EXHIBIT 10.2







                        ASSET SALE AND PURCHASE AGREEMENT

                                     Between

                     KAISER FOUNDATION HEALTH PLAN OF TEXAS
                         A TEXAS NON-PROFIT CORPORATION
                                   ("SELLER")


                                       AND

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


                                  JUNE 5, 1998





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                                                 TABLE OF CONTENTS
<TABLE>

<CAPTION>
<S>      <C>                                                                                                     <C>
         1.       SALE OF ASSETS..................................................................................2
                           1.1.     Sale and Purchase of Assets...................................................2
                           1.2.     Excluded Assets...............................................................4
                           1.3.     Liabilities...................................................................5
                                    1.3.1.  Assumed Liabilities...................................................5
                                    1.3.2.  Liabilities Not to be Assumed.........................................6
                                    1.3.3.  Property and Premium Taxes............................................7
                                    1.3.4.  Transfer Taxes; Recording Fees........................................7
                           1.4.     Purchase Price................................................................7
                                    1.4.1.  Purchase Price........................................................7
                                    1.4.2.  Certain Balance Sheet Adjustments to Purchase Price...................7
                                    1.4.3.  Collection of Receivables............................................10
                                    1.4.4.  Purchase Price Earn-Out for Growth in Certain Member
                                            Accounts.............................................................10
                                    1.4.5.  Purchase Price Earn-Out for NCQA Accreditation.......................12
          1.4.6. Purchase Price Decrease for Decrease in Certain Member
     Accounts.............................................................12
         1.4.7. Purchase Price Adjustment for Premium Yield Attributable
     to Certain Members...................................................13
                                    1.4.8.  Allocation...........................................................14
                           1.5.     Closing and Closing Date.....................................................14
                           1.6.     Actions to be Taken at Closing...............................................14
                                    1.6.1.  Buyer's Deliveries...................................................14
                                    1.6.2.  Seller's Deliveries..................................................16
                                    1.6.3.  Third Party Consents.................................................17

         2.       REPRESENTATIONS AND WARRANTIES OF SELLER.......................................................18
                           2.1.     Representations and Warranties of Seller.....................................19
                                    2.1.1.  Organization and Good Standing.......................................19
                                    2.1.2.  Seller's Authority and No Breach.....................................19
                                    2.1.3.  No Violations........................................................19
                                    2.1.4.  No Consents..........................................................20
                                    2.1.5.  Seller's Financial Statements........................................20
                                    2.1.6.  Litigation...........................................................20
                                    2.1.7.  Compliance With Applicable Laws......................................21
                                    2.1.8.  Labor and Employment Matters.........................................21
                                    2.1.9.  Absence of Certain Changes...........................................21
                                    2.1.10.Material Contracts....................................................22
                                    2.1.11.Title to and Condition of Assets......................................23
                                    2.1.12.Patents, Copyrights, Service Marks and Trademarks.....................23
                                    2.1.13.No Broker or Finders..................................................23
                                    2.1.14.Tax Returns and Tax Liabilities.......................................23
                                    2.1.15.No Untrue Representation or Warranty..................................23
                           2.2.     Representations and Warranties True and Correct at Closing;
                                    Breaches

                                                         i

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 .................................................................................................................24

         3.       REPRESENTATIONS AND WARRANTIES OF BUYER........................................................24
                           3.1.     Representations and Warranties of Buyer......................................24
                                    3.1.1.  Organization and Good Standing.......................................24
                                    3.1.2.  Buyer's Authority and No Breach......................................24
                                    3.1.3.  No Brokers or Finders................................................25
                                    3.1.4.  Buyer's Consents.....................................................25
                                    3.1.5.  No Untrue Representation or Warranty.................................25
                           3.2.     Representations and Warranties True and Correct at Closing;
                                    Breaches
 .................................................................................................................25

         4.       SURVIVAL OF REPRESENTATIONS AND WARRANTIES.....................................................25

         5.       BUYER'S CONDITIONS PRECEDENT TO CLOSING........................................................26
                           5.1.     Opinion of Counsel...........................................................26
                           5.2.     Agreements...................................................................26
                           5.3.     Corporate Resolutions........................................................26
                           5.4.     Seller's Representations and Warranties True and Correct.....................26
                           5.5.     Litigation...................................................................27
                           5.6.     Certain Covenants............................................................27

         6.       SELLER'S CONDITIONS PRECEDENT TO CLOSING.......................................................27
                           6.1.     Opinion of Counsel...........................................................27
                           6.2.     Corporate Resolutions........................................................27
                           6.3.     Agreements...................................................................27
                           6.4.     Buyer's Representations and Warranties True and Correct......................27
                           6.5.     Litigation...................................................................28

         7.       JOINT CONDITIONS PRECEDENT TO CLOSING..........................................................28
                           7.1.     Medical Services Agreement...................................................28
                           7.2.     Governmental Consents and Approvals..........................................28
                           7.3.     Hart-Scott-Rodino............................................................28
                           7.4.     Closing of Transactions Under Related Agreements.............................28

         8.       ADDITIONAL AGREEMENTS OF SELLER................................................................29
                           8.1.     Conduct of Business Pending Closing..........................................29
                           8.2.     Access to Documents and Premises.............................................29
                                    8.2.1.  Inspection of Books and Records......................................29
                                    8.2.2.  Request for Access...................................................30
                           8.3.     Breach by Seller.............................................................30
                           8.4.     Noncompetition and Nonsolicitation...........................................30

         9.       ADDITIONAL AGREEMENTS OF BUYER.................................................................31
                           9.1.     Maintenance of Records.......................................................31
                           9.2.     Communications...............................................................31

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         10.      ADDITIONAL AGREEMENTS OF BUYER AND SELLER......................................................32
                           10.1.    Regulatory Milestones Prior to Closing.......................................32
                                    10.1.1.          HSR Filing..................................................32
                                    10.1.2.          Texas Department of Insurance...............................32
                           10.2.    Health Care Financing Administration.........................................32
                           10.3.    Office of Personnel Management...............................................33
                           10.4.    Employment Matters...........................................................34
                                    10.4.1.          Severance Payments..........................................34
                                    10.4.2.          WARN, COBRA and HIPAA Notices...............................35
                                    10.4.3.          Health Care Coverage for Terminated Employees...............36
                                    10.4.4.          Health Care Coverage for Seller's Board of Directors........36
                           10.5.    Transition Issues............................................................36
                                    10.5.1.          Use of Materials............................................36
                                    10.5.2.          Transition Agreement........................................36
                           10.6.    Public Information Releases..................................................37
                           10.7.    Cooperation..................................................................37
                           10.8.    Group 3000...................................................................37
                           10.9.    Reciprocity Agreement........................................................38

         11.      INDEMNIFICATION................................................................................38
                           11.1.    Indemnification by Seller....................................................38
                           11.2.    Indemnification by Buyer.....................................................39
                           11.3.    Limitations..................................................................39
                                    11.3.1.          Minimum.....................................................39
                                    11.3.2.          Maximum.....................................................40
                           11.4.    Notice and Right to Defend...................................................40
                           11.5.    Exclusive Remedy.............................................................41
                           11.6.    Failure to Provide Records Cooperation.......................................41

         12.      TERMINATION....................................................................................41
                           12.1.    Termination..................................................................41
                           12.2.    Liability for Termination....................................................41

         13.      ARBITRATION....................................................................................42
                           13.1.    Conciliation and Mediation...................................................42
                           13.2.    Arbitration..................................................................42
                           13.3.    Equitable Relief.............................................................43
                           13.4.    No Applicability.............................................................43

         14.      GUARANTEES.....................................................................................43
                           14.1.    Seller's Guarantor...........................................................43
                           14.2.    Buyer's Guarantor............................................................43

         15.      MISCELLANEOUS..................................................................................44
                           15.1.    Notices......................................................................44
                           15.2.    Waiver.......................................................................45
                           15.3.    Counterparts.................................................................45

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                           15.4.    Headings.....................................................................45
                           15.5.    Severability.................................................................45
                           15.6.    Entire Agreement.............................................................46
                           15.7.    Successors and Assigns.......................................................46
                           15.8.    Governing Law................................................................46
                           15.9.    Cost of Transaction..........................................................46
                           15.10.   Further Assurances...........................................................47
                           15.11.   Construction.................................................................47
                           15.12.   Third Parties................................................................47
                           15.13.   Time is of the Essence.......................................................47
                           15.14.   Confidentiality..............................................................47
                           15.15.   Offsets......................................................................48
                           15.16.   No Duplication...............................................................48
</TABLE>


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<TABLE>

<CAPTION>
                                                 LIST OF SCHEDULES

<S>      <C>
Schedule 1.1(b)                     Provider Agreements
Schedule 1.1(c)                     Contracts
Schedule 1.1(d)                     Tangible Personal Property
Schedule 1.1(i)                     Assets of Seller's Affiliates
Schedule 1.1(j)                     Software, Hardware and Related Data of Seller or Seller's
                                    Affiliates
Schedule 1.2(m)                     Other Assets to be Excluded
Schedule 1.4.4                      Membership Base
Schedule 2.1.6                      Litigation
Schedule 2.1.7                      Compliance with Applicable Laws
Schedule 2.1.8                      Labor and Employment Matters
Schedule 2.1.9                      Absence of Certain Changes
Schedule 2.1.11                     Title to and Condition of Assets


                                                 LIST OF EXHIBITS

Exhibit 1.4.2(a)                    Opening Balance Sheet
Exhibit 1.4.2(a)-1                  Rules
Exhibit 1.6.1(b)                    Bill of Sale, Assignment and Assumption Agreements
Exhibit 1.6.1(c)                    Assumption Reinsurance Agreement
Exhibit 1.6.1(d)                    Insurance Assumption Reinsurance Agreement
Exhibit 1.6.1(l)                    Subsidy Agreement
Exhibit 1.6.1(m)                    Transition Agreement
Exhibit 1.6.1(n)                    Medical Services Agreement
Exhibit 5.1                         Opinion Letter of Seller's Counsel
Exhibit 6.1                         Opinion Letter of Buyer's Counsel
Exhibit 10.8(a)                     Seller's Group 3000 Rates
Exhibit 10.8(b)                     Seller's Affiliates' Standard Group 3000 Rates
Exhibit 13.2                        Exceptions to AAA Arbitration Rules
</TABLE>


                                                LIST OF DEFINITIONS

"Affiliates" can be found in Recital C.
"Agreement" can be found on page 1.
"Applicant"or "Applicants" can be found in Section 10.4.1(c).
"Assets" can be found in Section 1.1.
"Assumed Liabilities" can be found in Section 1.3.1.
"Assumption Reinsurance Agreement" can be found in Section 1.6.1(c).
"Board of Arbitration" can be found in Section 13.2.
"Business" can be found in Recital B.
"Buyer" can be found on page 1.
"Buyer's Parent" can be found in Section 14.2.
"CRF" can be found in Section 10.3(a).

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"COBRA" can be found in Section 10.4.2.
"Closing" can be found in Section 1.5.
"Closing Balance Sheet" can be found in Section 1.4.2(b).
"Closing Date" can be found in Section 1.5.
"Closing Working Capital" can be found in Section 1.4.2(b).
"Code" can be found in Recital A.
"Columbia Hospital Contract" can be found in Section 1.6.3(b).
"Commercial HMO Members" can be found in Section 1.4.6.
"Competitive Business" can be found in Section 8.4(a).
"Confidentiality Agreement" can be found in Recital E.
"Contracts" can be found in Section 1.1(c).
"Control" can be found in Recital C.
"Delivery System" can be found in Recital B.
"Earn-Out Accounts" can be found in Section 1.4.4.
"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 2.1.4.
"HCFA" can be found in Recital C.
"HCFA Novation Agreement" can be found in Section 10.2.
"HIPAA" can be found in Section 10.4.2.
"HMO" can be found in Section 1.1(h).
"HMO Business" can be found in Recital B.
"HSR Act" can be found in Section 2.1.4.
"Indemnification Liability" can be found in Section 10.3(b).
"Indemnity Business" can be found in Recital B.
"Insurance Assumption Reinsurance Agreement" can be found in Recital D.
"Interim Balance Sheet" can be found in Section 1.4.2(b).
"KFH" can be found in Recital C.
"KFHP" can be found in Recital C.
"KPIC" can be found in Recital B.
"Leased Real Property" can be found in 1.6.1(e).
"Liens" can be found in Section 2.1.11.
"Loss" or "Losses" can be found in Section 11.1.
"Master Purchase and Sale Agreement" can be found in Section 1.6.1(e).
"Material Adverse Effect" can be found in Section 2 and Section 3.
"Medical Services Agreement" can be found in Section 1.6.1(n).
"Member" or "Members" can be found in Recital C.
"Membership Base" can be found in Section 1.4.4.
"NCQA" can be found in Section 1.4.5.
"New Accounts" can be found in Section 1.4.4.
"Non-Texas Group 3000 Members" can be found in Section 10.8.
"Notifying Party" can be found in Section 1.4.2(e).
"OPM" can be found in Recital C.
"OPM Novation Agreement" can be found in Section 10.3.
"Old National Accounts" can be found in Section 1.4.4.
"Opening Balance Sheet" can be found in Section 1.2(k).

