PARACELSUS HEALTHCARE CORPORATION

                              EMPLOYMENT AGREEMENT

To:      Robert L. Smith

This  Agreement  establishes  the  terms  of  your  employment  with  Paracelsus
Healthcare  Corporation,  a California  corporation (the "Company") and reflects
your employment as the Company's Chief Executive Officer ("CEO").

Employment and Duties              You and the Company agree to your  employment
                                   by the Company as the Company's CEO. In such
                                   position, you will report  directly to the
                                   Company's  Board of Directors (the  "Board").
                                   You agree to perform whatever  duties the
                                   Board may assign  you from time to time that
                                   are  consistent  with those of the CEO of a
                                   public  company.  During  your  employment,
                                   you agree to devote your full  business
                                   time, attention,  and energies to performing
                                   those duties (except as the Board otherwise
                                   agrees from time to time). On termination of
                                   your employment  under this Agreement,  you
                                   agree that you will promptly resign as an
                                   officer and director and from all other
                                   officer and director  positions at the
                                   Company and its subsidiaries and affiliates
                                   which you hold at that time.

                                   You   represent   as  a  condition   to  your
                                   employment  under this Agreement that you are
                                   not subject to any agreement or understanding
                                   with any other person  which might  adversely
                                   affect your  ability to perform  your work as
                                   the Company's CEO under this Agreement.

Term of Employment                 Your  employment  under this Agreement  shall
                                   begin no later than  _________,  2000 (the
                                   "Effective Date") and,  unless sooner
                                   terminated or extended,  shall end on
                                   December 31, 2001. Your employment term under
                                   this Agreement will be  automatically
                                   extended for the period of one additional
                                   year on December 31 of each year,  beginning
                                   with December 31, 2001 absent notice on or
                                   before October 1 of that year from  either
                                   you or the  Company  not to extend  such term
                                   for an  additional  year.  The period running
                                   from the Effective Date to December 31, 2001
                                   or, if extended,  to the last day of the
                                   calendar year of such extension shall be
                                   referred to in this Agreement as your "Term".

Compensation
      Base Salary                  The Company will pay you a monthly base
                                   salary (the "Monthly  Base  Salary")  while
                                   you are employed under this Agreement,  and
                                   your initial  Monthly Base Salary shall be
                                   $35,420 per month,  payable in accordance
                                   with the Company's  generally  applicable
                                   payroll  practices.  Future adjustments to
                                   your Monthly  Base  Salary  will be made in
                                   the  discretion  of the  Company's  Option
                                   and  Compensation Committee.  However,  no
                                   future  adjustments  will reduce your Monthly
                                   Base Salary below $35,420 per month.

     Benefits                      While you are employed  under this
                                   Agreement,  you will be eligible to
                                   participate in the employee benefit and
                                   fringe  benefit  plans and  programs
                                   generally  available  to the  Company's
                                   executive officers and such additional
                                   benefits as the Board may from time to time
                                   provide.  If a participant is required to
                                   make a contribution or pay a premium to
                                   participate in any such plan or program,  the
                                   Company will  reimburse you for up to $6,000
                                   in such  contributions  and premiums  which
                                   you make or pay each  calendar  year. In
                                   addition,  you will be entitled  while
                                   employed to the following  life insurance and
                                   disability coverages and fringe benefits:

                                    Life  Insurance.  The Company will  maintain
                                    (whether   through   individual   or   group
                                    coverage or both) for your benefit while you
                                    are employed life insurance  coverage with a
                                    face amount  equal to three times the amount
                                    of  your  annualized  initial  Monthly  Base
                                    Salary,  $1,000,000  or the face  amount  of
                                    coverage   which  can  be  purchased  for  a
                                    premium  of no  more  than  $6,000  a  year,
                                    whichever  is less.  You will have the right
                                    to name and to change  from time to time the
                                    beneficiary or beneficiaries under such life
                                    insurance  coverage.   Such  life  insurance
                                    coverage  will be in  addition  to any death
                                    benefits  that  may  be  payable  under  any
                                    accidental death and dismemberment plan, any
                                    separate business travel accident  coverage,
                                    or any  qualified or  nonqualified  deferred
                                    compensation   plan   in   which   you   may
                                    participate,  and such coverage will also be
                                    in addition to any life  insurance  that you
                                    purchase for yourself.

