10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended September 30, 2007
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-33009

MedCath Corporation

(Exact name of registrant as specified in its charter)

Delaware	56-2248952
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10720 Sikes Place
Charlotte, North Carolina 28277

(Address of principal executive offices, including zip code)

(704) 708-6600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes o     No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or an non-accelerated filer. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act.

Large Accelerated Filer o     Accelerated Filer þ     Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

As of December 12, 2007 there were 21,272,644 shares of the Registrant’s Common Stock outstanding. The aggregate market value of the Registrant’s common stock held by non-affiliates as of March 31, 2007 was approximately $362.7 million (computed by reference to the closing sales price of such stock on the Nasdaq Global Market^® on such date).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s proxy statement for its annual meeting of stockholders to be held on March 5, 2008 are incorporated by reference into Part III of this Report.

MEDCATH CORPORATION

FORM 10-K

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business		1
Item 1A.	Risk Factors		20
Item 1B.	Unresolved Staff Comments		29
Item 2.	Properties		29
Item 3.	Legal Proceedings		29
Item 4.	Submission of Matters to a Vote of Security Holders		29
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		30
Item 6.	Selected Financial Data		32
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		53
Item 8.	Financial Statements and Supplementary Data		54
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		105
Item 9A.	Controls and Procedures		105
Item 9B.	Other Information		107
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		108
Item 11.	Executive Compensation		108
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stock-holder Matters		108
Item 13.	Certain Relationships and Related Transactions, and Director Independence		108
Item 14.	Principal Accounting Fees and Services		108
PART IV
Item 15.	Exhibits, Financial Statements Schedules		108
SIGNATURES			113
Exhibit 10.67
Exhibit 10.68
Exhibit 10.69
Exhibit 10.70
Exhibit 12.0
Exhibit 21.1
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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MARKET, RANKING AND OTHER DATA

We make reference in this report to reports prepared by The Lewin Group, a nationally recognized consultant to the health and human services industries. In 1999, we engaged The Lewin Group to determine how cardiac care services provided in our hospitals compared on measures of patient severity, quality and community impact to cardiac services provided in peer community hospitals across the United States that perform open-heart surgery. The study, which has been updated annually, analyzed publicly available Medicare data for federal fiscal years 2000 through 2006 using an all patient refined-diagnosis related group cardiac mix index. Cardiac case mix index calculations were based on Medicare discharges and were calculated using the general approach used by the Centers for Medicare and Medicaid Services. Quality of care was measured through an analysis of in-hospital mortality, average length of stay, discharge destination and patient complications.

FORWARD-LOOKING STATEMENTS

Some of the statements and matters discussed in this report and in exhibits to this report constitute forward-looking statements. Words such as “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “intends” and “hopes” and variations of such words and similar expressions are intended to identify such forward-looking statements. We have based these statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. The forward-looking statements contained in this report include, among others, statements about the following:

•  the impact of federal and state healthcare reform initiatives,

•  changes in Medicare and Medicaid reimbursement levels,

•  unanticipated delays in achieving expected operating results at our newer hospitals,

•  difficulties in executing our strategy,

•  our relationships with physicians who use our facilities,

•  competition from other healthcare providers,

•  our ability to attract and retain nurses and other qualified personnel to provide quality services to patients in our facilities,

•  our information systems,

•  existing governmental regulations and changes in, or failure to comply with, governmental regulations,

•  liabilities and other claims asserted against us,

•  changes in medical devices or other technologies, and

•  market-specific or general economic downturns.

Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that we will achieve our goals. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report and its exhibits might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. Other than as may be required by federal securities laws to disclose material developments related to previously disclosed information, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We urge you to review carefully all of the information in this report and the discussion of risk factors before making an investment decision with respect to our debt and equity securities.

Unless otherwise noted, the following references in this report will have the meanings below:

•  the terms the “Company,” “MedCath,” “we,” “us” and “our” refer to MedCath Corporation and its consolidated subsidiaries; and

•  references to fiscal years are to our fiscal years ending September 30. For example, “fiscal 2007” refers to our fiscal year ended September 30, 2007.

A copy of this report, including exhibits, is available on the internet site of the Securities and Exchange Commission at http://www.sec.gov or through our website at http://www.medcath.com.

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PART I

Item 1.   Business

Overview

We were incorporated in Delaware in 2001 as a healthcare provider and are focused primarily on providing high acuity services, including the diagnosis and treatment of cardiovascular disease. We own and operate hospitals in partnership with physicians whom we believe have established reputations for clinical excellence. We opened our first hospital in 1996 and currently have ownership interests in and operate 11 hospitals, including nine in which we own a majority interest. Each of our majority-owned hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services with a focus on cardiovascular care. Each of our hospitals has a 24-hour emergency room staffed by emergency department physicians. The hospitals in which we have ownership interests have a total of 667 licensed beds and are located in predominantly high growth markets in eight states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota, and Texas. We are currently developing a new acute care hospital in Kingman, Arizona which we expect to open in Fall 2009. This hospital is designed to accommodate a total of 106 licensed beds and will initially open with 70 licensed beds.

In addition to our hospitals, we currently own and/or manage 25 cardiac diagnostic and therapeutic facilities. Nine of these facilities are located at hospitals operated by other parties and one of these facilities is located at a hospital in which we own a minority interest. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining 11 facilities are not located at hospitals and offer only diagnostic procedures. Effective January 1, 2007, we renamed our diagnostics division “MedCath Partners.” See Note 19 to our consolidated financial statements in Item 8 of this report for financial information by segment.

We believe our facilities provide superior clinical outcomes, which, together with our ability to provide management capabilities and capital resources, positions us to expand upon our relationships with physicians and community hospitals to increase our presence in existing and new markets. Specifically, we plan to increase our revenue and income from operations through a combination of:

•  improved operating performance at our existing facilities;

•  increased capacity and expanded scope of services provided at certain of our existing hospitals;

•  the development of new relationships with physicians in certain of our existing markets;

•  the establishment of new ventures with physicians in new markets; and

•  selective evaluation of acquisitions of specialty and general acute care facilities.

We are subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act) and therefore, we file periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports may be read and copied at the Public Reference Room of the SEC at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (800) SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

We maintain an Internet website at www.medcath.com that investors and interested parties can access, free-of-charge, to obtain copies of all reports, proxy and information statements and other information that the Company submits to the SEC as soon as reasonably practicable after we electronically submit such material to the SEC. This information includes copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.

Investors and interested parties can also submit electronic requests for information directly to the Company at the following e-mail address: ir@medcath.com. Alternatively, communications can be mailed to the attention of “Investor Relations” at the Company’s executive offices.

Information on our website is not incorporated into this Form 10-K or our other securities filings and is not a part of them.

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Our Strengths

Superior Clinical Outcomes.  We believe our hospitals, on average, provide more complex cardiac care, achieve lower mortality rates and a shorter average length of stay, adjusted for patient severity of illness, as compared to our competitors. Since 1999, we have engaged The Lewin Group, a national health and human services consulting group, to conduct a study on cardiovascular patient outcomes based on Medicare hospital inpatient discharge data. The Lewin study, which is updated annually, has consistently concluded that, on average, we treat a more complex mix of cardiac cases as measured by the Medicare case mix index, and our hospitals have lower mortality rates and shorter length of stay, adjusted for severity, for cardiac cases, than peer community hospitals. Specifically, the most recent Lewin study, which is based on 2006 Medicare reimbursement data, concluded that when compared to peer community hospitals, our hospitals, on average and adjusted for severity, had a 21.7% higher case mix for cardiac patients, exhibited a 31.6% lower mortality rate for cardiac cases, and had a shorter length of stay for cardiac cases at 3.26 days as compared to 4.50 days. We believe quality of care is becoming increasingly important in government reimbursement. We continuously monitor quality of care standards to meet and exceed expectations.

Leading Local Market Positions in Growing Markets.  Of our majority-owned hospitals that have been open for at least three years, all eight are ranked number one or two in the local market based on procedures performed in our core business diagnosis-related group (DRG), as reported by Solucient, a leading source of healthcare business information, based on 2006 MedPar data. Historically, 90% to 95% of patients treated in our hospitals reside in markets where the population of those 55 years and older, the primary recipients of cardiac care services, is anticipated to increase on average by 17.6%, from 2007 to 2012, versus the national average of 16.1%, according to U.S. census data.

Efficient Quality Care Delivery Model.  Our hospitals have innovative facility designs and operating characteristics that we believe enhance the quality of patient care and service and improve physician and staff productivity. The innovative characteristics of our hospital designs include:

•  fully-equipped patient rooms capable of providing the majority of services needed during a patient’s entire length of stay;

•  centrally located inpatient ancillary services that reduce the amount of transportation patients must endure;

•  focus on resource allocation and care management through the use of protocols for more consistent and predictable outcomes and expenses.

We believe our care delivery model leads to a high level of patient satisfaction and quality care. We selected NRC Picker to administer our inpatient satisfaction surveys as of January 1, 2006. We have performed well when compared to the NRC Picker Comparative Group with an overall rating of our hospitals of 82.6% compared to 59.9%. Our overall hospital rating increased to 85.1% during our second quarter of fiscal 2007 compared to 64.5%.

Proven Ability to Partner with Physicians.  We partner with physicians and share capital commitments in all of our hospitals and many of our cardiac diagnostic and therapeutic facilities. Physicians practicing at our hospitals participate in shared governance where decisions are made on a wide range of strategic and operational matters, such as development of clinical care protocols, patient procedure scheduling, development of hospital formularies, selection of vendors for high-cost supplies and devices, review of annual operating budgets and significant capital expenditures. The opportunity to have a role in how our hospitals are managed empowers physicians and encourages them to share new ideas, concepts and practices. We attribute our success in partnering with physicians to our ability to develop and effectively manage facilities in a manner that promotes physician productivity, satisfaction and professional success while enhancing the quality and efficiency of patient care services that we provide.

Established Relationships with Community Hospital Systems.  We have management and partnership arrangements with community hospital systems in many of our cardiac diagnostic and therapeutic facilities, and in certain of our hospitals. We attribute our success in establishing relationships with community hospital systems to our proven ability to work effectively with physicians and deliver quality health care. As community hospital systems seek to enhance their networks for patient access and reputation for providing quality health care

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and physician relationships, we believe they will continue to seek alliances and partnerships with other entities in order to accomplish these goals. This partnership approach provides benefits to us in the form of further sharing of capital commitments and enhanced access to managed care relationships. Because of our experience in focused care, quality outcomes and partnering with physicians, we believe we offer expertise that differentiates us in the provider community.

Strong Management Team.  Our management team has extensive experience and relationships in the healthcare industry. Our president and chief executive officer, O. Edwin French, was appointed to this position in February 2006 and has over 39 years of experience in the healthcare industry, most recently serving as president of the Acute Care Hospital Division for Universal Health Services. In March 2006, Phillip J. Mazzuca was named chief operating officer and brings with him over two decades of proprietary hospital operations experience either as chief executive officer or with divisional operations responsibilities. James E. Harris has been our executive vice president and chief financial officer since 1999.

Our Strategy

Key components of our strategy include:

Improve Operating Performance at Our Existing Facilities.  In markets where we have well-established hospitals and cardiac diagnostic and therapeutic facilities, we intend to continue to focus on strengthening management processes and systems in an effort to improve operating performance. We will seek to:

•  improve labor efficiencies by staffing to patient volumes and clinical needs;

•  proactively manage the delivery of health care to achieve appropriate and efficient lengths of stay through the application of technology, medicines, and other resources which have a positive impact on the quality and cost of health care;

•  control supplies expense through more favorable group purchasing arrangements and inventory management;

•  focus efforts on the management of bad debt through improvement in our registration process and upfront collections as well as continued refinement of our business office operations after discharge;

•  consolidate the purchased services contracts for all of our facilities to achieve better pricing; and

•  improve the systems related to patient registration, billing, collections and managed care contracting to improve revenue cycle management.

Increase Patient Capacity and Expand Services at Existing Hospitals.  We intend to invest in our facilities to build out existing capacity and broaden the scope of services provided based on the needs of the communities we serve. We believe demand exists in certain of our existing markets to support the development of currently unutilized space within our existing facilities. We are currently adding 28 beds to our Arkansas Heart Hospital at an estimated cost of $2.8 million and we expect to invest between $15 million and $20 million over the next 18 to 24 months to increase the number of licensed beds in certain of our existing facilities by 107 beds. We believe capital investments to expand capacity in our existing facilities represents an attractive return on invested capital and enables us to better leverage our existing fixed asset base. We expect execution of this strategy will allow us to increase patient volume, improve operating efficiency and better utilize fixed operating costs while maintaining our quality of care.

Furthermore, to increase occupancy and utilization at our hospitals, we intend to expand the scope of procedures performed in certain of our facilities. While we continue to operate some of our facilities with a primary focus on serving the unique needs of patients suffering from cardiovascular disease, we believe we will be able to expand our quality of care service offerings and improve the performance of our facilities by utilizing our expertise in partnering with physicians and operating hospitals by broadening our services to include other high acuity surgical and medical services.

Develop New Relationships with Physicians in Our Existing Markets.  We intend to develop new relationships with physicians to strengthen our competitive position in certain of our existing markets. We believe that our

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relationships with physicians who have a reputation for clinical excellence gives us important insights into the operation and management of our facilities and provides further motivation to provide quality, cost-effective healthcare. Further, as we strengthen our market position, we believe we will improve our ability to develop favorable managed care relationships with, and market the quality of our services to, the communities we serve. We believe this focus on the provision of quality healthcare will continue to increase patient volume.

Pursue Growth Opportunities in New Markets with Physicians and Community Hospital Systems.  We will pursue growth opportunities in new markets by partnering with physicians and community hospital systems. These opportunities are expected to continue our historic focus on providing inpatient and outpatient cardiovascular care while also broadening our services to include other high acuity surgical and medical services. Community hospital systems often have limited access to the resources needed to invest in certain services, including cardiology. We believe that as a result of these limitations, our record of success in providing quality cardiovascular care, partnering with physicians and community hospital systems, and providing capital resources interests many other physicians and community hospital systems in partnering with us to provide cardiovascular care services and/or other surgical and medical services. During the fourth quarter of fiscal 2007, we announced plans to develop a 105 bed general acute care hospital in Kingman, Arizona, which we expect to open in Fall 2009.

Selectively Evaluate Acquisitions and Dispositions.  We may selectively evaluate acquisitions of specialty and general acute care facilities in attractive markets throughout the United States and we will potentially consider acquisitions of facilities where we believe we can improve clinical outcomes and operating performance. We also may consider opportunistic dispositions of hospitals or other facilities where a motivated buyer emerges or the facility does not meet our overall growth or financial return objectives. We will employ a disciplined approach to evaluating and qualifying acquisition and disposition opportunities.

Our Hospitals

We currently have ownership interests in and operate 11 hospitals and have one hospital under development. The following table identifies key characteristics of these hospitals.

		MedCath				Licensed			Cath		Operating
Hospital	Location	Ownership			Opening Date	Beds			Labs		Rooms
Arkansas Heart Hospital	Little Rock, AR		70.3	%	March 1997		84			6		3
Arizona Heart Hospital	Phoenix, AZ		70.6	%	June 1998		59			3		4
Heart Hospital of Austin	Austin, TX		70.9	%	January 1999		58			6		4
Dayton Heart Hospital	Dayton, OH		66.5	%	September 1999		47			4		3
Bakersfield Heart Hospital	Bakersfield, CA		53.3	%	October 1999		47			4		3
Heart Hospital of New Mexico	Albuquerque, NM		72.0	%	October 1999		55			4		3
Avera Heart Hospital of South Dakota(1)	Sioux Falls, SD		33.3	%	March 2001		55			3		3
Harlingen Medical Center(1)	Harlingen, TX		36.0	%	October 2002		112			2		10
Louisiana Medical Center and Heart Hospital(2)	St. Tammany Parish, LA		89.2	%	February 2003		58			3		4
Texsan Heart Hospital	San Antonio, TX		51.0	%	January 2004		60			4		4
Heart Hospital of Lafayette(3)	Lafayette, LA		51.0	%	March 2004		32			2		2
Hualapai Mountain Medical Center(4)	Kingman, AZ		79.2	%	(September 2009)		70	(5)		2		4

(1) Avera Heart Hospital of South Dakota and Harlingen Medical Center are the only hospitals in which we do not have a majority ownership interest as of September 30, 2007. We use the equity method of accounting for these hospitals, which means that we include in our consolidated statements of operations only a percentage of the hospitals’ reported net income (loss) for each reporting period. Harlingen Medical Center was consolidated prior to July 2007 and is included in the consolidated statements of operations for the years ended September 30,

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	2005 and 2006 and for the first three quarters of fiscal 2007 and was included in the consolidated balance sheet as of September 30, 2006 as a consolidated hospital.
(2)	We are currently expanding Louisiana Medical Center and Heart Hospital by 120 general acute care beds. After expansion, the hospital will contain capacity for 178 private rooms.
(3)	Based upon our review of the long-term outlook for Heart Hospital of Lafayette, we decided to seek to dispose of our interest in the facility and entered into a confidentiality and exclusivity agreement with a potential buyer during the fourth quarter of fiscal 2006. Subsequent to September 30, 2007, we completed the disposition of Heart Hospital of Lafayette to the Heart Hospital of Acadiana. Heart Hospital of Acadiana is co-owned by Our Lady of Lourdes, a Lafayette, Louisiana community hospital and local physicians.
(4)	This hospital is under development and is expected to open in the month indicated.
(5)	Hualapai Mountain Medical Center is designed to accommodate 106 inpatient beds, but will initially open with 70 licensed beds.

Before designing and constructing our first hospital, we consulted with our physician partners to analyze the operations, facilities and work flow of existing hospitals and found what we believed to be many inefficiencies in the way cardiovascular care was provided in existing hospitals. Based upon this analysis and our physician partners input, we designed a hospital that we believed would enhance physician and staff productivity and allow for the provision of patient-focused care. Using subsequent operating experience and further input from physicians at our other hospitals, we have refined our basic hospital layout to enable us to combine site selection, facility size and layout, staff and equipment to deliver quality high acuity care and will continue to do so at our existing facilities.

The innovative characteristics of our hospitals include:

Universal Patient Rooms.  Our large, single-patient rooms enable our staff to provide all levels of care required for our patients during their entire hospital stay, including critical care, telemetry and post-surgical care. Each room is equipped as an intensive care unit, which enables us to keep a patient in the same room throughout their recovery. This approach differs from the general acute care hospital model of moving patients, potentially several times, as they recover from surgical procedures.

Centrally Located Inpatient Services.  We have centrally located all services required for inpatients, including radiology, laboratory, pharmacy and respiratory therapy, in close proximity to the patient rooms, which are usually all located on a single floor in the hospital. This arrangement reduces scheduling conflicts and patient waiting time. Additionally, this eliminates the need for costly transportation staff to move patients from floor to floor and department to department.

Strategically Placed Nursing Stations.  Unlike traditional hospitals with large central nursing stations, which serve as many as 30 patients, we have corner configuration nursing stations on our patient floors where each station serves six to eight patients and is located in close proximity to the patient rooms. This design provides for excellent visual monitoring of patients, allows for flexibility in staffing to accommodate the required levels of care, shortens travel distances for nurses, allows for fast response to patient calls and offers proximity to the nursing station for family members.

Efficient Workflow.  We have designed and constructed our various procedure areas in close proximity to each other allowing for both patient safety and efficient staff workflow. For example, our cardiac catheterization laboratories are located in close proximity to our operating rooms, outpatient services are located immediately next to procedure areas and emergency services are located off the staff work corridor leading directly to the diagnostic and treatment areas.

Additional Capacity for Critical Cardiac Procedures.  We design and construct our hospitals with more operating rooms and cardiac catheterization laboratories than we believe are available in the cardiovascular program of a typical general acute care hospital and we believe this increases physician productivity and patient satisfaction. This feature of our hospitals ensures that the physicians practicing in our hospitals will experience fewer conflicts in scheduling procedures for their patients. In addition, all of our operating rooms are designed primarily for cardiovascular procedures, which enable them to be used more efficiently by physicians and staff.

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Diagnostic and Therapeutic Facilities

We have participated in the development of or have acquired interests in, and provide management services to facilities where physicians diagnose and treat cardiovascular disease and manage hospital-based cardiac catheterization laboratories. We also own and operate mobile cardiac catheterization laboratories serving hospital networks and maintain a number of mobile and modular cardiac catheterization laboratories that we lease on a short-term basis. These diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories are equipped to allow the physicians using them to employ a range of diagnostic and treatment options for patients suffering from cardiovascular disease.

Managed Diagnostic and Therapeutic Facilities.  Currently we own and/or manage the operations of 25 cardiac diagnostic and therapeutic facilities. The following table provides information about these facilities.

					MedCath
					Management		Termination
					Commencement		or Next
		MedCath			(Expected Opening)		Renewal
Facility/Entity	Location	Ownership			Date(3)		Date
Joint Ventures:
Cape Cod Cardiology Services, LLC	Hyannis, MA		51	%		1995		Dec. 2015
Greensboro Heart Center, LLC	Greensboro, NC		51	%		2001		July 2031
Center for Cardiac Sleep Medicine, LLC(1)	Lacombe, LA		51	%		2004		Dec. 2013
Blue Ridge Cardiology Services, LLC(1)	Morganton, NC		50	%		2004		Dec. 2014
Managed Ventures:
Cardiac Testing Centers, PA	Summit & Springfield, NJ		100	%(2)		1992		June 2022
Sun City Cardiac Center, Inc.(1)	Sun City, AZ		60	%(2)		1992		Oct. 2032
Heart Institute of Northern Arizona, LLC(1)	Kingman, AZ		100	%(2)		1994		Dec. 2034
Falmouth Hospital(1)	Falmouth, MA		100	%(2)		2002		May 2009
Johnston Memorial Hospital	Smithfield, NC		100	%(2)		2002		Aug. 2008
Watauga Medical Center(1)	Boone, NC		100	%(2)		2003		June 2009
Margaret R. Pardee Memorial Hospital(1)	Hendersonville, NC		100	%(2)		2004		Oct. 2012
Duke Health Raleigh Hospital(1)	Raleigh, NC		100	%(2)		2006		Dec. 2012
Caldwell Cardiology Services	Lenoir, NC		100	%(2)		2006		Mar. 2012
Neurology Associates of the Carolinas(1)	Matthews, NC		100	%(2)		2006		May 2009
Harlingen Sleep Center(1)	Harlingen, TX		100	%(2)		2006		June 2010
Southern Virginia Regional Medical Center(1)	Emporia, VA		100	%(2)		2006		Sept. 2011
Professional Services Agreements:
Greater Philadelphia Cardiology Assoc., Inc.	Philadelphia, PA		100	%(2)		2002		June 2012
PMA Nuclear Center(1)	Newburyport & Haverhill, MA		100	%(2)		2003		Nov. 2008
VNC Sleep(1)	Annandale, VA		100	%(2)		2004		Dec. 2008

(1)	Our management agreement with each of these facilities includes an option for us to extend the initial term at increments ranging from one to 10 years, through an aggregate of up to an additional 40 years for some of the facilities.
(2)	The ownership interest refers to our ownership in the entities that have entered into, and provided services to, the facilities under management services agreements or professional services agreements.
(3)	Calendar year.

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Our management services generally include providing all non-physician personnel required to deliver patient care and the administrative, management and support functions required in the operation of the facility. The physicians who supervise or perform diagnostic and therapeutic procedures at these facilities have complete control over the delivery of cardiovascular healthcare services. The management agreements for each of these centers generally have an extended initial term and several renewal options ranging from one to 10 years each. The physicians and hospitals with which we have contracts to operate these centers may terminate the agreements under certain circumstances. We may terminate most of these agreements for cause or upon the occurrence of specified material adverse changes in the business of the facilities. We intend to develop with hospitals and physician groups, or acquire contracts to manage, additional diagnostic and therapeutic facilities in the future.

Interim Mobile Catheterization Labs.  We maintain a rental fleet of mobile and modular cardiac catheterization laboratories. We lease these laboratories on a short-term basis to hospitals while they are either adding capacity to their existing facilities or replacing or upgrading their equipment. We also lease these laboratories to hospitals that experience a higher demand for cardiac catheterization procedures during a particular season of the year and choose not to expand their own facilities to meet peak period demand. Our rental and modular laboratories are manufactured by leading original equipment manufacturers and have advanced technology and enable cardiologists to perform both diagnostic and interventional therapeutic procedures. Each of our rental units is generally in service for an average of nine months of the year. These units enable us to be responsive to immediate demand and create flexibility in our operations.

Major Procedures Performed at Our Facilities

The following is a brief description of the major cardiovascular procedures physicians perform at our hospitals and other facilities.

Invasive Procedures

Cardiac catheterization:  percutaneous intravascular insertion of a catheter into any chamber of the heart or great vessels for diagnosis, assessment of abnormalities, interventional treatment and evaluation of the effects of pathology on the heart and great vessels.

Percutaneous cardiac intervention, including the following:

•  Atherectomy:  a technique using a cutting device to remove plaque from an artery. This technique can be used for coronary and non-coronary arteries.

•  Angioplasty:  a method of treating narrowing of a vessel using a balloon catheter to dilate the narrowed vessel. If the procedure is performed on a coronary vessel, it is commonly referred to as a percutaneous transluminal coronary angioplasty, or PTCA.

•  Percutaneous balloon angioplasty:  the insertion of one or more balloons across a stenotic heart valve.

•  Stent:  a small expandable wire tube, usually stainless steel, with a self-expanding mesh introduced into an artery. It is used to prevent lumen closure or restenosis. Stents can be placed in coronary arteries as well as renal, aortic and other peripheral arteries. A drug-eluting stent is coated with a drug that is intended to prevent the stent from reclogging with scar tissue after a procedure.

Brachytherapy:  a radiation therapy using implants of radioactive material placed inside a coronary stent with restenosis.

Electrophysiology study:  a diagnostic study of the electrical system of the heart. Procedures include the following:

•  Cardiac ablation:  removal of a part, pathway or function of the heart by surgery, chemical destruction, electrocautery or radio frequency.

•  Pacemaker implant:  an electrical device that can substitute for a defective natural pacemaker and control the beating of the heart by a series of rhythmic electrical discharges.

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•  Automatic Internal Cardiac Defibrillator:  cardioverter implanted in patients at high risk for sudden death from ventricular arrhythmias.

•  Cardiac assist devices:  a mechanical device placed inside of a person’s chest where it helps the heart pump oxygen rich blood throughout the body.

Coronary artery bypass graft surgery:  a surgical establishment of a shunt that permits blood to travel from the aorta to a branch of the coronary artery at a point past the obstruction.

Valve Replacement Surgery:  an open-heart surgical procedure involving the replacement of valves that regulate the flow of blood between chambers in the heart, which have become narrowed or ineffective due to the build-up of calcium or scar tissue or the presence of some other physical damage.

Non-Invasive Procedures

Cardiac magnetic resonance imaging:  a test using a powerful magnet to produce highly detailed, accurate and reproducible images of the heart and surrounding structures as well as the blood vessels in the body without the need for contrast agents.

Echocardiogram with color flow doppler, or ultrasound test:  a test which produces real time images of the interior of the heart muscle and valves, which are used to accurately evaluate heart valve and muscle problems and measure heart muscle damage.

Nuclear treadmill exercise test or nuclear angiogram:  a test which involves the injection of a low level radioactive tracer isotope into the patient’s bloodstream during exercise on a motorized treadmill, which is frequently used to screen patients who may need cardiac catheterization and to evaluate the results in patients who have undergone angioplasty or cardiac surgery.

Standard treadmill exercise test:  a test which involves a patient exercising on a motorized treadmill while the electrical activity of the patient’s heart is measured, which is frequently used to screen for heart disease.

Ultrafast computerized tomography:  a test which can detect the buildup of calcified plaque in coronary arteries before the patient experiences any symptoms.

Employees

As of September 30, 2007, we employed 3,444 persons, including 2,501 full-time and 943 part-time employees. None of our employees is a party to a collective bargaining agreement and we consider our relationships with our employees to be good. There currently is a nationwide shortage of nurses and other medical support personnel, which makes recruiting and retaining these employees difficult. We provide competitive wages and benefits and offer our employees a professional work environment that we believe helps us recruit and retain the staff we need to operate our hospitals and other facilities.

We do not currently employ any practicing physicians at any of our hospitals or other facilities. Our hospitals are staffed by licensed physicians who have been admitted to the medical staffs of individual hospitals. Any licensed physician — not just our physician partners — may apply to be admitted to the medical staff of any of our hospitals, but admission to the staff must be approved by the hospital’s medical staff and governing board in accordance with established credentialing criteria.

Environmental Matters

We are subject to various federal, state and local laws and regulations governing the use, storage, discharge and disposal of hazardous materials, including medical waste products. We believe that all of our facilities and practices comply with these laws and regulations and we do not anticipate that any of these laws will have a material adverse effect on our operations. We cannot predict, however, whether environmental issues may arise in the future.

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Insurance

Like most health care providers, we are subject to claims and legal actions in the ordinary course of business. To cover these claims, we maintain professional malpractice liability insurance and general liability insurance in amounts and with deductibles and levels of self-insured retention that we believe are sufficient for our operations. We also maintain umbrella liability coverage to cover claims not covered by our professional malpractice liability or general liability insurance policies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — General and Professional Liability Risk.”

We can offer no assurances that our professional liability and general liability insurance, nor our recorded reserves for self-insured retention, will cover all claims against us or continue to be available at reasonable costs for us to maintain adequate levels of insurance in the future.

Competition

In executing our business strategy, we compete primarily with other cardiovascular care providers, principally for-profit and not-for-profit general acute care hospitals. We also compete with other companies pursuing strategies similar to ours, and with not-for-profit general acute care hospitals that may elect to develop a hospital. In most of our markets we compete for market share of cardiovascular procedures with two to three hospitals. Some of the hospitals that compete with our hospitals are owned by governmental agencies or not-for-profit corporations supported by endowments and charitable contributions and can finance capital expenditures and operations on a tax-exempt basis. Some of our competitors are larger, are more established, have greater geographic coverage, offer a wider range of services or have more capital or other resources than we do. If our competitors are able to finance capital improvements, recruit physicians, expand services or obtain favorable managed care contracts at their facilities, we may experience a decline in market share. In operating our hospitals, particularly in performing outpatient procedures, we compete with free-standing diagnostic and therapeutic facilities located in the same markets.

Reimbursement

Medicare.  Medicare is a federal program that provides hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Under the Medicare program, we are paid for certain inpatient and outpatient services performed by our hospitals and also for services provided at our diagnostic and therapeutic facilities.

Medicare payments for inpatient acute services are generally made pursuant to a prospective payment system. Under this system, hospitals are paid a prospectively determined fixed amount for each hospital discharge based on the patient’s diagnosis. Specifically, each discharge is assigned to a diagnosis-related group (DRG). Based upon the patient’s condition and treatment during the relevant inpatient stay, each DRG is assigned a fixed payment rate that is prospectively set using national average costs per case for treating a patient for a particular diagnosis. The DRG rates are adjusted by an update factor each federal fiscal year, which begins on October 1. The update factor is determined, in part, by the projected increase in the cost of goods and services that are purchased by hospitals, referred to as the market basket index. DRG payments do not consider the actual costs incurred by a hospital in providing a particular inpatient service; however, such payments are adjusted by a predetermined geographic adjustment factor assigned to the geographic area in which the hospital is located.

While hospitals generally do not receive direct payments in addition to a DRG payment, hospitals may qualify for an outlier payment when the relevant patient’s treatment costs are extraordinarily high and exceed a specified threshold. Outlier payments, which were established by Congress as part of the DRG prospective payment system, are additional payments made to hospitals for treating patients who are costlier to treat than the average patient. In general, a hospital receives outlier payments when its costs, as determined by using gross charges adjusted by the hospital’s cost-to-charge ratio, exceed a certain threshold established annually by the Centers for Medicare and Medicaid Services (CMS). Outlier payments are currently subject to multiple factors including but not limited to: (1) the hospital’s estimated operating costs based on its historical ratio of costs to gross charges; (2) the patient’s case acuity; (3) the CMS established threshold; and, (4) the hospital’s geographic location. CMS is required by law to limit total outlier payments to between five and six percent of total DRG payments. CMS periodically changes the

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threshold in order to bring expected outlier payments within the mandated limit. An increase to the cost threshold reduces total outlier payments by (1) reducing the number of cases that qualify for outlier payments and (2) reducing the dollar amount hospitals receive for those cases that qualify. CMS historically has used a hospital’s most recently settled cost report to set the hospital’s cost-to-charge ratios. Those cost reports are typically two to three years old.

