INTEGRATED HEALTH SERVICES INC, DEF 14A, 1999-04-30

INTEGRATED HEALTH SERVICES INC
DEF 14A, 1999-04-30
SOCIAL SERVICES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement

[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))

[X] Definitive Proxy Statement

[ ] Definitive Additional Materials

[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

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

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No Fee Required.

[ ] Fee computed on table below per Exchange Act Rules, 14a-6(i)(1) and 0-11.

1) Title of each class of securities to which transaction applies:

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[ ] Fee paid previously with preliminary materials.

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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
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1) Amount Previously Paid:

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<PAGE>

INTEGRATED HEALTH SERVICES, INC.
10065 RED RUN BOULEVARD
OWINGS MILLS, MARYLAND 21117
(410) 998-8400

April 30, 1999

Dear Fellow Stockholder:

You are cordially invited to attend the Company's Annual Meeting of
Stockholders to be held at 2:00 p.m., on Friday, May 28, 1999, at the Pikesville
Hilton Inn, 1726 Reisterstown Road, Baltimore, Maryland.

This year, you are being asked to vote only on the election of eight
directors to the Company's Board of Directors. In addition, I will be pleased to
report on the affairs of the Company and a discussion period will be provided
for questions and comments of general interest to stockholders.

We look forward to greeting personally those stockholders who are able to
be present at the meeting; however, whether or not you plan to be with us at the
meeting, it is important that your shares be represented. Accordingly, you are
requested to sign and date the enclosed proxy and mail it in the envelope
provided at your earliest convenience.

Thank you for your cooperation.

Very truly yours,

Robert N. Elkins, M.D.
Chairman of the Board, President and
Chief Executive Officer

<PAGE>

INTEGRATED HEALTH SERVICES, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

Owings Mills, Maryland
April 30, 1999

Notice is hereby given that the Annual Meeting of Stockholders of
Integrated Health Services, Inc. will be held on Friday, May 28, 1999 at 2:00
p.m., at the Pikesville Hilton Inn, 1726 Reisterstown Road, Baltimore, Maryland
for the following purposes:

(1) To elect eight directors to serve for the ensuing year; and

(2) To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.

Stockholders of record at the close of business on April 9, 1999 will be
entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof.

All stockholders are cordially invited to attend the Annual Meeting in
person. Stockholders who are unable to attend the Annual Meeting in person are
requested to complete and date the enclosed form of proxy and return it promptly
in the envelope provided. No postage is required if mailed in the United States.

Stockholders who attend the Annual Meeting may revoke their proxy and vote
their shares in person.

MARC B. LEVIN
Secretary

<PAGE>

INTEGRATED HEALTH SERVICES, INC.
10065 RED RUN BOULEVARD
OWINGS MILLS, MARYLAND 21117
PROXY STATEMENT

GENERAL INFORMATION

PROXY SOLICITATION

This Proxy Statement is furnished to the holders of Common Stock, par value
$.001 per share (the "Common Stock"), of Integrated Health Services, Inc. (the
"Company") in connection with the solicitation by the Board of Directors of the
Company of proxies for use at the Annual Meeting of Stockholders to be held on
Friday, May 28, 1999, or at any adjournment thereof, pursuant to the
accompanying Notice of Annual Meeting of Stockholders. The purposes of the
meeting and the matters to be acted upon are set forth in the accompanying
Notice of Annual Meeting of Stockholders. The Board of Directors is not
currently aware of any other matters that will come before the meeting.

Proxies for use at the meeting are being solicited by the Board of
Directors of the Company. Proxies will be mailed to stockholders on or about May
3, 1999 and will be solicited chiefly by mail. The Company will make
arrangements with brokerage houses and other custodians, nominees and
fiduciaries to send proxies and proxy material to the beneficial owners of the
shares and will reimburse them for their expenses in so doing. Should it appear
desirable to do so in order to ensure adequate representation of shares at the
meeting, officers, agents and employees of the Company may communicate with
stockholders, banks, brokerage houses and others by telephone, facsimile or in
person to request that proxies be furnished. All expenses incurred in connection
with this solicitation will be borne by the Company. The Company has retained
Georgeson & Company Inc. to assist in soliciting proxies for a fee of
approximately $8,000 plus out-of-pocket expenses.

REVOCABILITY AND VOTING OF PROXY

A form of proxy for use at the Annual Meeting and a return envelope for the
proxy are enclosed. Stockholders may revoke the authority granted by their
execution of proxies at any time before their effective exercise by filing with
the Secretary of the Company a written notice of revocation or a duly executed
proxy bearing a later date, or by voting in person at the meeting. Shares of the
Company's Common Stock represented by executed and unrevoked proxies will be
voted in accordance with the choice or instructions specified thereon. If no
specifications are given, the proxies intend to vote the shares represented
thereby to elect as directors the persons nominated and in accordance with their
best judgment on any other matters which may properly come before the meeting.

RECORD DATE AND VOTING RIGHTS

Only stockholders of record at the close of business on April 9, 1999 are
entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof. On April 9, 1999 there were 52,588,735 shares of Common Stock
outstanding; each such share is entitled to one vote on each of the matters to
be presented at the Annual Meeting. The holders of a majority of the outstanding
shares of Common Stock, present in person or by proxy, will constitute a quorum
at the Annual Meeting. Abstentions and broker non-votes will be counted for
purposes of determining the presence or absence of a quorum. "Broker non-votes"
are shares held by brokers or nominees which are present in person or
represented by proxy, but which are not voted on a particular matter because
instructions have not been received from the beneficial owner. Under applicable
Delaware law, the effect of broker non-votes on a particular matter depends on
whether the matter is one as to which the broker or nominee has discretionary
voting authority under the applicable rule of the New York Stock Exchange. The
effect of broker non-votes on the election of directors is discussed under
Proposal No. 1.

<PAGE>

BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table sets forth information as of March 1, 1999 (except as
otherwise noted in the footnotes) regarding the beneficial ownership (as defined
by the Securities and Exchange Commission (the "Commission")) of the Company's
Common Stock of: (i) each person known by the Company to own beneficially more
than five percent of the Company's outstanding Common Stock; (ii) each director
of the Company; (iii) each executive officer named in the Summary Compensation
Table (see "Executive Compensation"); and (iv) all current directors and
executive officers of the Company as a group. Except as otherwise specified, the
named beneficial owner has sole voting and investment power over the shares
listed.

AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP OF PERCENTAGE OF
NAME OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK
- ---------------------------------------------------------------------- -------------------- --------------
<S> <C> <C>
Robert N. Elkins ..................................................... 2,782,191(1) 5.1%
Integrated Health Services, Inc.
8889 Pelican Bay Boulevard
Naples, FL 34108
Lawrence P. Cirka .................................................... 44,217(2) *
Edwin M. Crawford .................................................... 100,000(3) *
Stephen P. Griggs .................................................... 1,363,545(4) 2.5%
Kenneth M. Mazik ..................................................... 100,000(3) *
Robert A. Mitchell ................................................... 100,000(3) *
Charles W. Newhall III ............................................... 284,822(5) *
Timothy F. Nicholson ................................................. 327,283(6) *
C. Taylor Pickett .................................................... 111,041(7) *
John L. Silverman .................................................... 90,000(3) *
George H. Strong ..................................................... 36,300(8) *
Sally Weisberg ....................................................... 180,000(9) *
C. Christian Winkle .................................................. 128,507(10) *
All directors and executive officers as a group (13 persons) ......... 5,673,374(11) 10.1%
</TABLE>

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* Less than one percent

(1) Includes 1,720,000 shares of Common Stock issuable to Dr. Elkins upon the
exercise of options granted under the Company's stock option plans, 30,000
shares held by Dr. Elkins' spouse, and 75,936 shares held by LifeWay
Partners LLC, of which Dr. Elkins owns 99% and his spouse owns the
remaining 1%. Dr. Elkins disclaims beneficial ownership of the shares held
by his spouse.

(2) Information as of April 13, 1998, the latest date as of which information
is available to the Company. Does not include options to purchase shares of
Common Stock beneficially owned at April 13, 1998, which options have
expired. Mr. Cirka ceased to be an executive officer and director in March
1998. See "Executive Compensation -- Employment Agreements."

(3) Represents shares which may be acquired upon the exercise of options
granted under the Company's stock option plans.

(4) Includes 8,402 shares owned by L & G of Orlando, Inc., a corporation in
which Mr. Griggs is the principal shareholder, 870 shares owned by his
spouse, 391 shares owned by his spouse's trust, 750,000 shares which may be
acquired upon the exercise of warrants issued to Mr. Griggs in connection
with the Company's acquisition (the "RoTech Acquisition") of RoTech Medical
Corporation ("RoTech"), of which warrants to purchase 600,000 shares of
Common Stock are not exercisable within 60 days of March 1, 1999, and
493,510 shares which may be acquired upon the exercise of options granted
under stock option plans of RoTech and converted into options to purchase
shares of the Company's Common Stock in connection with the RoTech
Acquisition, of which options to purchase 145,000 shares of Common Stock
are not exercisable within 60 days of March 1, 1999. See "Executive
Compensation -- Employment Agreements."

(5) Includes 155,400 shares owned by New Enterprise Associates VIII, L.P.
("NEA"), 128,082 shares which may be acquired upon the exercise of options
granted under the Company's stock option plans, and 1,340 shares owned by
his spouse. Mr. Newhall may be deemed to beneficially own the shares held
by NEA by virtue of his being a general partner of the general partner of
NEA; however, Mr. Newhall disclaims beneficial ownership of the shares
owned by NEA.

(6) Includes 95,000 shares of Common Stock which may be acquired upon the
exercise of options granted under the Company's stock option plans, 15,000
shares owned by Caledonian Investments L.P., a partnership in which Mr.
Nicholson is the sole stockholder of the corporation which is the general
partner, and 2,250 shares owned in trust for the benefit of Mr.
Nicholson's minor children.

<PAGE>

(7) Includes 99,300 shares which may be acquired upon the exercise of options
granted under the Company's stock option plans, including 67,250 shares
issuable upon the exercise of options which are not exercisable within 60
days of March 1, 1999.

(8) Includes 25,000 shares of Common Stock which may be acquired upon the
exercise of options granted under the Company's stock option plans.

(9) Includes 105,000 shares which may be acquired upon the exercise of options
granted under the Company's stock option plans, including 56,250 shares
issuable upon the exercise of options which are not exercisable within 60
days of March 1, 1999. Does not include shares issuable upon exercise of
exchange traded call options, all of which have expired.

(10) Includes 125,375 shares which may be acquired upon the exercise of options
granted under the Company's stock option plans. Mr. Winkle ceased to be an
executive officer effective January 1, 1999.

(11) Includes 155,400 shares owned by NEA (see Note 5 above), 3,031,882 shares
which may be acquired upon the exercise of options granted under the
Company's stock option plans (including 245,000 shares issuable upon the
exercise of options which are not exercisable within 60 days of March 1,
1999), 750,000 shares which may be acquired upon the exercise of warrants
issued to Mr. Griggs in connection with the RoTech Acquisition, of which
warrants to purchase 600,000 shares are not exercisable within 60 days of
March 1, 1999, and 493,510 shares which may be acquired upon the exercise
of options granted under stock option plans of RoTech and converted into
options to purchase shares of the Company's Common Stock in connection with
the RoTech Acquisition, of which options to purchase 145,000 shares are not
exercisable within 60 days of March 1, 1999.

<PAGE>

PROPOSAL NO. 1--ELECTION OF DIRECTORS

Eight directors (constituting the entire Board) are to be elected at the
Annual Meeting. Unless otherwise specified, the enclosed proxy will be voted in
favor of the persons named below to serve until the next annual meeting of
stockholders and until their successors shall have been duly elected and shall
qualify. Each person named below is now a director of the Company. In the event
any of these nominees shall be unable to serve as a director, the shares
represented by the proxy will be voted for the person, if any, who is designated
by the Board of Directors to replace the nominee. All nominees have consented to
be named and have indicated their intent to serve if elected. The Board of
Directors has no reason to believe that any of the nominees will be unable to
serve or that any vacancy on the Board of Directors will occur.

The nominees, their ages, the year in which each first became a director
and their principal occupations or employment during the past five years are:

YEAR FIRST PRINCIPAL OCCUPATION
NOMINEE AGE BECAME DIRECTOR DURING THE PAST FIVE YEARS
- ---------------------------- ----- ----------------- ------------------------------------------------------
<S> <C> <C> <C>
Robert N. Elkins, M.D. ..... 55 1986 Chairman of the Board and Chief Executive Officer of
the Company since March 1986; President of the Company
since March 1998 and from March 1986 to July 1994;
from 1980 to 1986, Vice President of Continental Care
Centers, Inc., an owner and operator of long-term
healthcare facilities; from 1976 to 1980, a practicing
physician.(1)(2)

Edwin M. Crawford .......... 50 1995 Chairman of the Board of MedPartners, Inc. since
December 1, 1998 and President and Chief Executive
Officer since March 1998; Chairman of the Board of
Directors, President and Chief Executive Officer of
Magellan Health Services, Inc. (formerly Charter
Medical Corporation) from 1993 to March 1998;
President and Chief Operating Officer of Charter
Medical from 1992 to 1993; Executive Vice President --
Hospital Operations of Charter Medical from 1990 to
1992.(3)

Kenneth M. Mazik ........... 58 1995 Private investor involved in numerous enterprises;
Chairman of the Jovius Foundation; President of Au
Clair Programs and Orlando Financial Corporation,
specializing in investments in long-term care of the
disabled.(3)(4)(5)

Robert A. Mitchell ......... 44 1995 Attorney, Law Offices of Robert A. Mitchell, 1986 to
present, with an emphasis on corporate and
entertainment law, as well as finance and public
relations matters concerning healthcare acquisitions;
a founder, director and treasurer of the Bone Marrow
Foundation.(2)

Charles W. Newhall III ..... 54 1986 General Partner, since 1978, of New Enterprise
Associates, a group of venture capital
partnerships.(4)

</TABLE>

<PAGE>

YEAR FIRST PRINCIPAL OCCUPATION
NOMINEE AGE BECAME DIRECTOR DURING THE PAST FIVE YEARS
- -------------------------- ----- ----------------- ----------------------------------------------------
<S> <C> <C> <C>
Timothy F. Nicholson ..... 50 1986 Managing Director of Lyric Health Care LLC since
February 1998; Chairman and Managing Director of
Speciality Care PLC from May 1993 to February 1998;
Executive Vice President of the Company from March
1986 to May 1993; from 1980 to 1986, Executive Vice
President of Continental Care Centers, Inc.; from 1973
to 1980, a practicing attorney.

