SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 8-K


                 Current Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934


Date of Report:            December 31, 1997



                             HEALTHSOUTH Corporation
                          -----------------------------
             (Exact Name of Registrant as Specified in its Charter)


  Delaware                             1-10315                   63-0860407
  -------------                      -----------               -------------
  State or Other                     (Commission              (I.R.S. Employer
  Jurisdiction of Incorporation       File Number)           Identification No.)
  or Organization)


  One HEALTHSOUTH Parkway
  Birmingham, Alabama                                           35243
  ---------------------------                                   ---------
  (Address of Principal                                         (Zip Code)
  Executive Offices)


  Registrant's Telephone Number,
  Including Area Code:                                          (205) 967-7116



<PAGE>


Item 2. ACQUISITION OR DISPOSITION OF ASSETS

     On December 31, 1997, HEALTHSOUTH Corporation,  a Delaware corporation (the
"Company"),  consummated  the sale of the long-term care assets of the Company's
subsidiary   Horizon/CMS   Healthcare   Corporation,   a  Delaware   corporation
("Horizon/CMS"),  to Integrated  Health Services,  Inc., a Delaware  corporation
("IHS").  The assets sold included 139 long-term care  facilities,  12 specialty
hospitals,  35 institutional  pharmacy  locations and over 1,000  rehabilitation
therapy   contracts  with  long-term  care  facilities.   The  Company  received
approximately  $1,150,000,000 in cash and IHS assumed approximately $100,000,000
in  debt  relating  to the  transferred  assets,  for a total  consideration  of
$1,250,000,000.  HEALTHSOUTH  acquired  Horizon/CMS  in a merger  transaction on
October 29, 1997.  Charles W.  Newhall III and Gorge H. Strong are  directors of
both the Company and IHS. There are no other material  relationships between the
Company and IHS or any of their respective affiliates, directors or officers.


Item 7. FINANCIAL STATEMENTS AND EXHIBITS

     (b)  Pro forma Financial Information

               PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

         The following pro forma condensed  combined  financial  information and
explanatory  notes are presented to reflect the effect for all periods presented
of the merger of a wholly-owned  subsidiary of HEALTHSOUTH with Horizon/CMS in a
transaction  to be  accounted  for  as a  purchase  (the  "Merger"),  which  was
consummated  on  October  29,  1997.  In  addition,   the  pro  forma  financial
information  reflects  the effects for all periods  presented of the sale of the
long-term care assets acquired from  Horizon/CMS to Integrated  Health Services,
Inc. ("IHS"), which was consummated on December 31, 1997 (the "Sale").

         The pro forma condensed  combined balance sheet assumes that the Merger
and the Sale were each  consummated  on September  30,  1997,  and the pro forma
condensed  combined income  statements  assume that the Merger and the Sale were
each  consummated  on January 1, 1996.  The  assumptions  are  described  in the
accompanying Notes to Pro Forma Condensed Combined Financial Information.

         All  HEALTHSOUTH  shares  outstanding  and per share  amounts have been
adjusted to reflect a  two-for-one  stock  split  effected in the form of a 100%
stock dividend paid on March 17, 1997.

         The pro  forma  information  should  be read in  conjunction  with  the
historical financial statements of HEALTHSOUTH and Horizon/CMS included in their
respective  periodic reports filed with the Securities and Exchange  Commission.
The HEALTHSOUTH  historical  amounts in the  accompanying  pro forma  statements
include the financial position and results of operations of Health Images, Inc.,
which was acquired by HEALTHSOUTH  in March 1997 in a transaction  accounted for
as a pooling of interests.  Certain balance sheet and income  statement  amounts
from the Horizon/CMS  historical  financial statements have been reclassified in
order to conform to the HEALTHSOUTH  method of  presentation.  These  conforming
reclassifications had no effect on the reported financial position or results of
operations of Horizon/CMS.  The pro forma financial information is presented for
informational  purposes only and is not  necessarily  indicative of the combined
financial  position or results of  operations  that would have  resulted had the
Merger  and the  Sale  been  consummated  at the  dates  indicated,  nor is such
information  necessarily  indicative of the combined  financial  position of the
Companies or their combined results of operations for future periods.


<PAGE>


                    HEALTHSOUTH Corporation and Subsidiaries
             Pro Forma Condensed Combined Balance Sheet (Unaudited)
                               September 30, 1997
<TABLE>
<CAPTION>


                                                                          Pro        Assets      Pro
                                                            Pro Forma     Forma       Sold       Forma        Pro Forma
                                   HEALTHSOUTH Horizon/CMS  Adjustments   Combined    to IHS     Adjustments  Combined
                                   ----------- -----------  -----------   --------   --------   ------------  ---------
                                                 (In thousands)

ASSETS
Current assets:
<S>                                <C>        <C>          <C>       <C>        <C>         <C>           <C>         
   Cash and cash equivalents       $  189,408 $   54,170   $    0    $  243,578 $  (10,000)$ 1,150,000 (7)$    233,578
                                                                                            (1,150,000)(8)
   Other marketable securities         3,639          0         0         3,639          0           0           3,639
   Accounts receivable               659,415    365,652         0     1,025,067   (253,820)          0         771,247
                                                                0
   Inventories, prepaid expenses
    and other
    current assets                   224,478     70,469   (17,256)(2)   277,691    (48,810)          0         228,881
   Deferred income taxes              19,514     15,036         0        34,550          0           0          34,550
                                   ----------  --------- ---------    ---------  ----------   --------      ----------
Total current assets               1,096,454    505,327   (17,256)    1,584,525   (312,630)          0       1,271,895

Other assets                         114,517    130,229   (11,074)(1)   204,610    (30,610)          0         174,000
                                                          (29,062)(2)
                                                                0

Property, plant and equipment,
 net                               1,659,300    630,383   136,067 (2) 2,425,750   (434,446)          0       1,991,304
Intangible assets, net             1,379,500    347,043   280,080 (2) 2,049,201   (118,405)   (106,325)(7)   1,824,471
                                                           42,578 (3)
                                   ----------  --------- ---------    ---------  ----------   --------      ----------
Total assets                      $4,249,771 $1,612,982  $401,333    $6,264,086  $(896,091) $ (106,325)    $ 5,261,670
                                   ==========  ========= =========    =========  ==========   ========      ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
   Accounts payable               $   97,158 $   28,082  $      0     $ 125,240   $(32,619)  $        0     $    92,621
   Salaries and wages payable         67,774     23,579    27,100 (3)   118,453    (19,000)           0          99,453
   Accrued interest payable and
    other liabilities                 98,155    143,285    15,478 (3)   256,918    (43,666)     350,000 (7)     563,252
                                                                0

   Current portion of long-term debt  40,220      8,790         0        49,010          0            0          49,010
                                   ----------  --------- ---------     ---------  ----------   --------      ----------
Total current liabilities            303,307    203,736    42,578       549,621    (95,285)     350,000         804,336

Long-term debt                     1,882,466    733,876         0     2,616,342    (94,400)  (1,150,000)(8)   1,371,942
Deferred income taxes                 43,862          0   (11,074)(1)    32,788          0            0          32,788
Other long-term liabilities            2,655     20,212         0        22,867    (11,944)           0          10,923
Deferred revenue                          16        786         0           802          0            0             802
Minority interests                    80,054     18,915         0        98,969       (787)           0          98,182

Stockholders' equity:
   Preferred Stock, $.10 par               0          0         0             0          0            0               0
   Common Stock, $.01 par              3,413         53       400 (2)     3,866          0            0           3,866
   Additional paid-in capital      1,197,230    600,707   404,126 (2) 2,202,063   (642,811)     642,811 (7)   2,202,063
   Retained earnings                 754,754     43,402   (43,402)(2)   754,754    (50,864)      50,864 (7)     754,754

   Treasury stock                       (323)    (8,705)    8,705 (2)      (323)         0            0            (323)
   Receivable from Employee Stock
    Ownership Plan                   (12,247)         0         0       (12,247)         0            0         (12,247)
   Notes receivable from
    stockholders                      (5,416)         0         0        (5,416)         0            0          (5,416)
                                   ----------  ---------  --------    ---------  ----------    --------      ----------
Total stockholders' equity         1,937,411    635,457   369,829     2,942,697   (693,675)     693,675       2,942,697
                                   ----------  ---------  --------    ---------  ----------    --------      ----------

Total liabilities and
 stockholders' equity             $4,249,771 $1,612,982  $401,333   $ 6,264,086  $(896,091)   $(106,325)    $ 5,261,670
                                   ========== =========   =======     =========   =========    ========      ==========
</TABLE>


                             See accompanying notes.


