any Third Party Claim (the  "Claim  Notice"),  the
Indemnitee shall provide the Indemnitor with a copy of such Third Party Claim or
other  documents  received and shall  otherwise make available to the Indemnitor
all  relevant  information  material to the defense of such claim and within the
Indemnitee's possession. The Indemnitor shall have the right, by notice given to
the Indemnitee  within 15 days after the date of the Claim Notice, to assume and
control  the  defense of the Third Party Claim that is the subject of such Claim
Notice,  including the employment of counsel  selected by the  Indemnitor  after
consultation with the Indemnitee,  and the Indemnitor shall pay all expenses of,
and the Indemnitee shall cooperate fully with the Indemnitor in connection with,
the  conduct  of such  defense.  The  Indemnitee  shall have the right to employ
separate  counsel in any such proceeding and to participate in (but not control)
the defense of such Third Party Claim, but the fees and expenses of such counsel
shall be borne by the Indemnitee unless the Indemnitor shall agree otherwise. If
the Indemnitor  shall have failed to assume the defense of any Third Party Claim
in accordance  with the provisions of this Section,  then the  Indemnitee  shall
have the absolute  right to control the defense of such Third Party Claim,  and,
if and  when it is  finally  determined  that  the  Indemnitee  is  entitled  to
indemnification  from  the  Indemnitor  hereunder,  the  fees  and  expenses  of
Indemnitee's  counsel  shall  be  borne  by the  Indemnitor,  provided  that the
Indemnitor  shall  be  entitled,  at its  expense,  to  participate  in (but not
control)  such  defense.  The  Indemnitor  shall  have the  right to  settle  or
compromise  any such Third Party Claim for which it is  providing  indemnity  so
long as such  settlement  does not  impose  any  obligations  on the  Indemnitee
(except with respect to providing  releases of the third party).  The Indemnitor
shall not be liable for any settlement  effected by the  Indemnitee  without the
Indemnitor's  consent. The Indemnitor may assume and control, or bear the costs,
of any  such  defense  subject  to its  reservation  of a right to  contest  the
Indemnitee's  right to  indemnification  hereunder,  provided  that it gives the
Indemnitee  notice of such  reservation  within 15 days of the date of the Claim
Notice.


                                   ARTICLE 12
                               GENERAL PROVISIONS

         Section 12.1 Notices. All notices, requests, demands, waivers, consents
and other  communications  hereunder  shall be in  writing,  shall be  delivered
either in person,  by  telegraphic,  facsimile  or other  electronic  means,  by
overnight  air  courier or by mail,  and shall be deemed to have been duly given
and to have  become  effective  (a) upon  receipt if  delivered  in person or by
telegraphic,  facsimile or other  electronic  means  calculated to arrive on any
business day prior to 6:00 p.m. local time at the address of the  addressee,  or
on the next succeeding  business day if delivered on a non-business day or after
6:00 p.m. local time, (b) one business day after having been delivered to an air
courier for  overnight  delivery  or (c) five  business  days after  having been
deposited  in  the  mails  as  certified  or  registered  mail,  return  receipt
requested,  all  fees  prepaid,  directed  to the  parties  or  their  permitted
assignees at the following addresses (or at such other address as shall be given
in writing by a party hereto):


                                      -55-

<PAGE>

         If to HEALTHSOUTH or Seller, addressed to:

                  HEALTHSOUTH Corporation
                  One HealthSouth Parkway
                  Birmingham, Alabama 35243
                  Attention:  Michael D. Martin
                  Facsimile:  (205) 969-4712

         with a copy to:

                  William W. Horton, Esq.
                  HEALTHSOUTH Corporation
                  One HealthSouth Parkway
                  Birmingham, Alabama 35243
                  Facsimile:  (205) 969-4730

         If to Buyer, addressed to:

                  Integrated Health Services, Inc.
                  10065 Red Run Boulevard
                  Owings Mills, Maryland  21117
                  Attention:    Taylor Pickett (Facsimile:_______)
                                Marshall Elkins (Facsimile:_______)
                                Beth Kelly (Facimile: (410)902-2110

         with a copy to:

                  Michael S. Blass, Esq.
                  Blass & Driggs
                  461 Fifth Avenue
                  New York, New York  10017
                  Facsimile:  (212) 447-5428


         Section 12.2  Successors  and Assigns.  The rights under this Agreement
shall not be  assignable  or  transferable  nor the duties  delegable  by either
HEALTHSOUTH and Seller,  on the one hand, or Buyer,  on the other hand,  without
the prior written consent of the other,  except as provided in Section 2.16; and
nothing contained in this Agreement,  express or implied,  is intended to confer
upon any person or entity,  other than the  parties  hereto and their  permitted
successors-in-interest  and permitted assignees, any rights or remedies under or
by reason of this Agreement unless so stated to the contrary.

         Section 12.3  Counterparts.  This  Agreement  may be executed in one or
more counterparts,  each of which shall be deemed an original,  but all of which
together shall constitute one and the same instrument.


