EXHIBIT 10.3






                        ASSET SALE AND PURCHASE AGREEMENT

                                     Between

                    PERMANENTE MEDICAL ASSOCIATION OF TEXAS,
                        A TEXAS PROFESSIONAL ASSOCIATION
                                   ("SELLER")


                                       AND

                                 HMO TEXAS, L.C.
                        A TEXAS LIMITED LIABILITY COMPANY
                                    ("BUYER")


                                  June 5, 1998



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<TABLE>

<CAPTION>
                                TABLE OF CONTENTS
                                                             
                                                                        
                                                                                                           
                                                                                                            
                                                                                                             
1.       SALE OF ASSETS...........................................................................................1
<S>      <C>                                                                                                     <C>
         1.1.     Sale and Purchase of Assets.....................................................................1
         1.2.     Excluded Assets.................................................................................2
         1.3.     Liabilities.....................................................................................2
                           1.3.1    Assumed Liabilities...........................................................2
                           1.3.2    Liabilities Not to be Assumed.................................................2
                           1.3.3    Property Taxes................................................................3
                           1.3.4    Transfer Taxes; Recording Fees................................................3
         1.4.     Purchase Price..................................................................................3
                           1.4.1  Purchase Price.  ...............................................................3
                           1.4.2    Allocation....................................................................3
         1.5.     Closing.........................................................................................3
         1.6.     Actions to be Taken at Closing..................................................................3
                           1.6.1.   Buyer's Deliveries............................................................4
                           1.6.2.   Seller's Deliveries...........................................................4
                           1.6.3    Third Party Consents..........................................................6

2.       REPRESENTATIONS AND WARRANTIES OF SELLER.................................................................6
         2.1.     Representations and Warranties of Seller........................................................6
                           2.1.1.   Organization and Good Standing................................................6
                           2.1.2.   Seller's Authority and No Breach..............................................6
                           2.1.3.   No Violations.................................................................7
                           2.1.4.   Litigation....................................................................7
                           2.1.5.   Seller's Financial Statements.................................................7
                           2.1.6.   No Brokers or Finders.........................................................7
                           2.1.7.   Compliance with Applicable Laws...............................................8
                           2.1.8.   No Consents...................................................................8
                           2.1.9.   Material Contracts............................................................8
                           2.1.10.Title to and Condition of Properties and Assets.  ..............................8
                           2.1.11.No Untrue Representation or Warranty............................................9
         2.2.     Representations and Warranties True and Correct at Closing; Breaches............................9

3.       REPRESENTATIONS AND WARRANTIES OF BUYER..................................................................9
         3.1.     Representations and Warranties of Buyer.........................................................9
                           3.1.1.   Organization and Good Standing................................................9
                           3.1.2.   Buyer's Authority and No Breach...............................................9
                           3.1.3.   No Brokers or Finders........................................................10
                           3.1.4.   Buyer's Consents.............................................................10
                           3.1.5.   No Untrue Representation or Warranty.........................................10
         3.2.     Representations and Warranties True and Correct at Closing; Breaches...........................10

4.       SURVIVAL OF REPRESENTATIONS AND WARRANTIES..............................................................10

5.       BUYER'S CONDITIONS PRECEDENT TO CLOSING.................................................................11
         5.1.     Agreements.....................................................................................11


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         5.2.     Corporate Resolutions..........................................................................11
         5.3.     Seller's Representations and Warranties........................................................11
         5.4.     Litigation.....................................................................................11
         5.5.     Certain Covenants..............................................................................11

6.       SELLER'S CONDITIONS PRECEDENT TO CLOSING................................................................11
         6.1.     Agreements.....................................................................................12
         6.2.     Corporate Resolutions..........................................................................12
         6.3.     Litigation.....................................................................................12
         6.4.     Buyer's Representations and Warranties True and Correct........................................12

7.       JOINT CONDITIONS PRECEDENT TO CLOSING...................................................................12
         7.1.     Governmental Consents, and Approvals, and Licenses.............................................12
         7.2.     Termination of PMAT/KFHPTx Contract............................................................12
         7.3.     Closing of Transactions Under Related Agreements...............................................13

8.       ADDITIONAL AGREEMENTS OF SELLER.........................................................................13
         8.1.     Conduct of Business Pending Closing............................................................13
         8.2.     Access to Documents and Premises...............................................................13
                           8.2.1.   Inspection of Books and Records..............................................14
                           8.2.2.   Request for Access...........................................................14
         8.3.     Breach by Seller...............................................................................14

9.       ADDITIONAL AGREEMENTS OF BUYER..........................................................................14
         9.1.     Formation of New P.A...........................................................................14
         9.2.     Maintenance of Records.........................................................................14

10.      ADDITIONAL AGREEMENTS OF BUYER AND SELLER...............................................................15
         10.1.    Regulatory Milestones Prior to Closing.........................................................15
         10.2.    Employment Matters.............................................................................15
                           10.2.1.  Severance Payments...........................................................15
                           10.2.2.  WARN, COBRA and HIPAA Notices................................................16
                           10.2.3.  Healthcare Coverage for Terminated Employees.................................16
         10.3.    Cooperation....................................................................................17
         10.4.    Health Care Coverage for Certain Unitholders...................................................17

11.      INDEMNIFICATION.........................................................................................17
         11.1.    Indemnification by Seller......................................................................17
         11.2.    Indemnification by Buyer.......................................................................18
         11.3.    Limitations....................................................................................18
                           11.3.1.  Minimum......................................................................18
                           11.3.2.  Maximum......................................................................19
         11.4.    Notice and Right to Defend.....................................................................19
         11.5.    Exclusive Remedy...............................................................................19
         11.6.    Failure to Provide Records Cooperation.........................................................20

12.      TERMINATION.............................................................................................20
         12.1.    Termination....................................................................................20


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                  12.2.    Liability for Termination.............................................................20

13.      ARBITRATION.............................................................................................20
         13.1.    Conciliation and Mediation.....................................................................20
         13.2.    Arbitration....................................................................................21
         13.3.    Equitable Relief...............................................................................21

14.      MISCELLANEOUS...........................................................................................22
         14.1.    Notices........................................................................................22
         14.2.    Confidentiality................................................................................22
         14.3.    Waiver.........................................................................................23
         14.4.    Counterparts...................................................................................23
         14.5.    Headings.......................................................................................23
         14.6.    Severability...................................................................................23
         14.7.    Entire Agreement...............................................................................24
         14.8.    Successors and Assigns.........................................................................24
         14.9.    Governing Law..................................................................................24
         14.10.  Cost of Transaction.............................................................................24
         14.11.  Further Assurances..............................................................................24
         14.12.  Construction....................................................................................25
         14.13.  Third Parties...................................................................................25
         14.14.  Time is of the Essence..........................................................................25
</TABLE>




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                                LIST OF EXHIBITS

Exhibit 1.1                   Assets
Exhibit 1.2                   Excluded Assets
Exhibit 1.6.1(b)              Bill of Sale, Assignment and Assumption Agreement
Exhibit 13.2                  Exceptions to AAA Arbitration Rules

                               LIST OF DEFINITIONS


"Agreement" can be found on page 1 "Applicant" can be found in Section 10.2.1(c)
"Assets"  can be found in  Section  1.1  "Assumed  Liabilities"  can be found in
Section 1.3.1 "Board of Arbitration" can be found in Section 13.2 "Buyer" can be
found on page 1  "Closing"  can be found in Section  1.5  "Closing  Date" can be
found in Section 1.5 "COBRA" can be found in Section  10.2.2 "Code" can be found
in  Section  1.4.2  "Confidential  Information"  can be  found in  Section  14.2
"Excluded  Assets" can be found in Section  1.2  "Excluded  Liabilities"  can be
found in Section  1.3.2  "Execution  Date" can be found on page 1  "Governmental
Entity" can be found in Section  2.1.6  "HIPAA"  can be found in Section  10.2.2
"KFHPTx" can be found in Recital C "Loss" or "Losses" can be found  Section 11.1
"Material  Adverse Effect" re Buyer can be found in Section 3 "Material  Adverse
Effect" re Seller can be found in Section 2 "Medical  Services  Contract" can be
found in Recital G "New P.A." can be found in Recital E "Property  Taxes" can be
found in Section 1.3.3 "Purchase  Agreement" can be found in Recital C "Purchase
Price" can be found in Section 1.4 "Related  Agreements" can be found in Section
7.3 "Seller" can be found on page 1 "Severance Payments" can be found in Section
10.2.1(b)  "Subsidy  Agreement"  can be found in  Section  1.3.2(f)  "Terminated
Employees" can be found in Section 10.2.1(a) "Violation" can be found in Section
2.1.3 "WARN" can be found in Section 10.2.2



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                        ASSET SALE AND PURCHASE AGREEMENT

     THIS ASSET SALE AND PURCHASE  AGREEMENT  ("Agreement")  is made and entered
into as of this ________ day of June, 1998  ("Execution  Date"),  by and between
HMO Texas,  L.C., a Texas limited  liability company  ("Buyer"),  and Permanente
Medical Association of Texas, a Texas professional association ("Seller").