<PAGE>
                    HEALTHSOUTH Corporation and Subsidiaries
            Pro Forma Condensed Combined Income Statement (Unaudited)
                          Year Ended December 31, 1996
<TABLE>
<CAPTION>
                                                                               Pro Forma          Pro Forma     Assets Sold 
                                              HEALTHSOUTH     Horizon/CMS     Adjustments         Combined        to IHS    
                                              -----------     -----------     -----------         --------      ----------- 
                                                        (In thousands, except per share amounts)

<S>                                        <C>              <C>             <C>              <C>            <C>
Revenues                                   $     2,568,155  $   1,746,504   $           0    $   4,314,659  $  (1,029,563)

Operating unit expenses                          1,667,248      1,439,567               0        3,106,815       (873,869)
Corporate general and administrative                
 expenses                                           79,354         94,687               0          174,041        (39,268)
Provision for doubtful accounts                     58,637         27,284               0           85,921        (16,295)
Depreciation and amortization                      207,132         58,311          15,134 (4)      287,564        (27,041)
                                                                                    6,987 (5)
Merger and acquisition related expenses             41,515              0               0           41,515              0
Loss on impairment of assets                        37,390         11,000               0           48,390              0
Special charge                                           0         17,150               0           17,150              0
Interest expense                                    98,751         48,892               0          147,643         (8,968)
Interest income                                     (6,034)        (7,611)              0          (13,645)         1,027
                                              ------------   ------------    ------------     ------------   ------------
                                                 2,183,993      1,689,280          22,121        3,895,394       (964,414)
Income before income taxes, minority
     interests and extraordinary item              384,162         57,224         (22,121)         419,265        (65,149)
Provision for income taxes                         143,929         27,402               0          171,331        (25,694)
                                              ------------   ------------    ------------     ------------   ------------
                                                   240,233         29,822         (22,121)         247,934        (39,455)
Minority interests                                  50,369          7,506               0           57,875           (913)
                                              ------------   ------------    ------------     ------------   ------------
Income from continuing operations          $       189,864  $      22,316    $    (22,121)      $  190,059  $     (38,542)
                                              ============   ============    ============     ============   ============

Weighted average common and common
     equivalent shares outstanding                 336,807         52,266          (8,186) (6)     380,887           N/A    
                                              ============   ============    ============     ============   ============   
Income from continuing operations per
     common and common equivalent share    $          0.56  $        0.43   $         N/A      $      0.50     $     N/A    
                                              ============   ============    ============     ============   ============   

Income from continuing operations per
     common share - assuming full
     dilution                              $          0.55  $        0.43   $         N/A      $      0.49     $     N/A    
                                              ============   ============    ============     ============   ============   

(Table Continued)

                                                Pro Forma          Pro Forma 
                                               Adjustments         Combined  
                                               -----------         --------- 
                                                                             
Revenues                                   $           0      $   3,285,096  
                                                                             
Operating unit expenses                                0          2,232,946  
Corporate general and administrative                                         
 expenses                                              0            134,773  
Provision for doubtful accounts                        0             69,626  
Depreciation and amortization                     (2,658)(10)       257,864  
                                                                             
Merger and acquisition related expenses                0             41,515  
Loss on impairment of assets                           0             48,390  
Special charge                                         0             17,150  
Interest expense                                 (74,750) (9)        63,925  
Interest income                                        0            (12,618) 
                                           -------------       ------------  
                                                 (77,408)         2,853,571  
Income before income taxes, minority                                         
     interests and extraordinary item             77,408            431,525  
Provision for income taxes                        29,153 (11)       174,789  
                                           -------------       ------------  
                                                  48,256            256,735
Minority interests                                     0             56,962  
                                           -------------       ------------  
Income from continuing operations          $      48,256      $     199,773  
                                           =============       ============  
                                                                             
Weighted average common and common                                           
     equivalent shares outstanding                  N/A             380,887  
                                           =============       ============  
                                                                             
Income from continuing operations per                                        
     common and common equivalent share       $     N/A          $     0.52  
                                           =============       ============  
                                                                             
Income from continuing operations per                                        
     common share - assuming full                                            
     dilution                                 $     N/A          $     0.52  
                                           =============       ============  

</TABLE>

                             See accompanying notes.

<PAGE>
                    HEALTHSOUTH Corporation and Subsidiaries
            Pro Forma Condensed Combined Income Statement (Unaudited)
                      Nine Months Ended September 30, 1997

<TABLE>
<CAPTION>

                                                                               Pro Forma          Pro Forma     Assets Sold  
                                              HEALTHSOUTH     Horizon/CMS     Adjustments         Combined        to IHS     
                                              -----------     -----------     -----------         ---------     -----------  
                                                    (In thousands, except per share amounts)

<S>                                        <C>              <C>             <C>               <C>            <C>             
Revenues                                   $     2,163,018  $   1,351,125   $           0     $   3,514,143  $      (813,056)

Operating unit expenses                          1,354,082      1,114,297               0         2,468,379         (696,332)
Corporate general and administrative
 expenses                                           55,926         69,674               0           125,600          (27,500)
Provision for doubtful accounts                     51,811         27,042               0            78,853          (18,841)
Depreciation and amortization                      181,259         50,163          11,350 (4)       248,012          (21,516)
                                                                                    5,240 (5)
Merger and acquisition related expenses             15,875              0               0            15,875                0 
Loss on impairment of assets                             0              0               0                 0                0 
Special charge                                           0         86,155               0            86,155                0 
Interest expense                                    81,180         41,893               0           123,073           (6,726)
Interest income                                     (3,761)        (5,325)              0            (9,086)             743 
                                            --------------    -----------    ------------       -----------   -------------- 
                                                 1,736,372      1,383,899          16,590         3,136,861         (770,172)
Income before income taxes, minority
     interests and extraordinary item              426,646        (32,774)        (16,590)          377,282          (42,884)
Provision for income taxes                         145,347         (8,766)              0           136,581          (16,724)
                                            --------------    -----------    ------------       -----------   -------------- 
                                                   281,299        (24,008)        (16,590)          240,701          (26,160)
Minority interests                                  49,481          4,669               0            54,150           (1,075)
                                            --------------    -----------    ------------       -----------   -------------- 

Income from continuing operations          $       231,818   $    (28,677)   $    (16,590)      $   186,551  $       (25,085)
                                            ==============    ===========    ============       ===========   ============== 

Weighted average common and common
     equivalent shares outstanding                 351,740         52,640          (8,244)(6)       396,136             N/A  
                                            ==============    ===========    ============       ===========   ============== 

Income from continuing operations per
     common and common equivalent share    $          0.66   $      (0.54)   $        N/A       $      0.47  $          N/A  
                                            ==============    ===========    ============       ===========   ============== 

Income from continuing operations per
     common share - assuming full
     dilution                              $          0.65   $      (0.54)   $        N/A       $      0.47  $          N/A  
                                            ==============    ===========    ============       ===========   ============== 

(Table Continued)

                                               Pro Forma          Pro Forma  
                                              Adjustments         Combined   
                                              -----------         ---------  
                                                                             
