Employment Agreement - HealthSouth Corp. and Michael D. Martin


                              EMPLOYMENT AGREEMENT

          EMPLOYMENT  AGREEMENT,  dated as of April 1, 1998 (this  'Agreement'),
between HEALTHSOUTH  Corporation,  a Delaware  corporation (the 'Company'),  and
MICHAEL D. MARTIN, a resident of Birmingham, Alabama (the 'Executive').

                              W I T N E S S E T H:

          WHEREAS, the Company provides comprehensive rehabilitative,  clinical,
diagnostic and surgical healthcare services;

          WHEREAS,  the  Executive  serves as Executive  Vice  President,  Chief
Financial Officer and Treasurer of the Company; and

          WHEREAS, the Company wishes to assure itself of the continued services
of the  Executive  so that it will have the  continued  benefit of his  ability,
experience and services, and the Executive is willing to enter into an agreement
to that end, upon the terms and conditions hereinafter set forth.

          NOW,  THEREFORE,  in consideration of good and valuable  consideration
the receipt and sufficiency of which are hereby acknowledged, the parties hereby
covenant and agree as follows:

     1.   EMPLOYMENT

          The Company hereby agrees to continue to employ the Executive, and the
Executive  hereby agrees to remain in the employ of the Company,  on and subject
to the terms and conditions of this Agreement.

     2.   TERM

               (a) The period of this  Agreement  (the  'Agreement  Term') shall
commence as of the date hereof (the  'Effective  Date') and shall  expire on the
third   anniversary  of  the  Effective   Date.  The  Agreement  Term  shall  be
automatically  extended  for an  additional  year  on  each  anniversary  of the
Effective  Date,  unless written notice of  non-extension  is provided by either
party to the other party at least 90 days prior to such anniversary.

               (b) The period of the Executive's employment under this Agreement
(the  'Employment  Period')  shall  commence as of the Effective  Date and shall
expire at the end of the Agreement Term,  unless sooner terminated in accordance
with the terms and conditions of this Agreement.

     3.   POSITION, DUTIES AND RESPONSIBILITIES

               (a) The Executive shall serve as, and with the title,  office and
authority of, Executive Vice President, Chief Financial Officer and Treasurer of
the Company and shall  report  directly  to the Chief  Executive  Officer of the
Company or such other person designated from time to time by the Chief Executive
Officer of the Company.  The Executive shall also hold similar  titles,  offices
and authority with the Company's subsidiaries and/or their successors.






               (b) The Executive shall have all of the powers, authority, duties
and responsibilities  usually incident to the positions and offices of Executive
Vice President, Chief Financial Officer and Treasurer of the Company.

               (c) The  Executive  agrees  to  devote  substantially  all of his
business  time,  efforts  and  skills  to  the  performance  of his  duties  and
responsibilities under this Agreement;  provided,  however, that nothing in this
Agreement shall preclude the Executive from devoting reasonable periods required
for  (i)  participating  in  professional,  educational,  philanthropic,  public
interest, charitable, social or community activities, (ii) serving as a director
or member of an advisory  committee of any  corporation or other entity that the
Executive is serving on as of the  Effective  Date or any other  corporation  or
entity that is not in direct  competition with the Company or (iii) managing his
personal investments,  provided that such activities do not materially interfere
with the  Executive's  regular  performance  of his duties and  responsibilities
hereunder.

     4.   PLACE OF PERFORMANCE

          The Executive shall perform his duties at the principal offices of the
Company located at One HealthSouth Parkway,  Birmingham,  Alabama, but from time
to time the Executive may be required to travel to other locations in the proper
conduct of his responsibilities under this Agreement.

     5.   COMPENSATION AND BENEFITS

          In consideration of the services  rendered by the Executive during the
Employment  Period,  the Company  shall pay or provide the Executive the amounts
and benefits set forth below.