John L. Silverman ........ 57 1986 Private investor in, and consultant to, healthcare
companies; Chief Executive Officer and President of
Asia Care, Inc., a subsidiary of the Company, from
June 1995 to December 1997; President of VentureCorp,
Inc., a venture capital and investment management
company, from 1985 to June 1995; Vice President and
Chief Financial Officer of Chi Systems, Inc. (formerly
the Chi Group, Inc.), a healthcare consulting company,
from 1990 to 1997.

George H. Strong ......... 72 1994 From 1978 until 1993, a director and from 1978 to 1985
a senior officer of Universal Health Services, Inc., a
publicly owned hospital management corporation which
he co-founded; currently a director of six
corporations.(3)(5)

</TABLE>

- ----------

(1) Dr. Elkins is the brother of Marshall A. Elkins, Executive Vice President
and General Counsel of the Company.

(2) Member of the Acquisitions Committee of the Board of Directors.

(3) Member of the Finance Committee of the Board of Directors.

(4) Member of the Compensation and Stock Option Committee of the Board of
Directors.

(5) Member of the Audit Committee of the Board of Directors.

Mr. Crawford is a director of MedPartners, Inc. Mr. Newhall is a director
of HEALTHSOUTH Corporation, Opta Food Ingredients, Inc. and MedPartners, Inc.
Mr. Silverman is a director of Superior Consultant Holdings Corporation and MHM
Services, Inc. Mr. Strong is a director of HEALTHSOUTH Corporation, AmeriSource
Health Corporation and Balanced Care Corporation.

During the fiscal year ended December 31, 1998, the Board of Directors held
nine meetings (five of which were regularly scheduled meetings) and acted four
times by unanimous written consent in lieu of a meeting. Each director attended
at least 75% of the meetings of the Board of Directors held and of all
committees of the Board of Directors on which he served while he was director of
the Company.

In September 1990, the Board of Directors established an Audit Committee to
review the internal accounting procedures of the Company and to consult with and
review the Company's independent auditors and the services provided by such
auditors. Messrs. Mazik and Strong are the current members of the Audit
Committee. The Audit Committee met 10 times in 1998.

In September 1990, the Board of Directors formed the Stock Option Plan
Committee to administer the Company's stock option plans. In July 1992, the
Board of Directors formed the Executive Compensation Committee to administer the
Company's executive compensation policies. In July 1993, the Board of Directors
merged the Executive Compensation Committee and the Stock Option Plan Committee
to form the Compensation and Stock Option Committee, which took on the
responsibilities

<PAGE>

previously held by its predecessor committees. Messrs. Mazik and Newhall are
the current members of this committee. The Compensation and Stock Option
Committee held two meetings and acted five times by unanimous written consent
in lieu of a meeting in 1998.

On February 1, 1996, the Board of Directors formed the Finance Committee to
oversee the treasury operations and supervise the financial affairs of the
Company and approve debt offerings and matters relating to the Company's line of
credit. Messrs. Crawford, Mazik and Strong are the current members of this
committee. The Finance Committee held two meetings in 1998.

On July 24, 1997, the Board of Directors formed the Acquisitions Committee
to approve transactions for the acquisition or disposition by the Company of
assets or businesses in which the consideration paid or received includes
capital stock of the Company or the purchaser, respectively, without the
necessity for further Board approval, as long as (i) the consideration to be
paid or received by the Company in connection with any such acquisition or
disposition does not exceed $50 million and (ii) the aggregate consideration to
be paid or received by the Company in any calendar year does not exceed $300
million. Messrs. Elkins and Mitchell are the current members of this committee.
The Acquisitions Committee held 18 meetings and acted 22 times by unanimous
written consent in lieu of a meeting in 1998.

VOTE REQUIRED

The eight nominees receiving the highest number of affirmative votes of the
shares present in person or represented by proxy and entitled to vote for them,
a quorum being present, shall be elected as directors. Only votes cast for a
nominee will be counted, except that the accompanying proxy will be voted for
all nominees in the absence of instruction to the contrary. Abstentions, broker
non-votes and instructions on the accompanying proxy card to withhold authority
to vote for one or more nominees will result in the respective nominees
receiving fewer votes. However, the number of votes otherwise received by the
nominee will not be reduced by such action.

THE BOARD OF DIRECTORS DEEMS "PROPOSAL NO. 1 -- ELECTION OF DIRECTORS" TO
BE IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A
VOTE "FOR" EACH NOMINEE.

<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to (i) the Company's chief executive
officer, (ii) each of the four other most highly compensated executive officers
of the Company who were serving at the end of 1998 and (iii) Mr. Cirka, who
would have been included in (ii) but for the fact that he was not serving as an
executive officer at the end of 1998, for services in all capacities to the
Company and its subsidiaries.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
SECURITIES
UNDERLYING
OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SARS(#) COMPENSATION($)(1)
- ----------------------------- ------ ------------------ --------------------- ------------------ ---------------------
<S> <C> <C> <C> <C> <C>
Robert N. Elkins ............ 1998 $ 809,935 --(3) -- $ 11,598(6)
Chairman of the Board, 1997 $ 752,277 $ 3,250,000(4) 1,100,000 $ 14,453,794(7)
Chief Executive Officer and 1996 $ 750,000 $ 2,500,000(5) 500,000 $ 1,198,892(8)
President(2)

Stephen P. Griggs ........... 1998 $ 500,000 $ 500,000 1,243,510(12) --
President--RoTech 1997 $ 95,890(10) $ 3,595,890(11) 750,000(13) --
Medical Corporation(9) 1996 -- -- -- --

C. Taylor Pickett ........... 1998 $ 312,604 --(15) 75,000 $ 140,442(16)
Executive Vice President-- 1997 $ 310,000 $ 93,000 -- $ 43,958(17)
Chief Financial Officer(14) 1996 $ 237,500 $ 75,000 62,000 $ 5,554 (18)

Sally Weisberg .............. 1998 $ 349,920 --(15) 75,000 $ 5,341(20)
Executive Vice President and 1997 $ 324,000 $ 175,000 -- --
President of Symphony Health 1996 $ 242,308 $ 150,000 30,000 --
Services Division(19)

Lawrence P. Cirka ........... 1998 $ 594,219 $ 74,277 -- $ 11,256,634(24)
Former President(21) 1997 $ 584,286 $ 1,417,619(22) -- $ 2,136(18)
1996 $ 550,000 $ 833,334(23) 300,000 $ 901,465(25)
C. Christian Winkle ......... 1998 $ 400,000 $ 200,000(27) 125,375(28) $ 8,142(18)
Former Executive Vice 1997 $ 400,000 $ 300,000 -- $ 56,470(29)
President--Chief Operating 1996 $ 300,000 $ 100,000 100,000 $ 41,776(29)
Officer(26)

</TABLE>

- ----------

(1) Does not include perquisites paid to the listed officers, such as
automobile allowances, which did not exceed the lesser of $50,000 or 10% of
total compensation.

(2) The Company is a party to an employment and related agreements with Dr.
Elkins. Dr. Elkins used all salary and bonus in excess of $500,000 received
by him in 1998, net of taxes on his entire compensation, to repay
outstanding indebtedness to the Company. See "-- Employment Agreements" and
"Certain Transactions."

(3) Pursuant to Dr. Elkins' employment agreement, he is entitled to a bonus
equal to 100% of his base salary if the Company's annual earnings generally
equal or exceed the earnings per share targets set by the Board of
Directors. Twelve and one-half percent of the bonus is payable each
quarter; however, if the Company's annual earnings do not exceed the Board
of Directors' targets, these quarterly payments are treated as prepayments
of salary or must be repaid to the Company, net of all taxes paid or
payable (except to the extent Dr. Elkins receives tax benefits, through
deductions, for the repayment), with interest at the prime rate. The
remaining fifty percent of the bonus is payable at the end of the year if
the Company's annual earnings exceed the Board of Directors' targets.
During 1998, Dr. Elkins received $303,275 as a bonus pursuant to the
foregoing provisions of his employment agreement. Because the Company did
not equal or exceed the earnings per share targets set by the Board of
Directors, Dr. Elkins has elected to repay this amount (net of all taxes
paid or payable (except to the extent Dr. Elkins receives tax benefits,
through deductions, for the repayment)) with interest at the prime rate.
See "-- Employment Agreements."

(4) Includes the bonus earned in accordance with Dr. Elkins' employment
agreement ($750,000) and $2,500,000 of the $5,000,000 bonus granted in 1996
which became payable in 1997 upon the satisfaction of certain conditions.
In 1996, Dr. Elkins was

<PAGE>

granted a bonus of $5,000,000 which would become payable if certain
conditions were met. The conditions for the bonus, as amended, were as
follows: (i) 25% of the bonus would be paid if the Company met the
Company's earnings per share projections for the 12 months ended June 30,
1997 before taking into account the payment of the bonus and any
non-recurring non-cash charges; (ii) 25% of the bonus would be paid if the
proposed sale of the Company's pharmacy division to Capstone Pharmacy
Services, Inc. pursuant to the Asset Purchase Agreement dated as of June
20, 1996 was consummated; (iii) 25% of the bonus would be paid if the
proposed initial public offering of the Company's subsidiary Integrated
Living Communities, Inc. ("ILC") was consummated at a price of at least
$9.00 per share or, if after the proposed initial public offering of ILC at
a lower price, the price per share of ILC traded at a price of at least
$9.00 per share; and (iv) 25% of the bonus would be paid if the proposed
acquisition of First American Health Care of Georgia, Inc. pursuant to the
Merger Agreement dated as of February 21, 1996 was consummated. Conditions
(ii) and (iv) were met in 1996, and conditions (i) and (iii) were met in
1997. Dr. Elkins was required to use 50% of the after-tax amount of the
bonus (including the advance) to purchase shares of the Company's Common
Stock.

(5) Consists of $2,500,000 of the $5,000,000 bonus granted in 1996 which became
payable in 1996 upon the satisfaction of the conditions described in Note 4
above. Does not include the remaining $2,500,000 of such $5,000,000 bonus,
which amount was advanced in 1996 but became payable in 1997 upon the
satisfaction of the conditions described in Note 4 above.

(6) Represents life insurance premium payments made by the Company on behalf of
Dr. Elkins. Does not include 282,353 shares of Common Stock, having a value
of $3,000,000 at the time of contribution, contributed by the Company to
the Key Employee Supplemental Executive Retirement Plan for the benefit of
Dr. Elkins, which contribution was rescinded in April 1999 with Dr. Elkins'
consent. See "-- Supplemental Deferred Compensation Plans" and "Certain
Transactions."

(7) Represents $281,432 of loan forgiveness, $14,169,200 contributed by the
Company to the Key Employee Supplemental Executive Retirement Plan and
$3,162 of life insurance premium payments made by the Company on behalf of
Dr. Elkins. See "-- Supplemental Deferred Compensation Plans" and "Certain
Transactions."

(8) Represents $1,191,300 contributed to the Key Employee Supplemental
Executive Retirement Plan and $7,592 of life insurance premium payments
made by the Company on behalf of Dr. Elkins. See "-- Supplemental Deferred
Compensation Plans."

(9) Mr. Griggs joined the Company on October 21, 1997 upon consummation of the
RoTech Acquisition. Mr. Griggs was President of RoTech at the time of the
RoTech Acquisition. The Company is a party to an employment agreement with
Mr. Griggs. See "-- Employment Agreements."

(10) Does not include amounts paid to Mr. Griggs by RoTech prior to consummation
of the RoTech Acquisition.

(11) Includes a sign-on bonus of $3,500,000 paid to Mr. Griggs upon consummation
of the RoTech Acquisition. See "-- Employment Agreements."

(12) Includes (i) options to purchase 348,360 shares of Common Stock, the
exercise price of which was reduced from $29.71 per share to $10.63 per
share, (ii) options to purchase 145,150 shares of Common Stock at an
exercise price of $10.23 per share, the expiration date of which were
extended from December 31, 1998 to December 31, 2001, and (iii) a warrant
to purchase 750,000 shares of Common Stock, the exercise price of which was
reduced from $33.16 to $10.63 per share in November 1998. See Note 13
below.

(13) Consists of 750,000 shares which may be acquired upon the exercise of
warrants issued to Mr. Griggs in connection with the RoTech Acquisition.
Does not include 493,510 shares which may be acquired upon the exercise of
options granted under stock option plans of RoTech and converted into
options to purchase shares of the Company's Common Stock in connection with
the RoTech Acquisition. See "-- Employment Agreements."

(14) The Company is a party to an employment agreement with Mr. Pickett. See "--
Employment Agreements."

(15) The Compensation and Stock Option Committee intends to award a bonus to
this individual for 1998 but has not yet determined the amount.

(16) Represents $134,000 of loan forgiveness and $6,442 of life insurance
premium payments made by the Company on behalf of Mr. Pickett. Does not
include a $632,989 contribution by the Company to the Supplemental Deferred
Compensation Plan, in the form of shares of Common Stock, for the benefit
of Mr. Pickett, which contribution was rescinded in April 1999 with Mr.
Pickett's consent. See "-- Supplemental Deferred Compensation Plans."

(17) Represents a $39,613 contribution by the Company to the Supplemental
Deferred Compensation Plan and $4,345 of life insurance premium payments
made by the Company on behalf of Mr. Pickett. See "-- Supplemental Deferred
Compensation Plans."

(18) Represents life insurance premium payments made by the Company on behalf of
the named individual.

(19) The Company is a party to an employment agreement with Ms. Weisberg. See
"-- Employment Agreements."

(20) Represents life insurance premium payments made by the Company on behalf of
Ms. Weisberg. Does not include a $492,212 contribution by the Company to
the Supplemental Deferred Compensation Plan, in the form of shares of
Common Stock, for the benefit of Ms. Weisberg, which contribution was
rescinded in April 1999 with Ms. Weisberg's consent. See "-- Supplemental
Deferred Compensation Plans."

<PAGE>

(21) Mr. Cirka ceased to be an officer and director of the Company in March 1998
and ceased to be an employee in July 1998. See "-- Employment Agreements."

(22) Includes the bonus earned in accordance with Mr. Cirka's employment
agreement ($584,286) and $833,333 of the $1,666,667 bonus granted in 1996
which became payable in 1997 upon the satisfaction of the conditions
described in Note 4 above.

(23) Consists of $833,334 of the $1,666,667 bonus granted in 1996 which became
payable in 1996 upon the satisfaction of the conditions described in Note 4
above. Does not include the remaining $833,333 of such $1,666,667 bonus,
which amount was advanced in 1996 but became payable in 1997 upon the
satisfaction of certain conditions. See Notes 4 and 21 above. Mr. Cirka was
required to use 50% of the after-tax amount of the bonus (including the
advance) to purchase shares of the Company's Common Stock.