On August 22, 2007, CMS issued its final inpatient hospital prospective payment system rule for fiscal year 2008, which begins October 1, 2007. The final rule continues major DRG reforms designed to improve the accuracy of hospital payments. As introduced in the fiscal year 2007 final rule, CMS will continue to use hospital costs rather than charges to set payment rates. For fiscal year 2008, hospitals will be paid based upon a blend of 1/3 charge-based weights and 2/3 hospital cost-based weights for DRGs. Additionally, CMS adopted its proposal to restructure the current 538 DRGs to 745 MS-DRGs (severity-adjusted DRGs) to better recognize severity of patient illness. These MS-DRGs will be phased in over a two-year period..

Outpatient services are also subject to a prospective payment system. Services provided at our freestanding diagnostic facilities are typically reimbursed on the basis of the physician fee schedule, which is revised periodically, and bases payment on various factors including resource-based practice expense relative value units and geographic practice cost indices.

Future legislation may modify Medicare reimbursement for inpatient and outpatient services provided at our hospitals or services provided at our diagnostic and therapeutic facilities, but we are not able to predict the method or amount of any such reimbursement changes or the effect that such changes will have on us.

Medicaid.  Medicaid is a state-administered program for low-income individuals, which is funded jointly by the federal and individual state governments. Most state Medicaid payments for hospitals are made under a prospective payment system or under programs that negotiate payment levels with individual hospitals. Medicaid reimbursement is often less than a hospital’s cost of services. States periodically consider significantly reducing Medicaid funding, while at the same time in some cases expanding Medicaid benefits. This could adversely affect future levels of Medicaid payments received by our hospitals. We are unable to predict what impact, if any, future Medicaid managed care systems might have on our operations.

The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, court decisions, executive orders and freezes and funding reductions, all of which may adversely affect our business. There can be no assurance that payments for hospital services and cardiac diagnostic and other procedures under the Medicare and Medicaid programs will continue to be based on current methodologies or remain comparable to present levels. In this regard, we may be subject to rate reductions as a result of federal budgetary or other legislation related to the Medicare and Medicaid programs. In addition, various state Medicaid programs periodically experience budgetary shortfalls, which may result in Medicaid payment reductions and delays in payment to us.

Utilization Review.  Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards and are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients be reviewed by quality improvement organizations that analyze the appropriateness of Medicare and Medicaid patient admissions and discharges, quality of care provided, validity of DRG classifications and appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided, assess fines and recommend to the Department of Health and Human Services (HHS) that a provider not in substantial compliance with the standards of the quality improvement organization be excluded from participation in the Medicare program. Most non-governmental managed care organizations also require utilization review.

Annual Cost Reports.  Hospitals participating in the Medicare and some Medicaid programs, whether paid on a reasonable cost basis or under a prospective payment system, are required to meet certain financial reporting requirements. Federal and, where applicable, state regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients.

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Annual cost reports required under the Medicare and some Medicaid programs are subject to routine governmental audits. These audits may result in adjustments to the amounts ultimately determined to be due to us under these reimbursement programs and result in a recoupment of monies paid. Finalization of these audits and determination of amounts earned under these programs often takes several years. Providers can appeal any final determination made in connection with an audit.

Program Adjustments.  The Medicare, Medicaid and other federal health care programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, and requirements for utilization review and new governmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost of providing services and the timing of payment to facilities. The final determination of amounts earned under the programs often requires many years, because of audits by the program representatives, providers’ rights of appeal and the application of numerous technical reimbursement provisions. We believe that we have made adequate provision for such adjustments. Until final adjustment, however, previously determined allowances could become either inadequate or more than ultimately required.

Managed Care.  The percentage of admissions and net revenue attributable at our hospitals and other facilities to managed care plans has increased as a result of pressures to control the cost of healthcare services. We expect that the trend toward increasing percentages related to managed care plans will continue in the future. Generally, we receive lower payments from managed care plans than from traditional commercial/indemnity insurers; however, as part of our business strategy, we intend to take steps to improve our managed care position.

Commercial Insurance.  Our hospitals provide services to individuals covered by private healthcare insurance. Private insurance carriers pay our hospitals or in some cases reimburse their policyholders based upon the hospital’s established charges and the coverage provided in the insurance policy. Commercial insurers are trying to limit the costs of hospital services by negotiating discounts, and including the use of prospective payment systems, which would reduce payments by commercial insurers to our hospitals. Reductions in payments for services provided by our hospitals to individuals covered by commercial insurers could adversely affect us. We cannot predict whether or how payment by third party payors for the services provided by all hospitals and other facilities may change. Modifications in methodology or reductions in payment could adversely affect us.

Regulation

Overview.  The healthcare industry is required to comply with extensive government regulation at the federal, state and local levels. Under these laws and regulations, hospitals must meet requirements to be licensed under state law and be certified to participate in government programs, including the Medicare and Medicaid programs. These requirements relate to matters such as the adequacy of medical care, equipment, personnel, operating policies and procedures, emergency medical care, maintenance of records, relationships with physicians, cost reporting and claim submission, rate-setting, compliance with building codes and environmental protection. There are also extensive government regulations that apply to our owned and managed diagnostic facilities and the physician practices that we manage. If we fail to comply with applicable laws and regulations, we could be subject to criminal penalties and civil sanctions and our hospitals and other facilities could lose their licenses and their ability to participate in the Medicare, Medicaid and other federal and state health care programs. In addition, government laws and regulations, or the interpretation of such laws and regulations, may change. If that happens, we may have to make changes in our facilities, equipment, personnel, services or business structures so that our hospitals and other healthcare facilities remain qualified to participate in these programs. We believe that our hospitals and other health care facilities are in substantial compliance with current federal, state, and local regulations and standards.

The Medicare Modernization Act and Other Healthcare Reform Initiatives

The Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare Modernization Act) made significant changes to the Medicare program, particularly with respect to the coverage of prescription drugs. These modifications also include provisions affecting Medicare coverage and reimbursement to general acute care hospitals, as well as other types of providers.

The healthcare industry continues to attract much legislative interest and public attention. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state

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legislatures that, like the Medicare Modernization Act, would effect major changes in the healthcare system. Proposals that have been considered include changes in Medicare, Medicaid, and other state and federal programs, cost controls on hospitals and mandatory health insurance coverage for employees. We cannot predict the course of future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs and the effect that any legislation, interpretation, or change may have on us.

Licensure and Certification

Licensure and Accreditation.  Our hospitals are subject to state and local licensing requirements. In order to verify compliance with these requirements, our hospitals are subject to periodic inspection by state and local authorities. All of our majority-owned hospitals are licensed as general acute care hospitals under applicable state law. In addition, our hospitals are accredited by the Joint Commission for Accreditation of Health Organizations (JCAHO), a nationwide commission which establishes standards relating to physical plant, administration, quality of patient care and operation of hospital medical staffs.

Certification.  In order to participate in the Medicare and Medicaid programs, each provider must meet applicable regulations of the Department of Health and Human Services (HHS) and similar state entities relating to, among other things, the type of facility, equipment, personnel, standards of medical care and compliance with applicable federal, state and local laws. As part of such participation requirements and effective October 1, 2007, all physician-owned hospitals are required to provide written notice to patients that the hospital is physician-owned. Additionally, as part of a patient safety measure, all Medicare-participating hospitals must provide written notice to patients if a doctor is not present in the hospital 24 hours per day, 7 days a week. All our hospitals and our diagnostic and therapeutic facilities are certified to participate in the Medicare and Medicaid programs.

Emergency Medical Treatment and Active Labor Act.  The Emergency Medical Treatment and Active Labor Act (EMTALA) imposes requirements as to the care that must be provided to anyone who seeks care at facilities providing emergency medical services. In addition, CMS has issued final regulations clarifying those areas within a hospital system that must provide emergency treatment, procedures to meet on-call requirements, as well as other requirements under EMTALA. Sanctions for failing to fulfill these requirements include exclusion from participation in the Medicare and Medicaid programs and civil monetary penalties. In addition, the law creates private civil remedies that enable an individual who suffers personal harm as a direct result of a violation of the law to sue the offending hospital for damages and equitable relief. A hospital that suffers a financial loss as a direct result of another participating hospital’s violation of the law also has a similar right. Although we believe that our emergency care practices are in compliance with the law and applicable regulations, we cannot assure you that governmental officials responsible for enforcing the law or others will not assert that we are in violation of these laws nor what obligations may be imposed by regulations to be issued in the future.

Certificate of Need Laws.  In some states, the construction of new facilities, the acquisition of existing facilities or the addition of new beds or services may be subject to review by state regulatory agencies under a certificate of need program. These laws generally require appropriate state agency determination of public need and approval prior to the addition of beds or services. Currently, we do not operate any hospitals in states that have adopted certificate of need laws. However, these laws may limit our ability to acquire or develop new facilities in states that have such laws. We operate diagnostic facilities in some states with certificate of need laws and we believe they are operated in compliance with applicable requirements or are exempt from such requirements. However, we cannot assure you that government officials will agree with our interpretation of these laws.

Professional Licensure.  Healthcare professionals who perform services at our hospitals and diagnostic and therapeutic facilities are required to be individually licensed or certified under applicable state law. Our facilities are required to have by-laws relating to the credentialing process, or otherwise document appropriate medical staff credentialing. We take steps to ensure that our employees and agents and physicians on each hospital’s medical staff have all necessary licenses and certifications, and we believe that the medical staff members, as well as our employees and agents comply with all applicable state licensure laws as well as any hospital by-laws applicable to credentialing activities. However, we cannot assure you that government officials will agree with our position.

Corporate Practice of Medicine and Fee-Splitting.  Some states have laws that prohibit unlicensed persons or business entities, including corporations, from employing physicians. Some states also have adopted laws that

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prohibit direct or indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violations of these restrictions include loss of a physician’s license, civil and criminal penalties, and rescission of the business arrangements. These laws vary from state to state, are often vague, and in most states have seldom been interpreted by the courts or regulatory agencies. We have attempted to structure our arrangements with healthcare providers to comply with the relevant state law. However, we cannot assure you that governmental officials charged with responsibility for enforcing these laws will not assert that we, or the transactions in which we are involved, are in violation of these laws. These laws may also be interpreted by the courts in a manner inconsistent with our interpretations.

Fraud and Abuse Laws

Overview.  Various federal and state laws govern financial and other arrangements among healthcare providers and prohibit the submission of false or fraudulent claims to the Medicare, Medicaid and other government healthcare programs. Penalties for violation of these laws include civil and criminal fines, imprisonment and exclusion from participation in federal and state healthcare programs. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) broadened the scope of certain fraud and abuse laws by adding several civil and criminal statutes that apply to all healthcare services, whether or not they are reimbursed under a federal healthcare program. Among other things, HIPAA established civil monetary penalties for certain conduct, including upcoding and billing for medically unnecessary goods or services. In addition, the federal False Claims Act allows an individual to bring a lawsuit on behalf of the government, in what are known as qui tam or whistleblower actions, alleging false Medicare or Medicaid claims or other violations of the statute. The use of these private enforcement actions against healthcare providers has increased dramatically in the recent past, in part because the individual filing the initial complaint may be entitled to share in a portion of any settlement or judgment.

Anti-Kickback Statute.  The federal anti-kickback statute prohibits providers of healthcare and others from soliciting, receiving, offering, or paying, directly or indirectly, any type of remuneration in connection with the referral of patients covered by the federal healthcare programs. Violations of the anti-kickback statute may be punished by a criminal fine of up to $25,000 or imprisonment for each violation, civil fines of up to $50,000, damages of up to three times the total dollar amount involved, and exclusion from federal healthcare programs, including Medicare and Medicaid.

As authorized by Congress, the Office of Inspector General of the Department of HHS (OIG) has published safe harbor regulations that describe activities and business relationships that are deemed protected from prosecution under the anti-kickback statute. However, the failure of a particular activity to comply with the safe harbor regulations does not mean that the activity violates the anti-kickback statute. There are safe harbors for various types of arrangements, including those for personal services and management contracts and others for investment interests, such as stock ownership in companies with more than $50 million in undepreciated net tangible assets related to healthcare items and services. This publicly traded company safe harbor contains additional criteria, including that the stock must be obtained on terms and at a price equally available to the public when trading on a registered securities exchange.

The OIG is primarily responsible for enforcing the anti-kickback statute and generally for identifying fraud and abuse activities affecting government programs. In order to fulfill its duties, the OIG performs audits and investigations. In addition, the agency provides guidance to healthcare providers by issuing Special Fraud Alerts and Bulletins that identify types of activities that could violate the anti-kickback statute and other fraud and abuse laws. The OIG has identified the following arrangements with physicians as potential violations of the statute:

•  payment of any incentive by the hospital each time a physician refers a patient to the hospital,

•  use of free or significantly discounted office space or equipment for physicians,

•  provision of free or significantly discounted billing, nursing, or other staff services,

•  free training for a physician’s office staff including management and laboratory techniques,

•  guarantees which provide that if the physician’s income fails to reach a predetermined level, the hospital will pay any portion of the remainder,

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•  low-interest or interest-free loans, or loans which may be forgiven if a physician refers patients to the hospital,

•  payment of the costs of a physician’s travel and expenses for conferences,

•  payment of services which require few, if any, substantive duties by the physician, or payment for services in excess of the fair market value of the services rendered, or

•  purchasing goods or services from physicians at prices in excess of their fair market value.

We have a variety of financial relationships with physicians who refer patients to our hospitals and our other facilities. Physicians own interests in each of our hospitals and some of our cardiac catheterization laboratories. Physicians may also own MedCath Corporation common stock. We also have contracts with physicians providing for a variety of financial arrangements, including leases, management agreements, independent contractor agreements, right of first refusal agreements, and professional service agreements. Although we believe that our arrangements with physicians have been structured to comply with the current law and available interpretations, some of our arrangements do not expressly meet the requirements for safe harbor protection. We cannot assure you that regulatory authorities will not determine that these arrangements violate the anti-kickback statute or other applicable laws. Also, most of the states in which we operate have adopted anti-kickback laws, some of which apply more broadly to all payors, not just to federal health care programs. Many of these state laws do not have safe harbor regulations comparable to the federal anti-kickback law and have only rarely been interpreted by the courts or other government agencies. If our arrangements were found to violate any of these anti-kickback laws we could be subject to criminal and civil penalties and/or possible exclusion from participating in Medicare, Medicaid, or other governmental healthcare programs.

Physician Self-Referral Law.  Section 1877 of the Social Security Act, commonly known as the Stark Law, prohibits physicians from referring Medicare and Medicaid patients for certain designated health services to entities in which they or any of their immediate family members have a direct or indirect ownership or compensation arrangement unless an exception applies. The initial Stark Law applied only to referrals of clinical laboratory services. The statute was expanded in Stark II to apply to ten additional “designated health services,” including inpatient and outpatient hospital services, and some radiology services. Sanctions for violating the Stark Law include civil monetary penalties, including up to $15,000 for each improper claim and $100,000 for any circumvention scheme, and exclusion from the Medicare or Medicaid programs. There are various ownership and compensation arrangement exceptions to the self-referral prohibition, including an exception for a physician’s ownership in an entire hospital — as opposed to an ownership interest in a hospital department — if the physician is authorized to perform services at the hospital. This exception is commonly referred to as the “whole hospital exception.” There is also an exception for ownership of publicly traded securities in a company that has stockholder equity exceeding $75 million at the end of its most recent fiscal year or on average during the three previous fiscal years, as long as the physician acquired the securities on terms generally available to the public and the securities are traded on one of the major exchanges. Exceptions are also provided for many of the customary financial arrangements between physicians and providers, including employment contracts, personal service arrangements, isolated financial transactions, payments by physicians, leases, and recruitment agreements, as long as these arrangements meet certain conditions.

As noted above, the Stark Law prohibits a physician who has a financial relationship with an entity from referring Medicare or Medicaid patients to that entity for certain designated health services. Federal regulations promulgated under the Stark Law clarify that, with respect to indirect ownership interests, common ownership in an entity does not create an indirect ownership interest by one common owner in another common owner. The Stark regulations reiterate the concept that there is no affirmative duty to investigate whether an indirect financial relationship with a referring physician exists, absent information that puts one on notice of such a relationship.

As discussed, there are various ownership and compensation arrangement exceptions to the Stark Law. In addressing the whole hospital exception, the Stark regulations specifically reiterate the statutory requirements for the exception. Additionally, the exception requires that the hospital qualify as a “hospital” under the Medicare program. The Stark Law and the Stark Regulations may also apply to certain compensation arrangements between hospitals and physicians.

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The Deficit Reduction Act of 2005 (DRA) required the Secretary of HHS to develop a plan addressing several issues concerning physician investment in specialty hospitals. In August 2006, HHS submitted its required final report to Congress addressing: (1) proportionality of investment return; (2) bona fide investment; (3) annual disclosure of investment; (4) provision of care to Medicaid beneficiaries; (5) charity care; and (6) appropriate enforcement. The report reaffirms HHS’ intention to implement reforms to increase Medicare payment accuracy in the hospital inpatient prospective and ambulatory surgical center payment systems. HHS also has implemented certain “gainsharing” demonstrations are required by the DRA and other value-based payment approaches designed to align physician and hospital incentives while achieving measurable improvements in quality to care. In addition, HHS now requires transparency in hospital financial arrangements with physicians. Specifically, all hospitals are required to provide HHS information concerning physician investment and compensation arrangements that potentially implicate the physician self-referral statute, and to disclose to patients whether they have physician investors. Hospitals that do not comply in a timely manner with this new disclosure requirement may face civil penalties of $10,000 per day that they are in violation. HHS also announced its position that non-proportional returns on investments and non-bona fide investments may violate the physician self-referral statute and are suspect under the anti-kickback statute. Other components of the plan include providing further guidance concerning what is expected of hospitals that do not have emergency departments under EMTALA and changes in the Medicare enrollment form to identify specialty hospitals. Issuance of the strategic plan coincided with the sunset of a DRA provision suspending enrollment of new specialty hospitals into the Medicare program.

In connection with congressional efforts to reauthorize the State Children’s Health Insurance Program (SCHIP), the Ways and Means Committee of the United States House of Representatives passed a bill which included an amendment to the Stark Law’s whole hospital exception. Under the amendment, the exception would only be available to hospitals having a Medicare provider agreement in effect on July 24, 2007, and adhering to certain additional requirements. As part of these additional requirements, hospitals would be prohibited from increasing the number of their operating rooms and or beds, and aggregate physician ownership would be limited to 40% of the value of the investment interest and any individual physician owner could not exceed 2% of the total investment interests. These provisions of the House SCHIP bill were not included in the compromise SCHIP legislation which was ultimately vetoed by President Bush in October 2007. In November 2007, Congress sent to President Bush another compromise bill which similarly did not include any amendments to the whole hospital exception. President Bush has indicated that he will veto this legislation as well. There can be no assurance that the above amendment to the whole hospital exception, or some variation thereof, would not be enacted into law at some point either as part of the SCHIP legislation or in other legislation.

In July 2007 as part of proposed revisions to the Medicare physician fee scheduled for fiscal year 2008, CMS proposed certain additional changes to the Stark Law. In particular, the proposed rule would revise the Stark Law exception for space and equipment rentals. In instances where a physician leases space or equipment to an entity who accepts patients referred by that physician, the CMS proposal would no longer allow unit-of-service or “per click” payments for such leases. Additionally, the proposed rule would no longer treat “under arrangements” between hospitals and physician-owned entities as compensation instead of ownership relationships. Specifically, the proposal would revise the definition of “entity” under the Stark Law to include not only the entity billing for the service (as is the current definition), but also the entity that has performed the designated health service. If the proposed rule is enacted in its current form, physician-owned entities deemed to be “performing designated health services” would only be protected by satisfying an appropriate Stark Law ownership, rather than compensation, exception.

In November 2007, CMS released its final rule regarding the Medicare physician fee scheduled for fiscal year 2008. The final rule does not finalize the proposals regarding lease payments and under arrangements. Instead, CMS intends to publish a separate final rule addressing these provisions given the numerous comments received and significance of the proposals.

In September 2007, CMS published the third phase of Stark regulations. While these regulations are intended to be the final phase of the Stark rulemaking process, based upon the above and several comments by CMS in the preamble, it is likely that significant additional Stark Law changes will be proposed and perhaps adopted. None of the provisions published in September 2007 impact the Stark Law’s whole hospital exception or otherwise affect our business.

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There have been few enforcement actions taken and relatively few cases interpreting the Stark Law to date, although one case struck down an aspect of the Stark regulations relating to the Stark Law’s applicability to certain types of services. As a result, there is little indication as to how courts will interpret and apply the Stark Law; however, enforcement is expected to increase. We believe we have structured our financial arrangements with physicians to comply with the statutory exceptions included in the Stark Law and the Stark regulations. In particular, we believe that our physician ownership arrangements meet the whole hospital exception. In addition, we expect to meet the exception for publicly traded securities or indirect compensation arrangements, as appropriate. The diagnostic and other facilities that we own do not furnish any designated health services as defined under the Stark regulations, and thus referrals to them are not subject to the Stark Law’s prohibitions. Similarly, our consulting and management services to physician group practices are not subject to the Stark Law’s prohibitions.

Possible amendments to the Stark Law, including any modification or revocation of the whole hospital exception upon which we rely in establishing many of our relationships with physicians, could require us to change or adversely impact the manner in which we establish relationships with physicians to develop and operate a facility, as well as our other business relationships such as joint ventures and physician practice management arrangements. We note that legislation has been introduced in Congress recently and in the past seeking to limit or restrict the whole hospital exception. There can be no assurance that future legislation will not seek to modify, limit, restrict, or revoke the whole hospital exception.

Moreover, states in which we operate periodically consider adopting physician self-referral laws, which may prohibit certain physician referrals or require certain disclosures. Some of these state laws would apply regardless of the source of payment for care. These statutes typically provide criminal and civil penalties as well as loss of licensure and may have broader prohibitions than the Stark Law or more limited exceptions. While there is little precedent for the interpretation or enforcement of these state laws, we believe we have structured our financial relationships with physicians and others to comply with applicable state laws. In addition, existing state self-referral laws may be amended. We cannot predict whether new state self-referral laws or amendments to existing laws will be enacted or, once enacted, their effect on us, and we have not researched pending legislation in all the states in which our hospitals are located.

Civil Monetary Penalties.  The Social Security Act contains provisions imposing civil monetary penalties for various fraudulent and/or abusive practices, including, among others, hospitals which knowingly make payments to a physician as an inducement to reduce or limit medically necessary care or services provided to Medicare or Medicaid beneficiaries. In July 1999, the OIG issued a Special Advisory Bulletin on gainsharing arrangements. The bulletin warns that clinical joint ventures between hospitals and physicians may implicate these provisions as well as the anti-kickback statute, and specifically refers to specialty hospitals, which are marketed to physicians in a position to refer patients to the hospital, and structured to take advantage of the whole hospital exception. Hospitals specializing in heart, orthopedic, and maternity care are mentioned, and the bulletin states that these hospitals may induce investor-physicians to reduce services to patients through participation in profits generated by cost savings, in violation of a civil monetary penalty provision. Despite this initial broad interpretation of this civil monetary penalty law, in 2005 the OIG issued six advisory opinions which declined to sanction a particular gainsharing arrangement under this civil monetary penalty provision, or the anti-kickback statute, because of the specific circumstances and safeguards built into the arrangement. We believe that the ownership distributions paid to physicians by our hospitals do not constitute payments made to physicians under gainsharing arrangements. We cannot assure you, however, that government officials will agree with our interpretation of applicable law.

False Claims Prohibitions.  False claims are prohibited by various federal criminal and civil statutes. In addition, the federal False Claims Act prohibits the submission of false or fraudulent claims to the Medicare, Medicaid, and other government healthcare programs. Penalties for violation of the False Claims Act include substantial civil and criminal fines, including treble damages, imprisonment, and exclusion from participation in federal health care programs. In addition, the False Claims Act allows an individual to bring lawsuits on behalf of the government, in what are known as qui tam or whistleblower actions, alleging false Medicare or Medicaid claims or other violations of the statute.

A number of states, including states in which we operate, have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court. In fact, the

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DRA contains provisions which create incentives for states to enact anti-fraud legislation modeled after the federal False Claims Act.

Healthcare Industry Investigations

The federal government, private insurers and various state enforcement agencies have increased their scrutiny of providers’ business arrangements and claims in an effort to identify and prosecute fraudulent and abusive practices. There are ongoing federal and state investigations in the healthcare industry regarding multiple issues including cost reporting, billing and charge-setting practices, unnecessary utilization, physician recruitment practices, physician ownership of healthcare providers and joint ventures with hospitals. Certain of these investigations have targeted hospitals and physicians. We have substantial Medicare, Medicaid and other governmental billings, which could result in heightened scrutiny of our operations. We continue to monitor these and all other aspects of our business and have developed a compliance program to assist us in gaining comfort that our business practices are consistent with both legal requirements and current industry standards. However, because the federal and state fraud and abuse laws are complex and constantly evolving, we cannot assure you that government investigations will not result in interpretations that are inconsistent with industry practices, including ours. Evolving interpretations of current, or the adoption of new federal or state laws or regulations could affect many of the arrangements entered into by each of our hospitals. In public statements surrounding current investigations, governmental authorities have taken positions on a number of issues, including some for which little official interpretation previously has been available, that appear to be inconsistent with practices that have been common within the industry and that previously have not been challenged in this manner. In some instances, government investigations that in the past have been conducted under the civil provisions of federal law may now be conducted as criminal investigations.

A number of healthcare investigations are national initiatives in which federal agencies target an entire segment of the healthcare industry. One example involved the federal government’s initiative regarding hospitals’ improper requests for separate payments for services rendered to a patient on an outpatient basis within three days prior to the patient’s admission to the hospital, where reimbursement for such services is included as part of the reimbursement for services furnished during an inpatient stay. The government targeted all hospital providers to ensure conformity with this reimbursement rule. Further, the federal government continues to investigate Medicare overpayments to prospective payment system hospitals that incorrectly report transfers of patients to other prospective payment system hospitals as discharges. Law enforcement authorities, including the OIG and the United States Department of Justice, are also increasing scrutiny of various types of arrangements between healthcare providers and potential referral sources, including so-called contractual joint ventures, to ensure that the arrangements are not designed as a mechanism to exchange remuneration for patient care referrals and business opportunities. Investigators have also demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purpose of payments between healthcare providers and potential referral sources. Recently, the OIG has also begun to investigate certain hospitals with a particularly high proportion of Medicare reimbursement resulting from outlier payments. The OIG’s workplan has indicated its intention to review hospital privileging activities within the context of Medicare conditions of participation.

It is possible that governmental or regulatory authorities could initiate investigations on these or other subjects at our facilities and such investigations could result in significant costs in responding to such investigations and penalties to us, as well as adverse publicity, declines in the value of our equity and debt securities and lawsuits brought by holders of those securities. It is also possible that our executives, managers and hospital board members, many of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation. The positions taken by authorities in any investigations of us, our executives, managers, hospital board members or other healthcare providers, and the liabilities or penalties that may be imposed could have a material adverse effect on our business, financial condition and results of operations.

Clinical Trials at Hospitals

Our hospitals serve as research sites for physician clinical trials sponsored by pharmaceutical and device manufacturers and therefore may perform services on patients enrolled in those studies, including implantation of

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experimental devices. Only physicians who are members of the medical staff of the hospital may participate in such studies at the hospital. All trials are approved by an Institutional Review Board (IRB), which has the responsibility to review and monitor each study pursuant to applicable law and regulations. Such clinical trials are subject to numerous regulatory requirements.

The industry standard for conducting preclinical testing is embodied in the investigational new drug regulations administered by the federal Food and Drug Administration (the FDA). Research conducted at institutions supported by funds from the National Institutes of Health must also comply with multiple project assurance agreements and with regulations and guidelines governing the conduct of clinical research that are administered by the National Institutes of Health, the HHS Office of Research Integrity, and the Office of Human Research Protection. Research funded by the National Institutes of Health must also comply with the federal financial reporting and record keeping requirements incorporated into any grant contract awarded. The requirements for facilities engaging in clinical trials are set forth in the code of federal regulations and published guidelines. Regulations related to good clinical practices and investigational new drugs have been mandated by the FDA and have been adopted by similar regulatory authorities in other countries. These regulations contain requirements for research, sponsors, investigators, IRBs, and personnel engaged in the conduct of studies to which these regulations apply. The regulations require that written protocols and standard operating procedures are followed during the conduct of studies and for the recording, reporting, and retention of study data and records. CMS also imposes certain requirements for billing of services provided in connection with clinical trials.

The FDA and other regulatory authorities require that study results and data submitted to such authorities are based on studies conducted in accordance with the provisions related to good clinical practices and investigational new drugs. These provisions include:

•  complying with specific regulations governing the selection of qualified investigators,

•  obtaining specific written commitments from the investigators,

•  disclosure of financial conflicts-of-interest,

•  verifying that patient informed consent is obtained,

•  instructing investigators to maintain records and reports,

•  verifying drug or device safety and efficacy, and

•  permitting appropriate governmental authorities access to data for their review.

Records for clinical studies must be maintained for specific periods for inspection by the FDA or other authorities during audits. Non-compliance with the good clinical practices or investigational new drug requirements can result in the disqualification of data collected during the clinical trial. It may also lead to debarment of an investigator or institution or False Claims Act allegations if fraud or substantial non-compliance is detected, and subject a hospital to a recoupment of payments for services that are not covered by federal health care programs. Finally, non-compliance could lead to revocation or non-renewal of government research grants.

Failure to comply with new or revised applicable federal, state, and international clinical trial laws existing laws and regulations could subject us and physician investigators to loss of the right to conduct research, civil fines, criminal penalties, and other enforcement actions.

Finally, new final rules have been adopted by HHS related to the responsibilities of healthcare entities to maintain the privacy of patient identifiable medical information. See “— Privacy and Security Requirements.” We have implemented new policies in an attempt to comply with these rules as they apply to clinical research, including procedures to obtain all required patient authorizations. However, there is little or no guidance available as to how these rules will be enforced.

Privacy and Security Requirements

HIPAA requires the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce

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in the healthcare industry. HHS has adopted final regulations establishing electronic data transmission standards that all healthcare providers must use when submitting or receiving certain healthcare transactions electronically. We believe we have complied in all material respects with these electronic data transmission standards.

HHS has also adopted final regulations containing privacy standards as required by HIPAA. The privacy regulations extensively regulate the use and disclosure of individually identifiable health-related information. We have taken extensive measures to comply with the final privacy regulations, but since there is little guidance about how these regulations will be enforced by the government, we cannot predict whether the government will agree that our healthcare facilities are in compliance.

HHS has adopted final regulations regarding security standards. These security regulations require healthcare providers to implement organizational and technical practices to protect the security of electronically maintained or transmitted health-related information. We believe we have complied in all material respects with these security standards.

Violations of the Administrative Simplification Provisions of HIPAA could result in civil penalties of up to $25,000 per type of violation in each calendar year and criminal penalties of up to $250,000 per violation. In addition, our facilities continue to remain subject to state laws that may be more restrictive than the regulations issued under HIPAA. These statutes vary by state and could impose additional penalties.

Compliance Program

The OIG has issued guidelines to promote voluntarily developed and implemented compliance programs for the healthcare industry. In response to these guidelines, we adopted a code of ethics, designated compliance officers at the parent company level and individual hospitals, established a toll-free compliance line, which permits anonymous reporting, implemented various compliance training programs, and developed a process for screening all employees through applicable federal and state databases.