                                   Health  Insurance.  You agree to elect  COBRA
                                   coverage under your current  employer's group
                                   health plan.  The Company will  reimburse you
                                   for your  COBRA  premiums  while  your  COBRA
                                   coverage is in effect,  and the Company  will
                                   provide you, your wife and your children with
                                   a comprehensive  medical insurance and dental
                                   insurance  which shall be effective when your
                                   COBRA coverage terminates.

                                    Long-Term Disability. lf you become disabled
                                    (as defined in the long-term disability plan
                                    the Company  presently  maintains) while you
                                    are  employed,   you  will  be  eligible  to
                                    receive  disability  benefits  in an  amount
                                    equal to 60% of your then annualized Monthly
                                    Base Salary.  Any amount  payable  under any
                                    salary  continuation  plan or  disability or
                                    other plan  maintained  by the Company,  and
                                    any  amount   payable  to  you  or  to  your
                                    immediate  family (if timely applied for) as
                                    a  Social  Security  disability  benefit  or
                                    similar  benefit will be counted towards the
                                    Company's  fulfillment  of such  obligation.
                                    Disability  benefits will be payable monthly
                                    beginning 30 days following your  disability
                                    and will  continue  until  you are no longer
                                    disabled or, if earlier, until you reach age
                                    65 or die, whichever comes first.

                                   Liability  Coverage.  During your employment,
                                   you  will  be  insured  under  the  Company's
                                   general  liability  insurance  policy for all
                                   acts  done by you in good  faith  to the same
                                   extent as the Company  insures  other  senior
                                   officers of the Company.

                                    Vacations and Holidays. You will be entitled
                                    to five (5) weeks  paid  vacation  time each
                                    year,  which will vest and accrue on a month
                                    pro rata  basis  without  an  accrual  limit
                                    while  you are  employed  and  which  can be
                                    taken as  reasonably  agreed upon by you and
                                    the Option and Compensation  Committee.  You
                                    will be entitled  to all  holidays as listed
                                    annually in the Company's  official  holiday
                                    schedule.

                                    Tax Return  Preparation;  Financial  Advice.
                                    The  Company  while  you are  employed  will
                                    provide  you  with  the  assistance  of  its
                                    regular auditors for the preparation of your
                                    federal and state tax returns without charge
                                    to  you.  In  addition,   the  Company  will
                                    reimburse  you while you are  employed up to
                                    $5,000 per year for the reasonable costs you
                                    actually  incur  for  financial  and  estate
                                    planning services.

                                    Annual  Physical.  The Company while you are
                                    employed  will  reimburse  you  100%  of the
                                    reasonable   costs  you  actually  incur  in
                                    obtaining an annual,  comprehensive physical
                                    examination  to be  conducted by your choice
                                    of  physician,   clinic,  or  medical  group
                                    located  within a reasonable  distance  from
                                    your place of employment.

                                    Reimbursement  for business  expenses.  Your
                                    reimbursement    for   business    expenses,
                                    including  travel  and   entertainment   and
                                    monthly  country club dues,  will be limited
                                    to  reasonable  and  necessary  expenses you
                                    actually  incur on the  Company's  behalf in
                                    connection  with  performing  duties  on the
                                    Company's  behalf and  subject to (i) timely
                                    submission  of a properly  executed  Company
                                    expense    report   form    accompanied   by
                                    appropriate  supporting  documentation,  and
                                    (ii)  compliance  with Company  policies and
                                    procedures    governing   business   expense
                                    reimbursement   and  reporting   based  upon
                                    principles and guidelines  established  from
                                    time to time by the Board's Audit Committee,
                                    including  periodic  audits by the Company's
                                    Internal  Audit  Department  or the  Board's
                                    Audit Committee.

                                    Annual Performance Bonus. You shall have the
                                    opportunity  while you are  employed to earn
                                    an annual  performance bonus of up to 50% of
                                    your annualized Monthly Base Salary for each
                                    year if you achieve the specific performance
                                    goals  mutually  agreed  upon by you and the
                                    Option  and  Compensation  Committee.   Your
                                    annual  performance  bonus  will  be paid no
                                    later than 30 days after the  completion  of
                                    the  annual  audit  on  which  the  bonus is
                                    based.