(24) Consists of $5,559 of life insurance premium payments made by the Company
on behalf of Mr. Cirka and payments in 1998 in connection with the
termination of Mr. Cirka's employment as follows: (i) $2,471,069 in
satisfaction of its obligations to Mr. Cirka under the Key Employee
Supplemental Executive Retirement Plan and $262,244 in satisfaction of its
obligations to Mr. Cirka under a Supplemental Deferred Compensation Plan
(see "-- Supplemental Deferred Compensation Plans"), (ii) sale to Mr. Cirka
of a house valued at $4,857,931, which was paid through reduction of
severance amounts otherwise owed to Mr. Cirka, (iii) severance payments of
$3,081,734 (of which $627,446 was applied by the Company against an
outstanding loan (including accrued interest) of $1,446,437), (iv) $30,000
of Mr. Cirka's legal fees in connection with negotiating his severance
arrangements (net of legal fees previously paid by the Company on behalf of
Mr. Cirka which Mr. Cirka was obligated to reimburse to the Company) and
(v) cancellation of principal and interest due on a $523,333 loan made by
the Company to Mr. Cirka.

(25) Represents $898,700 contributed to the Key Employee Supplemental Executive
Retirement Plan and $2,765 of life insurance premium payments made by the
Company on behalf of Mr. Cirka. See "-- Supplemental Deferred Compensation
Plans."

(26) Mr. Winkle ceased to be an officer of the Company effective January 1,
1999. See "-- Employment Agreements."

(27) Pursuant to Mr. Winkle's termination agreement with the Company, this bonus
will be paid in shares of the Company's Common Stock, which shares cannot
be disposed of for two years without the consent of the Company.

(28) Consists of options to purchase Common Stock the exercise prices of which
were reduced from $20.88 per share (with respect to 10,000 options), $22.50
per share (with respect to 40,375 options) and $28.25 per share (with
respect to 75,000 options) to in each case $10.25 per share in connection
with the termination of his employment.

(29) Represents a contribution by the Company to the Supplemental Deferred
Compensation Plan. See "-- Supplemental Deferred Compensation Plans."

<PAGE>

The following table sets forth information with respect to option grants in
1998 to persons named in the Summary Compensation Table:

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (B)
---------------------------------------------------------- -------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES IN OR BASE EXPIRATION
NAME OPTION(#) FISCAL YEAR (A) PRICE ($/SH) DATE 5%($) 10%($)
- -------------------------------- ------------- ----------------- -------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert N. Elkins ............... -- -- -- -- -- --
Stephen P. Griggs(1) ........... 145,150(2) 2.1% $ 10.23 12/31/01 $ 233,691 $ 493,279
348,360(3) 5.0% $ 10.63 12/31/03 $1,024,178 $2,260,856
C. Taylor Pickett .............. 75,000 1.1% $ 28.25 1/28/08 $1,332,470 $3,376,742
Sally Weisberg ................. 75,000 1.1% $ 28.25 1/28/08 $1,332,470 $3,376,742
Lawrence P. Cirka .............. -- -- -- -- -- --
C. Christian Winkle(4) ......... 125,375 1.8% $ 10.25 3/23/00 $ 82,748 $ 166,749
</TABLE>

- ----------

(A) Based on options to purchase 6,898,701 shares granted to all employees in
fiscal 1998, including options which were repriced in 1998.

(B) These amounts represent assumed rates of appreciation in the price of the
Company's Common Stock during the terms of the options in accordance with
rates specified in applicable federal securities regulations. Actual gains,
if any, on stock option exercises will depend on the future price of the
Company's Common Stock and overall market conditions. The 5% rate of
appreciation over the 10-year term of the $28.25 option, the 3-year
remaining term (at the time of extension) of the $10.23 option, the 5-year
remaining term (at the time of extension) of the $10.63 option, the
1.75-year remaining term (at the time of repricing) of the $10.25 option
and the 1.27-year remaining term (at the time of repricing) of the $10.25
option would result in stock prices of $46.02, $11.84, $13.57, $11.23 and
$10.91, respectively. The 10% rate of appreciation over the 10-year term of
the $28.25 option, the 3-year remaining term of the $10.23 option, the
5-year remaining term of the $10.63 option, the 1.75-year remaining term of
the $10.25 option and the 1.27-year remaining term of the $10.25 option
would result in stock prices of $73.27, $13.62, $17.12, $12.12 and $11.58,
respectively. There is no representation that the rates of appreciation
reflected in this table will be achieved.

(1) Does not include a warrant to purchase 750,000 shares of Common Stock at an
exercise price of $33.16 per share issued to Mr. Griggs in the RoTech
Acquisition, which exercise price was reduced to $10.63 per share in
November 1998. The potential realizable value of the warrant over the
8.92-year remaining term (at the time of repricing) of the warrant would be
$4,350,000 at an assumed 5% annual rate of appreciation of the stock price
(based on the $10.63 exercise price of the warrant) over the 8.92-year
remaining term and $10,687,500 at an assumed 10% annual rate of
appreciation. These amounts represent assumed rates of appreciation in the
price of the Company's Common Stock during the term of the warrants in
accordance with rates specified in applicable federal securities
regulations. Actual gains, if any, on warrant exercises will depend on the
future price of the Common Stock and overall stock market conditions. The
5% rate of appreciation over the 8.92-year remaining warrant term of the
$10.63 exercise price would result in a stock price of $16.43. The 10% rate
of appreciation over the 8.92-year warrant term of the $10.63 exercise
price would result in a stock price of $24.88. There is no representation
that these rates of appreciation will be achieved. See "-- Employment
Agreements."

(2) Represents options which were to expire on December 31, 1998 but were
extended until December 31, 2001.

(3) Represents options with an original exercise price of $29.71 per share,
which exercise price was reduced in November 1998.

(4) Represents options to purchase Common Stock the exercise prices of which
were reduced from $20.88 per share (with respect to 10,000 options), $22.50
per share (with respect to 40,375 options) and $28.25 per share (with
respect to 75,000 options) to in each case $10.25 per share in connection
with the termination of his employment.

<PAGE>

The following table sets forth information with respect to (i) stock
options exercised in 1998 by the persons named in the Summary Compensation Table
and (ii) unexercised stock options held by such individuals at December 31,
1998:

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE ----------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ------------- --------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert N. Elkins .......... 880,000 $14,043,800(2) 1,720,000 -- -- --
Stephen P. Griggs(3) ...... -- -- 643,510 600,000 $2,307,127 $2,097,000
C. Taylor Pickett ......... 58,700 $ 1,010,270 32,050 67,250 -- --
Sally Weisberg ............ -- -- 48,750 56,250 -- --
Lawrence P. Cirka ......... 600,000 $ 11,392,690 245,464 225,000 -- --
C. Christian Winkle ....... 85,250 $ 1,551,093 125,375 -- $ 485,828 --
</TABLE>

- ----------

(1) Computed based upon the difference between the closing price of the
Company's Common Stock on December 31, 1998 ($14.125) and the exercise
price.

(2) Represents the difference between the closing price of the Company's Common
Stock on the date of exercise and the exercise price of the option. Dr.
Elkins did not sell these shares and continues to hold them. Subsequent to
the option exercise, the fair market value of the Company's Common Stock
and, therefore, the value realized upon exercise, has decreased
substantially.

(3) Consists of 750,000 shares of Common Stock which may be acquired upon the
exercise of warrants issued to Mr. Griggs in connection with the RoTech
Acquisition, of which warrants to purchase 600,000 shares are not
exercisable, and 493,510 shares which may be acquired upon the exercise of
options granted under stock option plans of RoTech and converted into
options to purchase shares of the Company's Common Stock in connection with
the RoTech Acquisition.

TEN YEAR OPTION REPRICINGS

The following table contains information concerning each repricing of
options held by any executive officer of the Company during the past ten years:

TEN-YEAR OPTION REPRICINGS

NUMBER OF LENGTH OF ORIGINAL
SECURITIES MARKET PRICE OF EXERCISE PRICE AT OPTION TERM
UNDERLYING STOCK AT TIME OF TIME OF NEW REMAINING AT DATE
OPTIONS REPRICED REPRICING OR REPRICING OR EXERCISE OF REPRICING OR
NAME DATE OR AMENDED(#) AMENDMENT($) AMENDMENT($) PRICE($) AMENDMENT
- ----------------------------- ---------- ------------------ ------------------ ------------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
W. Bradley Bennett .......... 11/27/95 15,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Exec. V.P.-- 11/27/95 900 $ 20.88 $ 23.50 $ 20.88 8 Years
Finance 11/27/95 80 $ 20.88 $ 23.25 $ 20.88 7 Years
Dennis A. Cahill ............ 11/27/95 50,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Former Exec. V.P.-- 11/27/95 9,000 $ 20.88 $ 23.50 $ 20.88 8 Years
Chief Accounting
Officer
David N. Chichester ......... 11/27/95 10,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Former Exec. V.P.-- 11/27/95 10,000 $ 20.88 $ 23.50 $ 20.88 8 Years
Finance 11/27/95 10,000 $ 20.88 $ 31.38 $ 20.88 9 Years
11/27/95 9,000 $ 20.88 $ 27.88 $ 20.88 8 Years
11/27/95 9,000 $ 20.88 $ 21.88 $ 20.88 8 Years
11/27/95 4,500 $ 20.88 $ 23.50 $ 20.88 8 Years
</TABLE>

<PAGE>

Brian Davidson .............. 11/27/95 35,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Former Exec. V.P.-- 11/27/95 10,000 $ 20.88 $ 23.50 $ 20.88 8 Years
Development

Marshall A. Elkins .......... 11/27/95 35,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Exec. V.P.-- 11/27/95 10,000 $ 20.88 $ 23.50 $ 20.88 8 Years
General Counsel

Robert N. Elkins ............ 11/27/95 700,000 $ 20.88 $ 26.63 $ 20.88 8 Years
Chairman, CEO 11/27/95 800,000 $ 20.88 $ 29.63 $ 20.88 8 Years
and President 11/27/95 150,000 $ 20.88 $ 28.63 $ 20.88 8 Years

Stephen Griggs(1) ........... 11/19/98 348,360 $ 10.63 $ 29.71 $ 10.63 5 Years
President--RoTech
Medical Corporation

Eleanor Harding ............. 11/27/95 13,500 $ 20.88 $ 23.50 $ 20.88 8 Years
Former Exec. V.P.-- 11/27/95 5,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Finance

John Heller ................. 11/27/95 5,000 $ 20.88 $ 35.25 $ 20.88 9 Years
Exec. V.P. and 11/27/95 15,000 $ 20.88 $ 27.88 $ 20.88 8 Years
President of Long- 11/27/95 3,000 $ 20.88 $ 23.50 $ 20.88 8 Years
Term Care Division

Edward J. Komp .............. 11/27/95 15,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Former Exec. V.P. 11/27/95 20,000 $ 20.88 $ 26.62 $ 20.88 8 Years

Marc B. Levin ............... 11/27/95 40,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Exec. V.P.--Investor 11/27/95 10,000 $ 20.88 $ 23.50 $ 20.88 8 Years
Relations

Anthony Masso ............... 11/27/95 100,000 $ 20.88 $ 28.63 $ 20.88 9 Years
Exec. V.P.--Managed
Care

C. Taylor Pickett ........... 11/27/95 10,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Exec. V.P.--Chief 11/27/95 12,000 $ 20.88 $ 21.88 $ 20.88 8 Years
Financial Officer

Scott Robertson ............. 11/27/95 15,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Former Exec. V.P.

Gary Singleton .............. 11/27/95 25,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Former Exec. V.P. 11/27/95 10,000 $ 20.88 $ 23.50 $ 20.88 8 Years

C. Christian Winkle ......... 11/27/95 25,000 $ 20.88 $ 29.63 $ 20.88 9 Years
Former Exec. V.P.-- 11/27/95 15,000 $ 20.88 $ 27.88 $ 20.88 8 Years
Chief Operating 11/27/95 3,000 $ 20.88 $ 23.50 $ 20.88 8 Years
Officer 11/27/95 10,000 $ 20.88 $ 23.25 $ 20.88 7 Years
12/03/98 10,000 $ 10.25 $ 20.88 $ 10.25 2 Years
12/03/98 40,375 $ 10.25 $ 22.50 $ 10.25 2 Years
12/03/98 75,000 $ 10.25 $ 28.25 $ 10.25 2 Years

</TABLE>

- ----------

<PAGE>

EMPLOYMENT AGREEMENTS

The Company is a party to an employment agreement with Robert N. Elkins.
The agreement provides for a five year term (which commenced January 1, 1994)
with an automatic one year extension at the end of each year, unless 90 days'
notice is given by either party. Under the agreement Dr. Elkins currently
receives an annual base salary of $809,935, with annual increases of at least
the increase in the consumer price index. Dr. Elkins will receive a bonus of
100% of his base salary if the Company's annual earnings generally equal or
exceed the earnings per share targets set by the Board of Directors. Twelve and
one-half percent of the bonus is payable each quarter; however, if the Company's
annual earnings do not exceed the Board of Directors' targets, these quarterly
payments are treated as prepayments of salary or must be repaid to the Company,
net of all taxes paid or payable (except to the extent Dr. Elkins receives tax
benefits, through deductions, for the repayment), with interest at the prime
rate. The remaining fifty percent of the bonus is payable at the end of the year
if the Company's annual earnings exceed the Board of Directors' targets. The
agreement may be terminated by either party on 90 days' notice. Upon termination
of Dr. Elkins' employment by the Company without "Cause" or by Dr. Elkins for
"Good Reason" or if the Company elects not to extend the term of the agreement,
Dr. Elkins will be entitled (i) to a lump-sum cash payment on the effective date
of termination equal to five times the sum of (a) his salary, (b) the "Bonus
Amount" and (c) a pro rata portion of the Bonus Amount through the date of
termination minus any bonus payments made for the fiscal year in which
termination occurs that are not required to be repaid and (ii) to receive
certain employee and other benefits for five years after termination. In
addition, upon termination of Dr. Elkins' employment by the Company without
"Cause" or by Dr. Elkins for "Good Reason" or upon the Company giving notice
that it elects not to extend the term of employment for another year, all stock
options, other equity-based rights and other benefits (including benefits under
the Company's Supplemental Deferred Compensation Plans) will become fully
vested. Upon termination of Dr. Elkins' employment for any reason other than (i)
by the Company for Cause or (ii) by Dr. Elkins before he attains the age of 55
and not due to death, permanent disability or Good Reason, and upon any change
of control that occurs while Dr. Elkins is employed with the Company or within
one year following his termination (other than for Cause, death, permanent
disability or Good Reason), he is entitled to exercise any outstanding stock
option until the earlier of five years following such event (or, if later, five
years after the date of termination of employment following a change of control)
or the stated term of the option. The agreement also provides that if Dr. Elkins
is required to pay an excise tax on "excess parachute payments" (as defined in
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), the
Company is required to pay Dr. Elkins one hundred percent of the amounts that
are necessary to place him in the same after-tax financial position that he
would have been in if such excise tax had not been applicable. The agreement
contains a two year non-competition provision (one year in the case of a
termination of employment other than for Cause within one year after a change of
control). In addition, Dr. Elkins' employment agreement provides that upon
termination without Cause or resignation for Good Reason or if the Company fails
to renew the agreement, Dr. Elkins shall have the right to acquire from the
Company for no additional consideration an assignment of the Company's leasehold
interest in certain floors of the Company's offices and to be provided with an
office, secretarial assistance, automobile insurance, an automobile allowance
and use of a Company plane for five years following termination. The agreement
also grants Dr. Elkins the right, at any time during his term of employment and
for one year thereafter, to purchase the aircraft owned by the Company at a
price equal to book value, and to lease or purchase from the Company at fair
market rental, or purchase from the Company at book value, the hangar space for
such aircraft at the Naples, Florida airport. Upon a change of control or
termination of Dr. Elkins' employment (other than a termination by the Company
for Cause or by Dr. Elkins for other than permanent disability or Good Reason),
Dr. Elkins also has the right to purchase from the Company the current
automobile furnished to him at book value.