We have established a reporting system, auditing and monitoring programs, and a disciplinary system to enforce the code of ethics, and other compliance policies. Auditing and monitoring activities include claims preparation and submission, and cover numerous issues such as coding, billing, cost reporting, and financial arrangements with physicians and other referral sources. These areas are also the focus of training programs.

Our policy is to require our officers and employees to participate in compliance training programs. The board of directors has established a compliance committee, which oversees implementation of the compliance program.

The committee consists of three outside directors, and is chaired by Galen Powers, a former chief counsel for the Health Care Financing Administration (now known as CMS), where he was responsible for providing legal advice on federal healthcare programs, particularly Medicare and Medicaid. The compliance committee of the board meets at least quarterly.

Joan McCanless, the Chief Clinical and Compliance Officer reports to the chief executive officer for day-to-day compliance matters and at least quarterly to the compliance committee of the board. The corporate compliance officer is a senior vice president, and has a background in nursing and hospital administration. Each hospital has its own compliance committee and compliance officer that reports to its governing board. The compliance committee of the board of directors assesses each hospital’s compliance program at least annually. The corporate compliance officer annually assesses the hospitals for compliance reviews, provides an audit guide to the hospitals to evaluate compliance with our policies and procedures and serves on the compliance committee of each hospital.

The objective of the program is to ensure that our operations at all levels are conducted in compliance with applicable federal and state laws regarding both public and private healthcare programs.

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Executive Officers of MedCath Corporation

The following table sets forth information regarding MedCath’s executive officers.

Name	Age		Position
O. Edwin French		61	President and Chief Executive Officer
Phillip J. Mazzuca		48	Executive Vice President, Chief Operating Officer
James E. Harris		45	Executive Vice President, Chief Financial Officer and Secretary
Joan McCanless		54	Senior Vice President, Chief Clinical and Compliance Officer

O. Edwin French has served as MedCath’s President and Chief Executive Officer since February 2006. Mr. French served as MedCath’s Interim Chief Operating Officer from October 2005 to February 2006. Prior to joining MedCath, Mr. French served as president of the Acute Care Hospital Division of Universal Health Services, Inc. until his early retirement in 2005. Since then, he has served as president of French Healthcare Consulting, Inc., a consulting firm specializing in operations improvement and joint ventures. He also served as president and chief operating officer of Physician Reliance Network from 1997 to 2000, as senior vice president for healthcare companies of American Medical from 1992 to 1995, as executive vice president of Samaritan Health Systems of Phoenix (Samaritan) from 1991 to 1992 and as senior vice president of Methodist Health Systems, Inc. (Methodist) in Memphis from 1985 to 1991. Both Samaritan and Methodist are large not-for-profit hospital systems. Mr. French received his undergraduate degree in occupational education from Southern Illinois University.

Phillip J. Mazzuca has served as MedCath’s Executive Vice President and Chief Operating Officer since March 2006. From 2001 to 2006, Mr. Mazzuca served as the president of the Florida and Texas divisions of IASIS Healthcare LLC. From 1999 to 2001, Mr. Mazzuca was the chief executive officer of Town and Country Hospital, an acute care hospital in Tampa, Florida. Mr. Mazzuca received his undergraduate degree from Valparaiso University and a masters degree in hospital and healthcare administration from the University of Alabama in Birmingham.

James E. Harris has served as MedCath’s Executive Vice President and Chief Financial Officer since December 1999. From 1998 to 1999, Mr. Harris was chief financial officer of Fresh Foods, Inc., a manufacturer of fully cooked food products. From 1987 to 1998, Mr. Harris served in several different officer positions with The Shelton Companies, Inc., a private investment company. Prior to joining The Shelton Companies, Inc., Mr. Harris served two years with Ernst & Young LLP as a senior accountant. Mr. Harris received his undergraduate degree from Appalachian State University and a masters degree in business administration from Wake Forest University’s Babcock School of Management. Mr. Harris is a director of Coca-Cola Bottling Co. Consolidated.

Joan McCanless has served as MedCath’s Senior Vice President and Chief Clinical and Compliance Officer since May 2006. From 1996 to May 2006, she served as Senior Vice President of Risk Management and Decision Support. From 1993 to 1996, Ms. McCanless served as a principal of Decision Support Systems, Inc., a healthcare software and consulting firm that she co-founded. Prior to that, she was employed at the Charlotte Mecklenburg Hospital Authority where she served as vice president of administration, a department director, head nurse and staff nurse. Ms. McCanless received her undergraduate degree in nursing from the University of North Carolina at Charlotte.

Item 1A.   Risk Factors

You should carefully consider and evaluate all of the information included in this report, including the risk factors set forth below before making an investment decision with respect to our securities. The following is not an exhaustive discussion of all of the risks facing our company. Additional risks not presently known to us or that we currently deem immaterial may impair our business operations and results of operations.

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If the anti-kickback, physician self-referral or other fraud and abuse laws are modified, interpreted differently or if other regulatory restrictions become effective, we could incur significant civil or criminal penalties and loss of reimbursement or be required to revise or restructure aspects of our business arrangements.

The federal anti-kickback statute prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring items or services payable by Medicare, Medicaid or any other federal healthcare program. The anti-kickback statute also prohibits any form of remuneration in return for purchasing, leasing or ordering or arranging for or recommending the purchasing, leasing or ordering of items or services payable by these programs. The anti-kickback statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law, regulations or advisory opinions.

Violations of the anti-kickback statute may result in substantial civil or criminal penalties, including criminal fines of up to $25,000 for each violation or imprisonment and civil penalties of up to $50,000 for each violation, plus three times the amount claimed and exclusion from participation in the Medicare, Medicaid and other federal healthcare reimbursement programs. Any exclusion of our hospitals or diagnostic and therapeutic facilities from these programs would result in significant reductions in revenue and would have a material adverse effect on our business.

The requirements of the physician self-referral statute, or Stark Law, are very complex and while federal regulations have been issued to implement all of its provisions, proper interpretation and application of the statute remains challenging. The Stark Law prohibits a physician who has a “financial relationship” with an entity from referring Medicare or Medicaid patients to that entity for certain “designated health services.” A “financial relationship” includes a direct or indirect ownership or investment interest in the entity, and a compensation arrangement between the physician and the entity. Designated health services include some radiology services and inpatient and outpatient services.

There are various ownership and compensation arrangement exceptions to this self-referral prohibition. Our hospitals rely upon the whole hospital exception to allow referrals from physician investors. Under this ownership exception, physicians may make referrals to a hospital in which he or she has an ownership interest if (1) the physician is authorized to perform services at the hospital and (2) the ownership interest is in the entire hospital, as opposed to a department or a subdivision of the hospital. Another exception for ownership of publicly traded securities permits physicians who own shares of our common stock to make referrals to our hospitals, provided our stockholders’ equity exceeded $75.0 million at the end of our most recent fiscal year or on average during the three previous fiscal years. This exception applies if, prior to the time the physician makes a referral for a designated health service to a hospital, the physician acquired the securities on terms generally available to the public and the securities are traded on one of the major exchanges.

In connection with congressional efforts to reauthorize SCHIP, the Ways and Means Committee of the United States House of Representatives passed a bill which included an amendment to the Stark Law’s whole hospital exception. Under the amendment, the exception would only be available to hospitals having a Medicare provider agreement in effect on July 24, 2007, and adhering to certain additional requirements. As part of these additional requirements, hospitals would be prohibited from increasing the number of their operating rooms and or beds, and aggregate physician ownership would be limited to 40% of the value of the investment interest and any individual physician owner could not exceed 2% of the total investment interests. These provisions of the House SCHIP bill were not included in the compromise SCHIP legislation which was ultimately vetoed by President Bush in October 2007. In November 2007, Congress sent to President Bush another compromise bill which similarly did not include any amendments to the whole hospital exception. President Bush has indicated that he will veto this legislation as well. There can be no assurance that the above amendment to the whole hospital exception, or some variation thereof, would not be enacted into law at some point in the future either as part of the SCHIP legislation or in other legislation.

In July 2007 as part of proposed revisions to the Medicare physician fee scheduled for fiscal year 2008, CMS proposed certain additional changes to the Stark Law. In particular, the proposed rule would revise the Stark Law exception for space and equipment rentals. In instances where a physician leases space or equipment to an entity who accepts patients referred by that physician, the CMS proposal would no longer allow unit-of-service or “per

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click” payments for such leases. Additionally, the proposed rule would no longer treat “under arrangements” between hospitals and physician-owned entities as compensation instead of ownership relationships. Specifically, the proposal would revise the definition of “entity” under the Stark Law to include not only the entity billing for the service (as is the current definition), but also the entity that has performed the designated health service. If the proposed rule is enacted in its current form, physician-owned entities deemed to be “performing designated health services” would only be protected by satisfying an appropriate Stark Law ownership, rather than compensation, exception.

In November 2007, CMS released its final rule regarding the Medicare physician fee scheduled for fiscal year 2008. The final rule does not finalize the proposals regarding lease payments and under arrangements. Instead, CMS intends to publish a separate final rule addressing these provisions given the numerous comments received and significance of the proposals.

In September 2007, CMS published the third phase of the Stark Law final regulations. While these regulations are intended to be the final phase of the Stark Law rulemaking process, based upon the above and several comments by CMS in the preamble to the new regulations, it is likely that significant additional Stark Law changes will be proposed and perhaps adopted. None of the recently adopted regulations impact the Stark Law’s whole hospital exception or otherwise affect our business.

Possible amendments to the Stark Law, the federal anti-kickback law or other applicable regulations, including the proposed amendments to SCHIP and the CMS proposal described above, could require us to change or adversely impact the manner in which we establish relationships with physicians to develop and operate a hospital, as well as our other business relationships such as joint ventures and physician practice management arrangements. We rely on the whole hospital exception in structuring our hospital ownership relationships with physicians. There can be no assurance that future legislation will not seek to further restrict or eliminate the whole hospital exception. Any such legislation could adversely affect our business and cause us to reorganize our relationships with physicians. Moreover, many states in which we operate also have adopted, or are considering adopting, similar or more restrictive physician self-referral laws. Some of these laws prohibit referrals of patients by physicians in certain cases and others require disclosure of the physician’s interest in the healthcare facility if the physician refers a patient to the facility. Some of these state laws apply even if the payment for care does not come from the government.

Reductions or changes in reimbursement from government or third-party payors could adversely impact our operating results.

Historically, Congress and some state legislatures have, from time to time, proposed significant changes in the healthcare system. Many of these changes have resulted in limitations on, and in some cases, significant reductions in the levels of, payments to healthcare providers for services under many government reimbursement programs. Recent budget proposals, if enacted in their current form, would freeze and/or reduce reimbursement for inpatient and outpatient hospital services. The Medicare hospital inpatient prospective payment system is evaluated on an annual basis. On August 22, 2007, CMS issued its final inpatient hospital prospective payment system rule for fiscal year 2008, which begins October 1, 2007. The final rule continues major DRG reforms designed to improve the accuracy of hospital payments. As introduced in the fiscal year 2007 final rule, CMS will continue to use hospital costs rather than charges to set payment rates. For fiscal year 2008, hospitals will be paid based upon a blend of 1/3 charge-based weights and 2/3 hospital cost-based weights for DRGs. Additionally, CMS adopted its proposal to restructure the current 538 DRGs to 745 MS-DRGs (severity-adjusted DRGs) to better recognize severity of patient illness. These MS-DRGs will be phased in over a two-year period. Effective fiscal year 2009, CMS has identified eight conditions that will not be paid at a higher rate unless they were present on admission, including three serious preventable events deemed “never events.”

During the fiscal years ended September 30, 2007 and 2006, we derived 46.3% and 49.4%, respectively, of our net revenue from the Medicare and Medicaid programs. We derived an even higher percentage of our net revenue in each of these fiscal periods from these programs in our hospital division, which for our most recent fiscal quarter represented 47.8% of our net revenue. Changes in laws or regulations governing the Medicare and Medicaid

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programs or changes in the manner in which government agencies interpret them could materially and adversely affect our operating results or financial position.

Our relationships with third-party payors are generally governed by negotiated agreements or out of network arrangements. These agreements set forth the amounts we are entitled to receive for our services. Third-party payors have undertaken cost-containment initiatives during the past several years, including different payment methods, monitoring healthcare expenditures and anti-fraud initiatives, that have made these relationships more difficult to establish and less profitable to maintain. We could be adversely affected in some of the markets where we operate if we are unable to establish favorable agreements with third-party payors or satisfactory out of network arrangements.

If we fail to comply with the extensive laws and government regulations applicable to us, we could suffer penalties or be required to make significant changes to our operations.

We are required to comply with extensive and complex laws and regulations at the federal, state and local government levels. These laws and regulations relate to, among other things:

•  licensure, certification and accreditation,

•  billing, coverage and reimbursement for supplies and services,

•  relationships with physicians and other referral sources,

•  adequacy and quality of medical care,

•  quality of medical equipment and services,

•  qualifications of medical and support personnel,

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

•  the screening, stabilization and transfer of patients who have emergency medical conditions,

•  building codes,

•  environmental protection,

•  clinical research,

•  operating policies and procedures, and

•  addition of facilities and services.

Many of these laws and regulations are expansive, and we do not always have the benefit of significant regulatory or judicial interpretation of them. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs, operating procedures, and contractual arrangements.

If we fail to comply with applicable laws and regulations, we could be subjected to liabilities, including:

•  criminal penalties,

•  civil penalties, including monetary penalties and the loss of our licenses to operate one or more of our facilities, and

•  exclusion of one or more of our facilities from participation in the Medicare, Medicaid and other federal and state healthcare programs.

A number of initiatives have been proposed during the past several years to reform various aspects of the healthcare system at the federal level and in the states in which we operate. Current or future legislative initiatives, government regulations or other government actions may have a material adverse effect on us.

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Companies within the healthcare industry continue to be the subject of federal and state investigations.

Both federal and state government agencies as well as private payors have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare organizations including hospital companies. Like others in the healthcare industry, we receive requests for information from these governmental agencies in connection with their regulatory or investigative authority which, if determined adversely to us, could have a material adverse effect on our financial condition or our results of operations.

In addition, the Office of Inspector General and the U.S. Department of Justice have, from time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Moreover, healthcare providers are subject to civil and criminal false claims laws, including the federal False Claims Act, which allows private parties to bring what are called whistleblower lawsuits against private companies doing business with or receiving reimbursement under government programs. These are sometimes referred to as “qui tam” lawsuits.

Because qui tam lawsuits are filed under seal, we could be named in one or more such lawsuits of which we are not aware or which cannot be disclosed until the court lifts the seal from the case. Defendants determined to be liable under the False Claims Act may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. Typically, each fraudulent bill submitted by a provider is considered a separate false claim, and thus the penalties under a false claim case may be substantial. Liability arises when an entity knowingly submits a false claim for reimbursement to a federal health care program. In some cases, whistleblowers or the federal government have taken the position that providers who allegedly have violated other statutes, such as the anti-kickback statute or the Stark Law, have thereby submitted false claims under the False Claims Act. Thus, it is possible that we have liability exposure under the False Claims Act.

Some states have adopted similar state whistleblower and false claims provisions. Publicity associated with the substantial amounts paid by other healthcare providers to settle these lawsuits may encourage current and former employees of ours and other healthcare providers to seek to bring more whistleblower lawsuits. Some of our activities could become the subject of governmental investigations or inquiries. Any such investigations of us, our executives or managers could result in significant liabilities or penalties to us, as well as adverse publicity.

In October 2007, we reached an agreement with the DOJ and the United States Attorneys’ Office in Phoenix, Arizona regarding clinical trials at the Arizona Heart Hospital, one of the 11 hospitals in which we own an interest. The settlement concerns Medicare claims submitted between June 1998 and October 2002 for physician services involving the implantation of certain endoluminal graft devices (utilized to treat aneurysms) that had not received final marketing approval from the FDA, and allegedly were either implanted without an approved investigational device exception (IDE) or were implanted outside of the approved IDE protocol. The DOJ allegations did not involve patient care and related solely to whether the procedures were properly reimbursable by Medicare. The parties reached a settlement of the allegations to avoid the delay, uncertainty, inconvenience, and expense of protracted litigation. Further, the hospital denies engagement in any wrongdoing or illegal conduct, and the settlement agreement does not contain any admission of liability. As disclosed in previous filings, the hospital agreed to pay approximately $5.8 million to settle and obtain a release from any civil or administrative monetary claims related to the DOJ’s investigation. Additionally, the hospital has entered into a five-year corporate integrity agreement with the OIG under which the hospital will continue to maintain its existing corporate compliance program and which relates to clinical trials conducted at the hospital. The $5.8 million was paid to the DOJ subsequent to September 30, 2007.

If laws governing the corporate practice of medicine change, we may be required to restructure some of our relationships.

The laws of various states in which we operate or may operate in the future do not permit business corporations to practice medicine, exercise control over physicians who practice medicine or engage in various business practices, such as fee-splitting with physicians. The interpretation and enforcement of these laws vary significantly from state to state. We are not required to obtain a license to practice medicine in any jurisdiction in which we own or operate a hospital or other facility because our facilities are not engaged in the practice of medicine. The

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physicians who use our facilities to provide care to their patients are individually licensed to practice medicine. In most instances, the physicians and physician group practices are not affiliated with us other than through the physicians’ ownership interests in the facility and through the service and lease agreements we have with some of these physicians. Should the interpretation, enforcement or laws of the states in which we operate or may operate change, we cannot assure you that such changes would not require us to restructure some of our physician relationships.

If government laws or regulations change or the enforcement or interpretation of them change, we may be obligated to purchase some or all of the ownership interests of the physicians associated with us.

Changes in government regulation or changes in the enforcement or interpretation of existing laws or regulations could obligate us to purchase at the then fair market value some or all of the ownership interests of the physicians who have invested in the ventures that own and operate our hospitals and other healthcare businesses. Regulatory changes that could create this obligation include changes that:

•  make illegal the referral of Medicare or other patients to our hospitals and other healthcare businesses by physicians affiliated with us,

•  create the substantial likelihood that cash distributions from the hospitals and other healthcare businesses to our physician partners will be illegal, or

•  make illegal the ownership by our physician partners of their interests in the hospitals and other healthcare businesses.

From time to time, we may voluntarily seek to increase our ownership interest in one or more of our hospitals and other healthcare businesses, in accordance with any applicable limitations. We may seek to use shares of our common stock to purchase physicians’ ownership interests instead of cash. If the use of our stock is not permitted or attractive to us or our physician partners, we may use cash or promissory notes to purchase the physicians’ ownership interests. Our existing capital resources may not be sufficient for the acquisition or the use of cash may limit our ability to use our capital resources elsewhere, limiting our growth and impairing our operations. The creation of these obligations and the possible adverse effect on our affiliation with these physicians could have a material adverse effect on us.

We may have fiduciary duties to our partners that may prevent us from acting solely in our best interests.

We hold our ownership interests in hospitals and other healthcare businesses through ventures organized as limited liability companies or limited partnerships. As general partner, manager or owner of the majority interest in these entities, we may have special legal responsibilities, known as fiduciary duties, to our partners who own an interest in a particular entity. Our fiduciary duties include not only a duty of care and a duty of full disclosure but also a duty to act in good faith at all times as manager or general partner of the limited liability company or limited partnership. This duty of good faith includes primarily an obligation to act in the best interest of each business, without being influenced by any conflict of interest we may have as a result of our own business interests.

We also have a duty to operate our business for the benefit of our stockholders. As a result, we may encounter conflicts between our fiduciary duties to our partners in our hospitals and other healthcare businesses, and our responsibility to our stockholders. For example, we have entered into management agreements to provide management services to our hospitals in exchange for a fee. Disputes may arise with our partners as to the nature of the services to be provided or the amount of the fee to be paid. In these cases, as manager or general partner we may be obligated to exercise reasonable, good faith judgment to resolve the disputes and may not be free to act solely in our own best interests or the interests of our stockholders. We cannot assure you that any dispute between us and our partners with respect to a particular business decision or regarding the interpretation of the provisions of the hospital operating agreement will be resolved or that, as a result of our fiduciary duties, any dispute resolution will be on terms favorable or satisfactory to us.

Material decisions regarding the operations of our facilities require consent of our physician and community hospital partners, and we may be unable as a result to take actions that we believe are in our best interest.

The physician and community hospital partners in our healthcare businesses participate in material strategic and operating decisions we make for these facilities. They may do so through their representatives on the governing

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board of the subsidiary that owns the facility or a requirement in the governing documents that we obtain the consent of their representatives before taking specified material actions. We generally must obtain the consent of our physician and other hospital partners or their representatives before making any material amendments to the operating or partnership agreement for the venture or admitting additional members or partners. Although they have not done so to date, these rights to approve material decisions could in the future limit our ability to take actions that we believe are in our best interest and the best interest of the venture. We may not be able to resolve favorably, or at all, any dispute regarding material decisions with our physician or other hospital partners.

We may experience difficulties in executing our growth strategy.

Our growth strategy depends on our ability to identify attractive markets in which to expand existing facilities and establish new business ventures. We may have difficulty in identifying potential markets that satisfy our criteria for expansion or developing a new facility or for entering into other business arrangements. Identifying physician and community hospital partners and negotiating and implementing the terms of an agreement with them can be a lengthy and complex process. As a result, we may not be able to develop new business ventures at the rate we currently anticipate.

Our growth strategy will also increase demands on our management, operational and financial information systems and other resources. To accommodate our growth, we will need to continue to implement operational and financial information systems and controls, and expand, train, manage and motivate our employees. Our personnel, information systems, procedures or controls may not adequately support our operations in the future. Failure to recruit and retain strong management, implement operational and financial information systems and controls, or expand, train, manage or motivate our workforce, could lead to delays in developing and achieving expected operating results for new facilities.

Our growth strategy depends on our ability to identify attractive markets in which to expand existing facilities and establish new business ventures. We may have difficulty in identifying potential markets that satisfy our criteria for expansion or developing a new facility or for entering into other business arrangements. Identifying physician and community hospital partners and negotiating and implementing the terms of an agreement with them can be a lengthy and complex process. As a result, we may not be able to develop new business ventures at the rate we currently anticipate.

Our growth strategy will also increase demands on our management, operational and financial information systems and other resources. To accommodate our growth, we will need to continue to implement operational and financial information systems and controls, and expand, train, manage and motivate our employees. Our personnel, information systems, procedures or controls may not adequately support our operations in the future. Failure to recruit and retain strong management, implement operational and financial information systems and controls, or expand, train, manage or motivate our workforce, could lead to delays in developing and achieving expected operating results for new facilities.

Unfavorable or unexpected results at one of our hospitals or in one of our markets could significantly impact our consolidated operating results.

Each of our individual hospitals comprise a significant portion of our operating results and a majority of our hospitals are located in the southwestern United States. Any material change in the current demographic, economic, competitive or regulatory conditions in this region, a particular market in which one of our other hospitals operates or the United States in general could adversely affect our operating results. In particular, if economic conditions deteriorate in one or more of these markets, we may experience a shift in payor mix arising from patients’ loss of or changes in employer-provided health insurance resulting in higher co-payments and deductibles or an increased number of uninsured patients.

Growth of self-pay patients and a deterioration in the collectibility of these accounts could adversely affect our results of operations.

We have experienced growth in our self-pay patients, which includes situations in which each patient is responsible for the entire bill, as well as cases where deductibles are due from insured patients after insurance pays.

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We may have greater amounts of uninsured receivables in the future and if the collectibility of those uninsured receivables deteriorates, increases in our allowance for doubtful accounts may be required, which could materially adversely impact our operating results and financial condition.

Our hospitals and other facilities face competition for patients from other healthcare companies.

The healthcare industry is highly competitive. Our facilities face competition for patients from other providers in our markets. In most of our markets we compete for market share of cardiovascular and other healthcare procedures that are the focus of our facilities with two to three providers. Some of these providers are part of large for-profit or not-for-profit hospital systems with greater financial resources than we have available to us and have been operating in the markets they serve for many years. Some of the hospitals that we compete against in certain of our markets and elsewhere have attempted to use their market position and managed care networks to influence physicians not to enter into or to abandon joint ventures that own facilities such as ours by, for example, revoking the admission privileges of our physician partners at the competing hospital. These practices of “economic credentialing” appear to be on the increase. Although these practices have not been successful to date in either preventing us from developing new ventures with physicians or causing us to lose existing investors, the future inability to attract new investors or loss of a significant number of our physician partners in one or more of our existing ventures could have a material adverse effect on our business and operating results.

We depend on our relationships with the physicians who use our facilities.

Our business depends upon the efforts and success of the physicians who provide healthcare services at our facilities and the strength of our relationships with these physicians. We generally do not employ any practicing physicians at any of our hospitals or other facilities. Each member of the medical staffs at our hospitals may also serve on the medical staffs of, and practice at, hospitals not owned by us.

At each of our hospitals, our business could be adversely affected if a significant number of key physicians or a group of physicians:

•  terminated their relationship with, or reduced their use of, our facilities,

•  failed to maintain the quality of care provided or to otherwise adhere to the legal professional standards or the legal requirements for the granting and renewal of privileges at our hospitals or other facilities,

•  suffered any damage to their reputation,

•  exited the market entirely, or

•  experienced major changes in its composition or leadership.

Based upon our management’s general knowledge of the operations of our hospitals, we believe that, consistent with most hospitals in our industry, a significant portion of the patient admissions at most of our hospitals are attributable to approximately 10% of the total number of physicians on the hospital’s medical staff. Historically, the medical staff at each hospital ranges from approximately 175 to 450 physicians depending upon the size of the hospital and the number of practicing physicians in the market. If we fail to maintain our relationships with the physicians in this group at a particular hospital, many of whom are investors in our hospitals, the revenues of that hospital would be reduced. None of the physicians practicing at our hospitals has a legal commitment, or any other obligation or arrangement that requires the physician to refer patients to any of our hospitals or other facilities.

A shortage of qualified nurses could affect our ability to grow and deliver quality, cost-effective care services.

We depend on qualified nurses to provide quality service to patients in our facilities. There is currently a shortage of qualified nurses in the markets where we operate our facilities. This shortage of qualified nurses and the more stressful working conditions it creates for those remaining in the profession are increasingly viewed as a threat to patient safety and may trigger the adoption of state and federal laws and regulations intended to reduce that risk. For example, some states have adopted or are considering legislation that would prohibit forced overtime for nurses and/or establish mandatory staffing level requirements. Growing numbers of nurses are also joining unions that threaten and sometimes call work stoppages.

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Historically, we have employed between approximately 100 and 240 nurses at each of our hospitals and between one and 15 at each of our diagnostic and therapeutic facilities. When we need to hire a replacement member of our nursing staff, it can several weeks to recruit for the position. We estimate the cost of recruiting and training a replacement nurse to range from $63,000 to $77,000.

In response to the shortage of qualified nurses, we have increased and are likely to have to continue to increase our wages and benefits to recruit and retain nurses or to engage expensive contract nurses until we hire permanent staff nurses. We may not be able to increase the rates we charge to offset increased costs. The shortage of qualified nurses has in the past and may in the future delay our ability to achieve our operational goals at a hospital by limiting the number of patient beds available during the start-up phase of the hospital. The shortage of nurses also makes it difficult for us in some markets to reduce personnel expense at our facilities by implementing a reduction in the size of the nursing staff during periods of reduced patient admissions and procedure volumes.

We rely heavily on our information systems and if our access to this technology is impaired or interrupted, or if such technology does not perform as warranted by the vendor, our business could be harmed and we may not comply with applicable laws and regulations.

Increasingly, our business depends in large part upon our ability to store, retrieve, process and manage substantial amounts of information. To achieve our strategic objectives and to remain in compliance with various regulations, we must continue to develop and enhance our information systems. This may require the acquisition of equipment and third-party software. Our inability to implement and utilize, in a cost-effective manner, information systems that provide the capabilities necessary for us to operate effectively, or any interruption or loss of our information processing capabilities, for any reason including if such systems do not perform appropriately, could harm our business, results of operations or financial condition.

Uninsured risks from legal actions related to professional liability could adversely affect our cash flow and operating results.

In recent years, physicians, hospitals, diagnostic centers and other healthcare providers have become subject, in the normal course of business, to an increasing number of legal actions alleging negligence in performing services, negligence in allowing unqualified physicians to perform services or other legal theories as a basis for liability. Many of these actions involve large monetary claims and significant defense costs. We may be subject to such legal actions even though a particular physician at one of our hospitals or other facilities is not our employee and the governing documents for the medical staffs of each of our hospitals require physicians who provide services, or conduct procedures, at our hospitals to meet all licensing and specialty credentialing requirements and to maintain their own professional liability insurance.

We have established a reserve for malpractice claims based on actuarial estimates made by an independent third party, who based the estimates on our historical experience with malpractice claims and assumptions about future events. Due to the considerable variability that is inherent in such estimates, including such factors as changes in medical costs and changes in actual experience, there is a reasonable possibility that the recorded estimates will change by a material amount in the near term. Also, there can be no assurance that the ultimate liability we experience under our self-insured retention for medical malpractice claims will not exceed our estimates. It is also possible that such claims could exceed the scope of coverage, or that coverage could be denied.

Our results of operations may be adversely affected from time to time by changes in treatment practice and new medical technologies.

One major element of our business model is to focus on the treatment of patients suffering from cardiovascular disease. Our commitment and that of our physician partners to treating cardiovascular disease often requires us to purchase newly approved pharmaceuticals and devices that have been developed by pharmaceutical and device manufacturers to treat cardiovascular disease. At times, these new technologies receive required regulatory approval and become widely available to the healthcare market prior to becoming eligible for reimbursement by government and other payors. In addition, the clinical application of existing technologies may expand, resulting in their increased utilization. We cannot predict when new technologies will be available to the marketplace, the rate

28

of acceptance of the new technologies by physicians who practice at our facilities, and when or if, government and third-party payors will provide adequate reimbursement to compensate us for all or some of the additional cost required to purchase new technologies. As such, our results of operations may be adversely affected from time to time by the additional, unreimbursed cost of these new technologies.

For example, the utilization of automatic implantable cardioverter defibrillators (AICDs) has increased due to their clinical efficacy in treating certain types of cardiovascular disease. AICDs are high-cost cardiac devices that cost often exceeds the related reimbursement. We are unable to determine if the reimbursement for these procedures will increase to a level necessary to consistently reimburse us for the cost of the devices.

In addition, advances in alternative cardiovascular treatments or in cardiovascular disease prevention techniques could reduce demand or eliminate the need for some of the services provided at our facilities, which could adversely affect our results of operations. Further, certain technologies may require significant capital investments or render existing capital obsolete which may adversely impact our cash flows or operations.

Item 1B.   Unresolved Staff Comments

None.

Item 2.   Properties

Our executive offices are located in Charlotte, North Carolina in approximately 32,580 square feet of leased commercial office space.

Each of the ventures we have formed to develop a hospital owns the land and buildings of the hospital, with the exception of the land underlying the Heart Hospital of Austin and the land and building at Harlingen Medical Center, which we lease. Each hospital has pledged its interest in the land and hospital building to secure the long-term debt incurred to develop the hospital, and substantially all the equipment located at these hospitals is pledged as collateral to secure long-term debt. Each entity formed to own and operate a diagnostic and therapeutic facility leases its facility.

Item 3.   Legal Proceedings

We are involved in various litigation and proceedings in the ordinary course of our business. We do not believe, based on our experience with past litigation, and taking into account our applicable insurance coverage and the expectations of counsel with respect to the amount of our potential liability, the outcome of any such litigation, individually or in the aggregate, will have a material adverse effect upon our business, financial condition or results of operations.