                                    RECITALS:

     A. Each member of Seller is a doctor of  medicine,  osteopathy  or podiatry
duly licensed under the laws of the State of Texas.

     B. The  purposes  for which  Seller  was formed  include  the  practice  of
medicine and surgery and the provisions of medical  services of all types within
the State of Texas.

     C. Buyer has  entered  into an "Asset  Sale and  Purchase  Agreement"  with
Kaiser  Foundation  Health Plan of Texas ("KFHPTx") dated of even date with this
Agreement  (the  "Purchase  Agreement")  whereby Buyer will acquire  assets from
KFHPTx as set forth in the Purchase Agreement for the purpose of operating the
"Business" as defined in the Purchase Agreement.

     D. In connection with the  consummation of the Purchase  Agreement,  Seller
desires to sell,  assign,  and deliver to Buyer,  and Buyer  desires to purchase
from Seller certain assets as set forth in this Agreement.

     E. Buyer will cause the creation of a Texas professional  association ("New
P.A.").

     F. Some of the assets  acquired  by Buyer from  KFHPTx  under the  Purchase
Agreement and from Seller under this Agreement will be contributed to New P.A.
effective the "Closing Date", as hereinafter defined.

     G.  Buyer  and New  P.A.  will  enter  into a  medical  services  agreement
substantially  similar  to the form  attached  as  Exhibit  7.1 to the  Purchase
Agreement (the "Medical Services Contract") effective the Closing Date.

     NOW,  THEREFORE,  for and in  consideration  of the above  recitals and the
representations,  warranties, mutual covenants, and agreements herein expressed,
and for other good and valuable  consideration,  the receipt and  sufficiency of
which are hereby expressly acknowledged, the parties hereby agree as follows:

1.       SALE OF ASSETS.

1.1.     Sale and Purchase of Assets.



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     On the basis of the representations and warranties and subject to the terms
and  conditions  set forth in this  Agreement,  Seller hereby agrees to sell and
assign to Buyer, and Buyer hereby agrees to purchase,  and to accept or to cause
acceptance  of  assignment  of, for payment of the Purchase  Price  specified in
Section 1.4, on the Closing  Date  referred to in Section 1.5, all of the assets
of every kind and description that are owned and used by Seller in the operation
of its business  ("ASSETS"),  including without  limitation the assets set forth
specifically  on Exhibit 1.1  attached to this  Agreement  except as provided in
Section 1.2.

1.2.     Excluded Assets.

     The assets of Seller  listed on Exhibit 1.2 are not included in the defined
term  "Assets"  and are not being  transferred  or  assigned to Buyer under this
Agreement. All assets retained by Seller are referred to as "Excluded Assets".

1.3.     Liabilities.

         1.3.1      Assumed Liabilities.

     As of the Closing  Date,  Buyer shall assume and agrees to pay,  discharge,
and perform as  appropriate,  only those  obligations of Seller  relating to the
Assets  accruing or arising with respect to periods on or after the Closing Date
and no others (collectively, the "Assumed Liabilities").

         1.3.2      Liabilities Not to be Assumed.

     Buyer  shall not assume and shall not be  obligated  to pay,  discharge  or
perform any obligations and liabilities of Seller not assumed above,  including,
without limitation, the following (collectively, "Excluded Liabilities"):

     (a) Any and all  liabilities  of  Seller,  Seller's  affiliates,  or  third
parties  (including  without  limitation  KFHPTx),  whether  currently  known or
unknown,  with respect to claims or potential claims for medical  malpractice or
professional  liability  with  respect to the  business  of Seller  relating  to
periods  prior to the  Closing  in each  case  regardless  of when the  claim is
asserted;

     (b) Any and all  liabilities  of  Seller,  Seller's  affiliates,  or  third
parties  (including  without  limitation  KFHPTx),  whether  currently  known or
unknown,  relating to litigation or claims of any kind or nature with respect to
the business of Seller  relating to periods  prior to the Closing,  in each case
regardless of when the claim is asserted;

         (c)        Liabilities relating to the Excluded Assets;



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     (d)   Liabilities   which  are  not  related  to  the  Assets  and  Assumed
Liabilities;

     (e) Seller's  obligations  relating to Seller's  health and welfare benefit
plans,  pension,  and retirement plans with respect to the Terminated  Employees
(as hereinafter defined) or any former employees of Seller; and

     (f) Any liability of Seller relating to that certain Subsidy Agreement (the
"Subsidy Agreement") among Seller, Buyer, KFHPTx, and Sierra Health Services,
Inc., to be delivered at Closing.

     1.3.3 Property Taxes.

     All annual or periodic ad valorem fees, taxes, assessments, licensing fees,
vehicle  use fees,  and similar  charges  imposed by taxing  authorities  on the
Assets  (collectively,  "Property  Taxes") shall be borne and paid (a) by Seller
for all full tax years or periods ending before the Closing and for that portion
of any tax year or  period  ending  on or  after  the  Closing  from the date of
commencement  of such  year or  period  to the date  immediately  preceding  the
Closing,  and (b) by Buyer for all full tax  years or  periods  beginning  on or
after the  Closing and for that  portion of any tax year or period  ending on or
after the Closing from and  including the Closing to the final date of such year
or period, regardless of when or by which party such Property Taxes are actually
paid to the applicable taxing authority.

         1.3.4      Transfer Taxes; Recording Fees.

     The Buyer and Seller shall share equally any and all sales,  use,  transfer
of  other  similar  taxes  imposed  as a  result  of  the  consummation  of  the
transactions between Buyer and Seller contemplated by this Agreement.

1.4.     Purchase Price.

     1.4.1 Purchase Price. The consideration for the transfer of the Assets from
Seller to Buyer shall be Seven Million Five Hundred  Thousand and no/100 Dollars
($7,500,000)  ("Purchase  Price").  The Purchase Price shall be paid by Buyer to
Seller by Federal Reserve Bank wire transfer of good funds at Closing.

         1.4.2      Allocation.

     Prior to the Closing Date,  the parties shall agree to an allocation of the
Purchase Price among the Assets in accordance  with Section 1060 of the Internal
Revenue Code of 1986 (the "Code") provided,  however,  the parties' agreement on
such allocation shall not be a condition to Closing.

1.5.     Closing.



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     The  actions   contemplated  to  consummate  the  transactions  under  this
Agreement shall take place on the date ("Closing Date") which,  unless otherwise
agreed by Buyer and Seller,  is the "Closing  Date" for the Purchase  Agreement;
provided,  however,  that  notwithstanding  the  actual  time  of the day on the
Closing Date at which the actions  contemplated  to  consummate  this  Agreement
shall  occur,  and  unless  otherwise  agreed  to by the  parties,  the  closing
("Closing")  shall be deemed to be effective as of and to occur, and the risk of
loss shall pass Seller to Buyer, at  12:01:01a.m.  (Central Time) on the Closing
Date.  Closing shall commence on the Closing Date at the offices of the law firm
of Jenkens & Gilchrist,  A  Professional  Corporation,  1445 Ross Avenue,  Suite
3200, Dallas Texas 75202, at 10:00 a.m. (Central Time) on the Closing Date.

1.6.     Actions to be Taken at Closing.

     Subject to the terms and  conditions  set forth in this  Agreement,  at the
Closing:

         1.6.1.     Buyer's Deliveries.

         Buyer shall deliver to Seller:

     (a) The Purchase Price by Federal Reserve Bank wire transfer of good funds;

     (b) A Bill of Sale, Assignment and Assumption  Agreement,  substantially in
the form of  Exhibit  1.6.1(b)  relating  to the  Assets  conveyed  to the Buyer
hereunder,  and such  other  instruments  and  agreements  as may be  reasonably
necessary to effect Buyer's assumption of the Assumed Liabilities;

     (c) All necessary  consents,  approvals or  authorizations of third parties
required to be obtained  by Buyer  under the terms of this  Agreement,  it being
expressly  agreed by the parties that failure by Buyer to obtain or provide such
consents,  estoppels,  approvals or  authorizations  shall not be a condition to
Seller's obligations to close the transactions contemplated hereby;

     (d) Good  standing  certificates  for Buyer,  dated no earlier than 30 days
before the Closing Date, from its state of incorporation;

     (e) Copies of the  resolutions  duly  adopted by the Board of  Directors or
Executive  Committee  of  Buyer  authorizing  Buyer's  execution,  delivery  and
performance  of  this   Agreement  and  of  all  documents   related  hereto  or
contemplated herein;

     (f)  Certificate  of  Buyer,  dated as of the  Closing  Date,  signed by an
authorized representative of Buyer and certifying that the covenants and


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     agreements to be performed  and complied with by Buyer have been  performed
and complied with in all material respects;

     (g)  Certificate  of  Buyer,  dated  as of  the  Closing  Date,  signed  by
authorized  representatives  of Buyer and certifying that each of the respective
representations  and  warranties of Buyer set forth in this  Agreement  shall be
true and correct at and as of the Closing Date; and

     (h)  Subsidy  Agreement  executed  by  Buyer in the  form  attached  to the
Purchase Agreement.