Dr. Elkins' employment agreement also provides for his participation in the
Company's Key Employee Supplemental Executive Retirement Plan (the "Key Employee
SERP"), and requires the establishment of a separate trust under the Key
Employee SERP to which the Company shall make irrevocable contributions at
specified times through January 2, 2001 such that, at January 2, 2001, there
would be $23,900,000 in such trust. Pursuant to the employment agreement, the
Company is required to use reasonable efforts to obtain an insurance policy or
letter of credit guaranteeing its obligations to make contributions to the
trust, although to date IHS has not done so. Upon a change of control of the

<PAGE>

Company, the Company is obligated to irrevocably fund the trust in the amount
necessary to fund Dr. Elkins' pension benefit under the Key Employee SERP. In
addition, upon a change of control, Dr. Elkins is entitled to a vested,
nonforfeitable right to retirement benefits under the Key Employee SERP as if he
had retired with 15 years of service on the date the change of control occurred
(without reduction for retirement prior to attaining age 62), payable (i) in a
lump sum if he is an employee at the time of the change of control and (ii) in
the lump sum actuarial equivalent less the sum of all retirement benefits
previously received under the Key Employee SERP if the change of control occurs
within one year after he ceases to be an employee. See "-- Supplemental Deferred
Compensation Plans -- Key Employee Supplemental Executive Retirement Plan."

For purposes of Dr. Elkins' employment agreement: (a) "Cause" is defined as
(i) conviction of a felony involving moral turpitude or (ii) willful gross
neglect or willful gross misconduct resulting in material economic harm to the
Company, unless Dr. Elkins believed in good faith that such conduct was in or
not opposed to the best interests of the Company; (b) "Good Reason" is defined
as (i) a material breach of the agreement by the Company, (ii) any termination
of Dr. Elkins' employment within one year following a change of control of the
Company, (iii) removal, dismissal from or failure of Dr. Elkins to be elected
Chairman of the Board of Directors or (iv) the relocation of Dr. Elkins to an
office which is more than 15 miles from his then principal residence; and (c)
"Bonus Amount" is defined as the highest of (i) Dr. Elkins' salary in the year
of termination, (ii) his bonus in the immediately preceding calendar year or
(iii) his bonus in the calendar year which was immediately prior to the year
immediately preceding the year of termination. The agreement provides that the
determination that Cause exists must be approved by 75% of the members of the
Board and that Dr. Elkins has a 60 day cure period. For purposes of the
agreement, the term "change of control" means the occurrence of one or more of
the following: (i) any person (as such term is used in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than
Dr. Elkins and any group (as such term is used in Section 13(d)(3) of the
Exchange Act) of which he is a member, becomes a beneficial owner (as such term
is used in Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the
capital stock of the Company of any class or classes having general voting power
under ordinary circumstances, in the absence of contingencies, to elect
directors ("Voting Stock"); (ii) the majority of the Board of Directors of the
Company consists of individuals other than individuals who are members of the
Board of Directors on November 18, 1997 ("Incumbent Directors"), provided that
any person becoming a director subsequent to such date whose election or
nomination for election was supported by two-thirds of the directors who then
comprised the Incumbent Directors shall be considered to be an Incumbent
Director, unless such election or nomination was the result of any actual or
threatened election contest of a type contemplated by Regulation 14a-11 under
the Exchange Act; (iii) the Company adopts any plan of liquidation providing for
the distribution of all or substantially all of its assets; (iv) there is
consummated any consolidation, reorganization or merger of the Company in which
the Company is not a continuing or surviving corporation or pursuant to which
all or substantially all of the Voting Stock is converted into cash, securities
or other property (unless the stockholders of the Company immediately prior to
such consolidation, reorganization or merger beneficially own, directly or
indirectly, in substantially the same proportion as they owned the Voting Stock,
all of the voting stock or other ownership interests of the entity or entities,
if any, that succeed to the business of the Company); (v) in any transaction not
described in preceding clause (iv), all or substantially all of the assets or
business of the Company is disposed of pursuant to a merger, consolidation or
other transaction (unless the stockholders of the Company immediately prior to
such merger, consolidation or other transaction beneficially own, directly or
indirectly, in substantially the same proportion as they owned the Voting Stock,
all of the voting stock or other ownership interests of the entity or entities,
if any, that succeed to the business of the Company); or (vi) the Company
combines with another company and is the surviving corporation but, immediately
after the combination, the stockholders of the Company immediately prior to the
combination hold, directly or indirectly, 50% or less of the shares of Voting
Stock of the combined company (there being excluded from the number of such
shares held by such stockholders, but not from the Voting Stock of the combined
company, any such shares received by "affiliates," as such term is defined in
the rules of the Commission, of such other company in exchange for stock of such
other company).

Pursuant to the supplemental agreement between Dr. Elkins and the Company,
the Company has agreed to forgive, on each January 28 from 1999 to 2003, an
amount equal to the principal and interest

<PAGE>

due on such date on a $15,535,000 loan made to him by the Company to exercise
options less, for the amount forgiven on January 28, 1999, the amount of his
salary and bonus for the prior calendar year in excess of $500,000. The
principal amount of the note is due in five equal installments of $3,107,000.
On January 28, 1999, the Company forgave $4,158,065 of principal and accrued
interest on the note. See "Certain Transactions."

In connection with the RoTech Acquisition on October 21, 1997, RoTech
entered into an employment agreement with Stephen P. Griggs, the President of
RoTech. Pursuant to the agreement, Mr. Griggs serves as the President of RoTech
and currently receives an annual base salary of $500,000 per year and an annual
bonus of $500,000 for each year in which RoTech's net income contribution to the
Company equals or exceeds specified targets, with an additional bonus determined
by the Company to be paid if the net income contribution target is exceeded. In
addition, pursuant to the agreement Mr. Griggs received a one-time cash sign-on
bonus of $3,500,000 and a warrant to purchase 750,000 shares of Common Stock of
the Company at an exercise price of $33.16 per share (subsequently reduced to
$10.63 per share (see "-- Ten Year Option Repricings")), which warrant becomes
exercisable at a rate of 20% per year beginning on October 21, 1998 (subject to
acceleration upon Mr. Griggs' death or the occurrence of a change of control of
the Company). The employment agreement has a term of five years. Upon
termination of Mr. Griggs' employment by RoTech without "Cause" or in case Mr.
Griggs resigns for Cause, Mr. Griggs' unpaid base salary under the agreement and
the pro-rated portion of his performance-based bonus, if any, will become
payable in one lump sum and all of Mr. Griggs' unvested stock options will fully
vest. For purposes of the agreement, RoTech may terminate Mr. Griggs' employment
for Cause if Mr. Griggs (i) fails to perform any of his duties in any material
respect or breaches any material term of the agreement, which failure or breach
is not corrected within 30 days of notice, (ii) breaches any representation or
warranty under the agreement in any material respect, (iii) dies or becomes
disabled for 90 days or more and RoTech has provided Mr. Griggs with disability
insurance which is payable after such 90-day period, (iv) is convicted of a
felony or commits an act of theft, larceny or embezzlement or a similar act of
material misconduct with respect to property of RoTech, the Company, their
subsidiaries or employees or (v) commits a material act of malfeasance,
dishonesty or breach of trust with respect to RoTech, the Company or any of
their subsidiaries. Mr. Griggs may terminate his employment for Cause if RoTech
(i) fails to perform any of its duties under the agreement in any material
respect, (ii) fails to provide Mr. Griggs with a work environment reasonably
similar to Mr. Griggs' past work environment or (iii) substantially changes Mr.
Griggs' job responsibilities, each of which failure or action is not corrected
by RoTech within 15 days of notice. Under the agreement Mr. Griggs is subject to
a non-competition provision prohibiting him, for a period of three years
following the termination or expiration of his employment, from being employed
by, being a director or manager of, acting as a consultant for, being a partner
in, having a proprietary interest in, giving advice to, loaning money to or
otherwise associating with any entity which competes with RoTech or its
subsidiaries in the continental United States, subject to certain limited
exceptions. Pursuant to a related agreement, RoTech and the Company have agreed
to pay to Mr. Griggs the amount of any excise tax payable by him under Section
4999 of the Code, or any corresponding provisions of state or local tax law, as
a result of any payments to him pursuant to his employment agreement or in
connection with the RoTech Acquisition, as well as the income tax and excise tax
on such additional compensation such that, after the payment of income and
excise taxes, Mr. Griggs is in the same economic position in which he would have
been if the provisions of Section 4999 of the Code (or any corresponding
provisions of state or local tax law) had not been applicable.

As of July 1, 1997, the Company entered into an employment agreement with
C. Taylor Pickett, its Executive Vice President -- Chief Financial Officer.
Pursuant to the agreement, Mr. Pickett currently receives an annual base salary
of $315,208 (subject to adjustment based on changes in the consumer price index)
plus a discretionary bonus, which bonus shall be not less than 50% of his annual
base salary if the Company attains earnings per share goals set by the Board of
Directors. The agreement has an initial term of three years, is automatically
extended for an additional year on each January 1st unless either party gives
120 days' prior notice, and can be terminated by either party on 90 days'
notice. Upon Mr. Pickett's termination without Cause or resignation for Good
Reason or in the event the Company fails to renew the agreement, Mr. Pickett is
entitled to a payment of three times the sum of (i) his salary in the year of
termination or the previous year, whichever is greater (salary for this purpose
being equal to the greater of Mr. Pickett's actual salary or $450,000, adjusted
based on changes in the consumer price index) and (ii) the

<PAGE>

higher of (A) his bonus in the year of termination, (B) his bonus in the
immediately preceding year or (C) 50% of the amount of salary determined
pursuant to clause (i). In addition, all stock option, other equity-based rights
and amounts under the Company's Supplemental Deferred Compensation Plans will
become fully vested and unrestricted and Mr. Pickett will have 60 months from
the date of his termination to exercise any options. Mr. Pickett will also be
entitled to receive certain benefits for three years after termination. If Mr.
Pickett is required to pay an excise tax on "excess parachute payments" (as
defined in Section 280G of the Code), the Company has agreed to pay any amounts
necessary to place Mr. Pickett in the same after-tax financial position that he
would have been in if such excise tax had not been applicable. The agreement
contains an 18-month non-competition provision (one year upon termination for
Cause or upon termination within a year after a change of control of the
Company). For purposes of the agreement, "Cause" is defined as Mr. Pickett's (i)
material failure to perform his duties, (ii) material breach of his
non-competition or confidentiality covenants or (iii) conviction of a felony
involving moral turpitude, in any case which is not corrected within 60 days
after notice, and "Good Reason" is defined as (i) a material breach of the
agreement by the Company or (ii) Mr. Pickett's resignation within one year after
a change in control of the Company or the resignation or termination of the
persons who were the Chief Executive Officer, Chairman of the Board or President
of the Company on July 1, 1997, in any case which is not corrected within 60
days after notice (10 days with respect to a failure to pay).

As of July 1, 1998, the Company entered into an employment agreement with
Sally Weisberg, its Executive Vice President and President -- Symphony Health
Services Division. Pursuant to the agreement, Ms. Weisberg currently receives an
annual base salary of $378,000 (subject to an annual increase in the amount of
the greater of 8% or the percentage increase in the consumer price index) plus a
discretionary bonus, which bonus shall be not less than 50% of her annual base
salary if the Company attains earnings per share goals set by the Board of
Directors. The agreement has an initial term of three years, is automatically
extended for an additional year on each July 1st unless either party gives 120
days' prior notice, and can be terminated by either party on 90 days' notice. In
addition, the agreement automatically terminates on the one hundred and
eightieth day following the anniversary date of a change of control of the
Company. In the event Ms. Weisberg's employment is terminated without Cause or
due to a change of control of the Company, Ms. Weisberg resigns for Good Reason
or the Company fails to renew the agreement, Ms. Weisberg is entitled to a
payment of three times the sum of (i) her salary in the year of termination or
the previous year, whichever is greater, and (ii) the higher of (A) her bonus in
the year of termination or (B) her bonus in the immediately preceding year. In
addition, all of Ms. Weisberg's stock options and other equity-based rights will
become fully vested and unrestricted and Ms. Weisberg will have 36 months from
the date of her termination to exercise any options. Ms. Weisberg will also be
entitled to receive certain benefits for 36 months after termination. The
agreement contains an 18-month non-competition provision (one year upon
termination for Cause), which does not apply if Ms. Weisberg is terminated
without Cause before the anniversary of a change of control of the Company. For
purposes of the agreement, "Cause" is defined as Ms. Weisberg's (i) material
failure to perform her duties, (ii) material breach of her non-competition or
confidentiality covenants, (iii) conviction of or pleading guilty or confessing
to a felony involving moral turpitude or (iv) conviction of or pleading guilty
or confessing to theft, larceny or embezzlement of the Company's tangible or
intangible property, in any case which is not corrected within 60 days after
notice, and "Good Reason" is defined as (i) a material diminution of Ms.
Weisberg's responsibilities, title, authority or status, (ii) the Company's
failure to pay amounts owing under the agreement when due, (iii) Ms. Weisberg's
removal or dismissal from the position of Executive Vice President or President
- -- Symphony Health Services or (iv) a reduction in Ms. Weisberg's salary or a
material reduction of her benefits, in any case which is not corrected within 60
days after notice (10 days with respect to a failure to pay).