Revenues                                   $           0      $   2,701,087  
                                                                             
Operating unit expenses                                0          1,772,047  
Corporate general and administrative                                         
 expenses                                              0             98,100  
                                                                             
Provision for doubtful accounts                        0             60,012  
Depreciation and amortization                     (1,994) (10)      224,503  
                                                                             
Merger and acquisition related expenses                0             15,875  
Loss on impairment of assets                           0                  0  
Special charge                                         0             86,155  
Interest expense                                 (56,063) (9)        60,285  
Interest income                                        0             (8,343) 
                                             -----------        ------------ 
                                                 (58,056)         2,308,633  
Income before income taxes, minority                                         
     interests and extraordinary item             58,056            392,454  
Provision for income taxes                        21,864 (11)       141,722  
                                             -----------        ------------ 
                                                  36,192            250,732  
Minority interests                                     0             53,075  
                                             -----------        ------------ 
                                                                             
Income from continuing operations            $    36,192      $     197,657  
                                             ===========        ===========  
                                                                             
Weighted average common and common                                           
     equivalent shares outstanding                  N/A             396,136  
                                             ===========        ===========  
                                                                             
Income from continuing operations per                                        
     common and common equivalent share       $     N/A       $        0.50  
                                             ===========        ===========  
                                                                             
Income from continuing operations per                                        
     common share - assuming full                                            
     dilution                                 $     N/A       $        0.49  
                                             ===========        ===========  
</TABLE>

                             See accompanying notes.

<PAGE>



                    HEALTHSOUTH CORPORATION AND SUBSIDIARIES
          NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION


         On  October  29,  1997  HEALTHSOUTH   consummated  the  acquisition  of
Horizon/CMS  by means  of a  stock-for-stock  merger.  The  transaction  will be
accounted  for as a purchase.  Under the terms of the Plan,  HEALTHSOUTH  issued
0.84338 of a share of its Common Stock in exchange for each outstanding share of
Horizon/CMS  Common Stock.  For purposes of the accompanying pro forma financial
statements,  it is assumed  that  HEALTHSOUTH  issued  approximately  45,262,000
shares of its Common Stock valued at  $975,849,000,  or $21.56 per share, in the
Merger.  The per  share  value  is  based  on the  closing  price  per  share of
HEALTHSOUTH  Common Stock on February 14, 1997,  the last business day preceding
public  announcement  of  the  Merger.  In  addition,  HEALTHSOUTH  assumed  all
outstanding  Horizon/CMS  stock  options,  which  will,  in  the  aggregate,  be
exercisable for options to acquire approximately 4,200,000 shares of HEALTHSOUTH
Common Stock. For purposes of the  accompanying pro forma financial  statements,
these options have an estimated total value of  $29,437,000,  bringing the total
equity consideration to $1,005,286,000.

         On December 31, 1997,  HEALTHSOUTH  completed the sale of the long-term
care  assets  acquired  from  Horizon/CMS  to IHS.  Under the terms of the Sale,
HEALTHSOUTH  sold 139 long-term  care  facilities,  12 specialty  hospitals,  35
institutional pharmacy locations and over 1,000 rehabilitation therapy contracts
with   long-term   care   facilities.    HEALTHSOUTH   received    approximately
$1,150,000,000 in cash and IHS assumed approximately $100,000,000 in debt.

         Horizon/CMS  has  historically  reported  on a May 31 fiscal  year-end.
Horizon's  results  of  operations  have  been  recast to a  November  30 fiscal
year-end in the accompanying  pro forma condensed  combined income statement for
the year ended December 31, 1996. This was accomplished by excluding the results
of  operations  for the six months ended  November  30, 1995 from  Horizon/CMS's
historical  May 31, 1996 income  statement  and then adding to it  Horizon/CMS's
results  of  operations  for  the  six  months  ended  November  30,  1996.  The
accompanying  pro forma condensed  combined income statement for the nine months
ended September 30, 1997 is based on a combination of  HEALTHSOUTH's  results of
operations  for the nine  months  ended  September  30,  1997 and  Horizon/CMS's
results of operations for the nine months ended August 31, 1997.

         The  accompanying  pro forma  balance sheet assumes that the Merger and
the Sale were each  consummated  on September 30, 1997 and includes  adjustments
which give effect to events that are directly attributable to the Merger and the
Sale. The  accompanying pro forma income  statements  assume that the Merger and
the Sale were each consummated on January 1, 1996 and include  adjustments which
give effect to events that are directly  attributable to the Merger and the Sale
and are expected to have a continuing  impact in future periods.  The historical
statements  used in the  accompanying  pro forma income  statement  for the year
ended December 31, 1996 do not reflect an extraordinary loss of $27,074,000, net
of tax,  recorded by  Horizon/CMS  during the period.  Likewise,  the historical
statements  used in the  accompanying  pro forma income  statement  for the nine
months  ended  September  30,  1997  do not  reflect  an  extraordinary  gain of
$3,963,000 recorded by Horizon/CMS during the period



<PAGE>



         The  following  pro forma  adjustments  are  necessary  to reflect  the
Merger:

         1. To net  Horizon/CMS's  noncurrent  deferred income tax asset against
HEALTHSOUTH's noncurrent deferred income tax payable.

         2. To allocate the purchase price as follows (in thousands):

<TABLE>
<CAPTION>

<S>                                                                     <C>        
                  Purchase price.....................................   $ 1,005,286
                                                                         ==========

                  Historical net asset value of Horizon/CMS..........   $   635,457
                  Capitalized favorable leasehold value..............       154,543
                  Client and customer lists..........................        34,091
                  Joint venture agreements...........................        12,136
                  Adjustments to net asset values:
                       Prepaid expenses and other current assets.....       (17,256)
                       Other assets..................................       (29,062)
                       Property, plant and equipment.................       (18,476)
                       Intangible assets.............................        (3,035)
                  Cost in excess of net asset value..................       236,888
                                                                          ---------

                                                                        $ 1,005,286
                                                                         ==========
</TABLE>


         This adjustment also reflects the issuance of approximately  45,262,000
shares of HEALTHSOUTH Common Stock, valued at $975,849,000,  in exchange for all
of the  outstanding  shares of  Horizon/CMS  Common Stock and the  assumption of
Horizon/CMS  stock options  which will, in the  aggregate,  be  exercisable  for
approximately   4,200,000  shares  of  HEALTHSOUTH   Common  Stock,   valued  at
$29,437,000.   The  fair  value  of  these  options  was  estimated  based  upon
HEALTHSOUTH's  historical  option valuation  criteria.  Because  HEALTHSOUTH and
Horizon/CMS have both elected to account for stock options under APB Opinion No.
25,  the  fair  value  of  the  nonvested  options  is  included  as  additional
consideration.  In addition,  this adjustment  reflects the retirement of all of
Horizon/CMS's treasury stock and the write-off of its retained earnings.

         For purposes of allocating the purchase price in the  accompanying  pro
forma financial  statements,  the remaining Horizon/CMS net assets acquired have
been assigned  values equal to their  historical book values at August 31, 1997.
In connection  with the  consummation  of the Merger,  management of HEALTHSOUTH
will, as a matter of routine,  perform a comprehensive analysis to determine the
fair value of the net assets  acquired and allocate the purchase  price based on
the determined fair values of the assets acquired and the liabilities assumed at
the date of  acquisition.  Based on all of the  information  it has obtained and
reviewed to date regarding the value of the remaining net assets of Horizon/CMS,
management of HEALTHSOUTH is not aware of any material  differences  between the
historical  book  value  and the fair  value of the  remaining  Horizon/CMS  net
assets,  except for the  adjustments  noted  above.  Furthermore,  at this time,
management  of  HEALTHSOUTH  is  not  aware  of  any  material   pre-acquisition
contingencies  that would materially affect the purchase price  allocation.  For
these  reasons  the  allocation  of the  purchase  price  described  above is an
estimate based on tentative and preliminary data. The final amount of the excess
purchase  price and the  allocation  among the net assets  may  differ  from the
amounts estimated (see also Note 3).

