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Published: 2008-03-26

Purchase and Sale Agreement - HealthSouth Corp., Horizon/CMS Healthcare Corp. and Integrated Health Services Inc.



                           PURCHASE AND SALE AGREEMENT


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

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

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

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

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


                                    ARTICLE 1

                                   DEFINITIONS

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

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

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

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

         "Laws" shall mean all statutes, rules, regulations, ordinances, orders,
codes,  permits,  licenses and agreements with or of federal,  state,  local and
foreign governmental and regulatory  authorities and any order, writ, injunction
or decree issued by any court, arbitrator or governmental agency or in

                                      A-1





connection with any judicial,  administrative or other  non-judicial  proceeding
(including, without limitation, arbitration or reference).

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

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

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

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

                Defined Term                                         Section
                ------------                                         -------

                Adjustment Sections                                  2.14
                Agreement                                            Preamble
                Allocation Schedule                                  2.7
                Assigned Stock                                       2.1(c)
                Assumed Contracts                                    2.3(a)
                Assumed Guarantees                                   2.3(a)
                Assumed Liabilities                                  2.3
                Balance Sheet                                        3.17(b)
                Buyer                                                Preamble
                Buyer's Affidavit                                    2.15(d)
                Buyer's Subsidiaries                                 Recitals
                Charter Documents                                    3.4
                Claim Notice                                         11.6
                Closing                                              2.13
                Closing Date                                         2.13
                COBRA                                                2.10(d)
                Code                                                 3.11
                Consents                                             8.4
                Delivery Date                                        2.15(d)
                EBITDA                                               3.17(a)
                EBITDA Statements                                    3.17(a)
                Employee Benefit Arrangements                        3.19(d)
                Environmental Regulations                            3.16(a)
                Equipment                                            2.1(e)
                ERISA                                                2.10(a)
                Escrow Agent                                         2.13(c)
                Excluded Assets                                      2.2
                Excluded Liabilities                                 2.4

                                      A-2





                Execution Fee                                        2.6(a)
                Facilities                                           Recitals
                Facility Records                                     5.7(a)
                Final Delivery Date                                  2.15(e)
                Final Net Book Values                                2.6(d)
                Financial Schedule                                   3.17
                Hazardous Materials                                  3.16
                Headquarters Assets                                  2.1(q)
                Headquarters Liabilities                             2.3(o)
                HEALTHSOUTH                                          Preamble
                Hired Employees                                      2.10(c)
                HSR Act                                              3.4
                Indemnitee                                           11.5
                Indemnitor                                           11.5(a)
                Intercompany Transactions                            2.1(g)(ii)
                Inventory                                            2.1(f)
                Leased Real Property                                 2.1(b)
                Losses                                               11.3(a)
                Management Agreement                                 2.15
                Material Adverse Change                              8.9
                Material Adverse Effect                              3.4
                Measurement Date                                     2.8
                Multiemployer Plans                                  2.10(a)
                Other Assigned Contracts                             2.1(g)
                Owned Real Property                                  2.1(a)
                Panel                                                2.12(b)
                Patient Records                                      5.7(a)
                Pension Plans                                        2.10(a)
                Permitted Encumbrances                               3.8
                Prepayments                                          2.1(l)
                Purchase Price                                       2.5
                Real Property Leases                                 2.1(b)
                Receivables                                          2.1(m)
                Related Agreements                                   3.4
                Retained Employees                                   2.10(b)
                Seller                                               Preamble
                Seller's Affidavit                                   2.15(d)
                Subsidiaries                                         Recitals
                Termination Fee                                      10.3
                Third Party Claims                                   11.5(a)
                Title Insurer                                        8.6
                Title Policies                                       8.6
                Topping Fee                                          10.4
                Transactions                                         Recitals
                Transferred Business Names                           2.1(j)
                Transferred Records                                  5.7
                Transferred Subsidiaries                             2.1(a)
                Venture Agreements                                   2.1(d)
                WARN Act                                             2.10(e)


                                      A-3





                                    ARTICLE 2
                               BASIC TRANSACTIONS

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

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

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

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

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

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

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

                                      A-4





         (g) All of Seller's or the  Subsidiary's  right,  title and interest in
and to all contracts and agreements to which Seller or the Subsidiary is a party
at the Closing,  other than the Real Property Leases and the Venture Agreements,
to the  extent  the same are  transferable  to Buyer  (whether  by action of the
Subsidiary or Seller or, in the case of Medicare provider agreements, the Health
Care  Finance  Administration),  and which,  or to the  extent,  the same relate
solely to the operations of Facilities operated by Seller or the Subsidiary (the
"Other  Assigned  Contracts"),  including,  but not  limited  to, the  contracts
identified on Schedule 2.1(g), which contains a list of the following categories
of Other Assigned  Contracts:  construction  contracts  relating to construction
work-in-progress  at the  Facilities;  Equipment  leases  (whether  operating or
capitalized  leases) and  installment  purchase  contracts  where the annualized
lease or installment payments exceed $100,000; contracts or arrangements binding
on  a  Facility   which  contain  any  covenant  not  to  compete  or  otherwise
significantly  restrict  the  nature  of the  business  activities  in which the
Facility  may  engage;   employment  contracts,  if  any,  between  Seller,  the
Subsidiary or a Facility and the chief executive or chief  financial  officer of
such Facility;  collective bargaining agreements,  if any; Medicare and Medicaid
provider numbers and provider  agreements with other Payors; any other contracts
relating  solely to the  Facilities  pursuant to which Seller or the  Subsidiary
paid or received over  $100,000  during its last fiscal year or is due to pay or
receive over $100,000  during any  subsequent  fiscal year,  including,  but not
limited to, any employment  contracts relating solely to the Facilities pursuant
to which Seller or the Subsidiary paid or received over $100,000 during its last
fiscal year or is obligated to pay over $100,000 in any subsequent  fiscal year;
and any contracts which will be binding on Buyer or any  Transferred  Subsidiary
after the Closing pursuant to which Seller or the Subsidiary has agreed with any
third party that such third party shall be the  exclusive or preferred  provider
of goods or  services to a Facility,  pursuant to which  Seller or a  Subsidiary
paid over  $100,000  during  its last  fiscalyear  or is  obligated  to pay over
$100,000 in any subsequent  fiscal year;  provided that Schedule 2.1(g) need not
list an Other  Assigned  Contract if all material  obligations  of Seller or the
Subsidiary thereunder have been, or, prior to the Closing, will be completed, or
Seller  or the  Subsidiary  is  entitled,  or has or by the  Closing  will  have
exercised a right, to terminate the contract  without penalty on 90 days' notice
or less.  Notwithstanding the foregoing,  the Other Assigned Contracts shall not
include:

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

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

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

                                      A-5





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

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

         (k) All of Seller's or the  Subsidiary's  right,  title and interest in
and to unexpired  warranties  as of the Closing that are  transferable  to Buyer
which Seller or the  Subsidiary  has received from third parties with respect to
the Transferred  Assets,  including,  but not limited to, such warranties as are
set forth in any construction  agreement,  lease agreement,  equipment  purchase
agreement,  consulting  agreement or agreement for architectural and engineering
services;

