July 25, 2000



Integrated Health Services, Inc.
The Highlands
910 Ridgebrook Road
Sparks, MD   21152

Attn:    C. Taylor Pickett

Dear Mr. Pickett:

The purpose of this letter is to set forth the terms of the  engagement  between
Alvarez & Marsal,  Inc. ("A&M"),  Joseph A. Bondi (the "Officer") and Integrated
Health Services, Inc. (the "Company"), including the scope of the services to be
performed and the basis of compensation for those services.  Upon your execution
and  the  effectiveness  hereof  pursuant  to  paragraph  8,  this  letter  will
constitute an agreement between the Company, the Officer, and A&M.


1.       Description of Services and Duties

         (a)      During the term of this engagement A&M shall make available to
                  the  Company  the   services  of  the   Officer.   Subject  to
                  sub-paragraph  (b) below,  the Officer shall be duly appointed
                  by the Board of Directors of the Company  (the"Board")  at the
                  next  scheduled  meeting  of the Board as its Chief  Executive
                  Officer.  As such,  the Officer  shall report  directly to the
                  Company's  Board and shall,  with senior  management,  develop
                  proposals  for  the  Board's   consideration  to  address  the
                  Company's  financial  and  operating   performance.   No  such
                  proposals,  including  proposals  related  to  the  activities
                  listed below,  shall be implemented by the Officer without the
                  Board's prior  approval.  It is anticipated  the Officer shall
                  work with senior management on the following activities:



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                  (i)      assistance in the preparation of a revised  operating
                           plan and cash flow forecast and present such plan and
                           forecast to the Board and the Company's creditors;

                  (ii)     assistance in the  identification  of cost  reduction
                           opportunities related to the Company;

                  (iii)    assistance in addressing financing issues,  including
                           the  preparation  of  reports,   and   communications
                           generally   with  the  Company's   shareholders   and
                           creditors;

                  (iv)     assistance in  development  of the Company's  Plan of
                           Reorganization; and

                  (v)      other activities as are approved by the Board.

         (b)      The Company currently has a Chief Executive Officer.  You have
                  advised A&M that the current Chief  Executive  Officer will no
                  longer be working  with the  Company  (and the  position  will
                  therefore  be vacant) by  agreement  between the two  parties,
                  effective  upon  entry  of an Order  by the  Bankruptcy  Court
                  having  jurisdiction  over  the  Company's  Chapter  11  cases
                  approving the terms of that  agreement  (the "CEO Order").  In
                  the event the CEO Order has not been  entered  and the closing
                  under the agreement  approved  thereby has not occurred by the
                  time  the  Board  meets  to  approve  the  appointment  of the
                  Officer,  as provided for in subparagraph  (a) above,  then at
                  such meeting,  the Board will appoint the Officer (1) as Chief
                  Restructuring  Officer  until the CEO Order is entered and the
                  closing under the agreement approved thereby occurs and (2) as
                  Chief  Executive  Officer  immediately  upon  entry of the CEO
                  Order and the closing of the agreement approved thereby. Prior
                  to entry of the CEO Order  and the  closing  of the  agreement
                  approved  thereby,  the Officer  shall report  directly to the
                  current CEO and the Board and in all other  respects the other
                  provisions  of this  engagement  letter  shall remain the same
                  regardless   of  whether  the  Officer  is  serving  as  Chief
                  Restructuring Officer or Chief Executive Officer.

         (c)      The Officer will continue to be employed by A&M, and while the
                  Officer is rendering services to the Company, he will continue
                  to work with other  personnel at A&M both in  connection  with
                  the Company's matters and possibly other unrelated matters. In
                  particular,  the Officer shall be permitted to devote  limited
                  services to Iridium LLC in conjunction with its sale of assets
                  and plan of reorganization  and the parties hereto expect that
                  the services which the Officer  continues to render to Iridium
                  LLC will not unduly  interfere  with the  services the Company
                  requests  of  the  Officer  pursuant  to  this  Agreement.  In
                  rendering  services  to  the  Company,  the  Officer  may  use
                  additional A&M personnel to assist him.