                                      -56-

<PAGE>

         Section 12.4  Captions and Paragraph  Headings.  Captions and paragraph
headings  used  herein  are  for  convenience  only  and  are not a part of this
Agreement and shall not be used in construing it.

         Section  12.5  Entirety  of  Agreement;   Amendments.   This  Agreement
(including the Schedules and Exhibits  hereto),  the Related  Agreements and the
other  documents and  instruments  specifically  provided for in this  Agreement
contain the entire  understanding  between the  parties  concerning  the subject
matter of this Agreement and such other documents and instruments and, except as
expressly   provided  for  herein,   supersede  all  prior   understandings  and
agreements,  whether  oral or written,  between them with respect to the subject
matter hereof and thereof. There are no representations, warranties, agreements,
arrangements  or  understandings,  oral or written,  between the parties  hereto
relating to the subject  matter of this  Agreement and such other  documents and
instruments which are not fully expressed herein or therein.  This Agreement may
be amended or modified  only by an  agreement  in writing  signed by each of the
parties  hereto.  All  Exhibits  and  Schedules  attached  to  or  delivered  in
connection  with this Agreement are integral parts of this Agreement as if fully
set  forth  herein,   and  all   statements   appearing   therein   relating  to
representations  and warranties  shall be deemed  disclosed for all purposes and
not only in connection with the specific  provision in which they are explicitly
referenced.

         Section  12.6  Construction.   This  Agreement  and  any  documents  or
instruments  delivered  pursuant hereto shall be construed without regard to the
identity of the person who drafted the various  provisions of the same. Each and
every provision of this Agreement and such other documents and instruments shall
be construed as though the parties  participated  equally in the drafting of the
same.  Consequently,  the  parties  acknowledge  and  agree  that  any  rule  of
construction that a document is to be construed against the drafting party shall
not be  applicable  either  to  this  Agreement  or  such  other  documents  and
instruments.

         Section  12.7 Waiver.  The failure of a party to insist,  in any one or
more instances,  on performance of any of the terms, covenants and conditions of
this  Agreement  shall not be  construed  as a waiver or  relinquishment  of any
rights granted hereunder or of the future performance of any such term, covenant
or  condition,  but the  obligations  of the parties with respect  thereto shall
continue in full force and effect.  No waiver of any  provision  or condition of
this  Agreement by a party shall be valid unless in writing signed by such party
or  operational  by the  terms of this  Agreement.  A waiver by one party of the
performance of any covenant, condition,  representation or warranty of the other
party shall not invalidate this Agreement, nor shall such waiver be construed as
a waiver of any other covenant, condition,  representation or warranty. A waiver
by any party of the time for performing any act shall not constitute a waiver of
the time for  performing  any other act or the time for  performing an identical
act required to be performed at a later time.

         Section 12.8  Governing  Law. This  Agreement  shall be governed in all
respects,  including  validity,  interpretation  and effect,  by the laws of the
State of Delaware, without regard to the principles of conflicts of law thereof,
provided  that the validity,  interpretation  and effect of any  instruments  by
which real  property is conveyed at the Closing shall be governed by the laws of
the state in which such real property is located.


                                      -57-

<PAGE>

         Section 12.9 Severability.  Whenever  possible,  each provision of this
Agreement  shall be  interpreted  in such  manner  as to be valid,  binding  and
enforceable under applicable law, but if any provision of this Agreement is held
to be invalid,  void (or voidable) or  unenforceable  under applicable law, such
provision shall be ineffective  only to the extent held to be invalid,  void (or
voidable) or unenforceable, without affecting the remainder of such provision or
the remaining provisions of this Agreement.

         Section 12.10 Consents Not Unreasonably Withheld.  Wherever the consent
or approval  of any party is  required  under this  Agreement,  such  consent or
approval shall not be unreasonably withheld,  unless such consent or approval is
to be given by such party at the sole or absolute discretion of such party or is
otherwise similarly qualified.




                                      -58-

<PAGE>


         IN WITNESS  WHEREOF,  the parties have duly executed this  Agreement on
the date first above written.

                                                HEALTHSOUTH CORPORATION


                                                By /s/ Michael D. Martin
                                                   ---------------------------
                                                        Michael D. Martin
                                                    Executive Vice President,
                                                     Chief Financial Officer
                                                          and Treasurer



                                                HORIZON/CMS HEALTHCARE
                                                CORPORATION


                                                By /s/ Scot Sauder
                                                  ----------------------------
                                                           Scot Sauder
                                                         Vice President


                                                INTEGRATED HEALTH SERVICES, INC.


