Employment Agreement - HealthSouth Corp. and Richard M. Scrushy


                              EMPLOYMENT AGREEMENT


     EMPLOYMENT AGREEMENT, dated as of April 1, 1998 (this 'Agreement'), between
HEALTHSOUTH Corporation,  a Delaware corporation (the 'Company'), and RICHARD M.
SCRUSHY, 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  is a founder of the  Company  and serves as Chief
Executive Officer of the Company and as Chairman of its Board of Directors; 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  fifth
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, the Chief Executive  Officer of the Company and the Chairman of the Board of
Directors of the Company (the  'Board') and shall report  directly to the Board.
The Company  shall use its best  efforts to cause the  Executive to be nominated
and  elected  (or  renominated  and  reelected,  as the case may be)  during the
Employment Period as a director of the Company.

     (b) The Executive  shall have effective  supervision  and control over, and
responsibility  for, the strategic  direction and general and active  day-to-day
leadership  and  management  of the  business and affairs of the Company and the
direct and indirect  subsidiaries of the Company,  subject only to the authority
of the  Board,  and  shall  have  all  of  the  powers,  authority,  duties  and
responsibilities  usually  incident  to  the  positions  and  offices  of  Chief
Executive Officer and Chairman of the Board 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.

     (d) The  foregoing  provisions  of this  Section 3 shall be  subject to the
Executive's  right to elect to serve the Company  solely as the  Chairman of the
Board, as provided in Section 22 hereof.

     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 to 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 $1,200,000. 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 (the  'Compensation  Committee')  for  consideration  of
appropriate merit increases and, once established,  the Base Salary shall not be
decreased  during the Employment  Period,  except as otherwise  contemplated  by
Section 22 hereof.

     (b) Annual Target Bonus.  The Company shall provide the Executive  with the
opportunity  to earn an annual target bonus (the 'Annual Target Bonus') equal to
at least  $2,400.000.  The amount of the Annual Target Bonus will be reviewed at
least annually by the  Compensation  Committee for  consideration of appropriate
merit increases and, once established at a specified  amount,  the Annual Target
Bonus shall not be decreased during the Employment  Period,  except as otherwise
contemplated  by Section 22 hereof.  The Annual  Target Bonus will be payable in
the event that the Company's operations meet the annual performance standard set
forth in the Company's business plan, as approved by the Compensation  Committee
in each year of the Employment  Period (the 'Business  Plan'). In the event that
the Company's  operations meet the monthly performance standard set forth in the
Business Plan, an amount equal to one-twelfth  (1/12) of the Annual Target Bonus
(a 'Monthly  Target Bonus') shall be payable within five days following the date
the Company's internal monthly financial statements have been completed.  In the
event that any Monthly  Target Bonus shall not be paid during the course of such
calendar  year because the relevant  monthly  performance  standard was not met,
such  Monthly  Target  Bonus shall  again  become  available  for payment if the
Company attains its annual  performance  standard for such calendar year. In the
event  that  the  annual  performance  standards  are not met,  Executive  shall
nevertheless be entitled to retain all amounts  theretofore  received in respect
of any Monthly  Target Bonuses paid during the course of such calendar year. For
the  remainder of the 1998  calendar year  following  the  Effective  Date,  the
Executive  will be paid  $200,000  within  five  days  following  the  date  the
Company's  internal  monthly  financial  statements have been completed for each
calendar month ending following the Effective Date in which the relevant monthly
performance  standard is met and,  in the event the  Company  attains its annual
performance  standard  for 1998,  the  Executive  shall be paid  $200,000 of any
month,  dating back to January,  1998,  in which the  Executive was not paid the
Monthly Target Bonus due to the relevant monthly performance standard not having
been met.

     (c) Other Incentive  Plans.  The Executive  shall  participate in all other
bonus or incentive plans or arrangements in which other senior executives of the
Company  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 upon  consultation
with the Executive.

     (d) 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  senior  executives  of the Company are  eligible to
participate.  The Executive's  awards under such plans and arrangements shall be
determined  from time to time by the  Compensation  Committee upon  consultation
with the Executive.