         3.   HEALTHSOUTH   and  Horizon/CMS   have  incurred   certain  direct,
nonrecurring  costs and charges  resulting  from the Merger.  The following is a
detail of the estimated costs related to the Merger (in thousands):

                  Financial advisory fees........................ $25,900
                  Professional fees..............................   1,900
                  Severance and related benefits.................  27,100
                                                                 --------

                                                                  $54,900
                                                                 ========



<PAGE>



         These costs, net of an estimated tax benefit of $12,322,000,  have been
accrued and added to the purchase  price in the  accompanying  pro forma balance
sheet.  Most of these  costs  are  only  partially  deductible  for  income  tax
purposes.  The income  tax  benefit of  $12,322,000  is based on the  deductible
portion of these costs, estimated at $31,595,000,000, multiplied by an effective
income tax rate of 39%.

         The financial  advisory fees are estimated  based on the  contractually
agreed  upon  fees  with  the two  financial  advisors,  which,  in the  case of
HEALTHSOUTH, is determined as a percentage of the value of the securities issued
to  consummate  the Merger and, in the case of  Horizon/CMS,  is determined as a
percentage  of the total  transaction  value,  which  includes  the value of the
securities issued and the debt acquired as a result of the Merger.

         The  $27,100,000  in severance  and related  benefits  described  above
comprises  $4,577,000  payable to the chief  executive  officer  of  Horizon/CMS
pursuant to an Employment and Change of Control Agreement,  $14,306,000  payable
to other  Horizon/CMS  executive  officers  pursuant to other  change in control
agreements  and  $8,217,000  in other  severance and related  benefits.  IHS has
assumed  the  liability  for up to  $19,000,000  of such  severance  and related
benefits.

         It is possible  that,  subsequent  to the  consummation  of the Merger,
HEALTHSOUTH  will incur costs to  discontinue  or dispose of certain  activities
previously  performed at HEALTHSOUTH and Horizon/CMS.  Furthermore,  in order to
combine the operations of the Companies,  it is possible that  HEALTHSOUTH  will
incur integration  costs,  such as training  Horizon/CMS  personnel,  relocating
certain HEALTHSOUTH and Horizon/CMS personnel, integrating and upgrading certain
Horizon/  CMS  computer  systems,   consolidating   and  restructuring   certain
functions,  severance  and  other  expenses  relating  to  personnel  performing
duplicative   functions,   and  other  related  costs.   These   activities  are
collectively  referred to as  "restructuring  measures".  At this time, a formal
plan  of  restructuring   measures  has  not  been  formulated  or  approved  by
HEALTHSOUTH management. Furthermore, other than the estimated costs noted in the
table  above,  it is not  practicable  at this time to estimate  the  individual
nature, timing or total cost of the various potential  restructuring measures or
to  assess  the  likelihood  that  particular  restructuring  measures  will  be
implemented.  Therefore, no provision for the cost of restructuring measures has
been  included  in the  accompanying  pro  forma  condensed  combined  financial
information.  However, if restructuring measures are approved and implemented by
HEALTHSOUTH  management  and,  depending  upon the nature of the  measures to be
undertaken  and the  timing of  management's  commitment  with  respect  to such
measures,  costs  resulting from such measures may be accrued as liabilities and
added to the  total  consideration  in this  purchase  business  combination  in
accordance  with  generally  accepted  accounting   principles.   Alternatively,
management's  decisions  with respect to the nature and timing of any  potential
restructuring  measures  may  require  that  nonrecurring  charges,  potentially
significant,   be  recorded  in  HEALTHSOUTH's   income  statements  in  periods
subsequent to the Merger. These types of charges would include all costs related
to activities or employees of HEALTHSOUTH.

         4. To adjust  depreciation  and  amortization  expense to  reflect  the
purchase price  allocation of  capitalized  favorable  leasehold  value totaling
$154,543,000,  client and customer lists totaling  $34,091,000 and joint venture
agreements  totaling  $12,136,000  described in Note 2 above.  These  intangible
assets are being amortized over their estimated useful lives as follows:

     Favorable leasehold value......................   16 years
     Client and customer lists......................    8 years
     Joint venture agreements.......................   10 years

         5. To adjust  depreciation  and  amortization  expense to  reflect  the
allocation  of the  excess  purchase  price  over the net asset  value  acquired
totaling  $236,888,000 and $42,578,000  ($54,900,000 in costs less the estimated
$12,322,000  tax benefit)  described in Notes 2 and 3 above.  In accordance with
its  stated  policy,   management  of  HEALTHSOUTH  evaluates  each  acquisition
independently to determine the appropriate  amortization  period for the cost in
excess of net asset value of purchased  facilities.  Each evaluation includes an
analysis of historic and  projected  financial  performance,  evaluation  of the
estimated  useful lives of buildings and fixed assets  acquired,  the indefinite
lives of certificates  of need and licenses  acquired,  the  competition  within
local markets, lease terms where 



<PAGE>



applicable,  and the legal terms of  partnership  agreements  where  applicable.
Based on its preliminary  evaluations,  management of HEALTHSOUTH has determined
that the cost in excess of net asset value related to the proposed Merger should
be amortized over a 40-year period on a straight-line basis.

         Because the Merger was  structured  as a  stock-for-stock  merger,  the
amortization  of  capitalized  leasehold  value,  goodwill and other  intangible
assets  described in Notes 4 and 5 above will not be  deductible  for income tax
purposes.  Therefore, no adjustment to the provision for income taxes is made in
the accompanying pro forma income statement.

         6. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding share of Horizon/CMS  Common Stock into 0.84338 of a
share of HEALTHSOUTH Common Stock.

         The following pro forma adjustments are necessary to reflect the Sale:

         7. To reflect the net cash received against the net assets sold to IHS.
HEALTHSOUTH  expects to recognize a tax liability of approximately  $350,000,000
on the taxable gain resulting from the Sale.  The resulting  difference  between
the  net  cash  received  and  the  net  assets  disposed  of,  net of  tax,  is
approximately $106,325,000.  This difference is offset against goodwill (cost in
excess of net asset value) calculated in the original Horizon/CMS purchase price
allocation described in Note 2 above.

         8.  To  reflect  the  retirement  of  approximately  $1,150,000,000  in
long-term debt from the cash proceeds of the Sale.

         9. To adjust  interest  expense to reflect the  retirement of long-term
debt described in Note 8. Interest is computed based on an assumed  blended rate
of 6.5%.

         10. To adjust  amortization  expense  to  reflect  the  purchase  price
reallocation  described in Note 7. The amortization period is 40 years (see Note
5).

         11. To adjust  income  taxes at an assumed  rate of 39% to reflect  the
reduction in interest expense described in Note 9. There is not a tax effect for
the reduction in amortization expense described in Note 10 (see Note 5).


<PAGE>


     (c)  Exhibits

          2(a)  Purchase  and Sale  Agreement,  dated  November  1, 1997,  among
                HEALTHSOUTH Corporation,  Horizon/CMS Healthcare Corporation and
                Integrated Health Services, Inc.

          2(b)  Amendment  to  Purchase  and Sale  Agreement  among  HEALTHSOUTH
                Corporation,  Horizon/CMS  Healthcare Corporation and Integrated
                Health Services, Inc. dated December 31, 1997.


                                        2

<PAGE>



                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the
undersigned hereunto duly authorized.