         1.6.2.     Seller's Deliveries.

         Seller shall deliver to Buyer:

         (a)        Possession of the Assets to be conveyed to Buyer hereunder;

     (b) A Bill of Sale, Assignment and Assumption  Agreement,  substantially in
the form of  Exhibit  1.6.1(b),  conveying  all Assets to be  conveyed  to Buyer
hereunder,  and such  other  instruments  and  agreements  as may be  reasonably
necessary to effect Seller's assignment of the Assumed Liabilities;

     (c) All consents, estoppels,  approvals,  authorizations or other documents
from third parties in a form reasonably satisfactory to Buyer obtained by Seller
hereunder,  it being  expressly  agreed by the parties that failure by Seller to
obtain all such consents, estoppels,  approvals or authorizations shall not be a
condition to Buyer's obligation to close the transactions contemplated hereby;

     (d) Good  standing  certificate  for Seller  dated no earlier  than 30 days
before the Closing Date, from its state of incorporation;

     (e) Copies of the  resolutions  duly  adopted by the Board of  Directors or
Executive Committee of Seller and any requisite Unitholder approvals authorizing
Seller's  execution,  delivery  and  performance  of this  Agreement  and of all
documents related hereto or contemplated herein;

     (f)  Certificate  of  Seller,  dated  as of the  Closing  Date,  signed  by
authorized  representatives  of Seller and  certifying  that the  covenants  and
agreements to be performed  and complied with by Seller have been  performed and
complied  with in all material  respects or have been waived by Buyer;  it being
expressly  agreed by the parties that,  except as expressly  provided in Section
5.3 and Section 5.5,  Seller's  compliance  with the  covenants  and  agreements
contained in this Agreement shall not be a condition to


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     Buyer's   obligation  to  close  the  transactions   contemplated   hereby.
Notwithstanding  the  above,  if such  covenants  and  agreements  have not been
complied with in all material  respects,  Seller shall provide a list describing
in reasonable detail the extent of the non-compliance;

     (g)  Certificate  of  Seller,  dated  as of the  Closing  Date,  signed  by
authorized  representatives of Seller and certifying that each of the respective
representations  and warranties of Seller set forth in this  Agreement  shall be
true and correct at and as of the Closing  Date or has been waived by Buyer,  as
contemplated  by Section  2.2, it being  expressly  agreed by the  parties  that
except as expressly  provided in Section 5.3 and 5.5,  Seller's  representations
and  warranties  being accurate at Closing  (other than the  representations  in
Section  2.1.1,  2.1.2,  2.1.5,  and  2.1.10)  is  not a  condition  to  Buyer's
obligation to close the transactions  contemplated  hereby.  Notwithstanding the
above,  if such  representations  and warranties are not true and correct on the
Closing Date,  Seller shall provide a list  describing in reasonable  detail the
extent of the discrepancies;

     (h)  Subsidy  Agreement  executed  by  Seller in the form  attached  to the
Purchase Agreement; and

     (i) Such other documents reasonably required by Buyer to transfer fully the
Assets to Buyer or to complete the transactions contemplated hereunder.

     1.6.3 Third Party Consents.

     To the extent that Seller's  rights under any  contracts to be  transferred
pursuant to this  Agreement  may not be assigned  without the consent of a third
party,  which consent has not been  obtained  prior to Closing,  this  Agreement
shall not constitute an agreement to assign the same if an attempted  assignment
would constitute a breach thereof or be unlawful.  Seller, at its expense, shall
use its commercially  reasonable efforts to obtain any such required consents as
promptly as possible after Closing.

2.       REPRESENTATIONS AND WARRANTIES OF SELLER.

     "Material  Adverse Effect" means, with respect to Seller, an adverse effect
on the Assets or the  Assumed  Liabilities  which  would  materially  impair the
ability of Seller to operate  its  business in  substantially  the manner it has
been heretofore conducted.

2.1.     Representations and Warranties of Seller.

     As of the  Execution  Date,  Seller  represents  and  warrants  to Buyer as
follows:

         2.1.1.     Organization and Good Standing.



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     Seller is a professional  association duly organized,  validly existing and
in good standing under the laws of the jurisdiction of its organization, has all
requisite  corporate power and corporate  authority to own lease and operate its
properties  and to carry on its business,  as now being  conducted,  and is duly
qualified and in good standing to do business  under the corporate  laws of each
jurisdiction  in which the nature of its business or the ownership or leasing of
its properties makes such qualification necessary, except when the failure to be
so qualified would not have a Material Adverse Effect.

         2.1.2.     Seller's Authority and No Breach.

     Seller has all requisite  corporate power and corporate  authority to enter
into this Agreement and to consummate the transactions  contemplated hereby. The
execution  and  delivery  of  this  Agreement  and  the   consummation   of  the
transactions  contemplated  hereby have been duly  authorized  by all  necessary
corporate  action of Seller  other than the  approval of  Seller's  Unitholders,
which approval shall be obtained prior to Closing.  This Agreement constitutes a
valid and  binding  obligation  of  Seller,  enforceable  against  Seller in all
material respects in accordance with its terms except insofar as enforcement may
be limited by insolvency or similar laws affecting the enforcement of creditors'
rights in  general,  and  except as  enforceability  may be  limited  by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).

         2.1.3.     No Violations

     Except for consents of third parties  required under contracts set forth on
Part A of Exhibit 1.1, the  execution and delivery of this  Agreement  does not,
and the  consummation  of the  transactions  contemplated  hereby will not,  (i)
conflict  with,  or result in any  material  violation  of, or default  (with or
without  notice  or lapse of time,  or both)  under,  or give rise to a right of
termination, cancellation or acceleration of any material obligation or the loss
of a material  benefit  under,  or the  creation  of a material  lien,  security
interest  or other  encumbrance  with  respect to, any  material  portion of the
Assets or Assumed Liabilities (any such conflict,  violation,  default, right of
termination,  cancellation or  acceleration,  loss or creation,  a "Violation"),
pursuant to any provision of the Articles of  Association or By- laws of Seller,
(ii) result in any Violation of any material agreement which constitutes part of
the  Assets  or  Assumed  Liabilities,  (iii)  result  in any  Violation  of any
judgment,  order or decree entered with respect to Seller or to which the Assets
or the Assumed Liabilities are subject,  or, (iv) to Seller's knowledge,  result
in any Violation of any statute,  law, ordinance,  rule or regulation applicable
to the Assets or the Assumed  Liabilities,  except, in each of subparagraphs (i)
through (iv), where such Violations, individually or in the aggregate, would not
have a Material Adverse Effect.

         2.1.4.     Litigation.



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     To  Seller's  knowledge,  there  are  no  actions,  suits,  proceedings  or
investigations  of any kind now pending or  threatened  in writing and involving
Seller, the Assets or the Assumed Liabilities, which may have a Material Adverse
Effect.

         2.1.5.     Seller's Financial Statements.

     Seller  has  delivered  to Buyer  complete  and  correct  copies of (i) the
audited  balance sheet of Seller as at December 31, 1996 and the related audited
statements  of income and cash flows for the fiscal  year then  ended,  together
with all footnotes, and (ii) a draft copy of the audited balance sheet of Seller
as at December 31, 1997 and the related draft  audited  statements of income and
cash  flows  for the  fiscal  year  then  ended,  together  with  drafts  of all
footnotes,  which  financial  statements and draft financial  statements  fairly
present  in all  material  respects,  as at and for the  periods  then ended the
financial  position  and  results of  operations  of Seller in  conformity  with
generally  accepted  accounting  principles  prevailing in the United States, in
each case applied on a basis consistent throughout the reported periods.  Seller
has also delivered to Buyer an unaudited  interim balance sheet and statement of
income of Seller for the fiscal period ended on March 31, 1998,  which have been
prepared in a manner  consistent  with prior  practices  for Seller's  unaudited
statements  and on which all  transactions  that are  material are recorded in a
manner that is consistent with the recordation of such transactions in the past.
Such  financial  statements  (i) do not  contain  any item of  extraordinary  or
non-recurring  income or expense  (except as specified  therein) and (ii) do not
reflect any write- off or revaluation  of assets (except as specified  therein),
other than year-end adjustments which individually,  or in the aggregate,  would
not be material.

         2.1.6.     No Brokers or Finders.

     No broker or finder is involved on behalf of Seller in connection  with the
sale of the  Assets,  nor may any broker or finder  involved on behalf of Seller
claim  any  commission  on  account  of the  sale  of the  Assets.  The  parties
acknowledge  that  Wasserstein  Perella & Co.  has been  engaged  by Seller as a
financial advisor to Seller, and the fees of Wasserstein  Perella & Co. shall be
paid for by Seller.