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

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

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

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

         (p) All proprietary materials,  documents,  information, media, methods
and processes owned by Seller or a Subsidiary and used exclusively in connection
with the  businesses  represented  by the  Transferred  Assets,  and any and all
rights to use the same, including,  but not limited to, all intangible


                                      A-6



assets of an intellectual  property nature such as  trademenarks,  service marks
and trade names (whether or not registered),  proprietary computer software, all
proprietary  procedures and manuals, and all promotional or marketing materials,
including all marketing computer hardware and software; and

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

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

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

         (b) [Intentionally omitted.];

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

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

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

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

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

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

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

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

                                      A-7





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

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

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

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

         (d) [Intentionally omitted.];

         (e)  Subject  to the  provisions  of  Sections  3.16  and  6.2(c),  all
liabilities  arising out of or in  connection  with the  existence  of Hazardous
Materials  (as defined in Section  3.16) upon,  about,  beneath or  migrating or
threatening  to migrate to or from the Owned Real  Properties or the Leased Real
Properties or the existence of any  violation of any  Environmental  Regulations
(as defined in Section  3.16)  pertaining  to any such Owned Real  Properties or
Leased Real Properties or the businesses operated therefrom;

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

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

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

                                      A-8





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

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

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

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

         (m)  Liabilities  or  obligations  of  Seller or the  Subsidiaries  now
existing or which may hereafter exist by reason of any alleged violation of Laws
by Seller or any of the  Subsidiaries  on or prior to the Closing Date, but only
to the extent that such alleged  violation  of Laws  relates to the  Transferred
Assets or the businesses or operations represented thereby;

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

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

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


                                      A-9





liability or obligation of any kind for or with respect to any of the following,
except to the extent expressly set forth in Section 2.3:

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

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

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

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

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

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

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


                                      A-10





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

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

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

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

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

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

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

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

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

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

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

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

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


                                      A-11





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

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

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

     Section 2.7 Allocation of Purchase Price.  Within 90 days after the Closing
Date,  HEALTHSOUTH  and Seller,  on the one hand, and Buyer,  on the other hand,
shall agree to an allocation of the Purchase Price among the Transferred  Assets
and shall prepare a written schedule reflecting such allocation (the "Allocation
Schedule").  Seller and Buyer shall, and Seller shall cause the Subsidiaries to,
allocate the Purchase Price in accordance  with the Allocation  Schedule,  to be
bound by such  allocations  for all  purposes,  to  account  for and  report the
purchases and sales  contemplated  hereby for all purposes  (including,  without
limitation,  financial, accounting, Medicare reimbursement and federal and state
tax purposes) in accordance with such allocations,  and not to take any position
(whether in financial statements,  Cost Reports, tax returns, Cost Report or tax
audits, or otherwise),  including  without  limitation any claim to a step up in
the basis of such assets by Buyer or its  successors  and  assigns for  Medicare
purposes which is inconsistent with such allocations in the Allocation  Schedule
without the prior written consent of the other party,  except to the extent,  if
any,  required by applicable Law or generally  accepted  accounting  principles.
Without limiting the generality of the foregoing,  Buyer agrees to indemnify and
hold harmless Seller and the Subsidiaries,  in accordance with the provisions of
Sections 11.4,  11.5 and 11.6,  from and against any and all Losses arising from
or connected  with any  determination  by Medicare or any other Payor to seek to
recapture any costs  reimbursed or reimbursable to Seller or any Subsidiary as a
result of the purchases and sales  contemplated  hereby (including any gain from
sale liability).

     Section 2.8 [Intentionally omitted.]


                                      A-12





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

     Section 2.10 Employee Matters.

         (a) Pension Plans. Schedule 2.10(a) lists all "employee pension benefit
plans"  ("Pension  Plans")  within the meaning of Section  3(2) of the  Employee
Retirement  Income  Security  Act  of  1974,  as  amended  ("ERISA"),   and  any
"multiemployer   plans"   within  the   meaning   of  Section   3(37)  of  ERISA
("Multiemployer  Plans"),  in which Retained Employees (as defined in Subsection
(b) below)  directly  employed  to work at the  Facilities  participate.  Seller
shall, or shall cause the  Subsidiaries to, (i) terminate as of the Closing Date
all Pension Plans relating solely to the Transferred Subsidiaries,  terminate as
of the  Closing  Date the  active  participation  of all such  employees  in the
Pension Plans who  constitute  Hired  Employees  (as defined in  Subsection  (c)
below),  (ii) cause the Pension Plans to make timely appropriate  distributions,
to the extent required,  to such employees in accordance with, and to the extent
permitted  by, the terms and  conditions  of such  Pension  Plans,  and (iii) in
connection  with  the  termination  of the  active  participation  of  all  such
employees in such Pension Plans,  comply, and cause each Pension Plan to comply,
with all applicable Laws.  Prior to the Closing,  Seller shall have delivered to
Buyer,  for  information  purposes  only,  forms of any letters or other written
communications  which Seller or the Subsidiaries  shall distribute  generally to
such employees  notifying them of their rights in respect of their  cessation of
active  participation  in the Pension Plans.  With respect to the  Multiemployer
Plans, Buyer agrees that Buyer shall contribute to such Multiemployer Plans with
respect to the operations  covered thereby for  substantially the same number of
contribution base units for which Seller and/or the pertinent  Subsidiaries have
an obligation to contribute to such  Multiemployer  Plans.  Buyer shall take all
action  necessary  to comply  with  Section  4204 of ERISA,  including,  without
limitation, posting, prior to the Closing Date, a bond or escrow for each of the
Multiemployer  Plans for which a bond or escrow is required,  in an amount,  for
the period of time and in a form which  complies with Section  4204(a)(1)(B)  of
ERISA, or, prior to the Closing Date,  obtaining a variance from such bonding or
escrow requirement from the applicable Plan or Plans or from the Pension Benefit
Guaranty Corporation, so that a transfer of contribution obligations to Buyer as
set forth herein does not result in a complete or partial  withdrawal  of Seller
or any  Subsidiary  from any of such Plans under ERISA,  and Buyer shall furnish
Seller proof  thereof.  The cost of each bond or escrow  required  under Section
4204(a)(1)(B)  of  ERISA  shall  be paid by Buyer  and  Buyer  shall be the sole
obligor  thereunder.  Buyer shall in accordance  with the provisions of Sections
11.4, 11.5, and 11.6,  indemnify and hold harmless  HEALTHSOUTH,  Seller and the
Subsidiaries (other than the Transferred Subsidiaries) for any Losses (including
any  secondary  liability  of the Seller or any such  Subsidiary  as a result of
Buyer's failure to make any withdrawal  liability payment when due) arising from
or in connection with the Multiemployer Plans, and any change or termination of,
or any  partial or complete  withdrawal  from,  any of such  Plans,  which might
accrue to HEALTHSOUTH,  Seller and the Subsidiaries  (other than the Transferred
Subsidiaries)  from acts or  omissions  occurring  or  required  on or after the
Closing Date,  including but not limited to, any liability  associated  with any
continuation  of coverage under such Plans on or after the Closing Date required
by Law or contract.