The Company was a party to an employment agreement with Lawrence P. Cirka
which provided for a five year term with an automatic one year extension at the
end of each year, unless 120 days' notice was given by either party. Under the
agreement Mr. Cirka was entitled to an annual base salary of $584,286 with
annual increases of at least the increase in the consumer price index. Mr. Cirka
was also entitled to a bonus of 100% of his base salary ("Bonus") if the
Company's annual earnings generally equaled or exceeded the earnings per share
targets set by the Board of Directors. Twelve and one-half percent of the Bonus
was payable each quarter; however, if the Company's annual earnings did not
exceed the Board of Directors' targets, these quarterly payments were treated as
prepayment of salary or had to be

<PAGE>

repaid to the Company with interest at the prime rate. The remaining fifty
percent of the Bonus was payable at the end of the year if the Company's annual
earnings exceeded the Board of Directors' targets. The Company also agreed to
pay a country club initiation fee for Mr. Cirka. The agreement could be
terminated by either party on 120 days' notice. Upon termination of the
agreement without Cause or in case Mr. Cirka resigned for Good Reason or the
Company failed to renew the agreement, Mr. Cirka would be entitled to a payment
of five times the sum of (a) his salary and (b) the highest of (i) his salary in
the year of termination, (ii) his Bonus in the immediately preceding calendar
year or (iii) his Bonus in the calendar year which was immediately prior to the
year immediately preceding the year of termination. In addition, all stock
option and other equity-based rights would become fully vested and Mr. Cirka
would be entitled to receive certain benefits for five years after termination.
The employment agreement also provided that if Mr. Cirka was required to pay an
excise tax on "excess parachute payments" (as defined in Section 280G of the
Code), the Company was required to pay Mr. Cirka one hundred percent of the
amount that would be necessary to place him in the same after-tax financial
position that he would have been in if such excise tax had not been applicable.
The agreement contains a two year non-competition provision (one year in the
case of a termination of employment other than for Cause within one year after a
change of control). For purposes of the agreement, "Cause" was defined as (i)
willful and continuing neglect of duties, (ii) material breach of
confidentiality or non-compete provisions or (iii) conviction of a felony, and
"Good Reason" was defined as (i) a material breach of the agreement by the
Company, (ii) resignation within one year after a change of control or (iii)
removal, dismissal from or failure of Dr. Elkins to be elected Chairman of the
Board of Directors.

In July 1998, Mr. Cirka and IHS entered into a Settlement Agreement
pursuant to which, among other things, (i) Mr. Cirka's employment with IHS
ceased, (ii) IHS paid Mr. Cirka $2,471,069 in satisfaction of its obligations to
Mr. Cirka under the Key Employee Supplemental Executive Retirement Plan and
$262,244 in satisfaction of its obligations to Mr. Cirka under a Supplemental
Deferred Compensation Plan (see "-- Supplemental Deferred Compensation Plans"),
(iii) IHS agreed to pay Mr. Cirka severance of $11,304,430 and (iv) Mr. Cirka
purchased a house in Florida owned by IHS which he was leasing and certain
personal property attached thereto for $4,857,931, which amount was deducted
from the severance payment. Upon Mr. Cirka's closing of his purchase of the
house in Florida, IHS paid Mr. Cirka $794,284 of the severance amount. The
remaining severance balance of $5,652,215 was discounted to $5,489,880. This
amount, less principal and interest of $1,446,437 due on a loan made by IHS to
Mr. Cirka, is being paid over a 12 month period beginning August 1998. The
Company canceled principal and interest due on a $500,000 loan made by the
Company to Mr. Cirka in lieu of its obligation to provide benefits (other than
COBRA benefits) to Mr. Cirka. All unexercised vested options expired January 31,
1999. Mr. Cirka agreed not to compete with the Company for a period of two
years, and Mr. Cirka and the Company released each other from all claims
relating to or arising out of Mr. Cirka's employment with IHS and the
termination of his employment.

As of October 1, 1996, the Company entered into an employment agreement
with C. Christian Winkle, its former Executive Vice President -- Chief Operating
Officer, pursuant to which Mr. Winkle received an annual base salary of $400,000
(subject to adjustment based on changes in the consumer price index) plus a
discretionary bonus. If the Company attained earnings per share goals set by the
Board of Directors, the bonus was to be not less than seventy-five percent of
annual base salary. The agreement had an initial term of three years and
contained an "evergreen" provision providing that the agreement was
automatically extended for an additional year at the end of each year unless
either party gave 120 days' prior notice of non-renewal. The agreement could be
terminated by either party on 90 days' notice. Upon termination without Cause or
in case Mr. Winkle resigned for Good Reason or the Company failed to renew the
contract, Mr. Winkle was entitled to a payment of one and one-half times the sum
of (i) the greater of his salary in the year of termination or in the previous
year and (ii) the higher of his bonus in the year of termination or in the
previous year. In addition, all stock option and other equity-based rights would
become fully vested and Mr. Winkle would be entitled to receive certain benefits
for one and one-half years after termination. For purposes of the agreement,
"Cause" was defined as (i) material failure to perform duties, (ii) material
breach of confidentiality or non-compete provisions, (iii) conviction of a
felony or (iv) theft, larceny or embezzlement of Company property, and "Good
Reason" was defined as (i) a material breach of the agreement by the Company or
(ii) resignation within one year after a change in control.

<PAGE>

In December 1998, the Company and Mr. Winkle entered into a termination
agreement pursuant to which, among other things, (i) Mr. Winkle's employment
with the Company terminated at 11:59 p.m. on December 31, 1998, (ii) all
outstanding options became immediately exercisable, (iii) IHS agreed to pay Mr.
Winkle severance of $2,100,427, of which half was paid in a lump sum and the
remainder is being paid in equal installments over 24 months, and (iv) the
Company agreed to pay Mr. Winkle a $200,000 bonus, payable in shares of Common
Stock which cannot be disposed of for two years. The Company also agreed to
forgive all interest on the $600,000 loan it made to Mr. Winkle, to restructure
repayment of the principal amount of the loan under certain circumstances and to
forgive a portion of the principal amount of the loan equal to 80% of the
difference between Mr. Winkle's basis in the house he is currently having built
and the sale price, if less than Mr. Winkle's basis, if the house is sold on or
before December 16, 1999. The Company and Mr. Winkle agreed that he is entitled
to $271,649 under the Company's Supplemental Deferred Compensation Plans for
senior executives. Mr. Winkle agreed not to become a member of senior management
of a competitor (as defined in the agreement) of the Company prior to March 1,
2000 (October 26, 1999 in the event of a change of control of the Company (as
defined in the termination agreement)). Mr. Winkle and the Company released each
other from all claims relating to or arising out of Mr. Winkle's employment with
the Company and the termination of his employment. The Company also engaged Mr.
Winkle to provide consulting services for a period of two years.

SUPPLEMENTAL DEFERRED COMPENSATION PLANS

Key Employee Supplemental Executive Retirement Plan

In 1997 the Company amended and restated its Key Employee Supplemental
Executive Retirement Plan (the "Key Employee SERP"), which was adopted in 1996
to provide retirement benefits to certain key employees based on the highest
annual earnings in the ten most recent calendar years of employment. The
following table shows the estimated annual benefit payable (rounded to the
nearest thousand) upon retirement to participants in the Key Employee SERP at
the specified compensation and years-of-service classifications. The benefit
amounts listed in the following table are not subject to any deduction for
Social Security benefits or other offset amounts.

FINAL AVERAGE EARNINGS* YEARS OF SERVICE
- ------------------------- -----------------------------------------
5 10 15 OR MORE
----------- ----------- -------------
<S> <C> <C> <C>
$1,750,000 .............. $ 87,500 $280,000 $1,225,000
$2,000,000 .............. $100,000 $320,000 $1,400,000
$2,250,000 .............. $112,500 $360,000 $1,575,000
$2,500,000 .............. $125,000 $400,000 $1,750,000
$2,750,000 .............. $137,500 $440,000 $1,825,000
$3,000,000 .............. $150,000 $480,000 $2,100,000
$3,250,000 .............. $162,500 $520,000 $2,275,000
$3,500,000 .............. $175,000 $560,000 $2,450,000
$3,750,000 .............. $187,500 $600,000 $2,625,000
$4,000,000 .............. $200,000 $640,000 $2,800,000
$4,250,000 .............. $212,500 $680,000 $2,975,000
$4,500,000 .............. $225,000 $720,000 $3,150,000
$4,750,000 .............. $237,500 $760,000 $3,325,000
$5,000,000 .............. $250,000 $800,000 $3,500,000
</TABLE>

- ----------

* Represents the highest annual compensation in the ten most recent calendar
years of employment.

Notwithstanding the foregoing, if the employment of a participant who has
at least five years of service terminates before the participant has attained
the age of 58 or, in the case of Robert N. Elkins, the age of 62, such
participant will be entitled to receive an annual benefit equal to the actuarial
equivalent of the benefit he would have received had he continued employment to
age 58 (62 in the case of Dr. Elkins), but based on years of service and
compensation at the time of termination. If Dr. Elkins' employment is terminated
after he attains the age of 58 but before he attains the age of 62, he is
entitled to receive an annual benefit equal to the benefit he would have
received had he attained the age of 62,

<PAGE>

reduced by two-twelfths of one percent for each full calendar month by which the
date of his termination precedes the month of his 62nd birthday. Pursuant to a
Supplemental Agreement entered into by the Company and Dr. Elkins (the
"Supplemental Agreement"), Dr. Elkins shall be deemed to have completed 15 years
of service if his employment is terminated because of death, permanent
disability, qualified medical termination, by Dr. Elkins for Good Reason or by
the Company without Cause (as such terms are defined in the Supplemental
Agreement or Dr. Elkins' employment agreement).

Compensation covered by the Key Employee SERP is the aggregate calendar
year earnings included in the participant's income for federal tax purposes
(including bonuses but excluding stock option gains). Benefits under the Key
Employee SERP vest upon the earliest to occur of (i) participant's completion of
five years of service, (ii) attainment of age 58 (62 in the case of Dr. Elkins)
or, in the case of participants other than Dr. Elkins, completion of five years
of service if later, (iii) death or disability (as defined in the Key Employee
SERP or the participant's employment agreement) while actively employed by the
Company or (iv) a change of control of the Company (substantially as defined in
Dr. Elkins' employment agreement (see "-- Employment Agreements"), except that
the date for determining Incumbent Directors is March 1, 1996). Notwithstanding
the foregoing, no retirement benefits are payable to a participant if his
employment with the Company terminates prior to his benefits vesting. Benefits
under the Key Employee SERP are payable in a lump sum distribution (based on the
1983 group annuity mortality table for males and an interest rate equal to the
average yield on 30-year U.S. Treasury Securities for the month preceding the
month in which the participant's employment terminates) or, if the participant
so elects, in the form of annual installments over a period not to exceed 10
years, in a joint and 50% survivor annuity or in an annuity for the life of the
participant. Participants in the Key Employee SERP also have the right to defer
a portion of their annual compensation into the Key Employee SERP, although such
amounts are immediately fully vested.

The Key Employee SERP is technically unfunded, and the Company will pay all
benefits from its general revenues and assets. To facilitate the payment of
benefits and provide participants with a measure of benefit security without
subjecting the Key Employee SERP to various rules under the Employee Retirement
Income Security Act of 1974, as amended, the Company has established two
irrevocable trusts, one for the benefit of Robert N. Elkins ("Trust 1") and one
for the benefit of other participants ("Trust A"). The Company intends to make
contributions to the trusts from time to time, and is obligated, within 30 days
following a change of control of the Company, to make an irrevocable
contribution to each trust in an amount sufficient to pay each participant their
full retirement benefit. Dr. Elkins' employment agreement requires that the
Company make irrevocable contributions to Trust 1 at specified times through
January 2, 2001 such that, at January 2, 2001, there would be $23,900,000 in
such trust. Pursuant to the employment agreement, the Company is required to use
its reasonable efforts to obtain an insurance policy or letter of credit
guaranteeing its obligations to make contributions to the trust. Assets of such
trust are considered general assets of the Company and are subject to claims of
the Company's creditors in the event of insolvency. As of December 31, 1998, the
Company had contributed $485,242 to Trust A. As of such date, the Company had
contributed $18,776,306 to Trust 1, of which $3,773,958 represents transfers of
amounts previously contributed to Trust A or to the trust established in
connection with the Company's Supplemental Deferred Compensation Plans on behalf
of Dr. Elkins. In April 1999 the Company's contribution to the Key Employee SERP
for the benefit of Dr. Elkins of 282,353 shares of Common Stock, having a value
of $3 million (based on the fair market value of the Common Stock on the date of
contribution), was rescinded with Dr. Elkins' consent due to the Company's
financial performance in 1998.

Dr. Robert N. Elkins is currently the only participant in the Key Employee
SERP. Dr. Elkins currently has 12 years of service under the Key Employee SERP.
Mr. Cirka's participation in the Key Employee SERP was terminated in connection
with the termination of his employment, and benefits thereunder were paid out
to him. See "-- Employment Agreements."

Supplemental Deferred Compensation Plans

The Company's Supplemental Deferred Compensation Plans (the "SERP") are
unfunded deferred compensation plans which offer certain executive and other
highly compensated employees an opportunity to defer compensation until the
termination of their employment with the Company. Contributions to the SERP by
the Company, which vest over a period of five years, are determined by

<PAGE>

the Board upon recommendation of the Compensation and Stock Option Committee and
are allocated to participants' accounts on a pro rata basis based upon the
compensation of all participants in the SERP in the year such contribution is
made. During 1998, the Company contributed 376,471 shares of Common Stock,
having a value of $4,000,000, to the SERP, none of which was allocated to the
account of Dr. Elkins. However, because of the Company's financial performance
in 1998 this contribution was rescinded in April 1999 with the consent of the
participants. In addition, a participant may elect to defer a portion of his or
her compensation and have that amount added to his or her SERP account.
Participants may direct the investments in their respective SERP accounts. All
participant contributions and the earnings thereon, plus the participant's
vested portion of the Company's contribution account, are payable upon
termination of a participant's employment with the Company.