         2.1.7.     Compliance with Applicable Laws.

     Except to the extent that non-compliance  would not have a Material Adverse
Effect,  the  business  of  Seller is being  conducted  in  compliance  with all
applicable laws, rules,  ordinances,  regulations,  licenses,  or judgments,  or
orders,  rules,  regulations,  licenses,  judgments,  or decrees of Governmental
Entities.  Seller has not,  and, to Seller's  knowledge,  none of its  executive
officers,  directors or employees (in their respective  capacities as such), has
engaged in any activity  constituting  fraud or abuse under the laws relating to
health care or insurance.

         2.1.8.     No Consents.



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     No  consent,   approval,   order  or  authorization  of,  or  registration,
declaration  or filing with, any court,  administrative  agency or commission or
other  governmental  authority  or  instrumentality,   domestic  or  foreign  (a
"Governmental  Entity"),  is required by or with respect to Seller in connection
with the execution and delivery of this Agreement by Seller, or the consummation
by Seller of the  transactions  contemplated  hereby,  except for such  filings,
authorizations,  orders and  approvals as may be required by federal,  state and
local Governmental Entities.

         2.1.9.     Material Contracts.

     Each  material  contract  constituting  part of the  Assets or the  Assumed
Liabilities  is in full force and effect and is valid and  enforceable by Seller
in accordance  with its terms,  except insofar as enforcement  may be limited by
bankruptcy,  insolvency or similar laws affecting the  enforcement of creditors'
rights in  general,  and  except as  enforceability  may be  limited  by general
principles of equity (regardless of whether such enforceability is considered in
a  proceeding  in equity or at law).  Seller is not in  material  default in the
observance  or the  performance  of any term or obligation to be performed by it
under any such  agreement to the extent that such default would cause a Material
Adverse  Effect.  To the  knowledge  of Seller,  no other  person is in material
default in the  observance  or the  performance  of any term or obligation to be
performed by it under any such  contract to the extent that such a default would
cause a Material Adverse Effect.  Seller has provided, or will provide before 60
days after the  Execution  Date,  originals  or true and  correct  copies of all
contracts  constituting part of the Assets or Assumed  Liabilities which are not
terminable on 90 days notice or less.

         2.1.10.    Title to and Condition of Properties and Assets.

     Seller  has good  title  to the  Assets  set  forth on Parts B, D, and E of
Exhibit  1.1,  whether  owned or leased,  in each case  subject to no  mortgage,
pledge, conditional sales contract, lien, security interest, right of possession
in favor of any third party, claim or other encumbrance  (collectively "Liens"),
and except with respect to leased  property,  the provisions of such leases.  No
representation or warranty is being made with respect to the physical  condition
of the Assets.  Seller makes no representation or warranty with respect to title
to the intellectual property set forth in Part C of Exhibit 1.1.

         2.1.11.    No Untrue Representation or Warranty.

     To  Seller's  Knowledge,  no  representation  or warranty by Seller in this
Agreement,  nor any  statement  or  certificate  furnished or to be furnished to
Buyer pursuant hereto or in connection with the transactions contemplated hereby
by Seller contains or will contain any untrue statement of a material fact.

2.2.     Representations and Warranties True and Correct at Closing; Breaches.



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     Each of the  representations  and  warranties  of Seller  set forth in this
Agreement  shall be true and  correct in all  respects  on the  Closing  Date as
though made on the Closing Date; and Seller shall have executed and delivered to
Buyer a certificate  signed by an authorized  representative of Seller and dated
as of the Closing Date to such  effect.  With the  exception of Sections  2.1.1,
2.1.2, 2.1.5, and 2.1.10, if any of the representations and warranties of Seller
are not true and  correct in all  respects as of the  Closing  Date,  then Buyer
shall be  entitled  to  indemnification  for any and all losses as  provided  in
Section  11  hereof,  but  shall  nevertheless  be  obligated  to  conclude  the
transactions  contemplated  hereby.  The consummation of the transactions  under
this  Agreement  by Buyer  shall not  constitute  a waiver of Buyer's  rights to
indemnification  for a breach of a  representation  or warranty  provided for in
this Section.

3.       REPRESENTATIONS AND WARRANTIES OF BUYER.

     "Material  Adverse Effect" means, with respect to Buyer, a material adverse
effect on Buyer's ability to consummate the transactions set forth herein.

3.1.     Representations and Warranties of Buyer.

     As of the  Execution  Date,  Buyer  represents  and  warrants  to Seller as
follows:

         3.1.1.     Organization and Good Standing.

     Buyer is a limited liability  company duly organized,  validly existing and
in good standing under the laws of the jurisdiction of its organization, has all
requisite  corporate power and corporate authority to own, lease and operate its
properties and to carry on its business,  as it is now being  conducted,  and is
duly  qualified and in good standing to do business  under the corporate laws of
each  jurisdiction  in which the  nature of its  business  or the  ownership  or
leasing of its properties makes such qualification  necessary,  except where the
failure to be so qualified would not have a Material Adverse Effect.

         3.1.2.     Buyer's Authority and No Breach.

     Buyer has all requisite  corporate  power and corporate  authority to enter
into this Agreement and to consummate the transactions  contemplated hereby. The
execution  and  delivery  of  this  Agreement  and  the   consummation   of  the
transactions  contemplated  hereby have been duly  authorized  by all  necessary
corporate  action on the part of Buyer.  This Agreement  constitutes a valid and
binding obligation of Buyer,  enforceable against Buyer in all material respects
in accordance  with its terms,  except insofar as enforcement  may be limited by
insolvency,  or similar laws affected the  enforcement  of creditors'  rights in
general,  and except as enforceability  may be limited by general  principles of
equity (regardless of whether such enforceability is considered in proceeding in
equity or at law).

         3.1.3.     No Brokers or Finders.



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     No broker or finder is involved on behalf of Buyer in  connection  with the
sale of the  Assets,  nor may any broker or finder  involved  on behalf of Buyer
claim  any  commission  on  account  of the  sale  of the  Assets.  The  parties
acknowledge  that Bear Stearns has been engaged by Buyer as a financial  advisor
to Buyer, and the fees of Bear Stearns shall be paid for by Buyer.

         3.1.4.     Buyer's Consents.

     No  consent,   approval,   order  or  authorization  of,  or  registration,
declaration  or filing  with,  any  Governmental  Entity is  required by or with
respect to Buyer in connection with the execution and delivery of this Agreement
by Buyer, or the consummation by Buyer of the transactions  contemplated hereby,
except for such filings, authorizations, orders and approvals as may be required
by state and local  Governmental  Entities,  including  those in connection with
Buyer's insurance business.

         3.1.5.     No Untrue Representation or Warranty.

     To  Buyer's  knowledge,  no  representation  or  warranty  by Buyer in this
Agreement,  nor any  statement  or  certificate  furnished or to be furnished to
Seller  pursuant  hereto or in  connection  with the  transactions  contemplated
hereby, contains or will contain any untrue statement of a material fact.

3.2.     Representations and Warranties True and Correct at Closing; Breaches.

     Buyer  shall  execute  and  deliver  to Seller a  certificate  signed by an
authorized  representative of Buyer,  dated as of the Closing Date, stating that
each of the  representations  and  warranties  of Buyer made herein are true and
correct in all respects,  or describing the manner in which such representations
and  warranties  are not true and  correct.  If any of the  representations  and
warranties of Buyer are not true and correct as of the Closing Date, then Seller
shall be  entitled  to  indemnification  for any and all losses as  provided  in
Section 11. The consummation of the transactions  under this Agreement by Seller
shall not constitute a waiver of Seller's rights to indemnification for a breach
of a representation or warranty provided for in this Section.

4.       SURVIVAL OF REPRESENTATIONS AND WARRANTIES.

     The  representations  and  warranties  of Buyer  and  Seller  contained  in
Sections 2 and 3 of this  Agreement  shall survive for a period of eighteen (18)
months following the Closing.

5.       BUYER'S CONDITIONS PRECEDENT TO CLOSING.

     Buyer's  agreement  to  purchase  and to pay for the  Assets  hereunder  is
subject  to  compliance  with  and  the  occurrence  of  each  of the  following
conditions on or before Closing,  except as any thereof may be waived in writing
by Buyer:


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<PAGE>




5.1.     Agreements.

     Seller  shall  have  executed  and  delivered  to  Buyer  all   agreements,
instruments,  certificates and other documents to be delivered by Seller, except
that Buyer shall be obligated to  consummate  this  transaction,  provided  that
Seller has substantially  performed and is proceeding in good faith and with due
diligence to obtain any remaining documents not delivered at Closing.

5.2.     Corporate Resolutions.

     Seller  shall  provide  Buyer  with the  resolutions  described  in Section
1.6.2(e).

