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(1)

Represents the approximate maximum number of shares of SunLink common stock to be issued in connection with the merger including shares issuable pursuant to the exercise of certain outstanding options and warrants to purchase HealthMont common stock and shares issuable in certain events under the terms of a letter of credit agreement and certain consulting termination agreements to be executed in connection with the merger (the “Merger”) of HealthMont, Inc. with and into HM Acquisition Corp., a wholly owned subsidiary of SunLink Health Systems, Inc (“SunLink”).

(2)

Estimated solely for the purpose of calculating the registration fee. Pursuant to Rules 457(c) and 457(f)(1) and (3), the proposed maximum offering price of the registrant’s common stock was calculated as: (a) $2.40, the average of the high and low prices of SunLink common stock, as reported on the American Stock Exchange on January 28, 2003, multiplied by (b) 1,372,000, the total number of shares of SunLink common stock estimated to be issued in connection with the Merger.

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Q:

How is the acquisition structured?

A:

The acquisition will be structured as a merger in which the shareholders of HealthMont will receive approximately 0.1849 of a share of SunLink in exchange for each share of HealthMont that they hold. HealthMont will merge with and into HM Acquisition Corp., a wholly-owned subsidiary of SunLink, with that subsidiary continuing to be a wholly-owned subsidiary of SunLink.

Q:

When will I be asked to approve the merger?

A:

SunLink will hold its special meeting of SunLink shareholders at 2:00 p.m., local time, on March 27, 2003, at the Sheraton Suites Galleria, 2844 Cobb Parkway S.W., Atlanta, Georgia 30339. At the special meeting, you will be asked to approve the merger. You can vote at the special meeting if you own SunLink common stock at the close of business on February 24, 2003, the record date for the special meeting.

Q:

Why are the two companies proposing to merge?

A:

The boards of directors of SunLink and HealthMont each have determined that the acquisition of HealthMont by SunLink through the merger of HealthMont into a wholly-owned subsidiary of SunLink is in the best interests of their respective corporations and shareholders and presents a favorable opportunity to achieve long-term strategic and financial benefits. SunLink believes that the two HealthMont hospitals it will acquire are compatible with its business strategy of operating community hospitals.

Q:

When do you expect the merger to be completed?

A:

We are working as quickly as possible and expect to complete the merger by March 31, 2003. However, it is possible that factors outside the control of the parties could require us to complete the merger at a later time. Accordingly, we cannot predict the exact timing of the merger.

Q:

What am I being asked to vote on?

A:

You are being asked to approve the proposed merger of HealthMont into a wholly-owned subsidiary of SunLink and the issuance of SunLink common stock, options and warrants in connection with the merger.

Q:

What do I need to do now?

A:

After you carefully read this document, mail your signed proxy card in the enclosed envelope as soon as possible. In order to assure that your vote is obtained, please vote your proxy as instructed on your proxy card even if you currently plan to attend your meeting in person.

Q:

What are the consequences of a failure to vote?

A:

Because approval of the merger transaction requires the affirmative vote of a majority of the outstanding shares of common stock of SunLink, if you do not vote your shares, or do not instruct your broker how to vote shares held for you in “street name,” the effect will be the same as a vote against the merger.

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Q:

If my SunLink shares are held in “street name,” will my broker vote my shares for me?

A:

No. Your broker will not vote your SunLink shares without instructions from you. If you do not provide your broker with instructions on how to vote your “street name” shares, your broker will not vote them on any of the proposals. If you do not give voting instructions to your broker, you will not be counted as voting your SunLink shares, unless you appear in person at the SunLink meeting with a legal, valid proxy from the record holder. You should be sure to provide your broker with instructions on how to vote your SunLink shares.

Q:

Can I change my vote after I have mailed my proxy card?

A:

Yes. You can change your SunLink vote at any time before your proxy is voted at the SunLink special meeting. You can do this in one of three ways:

•

timely delivery of a valid, later-dated proxy;

•

written notice to the SunLink corporate secretary before the meeting that you have revoked your proxy; or

•

voting in person at our special meeting after revoking your proxy.

Q:

Should HealthMont shareholders send in their stock certificates now?

A:

No. If the merger is completed, SunLink will send HealthMont shareholders written instructions for exchanging their stock certificates. SunLink shareholders will keep their existing stock certificates.

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•

1,155,000 SunLink shares to be issued in exchange for the outstanding capital stock of HealthMont;

•

95,000 SunLink shares to be issued to settle certain contractual obligations of HealthMont to its officers and directors;

•

approximately 20,000 SunLink shares issuable upon the exercise of certain outstanding HealthMont options;

•

approximately 27,000 SunLink shares issuable upon the exercise of certain outstanding warrants of HealthMont; and

•

75,000 SunLink shares issuable upon the exercise of warrants to be issued in connection with the HealthMont financing.

•

approval of the merger agreement and the merger by the SunLink shareholders, including the issuance of SunLink common stock, options and warrants in the merger;

•

approval of the merger agreement and the merger by the holders of at least 75% of HealthMont’s common stock;

•

receipt of regulatory approvals and the absence of legal restraints;

•

receipt of opinion of counsel to HealthMont, dated as of the date of the merger, to the effect that the merger will qualify as a “tax-free” reorganization within the meaning of Section 368(a) of the Internal Revenue Code and certain related matters.

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•

by mutual written consent

•

by SunLink or HealthMont, if:

—

the merger is not completed by                     , 2003 (the Termination Date), provided that neither SunLink nor HealthMont may terminate the merger agreement if the failure to complete the merger by that date is caused by the failure of the company seeking termination to fulfill its obligations under the merger agreement; or

—

any court of competent jurisdiction or governmental authority issues a final non-appealable order or injunction that prohibits the completion of the merger, and SunLink and HealthMont shall have used reasonable best efforts to prevent such order or injunction from being issued; or

—

the other party breaches, in any material respect, any of its representations, warranties or covenants contained in the merger agreement, which, unless cured within 30 days following written notice of breach from the non-breaching party, would result in conditions to the merger not being satisfied, unless such breach has been waived by the non-breaching party; or

—

approval of the merger agreement by the shareholders of either party shall not have been obtained.

•

by SunLink if:

—

SunLink pays the fee and expenses described below under “—Termination Payments” and under “The Merger Agreement—Termination Payments” on page 63; or

—

HealthMont breaches its obligations described under “The Merger Agreement—Offers for Alternative Transactions” beginning on page 58; or

—

if at any time (a) trading or quotation in SunLink’s securities shall have been suspended or limited by the SEC or by the American Stock Exchange, or trading in securities generally on the American Stock Exchange, the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such exchanges by the SEC or the NASD; (b) a general banking moratorium shall have been declared by any federal or state authorities; (c) there shall have occurred any outbreak or escalation of national or international hostilities war, material U.S. military activity, a significant act or acts of domestic or international terrorism, whether or not similar to the events of September 11, 2001, or any crisis or calamity, or any change in the United States or international financial markets, or any U.S. or international political, financial or economic conditions, as in the reasonable good faith judgment of SunLink is a material adverse development which makes it materially impracticable, inadvisable or imprudent for SunLink to continue with or consummate the merger; or (d) HealthMont or any of its subsidiaries shall have sustained an uninsured loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the SunLink may impair the value of the HealthMont and its subsidiaries (other than HealthMont of Texas, Inc.) or may interfere materially with the conduct of the business and operations of HealthMont or such subsidiary (other than HealthMont of Texas, Inc.).

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by HealthMont, if

—

HealthMont receives an offer to engage in a merger, consolidation or similar transaction or to purchase all or substantially all of HealthMont’s shares or assets which satisfies the conditions described under “The Merger Agreement—Offers for Alternative Transactions” and SunLink and HealthMont are unable to negotiate adjusted terms for the merger within ten business days after the receipt of such offer which would enable HealthMont to proceed with the merger; and

—

HealthMont pays the fees and expenses described below under “—Termination Payments” and under “The Merger Agreement—Termination Payments” beginning on page 63.

•

If the merger agreement is terminated due to a knowing or willful breach of its terms, or failure by the breaching party to obtain its shareholders approvals the breaching party is required to pay the non-breaching party a termination fee of $500,000 and reimburse the non-breaching party for expenses incurred in connection with the merger up to a limit of reimbursable expenses payable to SunLink of $75,000 and $50,000 payable to HealthMont. Additionally, if HealthMont enters into an agreement regarding a merger, consolidation or similar transaction involving HealthMont or the purchase or sale of all or substantially all of its shares or assets within six months following the termination of the merger agreement by SunLink as provided above, HealthMont is required to pay an additional $250,000 to SunLink.

•

If the merger agreement is terminated due to a non-willful breach of the representations, warranties or covenants which results in a termination right as described above, remedies under the merger agreement generally are more limited. If SunLink is the terminating party, HealthMont is only required to reimburse SunLink for SunLink’s expenses up to $75,000 and if HealthMont is the terminating party SunLink is only required to reimburse HealthMont for HealthMont’s expenses up to $50,000.

•

If HealthMont terminates the merger agreement in connection with a merger, consolidation, or similar transaction or a purchase of all or substantially all of the shares or assets of HealthMont as described under “The Merger Agreement—Offers for Alternative Transactions,” HealthMont is required to pay SunLink a termination fee of $750,000, and SunLink’s expenses up to $75,000.

•

SunLink may terminate the merger agreement at any time if it pays HealthMont a termination fee of $500,000 and HealthMont’s expenses up to $50,000.

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(a)

All of SunLink’s net revenues relate to the U.S. community hospital segment which was acquired February 1, 2001. Net revenues for the periods presented represent only the revenues subsequent to the acquisition date. The operations of SunLink’s other business segments which were operated during the periods presented (the U.K. housewares, child safety products, and leisure marine segments and the U.S. life sciences and engineering segments) have been reported as discontinued operations, and, therefore, have been excluded in the selected financial data for continuing operations presented above.

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SunLink will issue 35,000 shares in connection with the transaction to settle certain contractual obligations of HealthMont;

•

HealthMont has executed a plan to terminate certain corporate executives which will result in severance expense of $295,000; and

•

HealthMont will make a capital contribution to Vinsant of $275,000 at the closing of the merger and will be contingently liable to make an additional payment of up to $150,000 to Vinsant based on an earnings before interest, taxes, depreciation and amortization (“EBITDA”) calculation.

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(1)

Book value per share is computed by dividing stockholders’ equity at the period end by the diluted weighted average shares outstanding for the period.

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(1)

Book value per share is computed by dividing pro forma stockholders’ equity at period end by the pro forma diluted weighted average shares outstanding for the period.

(2)

Calculated by multiplying the SunLink pro forma as adjusted data by the exchange ratio for each share of HealthMont common stock. The exchange ratio used herein of 0.1849 is based on the 1,155,000 shares of SunLink common stock to be issued in the merger divided by the 6,247,744 HealthMont shares expected to be outstanding at the close of the merger. This ratio may change as the final exchange ratio will be based on the actual number of HealthMont shares outstanding at the close of the merger.

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•

changes in the business, operations or prospects of SunLink or HealthMont;

•

governmental and/or litigation developments and/or regulatory considerations;

•

market assessments as to whether and when the merger will be consummated;

•

the timing of the merger;

•

governmental action affecting the healthcare industry generally and the community hospital segment, in particular; and

•

general market and economic conditions.

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•

possible unanticipated liabilities;

•

inability to collect, or inability to timely collect, accounts receivable;

•

unanticipated costs;

•

diversion of management attention to the acquired facilities;

•

unanticipated cash needs; and

•

loss of hospital level personnel and physicians at the acquired facilities.

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unidentified liabilities of the companies SunLink may acquire or merge with;

•

the possible inability to successfully integrate and manage acquired operations, systems and personnel;

•

the potential failure to achieve the economics of scale or synergies sought; and

•

the diversion of management’s attention away from other ongoing business concerns.

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licensure;

•

conduct of operations;

•

ownership of facilities;

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addition of facilities and services;

•

confidentiality, maintenance, and security issues associated with medical records;

•

billing for services; and

•

prices for services.

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general economic and business conditions in the U.S., both nationwide and in the states in which we operate hospitals;

•

the competitive nature of the U.S. community hospital business;

•

demographic changes in areas where we operate hospitals;

•

the availability of capital to fund working capital, renovations, and capital improvements at existing hospital facilities and for acquisitions and replacement hospital facilities;

•

changes in accounting principles generally accepted in the U.S.; and

•

fluctuations in the market value of equity securities including SunLink common stock.

•

the availability of, and our ability to attract and retain, sufficient qualified staff physicians, management, and staff personnel for our hospital operations;

•

timeliness of reimbursement payments received under government programs;

•

restrictions imposed by debt agreements;

•

the cost and availability of insurance coverage including professional liability (e.g., medical malpractice) and general liability insurance;

•

the efforts of insurers, healthcare providers, and others to contain healthcare costs;

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•

the impact on hospital services of the treatment of patients in lower acuity healthcare settings, whether with drug therapy or via alternative healthcare services;

•

changes in medical and other technology; and,

•

increases in prices of materials and services utilized in our hospital operations.

•

claims under leases, guarantees, and other obligations relating to discontinued operations, including sold facilities, retained subsidiaries, and former subsidiaries;

•

potential adverse affects of known and unknown government investigations;

•

claims for product and environmental liabilities from continuing and discontinued operations; and,

•

professional, general, and other claims which may be asserted against us.

•

existing and proposed governmental budgetary constraints;

•

the regulatory environment for our businesses, including state CON laws and regulations, rules, and judicial cases relating thereto;

•

possible changes in the levels and terms of government (including Medicare, Medicaid, and other programs) and private reimbursement for SunLink’s healthcare services including the payment arrangements and terms of managed care agreements;

•

changes in or failure to comply with Federal, state or local laws and regulations affecting the healthcare industry; and

•

the possible enactment of Federal healthcare reform laws or reform laws in states where we operate hospital facilities (including Medicaid waivers and other reforms).

•

our ability to integrate acquired hospitals and implement our business strategy;

•

the ability to integrate effectively SunLink’s and HealthMont’s information systems, operations, and personnel in a timely and efficient manner; and

•

other risk factors described herein.

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•

a resolution to approve the merger agreement including:

—

to authorize the issue of SunLink common shares in exchange for currently outstanding HealthMont common shares; and

—

to authorize the issue of SunLink options and warrants in place of currently outstanding HealthMont options and warrants.

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notifying the secretary of SunLink in writing, including by telegram or telecopy, that the proxy is revoked;

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•

sending a later-dated proxy to the secretary of SunLink or giving a later-dated proxy to a person who attends the special meeting; or

•

in the case of holders of record, appearing in person and voting at the special meeting.

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•

the Balanced Budget Act of 1997 (“BBA 97”) had moderated the sales prices of hospitals;

•

legislative sentiment seemed to indicate that some relief from negative provisions of the BBA 97 would be forthcoming for rural hospitals;

•

certain companies which bought hospitals before BBA 97 might be motivated sellers;

•

SunLink had access to resources sufficient with which to make an initial acquisition of at least one and potentially several community hospitals; and

•

SunLink’s management possessed, or because of its prior hospital experience had access to, the requisite management skills and experience necessary to acquire and subsequently manage community hospitals.

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•

determined that the merger agreement and the merger are fair to, and in the best interests of, SunLink and its shareholders;

•

approved the merger agreement with HealthMont;

•

directed that the proposed transaction be submitted for consideration by the SunLink shareholders; and

•

recommended that the SunLink shareholders vote FOR the approval and adoption of the merger agreement and the merger, including the issuance of shares of SunLink common stock in connection with the merger.

•

the revenues of the companies, their complementary businesses, and the potential for cost savings and revenue growth;

•

the recent and historical stock price performance of SunLink common stock; and

•

the percentage of SunLink that its current shareholders and the former shareholders of HealthMont, respectively, would own following the merger.

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•

reviewed the merger agreement and certain related documents;

•

reviewed certain publicly available financial statements and other information of SunLink;

•

reviewed certain audited and unaudited financial statements and other information of HealthMont;

•

reviewed a number of internal financial analyses and forecasts for SunLink and HealthMont prepared by the respective companies;

•

discussed the past and current operations, financial condition, and prospects of SunLink and HealthMont with senior executives of SunLink and HealthMont, respectively;

•

reviewed certain information relating to, and discussed with senior executives of SunLink and HealthMont, certain of the strategic implications and operational benefits anticipated from the merger;

•

visited one of the two hospitals to be acquired by SunLink;

•

compared the financial performance of HealthMont with the financial performance, reported prices, and trading activity of certain comparable publicly-traded companies and their securities and determined a relevant marketability discount for the privately held common stock of HealthMont;

•

reviewed the financial terms, to the extent publicly available, of certain similar transactions which Cardinal deemed relevant and compared them to the proposed transaction;

•

considered certain pro forma effects of the acquisition of HealthMont on SunLink’s historical financial statements;

•

performed a discounted cash flow analysis with respect to HealthMont;

•

participated in certain discussions and negotiations among representatives of SunLink and HealthMont and their legal advisors, and with representatives of HealthMont’s senior lender; and

•

performed such other analyses, which Cardinal does not believe were material to its opinion, and considered such other factors as it deemed appropriate.

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•

the valuation of businesses and their securities in connection with mergers and acquisitions;

•

negotiated underwritings;

•

financial advisory services with respect to mergers and acquisitions;

•

secondary distributions of listed and unlisted securities;

•

private placements; and

•

valuations for corporate and other purposes.