                                   However,  if  you  fail  to  earn  an  annual
                                   performance  bonus for year 2000  equal to at
                                   least  25%  of  your   Monthly   Base  Salary
                                   actually  payable for calendar year 2000, you
                                   nevertheless  shall  receive a minimum  bonus
                                   for calendar  year 2000,  provided  that your
                                   employment has not terminated before December
                                   31, 2000,  equal to 25% of your total Monthly
                                   Base  Salary  payable for the  calendar  year
                                   2000.

                                   Long-term  Incentive.  When your  employment
                                   begins you shall receive a restricted  stock
                                   grant of 1,300,000 shares of the Company's
                                   common stock .

                                    This  grant  shall  vest  either  under  the
                                    general  vesting rule or the special vesting
                                    rule,  whichever  is more  favorable to you.
                                    Under the  general  vesting  rule this grant
                                    shall  vest  25%  (or  325,000   shares)  on
                                    January 1, 2001, 25% (or 325,000  shares) on
                                    January 1, 2002, 25% (or 325,000  shares) on
                                    January 1, 2003 and 25% (or 325,000  shares)
                                    on January 1, 2004.  However,  under  either
                                    the  general  vesting  rule  or the  special
                                    vesting  rule you shall  vest on a date only
                                    if you are still the  Company's  CEO on that
                                    date.  Alternatively  the option grant shall
                                    vest  under  the  special  vesting  rule  as
                                    follows:

                                   (i) If the  stock  price  hits $ 3.50  at any
                                   time in the  first  eighteen  (18)  months of
                                   your  employment  and closes for at least ten
                                   (10)  consecutive  trading days at or above $
                                   3.50,  35% (or  455,000) of the shares  shall
                                   become vested.

                                   (ii) If the  stock  price  hits $ 4.50 at any
                                   time in the first  twenty four (24) months of
                                   your  employment  and closes for at least ten
                                   (10)  consecutive  trading days at or above $
                                   4.50,  a  total  of 66% (or  858,000)  of the
                                   shares shall become vested.

                                   (iii) If the stock  price  hits $ 6.00 at any
                                   time in the first  thirty-six  (36) months of
                                   your  employment  and closes for at least ten
                                   (10)  consecutive  trading days at or above $
                                   6.00, 100% of the shares shall become vested.

                                   If  your  employment  is  terminated  by  the
                                   Company  without  Cause (as  defined  in this
                                   Agreement) and your right to your  restricted
                                   stock is less than 50% vested,  your right to
                                   such stock  shall  automatically  increase to
                                   vest 50% (or 650,000 shares).

                                   If your  employment is  terminated  for Cause
                                   (as  defined  in this  Agreement),  you  will
                                   forfeit all your unvested restricted stock.

                                   If  there  is a  change  of  control  in  the
                                   Company as a result of a change in  ownership
                                   of thirty  percent  (30%) or more or a change
                                   of three  (3) or more of the  members  of the
                                   Company's seven (7) member Board of Directors
                                   (or a proportionate  number of members if the
                                   total number of members exceeds seven (7)) in
                                   any annual  term (other than a change in such
                                   members  which was  approved by a majority of
                                   the  members  of the Board of  Directors  who
                                   were members at the beginning of such term or
                                   which  results  from  the  death,   voluntary
                                   resignation  or  mandatory  retirement  of  a
                                   member) and your employment terminates within
                                   the one (1) year period following such change
                                   of  control,  your  right to your  restricted
                                   stock will automatically vest 100%.

                                   All of the  foregoing  stock figures shall be
                                   adjusted  up or down  to  reflect  any  stock
                                   split or reverse stock split.

                                   Finally,   on   each   anniversary   of  this
                                   Agreement,  beginning on January 1, 2001, you
                                   will be granted an  additional  stock  option
                                   (if  you  are  still  the  Company's  CEO) to
                                   purchase  200,000  shares  of  the  Company's
                                   common stock (or an equivalent of that figure
                                   if there is a stock  split or  reverse  stock
                                   split  which   increases  or  decreases   the
                                   current number of shares of the Company),  no
                                   stated par value, at an exercise price at the
                                   fair market value of a share of such stock at
                                   that  time,  with a term of ten  (10)  years.
                                   These options become fully vested three years
                                   after  grant (if you are still the  Company's
                                   CEO).