                                                By /s/ Taylor Pickett
                                                  ------------------------------
                                                       Taylor Pickett
                                                    Executive Vice President


                                      -59-

<PAGE>

                                   EXHIBIT A


                                    FORM OF
                        BULK BILL OF SALE AND ASSIGNMENT


         FOR GOOD AND VALUABLE  CONSIDERATION,  the receipt and  sufficiency  of
which are hereby acknowledged,  HORIZON/CMS HEALTHCARE  CORPORATION,  a Delaware
corporation  (the "Seller"),  and each subsidiary of Seller set forth in Rider A
hereto  (individually,  a "Subsidiary" and  collectively,  the  "Subsidiaries"),
pursuant  to, and  subject to the terms,  provisions  and  conditions  of,  that
certain Purchase and Sale Agreement dated November 3, 1997 (the "Agreement"), by
and among HEALTHSOUTH Corporation, a Delaware corporation, Seller and Integrated
Health Services,  Inc., a Delaware  corporation  (the "Buyer"),  do hereby sell,
convey,  assign,  transfer and deliver to Buyer, its successors and assigns, the
assets (the  "Transferred  Assets") set forth in Rider B hereto,  but  excluding
those assets set forth in Rider C hereto, all as more particularly  described in
the Agreement.

         The sale, conveyance,  assignment, transfer and delivery made hereunder
is made "AS IS" and "WITH ALL FAULTS," all as more particularly described in the
Agreement,  and without  warranty of any kind,  except as may be provided in the
Agreement, including the warranty of merchantability or fitness for any purpose.

         Capitalized  terms not otherwise  defined herein  (including all Riders
hereto) shall have the meanings ascribed to them in the Agreement.

         IN WITNESS  WHEREOF,  the Seller and each Subsidiary have executed this
Bulk Bill of Sale and  Assignment  this ____ day of  _________________,  199___,
effective as of the Closing specified in the Agreement.



                                                   [Insert Names of all Sellers]


                                                   By
                                                     ---------------------------
                                                   Title
                                                        ------------------------



<PAGE>
                                    EXHIBIT B

                                     FORM OF
                ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE



WHEN RECORDED, MAIL TO:



         THIS   ASSIGNMENT   AND   ASSUMPTION  OF  REAL  PROPERTY   LEASE  (this
"Assignment")  is  entered  into as of  __________,  1997,  by and  between  the
undersigned  Assignor  and the  undersigned  Assignee  pursuant to that  certain
Purchase and Sale  Agreement,  dated November 3, 1997, by and among  HEALTHSOUTH
Corporation  ("HEALTHSOUTH"),  Horizon/CMS Healthcare Corporation ("Seller") and
Integrated Health Services, Inc. ("Buyer") (the "Agreement").


                              W I T N E S S E T H:


         WHEREAS,  Assignor is the tenant under that certain real property lease
described in Rider A attached  hereto  whereunder  Assignor  leases that certain
real property  described in Rider B attached hereto (the "Real Property Lease");
and

         WHEREAS,  Assignor  desires  to  assign  all of its  right,  title  and
interest  under the Real  Property  Lease and Assignee  desires to assume all of
Assignor's obligations thereunder.

         NOW, THEREFORE, the parties agree as follows:

         1.  Assignment of Lease.  Assignor  hereby assigns unto Assignee all of
Assignor's  right,  title and interest in the Real  Property  Lease,  including,
without limitation,  any rights to renew or extend the term of the Real Property
Lease and any rights of first  refusal  respecting  and options to purchase  the
leased premises that are the subject of the Real Property Lease.

         2. Assumption of Real Property Lease  Obligations.  Assignee and Buyer,
jointly and severally, do hereby assume all of the obligations of Assignor under
the Real Property Lease, and jointly and severally agree, in accordance with the
provisions  of the  Agreement,  to  indemnify  and  hold  Assignor,  Seller  and
HEALTHSOUTH harmless from and against any liability resulting from the breach of
this covenant by Assignee or Buyer.

         3. General Provisions.  Assignee and Buyer hereby confirm that Assignee
has irrevocably appointed Buyer as its sole and exclusive representative,  agent
and attorney-in-fact with respect to all matters arising from or related to this
Assignment.  Notice hereunder to Assignor, Seller or HEALTHSOUTH, or to Assignee
or Buyer,  as the case may be, shall be given to  HEALTHSOUTH  or Buyer,  as the
case may be, in accordance with the provisions of


<PAGE>


the Agreement.  The provisions of this Assignment  shall be binding on and shall
inure to the benefit of the respective  successors and permitted  assigns of the
parties hereto.

         IN WITNESS WHEREOF,  the undersigned have executed this Agreement as of
the day and year first above written.

                                            ASSIGNOR:

                                            [Name of Assignor]


                                            By
                                              ----------------------------------

                                              Its
                                                 -------------------------------

                                            ASSIGNEE:

                                            [Name of Assignor]


                                            By
                                              ----------------------------------

                                              Its
                                                 -------------------------------

                                            BUYER:

                                            INTEGRATED HEALTH SERVICES, INC.


                                            By
                                              ----------------------------------

                                              Its
                                                 -------------------------------

<PAGE>

                                    EXHIBIT C


                          FORM OF ASSUMPTION AGREEMENT


         FOR GOOD AND VALUABLE  CONSIDERATION,  the receipt and  sufficiency  of
which are  hereby  acknowledged,  and  pursuant  to,  and  subject to the terms,
provisions  and conditions  of, that certain  Purchase and Sale Agreement  dated
November 3, 1997 (the  "Agreement"),  by and among  HEALTHSOUTH  Corporation,  a
Delaware corporation, Horizon/CMS Healthcare Corporation, a Delaware corporation
(the "Seller") and Integrated Health Services, Inc., a Delaware corporation (the
"Buyer"), Seller does hereby assume, and does hereby agree to pay, discharge and
perform as and when due, the  obligations  and  liabilities set forth in Rider A
hereto (the "Excluded  Liabilities")  of each  subsidiary of Seller set forth in
Rider B hereto (individually,  a "Transferred Subsidiary" and collectively,  the
"Transferred  Subsidiaries"),  but  excluding  those  liabilities  (the "Assumed
Liabilities") set forth in Rider C hereto, all as more particularly described in
the Agreement.