     (e) 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 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 the following:

          (i)  provision  of  long-term  disability  insurance  coverage  paying
     benefits equal to at least 100% of the  Executive's  Base Salary and Annual
     Target Bonus for the duration of any permanent and total  disability of the
     Executive,  either  through an individual  disability  insurance  policy or
     otherwise;

          (ii) continued  provision of split-dollar life insurance  coverage and
     payment of premiums pursuant to that certain Split-Dollar Agreement between
     the Executive and the Company, dated February 1, 1992, as amended; and

          (iii) provision of the pension benefits provided under a non-qualified
     retirement  plan for the  Executive,  a  summary  of the  terms of which is
     attached hereto as Exhibit A.

     (f) 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 senior  executives of the Company 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) six weeks paid vacation during each calendar year;

          (iii) provision of an automobile of the Executive's  choice (which may
     be traded in for a new automobile  each year),  plus payment of all related
     automobile  expenses,  including gas,  maintenance  expenses and automobile
     insurance;

          (iv) payment of initiation  fees and annual dues for two country clubs
     of the  Executive's  choice,  and  payment  of dues  for  any  professional
     societies  and   associations  of  which  the  Executive  is  a  member  in
     furtherance of his duties hereunder;

          (v)  in  order  to  ensure  the  accessibility  and  security  of  the
     Executive,  use of the Company's  aircraft and related  facilities for both
     business  and  personal  travel  and  provision  of  appropriate   personal
     residence   security    services,    a   24-hour   bodyguard   service,   a
     security-trained  driver/bodyguard  and any other measures  prescribed from
     time to time by the Company's  corporate  security  advisor and approved by
     the Board; and

          (vi)  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 for Good Reason.  The Executive may voluntarily  terminate
his employment hereunder for Good Reason. For purposes of this Agreement,  'Good
Reason' shall mean:

          (i) the  assignment to the Executive of any duties  inconsistent  with
     the Executive's  position (including status,  offices,  titles or reporting
     relationships),  authority,  duties or  responsibilities as contemplated by
     Section 3 hereof, or any action by the Company that results in a diminution
     in such position, authority, duties or responsibilities,  but excluding for
     these purposes any isolated and insubstantial action not taken in bad faith
     and which is  remedied  by the  Company  promptly  after  receipt of notice
     thereof given by the Executive;

          (ii)   any   material    change   in   the    Executive's    reporting
     responsibilities;

          (iii) any  material  failure by the  Company to honor its  obligations
     under this Agreement;

          (iv) a notice of  non-extension  of the Agreement Term provided by the
     Company to the Executive as set froth in Section 2 hereof;

          (v) the relocation of the Company's  principal  executive offices to a
     location  more  than 40 miles  from its  current  location  in  Birmingham,
     Alabama,  or the location of the  Executive's  own office to other than the
     Company's principal executive offices;

          (vi) any  failure  by the  Company  to  obtain an  assumption  of this
     Agreement  by a successor  corporation  as  required  under  Section  14(a)
     hereof;

          (vii) the failure of the Company to  renominate  the  Executive to the
     Board or the failure of the Company's stockholders to reelect the Executive
     to the Board; or

          (viii) any  purported  termination  by the Company of the  Executive's
     employment otherwise than as expressly permitted by this Agreement.

However,  in no event shall the Executive be considered to have  terminated  his
employment  for 'Good  Reason'  unless and until the  Company  receives  written
notice from the Executive identifying in reasonable detail the acts or omissions
constituting  'Good Reason' and the provision of this Agreement relied upon, and
such  acts  or  omissions  are  not  cured  by the  Company  to  the  reasonable
satisfaction  of the Executive  within 30 days of the Company's  receipt of such
notice.

     (b) Resignation  other than for Good Reason.  The Executive may voluntarily
terminate his employment hereunder for any reason other than Good Reason.

     (c)  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 or competent  jurisdiction,  to be
guilty of a felony under the laws of the United  States or any state  thereof or
(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. 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 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 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.



     (d)  Termination  other than for Cause.  The Board  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.

     (e) 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(e)(i) 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.