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•

information concerning the businesses, earnings, operations, competitive position, and future business prospects of HealthMont and SunLink, both individually and on a combined basis;

•

the belief that by combining operations, the combined company would have better opportunities for future growth than HealthMont would have on its own;

•

the current and prospective economic and competitive environments facing HealthMont as a stand-alone company;

•

the performance of HealthMont’s hospitals to date, including the under-performance of its Vinsant hospital;

•

the belief that the merger would provide HealthMont with the management, technical, and financial resources to grow more quickly;

•

the fact that the outstanding shares of SunLink common stock are, and the shares of such stock to be received in exchange for HealthMont common stock in the merger will be, listed on the American Stock Exchange and, as a result, enjoy greater liquidity than shares of HealthMont common stock, which are not traded in any market;

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the opportunity for HealthMont’s shareholders to participate in a larger, more diversified organization and to benefit from the potential appreciation in the value of SunLink’s common stock;

•

the opportunity for HealthMont’s shareholders to receive a premium over the existing value of HealthMont’s stock;

•

the likely impact of the merger on HealthMont’s employees and customers;

•

the interests that the Chief Executive Officer and certain of the directors of HealthMont may have with respect to the merger, in addition to their interests as shareholders of HealthMont generally;

•

the treatment of the merger as a reorganization for tax purposes, which would allow HealthMont shareholders flexibility in their personal tax-planning;

•

the opinion of Harpeth Capital Atlanta as to the fairness to HealthMont’s shareholders, from a financial point of view, of an exchange ratio of 0.1847 shares of SunLink common stock for each share of HealthMont Common Stock, as well as the fairness to HealthMont’s shareholders, other than Mr. Hill, from a financial point of view, of the sale of HealthMont’s Vinsant hospital; and

•

the belief of HealthMont’s board that it was unlikely that any other party would be a more attractive strategic partner or make a proposal more favorable to HealthMont and its shareholders than SunLink.

•

the risk that the merger would not be completed in a timely manner or at all;

•

the possible negative effects of the public announcement of the merger on HealthMont’s relationships with its doctors, their patients, and thereby its operating results;

•

the fact that HealthMont’s shareholders will not receive the full benefit of any future growth in the value of their equity that HealthMont may have achieved as an independent company;

•

the potential disadvantage to HealthMont’s shareholders in the event SunLink does not perform as well in the future as HealthMont may have performed as an independent company;

•

the possibility that certain provisions of the merger agreement, including, among others, the no solicitation and termination fee payment provisions of the merger agreement, would likely have the effect of discouraging other persons potentially interested in merging with or acquiring HealthMont from pursuing such an opportunity;

•

the risk that the potential benefits of the merger may not be realized;

•

the risk that HealthMont’s shareholders will not receive the benefit of any future improvement in the performance of HealthMont’s Vinsant hospital and that for the purposes of its divestiture, the risk that HealthMont’s Vinsant hospital had been undervalued; and

•

the challenge of integrating the businesses and operations of the two companies and the substantial management time and effort and the substantial costs required to complete the integration following the merger.

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(1)

the merger agreement;

(2)

the divestiture agreement for HealthMont’s Vinsant hospital;

(3)

HealthMont’s audited financial statements for the fiscal years ended March 31, 2001 and March 31, 2002, detailed and monthly unaudited financial information on each of HealthMont’s hospitals and

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corporate expenses for the fiscal year ended March 31, 2002, for the three months ended June 30, 2002, and for the twelve months ended August 31, 2002;

(4)

a presentation made by the management of HealthMont to a potential source of debt financing;

(5)

shareholder lists provided by HealthMont;

(6)

SunLink’s web pages;

(7)

all press releases issued by SunLink from June 1999 to September 9, 2002, including the earnings press release reporting the financial results for the three months and twelve months ended June 30, 2002;

(8)

SunLink’s earnings conference call on September 10, 2002;

(9)

Annual Reports to Shareholders and Annual Reports on Form 10-K of Krug International Corp. (which subsequently changed its name to SunLink) for the two fiscal years ended March 31, 2000 and March 31, 2001, and for the fiscal year ended June 30, 2002;

(10)

Quarterly Reports on Form 10-Q of SunLink for the for the quarters ended June 30, 2001, September 30, 2001, December 31, 2001 and March 31, 2002;

(11)

all Current Reports filed on Form 8-K of SunLink since December 31, 2000;

(12)

certain other communications from HealthMont and SunLink to their respective shareholders;

(13)

certain internal financial analyses and forecasts for HealthMont prepared by the management of HealthMont;

(14)

certain internal financial analyses and forecasts for SunLink prepared by the management of SunLink;

(15)

certain cost savings projected by the management of HealthMont to result from the transaction contemplated by the merger agreement; and

(16)

such other data as Harpeth Capital Atlanta deemed relevant.

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Health Management Associates, Inc.;

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Province Healthcare Company;

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LifePoint Hospitals, Inc.;

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Community Health Systems, Inc.;

•

Universal Health Services, Inc.;

•

Triad Hospitals, Inc.;

•

HCA Inc.; and

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Tenet Healthcare Corporation.

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For the twelve months ended August 31, 2002, the Vinsant hospital had an operating loss of $688,384. A divestiture of the Vinsant hospital would improve, on a historical pro forma basis, HealthMont’s financial results. Accordingly, analyses such as those described above imply a higher value for HealthMont common stock if the Vinsant hospital is excluded from HealthMont’s financial results; and

•

Assuming that the sale of the Vinsant hospital would result in no change to the merger consideration to be paid by SunLink, the redemption of 250,000 shares of HealthMont common stock and the assumption of $655,000 in debt and capital lease obligations in connection with the sale of the Vinsant hospital would result in a 31.5% increase in the per share consideration payable in respect of the remaining HealthMont common stock.

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partnerships and other pass-through entities;

•

foreign persons and entities;

•

financial institutions;

•

insurance companies;

•

tax-exempt entities;

•

dealers in securities;

•

traders in securities that mark-to-market;

•

certain U.S. expatriates;

•

shareholders that hold HealthMont common stock as part of a straddle, appreciated financial position, hedge, conversion transaction or other integrated investment;

•

HealthMont shareholders whose functional currency is not the United States dollar; and

•

HealthMont shareholders who acquired HealthMont common stock through the exercise of employee stock options or otherwise as compensation or through a tax-qualified retirement plan.

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•

No gain or loss will be recognized by HealthMont shareholders upon the exchange of HealthMont common stock for SunLink common stock in the merger.

•

The tax basis of the SunLink common stock received by HealthMont shareholders in the merger will be the same as the tax basis of the shares of HealthMont common stock surrendered in exchange therefore, less the basis of any fractional share of SunLink common stock settled by cash payment.

•

The holding period of the shares of SunLink common stock received by the HealthMont shareholders will include the holding period of the shares of HealthMont common stock surrendered in exchange therefor, provided that such HealthMont stock is held as a capital asset on the date of consummation of the merger.

•

A holder of HealthMont common stock who exercises statutory dissenter’s rights in connection with the merger generally will recognize capital gain or loss (assuming the common stock is held as a capital asset) equal to the difference, if any, between such holder’s tax basis in the HealthMont common stock exchanged and the amount of cash received in exchange therefore.

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Chatham Investment Fund, LLC or its affiliates making a $3,000,000 subordinated loan to the surviving corporation in the merger; such loan to be subordinated to HealthMont’s existing senior credit agreements on terms to be agreed to by Chatham and the senior lender;

•

the entry by SunLink Health Systems, Inc. into an unconditional guarantee of payment satisfactory to the senior lender guaranteeing amounts owed under HealthMont’s existing senior credit agreements;

•

the extension of a letter of credit agreement by certain existing HealthMont directors and shareholders securing by commercial letters of credit up to $1,650,000 in borrowings by HealthMont under the credit facility through August 31, 2005;

•

the resetting of financial covenants in such senior credit agreements to reflect the post-acquisition financial condition of the combined company and/or the acquired operations;

•

payment of an extension fee of $40,000 to such senior lender and the conversion of 144,683 warrants held by such senior lender of HealthMont to warrants to acquire 26,723 shares of SunLink common stock at an exercise price of $0.01 per share; and

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indemnification of such senior lender against any claims arising out of or related to the merger agreement.

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Each outstanding HealthMont stock option not cancelled pursuant to the merger agreement or related agreements will be exchanged for an option to purchase the number of SunLink shares, derived by multiplying the number of shares subject to the HealthMont stock option by the exchange fraction, with an exercise price per share equal to the existing exercise price per share divided by the exchange fraction as described on page 59 under “—Stock Options.”

•

The outstanding Heller warrant to purchase 144,683 shares of HealthMont common stock will be exchanged for a new Heller warrant to purchase an aggregate maximum of 26,723 shares of SunLink common stock at an exercise price per SunLink common share equal to $0.01 per share, and such new Heller warrant will be exercisable for three years from the effective date of the merger.

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the applicable number of SunLink shares to which such holder is entitled; and

•

a check in the amount, after giving effect to any required tax withholdings, of:

—

cash, in U.S. dollars, in lieu of any fractional interest in a SunLink share, on the terms described above; plus

—

any cash dividends or other distributions that the holder has the right to receive, including dividends or other distributions, if any, payable with respect to the holder’s SunLink shares with a record date after the completion of the merger and a payment date on or before the date the holder properly delivers HealthMont common stock certificates to the exchange agent.

•

ensure that the certificate surrendered is properly endorsed or otherwise in proper form for transfer including signature guarantees, if required;

•

provide such proof of identity and genuineness of signatures as the exchange agent deems appropriate; and

•

pay the exchange agent any transfer or other taxes required or establish to the satisfaction of the exchange agent that such taxes have been paid or are not payable.

•

corporate matters, including due organization, good standing, and qualification;

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capital structure and outstanding securities;

•

corporate authority to enter into the merger agreement and lack of conflicts with corporate governance documents, contracts or laws;

•

governmental filings;

•

reports and other financial statements;

•

vote required;

•

absence of changes since June 30, 2002 with regard to SunLink and March 31, 2002 with regard to HealthMont;

•

litigation and liabilities;

•

brokers’ and finders’ fees;

•

labor and employment matters;

•

information supplied for use in this proxy statement/prospectus;

•

licenses;

•

healthcare licenses;

•

Medicare participation/accreditation;

•

medical staff matters;

•

sensitive payments;

•

healthcare reports and documents;

•

interested party transactions;

•

compliance with laws;

•

opinions of their respective financial advisors; and

•

tax matters.

•

employee benefits plans;

•

compliance with environmental laws;

•

intellectual property;

•

accounts receivable information;

•

inventory information;

•

absence of liability with respect to certain special healthcare funds; and

•

that it has taken or will take all actions appropriate and necessary to ensure that provisions of the Tennessee Corporation Act limiting business combinations will not affect the merger or any other transaction contemplated by the merger agreement.

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•

increase the number of members of their board of directors or otherwise amend their corporate governance documents other than in the case of SunLink which may take such actions if such amendment would not result in a material adverse effect on SunLink under the terms of the merger agreement;

•

declare, pay or set aside any dividend or other distribution or payment with respect to, or split, combine, redeem or reclassify their outstanding shares other than in the case of SunLink which may take such actions with respect to (A) dividends payable by a wholly-owned subsidiary of SunLink to SunLink or another wholly-owned subsidiary of SunLink, (B) repurchases permitted under any SunLink benefit plan (not to exceed 5% of SunLink’s outstanding capital stock) or (C) participation rights in any capital raising transaction;

•

adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructing, recapitalization or other reorganization of the company or any of its subsidiaries; or

•

knowingly take any action which would cause the merger to fail to qualify as a tax free reorganization under the U.S. Internal Revenue Code.

•

amend or make any new awards of stock-based compensation or other benefits under any compensation or benefit plan;

•

transfer, lease, license, guaranty, sell, mortgage, pledge, renovate, rehabilitate, dispose, encumber or subject to any lien, any assets of HealthMont or any of its subsidiaries except for (A) sales of assets or liens made or granted in the ordinary course of business, and (B) sales of assets which are not, individually or in the aggregate in excess of $25,000;

•

issue or sell any shares of capital stock other than the issuance of shares upon the exercise of outstanding options;

•

incur any material indebtedness other than in the ordinary course of business or other than as previously disclosed to SunLink in connection with transactions related to the merger;

•

enter into any merger or share exchange other than pursuant to the merger agreement and except as described below under “—Offers for Alternative Transactions”;

•

dispose of any material amount of assets outside the ordinary course of business;

•

acquire (whether pursuant to merger, stock or asset purchase or otherwise) in one transaction or series of related transactions any assets or properties (including any equity interests) having a fair market value in excess of $25,000, in the aggregate, other than acquisitions of inventory, supplies, licenses, services, and raw materials in the ordinary course of business consistent with past practice;

•

declare or pay dividends or make distributions on their outstanding shares;

•

repurchase any of HealthMont’s outstanding shares;

•

settle, pay or discharge any claim, suit or other action brought or threatened against HealthMont with respect to or arising out of a shareholder’s equity interest in HealthMont, or pay, discharge or satisfy any claims, liabilities or obligations over $10,000, individually or in the aggregate, other than the payment, discharge or satisfaction of such claims in the ordinary course of business and consistent with past practice;

•

enter into any agreement, understanding or commitment that materially restrains, limits or impedes HealthMont’s ability to compete with or conduct any business or line of business, including, but not

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limited to, geographic limitations on HealthMont’s activities, other than with respect to agreements solely as to HealthMont’s Texas hospital which is to be disposed of prior to the merger;

•

plan, announce, implement or effect any material reduction in labor force, lay-off, early retirement program, severance program or other program or effort concerning the termination of employment of employees of HealthMont or its subsidiaries;

•

take any action which would, directly or indirectly, restrict or impair the ability of SunLink to vote, or otherwise to exercise rights or receive benefits as a shareholder with respect to, securities of HealthMont that may be acquired or controlled by SunLink or HM Acquisition Corp.;

•

materially modify, amend or terminate any material contract to which HealthMont is a party, or waive any of its material rights or claims;

•

make any tax election or settle or comprise any United States, Federal, state, local or non-United States tax liability if the effect thereof would be adverse in any material respect to HealthMont;

•

other than in connection with acquisitions of inventory, supplies, licenses, services, and raw materials in the ordinary course of business consistent with past practice, incur any capital expenditures except for those (A) contemplated by the capital expenditure budgets for the HealthMont made available to, and previously approved by SunLink, or (B) not exceeding $50,000 in the aggregate;

•

except as required by applicable law or U.S. GAAP and after notice to SunLink, change its accounting policies or procedures (including, without limitation, procedures with respect to revenue recognition, payments of accounts payable, and collection of accounts receivable); or

•

accelerate the vesting of any bonus, stock option or other compensation or benefits, except as contemplated by the merger agreement or any related transaction documents previously disclosed to SunLink.

•

initiate, solicit or encourage any party to engage in a merger, consolidation or similar transaction with HealthMont or to purchase all or any significant portion of HealthMont’s assets or shares; or

•

engage in any discussions or negotiations with, or provide any confidential information or data to, any person relating to an offer for such an alternative transaction or engage in any negotiations with any person concerning any such alternative transaction offer.

•

the offer did not result from the breach of HealthMont’s obligations described above not to solicit or engage in discussions regarding an alternative transaction offer;

•

HealthMont’s board of directors determines in its good faith judgment, after receiving the advice of its financial adviser, that the offer is materially more favorable to HealthMont and its shareholders, that the offer is reasonably capable of being completed on the terms proposed, and that financing, if required, is committed or reasonably capable of being obtained; and

•

HealthMont’s board of directors determines in its good faith judgment that such action is required as a result of the board of directors’ fiduciary duties to the HealthMont shareholders.

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to terminate any discussions or negotiations regarding any potential merger, consolidation or similar transaction or for the purchase of all or substantially all of their respective shares or assets that were being conducted before the merger agreement was signed; and

•

to notify SunLink promptly if any proposals or requests for information regarding an alternative transaction are received or any discussions or negotiations are sought and identify the person making the proposal or request and the material terms of any offer to engage in a merger, consolidation or similar transaction or for the purchase of all or substantially all of its shares or assets that it receives.

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the holders of at least seventy-five percent of the voting power of HealthMont common stock approving the merger agreement;

•

the holders of a majority of the SunLink common shares approving the resolutions presented to SunLink’s shareholders, details of which we describe above under “The SunLink Special Meeting of Shareholders” beginning on page 23; and

•

no more than 6% of the outstanding HealthMont shareholders demanding dissenters’ rights.

•

all waiting periods, if any, under applicable U.S. and non-U.S. monopoly laws having expired or been terminated;

•

the Form S-4 registration statement of which this proxy statement/prospectus forms a part having become effective in accordance with the Securities Act; and

•

all other consents, approvals and declarations and authorizations of other governmental entities, except as would not have a material adverse effect, having been obtained.

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No law, judgment or order having been enacted or entered, and no injunction having been issued, by a governmental entity that restrains, enjoins or otherwise prohibits the completion of the merger.

•

the SunLink shares to be issued in the merger having been authorized for listing on the American Stock Exchange.

•

HealthMont and SunLink having received another opinion from Stokes Bartholomew Evans & Petree, P.A., dated as of the closing date, to the effect that, on the basis of the facts, representations, and assumptions set forth in the opinion:

—

the merger will be treated for U.S. federal income tax purposes as a reorganization within the meaning of Section 368(a) of the U.S. Internal Revenue Code; and

—

each of SunLink and HealthMont will be a party to the reorganization within the meaning of Section 368(b) of the U.S. Internal Revenue Code.

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by mutual written consent

•

by SunLink or HealthMont, if:

—

the merger is not completed by                 , 2003, provided that neither SunLink or HealthMont may terminate the merger agreement if the failure to complete the merger by such date is caused by the failure of the company seeking to terminate to fulfill its obligations under the merger agreement;

—

any court of competent jurisdiction or any governmental authority issues a final non-appealable order or injunction that prohibits the completion of the merger, and SunLink and HealthMont shall have used reasonable best efforts to prevent such order or injunction from being issued;

—

the other party breaches, in any material respect, any of its representations, warranties or covenants contained in the merger agreement, which, unless cured within 30 days following written notice of breach from the non-breaching party, would result in conditions to the merger not being satisfied, unless such breach has been waived by the non-breaching party;

—

approval of the merger agreement by the shareholders of either party shall not have been obtained; or

•

by SunLink, if:

—

SunLink pays the fee and expenses described below under “—Termination Payments;”

—

HealthMont breaches its obligations described under “The Merger Agreement—Offers for Alternative Transactions” beginning on page 58; or

—

if at any time (a) trading or quotation in SunLink’s securities shall have been suspended or limited by the SEC or by the American Stock Exchange, or trading in securities generally on the American Stock Exchange, the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such exchanges by the SEC or the NASD; (b) a general banking moratorium shall have been declared by any federal or state authorities; (c) there shall have occurred any outbreak or escalation of national or international hostilities war, material U.S. military activity, a significant act or acts of domestic or international terrorism, whether or not similar to the events of September 11, 2001, or any crisis or calamity, or any change in the United States or international financial markets, or any U.S. or international political, financial or economic conditions, as in the reasonable good faith judgment of SunLink is a material adverse development which makes it materially impracticable, inadvisable or imprudent for SunLink to continue with or consummate the merger; or (d) HealthMont or any of its subsidiaries shall have sustained an uninsured loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the SunLink may impair the value of the HealthMont and its subsidiaries (other than HealthMont of Texas, Inc.) or may interfere materially with the conduct of the business and operations of HealthMont or such subsidiary (other than HealthMont of Texas, Inc.).