In October 2007, we reached an agreement with the DOJ and the United States Attorneys’ Office in Phoenix, Arizona regarding clinical trials at the Arizona Heart Hospital, one of the 11 hospitals in which we own an interest. The settlement concerns Medicare claims submitted between June 1998 and October 2002 for physician services involving the implantation of certain endoluminal graft devices (utilized to treat aneurysms) that had not received final marketing approval from the FDA, and allegedly were either implanted without an approved investigational device exception (IDE) or were implanted outside of the approved IDE protocol. The DOJ allegations did not involve patient care and related solely to whether the procedures were properly reimbursable by Medicare. The parties reached a settlement of the allegations to avoid the delay, uncertainty, inconvenience and expense of protracted litigation. Further, the hospital denies engagement in any wrongdoing or illegal conduct, and the settlement agreement does not contain any admission of liability. As disclosed in previous filings, the hospital agreed to pay approximately $5.8 million to settle and obtain a release from any civil or administrative monetary claims related to the DOJ’s investigation. The settlement was paid to the United States in full in November 2007. Additionally, the hospital has entered into a five-year corporate integrity agreement with the OIG under which the hospital will continue to maintain its existing corporate compliance program and which relates to clinical trials conducted at the hospital. The $5.8 million was paid to the DOJ subsequent to September 30, 2007.

Item 4.   Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock began trading on July 24, 2001, on the predecessor to the Nasdaq Global Market^® under the symbol “MDTH.” At December 12, 2007, there were 21,272,644 shares of common stock outstanding, the sale price of our common stock per share was $23.79, and there were 44 holders of record. The following table sets forth, for the periods indicated, the high and low sale prices per share of our common stock as reported by the Nasdaq Global Market^®:

Year Ended September 30, 2007	High		Low
First Quarter	$	31.10	$	22.75
Second Quarter		31.09		25.62
Third Quarter		34.61		27.41
Fourth Quarter		34.29		23.95

Year Ended September 30, 2006	High		Low
First Quarter	$	24.72	$	16.56
Second Quarter		23.08		17.66
Third Quarter		19.54		14.10
Fourth Quarter		32.90		18.29

We have not declared or paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock for the foreseeable future. The terms of our credit agreements and the indenture governing our senior notes also restrict our ability to pay and the amount of any cash dividends or other distributions to our stockholders. We anticipate that we will retain all earnings, if any, to develop and expand our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” Payment of dividends in the future will be at the discretion of our board of directors and will depend upon our financial condition and operating results.

During August 2007, our board of directors approved a stock repurchase program of up to $59.0 million. The purchases will be made from time to time in the open market or in privately negotiated transactions in accordance with applicable federal and state securities laws and regulations. The extent to which we repurchase common shares and the timing of such repurchases will depend upon stock price, general economic and market conditions and other corporate considerations. The repurchase program may be discontinued at any time.

The following table summarizes our equity compensation plans as of September 30, 2007:

	Number of Securities to be
	Issued Upon Exercise of		Weighted Average		Number of Securities Remaining
	Outstanding		Exercise Price		Available for Future Issuance Under
Plan Category	Options		of Outstanding Options		Equity Compensation Plans
Equity Compensation Plans Approved		1,727,112	$	19.11		1,599,383
Equity Compensation Plans Not Approved		—	$	—		—

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The following graph illustrates, for the period from September 30, 2002 through September 30, 2007, the cumulative total shareholder return of $100 invested (assuming that all dividends, if any, were reinvested) in (1) our common stock, (2) the NASDAQ Composite Stock Index and (3) the S&P Health Care Facilities Index.

The comparisons in this table are required by the rules of the Securities and Exchange Commission and, therefore, are not intended to forecast or be indicative of possible future performance of our common stock.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among MedCath Corporation, The NASDAQ Composite Index

And The S&P Health Care Facilities Index

*  $100 invested on 9/30/02 in stock or index-including reinvestment of dividends. Fiscal year ending September 30.

Copyright ^© 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm

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Item 6.   Selected Financial Data

The selected consolidated financial data have been derived from our audited consolidated financial statements. The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, appearing elsewhere in this report.

The following table sets forth our selected consolidated financial data as of and for the years ended September 30, 2007, 2006, 2005, 2004 and 2003.

	Year Ended September 30,
	2007			2006			2005			2004			2003
Consolidated Statement of Operations Data:
(in thousands, except per share data)
Net revenue	$	718,959		$	706,374		$	672,001		$	608,514		$	495,640
Impairment of long-lived assets and goodwill	$	—		$	458		$	2,662		$	6,425		$	58,865
Income (loss) from continuing operations before minority interest, income taxes and discontinued operations	$	44,278		$	26,961		$	29,245		$	10,889		$	(51,625	)
Income (loss) from continuing operations	$	17,227		$	6,711		$	7,634		$	1,028		$	(59,157	)
Income (loss) from discontinued operations	$	(5,700	)	$	5,865		$	1,157		$	(4,651	)	$	(1,149	)
Net income (loss)	$	11,527		$	12,576		$	8,791		$	(3,623	)	$	(60,306	)
Earnings (loss) from continuing operations per share, basic	$	0.82		$	0.36		$	0.42		$	0.06		$	(3.29	)
Earnings (loss) from continuing operations per share, diluted	$	0.80		$	0.34		$	0.39		$	0.06		$	(3.29	)
Earnings (loss) per share, basic	$	0.56		$	0.67		$	0.48		$	(0.20	)	$	(3.35	)
Earnings (loss) per share, diluted	$	0.54		$	0.64		$	0.45		$	(0.20	)	$	(3.35	)
Weighted average number of shares, basic(a)		20,872			18,656			18,286			17,984			17,989
Weighted average number of shares, diluted(a)		21,511			19,555			19,470			17,984			17,989
Balance Sheet and Cash Flow Data:
(in thousands)
Total assets	$	669,415		$	785,849		$	763,205		$	754,236		$	749,297
Total long-term obligations	$	148,664		$	286,928		$	300,151		$	358,977		$	318,862
Net cash provided by operating activities	$	55,929		$	64,965		$	61,247		$	62,546		$	44,436
Net cash provided by (used in) investing activities	$	(28,591	)	$	10,064		$	22,802		$	(65,430	)	$	(112,091	)
Net cash provided by (used in) financing activities	$	(80,611	)	$	(21,547	)	$	(12,645	)	$	(19,434	)	$	44,934
Selected Operating Data (consolidated)(b):
Number of hospitals		8			9			9			9			8
Licensed beds(c)		468			580			580			580			520
Staffed and available beds(d)		451			563			546			516			433
Admissions(e)		38,757			41,406			39,876			37,614			29,895
Adjusted admissions(f)		52,714			54,186			51,942			47,381			36,951
Patient days(g)		132,937			136,532			139,115			131,666			107,250
Adjusted patient days(h)		180,258			178,667			180,248			165,469			132,478
Average length of stay(i)		3.43			3.30			3.49			3.50			3.59
Occupancy(j)		80.8	%		66.4	%		69.8	%		69.9	%		67.9	%
Inpatient catheterization procedures(k)		19,878			21,163			20,760			19,355			15,886
Inpatient surgical procedures(l)		10,193			10,764			10,815			9,856			8,178
Hospital net revenue	$	665,908		$	648,898		$	615,991		$	549,746		$	429,184

(a) See Note 14 to the consolidated financial statements included elsewhere in this report.

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(b)	Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which were accounted for using the equity method or as discontinued operations in our consolidated financial statements. During the fourth quarter of fiscal 2007, Harlingen Medical Center ceased to be a consolidated subsidiary due to the sale of a portion of the hospital.
(c)	Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use.
(d)	Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period.
(e)	Admissions represent the number of patients admitted for inpatient treatment.
(f)	Adjusted admissions is a general measure of combined inpatient and outpatient volume. We computed adjusted admissions by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions.
(g)	Patient days represent the total number of days of care provided to inpatients.
(h)	Adjusted patient days is a general measure of combined inpatient and outpatient volume. We computed adjusted patient days by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days.
(i)	Average length of stay (days) represents the average number of days inpatients stay in our hospitals.
(j)	We computed occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the number of staffed and available beds.
(k)	Inpatients with a catheterization procedure represent the number of inpatients with a procedure performed in one of the hospitals’ catheterization labs during the period.
(l)	Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report.

Overview

We are a healthcare provider focused primarily on providing high acuity services, including the diagnosis and treatment of cardiovascular disease. We own and operate hospitals in partnership with physicians whom we believe have established reputations for clinical excellence. We also have partnerships with community hospital systems, and we manage the cardiovascular program of various hospitals operated by other parties. We opened our first hospital in 1996 and currently have ownership interests in and operate 11 hospitals, including nine in which we own a majority interest. Each of our majority-owned hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services with a focus on cardiovascular care. Each of our hospitals has a twenty-four hour emergency room staffed by emergency department physicians. The hospitals in which we have ownership interests have a total of 667 licensed beds and are located in predominately high growth markets in eight states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota, and Texas. We are currently in the process of developing a new hospital in Kingman, Arizona. We expect this hospital to open in September 2009. This hospital is designed to accommodate a total of 105 licensed beds and will initially open with 72 licensed beds.

In addition to our hospitals, we currently own and/or manage 21 cardiac diagnostic and therapeutic facilities. Nine of these facilities are located at hospitals operated by other parties and one of these facilities is located at a hospital in which we own a minority interest. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining 11 facilities are not located at hospitals and offer only diagnostic procedures. Effective January 1, 2007, we renamed our diagnostic and therapeutic division “MedCath Partners.”

We believe our facilities provide superior clinical outcomes, which, together with our ability to provide management capabilities and capital resources, positions us to expand upon our relationships with physicians and

33

community hospitals to increase our presence in existing and new markets. Specifically, we plan to increase our revenue and income from operations through a combination of:

•  improved operating performance at our existing facilities;

•  increased capacity and expanded scope of services provided at certain of our existing hospitals;

•  the development of new relationships with physicians in certain of our existing markets; and

•  the establishment of new ventures with physicians in new markets.

Basis of Consolidation.  We have included in our consolidated financial statements hospitals and cardiac diagnostic and therapeutic facilities over which we exercise substantive control, including all entities in which we own more than a 50% interest, as well as variable interest entities in which we are the primary beneficiary. We have used the equity method of accounting for entities, including variable interest entities, in which we hold less than a 50% interest and over which we do not exercise substantive control, and are not the primary beneficiary. Accordingly, for all periods presented, one of the hospitals in which we hold a minority interest, Avera Heart Hospital of South Dakota, is excluded from the net revenue and operating results of our consolidated company and our consolidated hospital division. During the fourth quarter of fiscal 2007, we sold a portion of our equity interest in Harlingen Medical Center; therefore, beginning in July 2007, we began excluding this hospital from net revenue and operating results of our consolidated company and our consolidated hospital division. Similarly, a number of our diagnostic and therapeutic facilities are excluded from the net revenue and operating results of our consolidated company and our consolidated MedCath Partners division. Our minority interest in the results of operations for the periods discussed for these entities is recognized as part of the equity in net earnings of unconsolidated affiliates in our statements of operations in accordance with the equity method of accounting.

During the first quarter of fiscal 2005, we closed The Heart Hospital of Milwaukee and sold substantially all of the hospital’s assets. During the fourth quarter of fiscal 2006, we sold our equity interest in Tucson Heart Hospital and we decided to seek to dispose of our interest in Heart Hospital of Lafayette and entered into a confidentiality and exclusivity agreement with a potential buyer. Accordingly, for all periods presented, the results of operations for these hospitals have been excluded from continuing operations and are reported in income (loss) from discontinued operations, net of taxes. Subsequent to September 30, 2007, we completed the disposition of Heart Hospital of Lafayette to the Heart Hospital of Acadiana. Heart Hospital of Acadiana is co-owned by Our Lady of Lourdes, a Lafayette, Louisiana community hospital and local physicians. See Note 21 — Subsequent Events to the Consolidated Financial Statements.

Same Facility Hospitals.  Our policy is to include, on a same facility basis, only those facilities that were open and operational during the full current and prior fiscal year comparable periods. For example, on a same facility basis for our consolidated hospital division for the fiscal year ended September 30, 2007, we exclude the results of operations of Harlingen Medical Center, which, during the fourth quarter of fiscal 2007, ceased to be a consolidated subsidiary due to the sale of a portion of the hospital.

Revenue Sources by Division.  The largest percentage of our net revenue is attributable to our hospital division. The following table sets forth the percentage contribution of each of our consolidating divisions to consolidated net revenue in the periods indicated below.

	Year Ended September 30,
Division	2007			2006			2005
Hospital		93.0	%		92.4	%		91.9	%
MedCath Partners		6.7	%		7.2	%		7.5	%
Corporate and other		0.3	%		0.4	%		0.6	%
Net Revenue		100.0	%		100.0	%		100.0	%

Revenue Sources by Payor.  We receive payments for our services rendered to patients from the Medicare and Medicaid programs, commercial insurers, health maintenance organizations, and our patients directly. Generally, our net revenue is determined by a number of factors, including the payor mix, the number and nature of procedures performed and the rate of payment for the procedures. Since cardiovascular disease disproportionately affects those

34

age 55 and older, the proportion of net revenue we derive from the Medicare program is higher than that of most general acute care hospitals. The following table sets forth the percentage of consolidated net revenue we earned by category of payor in each of our last three fiscal years.

	Year Ended September 30,
Payor	2007			2006			2005
Medicare		41.9	%		44.7	%		48.6	%
Medicaid		4.4	%		4.7	%		4.4	%
Commercial and other, including self-pay		53.7	%		50.6	%		47.0	%
Total consolidated net revenue		100.0	%		100.0	%		100.0	%

A significant portion of our net revenue is derived from federal and state governmental healthcare programs, including Medicare and Medicaid, and we expect the net revenue that we receive from the Medicare program as a percentage of total consolidated net revenue will remain significant in future periods. Our payor mix may fluctuate in future periods due to changes in reimbursement, market and industry trends with self-pay patients and other similar factors.

The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, court decisions, executive orders and freezes and funding reductions, all of which may significantly affect our business. In addition, reimbursement is generally subject to adjustment following audit by third party payors, including the fiscal intermediaries who administer the Medicare program for Centers for Medicare and Medicaid Services (CMS). Final determination of amounts due providers under the Medicare program often takes several years because of such audits, as well as resulting provider appeals and the application of technical reimbursement provisions. We believe that adequate provision has been made for any adjustments that might result from these programs; however, due to the complexity of laws and regulations governing the Medicare and Medicaid programs, the manner in which they are interpreted and the other complexities involved in estimating our net revenue, there is a possibility that recorded estimates will change by a material amount in the near term. See “Business — Reimbursement” and “— Regulation.”

Critical Accounting Policies and Estimates

General.  The discussion and analysis of our financial condition and results of operations are based on our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on a regular basis and make changes as experience develops or new information becomes known. Actual results may differ from these estimates under different assumptions or conditions.

We define critical accounting policies as those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine and (3) have the potential to result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are those described below. For a detailed discussion of the application of these and other accounting policies, see Note 2 to the consolidated financial statements included elsewhere in this report.

Revenue Recognition.  Amounts we receive for treatment of patients covered by governmental programs such as Medicare and Medicaid and other third-party payors such as commercial insurers, health maintenance organizations and preferred provider organizations are generally less than our established billing rates. Payment arrangements with third-party payors may include prospectively determined rates per discharge or per visit, a discount from established charges, per diem payments, reimbursed costs (subject to limits) and/or other similar contractual arrangements. As a result, net revenue for services rendered to patients is reported at the estimated net

35

realizable amounts as services are rendered. We account for the difference between the estimated realizable rates under the reimbursement program and the standard billing rates as contractual adjustments.

The majority of our contractual adjustments are system-generated at the time of billing based on either government fee schedules or fee schedules contained in our managed care agreements with various insurance plans. Portions of our contractual adjustments are performed manually and these adjustments primarily relate to patients that have insurance plans with whom our hospitals do not have contracts containing discounted fee schedules, also referred to as non-contracted payors and patients that have secondary insurance plans following adjudication by the primary payor. Estimates of contractual adjustments are made on a payor-specific basis and based on the best information available regarding our interpretation of the applicable laws, regulations and contract terms. While subsequent adjustments to the systematic contractual allowances can arise due to denials, short payments deemed immaterial for continued collection effort and a variety of other reasons, such amounts have not historically been significant.

We continually review the contractual estimation process to consider and incorporate updates to the laws and regulations and any changes in the contractual terms of our programs. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties, which can take several years to determine. From a procedural standpoint, for government payors, primarily Medicare, we recognize estimated settlements in our consolidated financial statements based on filed cost reports. We subsequently adjust those settlements as we obtain new information from audits or reviews by the fiscal intermediary and, if the result of the fiscal intermediary audit or review impacts other unsettled and open cost reports, then we recognize the impact of those adjustments. We estimate current year settlements based on models designed to approximate our cost report filings and revise our estimates in February of each year upon completion of the actual cost report and tentative settlement. Due to the complexity of laws and regulations governing the Medicare and Medicaid programs, the manner in which they are interpreted, and the other complexities involved in estimating our net revenue, there is a reasonable possibility that recorded estimates will change by a material amount in the near term.

We provide care to patients who meet certain criteria under our charity care policy without charge or at amounts less than our established rates. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported as net revenue.

Our managed diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories operate under various contracts where management fee revenue is recognized under fixed-rate and percentage-of-income arrangements as services are rendered. In addition, certain diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories recognize additional revenue under cost reimbursement and equipment lease arrangements. Net revenue from our owned diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories is reported at the estimated net realizable amounts due from patients, third party payors, and others as services are rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors.

Allowance for Doubtful Accounts.  Accounts receivable primarily consist of amounts due from third-party payors and patients in our hospital division. The remainder of our accounts receivable principally consist of amounts due from billings to hospitals for various cardiovascular care services performed in our MedCath Partners division and amounts due under consulting and management contracts. To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. We estimate this allowance based on such factors as payor mix, aging and the historical collection experience and write-offs of our respective hospitals and other business units. Adverse changes in business office operations, payor mix, economic conditions or trends in federal and state governmental health care reimbursement could affect our collection of accounts receivable.

When possible, we will attempt to collect co-payments from patients prior to admission for inpatient services as a part of the pre-registration and registration processes. If unsuccessful, we will also attempt to reach a mutually agreed-upon payment arrangement at that time. To the extent possible, the estimated amount of the patient’s financial responsibility is determined based on the services to be performed, the patient’s applicable co-payment amount or percentage and any identified remaining deductible and co-insurance percentages. If payment arrangements are not provided upon admission or only a partial payment is obtained, we will attempt to collect any

36

estimated remaining patient balance upon discharge. We also comply with the requirements under applicable law concerning collection of Medicare co-payments and deductibles. Patients who come to our hospitals for outpatient services are expected to make payment or adequate financial arrangements before receiving services. Patients who come to the emergency room are screened and stabilized to the extent of the hospital’s capability for any emergency medical condition in accordance with applicable laws, rules and other regulations in order that financial arrangements do not delay such screening, stabilization, and appropriate disposition.

General and Professional Liability Risk.  For the past three fiscal years we carried a one-year claims-made policy providing coverage for medical malpractice claim amounts of retained liability per claim, subject to an additional amounts of retained liability per claim and an aggregate for claims reported if deemed necessary. In June 2007, we entered into a new one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $3.0 million of retained liability per claim.

Because of our self-insured retention levels, we are required to recognize an estimated expense/ liability for the amount of our retained liability applicable to each malpractice claim. As of September 30, 2007 and September 30, 2006, the total estimated liability for our self-insured retention on medical malpractice claims, including an estimated amount for incurred but not reported claims, was approximately $4.2 million and $5.9 million, respectively, which is included in other accrued liabilities on our consolidated balance sheets. We maintain this reserve based on actuarial estimates prepared by an independent third party, who bases the estimates on our historical experience with claims and assumptions about future events. The liability is also impacted by the nonconsolidation of Harlingen Medical Center at September 30, 2007.

In addition to reserves for medical malpractice, we also maintain reserves for our self-insured healthcare and dental coverage provided to our employees. As of September 30, 2007 and September 30, 2006, our total estimated reserve for self-insured liabilities on employee health and dental claims was $2.5 million and $3.1 million, respectively, which is included in current liabilities in our consolidated balance sheets. We maintain this reserve based on our historical experience with claims. Further, until June 30, 2007, we maintained commercial stop loss coverage for our health and dental insurance program of $125,000 per plan participant. At July 1, 2007, this coverage was increased to $150,000 per plan participant.

We continually review our estimates for self-insured liabilities and record adjustments as experience develops or new information becomes known. The changes to the estimated liabilities are included in current operating results. Due to the considerable variability that is inherent in such estimates, including such factors as changes in medical costs and changes in actual experience, there is a reasonable possibility that the recorded estimates will change by a material amount in the near term. Also, there can be no assurance that the ultimate liability will not exceed our estimates.

Goodwill and Intangible Assets.  Goodwill represents acquisition costs in excess of the fair value of net identifiable tangible and intangible assets of businesses purchased. Other intangible assets primarily consist of the value of management contracts. With the exception of goodwill, intangible assets are being amortized over periods ranging from 11 to 29 years. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), we evaluate goodwill annually on September 30 for impairment, or earlier if indicators of potential impairment exist. The determination of whether or not goodwill has become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of our reporting units. Changes in our strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of intangible assets.

For the years ended September 30, 2007, 2006 and 2005, we performed annual goodwill impairment tests. The results of the tests indicated that our goodwill was not impaired and no additional impairment was required in fiscal 2007, 2006 or 2005 for our continuing operations. The goodwill calculation for fiscal 2007 excluded Heart Hospital of Lafayette, which is reported as a discontinued operation. A separate goodwill impairment test related to this hospital was performed and it was determined that goodwill impairment for this hospital did exist. Accordingly, we recorded an impairment charge of approximately $2.8 million during the first quarter of fiscal 2007. The impairment charge is included as a component of income (loss) from discontinued operations in the statement of operations for the fiscal year ended September 30, 2007.

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Long-Lived Assets.  In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), long-lived assets, other than goodwill, are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in our strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets.

During the year ended September 30, 2006, the operating performance of one of our facilities, Heart Hospital of Lafayette, was significantly below expectations. Following the consideration of the performance of the hospital as well as other strategic alternatives for the hospital, we decided to seek to dispose of the Heart Hospital of Lafayette. Accordingly, the hospital is classified as a discontinued operation in the accompanying financial statements. We evaluated the carrying value of our interest in the hospital at September 30, 2006, to ensure it was equal to or greater than the fair market value to determine whether or not impairment existed. Based upon this evaluation it was determined that our investment in Heart Hospital of Lafayette was not impaired and recorded no impairment charge for the year ended September 30, 2006 related to this asset. During the year ended September 30, 2007 our impairment evaluation resulted in total impairment charges of $4.8 million, which are included in income (loss) from discontinued operations, net of taxes. Subsequent to September 30, 2007, we completed the disposition of Heart Hospital of Lafayette to the Heart Hospital of Acadiana. Heart Hospital of Acadiana is co-owned by Our Lady of Lourdes, a Lafayette, Louisiana community hospital and local physicians. See Note 21 — Subsequent Events to the Consolidated Financial Statements.

Also during the year ended September 30, 2006, we decided to discontinue the implementation of certain nurse staffing software and as a result, a $0.5 million impairment charge was recognized to write-off the costs incurred to date on such software.

During the year ended September 30, 2005, we recorded a $2.7 million impairment charge, which was comprised of $1.7 million relating to license fees associated with the use of certain accounting software and $1.0 million relating to a management contract. The accounting software was installed in two hospitals and was intended to be installed in the remaining hospitals; however, due to a lack of additional benefits provided by the system and additional installation costs required, it was determined that the system would not be installed in any additional hospitals. Therefore, the impairment charge reflects the unused license fees associated with this system. The remaining $1.0 million impairment charge relates to the excess carrying value over the fair value of a management contract due to lack of volumes and other economic factors at one managed diagnostic venture.

Earnings Allocated to Minority Interests.  Earnings allocated to minority interests represent the allocation of profits and losses to minority owners in our consolidated subsidiaries. Because our hospitals are owned as joint ventures, each hospital’s earnings and losses are generally allocated for accounting purposes to us and our physician and community hospital partners on a pro-rata basis in accordance with the respective ownership percentages in the hospital. If, however, the cumulative net losses of a hospital exceed its initial capitalization and committed capital obligations of our partners, then we are required, due to the respective at-risk capital positions, by accounting principles generally accepted in the United States of America, to recognize a disproportionately higher share, up to 100%, of the hospital’s losses, instead of the smaller pro-rata share of the losses that normally would be allocated to us based upon our percentage ownership. The disproportionate allocation to us of a hospital’s losses would reduce our consolidated net income in that reporting period. When the same hospital has earnings in a subsequent period, a disproportionately higher share, up to 100%, of the hospital’s earnings will be allocated to us to the extent we have previously recognized a disproportionate share of that hospital’s losses. The disproportionate allocation to us of a hospital’s earnings would increase our consolidated net income in that reporting period.

The determination of at-risk capital position is based on the specific terms of each hospital’s operating agreement, including each partner’s contributed capital, obligation to contribute additional capital to provide working capital loans, or to guarantee the outstanding obligations of the hospital. During each of our fiscal years 2007, 2006 and 2005, our disproportionate recognition of earnings and losses in our hospitals had a net negative

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impact of $0.2 million, $2.0 million, and $4.5 million, respectively, on our reported income from continuing operations before income taxes and discontinued operations.

We expect our earnings allocated to minority interests to fluctuate in future periods as we either recognize disproportionate losses and/or recoveries thereof through disproportionate profits of our hospitals. As of September 30, 2007, we have remaining cumulative disproportionate loss allocations of approximately $2.8 million that we may recover in future periods, or we may be required to recognize additional disproportionate losses, depending on the results of operations of each of our hospitals. We could also be required to recognize disproportionate losses at our other hospitals not currently in a disproportionate allocation position depending on their results of operations in future periods.

Accounting for Gains on Capital Transactions of Subsidiary.  A gain on the issuance of units in one of our subsidiaries, Harlingen Medical Center, LLC (HMC), is reflected in our consolidated balance sheets for fiscal 2007 as a component of stockholders’ equity, in accordance with the provisions of Staff Accounting Bulletin 51, Revenue Recognition in Financial Statements, (SAB 51). The gain resulted from the difference between the carrying amount of our investment in HMC prior to the issuance of units and our equity investment immediately following the issuance of units. We determined that recognition of the gain as a component of equity was appropriate since HMC has historically experienced net operating losses and due to uncertainty surrounding future transactions that may involve further dilution of our equity interest in HMC. Future issuances of units to third parties will further dilute our ownership percentage and may give rise to additional gains or losses based on the offering price in comparison to the carrying value of our investment.

Income Taxes.  Income taxes are computed on the pretax income based on current tax law. Deferred income taxes are recognized for the expected future tax consequences or benefits of differences between the tax bases of assets or liabilities and their carrying amounts in the consolidated financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit or their future deductibility is uncertain.

Developing the provision for income taxes requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. Our judgments and tax strategies are subject to audit by various taxing authorities. While we believe we have provided adequately for our income tax liabilities in our consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on our consolidated financial condition and results of operations.

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Results of Operations

Fiscal Year 2007 Compared to Fiscal Year 2006

Statement of Operations Data.  The following table presents our results of operations in dollars and as a percentage of net revenue:

	Year Ended September 30,
													% of Net
							Increase/Decrease						Revenue
	2007			2006			$			%			2007			2006
Net revenue	$	718,959		$	706,374		$	12,585			1.8	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		229,844			228,350			1,494			0.7	%		31.9	%		32.3	%
Medical supplies expense		192,036			196,046			(4,010	)		(2.0	)%		26.7	%		27.8	%
Bad debt expense		55,162			56,845			(1,683	)		(3.0	)%		7.7	%		8.0	%
Other operating expenses		142,584			141,498			1,086			0.8	%		19.8	%		20.0	%
Pre-opening expenses		555			—			555			100.0	%		0.1	%		—
Depreciation		33,602			34,792			(1,190	)		(3.4	)%		4.7	%		4.9	%
Amortization		631			1,008			(377	)		(37.4	)%		0.1	%		0.1	%
Loss (gain) on disposal of property, equipment and other assets		1,466			(142	)		1,608			1132.4	%		0.2	%		—
Impairment of long-lived assets		—			458			(458	)		(100.0	)%		—			0.1	%
Income from operations		63,079			47,519			15,560			32.7	%		8.8	%		6.8	%
Other income (expenses):
Interest expense		(22,464	)		(31,840	)		9,376			29.4	%		(3.1	)%		(4.5	)%
Loss on early extinguishment of debt		(9,931	)		(1,370	)		(8,561	)		(624.9	)%		(1.4	)%		(0.2	)%
Interest and other income, net		7,855			7,733			122			1.6	%		1.1	%		1.1	%
Equity in net earnings of unconsolidated affiliates		5,739			4,919			820			16.7	%		0.8	%		0.7	%
Income from continuing operations before minority interest and income taxes		44,278			26,961			17,317			64.2	%		6.2	%		3.9	%
Minority interest share of earnings of consolidated subsidiaries		(14,575	)		(15,521	)		946			6.1	%		(2.1	)%		(2.2	)%
Income from continuing operations before income taxes		29,703			11,440			18,263			159.6	%		4.1	%		1.7	%
Income tax expense		12,476			4,729			7,747			163.8	%		1.7	%		0.7	%
Income from continuing operations		17,227			6,711			10,516			156.7	%		2.4	%		1.0	%
Income (loss) from discontinued operations, net of taxes		(5,700	)		5,865			(11,565	)		(197.2	)%		(0.8	)%		0.8	%
Net income	$	11,527		$	12,576		$	(1,049	)		(8.3	)%		1.6	%		1.8	%

During the fourth quarter of fiscal 2007, we completed a recapitalization of Harlingen Medical Center. As part of the recapitalization, our ownership in Harlingen Medical Center was reduced from a majority ownership of 51.0% to a minority ownership of 36.0%. Due to this change in ownership, we began accounting for Harlingen Medical Center as an equity investment at the beginning of the fiscal quarter ended September 30, 2007 as opposed to including Harlingen Medical Center in our consolidated results of operations. As such, our fourth quarter of fiscal 2007 consolidated results exclude the financials results of Harlingen Medical Center. The following management discussion and analysis focuses on same facility fluctuations which excludes Harlingen Medical Center from the results of both fiscal 2007 and fiscal 2006 when appropriate.

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Net revenue.  Net revenue increased 1.8% to $719.0 million for our fiscal year ended September 30, 2007 from $706.4 million for our fiscal year ended September 30, 2006. Of this $12.6 million increase in net revenue, our hospitals generated a $17.0 million increase, which was partially offset by a $2.9 million decrease in our MedCath Partners division, a $0.3 million decrease in our cardiology consulting and management operations and a $1.2 million decrease in our corporate and other division.

On a same facility basis, excluding HMC from the results of both fiscal 2007 and fiscal 2006, our hospital net revenue increased $24.1 million, or 4.2% from the prior year.

•  Same facility adjusted admissions increased 1.5% and revenue per adjusted admissions increased 2.6% for the fiscal year ended September 30, 2007 as compared to the fiscal year ended September 30, 2006.

•  We have focused a significant amount of time and resources on the improvement of our clinical documentation process, both on an inpatient and outpatient basis. This focus has helped improve our reimbursement on a per adjusted admissions basis in both areas.

•  We have successfully renegotiated a number of managed care contracts during the course of this fiscal year, which has led to higher net revenue per admission.

Also attributing to the increase in net revenue over the prior fiscal year, during the second quarter of fiscal 2007, we recognized net positive contractual adjustments to our net revenue of $1.5 million related to the filing of our 2006 Medicare cost reports as well as other Medicare and Medicaid settlement adjustments. By contrast, we recognized adjustments that increased our net revenue by $0.8 million for prior period cost reports for fiscal 2006.

Further, the fiscal year ended September 30, 2007 was negatively impacted as a result of recording a $5.8 million reduction in net revenue for a portion of certain federal healthcare billings reimbursed in prior years. See Note 12 — Contingencies and Commitments.

Personnel expense.  Personnel expense increased 0.7% to $229.8 million for fiscal 2007 from $228.4 million for fiscal 2006. As a percentage of net revenue, personnel expense decreased to 31.9% from 32.3% for the comparable periods. The $1.4 million increase in personnel expense was primarily due to a $13.9 million increase for our same facility hospital division offset by an $8.9 million reduction in share-based compensation.