     (f) 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  for Good Reason.  In the event the Executive  voluntarily
terminates his employment  hereunder for Good Reason,  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 Annual Target Bonus for
     any completed calendar year, (C) any earned but unpaid Monthly Target Bonus
     for any completed month in the calendar year of the Executive's termination
     and (D) any  unreimbursed  business  expenses  or other  amounts due to the
     Executive from the Company as of the date of 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(e) and 5(f)  hereof  (including,  but not  limited  to, any
     retirement  benefits set forth on Exhibit A to which Executive is entitled)
     (together with the lump-sum payment, the 'Accrued Rights').

          (ii) Severance Payment. The Company shall pay the Executive a lump-sum
     amount  equal to the sum of the  Executive's  then-current  Base Salary and
     Annual Target Bonus at the time of the  Executive's  termination,  for each
     year remaining in the Agreement Term (with  pro-rated  amounts of such Base
     Salary and Annual Target Bonus, on a daily basis,  for any partial calendar
     years during such remaining  Agreement  Term),  with such lump-sum  payment
     discounted  to present  value using an  interest  rate equal to 100% of the
     monthly compounded  applicable federal rate (the 'Applicable  Rate'), as in
     effect  under  Section  1274(d) of the Internal  Revenue  Code of 1986,  as
     amended  (the  'Code'),  for the month in which  payment is  required to be
     made.  For purposes of  determining  the portion of the  severance  payment
     based on the Annual  Target  Bonus to be payable  hereunder,  the  relevant
     performance  standards  for the  Company  shall  be  deemed  to  have  been
     achieved.

          (iii)  Continued  Benefits.  The  Company  shall  pay or  provide  the
     Executive  with all  employee and fringe  benefits  referred to in Sections
     5(e) and 5(f)  hereof for the  balance  of the  Agreement  Term;  provided,
     however,  that if and to the extent the  Company  determines  that any such
     benefits cannot be paid or provided under the plans in question due to Code
     or other  restrictions,  the Company shall provide  payments,  coverages or
     benefits,  which are at least as favorable to the Executive on an after-tax
     basis, through other means reasonably satisfactory to the Executive.

          (iv) 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 the  duration of their  original  full term
     (without  regard to  termination  of  employment)  in  accordance  with the
     Founder  Retirement  Benefit  Program  attached  hereto  as  Exhibit B (the
     'Founders' Program').  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.

     (b)  Resignation  other than for Good  Reason.  In the event the  Executive
voluntarily  terminates his employment hereunder other than for Good Reason, the
Company shall pay the Executive and provide him with the following:

          (i) Accrued Rights. The Company shall pay and provide to the Executive
     any Accrued Rights.

          (ii) Severance Payment. The Company shall pay the Executive a lump-sum
     amount  equal to two times  the sum of the  Executive's  then-current  Base
     Salary and Annual Target Bonus at the time of the Executive's  termination,
     with such lump-sum payment discounted to present value using the Applicable
     Rate for the month in which payment is required to be made. For purposes of
     determining the portion of the severance payment based on the Annual Target
     Bonus to be payable hereunder,  the relevant performance  standards for the
     Company shall be deemed to have been achieved.

     (c)  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.

     (d) 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 all severance benefits set forth in Section 7(a) hereof.

     (e)  Disability.  In the  event the  Executive's  employment  hereunder  is
terminated by reason of the  Executive's  Disability,  the Company shall pay the
Executive and provide him with the following:

          (i) Accrued Rights. The Company shall pay and provide to the Executive
     any Accrued Rights, including all disability insurance coverage.

          (ii) Severance  Payment.  The Company shall provide the Executive with
     continued  payment of the Executive's  Base Salary and Annual Target Bonus,
     as in  effect  on the  date of  termination,  for a period  of three  years
     following  the  Executive's  termination,  payable  at the times and in the
     manner such Base Salary and Annual Target Bonus would have been paid if the
     Executive  had  continued  in the  employment  of the Company and as if all
     relevant performance standards had been achieved during such periods.

     (f) Death.

     In the event the Executive's  employment  hereunder is terminated by reason
of the Executive's death, the Company shall pay the Executive's  representatives
or estate the following:

          (i)  Accrued  Rights.  The  Company  shall  pay  and  provide  to  the
     Executive's  representatives  or estate any Accrued  Rights,  including all
     life insurance coverage.