               (a) Salary.  The Company  shall pay the  Executive an annual base
salary (the 'Base Salary') of at least  $400,000.  The  Executive's  Base Salary
shall be paid in arrears in substantially  equal installments at monthly or more
frequent  intervals,  in  accordance  with the normal  payroll  practices of the
Company.  The Executive's Base Salary shall be reviewed at least annually by the
Compensation   Committee   of  the  board  of  directors  of  the  Company  (the
'Compensation  Committee') for consideration of appropriate merit increases and,
once  established,  the Base Salary shall not be decreased during the Employment
Period.

               (b) Incentive  Plans.  The  Executive  shall  participate  in all
annual and long-term  bonus or incentive  plans or  arrangements  in which other
senior  executives  of  the  Company  of a  comparable  level  are  eligible  to
participate from time to time,  including,  without  limitation,  any management
bonus pool arrangement.  The Executive's  incentive  compensation  opportunities
under such plans and  arrangements  shall be determined from time to time by the
Compensation Committee.

               (c)   Equity   Incentives.   The   Executive   shall   be   given
consideration, at least annually, by the Compensation Committee for the grant of
options to purchase shares of the common stock of the Company. In addition,  the
Executive  shall be entitled to receive  awards  under any stock  option,  stock
purchase or equity-based  incentive  compensation plan or arrangement adopted by
the Company from time to time for which other senior  executives  of the Company
of a comparable level are eligible to participate.  The Executive's awards under
such  plans  and  arrangements  shall  be  determined  from  time to time by the
Compensation Committee.


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               (d)  Employee  Benefits.  The  Executive  shall  be  entitled  to
participate in all employee benefit plans,  programs,  practices or arrangements
of the Company in which other senior  executives  of the Company of a comparable
level  are  eligible  to  participate  from  time to  time,  including,  without
limitation,  any qualified or non-qualified pension,  profit sharing and savings
plans, any death benefit and disability benefit plans, and any medical,  dental,
health and welfare plans. Without limiting the generality of the foregoing,  the
Company shall provide the Executive with long-term disability insurance coverage
paying  benefits  equal to at least 60% of the  Executive's  Base Salary for the
duration of any permanent and total disability of the Executive.

               (e) Fringe  Benefits  and  Perquisites.  The  Executive  shall be
entitled to continuation of all fringe benefits and perquisites  provided to the
Executive on the  Effective  Date,  and to all fringe  benefits and  perquisites
which are generally made available to other senior  executives of the Company of
a comparable  level from time to time.  Without  limiting the  generality of the
foregoing, the Company shall provide the Executive with the following:

                    (i) provision of executive  offices and  secretarial  staff;

                    (ii) vacation in accordance with Company's  policy for other
               senior executives of a comparable level;

                    (iii) provision of a non-accountable automobile allowance of
               $500 per month;

                    (iv)  reimbursement  of  all  reasonable  travel  and  other
               business expenses and disbursements  incurred by the Executive in
               the performance of his duties under this  Agreement,  upon proper
               accounting in accordance with the Company's  normal practices and
               procedures for reimbursement of business expenses.

     6.   TERMINATION OF EMPLOYMENT

          The Employment  Period will be terminated upon the happening of any of
the following events:

               (a)  Resignation.  The  Executive may  voluntarily  terminate his
employment hereunder for any reason at any time.

               (b)  Termination  for  Cause.   The  Company  may  terminate  the
Executive's employment hereunder for Cause. For purposes of this Agreement,  the
Executive  shall be  considered  to be  terminated  for 'Cause'  only if (i) the
Executive  is  found,  by  a  non-appealable  order  of  a  court  of  competent
jurisdiction,  to be guilty of a felony  under the laws of the United  States or
any state thereof,  (ii) the Executive is found, by a non-appealable  order of a
court of competent jurisdiction, to have committed a fraud, which has a material
adverse effect on the Company, or (iii) the Executive is found to have committed
a  deliberate  violation  of  Company  policy.  However,  in no event  shall the
Executive's  employment be considered to have been terminated for 'Cause' unless
and until the  Executive  receives a copy of a  resolution  duly  adopted by the
affirmative  vote of a majority of the board of  directors  of the Company  (the
'Board') at a meeting called and held for such purpose (after reasonable written
notice is provided to the Executive setting forth in reasonable detail the facts
and circumstances claimed


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to  provide  a basis of  termination  for Cause  and the  Executive  is given an
opportunity,  together with counsel,  to be heard before the Board) finding that
the Executive is guilty of acts or omissions constituting Cause.