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"PMAT" can be found in Section 1.2(b).
"Pharmacy Business" can be found in Recital B.
"Premium Yield" can be found in Section 1.4.7.
"Provider Agreements" can be found in Recital C.
"Property Taxes" can be found in Section 1.3.3.
"Purchase Price" can be found in Section 1.4.1.
"Receiving Party" can be found in Section 1.4.2(e).
"Reinsurance Agreements" can be found in Recital D.
"Related Agreements" can be found in Section 7.4.
"Returns" can be found in Section 2.1.14.
"Rules" can be found in Section 1.4.2(a).
"Seller" can be found on page 1.
"Seller's Permits" can be found in Section 2.1.7.
"Severance Payments" can be found in Section 10.4.1(b).
"Subscriber Agreements" can be found in Recital C.
"Subsidy Agreement" can be found in Section 1.3.2(i).
"Tangible Personal Property" can be found in Section 1.1(d).
"Terminated Employees" can be found in Section 10.4.1(a).
"Texas Group 3000 Members" can be found at Section 10.8(a).
"Transfer" can be found in Section 10.2.
"Transition Agreement" can be found in Section 1.6.1(m).
"US GAAP" can be found in Section 2.1.5.
"Violation" can be found in Section 2.1.3.
"WARN" can be found in Section 10.4.2.


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                                         ASSET SALE AND PURCHASE AGREEMENT


     THIS ASSET SALE AND PURCHASE  AGREEMENT  ("Agreement")  is made and entered
into as of this 5th day of June,  1998  ("Execution  Date"),  by and between HMO
Texas, L.C., a Texas limited liability company ("Buyer"),  and Kaiser Foundation
Health Plan of Texas, a Texas non-profit corporation ("Seller").

                                                     RECITALS:

     A. Seller is a Texas  non-profit  corporation  that is exempt from  federal
income taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended ("Code"). Buyer is a Texas limited liability company.

     B. Seller's business operations are comprised of several business segments,
including  (i) its  operation  in the  State of  Texas  of a health  maintenance
organization  ("HMO  Business"),  (ii) the provision and delivery of health care
services  in the State of Texas (as  distinct  from the  financial  coverage  of
health care services that are part of the HMO Business) ("Delivery System"), and
(iii) the  provision  and  delivery of  pharmacy  services in the State of Texas
("Pharmacy  Business").  The HMO Business, the Delivery System, and the Pharmacy
Business are  collectively  referred to as the  "Business." In addition,  one of
Seller's Affiliates (as herein defined),  Kaiser Permanente Insurance Company, a
California  domiciled  life and  disability  insurer  ("KPIC"),  issues  certain
indemnity  products  in Texas  ("Indemnity  Business")  in support  of  Seller's
Business.

     C. Seller desires to sell,  assign,  and deliver to Buyer, or to arrange or
cause to be sold,  assigned,  and delivered by Seller's Affiliates to Buyer, and
Buyer desires to purchase, accept assignment, and accept delivery from Seller or
Seller's Affiliates, substantially all of the operating assets used by Seller in
the operation of its Business, including, without limitation, (1) the subscriber
agreements ("Subscriber Agreements") and government contracts under which Seller
has agreed to provide or arrange for the provision of health care services to be
delivered to covered  individuals and group enrollees  (including  their covered
spouses and covered  dependents)  under direct pay,  group,  welfare trust,  and
other  plans  or  policies,  and  (2)  certain  provider  agreements  ("Provider
Agreements")  through  which Seller has arranged for health care  services to be
delivered to Members (as hereinafter defined), and certain other property owned,
leased or otherwise used by Seller in the operation of its Business. Each person
enrolled under the Subscriber  Agreements or under  governmental  contracts with
the Health Care  Financing  Administration  ("HCFA") or the Office of  Personnel
Management  ("OPM"),  or Texas and  Non-Texas  Group 3000 Members is referred to
individually as a "Member" or  collectively as "Members." The term  "Affiliates"
shall mean any entity  which  controls,  which is under  control of, or which is
under common  control with,  either Buyer or Seller.  Affiliates of Seller shall
include Kaiser  Foundation  Hospitals  ("KFH") and Kaiser Foundation Heath Plan,
Inc.  ("KFHP").  "Control," as used in the definition of Affiliates,  shall mean
the  possession,  directly  or  indirectly,  of the power to direct or cause the
direction of  management  and policies of another  entity,  whether  through the
authority to elect the board of directors of such entity or otherwise.


<PAGE>



     D. KPIC desires to sell, assign and deliver the Indemnity Business to Buyer
or an Affiliate of Buyer,  such sale,  assignment and delivery to be the subject
of a separate agreement,  including its exhibits, ("Insurance ") between KPIC or
Buyer or Buyer's Affiliate. The Insurance and the Assumption Insurance Agreement
including  its  exhibits,  (as  herein  defined)  shall  be  referred  to as the
"Reinsurance Agreements."

     E.   Buyer   and   Seller   executed   two    confidentiality    agreements
("Confidentiality  Agreement") dated March 28 and March 30, 1998,  respectively,
relating to the transactions set forth in this Agreement.

     F. Buyer and Seller wish to set forth the terms and conditions  under which
Buyer will buy and  Seller  will  sell,  or cause to be sold,  the assets of the
Business.

     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.

     Seller hereby  agrees to sell and assign to Buyer,  or cause to be sold and
assigned to Buyer,  and Buyer hereby  agrees to purchase  and accept  assignment
from Seller or Seller's Affiliates,  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  ("Assets")  of every  kind and  description  that are  owned and used by
Seller in the operation of the  Business,  or owned by Seller's  Affiliates  (as
listed on Schedule 1.1(i)) including, without limitation, the following assets:

     (a)  All  of  Seller's  rights,  title  and  interests  in  the  Subscriber
Agreements,  as more fully  described in the Reinsurance  Agreements.  Buyer and
Seller shall execute the Assumption  Reinsurance Agreement simultaneous with the
execution of this Agreement,  and the Assumption Reinsurance Agreement is hereby
incorporated by reference into this Agreement;

     (b)  Seller's  rights,  title and  interests  in the  Provider  Agreements,
including,  without  limitation,  those  with  hospitals,  ancillary  and  other
institutional  providers,   laboratories,   vision  providers,  durable  medical
equipment services  providers,  and provider HMOs that are set forth on Schedule
1.1(b),  as may be amended prior to Closing through  terminations,  expirations,
and  additions  made  in the  ordinary  course  of  business,  but  specifically
excluding  (i) those  contracts to obtain  services or supplies on a group basis
that are listed as Excluded  Assets in Section  1.2(d),  and (ii) those  certain
provider agreements  providing for transplant  services,  except with respect to
Group 3000 Members for whom Seller shall make such contracts  available  through
December 31, 1999. To the extent that there

                                                         2

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     are parties to any particular  Provider Agreement other than Seller and the
provider,  Seller  shall  arrange  to have the  Provider  Agreement  amended  or
otherwise  restructured as necessary for Buyer to receive  substantially  all of
the  benefits and to assume  substantially  all of the  performance  obligations
accruing or arising with respect to periods after Closing  previously assumed by
Seller under such Provider Agreement;

     (c) All of Sellers'  rights,  title and interests in all other contracts of
Seller which  relate to the  Business,  including,  without  limitation,  vendor
agreements  set forth on  Schedule  1.1(c),  as may be amended  prior to Closing
through terminations,  expirations, and additions made in the ordinary course of
business  ("Contracts"),  but  specifically  excluding  contracts solely between
Seller and  Seller's  Affiliates  and any other  contract  listed as an Excluded
Asset;

     (d) All of Seller's  rights,  title and interests in the tangible  personal
property used in the operation of the Business,  including,  without limitation,
(i)  furniture,  fixtures and equipment,  whether  leased or owned,  unless such
furniture,  fixtures  and  equipment  are  attached to real  property  not to be
transferred to Seller pursuant to this Agreement or any other agreement  between
the  parties and dated as of the date  hereof,  less any  dispositions  plus any
additions made prior to the Closing Date in the ordinary course of business, and
(ii) all supplies,  stock-in-trade,  over-the-counter  drug  inventory,  and all
replacements thereof ("Tangible Personal  Property"),  as specifically listed on
Schedule 1.1(d);

     (e) All of Seller's  rights,  title and  interests in  intangible  personal
property,  including, without limitation, (i) to the extent shown on the Closing
Balance  Sheet (as herein  defined),  cash,  cash  deposits,  cash  investments,
securities and receivables,  and (ii) all licenses,  permits,  and warranties to
the  extent  permitted  by law  and the  terms  of such  licenses,  permits  and
warranties,  and (iii) all other rights  necessary to Seller's  operation of the
Business;

     (f) All of Seller's  rights,  title and interests in  prepayments  or other
payments by or on behalf of Members,  except to the extent  otherwise  expressly
agreed in Sections 10.2 and 10.3;

     (g)  Originals of or true and correct  copies of financial and other books,
records and title documents necessary for Buyer to operate the Business;

     (h) All of Seller's  rights,  title and interests in and to the  formulary,
the software  license and the hardware  comprising  Seller's  Pharmacy  Business
information  system  known as "NDC,"  except that with regard to the  formulary,
Seller hereby grants to Buyer a  non-exclusive,  non-transferable,  royalty-free
license,  to use the  formulary  for  the  limited  purpose  of  Buyer's  health
maintenance organization ("HMO") business in the service area (as

                                                         3

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     of the Execution  Date) of Seller in Texas and any contiguous  expansion of
such area by Buyer;

     (i) Certain assets of Seller's Affiliates, as set forth on Schedule 1.1(i);
and

     (j) The software listed on Schedule 1.1(j).

1.2.     Excluded Assets.

     The  following  assets of  Seller  are not  included  in the  defined  term
"Assets,"  and are not  being  transferred  or  assigned  to  Buyer  under  this
Agreement ("Excluded Assets"):

     (a) Seller's  rights,  title and  interests in the real  property  owned or
leased by Seller or Seller's Affiliates which is being transferred pursuant to a
Master Purchase and Sale Agreement (as herein defined);

     (b) Seller's  rights,  title and interests in that certain Medical Services
Agreement,  dated January 1, 1990,  as amended,  between  Seller and  Permanente
Medical  Association  of Texas  ("PMAT")  under  which PMAT agrees to arrange or
provide professional services to Members;

     (c) Seller's rights, title and interests in its contracts of employment;

     (d) Except as otherwise set forth in this Agreement, Seller's rights, title
and  interests in contracts  (i) between  Seller and Seller's  Affiliates,  (ii)
among  third  parties  and Seller and  Seller's  Affiliates,  and (iii)  between
Seller's Affiliates and third parties that inure to Seller's benefit, including,
without  limitation,  contracts to obtain  services or supplies on a group basis
(including contracts for the procurement of pharmaceuticals);

     (e)  Seller's  rights,   title  and  interests  in  its  prescription  drug
inventory;

     (f) Seller's  rights,  title and interests in Seller's  contracts with HCFA
and OPM and amounts due to Seller  from OPM for  periods  prior to the  Closing,
which shall be transferred in accordance with Sections 10.2 and 10.3;

     (g)  Seller's  rights,  title and  interests in the  insurance  policies or
programs covering Seller, its officers, directors, employees and agents, and any
claims for refunds or recoveries under any insurance policies or programs;

     (h) Seller's  rights,  title and interests in claims  against third parties
arising  with  respect to acts and  omissions  occurring  on dates  prior to the
Closing, if any;

     (i)  Except as set forth in  Section  1.1(h),  Seller's  rights,  title and
interests in the name of Seller and all derivations thereof, including,  without
limitation, trademarks, service marks, trade names and logos, and all pending

                                                         4

<PAGE>



     applications for the foregoing,  and Seller's  patents,  copyrights,  trade
secrets,  know-how,  processes and other  intellectual  property and all pending
applications  for the  foregoing,  other than Excluded  Assets that Buyer may be
entitled to utilize under the terms of the Transition Agreement;

     (j)   Seller's   rights,   title  and   interests  in  the  assets  of  the
administrative  facility  known as the  "Consolidated  Service  Center"  used in
connection  with  the  provision  of  membership   accounting  and  third  party
administration services for Seller and certain of Seller's Affiliates, including
all employment  contracts with employees of Seller working for the  Consolidated
Service Center, other than Excluded Assets that Buyer may be entitled to utilize
under the terms of the Transition Agreement;

     (k)  Seller's  rights,  title and  interests  in the assets  which shall be
disposed of after the date of the  opening  balance  sheet,  attached as Exhibit
1.4.2(a)  ("Opening  Balance  Sheet"),  but  prior  to the  Closing  Date in the
ordinary course of business;

     (l) Seller's rights,  title and interests in the administrative  procedures
and systems used by Seller, including, without limitation, internal policies and
methodologies,  other than Excluded Assets that Buyer may be entitled to utilize
under the terms of the Transition Agreement;

     (m) Seller's  rights,  title and  interests  in certain  other assets to be
retained by Seller and Seller's  Affiliates,  as specifically listed on Schedule
1.2(m); and

         (n) Any assets expressly listed as being excluded in Section 1.1.