         (d)      You understand that the services to be rendered by the Officer
                  may  include  the   preparation  of   projections   and  other
                  forward-looking  statements,  and


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                  numerous   factors  can  affect  the  actual  results  of  the
                  Company's  operations,  which  may  materially  and  adversely
                  differ  form  those  projections  and  other  forward  looking
                  statements.  In  addition,  the  Officer  will be  relying  on
                  information   provided  by  other  members  of  the  Company's
                  management in the  preparation of those  projections and other
                  forward-looking statements.  Neither the Officer nor A&M makes
                  any   representation   or   guarantee   that  an   appropriate
                  restructuring proposal can be formulated for the Company, that
                  any restructuring proposal presented to the Board will be more
                  successful  than all other possible  restructuring  proposals,
                  that  restructuring  is the  best  course  of  action  for the
                  Company,  or, if formulated,  that any proposed  restructuring
                  plan will be accepted by the Company's creditors, shareholders
                  and other constituents.  Further,  neither the Officer nor A&M
                  assumes  responsibility for the selection of any restructuring
                  proposal  which  the  Officer   assists  in  formulating   and
                  presenting to the Board,  and the Officer shall be responsible
                  for implementation only of the restructuring proposal approved
                  by the  Board  and  only  to  the  extent  and  in the  manner
                  authorized and directed by the Board.


2.       Compensation

         (a)      A&M will  receive  a fee for the  Officer  and  personnel  who
                  assist the Officer at a rate of $275,000  per month.  A&M will
                  staff this assignment with three to four people, including Mr.
                  Bondi  who  will  devote   substantially   full-time  to  this
                  engagement, consistent with functioning as a member of A&M.

         (b)      The Officer and A&M will be  reimbursed  for their  reasonable
                  out-of-pocket   expenses  incurred  in  connection  with  this
                  assignment such as travel,  lodging and telephone charges.  In
                  addition,  A&M shall be reimbursed for the reasonable fees and
                  expenses  of its  counsel  incurred  in  connection  with  the
                  preparation,  negotiation and approval of this agreement.  All
                  fees and  expenses  will be billed  and  payable  on a monthly
                  basis.

         (c)      In addition to the monthly compensation, A&M shall be entitled
                  to  incentive  compensation  payable  promptly  following  the
                  confirmation of the Company's Plan of  Reorganization  ("POR")
                  consisting of an "Earnings Bonus" and a "Plan Bonus."

                  (i)      The  Earnings  Bonus shall be equal to the greater of
                           (x)  $2,000,000 or (y) the amount equal to the sum of
                           the following  percentages of the product of four and
                           the Company's Operating EBITDA (as defined below) for
                           the Company's last complete fiscal quarter  preceding
                           the confirmation date of its POR ("POR EBITDA"):


                             POR EBITDA                               Percentage
                             ---------------                          ----------
                             first $267,000,000                 -       0.7491%
                             next $33,000,000                   -       1.5152%


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                             next $50,000,000                   -       4.0%
                             next $50,000,000                   -       2.0%
                             amount in excess of $400,000,000   -       1.0%