               (c) Termination  other than for Cause. The Company shall have the
right to terminate the  Executive's  employment  hereunder for any reason at any
time,  including for any reason that does not constitute  Cause,  subject to the
consequences of such termination as set forth in this Agreement.

               (d)  Disability.   The  Executive's  employment  hereunder  shall
terminate  upon his  Disability.  For purposes of this  Agreement,  'Disability'
shall mean the  inability of the  Executive to perform his duties to the Company
on account of physical or mental  illness for a period of six  consecutive  full
months,  or for a period of eight full months  during any 12-month  period.  The
Executive's  employment  shall  terminate  in such a case on the last day of the
applicable  period;  provided,  however,  in no event  shall  the  Executive  be
terminated by reason of Disability  unless (i) the Executive is eligible for the
long-term  disability  benefits  set forth in Section  5(d)  hereof and (ii) the
Executive receives written notice from the Company,  at least 30 days in advance
of such termination, stating its intention to terminate the Executive for reason
of Disability and setting forth in reasonable detail the facts and circumstances
claimed to provide a basis for such termination.

               (e) Death. The Executive's  employment  hereunder shall terminate
upon his death.

     7.   COMPENSATION UPON TERMINATION OF EMPLOYMENT

          In the event the  Executive's  employment by the Company is terminated
during the  Agreement  Term,  the  Executive  shall be entitled to the severance
benefits set forth below:

               (a)   Resignation.   In  the  event  the  Executive   voluntarily
terminates  his employment  hereunder for any reason,  the Company shall pay and
provide to the Executive any Accrued Rights (as defined in paragraph (c) below).

               (b)   Termination   for  Cause.  In  the  event  the  Executive's
employment  hereunder is terminated by the Company for Cause,  the Company shall
pay and provide to the Executive any Accrued Rights (as defined in paragraph (c)
below).

               (c) Termination other than for Cause, Disability or Death. In the
event the Executive's  employment hereunder is terminated by the Company for any
reason  other than for Cause,  Disability  or death,  the Company  shall pay the
Executive and provide him with the following:

                    (i) Accrued  Rights.  The Company  shall pay the Executive a
               lump-sum  amount  equal to the sum of (A) his  earned  but unpaid
               Base Salary through the date of  termination,  (B) any earned but
               unpaid  bonus for any  completed  calendar  year,  (C) a pro-rata
               payment of any bonus (based on the then-current  target amount of
               such bonus) for any partial year or period of service through the
               date of termination and (D) any unreimbursed business expenses or
               other  amounts  due to the  Executive  from the Company as of the
               date of


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               termination.  In  addition,  the  Company  shall  provide  to the
               Executive all payments, rights and benefits due as of the date of
               termination under the terms of the Company's  employee and fringe
               benefit plans,  practices,  programs and arrangements referred to
               in Sections  5(d) and 5(e)  hereof  (together  with the  lump-sum
               payment, the 'Accrued Rights').

                    (ii)  Severance  Payment.  The  Company  shall  provide  the
               Executive with continued  payment of the Executive's Base Salary,
               as in  effect  on the date of  termination,  for a period  of two
               years following the Executive's termination, payable at the times
               and in the manner  such Base  Salary  would have been paid if the
               Executive had continued in the employment of the Company.

                    (iii)   Equity   Rights.   All  stock   options   and  other
               equity-based  rights  held  by  the  Executive  at  the  date  of
               termination  shall  become   immediately  and  fully  vested  and
               exercisable, and the Executive shall retain the right to exercise
               all  outstanding  stock  options  for  a  period  of  five  years
               following termination of employment or to the end of the original
               term of such options,  if earlier.  The Company  shall  forthwith
               take all necessary steps to amend any relevant stock option plans
               of  the  Company  and  stock  option  agreements  to  the  extent
               necessary  to  allow  for  the  foregoing  vesting  and  term  of
               exercise.