         Capitalized  terms not otherwise  defined herein  (including all Riders
hereto) shall have the meanings ascribed to them in the Agreement.

         This Assumption Agreement is being delivered in favor of Buyer and each
of the Transferred Subsidiaries.

         IN WITNESS WHEREOF,  Seller has executed this Assumption Agreement this
____ day of ________________,  199____, effective as of the Closing specified in
the Agreement.


                                                     HORIZON/CMS HEALTHCARE
                                                     CORPORATION


                                                     By
                                                       -------------------------
                                                     Title
                                                          ----------------------

<PAGE>

                                    EXHIBIT D


                          FORM OF ASSUMPTION AGREEMENT


         FOR GOOD AND VALUABLE  CONSIDERATION,  the receipt and  sufficiency  of
which are  hereby  acknowledged,  and  pursuant  to,  and  subject to the terms,
provisions  and conditions  of, that certain  Purchase and Sale Agreement  dated
November 3, 1997 (the  "Agreement"),  by and among  HEALTHSOUTH  Corporation,  a
Delaware corporation, Horizon/CMS Healthcare Corporation, a Delaware corporation
(the "Seller") and Integrated Health Services, Inc., a Delaware corporation (the
"Buyer"),  Buyer does hereby assume, and does hereby agree to pay, discharge and
perform as and when due, the  obligations  and  liabilities set forth in Rider A
hereto (the "Assumed  Liabilities")  of Seller and of each  subsidiary of Seller
set forth in Rider B hereto (individually,  a "Subsidiary" and collectively, the
"Subsidiaries"),  but excluding those  liabilities (the "Excluded  Liabilities")
set  forth  in  Rider  C  hereto,  all as  more  particularly  described  in the
Agreement.

         Capitalized  terms not otherwise  defined herein  (including all Riders
hereto) shall have the meanings ascribed to them in the Agreement.

         This  Assumption  Agreement  is being  delivered in favor of Seller and
each of the Subsidiaries.

         IN WITNESS WHEREOF,  Buyer has executed this Assumption  Agreement this
____ day of ________________,  199____, effective as of the Closing specified in
the Agreement.


                                                INTEGRATED HEALTH SERVICES, INC.


                                                By
                                                  ------------------------------
                                                Title
                                                     ---------------------------




<PAGE>


                                    EXHIBIT E
                                     FORM OF
                              MANAGEMENT AGREEMENT


         THIS MANAGEMENT AGREEMENT (the "Agreement") is made and entered into as
of the ______ day of  _____________,  199___,  by and between  INTEGRATED HEALTH
SERVICES, INC., a Delaware corporation  ("Manager"),  and HORIZON/CMS HEALTHCARE
CORPORATION,  a Delaware corporation ("Owner"), in its corporate capacity and as
agent for certain of its wholly-owned  subsidiaries identified on Rider A (each,
an "Affected Subsidiary" and collectively,  the "Affected  Subsidiaries"),  with
respect to the following facts:

         A. Pursuant to that certain  Purchase and Sale Agreement dated November
3, 1997  between  HEALTHSOUTH  Corporation,  Owner and  Manager  (the  "Purchase
Agreement"),  Owner  and  certain  of its  Subsidiaries  have  agreed to sell to
Manager certain assets of Owner and certain of such  Subsidiaries and the issued
outstanding capital stock of certain of such Subsidiaries. All capitalized terms
used in this  Agreement  and not  otherwise  defined  herein shall have the same
meaning such terms have in the Purchase Agreement.

         B. Directly or through the Subsidiaries,  Owner operates the Facilities
identified  on Rider B (each,  an  "Affected  Facility"  and  collectively,  the
"Affected Facilities").

         C. Pursuant to an Escrow  Agreement  dated  _____________,  199___ (the
"Escrow  Agreement"),  Owner has  delivered in escrow to  ______________________
(the "Escrow  Agent"),  instruments of transfer with respect to [certain of] the
Transferred  Assets and the  Assigned  Stock,  all as provided  in the  Purchase
Agreement.

         D. Until termination of the Escrow established  pursuant to such Escrow
Agreement,  Owner and Manager  wish to enter into certain  arrangements  whereby
Manager will manage the Affected  Facilities  represented  by the  documents and
instruments held by the Escrow Agent pursuant to the Escrow Agreement.