EMPLOYEE LOAN PLAN

The Company adopted in 1999 an Employee Loan Plan (the "Loan Plan") to
assist the Company in retaining its senior management on a long-term basis in
light of the significantly reduced stock price and loss of equity incentives by
such executives and to encourage stock ownership by senior management. Under the
Loan Plan, the Company is authorized to loan an aggregate of $25 million to all
officers holding the title of senior vice president or above to enable them to
acquire and hold shares of Common Stock. The Loan Plan provides that each loan
will bear interest at a rate of 7% per annum, with interest only being paid at
maturity, and have a maturity date five years after the date of the loan. Each
loan is unsecured. In order to encourage the borrowers to remain with the
Company and to reduce or eliminate the pressure to sell Common Stock upon
maturity of the loan, the Loan Plan provides that 20% of principal and accrued
interest will be forgiven on the second, third and fourth anniversaries of the
date of borrowing if the borrower is still employed by the Company, and the
remainder will be forgiven on the fifth anniversary if the borrower is still
employed by the Company. The Company has the right under certain circumstances
to require that a participant immediately repay any amounts outstanding under
the Loan Plan if such participant's employment with the Company terminates. At
March 31, 1999, an aggregate of $24.4 million had been loaned to the 25 officers
who elected to participate in the Loan Plan.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation and Stock Option Committee (the "Committee") is comprised
of two independent non-employee directors. As members of the Committee, it is
our responsibility to administer the Company's executive compensation programs,
monitor corporate performance and its relationship to compensation of executive
officers, and make appropriate recommendations concerning matters of executive
compensation.

Compensation Policies

The Company was formed in 1986 as a private company, was initially publicly
traded in 1991, and is recognized today as an industry leader and a
growth-oriented company. One of the Company's strengths contributing to its
success is a strong management team, many of whom have been with the Company for
a large number of years. The Committee believes that low executive turnover has
been instrumental to the Company's success, and that the Company's compensation
program has played a major role in limiting executive turnover. The compensation
program is designed to enable the Company to attract, retain and reward capable
employees who can contribute to the continued success of the Company,
principally by linking compensation with the attainment of key business
objectives. Equity participation and a strong alignment to stockholders'
interests are key elements of the Company's compensation philosophy. Five key
principles serve as the guiding framework for compensation decisions for all
employees of the Company:

1. To attract and retain the most highly qualified management and
employee team;

2. To pay competitively compared to similar healthcare companies;

3. To emphasize sustained performance by aligning rewards with
stockholder interests, especially through the use of equity
participation programs;

4. To motivate executives and employers to achieve the Company's annual
and long-term business goals; and

<PAGE>

5. To strive for fairness in administration by emphasizing
performance-related contributions as the basis of pay decisions.

To implement these policies, the Committee has designed a four-part
executive compensation program consisting of base salary, annual incentive plan,
stock options and other employment benefits.

Section 162(m) of the Internal Revenue Code of 1986 ("Section 162(m)")
establishes certain criteria for the tax deductibility of annual compensation in
excess of $1 million paid to certain of the Company's executive officers.
Generally, Section 162(m) permits the deductibility of "performance based"
remuneration, including stock options and bonus payments that are earned upon
the satisfaction of preestablished objective criteria in each case pursuant to a
plan which is approved by stockholders regardless of amount. Although the
Committee considers the net cost to the Company in making all compensation
decisions (including, for this purpose, the potential limitation on
deductibility of executive compensation), there is no assurance that
compensation realized with respect to any particular award will qualify as
"performance based" remuneration.

Although most of the Company's stock option, stock purchase and stock
incentive plans satisfy the criteria for Section 162(m), the Company's current
annual incentive plan, the 1996 Stock Incentive Plan and the Cash Bonus
Replacement Plan do not satisfy the criteria for deductibility of remuneration
in excess of $1 million under Section 162(m). The Committee believes, however,
that the flexibility to adjust annual bonuses upward, as well as downward, is an
important feature of annual incentive plans and one which serves the best
interests of the Company by allowing the Committee to recognize and motivate
individual executive officers, as well as to change performance objectives, as
circumstances warrant. Consequently, the Committee believes that the benefits
from having flexibility under the annual incentive plans outweigh the possible
loss of a tax deduction for a portion of such remuneration and, therefore, does
not propose to have the annual incentive plans comply with Section 162(m)
requirements. Amounts paid under the annual incentive plans to the executive
officers will count toward the $1 million deductibility limitation that is
provided in Section 162(m). Those portions of the executives' compensation that
are not performance based (as defined in Section 162(m)) and that exceed the cap
will not be tax deductible by the Company.

Base Salary. The Committee seeks to maintain levels of compensation that
are competitive with similar healthcare companies in the industry. For
comparison purposes, a group of similar companies, including all companies which
comprise the Company's 1998 "peer group" for purposes of the Company Performance
Chart, below, is also utilized for determining competitive compensation levels.

Base salary represents the fixed component of the executive compensation
program. The Company's philosophy regarding base salaries is conservative,
maintaining salaries for the aggregate officer group at approximately the
competitive industry average. Periodic increases in base salary relate to
individual contributions evaluated against established objectives, length of
service and the industry's annual competitive pay practice movement.

Annual Incentive Plan. The Company's executive officers are eligible to
participate in an annual incentive compensation program which awards cash
bonuses based on the attainment of corporate earnings per share goals, as well
as divisional and individual performance objectives, set by the Committee. While
performance against financial objectives is the primary measurement for
executive officers' annual incentive compensation, non-financial performance can
also affect pay. The amount of each annual incentive award is determined by the
Committee. Because the Company did not meet the earnings per share goals
originally set forth by the Board of Directors for 1998, no executive officer is
entitled to a bonus under his or her employment agreement. However, because the
failure to meet the earnings per share goals resulted primarily from the charges
resulting from the discontinuance of the Company's home health nursing business
and the restructuring required in order to prepare for implementation of the
Medicare prospective payment system, the Committee has determined to award
discretionary bonuses to the executive officers (other than Dr. Elkins),
although the amount of the bonuses to be awarded has not yet been determined.
The Committee notes that the implementation of a prospective payment system
adversely affected the earnings of many of the Company's competitors.

<PAGE>

Cash Bonus Replacement Plan. Pursuant to the Cash Bonus Replacement Plan,
the Committee has the authority to award an aggregate of 500,000 shares of
Common Stock to key employees in payment of all or a portion of bonuses awarded
pursuant to employment agreements or discretionary awards of the Committee. The
number of shares of Common Stock to be paid as a bonus shall be equal in value
to a fixed cash amount, with the value of such Common Stock computed at the
higher of (a) the fair market value of the Common Stock paid on the
determination date or (b) the par value of the Common Stock. The Committee may
determine that the Company will provide and bear the expense of a brokerage
mechanism through which employees may immediately, upon payment of their
bonuses, at the option of each employee, sell shares of Common Stock awarded to
them under the Plan, subject to any restrictions against disposition imposed on
officers or like employees under any applicable federal or state securities
laws.

Stock Options. The Committee strongly believes that the pay program should
provide employees with an opportunity to increase their ownership and
potentially gain financially from Company stock price increases. By this
approach, the best interests of stockholders, executives and employees will be
closely aligned. Therefore, executives and other employees are eligible to
receive stock options, giving them the right to purchase shares of Common Stock
of the Company in the future at a specified price.

The Committee believes that the use of stock options as the basis for
long-term incentive compensation meets the Committee's defined compensation
strategy and business needs of the Company by achieving increased value for
stockholders and retaining key employees.

Supplemental Deferred Compensation Plans. The Company's Supplemental
Deferred Compensation Plans (the "SERP") are unfunded deferred compensation
plans which offer certain executive and other highly compensated employees an
opportunity to defer compensation until the termination of their employment with
the Company. Contributions to the SERP by the Company, which vest over a period
of five years, are determined by the Board upon recommendation of the Committee
and are allocated to participants' accounts on a pro rata basis based upon the
compensation of all participants in the SERP in the year such contribution is
made. During 1998, the Company contributed 376,471 shares of Common Stock,
having a value of $4,000,000, to the SERP, of which $0, $0, $0, $632,989,
$492,212 and $0 was allocated to the accounts of Dr. Elkins, Mr. Cirka, Mr.
Griggs, Mr. Pickett, Ms. Weisberg and Mr. Winkle. These amounts were based on
the fair market value of the Company's Common Stock on November 19, 1998.
However, because of the Company's financial performance in 1998, this
contribution was rescinded in April 1999 with the consent of each of the
participants who received an allocation. In addition, a participant may elect to
defer a portion of his or her compensation and have that amount added to his or
her SERP account. Participants may direct the investments in their respective
SERP accounts. All participant contributions and the earnings thereon, plus the
participant's vested portion of the Company's contribution account, are payable
upon termination of a participant's employment with the Company.

In 1996 the Company adopted a Key Employee Supplemental Executive
Retirement Plan (the "Key Employee SERP") to provide retirement benefits to
certain key executives based on the highest annual earnings in the ten most
recent calendar years of employment. See "-- Supplemental Deferred Compensation
Plans."

Other Benefits. The Company's philosophy is to provide adequate health- and
welfare-oriented benefits to executives and employees, but to maintain a highly
conservative posture relative to executive benefits. Consistent with industry
practices, the Company provides a car or car allowance to executive officers.

Option Repricing Program

As discussed above, the Committee believes that stock options are a
critical component of the compensation offered by the Company to promote
long-term retention of key employees, motivate high levels of performance and
recognize employee contributions to the success of the Company. The market price
of the Common Stock declined substantially during the year, as did the market
prices of the common stock of the Company's competitors. The Committee believes
that the decline in the market price of the Common Stock was in large part due
to investors' expectation that the industry in general would have difficulty
with the shift to the new Medicare prospective payment system. In light of the
substantial decline in the market price, the Committee believed that the
outstanding stock options held by non-executive employees with exercise prices
far in excess of the actual market price were no longer an effective tool to
encourage employee retention or to motivate high levels of performance.

<PAGE>

In December 1998, the Committee approved an offer to all current employees
(other than executive officers) holding stock options to reset their exercise
prices at $10.25 per share, the fair market value of the Company's Common Stock
as of such date. In order to have their options repriced, employees were
required to surrender one-half of their options. This action was taken to help
restore the incentive value of these options to the holders. Options to purchase
1,830,880 shares were repriced and options to purchase 1,830,880 shares were
surrendered. In addition, the Company lowered the exercise price of options to
purchase 125,375 shares of Common Stock issued to Mr. Winkle to $10.25 per share
in connection with the termination of his employment. In November 1998, the
Company also reduced the exercise price of the warrant to purchase 750,000
shares of Common Stock issued to Mr. Griggs in connection with the acquisition
of RoTech from $33.16 to $10.63, the fair market value of the Common Stock on
the date of reduction, and reduced the exercise price of options to purchase
348,360 shares of Common Stock from $29.71 to $10.63.

1998 Compensation for the Chief Executive Officer

The Company, concerned about retaining the services of Dr. Robert N.
Elkins, a founder of the Company, over the next five years, in 1997 engaged an
independent compensation consultant to advise the Committee. The consultant
studied Dr. Elkins' current compensation arrangements and made various
recommendations. Based on these recommendations, the Company revised Dr. Elkins'
employment arrangements to create additional incentives to assure Dr. Elkins'
continued active participation in the management of the Company over the next
several years. In 1998, Dr. Elkins' total cash compensation equalled $821,533,
which consisted of salary ($809,935) and life insurance premium payments
($11,598). Pursuant to Dr. Elkins' employment agreement, he is entitled to a
bonus equal to 100% of his base salary if the Company's annual earnings
generally equal or exceed the earnings per share targets set by the Board of
Directors. Twelve and one-half percent of the bonus is payable each quarter;
however, if the Company's annual earnings do not exceed the Board of Directors'
targets, these quarterly payments are treated as prepayments of salary or must
be repaid to the Company, net of all taxes paid or payable (except to the extent
Dr. Elkins receives tax benefits, through deductions, for the repayment) with
interest at the prime rate. The remaining fifty percent of the bonus is payable
at the end of the year if the Company's annual earnings exceed the Board of
Directors' targets. During 1998, Dr. Elkins received $303,725 as a bonus
pursuant to the foregoing provisions of his employment agreement. Because the
Company did not equal or exceed the earnings per share targets set by the Board
of Directors, Dr. Elkins has elected to repay this amount (net of all taxes paid
or payable (except to the extent Dr. Elkins receives tax benefits, through
deductions, for the repayment)) with interest at the prime rate. No options were
granted to Dr. Elkins during 1998. In 1998, the Company loaned Dr. Elkins
$2,088,000, the proceeds of which were used to exercise options to acquire the
Company's Common Stock. Dr. Elkins also participates in the SERP and the Key
Employee SERP, and in 1998 the Company funded $3.0 million in the form of
282,353 shares of Company's Common Stock in a trust for Dr. Elkins' benefit
under the Key Employee SERP. The value of the contribution was based on the fair
market value of the Company's Common Stock on November 19, 1998. However,
because of the Company's financial performance in 1998, this contribution was
rescinded in April 1999 with the consent of Dr. Elkins. See "-- Employment
Agreements," "-- Supplemental Deferred Compensation Plans" and "Certain
Transactions."

Summary

The Committee believes that the total compensation program for executives
of the Company is appropriate and competitive with the total compensation
programs provided by other similar healthcare industry companies with which the
Company competes. The Committee believes its compensation practices are directly
tied to stockholder returns and linked to the achievement of annual and
longer-term financial and operational results of the Company on behalf of the
Company's stockholders.

Compensation and Stock Option Committee
of the Board of Directors

--Kenneth M. Mazik
--Charles W. Newhall III

<PAGE>

COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation and Stock Option Committee currently consists of
Messrs. Mazik and Newhall. In January 1998, each of Messrs. Mazik and Newhall
were granted options to purchase 25,000 shares of Common Stock at an exercise
price of $28.25 per share pursuant to the 1996 Stock Incentive Plan.
See "-- Compensation of Directors."

COMPANY PERFORMANCE

The following graph shows the cumulative total stockholder return on the
Company's Common Stock since January 1, 1994, compared to the returns of (i) the
New York Stock Exchange Market Index, and (ii) an industry peer group index (the
"1998 Peer Index"). The 1998 Peer Index consists of Beverly Enterprises, Inc.,
Genesis Health Ventures, Inc., Mariner Post-Acute Network, Inc., Novacare, Inc.,
Sun Healthcare Group, Inc., Tenet Healthcare Corp. and Vencor Inc.