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


                                      A-13





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

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

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

               (iv) Any such offer of employment to a Retained Employee by Buyer
          shall  be to  perform  comparable  services,  in such  position  as is
          comparable to the position such Retained  Employee held with Seller or
          any of its  subsidiaries  as of the Closing,  provided  that Buyer may
          offer compensation to such Retained  Employees at levels  commensurate
          with  compensation  levels paid to other  employees  of Buyer  holding
          comparable  positions,   and  provided  further  that  any  change  in
          compensation  levels does not result in any constructive  discharge of
          any such Retained Employee,  breach of any employment contract assumed
          by  Buyer   hereunder  or  any  other  liability  of  Seller  and  the
          Subsidiaries. HEALTHSOUTH, Seller or their respective Affiliates shall
          have the right (but not the  obligation)  to employ or offer to employ
          any Retained Employee who declines Buyer's offer of employment.

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

         (d) Health Benefits.  Buyer shall provide the Hired Employees a program
of health  care  benefits  which is  equivalent  to the  program of health  care
benefits  currently  provided  by Buyer  to its  existing  employees,  provided,
however,  that such health care benefits shall be immediately  available to such
Hired Employees as of their  respective hire dates by Buyer,  and such employees
shall become as of


                                      A-14





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

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

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

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

     Section 2.11 [Intentionally omitted.]

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

         (a)  Notwithstanding  anything  contained  in  this  Agreement  to  the
contrary,  this  Agreement  shall not  constitute  an  agreement  to assign  any
Transferred Asset, or assume any Assumed Liability,  if the attempted assignment
or  assumption  of the  same,  as a result  of the  absence  of the  consent  or
authorization  of a third party,  would constitute a breach or default under any
lease, agreement, encumbrance or commitment or would in any way adversely affect
the rights, or increase the obligations,  of Buyer,  HEALTHSOUTH,  Seller or any
Subsidiary with respect  thereto;  provided that the assignment of any contract,
including without limitation Medicare, Medicaid and similar provider agreements,
which may lawfully be made subject to customary  conditions  subsequent (such as
needs   surveys,   evaluations   of  Buyer  or  other   determinations   by  the
counterparties  to such agreements)  shall be deemed not to constitute a default
under, or to in any way adversely  affect the rights or increase the obligations
of Buyer with respect


                                      A-15





to, such lease,  agreement,  encumbrance or commitment,  unless the counterparty
indicates prior to the Closing that such condition or conditions  subsequent are
not likely to be met. If any such consent or authorization  is not obtained,  or
if an attempted assignment or assumption would be ineffective or would adversely
affect  the  rights or  increase  the  obligations  of  HEALTHSOUTH,  Seller,  a
Subsidiary or Buyer, with respect to any such lease,  agreement,  encumbrance or
commitment, so that Buyer would not, in fact, receive all such rights, or assume
the  obligations,  of Seller or  Subsidiary  with respect  thereto as they exist
prior to such attempted  assignment or assumption,  then, in accordance with the
procedures  described in Section 2.14, but subject to the  Management  Agreement
provisions of Section 2.15,  Seller and Buyer shall, and Seller shall cause each
Subsidiary to, enter into such  reasonable  cooperative  arrangements  as may be
reasonably  acceptable to both Buyer and Seller (including  without  limitation,
sublease, agency, partial closing, management, indemnity or payment arrangements
and  enforcement  at the cost and for the benefit of Buyer of any and all rights
of Seller and the  Subsidiaries  against an involved third party) to provide for
Buyer the  benefits  of such  Transferred  Asset or to  relieve  Seller  and the
Subsidiaries from the obligations of such Assumed Liability, and any transfer or
assignment to Buyer by Seller or a Subsidiary of any such Transferred  Asset, or
any assumption by Buyer of any such Assumed Liability,  which shall require such
consent or  authorization  of a third party that is not  obtained  shall be made
subject  to  such  consent  or  authorization  being  obtained.  Subject  to the
provisions of Section 2.15, if the parties cannot agree on any such arrangement,
or any such arrangement  would not be reasonably  practicable,  to provide Buyer
with materially all the benefits of such Transferred Asset or materially all the
obligations of such Assumed  Liability,  then such Transferred  Asset or Assumed
Liability, as the case may be, shall be excluded from the Transactions and shall
be deemed to be an Excluded Asset or an Excluded Liability,  as the case may be,
and Buyer and Seller shall  negotiate in good faith an equitable  adjustment  in
the Purchase Price, or resolve any disagreement  respecting such adjustment,  in
accordance with the procedures of Section 2.14.

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

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

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

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

                   (ii) A Bill of Sale and Assignment in substantially  the form
     of Exhibit A executed by Seller or the relevant Subsidiary (or by Seller as
     its  attorney-in-fact)  with respect to the


                                      A-16





     Transferred  Assets of Seller or such Subsidiary  (other than shares of the
     Assigned Stock) covered thereby;

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

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

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

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

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

                   (viii) Possession of the Transferred Assets.

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

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

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

         (c) Escrow.  If either of the parties desires to consummate the Closing
through an escrow,  an escrow shall be opened  with,  and the escrow agent shall
be, Fidelity National Title Company (the "Escrow Agent"),  by depositing a fully
executed  copy  of  this   Agreement  with  Escrow  Agent  to  serve  as  escrow
instructions. This Agreement shall be considered the primary escrow instructions
between the parties,  but the parties  shall  execute such  additional  standard
escrow instructions as Escrow Agent shall require in order to clarify the duties
and  responsibilities of Escrow Agent. In the event of any conflict between this
Agreement and such additional standard escrow instructions, this Agreement shall
prevail.  If the Closing is to be consummated  through the Escrow Agent, then on
or prior to the Closing Date, Buyer shall cause the funds required by Subsection
(b)(i)  above to be wired to Escrow  Agent,  and the parties  shall  deliver the
instruments  of  sale,  assignment,  conveyance  and  assumption  called  for by
Subsections (a) and (b) above to the Escrow Agent,  and on the Closing Date, the
Escrow Agent shall close the escrow by:

                   (i)  Causing  the deeds for the Owned  Real  Properties,  the
     assignments of the Real Property Leases,  and any other documents which the
     parties may mutually  designate  to be re-


                                      A-17





     corded in the  official  records of the  appropriate  counties in which the
     pertinent Transferred Assets are located;

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

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

     Section 2.14 Purchase Price Adjustment.