                                    Excise  Tax.  If, as a result of a change of
                                    control,   any   option   vesting  or  other
                                    payments trigger a "golden  parachute excise
                                    tax" for you, such vesting may be delayed or
                                    such  payments  may be suspended or cut back
                                    to the extent required to avoid that tax.

                                    Car  Allowance.  You shall be entitled to
                                    receive an annual Car  Allowance  of $9,600,
                                    payable per the Company's generally
                                    applicable payroll practices.

Termination                        Subject to the  provisions  of this  section,
                                   you and the  Company  agree that the  Company
                                   may  terminate  your  employment,  or you may
                                   resign,  at any  time  with or  without  good
                                   reason  before the end of your  Term,  except
                                   that, if you resign, you agree to provide the
                                   Company  with 90 days' prior  written  notice
                                   (unless the Board has previously  waived such
                                   notice in  writing  or  authorized  a shorter
                                   notice period).

     For Cause                     The Company may terminate your employment for
                                   "Cause" if you:

                                    (i) act with willful disregard for the
                                    Company's best interests;  provided
                                    however,  that such act or action was not
                                    approved by the Board;

                                    (ii) seize an  opportunity to enhance or
                                    diversify the Company's  business for
                                    yourself  instead of offering such
                                    opportunity to the Company;

                                    (iii) are convicted of or plead guilty or no
                                    contest  to a felony,  or,  with  respect to
                                    your  employment,  commit  either a material
                                    dishonest   act  or  common   law  fraud  or
                                    intentionally  violate  any federal or state
                                    securities or tax laws; or

                                    (iv) violate the  Company's  code of conduct
                                   or materially breach any provision of this
                                   Agreement.

                                   Your  termination for Cause will be effective
                                   immediately  upon the  Company's  mailing  or
                                   transmission  of notice of such  termination.
                                   However,  before  terminating your employment
                                   for  Cause  for any  reason  (except  for the
                                   reason   described  in  clause  (iii)),   the
                                   Company  will  specify  in writing to you the
                                   nature  of the  act,  omission,  refusal,  or
                                   failure that it deems to constitute Cause and
                                   give  you 60  days  after  you  receive  such
                                   notice to  correct  the  situation  (and thus
                                   avoid a  termination  for Cause),  unless the
                                   Company  agrees  to  extend  the time for the
                                   correction.  You agree  that the  Board  will
                                   have the  reasonable  discretion to determine
                                   whether  the  situation  is  correctable  and
                                   whether  your  correction  is  sufficient  to
                                   eliminate  the  basis for a  termination  for
                                   Cause.  If your  employment is terminated for
                                   Cause,  the  Company  shall  have no  further
                                   obligations to you under this Agreement.

      Without Cause                The Company may terminate your employment
                                   under this Agreement at any time during your
                                   Term without Cause.  The termination  will
                                   take effect 60 days after the Company gives
                                   you written notice of such termination.  If
                                   the Company  terminates your employment
                                   without Cause during your Term, the Company
                                   shall pay you your then Monthly Base Salary
                                   for the month in which you  terminate  and
                                   shall pay you as severance pay an amount
                                   equal to  twenty-four  (24) months of your
                                   final Monthly Base Salary plus any Bonus
                                   earned but not yet paid in one lump sum.  The
                                   Company  thereafter  shall have no further
                                   obligations to you under this Agreement.
                                   Finally,  a failure by the Company to extend
                                   your Term, or a failure by the Company to
                                   renew or replace the surety bond described in
                                   the next paragraph  within 30 days prior to
                                   its  expiration  (unless such  deadline is
                                   extended in writing by Robert L. Smith),
                                   shall constitute a termination of your
                                   employment by the Company without Cause.

                                   The Company will establish a surety bond at a
                                   mutually  agreeable  insurance company for an
                                   amount of  $850,000  upon  execution  of this
                                   agreement  to satisfy in whole or in part the
                                   Company's  obligations,  if any,  under  this
                                   part of this Agreement.