1.3.     Liabilities.

         1.3.1.   Assumed Liabilities.

     As of the  Closing,  Buyer shall  assume and agree to pay,  discharge,  and
perform,  as  appropriate,  all of the  following  obligations  of Seller and no
others (collectively, "Assumed Liabilities"):

         (a)      All obligations shown on the Closing Balance Sheet;

     (b) All obligations accruing or arising under the Subscriber Agreements, on
the terms and conditions described in the Assumption Reinsurance Agreement;

     (c) All  obligations  accruing or arising with respect to periods after the
Closing under those  Provider  Agreements  and  Contracts  assigned or otherwise
transferred to Buyer, including,  without limitation, all obligations to pay and
administer payment under the Provider Agreements;


                                                         5

<PAGE>



     (d) All  obligations  accruing or arising with respect to periods after the
Closing relating to the other Assets  transferred to Buyer under Section 1.1 and
not listed in Section 1.3.1(a) through 1.3.1(c); and

     (e) Only those  employee  related  obligations  as  expressly  set forth in
Section 10.4.

         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 or  Seller's  Affiliates
relating  to the  Business  not  listed in  Section  1.3.1,  including,  without
limitation, the following (collectively, "Excluded Liabilities"):

     (a) Any and all  liabilities  of Seller,  Seller's  Affiliates or any third
party (including, without limitation, PMAT), whether currently known or unknown,
with  respect  to  claims  or  potential  claims  for  medical   malpractice  or
professional liability with respect to the Business 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 any third
party (including, without limitation, PMAT), whether currently known or unknown,
relating  to  litigation  or claims of any kind or nature  with  respect  to the
Business  relating to periods prior to the Closing,  in each case  regardless of
when the claim is asserted;

         (c)      Liabilities relating to the Excluded Assets;

         (d)      Liabilities that do not relate to the Business;

         (e)      Liabilities to any of Seller's Affiliates;

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

     (g) 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;

     (h)  Liabilities of Seller or Seller's  Affiliates that are not required to
be stated on a balance sheet by US GAAP (as herein defined); and

     (i) Any  liability  relating to that certain  subsidy  agreement  ("Subsidy
Agreement") among Seller,  Buyer,  PMAT, and Sierra Health Services,  Inc., such
Subsidy Agreement to be delivered at Closing.

         1.3.3.   Property and Premium Taxes.


                                                         6

<PAGE>



     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.  Premium  taxes  shall be  allocated
between  Buyer and Seller  pursuant to the terms of the  Assumption  Reinsurance
Agreement, except that premium taxes relating to Seller's contracts with OPM and
HCFA shall be allocated as provided in this Agreement.

         1.3.4.   Transfer Taxes; Recording Fees.

     The Buyer and Seller shall share equally any and all sales,  use,  transfer
or  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 and Seller's
Affiliates to Buyer shall be One Hundred Twenty Seven Million Two Hundred Twenty
Four  Thousand  Three  Hundred  Nine Dollars  ($127,224,309.00),  as adjusted as
provided in this  Section  1.4  ("Purchase  Price").  Ninety  Seven  Million Two
Hundred Twenty Four Thousand Three Hundred Nine Dollars  ($97,224,309.00) of the
Purchase  Price  shall be paid by Buyer to Seller by Federal  Reserve  Bank wire
transfer of good funds at Closing,  as adjusted as provided in this Section 1.4.
The remaining  Thirty  Million  Dollars  ($30,000,000.00)  of the Purchase Price
shall be paid in accordance  with the earn-outs set forth in Sections  1.4.4 and
1.4.5 below. The parties acknowledge that the amount of Two Hundred Seventy Five
Thousand Six Hundred  Ninety One Dollars  ($275,691.00)  is the  purchase  price
associated  with the Insurance  Assumption  Reinsurance  Agreement and that such
amount  is not  included  in the  term  Purchase  Price  for  purposes  of  this
Agreement.

         1.4.2.   Certain Balance Sheet Adjustments to Purchase Price.

     (a) The Opening  Balance  Sheet (and related  worksheets,  working  papers,
notes  and  schedules  thereto,  if  applicable),  attached  hereto  as  Exhibit
1.4.2(a),  sets  forth,  at March 31,  1998,  the book  value of the  assets and
liabilities  of Seller.  Except as expressly  provided by the rules set forth in
Exhibit 1.4.2(a)-1 ("Rules"),  the Opening Balance Sheet (i) fairly presents the
financial  position of Seller at March 31,  1998,  in  conformity  with US GAAP,
applied on a consistent basis, and (ii) reflects all write-offs or

                                                         7

<PAGE>



     revaluations of assets (except as specified therein). The reserves recorded
in the Opening  Balance Sheet were  prepared in accordance  with US GAAP and are
consistent  with the  statutory  or other  accounting  practices  prescribed  or
permitted by the insurance  regulatory  authorities of the State of Texas and of
all the jurisdictions in which Seller is licensed to transact insurance business
and make good and sufficient provision for all insurance  obligations of Seller.
If there is a  conflict  between  US GAAP and the  Rules,  the Rules  shall take
precedence.

     (b) Not less than five  business  days prior to the  Closing  Date,  Seller
shall deliver to Buyer a balance sheet  ("Interim  Balance  Sheet") for the most
recent month end prior to the Closing Date, prepared in accordance with US GAAP,
the Rules, and other standards applicable to the Closing Balance Sheet. Not more
than 15 days after the Closing  Date,  Seller shall deliver to Buyer the closing
balance sheet ("Closing  Balance Sheet") pursuant to which the book value of the
current  assets  included  in the  Assets  less  the book  value of the  current
liabilities included in the Assumed Liabilities ("Closing Working Capital") will
be zero at the Closing Date.  The Closing  Balance Sheet will (i) fairly present
the financial  position of Seller as at the Closing Date, in conformity  with US
GAAP,  applied on a consistent  basis,  and (ii) will reflect all  write-offs or
revaluation  of assets.  Seller will provide a list of all write-offs or partial
write-downs of assets from the Opening Balance Sheet in excess of $5,000.00. The
reserves  recorded in the Closing  Balance  Sheet will be prepared in accordance
with US GAAP  and will be  consistent  with the  statutory  or other  accounting
practices prescribed or permitted by the insurance regulatory authorities of the
State of Texas  and of all the  jurisdictions  in which  Seller is  licensed  to
transact  insurance  business and make good and  sufficient  provisions  for all
insurance  obligations of Seller. If there is a conflict between US GAAP and the
Rules, the Rules shall take precedence.  If the book value of the current assets
included in the Assets of Seller less the book value of the current  liabilities
included in the Assumed  Liabilities of Seller set forth on the Interim  Balance
Sheet is less than zero,  the Purchase Price payable at Closing shall be reduced
by the amount of such deficit,  without  prejudice to either party to assert any
adjustments  pursuant to this  Section  1.4.2.  If the book value of the current
assets  included  in the  Assets of Seller  less the book  value of the  current
liabilities  included  in the  Assumed  Liabilities  of Seller  set forth on the
Interim  Balance Sheet is more than zero,  the Purchase Price payable at Closing
shall be  increased by the amount of such  excess,  without  prejudice to either
party to assert any adjustments pursuant to this Section 1.4.2. The parties may,
by mutual  agreement,  arrange for Seller to retain and  discharge  on or before
Closing certain  liabilities set forth on the Closing Balance Sheet in the place
of all or part of any  necessary  adjustment  to the Purchase  Price  payable at
Closing.

     (c) Seller shall  promptly pay to Buyer the amount of any payable of Seller
booked to the Closing Balance Sheet under Rule 9 on Exhibit 1.4.2(a)-1,

                                                         8

<PAGE>



     and Buyer shall  promptly  pay to Seller the amount of any payable of Buyer
booked to the  Closing  Balance  Sheet  under Rule 9 on Exhibit  1.4.2(a)-1.  In
addition, if at any time, either party determines that the Closing Balance Sheet
is not in conformity with the standards set forth in Section  1.4.2(b),  and the
Closing  Working  Capital was not zero, it shall promptly notify the other party
of such discrepancy in writing, setting forth in detail the basis for its belief
that a discrepancy exists, and the Purchase Price shall be adjusted as set forth
below;  provided  however,  (i) no adjustments shall be made with respect to any
event that occurs subsequent to December 31, 1999; and (ii) no adjustments shall
be made  with  respect  to any  proposed  adjustment  not  asserted  in  writing
containing a reasonable description of the proposed adjustment sent on or before
March 31, 2000.

     (d) If, as a result of an  adjustment  to the Closing  Balance  Sheet,  the
Closing Working Capital is less than zero, Seller shall promptly pay in full the
amount by which it is less than zero to Buyer.  If, as a result of an adjustment
to the Closing  Balance Sheet,  the Closing  Working  Capital is more than zero,
Buyer shall promptly pay the amount by which it is more than zero to Seller. All
amounts due hereunder shall be paid within 30 days of receipt of notice from the
other party that an amount is due and owing unless,  within such 30-day  period,
the matter has been made the subject of a dispute  resolution  proceeding as set
forth in Section 1.4.2(e).

     (e) If one party  ("Notifying  Party")  has  given  the  other  ("Receiving
Party")  written  notice that it believes an adjustment  to the Closing  Balance
Sheet or the Closing  Working  Capital is  appropriate,  and the Receiving Party
does not agree that an adjustment is appropriate,  or disputes the amount of the
adjustment,  then the Receiving Party shall give the Notifying Party notice that
it is  submitting  the matter to the dispute  resolution  procedure set forth in
this  Section  1.4.2(e).  In that event,  the parties  shall seek,  for a 30-day
period  following the notice from the Receiving Party to the Notifying Party, to
come to an  agreement  on the  amount,  if any, of the  appropriate  adjustment.
During  that  30-day  period,  (i) each  party  shall  share  with the other the
information  in its  possession  that causes it to believe that an adjustment is
required,  and (ii)  representatives  of each party who are authorized to settle
the dispute  shall meet to discuss the  resolution  thereof.  If the parties are
unable to reach  resolution of the dispute within the 30-day period,  they shall
promptly  submit  the  matter  to an  independent  "Big  Six"  accounting  firm,
acceptable to both parties, and the determination of the independent  accounting
firm as to the amount,  if any, of the  adjustment,  shall be conclusive and not
subject to arbitration  under this  Agreement.  Each party shall cooperate fully
with the  independent  accounting firm and provide to it such documents and work
papers as it may request in making its determination. The cost of the submission
of the adjustment to the independent accounting firm shall be borne by the party
whose  position  is  most  at  variance  with  the  final  determination  of the
independent accounting

                                                         9

<PAGE>



     firm. All amounts due from one party to the other shall be promptly paid in
full upon the resolution of the matter by the independent accounting firm.

     (f) Either  party may,  through  its own  employees  or through  designated
representatives, review and audit the proposed adjustments asserted by the other
party.  Each party  shall fully  cooperate  with such review and audit and shall
share with the other  party and its  designated  representatives,  such  working
papers and accounting records as they may reasonably  request.  Each party shall
use  commercially  reasonable  efforts to conduct its review and audit in such a
manner as to not  unreasonably  interfere with the other party's  conduct of its
business.