                           provided,  however if the Company sells, transfers or
                           otherwise   disposes   of   assets   prior   to   the
                           confirmation  of  the  POR  (or,  in the  event  of a
                           dismissal or  conversion  to Chapter 7, prior to such
                           dismissal   or   conversion),   then   whenever   the
                           Cumulative  Sold  Asset  EBITDA  (as  defined  below)
                           exceeds $5 million,  A&M shall receive a fee equal to
                           a percentage(s)  of such Cumulative Sold Asset EBITDA
                           at  the  closing  of the  disposition  at  which  the
                           Cumulative   Sold  Asset  EBITDA  first  exceeded  $5
                           million.  The  percentage(s)  shall be the same as in
                           the  chart  above,  based  on the same  amount(s)  of
                           Cumulative  Sold  Asset  EBITDA as POR  EBITDA in the
                           chart above.  "Cumulative  Sold Asset  EBITDA"  shall
                           mean (without duplication of any such amounts already
                           included in  calculating  the incentive  compensation
                           previously paid to A&M under this proviso) the sum of
                           the  Operating  EBITDA (if  positive)  for each asset
                           sold,  transferred or otherwise  disposed of prior to
                           the  confirmation  of the POR (or,  in the event of a
                           dismissal or  conversion  to Chapter 7, prior to such
                           dismissal or conversion)  for the last fiscal quarter
                           prior to the  disposition  of each such  asset  times
                           four (4).  In  calculating  the  amount of  incentive
                           compensation  payable to A&M upon confirmation of the
                           POR,  first,  the  amount of POR  EBITDA in the chart
                           above  shall be  reduced by the  aggregate  amount of
                           Cumulative  Sold Asset EBITDA included in calculating
                           the  incentive  compensation  paid  to A&M  prior  to
                           confirmation,  such  reduction  applied  first to the
                           $267 million line, then to the $33 million line, then
                           to the first $50 million line, then to the second $50
                           million  line and last,  to the $400  million  excess
                           line; and second, for purposes of determining whether
                           the $2,000,000 minimum is applicable, amounts already
                           paid under this proviso shall be aggregated  with the
                           amount  payable upon  confirmation  and, in the event
                           the $2,000,000 is applicable,  it shall be reduced by
                           the  amounts   already   paid  under  this   proviso.
                           "Operating EBITDA" shall mean EBITDA (earnings before
                           interest,  taxes,  depreciation and amortization) net
                           of other income (expense); extraordinary items; gains
                           or  losses  on  the  sale  of  assets;   expenses  of
                           litigation (including administrative proceedings) and
                           related   professional   fees,  fines,   damages  and
                           settlement   payments;   and  restructuring   charges
                           (including, without limitation, professional fees and
                           expenses,  employee severance and incentive payments,
                           costs of operations  discontinued or identified to be
                           discontinued and cure payments for assumed  contracts
                           or leases).

                  (ii)     The  Plan  Bonus  shall  be  $500,000  if the  POR is
                           confirmed  prior to  September  1,  2001 and shall be
                           reduced  commencing  September  1,  2001 at a rate of
                           $83,333 per month,  pro rated on a

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<PAGE>


                           daily basis, with no Plan Bonus payable subsequent to
                           February 28, 2002.

                  No incentive compensation shall be earned after termination of
                  this agreement by the Company For Cause (as defined below), or
                  by A&M Without  Good Reason (as defined  below).  A&M shall be
                  entitled  to receive  and retain  any  incentive  compensation
                  earned prior to the date of such termination.

         (d)      The  Company  shall  promptly  remit to A&M a retainer  in the
                  amount of $275,000 which shall be returned or credited against
                  any amounts due at the termination of this assignment.


3.       Term

         (a)      The engagement  will commence as of the date hereof and may be
                  terminated  by either  the  Company  or A&M  without  cause by
                  giving 30 days'  written  notice to the  other  party.  In the
                  event of such  terminaton  by either the  Company or A&M,  any
                  fees and expenses due to A&M shall be remitted  promptly,  A&M
                  shall remain entitled to the incentive  compensation which has
                  been agreed upon provided the criteria therefor are satisfied,
                  except as provided in 3(b) and 3(c).

         (b)      The Company may immediately terminate A&M's services hereunder
                  at any time for Cause by giving  written  notice to A&M.  Upon
                  any such  termination  for  Cause,  A&M shall have no right to
                  compensation  under Section 2 for any period subsequent to the
                  date of termination.  For purposes of this Agreement,  "Cause"
                  shall mean: (i) the Officer is convicted of a felony;  or (ii)
                  the Officer or A&M  willfully  disobeys a lawful  direction of
                  the Board.