         NOW,  THEREFORE,  in consideration of the foregoing  recitals,  and the
agreements herein contained, and for other good and valuable consideration,  the
receipt and  sufficiency of which are hereby  acknowledged,  the parties hereto,
intending to be legally bound, do hereby agree as follows:


1.       ENGAGEMENT OF MANAGER

         Owner hereby engages  Manager for the purpose of rendering  management,
administration,   purchasing  services,   financial  assistance  and  all  other
management,  support and administrative services needed for the operation of the
Affected Facilities , on the basis hereinafter set forth, and the Manager hereby
accepts such  engagement.  Throughout the term of this  Agreement,  Owner or the
relevant  Affected  Subsidiary,  as the case may be,  shall  retain all ultimate
authority  over the  business,  policies,  operations  and assets of each of the
Affected  Facilities and,  therefore,  shall have the right to review  Manager's
activities  as  manager  of the  Affected  Facilities.  By  entering  into  this
Agreement, Owner does not delegate to Manager


<PAGE>

the power, duties and ultimate  responsibilities vested in Owner or the Affected
Subsidiaries, as the case may be, as licensees of the Affected Facilities. It is
understood  that,  during  the term of this  Agreement,  Owner  or the  Affected
Subsidiaries,  as the case may be, are and will remain the responsible licensees
of  the  Affected  Facilities  and,  as  such,  are  fully  liable  and  legally
accountable  at all times to all  patients  and  governmental  agencies  for all
patient care and funds,  and all other aspects of the operation and  maintenance
of the Affected Facilities.


2.       RESPONSIBILITIES OF MANAGER

         2.1 Total Management  Services.  Manager shall provide total management
services for the Affected  Facilities in a manner consistent with and subject to
the responsibilities of Owner and the Affected  Subsidiaries as the licensees of
the  Affected  Facilities.   Certain  of  these  management  services  are  more
specifically described in this Section 2. As Manager of the Affected Facilities,
Manager  shall  have  responsibility  and  commensurate  authority  to  conduct,
supervise  and  effectively  manage the  day-to-day  operations  of the Affected
Facilities.  Manager shall be expected to exercise the reasonable judgment of an
experienced   healthcare   management  company  in  its  management   activities
hereunder.

         2.2 Oversight and Staffing.  Pursuant to its engagement,  Manager shall
have  sole  responsibility  for  the  operations  of  the  Affected  Facilities,
including,  but not limited to, overseeing and staffing all non-medical  aspects
of the Affected Facilities'  departments,  including,  but not limited to, those
departments  performing  the  functions  of  nursing,   personnel,   purchasing,
administration,    planning,   finance,   reimbursement,   credit,   collection,
housekeeping,  maintenance,  medical records,  security,  medical staff liaison,
asset management,  pharmacy,  contract  administration,  dietary services,  data
processing,  laboratory,  marketing,  outpatient clinics,  medical library,  and
business  office and  administrative  matters,  all to the extent  applicable to
particular Affected Facilities.

         2.3 Specific Duties. In furtherance of its responsibilities  hereunder,
Manager shall

                  (a)  Establish,  maintain,  administer and modify as necessary
         the charge  structure  of the Affected  Facilities  and  negotiate  fee
         payment methods with any Payor.

                  (b) Recruit, hire, train, promote, assign,  supervise,  manage
         and discharge all personnel  required in connection with the operations
         of the Affected Facilities.

                  (c) Prepare invoices for services and collect accounts owed to
         Owner in respect thereof. In this connection,  Manager shall submit all
         bills and  necessary  documentation  required  by patients or Payors to
         obtain payment therefrom in connection with all charges.  Manager shall
         act as the agent of Owner with respect to billing and  collecting,  and
         billing  shall  be in the  name of  Owner.  Accordingly,  Owner  hereby
         appoints Manager,  for the purposes of this Agreement,  as its true and
         lawful attorney-in-fact:

                        (i)   to bill patients or clients on Owner's behalf;

                                        2

<PAGE>

                        (ii)  to collect accounts  receivable on Owner's behalf;
                   and

                        (iii) to receive  all  payments  on behalf of Owner from
                   all  Payors,  and to take  possession  of, and endorse in the
                   name of Owner,  any notes,  checks,  money orders,  insurance
                   payments and other instruments received as payment in respect
                   of such  billings  (except  as  prohibited  by  Medicare  and
                   Medicaid law and regulations).

                  (d)  Establish  and  administer   accounting   procedures  and
         controls,  in accordance with sound industry practice,  and establish a
         system for the  development,  preparation  and safekeeping of books and
         records relating to the business and financial affairs of Owner as they
         relate to the Affected Facilities, including, but not limited to:

                        (i)   preparation and filing, from time to time, of such
                   forms and reports as may be required  under  federal or state
                   laws or programs applicable to wages, hours and prices; and

                        (ii)  preparation  and submission  periodically to Owner
                   as required  for timely  payment of all  returns  relating to
                   taxes imposed upon the operations of the Affected  Facilities
                   and all cost reports,  supporting  data and other  applicable
                   materials  pertaining to  reimbursement  by or from Medicare,
                   Medicaid and all other Payors.

                  (e)  Periodic  evaluation  of all quality  assurance  and risk
         management aspects of the operations of the Affected Facilities.