Date:    January 15, 1998


                                                     HEALTHSOUTH CORPORATION


                                                     By    /s/WILLIAM W. HORTON
                                                       -------------------------
                                                             William W. Horton
                                                           Senior Vice President
                                                           and Corporate Counsel
[{"type": "8-K", "sequence": "1", "description": "FORM 8-K", "secsgml_size_bytes": 43313}]
{"company-data": {"conformed-name": "HEALTHSOUTH CORP", "cik": "0000785161", "assigned-sic": "8093", "irs-number": "630860407", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "000-14940", "film-number": "98507830"}, "business-address": {"street1": "ONE HEALTHSOUTH PKWY", "street2": "STE 224W", "city": "BIRMINGHAM", "state": "AL", "zip": "35243", "phone": "2059677116"}, "mail-address": {"street1": "ONE HEALTHSOUTH PARKWAY", "city": "BIRMINGHAM", "state": "AL", "zip": "35243"}, "former-company": {"former-conformed-name": "HEALTHSOUTH REHABILITATION CORP", "date-changed": "19920703"}}
SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 8-K

                 Current Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

Date of Report:            December 31, 1997

                             HEALTHSOUTH Corporation
                          -----------------------------
             (Exact Name of Registrant as Specified in its Charter)

  Delaware                             1-10315                   63-0860407
  -------------                      -----------               -------------
  State or Other                     (Commission              (I.R.S. Employer
  Jurisdiction of Incorporation       File Number)           Identification No.)
  or Organization)

  One HEALTHSOUTH Parkway
  Birmingham, Alabama                                           35243
  ---------------------------                                   ---------
  (Address of Principal                                         (Zip Code)
  Executive Offices)

  Registrant's Telephone Number,
  Including Area Code:                                          (205) 967-7116
Item 2. ACQUISITION OR DISPOSITION OF ASSETS

     On December 31, 1997, HEALTHSOUTH Corporation,  a Delaware corporation (the
"Company"),  consummated  the sale of the long-term care assets of the Company's
subsidiary   Horizon/CMS   Healthcare   Corporation,   a  Delaware   corporation
("Horizon/CMS"),  to Integrated  Health Services,  Inc., a Delaware  corporation
("IHS").  The assets sold included 139 long-term care  facilities,  12 specialty
hospitals,  35 institutional  pharmacy  locations and over 1,000  rehabilitation
therapy   contracts  with  long-term  care  facilities.   The  Company  received
approximately  $1,150,000,000 in cash and IHS assumed approximately $100,000,000
in  debt  relating  to the  transferred  assets,  for a total  consideration  of
$1,250,000,000.  HEALTHSOUTH  acquired  Horizon/CMS  in a merger  transaction on
October 29, 1997.  Charles W.  Newhall III and Gorge H. Strong are  directors of
both the Company and IHS. There are no other material  relationships between the
Company and IHS or any of their respective affiliates, directors or officers.

Item 7. FINANCIAL STATEMENTS AND EXHIBITS

     (b)  Pro forma Financial Information

               PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

         The following pro forma condensed  combined  financial  information and
explanatory  notes are presented to reflect the effect for all periods presented
of the merger of a wholly-owned  subsidiary of HEALTHSOUTH with Horizon/CMS in a
transaction  to be  accounted  for  as a  purchase  (the  "Merger"),  which  was
consummated  on  October  29,  1997.  In  addition,   the  pro  forma  financial
information  reflects  the effects for all periods  presented of the sale of the
long-term care assets acquired from  Horizon/CMS to Integrated  Health Services,
Inc. ("IHS"), which was consummated on December 31, 1997 (the "Sale").

         The pro forma condensed  combined balance sheet assumes that the Merger
and the Sale were each  consummated  on September  30,  1997,  and the pro forma
condensed  combined income  statements  assume that the Merger and the Sale were
each  consummated  on January 1, 1996.  The  assumptions  are  described  in the
accompanying Notes to Pro Forma Condensed Combined Financial Information.

         All  HEALTHSOUTH  shares  outstanding  and per share  amounts have been
adjusted to reflect a  two-for-one  stock  split  effected in the form of a 100%
stock dividend paid on March 17, 1997.

         The pro  forma  information  should  be read in  conjunction  with  the
historical financial statements of HEALTHSOUTH and Horizon/CMS included in their
respective  periodic reports filed with the Securities and Exchange  Commission.
The HEALTHSOUTH  historical  amounts in the  accompanying  pro forma  statements
include the financial position and results of operations of Health Images, Inc.,
which was acquired by HEALTHSOUTH  in March 1997 in a transaction  accounted for
as a pooling of interests.  Certain balance sheet and income  statement  amounts
from the Horizon/CMS  historical  financial statements have been reclassified in
order to conform to the HEALTHSOUTH  method of  presentation.  These  conforming
reclassifications had no effect on the reported financial position or results of
operations of Horizon/CMS.  The pro forma financial information is presented for
informational  purposes only and is not  necessarily  indicative of the combined
financial  position or results of  operations  that would have  resulted had the
Merger  and the  Sale  been  consummated  at the  dates  indicated,  nor is such
information  necessarily  indicative of the combined  financial  position of the
Companies or their combined results of operations for future periods.
HEALTHSOUTH Corporation and Subsidiaries
             Pro Forma Condensed Combined Balance Sheet (Unaudited)
                               September 30, 1997
Pro        Assets      Pro
                                                            Pro Forma     Forma       Sold       Forma        Pro Forma
                                   HEALTHSOUTH Horizon/CMS  Adjustments   Combined    to IHS     Adjustments  Combined
                                   ----------- -----------  -----------   --------   --------   ------------  ---------
                                                 (In thousands)

ASSETS
Current assets:
Cash and cash equivalents       $  189,408 $   54,170   $    0    $  243,578 $  (10,000)$ 1,150,000 (7)$    233,578
                                                                                            (1,150,000)(8)
   Other marketable securities         3,639          0         0         3,639          0           0           3,639
   Accounts receivable               659,415    365,652         0     1,025,067   (253,820)          0         771,247
                                                                0
   Inventories, prepaid expenses
    and other
    current assets                   224,478     70,469   (17,256)(2)   277,691    (48,810)          0         228,881
   Deferred income taxes              19,514     15,036         0        34,550          0           0          34,550
                                   ----------  --------- ---------    ---------  ----------   --------      ----------
Total current assets               1,096,454    505,327   (17,256)    1,584,525   (312,630)          0       1,271,895

Other assets                         114,517    130,229   (11,074)(1)   204,610    (30,610)          0         174,000
                                                          (29,062)(2)
                                                                0

Property, plant and equipment,
 net                               1,659,300    630,383   136,067 (2) 2,425,750   (434,446)          0       1,991,304
Intangible assets, net             1,379,500    347,043   280,080 (2) 2,049,201   (118,405)   (106,325)(7)   1,824,471
                                                           42,578 (3)
                                   ----------  --------- ---------    ---------  ----------   --------      ----------
Total assets                      $4,249,771 $1,612,982  $401,333    $6,264,086  $(896,091) $ (106,325)    $ 5,261,670
                                   ==========  ========= =========    =========  ==========   ========      ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
   Accounts payable               $   97,158 $   28,082  $      0     $ 125,240   $(32,619)  $        0     $    92,621
   Salaries and wages payable         67,774     23,579    27,100 (3)   118,453    (19,000)           0          99,453
   Accrued interest payable and
    other liabilities                 98,155    143,285    15,478 (3)   256,918    (43,666)     350,000 (7)     563,252
                                                                0

   Current portion of long-term debt  40,220      8,790         0        49,010          0            0          49,010
                                   ----------  --------- ---------     ---------  ----------   --------      ----------
Total current liabilities            303,307    203,736    42,578       549,621    (95,285)     350,000         804,336

Long-term debt                     1,882,466    733,876         0     2,616,342    (94,400)  (1,150,000)(8)   1,371,942
Deferred income taxes                 43,862          0   (11,074)(1)    32,788          0            0          32,788
Other long-term liabilities            2,655     20,212         0        22,867    (11,944)           0          10,923
Deferred revenue                          16        786         0           802          0            0             802
Minority interests                    80,054     18,915         0        98,969       (787)           0          98,182