         (c)      A&M may terminate its services  under this  Agreement  without
                  Good  Reason  at any  time by  giving  written  notice  to the
                  Company.  Such termination will become effective upon the date
                  specified in such notice,  provided that such date is at least
                  30 days after the date of  delivery  of the  notice.  Upon any
                  such  termination  the Company shall be relieved of all of its
                  obligations  under  this  Agreement,  except  for  payment  of
                  monthly  fees  and  expenses  through  the  effective  date of
                  termination and its obligations under paragraph 6.

         (d)      A&M shall be entitled to terminate its services  hereunder for
                  Good Reason.  For purposes of the Agreement,  termination  for
                  "Good Reason" shall mean its resignation  caused by the breach
                  by the Company of any of its material  obligations  under this
                  Agreement  which  breach  is not  cured  within 30 days of A&M
                  having given written notice to the Company thereof.

         (e)      A&M and the  Company  shall  each have the right to  terminate
                  this Agreement  within 30 days following the  confirmation  of
                  any Chapter 11 plan of  reorganization  upon 30 days'  written
                  notice to the other  parties  hereto.  In


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                  such  event  A&M  shall  remain   entitled  to  the  incentive
                  compensation  (subject to the  conditions set forth in Section
                  2(c)).


         (f)      A&M  shall  have  the  right  to  terminate   this   Agreement
                  immediately  if the Officer shall not have been  appointed and
                  assumed the position of Chief Executive Officer within 60 days
                  of the date of this letter in  accordance  with  paragraph  1.
                  Upon such  termination,  A&M shall be  entitled to receive and
                  retain all compensation earned to date pursuant to paragraph 2
                  and reimbursement  for all reimbursable  expenses incurred and
                  shall be paid  liquidated  damages  in the amount of $ 825,000
                  within 5 days of receipt of notice of termination.


4.       Relationship of the Parties

         The parties intend that an independent contractor  relationship will be
         created  between A&M and the  Company by this  engagement  letter.  The
         Officer shall remain an employee of A&M,  which shall retain the rights
         (subject to the terms  hereof) to direct and  control his  performance.
         The compensation  set forth in paragraph 2 shall be exclusive,  and the
         Officer shall not be entitled to participate in any other  compensation
         or benefit plan or perquisite of the Company.  Any amounts of cash paid
         to the Officers  shall be paid to and received by the Officer solely as
         nominee for and on behalf of A&M and not on their own account.  Neither
         A&M nor any of its personnel or  subcontractors  is to be considered an
         employee or agent of the Company and the personnel  and  subcontractors
         of A&M  are  not  entitled  to any of the  benefits  that  the  Company
         provides for the Company's  employees.  The Company  acknowledges  that
         A&M's engagement shall not constitute an audit,  review or compilation,
         or any other type of financial statement  reporting  engagement that is
         subject  to the rules of the AICPA,  SEC,  or other  state or  national
         professional or regulatory body.


5.       Confidentiality / Non-Solicitation / Non-Competition

         A&M  and  the  Officer  shall  keep  as  confidential   all  non-public
         information   received  from  the  Company  in  conjunction  with  this
         engagement,  except:  (i) as  requested  by the  Company  or its  legal
         counsel;  (ii) as required by legal  proceedings or (iii) as reasonably
         required in communication with the Company's  shareholders,  affiliates
         and  creditors,   or  their  advisors,   in  the  performance  of  this
         engagement.  The  Company  agrees not to  solicit,  recruit or hire any
         employees  of  A&M  for  a  period  of  two  years  subsequent  to  the
         termination  of this  agreement.  During the term of this agreement and
         for a period  of 12 months  commencing  on the date of  termination  of
         services  under  this  Agreement,   the  Officer  shall  not  have  any
         relationship  or association  with a "Competitor"  of the Company as an
         independent contractor, service provider, stockholder (of more than two
         percent  of  any  equity  interest),   director,  officer,  consultant,
         employee or  otherwise.  "Competitor"  shall mean a  corporation  which
         derives  more  than  30%  of  its  revenues  from   long-term  care  or
         respiratory  care and which  competes with the Company in more than 30%
         of  the


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         Company's markets.  This foregoing provision concerning activities with
         a Competitor  shall apply solely to the Officer and not to A&M or other
         A&M employees.