     (g) The entries on the Opening  Balance Sheet and the Closing Balance Sheet
that are the subject of the Post Closing  Reconciliation  and Report Procedures,
as defined  and set forth in the  Reinsurance  Agreements,  shall be adjusted in
accordance with the terms of the Reinsurance Agreements.  Such adjustments under
the  Assumption  Reinsurance  Agreement  shall  not  be  duplicated  under  this
Agreement  and  shall be  netted  against  any  adjustments  or  indemnification
payments hereunder made with respect to the same event or circumstance.

         1.4.3.   Collection of Receivables.

     (a) Seller may, from time to time, review the collection efforts being made
by Buyer with  respect to accounts  receivable  included on the Closing  Balance
Sheet  which are aged at least 90 days.  If at any  time,  or from time to time,
Seller wishes to assume responsibility for collection of all or any part of such
receivables  listed on the Closing  Balance Sheet,  Seller shall notify Buyer in
writing  that it  wishes to do so,  and  Buyer  shall  provide  Seller  with all
information necessary or appropriate to enable Seller to collect the amounts due
on the accounts so designated.  Buyer shall not have any  responsibility to take
any action  with  respect to  accounts  receivable  following  the  transfer  of
responsibility for their collection to Seller.

     (b) Any amounts  collected  by Seller on national or  multi-state  accounts
with respect to Members under Subscription  Agreements  transferred  pursuant to
this Agreement shall be paid to Buyer within 15 business days of receipt.

         1.4.4.   Purchase Price Earn-Out for Growth in Certain Member Accounts.

     Buyer shall pay to Seller,  in accordance with this Section 1.4.4, up to an
additional  Twenty  Seven  Million  Dollars  ($27,000,000.00)  on account of (i)
post-Closing  increases in the membership count of employer groups identified by
Seller prior to Closing as national accounts ("Old National  Accounts") over the
membership level of such accounts at the Closing,  and (ii) new accounts written
by Buyer or Buyer's  Affiliates in their Dallas,  Houston,  Las Vegas,  and Reno
service  areas  after the  Closing  ("New  Accounts")  which  Seller or Seller's
Affiliates has been primarily responsible for obtaining on Buyer's behalf.

                                                        10

<PAGE>



     The names and membership levels of the Old National  Accounts  ("Membership
Base") at March 31, 1998 is set forth in Schedule 1.4.4.  This Schedule shall be
replaced  by Seller  within 60 days  after  Closing  to  reflect  additions  and
deletions to names and  membership  levels  effective the Closing Date.  The Old
National  Accounts  and  the  New  Accounts  are,  collectively,  the  "Earn-Out
Accounts."

     (a) If the number of Members in the  Earn-Out  Accounts at the first annual
anniversary of the Closing Date is equal to or in excess of the First Membership
Milestone  percentages of the number of Members in the Earn- Out Accounts at the
Closing Date,  Buyer shall pay Seller the amount  opposite the  percentage.  The
amount paid to Seller shall be prorated between the First  Membership  Milestone
percentages.  First  Membership  Milestones  (1st  Anniversary  Compared  to the
Closing  Date)  Earn-Out 107% $9 Million 100% $6.75 Million 90% $4.5 Million 80%
$2.25 Million Less than 80% - 0 -

     (b) If the number of Members in the Earn-Out  Accounts at the second annual
anniversary  of the  Closing  is equal to or in excess of the  following  Second
Membership  Milestone  percentages  of the  number of  Members  in the Earn- Out
Accounts at the Closing Date plus 7%, Buyer shall pay Seller the amount opposite
such  percentage,  less any amount  already  paid to Seller at the first  annual
anniversary of the Closing.  The amount paid to Seller shall be prorated between
the Second Membership Milestone  percentages.  If the amount owed Seller is less
than the amount paid Seller at the first  anniversary,  Seller  shall  return to
Buyer the difference.  Second Membership Milestones (2nd Anniversary Compared to
the Closing  Date)  Earn-Out  114% $18 Million 107% $13.5 Million 96% $9 Million
86% $4.5 Million Less than 86% - 0 -

     (c) If the number of Members in the  Earn-Out  Accounts at the third annual
anniversary of the Closing Date is equal to or in excess of the Third Membership
Milestone  percentages of the number of Members in the Earn- Out Accounts at the
Closing  Date  plus 14%,  Buyer  shall  pay  Seller  the  amount  opposite  such
percentage,  less any  amount  already  paid to Seller  at the first and  second
annual anniversaries of the Closing. The amount paid to Seller shall be prorated
between the Third Membership Milestone percentages. If the amount owed Seller is
less than the amount paid Seller at the first and second  anniversaries  (net of
any payments from Seller to

                                                        11

<PAGE>



     Buyer at the first and second  anniversaries)  Seller shall return to Buyer
the difference.  Third Membership  Milestones (3rd  Anniversary  Compared to the
Closing Date)  Earn-Out 122% $27 Million 114% $20.25  Million 103% $13.5 Million
91% $6.75 Million Less than 91% - 0 -

     (d) Buyer agrees to make available to the Earn-Out Accounts benefit designs
and rates consistent with prudent business practices. Such benefit designs shall
also be materially  consistent with the Old National Accounts existing as of the
Closing Date.

     (e) Calculations and audits thereof shall be undertaken by Seller and Buyer
within 90 days of each annual anniversary, with any payment owed by one party to
the other paid  within  120 days of each  annual  anniversary.  Seller and Buyer
shall each have the right to inspect  and  photocopy  those books and records of
the other  necessary  to verify any amounts that may be owed by one party to the
other under this Section.

         1.4.5.   Purchase Price Earn-Out for NCQA Accreditation.

     Buyer shall pay Seller  Three  Million  Dollars  ($3,000,000.00)  if Seller
achieves for the HMO Business a full one-year or better non-provisional National
Committee on Quality Assurance ("NCQA")  accreditation  certificate for the NCQA
survey currently scheduled on or about July of 1998. Buyer shall pay Seller such
amount within five business days of receipt of proof of such  certification from
NCQA.  Buyer  agrees  not to take any  action  other  than  entering  into  this
Agreement which might delay the July, 1998 NCQA site visit.

     1.4.6. Purchase Price Decrease for Decrease in Certain Member Accounts.

     If at  Closing,  the total  number of Seller's  Commercial  HMO Members (as
herein defined) plus Medicare risk HMO Members is less than 114,000, Buyer shall
be entitled to reduce the  Purchase  Price by an amount  equal to Seven  Hundred
Forty Five Dollars  ($745.00)  multiplied  by the  difference  between the total
number of Seller's  Commercial  HMO Members plus  Medicare  risk HMO Members and
114,000;  provided,  however,  that if Buyer declines to accept the  assignment,
reinsurance,  novation or other  transfer of certain  Commercial  HMO Members or
Medicare risk HMO Members from Seller to Buyer,  including,  without limitation,
Group 3000,  such  Commercial HMO Members or Medicare risk HMO Members shall not
be  included  in this  difference.  Calculation  and audits of  Seller's  actual
Commercial  HMO Members plus  Medicare  risk HMO Members as of Closing  shall be
undertaken by Seller and Buyer within 90 days of the Closing.  Such  calculation
and audit shall be completed within 180 days following the Closing. For purposes
of such calculation, an individual shall not be considered a Commercial HMO

                                                        12

<PAGE>



     or Medicare risk HMO Member if there is an account  receivable for premiums
associated  with such  individual in excess of 120 days.  Buyer shall apply such
reduction  first to offset any amounts  owed by Buyer to Seller  under  Sections
1.4.4 and  1.4.5.  If such  offset  proves  to be  inadequate,  Seller  shall be
required to refund to Buyer the remaining  amount owed within 15 business  days.
The term  "Commercial HMO Members" shall mean those persons enrolled with Seller
for HMO and  point-of-service  benefits  under group and  individual  Subscriber
Agreements, including, without limitation, through the Old National Accounts and
OPM and other  governmental  groups,  but excluding any Medicare cost enrollees,
fee-for-service patients and preferred provider organization beneficiaries.



                                                        13

<PAGE>



     1.4.7.  Purchase Price Adjustment for Premium Yield Attributable to Certain
Members.

     Seller's  estimated  commercial HMO Premium Yield (as hereinafter  defined)
for the first quarter of 1998 is $123.12 as illustrated by the table below.

<TABLE>

<CAPTION>
Account                                     Dues                       Member           Premium
                                            Number                     Revenue          Months            Yield

<S>                                         <C>    <C>                 <C>              <C>               <C>
Group                                       4100 & 4110                $40,166,169      331,298           $121.24
Member Dues Allowance & Adj                 4060                           (470,543)    ----              ---
Direct Pay                                  4150,4151,4152                2,952,240     16,770            $176.04
POS                                         Note 1                        1,685,221     12,003             $140.40
                                                                       ------------     ------            --------
Net Commercial Revenue
w/Gross POS Revenue                         Note 2                     44,333,087       360,071           $123.12
                                                                       ==========================================
</TABLE>

     Note 1: POS revenue  shall be calculated  as follows:  account  number 4020
less account number 4920; gross up net balance by 40%.

Note 2: Account number 4950, other regions' members dues is not included in this
calculation.

     If, for the first  calendar  quarter of 1998,  the actual Premium Yield for
all Commercial HMO Members is not $123.12,  (i) Seller shall (up to a maximum of
Three Million Five Hundred Thousand Dollars ($3,500,000.00)) pay to Buyer if the
Premium  Yield is lower than  $123.12,  or (ii) Buyer  shall (up to a maximum of
Three Million Five Hundred  Thousand Dollars  ($3,500,000.00))  pay to Seller if
the Premium  Yield is higher than  $123.12,  the  difference  between the actual
Premium Yield and $123.12  multiplied  by the actual  number of  Commercial  HMO
Member months for the same quarter times four.  "Premium Yield" shall mean gross
billed  premiums  (including  100% of premium  revenue  due Seller and  Seller's
Affiliates  for  point-of-service  Members,  without  offset  for the  indemnity
component of the point-of-service plan), less cancellations,  returned premiums,
and bad debt but shall not include deductions for commissions,  premium taxes or
Texas Health Insurance Risk Pool Assessments.  The calculation  required by this
Section  shall be made by Seller and Buyer  within 60 days of  Closing  with any
payment owed due within 90 days of Closing.  Such calculation shall be performed
using the identical  methodology as the calculations set forth above, subject to
such  methodology  being consistent with Seller's past practice as it relates to
payment of commissions.

         1.4.8.   Allocation.

     Prior to the Closing Date,  the parties shall agree to an allocation of the
Purchase Price among the Assets in accordance with the Code; provided,  however,
the parties' agreement on such allocation shall not be a condition to Closing.