                  (f) Supervision and organization of the medical records of the
         Affected  Facilities,  which  shall be  obtained  and  maintained  with
         respect to all medical  services  rendered  in or through the  Affected
         Facilities.

                  (g)  Arrangement  for the provision of such other  services as
         may be required from time to time by federal,  state and local law, the
         bylaws,  rules and regulations of the governing  bodies of the Affected
         Facilities  and  any  accreditation  or  governmental  agencies  having
         jurisdiction over the Affected Facilities.

                  (h)  Procurement,   for  the  account  of  Manager,   of  such
         equipment, drugs, supplies, materials and services as Manager deems, in
         the reasonable  exercise of its  discretion,  necessary or desirable in
         connection with the operations of the Affected Facilities.

                  (i) Payment of trade accounts, all taxes, amounts due on short
         and long-term indebtedness and leases of real and personal property and
         all  other  obligations  incurred  by  the  Owner  or  the  Manager  in
         connection  with the operations of the Affected  Facilities and Assumed
         Liabilities.


                                        3

<PAGE>

         2.4  Licenses  and  Approvals.  Manager  shall use its best  efforts to
assist  Owner and the Affected  Subsidiaries  in obtaining  and  maintaining  in
effect  at  all  times  during  the  term  hereof  all  Licenses  necessary  and
appropriate  to operate the Affected  Facilities as presently  operated by Owner
and the Affected  Subsidiaries as of the date of this  Agreement.  Manager shall
refrain  from any and all  conduct  which  has the  effect of  jeopardizing  any
License of an Affected Facility or an Affected  Facility's status as a licensed,
accredited  health care facility which provides services to Medicare or Medicaid
beneficiaries.

         2.5  Standards.  Manager shall act in good faith in the  performance of
its obligations  hereunder.  Manager shall,  at all times,  operate the Affected
Facilities  in  conformity  with (a) the bylaws,  rules and  regulations  of the
governing bodies of the Affected Facilities, (b) the standards of performance of
all  regulatory  and  accrediting   agencies  and  authorities   which  exercise
jurisdiction over the Affected  Facilities,  and (c) in a manner consistent with
good and ethical  business  practices in the communities  served by the Affected
Facilities and the health care industry.

         2.6  Employees.  Except  as may  be  otherwise  required  by  law,  all
personnel employed in connection with the operations of the Affected Facilities,
shall be and remain  employees of, or  independent  contractors in privity with,
Owner. Manager shall determine from time to time the number and qualification of
employees  required  or  desirable  in  connection  with the  operations  of the
Affected  Facilities,   establish,   revise  and  administer  all  wage  scales,
compensation rates,  employee benefits and conditions of employment,  administer
in-service training,  seminars and conferences and establish staff schedules and
job  descriptions.  Manager shall  reimburse  Owner for all expense  incurred in
connection with such employees.

         2.7  Insurance.  Manager  shall  reimburse  Owner  for the  cost of all
necessary  insurance coverage and the cost of all self-insured claims pertaining
to the Affected Facilities and their operations.


3.       LIMITATIONS ON AUTHORITY OF MANAGER

         Notwithstanding the rights and powers of Manager pursuant to Section 2,
Manager shall have no right or authority to do any of the following  without the
prior written consent of Owner or, as applicable, an Affected Subsidiary:

         (a) Act for Owner or the  Affected  Subsidiaries  with  respect  to any
business  that is not  directly  related to the  management  or operation of the
Affected Facilities.

         (b) Enter  into or  terminate  any  contract  on behalf of Owner or the
Affected  Subsidiaries  without the prior written  approval of Owner;  provided,
however,  that  Manager  shall  have the  authority  on  behalf of Owner and the
Affected Subsidiaries,  as applicable,  to enter into any such contract (i) that
is terminable by Owner or the  applicable  Affected  Subsidiary at any time upon
not more  than 90  days'  notice  without  penalty.  Manager  hereby  agrees  to
reimburse  Owner or the Affected  Subsidiary for any amounts payable by Owner or
such Affected  Subsidiary  thereunder  which are in excess of  prevailing  local
rates for the goods or services  provided;  provided,  however,  that  Manager's
reimbursement obligation shall

                                        4

<PAGE>

terminate on the earliest date on which Owner or such Affected  Subsidiary could
have terminated such contract.


4.       RESPONSIBILITIES AND RIGHTS OF OWNER

         4.1 Maintenance of Licenses.  Subject to and conditioned upon Manager's
full compliance with its obligations  hereunder,  Owner shall hold and maintain,
and cause the  Affected  Subsidiaries  to hold and maintain  the  necessary  and
appropriate Licenses to operate the Affected Facilities as presently operated by
Owner and the Affected  Subsidiaries.  Manager shall, no less than 30 days prior
to the due  date,  prepare  and  deliver  to  Owner  all  routine  applications,
extensions  and other  filings  necessary to maintain  such Licenses for Owner's
execution of the same and shall timely file such  applications,  extensions  and
other  filings,  together  with any filing fees or other  charges  (all of which
shall  be  paid  for  by  Manager),   with  the   appropriate   governmental  or
accreditation agencies.