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by HealthMont, if HealthMont receives an offer to engage in a merger, consolidation or similar transaction or to purchase all or substantially all of HealthMont’s shares or assets which satisfies the conditions described under “The Merger Agreement—Offers for Alternative Transactions” and SunLink and HealthMont are unable to negotiate adjusted terms for the merger within ten business days after the receipt of such offer which would enable HealthMont to proceed with the merger; provided that, HealthMont pays the fees and expenses described below under “—Termination Payments.”

•

a knowing or willful breach by HealthMont of any representation, warranty, covenant or other agreement contained in the merger agreement, which, unless cured within 30 days following written notice of the breach, would result in conditions to the merger not being satisfied, unless such breach has been waived by SunLink (however, if the merger agreement is terminated by SunLink due to a non-willful breach by HealthMont of its representations, warranties or covenants in the merger agreement, HealthMont will only be required to reimburse SunLink for its expenses up to $75,000);

•

HealthMont breaches its obligations under “—Offers for Alternative Transactions” beginning on page 58; or

•

if at the HealthMont shareholder meeting, the approval of the merger by the HealthMont shareholders is not obtained.

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state where the payment demand must be sent and where and when certificates for certificated shares of HealthMont stock must be deposited;

•

inform holders of uncertificated shares (if any) to what extent transfer of the shares will be restricted after the payment demand is received;

•

supply a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the principal terms of the proposed corporate action and requires that the person asserting the dissenters’ rights certify whether or not he or she acquired beneficial ownership of the shares before that date;

•

set a date by which HealthMont must receive the payment demand, which date may not be fewer than one (1) month nor more than two (2) months after the date the dissenter's notice was delivered; and

•

be accompanied by a copy of Chapter 23 of Title 48 of the TBCA unless HealthMont has not previously sent such copy of such provisions to the shareholder.

•

certain HealthMont financial information, including a balance sheet, income statement, statement of shareholder equity changes and financial statements;

•

a statement of SunLink’s estimate of the fair value of the HealthMont shares;

•

an explanation of how the interest was calculated;

•

a statement of the dissenting shareholder’s right to demand payment under Section 48-23-209 of the TBCA; and

•

a copy of Chapter 23 of Title 48 of the TBCA, if not previously furnished.

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the Lock-Up Agreement between SunLink and certain shareholders of HealthMont;

•

Employment and Consulting Agreement terminations;

•

Non-Competition Agreement and General Release for Timothy S. Hill;

•

the Overline Letter of Credit Agreement;

•

the HealthMont of Texas Disposition Agreement;

•

HealthMont of Texas Stock Subscription and Purchase Agreement;

•

the Consulting Agreement between HealthMont of Texas and Timothy S. Hill; and

•

the Founders Stock Redemption Agreement.

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SunLink will issue 35,000 shares in connection with the transaction to settle certain contractual obligations of HealthMont;

•

In addition, HealthMont has executed a plan to terminate certain corporate executives which will result in severance expense of $295,000; and

•

HealthMont will also make a capital contribution to Vinsant of $275,000 at the closing of the merger and will be contingently liable to make an additional payment of up to $150,000 to Vinsant based on a combination of hospital level EBITDA for the hospitals acquired by SunLink and networking capital of HealthMont, in each case, as of the closing of the merger.

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(a)

HealthMont divested Eastmoreland and Woodland Park, both in Portland, OR, in the fiscal year ended March 31, 2002 and will divest Vinsant pursuant to the merger. This column eliminates the results of such three hospitals for the year ended March 31, 2002 for HealthMont. Derived from the unaudited statement of earnings financial information for Eastmoreland, Woodland Park, and Vinsant for the year ended March 31, 2002.

(b)

Depreciation expense increased based upon the increased property, plant and equipment resulting from the preliminary purchase price allocation, as follows:

(e)

Tax expense—No tax benefit is recorded on the pro forma loss before income taxes due to tax net operating loss carryforward positions of both SunLink and HealthMont.

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(a)

Represents divestiture of Vinsant. Derived from the unaudited statement of earnings for Vinsant for the three months ended September 30, 2002.

(b)

Depreciation expense increased based upon the increased property, plant and equipment resulting from the preliminary purchase price allocation.

(f)

Tax expense—No tax benefit is recorded on the pro forma loss before income taxes due to tax net operating loss carryforward positions of both SunLink and HealthMont.

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The appearance and functionality of the healthcare facilities;

•

The quality and demeanor of professional staff and physicians; and,

•

The participation of the hospital in plans which pay a portion of the patient’s bill.

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*

Represents beneficial ownership of HealthMont’s common stock of less than 1%.

(1)

Except as otherwise indicated in the footnotes to this table, the persons named in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable.

(2)

Under SEC rules, a person is deemed to be the beneficial owner of shares that can be acquired by such person within 60 days upon the exercise of warrants or options to purchase such shares. All outstanding warrants and options to purchase shares of HealthMont common stock granted by HealthMont are immediately exercisable.

(3)

Calculated on the basis of 6,632,479 shares of common stock outstanding as of December 31, 2002, provided that any additional shares of common stock that a shareholder has the right to acquire within 60 days after December 31, 2002 are deemed to be outstanding for the purpose of calculating that shareholder’s percentage beneficial ownership.

(4)

Includes warrants and options to purchase an aggregate of 60,000 shares of HealthMont common stock. Also includes 250,000 shares of HealthMont common stock to be redeemed by HealthMont immediately prior to the completion of the merger in connection with the disposition of HealthMont’s Texas hospital and 72,722 shares of HealthMont common stock to be redeemed by HealthMont immediately prior to the completion of the merger pursuant to the Founders Stock Redemption Agreement.

(5)

Includes options to purchase 15,000 shares of HealthMont common stock.

(6)

Includes 12,499 shares of HealthMont common stock held jointly with M. Jan Burleson. Also includes warrants and options to purchase an aggregate of 95,000 shares of HealthMont common stock. Does not include an aggregate of 42,000 shares of HealthMont common stock to be received at the time of the merger as consideration for the extension of letters of credit in favor of HealthMont’s lender in connection with the restructuring of certain of HealthMont’s indebtedness.

(7)

Includes 431,750 shares of HealthMont common stock held by the Chaney Family Partnership LTD. Also includes warrants and options to purchase an aggregate of 175,000 shares of HealthMont common stock. Also includes 17,500 shares of HealthMont common stock to be redeemed by HealthMont immediately prior to the completion of the merger pursuant to the Founders Stock Redemption Agreement.

(8)

Includes 22,743 shares of HealthMont common stock held jointly with Clayre Haft. Also includes options to purchase 15,000 shares of HealthMont common stock.

(9)

Includes 137,500 shares of HealthMont common stock held by the Kanter Family Foundation. Also includes warrants and options to purchase an aggregate of 215,000 shares of HealthMont common stock. Does not include an aggregate of 105,000 shares of HealthMont common stock to be received at the time of the merger as consideration for the extension of letters of credit in favor of HealthMont’s lender in connection with the restructuring of certain of HealthMont’s indebtedness.

(10)

Includes warrants and options to purchase an aggregate of 215,000 shares of HealthMont common stock. Also includes 35,000 shares of HealthMont common stock to be redeemed by HealthMont immediately prior to the completion of the merger pursuant to the Founders Stock Redemption Agreement.

(11)

Includes options to purchase 15,000 shares of HealthMont common stock.

(12)

Includes warrants and options to purchase an aggregate of 805,000 shares of HealthMont common stock.

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*

Represents less than 1% of the outstanding shares of common stock.

(1)

Under applicable SEC regulations, shares are treated as “beneficially owned” if a person has or shares voting or investment power with respect to the shares or has a right to acquire the shares within 60 days of December 31, 2002. Unless otherwise indicated, sole voting power and sole investment power are exercised by the named person. In calculating “% of Class,” shares which may be acquired by a person within such 60-day period are treated as owned by such person and as outstanding shares.

(2)

The business of Fortuna Asset Management, LLC is to provide discretionary investment management services to clients and Karen B. Brenner is President of Fortuna Asset Management, LLC. Ms. Brenner also serves as a director of SunLink. Ms. Brenner has shared investment power over all shares reported as beneficially owned by the Baileys Family Trust and Steven J. Baileys.

(3)

Baileys Family Trust is a private investor. Steven J. Baileys is a private investor, the Trustee of Baileys Family Trust, and a director of SunLink.

(4)

Includes 705,349 shares (which includes 107,383 shares which may be acquired upon the exercise of warrants) over which Ms. Brenner, as a registered investment advisor and sole shareholder of Fortuna Asset Management, LLC, has shared investment power, includes an aggregate of 259,160 shares which may be acquired upon exercise of warrants and includes 5,000 shares which may be acquired under options exercisable within 60 days of December 31, 2002 of such 705,349 shares, Ms. Brenner shares investment power over 665,198 shares (which include 102,982 shares which may be acquired upon the exercise of warrants) with Dr. Baileys.

(5)

Includes 705,349 shares (which includes 107,383 shares which may be acquired upon the exercise of warrants) over which Ms. Brenner, as a registered investment advisor and sole shareholder of Fortuna Asset Management, LLC, has shared investment power, includes an aggregate of 259,160 shares which may be acquired under exercise of warrants.

(6)

Includes 665,198 shares (which includes 102,982 shares which may be acquired upon the exercise of warrants, also includes 378,649 shares held by the Baileys Family Trust) over which Dr. Baileys shares investment power with Ms. Brenner and includes 5,000 shares which may be acquired under options exercisable within 60 days of December 31, 2002.

(7)

Includes 52,041 shares that may be acquired upon exercise of warrants.

(8)

Includes 37,540 shares that may be acquired upon the exercise of warrants and 116,000 shares that may be acquired under options exercisable within 60 days of December 31, 2002.

(9)

Includes 5,380 shares that may be acquired upon exercise of warrants and 5,000 shares that may be acquired under options exercisable within 60 days of December 31, 2002.

(10)

Includes 51,250 shares that may be acquired under options exercisable within 60 days of December 31, 2002.

(11)

Includes 5,000 shares that may be acquired under options exercisable within 60 days of December 31, 2002.

(12)

Includes 5,000 shares that may be acquired under options exercisable within 60 days of December 31, 2002.

(13)

Includes 5,000 shares that may be acquired under options exercisable within 60 days of December 31, 2002.

(14)

Includes 12,685 shares that may be acquired upon exercise of warrants and 5,000 shares that may be acquired under options exercisable within 60 days of December 31, 2002.

(15)

Includes 44,000 shares that may be acquired under options exercisable within 60 days of December 31, 2002.

(16)

Includes 18,750 shares that may be acquired under options exercisable within 60 days of December 31, 2002.

(17)

Includes 10,000 shares that may be acquired under options exercisable within 60 days of December 31, 2002.

(18)

Includes 314,765 shares that may be acquired upon exercise of warrants and 275,000 shares which may be acquired under options exercisable within 60 days of December 31, 2002.

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*

Represents beneficial ownership of less than 1%

(1)

Represents number of current beneficially owned SunLink shares by SunLink beneficial shareholders. Represents number of HealthMont shares currently beneficially owned by HealthMont beneficial shareholders multiplied by the anticipated exchange fraction of 0.1849.

(2)

Calculated on the basis of 6,369,592 shares of SunLink common stock estimated to be outstanding at the close of the merger, including an estimated 1,372,000 shares of SunLink common stock to be issued in the merger or in connection with obligations assumed pursuant to the merger.

(3)

Includes all current and post-merger directors and executive officers of SunLink (except for Mr. Vannuki, a current director). Mr. Burleson will replace Mr. Vannuki on the SunLink board following the completion of the merger.

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certain information as to each person whom the shareholder proposes to nominate for election or reelection as a director and such person’s written consent to serve as a director if elected; and

•

certain information as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, including whether either such shareholder or beneficial owner intends to solicit or participate in the solicitation of proxies in favor of such proposal or nominee or nominees.

•

exercised or used the same degree of care and skill as a prudent man would have exercised or used under the circumstances and the conduct of his own affairs, or

•

took, or admitted to take, such action in reliance upon advice of counsel for SunLink or upon statements made or information furnished by officers or employees of SunLink which he had reasonable grounds to believe or upon a financial statement of SunLink prepared by an officer or employee of SunLink in charge of its accounts or certified by public accountant or firm of public accountants, or

•

consider the assets to be value at their book value or followed what he believed to be sound accounting and business practice.

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(a)

Merger Sub Common Stock.    Each issued and outstanding share of the Common Stock of Merger Sub shall be converted into and become one fully paid and non-assessable share of common stock, par value $.01 per share, of the Surviving Corporation.

(b)

Cancellation of Treasury Stock and Parent-Owned Stock.    All Shares that are owned by the Company as treasury stock and any Shares owned by Parent, Merger Sub or any other wholly-owned Subsidiary of Parent shall be cancelled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor.

(c)

Conversion of Shares.    Each issued and outstanding Share (other than Shares to be cancelled in accordance with Section 2.1(b) and other than Dissenting Shares) shall be automatically converted into the right to receive from Parent pursuant to Section 2.1(e) a number of Parent Shares equal to the Exchange Fraction, which shall be referred to herein as the “Merger Consideration.” At the Effective Time, all Shares shall no longer be outstanding, shall be canceled and retired and shall cease to exist, and each certificate (a “Certificate”) formerly representing any of such Shares shall thereafter represent only the right to receive the Merger Consideration and the right, if any, to receive pursuant to Section 2.2(f) cash in lieu of a fractional Parent Share and any dividend or distribution pursuant to Section 2.2(d), in each case without interest. Parent shall, following the Closing, pay all stamp duties, stamp duty reserve tax and other Taxes and similar levies imposed in connection with the issuance or creation of the Parent Shares.

(d)

Exchange Fraction.    The Exchange Fraction shall be the fraction derived by dividing 1,155,000 by the total number of Shares outstanding as of the Effective Time. By way of illustration, if the total number of Shares outstanding as of the Effective Time were 6,247,744 (as is anticipated by the Company), the Exchange Fraction would be 0.1847 (1,155,000 ÷ 6,247,744), such that for each one Share the holder thereof would receive 0.1847 Parent Shares. In no event shall Parent issue or be obligated to issue more than 1,155,000 Parent Shares in connection with the Merger and the

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Transactions contemplated by this Agreement except from and to the extent provided for with respect to (i) up to 19,394 Parent Shares issuable upon the exercise of and in connection with assumed Company Derivative Securities, including assumed Company Options, as set forth in Section 5.7 of the Company Disclosure Schedule, (ii) 26,723 Parent Shares issuable upon the exercise of, and in connection with, the New Heller Warrants issued in replacement of the old Heller Warrants, (iii) 60,000 Parent Shares under the terms of the LOC Agreement, plus up to 350,000 Parent Shares issuable in certain events as set forth therein, and (iv) 35,000 Parent Shares to be issued in the aggregate in connection with the Consulting Termination Agreements.

(e)

Issuance of Merger Consideration.    In consideration of the issuance to Parent by the Surviving Corporation of shares of common stock of the Surviving Corporation pursuant to Section 2.1(a) hereof and subject to Section 2.1(b), Parent shall issue to the Exchange Agent such number of Parent Shares as is equal to the number of Shares outstanding immediately prior to the Effective Time multiplied by the Exchange Fraction.

(f)

Extraordinary Adjustments.    In the event that, subsequent to the date of this Agreement but prior to the Effective Time, (x) the Company changes the number of Shares, or Parent changes the number of Parent Shares, issued and outstanding as a result of a stock split, stock combination, dividend of stock or other securities (or a record date within such period with respect to such a dividend), recapitalization, redenomination of share capital or other similar transaction (which, for the avoidance of doubt, shall not include the exercise or conversion of any security identified on Schedule 2.1(f) to this Agreement), the Exchange Fraction and other items dependent thereon shall be appropriately adjusted to provide to the holders of Shares the same economic effect and percentage ownership of Parent Shares as contemplated by this Agreement prior to such stock split, stock combination, dividend, recapitalization, redenomination or similar transaction, or (y) the Company changes the number of Shares issued and outstanding (except as a result of the exercise or conversion of outstanding exercisable or convertible securities) or issues additional Company Derivative Securities, the Exchange Fraction and other items dependent thereon shall be appropriately reduced.

(g)

Dissenting Shares.

(i)

The Company shall cause notice to be given under TBCA §48-23-201—48-23-209 to each Person entitled to appraisal rights thereunder concurrently with the mailing of the Prospectus to the Company’s shareholders.

(ii)

Notwithstanding any provision of this Agreement to the contrary, any Shares issued and outstanding immediately prior to the Effective Time and held by a holder who has demanded and perfected his demand for appraisal of his Shares in accordance with the TBCA and as of the Effective Time has neither effectively withdrawn nor lost his right to such appraisal (“Dissenting Shares”) shall not be converted into or represent a right to receive the Merger Consideration pursuant to Section 2.1(c) hereof, but the holder thereof shall be entitled only to such rights as are granted by the TBCA.

(iii)

Notwithstanding the provisions of Section 2.1(g)(i) above, if any holder of Shares who demands appraisal of his Shares under the TBCA shall effectively withdraw or lose (through failure to perfect or otherwise) his right to appraisal, then as of the Effective Time or the occurrence of such event, whichever occurs later, such holder’s Shares shall automatically be treated as if converted at the Effective Time into, and thereafter represent only, the right to receive the Merger Consideration as provided in Section 2.1(c) hereof, without interest thereon, upon surrender of the certificate or certificates representing such Shares.