          (ii)  Severance  Payment.   The  Company  shall  pay  the  Executive's
     representatives  or  estate  a  lump-sum  amount  equal  to the  sum of the
     Executive's then-current Base Salary and Annual Target Bonus at the time of
     the Executive's  death,  with such lump-sum  payment  discounted to present
     value using the Applicable  Rate for the month in which payment is required
     to be made.  For  purposes  of  determining  the  portion of the  severance
     payment  based on the  Annual  Target  Bonus to be payable



     hereunder,  the relevant  performance  standards  for the Company  shall be
     deemed to have been achieved.

     8. FOUNDERS' BENEFITS

     Upon the  Executive's  termination of employment  hereunder for any reason,
and in addition to any severance benefits payable to him under Section 7 hereof,
the Company shall treat such  termination as a 'retirement'  for purposes of the
Founder's Program, and shall provide the Executive with the benefits outlined in
the Founders' Program in recognition of his status as a founder of the Company.

     9. CHANGE IN CONTROL

     (a)  Supplemental   termination   Rights.   In  the  event  of  Executive's
termination  other  than  for  Cause,  Disability  or  death  or in the  event a
voluntary  termination of employment by the Executive pursuant to either Section
6(a) or Section 6(b) hereof, in either case occurring within two years following
a Change in Control, the Company shall pay to the Executive,  in addition to the
severance  benefits  payable under Section 7(b) hereof,  an additional  lump-sum
amount equal to the Executive's then-current Base Salary and Annual Target Bonus
at  the  time  of  the  Executive's  termination,  with  such  lump-sum  payment
discounted  to present  value using the  Applicable  Rate for the month in which
payment is required to be made.

     (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

          (ii) individuals who, as of the 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  9(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.

     10. PARACHUTE TAX INDEMNITY

     (a) If it shall be determined that any amount paid,  distributed or treated
as paid or distributed by the Company to or for the Executive's benefit (whether
paid or payable or  distributed or  distributable  pursuant to the terms of this
Agreement or otherwise, but determined without regard to any additional payments
required under this Section 10) (a 'Payment') would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are



incurred by the  Executive  with  respect to such  excise tax (such  excise tax,
together with any such interest and penalties,  being  hereinafter  collectively
referred  to as the  'Excise  Tax'),  then the  Executive  shall be  entitled to
receive an  additional  payment (a  'Gross-Up  Payment')  in an amount such that
after payment by the Executive of all federal,  state and local taxes (including
any interest or penalties imposed with respect to such taxes), including without
limitation,  any income  taxes (and any  interest  and  penalties  imposed  with
respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up  Payment  equal to the Excise Tax imposed upon
the Payments.

     (b) All determinations required to be made under this Section 10, including
whether and when a Gross-Up  Payment is required and the amount of such Gross-Up
Payment and the  assumptions  to be utilized in arriving at such  determination,
shall be made by a nationally recognized accounting firm as may be designated by
the Executive (the 'Accounting  Firm') which shall provide  detailed  supporting
calculations  both to the Company and the  Executive  within 15 business days of
the receipt of notice from the Executive that there has been a Payment,  or such
earlier time as is requested  by the Company.  In the event that the  Accounting
Firm is serving as  accountant  or auditor for the  individual,  entity or group
effecting the Change in Control,  the Executive shall appoint another nationally
recognized accounting firm to make the determinations  required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and  expenses of the  Accounting  Firm shall be borne by the  Company.  Any
Gross-Up  Payment,  as determined  pursuant to this Section 10, shall be paid by
the Company to the Executive  within five days of the receipt of the  Accounting
Firm's determination.  Any determination by the Accounting Firm shall be binding
upon the  Company  and the  Executive.  As a result  of the  uncertainty  in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting  Firm hereunder,  it is possible that Gross-Up  Payments which
will not have been made by the Company  should have been made  ('Underpayment'),
consistent with the  calculations  required to be made  hereunder.  In the event
that the Company  exhausts  its  remedies  pursuant  to this  Section 10 and the
Executive  thereafter  is  required  to make a payment  of any Excise  Tax,  the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such  Underpayment  shall be promptly  paid by the Company to or for the
Executive's benefit.