6.       Indemnification

         The  attached  indemnification  agreement  is  incorporated  herein  by
         reference and shall be executed upon the acceptance of this  agreement.
         In  addition  to the  indemnity  provided  in the  indemnity  agreement
         incorporated  herein,  the Officer shall be  indemnified by the Company
         for all acts performed as an officer to the maximum extent permitted by
         law. The Company shall continue to maintain its directors and officer's
         liability  insurance policy in the same or greater amounts as currently
         provided and shall provide  coverage for the officer under such policy.
         The Company shall continue to provide such  insurance  coverage for the
         Officer for two years after termination or this engagement. Termination
         of this  engagement  shall  not  affect  any of  these  indemnification
         provisions, which shall remain in full force and effect.


7.       Miscellaneous

         This   engagement   letter   (together  with  the  attached   indemnity
         provisions); (a) shall be governed and construed in accordance with the
         laws of the  State  of New  York,  regardless  of the laws  that  might
         otherwise  govern  under  applicable  principles  of  conflict  of laws
         thereof;  (b) incorporates the entire understanding of the parties with
         respect to the  subject  matter  hereof;  and (c) may not be amended or
         modified  except  in  writing  executed  by both  parties  hereto.  The
         Company,  the  Officer  and A&M  agree  to  waive  trial by jury in any
         action,  proceeding  or  counterclaim  brought  by or on  behalf of the
         parties hereto with respect to any matter relating to or arising out of
         the engagement or the performance or non-performance of the Officers or
         A&M  hereunder.  The  Company and A&M agree that the  Bankruptcy  Court
         having  jurisdiction  over the  Company's  Chapter 11 case (or any case
         into which it may be converted) shall have exclusive  jurisdiction over
         any and all matters arising under or in connection with this engagement
         letter and the indemnity provisions and in connection with the services
         rendered by A&M hereunder.

8.       Effectiveness

         This engagement letter shall become effective upon its execution by the
         parties  hereto,  approval by the Company's  Board of Directors and the
         entry of an order (the "Order"),  in form satisfactory to such parties,
         of the Bankruptcy Court having  jurisdiction over the Company's Chapter
         11 case approving  this  engagement  letter and the attached  indemnity
         provisions in the form executed and authorizing the retention of A&M on
         the terms provided for herein; provided that effective immediately upon
         the Company's  execution  below,  the Company  agrees to seek by motion
         (the "Motion") such judicial  approval and authorization as promptly as
         possible.  The Officer will  commence the  rendering of the service and
         duties set forth in  paragraph 1 upon  execution  of this letter by the
         parties but before the entry of the


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<PAGE>

         Order.  A&M may withdraw  this letter at any time prior to the judicial
         approval  referred to above by providing written notice to the Company,
         which shall be effective  immediately,  to that  effect,  in which case
         this letter (and the attached Indemnification  Agreement) shall be null
         and  void  except  insofar  as it  (including  the  provisions  of  the
         Indemnification Agreement) relate to services already rendered.

Please sign the enclosed copy of this  proposal to  acknowledge  your  agreement
with its terms.

                                            Very truly yours,

                                            Alvarez & Marsal, Inc.


                                            By: /s/ Joseph A. Bondi
                                               ------------------------------
                                               Joseph A. Bondi
                                               Managing Director




ACCEPTED AND AGREED:

Integrated Health Services, Inc.


By: /s/ C. Taylor Pickett
   ------------------------------
   C. Taylor Pickett
   EVP and CFO

/s/ Joseph A. Bondi5
-----------------------
Joseph A. Bondi


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