      Resignation                  If you resign at any time during your Term,
                                   the Company  shall have no further
                                   obligations  to you under this Agreement.

                                   If your  employment is terminated,  you shall
                                   return  within  3  business  days any and all
                                   property  to the  Company  which  you have in
                                   your    possession   when   your   employment
                                   terminates   and  any   copies  of  any  such
                                   property.

Noncompetition                     You have disclosed to the Board, in writing,
and Secrecy                        all healthcare related interests,
                                   investments,  and business  activities,
                                   whether as proprietor, stockholder, partner,
                                   co-venturer,  director, officer,  employee,
                                   independent  contractor, agent,  consultant,
                                   or in any other capacity or  manner
                                   whatsoever.  You  shall  promptly
                                   notify the Board, in writing,  of any changes
                                   in or additions to such interests, activities
                                   or investments  within 15 days of such change
                                   or addition.

                                   Without the written consent of the Board, you
                                   may  not  engage  in  any  of  the  following
                                   actions  during the period  that is (a) prior
                                   to your  termination  of employment  with the
                                   Company   and  (b)   within   two  (2)  years
                                   following the  termination of your employment
                                   with the Company (the "Restricted Period"):

                                   (i) own, either  directly or indirectly,  any
                                   interest in any business  that  competes with
                                   the  "Primary  Business" in which the Company
                                   or any  subsidiary or affiliate is engaged at
                                   the time your employment terminates, within a
                                   radius of 35 miles  from any site,  facility,
                                   or  location  which  is  owned,   managed  or
                                   operated by or affiliated with the Company or
                                   any  of  its   subsidiaries   or  affiliates,
                                   including  physician  practices  of any  kind
                                   (except   with   respect  to  the   Company's
                                   Baytown,  Texas, facility,  where such radius
                                   shall  be 5  miles).  For  purposes  of  this
                                   Agreement,  the term Primary  Business  shall
                                   mean the  delivery of  integrated  healthcare
                                   services in markets  where the Company or its
                                   subsidiaries or affiliates own hospitals and/
                                   or  skilled  nursing  facilities,   with  the
                                   hospital  serving  as the  hub  of the  local
                                   delivery  system  in  conjunction   with  its
                                   physical   medical  staff.   In  addition  to
                                   inpatient  acute  care,  these  services  can
                                   include (a)  individual  physician  practices
                                   and/ or physician based organizations such as
                                   primary   care   and    specialty    clinics,
                                   physician-hospital  organizations  or medical
                                   service  organizations,  or physician medical
                                   groups    and   (b)    ambulatory    surgery,
                                   psychiatric services, occupational and sports
                                   medicine centers,  psychiatric after-care and
                                   day  care  programs,  and  other  diagnostic,
                                   rehabilitative  and treatment  services.  The
                                   Board  may  modify,  from  time to time,  the
                                   definition of Primary Business to include any
                                   additional  business  or service  activity in
                                   which the Company may engage during your Term
                                   or to  exclude  any  business  or  service in
                                   which the Company ceases to engage;

                                   (ii) participate or serve, either directly or
                                   indirectly,    whether   as   a   proprietor,
                                   stockholder, partner, co-venturer,  director,
                                   officer,  agent,  or in any other capacity or
                                   manner  whatsoever in any business or service
                                   activity   that  competes  with  the  Primary
                                   Business;

                                   (iii)  directly  or  indirectly,  solicit  or
                                   recruit  any   individual   employed  by  the
                                   Company,  its  subsidiaries or affiliates for
                                   the  purpose of being  employed  by you or by
                                   any competitor of the Company on whose behalf
                                   you are acting as an agent, representative or
                                   employee,    or   convey   any   confidential
                                   information  or trade  secrets  regarding the
                                   Company,  its  subsidiaries  or affiliates to
                                   any other person; or

                                   (iv)  directly or  indirectly,  influence  or
                                   attempt to influence customers of the Company
                                   or any of its  subsidiaries  or affiliates to
                                   direct their  business to any  competitor  of
                                   the Company.

                                   In  the  event  you   violate  any  of  these
                                   noncompetition  and  secrecy  provision,  you
                                   agree  to repay  any  severance  amount  paid
                                   pursuant to this Agreement and agree that you
                                   shall  forfeit  all  your  outstanding  stock
                                   options  held by you,  except for those stock
                                   options already vested.