     (c) The  Executive  shall notify the Company in writing of any claim by the
Internal  Revenue Service that, if successful,  would require the payment by the
Company of the Gross-Up  Payment.  Such  notification  shall be given as soon as
practicable  but no later than ten business days after the Executive is informed
in  writing of such claim and shall  apprise  the  Company of the nature of such
claim and the date on which such claim is  requested to be paid.  The  Executive
shall not pay such claim prior to the expiration of the 30-day period  following
the date on which it gives such notice to the Company  (or such  shorter  period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:

          (i) give the  Company  any  information  reasonably  requested  by the
     Company relating to such claim;

          (ii) take such action in connection  with contesting such claim as the
     Company shall reasonably  request in writing from time to time,  including,
     without  limitation,  accepting legal  representation  with respect to such
     claim by an attorney reasonably selected by the Company;

          (iii) cooperate with the Company in good faith in order to effectively
     contest such claim; and

          (iv) permit the Company to participate  in any proceeding  relating to
     such claim;

provided,  however,  that the Company  shall bear and pay directly all costs and
expenses  (including  additional  interest and penalties) incurred in connection
with such contest and shall  indemnify  and hold the Executive  harmless,  on an
after-tax  basis,  from any  Excise Tax or income tax  (including  interest  and
penalties with respect thereto) imposed as a result of such  representation  and
payment of costs and expense.  Without limitation on the foregoing provisions of
this Section 10, the Company shall control all  proceedings  taken in connection
with such  contest  and,  at its sole  option,  may pursue or forego any and all
administrative  appeals,  proceedings,  hearings and conferences with the taxing
authority in respect of such claim and may at its sole option, either direct the
Executive  to pay the tax  claimed  and sue for a refund or contest the claim in
any permissible  manner, and the Executive agrees to prosecute such contest to a
determination  before  any  administrative



tribunal, in a court of initial jurisdiction and in one or more appellate courts
as the Company shall determine;  provided,  however, that if the Company directs
the Executive to pay such claim and sue for a refund,  the Company shall advance
the amount of such payment to the  Executive,  on an  interest-free  basis,  and
shall indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including  interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed  income with
respect to such advance;  and further provided that any extension of the statute
of  limitations  relating to payment of taxes for the  Executive's  taxable year
with  respect  to which  such  contested  amount is claimed to be due is limited
solely to such  contested  amount.  Furthermore,  the  Company's  control of the
contest  shall be limited  to issues  with  respect to which a Gross-Up  Payment
would be payable  hereunder  and the  Executive  shall be  entitled to settle or
contest,  as the case may be, any other  issue  raised by the  Internal  Revenue
Service or any other taxing authority.

     (d) If, after the Executive's  receipt of an amount advanced by the Company
pursuant  to this  Section  10, the  Executive  becomes  entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the  requirements of this Section 10) promptly pay to the Company
the amount of such refund  (together with any interest paid or credited  thereon
after taxes applicable thereto).  If, after the Executive's receipt of an amount
advanced by the Company  pursuant to this  Section 10, a  determination  is made
that the  Executive  shall not be entitled  to any refund  with  respect to such
claim and the Company does not notify the  Executive in writing of its intent to
contest  such  denial of refund  prior to the  expiration  of 30 days after such
determination,  then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance  shall offset,  to the extent  thereof,
the amount of Gross-Up Payment required to be paid.

     11. NO MITIGATION OR OFFSET

     The Executive  shall not be required to seek other  employment or to reduce
any severance benefit payable to him under Section 7, 8 or 9 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.

     12. 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 9 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  at the
Applicable rate until the date of payment.

     13. 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 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 in the event of a
resignation  by the Executive for any reason other than Good Reason,  for the 24
month period  following the termination of his  employment,  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 13(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 13.

     14. SUCCESSORS

     (a) 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 14 or which otherwise becomes bound by all the terms and provisions
of this Agreement by operation of law.

     (b) 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.

     15. 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 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.

     16. 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, including,  without limitation,  that
certain employment  agreement dated July 23, 1986, as amended.  Any amendment or
modification of this Agreement shall not be binding unless in writing and signed
by the Company and the Executive.

     17. 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.