On October 1, 2005, we adopted SFAS No. 123-R (revised 2004), Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. Using this methodology and since all options are immediately vested, we recognized share-based compensation of $4.3 million and $13.2 million for the fiscal year ended September 2007 and 2006, respectively. Due to the appointment of a new president and chief executive officer as well as a new chief operating officer, the issuance of stock options during fiscal 2006 was above normal historical activity.

For our same facility hospitals, on an adjusted patient day basis, personnel expense increased by 2.5% to $1,262 per adjusted patient day for the fiscal year ended September 30, 2007 from $1,231 per adjusted patient day for the comparable period in the prior year. Further, excluding the share-based compensation and the consolidated results of Harlingen Medical Center, as a percentage of net revenue, personnel expense increased to 31.3% for the fiscal year ended September 30, 2007 from 30.1% for the fiscal year ended September 30, 2006. This increase is mainly due to cost of living wage adjustments made during the first quarter of fiscal 2007.

Medical supplies expense.  Medical supplies expense decreased 2.0% to $192.0 million for fiscal 2007 from $196.0 million for fiscal 2006. Further, same facility hospital medical supplies expense per adjusted patient day decreased 5.0% to $1,103 for fiscal 2007 as compared to $1,162 for fiscal 2006, reflecting the decrease in overall supplies volume as well as the shift in procedural mix from drug eluting stents to bare metal stents. Also, our supply chain initiatives helped us experience price reductions during the fiscal year as we experienced a decline in our most costly medical devices.

Bad debt expense.  Bad debt expense decreased 3.0% to $55.2 million for fiscal 2007 from $56.8 million for fiscal 2006. On a same facility basis, bad debt expense decreased 2.7% to $42.6 million for fiscal 2007 compared to $43.8 million for fiscal 2006. We have experienced reductions in bad debt expense due to our continued initiatives

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to improve our registration process to more timely and accurately identify patients eligible for third party benefits and to improve processes surrounding our billing and collection procedures.

Other operating expenses.  Other operating expenses increased 0.8% to $142.6 million for fiscal 2007 from $141.5 million for fiscal 2006. Same facility other operating expenses increased 2.9% from $129.4 million for fiscal 2007 compared to $125.7 million for fiscal 2006. During fiscal 2007, we have experienced an increase in contract services due to the growth in volume at several of our facilities as well as increased maintenance costs at our hospitals as machinery warranties have expired at several of our facilities.

Pre-opening expenses.  We incurred approximately $0.6 million in pre-opening expenses during fiscal 2007 while there were no pre-opening expenses incurred in fiscal 2006. Pre-opening expenses represent costs specifically related to projects under development, primarily new hospitals. As of September 30, 2007, we have one hospital under development, Hualapai Medcial Center in Kingman, Arizona. The amount of pre-opening expenses, if any, we incur in future periods will depend on the nature, timing and size of our development activities.

Depreciation.  Depreciation decreased 3.4% to $33.6 million for the fiscal year ended September 30, 2007 as compared to $34.8 million for the fiscal year ended September 30, 2006. Excluding Harlingen Medical Center, which we began accounting for as an equity investment during the fourth quarter of fiscal 2007, depreciation remained flat at $29.8 million for the fiscal years 2007 and 2006.

Loss (gain) on disposal of property, equipment and other assets.  We incurred a gain on the disposal of property, equipment and other assets of $0.1 million in fiscal 2006 compared to a loss of $1.5 million in fiscal 2007. The current year loss is a result of several assets that were disposed and replaced with improved technology to ensure the highest state of the art care for our patients.

Impairment of long-lived assets.  Impairment of long-lived assets was $0.5 million in fiscal 2006. During fiscal 2006, management decided to discontinue the implementation of certain nurse staffing software and as a result, a $0.5 million impairment charge was recognized to write-off the costs incurred to date on such software. During fiscal 2007, no such impairment was recorded. See “Critical Accounting Policies — Long-Lived Assets.”

Interest expense.  Interest expense decreased 29.4% to $22.5 million for fiscal 2007 compared to $31.8 million for fiscal 2006. This $9.3 million decrease in interest expense is primarily attributable to the overall reduction in our outstanding debt as we repurchased approximately $36.2 million of our senior notes, repaid $21.2 million of our REIT loan at one of our facilities, repaid $11.1 million of our equipment loan at another of our facilities, and repaid $39.9 million of our senior secured credit facility during the fiscal year ended September 30, 2007.

Loss on early extinguishment of debt.  Loss on early extinguishment of debt increased to $9.9 million for fiscal 2007 compared to $1.4 million for fiscal 2006. During the fiscal year ended September 30, 2007, this loss consisted of a $3.5 million repurchase premium and the write off of approximately $1.0 million of deferred loan acquisition costs related to the prepayment of a portion of our senior notes in December 2006. We also wrote off $0.5 million in deferred loan acquisition costs during fiscal 2007 related to the prepayment of $39.9 million of our senior secured credit facility. Further, upon early repayment of $11.1 million of our equipment loan at one of our facilities, we expensed approximately $0.2 million of deferred loan acquisition costs, and as part of the Harlingen Medical Center recapitalization transaction, we incurred a $3.5 million repurchase premium and expensed approximately $1.2 million of deferred loan acquisition costs. During the fiscal year ended September 30, 2006, this loss consists of approximately $1.4 million of deferred loan acquisition costs related to the prepayment of $58.0 million of the outstanding balance of our senior secured credit facility and the prepayment of $11.9 million of our senior notes.

Interest and other income, net.  Interest and other income, net remained relatively flat at $7.9 million for fiscal 2007 as compared to $7.7 million for fiscal 2006. During the fiscal year ended September 30, 2006, we received $2.0 million as a part of a settlement agreement related to a lawsuit. The proceeds received from the settlement were offset in part by $0.6 million of legal fees incurred related to the settlement. Excluding this net receipt of $1.4 million, interest and other income, net, increased $1.6 million from fiscal 2006 to fiscal 2007. This increase is due to higher interest earned on available cash and cash equivalents during the comparable periods, as well as higher rates of return on our short-term investments.

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Equity in net earnings of unconsolidated affiliates.  Equity in net earnings of unconsolidated affiliates increased to $5.7 million in fiscal 2007 from $4.9 million in fiscal 2006. The increase is attributable to growth in earnings at one of the hospitals in which we hold less than a 50% interest, as well as growth in earnings in various diagnostic ventures in which we hold less than a 50% interest.

Minority interest share of earnings of consolidated subsidiaries.  Minority interest share of earnings of consolidated subsidiaries decreased $0.9 million in fiscal 2007 compared to fiscal 2006. Our minority interest share of earnings can fluctuate as a result of our disproportionate share accounting for our partnership interests. Our partnership operating agreements may call for the recognition of losses or profits at amounts that are disproportionate to our partnership interest.

Income tax expense.  Income tax expense was $12.5 million for fiscal 2007 compared to $4.7 million for fiscal 2006, which represented an effective tax rate of approximately 42.0% and 41.3%, respectively. The overall increase in the effective rate is the result of several items that are not deductible for tax such as the exercise of incentive stock options and penalties incurred on contingencies.

Income (loss) from discontinued operations, net of taxes.  During the fourth quarter of fiscal 2006, we sold our equity interest in Tucson Heart Hospital, and we decided to seek to dispose of our interest in Heart Hospital of Lafayette and we entered into a confidentiality and exclusivity agreement with a potential buyer. Accordingly, these hospitals are accounted for as discontinued operations. Subsequent to September 30, 2007, we completed the disposition of Heart Hospital of Lafayette to the Heart Hospital of Acadiana. Heart Hospital of Acadiana is co-owned by Our Lady of Lourdes, a Lafayette, Louisiana community hospital and local physicians. See Note 21, Subsequent Events, to the Consolidated Financial Statements.

In accordance with SFAS No. 144, we evaluated the carrying value of the long-lived assets related to Heart Hospital of Lafayette and determined that the carrying value was in excess of the fair value. Accordingly, an impairment charge of $4.1 million was recorded in accordance with SFAS No. 144 during the first quarter of fiscal 2007. An additional impairment charge of $3.5 million was recorded during the fourth quarter of fiscal 2007. At March 31, 2007 and June 30, 2007, it was determined that the carrying value approximated fair value and no further impairment was necessary.

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Fiscal Year 2006 Compared to Fiscal Year 2005

Statement of Operations Data.  The following table presents our results of operations in dollars and as a percentage of net revenue:

	Year Ended September 30,
													% of Net
							Increase/Decrease						Revenue
	2006			2005			$			%			2006			2005
Net revenue	$	706,374		$	672,001		$	34,373			5.1	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		228,350			205,469			22,881			11.1	%		32.3	%		30.5	%
Medical supplies expense		196,046			189,953			6,093			3.2	%		27.8	%		28.3	%
Bad debt expense		56,845			48,220			8,625			17.9	%		8.0	%		7.2	%
Other operating expenses		141,498			135,618			5,880			4.3	%		20.0	%		20.2	%
Depreciation		34,792			34,862			(70	)		(0.2	)%		4.9	%		5.2	%
Amortization		1,008			1,160			(152	)		(13.1	)%		0.1	%		0.2	%
Gain on disposal of property, equipment and other assets		(142	)		(646	)		504			78.0	%		—			(0.1	)%
Impairment of long-lived assets		458			2,662			(2,204	)		(82.8	)%		0.1	%		0.4	%
Income from operations		47,519			54,703			(7,184	)		(13.1	)%		6.8	%		8.1	%
Other income (expenses):
Interest expense		(31,840	)		(31,832	)		(8	)		(0.0	)%		(4.5	)%		(4.7	)%
Loss on early extinguishment of debt		(1,370	)		—			(1,370	)		(100.0	)%		(0.2	)%		—
Interest and other income, net		7,733			3,018			4,715			156.3	%		1.1	%		0.4	%
Equity in net earnings of unconsolidated affiliates		4,919			3,356			1,563			46.6	%		0.7	%		0.5	%
Income from continuing operations before minority interest and income taxes		26,961			29,245			(2,284	)		(7.8	)%		3.9	%		4.3	%
Minority interest share of earnings of consolidated subsidiaries		(15,521	)		(15,968	)		447			2.8	%		(2.2	)%		(2.4	)%
Income from continuing operations before income taxes		11,440			13,277			(1,837	)		(13.8	)%		1.7	%		1.9	%
Income tax expense		4,729			5,643			(914	)		(16.2	)%		0.7	%		0.8	%
Income from continuing operations		6,711			7,634			(923	)		(12.1	)%		1.0	%		1.1	%
Income from discontinued operations, net of taxes		5,865			1,157			4,708			406.9	%		0.8	%		0.2	%
Net income	$	12,576		$	8,791			3,785			43.1	%		1.8	%		1.3	%

Net revenue.  Net revenue increased 5.1% to $706.4 million for our fiscal year ended September 30, 2006 from $672.0 million for our fiscal year ended September 30, 2005. Of this $34.4 million increase in net revenue, our hospital division generated a $35.1 million increase and our MedCath Partners division generated a $0.5 million increase, both of which were partially offset by a $0.9 million decrease in our cardiology consulting and management operations and a $0.3 million decrease in our corporate and other division.

The $35.1 million increase in hospital division net revenue was a result of year over year growth at the majority of our facilities driven by a 3.8% increase in hospital admissions. Adjusted admissions, which adjusts for outpatient volume, increased 4.3% over fiscal 2005. Outpatient services accounted for approximately 22.4% of revenue in fiscal 2006, up from approximately 20.3% in fiscal 2005. Also, on a consolidated basis, total catheterization procedures increased 1.9% and inpatient surgical procedures increased 0.9% for fiscal 2006, while average length of stay decreased to 3.30 days for fiscal 2006 from 3.49 days for fiscal 2005.

During the second quarter of fiscal 2006, we filed Medicare cost reports for fiscal 2005 and as a result of changes in our estimates of final settlements based on additional information, we recognized contractual allowance adjustments that increased net revenue by approximately $0.8 million. Similarly, during the second quarter of fiscal

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2005 we filed Medicare cost reports for fiscal year 2004 and recognized adjustments that increased net revenue by approximately $2.3 million. Additionally, during fiscal 2006, we recognized approximately $0.4 million of contractual allowance adjustments that decreased net revenue as a result of our calculation of amounts owed to us by Medicare under disproportionate share hospital (DSH) provisions for fiscal 2005 and fiscal 2006 based on rates that are not published by Medicare until the fourth quarter of our fiscal year. DSH amounts are provided to facilities that have a high proportion of Medicaid payors and the calculation of the amounts owed is based on formulas that incorporate the number of Medicaid days among other factors. Similarly, we recognized $2.1 million in the fourth quarter of fiscal 2005 for amounts owed under the DSH provisions for fiscal 2004 and fiscal 2005.

Personnel expense.  Personnel expense increased 11.1% to $228.4 million for fiscal 2006 from $205.5 million for fiscal 2005. As a percentage of net revenue, personnel expense increased to 32.3% from 30.5% for the comparable periods. The $22.9 million increase in personnel expense is a result of recording $13.2 million in share-based compensation in fiscal 2006 with the remainder of the increase due to the increase in full-time employees and contract labor to accommodate the increase in hospital admissions. Share-based compensation was not reflected in the statement of operations prior to fiscal 2006 as we adopted the provisions of SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123-R) on October 1, 2005. SFAS No. 123-R requires that all share-based payments to employees be recognized as compensation expense in our consolidated financial statements based on their fair values. Excluding the share-based compensation, personnel expense increased $11.1 million, or 5.5% year over year and as a percentage of net revenue, personnel expense increased marginally to 30.5% from 30.4%. On an adjusted patient day basis, personnel expense increased 6.2% for the hospital division to $1,143 per adjusted patient day for fiscal 2006 compared to $1,076 per adjusted patient day for fiscal 2005. This increase was also impacted by a 5.4% decrease in average length of stay for our hospitalized patients.

Medical supplies expense.  Medical supplies expense increased 3.2% to $196.0 million for fiscal 2006 from $190.0 million for fiscal 2005. The increase in our medical supplies expense was primarily attributable to increases in catheterization and surgical procedures performed during fiscal 2006 compared to fiscal 2005. The increase in surgical procedures during fiscal 2006 was disproportionately comprised of cardiac procedures that use high-cost medical devices and supplies such as pacemaker implants and drug-eluting stents. During fiscal 2006, we experienced a 1.0% increase in the number of implanted pacemakers compared to fiscal 2005. Further, our utilization rate for drug-eluting stents was 1.48 stents per case during fiscal 2006 as compared to 1.42 stents per case during fiscal 2005.

Hospital division medical supplies expense per adjusted patient day increased 4.6% to $1,016 for fiscal 2006 as compared to $971 for fiscal 2005, reflecting the increase in procedures that use high-cost medical devices and drug-eluting stents. We have continued to improve our net pricing on items purchased through our group purchasing vendors, which has minimized the impact of general inflationary cost increases.

Bad debt expense.  Our hospitals have been impacted by changes in commercial health insurance benefits which have contributed to an increase in both the number of uninsured and, as co-pays and co-insurance amounts have increased, the number of underinsured patients seeking health care. In addition, we have experienced an increase in the number of self-pay patients in several of our markets in fiscal 2006. Self-pay patients represented 8.1% of hospital division revenue in fiscal 2006 as compared to 7.1% in fiscal 2005. As a result, bad debt expense increased 17.9% to $56.8 million for fiscal 2006 from $48.2 million for fiscal 2005. In addition to the economic conditions, this $8.6 million increase in bad debt expense was also driven by the increase in admissions for the hospital division. Adjusted admissions increased 4.3% in fiscal 2006 compared to fiscal 2005 and revenue per adjusted admission increased 1.0% year over year. As a percentage of net revenue, bad debt expense increased to 8.0% for fiscal 2006 from 7.2% for fiscal 2005.

Other operating expenses.  Other operating expenses increased 4.3% to $141.5 million for fiscal 2006 from $135.6 million for fiscal 2005. This $5.9 million increase in other operating expenses was due to overall combined increases in the hospital and corporate and other divisions of $7.1 million, and overall decreases in the MedCath Partners and cardiology consulting and management divisions of $1.1 million and $0.1 million, respectively. The $7.1 million increase in the hospital and corporate and other divisions was primarily due to higher fixed costs associated with the management of our facilities and executive severances. In addition, we experienced increases in contract services due to the growth in volume at several facilities during fiscal 2006 and we incurred higher

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maintenance costs at our newest facility as it is completing its second year of operations. The $1.1 million decrease in the MedCath Partners division other operating expenses for fiscal 2006 relates to the reduction in development expenses for the division as these expenses were incurred at the corporate level. As a percentage of revenue, other operating expenses decreased to 20.0% from 20.2% for the years ended September 30, 2006 and 2005, respectively.

Pre-opening expenses.  There were no pre-opening expenses incurred in either fiscal 2006 or 2005. Pre-opening expenses represent costs specifically related to projects under development, primarily new hospitals.

Depreciation.  Depreciation remained flat at $34.8 million for the year ended September 30, 2006 as compared to $34.9 million for the year ended September 30, 2005.

Impairment of long-lived assets.  Impairment of long-lived assets was $0.5 million and $2.7 million in fiscal 2006 and 2005, respectively. During fiscal 2006, management decided to discontinue the implementation of certain nurse staffing software and as a result, a $0.5 million impairment charge was recognized to write-off the costs incurred to date on such software. The $2.7 million impairment in fiscal 2005 represents management’s decision to discontinue implementation of certain accounting software, as well as the determination that the carrying value of a management contract in the MedCath Partners division exceeded its fair value. See “Critical Accounting Policies — Long-Lived Assets.”

Interest expense.  Interest expense increased 4.3% to $33.2 million for fiscal 2006 compared to $31.8 million for fiscal 2005. This $1.4 million increase in interest expense is primarily attributable to deferred loan acquisition costs that were expensed during fiscal 2006 as a result of the prepayment of $11.9 million of our senior notes and the prepayment of $58.0 million of our senior secured credit facility. Further, we experienced an increase in the variable interest rates on portions of our debt. As of September 30, 2006, approximately 16.2% of our outstanding debt bears interest at variable rates.

Interest and other income, net.  Interest and other income, net increased to $7.7 million for fiscal 2006 compared to $3.0 million for fiscal 2005. This $4.7 million increase is primarily due to interest earned on available cash and cash equivalents as our cash position has increased by approximately $53.5 million year over year.

Equity in net earnings of unconsolidated affiliates.  Equity in net earnings of unconsolidated affiliates increased to $4.9 million in fiscal 2006 from $3.4 million in fiscal 2005. The majority of the increase is attributable to growth in earnings at the one hospital in which we hold less than a 50% interest, with the remainder being attributable to growth in earnings in various diagnostic ventures in which we hold less than a 50% interest.

Income tax expense.  Income tax expense was $4.7 million for fiscal 2006 compared to $5.6 million for fiscal 2005, which represented an effective tax rate of approximately 41.3% and 42.5%, respectively. The overall decrease in the effective rate represents the lower impact of certain non-deductible expenses period to period on overall taxable income.

Income from discontinued operations, net of taxes.  During the third quarter of fiscal 2006, we sold our equity interest in Tucson Heart Hospital and during the fourth quarter of fiscal 2006, we decided to seek to dispose of our interest in Heart Hospital of Lafayette and we entered into a confidentiality and exclusivity agreement with a potential buyer. During the first quarter of fiscal 2005, we closed and sold substantially all of the assets of The Heart Hospital of Milwaukee. Accordingly, these hospitals are accounted for as discontinued operations. Income from discontinued operations, net of taxes, in fiscal 2006 reflects the gain on the sale of Tucson Heart Hospital of approximately $13.0 million, partially offset by operating losses and the overall income tax expense associated with the facility. It also includes the operating losses and related tax benefit associated with Heart Hospital of Lafayette during the period. Income from discontinued operations, net of taxes, in fiscal 2005 reflects the gain on the sale of the assets of The Heart Hospital of Milwaukee of approximately $9.1 million, partially offset by operating losses, shut-down costs and the overall income tax expense associated with the facility. It also includes the operating income (losses) and related tax expense (benefit) associated with Tucson Heart Hospital and Heart Hospital of Lafayette during the period.

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Selected Quarterly Results of Operations

The following table sets forth quarterly consolidated operating results for each of our last five quarters. We have prepared this information on a basis consistent with our audited consolidated financial statements and included all adjustments that we consider necessary for a fair presentation of the data. These quarterly results are not necessarily indicative of future results of operations. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report.

	Three Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
	2007			2007			2007			2006			2006
	(In thousands)
Statement of Operations Data (unaudited):
Net revenue	$	158,641		$	192,278		$	192,491		$	175,549		$	177,444
Impairment of long-lived assets		—			—			—			—			7
Income from operations		14,176			20,156			18,017			10,730			15,668
Equity in net earnings of unconsolidated affiliates		1,644			1,175			1,482			1,438			1,036
Minority interest share of earnings of consolidated subsidiaries		(4,221	)		(3,914	)		(3,960	)		(2,480	)		(3,171	)
Income from continuing operations		2,532			8,630			5,811			254			4,490
Income (loss) from discontinued operations		(1,624	)		635			439			(5,150	)		6,449
Net income (loss)	$	908		$	9,265		$	6,250		$	(4,896	)	$	10,939
Earnings (loss) per share, basic Continuing operations	$	0.12		$	0.41		$	0.28		$	0.01		$	0.24
Discontinued operations		(0.08	)		0.03			0.02		$	(0.25	)		0.34
Earnings (loss) per share, basic	$	0.04		$	0.44		$	0.30		$	(0.24	)	$	0.58
Earnings (loss) per share, diluted Continuing operations	$	0.12		$	0.39		$	0.27		$	0.01		$	0.23
Discontinued operations		(0.08	)		0.03			0.02		$	(0.25	)		0.32
Earnings (loss) per share, diluted	$	0.04		$	0.42		$	0.29		$	(0.24	)	$	0.55
Weighted average number of shares, basic		21,202			21,144			21,019			20,121			18,872
Dilutive effect of stock options and restricted stock		579			682			625			—			1,037
Weighted average number of shares, diluted		21,781			21,826			21,644			20,121			19,909
Cash Flow Data (unaudited):
Net cash provided by operating activities	$	14,236		$	19,347		$	12,459		$	9,887		$	10,539
Net cash used in investing activities	$	(11,251	)	$	(8,309	)	$	(5,919	)	$	(3,112	)	$	7,276
Net cash provided by (used in) financing activities	$	(1,328	)	$	(1,499	)	$	(52,552	)	$	(25,232	)	$	5,532

Our results of operations historically have fluctuated on a quarterly basis and can be expected to continue to be subject to quarterly fluctuations. Cardiovascular procedures can often be scheduled ahead of time, permitting some patients to choose to undergo the procedure at a time and location of their preference. Some of the types of trends that we have experienced in the past and may experience again in the future include:

•  the markets where some of our hospitals are located are susceptible to seasonal population changes with part-time residents living in the area only during certain months of the year;

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•  patients choosing to schedule procedures around significant dates, such as holidays; and

•  physicians in the market where a hospital is located schedule vacation from their practice during the summer months of the year, around holidays and for various professional meetings held throughout the world during the year.

To the extent these types of events occur in the future, as in the past, we expect they will affect the quarterly results of operations of our hospitals.

Liquidity and Capital Resources

Working Capital and Cash Flow Activities.  Our consolidated working capital was $179.0 million at September 30, 2007 and $197.3 million at September 30, 2006. The decrease of $18.3 million in working capital primarily resulted from a decrease in cash and cash equivalents and accounts receivable, net, combined with a decrease in current portion of long-term debt and obligations under capital leases. The change in accounts receivable was driven by overall operations, as further described below. The decrease in current portion of long-term debt and obligations under capital leases is primarily the result of payments in the amounts of $21.2 million and $11.1 million to pay off a REIT loan and an equipment loan, respectively, at two of our facilities and the repayment of the remaining $39.9 million due under our senior secured credit facility. The REIT loan matured in December 2006; therefore, the entire balance was considered current at September 30, 2006. Further, at September 30, 2006, we had received a waiver for a covenant violation related to the equipment loan; however, since is was our intent to pay the total outstanding balance of the equipment loan during fiscal 2007, the entire balance of the equipment loan was included in the current portion of long-term debt and obligations under capital leases as of September 30, 2006.

During the second quarter of fiscal 2007, we were informed by one of our Medicare fiscal intermediaries that outlier payments received prior to January 1, 2004 would not be disputed; therefore, we reversed a reserve of $2.2 million that was originally recorded to account for outlier payments that had been received in 2003. At September 30, 2007, we continued to carry a reserve of $8.5 million for outlier payments received in 2004.

The cash provided by operating activities of continuing operations was $64.0 million and $67.1 million for the years ending September 30, 2007 and 2006, respectively. The $3.1 million decrease can be primarily attributed to a decrease in accounts receivable due to successful efforts in our business office to qualify patients for Medicaid and significant improvement in our collections of self-pay patient revenue.

Our investing activities from continuing operations used net cash of $32.9 million for fiscal 2007 compared to net cash provided of $12.3 million for fiscal 2006. The $32.9 million of net cash used by investing activities for the year ended September 30, 2007 was primarily for capital expenditures as we began the development of our hospital in Kingman, Arizona and started expansion projects at two of our existing hospitals. The $28.3 million of net cash used in investing activities for the year ended September 30, 2006 can be primarily attributed to the purchase of capital equipment.

Our financing activities from continuing operations used net cash of $79.0 million during fiscal 2007 compared to net cash used of $22.4 million during fiscal 2006. The $79.0 million of net cash used for financing activities for the year ended September 30, 2007 is primarily a result of distributions to minority partners and the repayment of long-term debt and obligations under capital leases, including a payment of $39.9 million to pay off our senior secured credit facility, a payment of $21.2 million to pay off one of our facility’s REIT loans, which matured in December 2006, and a payment of $11.1 million to pay off the equipment loan at another of our facilities. Further, during fiscal 2007, we completed a secondary public offering in which we sold an additional 1.7 million shares of common stock. The proceeds from this offering were used to prepay $36.2 million of our senior notes. The $22.4 million of net cash used for financing activities for the year ended September 30, 2006 was primarily the result of the receipt of funds, net of loan acquisition costs, obtained through the issuance of long-term debt at Harlingen Medical Center, the proceeds of which were used to prepay a portion of our senior secured credit facility loan as well as distributions to minority partners.

Lease Transaction with HMC Realty.  During July 2007, Harlingen Medical Center transferred real property with a net book value of approximately $34.3 million (fair value of $57.8 million) to a newly formed wholly-owned limited liability subsidiary, HMC Realty, LLC (HMC Realty), in exchange for HMC Realty’s assumption of related

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party and third party debt of approximately $57.8 million. Subsequently, Harlingen Medical Center entered into a lease agreement with HMC Realty whereby Harlingen Medical Center will lease the real property from HMC Realty for approximately $5.5 million annually for 25 years. Subsequent to the transfer of assets and debt, HMC Realty received capital contributions as described below, and Harlingen Medical Center canceled its membership in HMC Realty. The $57.8 million debt assumed by HMC Realty consisted of $2.9 million owed to Valley Baptist Health System (Valley Baptist), $11.3 million owed to us for working capital loans, and the assumption of $43.5 million in real estate debt with a third party. We converted $9.6 million of the working capital loan with HMC Realty into a 36% interest in HMC Realty.

Recapitalization of Harlingen Medical Center.  During fiscal 2006, Harlingen Medical Center entered into two $10.0 million convertible notes with Valley Baptist. The first note could have been voluntarily converted by the health system into a 13.2% ownership interest in Harlingen Medical Center after the third anniversary date of issuance, or it could have been automatically converted into an ownership interest in Harlingen Medical Center upon the achievement of specified financial targets contained in the debt agreement, up until the third anniversary date of the agreement or the fourth anniversary date of the agreement, if extended by Harlingen Medical Center. The second note was convertible into the same ownership interest percentage as the first note at the discretion of the health system after the conversion of the first note. The potential ownership interest in Harlingen Medical Center by the health system was capped at 49%. The notes accrued interest at 5% per annum up until the third anniversary date, after which time the interest rate would have been increased to 8% if the notes had not been converted.

Interest payments were due quarterly. In accordance with the provisions of EITF 99-1, Accounting for Debt Convertible into the Stock of a Consolidated Subsidiary, EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and EITF 01-6, The Meaning of Indexed to a Company’s Own Stock, the convertible notes were accounted for as convertible debt in the accompanying consolidated balance sheets and the embedded conversion option in the convertible notes were not accounted for as a separate derivative.

During July 2007, we elected, along with the original physician investors and Valley Baptist, to allow early conversion of the Valley Baptist notes into an equity interest in Harlingen Medical Center (the “Recapitalization”). Valley Baptist converted $17.1 million of the convertible notes into a 32.1% equity interest in Harlingen Medical Center. The remaining $2.9 million was converted into a membership interest in HMC Realty. Prior to the Recapitalization, Harlingen Medical Center had approximately $12.5 million in working capital debt outstanding with us. As a result of the Recapitalization, we converted $1.2 million of the debt into additional capital in Harlingen Medical Center, converted $9.5 million into a membership interest of HMC Realty, and was repaid the remaining balance of the working capital note. As a result of the transactions described above, we now own a 36% interest in Harlingen Medical Center, and a 36% interest in HMC Realty. In addition, Valley Baptist holds a 32% interest in Harlingen Medical Center and a 19% interest in HMC Realty, and the remaining ownership interests in both entities are held by unrelated physician investor groups.

Prior to the Recapitalization, we consolidated Harlingen Medical Center. As a result of the Recapitalization, our interest in Harlingen Medical Center was diluted from 51.0% to 36.0% effective for the fourth quarter of fiscal year 2007. We recorded the gain resulting from the change in ownership interest in accordance with SAB Topic 5H. The gain resulted from the difference between the carrying amount of our investment in Harlingen Medical Center prior to the issuance of units and our equity investment immediately following the issuance of units. We determined that recognition of the gain as a capital transaction was appropriate because Harlingen Medical Center had historically experienced net losses, and because of uncertainty regarding the possible future occurrence of transactions that may involve further dilution of our equity interest in Harlingen Medical Center. Future issuances of units to third parties, if any, will further dilute our ownership percentage and may give rise to additional gains or losses based on the offering price in comparison to the carrying value of our investment.

Capital Expenditures.  Expenditures for property and equipment for fiscal years 2007 and 2006 were $37.4 million and $30.5 million, respectively. For the year ended September 30, 2007, we began the development of our hospital in Kingman, Arizona and started expansion projects at two of our existing hospitals. For the year ended September 30, 2006, our capital expenditures were principally focused on improvement to and expansion of

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existing facilities. The amount of capital expenditures we incur in future periods will depend largely on the type and size of strategic investments we make in future periods.

Obligations, Commitments and Availability of Financing.  As described more fully in the notes to our consolidated financial statements included elsewhere in this report, we had certain cash obligations at September 30, 2007, which are due as follows (in thousands):

	Payments Due by Fiscal Year
	2008		2009		2010		2011		2012		Thereafter		Total
Long-term debt	$	2,857	$	3,045	$	3,273	$	2,797	$	101,975	$	35,308	$	149,255
Obligations under capital leases		1,251		883		383		372		168		—		3,057
Total debt		4,108		3,928		3,656		3,169		102,143		35,308		152,312
Other long-term obligations, excluding interest rate swaps(1)		2,862		174		54		12		—		—		3,102
Interest on indebtedness(2)		18,972		18,676		18,405		18,138		14,855		9,762		98,808
Operating leases		2,269		1,736		1,114		647		378		3,302		9,446
Total	$	28,211	$	24,514	$	23,229	$	21,966	$	117,376	$	48,372	$	263,668

(1)	Other long-term obligations, excluding interest rate swaps, consist of the non-current portion of deferred compensation under nurse retention arrangements at one of our hospitals and the potential future obligations pursuant to professional service guarantees.
(2)	Interest on indebtedness represents only fixed rate indebtedness; variable rate indebtedness, which is not included in the table above, is based on LIBOR or the prime rate.