         (a) In the event that  circumstances  exist that require the parties to
negotiate in good faith cooperative arrangements under Section 2.12 or potential
amendments  to this  Agreement  pursuant to Sections 8.5 and 9.5  (dealing  with
possible  subsequent  transfers of  Transferred  Assets after the Closing in the
event  of  certain  injunctions)  or  potential  amendments  to  the  Management
Agreement  referred to in Section 2.15, or to negotiate in good faith  equitable
adjustments  in the Purchase  Price  pursuant to the provisions of the foregoing
Sections, or the provisions of Section 8.6 (respecting the condition of title to
interests  in real  property)  (Sections  2.12,  2.15,  8.5,  8.6 and 9.5  being
collectively referred to as the "Adjustment Sections"),  then and in any of such
events,  such  negotiations,   and  the  resolution  of  disagreements   arising
therefrom,  shall be conducted in accordance with the provisions of this Section
2.14.  The parties shall  negotiate  such  cooperative  arrangements,  potential
amendments  and equitable  adjustments in the Purchase Price in good faith prior
to any  scheduled  Closing  Date (as may be extended by mutual  agreement of the
parties),  and, in connection  with an adjustment to the Purchase  Price,  shall
also  negotiate  appropriate  amendments  to  the  Allocation  Schedule  arising
therefrom,  provided  that  any  adjustment  in  the  Purchase  Price  shall  be
consistent with the original Allocation  Schedule.  If the parties are unable to
agree by the day prior to such  scheduled  Closing  Date,  then  such  scheduled
Closing Date (and the Termination  Date, if necessary)  shall be extended for up
to 15 business days to provide for the opportunity to resolve such  disagreement
pursuant to the  provisions  of this Section  2.14. On the day the Closing would
have occurred but for the absence of agreement  between the parties,  each party
shall  designate  an  individual  (who may not be a present  or former  officer,
director,  partner  or  employee  of the  party  or of  any  present  or  former
investment  banker,  accounting firm, law firm or attorney regularly used by the
party) to mediate  such  disagreement,  and advise the other party in writing of
the identity of such individual,  which advice shall be accompanied by a list of
up to ten  suggested  neutral  individuals  to  serve as a third  mediator.  The
mediators  originally  designated by each party shall promptly  confer about the
selection of a third  mediator  from such lists,  and within five  business days
following the originally  scheduled  Closing Date (or  Termination  Date, as the
case may be), the originally  designated mediators shall agree upon and (subject
to  availability)  select the third  mediator  from the lists  submitted  by the
parties or  otherwise,  provided  that if the  originally  designated  mediators
cannot agree upon a third  mediator by such date,  the third  mediator  shall be
designated by the Alternative Dispute Resolution Service of NHLA/AAHA,  Inc. The
three  mediators so selected are herein  referred to as the "Panel".  Within two
business days following the designation of the third mediator,  each party shall
submit  to  the  Panel,  in  writing,  its  proposed  cooperative  arrangements,
amendments to this  Agreement,  amendments to the Management  Agreements  and/or
equitable  adjustments  in the  Purchase  Price  in  the  absence  of  any  such
cooperative arrangements or amendments, except that the parties need only submit
their proposed adjustments to the Purchase Price (and proposed amendments to the
Allocation  Schedule) in the case of disagreements about adjustments for certain
acquisitions and modifications  under Section 2.12(b), or imperfections of title
under Section 8.6).  Such proposals  shall be materially in accordance  with the
last  proposals  made by such party to the other party  during the course of the
aforementioned  good faith negotiations  between the parties.  The parties shall
additionally submit such memoranda, arguments, briefs and evidence in support of
their  respective  positions,  and in  accordance  with  such  procedures,  as a
majority of the Panel may  determine.  Within seven  business days following the
designation of the third mediator, the Panel shall, by majority vote, select the
proposed  cooperative  arrangements,  amendments


                                      A-18





or adjustments of the Purchase Price, as the case may be, proposed by one of the
parties,  it being  agreed  that the Panel may modify  such  proposal in any way
which  is  not  otherwise   inconsistent  with  the  terms  of  this  Agreement.
Thereafter,  the  parties  shall,  subject to the terms and  conditions  of this
Agreement, consummate the Transactions on the basis of such selected cooperative
arrangements,  amendments or adjustments at a mutually  agreeable time and place
or places,  in accordance with the provisions of Section 2.13, which shall be no
later than the 15th business day following the originally scheduled Closing Date
or such later date as the parties may agree upon. Subject to the foregoing,  the
Panel may determine the issues in dispute following such procedures,  consistent
with  the  language  of  this  Agreement,   as  it  deems   appropriate  to  the
circumstances  and  with  reference  to the  amounts  in  issue.  No  particular
procedures are intended to be imposed upon the Panel, it being the desire of the
parties  that any such  disagreement  shall be  resolved  as  expeditiously  and
inexpensively as reasonably  practicable.  No member of the Panel shall have any
liability  to the  parties in  connection  with  service  on the Panel,  and the
parties shall provide such indemnities to the members of the Panel as they shall
request.

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

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

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

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

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

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

         (b) The  instruments  of transfer and  assumption set forth in Sections
2.13(a) and 2.13(b)(ii)  respecting each such Real Property Lease (or related or
other  agreement),  and/or  respecting  those  Transferred  Assets  and  Assumed
Liabilities that may not be lawfully  transferred or assumed until


                                      A-19





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

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

         (d) With respect to each such Facility,  the Escrow Agent shall deliver
the  aforementioned  instruments of assumption to Seller and the  aforementioned
instruments  of  transfer  to  Buyer  (and  cause  to be  recorded  any of  such
instruments as are contemplated by Section  2.13(c)(i)) upon the date (each such
date  being a  "Delivery  Date")  that the  Escrow  Agent has  received,  if the
provisions  of  clause  2.15(i)  apply,   an  affidavit  of  Buyer  (a  "Buyer's
Affidavit"), executed by a duly authorized officer of Buyer, to the effect that:

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

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

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

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

                    (ii)  Since the  Closing  Date,  neither  the Seller nor the
          Subsidiaries have sold, conveyed,  assigned,  transferred or delivered
          any Transferred Asset to any third party, or created any lien, charge,
          claim,  pledge,   security  interest  or  encumbrance  respecting  any
          Transferred Asset


                                      A-20





          except for Permitted Encumbrances (as defined in Section 3.8), without
          the consent of, or  participation in such transaction by, Buyer in its
          role as manager of the Facility or Facilities in question; and

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

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

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


                                      A-21





parties or determined  under the  provisions of Section  2.14,  and,  subject to
receipt of such deposits into escrow, the Escrow Agent shall:

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

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

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

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

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

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

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

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

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

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


                                      A-22





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

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

                   (i) Any right to subrogation,  reimbursement,  exoneration or
         contribution  or any other  rights  that  would  result in Buyer  being
         deemed a creditor of a Buyer  Subsidiary  under the federal  Bankruptcy
         Code or any other  law,  in each case  arising  from the  existence  or
         performance  of  Buyer's   guaranty  of  the  obligations  of  a  Buyer
         Subsidiary hereunder;

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

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

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


                                      A-23





                                    ARTICLE 3
            REPRESENTATIONS AND WARRANTIES OF HEALTHSOUTH AND SELLER

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

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

     Section 3.2 Subsidiaries.