         4.2  Owner's  Inspection.  During  the  term  of this  Agreement,  upon
reasonable  prior written  notice and during normal  business  hours,  (i) Owner
shall have the right to inspect the Affected Facilities, to inspect and/or audit
all books and records of Manager  pertaining  to the  operation  of the Affected
Facilities  and to meet with the executive  officers of Manager and the Affected
Facilities  to discuss  Manager's  compliance  with its  obligations  under this
Agreement,  and (ii) Manager shall have the right to review such information and
records that pertain to the Affected  Facilities and which are in the possession
of Owner or the  Affected  Subsidiaries  asManager  may  reasonably  require  in
connection with the performance of its duties hereunder.

         4.3  Access to  Medical  Records.  Owner  shall  have the same right of
access to, and Manager shall have the same  obligation of  preservation  of, all
medical,  clinical and other records directly or indirectly  associated with the
admission,  care and treatment of patients during the term of this Agreement and
all financial and other records of the Affected Facilities for the period during
the term of this Agreement as Owner and Manager have with respect to the Medical
Records under Section 6.2 of the Purchase Agreement.


5.       COMPENSATION.

                  (a) In  consideration  of all  services  provided  by  Manager
hereunder,  Manager  shall  retain,  as its  management  fee,  all net  revenues
generated by the operations of the Affected  Facilities  during the term of this
Agreement.  From such management fee, however,  Manager shall be responsible for
paying all costs,  expenses and  expenditures  of any kind or nature  whatsoever
incurred in connection with the operation of the Affected  Facilities during the
term of this  Agreement  including,  but not limited to,  capital  expenditures,
taxes (including Taxes and income taxes and any tax based on net income or gains
from the disposition of property which arise with respect to Manager's operation
of the Affected  Facilities),  litigation awards and settlements,  all insurance
premiums (including any insurance premiums paid by Owner during the term of this
Agreement),  operating charges,  maintenance  costs,  construction costs and any
other charges, costs, liabilities and expenses.  Manager acknowledges that Owner
does not guarantee and has not represented that the Affected

                                        5

<PAGE>

Facilities can or will be operated profitably by Manager.  All financial risk of
operating the Affected  Facilities  during the term of this  Agreement  shall be
borne entirely by Manager and neither Owner nor the Affected  Subsidiaries shall
have  any  liability  or  obligation  therefor.  Accordingly,  Manager  shall be
obligated to provide the working capital needs of the Affected Facilities during
the term of this Agreement even if the Affected Facilities are being operated by
Manager at a loss. Owner and the Affected  Subsidiaries  shall have no financial
obligations  hereunder with respect to the operations of the Affected Facilities
or the payment to Manager of any fees or  reimbursement of any costs incurred by
Manager.  Manager  shall be  responsible  for  acquiring,  at its own cost,  all
equipment and other personal property Manager reasonably determines is necessary
for the operation of the Affected  Facilities  and all such  equipment and other
personal  property  so  acquired  by Manager  shall be the  property of Manager.
Manager,  however,  shall have no liability or obligation with respect to any of
the Excluded Assets or Excluded Liabilities.

                  (b) In the event that Manager pays any capital  expenditure in
connection  with  an  Affected  Facility,   and  this  Agreement  is  thereafter
terminated under  circumstances  where all instruments of transfer pertaining to
such  Affected  Facility  are  delivered  out of escrow to Owner or an  Affected
Subsidiary,  then in such event  Owner shall  promptly  pay to Manager an amount
equal  to  the  aggregate  of  such  capital   expenditures,   less   cumulative
depreciation  for  the  applicable  capital  asset  through  the  date  of  such
termination  in an amount as  determined  in  conformity  with the  depreciation
methods then utilized generally by Manager for financial reporting purposes with
respect to similar assets.


6.       TERM AND TERMINATION

         6.1 Unless sooner terminated by mutual written consent,  this Agreement
shall  continue in full force and effect with respect to each Affected  Facility
until  the  earliest  of (i)  termination  of the  Escrow  Agreement,  (ii)  the
dissolution of Manager,  or (iii)  rejection or termination of this Agreement as
the result of any bankruptcy or insolvency proceeding by or against Manager.

         6.2 Upon the termination of this Agreement,  all further obligations of
the parties shall terminate, except that the obligations of Manager set forth in
Sections  5(b), 7 and 8 shall  survive,  and such  termination  shall be without
prejudice to the rights and remedies that either may have against the other.


7.       INDEMNIFICATION

         In  addition   to  the  rights  of  any  of  the   parties   hereto  to
indemnification  under Article 11 of the Purchase  Agreement,  (i) Manager shall
indemnify  Owner and the Affected  Subsidiaries  and hold Owner and the Affected
Subsidiaries  harmless from and against any and all Losses which they sustain or
suffer  or  to  which  they  may  become   subject  as  a  result  of:  (a)  the
non-performance  or breach of any covenant or agreement  made or  undertaken  by
Manager  in  this  Agreement,  or (b) the  ongoing  operations  of the  Affected
Facilities  during the term of this  Agreement,  and (ii) Owner and the Affected
Subsidiaries,  jointly and severally,  shall indemnify  Manager and hold Manager
harmless from and against any and all Losses

                                        6

<PAGE>

which it  sustains  or suffers or to which it may become  subject as a result of
the  gross  negligence  or  intentionally  wrongful  acts of Owner or any of the
Affected Subsidiaries.  The provisions of Sections 11.5 and 11.6 of the Purchase
Agreement shall govern any claim for indemnification  made hereunder by Manager,
Owner or the Affected  Subsidiaries and such provisions are hereby  incorporated
herein by reference.