Stockholders' equity:
   Preferred Stock, $.10 par               0          0         0             0          0            0               0
   Common Stock, $.01 par              3,413         53       400 (2)     3,866          0            0           3,866
   Additional paid-in capital      1,197,230    600,707   404,126 (2) 2,202,063   (642,811)     642,811 (7)   2,202,063
   Retained earnings                 754,754     43,402   (43,402)(2)   754,754    (50,864)      50,864 (7)     754,754

   Treasury stock                       (323)    (8,705)    8,705 (2)      (323)         0            0            (323)
   Receivable from Employee Stock
    Ownership Plan                   (12,247)         0         0       (12,247)         0            0         (12,247)
   Notes receivable from
    stockholders                      (5,416)         0         0        (5,416)         0            0          (5,416)
                                   ----------  ---------  --------    ---------  ----------    --------      ----------
Total stockholders' equity         1,937,411    635,457   369,829     2,942,697   (693,675)     693,675       2,942,697
                                   ----------  ---------  --------    ---------  ----------    --------      ----------

Total liabilities and
 stockholders' equity             $4,249,771 $1,612,982  $401,333   $ 6,264,086  $(896,091)   $(106,325)    $ 5,261,670
                                   ========== =========   =======     =========   =========    ========      ==========
See accompanying notes.
HEALTHSOUTH Corporation and Subsidiaries
            Pro Forma Condensed Combined Income Statement (Unaudited)
                          Year Ended December 31, 1996
Pro Forma          Pro Forma     Assets Sold 
                                              HEALTHSOUTH     Horizon/CMS     Adjustments         Combined        to IHS    
                                              -----------     -----------     -----------         --------      ----------- 
                                                        (In thousands, except per share amounts)
Revenues                                   $     2,568,155  $   1,746,504   $           0    $   4,314,659  $  (1,029,563)

Operating unit expenses                          1,667,248      1,439,567               0        3,106,815       (873,869)
Corporate general and administrative                
 expenses                                           79,354         94,687               0          174,041        (39,268)
Provision for doubtful accounts                     58,637         27,284               0           85,921        (16,295)
Depreciation and amortization                      207,132         58,311          15,134 (4)      287,564        (27,041)
                                                                                    6,987 (5)
Merger and acquisition related expenses             41,515              0               0           41,515              0
Loss on impairment of assets                        37,390         11,000               0           48,390              0
Special charge                                           0         17,150               0           17,150              0
Interest expense                                    98,751         48,892               0          147,643         (8,968)
Interest income                                     (6,034)        (7,611)              0          (13,645)         1,027
                                              ------------   ------------    ------------     ------------   ------------
                                                 2,183,993      1,689,280          22,121        3,895,394       (964,414)
Income before income taxes, minority
     interests and extraordinary item              384,162         57,224         (22,121)         419,265        (65,149)
Provision for income taxes                         143,929         27,402               0          171,331        (25,694)
                                              ------------   ------------    ------------     ------------   ------------
                                                   240,233         29,822         (22,121)         247,934        (39,455)
Minority interests                                  50,369          7,506               0           57,875           (913)
                                              ------------   ------------    ------------     ------------   ------------
Income from continuing operations          $       189,864  $      22,316    $    (22,121)      $  190,059  $     (38,542)
                                              ============   ============    ============     ============   ============

Weighted average common and common
     equivalent shares outstanding                 336,807         52,266          (8,186) (6)     380,887           N/A    
                                              ============   ============    ============     ============   ============   
Income from continuing operations per
     common and common equivalent share    $          0.56  $        0.43   $         N/A      $      0.50     $     N/A    
                                              ============   ============    ============     ============   ============   

Income from continuing operations per
     common share - assuming full
     dilution                              $          0.55  $        0.43   $         N/A      $      0.49     $     N/A    
                                              ============   ============    ============     ============   ============   

(Table Continued)

                                                Pro Forma          Pro Forma 
                                               Adjustments         Combined  
                                               -----------         --------- 
                                                                             
Revenues                                   $           0      $   3,285,096  
                                                                             
Operating unit expenses                                0          2,232,946  
Corporate general and administrative                                         
 expenses                                              0            134,773  
Provision for doubtful accounts                        0             69,626  
Depreciation and amortization                     (2,658)(10)       257,864  
                                                                             
Merger and acquisition related expenses                0             41,515  
Loss on impairment of assets                           0             48,390  
Special charge                                         0             17,150  
Interest expense                                 (74,750) (9)        63,925  
Interest income                                        0            (12,618) 
                                           -------------       ------------  
                                                 (77,408)         2,853,571  
Income before income taxes, minority                                         
     interests and extraordinary item             77,408            431,525  
Provision for income taxes                        29,153 (11)       174,789  
                                           -------------       ------------  
                                                  48,256            256,735
Minority interests                                     0             56,962  
                                           -------------       ------------  
Income from continuing operations          $      48,256      $     199,773  
                                           =============       ============  
                                                                             
Weighted average common and common                                           
     equivalent shares outstanding                  N/A             380,887  
                                           =============       ============  
                                                                             
Income from continuing operations per                                        
     common and common equivalent share       $     N/A          $     0.52  
                                           =============       ============  
                                                                             
Income from continuing operations per                                        
     common share - assuming full                                            
     dilution                                 $     N/A          $     0.52  
                                           =============       ============
See accompanying notes.
HEALTHSOUTH Corporation and Subsidiaries
            Pro Forma Condensed Combined Income Statement (Unaudited)
                      Nine Months Ended September 30, 1997
Pro Forma          Pro Forma     Assets Sold  
                                              HEALTHSOUTH     Horizon/CMS     Adjustments         Combined        to IHS     
                                              -----------     -----------     -----------         ---------     -----------  
                                                    (In thousands, except per share amounts)
Revenues                                   $     2,163,018  $   1,351,125   $           0     $   3,514,143  $      (813,056)

Operating unit expenses                          1,354,082      1,114,297               0         2,468,379         (696,332)
Corporate general and administrative
 expenses                                           55,926         69,674               0           125,600          (27,500)
Provision for doubtful accounts                     51,811         27,042               0            78,853          (18,841)
Depreciation and amortization                      181,259         50,163          11,350 (4)       248,012          (21,516)
                                                                                    5,240 (5)
Merger and acquisition related expenses             15,875              0               0            15,875                0 
Loss on impairment of assets                             0              0               0                 0                0 
Special charge                                           0         86,155               0            86,155                0 
Interest expense                                    81,180         41,893               0           123,073           (6,726)
Interest income                                     (3,761)        (5,325)              0            (9,086)             743 
                                            --------------    -----------    ------------       -----------   -------------- 
                                                 1,736,372      1,383,899          16,590         3,136,861         (770,172)
Income before income taxes, minority
     interests and extraordinary item              426,646        (32,774)        (16,590)          377,282          (42,884)
Provision for income taxes                         145,347         (8,766)              0           136,581          (16,724)
                                            --------------    -----------    ------------       -----------   -------------- 
                                                   281,299        (24,008)        (16,590)          240,701          (26,160)
Minority interests                                  49,481          4,669               0            54,150           (1,075)
                                            --------------    -----------    ------------       -----------   -------------- 

Income from continuing operations          $       231,818   $    (28,677)   $    (16,590)      $   186,551  $       (25,085)
                                            ==============    ===========    ============       ===========   ============== 

Weighted average common and common
     equivalent shares outstanding                 351,740         52,640          (8,244)(6)       396,136             N/A  
                                            ==============    ===========    ============       ===========   ============== 

Income from continuing operations per
     common and common equivalent share    $          0.66   $      (0.54)   $        N/A       $      0.47  $          N/A  
                                            ==============    ===========    ============       ===========   ============== 