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

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

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

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


                                      A-24





or  proceeding  on the part of any  Subsidiary,  its board of  directors  or its
stockholders is necessary to authorize any Related  Agreement or other agreement
contemplated  hereby and  thereby or the  transactions  contemplated  hereby and
thereby.

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

     Section 3.4 Absence of Breach.  Subject to the  provisions  of Sections 3.5
and 3.6 below regarding private party and governmental  consents, and except for
compliance with the requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"),  and any  regulatory or licensing  Laws
applicable to the businesses and assets  represented by the Transferred  Assets,
the  execution,  delivery  and  performance  by  HEALTHSOUTH  and Seller of this
Agreement and all other agreements contemplated hereby or executed in connection
herewith (the "Related Agreements"),  and the performance by the Subsidiaries of
the transactions contemplated by this Agreement and the Related Agreements to be
performed by the  Subsidiaries,  do not, (a) conflict with or result in a breach
of any of the provisions of the Articles or  Certificates  of  Incorporation  or
Bylaws or similar  charter  documents (the "Charter  Documents") of HEALTHSOUTH,
Seller  or of any of the  Subsidiaries,  (b)  contravene  any Law or  cause  the
suspension or revocation  of any License  presently in effect,  which affects or
binds HEALTHSOUTH,  Seller or any of the Subsidiaries,  or any of their material
properties,  except where such contravention,  suspension or revocation will not
have a Material  Adverse  Effect (as defined below) on any Facility and will not
affect  the  validity  or  enforceability  of this  Agreement  and  the  Related
Agreements or the validity of the Transactions  contemplated hereby and thereby,
or (c) conflict  with or result in a breach of or default under any indenture or
loan  or  credit  agreement  or any  other  agreement  or  instrument  to  which
HEALTHSOUTH, Seller or any of the Subsidiaries is a party or by which it or they
or any of their  properties  may be  affected  or  bound,  the  effect  of which
conflict,  breach  or  default  would  be  a  Material  Adverse  Effect  on  the
Transferred  Assets or on the ability of HEALTHSOUTH,  Seller or a Subsidiary to
consummate the Transactions.  As used herein, a "Material  Adverse Effect":  (a)
when used with  respect to the  Transferred  Assets,  means a  material  adverse
effect on the  Transferred  Assets  and on the  businesses  operated  therefrom,
including  their  condition  (financial or otherwise) and results of operations,
taken as a whole;  (b) when used with respect to any portion of the  Transferred
Assets,  means a material  adverse  effect on such  portion  of the  Transferred
Assets and on the  businesses  operated  therefrom,  including  their  condition
(financial or otherwise)  and results of operations,  taken as a whole;  and (c)
when used with  respect to an entity,  such as Seller,  a  Subsidiary  or Buyer,
means a  material  adverse  effect  on the  business,  condition  (financial  or
otherwise) and results of operations of such entity taken as a whole  (including
any subsidiaries of such entity).

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


                                      A-25





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

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

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

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

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


                                      A-26





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

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

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

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

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

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

     Section 3.15 Tax Returns. All tax returns, statements, reports and forms or
extensions  ("Returns")  with  respect  thereto  required  to be filed  with any
federal, state or local taxing authority on or before the Closing Date have been
or will be timely  filed by Seller and each  Subsidiary  and will be prepared in
accordance in all material  respects with all applicable  Laws.  Seller and each
Subsidiary  have timely paid,  or have  obtained  extensions to pay, all amounts
shown as due by such  Returns  which are  required  to have been paid before the
date hereof and will timely pay all amounts  shown as due by such Returns  which
are required to be paid on or before the Closing Date. No audits of any material
Returns filed by or on behalf of the Transferred  Subsidiaries is pending or, to
the knowledge of HEALTHSOUTH or Seller, threatened.


                                      A-27





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

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

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

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

     Section 3.17 Financial Information.

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

         (b)  Attached  hereto  as  Schedule  3.17(b)  is a  regularly  prepared
internal  unaudited  combined  balance sheet of the  Facilities as of August 31,
1997 (the  "Balance  Sheet";  collectively,  the  Balance  Sheet and the  EBITDA
Statement  are the  "Financial  Schedule").  The Balance Sheet has been prepared
from,  and is in accordance  with,  the internal books and records of Seller and
the Subsidiaries and presents fairly the financial  condition of the Facilities,
taken as a whole,  as of the date  shown.  The  Balance  Sheet was  prepared  in
accordance  with Seller's  practices for the  preparation of internal  financial
statements,  consistently  applied,  and is materially  in  accordance  with the
generally  accepted  accounting  principles  utilized in the  preparation of the
published financial statements of Seller.

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


                                      A-28





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

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

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

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

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

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

         (e) Any  amendment  (other than  general  amendments  which the carrier
makes for a category  of  policy)  or  termination  of any  insurance  policy or
failure to renew any insurance  policy covering the Transferred  Assets,  except
for  amendments,  terminations  or failures to renew that do not have a Material
Adverse Effect on the Transferred Assets;

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

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

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

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

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


                                      A-29





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

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

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

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

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



                                    ARTICLE 4
                     REPRESENTATIONS AND WARRANTIES OF BUYER

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

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

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

     Section 4.3 Absence of Breach.  Subject to the  provisions  of Sections 4.4
and 4.5 below regarding private party and governmental  consents, and except for
compliance with the  requirements of the HSR Act and any regulatory or licensing
Laws  applicable to the  businesses and assets  represented  by the  Transferred
Assets,  the execution,  delivery and performance by Buyer of this Agreement and
the Related


                                      A-30





Agreements  do not,  (a)  conflict  with or  result  in a  breach  of any of the
provisions of Charter  Documents of Buyer,  (b)  contravene any Law or cause the
suspension or revocation  of any License  presently in effect,  which affects or
binds Buyer or any of its material properties,  except where such contravention,
suspension or revocation will not affect the validity or  enforceability of this
Agreement  and  the  Related  Agreements  or the  validity  of the  Transactions
contemplated  hereby and thereby,  or (c) conflict with or result in a breach of
or  default  under  any  indenture  or loan or  credit  agreement  or any  other
agreement or  instrument  to which Buyer is a party or by which it or any of its
properties  may be affected or bound,  the effect of which  conflict,  breach or
default  would be a  Material  Adverse  Effect  on Buyer  or on its  ability  to
consummate the Transactions.

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

     Section 4.5 Governmental Consents. The execution,  delivery and performance
by Buyer  of this  Agreement  and the  Related  Agreements  do not  require  the
authorization,  consent,  approval,  certification,  license or order of, or any
filing with, any court or  governmental  agency,  except for compliance with the
HSR Act and except for such governmental  authorizations,  consents,  approvals,
certifications,  licenses and orders that customarily  accompany the transfer of
health care facilities such as the Facilities.

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

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

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

     Section 4.9 [Intentionally omitted.]