               (d) Disability. In the event the Executive's employment hereunder
is terminated by reason of the Executive's Disability, the Company shall pay and
provide to the Executive any Accrued Rights,  including all disability insurance
coverage.

               (e) Death. In the event the Executive's  employment  hereunder is
terminated by reason of the Executive's death, the Company shall pay and provide
to the Executive's  representative  or estate any Accrued Rights,  including all
life insurance coverage.

     8.   CHANGE IN CONTROL

               (a) Supplemental  Termination Rights. In the event of a voluntary
termination of employment by the Executive  pursuant to Section 6(a) hereof that
occurs  within six months  following a Change in Control,  the Company shall pay
the Executive and provide him with the benefits and rights  described in Section
7(c) hereof.

               (b)  Definition.  For  purposes of this  Agreement,  a 'Change in
Control' shall be deemed to have occurred by reason of:

                    (i) the  acquisition  (other  than from the  Company) by any
               person,  entity  or  'group'  (within  the  meaning  of  Sections
               13(d)(3) or 14(d)(2) of the Securities  Exchange Act of 1934, but
               excluding, for this purpose, the Company or its subsidiaries,  or
               any  employee  benefit  plan of the  Company or its  subsidiaries
               which acquires  beneficial  ownership of voting securities of the
               Company)  of  beneficial  ownership  (within  the meaning of Rule
               13d-3 promulgated  under the Securities  Exchange Act of 1934) of
               25% or more of either the  then-outstanding  shares of the common
               stock  of  the  Company  or  the  combined  voting  power  of the
               Company's  then-outstanding  voting  securities  entitled to vote
               generally in the election of directors; or


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                       (ii) individuals  who, as of date hereof,  constitute the
                  Board (as of such date, the  'Incumbent  Board') cease for any
                  reason  to  constitute  at  least  a  majority  of the  Board;
                  provided,   however,  that  any  person  becoming  a  director
                  subsequent  to such date whose  election,  or  nomination  for
                  election, was approved by a vote of at least a majority of the
                  directors then constituting the Incumbent Board (other than an
                  election  or  nomination   of  an  individual   whose  initial
                  assumption  of  office  is in  connection  with an  actual  or
                  threatened  election  contest  relating  to  the  election  of
                  directors  of the  Company)  shall be,  for  purposes  of this
                  Section  8(b)(ii),  considered  as though  such  person were a
                  member of the Incumbent Board; or

                       (iii)  approval by the  stockholders  of the Company of a
                  reorganization,  merger,  consolidation or share exchange,  in
                  each  case  with  respect  to  which   persons  who  were  the
                  stockholders  of  the  Company   immediately   prior  to  such
                  reorganization,  merger,  consolidation  or share  exchange do
                  not, immediately thereafter, own more than 75% of the combined
                  voting  power  entitled to vote  generally  in the election of
                  directors of the  reorganized,  merged,  consolidated or other
                  surviving entity's  then-outstanding  voting securities,  or a
                  liquidation  or  dissolution of the Company or the sale of all
                  or substantially all of the assets of the Company.

     9.   NO MITIGATION OR OFFSET

          The  Executive  shall not be required to seek other  employment  or to
reduce any severance benefit payable to him under Sections 7 or 8 hereof, and no
such severance benefit shall be reduced on account of any compensation  received
by  the  Executive  from  other  employment.  The  Company's  obligation  to pay
severance  benefits under this Agreement shall not be reduced by any amount owed
by the Executive to the Company.

     10.  TAX WITHHOLDING; METHOD OF PAYMENT

          All compensation payable pursuant to this Agreement,  shall be subject
to reduction by all applicable  withholding,  social security and other federal,
state and local taxes and  deductions.  Any  lump-sum  payments  provided for in
Sections 7 or 8 hereof shall be made in a cash payment,  net of any required tax
withholding, no later than the fifth business day following the Executive's date
of  termination.  Any payment  required to be made to the  Executive  under this
Agreement that is not made in a timely manner shall bear interest until the date
of payment at a rate equal to 100% of the monthly compounded  applicable federal
rate, as in effect under Section  1274(d) of the Internal  Revenue Code of 1986,
as amended, for the month in which payment was required to be made.