During the fourth quarter of fiscal 2004, we completed our offering of $150.0 million in aggregate principal amount of 97/8% senior notes. Concurrent with our offering of the notes, we entered into a $200.0 million senior secured credit facility with a syndicate of banks and other institutional lenders. The credit facility provides for a seven-year term loan facility in the amount of $100.0 million, all of which was drawn in July 2004, and a five-year senior secured revolving credit facility in the amount of $100.0 million which includes a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit and a $10.0 million sub-limit for swing-line loans. Proceeds from these debt facilities combined with cash on hand were used to repay $276.9 million of the long-term debt outstanding at that time.

At September 30, 2007, we had $152.3 million of outstanding debt, $4.1 million of which was classified as current. Of the outstanding debt, $102.0 million was outstanding under our 97/8% senior notes and $49.4 million was outstanding to lenders to our hospitals. The remaining $0.9 million of debt was outstanding to lenders for MedCath Partners’ diagnostic services under capital leases and other miscellaneous indebtedness. No amounts were outstanding to lenders under our $100.0 million revolving credit facility at September 30, 2007. At the same date, however, we had letters of credit outstanding of $1.7 million, which reduced our availability under this facility to $98.3 million.

During the first quarter of fiscal 2007, we sold 1.7 million shares of common stock to the public. The $39.7 million in net proceeds from this offering were used to repurchase approximately $36.2 million of our outstanding senior notes and to pay approximately $3.5 million of associated premiums and expenses associated with the note repurchase.

Covenants related to our long-term debt restrict the payment of dividends and require the maintenance of specific financial ratios and amounts and periodic financial reporting. At September 30, 2007 and 2006, we were in violation of a financial covenant under an equipment loan to Heart Hospital of Lafayette. Heart Hospital of Lafayette is classified as a discontinued operation. Accordingly, the total outstanding balance of this loan has been included in current liabilities of discontinued operations on the consolidated balance sheets as of September 30,

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2007 and 2006. Subsequent to September 30, 2007, we completed the disposition of Heart Hospital of Lafayette to the Heart Hospital of Acadiana. Heart Hospital of Acadiana is co-owned by Our Lady of Lourdes, a Lafayette, Louisiana community hospital and local physicians. See Note 21 — Subsequent Events to the Consolidated Financial Statements. We were in compliance with all other covenants in the instruments governing our outstanding debt at September 30, 2007.

At September 30, 2007, we guaranteed either all or a portion of the obligations of our subsidiary hospitals for equipment and other notes payable. We provide these guarantees in accordance with the related hospital operating agreements, and we receive a fee for providing these guarantees from the hospitals or the physician investors.

We also guarantee approximately 30% of the equipment debt of Avera Heart Hospital of South Dakota, a hospital in which we own a minority interest at September 30, 2007, and therefore do not consolidate the hospital’s results of operations and financial position. We provide this guarantee in exchange for a fee from the hospital. At September 30, 2007, Avera Heart Hospital of South Dakota was in compliance with all covenants in the instruments governing its debt. The total amount of the hospital’s equipment debt was approximately $1.1 million at September 30, 2007. Accordingly, the equipment debt guaranteed by us was approximately $0.3 million at September 30, 2007.

See Note 9 to the consolidated financial statements included elsewhere in this report for additional discussion of the terms, covenants and repayment schedule surrounding our debt.

We believe that internally generated cash flows and available borrowings under our senior secured credit facility will be sufficient to finance our business plan, capital expenditures and our working capital requirements for the next 12 to 18 months.

Intercompany Financing Arrangements.  We provide secured real estate, equipment and working capital financings to our majority-owned hospitals. The aggregate amount of the intercompany real estate, equipment and working capital and other loans outstanding as of September 30, 2007 was $257.3 million.

Each intercompany real estate loan is separately documented and secured with a lien on the borrowing hospital’s real estate, building and equipment and certain other assets. Each intercompany real estate loan typically matures in 7 to 10 years and accrues interest at variable rates based on LIBOR plus an applicable margin or a fixed rate similar to terms commercially available.

Each intercompany equipment loan is separately documented and secured with a lien on the borrowing hospital’s equipment and certain other assets. Amounts borrowed under the intercompany equipment loans are payable in monthly installments of principal and interest over terms that range from 5 to 7 years. The intercompany equipment loans accrue interest at fixed rates ranging from 8.03% to 8.58% or variable rates based on LIBOR plus an applicable margin. The weighted average interest rate for the intercompany equipment loans at September 30, 2007 was 8.22%.

We typically receive a fee from the minority partners in the subsidiary hospitals as consideration for providing these intercompany real estate and equipment loans.

We also use intercompany financing arrangements to provide cash support to individual hospitals for their working capital and other corporate needs. We provide these working capital loans pursuant to the terms of the operating agreements between our physician and hospital investor partners and us at each of our hospitals. These intercompany loans are evidenced by promissory notes that establish borrowing limits and provide for a market rate of interest to be paid to us on outstanding balances. These intercompany loans are subordinate to each hospital’s mortgage and equipment debt outstanding, but are senior to our equity interests and our partners’ equity interests in the hospital venture and are secured, subject to the prior rights of the senior lenders, in each instance by a pledge of certain of the borrowing hospital’s assets. Also as part of our intercompany financing and cash management structure, we sweep cash from individual hospitals as amounts are available in excess of the individual hospital’s working capital needs. These funds are advanced pursuant to cash management agreements with the individual hospitals that establish the terms of the advances and provide for a rate of interest to be paid consistent with the market rate earned by us on the investment of its funds. These cash advances are due back to the individual hospital on demand and are subordinate to our equity investment in the hospital venture. As of September 30, 2007 and

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September 30, 2006, we held $33.0 million and $55.5 million, respectively, of intercompany working capital and other notes and related accrued interest, net of advances from our hospitals.

Because these intercompany notes receivable and related interest income are eliminated with the corresponding notes payable and interest expense at our consolidating hospitals in the process of preparing our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, the amounts outstanding under these notes do not appear in our consolidated financial statements or accompanying notes. Information about the aggregate amount of these notes outstanding from time to time may be helpful, however, in understanding the amount of our total investment in our hospitals. In addition, we believe investors and others will benefit from a greater understanding of the significance of the priority rights we have under these intercompany notes receivable to distributions of cash by our hospitals as funds are generated from future operations, a potential sale of a hospital, or other sources. Because these notes receivable are senior to the equity interests of MedCath and our partners in each hospital, in the event of a sale of a hospital, the hospital would be required first to pay to us any balance outstanding under its intercompany notes prior to distributing any of the net proceeds of the sale to any of the hospital’s equity investors as a return on their investment based on their pro-rata ownership interests. Also, appropriate payments to us to amortize principal balances outstanding and to pay interest due under these notes are generally made to us from a hospital’s available cash flows prior to any pro-rata distributions of a hospital’s earnings to the equity investors in the hospitals.

On December 1, 2004, we completed the sale of certain assets of The Heart Hospital of Milwaukee for $42.5 million. Of the $42.5 million in proceeds received, approximately $37.0 million was used to repay The Heart Hospital of Milwaukee’s intercompany secured loans, thereby increasing our consolidated cash position on such date. As part of the terms of the sale, we were required to close the hospital. As such, we incurred costs associated with the closing of the hospital, in addition to costs associated with completing the sale and additional operating expenses. As stipulated by the covenants of our senior secured credit facility, within 300 days after the receipt of the net proceeds, we could identify a use of the net proceeds for capital expenditures or other permitted investments, so long as such usage occurred within 300 days of the date identified, which we have done. Any net proceeds not identified or invested within this time period were to be used to repay principal of senior secured indebtedness. The lenders under our senior secured credit facility waived this requirement. However, the indenture governing our senior notes contains a similar requirement. Accordingly, we offered to repurchase up to $30.3 million of our senior notes. The tender offer for the notes expired during fiscal year 2006 and we accepted for purchase and paid for $11.9 million principal amount of senior notes tendered prior to the expiration of the tender offer.

On August 31, 2006, we completed the divestiture of our equity interest in Tucson Heart Hospital for $40.7 million. Of the $40.7 million proceeds received, approximately $40.2 million was used to repay Tucson Heart Hospital’s intercompany secured loans, thereby increasing our consolidated cash position on such date.

We have, during fiscal 2006, and will continue in future periods, provided information on a quarterly basis about the aggregate amount of these intercompany loans outstanding to assist investors in better understanding the total amount of our investment in our hospitals, our claim to the future cash flows of our hospitals, and our capital structure.

Off-Balance Sheet Arrangements.  We do not have any off-balance sheet financing that has, or is reasonably likely to have, a material current or future effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.

Reimbursement, Legislative and Regulatory Changes

Legislative and regulatory action has resulted in continuing changes in reimbursement under the Medicare and Medicaid programs that will continue to limit payments we receive under these programs. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to legislative and regulatory changes, administrative rulings, interpretations, and discretion which may further affect payments made under those programs, and the federal and state governments may, in the future, reduce the funds available under those programs or require more stringent utilization and quality reviews of our hospitals or require other changes in our operations. Additionally, there may be a continued rise in managed care programs and future restructuring of the financing and delivery of healthcare in the United States. These events could have an adverse effect on our future

52

financial results. See Item 1A: Risk Factors — Reductions or changes in reimbursement from government or third-party payors could adversely impact our operating results.

Inflation

The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation and when labor shortages, such as the growing nationwide shortage of qualified nurses, occur in the marketplace. In addition, suppliers pass along rising costs to us in the form of higher prices. We have implemented cost control measures, including our case and resource management program, to curb increases in operating costs and expenses. We have, to date, offset increases in operating costs by increasing reimbursement for services and expanding services. However, we cannot predict our ability to cover, or offset, future cost increases.

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

We maintain a policy for managing risk related to exposure to variability in interest rates, commodity prices, and other relevant market rates and prices which includes considering entering into derivative instruments (freestanding derivatives), or contracts or instruments containing features or terms that behave in a manner similar to derivative instruments (embedded derivatives) in order to mitigate our risks. In addition, we may be required to hedge some or all of our market risk exposure, especially to interest rates, by creditors who provide debt funding to us. To date, we have only entered into the fixed interest rate swaps as discussed below.

Three of our consolidated hospitals entered into fixed interest rate swaps during previous years. These fixed interest rate swaps effectively fixed the interest rate on the hedged portion of the related debt at 4.92% plus an applicable margin for two of the hospitals and at 4.6% plus an applicable margin for the other hospital. These interest rate swaps were accounted for as cash flow hedges prior to the repayment of the outstanding balances of the mortgage debt for these three hospitals as part of the July 2004 financing transaction. We did not terminate the interest rate swaps as part of the financing transaction, which resulted in the recognition of a loss of approximately $0.6 million during the fourth quarter of fiscal 2004. Since July 2004, the fixed interest rate swaps have not been utilized as a hedge of variable debt obligations, and accordingly, changes in the valuation of the interest rate swaps have been recorded directly to earnings as a component of interest expense. The fixed interest rate swaps expired during fiscal 2006 resulting in an unrealized gain for the fiscal year ended September 30, 2006 that was not significant to the consolidated financial position or results of operations.

53

Item 8.   Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

MEDCATH CORPORATION AND SUBSIDIARIES

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		55
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 2007 and 2006		56
Consolidated Statements of Operations for the Years Ended September 30, 2007, 2006 and 2005		57
Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2007, 2006 and 2005		58
Consolidated Statements of Cash Flows for the Years Ended September 30, 2007, 2006 and 2005		59
Notes to Consolidated Financial Statements		60

HEART HOSPITAL OF SOUTH DAKOTA, LLC

	Page
INDEPENDENT AUDITORS’ REPORT		93
FINANCIAL STATEMENTS:
Balance Sheets as of September 30, 2007 and 2006		94
Statements of Operations for the Years Ended September 30, 2007, 2006 and 2005		95
Statements of Members’ Capital for the Years Ended September 30, 2007, 2006 and 2005		96
Statements of Cash Flows for the Years Ended September 30, 2007, 2006 and 2005		97
Notes to Financial Statements		98

54

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

MedCath Corporation

Charlotte, North Carolina

We have audited the accompanying consolidated balance sheets of MedCath Corporation and subsidiaries (the Company) as of September 30, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, effective October 1, 2005, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123-R, Share-Based Payment.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of September 30, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 14, 2007, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/  Deloitte & Touche LLP

Charlotte, North Carolina

December 14, 2007

55

MEDCATH CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	September 30,
	2007			2006
Current assets:
Cash and cash equivalents	$	140,381		$	193,654
Accounts receivable, net		86,994			93,584
Medical supplies		15,336			19,761
Deferred income tax assets		12,389			11,998
Prepaid expenses and other current assets		6,527			7,039
Current assets of discontinued operations		10,786			6,940
Total current assets		272,413			332,976
Property and equipment, net		296,800			338,152
Investments in affiliates		5,718			7,803
Goodwill		62,740			62,490
Other intangible assets, net		6,448			7,082
Other assets		6,547			10,662
Long-term assets of discontinued operations		18,749			26,684
Total assets	$	669,415		$	785,849
Current liabilities:
Accounts payable	$	33,247		$	38,748
Income tax payable		11,124			1,207
Accrued compensation and benefits		19,557			22,801
Other accrued liabilities		14,137			19,172
Current portion of long-term debt and obligations under capital leases		4,108			39,093
Current liabilities of discontinued operations		11,199			14,680
Total current liabilities		93,372			135,701
Long-term debt		146,398			285,067
Obligations under capital leases		1,806			1,552
Deferred income tax liabilities		12,018			19,752
Other long-term obligations		460			309
Total liabilities		254,054			442,381
Commitments and contingencies
Minority interest in equity of consolidated subsidiaries		29,737			25,808
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none issued		—			—
Common stock, $0.01 par value, 50,000,000 shares authorized; 21,271,144 issued and 21,202,244 outstanding at September 30, 2007 19,159,998 issued and 19,091,098 outstanding at September 30, 2006		213			192
Paid-in capital		447,688			391,261
Accumulated deficit		(61,821	)		(73,348	)
Accumulated other comprehensive loss		(62	)		(51	)
Treasury stock, 68,900 shares at cost		(394	)		(394	)
Total stockholders’ equity		385,624			317,660
Total liabilities and stockholders’ equity	$	669,415		$	785,849

See notes to consolidated financial statements.

56

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Year Ended September 30,
	2007			2006			2005
Net revenue	$	718,959		$	706,374		$	672,001
Operating expenses:
Personnel expense		229,844			228,350			205,469
Medical supplies expense		192,036			196,046			189,953
Bad debt expense		55,162			56,845			48,220
Other operating expenses		142,584			141,498			135,618
Pre-opening expenses		555			—			—
Depreciation		33,602			34,792			34,862
Amortization		631			1,008			1,160
Loss (gain) on disposal of property, equipment and other assets		1,466			(142	)		(646	)
Impairment of long-lived assets		—			458			2,662
Total operating expenses		655,880			658,855			617,298
Income from operations		63,079			47,519			54,703
Other income (expenses):
Interest expense		(22,464	)		(31,840	)		(31,832	)
Loss on early extinguishment of debt		(9,931	)		(1,370	)		—
Interest and other income, net		7,855			7,733			3,018
Equity in net earnings of unconsolidated affiliates		5,739			4,919			3,356
Total other expenses, net		(18,801	)		(20,558	)		(25,458	)
Income from continuing operations before minority interest and income taxes		44,278			26,961			29,245
Minority interest share of earnings of consolidated subsidiaries		(14,575	)		(15,521	)		(15,968	)
Income from continuing operations before income taxes		29,703			11,440			13,277
Income tax expense		12,476			4,729			5,643
Income from continuing operations		17,227			6,711			7,634
Income (loss) from discontinued operations, net of taxes		(5,700	)		5,865			1,157
Net income	$	11,527		$	12,576		$	8,791
Earnings (loss) per share, basic Continuing operations	$	0.82		$	0.36		$	0.42
Discontinued operations		(0.26	)		0.31			0.06
Earnings (loss) per share, basic	$	0.56		$	0.67		$	0.48
Earnings (loss) per share, diluted Continuing operations	$	0.80		$	0.34		$	0.39
Discontinued operations		(0.26	)		0.30			0.06
Earnings (loss) per share, diluted	$	0.54		$	0.64		$	0.45
Weighted average number of shares, basic		20,872			18,656			18,286
Dilutive effect of stock options and restricted stock		639			899			1,184
Weighted average number of shares, diluted		21,511			19,555			19,470

See notes to consolidated financial statements.

57

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

										Accumulated
										Other
	Common Stock				Paid-in		Accumulated			Comprehensive			Treasury Stock
	Shares		Par Value		Capital		Deficit			Income (Loss)			Shares		Amount			Total
Balance, September 30, 2004		18,022	$	181	$	358,656	$	(94,715	)	$	(80	)		69	$	(394	)	$	263,648
Exercise of stock options, including income tax benefit		472		5		8,725		—			—			—		—			8,730
Acceleration of vesting of stock options		—		—		1,468		—			—			—		—			1,468
Comprehensive income:
Net income		—		—		—		8,791			—			—		—			8,791
Change in fair value of interest rate swaps, net of income tax expense		—		—		—		—			104			—		—			104
Total comprehensive income																			8,895
Balance, September 30, 2005		18,494		186		368,849		(85,924	)		24			69		(394	)		282,741
Exercise of stock options, including income tax benefit		597		6		9,190		—			—			—		—			9,196
Share-based compensation expense		—		—		13,222		—			—			—		—			13,222
Comprehensive income:
Net income		—		—		—		12,576			—			—		—			12,576
Change in fair value of interest rate swaps, net of income tax benefit		—		—		—		—			(75	)		—		—			(75	)
Total comprehensive income																			12,501
Balance, September 30, 2006		19,091		192		391,261		(73,348	)		(51	)		69		(394	)		317,660
Exercise of stock options, including income tax benefit		411		4		7,879		—			—			—		—			7,883
Secondary public offering		1,700		17		39,641													39,658
Share-based compensation expense		—		—		4,338		—			—			—		—			4,338
Gain on capital transaction of subsidiary, net of tax						4,569													4,569
Comprehensive income:
Net income		—		—		—		11,527			—			—		—			11,527
Change in fair value of interest rate swaps, net of income tax benefit		—		—		—		—			(11	)		—		—			(11	)
Total comprehensive income																			11,516
Balance, September 30, 2007		21,202	$	213	$	447,688	$	(61,821	)	$	(62	)		69	$	(394	)	$	385,624

See notes to consolidated financial statements.

58

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended September 30,
	2007			2006			2005
Net income	$	11,527		$	12,576		$	8,791
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations, net of taxes		5,700			(5,865	)		(1,157	)
Bad debt expense		55,162			56,845			48,220
Depreciation		33,602			34,792			34,862
Amortization		631			1,008			1,160
Excess income tax benefit on exercised stock options		(2,080	)		(2,697	)		1,268
Loss (gain) on disposal of property, equipment and other assets		1,466			(142	)		(646	)
Share-based compensation expense		4,338			13,222			1,468
Impairment of long-lived assets		—			458			2,662
Amortization of loan acquisition costs		3,858			2,907			1,602
Equity in earnings of unconsolidated affiliates, net of dividends received		(2,458	)		(2,071	)		(668	)
Minority interest share of earnings of consolidated subsidiaries		14,575			15,521			15,968
Change in fair value of interest rate swaps		—			(120	)		(1,041	)
Deferred income taxes		(6,037	)		7,217			5,699
Change in assets and liabilities that relate to operations:
Accounts receivable		(61,363	)		(69,531	)		(50,899	)
Medical supplies		1,597			(1,878	)		2,011
Prepaids and other assets		1,696			(218	)		1,486
Accounts payable and accrued liabilities		1,711			5,110			(4,445	)
Net cash provided by operating activities of continuing operations		63,925			67,134			66,341
Net cash used in operating activities of discontinued operations		(7,996	)		(2,169	)		(5,094	)
Net cash provided by operating activities		55,929			64,965			61,247
Investing activities:
Purchases of property and equipment		(37,399	)		(30,451	)		(18,965	)
Proceeds from sale of property and equipment		4,541			2,119			1,138
Other investing activities		—			—			6
Net cash used in investing activities of continuing operations		(32,858	)		(28,332	)		(17,821	)
Net cash provided by investing activities of discontinued operations		4,267			38,396			40,623
Net cash provided by (used in) investing activities		(28,591	)		10,064			22,802
Financing activities:
Proceeds from issuance of long-term debt		—			60,000			—
Repayments of long-term debt		(112,969	)		(75,033	)		(10,594	)
Repayments of obligations under capital leases		(1,925	)		(2,061	)		(2,359	)
Payments of loan acquisition costs		—			(1,879	)		—
Investments by minority partners		2,688			—			1,241
Distributions to minority partners		(13,799	)		(13,233	)		(10,144	)
Repayments from (advances to) minority partners, net		(533	)		618			206
Proceeds from exercised stock options		5,803			6,499			7,462
Proceeds from issuance of common stock		39,658			—			—
Excess income tax benefit on exercised stock options		2,080			2,697			—
Net cash used in financing activities of continuing operations		(78,997	)		(22,392	)		(14,188	)
Net cash (used in) provided by financing activities of discontinued operations		(1,614	)		845			1,543
Net cash used in financing activities		(80,611	)		(21,547	)		(12,645	)
Net increase (decrease) in cash and cash equivalents		(53,273	)		53,482			71,404
Cash and cash equivalents:
Beginning of year		193,654			140,172			68,768
End of year	$	140,381		$	193,654		$	140,172
Supplemental disclosure of cash flow information:
Interest paid	$	23,065		$	30,494		$	31,834
Income taxes paid	$	10,927		$	2,550		$	1,056
Supplemental schedule of noncash investing and financing activities:
Capital expenditures financed by capital leases	$	1,645		$	—		$	514
Subsidiary stock issued in exchange for services at fair market value	$	240		$	—		$	—

See notes to consolidated financial statements.

59

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All tables in thousands, except per share amounts)

1.   Business and Organization

MedCath Corporation (the Company) primarily focuses on providing high acuity services, including the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in partnership with physicians, most of whom are cardiologists and cardiovascular surgeons. While each of the Company’s majority-owned hospitals (collectively, the hospital division) is licensed as a general acute care hospital, the Company focuses on serving the unique needs of patients suffering from cardiovascular disease. As of September 30, 2007, the Company owned and operated eleven hospitals, together with its physician partners, who own an equity interest in the hospitals where they practice. The Company’s existing hospitals had a total of 667 licensed beds, of which 646 were staffed and available, and were located in eight states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota and Texas. The Company is currently in the process of developing a new hospital located in Kingman, Arizona which it expects to open during September 2009.

See Note 3 — Discontinued Operations for details concerning the Company’s sale of its equity interest in Tucson Heart Hospital and the Company’s pending disposition of Heart Hospital of Lafayette. Unless specifically indicated otherwise, all amounts and percentages presented in these notes are exclusive of the Company’s discontinued operations.

The Company accounts for all but two of its owned and operated hospitals as consolidated subsidiaries. The Company owns a minority interest in Avera Heart Hospital of South Dakota and Harlingen Medical Center as of September 30, 2007 and is not the primary beneficiary under the revised version of Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN No. 46-R). Therefore, the Company is unable to consolidate the hospitals’ results of operations and financial position, but rather is required to account for its minority ownership interest in the hospital as an equity investment. Harlingen Medical Center was a consolidated entity for the fiscal years ended September 30, 2005 and 2006 and for the first three quarters of fiscal 2007. In July 2007, the Company sold a portion of its equity interest in Harlingen Medical Center; therefore, the Company no longer is its primary beneficiary and accounts for its minority ownership interest in the hospital as an equity investment.

In addition to its hospitals, the Company provides cardiovascular care services in diagnostic and therapeutic facilities in various locations and through mobile cardiac catheterization laboratories (the MedCath Partners division). The Company also provides consulting and management services tailored primarily to cardiologists and cardiovascular surgeons, which is included in the corporate and other division.

2.   Summary of Significant Accounting Policies and Estimates

Basis of Consolidation — The consolidated financial statements include the accounts of the Company and its subsidiaries that are wholly and majority owned and/or over which it exercises substantive control, including variable interest entities in which the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation. The Company uses the equity method of accounting for entities, including variable interest entities, in which it holds less than a 50% interest and it is not the primary beneficiary.

Restatements and Reclassifications — In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), hospitals sold or classified as held for sale are required to be reported as discontinued operations. During fiscal 2005, the Company completed the sale of the assets of The Heart Hospital of Milwaukee and during fiscal 2006, the Company completed the sale of its equity interest in Tucson Heart Hospital and decided to seek to dispose of its interest in Heart Hospital of Lafayette and entered into a confidentiality and exclusivity agreement with a potential buyer, therefore classifying the hospital as held for sale. Subsequent to September 30, 2007, the Company completed the disposition of Heart Hospital of Lafayette to the Heart Hospital of Acadiana. Heart Hospital of Acadiana is co-

60

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

owned by Our Lady of Lourdes, a Lafayette, Louisiana community hospital and local physicians. See Note 21 - Subsequent Events, to the Consolidated Financial Statements. In accordance with the provisions of SFAS No. 144, the results of operations of these hospitals for the years ended September 30, 2007, 2006 and 2005 are reported as discontinued operations for all periods presented. Many of the provisions of SFAS No. 144 involve judgment in determining whether a hospital will be reported as continuing or discontinued operations. Such judgments include whether a hospital will be sold, the period required to complete the disposition and the likelihood of changes to a plan for sale. If in future periods the Company determines that a hospital should be either reclassified from continuing operations to discontinued operations or from discontinued operations to continuing operations, previously reported consolidated statements of operations are reclassified in order to reflect the current classification.

The Company evaluated the carrying value of the long lived assets related to Heart Hospital of Lafayette at the end of each of the four quarters during fiscal 2007. At December 31, 2006 and September 30, 2007, it was determined that the carrying value was in excess of the fair value. Accordingly, an impairment charge of $4.1 million and $3.5 million was recorded in accordance with SFAS No. 144 during the first and fourth quarters of fiscal 2007, respectively, and is included in loss from discontinued operations in the consolidated statement of operations for the year ended September 30, 2007. As of March 31 and June 30, 2007 it was determined that the carrying value approximated fair value and no further impairment was necessary.

The Company has reclassified the prior year loss on early extinguishment of debt to be consistent with the current year presentation. The loss had previously been recorded as a component of interest expense. In addition, the Company reclassified proceeds from the sale of discontinued operations to net cash provided by investing activities of discontinued operations in the accompanying 2006 and 2005 consolidated statements of cash flows as the Company believes such presentation is more reflective of the concepts contained in FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. There is a reasonable possibility that actual results may vary significantly from those estimates.

Fair Value of Financial Instruments — The Company considers the carrying amounts of significant classes of financial instruments on the consolidated balance sheets, including cash and cash equivalents, accounts receivable, net, accounts payable, income taxes payable, accrued liabilities, variable rate long-term debt, obligations under capital leases, and other long-term obligations to be reasonable estimates of fair value due either to their length to maturity or the existence of variable interest rates underlying such financial instruments that approximate prevailing market rates at September 30, 2007 and 2006. The estimated fair value of long-term debt, including the current portion, at September 30, 2007 is approximately $177.0 million as compared to a carrying value of approximately $149.3 million. At September 30, 2006, the estimated fair value of long-term debt, including the current portion, was approximately $336.7 million as compared to a carrying value of approximately $322.4 million. Fair value of the Company’s fixed rate debt was estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of arrangements, and the fair value of the Company’s variable rate debt was determined to approximate its carrying value, due to the underlying variable interest rates.

Concentrations of Credit Risk — Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents and accounts receivable. Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand.

The Company grants credit without collateral to its patients, most of whom are insured under payment arrangements with third party payors, including Medicare, Medicaid and commercial insurance carriers. The

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Company has not experienced significant losses related to receivables from individual patients or groups of patients in any particular industry or geographic area.

Cash and Cash Equivalents — Cash consists of currency on hand and demand deposits with financial institutions. Cash equivalents include investments in highly liquid instruments with original maturities of three months or less.

Allowance for Doubtful Accounts — Accounts receivable primarily consist of amounts due from third-party payors and patients in the Company’s hospital division. The remainder of the Company’s accounts receivable principally consist of amounts due from billings to hospitals for various cardiovascular care services performed in its MedCath Partners division and amounts due under consulting and management contracts. To provide for accounts receivable that could become uncollectible in the future, the Company establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. The Company estimates this allowance based on such factors as payor mix, aging and the historical collection experience and write-offs of its respective hospitals and other business units.

Medical Supplies — Medical supplies consist primarily of supplies necessary for diagnostics, catheterization and surgical procedures and general patient care and are stated at the lower of first-in, first-out (FIFO) cost or market.

Property and Equipment — Property and equipment are recorded at cost and are depreciated principally on a straight-line basis over the estimated useful lives of the assets, which generally range from 25 to 40 years for buildings and improvements, 25 years for land improvements, and from 3 to 10 years for equipment, furniture and software. Repairs and maintenance costs are charged to operating expense while betterments are capitalized as additions to the related assets. Retirements, sales, and disposals are recorded by removing the related cost and accumulated depreciation with any resulting gain or loss reflected in income from operations. Amortization of property and equipment recorded under capital leases is included in depreciation expense. Interest expense incurred in connection with the construction of hospitals is capitalized as part of the cost of the building until the facility is operational, at which time depreciation begins using the straight-line method over the estimated useful life of the building. The Company capitalized approximately $0.2 million during the year ended September 30, 3007. The Company did not capitalize any interest during the years ended September 30, 2006 and 2005.

Goodwill and Intangible Assets — Goodwill represents acquisition costs in excess of the fair value of net identifiable tangible and intangible assets of businesses purchased. Other intangible assets primarily consist of the value of management contracts. With the exception of goodwill, intangible assets are being amortized over periods ranging from 11 to 29 years. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), the Company evaluates goodwill annually on September 30 for impairment, or earlier if indicators of potential impairment exist. The determination of whether or not goodwill has become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of the Company’s reporting units. Changes in the Company’s strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of intangible assets. The Company recorded a goodwill impairment charge of approximately $2.8 million during the first quarter of fiscal 2007 related to Heart Hospital of Lafayette, which is reported as a discontinued operation. The impairment charge is included as a component of income (loss) from discontinued operations in the statement of operations for the fiscal year ended September 30, 2007.

Other Assets — Other assets primarily consist of loan acquisition costs and prepaid rent under a long-term operating lease for land at one of the Company’s hospitals. The loan acquisition costs are being amortized using the straight-line method over the life of the related debt, which approximates the effective interest method. The Company recognizes the amortization of the loan acquisition costs as a component of interest expense. The prepaid rent is being amortized using the straight-line method over the lease term, which extends through December 11, 2065. The Company recognizes the amortization of prepaid rent as a component of other operating expense. For the

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years ended September 30, 2007, 2006 and 2005, amortization expense related to other assets was $1.2 million, $2.9 million and $1.6 million, respectively.

Long-Lived Assets — In accordance with SFAS No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets, are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in the Company’s strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets.

During the year ended September 30, 2006, the operating performance of one of the Company’s facilities, Heart Hospital of Lafayette, was significantly below expectations. The performance of the hospital as well as other strategic initiatives were considered when management made the decision to seek to dispose of the Heart Hospital of Lafayette, which is classified as a discontinued operation in the accompanying financial statements (see Note 3). At September 30, 2006, management believed the net carrying value of the discontinued assets as of September 30, 2007 would be realizable; however, ultimate realization of the discontinued assets could not be assured. During the year ended September 30, 2007, the Company re-evaluated the discontinued assets and $4.8 million in impairment charges in accordance with SFAS No. 144 (in addition to the $2.8 million goodwill impairment recorded in accordance with SFAS No. 142 discussed above) were recorded and are included in income (loss) from discontinued operations, net of taxes in the Company’s statement of operations for fiscal 2007.

Also during the year ended September 30, 2006, management decided to discontinue the implementation of certain nurse staffing software and as a result, a $0.5 million impairment charge was recognized to write-off the costs incurred to date on such software.