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


                                      A-31





warranty of habitability,  the implied warranty of merchantability,  the implied
warranty of fitness  for a  particular  purpose,  and all  expressed  or implied
warranties  relating to the  quality of or  otherwise  relating to the  physical
condition of the Transferred Assets.

     Section 4.11 No Assurance.  Buyer acknowledges and agrees that the rates or
bases  used  in  calculating  payments  or  reimbursements  to it by  any  Payor
(including but not limited to Medicare) may differ from the rates and bases used
in calculating such payments or  reimbursements  to Seller and the Subsidiaries.
Buyer  further  acknowledges  and agrees that the  Financial  Schedule  has been
prepared  based  upon the  records  and  historical  methodology  of  Seller  as
described in Section 3.17, and that HEALTHSOUTH has not  independently  verified
the information contained therein; provided,  however, that the foregoing clause
shall not impair Buyer's right to the satisfaction of the condition set forth in
Section 8.2.


                                    ARTICLE 5
                             COVENANTS OF EACH PARTY

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

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


                                      A-32





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

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

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

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

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

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

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

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


                                      A-33





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

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

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

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

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

     Section 5.6 Announcements;  Confidentiality.  Prior to the Closing Date, no
press or other public  announcement,  or public statement or comment in response
to any inquiry,  relating to the  transactions  contemplated  by this  Agreement
shall be issued or made by Buyer or Seller or any  Subsidiary  without the joint
approval  of Buyer and Seller;  provided  that a press  release or other  public
announcement, statement or comment made without such joint approval shall not be
in violation  of this  Section if it is made in order to comply with  applicable
securities Laws or stock exchange policies and in the reasonable judgment of the
party  making such  release or  announcement,  based upon advice of  independent
counsel,  prior review and joint approval,  despite reasonable efforts to obtain
the same,  would  prevent  dissemination  of such release or  announcement  in a
timely enough fashion to comply with such Laws or policies, provided that in all
instances  prompt notice from one party to the other shall be given with respect
to  any  such  release,  announcement,  statement  or  comment.  Subject  to the
foregoing,  the  parties  hereto  recognize  and  agree  that  all  information,
instruments,  documents and details  concerning the businesses of Buyer,  Seller
and the Subsidiaries are strictly  confidential,  and Seller and Buyer expressly
covenant and agree with each other that,  prior to and after the  Closing,  they
will not,  nor will  they  allow any of their  respective  officers,  directors,
employees,  representatives  or  agents  (including  professional  advisors)  to
disclose or publicly  comment  upon any matters  relating to the business of the
other or relating to this Agreement,  including,  without limitation, the terms,
timing or progress of the transactions  contemplated hereby, or its negotiation,
terms, provisions or conditions, including Purchase Price, except for disclosure
to their respective  professional  advisors (who shall agree not to disclose the
same) which is reasonably necessary to effectuate the Transactions  contemplated
hereby  and in a  manner  consistent  with  the  provisions  of this  Agreement.
Notwithstanding anything contained in this Agreement to the contrary,  except in
connection  with filings to obtain  Licenses  necessary for  consummation of the
Transactions  (but  subject to Section 5.2) and except as may be required by any
Laws (based on advice of independent counsel),  Buyer shall not (nor shall Buyer
allow any of its officers, directors, employees,  representatives or agents to),
without  the prior  written  consent of Seller (in  Seller's  sole and  absolute
discretion), disclose to or otherwise discuss with any person, regulatory board,
fiscal intermediary or other entity Buyer's proposed purchase of the Transferred
Assets,  Seller's proposed sale of the Transferred  Assets, the contents of this
Agreement  or the  negotiation  of this  Agreement.  Each  party  shall keep all
information  obtained  from the  other  either  before or after the date of this
Agreement confidential,  and neither party shall reveal such information to, nor
produce copies of any written information for, any person outside its management
group or its  lenders,  attorneys,  accountants,  investment  bankers  and other
professional  advisors  without the prior  written  consent of the other  party,
unless such party is  compelled  to  disclose  such  information  by judicial or
administrative  process or by any other requirements of Law. If the Transactions
contemplated by this Agreement should


                                      A-34





fail to close for any reason,  each party  shall  return to the other as soon as
practicable  all  originals and copies of written  information  provided to such
party by or on behalf of the other party and none of such  information  shall be
used by either  party,  or their  employees,  agents or  representatives  in the
business operations of any person.  Notwithstanding the foregoing,  each party's
obligations  under this Section shall not apply to any  information  or document
which  is or  becomes  available  to the  public  other  than as a  result  of a
disclosure by the other party in violation of this Agreement or other obligation
of confidentiality under which such information may be held or becomes available
to the party on a  non-confidential  basis  from a source  other  than the other
party or its officers,  directors,  employees,  representatives  or agents.  The
parties'  obligations  under this Section shall survive the  termination of this
Agreement.  Nothing in this Section  shall,  or is intended to, impair or modify
any of the rights or obligations  of Buyer or its Affiliates  under that certain
confidentiality  agreement  dated  ______________,  1997, all of which remain in
effect until  termination of such letter agreement in accordance with its terms.
Notwithstanding the foregoing, however, Buyer may provide information concerning
the Transferred Assets constituting Seller's  institutional pharmacy business to
potential  purchasers  thereof  so  long  as  Buyer  obtains  a  confidentiality
agreement (which shall name HEALTHSOUTH and Seller as third party beneficiaries)
containing substantially the same terms as the confidentiality agreement between
HEALTHSOUTH and Buyer.

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

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


                                    ARTICLE 6
                 ADDITIONAL COVENANTS OF SELLER AND HEALTHSOUTH

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

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


                                      A-35





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

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

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

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

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

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

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

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

     Section 6.2 Access and  Information.  Subject to the restrictions set forth
in Section 5.6 respecting  confidentiality  and provided that Buyer has complied
with  each and every  provision  thereof,  Seller  shall,  and  shall  cause the
Subsidiaries  to,  afford  Buyer,   and  the  counsel,   accountants  and  other
representatives of Buyer, reasonable access, throughout the period from the date
hereof to the Closing,  to the Transferred  Assets and the employees,  personnel
and medical staff associated therewith and all the properties, books, contracts,
commitments,   cost  reports  and  records  respecting  the  Transferred  Assets
(regardless  of where such  information  may be  located).  Such access shall be
afforded  after no less than 24  hours'  prior  written  notice,  during  normal
business hours whenever reasonably possible and only in such manner so as not to
disturb  patient  care  or to  interfere  with  the  normal  operations  of  the
Facilities;  provided,  however, that, notwithstanding the foregoing and subject
to the provisions  concerning  nondisclosure  set forth in Section 5.6,  without
first  obtaining the written  consent of the  Executive  Vice  President,  Chief
Financial Officer


                                      A-36





and Treasurer of HEALTHSOUTH or the Senior Vice President and Corporate  Counsel
of HEALTHSOUTH,  which consent shall not be unreasonably withheld, neither Buyer
nor its counsel,  accountants and other  representatives shall tour or visit the
Facilities or contact any of the employees,  personnel or medical staff thereof;
and  provided  further  that until the first to occur of November 3, 1998 or the
Closing,  under no  circumstances  shall  Buyer  solicit the  employment  of any
employees of Seller or its Subsidiaries,  except as Hired Employees  pursuant to
the terms hereof or except as may be permitted with the prior written consent of
a responsible officer of Seller.  Seller's covenants under this Section are made
with the  understanding  that Buyer shall use all such information in compliance
with all Laws. Buyer shall not have access to patient or employee records or any
other  records  the  disclosure  of  which  would  be  prohibited  by  any  Law,
accreditation   standards,   or  rule  or  agreement  (express  or  implied)  of
confidentiality,  except that Buyer may be granted access to such records to the
extent  they are  appropriately  redacted  and in  conformity  with  such  other
reasonable  procedures as may be required to conform to any such requirements of
Law, accreditation standards or rule or agreement of confidentiality.