INTEGRATED HEALTH SERVICES, INC.
COMPARISON OF CUMULATIVE TOTAL RETURN 1/94-12/98
VS. NYSE MARKET INDEX AND 1998 PEER INDEX

PERFORMANCE ANALYSIS

FISCAL YEAR ENDING

COMPANY/INDEX/MARKET 1993 1994 1995 1996 1997 1998
- -------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Integrated Health Services 100.00 139.28 88.22 86.09 110.22 49.92
Peer Group Index 100.00 98.71 113.80 131.03 184.20 112.86
NYSE Market Index 100.00 98.06 127.15 153.16 201.50 239.77

</TABLE>

ASSUMES $100 INVESTED ON JANUARY 1, 1994
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 1998

<PAGE>

COMPENSATION OF DIRECTORS

Directors currently receive $5,000 per regularly scheduled meeting and
$1,250 per telephonic meeting and committee meetings for services provided in
that capacity and are reimbursed for out-of-pocket expenses incurred in
connection with attendance at Board of Directors and committee meetings.
Directors who are also employees of or consultants to the Company participate in
the Equity Incentive Plan, the 1990 Employee Stock Option Plan, the 1992 Stock
Option Plan, the 1994 Stock Incentive Plan and the 1996 Stock Incentive Plan.
Dr. Elkins and Mr. Cirka, who was a director until March 1998, participate in
the Senior Executives' Stock Option Plan.

In July 1993 the Company adopted a Stock Option Plan for New Non-Employee
Directors (the "Directors' Plan") pursuant to which options to acquire a maximum
aggregate of 300,000 shares of Common Stock could be granted to non-employee
directors. The Directors' Plan provided for an automatic one-time grant to each
of the Company's non-employee directors of an option to purchase 50,000 shares
of Common Stock on the date of such director's initial election or appointment
to the Board of Directors. The options have an exercise price of 100% of the
fair market value of the Common Stock on the date of grant, have a ten-year term
and became exercisable on the first anniversary of the grant thereof, subject to
acceleration in the event of a change of control (as defined in the Directors'
Plan). Messrs. Newhall, Nicholson and Silverman, who were each directors of the
Company on the date the Directors' Plan was adopted by the Board of Directors,
each received an option to purchase 50,000 shares of Common Stock at an exercise
price of $23.50 per share under the Directors' Plan on July 29, 1993, the date
the Directors' Plan was adopted by the Board of Directors. Mr. Strong received
an option to purchase 50,000 shares of Common Stock at an exercise price of
$35.75 per share under the Directors' Plan on September 26, 1994, the date Mr.
Strong joined the Board of Directors. No options remain available for issuance
under the Directors' Plan.

In December 1993, the Company adopted a Stock Option Compensation Plan for
Non-Employee Directors (the "Directors' Compensation Plan") pursuant to which
options to acquire a maximum aggregate of 300,000 shares of Common Stock could
be granted to non-employee directors. The Directors' Compensation Plan provided
for the automatic grant to each of the Company's non-employee directors of an
option to purchase 25,000 shares of Common Stock on the date of such director's
initial election or appointment to the Board of Directors and provided for the
automatic grant to each such director of an option to purchase 25,000 shares of
Common Stock on each anniversary date of such director's initial election or
appointment to the Board of Directors (or the date the plan was adopted by the
Board of Directors in the case of non-employee directors on the date the plan
was adopted). The options have an exercise price of 100% of the fair market
value of the Common Stock on the date of grant, have a ten-year term and become
exercisable on the first anniversary of the grant thereof, subject to
acceleration in the event of a change of control (as defined in the Directors'
Compensation Plan). Messrs. Newhall, Nicholson and Silverman, who were each
directors of the Company on the date the Directors' Compensation Plan was
adopted by the Board of Directors, each received under the Directors'
Compensation Plan options to purchase 25,000 shares of Common Stock on each of
December 23, 1993 and 1994, the date of adoption of the Directors' Compensation
Plan by the Board of Directors and the anniversary of the date of adoption,
respectively, at an exercise price of $27.88 per share and $38.00 per share,
respectively. Mr. Strong received an option to purchase 25,000 shares of Common
Stock, at an exercise price of $35.75 per share, under the Directors'
Compensation Plan on September 26, 1994, the date Mr. Strong joined the Board of
Directors, and an option to purchase an additional 25,000 shares of Common
Stock, at an exercise price of $28.25 per share, under the Directors'
Compensation Plan on September 26, 1995, the anniversary of the date Mr. Strong
became a director. No options remain available for issuance under the Directors'
Compensation Plan.

On November 27, 1995, the Board of Directors determined that the options
granted to that date under the Directors' Plan and the Directors' Compensation
Plan were exercisable at prices significantly in excess of the then current
market price of the Common Stock, and accordingly were not fulfilling their
designated purposes under such plans of providing incentive for such directors
to work for the best interests of the Company and its stockholders through the
ownership of Common Stock. Accordingly, to restore the purpose for which such
options were granted, the Board of Directors amended the Directors' Plan and the
Directors' Compensation Plan, subject to stockholder approval, to provide that
each option granted prior to November 27, 1995 to non-employee directors of the
Company in office on November 27, 1995 would be exercisable at an exercise price
of $20.88, the fair market value of the Common Stock on November 27, 1995. The
Company's stockholders approved such action at the 1996 Annual Meeting of
Stockholders.

In 1995 the Company adopted, subject to stockholder approval, the 1995
Stock Option Plan for Non-Employee Directors (the "1995 Directors' Plan")
pursuant to which options to acquire a maximum aggregate of 350,000 shares of
Common Stock can be granted to non-employee directors. The 1995 Directors' Plan
provides for an automatic one-time grant to each of the Company's non-employee
directors of an option to purchase 50,000 shares of Common Stock on the date of
such director's initial election or appointment to the Board of Directors. The
options have an exercise price of 100% of the fair market value of the Common
Stock on the date of such director's initial election or appointment to the
Board of Directors, have a ten-year term and become exercisable on the first
anniversary of the grant thereof, subject to acceleration in the event of a
change of control (as defined in the 1995 Directors' Plan). The 1995 Directors'
Plan also provided that Messrs. Crawford, Mazik, Mitchell, Newhall, Nicholson
and Strong, who were non-employee directors of the Company on the date the 1995
Directors' Plan was

<PAGE>

adopted by the Board of Directors, each receive an option to purchase 50,000
shares of Common Stock at an exercise price of $20.88 per share under the 1995
Directors' Plan on November 27, 1995, the date the 1995 Directors' Plan was
adopted by the Board of Directors. The 1995 Directors' Plan was approved at the
1996 Annual Meeting of Stockholders. Options to purchase 50,000 shares of Common
Stock remain available for issuance under the 1995 Directors' Plan.

In September 1996, the Company adopted the 1996 Stock Incentive Plan. On
November 27, 1996 and January 28, 1998, each director, with the exception of Dr.
Elkins and Mr. Cirka, was granted an option to purchase 25,000 shares of Common
Stock at an exercise price of $22.63 and $28.25, respectively, per share. These
options become exercisable after one year from the date of grant if the director
has attended in person four out of the five regularly scheduled meetings of the
Board of Directors.

Mr. Nicholson has received compensation for services rendered from
entities in which the Company had an interest. See "Certain Transactions."

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who beneficially own more than ten percent of the
Company's Common Stock, to file initial reports of ownership and reports of
changes in ownership with the Commission and the New York Stock Exchange.
Executive officers, directors and greater than ten percent beneficial owners are
required by the Commission to furnish the Company with copies of all Section
16(a) forms they file.

Based upon a review of the copies of such forms furnished to the Company
and written representations from the Company's executive officers and directors,
the Company believes that during fiscal 1998 all Section 16(a) filing
requirements applicable to its executive officers, directors and greater than
ten percent beneficial owners were complied with, except that Dr. Elkins filed a
late Form 4 with respect to an exercise of an option.

<PAGE>

CERTAIN TRANSACTIONS

In April 1993, as part of its investigation of healthcare investment
opportunities outside the United States, the Company, together with outside
investors, Mr. Nicholson, Dr. Elkins and a partnership consisting of certain
directors and executive officers of the Company, invested in Speciality Care PLC
("Speciality"), a United Kingdom company formed by Mr. Nicholson to own and
operate nursing homes. In connection with this investment, Mr. Nicholson moved
to the United Kingdom and served full-time as Chairman and managing director of
Speciality. As a result of several financings and restructurings, the Company
owned 63.65% of the convertible preference shares and 21.3% of the ordinary
shares of Speciality (31.38% of the outstanding ordinary shares assuming
conversion of the convertible preference shares). In January and February 1998
the Company made capital contributions aggregating approximately $700,000 to
Speciality to provide operating expenses pending the sale of Speciality in
February 1998 to Craegmoor Healthcare Company Limited, an owner and operator of
residential nursing homes in the United Kingdom. The stockholders of Speciality
received 10% of the outstanding ordinary shares of Craegmoor Healthcare; as a
result of their ownership of Speciality, the Company owns less than 10% of the
outstanding ordinary shares of Craegmoor Healthcare.

On December 12, 1997, the Company entered into an Aircraft Lease Agreement
(the "Lease") with RNE Skyview, LLC ("Skyview"), which is wholly owned by Dr.
Elkins. Pursuant to the Lease, the Company has agreed to lease one aircraft from
Skyview for seven years, commencing on December 12, 1997 and terminating on
December 12, 2004, with automatic one-year extensions unless either party
notifies the other in writing six months prior to termination. Under the Lease,
the Company has agreed to pay Skyview a commercially reasonable base rent, which
shall be no less than $89,675.81 per month and $1,076,109.72 per year. The
Company must also pay additional rent of $2,150 per block hour for any month in
which the number of block hours flown is more than 42 hours. The Company is
responsible for all maintenance and operation expenses of the aircraft during
the term of the Lease. The Lease provides that Dr. Elkins shall have exclusive
first use of the aircraft throughout the term of the Lease, even if Dr. Elkins
is terminated as an employee of the Company for any reason, including, without
limitation, as a result of a change of control of the Company (as defined in the
Company's credit facility). The Lease further provides that in the event of the
termination of Dr. Elkins' employment with the Company, including, without
limitation, as a result of a change of control of the Company, the members of
the aircraft's cockpit crew shall become employees of Skyview; however, the
salaries, expenses and benefits of such crew members shall be a cost and expense
of the Company throughout the term of the Lease. Dr. Elkins is obligated to
reimburse the Company for its out-of-pocket costs associated with use of the
aircraft if, at any time during the term of the Lease, Dr. Elkins uses the
aircraft for his own personal use. The Lease and the aircraft are subject to a
security interest in favor of BTM Capital Corporation securing a loan in the
amount of $9,177,159 made to Skyview. Dr. Elkins has also pledged all of his
membership interests in Skyview to secure such loan. In connection with the
Lease, Skyview purchased the Gulfstream II airplane then owned by the Company,
which aircraft was traded in. The Company recognized no gain or loss on the sale
of the aircraft to Skyview.

Pursuant to a Relocation Agreement dated as of August 5, 1997 between Mr.
Cirka and the Company, the Company purchased Mr. Cirka's Florida residence and
Mr. Cirka agreed to perform substantially all of his duties for the Company at
its Owings Mills, Maryland headquarters beginning on May 1, 1998. Mr. Cirka had
previously performed his duties for the Company at the Company's Naples,
Florida, office. The Company paid Mr. Cirka a total of $4,823,774 for his
Florida residence (including furniture and improvements), including
approximately $579,000 for real estate taxes, closing costs and reimbursement of
relocation expenses, and agreed to allow Mr. Cirka to rent such Florida
residence, on a month-to-month basis for $10,000 per month, until May 1, 1998.
In addition, the Company granted Mr. Cirka a right of first refusal through
March 31, 1999 to match any third-party offer on the residence which was
acceptable to the Company. Mr. Cirka and the Company agreed that if Mr. Cirka
did not exercise his option to repurchase the residence and the Company sells
the residence for less than $4,823,774 to a third party, the difference between
$4,823,774 and the sale price would be deducted from Mr. Cirka's bonus. Mr.
Cirka repurchased this residence from the Company in October 1998 for a price of
$4,857,931. See "Executive Compensation -- Employment Agreements."

<PAGE>

In 1997, the Company began to explore various options to deleverage the
Company without adversely affecting earnings. As part of its deleveraging
strategy, in each of January and April 1998, the Company sold five long-term
care facilities to Omega Healthcare Investors, Inc. ("Omega") for $44,500,000
and $50,500,000, respectively, which facilities were leased back by Lyric Health
Care LLC ("Lyric"), a newly formed subsidiary of the Company, at an annual rent
of approximately $4,500,000 and $4,949,000, respectively. The Company also
entered into management and franchise agreements with Lyric, which agreements
have initial terms of 13 years with two renewal options of 13 years each. The
base management fee is 3% of gross revenues, subject to increase if gross
revenues exceed $350,000,000. In addition, the management agreement provides for
an incentive management fee equal to 70% of annual net cash flow (as defined in
the management agreement). The duties of the Company as manager include the
following: accounting, legal, human resources, operations, materials and
facilities management and regulatory compliance. The annual franchise fee is 1%
of gross revenues, which grants Lyric the authority to use the Company's trade
names and proprietary materials. In a related transaction, TFN Healthcare
Investors, Inc., an entity in which Mr. Nicholson is the principal stockholder
("TFN Healthcare"), purchased a 50% interest in Lyric for $1,000,000, an amount
equal to the Company's initial investment in Lyric, and the Company's interest
in Lyric was reduced to 50%. Lyric will dissolve on December 31, 2047 unless
extended for an additional 12 months. The transactions with Lyric were approved
by the disinterested members of the Board of Directors. The Company believes
that the terms of the arrangements with Lyric are more advantageous to the
Company than could have been obtained from an unrelated third party. The Company
believes that the long-term growth of Lyric through facility acquisitions from
third-parties will allow IHS to increase management fee revenue.