During the year ended September 30, 2005, the Company recorded a $2.7 million impairment charge, which was comprised of $1.7 million relating to license fees associated with the use of certain accounting software and $1.0 million relating to a management contract. The accounting software was installed in two hospitals and was intended to be installed in the remaining hospitals; however, due to a lack of additional benefits provided by the system and additional installation costs required, it was determined that the system would not be installed in any additional hospitals. Therefore, the impairment charge reflects the unused license fees associated with this system. The remaining $1.0 million impairment charge relates to the excess carrying value over the fair value of a management contract due to lack of volumes and other economic factors at one managed diagnostic venture.

Other Long-Term Obligations — Other long-term obligations consist of the Company’s liabilities for its interest rate swap derivatives, which are recognized at their fair market value as of the balance sheet date and the Company’s noncurrent obligations under certain deferred compensation arrangements.

Market Risk Policy — The Company’s policy for managing risk related to its exposure to variability in interest rates, commodity prices, and other relevant market rates and prices includes consideration of entering into derivative instruments (freestanding derivatives), or contracts or instruments containing features or terms that behave in a manner similar to derivative instruments (embedded derivatives) in order to mitigate its risks. In addition, the Company may be required to hedge some or all of its market risk exposure, especially to interest rates, by creditors who provide debt funding to the Company. The Company recognizes all derivatives as either assets or liabilities on the balance sheets and measures those instruments at fair value in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (an Amendment of FASB Statement No. 133), and as amended by SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.

Revenue Recognition — Amounts the Company receives for treatment of patients covered by governmental programs such as Medicare and Medicaid and other third-party payors such as commercial insurers, health

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maintenance organizations and preferred provider organizations are generally less than established billing rates. Payment arrangements with third-party payors may include prospectively determined rates per discharge or per visit, a discount from established charges, per diem payments, reimbursed costs (subject to limits) and/or other similar contractual arrangements. As a result, net revenue for services rendered to patients is reported at the estimated net realizable amounts as services are rendered. The Company accounts for the differences between the estimated realizable rates under the reimbursement program and the standard billing rates as contractual adjustments.

The majority of the Company’s contractual adjustments are system-generated at the time of billing based on either government fee schedules or fee schedules contained in managed care agreements with various insurance plans. Portions of the Company’s contractual adjustments are performed manually and these adjustments primarily relate to patients that have insurance plans with whom the Company’s hospitals do not have contracts containing discounted fee schedules, also referred to as non-contracted payors, and patients that have secondary insurance plans following adjudication by the primary payor. Estimates of contractual adjustments are made on a payor-specific basis and based on the best information available regarding the Company’s interpretation of the applicable laws, regulations and contract terms. While subsequent adjustments to the systematic contractual allowances can arise due to denials, short payments deemed immaterial for continued collection effort and a variety of other reasons, such amounts have not historically been significant.

The Company continually reviews the contractual estimation process to consider and incorporate updates to the laws and regulations and any changes in the contractual terms of its programs. Final settlements under some of these programs are subject to adjustment based on audit by third parties, which can take several years to determine. From a procedural standpoint, for governmental payors, primarily Medicare, the Company recognizes estimated settlements in its consolidated financial statements based on filed cost reports. The Company subsequently adjusts those settlements as new information is obtained from audits or reviews by the fiscal intermediary and, if the result of the fiscal intermediary audit or review impacts other unsettled and open cost reports, the Company recognizes the impact of those adjustments. As such, the Company recognized adjustments that increased/(decreased) net revenue by $1.5 million, ($0.5) million and $3.0 million in the years ended September 30, 2007, 2006 and 2005, respectively.

A significant portion of the Company’s net revenue is derived from federal and state governmental healthcare programs, including Medicare and Medicaid, which, combined, accounted for 46.3%, 49.4% and 53.0% of the Company’s net revenue during the years ended September 30, 2007, 2006 and 2005, respectively. Medicare payments for inpatient acute services and certain outpatient services are generally made pursuant to a prospective payment system. Under this system, hospitals are paid a prospectively-determined fixed amount for each hospital discharge based on the patient’s diagnosis. Specifically, each discharge is assigned to a diagnosis-related group (DRG). Based upon the patient’s condition and treatment during the relevant inpatient stay, each DRG is assigned a fixed payment rate that is prospectively set using national average costs per case for treating a patient for a particular diagnosis. The DRG rates are adjusted by an update factor each federal fiscal year, which begins on October 1. The update factor is determined, in part, by the projected increase in the cost of goods and services that are purchased by hospitals, referred to as the market basket index. DRG payments do not consider the actual costs incurred by a hospital in providing a particular inpatient service; however, DRG payments are adjusted by a predetermined adjustment factor assigned to the geographic area in which the hospital is located.

While hospitals generally do not receive direct payment in addition to a DRG payment, hospitals may qualify for additional capital-related cost reimbursement and outlier payments from Medicare under specific circumstances. Medicare payments for non-acute services, certain outpatient services, medical equipment, and education costs are made based on a cost reimbursement methodology and are under transition to various methodologies involving prospectively determined rates. The Company is reimbursed for cost-reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by the Company and audits thereof by the Medicare fiscal intermediary. Medicaid payments for inpatient and outpatient services are made at prospectively determined amounts and cost based reimbursement, respectively.

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The Company’s managed diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories operate under various contracts where management fee revenue is recognized under fixed-rate and percentage-of-income arrangements as services are rendered. In addition, certain diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories recognize additional revenue under cost reimbursement and equipment lease arrangements. Net revenue from the Company’s owned diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories is reported at the estimated net realizable amounts due from patients, third-party payors, and others as services are rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors.

Advertising — Advertising costs are expensed as incurred. During the years ended September 30, 2007, 2006 and 2005, the Company incurred approximately $4.1 million, $4.5 million and $5.2 million of advertising expenses, respectively.

Pre-opening Expenses — Pre-opening expenses consist of operating expenses incurred during the development of a new venture and prior to its opening for business. Such costs specifically relate to ventures under development and are expensed as incurred. The Company incurred approximately $0.6 million of pre-opening expenses during the year ended September 30, 2007. The Company did not incur any pre-opening expenses during the years ended September 30, 2006 and 2005.

Income Taxes — Income taxes are computed on the pretax income based on current tax law. Deferred income taxes are recognized for the expected future tax consequences or benefits of differences between the tax bases of assets or liabilities and their carrying amounts in the consolidated financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefit or that future deductibility is uncertain.

Members’ and Partners’ Share of Hospital’s Net Income and Loss — Each of the Company’s consolidated hospitals is organized as a limited liability company or limited partnership, with one of the Company’s wholly-owned subsidiaries serving as the manager or general partner and holding from 51.0% to 89.2% of the ownership interest in the entity. In most cases, physician partners or members own the remaining ownership interests as members or limited partners. In some instances, the Company may organize a hospital with a community hospital investing as an additional partner or member. In those instances, the Company may hold a minority interest in the hospital with the community hospital and physician partners owning the remaining interests also as minority partners. In such instances, the hospital is generally accounted for under the equity method of accounting. Profits and losses of hospitals accounted for under either the consolidated or equity methods are generally allocated to their owners based on their respective ownership percentages. If the cumulative losses of a hospital exceed its initial capitalization and committed capital obligations of the partners or members, the Company is required, due to at-risk capital position, by generally accepted accounting principles, to recognize a disproportionate share of the hospital’s losses that otherwise would be allocated to all of its owners on a pro rata basis. In such cases, the Company will recognize a disproportionate share of the hospital’s future profits to the extent the Company has previously recognized a disproportionate share of the hospital’s losses.

Share-Based Compensation — On October 1, 2005, the Company adopted SFAS No. 123-R (revised 2004), Share-Based Payment (SFAS No. 123-R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS No. 123-R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model and to expense the value of the portion of the award that is ultimately expected to vest over the requisite service period in the Company’s statement of operations. Prior to the adoption of SFAS No. 123-R, the Company accounted for stock options issued to employees and directors using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), as permitted under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and provided pro forma net income and pro forma earnings per share disclosures for stock option grants made as if the fair value method of measuring compensation cost for stock options granted had been applied. Under the intrinsic

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MEDCATH CORPORATION

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value method, no share-based compensation expense was recognized for options granted with an exercise price equal to the fair value of the underlying stock at the grant date.

In September 2005, the compensation committee of the board of directors approved a plan to accelerate the vesting of substantially all unvested stock options previously awarded to employees with the condition that the optionee enter into a sale restriction agreement which provides that if the optionee exercises a stock option prior to its originally scheduled vesting date while employed by the Company, the optionee will be prohibited from selling the share of stock acquired upon exercise of the option until the date the option would have become vested had it not been accelerated. All new stock options granted since September 30, 2005 have immediate vesting with the same sale restriction. As a result, share-based compensation is recorded on the option grant date.

The Company adopted SFAS No. 123-R using the modified prospective transition method, which requires the application of the accounting standard as of October 1, 2005, the first day of the Company’s fiscal year 2006. The Company’s financial statements as of and for the years ended September 30, 2007 and 2006 reflect the impact of SFAS No. 123-R.

On November 10, 2005, the FASB issued Staff Position No. 123-R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (Staff Position No. 123-R-3), which provides a simplified alternative method to calculate the pool of excess income tax benefits upon the adoption of SFAS No. 123-R. The Company has elected to follow the provisions of Staff Position No. 123-R-3.

As required under SFAS No. 123-R in calculating the share-based compensation expense for the years ended September 30, 2007 and 2006 and as required under SFAS No. 123 and SFAS No. 148, Accounting for Stock Based Compensation, in calculating the share-based compensation expense for the year ended September 30, 2005, the fair value of each option grant was estimated on the date of grant. The Company used the Black-Scholes option pricing model with the range of weighted-average assumptions used for option grants noted in the following table. The expected life of the stock options represents the period of time that options granted are expected to be outstanding and the range given below results from certain groups of employees exhibiting different behavior with respect to the options granted to them and was determined based on an analysis of historical and expected exercise and cancellation behavior. This analysis is updated December 31 of each year and at December 31, 2006 the analysis illustrated a change in the range of expected life for subsequent grants, which is reflected in the table below. The risk-free interest rate is based on the US Treasury yield curve in effect on the date of the grant. The expected volatility is based on the historical volatilities of the Company’s common stock and the common stock of comparable publicly traded companies.

	Year Ended September 30,
	2007	2006	2005
Expected life	5-8 years	6-8 years	8 years
Risk- free interest rate	4.12-5.17%	4.26-5.20%	3.86-4.15%
Expected volatility	37-43%	39-44%	47%

Accounting for Gains on Capital Transactions of Subsidiary.  In accordance with SAB Topic 5H, the Company has adopted an accounting policy of recording non-operating gains in the Company’s consolidated statement of income upon the dilution of ownership interests that occurs when ownership interests of subsidiaries are issued to third party investors, if the gain recognition criteria of Topic 5H are met. If such criteria are not met, then such gains will be recorded directly to equity as a capital transaction. A gain on the issuance of units in one of the Company’s formerly consolidated subsidiaries, Harlingen Medical Center, LLC (the Partnership), is reflected in the Company’s consolidated balance sheets for fiscal 2007 as a capital transaction, in accordance with the provisions of Topic 5H. The gain resulted from the difference between the carrying amount of the Company’s investment in the Partnership prior to the issuance of units and the Company’s equity investment immediately following the issuance of units. Management determined that recognition of the gain as a capital transaction was appropriate because the Partnership has historically experienced net losses, and due to the uncertainty surrounding

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future transactions that may involve further dilution of the Company’s equity interest in the Partnership. Future issuances of units to third parties will further dilute the Company’s ownership percentage and may give rise to additional gains or losses based on the offering price in comparison to the carrying value of the Company’s investment.

New Accounting Pronouncements — In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes (FAS No. 109). Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN No. 48 and in subsequent periods. FIN No. 48 will be effective for fiscal years beginning after December 15, 2006 and the provisions of FIN No. 48 will be applied to all tax positions accounted for under FAS No. 109 upon initial adoption. The cumulative effect of applying the provisions of FIN No. 48 will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The accounting provisions of FIN 48 will be effective for us as of the beginning of fiscal 2008. The Company has evaluated the potential impact of FIN No. 48 on the consolidated financial statements and has determined that the adoption will not have a significant impact on the consolidated financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a formal framework for measuring fair value and expands disclosures about fair value measurements. The Statement is effective beginning in fiscal 2009. The Company is in the process of determining the effect, if any, that the adoption of SFAS No. 157 will have on its consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, the Company’s fiscal 2009. The Company is in the process of determining the effect, if any, that the adoption of SFAS No. 159 will have on its financial statements.

On June 29, 2005, the FASB ratified the Emerging Issues Task Force’s final consensus on Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights, (Issue No. 04-5). Issue No. 04-5 provides a framework for determining whether a general partner controls, and should consolidate, a limited partnership or a similar entity. The Issue No. 04-5 framework is based on the principal that a general partner in a limited partnership is presumed to control the limited partnership, regardless of the extent of its ownership interest, unless the limited partners have substantive kick-out rights or substantive participating rights. However, the consensus does not apply to entities that are variable interest entities, as defined under FIN No. 46-R, and various other situations. Issue No. 04-5 is effective after June 29, 2005 for all newly formed limited partnerships and for any pre-existing limited partnerships that modify their partnership agreements after that date. In addition, general partners of all other limited partnerships should apply the consensus no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The Company does not currently have any partnerships that meet the requirements of Issue No. 04-5.

3.   Discontinued Operations

During September 2006, the Company decided to seek to dispose of its interest in Heart Hospital of Lafayette (HHLf) and entered into a confidentiality and exclusivity agreement with a potential buyer. Subsequent to September 30, 2007, the Company completed the disposition of Heart Hospital of Lafayette to the Heart Hospital of Acadiana. Heart Hospital of Acadiana is co-owned by Our Lady of Lourdes, a Lafayette, Louisiana community

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hospital and local physicians. See Note 21 — Subsequent Events. Pursuant to the provisions of SFAS No. 144, the consolidated financial statements for all periods presented have been restated to give effect to HHLf as a discontinued operation.

At September 30, 2007 and 2006, the Company was in violation of a financial covenant under an equipment loan to HHLf, which is guaranteed by MedCath. HHLf is classified as a discontinued operation. Accordingly, the total outstanding balance of this loan has been included in current liabilities of discontinued operations on the consolidated balance sheets as of September 30, 2007 and 2006.

On August 31, 2006, the Company completed the divestiture of its equity interest in Tucson Heart Hospital (THH) to Carondelet Health Network. Pursuant to the terms of the transaction, Carondelet Health Network acquired MedCath’s 59% ownership interest in THH and the hospital repaid all secured debt owed to MedCath. Total proceeds received by MedCath were $40.7 million. The consolidated financial statements for all periods presented have been restated to give effect to THH as a discontinued operation.

On November 5, 2004, the Company and local Milwaukee physicians, who jointly owned The Heart Hospital of Milwaukee (HHM), entered into an agreement with Columbia St. Mary’s, a Milwaukee-area hospital group, to close HHM and sell certain assets primarily comprised of real property and equipment to Columbia St. Mary’s for $42.5 million. The sale was completed on December 1, 2004. In connection with the agreement to sell the assets of HHM, the Company closed the facility prior to the completion of the sale. As a part of the closure, the company incurred termination benefits and contract termination costs of approximately $2.2 million. In addition, the Company wrote-off approximately $1.4 million related to the net book value of certain assets abandoned as a part of the closure of the facility. Transaction proceeds were used by HHM to pay intercompany secured debt, which totaled approximately $37.0 million on the date of the closing, as well as transaction costs and hospital operating expenses of approximately $2.0 million. The remaining proceeds from the divestiture, combined with proceeds from the liquidation of the assets not sold to Columbia St. Mary’s were used to satisfy certain liabilities of HHM and return a portion of the original capital contribution to the investors. The consolidated financial statements for all periods presented have been restated to give effect to HHM as a discontinued operation.

The results of operations of HHLf , THH and HHM excluding intercompany interest expense, are as follows:

	Year Ended September 30,
	2007			2006			2005
Net revenue	$	34,972		$	84,435		$	88,652
Restructuring and write-off charges		(7,600	)		—			(3,635	)
Operating expenses		(33,733	)		(86,690	)		(87,721	)
Loss from operations		(6,361	)		(2,255	)		(2,704	)
(Loss) gain on sale of assets and equity interest		(1	)		12,993			9,054
Other expenses, net		(360	)		(674	)		(1,666	)
Income (loss) before income taxes		(6,722	)		10,064			4,684
Income tax (benefit) expense		(1,022	)		4,199			3,527
Net (loss) income	$	(5,700	)	$	5,865		$	1,157

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The principal balance sheet items of HHLf including allocated goodwill and excluding intercompany debt, are as follows:

	September 30,		September 30,
	2007		2006
Cash and cash equivalents	$	3,512	$	721
Accounts receivable, net		5,014		4,967
Other current assets		2,260		1,252
Current assets	$	10,786	$	6,940
Property and equipment, net	$	18,369	$	22,636
Investments in affiliates		240		817
Goodwill		—		3,050
Other assets		140		181
Long-term assets	$	18,749	$	26,684
Accounts payable	$	1,484	$	3,721
Accrued liabilities		1,521		1,151
Current portion of long-term debt and obligations under capital leases		8,194		9,808
Current liabilities	$	11,199	$	14,680

4.   Goodwill and Other Intangible Assets

The results of the annual goodwill impairment testing performed in September 2007, 2006 and 2005 indicated that no impairment was required in fiscal 2007, 2006 and 2005, respectively for continuing operations.

As of September 30, 2007 and 2006, the Company’s other intangible assets, net, included the following:

	September 30, 2007					September 30, 2006
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Management contracts	$	19,084	$	(12,985	)	$	19,084	$	(12,383	)
Other		480		(131	)		480		(99	)
Total	$	19,564	$	(13,116	)	$	19,564	$	(12,482	)

Amortization expense recognized for the management contracts and other intangible assets totaled $0.6 million, $1.0 million and $1.2 million for the years ended September 30, 2007, 2006 and 2005, respectively.

The estimated aggregate amortization expense for each of the five fiscal years succeeding the Company’s most recent fiscal year ended September 30, 2007 is as follows:

	Estimated Amortization
Fiscal Year	Expense
2008	$	477
2009		477
2010		477
2011		477
2012		477

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5.   Business Combinations and Hospital Development

New Hospital Development — In August 2007, the Company announced a venture to construct a new 105 inpatient bed capacity general acute care hospital, Hualapai Mountain Medical Center, which will be located in Kingman, Arizona. The hospital is accounted for as a consolidated subsidiary since the Company, through its wholly-owned subsidiary, owns 79.2% of the interest in the venture with physician partners owning the remaining 20.8%. Further, the Company exercises substantive control over the hospital. Construction of Hualapai Mountain Medical Center is expected to begin in early calendar 2008 and is anticipated to be completed in September 2009.

In May 2007, the Company and its physician partners announced a 120 bed general acute care expansion of its hospital located in St. Tammany Parish, Louisiana. Construction is expected to be completed in late fall of 2008, with 80 patient rooms being completed initially and capacity for 40 patient rooms being available for future growth. To recognize its expanded service capabilities, the hospital, which opened in February 2003, has been renamed the Louisiana Medical Center and Heart Hospital.

In April 2007, the Company and its physician partners announced the expansion of Arkansas Heart Hospital, located in Little Rock, Arkansas. The expansion will convert shelled space into 28 inpatient beds, add a 130 space parking garage to the campus and support the renovation of the hospital’s annex building to accommodate non-clinical services. The new beds are anticipated to be in service by January 2008, pending state regulatory approval.

Closure of Hospital and Sale of Related Assets — As further discussed in Note 3, the Company closed and sold certain assets of The Heart Hospital of Milwaukee on December 1, 2004.

Lease Transaction with HMC Realty.  During July 2007, Harlingen Medical Center transferred real property with a net book value of approximately $34.3 million (fair value of $57.8 million) to a newly formed wholly-owned limited liability subsidiary, HMC Realty, LLC (HMC Realty), in exchange for HMC Realty’s assumption of related party and third party debt of approximately $57.8 million. Subsequently, Harlingen Medical Center entered into a lease agreement with HMC Realty whereby Harlingen Medical Center will lease the real property from HMC Realty for approximately $5.5 million annually for 25 years. Subsequent to the transfer of assets and debt, HMC Realty received capital contributions as described below, and Harlingen Medical Center canceled its membership in HMC Realty. The $57.8 million debt assumed by HMC Realty consisted of $2.9 million owed to Valley Baptist Health System (Valley Baptist), $11.3 million owed to the Company for working capital loans, and the assumption of $43.5 million in real estate debt with a third party. The Company converted $9.6 million of the working capital loan with HMC Realty into a 36% interest in HMC Realty.

Recapitalization of Harlingen Medical Center.  During fiscal 2006, Harlingen Medical Center entered into two $10.0 million convertible notes with Valley Baptist. The first note could have been voluntarily converted by the health system into a 13.2% ownership interest in Harlingen Medical Center after the third anniversary date of issuance, or it could have been automatically converted into an ownership interest in Harlingen Medical Center upon the achievement of specified financial targets contained in the debt agreement, up until the third anniversary date of the agreement or the fourth anniversary date of the agreement, if extended by Harlingen Medical Center. The second note was convertible into the same ownership interest percentage as the first note at the discretion of the health system after the conversion of the first note. The potential ownership interest in Harlingen Medical Center by the health system was capped at 49%. The notes accrued interest at 5% per annum up until the third anniversary date, after which time the interest rate would have been increased to 8% if the notes had not been converted.

The noncash impact of accounting for Harlingen Medical Center as an equity investment and the recapitalization of Harlingen Medical Center during the fourth quarter of fiscal 2007 were taken into consideration in the accompanying consolidated statements of cash flows.

Interest payments were due quarterly. In accordance with the provisions of EITF 99-1, Accounting for Debt Convertible into the Stock of a Consolidated Subsidiary, EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and EITF 01-6, The Meaning of

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Indexed to a Company’s Own Stock, the convertible notes were accounted for as convertible debt in the accompanying consolidated balance sheets and the embedded conversion option in the convertible notes were not accounted for as a separate derivative.

During July 2007, the Company elected, along with the original physician investors and Valley Baptist, to allow early conversion of the Valley Baptist notes into an equity interest in Harlingen Medical Center (the “Recapitalization”). Valley Baptist converted $17.1 million of the convertible notes into a 32.1% equity interest in Harlingen Medical Center. The remaining $2.9 million was converted into a membership interest in HMC Realty. Prior to the Recapitalization, Harlingen Medical Center had approximately $12.5 million in working capital debt outstanding with the Company. As a result of the Recapitalization, the Company converted $1.2 million of the debt into additional capital in Harlingen Medical Center, converted $9.6 million into a membership interest of HMC Realty, and was repaid the remaining balance of the working capital note. As a result of the transactions described above, the Company now owns a 36% interest in Harlingen Medical Center, and a 36% interest in HMC Realty. In addition, Valley Baptist holds a 32% interest in Harlingen Medical Center and a 19% interest in HMC Realty, and the remaining ownership interests in both entities are held by unrelated physician investor groups.

Prior to the Recapitalization, the Company consolidated Harlingen Medical Center. As a result of the Recapitalization, the Company’s interest in Harlingen Medical Center was diluted from 51.0% to 36.0% effective for the fourth quarter of fiscal year 2007. The Company recorded the gain resulting from the change in ownership interest in accordance with SAB Topic 5H. The gain resulted from the difference between the carrying amount of the Company’s investment in Harlingen Medical Center prior to the issuance of units and the Company’s equity investment immediately following the issuance of units. The Company determined that recognition of the gain as a capital transaction was appropriate because Harlingen Medical Center had historically experienced net losses, and because of uncertainty regarding the possible future occurrence of transactions that may involve further dilution of the Company’s equity interest in Harlingen Medical Center. Future issuances of units to third parties, if any, will further dilute the Company’s ownership percentage and may give rise to additional gains or losses based on the offering price in comparison to the carrying value of the Company’s investment.

Sale of Equity Interest in Hospital — As further discussed in Note 3, the Company sold its equity interest in Tucson Heart Hospital on August 31, 2006.

Assets Held For Sale — As further discussed in Note 3, the Company decided to seek to dispose of its interest in Heart Hospital of Lafayette and has entered into a confidentiality and exclusivity agreement with a potential buyer. Subsequent to September 30, 2007, the Company completed the disposition of Heart Hospital of Lafayette to the Heart Hospital of Acadiana. Heart Hospital of Acadiana is co-owned by Our Lady of Lourdes, a Lafayette, Louisiana community hospital and local physicians. See Note 21 — Subsequent Events.

Diagnostic and Therapeutic Facilities Development — During fiscal 2007, the Company entered into three non-consolidating joint ventures of which the Company owns between 9.2% and 15%.

During fiscal 2006, the Company entered into a business alliance with a medical center in Illinois. Under this agreement, the Company receives fees related to the management of the hospital’s existing cardiovascular program.

Also throughout fiscal 2006, the Company opened five managed ventures throughout the United States. The Company owns 100% of these centers.

During fiscal 2005, the Company entered into a development agreement and service line management agreement with a third party hospital in Montana. Under these agreements, the Company receives fees related to the management of the hospital’s cardiovascular service line. During fiscal 2006, the Company announced its plans to end this strategic alliance. The alliance terminated in December 2006.

Also throughout fiscal 2005, the Company opened four different sleep centers throughout the United States. The Company owns 51% to 100% of these centers.

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6.   Accounts Receivable

Accounts receivable, net,consist of the following:

	September 30,
	2007			2006
Receivables, principally from patients and third-party payors	$	125,235		$	111,765
Receivables, principally from billings to hospitals for various cardiovascular procedures		4,630			4,218
Amounts due under management contracts		1,763			4,651
Other		4,528			2,355
		136,156			122,989
Less allowance for doubtful accounts		(49,162	)		(29,405	)
Accounts receivable, net	$	86,994		$	93,584

Activity for the allowance for doubtful accounts is as follows:

	Year Ended September 30,
	2007			2006			2005
Balance, beginning of year	$	29,405		$	21,215		$	15,842
Bad debt expense		55,162			56,845			48,220
Write-offs, net of recoveries		(35,405	)		(48,655	)		(42,847	)
Balance, end of year	$	49,162		$	29,405		$	21,215

7.   Property and Equipment

Property and equipment, net, consists of the following:

	September 30,
	2007			2006
Land	$	25,493		$	25,091
Buildings		230,933			262,458
Equipment		255,652			277,329
Construction in progress		10,097			2,626
Total, at cost		522,175			567,504
Less accumulated depreciation		(225,375	)		(229,352	)
Property and equipment, net	$	296,800		$	338,152

Substantially all of the Company’s property and equipment is either pledged as collateral for various long-term obligations or assigned to lenders under the senior secured credit facility as intercompany collateral liens.

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8.   Investments in Affiliates

The Company’s determination of the appropriate consolidation method to follow with respect to investments in affiliates is based on the amount of control it has and the ownership level in the underlying entity. Investments in entities that the Company does not control, but over whose operations the Company has the ability to exercise significant influence (including investments where we have less than 20% ownership), are accounted for under the equity method. The Company also considers FAS Interpretation No. 46, Consolidation of Variable Interest Entities (as amended) (FIN 46R) to determine if the Company is the primary beneficiary of (and therefore should consolidate) any entity whose operations the Company does not control. At September 30, 2007, all of the Company’s investments in unconsolidated affiliates are accounted for using the equity method.

Variable Interest Entities

During the fourth quarter of fiscal 2007 the Company’s interest in Harlingen Medical Center was diluted from 51.0% to 36.0% (see Note 5). Prior to the fourth quarter of fiscal 2007 the Company consolidated the results of Harlingen Medical Center. Upon dilution, the Company began accounting for Harlingen Medical Center as an equity investment as the Company determined that Harlingen Medical Center was a variable interest entity as defined by FIN 46(R) and was not the primary beneficiary. Harlingen Medical Center is an acute care hospital facility. The nature of the Company’s involvement with Harlingen Medical Center is to act as manager of the facility and provide support services as necessary. The Company’s initial involvement with Harlingen Medical Center began in fiscal year 2001. The Company’s share of the maximum loss exposure relating to the hospital is not anticipated to be material to the Company’s financial position, results of operations, or cash flows.

Investments in unconsolidated affiliates accounted for under the equity method consist of the following:

	Year Ended September 30,
	2007			2006
Avera Heart Hospital of South Dakota	$	8,856		$	7,362
Harlingen Medical Center		7,105			—
HMC Realty, LLC		(11,371	)		—
Other		1,128			441
	$	5,718		$	7,803

At September 30, 2007, accumulated deficit includes $7.6 million related to undistributed earnings of Avera Heart Hospital of South Dakota. Distributions received from Avera Heart Hospital of South Dakota were $3.3 million during the year ended September 30, 2007 and $2.7 million in each year ended September 30, 2006 and 2005. No distributions were received from Harlingen Medical Center during the year ended September 30, 2007.

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MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.   Long-Term Debt

Long-term debt consists of the following:

	September 30,
	2007			2006
Senior Notes	$	101,961		$	138,135
Senior Secured Credit Facility		—			40,045
Notes payable to various lenders		47,294			144,196
		149,255			322,376
Less current portion		(2,857	)		(37,309	)
Long-term debt	$	146,398		$	285,067

Senior Notes — During fiscal 2004, the Company’s wholly-owned subsidiary, MedCath Holdings Corp. (the Issuer), completed an offering of $150.0 million in aggregate principal amount of 97/8% senior notes (the Senior Notes). The proceeds, net of fees, of $145.5 million were used to repay a significant portion of the Company’s then outstanding debt and obligations under capital leases. The Senior Notes, which mature on July 15, 2012, pay interest semi-annually, in arrears, on January 15 and July 15 of each year. The Senior Notes are redeemable, in whole or in part, at any time on or after July 15, 2008 at a designated redemption amount, plus accrued and unpaid interest and liquidated damages, if any, to the applicable redemption date. The Company could redeem up to 35% of the aggregate principal amount of the Senior Notes on or before July 15, 2007 with the net cash proceeds from certain equity offerings. In event of a change in control in the Company or the Issuer, the Company must offer to purchase the Senior Notes at a purchase price of 101% of the aggregate principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption.

The Senior Notes are general unsecured unsubordinated obligations of the Issuer and are fully and unconditionally guaranteed, jointly and severally, by MedCath Corporation (the Parent) and all 95% or greater owned existing and future domestic subsidiaries of the Issuer (the Guarantors). The guarantees are general unsecured unsubordinated obligations of the Guarantors.

The Senior Notes include covenants that restrict, among other things, the Company’s and its subsidiaries’ ability to make restricted payments, declare or pay dividends, incur additional indebtedness or issue preferred stock, incur liens, merge, consolidate or sell all or substantially all of the assets, engage in certain transactions with affiliates, enter into various transactions with affiliates, enter into sale and leaseback transactions or engage in any business other than a related business.

In connection with the sale of the assets of The Heart Hospital of Milwaukee and as stipulated by the indenture governing the Senior Notes, during fiscal 2006, the Company offered to repurchase up to $30.3 million of Senior Notes. The tender offer for the notes expired during the fiscal year and the Company accepted for purchase and paid for $11.9 million principal amount of Senior Notes tendered prior to the expiration of the tender offer. Accordingly, the Company expensed $0.4 million of deferred loan acquisition costs related to this prepayment. This expense is reported as a loss on early extinguishment of debt in the Company’s statement of operations for the year ended September 30, 2006.

During fiscal 2007, the Company repurchased $36.2 million of its outstanding Senior Notes using the proceeds from the Company’s secondary public offering which was declared effective by the Securities and Exchange Commission on November 6, 2006. The Company incurred a repurchase premium of $3.5 million and approximately $1.0 million of deferred loan acquisition costs were written off in connection with the repurchase. These costs are reported as a loss on early extinguishment of debt in the Company’s statement of operations for the year ended September 30, 2007.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Senior Secured Credit Facility — Concurrent with the offering of the Senior Notes, the Issuer entered into a $200.0 million senior secured credit facility (the Senior Secured Credit Facility) with a syndicate of banks and other institutional lenders. The Senior Secured Credit Facility provides for a seven-year term loan facility (the Term Loan) in the amount of $100.0 million and a five-year senior secured revolving credit facility (Revolving Facility) in the amount of $100.0 million, which includes a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit and a $10.0 million sub-limit for swing-line loans, and is collateralized by patient accounts receivable and certain other assets of the Company. There were no borrowings under the Revolving Facility at September 30, 2007; however, the Company has letters of credit outstanding of $1.7 million, which reduces availability under the Revolving Facility to $98.3 million.