                                                        14

<PAGE>



1.5.     Closing and Closing Date.

     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,  shall be effective the last day of the month during
the calendar month after all conditions  precedent of Buyer and Seller which are
set forth in this  Agreement  have been fully  satisfied  or have been waived in
writing;  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  12:01:01  a.m.  (Central  Standard  Time,
adjusted for daylight savings time, if applicable) on the Closing Date.  Closing
shall commence on the Closing Date at the offices of Seller's  counsel,  the law
firm of Jenkens & Gilchrist, A Professional Corporation, 1445 Ross Avenue, Suite
3200,  Dallas Texas 75202, at 10:00 a.m.  (Central  Standard Time,  adjusted for
daylight  savings time, if  applicable).  Notwithstanding  the foregoing,  Buyer
shall not be obliged to close prior to October  31, 1998 if it has not  received
approval of the HCFA Novation Agreement prior to that 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) Ninety Seven  Million Two Hundred  Twenty Four  Thousand  Three Hundred
Nine Dollars ($97,224,309.00) of the Purchase Price (as may be adjusted pursuant
to this Agreement) by Federal Reserve Bank wire transfer of good funds;

     (b) One or  more  Bill  of  Sale,  Assignment  and  Assumption  Agreements,
substantially in the form of Exhibit 1.6.1(b) relating to the Assets (except the
Subscriber  Agreements)  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  (except those relating to the Subscriber
Agreements);

     (c)  An   assumption   reinsurance   agreement   ("Assumption   Reinsurance
Agreement"),  substantially  in the form of Exhibit  1.6.1(c),  relating  to the
Subscriber  Agreements  conveyed to Buyer hereunder,  and such other instruments
and agreements as may be reasonably  necessary to effect  Buyer's  assumption of
the Subscriber Agreements;

     (d) The Insurance Assumption  Reinsurance  Agreement,  substantially in the
form as set forth in Exhibit 1.6.1(d), executed by Sierra Health and Life

                                                        15

<PAGE>



     Insurance  Company,  Inc. and KPIC,  together with  confirmation of Federal
Reserve Bank wire  transfer of good funds of the purchase  price  thereunder  to
KPIC in the amount  specified in such  agreement,  and delivery of all documents
required under that agreement;

     (e) The sublease  agreements  relating to the certain  leased real property
("Leased Real Property"),  executed by Buyer,  Seller and the applicable lessor,
and the documents and transfer of funds required by the Master Purchase and Sale
Agreement  ("Master  Purchase and Sale Agreement") of even date herewith between
Seller and Southwest Realty, Inc., a Nevada corporation;

     (f) The opinion of Buyer's counsel in the form described in Section 6.1;

     (g) 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;

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

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

     (j)  Certificate  of  Buyer,  dated as of the  Closing  Date,  signed by an
authorized  representative  of  Buyer  and  certifying  that the  covenants  and
agreements to be performed  and complied  with by Buyer have been  performed and
complied with in all material respects;

     (k)  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, as contemplated by Section 3.2;

     (l) The Subsidy  Agreement,  in the form of Exhibit  1.6.1(l),  executed by
Buyer and Buyer's Affiliates, as the case may be, and such other instruments and
agreements as specifically provided therein;

     (m)   That   certain   transition   agreement   ("Transition   Agreement"),
substantially  in the form of Exhibit  1.6.1(m),  executed  by Buyer and Buyer's
Affiliates, as

                                                        16

<PAGE>



     the case may be, and such other  instruments and agreements as specifically
provided therein; and

     (n) That certain medical services agreement ("Medical Services Agreement"),
substantially  in the form of Exhibit  1.6.1(n),  executed  by Buyer and Buyer's
Affiliates,  as the case may be, and such other  instruments  and  agreements as
specifically provided therein.

         1.6.2.   Seller's Deliveries.

     Seller, and Seller's Affiliates, as applicable,  shall deliver to Buyer, or
to the extent any Assets are owned by Seller's Affiliates,  shall cause Seller's
Affiliates to deliver to Buyer:

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

     (b) One or  more  Bill  of  Sale,  Assignment  and  Assumption  Agreements,
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
(except those relating to the Subscriber Agreements);

     (c) The  Reinsurance  Agreements,  substantially  in the  form of  Exhibits
1.6.1(c) and  1.6.1(d),  and such other  instruments  and  agreements  as may be
reasonably necessary to effect Buyer's assumption of the Subscriber Agreements;

     (d) The opinion of Seller's counsel in the form described in Section 5.1;

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

     (f) All necessary consents, estoppels,  approvals,  authorizations or other
documents executed by Seller's  Affiliates in a form reasonably  satisfactory to
Buyer  which are  necessary  to convey to Buyer  the  Assets  owned by  Seller's
Affiliates;

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

     (h) Copies of the  resolutions  duly  adopted by the Board of  Directors or
Executive Committee of Seller authorizing Seller's execution, delivery and

                                                        17

<PAGE>



     performance  of this  Agreement  and of all  documents  related  hereto  or
contemplated herein;

     (i)  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
5.4 and Section 5.6,  Seller's  compliance  with the  covenants  and  agreements
contained in this  Agreement  shall not be a condition to 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;

     (j)  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  5.4  and  Section  5.6,  Seller's
representations  and  warranties  being  accurate  at  Closing  (other  than the
representations  in Section  2.1.1,  2.1.2,  2.1.5,  2.1.9 and  2.1.11) 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;

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

     (l) The Subsidy  Agreement,  in the form of Exhibit  1.6.1(l),  executed by
Seller and Seller's  Affiliates,  as the case may be, and such other instruments
and agreements as specifically provided therein; and

     (m)  The  Transition  Agreement,  substantially  in  the  form  of  Exhibit
1.6.1(m),  executed by Seller and Seller's  Affiliates,  as the case may be, and
such other instruments and agreements as specifically provided therein.

         1.6.3.   Third Party Consents.

     (a) To the extent that Seller's rights under any contracts  (other than the
Subscriber  Agreements) relating to the Business 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

                                                        18

<PAGE>



     efforts to obtain any such required  consents as promptly as possible after
Closing.  If any such consents are not obtained or if any  attempted  assignment
would be  ineffective  or would impair Buyer's rights so that Buyer would not in
effect  acquire the benefit of all such rights,  Seller,  to the maximum  extent
permitted  by law and by the terms of the  applicable  contract(s),  at Seller's
expense, shall act for six months after the Closing as Buyer's agent in order to
obtain for Buyer the benefits  thereunder,  and shall cooperate,  to the maximum
extent  permitted by law and by the terms of the  applicable  contract(s),  with
Buyer in any other  reasonable  arrangement  designed to provide the benefits of
such  contracts  to  Buyer.  Alternatively,   at  Seller's  option,  Seller  may
recharacterize  any contract of Seller for which the required consent of a third
party could not be obtained at Closing or within six months  after  Closing Date
as an  Excluded  Asset (and not an Asset to be  transferred  to Buyer),  and all
rights and obligations relating to such contract shall remain with Seller.

     (b)  Notwithstanding  Section  1.6.3(a)  above,  should Seller be unable to
obtain the third party  consents  required to assign the hospital  contract with
certain  Columbia  hospitals,  dated  January  1, 1995,  as  amended  ("Columbia
Hospital  Contract"),  Seller shall attempt to  substitute an adequate  hospital
network for the  existing  service  area of the HMO  Business.  Irrespective  of
whether Seller or Buyer provides such substitute hospital network,  Seller shall
pay to Buyer 75% of the excess  (if any) of the  amount  that Buyer must pay for
hospital services with such substitute hospital delivery network over the amount
which Buyer would have enjoyed as an assignee of Seller pursuant to the Columbia
Hospital  Contract,  for the period from the Closing Date  through  December 31,
1999.  The amount due  hereunder  shall be  determined by repricing the services
actually used during the period in question as if they had been  provided  under
the Columbia Hospital Contract.

     (c)  All  third  party  consent  issues  with  respect  to  the  Subscriber
Agreements shall be resolved pursuant to the terms of the Assumption Reinsurance
Agreement.

2.       REPRESENTATIONS AND WARRANTIES OF SELLER.

     The  parties  acknowledge  that there are  additional  representations  and
warranties  relating to the  Subscriber  Agreements  set forth in the Assumption
Reinsurance Agreement.  "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 Buyer to operate the Business in substantially
the manner it has been heretofore conducted.

                                                        19

<PAGE>




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.

     Seller is a non-profit corporation duly organized,  validly existing and in
good standing under the laws of the  jurisdiction if its  organization,  has all
requisite  corporate power and corporate authority to own, lease and operate its
properties and to carry on the 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 the  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.

         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 on the part of Seller and, as necessary,  Seller's  Affiliates.
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 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 a proceeding in equity or at law).

         2.1.3.   No Violations.

     Except  for  consents  of  third  parties  required  under  contracts,  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, material security interest or other material
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 Incorporation 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 clauses (i) through (iv), where such
Violations,  individually or in the aggregate, would not have a Material Adverse
Effect.

         2.1.4.   No Consents.

                                                        20

<PAGE>




     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
("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 (i) the filing of
a premerger notification report by Seller under the Hart-Scott-Rodino  Antitrust
Improvements  Act of 1976,  as  amended  ("HSR  Act"),  and (ii)  such  filings,
authorizations,  orders and  approvals as may be required by federal,  state and
local  Governmental  Entities,  including  those  in  connection  with  Seller's
insurance business.

         2.1.5.   Seller's Financial Statements.

     Seller has delivered (or if not yet available as of the Execution Date will
promptly  deliver when available  prior to the Closing Date) to Buyer,  complete
and correct  copies of (i) the audited  balance  sheets of Seller as at December
31, 1995, 1996 and 1997, and those related audited statements of income and cash
flows,  for the fiscal years ended on those dates,  together  with all footnotes
and (ii) the unaudited  interim balance sheet and statement of income for Seller
for the fiscal period ended on March 31, 1998 and  subsequent  quarters prior to
Closing.  All of such  financial  statements  fairly  present,  in all  material
respects,  as at and for the periods then ended, as the case may be (subject, in
the case of the  unaudited  balance  sheet  and  income  statement,  to  normal,
recurring adjustments and the absence of footnotes),  the financial position and
results of operations of Seller in conformity with generally accepted accounting
principles  prevailing  in the United  States ("US GAAP") or  statutory or other
accounting  practices  prescribed  or  permitted  by  the  insurance  regulatory
authorities  in the State of Texas,  in each case applied on a basis  consistent
throughout the reported periods. Such financial statements (i) do not contain or
when delivered will not contain,  as the case may be, any item of  extraordinary
or  non-recurring  income or expense  (except as  specified  therein);  and (ii)
reflects all write-offs or necessary  revaluation of assets (except as specified
therein).  The  reserves  recorded  in the  accounting  records  of  Seller  for
insurance  or HMO policy  benefits,  losses,  claims and  expenses and any other
reserves  were prepared in  accordance  with the  statutory or other  accounting
practices prescribed or permitted by the insurance regulatory authorities of the
State  of Texas  and  make  good and  sufficient  provisions  for all  insurance
obligations of Seller.

         2.1.6.   Litigation.

     To Seller's knowledge,  except as set forth on Schedule 2.1.6, there are no
actions, suits, proceedings,  of any kind pending, 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.

                                                        21

<PAGE>




         2.1.7.   Compliance With Applicable Laws.

     Except as set forth on  Schedule  2.1.7,  and  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 holds all certificates of
authority, permits, licenses, consents, certificates,  orders and approvals from
all Governmental Entities (collectively, "Seller's Permits") which are necessary
to own, lease and operate the Assets in the manner heretofore conducted,  except
to the extent  that  failure to hold same does not result in a Material  Adverse
Effect.  Seller has filed all material  statements  and reports  with  insurance
regulatory authorities required by the law, regulations,  licensing requirements
and orders  administered or issued by such regulatory  authorities.  To Seller's
knowledge,  no event has occurred with respect to any of such  Seller's  Permits
which would cause revocation,  termination or suspension of any of such Seller's
Permits if such revocation,  termination,  suspension or impairment would have a
Material Adverse Effect. 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.   Labor and Employment Matters.

     Except as set forth on Schedule 2.1.8,  (i) Seller has no employees who are
represented by a labor union or organization, no labor union or organization has
been  certified or recognized as a  representative  of any such  employees,  and
Seller is not a party to and does not have any obligation under any collectively
bargaining  agreement  or other  contract or  agreement  with any labor union or
organization;  (ii) there are no pending or, to Seller's knowledge,  threatened,
representation campaigns, elections or proceedings or questions concerning union
representation involving any employees of Seller; and (iii) Seller does not have
any knowledge of any  activities or efforts of any labor union or  organizations
(or representatives  thereof) to organize any of its employees,  any demands for
recognition for collective bargaining, any strikes, slowdowns, work stoppages or
lock-outs of any kind, or threats  thereof,  by or with respect to any employees
of Seller, and no such activities,  efforts, demands,  strikes,  slowdowns, work
stoppages  or  lock-outs  occurred  during a  three-year  period  preceding  the
Execution Date.

         2.1.9.   Absence of Certain Changes.

     Since March 31, 1998,  except (i) as set forth on Schedule 2.1.9,  (ii) for
the execution and delivery of this Agreement and changes in Seller's  properties
or Business  attributable  to the  transactions  contemplated or necessitated by
this  Agreement  and the  Related  Agreements  (as herein  defined)  (including,
without  limitation,   the  spin-off  of  Consolidated  Service  Center  assets,
employees  and  operations  on or before  Closing),  and (iii) as  disclosed  in
Seller's  financial  statements  as  previously  delivered or to be delivered to
Seller:


                                                        22

<PAGE>



     (a) Seller has not made any material  change in its  accounting  methods or
practices with respect to its condition,  operations,  the Business, the Assets,
or the Assumed Liabilities;

     (b)  Seller  has  not  entered  into or  materially  amended  any  contract
requiring  payment by Seller,  on an annualized  basis,  of more than  $250,000,
which contract is not terminable without cause on 90 days notice or less;

     (c) Seller has not permitted any lien, charge or encumbrance on the Assets,
to the extent such lien,  charge or  encumbrance  would have a Material  Adverse
Effect;

     (d) Seller has not increased,  or agreed to increase,  the  compensation of
any of the Terminated  Employees,  over the rate being paid to them on March 31,
1998, other than normal merit and cost-of-living increases pursuant to customary
arrangements consistently followed and any special retention bonuses relating to
the winding down of Seller's Business;

     (e) Except for transactions that,  individually or in the aggregate,  would
not have a Material  Adverse Effect,  Seller has (i) conducted its Business in a
commercially  prudent manner, as a going concern and in the ordinary course, and
consistent  with  such  operation,   complied  in  all  material  respects  with
applicable  legal and  contractual  obligations,  consistent with past practice;
(ii) used commercially  reasonable  efforts,  consistent with past practice,  to
preserve  the  goodwill  of its  Members and its  employees,  including  without
limitation,  issuing  rate  quotes  and  taking  such  other  action  as  may be
necessary;  and (iii) not intentionally taken any action outside of the ordinary
course of  business  which would tend to cause  employer  groups,  suppliers  or
Members to cease their respective affiliations with Seller.