5.3.     Seller's Representations and Warranties.

     The  representations  and warranties of Seller set forth in Sections 2.1.1,
2.1.2,  2.1.5, and 2.1.10 shall be true and correct in all material  respects as
of the date of this  Agreement  and as of the Closing Date as though made on and
as of the Closing Date. Buyer shall have received a certificate signed on behalf
of  Seller  by  an  authorized   officer  of  Seller  to  the  effect  that  the
representations and warranties of Seller set forth in those Sections (as amended
through disclosure  submitted to Buyer on or before the Closing regarding events
arising  since the  Execution  Date) shall be true and  correct in all  material
respects as of the  Execution  Date and as of the Closing Date as though made on
and as of the Closing Date, except as otherwise contemplated by this Agreement.

5.4.     Litigation.

     No order has been issued in any action, suit or proceeding before any court
or administrative authority in any domestic or foreign jurisdiction of any kind,
that enjoins the consummation of this Agreement or any related agreements.

5.5.     Certain Covenants.

     Seller shall have  complied  with its  obligations  in Sections  8.1(a) and
8.1(b) and Section 8.2 in all material respects.

6.       SELLER'S CONDITIONS PRECEDENT TO CLOSING.

     Seller's  agreement to sell and to deliver the Assets to be sold  hereunder
is subject to the payment at Closing of the Purchase Price and  compliance  with
and the  occurrence  of each of the following  conditions on or before  Closing,
except as any thereof may be waived in writing by Seller:

6.1.     Agreements.



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<PAGE>



     Buyer  shall  have  executed  and  delivered  to  Seller  all   agreements,
instruments, certificates and other documents to be delivered by Buyer.

6.2.     Corporate Resolutions.

     Buyer  shall  provide  Seller  with the  resolutions  described  in Section
1.6.1(e).

6.3.     Litigation.

     No order has been issued in any action, suit or proceeding before any court
or administrative authority in any domestic or foreign jurisdiction of any kind,
that enjoins the consummation of this Agreement or related agreements.

6.4.     Buyer's Representations and Warranties True and Correct.

     The  representations and warranties of Buyer set forth in Section 3.1.1 and
3.1.2 shall be true and  correct in all  material  respects as of the  Execution
Date and as of the Closing  Date as though  made on and as of the Closing  Date.
Seller shall have received a certificate  signed on behalf of Buyer by the chief
executive  officer and the chief  financial  officer of Buyer to the effect that
the  representations  and  warranties  of Buyer set forth in those  Sections (as
amended  through  disclosure  submitted  to  Seller  on or  before  the  Closing
regarding  events arising since the Execution Date) shall be true and correct in
all  material  respects as of the  Execution  Date and as of the Closing Date as
though made on and as of the Closing Date,  except as otherwise  contemplated by
this Agreement.

7.       JOINT CONDITIONS PRECEDENT TO CLOSING.

     In addition to the  matters  set forth in  Sections 5 and 6,  Seller's  and
Buyer's  agreement  hereunder  are subject to the  occurrence  of the  following
conditions on or before the Closing, except as any thereof may be waived by both
Seller and Buyer:

7.1.     Governmental Consents, and Approvals, and Licenses.

     Buyer  and  Seller  shall  have  obtained  all  appropriate  and  necessary
approvals, consents, licenses,  certifications, or exemptions required to effect
this Agreement from any and all state, local, and federal Governmental  Entities
for which  approval is  required;  provided,  however,  that each of the parties
shall  have  used its best  efforts  to  obtain  such  approvals,  consents,  or
exemptions.

7.2.     Termination of PMAT/KFHPTx Contract.

     Seller shall have terminated the Medical Service  Agreement  between Seller
and Kaiser  Foundation  Health  Plan of Texas,  effective  January  1, 1990,  as
amended, as of Closing.



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<PAGE>



7.3.     Closing of Transactions Under Related Agreements.

     The  transactions  contemplated  by  the  Purchase  Agreement,  the  Master
Purchase  and Sale  Agreement  (as defined in the  Purchase  Agreement)  and the
Reinsurance  Agreements (as defined in the Purchase Agreement) shall have closed
concurrently with the transactions  contemplated by this Agreement.  The Medical
Services Agreement,  the Transition Agreement described in Section 10.5.2 of the
Purchase Agreement, and the agreements described in this Section,  together with
their schedules and exhibits, shall be known as the "Related Agreements."

8.       ADDITIONAL AGREEMENTS OF SELLER.

8.1.     Conduct of Business Pending Closing.

     From the  Execution  Date until the Closing,  Seller  agrees that except as
otherwise consented to by Buyer in writing, Seller will:

     (a) Conduct the business of Seller in a commercially  prudent manner,  as a
going concern and in the ordinary  course,  and consistent  with such operation,
comply  in  all  material   respects  with  applicable   legal  and  contractual
obligations, consistent with past practice;

     (b) Use commercially reasonable efforts,  consistent with past practice, to
preserve the goodwill of its patients and its employees;

     (c) Not  intentionally  take any action  outside of the ordinary  course of
business  which  would  tend to cause  suppliers  or  patients  to  cease  their
respective affiliations with Seller;

     (d) Not enter into or materially amend any contract requiring  payment,  on
an annualized  basis, of more than $100,000.00  which contract is not terminable
without cause on 90 days notice or less;

     (e) Not permit any lien, charge or encumbrance on the Assets, to the extent
such lien, charge or encumbrance would have a Material Adverse Effect; or

     (f) Not take any  action  (or omit to take any  action),  which  action  or
omission  would  cause any  representation  or warranty  contained  herein to be
untrue in any material  respect at any time through the Closing Date, as if such
representation or warranty were made at and as of such time.

8.2.     Access to Documents and Premises.

         8.2.1.     Inspection of Books and Records.


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<PAGE>




     From the  Execution  Date  through the Closing  Date,  Buyer,  its counsel,
accountants,   and  other  representatives  shall,  subject  to  confidentiality
covenants made by Seller to third parties and state and federal  antitrust laws,
have the right to inspect the books and  records of Seller  relating to Seller's
business  and the Assets,  including  inspections  (without  copying) by Buyer's
counsel to the extent  possible  without  waiving any privilege  with respect to
information regarding all actions,  suits,  proceedings or investigations of any
kind,  now pending or  threatened in writing,  involving  Seller with respect to
Seller's business.  Any such inspection shall occur during normal business hours
and shall be scheduled by Buyer and Seller following request for inspection made
to Seller.  All  inspections  shall be  conducted  by Buyer and Seller in such a
manner as to maximize all applicable  privileges.  Buyer and its representatives
shall use their best efforts to conduct their inspection in such a manner as not
to be  disruptive  to Seller's  employees  or business  operations.  Buyer shall
reimburse Seller for any damage,  whether to the Assets or otherwise,  caused by
Buyer or Buyer's representatives during the inspection process.

         8.2.2.     Request for Access.

     All  requests  of Buyer,  its counsel  and such other  representatives  for
books,  records or interviews with Seller's  officers,  directors,  or employees
shall be coordinated through Nancy Mecodangelo,  Medical Group Administration of
Seller, or her designee.

8.3.     Breach by Seller.

     Except as provided in Section 5.5,  Seller's  compliance with the covenants
of Section 8.1 and 8.2 shall not be a condition to Closing,  but, rather, breach
of such covenants  shall entitle Buyer to recover its actual  damages  resulting
therefrom in accordance with Section 11.

9.       ADDITIONAL AGREEMENTS OF BUYER.

9.1.     Formation of New P.A..

     Prior to the  Closing,  Buyer  shall cause New P.A. to be formed and at the
Closing  New  P.A.  shall  be  duly  organized,  validly  existing,  and in good
standing.

9.2.     Maintenance of Records.

     Buyer shall retain all business and other records and documents relating to
the Assets in  accordance  with  Buyer's own record  retention  policies for the
longer of six years or the time  required by  applicable  law.  Buyer shall make
such records as are retained by Buyer  pursuant  hereto  available  for Seller's
review and copying upon request of Seller or its agents,  in a prompt manner, at
a reasonable time and place,  and Buyer shall be entitled to the actual costs of
such cooperation; provided, however, that Seller shall agree


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<PAGE>



     to hold all such  information  confidential as required by law. Buyer shall
be responsible for obtaining any and all consents required to release records to
Seller.  Buyer  shall  provide  the  records  requested  by Seller in the format
requested by Seller, including,  without limitation, on paper, on computer disk,
or by direct  electronic  transmission  in a form  compatible  with Buyer's then
existing  systems.  Buyer shall permit Seller to have access and to copy to such
records during normal business hours with prior notice to Buyer of the time that
such access shall be needed.  Seller's  employees,  representatives,  and agents
shall  conduct  themselves  in  such  a  manner  that  Buyer's  normal  business
activities  shall not be unduly or  unnecessarily  disrupted.  The provisions of
this  Section 9.2 shall  survive the Closing for a period of six years after the
Closing Date or longer if required by applicable law.