(iv)

The Company shall give Parent (A) prompt notice of any written demands for appraisal or payment of the fair value of any Shares, withdrawals of such demands and any other instruments served pursuant to the TBCA received by the Company after the date hereof and (B) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under

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the TBCA and Parent shall use commercially reasonable efforts to inform the Company of the status of such negotiations and proceedings and shall consult with the Company as Parent deems appropriate. The Company shall not voluntarily make any payment with respect to any demands for appraisal and shall not, except with the prior written consent of Parent, settle or offer to settle any such demands.

(b)

Exchange Fund.    Within five Business Days following the Effective Time, Parent shall make available to the Exchange Agent for exchange in accordance with this Article II, certificates for the Parent Shares issuable pursuant to Section 2.1(c) in exchange for outstanding Shares and cash in an amount sufficient for payment in lieu of fractional Parent Shares pursuant to Section 2.2(f) and any dividends or distributions to which holders of Shares may be entitled pursuant to Section 2.2(d). The cash amounts payable pursuant to Section 2.2(d) and Section 2.2(f) are referred to collectively as the “Exchange Fund.” The Exchange Agent shall invest any cash included in the Exchange Fund as directed by the Parent on a daily basis; provided that no such investment or loss thereon shall affect the amounts payable to the Company’s shareholders pursuant to this Article II. Any interest and other income resulting from such investments shall promptly be paid to the Surviving Corporation. All Parent Shares to be issued and delivered to the holders of Shares in accordance with this Agreement shall, as of the Effective Time, have been registered under the Securities Act pursuant to a registration statement on Form S-4 declared effective by the SEC.

(c)

Exchange Procedures.    Upon surrender to the Exchange Agent of a Certificate for cancellation, together with the letter of transmittal referred to in Section 2.2(a) duly executed and completed in accordance with its terms, the holder of such Certificate shall be entitled to receive in exchange therefor (i) a certificate or certificates representing that whole number of Parent Shares to be received in accordance with Section 2.1(c), (ii) the amount of dividends or other distributions, if any, with a record date on or after the Effective Time which theretofore became payable with respect to such Parent Shares in accordance with Section 2.2(d), and (iii) the cash amount payable in lieu of fractional Parent Share in accordance with Section 2.2(f), in each case which such holder has the right to receive pursuant to the provisions of this Article, and the Certificate so surrendered shall forthwith be canceled. In no event shall the holder of any Certificate be entitled to receive interest on any funds to be received in the Merger. In the event of a transfer of ownership of Shares which is not registered in the transfer records of the Company, that whole number of Parent Shares to be received in accordance with Section 2.1(c), plus any dividends or other distributions to which the transferor would otherwise be entitled pursuant to Section 2.2(d), plus the cash amount payable in lieu of fractional Parent Share in accordance with Section 2.2(f), may be issued to a transferee if the Certificate representing such Shares is presented to the Exchange Agent accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section, and subject to Section 2.2(d), each Certificate shall, after the Effective Time, represent for all purposes only the right to receive the whole number of Parent Shares into which the number of Shares shown thereon have been converted as contemplated by this Article plus the cash amount payable in lieu of a fractional Parent Share in accordance with Section 2.2(f).

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(d)

Distributions With Respect To Unexchanged Shares.    No dividends or other distributions declared, made or paid after the Effective Time with respect to Parent Shares with a record date on or after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the Parent Shares represented thereby and no cash payment in lieu of a fractional Parent Share shall be paid to any such holder pursuant to Section 2.2(f) until the holder of record of such Certificate shall surrender such Certificate in accordance with this Section 2.2. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the record holder of the Parent Shares issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions, if any, with a record date on or after the Effective Time which theretofore became payable, but which were not paid by reason of the immediately preceding sentence, with respect to such Parent Shares, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date on or after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such Parent Shares. Dividends or other distributions with a record date on or after the Effective Time but prior to surrender of Certificates by holders thereof payable in respect of Parent Shares held by the Exchange Agent shall be held in trust for the benefit of such holders of Certificates.

(e)

No Further Ownership Rights In Shares.    All Parent Shares issued upon the surrender for exchange of Certificates in accordance with the terms hereof (including any cash paid pursuant to Section 2.2(f)) shall be deemed to have been issued at the Effective Time in full satisfaction of all rights pertaining to the Shares represented thereby, subject, however, to the Surviving Corporation’s obligation to pay any dividends which may have been declared by the Company on the Shares in accordance with the terms of this Agreement and which remained unpaid at the Effective Time. From and after the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers thereon of the Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Section.

(f)

No Fractional Shares.    No certificate or scrip representing fractional Parent Shares will be issued in the Merger upon the surrender for exchange of Certificates, and such fractional interests will not entitle the owner thereof to vote or to any rights of a holder of Parent Shares. In lieu of any such fractional Parent Share, each holder of Certificates who would otherwise have been entitled to a fraction of a Parent Share in exchange for such Certificates (after taking into account all Certificates delivered by such holder) pursuant to this Section shall receive from the Exchange Agent a cash payment in lieu of such fractional Parent Share, determined by multiplying (A) the Parent Average Price by (B) the fractional Parent Share interest to which such holder would otherwise be entitled. Parent may aggregate fractional interests and sell such interests by public or private sale to fund the Exchange Fund either in whole or in part.

(g)

Termination of Exchange Fund.    Any portion of the Exchange Fund which remains undistributed to the shareholders of the Company for one (1) year after the Effective Time shall be delivered to or as directed by Parent, upon demand, and any holders of Certificates who have not theretofore complied with this Article II shall thereafter look only to Parent (subject to abandoned property, escheat and other similar laws) as a general creditor for payment of their claim for Parent Shares, any cash in lieu of fractional Parent Shares and any dividends or distributions with respect to Parent Shares. Any amounts remaining unclaimed by any holder of Certificates formerly representing Shares immediately prior to such time when such amounts would otherwise escheat to or become the property of any Governmental Entity (as hereinafter defined), shall, to the extent permitted by applicable laws, become the property of Parent, free and clear of all claims or interests of any Person previously entitled thereto. Neither Parent, the Surviving Corporation nor the Exchange Agent shall be liable to any holder of Certificates formerly representing Shares with respect to any Parent Shares (or dividends or distributions with respect thereto), or cash payable in respect of fractional Parent Shares, delivered to a

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public official pursuant to any applicable abandoned property, escheat or similar law, rule, regulation or Order.

(h)

Lost, Stolen or Destroyed Certificates.    If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by Parent in its discretion and as a condition precedent to the issuance thereof, the posting by such person of a bond in such reasonable amount as Parent may direct as indemnity against any claim that may be made against Parent, the Surviving Corporation or the Exchange Agent with respect to such Certificate, the Exchange Agent will deliver in exchange for such lost, stolen or destroyed Certificate the applicable Merger Consideration with respect to the Shares formerly represented thereby, any cash in lieu of fractional Parent Shares, and unpaid dividends and distributions in respect of or on Parent Shares deliverable in respect thereof, pursuant to this Agreement.

(i)

Withholding Rights.    Each of the Exchange Agent, Surviving Corporation and Parent shall be entitled to deduct and withhold from the Merger Consideration (and any dividends or distributions thereon) otherwise payable hereunder to any Person such amounts as it is required to deduct and withhold with respect to the making of such payment under any provision of federal, state, local or foreign income or other Tax law.

(b)

The Company has heretofore delivered to Parent complete and correct copies of the Charter Documents of the Company and each Company Subsidiary as amended to date. All such Charter Documents are in full force and effect, and neither the Company nor any Company Subsidiary is in violation of any provision of its respective Charter Documents except for breaches which would not restrict the ability of Company to consummate the Merger or could not reasonably be expected to have a Company Material Adverse Effect.

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(b)

Except as set forth in Section 3.2(b) of the Company Disclosure Schedule, all the outstanding capital stock of each Company Subsidiary is owned directly or indirectly by the Company, free and clear of all pledges, claims, liens, charges, options, agreements, limitations on voting rights, encumbrances or security interests of any kind (collectively, “Liens”), and is validly issued, fully paid and non-assessable, and there are no outstanding options, rights or agreements of any kind relating to the issuance, sale or transfer of any capital stock or other equity securities of any such Company Subsidiary to any Person except the Company. Each Company Subsidiary (i) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation or other organization; (ii) has full corporate power and authority to carry on its business as it is now being conducted and to own the properties and assets it now owns; and (iii) is duly qualified or licensed to do business as a foreign corporation or other foreign entity in good standing in every jurisdiction in which ownership of property or the conduct of its business requires such qualification, except, in each case, where the failure to have such power and authority or to be so qualified, licensed or in good standing would not reasonably be likely to, individually or in the aggregate, have a Company Material Adverse Effect.

(i)

6,632,479 Shares are issued and outstanding,

(ii)

no Shares are held in the treasury of the Company or by any Subsidiary of the Company,

(iii)

no shares of preferred stock are issued and outstanding,

(iv)

an aggregate of 306,000 Shares are issuable upon exercise of outstanding Company Options, including, without limitation, options under the Company’s Stock Option Plan and any Company Award (collectively, the “Company Stock Plans”) and warrants,

(v)

an aggregate of 804,683 Shares are issuable upon exercise of outstanding Company Warrants (all of which are issuable pursuant to Warrants issued to current or former Directors of the Company or Persons related to such Directors or to Heller), and

(vi)

an aggregate of 825,000 shares authorized for issuance under the Company Stock Plans, none of which Shares have been separately reserved for issuance.

(b)

All the outstanding shares of the Company’s capital stock are, and all Shares which may be issued pursuant to the exercise of outstanding Company Derivative Securities will be, when issued in accordance with the respective terms thereof, duly authorized, validly issued, fully paid and non-assessable. There is no Voting Debt of the Company or any Company Subsidiary issued and outstanding. There is no Preferred Stock of any Subsidiary issued and outstanding. Except as set forth above and except for the Transactions, and the Divestco Disposition, as of the date hereof, (i) there are no shares of capital stock of the Company authorized, issued or outstanding; (ii) there are no existing options, warrants, calls, pre-emptive rights, subscriptions, Company Derivative Securities or other rights, agreements, arrangements or commitments of any character, relating to the issued or unissued capital stock of the Company or any Company Subsidiary, obligating the Company or any Company Subsidiary to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity interest in, the Company or any Company Subsidiary or securities convertible into or exchangeable for such shares or equity interests, or obligating the Company or any

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Company Subsidiary to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment and (iii) there are no outstanding obligations (contingent or otherwise) of the Company or any Company Subsidiary to repurchase, redeem or otherwise acquire any Shares, or the capital stock of the Company, or any Company Subsidiary or Affiliate of the Company.

(c)

Except as expressly contemplated by this Agreement, there are no voting trusts or other agreements or understandings to which the Company or any Company Subsidiary is a party with respect to the voting of the capital stock of the Company or any of the Subsidiaries.

(d)

Section 3.3(d) of the Company Disclosure Schedule lists the holder of each outstanding Company Derivative Security, the number of Company Derivative Securities held by such Person, the number of Shares or other securities issuable upon the exercise thereof, and the exercise price, and expiration date thereof. The Company has not repriced any Company Derivative Securities or issued any Shares or Company Derivative Securities exercisable at an exercise price of less than 100% of the fair market value of the Shares as of the date of any such issuance or grant.

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(i)

The audited balance sheets of the Company and its consolidated Subsidiaries as of March 31, 2001 and March 31, 2002 and the related audited consolidated statements of operations, stockholders’ equity and cash flows for each of the fiscal years then ended, (the “Company Audited Financial Statements”) together with a true and correct copy of the report on such audited information by KPMG LLP (“KPMG”), and all communications from such accountants including, without limitation with respect to the results of such audits, accounting principles or practices, financial statement disclosure, auditing scope or procedures, deficiencies, material weaknesses, internal controls and Disagreements; and

(ii)

the unaudited monthly balance sheets of the Company and its consolidated Subsidiaries as of the end of each month through August 2002 and the related unaudited consolidated statements of operations, and stockholders’ equity (the “Company Unaudited Financial Statements”) for the portion of the fiscal year then ended.

(b)

Except as set forth in the notes thereto and as disclosed in Section 3.8 of the Company Disclosure Schedule, the Company Financial Statements (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading, (ii) were prepared in accordance with U.S. GAAP applied on a consistent basis for the periods involved (except in the case of the Unaudited Company Financial Statements subject to the absence of financial footnotes and to normal and recurring year-end adjustments that are not likely to be material in amount), and (iii) fairly present the consolidated financial condition and consolidated results of operations and cash flows and changes in financial position (if any) of the Company and its consolidated subsidiaries as of the times and for the respective periods referred to therein. The Company Financial Statements have been prepared from, and are in accordance with, the Books and Records of the Company and its Subsidiaries regularly maintained by management and used to prepare the financial statements of the Company and its Subsidiaries in accordance with the principles stated therein. The Company and its Subsidiaries have maintained their respective Books and Records in a manner sufficient to permit the preparation of financial statements in accordance with GAAP, such Books and Records fairly reflect, in all material respects, the income, expenses, assets and liabilities of the Company and its Subsidiaries and the Books and Records provided a fair and accurate basis for the preparation of the Audited Financial Statements and the Unaudited Financial Statements. Except for those Subsidiaries listed in Section 3.8 of the Company Disclosure Schedule, the financial condition and results of operations of each Subsidiary are, and for all periods referred to in this Section 3.8 have been, consolidated with those of the Company.

(c)

After the date of this Agreement and within thirty (30) days following the end of each calendar month prior to the Closing Date, Company will deliver to Parent true and complete copies of the unaudited

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balance sheets and the related unaudited statements of income of, or relating to, each of the Hospitals for each month then ended, together with the notes, if any, related thereto, which presentation shall be true, correct and complete in all material respects, shall have been prepared from and in accordance with the books and records of each of the Hospitals and which shall fairly present the financial position and results of operations of each of the Hospitals as of the date and for the period indicated, all in accordance with generally accepted accounting principles consistently applied except as to the absence of footnotes and normal audit adjustments; provided, however, that following the divestiture of Divestco pursuant to a Divestco Disposition, the Company need not deliver any balance sheet or statements of income for Divestco for any period after the date of such Divestco Disposition.

(d)

KPMG has not resigned or declined to be re-appointed as the Company’s independent public accountants nor to the Knowledge of the Company has KPMG stated any intention to resign or to decline to be re-appointed as the Company’s independent public accountants. Except as set forth in Section 3.8(d) of the Company Disclosure Schedule, at no time during the Company’s two most recent fiscal years or thereafter has (i) there been any “Disagreement” between the Company or any of its Subsidiaries, on the one hand, and KPMG, on the other hand, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, audit deficiencies, material weaknesses or internal controls, including any Disagreement which would have caused KPMG to make reference to the subject matter of the Disagreement(s) in connection with its report and regardless of whether or not such Disagreement was resolved to the satisfaction of KPMG; (ii) KPMG advised the Company that internal controls necessary to develop reliable financial statements do not exist, (iii) KPMG advised the Company that it is no longer able to rely on the representations of the Company or its Subsidiaries or that it is unwilling to be associated with the financial statements of the Company or its Subsidiaries, (iv) KPMG advised the Company of any need to expand the scope of its audits or reviews or that information has come to the attention of KPMG that impacts or if further investigated might impact the fairness or reliability of any audit report or review or the underlying financial statements of the Company or its Subsidiaries or cause KPMG to be unwilling to rely on the representations of the Company or its Subsidiaries or be associated with the financial statements of the Company or its Subsidiaries.

(b)

Without limiting the foregoing, except as disclosed in Section 3.10 of the Company Disclosure Schedule, there has not occurred between the Balance Sheet Date and the date hereof:

(i)

any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) in respect of the capital stock of the Company or any Subsidiary not wholly owned by the Company, or any direct or indirect redemption, purchase or other acquisition by the Company or any Subsidiary of any such capital stock of or any Company Derivative Security with respect to the Company or any Subsidiary not wholly owned by the Company;

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(ii)

any authorization, issuance, sale or other disposition by the Company or any Subsidiary of any shares of capital stock of, or Company Derivative Security with respect to, the Company or any Subsidiary, or any modification or amendment of any right of any holder of any outstanding shares of capital stock of, or Company Derivative Security with respect to, the Company or any Subsidiary, except for the issuance of Company Common Stock upon the exercise of Company Derivative Securities awarded prior to the Balance Sheet Date;

(iii)

(A) any increase in salary, wages, bonus, benefits, change in control payments, severance payments or other compensation of any current or former executive officer, key employee, director or consultant of the Company or any Subsidiary (including any Person whose annual compensation is, or after giving effect to such change would be, $60,000 or more); (B) any establishment, amendment or other modification of (1) targets, goals, pools or similar provisions in respect of any fiscal year under any Benefit Plan, employment or other service-related Contract, including any employment, deferred compensation, consulting, severance, termination or indemnification agreement or other similar compensation arrangement, or (2) salary ranges, increase guidelines or similar provisions in respect of any Benefit Plan, employment-related Contract or other similar compensation arrangement; or (C) any adoption, entering into or becoming bound by any Benefit Plan, employment-related Contract or collective bargaining agreement, or amendment, modification or termination (partial or complete) of any Benefit Plan, employment-related Contract or collective bargaining agreement, except to the extent required by applicable Law and, in the event compliance with legal requirements presented options, only to the extent the option which the Company or Subsidiary reasonably believed to be the least costly was chosen;

(iv)

(A) incurrences by the Company or any Subsidiary of Indebtedness in an aggregate principal amount exceeding $10,000 (net of any amounts discharged during such period), or (B) any voluntary purchase, cancellation, prepayment or complete or partial discharge in advance of a scheduled payment date with respect to, or waiver of any right of the Company or any Subsidiary under, any Indebtedness of or owing to the Company or any Subsidiary;

(v)

any physical damage, destruction or other casualty loss (whether or not covered by insurance) affecting any of the plant, real or personal property or equipment of the Company or any Subsidiary in an aggregate amount exceeding $25,000;

(vi)

any material change in (A) any pricing, investment, accounting, financial reporting, inventory, credit, allowance or Tax practice or policy of the Company or any Subsidiary, or (B) any method of calculating any bad debt, contingency or other reserve of the Company or any Subsidiary for accounting, financial reporting or Tax purposes, or any change in the fiscal year of the Company or any Subsidiary;

(vii)

any write-off or write-down of or any determination to write off or write down any of the Assets and Properties of the Company or any Subsidiary in an aggregate amount exceeding $25,000 (except for non-cash write downs for the Assets and Properties of Divestco or for the capital stock of Divestco);

(viii)

any acquisition or disposition of, or incurrence of a Lien (other than a Permitted Lien) on, any Assets and Properties of the Company or any Subsidiary, other than (A) in the ordinary course of business consistent with past practice, or (B) with respect to the capital stock or Assets and Properties of Divestco in connection with a Divestco Disposition;

(ix)

except as to Divestco in connection with the Divestco Disposition, any (A) amendment of the certificate or articles of incorporation or by-laws (or other comparable corporate charter documents) of the Company or any Subsidiary, (B) recapitalization, reorganization, liquidation or dissolution of the Company or any Subsidiary or (C) merger or other business combination involving the Company or any Subsidiary and any other Person;

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(x)

any entering into, amendment, modification, termination (partial or complete) or granting of a waiver under or giving any consent with respect to (A) any Contract which is required (or had it been in effect on the date hereof would have been required) to be disclosed in the Company Disclosure Schedule pursuant to Section 3.22, or (B) any material License held by the Company or any Subsidiary;

(xi)

capital expenditures or commitments for additions to property, plant or equipment of the Company and the Subsidiaries constituting capital assets in an aggregate amount exceeding $10,000;

(xii)

any commencement or termination by the Company or any Subsidiary of any line of business;

(xiii)

any transaction by the Company or any Subsidiary with the Company, any officer, director, Affiliate (other than the Company or any Subsidiary (other than Divestco)) or Associate of the Company or any Associate of any such officer, director or Affiliate (A) outside the ordinary course of business consistent with past practice, or (B) other than on an arm’s-length basis, other than pursuant to any Contract in effect on the Balance Sheet Date and disclosed pursuant to Section 3.22;

(xiv)

any entering into of a Contract to do or engage in any of the foregoing after the date hereof; or

(xv)

any other transaction involving or development affecting the Company or any Subsidiary outside the ordinary course of business consistent with past practice.