In February 1998, Mr. Nicholson entered into an employment agreement with
Lyric pursuant to which Mr. Nicholson serves as Managing Director of Lyric,
having day-to-day authority for the management and operation of Lyric. Mr.
Nicholson currently receives a base salary of $300,000, which may be increased
from time to time with the Company's approval and shall be increased to $350,000
upon Lyric achieving annual fiscal year revenues of $450 million. Mr. Nicholson
also receives benefits similar to those provided to the Company's executive
officers. The agreement has an initial term through December 31, 2002, subject
to automatic one year extensions thereafter unless the Company or Mr. Nicholson
elects not to extend. The agreement may be terminated by Lyric for Cause or by
Mr. Nicholson for Good Reason. Upon termination by Lyric without Cause or by Mr.
Nicholson for Good Reason, Mr. Nicholson will be entitled to a severance payment
equal to one year's salary plus the average of his last two annual bonuses,
payable 50% within 10 days of termination and 50% monthly in 12 equal
installments unless such termination occurs within one year following a change
of control of the Company or the Company and TFN Healthcare cease to own in
aggregate 50% of Lyric, in which case the entire severance payment shall be made
in one lump sum. If Mr. Nicholson resigns within 30 days after TFN Healthcare's
interest in Lyric is diluted below 33 1/3% and TFN Healthcare sells its interest
in Lyric, then Mr. Nicholson will be entitled to severance in an amount equal to
up to three times his annual salary. The employment agreement contains
confidentiality and non-compete provisions. For purposes of the agreement,
"Cause" means (i) Mr. Nicholson materially fails to perform his duties, (ii) Mr.
Nicholson materially breaches his confidentiality or non-compete covenants,
(iii) Mr. Nicholson is convicted of any felony or any misdemeanor involving
moral turpitude, or commits larceny, embezzlement or theft of Lyric's tangible
or intangible property, or (iv) TFN Healthcare disposes of more than 50% of its
interest in Lyric, and "Good Reason" is defined as (i) a material breach of the
agreement by Lyric, (ii) a change of control of the Company (similar to the
change of control definition contained in Dr. Elkins' employment agreement (see
"Executive Compensation -- Employment Agreements")), (iii) the Company and TFN
Healthcare no longer own in aggregate 50% of Lyric or (iv) TFN Healthcare's
interest in Lyric is diluted below 33 1/3% and TFN Healthcare sells its interest
in Lyric.

As part of its deleveraging strategy, the Company and various wholly owned
subsidiaries of the Company (the "Lyric Subsidiaries") sold, effective January
1, 1999, 32 long-term care facilities to Monarch Properties, LP ("Monarch LP"),
a newly formed private company, for approximately $135 million in net cash
proceeds plus contingent earn-out payments of up to a maximum of $67.6 million.
The contingent earn-out payments will be paid to the Company by Monarch LP upon
a sale, transfer or refinancing of any or all of the facilities or upon a sale,
consolidation or merger of Monarch LP, with the

<PAGE>

amount of the earn-out payments determined in accordance with a formula
described in the Facilities Purchase Agreement among the Company, the Lyric
Subsidiaries and Monarch LP. Dr. Robert N. Elkins, Chairman of the Board, Chief
Executive Officer and President of the Company, beneficially owns 30% of Monarch
LP and is the Chairman of the Board of Managers of Monarch Properties, LLP, the
parent company of Monarch LP. After the sale of the facilities to Monarch LP,
the Company transferred the stock of each of the Lyric Subsidiaries to Lyric.
Monarch LP then leased all of the facilities back to the Lyric Subsidiaries
under a long-term master lease. In March 1999, the Company sold three additional
facilities to Monarch LP for $33 million, which purchase price was paid by a 10%
promissory note due March 2000. Monarch LP then leased these facilities to
subsidiaries of Lyric. The Company is managing these facilities for Lyric
pursuant to the above-described agreements. The transactions with Monarch LP and
Lyric were approved by the disinterested members of the Board of Directors. The
Company believes that the terms of the arrangements with Monarch LP are more
advantageous to the Company than could have been obtained from an unrelated
third party.

During 1998 the Law Offices of Robert A. Mitchell, a director of the
Company, performed legal services for the Company for which such firm received
$162,820.

At March 31, 1999, the Company had four outstanding loans to Robert N.
Elkins, the Company's Chairman, President and Chief Executive Officer,
aggregating $37,262,100. One loan, in the original principal amount of
$4,690,527 ("Loan A"), was used primarily to purchase shares of the Company's
Common Stock, bears interest at a rate per annum equal to the higher of 7.5% or
the Company's cost of borrowing under its bank credit facility and is due
December 19, 2001. The principal amount of Loan A, which is unsecured, is due in
five annual installments beginning December 19, 1997; however, repayment of the
first installment of principal of $281,432 was forgiven in 1997. The largest
amount of indebtedness (including accrued interest) outstanding under Loan A
during fiscal 1998 was $4,792,402. During 1998 Dr. Elkins repaid $265,643 of the
principal of and interest on Loan A. The second loan is in the original
principal amount of $15,535,000 ("Loan B"). Loan B, which was used to exercise
options, bears interest at 6.8% per annum, is due January 28, 2003 and is
unsecured. The largest amount of indebtedness outstanding under Loan B during
fiscal 1998 was $15,535,000. Loan B provides that upon the occurrence of any
change of control of the Company or the termination of Dr. Elkins' employment
with the Company by death, for permanent disability, by Dr. Elkins for Good
Reason or by the Company without Cause (as such terms are defined in Dr. Elkins'
employment agreement), any amounts outstanding and not then due under Loan B
shall be automatically and immediately discharged. Pursuant to the Supplemental
Agreement, as amended, entered into between the Company and Dr. Elkins, the
Company has agreed to forgive, on each January 28 from 1999 to 2003, an amount
equal to the principal and interest due on such date on Loan B less, in the case
of the amount forgiven on January 28, 1999, the amount of his salary and bonus
for the prior calendar year in excess of $500,000. The principal amount of the
note is due in five equal installments of $3,107,000. On January 28, 1999, the
Company forgave $4,158,065 of principal and accrued interest on the note. The
Supplemental Agreement also provides that upon the occurrence of any change of
control of the Company or the termination of Dr. Elkins' employment with the
Company by death, for permanent disability, by Dr. Elkins for Good Reason or by
the Company without Cause (as such terms are defined in Dr. Elkins' employment
agreement), any amounts outstanding under Loan A shall be automatically and
immediately discharged. The third loan, which was made in November 1998, is in
the original principal amount of $8,750,000 ("Loan C"). Loan C, which was used
to pay taxes resulting from the exercise of options, bears interest at 6.8% per
annum, is due September 30, 1999 and is unsecured. Dr. Elkins continues to own
the shares of Common Stock acquired upon the exercise of options using the Loan
B proceeds. In March 1999 the Company loaned Dr. Elkins $11,500,000 under the
Loan Plan to assist the Company in retaining Dr. Elkins on a long-term basis in
light of the significantly reduced stock price and loss of equity incentives by
Dr. Elkins and the fact that Dr. Elkins' options were not repriced as well as to
encourage stock ownership by Dr. Elkins. In addition, because the Company did
not meet the earnings per share goals for 1998 set by the Committee, Dr. Elkins'
was not entitled to a bonus under his employment agreement for 1998.
Accordingly, Dr. Elkins has elected to repay, with interest at the prime rate,
the $303,275 paid to him in 1998 as an advance on his bonus in accordance with
the terms of his employment agreement, net of all

<PAGE>

taxes paid or payable (except to the extent Dr. Elkins receives tax benefits,
through deductions, for the repayment). See "Executive Compensation -- Employee
Loan Plan" and "-- Employment Agreements."

During 1998, the Company had outstanding loans to Lawrence P. Cirka, the
former President and a former director of the Company, aggregating $1,886,058.
One loan, in the original principal amount of $1,474,530, was used primarily to
purchase shares of the Company's Common Stock, bore interest at the higher of
7.5% or the Company's cost of borrowing under its bank credit facility, was due
in five annual installments beginning December 19, 1997 and was unsecured. In
December 1997, the Company loaned Mr. Cirka $500,000. This loan bore interest at
the rate of 8%, was unsecured and was due in 10 equal annual installments
beginning December 10, 1998, although the Company had the right to accelerate
the maturity if Mr. Cirka left the Company's employ for any reason. The loan
provided that if Mr. Cirka's employment was terminated within one year after the
occurrence of any change of control of the Company, any amounts outstanding
under the loan would be automatically and immediately forgiven as of the last
day of employment. In connection with the termination of Mr. Cirka's employment,
the Company forgave the $500,000 loan and interest on the $1,474,530 loan, which
loan is being repaid through the reduction of severance payments to Mr. Cirka.
See "Executive Compensation -- Employment Agreements."

At March 31, 1999, the Company had four outstanding loans to C. Taylor
Pickett, the Company's Executive Vice President -- Chief Financial Officer,
aggregating $1,826,817. One such loan, in the original principal amount of
$500,000, bears interest at 6.8%, is unsecured and is due on November 13, 2002.
In November 1998, the Company forgave $100,000 of the principal amount of this
loan and $34,000 of accrued interest. The second loan, in the original principal
amount of $6,963, bears interest at 9%, is unsecured and is due on March 31,
1999. To date the loan remains unpaid. In 1994, the Company advanced to Mr.
Pickett $10,000. The advance does not bear interest and has no stated maturity
date. In March 1999, the Company loaned Mr. Pickett $1,400,000 under the Loan
Plan to assist the Company in retaining Mr. Pickett on a long-term basis in
light of the significantly reduced stock price and loss of equity incentives by
Mr. Pickett and the fact that Mr. Pickett's options were not repriced as well as
to encourage stock ownership by Mr. Pickett. See "Executive Compensation --
Employee Loan Plan." The largest amount of indebtedness outstanding during
fiscal 1998 was $556,319.

At March 31, 1999, the Company had outstanding two loans to W. Bradley
Bennett, the Company's Executive Vice President -- Finance, aggregating
$1,669,087. One such loan, in the aggregate principal amount of $431,000, is
unsecured, bears interest at 7.5% and is due July 23, 2002. In March 1999, the
Company loaned Mr. Bennett $1,200,000 under the Loan Plan to assist the Company
in retaining Mr. Bennett on a long-term basis in light of the significantly
reduced stock price and loss of equity incentives by Mr. Bennett and the fact
that Mr. Bennett's options were not repriced as well as to encourage stock
ownership by Mr. Bennett. See "Executive Compensation -- Employee Loan Plan."
The largest amount of indebtedness outstanding during fiscal 1998 was $437,341.

During 1998, the Company had outstanding loans to C. Christian Winkle, the
Company's former Executive Vice President -- Chief Operating Officer,
aggregating $610,000. One such loan, in the principal amount of $600,000, bore
interest at 8%, is unsecured and is due November 18, 2000; the second loan, in
the principal amount of $10,000, bore interest at 9% and was unsecured. The
largest amount of indebtedness outstanding during fiscal 1998 was $666,123. The
Company forgave interest on the $600,000 loan and agreed to restructure and/or
forgive a portion of the principal of the loan under certain circumstances in
connection with the termination of Mr. Winkle's employment. See "Executive
Compensation -- Employment Agreements."

RELATIONSHIP WITH INDEPENDENT AUDITORS

KPMG LLP have been the independent auditors for the Company since its
inception in 1986 and will serve in that capacity for the 1999 fiscal year. A
representative of KPMG LLP will be present at the Annual Meeting, will have an
opportunity to make a statement if he desires to do so, and will respond to
appropriate questions from stockholders.

<PAGE>

STOCKHOLDER PROPOSALS

All stockholder proposals which are intended to be presented at the 2000
Annual Meeting of Stockholders of the Company must be received by the Company no
later than January 3, 2000 for inclusion in the Board of Directors' proxy
statement and form of proxy relating to that meeting. The Company's By-laws
impose certain requirements which must be complied with in connection with the
submission of stockholder proposals.

Pursuant to the By-laws of the Company, no person may present a matter to
be voted on at the 2000 Annual Meeting of Stockholders unless such person
complies with certain requirements set forth in the By-laws, including giving
notice of such person's intent to present such matter to the stockholders at the
Annual Meeting no earlier than December 4, 1999 and no later than January 3,
2000.

OTHER BUSINESS

The Board of Directors knows of no other business to be acted upon at the
Annual Meeting. However, if any other business properly comes before the Annual
Meeting, it is the intention of the persons named in the enclosed proxy to vote
on such matters in accordance with their best judgment.

The prompt return of your proxy will be appreciated and helpful in
obtaining the necessary vote. Therefore, whether or not you expect to attend the
Annual Meeting, please sign the proxy and return it in the enclosed envelope.

By Order of the Board of Directors

MARC B. LEVIN
Secretary

Dated: April 30, 1999

A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K WILL BE SENT WITHOUT
CHARGE TO ANY STOCKHOLDER REQUESTING IT IN WRITING FROM: INTEGRATED HEALTH
SERVICES, INC., ATTENTION: MARC B. LEVIN, EXECUTIVE VICE PRESIDENT -- INVESTOR
RELATIONS, 10065 RED RUN BOULEVARD, OWINGS MILLS, MARYLAND 21117.

<PAGE>

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INTEGRATED HEALTH SERVICES, INC.

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 28, 1999

Robert N. Elkins and C. Taylor Pickett, and each of them, as the true and
lawful attorneys, agents and proxies of the undersigned, with full power of
substitution, are hereby authorized to represent and to vote all shares of
Common Stock of Integrated Health Services, Inc. (the "Company") held of record
by the undersigned on April 9, 1999, at the Annual Meeting of Stockholders to be
held at 2:00 p.m. on Friday, May 28, 1999, at the Pikesville Hilton Inn, 1726
Reisterstown Road, Baltimore, Maryland and at any adjournments or postponements
thereof. Any and all proxies heretofore given are hereby revoked.

WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS DESIGNATED BY THE
UNDERSIGNED. IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED FOR PROPOSAL
NO. 1.

1. Proposal No. 1 -- Election of Directors -- Nominees are:

<S> <C> <C> <C>
Robert N. Elkins, M.D. Kenneth M. Mazik Charles W. Newhall III John L. Silverman and
Edwin M. Crawford Robert A. Mitchell Timothy F. Nicholson George H. Strong
</TABLE>

FOR all nominees listed above WITHHOLD AUTHORITY
(except as listed below) [ ] to vote for all nominees listed above [ ]

To withhold authority to vote for any individual nominee, write that
nominee's name in the space provided:

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Discretionary authority is hereby granted with respect to such other
matters as may properly come before the meeting.

The undersigned acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement of the Company, each dated April 30, 1999, and
the Company's Annual Report for the fiscal year ended December 31, 1998.

Dated:
-------------------------------

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Signature

------------------------------------
Signature if held jointly

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Title (if applicable)

PLEASE DATE, SIGN EXACTLY AS YOUR
NAME APPEARS ON THIS PROXY AND
PROMPTLY RETURN IN THE ENCLOSED
ENVELOPE. IN THE CASE OF JOINT
OWNERSHIP, EACH JOINT OWNER MUST
SIGN. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE OR
GUARDIAN, OR IN ANY OTHER SIMILAR
CAPACITY, PLEASE GIVE FULL TITLE. IF
A CORPORATION, SIGN IN FULL CORPORATE
NAME BY PRESIDENT OR OTHER AUTHORIZED
OFFICER, GIVING TITLE. IF A
PARTNERSHIP, SIGN IN PARTNERSHIP NAME
BY AUTHORIZED PERSON.

THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS

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