8.       MISCELLANEOUS

         8.1 Pursuant to Title 42 of the United States Code and applicable rules
and regulations thereunder, until the expiration of four years after termination
of this Agreement,  the Manager shall make available,  upon appropriate  written
request by the  Secretary of the United  States  Department  of Health and Human
Services or the  Comptroller  General of the United  States  General  Accounting
Office,  or any of  their  duly  authorized  representatives,  a  copy  of  this
Agreement and such books,  documents and records as are necessary to certify the
nature and extent of the costs of the  services  provided by the  Manager  under
this Agreement.  The Manager further agrees that in the event it carries out any
of its duties under this Agreement through a subcontract with a value or cost of
$10,000  or more  over a 12  month  period  with a  related  organization,  such
subcontract  shall  contain a clause to the effect that until the  expiration of
four years after the furnishing of such services  pursuant to such  subcontract,
the related organization shall make available,  upon appropriate written request
by the Secretary of the United States Department of Health and Human Services or
the Comptroller General of the United States General Accounting Office or any of
their  duly  authorized  representatives,  a copy of such  subcontract  and such
books, documents and records of such organization as are necessary to verify the
nature and extent of such costs.  Disclosure  pursuant to this Section shall not
be  construed  as a waiver of any other  legal right to which the Manager may be
entitled under law or regulation.

         8.2 With respect to each Affected  Facility,  this  Agreement  shall be
governed in all respects, including validity,  interpretation and effect, by the
laws of the state in which such Affected Facility is located,  without regard to
the principles of conflicts of law thereof.

         8.3 Manager hereby  authorizes  Owner and the Affected  Subsidiaries to
state in any  advertising,  promotional  or other  material that Manager acts as
consultant to, and Manager of, the Affected Facilities.

         8.4 Owner shall not be deemed to be in violation  of this  Agreement if
it is prevented from performing any of its obligations  hereunder for any reason
beyond its control including, without limitation,  strikes, shortages, war, acts
of God, lack of any Payor's financial resources,  or any statute,  regulation or
rule of federal, state or local government or agency thereof.

         8.5 This  Agreement  shall not change or alter in any manner the rights
and obligations of the parties under the Purchase Agreement.  In the event there
is any  inconsistency  between this  Agreement and the Purchase  Agreement,  the
terms of the Purchase Agreement shall prevail.


                                        7

<PAGE>

         8.6 Each party shall keep all  information  concerning the operation of
the Affected  Facilities,  during the term of this Agreement and all information
obtained  from the other  either  before  or after  the date of this  Agreement,
confidential  and neither  party shall reveal such  information  to, nor produce
copies of any written  information  for, any person outside its management group
or its  professional  advisors  without the prior  written  consent of the other
party,  unless such party is compelled to disclose such  information by judicial
or administrative process or by any other requirements of Law.

         8.7  This  Agreement   (including  the  Riders  hereto),  the  Purchase
Agreement  (including  the  Schedules  and  exhibits  thereto),  and  the  other
documents and instruments  specifically  provided for herein and therein contain
the entire  understanding  between the parties  concerning the subject matter of
this Agreement and such other documents and instruments and, except as expressly
provided  for  herein  or  therein,   supersede  all  prior  understandings  and
agreements,  whether  oral or written,  between them with respect to the subject
matter hereof and thereof. There are no representations, warranties, agreements,
arrangements  or  understandings,  oral or written,  between the parties  hereto
relating to the subject  matters of this Agreement and such other  documents and
instruments which are not fully expressed herein or therein.  This Agreement may
be amended or modified  only by an  agreement  in writing  signed by each of the
parties hereto.

         8.8  Incorporation of Provisions of Purchase  Agreement.  The following
provisions  of the  Purchase  Agreement  are  incorporated  herein by  reference
mutatis mutandis: Sections 12.1 through 12.11.

         8.9  Excluded  Liabilities.  Notwithstanding  anything  herein  to  the
Contrary,  Manager shall not be required to assume,  pay or perform any Excluded
Liability.


                                        8

<PAGE>


         IN WITNESS  WHEREOF,  the undersigned  have caused this Agreement to be
executed on the day and year first above written.

                           MANAGER:

                           INTEGRATED HEALTH SERVICES, INC.


                           By
                             ---------------------------------------------------

                             Its
                                ------------------------------------------------

                           OWNER:

                           HORIZON/CMS HEALTHCARE
                           CORPORATION,
                           for itself and as Agent for the Affected Subsidiaries


                           By
                             ---------------------------------------------------
                             Its
                                ------------------------------------------------








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