(xvi)

except insofar as may have been expressly disclosed in the Company Financial Statements as furnished to Parent, whether or not required by a change in U.S. GAAP, any change in accounting methods, principles or practices by the Company affecting its Assets and Properties, liabilities or business; or

(xvii)

except insofar as may have been disclosed in the Company Financial Statements as furnished to Parent, any Tax election or any settlement or compromise of any income tax liability.

(b)

All of the Company Benefit Plans subject to ERISA comply in all material respects and have been administered in compliance in all material respects with (i) the provisions of ERISA, (ii) all provisions

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of the Code, applicable to secure the intended Tax consequences, (iii) all applicable state and federal securities laws and (iv) all other applicable laws, rules, regulations and collective bargaining agreements, except where the failure to so comply or to be so administered would not result in any Company Material Adverse Effect. The Company has not received any written notice from any Governmental Entity questioning or challenging such compliance that would reasonably be likely to, individually or in the aggregate, have a Company Material Adverse Effect.

(c)

Neither the Company nor its ERISA Affiliates has engaged in any transaction or acted or failed to act in any manner that could subject the Company to any direct or indirect liability (by indemnity or otherwise) for a breach of any fiduciary or co-fiduciary duty under ERISA, or liability for a prohibited transaction (within the meaning of ERISA Section 406 or Code Section 4975) that would reasonably be likely to, individually or in the aggregate, have a Company Material Adverse Effect.

(d)

No Company Benefit Plan is subject to Title IV of ERISA, and neither the Company nor any of its ERISA Affiliates has incurred any liability under Title IV of ERISA arising in connection with the termination of any plan covered or previously covered by Title IV of ERISA that could become, after the Closing Date, an obligation of the Company or any of its ERISA Affiliates, in each case, that would reasonably be likely to, individually or in the aggregate have a Company Material Adverse Effect.

(e)

Neither the Company nor, to the Knowledge of the Company, any of its ERISA Affiliates has ever established, maintained, contributed to or otherwise participated in, or had an obligation to maintain, contribute to, or otherwise participate in, any multi-employer plan within the meaning of ERISA Section 4001(a)(3).

(f)

To the Company’s Knowledge, none of the Company Benefit Plans provides welfare benefits, including, without limitation, death or medical benefits (whether or not insured), with respect to current or former employees beyond their retirement or other termination of service (other than coverage required by COBRA or any similar state law).

(g)

Except as described in the Company Disclosure Schedule, there are no insurance reserves, trusts or escrow accounts that have been established to provide for payments under welfare plans within the meaning of Section 3(1) of ERISA.

(h)

Each Company Benefit Plan which is intended to be qualified under Code Section 401(a) (“Qualified Retirement Plan”) has received from the Internal Revenue Service a favorable determination letter to the effect that the plan in form satisfies the requirements for qualification under Code Section 401(a) (taking into account the provisions of the Tax Reform Act of 1986). To the Company’s Knowledge, no event has occurred or circumstances exist that will or could give rise to disqualification of a Qualified Retirement Plan and no amendment to any Qualified Retirement Plan made since applying for such determination letter could cause a disqualification of such Company Benefit Plan.

(i)

The Company has the right pursuant to the terms of each Company Benefit Plan that is a welfare plan within the meaning of Section 3(1) of ERISA and all agreements related to such Company Benefit Plan unilaterally to terminate such Company Benefit Plan (or its participation in such Company Benefit Plan) or to amend the terms of such Company Benefit Plan at any time.

(j)

The transactions contemplated by this Agreement will not result in any additional payments to or benefit accruals for, or any increase in the vested interest of, any current or former officer, employee or director or their spouses or dependents under any Company Benefit Plan. There are no agreements or

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commitments by the Company and the Company shall not prior to the Closing Date enter into any agreement or make any commitment under which the Company would be obligated to reimburse or increase the compensation of, or payments to, any current or former officer, employee or director of the Company or their spouses or dependents or any entity in which such persons have an ownership interest in order to make such person whole for any Taxes, including, but not limited to, any excise tax such Person may pay under Section 4999 of the Code due to an excess parachute payment under Section 280G of the Code, or which such Person may pay as a director or indirect result of the merger transaction described in this Agreement.

(k)

Except as expressly provided in this Agreement, there is no pending or, to the Knowledge of the Company, threatened complaint, claim (other than a routine undisputed claim for benefits), proceeding, audit, or investigation of any kind in or before any Governmental Entity with respect to any Company Benefit Plan that would reasonably be likely to result in a Company Material Adverse Effect.

(l)

Except as set forth in Section 3.12(l) of the Company Disclosure Schedule, no Person who is not an employee of the Company or any Company Subsidiary, including any Person identified as a consultant in Section 3.20(a)(i) of the Company Disclosure Schedule, is entitled to any benefits under any Benefit Plan.

(b)

No notification has been received by the Company or by any Company Subsidiary that an audit, examination or other proceeding is pending or, to the Company’s Knowledge, threatened with respect to any Taxes due from or with respect to or attributable to the Company or any Company Subsidiary or any Tax Return filed by or with respect to the Company or any Company Subsidiary.

(c)

Neither the Company nor any of its Subsidiaries has taken any action or Knows of any fact, agreement, plan or other circumstance that is reasonably likely to prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code.

(d)

None of the Company or any Company Subsidiary has been a member of any affiliated group within the meaning of Section 1504(a) of the Code, or any similar affiliated or consolidated group for Tax purposes under state, local or foreign law (other than a group, the common parent of which is the Company), or has any liability for Taxes of any person (other than the Company and its Subsidiaries) under Treasury Regulation Section 1.1502-6 or any similar provision of state, local or foreign law as a transferee or successor, by contract or otherwise.

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(b)

The Company has complied with any obligations under the federal Community Right to Know Act, any state right to know act, and any other state or local laws having similar requirements, including but not limited to the requirement to maintain and disclose material safety data sheets with respect to each Hospital and to submit annual reports to governmental authorities detailing inventories of hazardous materials present on-site and volumes of toxic chemicals released into the environment, except where such non-compliance could not reasonably be expected, individually or in the aggregate, to have a Company Material Adverse Effect.

(c)

Parent shall be entitled to select an environmental engineer reasonably acceptable to the Company to furnish, at Parent’s expense, a “phase I” environmental survey of the Real Property owned or leased by the Company, which survey shall reflect inspection for potential environmental hazards, including the presence of asbestos, asbestos containing material, urea formaldehyde, polychlorinated biphenyls, underground storage tanks and Hazardous Substances. Parent shall use commercially reasonable efforts, and the Company shall cooperate with Parent in any manner reasonably requested, to cause such engineer to complete such survey (the “Environmental Survey”) within thirty (30) days after the date of execution of this Agreement. Parent agrees to instruct its environmental engineer not to unreasonably interfere with the operations of the Hospitals during the Environmental Survey. Parent further agrees that it shall indemnify the Company against any reasonable out-of-pocket costs of restoring any material damage to the Real Property caused by Parent’s environmental engineer as a direct result of the Environmental Survey, but in no event shall Parent be responsible for any consequential, exemplary or other damages in respect thereof. The Company shall within ten (10) days after any alleged damage to the Real Property by such environmental engineer give Parent notice in writing thereof specifying in reasonable detail the nature of any such damage and a reasonable opportunity to cause such damage to be repaired. The Environmental Survey shall be deemed satisfactory for all purposes of this Agreement unless it discloses conditions which would have a material adverse effect upon the operation of any applicable Hospital. For purposes of this Section 3.14(c), a “material adverse effect” shall be deemed to exist if the remedy of any existing environmental condition in accordance with applicable law is in the good faith reasonable opinion of Parent’s environmental consultant expected to cost in excess of $100,000 for the Hospitals, either individually or in the aggregate. The Company shall provide Parent with any required environmental disclosures under any applicable property transfer laws not more than sixty (60) days after the date of this Agreement.

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(b)

The Company has not received any information that would lead it to believe that a material number of the persons described in Section 3.17 (a) or, as to any Hospital, any Physicians or other healthcare professionals will or may cease to be employees, or will refuse offers of employment from Parent or one of its Subsidiaries or intend to terminate their affiliation or other relationship with any of the Hospitals because of the consummation of the Merger and the Transactions contemplated by this Agreement in each case, except with respect to employees of Divestco or Persons identified in Section 5.1(e) of the Company Disclosure Schedule.

(c)

There is (i) to the Knowledge of the Company, no unfair labor practice complaint against the Company or any Company Subsidiary pending before the National Labor Relations Board; (ii) no labor strike, dispute, slowdown or stoppage actually pending or, to the Knowledge of the Company, threatened against or affecting the Company or any Company Subsidiary; (iii) to the Company’s Knowledge, no organizational effort presently being made or threatened by or on behalf of any labor union with respect to employees of the Company and its Subsidiaries; except for any occurrence that individually or in the aggregate would not reasonably be likely to have a Company Material Adverse Effect; and (iv) no grievance which might have, individually or in the aggregate, a Company Material Adverse Effect, arising out of or under collective bargaining agreements is pending.

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(b)

Except as disclosed in Section 3.19(b) of the Company Disclosure Schedule, each of the Liabilities and transactions listed in Section 3.19(a) of the Company Disclosure Schedule was incurred or engaged in, as the case may be, on an arm’s-length basis.

(c)

Except as disclosed in Section 3.19(c) of the Company Disclosure Schedule, since the Balance Sheet Date, all settlements of intercompany Liabilities between the Company or any Subsidiary, on the one hand, and Seller or any such officer, director, Affiliate or Associate, on the other, have been made, and all allocations of intercompany expenses have been applied, in the ordinary course of business consistent with past practice and in accordance with the terms of all applicable Contracts regulating such transactions, including credit agreements and debt agreements.

(i)

(A) all Contracts (excluding Benefit Plans) providing for a commitment of employment or consultation services for a specified or unspecified term or otherwise relating to employment or engagement or the termination of employment or engagement of any Person, the name, position and rate of compensation of each Person party to such a Contract and the expiration date of each such Contract; and (B) any written or unwritten representations, commitments, promises, communications or courses of conduct (excluding Benefit Plans and any such Contracts referred to in clause (A)) involving an obligation of the Company or any Company Subsidiary to make payments in any year, other than with respect to salary or incentive compensation payments in the ordinary course of business, to any employee or consultant exceeding $5,000 or any group of employees or consultants exceeding $25,000 in the aggregate;

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(ii)

all Contracts with any Person containing any provision or covenant prohibiting or limiting the ability of the Company or any Company Subsidiary to engage in any business activity or compete with any Person or prohibiting or limiting the ability of any Person to compete with the Company or any Company Subsidiary;

(iii)

all partnership, joint venture, shareholders’ or other similar Contracts with any Person;

(iv)

all Contracts relating to Indebtedness of the Company or any Company Subsidiary (including sale and lease back and capitalized lease transactions and other similar or “off-balance sheet” transactions) in excess of $25,000 in the aggregate or to any preferred stock issued by the Company or any Company Subsidiary;

(v)

all Contracts with distributors, dealers, manufacturer’s representatives, sales agencies, licensees or Governmental Entities;

(vi)

all Contracts relating to (A) the future disposition or acquisition of any Assets and Properties, other than dispositions or acquisitions in the ordinary course of business consistent with past practice, and (B) any merger or other business combination;

(vii)

all Contracts between or among the Company or any Company Subsidiary, on the one hand, and any officer, director or Affiliate of the Company or any Company Subsidiary (other than the Company or any Company Subsidiary), on the other hand;

(viii)

all collective bargaining or similar labor Contracts;

(ix)

all Contracts that (A) limit or contain restrictions on the ability of the Company or any Company Subsidiary to declare or pay dividends on, to make any other distribution in respect of or to issue or purchase, redeem or otherwise acquire its capital stock, to incur Indebtedness, to incur or suffer to exist any Lien, to purchase or sell any Assets and Properties, to change the lines of business in which it participates or engages or to engage in any business combination or (B) require the Company or any Company Subsidiary to maintain specified financial ratios or levels of net worth or other indicia of financial condition;

(x)

all Contracts consisting of provider based physician agreements, agreements with health maintenance organizations, preferred provider organizations, insurance companies, alternative delivery systems, and contracts with Governmental Entities or private Persons with respect to or for the provision of healthcare goods and services under any Healthcare Reimbursement Contract or Program;

(xi)

all other Contracts (other than Benefit Plans, leases disclosed in the Company Financial Statements, and insurance policies listed in Section 3.22 of the Company Disclosure Schedule) that (A) involve the payment or potential payment, pursuant to the terms of any such Contract, by or to the Company or any Company Subsidiary of more than $25,000 annually and (B) cannot be terminated within thirty (30) days after giving notice of termination without resulting in any material cost or penalty to the Company or any Company Subsidiary; and

(xii)

all Contracts which would result in the payment to, or obligate the Company to make any payment to, any Person as a result of the transactions contemplated by this Agreement, including the Lock Up Agreements.

(b)

Each Contract required to be disclosed in Section 3.20(a) of the Company Disclosure Schedule is in full force and effect and constitutes a legal, valid and binding agreement, enforceable in accordance with its terms except where the failure to meet one or more of the foregoing requirements would reasonably be likely to have a Company Material Adverse Effect, of each party thereto; and except as disclosed in Section 3.20(b) of the Company Disclosure Schedule, neither the Company, any Company

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Subsidiary nor, to the Knowledge of the Company, any other party to such Contract is, or has received notice that it is, in violation or breach of or default under any such Contract (or with notice or lapse of time or both, would be in violation or breach of or default under any such Contract) in any material respect.

(c)

Except as disclosed in Section 3.20(c) of the Company Disclosure Schedule, neither the Company nor any Company Subsidiary is a party to or bound by any Contract that has been or would reasonably be likely to have, individually or in the aggregate with any other such Contracts, a Company Material Adverse Effect.

(a)

the Company and each Company Subsidiary owns or validly holds all Licenses that are material, individually or in the aggregate, to its business or operations;

(b)

each License listed in Section 3.21 of the Company Disclosure Schedule is valid, binding and in full force and effect; and

(c)

neither the Company nor any Subsidiary is, or has received any notice that it is, in default (or with the giving of notice or lapse of time or both, would be in default) under any such License.

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(b)

Except as disclosed in Section 3.24(a) of the Company Disclosure Schedule, the Company or a Subsidiary has marketable fee simple title to each parcel of real property owned by it, free and clear of all Liens other than Permitted Liens. Except for the real property leased to others referred to in clause (ii) of Section 3.24(a) above, the Company or a Subsidiary is in possession of each parcel of real property owned by it, together with all buildings, structures, facilities, fixtures and other improvements thereon. To the Knowledge of the Company, each of the Company and the Subsidiaries have adequate rights of ingress and egress with respect to the real property owned or leased by them and listed in Section 3.24(a) of the Company Disclosure Schedule and all buildings, structures, facilities, fixtures and other improvements thereon. None of such real property, buildings, structures, facilities, fixtures or other improvements, or the use thereof, contravenes or violates any building, zoning, administrative, occupational safety and health or other applicable Law in any material respect (whether or not permitted on the basis of prior nonconforming use, waiver or variance).

(c)

The Company or a Subsidiary has a valid and subsisting leasehold estate in and the right to quiet enjoyment of the real properties leased by it for the full term of the lease thereof. Each lease referred to in clause (ii) of Section 3.24(a) above is a legal, valid and binding agreement, enforceable in accordance with its terms, of the Company or a Subsidiary and of each other Person that is a party thereto, and except as set forth in Section 3.24(c) of the Company Disclosure Schedule, there is no, and neither the Company nor any Subsidiary has received notice of any, default (or any condition or event which, after notice or lapse of time or both, would constitute a default) thereunder. Neither the Company nor any Subsidiary owes any brokerage commissions with respect to any such leased space.