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

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

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

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

     Section 6.7 Letters of Intent.  Promptly  after  execution  and delivery of
this Agreement,  Seller shall provide Buyer with copies of all letters of intent
or similar non-binding expressions of intent or


                                      A-37





understanding  with respect to the  acquisition  or divestiture of any Facility,
and, to the extent such letters of intent are terminable, will give any required
notice of termination if directed in writing by Buyer to do so.



                                    ARTICLE 7
                          ADDITIONAL COVENANTS OF BUYER

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

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

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

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

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


                                    ARTICLE 8
                          BUYER'S CONDITIONS TO CLOSING

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

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


                                      A-38





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

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

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

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

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

     Section  8.5  Absence  of  Injunctions.  There  shall  not be in  effect  a
temporary  restraining  order or a preliminary or permanent  injunction or other
order,  decree  or  ruling  by  a  court  of  competent  jurisdiction  or  by  a
governmental   agency  which  restrains  or  prohibits  Buyer's  acquisition  or
operation of the Transferred  Assets, or any threat by governmental  authorities
to exact any  penalty  or  impose  any  economic  deteriment  upon  Buyer or the
Transferred  Assets  following  the Closing,  provided that the parties will use
their  reasonable  efforts to  litigate  against  the entry of, or to obtain the
lifting  of,  any  such  order  or  injunction,  and the  existence  of any such
temporary  restraining  order or preliminary  injunction  shall operate,  at the
option of the  parties,  only to delay the Closing  (and extend the  Termination
Date) until the 30th day following the lifting of any such order or  injunction,
except  that such delay may not extend the  original  Termination  Date for more
than nine  months.  Notwithstanding  the  foregoing,  in the event that any such
order or injunction affects only a portion of the Transferred  Assets,  then the
parties (x) shall negotiate an equitable  adjustment in the Purchase Price so as
to consummate the  Transactions  with respect to Transferred  Assets and Assumed
Liabilities  relating  to  Facilities  that are not  affected  by such  order or
injunction,  and (y) shall  either  agree upon  appropriate  amendments  to this
Agreement to effect further  transfers of the remaining  Transferred  Assets and
assumptions of the remaining Assumed  Liabilities when and if they are no longer
subject to such order or injunction  or, if no such  amendments


                                      A-39





are agreed upon, such remaining Transferred Assets and Assumed Liabilities shall
be deemed to be Excluded  Assets and  Excluded  Liabilities  for all purposes of
this  Agreement;  provided  that if the  parties  are  unable  to agree  upon an
equitable adjustment of the Purchase Price, or appropriate  amendments to effect
further  transfers,  prior to any scheduled Closing Date, then such disagreement
shall be resolved pursuant to the provisions of Section 2.14.

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

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

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

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

The  willingness  of the Title  Insurer  to issue the  Title  Policies  shall be
evidenced either by the issuance  thereof or the written  commitments or binders
of the Title Insurer to issue such Title Policies within a reasonable time after
the Closing Date,  subject to actual  transfer of the real property in question.
If the Title  Insurer is unwilling to issue any such Title  Policy,  it shall be
required to provide  Buyer and  Seller,  in writing,  notice  setting  forth the
reason(s) for such  unwillingness  on or before the Closing  Date.  Seller shall
have  the  right  to seek to cure  any  defect  which  is the  reason  for  such
unwillingness,  and, if such notice by the Title  Insurer is given less than ten
business days prior to the then  scheduled  Closing Date,  then the Closing Date
(and, to the extent  necessary,  the  Termination  Date) shall be extended for a
period of up to ten business days to provide to Seller such opportunity to cure.
In the event that,  despite  Seller's efforts to cure, the Title Insurer remains
unwilling to issue any such Title Policy on the Closing Date (as may be extended
as provided  herein),  then, at the election of Buyer, and without affecting the
other conditions of the parties to consummation of the  Transactions,  such real
property  interests  not covered by such a Title Policy shall not be included in
the  Transferred  Assets  and  shall  be  deemed  to  be  Excluded  Assets,  and
liabilities  associated  therewith that would  otherwise be Assumed  Liabilities


                                      A-40





shall be deemed to be Excluded Liabilities; and Buyer and Seller shall negotiate
in good faith  prior to the  Closing an  equitable  adjustment  in the  Purchase
Price.  If the parties  cannot agree upon such  equitable  adjustment,  then the
disagreement shall be resolved in accordance with Section 2.14.  Notwithstanding
the  foregoing,  Buyer  may  accept  such  title  to any such  interests  as the
pertinent  Subsidiary  may be able to  convey,  and such  title  insurance  with
respect to the same as the Title Insurer is willing to issue, in which case such
interests shall be conveyed as part of the Transferred  Assets without reduction
of the Purchase  Price or any credit or  allowance  against the same and without
any other liability on the part of Seller or the Subsidiaries.

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

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

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

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

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

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

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

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

     Section  8.9  Absence of  Material  Adverse  Changes.  There shall not have
occurred  or been  discoverd  any change (a  "Material  Adverse  Change") in the
business,  operations,  financial  condition  or  prospects  of  the  businesses
represented  by the  Transferred  Assets the effect of which has been to cause a
Material  Adverse  Effect  on the  Transferred  Assets,  taken as a  whole,  and
HEALTHSOUTH  and Seller shall have  furnished  Buyer with the  certificate of an
executive officer of each to such effect;  provided,  however,  that no Material
Adverse  Change shall be deemed to have occurred as a result of matters  arising
or  resulting  from  (i)  matters  generally  affecting  businesses  of the type
represented  by the  Transferred  Assets which are not peculiar to Seller or the
Subsidiaries,  (ii) changes in generally accepted accounting  principles,  (iii)
public  announcement of the  Transactions  and compliance with the provisions of
this  Agreement,  or (iv) acts  taken or  omitted  by  HEALTHSOUTH,  Seller or a
Subsidiary  at the  written  direction  or with the express  written  consent of
Buyer.