     18. 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. Richard M. Scrushy
              2406 Longleaf Street
              Birmingham, Alabama  35243

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 35243, with a copy to the Legal Services  Department at the
same  address or delivered by hand to the  Secretary  and to the Legal  Services
Department  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.

     19. 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.

     20. 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 courts  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.

     21. CONVERSION TO CHAIRMAN-ONLY STATUS

     The Executive may elect at any time during the Employment  Period to resign
his  position as Chief  Executive  Officer  and serve the Company  solely as the
Chairman  of  the  Board  ('Chairman-Only  Status')  for  the  remainder  of the
Employment  Period (as  automatically  extended in accordance  with Section 2(a)
hereof) under the terms and conditions  hereof.  An election by the Executive to
maintain   Chairman-Only   Status  shall  not  constitute  a  violation  of  the
Executive's  obligations  under  Section 3 hereof,  nor  shall it  constitute  a
termination  of the  Executive's  employment  for any  purpose  under  Section 6
hereof. As used in this Agreement, the term 'employment' and similar terms shall
be deemed to include  service to the  Company  while  maintaining  Chairman-Only
Status.



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

                                             EXECUTIVE


                                             /s/RICHARD M. SCRUSHY
                                             ___________________________________
                                             Richard M. Scrushy


                                             HEALTHSOUTH Corporation


                                             By       /s/MICHAEL D. MARTIN
                                               ---------------------------------
                                                    Michael D. Martin
                                                    Executive Vice President and
                                                    Chief Financial Officer



                                                                       EXHIBIT A

                             HEALTHSOUTH CORPORATION

                            EXECUTIVE RETIREMENT PLAN
                             FOR RICHARD M. SCRUSHY


                                            Summary of Terms(1)

Retirement Benefits:          In  consideration  of Executive's role as Founder,
                              his service to the HEALTHSOUTH since its formation
                              and in  lieu  of  the  benefits  and  compensation
                              offered through full-time  employment as Chairman,
                              Executive   shall  be  entitled  to  the  benefits
                              described  below  upon  his  retirement  from  the
                              active  employment with HEALTHSOUTH and continuing
                              until his death  (as more  specifically  set forth
                              below).   In  addition,   in  recognition  of  the
                              Executive's  founder  status,   HEALTHSOUTH  shall
                              provide the  Executive  with  suitable  office and
                              secretarial    support    within   the   Corporate
                              headquarters  for a  period  of  up  to  10  years
                              following his retirement.

Benefit Formula:              Annual  retirement  benefit  equal  to 60% of Base
                              Compensation  (defined below) at Normal Retirement
                              Age

Base Compensation:            Average  Base  Salary and Annual  Target  Bonus of
                              Executive in effect as of the date of  termination
                              pursuant to the terms of the Employment Agreement

Vesting:                      Fully vested at all times,  such that all benefits
                              provided  for in this  Exhibit A are payable  upon
                              Executive's  termination for any reason during the
                              period from and after the date Executive qualifies
                              for  Early  Retirement.  There can be no breach of
                              this retirement  plan by the Executive  except for
                              violation  of  Section  13(b)  of  the  Employment
                              Agreement.  This  consideration is fully earned by
                              the Executive and  HEALTHSOUTH  has no right under
                              any  circumstances  to discontinue any payments or
                              other benefits under this plan.

Normal Retirement Age:        Age 60

Early Retirement:             The  retirement  benefits  provided  for  in  this
                              Exhibit  A are fully  vested  and  accrued  in the
                              event of  termination  for any reason prior to age
                              60,  but  earliest  benefit  commencement  date is
                              January 23, 2000, the date on which Executive will
                              have  completed   sixteen   consecutive  years  of
                              service   with    HEALTHSOUTH    (with   actuarial
                              reduction)

Change in Control:            In the event of a Change in Control (as defined in
                              Section  9 of  the  Agreement)  or  in  the  event
                              HEALTHSOUTH  completes a  transaction  in which it
                              sells or otherwise  ceases to own a business unit,
                              subsidiary,  or division  representing  30% of its
                              consolidated   revenues  for  the  most   recently
                              completed fiscal year,  Executive shall thereafter
                              be entitled to full retirement  benefits hereunder
                              (i.e.   60%  of  Base   Compensation)   upon   his

--------
     (1)  All  defined  terms  shall  have  the  meanings  given  to them in the
Employment  Agreement to which this Exhibit A is a part, and all  determinations
shall be made in accordance with the terms and provisions hereof.