     11.  RESTRICTIVE COVENANTS

               (a) Confidential Information. During the Employment Period and at
all times  thereafter,  the Executive  agrees that he will not divulge to anyone
(other than the Company or any persons  employed or  designated  by the Company)
any knowledge or information of a


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confidential  nature  relating  to the  business  of the  Company  or any of its
subsidiaries or affiliates,  including,  without limitation,  all types of trade
secrets (unless readily  ascertainable  from public or published  information or
trade  sources)  and  confidential  commercial  information,  and the  Executive
further  agrees not to  disclose,  publish or make use of any such  knowledge or
information without the consent of the Company.

               (b)  Noncompetition.  During the  Employment  Period and, for any
applicable period that the Executive is entitled to receive  severance  payments
pursuant to Section  7(c) hereof,  the  Executive  shall not,  without the prior
written consent of the Company,  engage in the comprehensive  rehabilitative and
related  healthcare   services  business  on  behalf  of  any  person,  firm  or
corporation  within any  geographical  area in which the Company  transacts such
business, and the Executive shall not acquire any financial interest (except for
an equity  interest  in  publicly-held  companies  that do not  exceed 5% of any
outstanding  class of equity of that  company),  in any business that engages in
the comprehensive rehabilitative and related healthcare services business within
any   geographical   area  in  which  the  Company   transacts   such  business.
Notwithstanding  the  foregoing,  upon the  occurrence  of a Change  in  Control
(whether  before  or  after  the  termination  of the  Employment  Period),  the
restrictions of this Section 11(b) shall cease to apply to the Executive for any
period following his termination of employment hereunder.

               (c)  Enforcement.  The  Company  shall  be  entitled  to  seek  a
restraining  order or  injunction  in any  court of  competent  jurisdiction  to
prevent any continuation of any violation of the provisions of this Section 11.

     12.  SUCCESSORS

          This Agreement shall be binding upon and shall inure to the benefit of
the Company,  its  successors and assigns and any person,  firm,  corporation or
other entity which succeeds to all or substantially all of the business,  assets
or property of the  Company.  The Company will  require any  successor  (whether
direct or indirect, by purchase,  merger,  consolidation or otherwise) to all or
substantially  all of the  business,  assets  or  property  of the  Company,  to
expressly  assume and agree to perform this  Agreement in the same manner and to
the same  extent  that the  Company  would be  required to perform it if no such
succession had taken place. As used in this Agreement,  the 'Company' shall mean
the Company as hereinbefore defined and any successor to its business, assets or
property as aforesaid  which executes and delivers an agreement  provided for in
this Section 12 or which otherwise becomes bound by all the terms and provisions
of this Agreement by operation of law.

                  This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's  personal or legal
representatives,  executors,  administrators,  successors,  heirs, distributees,
devisees and legatees. If the Executive should die while any amounts are due and
payable to him hereunder,  all such amounts,  unless otherwise  provided herein,
shall be paid to the Executive's  designated beneficiary or, if there be no such
designated beneficiary, to the legal representatives of the Executive's estate.

     13.  NO ASSIGNMENT

          Except  as to  withholding  of any tax  under  the laws of the  United
States or any other country,  state or locality,  neither this Agreement nor any
right or interest hereunder nor any



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amount  payable  at any  time  hereunder  shall  be  subject  in any  manner  to
alienation,  sale,  transfer,  assignment,  pledge,  attachment,  or other legal
process, or encumbrance of any kind by the Executive or the beneficiaries of the
Executive or by his legal  representatives  without the Company's  prior written
consent,  nor shall there be any right of set-off or  counterclaim in respect of
any  debts  or  liabilities  of  the  Executive,   his  beneficiaries  or  legal
representatives;  provided, however, that nothing in this Section shall preclude
the Executive from  designating a beneficiary to receive any benefit  payable on
his death,  or the legal  representatives  of the Executive  from  assigning any
rights hereunder to the person or persons entitled thereto under his will or, in
case of intestacy,  to the person or persons  entitled thereto under the laws of
intestacy applicable to his estate.