10.      ADDITIONAL AGREEMENTS OF BUYER AND SELLER.

10.1.    Regulatory Milestones Prior to Closing.

     Seller and Buyer shall prepare and file the applications as may be required
with respect to the  execution,  delivery and  performance of this Agreement and
the consummation of the transactions contemplated hereby. Buyer and Seller agree
to take all reasonable actions required or requested by such authorities for the
expeditious  consideration and rendering of all appropriate approvals,  consents
and authorizations.  Seller and Buyer shall diligently and timely cooperate with
each other and with all other parties in the submission of  applications  and of
any and all such additional  information or documentation  requested by any such
regulatory authorities.

10.2.    Employment Matters.

         10.2.1.    Severance Payments.

     (a) Seller  shall  terminate  all of  Seller's  employees  relating  to the
Business,  whether  such  employees  are  at-will or are  subject to  employment
agreements, as of the Closing (collectively, "Terminated Employees").

     (b) Buyer shall reimburse  Seller for all severance  payments arising under
Seller's  severance  policy in effect on the date of execution of this Agreement
due to those  Terminated  Employees  to whom  Buyer  does not  offer  comparable
employment with comparable pay following their termination from their employment
with Seller  ("Severance  Payments").  Buyer shall also assume the obligation to
provide or pay for all accrued but unused vacation to Terminated Employees,  but
only to the extent such benefits would be owed under Seller's  policies.  Seller
shall retain the  responsibility to pay any transition bonuses to the Terminated
Employees pursuant to Seller's policies.  If any Terminated Employee is hired by
Buyer pursuant to this Section 10.2.1 and such Terminated  Employee's employment
is severed by Buyer within 60 days of the Closing without


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<PAGE>



     cause, Buyer shall reimburse Seller for such Terminated  Employee severance
in an amount which would have been due the  Terminated  Employee  under Seller's
severance  policies in effect on the date of execution  of this  Agreement as if
Buyer had not offered comparable employment at comparable pay.

     (c)  Promptly   following  the  Execution  Date,  Buyer  (i)  will  provide
information  regarding  its  employment  application  process to the  Terminated
Employees,   and  (ii)  will  actively  begin  to  interview  and  consider  for
employment,  to be  effective  as of the Closing,  any  Terminated  Employee who
submits an  application  for  employment  in accordance  with Buyer's  customary
application process requirements and who are qualified for employment with Buyer
(each individually, an "Applicant," or collectively, "Applicants").

     (d) On or before July 15, 1998,  Buyer shall provide  Seller with a list of
the  Terminated  Employees  that Buyer has elected to hire  effective  as of the
Closing Date, as provided in Section  10.2.2.  Seller shall provide WARN notices
to all  employees  on or before 60 days prior to Closing.  Buyer  shall  provide
Seller,  at the  same  time  Buyer  provides  Seller  with a list of  Terminated
Employees  that Buyer has elected to hire,  with an offer of employment for each
such employee so that Seller may enclose such offer in the WARN notice.

     (e) All  Terminated  Employees who are hired by Buyer shall be given credit
for the time that they were employed by Seller for purposes of calculating  such
Terminated  Employees'  rights under each of Buyer's  employee  benefits  plans,
including without  limitation,  vacation pay, sick pay, and vesting for purposes
of deferred compensation and retirement plans.

     (f) After the Execution Date,  Seller agrees to cooperate with Buyer and to
release  information  to  Buyer  regarding  Terminated  Employees  who  Buyer is
considering  for  employment  prior to Closing.  All  information  regarding the
Terminated  Employees  shall be provided  subject to (i) all applicable laws and
regulations   regarding   protection  of  the   confidentiality   of  employment
information,  (ii) Buyer's obtaining the written consent of such employees,  and
(iii) Buyer's adherence to any policies of Seller with respect to the protection
of the confidentiality of employee information, as if such policies were Buyer's
own.  Buyer shall respect and protect the  confidentiality  of all such employee
information.  Information  to be released  hereunder  does not  include  quality
management and peer review  documents,  including but not limited to any and all
credentialing files, utilization review information,  peer evaluations,  medical
record reviews,  and member complaints,  except as may be permitted by law so as
not to waive the privilege with respect to such documents.


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         10.2.2.    WARN, COBRA and HIPAA Notices.

     To the extent  required of Seller by law,  Seller shall provide all notices
relating to the  termination of the  Terminated  Employees,  including,  without
limitation,  the notice  obligations  arising under the Workers  Adjustment  and
Retraining  Notification  Act  ("WARN"),  the  Consolidated  Omnibus  Budget and
Reconciliation  Act of 1985 ("COBRA"),  or the Health Insurance  Portability and
Accountability  Act  of  1996  ("HIPAA").   WARN-  related  liabilities  to  the
Terminated  Employees  which result from any delay in providing  WARN notices to
the Terminated Employees shall be paid by the party causing the delay.

         10.2.3.    Healthcare Coverage for Terminated Employees.

     Buyer shall offer healthcare  coverage to all Terminated  Employees,  which
shall be at least substantially equivalent to the healthcare coverage they would
be entitled to receive  under COBRA if Seller  remained in  existence  after the
Closing,  effective  as of the date of Closing,  for a period of up to 36 months
after the Closing Date or such shorter period as permitted by law. To the extent
that any  Terminated  Employee  becomes  employed by Buyer,  and the  Terminated
Employee  does not meet the  eligibility  requirements  for  Buyer's  own  COBRA
healthcare coverage prior to the Buyer's termination of the Terminated Employee,
Buyer agrees to offer the healthcare  coverage set forth in this Section to such
Terminated  Employee,  effective as of his date of termination from Buyer, until
the expiration of the thirty-sixth month after the Closing Date. Each Terminated
Employee  shall be  responsible  for  payment of his own  premiums  relating  to
healthcare coverage provided pursuant to this Section.

10.3.    Cooperation.

     Buyer and Seller agree to cooperate  reasonably  with each other,  from the
Execution  Date up through and following the Closing Date, in good faith,  in an
effort to satisfy all conditions,  undertakings and agreements contained in this
Agreement.

10.4.    Health Care Coverage for Certain Unitholders.

     Seller  shall  prepay  through  December 31, 1999 the premiums for whatever
health care coverage  certain  Unitholders  of Seller  maintain  under  KFHPTx's
Subscriber  Agreements,  as defined in the Purchase Agreement (be it individual,
spouse, family, or other health coverage) provided Buyer accepts the assignment,
reinsurance,  or  other  transfer  of  such  Subscriber  Agreements  under  this
Agreement and provided further the Unitholders pay such premiums to Seller.

11.      INDEMNIFICATION.

11.1.    Indemnification by Seller.



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     Subject to the limitations of Section 11.3, Seller shall indemnify and hold
harmless Buyer and its respective officers, directors,  unitholders,  employees,
agents and affiliates  against any and all actual damages resulting from claims,
losses,  costs,  expenses,  fees,  liabilities and damages,  including interest,
penalties and reasonable  attorneys' fees and disbursements (each individually a
"LOSS,"  and  collectively,  "LOSSES"),  arising out of, in  connection  with or
otherwise relating to:

         (a)        The Excluded Assets;

         (b)        The Excluded Liabilities;

     (c) The material breach by Seller of any representation, warranty, covenant
or  agreement  made by  Seller  in this  Agreement,  or in any  other  agreement
executed in connection herewith;

     (d) Any claim,  obligation or other liability  arising from the business of
Seller with  respect to any period  prior to the Closing  Date other than to the
extent such claims,  obligations or liabilities  constitute  part of the Assumed
Liabilities; and

     (e) Any action or litigation which  challenges,  seeks damages arising from
or seeks to enjoin any of the transactions contemplated by this Agreement, other
than any actions  commenced by  shareholders  of Buyer or Buyer's  Affiliates or
primarily involving the operations of Buyer's or Buyer's Affiliates' businesses.

11.2.    Indemnification by Buyer.

     Subject to the limitations of Section 11.3,  Buyer shall indemnify and hold
harmless Seller and its respective officers,  directors,  employees,  agents and
affiliates,  against any and all Losses,  arising out of, in connection  with or
otherwise relating to:

         (a)        The Assets;

         (b)        The Assumed Liabilities;

     (c) The material breach by Buyer of any representation,  warranty, covenant
or agreement made by Buyer in this Agreement, or in any other agreement executed
in connection herewith;

     (d) Any claim, obligation or other liability arising from Buyer's operation
of the Assets or the Assumed Liabilities as part of an HMO in Texas with respect
to any period after the Closing Date;



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     (e) Any action or litigation  commenced by members or shareholders  (as the
case  may  be) of  Buyer  or  Buyer's  Affiliates  or  primarily  involving  the
operations of Buyer's or Buyer's Affiliates' businesses which challenges,  seeks
damages arising from or seeks to enjoin any of the transactions  contemplated by
this Agreement or Related Agreements.