                              termination  for any reason,  regardless of age or
                              length  of  service,  which  benefits  shall be in
                              addition to any other benefits to which  Executive
                              is  entitled  upon such  occurrence.  While such a
                              Change in Control  gives the  Executive the option
                              to  retire  early  regardless  of age or length of
                              service,   the   Executive   may,   at  his   sole
                              discretion,  choose  to  continue  working  for  a
                              period of time before exercising such option.

Payment:                      Unless  Executive  chooses one of the  alternative
                              forms of  payment  listed  below,  payment  of his
                              retirement benefits will be in accordance with the
                              normal payroll practices.  If HEALTHSOUTH fails to
                              provide  payment in  accordance  with the selected
                              schedule and remains delinquent for a period of 10
                              business days following  receipt of written notice
                              from the Executive  (made in  accordance  with the
                              provisions   of  Section  18  of  the   Employment
                              Agreement),  HEALTHSOUTH shall pay a penalty equal
                              to three times the amount owed.

Forms of Payment:             Executive's choice of alternative forms:

                                  o Single Life Annuity
                                  o Single Life  Annuity with 10 year  guarantee
                                  o Joint and  Survivor  Annuity (50% or 100%)
                                  o Lump Sum
                                  o Payment  of   present  value  of  retirement
                                     benefits in 5 equal annual installments

Death Benefit:                For death prior to benefit  commencement  date and
                              for death  following  benefit  commencement  date,
                              Executive's   estate   will   receive  the  annual
                              retirement   benefits  payable  hereunder  (as  if
                              Executive had not died) for a period of 5 years

Actuarial Assumptions:        Pre-age 60 commencement  and alternative  forms of
                              payment adjusted on an actuarial equivalent basis:

                                  o interest rate - 30 year Treasury rate
                                  o mortality assumption - 1983 GAM Table

Unfunded Status:              Plan  is  an  unfunded,  unsecured  obligation  of
                              HEALTHSOUTH,  but HEALTHSOUTH may elect to fund on
                              a tax-neutral basis to Executive



                                                                       EXHIBIT B


                       FOUNDER RETIREMENT BENEFITS PROGRAM


     In recognition of the significant  contributions of the management founders
of HEALTHSOUTH  Corporation,  upon their  retirement from the  Corporation,  the
Corporation  shall  provide  the  following  benefits  to each  of them  for the
remainder  of  their  natural  life or until  their  written  election  to cease
receiving them:


o    Health  Benefits.  The Corporation  will extend its regular Employee Health
     Benefit  Program,  as it may exist from time to time,  to cover the retired
     founder, and his spouse, for the remainder of their natural lives, with the
     founder  continuing  to bear  the  cost of  dependent  coverage.  When  the
     individuals  become  eligible for the Medicare  program,  or any other such
     government-funded  health  benefit,  the  HEALTHSOUTH  benefit program will
     become the individual's secondary coverage.

o    Insurance.  The  Corporation  will allow the retired founder to continue to
     participate in any of the Company's voluntary  insurance programs,  as they
     may exist from time to time, until age 72.

o    Split-Dollar  Policy.  The Corporation will continue to pay the premiums on
     the retired founder's existing split-dollar life insurance policies (or any
     policies issued in substitution therefor) until such founder reaches age 65
     or until the policies are fully paid, whichever comes first.

o    Stock Options.  The  Corporation  will waive the normal option  termination
     period for the  retired  founder,  so that all vested  option  grants  will
     continue for the term of the original grant period.

o    Travel.  The  Corporation  will allow the  retired  founder to utilize  the
     Corporation's  travel department to make personal travel  arrangements.  In
     addition,  the retired  founder will also be able to use the  Corporation's
     aircraft, at no cost, if the aircraft is already scheduled for the trip and
     there are seats available.  Otherwise,  the retired founder will be allowed
     to use the  Corporation's  aircraft  at the  standard  use rate,  including
     direct and indirect expenses.