(d)

The Company has delivered to Parent prior to the execution of this Agreement true and complete copies of (i) all deeds, leases, mortgages, deeds of trust, certificates of occupancy, title insurance policies, title reports, surveys and similar documents, and all amendments thereof, with respect to the real property owned by the Company and the Subsidiaries, and (ii) all leases (including any amendments and renewal letters) and all other documents referred to in clause (i) of Section 3.24(d) with respect to the real property leased by the Company and the Subsidiaries.

(e)

Except as disclosed in Section 3.24 (e) of the Company Disclosure Schedule, no tenant or other party in possession of any of the real properties owned by the Company and the Subsidiaries, has any right to purchase, or holds any right of first refusal to purchase, such properties.

(f)

Except as disclosed in Section 3.24 (f) of the Company Disclosure Schedule, the improvements on the real property identified in Section 3.24(a) of the Company Disclosure Schedule are in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted, are adequate and suitable for the purposes for which they are presently being used and, to the Knowledge of the

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Company, there are no condemnation or appropriation proceedings pending or threatened against any of such real property or the improvements thereon.

(b)

Section 3.25(b) of the Company Disclosure Schedule describes each Investment Asset owned by the Company or any Subsidiary on the date hereof. Except as disclosed in Section 3.25(b) of the Company Disclosure Schedule, all such Investment Assets are owned by the Company or a Subsidiary free and clear of all Liens other than Permitted Liens.

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(b)

Parent has heretofore delivered or made available to the Company complete and correct copies of the Charter Documents of Parent and each Parent Subsidiary, as amended to date. All such Charter Documents are in full force and effect, and neither Parent nor any Parent Subsidiary is in violation of any provision of its respective Charter Documents except for breaches which would not materially restrict the ability of Parent to consummate the Merger or would not reasonably be likely to have a Parent Material Adverse Effect.

(i)

4,977,592 Parent Shares are issued and outstanding,

(ii)

no Parent Shares are held in the treasury of the Parent or held by any Subsidiary of Parent,

(iii)

no shares of preferred stock are issued and outstanding;

(iv)

999,487 Parent Shares are issuable under outstanding Parent Warrants; and

(v)

801,850 shares are issuable upon the exercise of outstanding Parent Options.

(b)

All the outstanding shares of Parent’s capital stock are, and all of the Parent Shares which may be issued pursuant to the exercise, conversion or exchange of outstanding Parent Derivative Securities into Parent Shares will be, when issued in accordance with the respective terms thereof, duly authorized, validly issued, fully paid and non-assessable and, except as set forth on the Parent Disclosure Schedule, are free of any pre-emptive or other similar rights. There is no Voting Debt of Parent or any Parent Subsidiary issued and outstanding. Except as set forth above and except for the Transactions, as of the date hereof, (i) there are no shares of capital stock of Parent authorized, issued or outstanding; (ii) except for Parent Options and Parent Warrants, there are no existing options, warrants, calls, preemptive rights, subscriptions, Parent Derivative Securities or other rights, agreements, arrangements or commitments of any character, relating to the issued or unissued capital stock of the Parent or any Parent Subsidiary, obligating Parent or any Parent Subsidiary to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity interest in, Parent or any Parent Subsidiary or securities convertible into or exchangeable for such shares or equity interests, or obligating Parent or any Parent Subsidiary to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment and (iii) there are no outstanding obligations (contingent or otherwise) of Parent or any Parent Subsidiary to repurchase, redeem or otherwise acquire any Parent Shares, the Convertible Preferred Shares, or the other capital stock of Parent, or any Parent Subsidiary or Affiliate of Parent.

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(c)

Except as expressly contemplated by this Agreement, there are no voting trusts or other agreements or understandings to which Parent or any Parent Subsidiary is a party with respect to the voting of the capital stock of Parent or any of the Parent Subsidiaries.

(d)

The Parent Shares to be issued as part of the Merger Consideration, when issued and delivered in accordance with the terms of this Agreement, will have been duly authorized, validly issued, fully paid and non-assessable and will be free of any preemptive or other similar rights, except as set forth on the Parent Disclosure Schedule.

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(a)

the Company and each of its Subsidiaries shall conduct their respective operations in all material respects only according to their ordinary and usual course of business consistent with past practice and shall use their commercially reasonable efforts to preserve intact their respective business organization, keep available the services of their officers, employees and consultants and maintain satisfactory relationships with licensors, suppliers, distributors, clients, customers, joint venture partners and others having significant business relationships with them;

(b)

by way of illustration and not limitation, neither the Company nor any of its Subsidiaries shall:

(i)

make any change in or amendment to the Company’s Charter Documents or increase the number of members on the Company Board of Directors beyond the number in office as of the date of this Agreement;

(ii)

issue, sell, pledge, dispose of or encumber, or authorize to issue or sell, pledge, dispose of or encumber, any shares of its capital stock or any other securities, or issue or sell, or authorize to issue or sell, any securities convertible into, or options, warrants, convertible securities or other rights to purchase or subscribe to, or enter into any arrangement or contract with respect to the issuance or sale of, any shares of its capital stock or any other securities, or make any other changes in its capital structure, other than (A) the issuance of Shares upon the exercise of Company Options and Company Warrants, in each case, outstanding on the date hereof, in accordance with their present terms, (B) the issuance of Shares upon the conversion, exercise or vesting of other Company Derivative Securities outstanding on December 31, 2002, or (C) issuances by a wholly-owned Subsidiary of the Company (other than Divestco) of capital stock to such Subsidiary’s parent, the Company or another wholly-owned Subsidiary of the Company (other than Divestco); or (D) the issuance or sale of Divestco Capital Stock pursuant to a Divestco Disposition.

(iii)

declare, pay or set aside any dividend or other distribution (whether in cash, stock or property or any combination thereof) or payment with respect to, or split, combine, redeem or reclassify, or purchase or otherwise acquire, any shares of its capital stock or its other securities other than intracompany transfers payable by a wholly owned Subsidiary of the Company to the Company in the ordinary course of business consistent with past practice.

(iv)

other than in connection with transactions permitted by Section 5.1(b)(v), incur any capital expenditures or any obligations or liabilities in respect thereof, except for those (A) contemplated by the capital expenditure budgets for the Company and its Subsidiaries made available to, and approved by, Parent prior to the date hereof, or (B) not otherwise described in clause (A) which, as to this clause (B), do not exceed $50,000 in the aggregate;

(v)

acquire (whether pursuant to merger, stock or asset purchase or otherwise) in one transaction or series of related transactions any Assets or Properties (including any equity interests) having a fair market value in excess of $25,000, in the aggregate, other than acquisitions of inventory, supplies, licenses, services and raw materials in the ordinary course of business consistent with past practice;

(vi)

(A) grant any options under the Company Stock Plans or otherwise grant any Company Option, Company Award, or other Company Derivative Security or (B) establish, adopt, enter into or amend any bonus, profit sharing or similar plan, agreement, trust, fund, policy or arrangement, or (C) except in the ordinary course of business consistent with past practice and except to the extent (1) required under existing employee and director benefit plans, agreements or arrangements as in effect on the date of this Agreement or (2) as contemplated by Section 5.1(b)(vi) of the Company Disclosure Schedule with respect to severance payments, increase the compensation or fringe benefits of any of its directors, officers or employees or grant any severance or termination pay not currently required to be paid under existing severance plans or enter into any employment, consulting or severance agreement or arrangement with any present, former or prospective director, officer or other employee of

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the Company or any of its Subsidiaries, or establish, adopt, enter into or amend in any material respect or terminate any collective bargaining, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any directors, officers or employees, except as may be required by law and upon prior written notice to Parent.

(vii)

transfer, lease, license, guarantee, sell, mortgage, pledge, renovate, rehabilitate, dispose of, encumber or subject to any Lien, any assets of the Company or any of its Subsidiaries except for (A) sales of assets or Liens made or granted in the ordinary course of business, and (B) sales of assets which are not, individually or in the aggregate in excess of $25,000.

(viii)

except as required by applicable law or U.S. GAAP and after notice to Parent, take any action to change accounting policies or procedures (including, without limitation, procedures with respect to revenue recognition, payments of accounts payable and collection of accounts receivable);

(ix)

adopt or enter into a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its Subsidiaries (other than the Merger and the disposition of Divestco pursuant to a Divestco Disposition) or any agreement relating to a Company Acquisition Proposal, except as provided for in Section 7.1(c)(iv);

(x)

(A) incur any material indebtedness for borrowed money, issue any debt securities, or assume or guarantee any such indebtedness of another Person (other than indebtedness owing to or guarantees of indebtedness owing to the Company or any direct or indirect wholly-owned Subsidiary of the Company(other than Divestco)) or endorse or otherwise become responsible for the obligations of any Person or (B) make any loans or advances to any other Person, other than to the Company or to any direct or indirect wholly-owned Subsidiary of the Company (other than Divestco), except, in the case of clause (A), for borrowings (1) in the ordinary course of business consistent with past practice, including without limitation borrowings under existing credit facilities in the ordinary course of business consistent with past practice, (2) in connection with the Transactions, or (3) in connection with financing activities relating to any activities described in Section 5.1(b)(x) of the Company Disclosure Schedule;

(xi)

except as required by the preexisting agreements set forth on Section 5.1(b)(xi) of the Company Disclosure Schedule, accelerate the payment, right to payment or vesting of any bonus, severance, profit sharing, retirement, deferred compensation, stock option (including any options issued pursuant to the Company Stock Plans or under any Company Award), insurance or other compensation or benefits, or amend the terms or change the period of exercisability of, purchase, repurchase, redeem or otherwise acquire, or permit any Subsidiary to amend the terms or change the period of exercisability of, purchase, repurchase, redeem or otherwise acquire, any of its securities or any securities of its subsidiaries, including, without limitation, Shares, or any option, warrant or right, directly or indirectly, to acquire any such securities;

(xii)

settle, pay or discharge any claim, suit or other action brought or threatened against the Company with respect to or arising out of a shareholder’s equity interest in the Company (other than in connection with the severance of employees or the termination of consulting agreements, in each case, as expressly contemplated herein), or pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise) over $10,000, individually or in the aggregate, other than the payment, discharge or satisfaction (A) of any such claims, liabilities or obligations in the ordinary course of business and consistent with past practice or (B) of claims, liabilities or obligations reflected or reserved against in, or contemplated by, the consolidated financial statements (or the notes thereto) of the Company furnished to Parent prior to the date of this Agreement; provided, in each case, that any such settlement provides for a complete release of the Company and its Subsidiaries and imposes no obligation on the Company or its Subsidiaries other than the payment of money;

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(xiii)

enter into any agreement, understanding or commitment that materially restrains, limits or impedes the Company’s or any of its Subsidiaries’ ability to compete with or conduct any business or line of business, including, but not limited to, geographic limitations on the Company’s or any of its Subsidiaries’ activities, in each case other than with respect to agreements solely as to Divestco pursuant to a Divestco Disposition;

(xiv)

plan, announce, implement or effect any material reduction in labor force, lay-off, early retirement program, severance program or other program or effort concerning the termination of employment of employees of the Company or its Subsidiaries, provided, however, that (A) routine employee terminations for cause, (B) terminating of Divestco employees pursuant to a Divestco Disposition, (C) the termination of persons identified in Section 5.1(b)(xiv) of the Company Disclosure Schedule which do not result in the payment to such persons in excess of the amount set forth therein or, if no amount is set forth therein, then not in excess of $10,000 per person without the Parent’s consent, which consent will not be unreasonably refused or delayed in each case, shall not be considered subject to this clause (xiv);

(xv)

knowingly take any action or fail to take any action which action or failure to act would prevent, or would be reasonably likely to prevent, the Merger from qualifying as a Section 368 Reorganization;

(xvi)

take any action including, without limitation, the adoption of any shareholder rights plan or amendments to its Charter Documents, which would, directly or indirectly, restrict or impair the ability of Parent to vote, or otherwise to exercise the rights and receive the benefits of a shareholder with respect to, securities of the Company that may be acquired or controlled by Parent or Merger Sub or, except as provided in preexisting agreements set forth on Section 5.1(b)(xvi) of the Company Disclosure Schedule, permit any shareholder to acquire securities of the Company on a basis not available to Parent or Merger Sub in the event that Parent or Merger Sub were to acquire any shares of the Company’s capital stock;

(xvii)

materially modify, amend or terminate any material Contract, including without limitation, Contracts of the type identified in Section 3.20 (a)(x), each of which shall be presumed to be material for purposes of this clause, to which it is a party, or waive any of its material rights or claims except, in each case, in the ordinary course of business consistent with past practice and upon prior written notice to Parent;

(xviii)

make any Tax election or settle or compromise any United States federal, state, local or non-United States Tax liability if the effect thereof would be adverse in any material respect to the Company; or

(xix)

agree, in writing or otherwise, to take any of the foregoing actions.

(c)

The Company shall promptly implement the cost saving measures set forth in Section 5.1(c) of the Company Disclosure Schedule and such other cost savings measures as Parent may reasonably request, which request will not unreasonably refused or delayed.

(d)

The Company shall promptly negotiate and implement the Company debt restructuring outlined in Exhibit 5.1(d) to this Agreement (the “Company Debt Restructuring”). The Company shall use commercially reasonable efforts to inform Parent of the status of such negotiations and shall provide Parent with the opportunity to participate in all negotiations with respect to the Company Debt Restructuring from and to the extent Parent so desires.

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(a)

the Parent and each of its Subsidiaries shall conduct their respective operations in all material respects according to their ordinary and usual course of business consistent with past practice or otherwise which are not reasonably likely to give rise to a Parent Material Adverse Effect and shall use their reasonable best efforts to preserve intact their respective business organization, keep available the services of their officers, employees and consultants and maintain satisfactory relationships with licensors, suppliers, distributors, clients, customers, joint venture partners and others having significant business relationships with them unless the failure to take such actions would not give rise to a Parent Material Adverse Effect;

(b)

the Parent shall not:

(i)

make any change in or amendment to the Parent’s Charter Documents which would give rise to a Parent Material Adverse Effect or which would increase the size of the Board of Directors beyond the number authorized as of the date of this Agreement;

(ii)

declare, pay or set aside any dividend or other distribution (whether in cash, stock or property or any combination thereof) or payment with respect to, or split, combine, redeem or reclassify, or purchase or otherwise acquire, any shares of its capital stock or its other securities, other than (A) dividends payable by a wholly-owned Subsidiary of the Parent to the Parent or another wholly-owned Subsidiary of the Parent, (B) repurchases permitted under any Parent Benefit Plan (not to exceed 5% of Parent’s outstanding capital stock)or (C) participation rights in any capital raising transaction;

(iii)

adopt or enter into a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Parent, provided that this clause (iii) shall not limit (A) any reincorporation merger of Parent solely to change its jurisdiction of incorporation;

(iv)

take any action including, without limitation, the adoption of any shareholder rights plan or amendments to its Charter Documents, which would, directly or indirectly, restrict or impair the ability of the Company’s shareholders to vote, or otherwise to exercise the rights and receive the benefits of a shareholder with respect to, securities of Parent that may be acquired by the Company’s shareholders in the Merger;

(v)

other than pursuant to this Agreement, take any action to cause the Parent Shares to cease to be quoted on the American Stock Exchange unless the Parent Shares are listed on another national securities exchange including the Nasdaq National Market; or

(vi)

agree, in writing or otherwise, to take any of the foregoing actions in this Section 5.2(b), except, in each case, where such actions would not result in a Parent Material Adverse Effect.

(c)

neither the Parent nor any of its Subsidiaries shall knowingly take any action or fail to take any action which action or failure to act would prevent, or would be reasonably likely to prevent, the Merger from qualifying as a Section 368 Reorganization.

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(a)

The Company Shareholder Meeting.    The Company, acting through its Board of Directors, shall, in accordance with applicable law, duly call, convene and hold a meeting of the holders of the Shares (the “Company Shareholder Meeting”) as soon as reasonably practicable for the purpose of voting upon the approval and adoption of this Agreement and the Merger, and the Company agrees that this Agreement and the Merger shall be submitted at such meeting. Except as provided in Section 5.8: (i) the Company Board of Directors shall recommend approval and adoption by its shareholders of this Agreement (the “Company Recommendation”), and (ii) neither the Company’s Board of Directors nor any committee thereof shall amend, modify, withdraw, condition or qualify the Company Recommendation in a manner adverse to Parent.

(b)

Parent Shareholder Meeting.    Parent, acting through its Board of Directors, shall, in accordance with applicable, law, duty call, convene and hold a meeting of the holders of Parent Shares (the “Parent Shareholder Meeting”) as soon as reasonably practicable, which Parent Shareholder Meeting may be held after such Company Shareholder Meeting, for the purpose of voting on the Transactions, including the Merger and the issuance of Parent Shares hereunder and Parent agrees that this Agreement and the issuance of Parent Shares hereunder shall be submitted at such meeting. Parent’s Board of Directors shall recommend approval by its shareholders of the Transactions, including the issuance of Parent Shares pursuant to the Merger (the “Parent Recommendation”), and (ii) neither Parent’s Board of Directors nor any committee thereof shall amend, modify, withdraw, condition or qualify the Parent Recommendation in a manner adverse to the Company unless there shall have occurred a Company Material Adverse Effect or Parent shall have terminated this Agreement.

(b)

The Parent shall (and shall cause each of its Subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of the Company, reasonable access during normal business hours during the period prior to the Closing Date, to all its properties, books, contracts, commitments and records and, during such period, the Parent shall (and shall cause each of its Subsidiaries to) furnish promptly to the Company (i) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of federal securities laws (to the extent not available through EDGAR), and (ii) all other information concerning its business, properties and personnel as the Company may reasonably request for purposes consistent with this Agreement and the Transactions contemplated hereby.

(c)

Any investigation pursuant to this Section shall be conducted in a manner which will not interfere unreasonably with the conduct of the business of the other party.