11.3.    Limitations.

     The  indemnification  rights and  obligations  set forth in this Section 11
shall  survive the Closing and shall expire 18 months after  Closing;  provided,
however,  that  (i)  with  respect  to  claims  notified  in good  faith  to the
indemnifying party prior to the expiration of the indemnity rights, the parties'
obligations with respect to its indemnity rights and obligations  shall continue
in effect  until  payment  or other  resolution  of such  claims;  and (ii) with
respect to  liabilities  under Section  1.3.2,  the  indemnification  rights and
obligations  shall  continue  until the expiration of the statute of limitations
applicable thereto.  Each party's liability hereunder shall be limited to actual
damages and no party shall be liable to any other party  hereunder  for special,
consequential, incidental, punitive or other damages.

         11.3.1.    Minimum.

     No party to this Agreement  shall have any liability,  whether  pursuant to
Section  11  or  otherwise,   for  breach  of  any  covenant  or  warranty,  for
misrepresentation,  or otherwise,  unless the aggregate amount of all claims for
which such party would, but for this Section 11, be liable,  exceeds $350,000 on
a cumulative basis. Each claim making up the $350,000  cumulative amount must be
a claim of $5,000 or more. If such party's  aggregate  liability for such claims
exceeds $350,000 on a cumulative  basis, then such party shall be liable for all
such claims in excess of $350,000.  Excluded  Liabilities are not subject to and
do not count towards these minimum limitations.

         11.3.2.    Maximum.

     In no event shall the  aggregate  liability of any party to this  Agreement
(whether  for breach of covenant  or  warranty,  misrepresentation,  pursuant to
Section 11 or otherwise) exceed 50% of the Purchase Price.  Excluded Liabilities
are not subject to and do not count towards these maximum limitations.



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11.4.    Notice and Right to Defend.

     (a) Should any claim or action by a third party arise after the Closing for
which Buyer or Seller may be liable to the other under the indemnity  provisions
of this Agreement,  the indemnitee shall notify the indemnitor in writing and in
reasonable detail as soon as practicable after the indemnitee receives notice of
such claim or action in the manner provided for the giving of notices under this
Agreement.   The   expenses  of  all   proceedings,   contests,   lawsuits,   or
investigations of claims with respect to such claims or actions,  shall be borne
by the indemnitor.  If an indemnitor  wishes to assume the defense of such claim
or action,  it shall give written notice to the indemnitee  within ten (10) days
after  notice from the  indemnitee  of such claim or action of its  intention to
assume the defense,  and the indemnitor shall  thereafter  assume the defense of
any such claim or  liability  through  counsel  reasonably  satisfactory  to the
indemnitee, provided that the indemnitee may also participate in such defense at
its own expense.

     (b) If the  indemnitor  shall not  assume  the  defense  of, or if after so
assuming it shall fail to defend,  any such claim or action,  the indemnitee may
defend against any such claim or action in such manner as it may reasonably deem
appropriate and the indemnitee may settle such claim or litigation on such terms
as it may  reasonably  deem  appropriate,  and  the  indemnitor  shall  promptly
reimburse the indemnitee for the amount of all  reasonable  expenses,  legal and
otherwise,  incurred by the  indemnitee  in connection  with the defense  and/or
settlement of such claim or action.  If no settlement of such claim or action is
made,  the indemnitor  shall satisfy any judgment  rendered with respect to such
claim or in such  action  before  indemnitee  is  required to do so, and pay all
expenses, legal or otherwise,  incurred by the indemnitee in the defense against
such claim or litigation.

11.5.    Exclusive Remedy.

     If a party is entitled to indemnification under this Agreement with respect
to a particular claim, then such indemnification  shall be such party's sole and
exclusive remedy.

11.6.    Failure to Provide Records Cooperation.

     If Buyer materially  breaches its obligations under Section 9.2 that Seller
can establish were actually transferred by Seller to Buyer under this Agreement,
and Seller  establishes  that such breach resulted in the loss or destruction of
documents  material to the defense of Buyer by Seller of an action or claim by a
third  party  pursuant  to  Seller's  indemnification   obligations  under  this
Agreement,  Seller  shall be  entitled to recover  from Buyer its actual  losses
incurred in the matter directly resulting from Buyer's breach. The


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     amount of the losses  recoverable  from Buyer shall in no event  exceed the
amount of the third party claim, and shall not include  special,  consequential,
incidental, punitive or other damages.

12.      TERMINATION.

12.1.    Termination.

This Agreement and the transactions contemplated hereby may be terminated or
abandoned at any time prior to the Closing Date:

     (a) By the mutual consent of Buyer and Seller;

     (b) By Seller or Buyer if the Closing  shall not have occurred on or before
October 31,  1998 (or such later date as may be mutually  agreed to by Buyer and
Seller);

     Termination of this Agreement shall terminate the Related Agreements. Where
a Related  Agreement  is only  between  Buyer and Seller,  no further  action or
notice shall be required for such termination to take effect. Where an affiliate
or a third party is involved in a Related Agreement, Buyer and Seller (as may be
the case) shall cause termination of such Related Agreement.

12.2.    Liability for Termination.

     If this  Agreement is  terminated  pursuant to this Section 12, all further
obligations  of the parties under this  Agreement  shall be  terminated  without
further liability of any party to the other, provided that nothing shall relieve
either party from any liability it may have for any breach hereof. 

13.      ARBITRATION.

13.1.    Conciliation and Mediation.

     If a dispute  between Buyer and Seller  relating to this Agreement or under
any other agreement  executed and delivered in connection with this Agreement is
not  resolved  within  fifteen  (15) days from the date  that  either  party has
notified  the other  that  such  dispute  exists,  then  such  dispute  shall be
submitted  jointly for  conciliation  to the  President  or his designee of each
party.  If such  senior  executive  officers  are unable to resolve  the dispute
within thirty (30) days from the date that it is first presented to them, either
party may give notice to the other party that the dispute  shall be submitted to
non- binding  mediation  with a mediator  acceptable  to both  parties,  and the
parties shall, for a sixty (60) day period from the receipt of such notice, seek
in good faith to resolve such dispute in mediation.  If the parties are not able
to resolve  the dispute in  mediation,  then such  dispute  shall be referred to
binding arbitration, except to the extent that injunctive relief is available to
a party hereto.


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13.2.    Arbitration.

     Any dispute  submitted to  arbitration  pursuant to this  Section  shall be
determined  by the decision of a board of  arbitration  consisting  of three (3)
members (ABoard of Arbitration")  selected as hereinafter provided.  Buyer shall
select an arbitrator and Seller shall select an  arbitrator,  each of whom shall
be a member of the Board of Arbitration  who is  independent  of the parties.  A
third Board of Arbitration member, independent of the parties, shall be selected
by mutual agreement of the other two Board of Arbitration  members. If the other
two Board of  Arbitration  members fail to reach  agreement on such third member
within  twenty  (20)  days  after  their  selection,  such  third  member  shall
thereafter be selected by the American Arbitration  Association upon application
made to it for such  purpose  by any  party  to the  arbitration.  The  Board of
Arbitration  shall meet in Dallas,  Texas,  or such other place as a majority of
the members of the Board of Arbitration  determines more appropriate,  and shall
reach and render a decision  in writing  (which  shall state the reasons for its
decisions in writing and shall make such decisions  entirely on the basis of the
substantive  law  governing  the  Agreement and which shall be concurred in by a
majority of the members of the Board of  Arbitration)  with respect to the items
in dispute. In connection with rendering its decisions, the Board of Arbitration
shall  adopt and follow the  Commercial  Rules of  Arbitration  of the  American
Arbitration  Association,  except as  provided  in Exhibit  13.2.  To the extent
practical,  decisions of the Board of Arbitration shall be rendered no more than
thirty (30) calendar days following  commencement  of  proceedings  with respect
thereto.  The Board of  Arbitration  shall  cause  its  written  decision  to be
delivered  to Buyer and Seller.  Any decision  made by the Board of  Arbitration
(either  prior to or after the  expiration  of such  thirty  (30)  calendar  day
period)  shall be final,  binding  and  conclusive  on Buyer and Seller and each
party to the  arbitration  shall be  entitled  to enforce  such  decision to the
fullest  extent  permitted  by  law  and  entered  in  any  court  of  competent
jurisdiction.  The  fees  and  expenses  of the  Board  of  Arbitration  and the
reasonable  fees and expenses of legal  counsel and  consultants  of the parties
shall be allocated  among the parties in the same  proportion that the aggregate
amount of the disputed  items so submitted to the Board of  Arbitration  that is
unsuccessfully  submitted by each of them (as finally determined by the Board of
Arbitration)  bears to the total amount of items so submitted.  

13.3.  Equitable Relief.

     Notwithstanding any other provision of this Agreement, any party shall have
the right to seek equitable relief, in a court of competent jurisdiction, to the
extent that equitable relief is available to a party hereto.  If a party chooses
to pursue equitable relief,  such conduct shall not constitute a waiver of or be
deemed  inconsistent  with the arbitration  provisions set forth in this Section
13. The Board of  Arbitration  may consider the findings of, rulings of, and any
evidence  submitted in every legal  proceeding for equitable relief as the Board
of Arbitration deems proper;  however,  any such findings,  rulings and evidence
shall not  necessarily be binding on the Board of Arbitration in connection with
any arbitration proceedings conducted by such Board of Arbitration.