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

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

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

     Section 9.2 Accuracy of Representations and Warranties. The representations
and warranties of Buyer set forth in Article 4 of this  Agreement  shall be true
in all material respects as of the date of this


                                      A-41





Agreement (unless the inaccuracy or inaccuracies which would otherwise result in
a failure  of this  condition  have  been  cured by the  Closing)  and as of the
Closing as if made as of such time.

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

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

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

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

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


                                      A-42





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

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

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

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

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

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

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


                                   ARTICLE 10
                                   TERMINATION

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

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

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

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


                                      A-43





     Section 10.2 Effect of  Termination.  In the event of  termination  of this
Agreement as provided above,  there shall be no liability on the part of a party
to  another  under  and  by  reason  of  this  Agreement  or  the   transactions
contemplated  hereby except as set forth in Sections 2.6(a),  5.5, 5.6, 10.3 and
10.4 and  Articles  11 and 12 and except  for  fraudulent  acts by a party,  the
remedies for which shall not be limited by the provisions of this Agreement. The
foregoing  provisions shall not, however,  limit or restrict the availability of
specific  performance or other injunctive or equitable relief to the extent that
specific  performance  or such other  relief  would  otherwise be available to a
party hereunder.

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

     Section 10.4 Wrongful  Termination  by Seller.  If  HEALTHSOUTH  and Seller
purport to terminate this Agreement  otherwise than pursuant to Section 10.1, or
if HEALTHSOUTH and Seller shall otherwise fail to consummate the Transactions by
the Termination Date for any reason other than a material breach by Buyer of its
obligations  hereunder or a failure by Buyer to obtain the consent  described in
Section 8.8, then in such event  HEALTHSOUTH and Seller shall pay to Buyer, upon
demand,  a fee (the "Topping  Fee") in the amount of  $50,000,000 in immediately
available funds.  HEALTHSOUTH and Seller acknowledge and agree that such Topping
Fee represents the parties' best estimate of the out-of-pocket costs incurred by
Buyer and the value of management time,  overhead,  opportunity  costs and other
unallocated  costs of Buyer incurred by or on behalf of Buyer in connection with
this Agreement.  HEALTHSOUTH and Seller further  acknowledge that the provisions
for the  payment  of the  Topping  Fee  contained  in this  Section  10.4 are an
integral part of the  Transactions  and that,  without these  provisions,  Buyer
would not have  entered  into this  Agreement.  Accordingly,  if the Topping Fee
shall become due and payable and  HEALTHSOUTH  and Seller shall fail to pay such
amount when due, and, in order to obtain such payment,  suit is commenced  which
results in a judgment against  HEALTHSOUTH and Seller therefor,  HEALTHSOUTH and
Seller  shall  pay all  reasonable  costs  and  expenses  (including  reasonable
attorneys' fees incurred by Buyer) in connection  with such suit,  together with
interest  computed on the amounts  determined to be due pursuant to this Section
(computed from the date upon which such amounts were due and payable pursuant to
this Section) and such costs (computed from the date incurred) at the prime rate
of interest  announced from time to time by NationsBank,  N.A.  (South).  If the
Topping Fee becomes due and payable, HEALTHSOUTH and Seller will also return the
Execution Fee with interest as provided in Section 2.6(a).


                                      A-44





                                   ARTICLE 11
                     SURVIVAL AND REMEDIES; INDEMNIFICATION

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

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

     Section 11.3 Indemnity by HEALTHSOUTH and Seller.

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

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

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

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

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

     Section 11.4 Indemnity by Buyer.

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

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

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


                                      A-45





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

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

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

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

         (b) In  computing  Losses,  such  amounts  shall be computed net of any
related  recoveries to which the Indemnitee is entitled under insurance policies
or other related  payments  received or receivable from third parties and net of
any  tax  benefits  actually  received  by the  Indemnitee  or for  which  it is
eligible,  taking  into  account  the income  tax  treatment  of the  receipt of
indemnification.

     Section 11.6 Procedures  Respecting Third Party Claims. In providing notice
to the Indemnitor of any Third Party Claim (the "Claim Notice"),  the Indemnitee
shall  provide  the  Indemnitor  with a copy of such Third  Party Claim or other
documents  received and shall  otherwise  make  available to the  Indemnitor all
relevant  information  material  to the  defense  of such  claim and  within the
Indemnitee's possession. The Indemnitor shall have the right, by notice given to
the Indemnitee  within 15 days after the date of the Claim Notice, to assume and
control  the  defense of the Third Party Claim that is the subject of such Claim
Notice,  including the employment of counsel  selected by the  Indemnitor  after
consultation with the Indemnitee,  and the Indemnitor shall pay all expenses of,
and the Indemnitee shall cooperate fully with the Indemnitor in connection with,
the  conduct  of such  defense.  The  Indemnitee  shall have the right to employ
separate  counsel in any such proceeding and to participate in (but not control)
the defense of such Third Party Claim, but the fees and expenses of such counsel
shall be borne by the Indemnitee unless the Indemnitor shall agree otherwise. If
the Indemnitor  shall have failed to assume the defense of any Third Party Claim
in accordance  with the provisions of this Section,  then the  Indemnitee  shall
have the absolute  right to control the defense of such Third Party Claim,  and,
if and  when it is  finally  determined  that  the  Indemnitee  is  entitled  to
indemnification  from  the  Indemnitor  hereunder,  the  fees  and  expenses  of
Indemnitee's  counsel  shall  be  borne  by the  Indemnitor,  provided  that the
Indemnitor  shall  be  entitled,  at its  expense,  to  participate  in (but not
control)  such  defense.  The  Indemnitor  shall  have the  right to  settle  or
compromise  any such Third Party Claim for which it is  providing  indemnity  so
long as such  settlement  does not  impose  any  obligations  on the  Indemnitee
(except with respect to providing  releases of the third party).  The Indemnitor
shall not be liable for any


                                      A-46





settlement  effected by the Indemnitee  without the  Indemnitor's  consent.  The
Indemnitor  may  assume and  control,  or bear the  costs,  of any such  defense
subject to its  reservation  of a right to  contest  the  Indemnitee's  right to
indemnification hereunder,  provided that it gives the Indemnitee notice of such
reservation within 15 days of the date of the Claim Notice.


                                   ARTICLE 12
                               GENERAL PROVISIONS

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

         If to HEALTHSOUTH or Seller, addressed to:

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

         with a copy to:

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

         If to Buyer, addressed to:

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

         with a copy to:

                  Michael S. Blass, Esq.
                  Blass & Driggs
                  461 Fifth Avenue
                  New York, New York  10017


                                      A-47





                  Facsimile:  (212) 447-5428


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

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

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

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

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

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


                                      A-48





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

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

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




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

                                                HEALTHSOUTH CORPORATION


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



                                                HORIZON/CMS HEALTHCARE
                                                CORPORATION


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


                                                INTEGRATED HEALTH SERVICES, INC.



                                                By  Taylor Pickett
                                                  ------------------------------
                                                   Its  Executive Vice President
                                                      --------------------------


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