Income from continuing operations per
     common share - assuming full
     dilution                              $          0.65   $      (0.54)   $        N/A       $      0.47  $          N/A  
                                            ==============    ===========    ============       ===========   ============== 

(Table Continued)

                                               Pro Forma          Pro Forma  
                                              Adjustments         Combined   
                                              -----------         ---------  
                                                                             
Revenues                                   $           0      $   2,701,087  
                                                                             
Operating unit expenses                                0          1,772,047  
Corporate general and administrative                                         
 expenses                                              0             98,100  
                                                                             
Provision for doubtful accounts                        0             60,012  
Depreciation and amortization                     (1,994) (10)      224,503  
                                                                             
Merger and acquisition related expenses                0             15,875  
Loss on impairment of assets                           0                  0  
Special charge                                         0             86,155  
Interest expense                                 (56,063) (9)        60,285  
Interest income                                        0             (8,343) 
                                             -----------        ------------ 
                                                 (58,056)         2,308,633  
Income before income taxes, minority                                         
     interests and extraordinary item             58,056            392,454  
Provision for income taxes                        21,864 (11)       141,722  
                                             -----------        ------------ 
                                                  36,192            250,732  
Minority interests                                     0             53,075  
                                             -----------        ------------ 
                                                                             
Income from continuing operations            $    36,192      $     197,657  
                                             ===========        ===========  
                                                                             
Weighted average common and common                                           
     equivalent shares outstanding                  N/A             396,136  
                                             ===========        ===========  
                                                                             
Income from continuing operations per                                        
     common and common equivalent share       $     N/A       $        0.50  
                                             ===========        ===========  
                                                                             
Income from continuing operations per                                        
     common share - assuming full                                            
     dilution                                 $     N/A       $        0.49  
                                             ===========        ===========
See accompanying notes.
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
          NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

         On  October  29,  1997  HEALTHSOUTH   consummated  the  acquisition  of
Horizon/CMS  by means  of a  stock-for-stock  merger.  The  transaction  will be
accounted  for as a purchase.  Under the terms of the Plan,  HEALTHSOUTH  issued
0.84338 of a share of its Common Stock in exchange for each outstanding share of
Horizon/CMS  Common Stock.  For purposes of the accompanying pro forma financial
statements,  it is assumed  that  HEALTHSOUTH  issued  approximately  45,262,000
shares of its Common Stock valued at  $975,849,000,  or $21.56 per share, in the
Merger.  The per  share  value  is  based  on the  closing  price  per  share of
HEALTHSOUTH  Common Stock on February 14, 1997,  the last business day preceding
public  announcement  of  the  Merger.  In  addition,  HEALTHSOUTH  assumed  all
outstanding  Horizon/CMS  stock  options,  which  will,  in  the  aggregate,  be
exercisable for options to acquire approximately 4,200,000 shares of HEALTHSOUTH
Common Stock. For purposes of the  accompanying pro forma financial  statements,
these options have an estimated total value of  $29,437,000,  bringing the total
equity consideration to $1,005,286,000.

         On December 31, 1997,  HEALTHSOUTH  completed the sale of the long-term
care  assets  acquired  from  Horizon/CMS  to IHS.  Under the terms of the Sale,
HEALTHSOUTH  sold 139 long-term  care  facilities,  12 specialty  hospitals,  35
institutional pharmacy locations and over 1,000 rehabilitation therapy contracts
with   long-term   care   facilities.    HEALTHSOUTH   received    approximately
$1,150,000,000 in cash and IHS assumed approximately $100,000,000 in debt.

         Horizon/CMS  has  historically  reported  on a May 31 fiscal  year-end.
Horizon's  results  of  operations  have  been  recast to a  November  30 fiscal
year-end in the accompanying  pro forma condensed  combined income statement for
the year ended December 31, 1996. This was accomplished by excluding the results
of  operations  for the six months ended  November  30, 1995 from  Horizon/CMS's
historical  May 31, 1996 income  statement  and then adding to it  Horizon/CMS's
results  of  operations  for  the  six  months  ended  November  30,  1996.  The
accompanying  pro forma condensed  combined income statement for the nine months
ended September 30, 1997 is based on a combination of  HEALTHSOUTH's  results of
operations  for the nine  months  ended  September  30,  1997 and  Horizon/CMS's
results of operations for the nine months ended August 31, 1997.

         The  accompanying  pro forma  balance sheet assumes that the Merger and
the Sale were each  consummated  on September 30, 1997 and includes  adjustments
which give effect to events that are directly attributable to the Merger and the
Sale. The  accompanying pro forma income  statements  assume that the Merger and
the Sale were each consummated on January 1, 1996 and include  adjustments which
give effect to events that are directly  attributable to the Merger and the Sale
and are expected to have a continuing  impact in future periods.  The historical
statements  used in the  accompanying  pro forma income  statement  for the year
ended December 31, 1996 do not reflect an extraordinary loss of $27,074,000, net
of tax,  recorded by  Horizon/CMS  during the period.  Likewise,  the historical
statements  used in the  accompanying  pro forma income  statement  for the nine
months  ended  September  30,  1997  do not  reflect  an  extraordinary  gain of
$3,963,000 recorded by Horizon/CMS during the period
The  following  pro forma  adjustments  are  necessary  to reflect  the
Merger:

         1. To net  Horizon/CMS's  noncurrent  deferred income tax asset against
HEALTHSOUTH's noncurrent deferred income tax payable.

         2. To allocate the purchase price as follows (in thousands):
Purchase price.....................................   $ 1,005,286
                                                                         ==========

                  Historical net asset value of Horizon/CMS..........   $   635,457
                  Capitalized favorable leasehold value..............       154,543
                  Client and customer lists..........................        34,091
                  Joint venture agreements...........................        12,136
                  Adjustments to net asset values:
                       Prepaid expenses and other current assets.....       (17,256)
                       Other assets..................................       (29,062)
                       Property, plant and equipment.................       (18,476)
                       Intangible assets.............................        (3,035)
                  Cost in excess of net asset value..................       236,888
                                                                          ---------

                                                                        $ 1,005,286
                                                                         ==========
This adjustment also reflects the issuance of approximately  45,262,000
shares of HEALTHSOUTH Common Stock, valued at $975,849,000,  in exchange for all
of the  outstanding  shares of  Horizon/CMS  Common Stock and the  assumption of
Horizon/CMS  stock options  which will, in the  aggregate,  be  exercisable  for
approximately   4,200,000  shares  of  HEALTHSOUTH   Common  Stock,   valued  at
$29,437,000.   The  fair  value  of  these  options  was  estimated  based  upon
HEALTHSOUTH's  historical  option valuation  criteria.  Because  HEALTHSOUTH and
Horizon/CMS have both elected to account for stock options under APB Opinion No.
25,  the  fair  value  of  the  nonvested  options  is  included  as  additional
consideration.  In addition,  this adjustment  reflects the retirement of all of
Horizon/CMS's treasury stock and the write-off of its retained earnings.

         For purposes of allocating the purchase price in the  accompanying  pro
forma financial  statements,  the remaining Horizon/CMS net assets acquired have
been assigned  values equal to their  historical book values at August 31, 1997.
In connection  with the  consummation  of the Merger,  management of HEALTHSOUTH
will, as a matter of routine,  perform a comprehensive analysis to determine the
fair value of the net assets  acquired and allocate the purchase  price based on
the determined fair values of the assets acquired and the liabilities assumed at
the date of  acquisition.  Based on all of the  information  it has obtained and
reviewed to date regarding the value of the remaining net assets of Horizon/CMS,
management of HEALTHSOUTH is not aware of any material  differences  between the
historical  book  value  and the fair  value of the  remaining  Horizon/CMS  net
assets,  except for the  adjustments  noted  above.  Furthermore,  at this time,
management  of  HEALTHSOUTH  is  not  aware  of  any  material   pre-acquisition
contingencies  that would materially affect the purchase price  allocation.  For
these  reasons  the  allocation  of the  purchase  price  described  above is an
estimate based on tentative and preliminary data. The final amount of the excess
purchase  price and the  allocation  among the net assets  may  differ  from the
amounts estimated (see also Note 3).