         2.1.10.           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 its
under any such  Agreement to the extent that such default would cause a Material
Adverse effect. To Seller's knowledge, 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.  There is  currently no  outstanding  bid or contract
proposal by Seller  which,  if accepted or entered  into,  might  reasonably  be
expected to result in a Material  Adverse Effect.  Seller has provided,  or will
provide before 60 days after the Execution  Date,  originals or true and correct
copies of

                                                        23

<PAGE>



     all  contracts  constituting  part of the  Assets  or  Assumed  Liabilities
requiring  payment by Seller,  on an annualized basis, of more than $250,000 and
which contracts are not terminable on 90 days notice or less.

         2.1.11.           Title to and Condition of Assets.

     Except as set forth on Schedule  2.1.11 or reflected on the Opening Balance
Sheet,  Seller has good title to the Assets,  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 the applicable  leases. No representation or warranty is being
made with  respect to the  physical  condition  of the  Assets,  and Buyer shall
receive the Assets in their "AS-IS" condition.

         2.1.12.           Patents, Copyrights, Service Marks and Trademarks.

     Seller is not transferring to Buyer any patents, copyrights, service marks,
trademarks, or other intellectual property other than its rights, as a licensee,
to use certain software, as described elsewhere in this Agreement.

         2.1.13.           No Broker or Finders.

     No  broker or finder is  involved  on behalf of Seller or an  Affiliate  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.

         2.1.14.           Tax Returns and Tax Liabilities.

     To Seller's  knowledge,  Seller has made and is current with respect to all
reports,  returns and other  filings  (collectively,  "Returns")  required to be
furnished from time to time to all federal,  state,  local or other governmental
tax or fiscal authorities (including,  without limitation, all real and personal
property, informational, franchise and withholding taxes and other Returns); all
such Returns so furnished  were correct in all material  respects;  and based on
the  applicable  measure of Seller's  operations  or Assets during the period in
question;  each such Return  correctly stated and reported the amount due in all
material  respects;  true and correct copies of all such Returns are included in
Seller's files; and all amounts reflected as due and payable on the Returns have
been paid.

         2.1.15.           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
contains or will contain any untrue statement of a material fact.

                                                        24

<PAGE>




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

     Seller  shall  execute  and  deliver  to Buyer a  certificate  signed by an
authorized  representative of Seller, dated as of the Closing Date, stating that
each of the  representations  and  warranties of Seller made herein are true and
correct in all  respects as of the Closing  Date,  or  describing  the manner in
which such  representations  and warranties  are not true and correct.  With the
exception  of Sections  2.1.1,  2.1.2,  2.1.5,  2.1.9 and 2.1.11,  if any of the
representations  and  warranties  of Seller  are not true and  correct as of the
Closing Date,  then Buyer shall be entitled to  indemnification  for any and all
losses as  provided  in  Section  11, 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.

     The  parties  acknowledge  that there are  additional  representations  and
warranties  relating to the  Subscriber  Agreements  set forth in the Assumption
Reinsurance Agreement. "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,  and, as necessary,  Buyer's  Affiliates.
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 a proceeding in equity or at law).

                                                        25

<PAGE>




         3.1.3.   No Brokers or Finders.

     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 (i) the filing of a premerger notification report by Seller under the
HSR Act, and (ii) such filings,  authorizations,  orders and approvals as may be
required by foreign, 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 as of the Closing  Date,  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 18 months
following the Closing.

5.       BUYER'S CONDITIONS PRECEDENT TO CLOSING.


                                                        26

<PAGE>



     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:

5.1.     Opinion of Counsel.

     Seller shall have furnished Buyer with an opinion of its counsel, Jenkens &
Gilchrist, A Professional Corporation,  dated the Closing Date, substantially in
the form and substance attached hereto as Exhibit 5.1.

5.2.     Agreements.

     Seller  shall  have  executed  and  delivered  to  Buyer  all   agreements,
instruments,  certificates  and other documents to be delivered by Seller or, as
necessary,  Seller's Affiliates, as required by Section 1.6.2(a) through (j) and
(l)-(m). Seller shall have executed and delivered to Buyer all other agreements,
instruments, certificates, and other documents to be delivered by Seller, or, as
necessary,  Seller's Affiliates (including,  without limitation,  to those items
contemplated  by Section  1.6.2(k));  provided,  however,  that  Buyer  shall be
obligated to consummate this transaction if Seller has  substantially  performed
its obligations and is proceeding in good faith and with due diligence to obtain
these  particular  documents not delivered at Closing with respect to deliveries
required by Section 1.6.2(k).

5.3.     Corporate Resolutions.

     Seller shall provide Buyer with  appropriate  resolutions from its Board of
Directors,  authorizing  Seller to effectuate the actions  required by Seller to
consummate the transactions contemplated by this Agreement.

5.4.     Seller's Representations and Warranties True and Correct.

     The  representations  and  warranties of Seller set forth in Section 2.1.1,
2.1.2,  2.1.5,  2.1.9  and  2.1.11  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.  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.

5.5.     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.


                                                        27

<PAGE>



5.6.     Certain Covenants.

     Seller shall have  complied  with its  obligations  in Sections  8.1(a) and
8.1(b), and 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  payable at Closing
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.     Opinion of Counsel.

     Buyer shall have furnished Seller with one or more opinions of its counsel,
dated the Closing Date,  substantially in the form and substance attached hereto
as Exhibit 6.1.

6.2.     Corporate Resolutions.

     Buyer shall provide Seller with  appropriate  resolutions from its Board of
Directors  (which  resolutions  were  obtained  prior to the  execution  of this
Agreement),  authorizing  Buyer to effectuate  the actions  required by Buyer to
consummate the transactions contemplated by this Agreement.

6.3.     Agreements.

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

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.

6.5.     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.


                                                        28

<PAGE>



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:

7.1.     Medical Services Agreement.

     Buyer or its Affiliate shall have executed the Medical  Services  Agreement
relating to the provision of professional  physician services to the Members, in
substantially the form attached as Exhibit 1.6.1(n)..

7.2.     Governmental Consents and Approvals.

     Buyer and Seller  shall  have  obtained  from any and all local,  state and
federal  Governmental  Entities  all  appropriate  and  necessary  approvals  or
consents  required,  or  exemptions  thereof (but which shall not include OPM or
HCFA),  to effect the  transactions  set forth in this  Agreement  and to enable
Buyer to operate the Business; provided, however, each of the parties shall have
used its best efforts to obtain such approvals, consents or exemptions.

7.3.     Hart-Scott-Rodino.

     Buyer and Seller  shall have made the  required  filings  under the HSR Act
with  respect  to the  transactions  contemplated  by  this  Agreement,  and all
additional  submissions required to be made thereunder,  and the waiting periods
under the HSR Act shall have terminated;  provided, however, each of the parties
shall  have  used its  best  efforts  to  obtain  such  approvals,  consents  or
exemptions.

7.4.     Closing of Transactions Under Related Agreements.

     The  transactions  contemplated  by the Master Purchase and Sale Agreement,
the Reinsurance  Agreements,  and the Asset Sale and Purchase  Agreement between
Permanente   Medical   Association  of  Texas  and  Buyer,   shall  have  closed
concurrently with the transactions  contemplated by this Agreement.  The Medical
Services  Agreement  described in Section  1.6.1(n),  the  Transition  Agreement
described  in Section  1.6.1(m),  the  Subsidy  Agreement  described  in Section
1.6.1(l),  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, with respect
to the operation and maintenance of the Business,  except as otherwise consented
to by Buyer in writing, Seller will:


                                                        29

<PAGE>



     (a)  Conduct the  Business 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  Members  and its  employees  including  without
limitation,  issuing  rate  quotes  and  taking  such  other  action  as  may be
necessary;

     (c) Not  intentionally  take any action  outside of the ordinary  course of
business  which would tend to cause  employer  groups,  suppliers  or Members 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 $250,000.00  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.

     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 the
Business and the Assets,  including inspection (without photocopying) by Buyer's
counsel to the extent  possible  without  waiving any privileges with respect to
information regarding all actions,  suits,  proceedings or investigations of any
kind,  now  pending or  threatened  in  writing,  involving  Seller or  Seller's
Affiliates with respect to the 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.


                                                        30

<PAGE>



         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  Peter Hohl,  Director  of  Acquisitions/Alliance
Services for Seller, or his designee.

8.3.     Breach by Seller.

     Except as provided in Section 5.6,  Seller's  compliance with the covenants
of Sections 8.1 and 8.2 shall not be a condition to Closing, but, rather, breach
of such covenants shall entitle Buyer to recover their actual damages  resulting
therefrom in accordance with Section 11.

8.4.     Noncompetition and Nonsolicitation.

     (a) Seller  agrees that for a period of five years after the Closing  Date,
neither Seller nor Seller's Affiliates will, directly or indirectly,  through an
entity  controlled  by them or  their  Affiliates,  (i)  own,  manage,  operate,
develop, join, control or participate in the ownership,  management,  operation,
development or control of, any  Competitive  Business (as defined below) whether
in corporate,  proprietorship,  professional  association or partnership form or
otherwise  located in the  greater  metropolitan  areas of  Houston,  Texas,  or
Dallas-Fort  Worth,  Texas,  or any other area  within the State of Texas  where
Seller or its Affiliates conducted business as of the Closing Date, or (ii) make
any federal,  state or local regulatory filing with the purpose of being granted
a permit,  license  or any  other  authorization,  or  otherwise  qualifying  to
participate  in the  State of Texas in any  Competitive  Business.  "Competitive
Business" shall mean any health insurance,  medical group practice,  health care
provider  or  hospital  business,  including,  without  limitation,  any  health
maintenance organization, health care preferred provider organization,  multiple
employer trust program or traditional indemnity program offered by Seller or any
other Affiliate of Seller. The parties  specifically  acknowledge and agree that
the remedy at law for breach of the foregoing will be inadequate and that Buyer,
in addition to any other  relief  available to it, shall be enticed to temporary
and permanent  injunctive relief without the necessity of proving actual damage.
If the  provisions of this Section  should ever be deemed to violate,  exceed or
otherwise  contravene the  provisions of applicable  law, then the parties agree
that such  provisions  shall be reformed  to set forth the  maximum  permissible
limitations or provisions allowable by law.

     (b) The foregoing covenant not to compete shall not apply to fulfillment by
Seller of its obligations  under Seller's  existing  contracts with HCFA or OPM,
existing accounts that are reinsured  instead of assigned,  or ownership of less
than 5% of the  issued  and  outstanding  shares  of  stock in  publicly  traded
corporations.


                                                        31

<PAGE>




9.       ADDITIONAL AGREEMENTS OF BUYER.

9.1.     Maintenance of Records.

     Buyer shall retain all business and other records and documents relating to
the  Business  and the Assets which are  transferred  to Buyer  pursuant to this
Agreement  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 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 its actual costs of such  cooperation;  provided,  however,  that
Seller shall keep all such records  confidential  to the extent 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 to and
to copy 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 9.1 shall survive for a period of six years after the
Closing Date, or longer if required by applicable law.