     14.  ENTIRE AGREEMENT

          This Agreement  contains the entire  understanding of the parties with
respect to the  subject  matter  hereof  and,  except as  specifically  provided
herein,  cancels and supersedes any and all other agreements between the parties
with respect to the subject matter hereof. Any amendment or modification of this
Agreement  shall not be binding  unless in writing and signed by the Company and
the Executive.

     15.  SEVERABILITY

          In the event that any provision of this  Agreement is determined to be
invalid or  unenforceable,  the remaining terms and conditions of this Agreement
shall be  unaffected  and shall  remain in full force and  effect,  and any such
determination of invalidity or unenforceability shall not affect the validity or
enforceability of any other provision of this Agreement.

     16.  NOTICES

          All notices which may be necessary or proper for either the Company or
the Executive to give to the other shall be in writing and shall be delivered by
hand or sent by registered or certified mail,  return receipt  requested,  or by
air courier, to the Executive at:

                           Mr. Michael D. Martin
                           5608 Canongate Lane
                           Birmingham, Alabama  35242

with a copy to:

                           Frederick W. Kanner, Esq.
                           Dewey Ballantine LLP
                           1301 Avenue of the Americas
                           New York,  New York 10019

and shall be sent in the manner  described above to the Secretary of the Company
at the  Company's  principal  executives  offices  at One  HealthSouth  Parkway,
Birmingham, Alabama



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35243, or delivered by hand to the Secretary of the Company, and shall be deemed
given when sent,  provided  that any notice  required  under Section 6 hereof or
notice  given  pursuant  to  Section 2 hereof  shall be deemed  given  only when
received.  Any party may by like notice to the other party change the address at
which he or they are to receive notices hereunder.

     17.  GOVERNING LAW

          This Agreement shall be governed by and enforceable in accordance with
the laws of the State of Alabama,  without  giving  effect to the  principles of
conflict of laws thereof.

     18.  ARBITRATION

          Any  controversy  or  claim  arising  out  of,  or  related  to,  this
Agreement, or the breach thereof, shall be settled by binding arbitration in the
City of Birmingham,  Alabama, in accordance with the rules then obtaining of the
American Arbitration Association, and the arbitrator's decision shall be binding
and final,  and  judgment  upon the award  rendered  may be entered in any court
having jurisdiction thereof.

     19.  LEGAL FEES AND EXPENSES

          To induce the  Executive to execute this  Agreement and to provide the
Executive with reasonable assurance that the purposes of this Agreement will not
be frustrated by the cost of its enforcement  should the Company fail to perform
its  obligations  under this Agreement or should the Company or any  subsidiary,
affiliate or stockholder of the Company  contest the validity or  enforceability
of this  Agreement,  the  Company  shall pay and be solely  responsible  for any
attorneys'  fees and  expenses  and court costs  incurred by the  Executive as a
result of a claim that the Company has breached or  otherwise  failed to perform
this  Agreement or any  provision  hereof to be performed by the Company or as a
result of the Company or any subsidiary, affiliate or stockholder of the Company
contesting  the validity or  enforceability  of this  Agreement or any provision
hereof to be performed by the Company,  in each case  regardless of which party,
if any, prevails in the contest.


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          IN WITNESS  WHEREOF,  the Company and the Executive have executed this
Agreement as of the date first above written.

                                    EXECUTIVE

                                    /s/ Michael D. Martin
                                    --------------------------------
                                    Michael D. Martin

                                    HEALTHSOUTH CORPORATION

                                    By /s/ Richard M. Scrushy
                                      ------------------------------
                                      Richard M. Scrushy
                                      Chairman of the Board and
                                      Chief Executive Officer





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