                                   You further  expressly agree that the Company
                                   will or would  suffer  irreparable  injury if
                                   you were to compete  with the  Company or any
                                   subsidiary  or affiliate in violation of this
                                   Agreement  and  that  the  Company  would  by
                                   reason of such  competition  be  entitled  to
                                   preliminary or permanent injunctive relief in
                                   a court of appropriate jurisdiction,  and you
                                   further consent and stipulate to the entry of
                                   such  preliminary  or  permanent   injunctive
                                   relief in such a court  prohibiting  you from
                                   competing  with the Company or any subsidiary
                                   or  affiliate  of the Company in violation of
                                   this Agreement upon an appropriate finding by
                                   such  court  that  you  have   violated  this
                                   Agreement.

                                   You   acknowledge  and  agree  that  in  your
                                   employment  under  this  Agreement  you  will
                                   occupy and will continue to occupy a position
                                   of  trust  and  confidence.  You  shall  not,
                                   except as may be  required  to  perform  your
                                   duties under this Agreement or as required by
                                   applicable  law,  until the expiration of the
                                   Restricted  Period or until such  information
                                   shall have become  public  other than by your
                                   unauthorized    disclosure,    disclose   (or
                                   threaten  to  disclose)  to  others  or  use,
                                   whether directly or indirectly, and any trade
                                   secrets or confidential information regarding
                                   the Company, its subsidiaries and affiliates,
                                   and you  agree  that  the  Company  would  by
                                   reason  of  such   disclose   or   threatened
                                   disclosure  or other  failure to  comply,  be
                                   entitled   to    preliminary   or   permanent
                                   injunctive  relief in a court of  appropriate
                                   jurisdiction,  and you  further  consent  and
                                   stipulate to the entry of such preliminary or
                                   permanent  injunctive  relief in such a court
                                   prohibiting  you from  disclosing  any  trade
                                   secrets  or   confidential   information   in
                                   violation   of   this   Agreement   upon   an
                                   appropriate  finding  by such  court that you
                                   have violated this Agreement. You agree never
                                   to copy,  and to  deliver  or  return  to the
                                   Company, at the Company's request at any time
                                   or upon  termination  or  expiration  of your
                                   employment or as soon thereafter as possible,
                                   all  documents,  computer  tapes  and  disks,
                                   records, lists, data, drawings, prints, notes
                                   and  written  information  furnished  by  the
                                   Company,  its  subsidiaries  or affiliates or
                                   prepared  by you  during  the  term  of  your
                                   employment by the Company,  its  subsidiaries
                                   and affiliates.

                                   You agree  that you will hold in a  fiduciary
                                   capacity  for the  benefit of the Company and
                                   any subsidiary  and  affiliate,  and will not
                                   directly or indirectly  use or disclose,  any
                                   trade  secret  that  you  may  have  acquired
                                   during the term of your employment under this
                                   Agreement so long as such information remains
                                   a trade secret. The term "trade secret" shall
                                   mean information,  including, but not limited
                                   to,   technical  or   nontechnical   data,  a
                                   formula, a pattern, a compilation, a program,
                                   a device, a method, a technique, a drawing, a
                                   process,  financial  data,  financial  plans,
                                   product  plans,   or  a  list  of  actual  or
                                   potential  customers  or  suppliers  that (a)
                                   derives economic value,  actual or potential,
                                   from not being  generally  known to,  and not
                                   being  generally  readily   ascertainable  by
                                   proper means by, other persons who can obtain
                                   economic value from its disclosure or use and
                                   (b) is the subject to  reasonable  efforts by
                                   the Company and each subsidiary and affiliate
                                   to  maintain  its  secrecy.   This  provision
                                   regarding   trade   secrets  is  intended  to
                                   provide  rights to the  Company  which are in
                                   addition  to those  rights  the  Company  has
                                   under the common law or  applicable  statutes
                                   for the protection trade secrets.

                                    The term  "confidential  information"  under
                                   this   Agreement   shall  mean  any   secret,
                                   confidential or proprietary  information that
                                   the Company or a  subsidiary  or an affiliate
                                   (not otherwise  included in the definition of
                                   a trade secret under this Agreement) that has
                                   not become generally  available to the public
                                   by the  act of  one  who  has  the  right  to
                                   disclose such information  without  violating
                                   any right of the company or a  subsidiary  or
                                   an affiliate.