         3.   HEALTHSOUTH   and  Horizon/CMS   have  incurred   certain  direct,
nonrecurring  costs and charges  resulting  from the Merger.  The following is a
detail of the estimated costs related to the Merger (in thousands):

                  Financial advisory fees........................ $25,900
                  Professional fees..............................   1,900
                  Severance and related benefits.................  27,100
                                                                 --------

                                                                  $54,900
                                                                 ========
These costs, net of an estimated tax benefit of $12,322,000,  have been
accrued and added to the purchase  price in the  accompanying  pro forma balance
sheet.  Most of these  costs  are  only  partially  deductible  for  income  tax
purposes.  The income  tax  benefit of  $12,322,000  is based on the  deductible
portion of these costs, estimated at $31,595,000,000, multiplied by an effective
income tax rate of 39%.

         The financial  advisory fees are estimated  based on the  contractually
agreed  upon  fees  with  the two  financial  advisors,  which,  in the  case of
HEALTHSOUTH, is determined as a percentage of the value of the securities issued
to  consummate  the Merger and, in the case of  Horizon/CMS,  is determined as a
percentage  of the total  transaction  value,  which  includes  the value of the
securities issued and the debt acquired as a result of the Merger.

         The  $27,100,000  in severance  and related  benefits  described  above
comprises  $4,577,000  payable to the chief  executive  officer  of  Horizon/CMS
pursuant to an Employment and Change of Control Agreement,  $14,306,000  payable
to other  Horizon/CMS  executive  officers  pursuant to other  change in control
agreements  and  $8,217,000  in other  severance and related  benefits.  IHS has
assumed  the  liability  for up to  $19,000,000  of such  severance  and related
benefits.

         It is possible  that,  subsequent  to the  consummation  of the Merger,
HEALTHSOUTH  will incur costs to  discontinue  or dispose of certain  activities
previously  performed at HEALTHSOUTH and Horizon/CMS.  Furthermore,  in order to
combine the operations of the Companies,  it is possible that  HEALTHSOUTH  will
incur integration  costs,  such as training  Horizon/CMS  personnel,  relocating
certain HEALTHSOUTH and Horizon/CMS personnel, integrating and upgrading certain
Horizon/  CMS  computer  systems,   consolidating   and  restructuring   certain
functions,  severance  and  other  expenses  relating  to  personnel  performing
duplicative   functions,   and  other  related  costs.   These   activities  are
collectively  referred to as  "restructuring  measures".  At this time, a formal
plan  of  restructuring   measures  has  not  been  formulated  or  approved  by
HEALTHSOUTH management. Furthermore, other than the estimated costs noted in the
table  above,  it is not  practicable  at this time to estimate  the  individual
nature, timing or total cost of the various potential  restructuring measures or
to  assess  the  likelihood  that  particular  restructuring  measures  will  be
implemented.  Therefore, no provision for the cost of restructuring measures has
been  included  in the  accompanying  pro  forma  condensed  combined  financial
information.  However, if restructuring measures are approved and implemented by
HEALTHSOUTH  management  and,  depending  upon the nature of the  measures to be
undertaken  and the  timing of  management's  commitment  with  respect  to such
measures,  costs  resulting from such measures may be accrued as liabilities and
added to the  total  consideration  in this  purchase  business  combination  in
accordance  with  generally  accepted  accounting   principles.   Alternatively,
management's  decisions  with respect to the nature and timing of any  potential
restructuring  measures  may  require  that  nonrecurring  charges,  potentially
significant,   be  recorded  in  HEALTHSOUTH's   income  statements  in  periods
subsequent to the Merger. These types of charges would include all costs related
to activities or employees of HEALTHSOUTH.

         4. To adjust  depreciation  and  amortization  expense to  reflect  the
purchase price  allocation of  capitalized  favorable  leasehold  value totaling
$154,543,000,  client and customer lists totaling  $34,091,000 and joint venture
agreements  totaling  $12,136,000  described in Note 2 above.  These  intangible
assets are being amortized over their estimated useful lives as follows:

     Favorable leasehold value......................   16 years
     Client and customer lists......................    8 years
     Joint venture agreements.......................   10 years

         5. To adjust  depreciation  and  amortization  expense to  reflect  the
allocation  of the  excess  purchase  price  over the net asset  value  acquired
totaling  $236,888,000 and $42,578,000  ($54,900,000 in costs less the estimated
$12,322,000  tax benefit)  described in Notes 2 and 3 above.  In accordance with
its  stated  policy,   management  of  HEALTHSOUTH  evaluates  each  acquisition
independently to determine the appropriate  amortization  period for the cost in
excess of net asset value of purchased  facilities.  Each evaluation includes an
analysis of historic and  projected  financial  performance,  evaluation  of the
estimated  useful lives of buildings and fixed assets  acquired,  the indefinite
lives of certificates  of need and licenses  acquired,  the  competition  within
local markets, lease terms where
applicable,  and the legal terms of  partnership  agreements  where  applicable.
Based on its preliminary  evaluations,  management of HEALTHSOUTH has determined
that the cost in excess of net asset value related to the proposed Merger should
be amortized over a 40-year period on a straight-line basis.

         Because the Merger was  structured  as a  stock-for-stock  merger,  the
amortization  of  capitalized  leasehold  value,  goodwill and other  intangible
assets  described in Notes 4 and 5 above will not be  deductible  for income tax
purposes.  Therefore, no adjustment to the provision for income taxes is made in
the accompanying pro forma income statement.

         6. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding share of Horizon/CMS  Common Stock into 0.84338 of a
share of HEALTHSOUTH Common Stock.

         The following pro forma adjustments are necessary to reflect the Sale:

         7. To reflect the net cash received against the net assets sold to IHS.
HEALTHSOUTH  expects to recognize a tax liability of approximately  $350,000,000
on the taxable gain resulting from the Sale.  The resulting  difference  between
the  net  cash  received  and  the  net  assets  disposed  of,  net of  tax,  is
approximately $106,325,000.  This difference is offset against goodwill (cost in
excess of net asset value) calculated in the original Horizon/CMS purchase price
allocation described in Note 2 above.

         8.  To  reflect  the  retirement  of  approximately  $1,150,000,000  in
long-term debt from the cash proceeds of the Sale.

         9. To adjust  interest  expense to reflect the  retirement of long-term
debt described in Note 8. Interest is computed based on an assumed  blended rate
of 6.5%.

         10. To adjust  amortization  expense  to  reflect  the  purchase  price
reallocation  described in Note 7. The amortization period is 40 years (see Note
5).

         11. To adjust  income  taxes at an assumed  rate of 39% to reflect  the
reduction in interest expense described in Note 9. There is not a tax effect for
the reduction in amortization expense described in Note 10 (see Note 5).
(c)  Exhibits

          2(a)  Purchase  and Sale  Agreement,  dated  November  1, 1997,  among
                HEALTHSOUTH Corporation,  Horizon/CMS Healthcare Corporation and
                Integrated Health Services, Inc.

          2(b)  Amendment  to  Purchase  and Sale  Agreement  among  HEALTHSOUTH
                Corporation,  Horizon/CMS  Healthcare Corporation and Integrated
                Health Services, Inc. dated December 31, 1997.

                                        2
SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the
undersigned hereunto duly authorized.

Date:    January 15, 1998

                                                     HEALTHSOUTH CORPORATION

                                                     By    /s/WILLIAM W. HORTON
                                                       -------------------------
                                                             William W. Horton
                                                           Senior Vice President
                                                           and Corporate Counsel