14.      MISCELLANEOUS.


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14.1.    Notices.

     All  notices  and other  communications  hereunder  shall be in writing and
shall be either (i) deposited in first class United States mail, certified, with
postage prepaid,  (ii) delivered by messenger,  (iii) sent by overnight courier,
or (iv) sent by fully  completed and confirmed  facsimile  transmission  (with a
written confirmation  simultaneously sent in first class United States mail), as
follows:

If to the Seller:                           Copy to:


Permanente Medical Association of           McGlinchey Stafford, A Professional
Texas                                       Limited Liability Company
12720 Hillcrest Road, Suite 600             643 Magazine Street
Dallas, TX 75230                            New Orleans, LA 70130

Attention:  William Gillespie, M.D.         Attention:  Donna G. Klein

                                            FAX:  504-596-2800


If to the Buyer:                            Copy to:
HMO Texas, L.C.                             Morgan, Lewis & Bockius, LLP
c/o Sierra Health Services, Inc.            300 South Grand Avenue
2720 North Tenaya Way                       Twenty-Second Floor
Las Vegas, Nevada 89128                     Los Angeles, California 90071-3132
Attention: Paul Palmer, Vice                Attention: Richard J. Maire, Jr.
President and CFO                           Fax: (213) 612-2554
Fax: (702) 240-7148

     or such  other  address  or fax  number as any party may  request by notice
given as aforesaid. Notices sent as provided herein shall be deemed given on the
date received by the  recipient.  If a recipient  rejects or refuses to accept a
notice given pursuant to this Section, or if a notice is not deliverable because
of a changed  address or fax  number of which no notice was given in  accordance
with the provisions  hereof,  such notice shall be deemed to be received two (2)
days  after  such  notice  was  mailed  (whether  as the  actual  notice  or the
confirmation  of a faxed  notice)  in  accordance  with the  terms  hereof.  The
foregoing shall not preclude the effectiveness of actual written notice given to
a party at any address or by any means.

14.2.    Confidentiality.

     All  information,  instruments,  documents  and details  concerning or with
respect  to  the  business   operations  of  Buyer  and  Seller   ("Confidential
Information") are strictly confidential, and Seller and Buyer expressly covenant
and agree with each other that they


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     will  not nor  will  they  or any of them  allow  any of  their  respective
officers,   directors,   employees  or  agents  to  disclose  the   Confidential
Information  or any  matters  relating  to the  business of the other or to this
Agreement, its negotiation, terms, provisions or conditions,  including, but not
limited  to,  the  Purchase  Price,  except as may be  reasonably  necessary  to
effectuate the transactions contemplated hereby; provided,  however, (i) neither
party shall be prohibited  from  disclosing  any such  information,  without the
other party's consent, if such disclosure is required, in the reasonable opinion
of its legal  counsel,  by order of a court of competent  jurisdiction  or under
applicable law or regulatory action and the disclosing party has given notice of
such  requirement to the other party promptly upon learning that such disclosure
may be  required  and (ii) Buyer shall not be  prohibited  from  disclosing  any
confidential  information  to  its  insurers,  reinsurers,  public  and  private
auditors,   investors  and  bankers  or  otherwise  to  comply  with  applicable
securities laws and other governmental regulations.

     If the transactions  contemplated  hereby are not completed for any reason,
upon the  written  request of the other  party,  each party  shall  destroy  all
materials  received from the other party hereto including,  without  limitation,
deletion  of  information  in  computer  storage,  along with any copies and any
worksheets or abstracts  compiled or derived from such information,  and provide
an officer's  certification that such destruction has occurred.  Notwithstanding
anything in this  Agreement to the  contrary,  (i) the  covenants of the parties
contained in this  Section  shall  survive  Closing or any  termination  of this
Agreement,  (ii) Buyer and Seller  each shall have the right to seek  injunctive
relief to enjoin the other party from  violating  this Section,  and (iii) Buyer
and Seller each shall have the right to seek specific  performance  of the other
party with respect to the obligations set forth in this Section.

14.3.    Waiver.

     No  waiver  by  either  Buyer or  Seller  hereto  of its  rights  under any
provision of this  Agreement  shall  constitute a waiver of such party's  rights
under such  provision at any other time or a waiver of such party's rights under
any other provision of this Agreement.

14.4.    Counterparts.

     This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original but all of which together  shall  constitute one and
the same instrument. An executed faxed copy of this agreement shall be deemed an
original executed copy of this Agreement.

14.5.    Headings.

     The headings contained in this Agreement have been inserted for convenience
of  reference  only and shall in no way  restrict  or modify any of the terms or
provisions hereof.

14.6.    Severability.


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     If any provision of this  Agreement is held by final judgment of a court of
competent  jurisdiction to be invalid,  illegal or unenforceable,  such invalid,
illegal or  unenforceable  provision shall be severed from the remainder of this
Agreement,  and the remainder of this Agreement shall be enforced.  In addition,
the  invalid,   illegal  or  unenforceable  provision  shall  be  deemed  to  be
automatically  modified,  and, as so modified, to be included in this Agreement,
such  modification  being made to the  minimum  extent  necessary  to render the
provision valid, legal and enforceable.  Notwithstanding the foregoing, however,
if the severed or modified  provision concerns all or a portion of the essential
consideration  to be delivered  under this  Agreement by one party to the other,
the remaining  provisions of this Agreement shall also be modified to the extent
necessary to adjust  equitably the parties'  respective  rights and  obligations
hereunder.

14.7.    Entire Agreement.

     This  Agreement  (including  the  Exhibits  and  Schedules)  and the  other
agreements,  certificates and documents of Seller and Buyer contemplated  herein
constitute the entire  agreement  between the parties hereto with respect to the
matter hereof, superseding all prior agreements or understandings. No amendment,
alteration,  or  modification  of this  Agreement  shall be valid unless in each
instance such amendment,  alteration,  or modification is expressed in a written
instrument duly executed by the parties hereto.

14.8.    Successors and Assigns.

     This  Agreement  shall be binding  upon and inure to the  benefit of and be
enforceable  by the  respective  successors  and assigns of the parties  hereto.
Notwithstanding  the foregoing,  this  Agreement  shall not be assignable by any
party  without  the prior  written  consent of the other,  and any attempt at an
assignment in violation of this Section shall be void ab initio.

14.9.    Governing Law.

     This Agreement is to be governed by and  interpreted  under the laws of the
State of Texas,  without  resort to choice of law or conflict of law  principles
which direct the application of the laws of a different state.

14.10.   Cost of Transaction.

     Whether or not the transactions contemplated hereby are consummated:

     (a) Buyer shall pay the fees, expenses,  and disbursements of Buyer and its
agents, representatives, accountants, and counsel; and

     (b) Seller shall pay the fees, expenses and disbursements of Seller and its
agents, representatives, accountants and counsel.


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14.11.   Further Assurances.

     Each party  hereto  agrees for the benefit of the other  parties  hereto to
execute and deliver any necessary documents,  instruments or agreements,  and to
take any and all  necessary  actions,  in order to (i)  fully  vest in Buyer all
right,  title and  interest to the Assets,  and (ii) carry out the terms of this
Agreement and the transactions contemplated by this Agreement.

14.12.   Construction.

     Whenever the context of this  Agreement  requires,  the gender of all words
herein shall include the masculine,  feminine, and neuter, and the number of all
words  herein  shall  include  the  singular  and  plural.  All  parties to this
Agreement  have been  represented  by counsel and,  accordingly,  this Agreement
shall not be construed  strictly for or against any party hereto.  The Schedules
and Exhibits attached hereto are incorporated herein for all purposes and made a
part of this Agreement as if set out in full in this  Agreement.  All references
to section  numbers in this  Agreement  shall be  references to sections in this
Agreement unless otherwise specifically indicated.

14.13.   Third Parties.

     None of the provisions of this Agreement shall confer rights or benefits as
third  party  beneficiaries  or  otherwise  upon  any  third  party  that is not
expressly  a  party  to  this  Agreement  including,   without  limitation,  the
Terminated  Employees,  and  the  provisions  of  this  Agreement  shall  not be
enforceable by any such third party.

14.14.   Time is of the Essence.

     Time  is of the  essence  with  regard  to all of the  provisions  of  this
Agreement.




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     IN WITNESS  WHEREOF,  the parties hereto have executed this Agreement as of
the Execution Date.

                                       BUYER:

                                       HMO TEXAS, L.C.


                                       By:               /s/ Larry S. Howard
                                       Title:            President


                                       SELLER:

                     PERMANENTE MEDICAL ASSOCIATION OF TEXAS


                                       By:      /s/ William A. Gillespie, M.D.
                                       Title:            President




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