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(b)

Prior to the Closing, each party shall promptly consult with the other parties hereto with respect to, provide any necessary information with respect to, and provide the other parties (or their respective counsel) with copies of, all filings made by such party with any Governmental Entity or any other information supplied by such party to a Governmental Entity in connection with this Agreement, the Merger and the other Transactions. Each party hereto shall promptly inform the other of any communication from any Governmental Entity regarding any of the Transactions. If any party hereto or Affiliate thereof receives a request for additional information or documentary material from any such Governmental Entity with respect to any of the Transactions, then such party shall endeavor in good faith to make, or cause to be made, as soon as reasonably practicable and after consultation with the other parties, an appropriate response in compliance with such request. To the extent that transfers, amendments or modifications of permits (including environmental permits) are required as a result of the execution of this Agreement or consummation of any of the Transactions, each party shall use its reasonable best efforts to effect such transfers, amendments or modifications.

(c)

Notwithstanding anything to the contrary in Section 5.6(a) or (b), (i) neither Parent nor any of its Subsidiaries shall be required to divest or hold separate any of their respective businesses, product lines or assets, or to take or agree to take any other action or agree to any limitation, that could reasonably be expected to have a Parent Material Adverse Effect on Parent or on Parent combined with the Company after the Effective Time, and (ii) for purposes of this Section, neither the Company nor any of its Subsidiaries shall be entitled to divest, nor shall it commit to divest (other than, in each case, Divestco pursuant to a Divestco Disposition), any of their respective businesses, product lines or assets, or to take or agree to take any other action or agree to any limitation, that could reasonably be expected to have a Company Material Adverse Effect on the Company or on the Company combined with the Parent after the Effective Time.

(b)

As of the Effective Time (i) each outstanding Company Employee Stock Option and each other Company Option, outstanding immediately prior to the Effective Time which is not canceled as provided above, all of which are shown in Section 5.7 of the Company Disclosure Schedule, shall be exchanged for an option (the “Adjusted Options”) to purchase the number of Parent Shares (rounded to the nearest whole number of Parent Shares), derived by multiplying the number of Shares subject to such Company Employee Stock Option immediately prior to the Effective Time by the Exchange Fraction at an exercise price per share (rounded down to the nearest whole cent), equal to the exercise price for each such Share at which such option was exercisable immediately prior to the Effective Time divided by the Exchange Fraction and all references in each such option to the Company shall be deemed to refer to Parent, where appropriate, and (ii) Parent shall assume the obligations of the Company under the Company Stock Plans (the other terms of each Adjusted Option, and the plans under which they were issued, shall continue to apply in accordance with their terms, subject to Section 5.7(c)).

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(c)

Prior to the Effective Time of the Merger, the Company shall cause each holder of a Company Option, which option was not a Company Employee Stock Option, to agree that notwithstanding anything to the contrary in any Employee Benefit Plan or Company Award, the term of the Adjusted Options for such options shall not exceed three years from the Effective Time.

(d)

Parent shall (i) reserve for issuance the number of Parent Shares that will become subject to the Adjusted Options, and (ii) issue or cause to be issued the appropriate number of Parent Shares pursuant to such Adjusted Options, upon the exercise or maturation of rights existing thereunder.

(b)

As of the Effective Time the outstanding Heller Warrant identified in Section 5.8 of the Company Disclosure Schedule to purchase 144,683 shares of the Company shall be exchanged for a New Heller Warrant to purchase an aggregate maximum of 26,723 Parent Shares at an exercise price per Parent Share equal to $0.01 per share. Such New Heller Warrant shall be exercisable for three (3) years from the Effective Date and if not exercised in such period shall be void. Such New Heller Warrant shall be substantially in such form as shall be acceptable to Parent, in its sole discretion.

(c)

Parent shall (i) reserve for issuance the number of Parent Shares that will become subject to the New Heller Warrant, and (ii) issue or cause to be issued the appropriate number of Parent Shares pursuant to such New Heller Warrant, upon the exercise or maturation of rights existing thereunder.

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(x)

a Person has, on an unsolicited basis, submitted a written proposal to the Company Board of Directors relating to any Company Acquisition Proposal which the Board determines in good faith (based on the advice of a financial adviser of nationally recognized reputation) to be reasonably capable of being completed on substantially all of the terms proposed and to be more materially favorable to the Company and its shareholders and to be a proposal for which financing, to the extent required, is then committed or which in the good faith judgment of the Company Board of Directors, is reasonably capable of being obtained by such Person; and

(y)

the Company Board of Directors determines in good faith, after consultation with outside counsel, that such action is required to act in a manner consistent with the Board’s fiduciary duties to the Company’s shareholders under applicable law.

(b)

The Company shall, as promptly as possible (and in no event later than twenty-four (24)) hours notify Parent, orally and in writing, of the existence of any Company Acquisition Proposal, or any modification of or amendment to any Company Acquisition Proposal, or any request for nonpublic information relating to the Company or any of its Subsidiaries in connection with a Company Acquisition Proposal, and the Company will immediately communicate to Parent, orally and in writing, the terms of any Company Acquisition Proposal, modification or request which it may receive, the identity of the party making such Company Acquisition Proposal, modification or request, and copies of all information considered by the Company in determining that the Company Acquisition Proposal constitute a Company Superior Proposal and whether the Company is providing or intends to provide the Person making the Company Acquisition Proposal, modification or request with access to information concerning the Company, and will immediately provide to Parent copies of any written materials received by the Company describing or stating such Company Acquisition Proposal. The Company will promptly provide to Parent any non-public information concerning the Company provided to any other party which was not previously provided to Parent.

(c)

Except as set forth in this Section 5.9(c), neither the Company Board of Directors nor any committee thereof shall (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to Parent or Merger Sub, the approval or recommendation by such Board of Directors or any such committee of this Agreement or the Merger, (ii) approve or recommend or propose to approve or recommend, any Company Acquisition Proposal, or (iii) enter into any agreement with respect to any Company Acquisition Proposal. Notwithstanding the foregoing, prior to the Effective Time, the Company Board of Directors may withdraw or modify its approval or recommendation of this Agreement or the Merger, approve or recommend a Company Superior Proposal, or enter into an agreement with respect to a Company Superior Proposal, and may terminate this Agreement in order to concurrently enter into an agreement with respect to such Company Superior Proposal, in each case at any time after the tenth (10th) Business Day following delivery to Parent of written notice from the Company advising Parent that the Company Board of Directors has received a Company Superior Proposal which it intends to accept, specifying the material terms and conditions of such Company Superior Proposal, and identifying the Person making such Company Superior Proposal, but only if the Company shall have caused its financial and legal advisors to, if requested by the Parent, negotiate with Parent to make such adjustments in the terms and conditions of this Agreement as would enable the Company to proceed with the transactions contemplated herein on such adjusted terms and, at the end of such ten (10) Business Day period, the Company Board of Directors, in good faith continues reasonably to believe, that the Company Acquisition Proposal constitutes a Company Superior Proposal.

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(b)

Each of the Parent and the Company shall cooperate with each other in obtaining the opinion of Stokes Bartholomew Evans & Petree, P.A., counsel to the Company, dated as of the Closing Date, to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code. In connection therewith, each of the Company and the Parent shall deliver to Stokes Bartholomew Evans & Petree, P.A. customary representation letters in form and substance reasonably satisfactory to such counsel, and the Company shall obtain any representation letters from appropriate shareholders and shall deliver any such letters obtained to Stokes Bartholomew Evans & Petree, P.A. (the representation letters referred to in this sentence are collectively referred to as the “Tax Certificates”).

(c)

Parent shall not take, and, after the Merger, Parent shall cause the Company not to take, any position with respect to Taxes that is inconsistent with the treatment of the Merger as a Section 368 Reorganization.

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(b)

Nothing in Section 5.14 (a) shall obligate Parent to take any action which would require the voluntary surrender, forfeiture or other termination by Parent of a Healthcare Approval then held by Parent or any of its subsidiaries if Parent determines in good faith that it is inadvisable to do so.

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(b)

The Company shall use commercially reasonable efforts to maintain in effect through the Effective Time: (i) the Company’s current directors’ and officers’ liability insurance or other directors’ and officers’ liability insurance with a reputable and financially sound insurer that provides coverage that is no less favorable than the Company’s current policy, in each case, covering acts or omissions occurring prior to the Effective Time with respect to those persons who are currently covered by the Company’s directors’ and officers’ liability insurance policy on terms with respect to such coverage and amount no less favorable than those of such policy in effect on the date hereof, and (ii) the Company’s current fiduciary liability insurance policies for employees who serve or have served as fiduciaries under or with respect to any Company Benefit Plan.

(b)

Section 5.24(b) of the Company Disclosure Schedule sets forth a test calculation of the Company’s Hospital-Level EBITDA as of the twelve-month period ended August 31, 2002. Within five (5) Business Days after the execution of this Agreement, the Company shall furnish Parent with the calculation of the Company’s Hospital-Level EBITDA for the initial Hospital-Level EBITDA Test Period. Thereafter, not later than the twentieth (20th) day of each month after the month in which this Agreement is executed, the Company shall furnish Parent with the calculation of the Hospital-Level EBITDA for the applicable Hospital-Level EBITDA Test Period. Not later than seven (7) Business Days after the Closing Date, the Surviving Corporation shall deliver a closing Hospital-Level EBITDA calculation (the “Closing Hospital-Level EBITDA”) reflecting actual Hospital-Level EBITDA for the 365 days prior to and through the Closing Date as of the Closing Date. Except as expressly contemplated by this Agreement, the calculation of Hospital-Level EBITDA hereunder shall be made in accordance with GAAP and with the calculation methodology set forth in Section 5.24(b) of the Company Disclosure Schedule.

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(c)

At each Net Working Capital Test Date and at the Closing, the Net Working Capital determined pursuant to subparagraph (a) above shall be compared to a benchmark Net Working Capital of negative $150,000, with any difference between actual Net Working Capital and such benchmark being referred to herein as the “Net Working Capital Difference.” If Net Working Capital is a deficit amount, and such deficit amount exceeds $150,000, then the Net Working Capital Difference shall be expressed as a positive number. If Net Working Capital is a deficit amount, and such deficit amount is less than $150,000, or if Net Working Capital is zero or a positive amount, then the Net Working Capital Difference shall be expressed as a negative number. Also, for each Hospital-Level Test Period and at the Closing, the Hospital-level EBITDA determined pursuant to subparagraph (b) above shall be compared to a benchmark Hospital-level EBITDA of $2,725,000, with any difference between actual Hospital-Level EBITDA and such benchmark being referred to herein as the “Hospital-Level EBITDA Difference.” If Hospital-level EBITDA is less than $2,725,000, then the Hospital-level EBITDA Difference shall be expressed as a positive number. If Hospital-Level EBITDA is greater than $2,725,000, then the Hospital-Level EBITDA Difference shall be expressed as a negative number.

(d)

If, based on the Closing Hospital-Level EBITDA and the Closing Net Working Capital, the sum of the Net Working Capital Difference and the Hospital-Level EBITDA Difference (the “Shortfall”) is less than or equal to $150,000, then the Surviving Corporation will promptly (but in no event later than three (3) Business Days after the determination of both Closing Hospital-Level EBITDA and Closing Net Working Capital) fund the Divestco Contingent Capital Contribution to Divestco pursuant to Section 8.2 of the Divestco Disposition Agreement. If the Shortfall is greater than $150,000, then the Surviving Corporation shall have no obligation to fund the Divestco Contingent Capital Contribution.

(e)

The Company will provide Parent, contemporaneously with each Net Working Capital calculation and each Hospital-Level EBITDA calculation, full and complete access to all Hospital financial information and working papers with respect to such calculations and the opportunity to review and discuss the calculation of such financial measurements with such Company personnel and others as Parent shall deem appropriate prior to the formal submission of such calculations to Parent.

(a)

Shareholder Approvals.    Each of the Company Shareholder Approval and the Parent Shareholder Approval shall have been obtained;

(b)

Antitrust Approvals.    All waiting periods (and any extension thereof), if any, under the HSR Act applicable to the Merger shall have expired or been terminated, and all consents, waivers, approvals and authorizations required to be obtained, and all filings or notices required to be made by the parties hereto with any Governmental Entity pursuant to the HSR Act shall have been obtained or made;

(c)

No Injunction or Restraints.    No preliminary or permanent injunction or other order shall have been issued by any federal, state or foreign court or by any federal, state or foreign governmental or regulatory agency, body or authority and be in effect at the Effective Time which prohibits, restrains, restricts or enjoins the consummation of the Merger, provided, however, that, in the case of an injunction or other order, each of the parties shall have used reasonable best efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any such injunction or other order that may have been entered;

(d)

Statutes.    No federal, state or foreign statute, rule, regulation, executive order, decree or order of any kind shall have been enacted, entered, promulgated or enforced by any court or governmental authority

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which prohibits, restrains, restricts or enjoins the consummation of the Merger or has the effect of making the Merger illegal;

(e)

No Material Adverse Effect.    Since the date hereof, no event shall have occurred that has had, or would reasonably be likely to have, individually or in the aggregate, a Company Material Adverse Effect;

(f)

American Stock Exchange Listing.    The Parent Shares to be issued in the Merger and the Parent Shares underlying the Adjusted Options and Company Warrants shall have been authorized for quotation on the American Stock Exchange following the due issuance thereof;

(g)

Registration Statement.    The Registration Statement shall have become effective in accordance with the provisions of the Securities Act, no stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose shall have been initiated by the SEC and not concluded or withdrawn;

(h)

Representations and Warranties True.    (i) Each of the representations and warranties of the Company contained herein shall have been true and correct (except that where any statement in a representation or warranty expressly includes a standard of materiality or is qualified by reference to a Company Material Adverse Effect such statement shall be true and correct in all respects giving effect to such standards or determination as to Company Material Adverse Effect, as the case may be) when made and on and as of the Closing Date, except for representations and warranties made as of a specified date, which need be true and correct only as of the specified date, as if made on and as of such date, and (ii) the failure of any representations and warranties of the Company contained in this Agreement to be true and correct (disregarding for purposes of this Section 6.1(h)(ii), all qualifications therein which reference a Company Material Adverse Effect or other standard of potential exclusion) shall not have, or be reasonably likely to have, in the aggregate, a Company Material Adverse Effect;

(i)

Performance.    The Company shall have performed or complied in all respects with all agreements, covenants and undertakings (or, if any such agreement, covenant or undertaking is qualified as to materiality then the Company shall have performed or complied with such agreement or covenant or undertaking in all respects in accordance with its terms) contained herein required to be performed or complied with by it prior to or at the time of the Closing;

(j)

Compliance Certificate.    The Company shall have delivered to Parent a certificate, dated the date of the Closing, signed by the Chief Executive Officer and Chief Financial Officer of the Company, certifying as to the fulfillment of the conditions specified in Section 6.1(h) and Section 6.1(i);

(k)

Lock Up Agreements.    Parent and each Significant Shareholder shall have entered into a Lock Up Agreement and such Agreement shall be in full force and effect as of the Effective Time.

(l)

Consents Obtained.    All (i) consents identified in Section 3.7 of the Company Disclosure Schedule have been obtained, and (ii) other consents, waivers, approvals, authorizations or orders required to be obtained, and all filings required to be made by the Company for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by the Company, except where the failure to receive such consents, waivers, approvals, authorizations or orders would not, individually or in the aggregate with all other such failures, have a Company Material Adverse Effect.

(m)

Divestco Divestiture Completed.    The Company shall have completely effected the divesture of Divestco pursuant to a Divestco Disposition.

(n)

Appraisal Rights.    Holders of no more than 6.0% of the Shares shall have demanded or exercised or delivered to Company at any time before the Effective Time of the Merger timely written notice of such holder’s intent to demand or exercise appraisal rights with respect to the Merger in accordance with the TBCA, unless such holder shall have lost his or her right to such payment.

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(o)

Company Debt Restructure.    The Company’s outstanding Indebtedness shall have been restructured in compliance with all of the terms outlined in Exhibit 5.8, each of which terms shall be deemed material.

(p)

The amount of Indebtedness as of the Effective Date shall not exceed the following:

(i)

$8,880,000 in the case of Indebtedness owed under the Heller Loan Agreement and immediately after the Effective Date under the New Heller Loan Agreements;

(ii)

$912,000 in Indebtedness in the form of capitalized leases and other long term debts and liabilities;

(iii)

$1,650,000 in Indebtedness in the form of guarantees of overline letters of credit; and

(iv)

any Indebtedness constituting contingent payment obligations not to exceed the amounts as described in Section 6.1(p) of the Company Disclosure Schedule reduced by any payments thereon subsequent to the date of this Agreement.

(q)

The Heller Loan Documents shall have been amended, restated or superceded by new loan documents, whether with Heller or one or more other financial institutions, containing the terms set forth in Exhibit 6.1(a) or such other terms as Parent shall agree are no less favorable to Parent and HealthMont and the Surviving Corporation than those set forth in the existing Heller Loan Documents as modified by those terms set forth in Exhibit 6.1(q).

(r)

Tax Opinion.    The Parent shall have received an opinion of Stokes Bartholomew Evans & Petree, P.A. in form and substance reasonably satisfactory to the Company on the basis of certain facts, representations and assumptions set forth in such opinion, dated as of the Closing Date, to the effect that (i) the Merger will be treated for U.S. federal income tax purposes as a Section 368 Reorganization, and (ii) each of Parent and the Company will be a party to the reorganization within the meaning of Section 368(b) of the Code. In rendering such opinion, such counsel shall be entitled to rely upon the Tax Certificates.