9.2.     Communications.

     Between the  Execution  Date and the  Closing  Date,  and unless  otherwise
specifically   authorized  in  this  Agreement  or  the  Assumption  Reinsurance
Agreement,  Buyer may not  communicate,  orally  or in  writing,  with  Members,
service providers of Seller,  employees of Seller, vendors of Seller,  suppliers
of  Seller,  or  other  third  party  contractors  of  Seller,  concerning  this
transaction,  without the prior  written  consent of Seller  (which shall not be
unreasonably withheld) except for Peter Hohl, Director of  Acquisitions/Alliance
Services for Seller,  and George Tomberlin,  Senior Counsel for Seller, or their
designees.  Nothing in this Section shall  preclude  either Buyer or Seller from
communicating  as it  deems  advisable  with  its  own  subscribers,  government
regulators, service providers, employees, vendors, shareholders,  suppliers, and
third party  contractors  required by law or in the ordinary course of business.
In no event shall  either  party cause any oral or written  communication  to be
issued  relating to this  transaction  which  disparages  any other party or its
Affiliates,  unless  otherwise  required by law.  Communications  with the media
shall be  subject  to the joint  work plan to be  developed  by Buyer and Seller
pursuant to Section 10.6.

10.      ADDITIONAL AGREEMENTS OF BUYER AND SELLER.

10.1.    Regulatory Milestones Prior to Closing.

     Seller  and  Buyer  shall  diligently  and  timely  prepare  and  file  the
applications  and  submissions as may be required with respect to the execution,
delivery  and  performance  of  this  Agreement  and  the  consummation  of  the
transactions contemplated hereby,

                                                        32

<PAGE>



     including,  without  limitation,  the  filings set forth  below.  Buyer and
Seller  agree to take all  reasonable  actions  required  or  requested  by such
authorities  for  the  expeditious  consideration  and  rendering  of  all  such
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.

         10.1.1.           HSR Filing.

     Seller and Buyer shall  submit all  notifications,  report  forms and other
submissions to the Federal Trade  Commission  and the Antitrust  Division of the
Department of Justice sufficient to trigger the HSR Act waiting period within 14
calendar  days  of  the  Execution   Date.   Buyer  shall  provide  Seller  with
time-stamped  copies of all correspondence with the Federal Trade Commission and
the Antitrust  Division of the Department of Justice as proof of compliance with
this Section.

         10.1.2.           Texas Department of Insurance.

     Buyer shall use its best efforts file all submissions required by the Texas
Department  of  Insurance  to  approve  the  transactions  contemplated  hereby,
including,   without  limitation,  the  Assumption  Reinsurance  Agreement,  the
application  for  Certificate  of  Authority  or  service  area  expansion,   as
necessary, and such other submissions as may be required by the Texas Department
of Insurance,  as soon as practicable after the Execution Date. Buyer shall make
its  initial  filing with the Texas  Department  of  Insurance  pursuant to this
Section  within 14 calendar  days of the  Execution  Date.  Buyer shall  provide
Seller with time-stamped  copies of all correspondence with the Texas Department
of Insurance as proof of compliance with this Section.

10.2.    Health Care Financing Administration.

     Buyer and Seller  acknowledge  and agree that Seller's  contracts with HCFA
are not  assignable  without  the  written  consent  or  approval  of HCFA,  and
assignment of such contracts  shall require the  preparation  and execution of a
novation or other  agreement and the submission of any and all  applications  or
other  documentation  necessary  to  effectuate  the  novation  ("HCFA  Novation
Agreement")  among Seller,  Buyer, and HCFA. Seller shall transfer and assign to
Buyer as of the Closing the contracts with HCFA, or, at Buyer's election, Seller
shall take all actions reasonably necessary to terminate the contracts with HCFA
and Seller's  obligations  to provide  services  under the  contracts  with HCFA
effective as of a date after the Closing that is  acceptable  to Buyer and HCFA,
or to take any other  actions  reasonably  required by Buyer or HCFA to transfer
beneficiaries  under  the HCFA  contracts  to Buyer  (each of which  actions  is
referred to as the  "Transfer").  If Seller has any  obligations  under the HCFA
contracts  to  provide  services  to  Medicare  beneficiaries  during the period
commencing on the Closing Date to termination of the HCFA contracts, Buyer shall
arrange or provide all such services to such beneficiaries.  All amounts paid in
respect of coverage or services during such period will be paid by Seller to and
become the  property of Buyer.  Seller  shall  prepare a cost report for 1998 as
required by HCFA and shall be responsible for, or entitled to the

                                                        33

<PAGE>



     return  of,  any  amounts  due to,  or from (as the case may be) HCFA  with
respect to contract periods prior to the Closing.

     Buyer shall make the initial filing  required to be made by Buyer to effect
the HCFA  Novation  Agreement  within 14 calendar  days of the  Execution  Date,
unless a later date is  requested  by Seller.  Buyer shall  provide  Seller with
time-stamped  copies of all correspondence with HCFA as proof of compliance with
this Section.  Buyer's and HCFA's  entering into the HCFA Novation  Agreement is
not a condition to Buyer's  obligation  to close the  transactions  contemplated
hereby.

10.3.    Office of Personnel Management.

     (a) Buyer and Seller  acknowledge and agree that Seller's contract with OPM
is not assignable without the written consent or approval of OPM, and assignment
of such contract  shall require the  preparation  and execution of a novation or
other agreement ("OPM Novation  Agreement") by and among Buyer,  Seller and OPM.
Seller shall cooperate in all commercially reasonable respects with Buyer in the
preparation of the OPM Novation Agreement.  Any documents which must be executed
or prepared by Seller after the Closing  shall be  transmitted  by Seller to OPM
within a  reasonable  period of time after the  Closing.  Seller and Buyer shall
cooperate  reasonably  to effect the  transfer of the  contingency  reserve fund
("CRF") to Buyer's federal contract for the benefit of Buyer.

     (b) Subject to  Sections  10.3(c) and 11.5  below,  but not  Sections  11.1
through 11.4, Seller hereby agrees to indemnify and hold harmless Buyer from and
against any and all losses,  damages,  costs and expenses (including  reasonable
attorneys'  fees)  arising  out of or  sustained  as a  result  of any  negative
adjustment made by the government under Seller's contract with OPM (such losses,
damages,  costs and expenses are hereinafter referred to as the "Indemnification
Liability") with respect to contract periods prior to contract year 1999.

     (c) With respect to contract year 1999, Seller's indemnification obligation
shall be limited to 75% of any Indemnification  Liability up to a maximum amount
of $2,000,000. Provided, however, that Seller shall have no liability under this
Section to the extent that any rate adjustment required by OPM is (i) the result
of rates  quoted by Buyer  which are lower than the current  rates for  existing
groups of Seller as long as standard rating  methodology was employed for rating
similarly sized groups;  and/or (ii) the result of rates quoted by Buyer for new
groups.  Seller  further agrees that the rate charged OPM for contract year 1999
shall not be less than the rate charged OPM for 1998.

     (d)  The  CRF is and  will  be  properly  funded  in  accordance  with  OPM
regulations  and  applicable  laws.  Only those  amounts  which OPM deems are in
excess of what is required and OPM allows to be removed by a contractor under

                                                        34

<PAGE>



     applicable laws and regulations as a lump sum payment will be considered an
excess.  Buyer shall,  upon  receipt from OPM of any lump sum payment  resulting
from any positive  adjustment made by OPM for contract periods prior to contract
year 1999,  remit such amount to Seller.  For  contract  year 1999,  Buyer shall
retain 25% of any lump sum payment  resulting from any positive  adjustment made
by the OPM for that year and the balance  shall be remitted to Seller.  Payments
to be made hereunder shall be by wire transfer within five business days of time
of receipt of Buyer's  payment from OPM.  Buyer  retains the right to offset any
amounts  otherwise due Seller under Section 10.3(b) from any such payment.  Such
payment  shall be  accompanied  by a  statement  identifying  the  amount of the
payment from OPM and the specific time period covered by the payment.

     (e) Buyer shall make all filings required to be made by Buyer to effect the
OPM Novation  Agreement within 14 calendar days of the Execution Date,  unless a
later date is requested by Seller. Buyer shall provide Seller with time- stamped
copies of all correspondence  with OPM as proof of compliance with this Section.
Buyer's and OPM's entering into the OPM Novation Agreement is not a condition to
Buyer's obligation to close the transactions contemplated hereby.

10.4.    Employment Matters.

         10.4.1.           Severance Payments.

     (a) Seller  shall  terminate  all of  Seller's  employees  relating  to the
Business (except Consolidated Service Center employees, who shall be transferred
to a Seller's Affiliate on or before Closing) 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 and to
the extent adequate reserves have been made in the Closing Balance Sheet. 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 10.4.1 and such Terminated  Employee's employment
is severed by Buyer  within 60 days of the Closing  without  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

                                                        35

<PAGE>



     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  10.4.2.  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  which  Buyer
considers  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.

         10.4.2.           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.

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<PAGE>




         10.4.3.           Health Care Coverage for Terminated Employees.

     Buyer shall offer health care coverage to all  Terminated  Employees  which
shall be at least  substantially  equivalent  to the health care  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 health care coverage  prior to the Buyer's  termination  of the Terminated
Employee,  Buyer  agrees to offer the  health  care  coverage  set forth in this
Section to such  Terminated  Employee,  effective as of his date of  termination
from Buyer,  until the expiration of the 36th month after the Closing Date. Each
Terminated  Employee  shall  be  responsible  for  payment  of his own  premiums
relating to health care coverage provided pursuant to this Section.

         10.4.4.           Health Care Coverage for Seller's Board of Directors.

     Seller  shall  prepay  through  December 31, 1998 the premiums for whatever
health  care  coverage a member of the Board of  Directors  of Seller  maintains
under Seller's Subscriber Agreements (be it individual, spouse, family, or other
health coverage)  provided Buyer accepts the assignment,  reinsurance,  or other
transfer of such Subscriber  Agreement  under this Agreement.  Buyer shall offer
renewal of such coverage,  without medical  underwriting,  for the calendar year
1999, or until Medicare  eligibility.  Buyer and such individual  shall agree on
the premium payment amount, if any, as Buyer and the individual may agree.

10.5.    Transition Issues.

         10.5.1.           Use of Materials.

     Buyer  shall  have  the  right  to use all  existing  stock  of any and all
advertising brochures,  marketing materials,  literature,  form contracts,  form
certificates of coverage,  membership  handbooks and other pre-printed  material
relating to the  Business,  as  authorized  by law,  until the later of one year
after the Closing Date or (with respect to any particular Subscriber Agreement),
the renewal date for the Member,  or for some other  shorter time  limitation as
may be required by law.  Buyer shall make a  commercially  reasonable  effort to
sticker such materials with Buyer's name to avoid confusion.

         10.5.2.           Transition Agreement.

     On or before the Closing  Seller and Buyer shall enter into the  Transition
Agreement,  in  substantially  the form  attached  hereto as  Exhibit  1.6.1(m),
pursuant to which certain of Seller's  Affiliates will provide Buyer,  for a fee
measured by the direct cost of providing such services,  with certain transition
assistance,  including  membership  accounting,  claims processing,  information
systems training and other administrative support.


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<PAGE>



10.6.    Public Information Releases.

     Between the Execution Date and the Closing,  and for a period of six months
following the Closing Date, Seller and Buyer agree to use reasonable  efforts to
consult  with each other  prior to any press  release,  public  announcement  or
publicly disseminated communication concerning this transaction,  to discuss the
content  of any such  announcement,  and to refrain  from  making any such press
releases or public  announcements  without  first  receiving  the other's  prior
written  consent,  which shall not be unreasonably  withheld.  The parties shall
develop  and  implement  a  joint  work  plan  for  this  transaction  regarding
communications  with the media. In no event shall either party cause any oral or
written communication to be issued relating to this transaction which disparages
any other party or its  Affiliates,  unless  required by law. The  provisions of
this Section shall survive the termination of this Agreement.

10.7.    Cooperation.

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

10.8.    Group 3000.

     (a) Seller  currently  provides or arranges to provide health care services
to certain  enrollees in Texas ("Texas Group 3000  Members") who are employed by
employers that have  subscriber  agreements  with various  Seller's  Affiliates.
Buyer agrees to continue  Seller's current  practice of providing,  or arranging
for one of Buyer's  Affiliates  to provide,  health  care  services to the Texas
Group  3000  Members  through  the end of the  term  of  each of the  subscriber
agreements covering the Texas Group 3000 Members, in exchange for which Buyer or
Buyer's  Affiliate shall be entitled to charge,  and Seller's  Affiliates  shall
pay, Seller's  standard Group 3000 rates through December 31, 1998.  Thereafter,
Seller's Affiliates agree to pay Buyer a rate actuarially  sufficient to provide
the benefits required by the Subscriber  Agreement.  A copy of Seller's standard
Group 3000 rates is set forth as Exhibit 10.8(a).