                                    You agree that your  obligations  under this
                                   section are  obligations  which will continue
                                   beyond the date your employment terminates.

                                   You  agree  that  you  were   separately  and
                                   adequately  compensated  for the  obligations
                                   described  in this  section,  and  that  they
                                   reasonably  reflect  the need for the Company
                                   to protect its business interests.

Assignment                         The Company may assign or otherwise  transfer
                                   this Agreement and any and all of its rights,
                                   duties, obligations,  or  interests  under it
                                   to any  subsidiary  or  affiliate  of the
                                   Company.  Upon such assignment or transfer,
                                   any such business  entity will be deemed to
                                   be substituted  for the Company
                                   for all purposes.  You agree that  assignment
                                   or transfer  does not entitle you to
                                   Severance.  This Agreement  binds  and
                                   benefits  the  Company  and its  assigns  and
                                   your  heirs  and the  personal
                                   representatives  of your estate.  Without the
                                   Board's prior written  consent,  you may not
                                   assign or delegate  your  obligations  under
                                   this  Agreement or any or all your rights,
                                   duties,  or interests under it.

Severability                       lf the final  determination  of an arbitrator
                                   or  a   court   of   competent   jurisdiction
                                   declares,  after the  expiration  of the time
                                   within which  judicial  review (if permitted)
                                   of such determination may be perfected,  that
                                   any term or  provision  of this  Agreement is
                                   invalid or unenforceable, the remaining terms
                                   and provisions  will be  unimpaired,  and the
                                   invalid or  unenforceable  term or  provision
                                   will  be  deemed   replaced   by  a  term  or
                                   provision that is valid and  enforceable  and
                                   that   comes   closest  to   expressing   the
                                   intention  of the  invalid  or  unenforceable
                                   term or provision.

Amendment; Waiver                  Neither  you  nor  the  Company  may
                                   modify,  amend,  or waive  the  terms of this
                                   Agreement other than by a written  instrument
                                   signed by you and a director  of the  Company
                                   duly authorized by the Board.  Either party's
                                   waiver of the other party's  compliance  with
                                   any  provision  of  this  Agreement  is not a
                                   waiver  of  any  other   provision   of  this
                                   Agreement or of any subsequent breach by such
                                   party of a provision of this Agreement.

No Other Agreements                 This Agreement  supercedes
                                    and  replaces  any and all prior  agreements
                                    and  understandings  regarding the terms and
                                    conditions  of  your  employment,  and  this
                                    Agreement  constitutes the entire  agreement
                                    between you and the Company  with respect to
                                    such terms and conditions.

Withholding                        The  Company  will  reduce  its  compensatory
                                   payments  to you  for  withholding  and  FICA
                                   taxes   and  any   other   withholdings   and
                                   contributions  required  by law or elected by
                                   you.

Governing Law                      The laws of the State of Texas (other than
                                   its conflict of laws provisions) govern this
                                   Agreement.

Notices                            Notices must be given in writing by personal
                                   delivery,  by certified mail, return receipt
                                   requested, by telecopy,  or by  overnight
                                   delivery.  You must send or deliver  your
                                   notices to the  Company's corporate
                                   headquarters.  The Company will send or
                                   deliver any notice given to you at your
                                   address as reflected on the Company's
                                   personnel records.  You and the Company may
                                   change the address for notice by like  notice
                                   to the others.  You and the Company  agree
                                   that notice is received on the date it is
                                   personally delivered,  the date it is
                                   received by certified mail, the date of
                                   guaranteed delivery by the overnight service,
                                   or the date the fax machine confirms
                                   effective transmission.


<PAGE>



lf you accept the terms of this  Agreement,  please sign in the space  indicated
below. We encourage you to consult before signing with any advisors you choose.

                                      PARACELSUS HEALTHCARE CORPORATION

                                      By:_______________________________________

                                      Name:____________________________________

                                    Title:_____________________________________

I accept and agree to the terms of employment set forth in this Agreement:

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

Robert L. Smith

Dated: December___, 1999