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(a)

Shareholder Approvals.    Each of the Company Shareholder Approval and the Parent Shareholder Approval shall have been obtained;

(b)

Antitrust Approvals.    All waiting periods (and any extension thereof), if any, under the HSR Act applicable to the Merger shall have expired or been terminated, and all consents, waivers, approvals and authorizations required to be obtained, and all filings or notices required to be made by the parties hereto with any Governmental Entity pursuant to the HSR Act shall have been obtained or made;

(c)

No Injunction or Restraints.    No preliminary or permanent injunction or other order shall have been issued by any federal, state or foreign court or by any federal, state or foreign governmental or regulatory agency, body or authority and be in effect at the Effective Time which prohibits, restrains, restricts or enjoins the consummation of the Merger, provided, however, that, in the case of an injunction or other order, each of the parties shall have used reasonable best efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any such injunction or other order that may have been entered;

(d)

Statutes.    No federal, state or foreign statute, rule, regulation, executive order, decree or order of any kind shall have been enacted, entered, promulgated or enforced by any court or governmental authority which prohibits, restrains, restricts or enjoins the consummation of the Merger or has the effect of making the Merger illegal;

(e)

No Material Adverse Effect.    Since the date hereof, no event shall have occurred that has had, or would reasonably be likely to have, individually or in the aggregate, a Parent Material Adverse Effect;

(f)

American Stock Exchange.    The Parent Shares to be issued in the Merger and the Parent Shares underlying the Adjusted Options and Company Warrants shall have been authorized for quotation on the American Stock Exchange following the due issuance thereof;

(g)

Registration Statement.    The Registration Statement shall have become effective in accordance with the provisions of the Securities Act, no stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose shall have been initiated by the SEC and not concluded or withdrawn;

(h)

Representations and Warranties True.    (i) Each of the representations and warranties of the Parent contained herein shall be true and correct (except that where any statement in a representation or warranty expressly includes a standard of materiality or is qualified by reference to a Parent Material Adverse Effect, such statement shall be true and correct in all respects, giving effect to such standards or determination as to Parent Material Adverse Effect, as the case may be) when made and on and as of the Closing Date (except for representations and warranties made as of a specified date, which need be true and correct only as of the specified date), as if made on and as of such date, and (ii) the failure of any representations and warranties of the Parent contained in this Agreement to be true and correct disregarding for purposes of this Section 6.2(h)(ii), all qualifications therein which reference a Parent Material Adverse Effect), shall not have, or be reasonably likely to have, in the aggregate, a Parent Material Adverse Effect;

(i)

Performance.    Parent shall have performed or complied in all material respects with all material agreements, undertakings and covenants (or, if any such agreement, covenant or undertaking is qualified as to materiality then the Company shall have performed or complied with such agreement or covenant or undertaking in all respects) contained herein required to be performed or complied with by it prior to or at the time of the Closing;

(j)

Compliance Certificate.    Parent shall have delivered to the Company a certificate, dated the date of the Closing, signed by the Chief Executive Officer and Chief Financial Officer of Parent, certifying as to the fulfillment of the conditions specified in Section 6.2(h) and Section 6.2(i);

(k)

Consents Obtained.    All material consents, waivers, approvals, authorizations or orders required to be obtained, and all filings required to be made, by Parent or Merger Sub for the authorization, execution and delivery of this Agreement and the consummation by them of the transactions contemplated hereby

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shall have been obtained and made by Parent or Merger Sub, except where the failure to receive such consents, waivers, approvals, authorizations or orders would not, individually or in the aggregate with all other such failures, have a Parent Material Adverse Effect; and

(l)

Tax Opinion.    The Company shall have received an opinion of Stokes Bartholomew Evans & Petree, P.A. in form and substance reasonably satisfactory to the Company on the basis of certain facts, representations and assumptions set forth in such opinion, dated as of the Closing Date, to the effect that (i) the Merger will be treated for U.S. federal income tax purposes as a Section 368 Reorganization and (ii) each of Parent and the Company will be a party to the reorganization within the meaning of Section 368(b) of the Code. In rendering such opinion, such counsel shall be entitled to rely upon the Tax Certificates;

(a)

by mutual written consent duly authorized by the respective Boards of Directors of Parent and the Company; or

(b)

by Parent:

(i)

if, prior to the Effective Time, the Company has breached in any material respect any representation, warranty, covenant or other agreement contained in this Agreement which (A) would give rise to the failure of a condition set forth in clause (h) or (i) of Section 6.1, which is not cured within thirty (30) days after written notice thereof or is incapable of being cured by the Company, or (B) has not been waived by Parent pursuant to the provisions hereof;

(ii)

if the Company breaches its obligations under Section 5.9;

(iii)

if at the Company Shareholder Meeting (including any adjournment or postponement thereof) the Company Shareholder Approval shall not have been obtained;

(iv)

if at the Parent Shareholder Meeting (including any adjournment or postponement thereof) the Parent Shareholder Approval shall not have been obtained;

(v)

if Parent pays the Regular Termination Fee and the Expenses of the Company (as liquidated damages and as the Company’s sole and exclusive remedy for such termination); or

(vi)

if at any time (A) trading or quotation in any of the Parent’s securities shall have been suspended or limited by the SEC or by the American Stock Exchange, or trading in securities generally on

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the American Stock Exchange, the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the SEC or the NASD; (B) a general banking moratorium shall have been declared by any federal or state authorities; (C) there shall have occurred any outbreak or escalation of national or international hostilities war, material U.S. military activity, a significant act or acts of domestic or international terrorism, whether or not similar to the events of September 11, 2001, or any crisis or calamity, or any change in the United States or international financial markets, or any U.S. or international political, financial or economic conditions, as in the reasonable good faith judgment of Parent is a material adverse development which makes it materially impracticable, inadvisable or imprudent for Parent and Merger Sub to continue with the Merger or to consummate the Merger; or (D) the Company or any Subsidiary shall have sustained an uninsured loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Parent may impair the value of the Assets and Properties of the Company and its Subsidiaries (other than Divestco) or may interfere materially with the conduct of the business and operations of the Company or such Subsidiary (other than Divestco).

(c)

by the Company:

(i)

if, prior to the Effective Time, Parent or Merger Sub has breached in any material respect any representation, warranty, covenant or other agreement contained in this Agreement which (A) would give rise to the failure of a condition set forth in clauses (h) and (i) of Section 6.2, which is not cured within thirty (30) days after written notice thereof or is incapable of being cured by the Parent; or (B) has not been waived by the Company pursuant to the provisions hereof;

(ii)

in accordance with Section 5.9(c); provided, that, in order for the termination of this Agreement pursuant to this Section 7.1(c)(ii), to be deemed effective, the Company shall have complied with all provisions contained in Section 5.9 and Section 7.3, including the payment of the Regular Termination Fee, the Special Termination Fee and the Expenses of Parent and Merger Sub as provided therein;

(iii)

if at the Company Shareholder Meeting (including any adjournment or postponement thereof) the Company Shareholder Approval shall not have been obtained;

(iv)

if at the Parent Stockholder Meeting (including any adjournment or postponement thereof) the Parent Shareholder Meeting shall not have been obtained.

(d)

by either Parent or the Company:

(i)

if the Effective Time of the Merger has not occurred on or prior to January 31, 2003 (the “Termination Date”); provided, that the right to terminate this Agreement pursuant to this clause shall not be available to any party whose failure to fulfill any material obligation of this Agreement or other material breach of this Agreement has been the cause of, or resulted in, the failure of the Effective Time of the Merger to have occurred on or prior to the aforesaid date; or

(ii)

if any court of competent jurisdiction or any Governmental Entity having authority with respect thereto shall have issued an order, decree or ruling or taken any other action permanently restricting, enjoining, restraining or otherwise prohibiting the Transactions and such order, decree, ruling or other action shall have become final and non-appealable and prior to such termination and subject to the exclusions under Section 5.6(c), the parties shall have used reasonable best efforts to resist, resolve, or lift, as applicable, such judgment, injunction, order or decree.

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(b)

If this Agreement is terminated by Parent in accordance with Section 7.1(b)(i) or Section 7.1(b)(ii) as a result of a knowing or willful breach by the Company or in accordance with Section 7.1(b)(iii), then the Company shall pay to Parent the Regular Termination Fee and the Expenses of Parent and Merger Sub; provided, however, that if the Company shall enter into an agreement with respect to a Company Superior Proposal within six months of the Termination Date, the Company shall also pay Parent the Special Termination Fee. If this Agreement is terminated by Parent in accordance with Section 7.1(b)(i) hereof as a result of a non-willful breach by Company, then except as otherwise provided above, the Company shall pay to Parent the Expenses of Parent and Merger Sub.

(c)

If this Agreement is terminated by Parent in accordance with Section 7.1(b)(v), then Parent shall pay to Company the Regular Termination Fee and the Expenses of the Company (as liquidated damages and as the Company’s sole and exclusive remedy for such termination).

(d)

If this Agreement is terminated by the Company pursuant to Section 7.1(c)(i) as a result of a knowing or willful breach by Parent or in accordance with Section 7.1(c)(iv), then Parent shall pay to the Company the Regular Termination Fee and the Expenses of the Company. If this Agreement is terminated by the Company in accordance with Section 7.1(c)(i) as a result of a non-willful breach by Parent, then Parent shall pay the Company its Expenses. If this Agreement is terminated by the Company in accordance with Section 7.1(c)(ii), then the Company shall pay to Parent the Regular Termination Fee, the Special Termination Fee and the Expenses of the Parent and Merger Sub.

(e)

The parties acknowledge that the agreements contained in Section 7.3(b) Section 7.3(c), and Section 7.3(d) are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, the Company and Parent would not enter into this Agreement.

(f)

Any payment of an applicable Termination Fee and/or applicable Expenses pursuant to this Section 7.3 shall be made as follows:

(1)

in the case of either a termination by Parent pursuant to Section 7.1(b)(i) involving a willful breach or Section 7.1 (b)(ii), the Regular Termination Fee will be paid to Parent within one Business Day after termination of this Agreement and the Expenses of Parent and Merger Sub shall be paid promptly and in no event later than five Business Days after the submission of such Expenses for payment and, if applicable, the Special Termination Fee shall be paid promptly after the execution by the Company of a definitive agreement with respect to a Company Superior Proposal;

(2)

in the case of a termination by Parent pursuant to Section 7.1(b)(i) not involving a willful breach, the Expenses of Parent and Merger Sub shall be paid promptly and in no event later than five Business Days after the submission of such Expenses for payment;

(3)

in the case of a termination by Parent pursuant to Section 7.1(b)(iii), the Regular Termination Fee will be paid to Parent in twelve equal monthly installments, beginning on the fifth (5th) Business

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Day after termination of this Agreement, plus interest on the unpaid balance at a simple rate of interest of 6% per year, beginning on the fifth (5th) Business Day after termination of this Agreement and the Expenses of Parent and Merger Sub shall be paid promptly and in no event later than five Business Days after the submission of such Expenses for payment.

(4)

in the case of a termination by Parent pursuant to Section 7.1(b)(v), the Regular Termination Fee will be paid by Parent to the Company in twelve equal monthly installments beginning on the fifth (5th) Business Day after termination of this Agreement, plus interest on the unpaid balance at a simple rate of interest of 6% per year beginning on the fifth Business Day after termination of this Agreement.

(5)

in the case of a termination by the Company pursuant to Section 7.1(c)(i) involving a willful breach, the Regular Termination Fee will be paid to Company within one Business Day after termination of this Agreement and Parent will pay the Expenses of the Company promptly and in no event later than five (5) Business Days after the submission of such Expenses for payment.

(6)

In the case of a termination by the Company pursuant to Section 7.1(c)(i) involving a non-willful breach, Parent will pay the Expenses of the Company promptly and in no event later than five (5) Business Days after the submission of such Expenses for payment.

(7)

in the case of a termination by the Company pursuant to Section 5.9(c) and Section 7.1(c)(ii), the Regular Termination Fee and the Special Termination Fee will be paid to Parent within one (1) Business Day after termination of this Agreement and the Expenses of Parent and Merger Sub shall be paid promptly and in no event later than five (5) Business Days after the submission of such Expenses for payment.

(8)

in the case of a termination by the Company pursuant to Section 7.1 (c)(iv), the Regular Termination Fee will be paid to the Company in twelve equal monthly installments, beginning on the fifth (5th) Business Day after termination of this Agreement, plus interest on the unpaid balance at a simple rate of interest of 6% per year, beginning on the fifth (5th) Business Day after termination of this Agreement and the Expenses of the Company shall be paid promptly and in no event later than five Business Days after the submission of such Expenses for payment.

(g)

If either party fails to pay to (or reimburse) the other party any fee or expense due hereunder (including any Termination Fee), such party shall pay the costs and expenses (including legal fees and expenses) in connection with any action, including the filing of any lawsuit or other legal action, taken to collect payment, together with interest on the amount of any unpaid fee and/or expense at the publicly announced prime rate of Bank of America from the date such fee was required to be paid to the date it is paid.

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(a)

the income (or loss) of any Person accrued prior to the date such Person becomes a wholly owned subsidiary of, or is merged into or consolidated with, a Hospital, and the income (or loss) of any Person, substantially all of the assets of which have been acquired by a Hospital in any manner, realized by such other Person prior to the date of such acquisition;

(b)

the income (or loss) of any Person in which a Hospital has an ownership interest, except to the extent that any such income has been actually received by a Hospital in the form of cash dividends or similar cash distributions;

(c)

the undistributed earnings of any subsidiary of any Hospital to the extent that the declaration or payment of dividends or similar distributions by such subsidiary is not at the time permitted by the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such subsidiary;

(d)

any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made out of income accrued during such Hospital-Level EBITDA Test Period;

(e)

any aggregate net gain (but not any aggregate net loss) during such Hospital-Level EBITDA Test Period arising from the sale, conversion, exchange or other disposition of capital assets (such term to include, without limitation, (i) all non-current assets and, without duplication, (ii) the following, whether or not current, all fixed assets, whether tangible or intangible, all inventory sold in conjunction with the disposition of fixed assets, and all securities);

(f)

any gains resulting from any write-up of any assets (but not any loss resulting from any write-down of any assets);

(g)

any gain (but not any loss) arising from the acquisition of any security or the extinguishment, under U.S. GAAP, of any indebtedness of either Hospital;

(h)

any net income (but not any aggregate net loss) during such Hospital-Level EBITDA Test Period from (i) any change in accounting principles in accordance with U.S. GAAP, (ii) any prior period adjustments resulting from any change in accounting principles in accordance with U.S. GAAP, (iii) any extraordinary items, or (iv) any discontinued operations or the disposition thereof; and

(i)

any portion of Net Income attributable to the resolution of any audit, investigation or other adjustment under or with respect to any Healthcare Reimbursement Contract or Program or Healthcare Report with respect to any period prior to the applicable Hospital-Level EBITDA Test Period.

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(a)

any change, circumstance, development, effect, event, fact or occurrence that is or would reasonably be likely to be materially adverse to (i) the ability of the Company to perform its obligations under this Agreement or to consummate the Transactions, or (ii) the business, prospects, assets, liabilities, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole, other than any change, circumstance, development, effect, event, fact or occurrence (A) relating to the economy or securities markets of the United States or any other region in general, (B) relating to changes in conditions generally applicable to the business in which the Company and its Subsidiaries are involved, (C) resulting from entering into this Agreement or the consummation of the Transactions or the announcement thereof, or (D) relating to its business, prospects, financial condition or results of operations that has been expressly disclosed in writing to the other party prior to the date of this Agreement, or

(b)

if, at any time on or after the date of this Agreement and prior to termination of this Agreement, the amount of the Shortfall under Section 5.24(d) of this Agreement is reasonably likely to be greater than $150,000.

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(b)

Whenever the words “include,” “includes,” or “including” are used in this Agreement they shall be deemed to be followed by the words “without limitation.”

(c)

The words “hereof,” “herein,” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified.

(d)

The plural of any defined term shall have a meaning correlative to such defined term, and words denoting any gender shall include all genders. Where a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning.

(e)

A reference to any party to this Agreement or any other agreement or document shall include such party’s successors and permitted assigns.

(f)

A reference to any legislation or to any provision of any legislation shall include any modification or re-enactment thereof, any legislative provision substituted therefor and all regulations and statutory instruments issued thereunder or pursuant thereto.

(g)

The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.

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1.    Reviewed

the Transaction Documents;

2.

Examined the publicly filed information concerning the Company, evaluated information furnished to us by the Company concerning the Company and Healthmont, Inc. and read Healthmont’s audited financial statements for the fiscal years ended 3/31/02, and its unaudited interim financial statements for the periods ended 6/30/02;

3.

Examined certain operating and financial information, including projections, provided to us by management relating to the business prospects of the Company and Healthmont, Inc.;

4.

Spoke with certain members of Healthmont, Inc. senior and operating management to discuss Healthmont, Inc. operations, historical financial results and future prospects;

5.

Visited the Healthmont, Inc.’s Adel facility in Adel, Georgia;

6.

Considered publicly available data and stock market performance data of the Company and of public companies we deem comparable to Healthmont, Inc.;

7.

Compared the financial terms of the merger and the HMI acquisition with the publicly available financial terms of certain other transactions which we believe to be generally relevant;

8.

Considered certain pro forma effects of the HMI Acquisition on SSY financial statements;

9.

Performed discounted cash flow analyses of HMI; and

10.

Conducted such other studies, analyses, inquiries and investigations, as we, in our professional judgment, deemed appropriate.

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1)

the Agreement;

2)

the Dolly Vinsant Memorial Hospital divestiture agreement;

3)

the Company’s audited financial statements for the fiscal years ended March 31, 2001 and March 31, 2002, detailed and monthly financial information on each of the Company’s hospitals and corporate expenses for the fiscal year ended March 31, 2002, for the three months ended June 30, 2002, and for the last twelve months ended August 31, 2002;

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4)

a presentation made by the management of the Company to GE/Heller Finance;

5)

shareholder lists provided by the Company;

6)

SunLink’s web pages;

7)

all press releases issued by SunLink from June 1999 to September 9, 2002, including the earnings press release reporting the financial results for the last three months and twelve months ended June 30, 2002;

8)

SunLink earnings conference call on September 10, 2002;

9)

Annual Reports to Stockholders and Annual Reports on Form 10-K of Krug International Corp. (which subsequently changed names to SunLink) for the two fiscal years ended March 31, 2000 and March 31, 2001, and for the fiscal year ended June 30, 2002;

10)

Quarterly Reports on Form 10-Q of SunLink for quarters ending June 30, 2001, September 30, 2001, December 31, 2001 and March 31, 2002;

11)

all current reports filed on Form 8-K of SunLink since December 31, 2000;

12)

certain other communications from the Company and SunLink to their respective stockholders;

13)

certain internal financial analyses and forecasts for the Company prepared by the management of the Company (the “Company Forecasts”);

14)

certain internal financial analyses and forecasts for SunLink prepared by the management of SunLink (the “SunLink Forecasts”);

15)

certain cost savings projected by the management of the Company to result from the transaction contemplated by the Agreement (the “Synergies”); and

16)

such other data as we have deemed relevant.

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