     (b) Seller's  Affiliates  currently provide or arrange health care services
to certain  enrollees  outside Texas  ("Non-Texas  Group 3000  Members") who are
employed by Texas employers that have subscriber  agreements with Seller,  which
Subscriber  Agreements  will be  assigned to Buyer  pursuant to this  Agreement.
Seller agrees to cause Seller's Affiliates to continue their current practice of
providing,  or arranging for one of Seller's Affiliates to provide,  health care
services to the Non-Texas Group 3000 Members through the end of the term of each
of the  subscriber  agreements  covering the Non-Texas  Group 3000  Members,  in
exchange for which Seller's  Affiliates  shall be entitled to charge,  and Buyer
shall pay Seller's Affiliates'

                                                        38

<PAGE>



     standard  Group 3000 rates  through  December 31, 1998.  Thereafter,  Buyer
agrees to pay Seller's  Affiliates a rate actuarially  sufficient to provide the
benefits required by the Subscriber  Agreement.  A copy of Seller's  Affiliates'
Standard Group 3000 rates is set forth in Exhibit 10.8(b).

     (c) Following the Closing Date,  Seller shall cause Seller's  Affiliates to
make commercially  reasonable efforts not to offer any new or renewal subscriber
agreements  providing for services for Members  located in Texas which  services
would be required to be provided by Buyer absent a separate agreement  providing
for same. In addition,  Buyer shall make commercially  reasonable efforts not to
offer any new or  renewal  agreements  covering  services  for  Members  located
outside of Texas which  would be required to be provided by Seller's  Affiliates
absent a separate agreement providing for same.

10.9.    Reciprocity Agreement.

     Buyer and Seller shall cause their  Affiliates to endeavor in good faith to
enter into  reciprocity  agreements  regarding the provision or  arrangement  of
health care in various states. Failure to enter into such arrangements before or
after the Closing shall not be a condition, covenant, representation,  warranty,
obligation or otherwise  give any party any right or remedy with respect to this
Agreement.

11.      INDEMNIFICATION.

11.1.    Indemnification by Seller.

         Subject to the limitations of Section 11.3,  Seller shall indemnify and
hold harmless Buyer and its respective officers,  directors,  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 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


                                                        39

<PAGE>



     (e) Any action or litigation which  challenges,  seeks damages arising from
or seeks to enjoin any of the  transactions  contemplated  by this  Agreement or
Related Agreements, 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;

     (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.  Any  indemnified  claim
under Article VII of the Assumption  Reinsurance  Agreement and Article X of the
Insurance Assumption  Reinsurance Agreement shall apply towards the maximums and
minimums set forth in this Section 11.3.

         11.3.1.           Minimum.


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<PAGE>



     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
$1,000,000.00  on a cumulative  basis.  Each claim  making up the  $1,000,000.00
cumulative  amount  shall  be a claim of  $5,000.00  or  more.  If such  party's
aggregate liability for such claims exceeds $1,000,000.00 on a cumulative basis,
then such party shall be liable for all claims,  including claims which are part
of the $1,000,000.00  minimum.  Excluded  Liabilities and reconciliations  under
Section 3.3 of the Assumption  Reinsurance Agreement and Section 3.3 of Schedule
2.5 of the Assumption Reinsurance Agreement or this Agreement 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,  net of any
adjustments provided by this Agreement. Excluded Liabilities and reconciliations
under  Section 3.3 of the  Assumption  Reinsurance  Agreement and Section 3.3 of
Schedule 2.5 of the Assumption  Reinsurance  Agreement or this Agreement are not
subject to and do not count towards this maximum limitation.

11.4.    Notice and Right to Defend.

     (a) Should any claim or action by a third  party  arise  after the  Closing
Date 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
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

                                                        41

<PAGE>



     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 9.1 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 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; or

     (b) By Seller or Buyer if the Closing  shall not have occurred on or before
October 31, 1998.

     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.

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<PAGE>




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  herewith,  is not
resolved  within 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 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 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.

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 members
("Board 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 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  in
effect as of the date of the arbitration, except as provided in Exhibit 13.2. To
the extent practical, decisions of the Board of Arbitration shall be rendered no
more than 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 30 calendar day period) shall
be final,  binding and conclusive on Buyer and Seller (except as may be provided
in Exhibit 13.2) 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  as the  Board  of  Arbitration  deems
appropriate.

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<PAGE>




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.

13.4.    No Applicability.

     This Section is not  applicable  to disputes  required by the terms of this
Agreement  to be  resolved  pursuant  to the  procedures  set  forth in  Section
1.4.1(e).

14.      GUARANTEES.

14.1.    Seller's Guarantor.

     KFH hereby irrevocably and unconditionally  agrees to cause Seller to fully
perform its obligations under this Agreement and the Reinsurance Agreements in a
timely manner, and further irrevocably and  unconditionally  guarantees the full
and timely  performance  of this  Agreement  and the  Reinsurance  Agreements by
Seller  in  accordance  with its  terms.  The  foregoing  guarantee  includes  a
guarantee of the immediate  payment when due of all amounts for which Seller may
at any  time  be  liable  on  account  of  this  Agreement  or  the  Reinsurance
Agreements.  Buyer may,  at its  option,  proceed  directly  against KFH for the
performance of any  obligation of Seller  hereunder or for any amounts which may
be recoverable as a result of any misrepresentation,  breach of warranty, breach
of covenant or other cause of Seller's  liability  under this  Agreement  or the
Reinsurance Agreements, without any requirement to proceed against Seller either
prior to or concurrently  with  proceeding  against KFH. KFH further agrees that
its  guarantee  shall  continue  in  effect  notwithstanding  any  modification,
extension,  waiver or other change in or under this Agreement or the Reinsurance
Agreements  or any  guaranteed  obligation or any other act or thing which might
otherwise operate as a legal or equitable  discharge of a guarantor.  KFH hereby
waives all special suretyship defenses and notice requirements.  Any claim under
this Section shall be resolved in accordance with Section 13.

14.2.    Buyer's Guarantor.

     Sierra Health  Services,  Inc.  ("Buyer's  Parent") hereby  irrevocably and
unconditionally  agrees to cause Buyer to fully  perform its  obligations  under
this Agreement and the  Reinsurance  Agreements in a timely manner,  and further
irrevocably and  unconditionally  guarantees the full and timely  performance of
this Agreement and the  Reinsurance  Agreements by Buyer in accordance  with its
terms.  The foregoing  guarantee  includes a guarantee of the immediate  payment
when due of all amounts for

                                                        44

<PAGE>



     which Buyer may at any time be liable on account of this  Agreement and the
Reinsurance  Agreements,  including but not limited to the promissory note which
will shall be payment for the real property  transferred  to Buyer  simultaneous
with the  closing  of this  transaction.  Seller  may,  at its  option,  proceed
directly  against  Buyer's Parent for the performance of any obligation of Buyer
hereunder  or for any  amounts  which  may be  recoverable  as a  result  of any
misrepresentation,  breach of  warranty,  breach of  covenant  or other cause of
Buyer's liability under this Agreement and the Reinsurance  Agreements,  without
any requirement to proceed  against Buyer either prior to or  concurrently  with
proceeding  against  Buyer's  Parent.  Buyer's  Parent  further  agrees that its
guarantee shall continue in effect notwithstanding any modification,  extension,
waiver or other change in or under this Agreement and the Reinsurance Agreements
or any  guaranteed  obligation  or any other act or thing which might  otherwise
operate as a legal or equitable discharge of a guarantor.  Buyer's Parent hereby
waive all special suretyship defenses and notice  requirements.  Any claim under
this Section shall be resolved in accordance with Section 13.

15.      MISCELLANEOUS.

15.1.    Notices.

     All  notices  and other  communications  hereunder  shall be in writing and
shall be either (i) be 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 Seller or Seller's Affiliate                Copy to:
(as the case may be):

Kaiser Foundation Health Plan of Texas         Jenkens & Gilchrist,
or Kaiser Foundation Health Plan, Inc.         A Professional Corporation
or Kaiser Foundation Hospitals                 1100 Louisiana Street, Suite 1800
c/o Kaiser Foundation Health Plan, Inc.        Houston, Texas 77002
One Kaiser Plaza                               Attention: Lawrence L. Foust
Oakland, California 94612                      Fax: (713) 951-3314
Attention: Peter Hohl, Director of
Acquisitions/Alliance Services
Fax: (510) 271-2309

If to Buyer or Buyer's Parent:              Copy to:

HMO Texas, L.C.                             Morgan, Lewis & Bockius, LLP
c/o Sierra Health Services, Inc.            300 South Grand Avenue
2724 N. Tenaya Way (for FedEx)              Twenty-Second Floor
Las Vegas, Nevada 89128                     Los Angeles, California 90071-3132
P.O. Box 15645 (for U.S. Mail)              Attention: Richard J. Maire, Jr.
Las Vegas, Nevada 89114-5645                Fax: (213) 612-2554

                                                        45

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Attn: Paul Palmer, Vice President
of Finance and CFO
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 days
after  such  notice  was  mailed  (whether  as  the  actual  notice  or  as  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.

15.2.    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.

15.3.    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.

15.4.    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.

15.5.    Severability.

     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.

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<PAGE>




15.6.    Entire Agreement.

     This  Agreement  (including  the  Exhibits  and  Schedules),   the  Related
Agreements,  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, and supersedes all prior agreements or
understandings between the parties, except the Confidentiality  Agreement, which
will  continue  in  effect  until  terminated  pursuant  to the  terms set forth
therein.  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.

15.7.    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.

15.8.    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.

15.9.    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.

15.10.   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.

15.11.   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

                                                        47

<PAGE>



     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.

15.12.   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 or the Members, and the provisions of this Agreement shall
not be enforceable by any such third party.

15.13.   Time is of the Essence.

     Time  is of the  essence  with  regard  to all of the  provisions  of  this
Agreement.  The parties acknowledge and agree that strict compliance with all of
the deadlines set forth in this Agreement,  including,  without limitation,  the
deadlines for filings pursuant to Section 10.

15.14.   Confidentiality.

     The  parties  acknowledge  and agree that this  Agreement  and the  Related
Agreements are part of the  "Confidential  Information"  of the  Confidentiality
Agreement.  Notwithstanding the Confidentiality  Agreement,  which shall survive
the execution of this Agreement, or any confidentiality, proprietary, or similar
clause  in any  Related  Agreement,  the  parties  may  disclose  any  terms  or
conditions of this Agreement to any third parties to comply with securities laws
or HMO or insurance laws, and as needed to meet prudent business requirements of
shareholders, investors, bondholders, members and other creditors.

15.15.   Offsets.

     Either  party may offset any amount  owed the other by amounts  owed by the
other to the party.

15.16.   No Duplication.

     The  intent of the  parties  is that the  Reinsurance  Agreements  and this
Agreement are different  memorializations  of substantially  similar  agreements
between   the   parties,   and   that   the   claims,   offsets,    adjustments,
indemnifications,  reconciliations,  liabilities, rights, and remedies under the
Reinsurance  Agreements  and this  Agreement  shall not be  duplicative.  If any
particular event or circumstances gives rise to any claim,  offset,  adjustment,
indemnification,   reconciliation,   liability,  right,  or  remedy  under  this
Agreement and under one or both of the Reinsurance  Agreements,  Buyer or Seller
must elect to exercise its rights either under this  Agreement or any one of the
Reinsurance

                                                        48

<PAGE>



     Agreements,  and may not  exercise  duplicative  rights with respect to the
same event or circumstances.

                                                       *****





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                                                        49

<PAGE>


     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
                                         Name:    Larry S. Howard
                                         Title:   President


                                         SELLER:

                                         KAISER FOUNDATION HEALTH PLAN OF TEXAS


                                         By:               /s/ Deborah Stokes
                                         Name:    Deborah Stokes
                                         Title:            President



     Sierra Health Services,  Inc. and Kaiser Foundation Hospitals have executed
this  Agreement  below  solely  with  respect  to  their  respective   guarantee
obligations set forth in Section 14.


                                    SIERRA HEALTH SERVICES, INC.


                                    By:               /s/ Anthony M. Marlon
                                    Name:    Anthony M. Marlon, M.D.
                                    Title:            Chairman and CEO


                                    KAISER FOUNDATION HOSPITALS


                                    By:               /s/ Deborah Stokes
                                    Name:    Deborah Stokes           
                                    Title:___President_____



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