Borrowings under the Senior Secured Credit Facility, excluding swing-line loans, bear interest per annum at a rate equal to the sum of LIBOR plus the applicable margin or the alternate base rate plus the applicable margin. The applicable margin is different for the Revolving Facility and the Term Loan and varies for the Revolving Facility depending on the Company’s financial performance. Swing-line borrowings under the Revolving Facility bear interest at the alternate base rate which is defined as the greater of the Bank of America, N.A. prime rate or the federal funds rate plus 0.5%. The Issuer is required to pay quarterly, in arrears, a 0.5% per annum commitment fee equal to the unused commitments under the Senior Secured Credit Facility. The Issuer is also required to pay quarterly, in arrears, a fee on the stated amount of each issued and outstanding letter of credit ranging from 200 to 300 basis points depending upon the Company’s financial performance.

The Senior Secured Credit Facility is guaranteed, jointly and severally, by the Parent and all 95% or greater owned existing and future direct and indirect domestic subsidiaries of the Issuer and is secured by a first priority perfected security interest in all of the capital stock or other ownership interests owned by the Issuer in each of its subsidiaries, all other present and future assets and properties of the Parent, the Issuer and the subsidiary guarantors and all the intercompany notes.

The Senior Secured Credit Facility requires compliance with certain financial covenants including a senior secured leverage ratio test, a fixed charge coverage ratio test, a tangible net worth test and a total leverage ratio test. The Senior Secured Credit Facility also contains customary restrictions on, among other things, the Company’s ability and its subsidiaries’ ability to incur liens; engage in mergers, consolidations and sales of assets; incur debt; declare dividends, redeem stock and repurchase, redeem and/or repay other debt; make loans, advances and investments and acquisitions; make capital expenditures; and transactions with affiliates.

The Issuer is required to make mandatory prepayments of principal in specified amounts upon the occurrence of excess cash flows and other certain events, as defined by the Senior Secured Credit Facility, and is permitted to make voluntary prepayments of principal under the Senior Secured Credit Facility. The Term Loan is subject to amortization of principal in quarterly installments of $250,000 for each of the first five years, with the remaining balance payable in the final two years.

During fiscal 2006, the Company made a voluntary prepayment of $58.0 million on the outstanding balance of the Term Loan. Accordingly, the Company expensed approximately $1.0 million of deferred loan acquisition costs related to this prepayment. This expense is reported as a loss on early extinguishment of debt in the Company’s statement of operations for the year ended September 30, 2006. Further, the amortization of principal was revised to quarterly installments of $102,000 for the remaining first five years, with the remaining balance payable in the final two years.

During January 2007, the Company paid off its outstanding $39.9 million Term Loan under the Senior Secured Credit Facility. In connection with the early repayment, the Company wrote off approximately $0.5 million in deferred loan acquisition costs. These costs are reported as a loss on early extinguishment of debt in the Company’s statement of operations for the year ended June 30, 2007.

Real Estate Investment Trust (REIT) Loans — As of September 30, 2006, the Company’s REIT Loan balance included the outstanding indebtedness of two hospitals. The interest rates on the outstanding REIT Loans were

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MEDCATH CORPORATION

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based on a rate index tied to U.S. Treasury Notes plus a margin that was determined on the completion date of the hospital, and subsequently increased per year by 20 basis points. The principal and interest on the REIT Loans were payable monthly over seven-year terms from the completion date of the hospital using extended period amortization schedules and included balloon payments at the end of the terms. One of the REIT Loans was due in full in October 2006 and therefore, the outstanding balance was included in the current portion of long-term debt and obligations under capital leases as of September 30, 2006. Borrowings under this REIT Loan were collateralized by a pledge of the Company’s interest in the related hospital’s property, equipment and certain other assets. During the first quarter of fiscal 2007, this loan, in the amount of $21.2 million, was repaid in full. The other REIT Loan, which was previously scheduled to mature during the second quarter of fiscal 2006, was refinanced in February 2006. Under the terms of the new financing, the loan requires monthly, interest-only payments for ten years, at which time the loan is due in full. The interest rate on this loan is 81/2%. Borrowings under this REIT Loan are collateralized by a pledge of the Company’s interest in the related hospital’s property, equipment and certain other assets.

As of September 30, 2006, in accordance with the hospital’s operating agreement and as required by the lender, the Company guaranteed 100% of the obligation of one of its subsidiary hospitals for the bank mortgage loan made under its REIT Loan. As of September 30, 2007, the outstanding REIT Loan was not guaranteed by the Company. The Company received a fee during fiscal 2006 from the minority partners in the subsidiary hospital as consideration for providing a guarantee in excess of the Company’s ownership percentage in the subsidiary hospital. The guarantee expired concurrent with the terms of the related real estate loan and required the Company to perform under the guarantee in the event of the subsidiary hospitals’ failing to perform under the related loan. The total amount of the real estate debt was secured by the subsidiary hospital’s underlying real estate, which was financed with the proceeds from the debt.

At September 30, 2007, the total amount of the REIT loan was approximately $35.3 million. Because the Company consolidates the subsidiary hospitals’ results of operations and financial position, both the assets and the accompanying liabilities are included in the assets and long-term debt on the Company’s consolidated balance sheets.

Convertible Notes — During fiscal 2006, Harlingen Medical Center entered into two $10.0 million convertible notes with a third-party health system, Valley Baptist Health System (Valley Baptist). The first note could be voluntarily converted by the health system into a 13.2% ownership interest in Harlingen Medical Center after the third anniversary date or it will automatically be converted into an ownership interest in Harlingen Medical Center upon the achievement of specified financial targets of the agreement, up until the third anniversary date of the agreement or the fourth anniversary date of the agreement, if extended by Harlingen Medical Center. The second note was convertible into the same ownership interest percentage as the first note at the discretion of the health system after the conversion of the first note. The potential ownership interest in Harlingen Medical Center by the health system was capped at 49%. The notes accrued interest at 5% up until the third anniversary date, after which time the interest rate increased to 8% if the notes have not been converted. Interest payments were due quarterly. In accordance with the provisions of EITF 99-1, Accounting for Debt Convertible into the Stock of a Consolidated Subsidiary, EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and EITF 01-6, The Meaning of Indexed to a Company’s Own Stock, at September 30, 2006, the convertible notes were accounted for as convertible debt in the accompanying consolidated balance sheet and the embedded conversion option in the convertible notes had not been accounted for as a separate derivative as of September 30, 2006.

During July 2007, the Company elected, along with the original physician investors and Valley Baptist, to allow early conversion of the notes into an equity interest in Harlingen Medical Center (the “Recapitalization”). Valley Baptist converted $17.1 million of the convertible loans into a 32.1% equity interest in Harlingen Medical Center. The remaining $2.9 million was conveyed to HMC Realty as payment of the real property as a result of the sales-leaseback transaction discussed above. See Note 5 for further discussion of the Recapitalization transaction.

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Mortgage Loan — Concurrent with the issuance of the convertible notes, Harlingen Medical Center also entered into a $40.0 million, ten year mortgage loan with a third-party lender. The loan required quarterly, interest-only payments until the maturity date. The interest rate on the loan was 83/4%. The loan was secured by substantially all the assets of Harlingen Medical Center and was subject to certain financial and other restrictive covenants. In addition, the Company guaranteed $10.0 million of the loan balance. The Company received a fee from the minority partners at Harlingen Medical Center as consideration for providing a guarantee in excess of the Company’s ownership percentage in Harlingen Medical Center. The guarantee expired concurrent with the terms of the related loan and required the Company to perform under the guarantee in the event of Harlingen Medical Center’s failure to perform under the related loan.

During July 2007, the Company completed a recapitalization of Harlingen Medical Center, which included the repayment of this mortgage loan. See Note 5 for further discussion of the Recapitalization transaction.

Notes Payable to Various Lenders — The Company acquired substantially all of the medical and other equipment for its hospitals and certain diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories under installment notes payable to equipment lenders collateralized by the related equipment. In addition, two facilities in the MedCath Partners division financed leasehold improvements through notes payable collateralized by the leasehold improvements. Amounts borrowed under these notes are payable in monthly installments of principal and interest over 3 to 7 year terms. Interest is at fixed and variable rates ranging from 7.15% — 8.08%. The Company has guaranteed certain of its subsidiary hospitals’ equipment loans. The Company receives a fee from the minority partners in the subsidiary hospitals as consideration for providing guarantees in excess of the Company’s ownership percentage in the subsidiary hospitals. These guarantees expire concurrent with the terms of the related equipment loans and would require the Company to perform under the guarantee in the event of the subsidiaries’ failure to perform under the related loan.

During March 2007, the Company paid off $11.1 million of equipment debt outstanding at one of its hospitals. Due to the early prepayment, the Company wrote off approximately $0.1 million of deferred loan acquisition costs and incurred approximately $0.1 million in early prepayment fees. These costs are reported as a loss on early extinguishment of debt in the consolidated statement of operations for the year ended September 30, 2007.

At September 30, 2007, the total amount of notes payable to various lenders was approximately $12.0 million, of which $7.2 million was guaranteed by the Company. Because the Company consolidates the subsidiary hospitals’ results of operations and financial position, both the assets and the accompanying liabilities are included in the assets and long-term debt on the Company’s consolidated balance sheets. These notes payable contain various covenants and restrictions including the maintenance of specific financial ratios and amounts and payment of dividends.

Debt Covenants — At September 30, 2007, the Company was in violation of a financial covenant under an equipment loan to Heart Hospital of Lafayette, which is guaranteed by MedCath. Heart Hospital of Lafayette is classified as a discontinued operation. Accordingly, the total outstanding balance of this loan has been included in current liabilities of discontinued operations on the Company’s consolidated balance sheet as of September 30, 2007. The Company was in compliance with all other covenants in the instruments governing its outstanding debt as of September 30, 2007.

Guarantees of Unconsolidated Affiliate’s Debt — The Company has guaranteed approximately 30% of the equipment debt of one of the affiliate hospitals in which the Company has a minority ownership interest and therefore does not consolidate the hospital’s results of operations and financial position. The Company provides this guarantee in exchange for a fee from that affiliate hospital. At September 30, 2007, the affiliate hospital was in compliance with all covenants in the instruments governing its debt. The total amount of the affiliate hospital’s equipment debt was approximately $1.1 million at September 30, 2007. Accordingly, the equipment debt guaranteed by the Company was approximately $0.3 million at September 30, 2007. This guarantee expires concurrent with the terms of the related equipment loans and would require the Company to perform under the

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MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

guarantee in the event of the affiliate hospital’s failure to perform under the related loans. The total amount of this affiliate hospital’s debt is secured by the hospital’s underlying equipment, which was financed with the proceeds from the debt. Because the Company does not consolidate the affiliate hospital’s results of operations or financial position, neither the assets nor the accompanying liabilities are included in the assets or liabilities on the Company’s consolidated balance sheets.

Interest Rate Swaps — As required by their existing bank mortgage loans at the time, three of the Company’s consolidated hospitals entered into fixed interest rate swaps during fiscal 2001. These fixed interest rate swaps effectively fixed the interest rate on the hedged portion of the related debt at 4.92% plus an applicable margin for two of the hospitals and at 4.60% plus an applicable margin for the other hospital. These interest rate swaps were accounted for as cash flow hedges prior to the repayment of the outstanding balances of the bank mortgage debt for these three hospitals as part of the financing transaction in fiscal 2004. The Company did not terminate the interest rate swaps as part of the financing transaction, which resulted in the recognition of a loss of approximately $0.6 million during the fourth quarter of fiscal 2004. The fixed interest rate swaps have not been utilized as a hedge of variable rate debt obligations since the financing transaction, and accordingly, changes in the valuation of the interest rate swaps have been recorded directly to earnings as a component of interest expense. During fiscal 2006, all interest rate swaps expired resulting in an unrealized gain that was not significant to the consolidated results of operations or financial position.

Future Maturities — Future maturities of long-term debt at September 30, 2007 are as follows:

	Debt
Fiscal Year	Maturity
2008	$	2,857
2009		3,045
2010		3,273
2011		2,797
2012		101,975
Thereafter		35,308
	$	149,255

10.   Obligations Under Capital Leases

The Company currently leases several diagnostic and therapeutic facilities, mobile catheterization laboratories, office space, computer software and hardware, equipment and certain vehicles under capital leases expiring through fiscal year 2012. Some of these leases contain provisions for annual rental adjustments based on increases in the consumer price index, renewal options, and options to purchase during the lease terms. Amortization of the capitalized amounts is included in depreciation expense. Total assets under capital leases (net of accumulated depreciation of approximately $7.3 million and $7.2 million) at September 30, 2007 and 2006, respectively, are approximately $3.6 million and $4.5 million, respectively, and are included in property and equipment on the consolidated balance sheets. Lease payments during the years ended September 30, 2007, 2006, and 2005 were $1.8 million, $2.7 million and $3.1 million, respectively, and include interest of approximately $0.2 million, $0.4 million, and $0.8 million, respectively.

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MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Future minimum lease payments at September 30, 2007 are as follows:

	Minimum
Fiscal Year	Lease Payment
2008	$	1,427
2009		976
2010		433
2011		397
2012		171
Total future minimum lease payments		3,404
Less amounts representing interest		(347	)
Present value of net minimum lease payments		3,057
Less current portion		(1,251	)
	$	1,806

11.   Liability Insurance Coverage

During June 2004, the Company entered into a new one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $3.0 million of retained liability per claim, subject to an additional amount of retained liability of $2.0 million per claim and $4.0 million in the aggregate for claims reported during the policy year at one of its hospitals. During June 2005, the Company entered into a new one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $3.0 million of retained liability per claim. At that time, the Company also purchased additional insurance to reduce the retained liability per claim to $250,000 for the MedCath Partners division. During June 2006, the Company entered into a new one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $2.0 million of retained liability per claim. The Company also purchased additional insurance to reduce the retained liability per claim to $250,000 for the MedCath Partners division. During June 2007, the Company entered into a new one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $3.0 million of retained liability per claim. The Company also purchased additional insurance to reduce the retained liability per claim to $250,000 for the MedCath Partners division.

Because of the Company’s self-insured retention levels, the Company is required to recognize an estimated expense/liability for the amount of retained liability applicable to each malpractice claim. As of September 30, 2007 and September 30, 2006, the total estimated liability for the Company’s self-insured retention on medical malpractice claims, including an estimated amount for incurred but not reported claims, was approximately $4.2 million and $5.9 million, respectively, which is included in other accrued liabilities on the consolidated balance sheets. The Company maintains this reserve based on actuarial estimates prepared by an independent third party, who bases the estimates on the Company’s historical experience with claims and assumptions about future events. Due to the considerable variability that is inherent in such estimates, including such factors as changes in medical costs and changes in actual experience, there is a reasonable possibility that the recorded estimates will change by a material amount in the near term. Also, there can be no assurance that the ultimate liability will not exceed the Company’s estimates.

12.   Commitments and Contingencies

Operating Leases — The Company currently leases several cardiac diagnostic and therapeutic facilities, mobile catheterization laboratories, office space, computer software and hardware equipment, certain vehicles and land under noncancelable operating leases expiring through fiscal year 2064. Total rent expense under noncancelable rental commitments was approximately $2.6 million, $3.1 million and $2.8 million for the years ended

79

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

September 30, 2007, 2006 and 2005, respectively, and is included in other operating expenses in the accompanying consolidated statements of operations.

The approximate future minimum rental commitments under noncancelable operating leases as of September 30, 2007 are as follows:

	Rental
Fiscal Year	Commitment
2008	$	2,269
2009		1,736
2010		1,114
2011		647
2012		378
Thereafter		3,302
	$	9,446

Contingencies — Laws and regulations governing the Medicare and Medicaid programs are complex, subject to interpretation and may be modified. The Company believes that it is in compliance with such laws and regulations. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including substantial fines and criminal penalties, as well as repayment of previously billed and collected revenue from patient services and exclusion from the Medicare and Medicaid programs.

The Company is involved in various claims and legal actions in the ordinary course of business, including malpractice claims arising from services provided to patients that have been asserted by various claimants and additional claims that may be asserted for known incidents through September 30, 2007. These claims and legal actions are in various stages, and some may ultimately be brought to trial. Moreover, additional claims arising from services provided to patients in the past and other legal actions may be asserted in the future. The Company is protecting its interests in all such claims and actions and does not expect the ultimate resolution of these matters to have a material adverse impact on the Company’s consolidated financial position, results of operations or cash flows.

The U.S. Department of Justice, or DOJ, conducted an investigation of a clinical trial conducted at one of our hospitals. The investigation concerns alleged improper federal healthcare program billings from 1998-2002 because certain endoluminal graft devices were implanted either without an approved investigational device exception or outside of the approved protocol. The DOJ has reached a settlement under the False Claims Act with the medical practice whose physicians conducted the clinical trial. The hospital has entered into an agreement with the DOJ under which it will pay $5.8 million to the United States to settle, and obtain a release from any federal civil false claims related to DOJ’s investigation. As part of the settlement, the hospital is finalizing negotiations with the Department of Health and Human Services, Office of the Inspector General, or OIG, on additional provisions to the hospital’s existing compliance program relating to certain disclosures and internal claims reviews, and to maintain that program for five years in order to obtain a permissive exclusion release from the OIG. The settlement and release cover both the hospital and the physician who conducted the clinical trial, and does not include any finding of wrong doing or any admission of liability. The Company recorded a $5.8 million reduction in net revenue for the year ended September 30, 2007, to establish a reserve for repayment of a portion of Medicare reimbursement related to hospital inpatient services provided to patients from 1998-2002 in accordance with SFAS No. 5, Accounting for Contingences. As a result of the agreement to settle, no additional reserve will be recorded. The settlement was paid to the United States in full in November 2007.

Commitments — On November 10, 2005, the FASB issued Interpretation No. 45-3, Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners (FIN No. 45-3).

80

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIN No. 45-3 amends FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others , to expand the scope to include guarantees granted to a business, such as a physician’s practice, or its owner(s), that the revenue of the business for a specified period will be at least a specified amount. Under FIN No. 45-3, the accounting requirements of FIN No. 45 are effective for any new revenue guarantees issued or modified on or after January 1, 2006 and the disclosure of all revenue guarantees, regardless of whether they were recognized under FIN No. 45, is required for all interim and annual periods beginning after January 1, 2006.

Some of the Company’s hospitals provide guarantees to certain physician groups for funds required to operate and maintain services for the benefit of the hospital’s patients including emergency care services and anesthesiology services, among others. These guarantees extend for the duration of the underlying service agreements and the maximum potential future payments that the Company could be required to make under these guarantees was approximately $2.6 million through October 2008 as of September 30, 2007. The Company would only be required to pay this maximum amount if none of the physician groups collected fees for services performed during the guarantee period.

13.   Income Taxes

The components of income tax expense (benefit) are as follows:

	Year Ended September 30,
	2007			2006			2005
Current tax (benefit) expense:
Federal	$	18,434		$	(1,187	)	$	496
State		2,922			1,502			1,381
Total current tax expense		21,356			315			1,877
Deferred tax (benefit) expense:
Federal		(7,864	)		5,859			4,409
State		(1,016	)		(1,445	)		(643	)
Total deferred tax (benefit) expense		(8,880	)		4,414			3,766
Total income tax (benefit) expense	$	12,476		$	4,729		$	5,643

81

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of net deferred taxes are as follows:

	Year Ended September 30,
	2007			2006			2005
Deferred tax liabilities:
Property and equipment	$	24,569		$	27,793		$	29,881
Equity investments		1,533			1,612			1,233
Management contracts		1,016			1,126			1,360
Gain on sale of partnership units		2,461			—			—
Other		1,077			2,078			1,704
Total deferred tax liabilities		30,656			32,609			34,178
Deferred tax assets:
Net operating and economic loss carryforward		4,252			4,540			8,824
Basis difference in investment in subsidiaries		6,748			6,365			8,782
AMT credit carryforward		—			—			2,095
Allowances for doubtful accounts and other reserves		9,172			5,880			4,639
Accrued liabilities		3,152			3,900			4,425
Intangibles		267			609			2,128
Derivative swap		—						34
Share-based compensation expense		7,333			5,290			—
Impairment of assets		1,486			—			—
Other		1,427			18			1,521
Total deferred tax assets		33,837			26,602			32,448
Valuation allowance		(2,810	)		(1,747	)		(1,552	)
Net deferred tax asset (liability)	$	371		$	(7,754	)	$	(3,282	)

As of September 30, 2007 and 2006, the Company had recorded a valuation allowance of $2.8 million and $1.7 million, respectively, primarily related to state net operating loss carryforwards. The valuation allowance increased by $1.1 million during the year ended September 30, 2007 due to current year losses incurred in certain states.

The Company has state net operating loss carryforwards of approximately $111.0 million that began to expire in 2007.

The differences between the U.S. federal statutory tax rate and the effective rate are as follows.

	Year Ended September 30,
	2007			2006			2005
Statutory federal income tax rate		35.0	%		35.0	%		34.0	%
State income taxes, net of federal effect		5.4	%		0.5	%		4.6	%
Share-based compensation expense		1.7	%		2.1	%		—
Settlements		1.1	%		—			—
Other non-deductible expenses and adjustments		(1.2	)%		3.7	%		3.9	%
Effective income tax rate		42.0	%		41.3	%		42.5	%

82

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14.   Per Share Data and Share Repurchase Plan

The calculation of diluted earnings (loss) per share considers the potential dilutive effect of options to purchase 1,727,112, 2,070,472, and 2,409,618 shares of common stock at prices ranging from $4.75 to $33.05, which were outstanding at September 30, 2007, 2006 and 2005, respectively, as well as 193,982 and 216,835 shares of restricted stock which were outstanding at September 30, 2007 and 2006, respectively. Of the outstanding stock options, 135,000, 208,500, and 170,000 options have not been included in the calculation of diluted earnings (loss) per share at September 30, 2007, 2006 and 2005, respectively, because the options were anti-dilutive.

15.   Stock Compensation Plans

On July 28, 1998, the Company’s board of directors adopted a stock option plan (the 1998 Stock Option Plan) under which it may grant incentive stock options and nonqualified stock options to officers and other key employees. Under the 1998 Stock Option Plan, the board of directors may grant option awards and determine the option exercise period, the option exercise price, and other such conditions and restrictions on the grant or exercise of the option as it deems appropriate. The 1998 Stock Option Plan provides that the option exercise price may not be less than the fair value of the common stock as of the date of grant and that the options may not be exercised more than ten years after the date of grant. Options that have been granted during the years ended September 30, 2007, 2006 and 2005 were granted at an option exercise price equal to or greater than fair market value of the underlying stock at the date of the grant and become exercisable on grading and fixed vesting schedules ranging from 4 to 8 years subject to certain performance acceleration features. As further discussed in Note 2, effective September 30, 2005, the compensation committee of the board of directors approved a plan to accelerate the vesting of substantially all unvested stock options previously awarded to employees, subject to a Restriction Agreement. At September 30, 2007, the maximum number of shares of common stock, which can be issued through awards granted under the 1998 Option Plan is 3,000,000, of which 825,365 are outstanding as of September 30, 2007.

On July 23, 2000, the Company adopted an outside director’s stock option plan (the Director’s Plan) under which nonqualified stock options may be granted to non-employee directors. Under the Director’s Plan, grants of 2,000 options were granted to each new director upon becoming a member of the board of directors and grants of 2,000 options were made to each continuing director on October 1, 1999 (the first day of the fiscal year ended September 30, 2000). Effective September 15, 2000, the Director’s Plan was amended to increase the number of options granted for future awards from 2,000 to 3,500. Further, effective September 30, 2007, the Director’s Plan was amended to increase the number of options granted for future awards from 3,500 to 8,000. All options granted under the Director’s Plan through September 30, 2007 have been granted at an exercise price equal to or greater than the fair market value of the underlying stock at the date of the grant. Options are exercisable immediately upon the date of grant and expire ten years from the date of grant. The maximum number of shares of common stock which can be issued through awards granted under the Director’s Plan is 250,000, of which 57,000 are outstanding as of September 30, 2007.

Effective October 1, 2005, the Company adopted the MedCath Corporation 2006 Stock Option and Award Plan (the Stock Plan), which provides for the issuance of stock options, restricted stock and restricted stock units to employees of the Company. The Stock Plan is administered by the compensation committee of the board of directors, who has the authority to select the employees eligible to receive awards. This committee also has the authority under the Stock Plan to determine the types of awards, select the terms and conditions attached to all awards, and, subject to the limitation on individual awards in the Stock Plan, determine the number of shares to be awarded. At September 30, 2007, the maximum number of shares of common stock which can be issued through awards granted under the Stock Plan is 1,750,000 of which 717,018 are outstanding as of September 30, 2007.

Stock options granted to employees and directors under the Stock Plan have an exercise price per share that represents the fair market value of the common stock of the Company on the respective dates that the options are granted. The options expire ten years from the grant date, are fully vested and are exercisable at any time. Subsequent to the exercise of stock options, the shares of stock acquired upon exercise may be subject to certain sale

83

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

restrictions depending on the optionee’s employment status and length of time the options were held prior to exercise.

Activity for the Company’s stock compensation plans during the years ended September 30, 2007, 2006 and 2005 was as follows:

				Weighted-
	Number of			Average
	Options			Exercise Price
Outstanding options, September 30, 2004		2,730,493		$	13.09
Granted		259,000			23.90
Exercised		(472,449	)		15.79
Cancelled		(107,426	)		18.23
Outstanding options, September 30, 2005		2,409,618		$	13.50
Granted		1,070,500			20.98
Exercised		(597,363	)		11.72
Cancelled		(380,283	)		12.79
Forfeited		(432,000	)		9.72
Outstanding options, September 30, 2006		2,070,472		$	18.80
Granted		243,000			29.22
Exercised		(411,146	)		14.03
Cancelled		(175,214	)		22.95
Outstanding options, September 30, 2007		1,727,112		$	19.11

The following table summarizes information for options outstanding and exercisable at September 30, 2007:

Options Outstanding and Exercisable
	Number of
	Options		Weighted-		Weighted-
	Outstanding		Average		Average
Range of	and		Remaining		Exercise
Prices	Exercisable		Life (years)		Price
$ 4.75 - 15.80		246,912		6.63	$	12.40
15.91 - 18.26		116,700		8.13		16.22
18.63 - 19.60		229,500		2.97		19.05
20.90 - 21.49		500,000		8.39		21.49
21.66 - 22.50		320,000		8.51		22.45
23.65 - 27.71		152,500		8.71		26.63
27.80 - 30.24		86,500		9.19		29.45
30.35 - 33.05		75,000		9.51		31.55
$ 4.75 - 33.05		1,727,112		7.63	$	19.11

Under SFAS No. 123-R, share-based compensation expense recognized for the fiscal years ended September 30, 2007 and 2006 was $4.3 million and $13.2 million, respectively, which had the effect of decreasing net income by $2.5 million or $0.12 per basic and diluted share and $7.8 million or $0.42 per basic share and $0.40 per diluted share for the respective periods. The compensation expense recognized represents the compensation related to restricted stock awards over the vesting period, as well as the value of all stock options issued during the period as all such options vest immediately. The total intrinsic value of options exercised during fiscal 2007 and

84

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2006 was $5.5 million and $7.0 million, respectively and the total intrinsic value of options outstanding at September 30, 2007 was $11.2 million. Since all options granted during the year ended September 30, 2005 had an exercise price equal to the market value of the underlying shares of common stock at the date of grant, no compensation expense was recorded for the year ended September 30, 2005.

The following table illustrates the effect on reported net income and earnings per share as if the Company had applied SFAS No. 123-R during the periods indicated.

	Year Ended
	September 30,
	2005
Net income, as reported	$	8,791
Add: Total share-based compensation expense included in reported net income, net of tax related effects		859
Deduct: Total share-based compensation expense determined under fair value based method for all awards, net of related tax effects		(10,963	)
Pro forma net loss	$	(1,313	)
Earnings (loss) per share, basic:
As reported	$	0.48
Pro forma	$	(0.07	)
Earnings (loss) per share, diluted:
As reported	$	0.45
Pro forma	$	(0.07	)

During the fiscal year ended September 30, 2006, the Company granted to employees 270,836 shares of restricted stock, which vest at various dates through March 2009. The compensation expense, which represents the fair value of the stock measured at the market price at the date of grant, less estimated forfeitures, is recognized on a straight-line basis over the vesting period. Unamortized compensation expense related to restricted stock amounted to $1.8 million at September 30, 2007.

16.   Employee Benefit Plan

The Company has a defined contribution retirement savings plan (the 401(k) Plan) which covers all employees. The 401(k) Plan allows employees to contribute from 1% to 25% of their annual compensation on a pre-tax basis.. The Company, at its discretion, may make an annual contribution of up to 30% of an employee’s pretax contribution, up to a maximum of 6% of compensation. This annual contribution percentage was increased to 30% for fiscal 2007 from 25% for fiscal 2006. The Company’s contributions to the 401(k) Plan for the years ended September 30, 2007, 2006 and 2005 were approximately $1.9 million, $1.5 million and $1.5 million, respectively.

17.   Related Party Transactions

During each of the years ended September 2007, 2006 and 2005 the Company incurred $0.1 million in insurance and related risk management fees to its principal stockholders and their affiliates. In addition, $0.1 million and $0.2 million were paid to a director in consulting fees in the years ended September 30, 2006 and 2005, respectively. No consulting fees were paid to a director during the year ended September 30, 2007.

85

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

18.   Summary of Quarterly Financial Data (Unaudited)

Summarized quarterly financial results were as follows:

	Year Ended September 30, 2007
	First			Second		Third		Fourth
	Quarter			Quarter		Quarter		Quarter
Net revenue	$	175,549		$	192,491	$	192,278	$	158,641
Operating expenses		164,819			174,474		172,122		144,465
Income from operations		10,730			18,017		20,156		14,176
Income from continuing operations		254			5,811		8,630		2,532
Income (loss) from discontinued operations		(5,150	)		439		635		(1,624	)
Net income (loss)	$	(4,896	)	$	6,250	$	9,265	$	908
Earnings (loss) per share, basic
Continuing operations	$	0.01		$	0.28	$	0.41	$	0.12
Discontinued operations		(0.25	)		0.02		0.03		(0.08	)
Earnings (loss) per share, basic	$	(0.24	)	$	0.30	$	0.44	$	0.04
Earnings (loss) per share, diluted
Continuing operations	$	0.01		$	0.27	$	0.39	$	0.12
Discontinued operations		(0.25	)		0.02		0.03		(0.08	)
Earnings (loss) per share, diluted	$	(0.24	)	$	0.29	$	0.42	$	0.04
Weighted average number of shares, basic		20,121			21,019		21,144		21,202
Dilutive effect of stock options and restricted stock		—			625		682		579
Weighted average number of shares, diluted		20,121			21,644		21,826		21,781

	Year Ended September 30, 2006
	First			Second			Third			Fourth
	Quarter			Quarter			Quarter			Quarter
Net revenue	$	163,613		$	183,270		$	182,047		$	177,444
Operating expenses		156,437			176,495			164,147			161,776
Income from operations		7,176			6,775			17,900			15,668
Income (loss) from continuing operations		(1,265	)		(2,408	)		5,894			4,490
Income (loss) from discontinued operations		(68	)		468			(984	)		6,449
Net income (loss)	$	(1,333	)	$	(1,940	)	$	4,910		$	10,939
Earnings (loss) per share, basic
Continuing operations	$	(0.07	)	$	(0.13	)	$	0.31		$	0.24
Discontinued operations		—		$	0.03			(0.05	)		0.34
Earnings (loss) per share, basic	$	(0.07	)	$	(0.10	)	$	0.26		$	0.58
Earnings (loss) per share, diluted
Continuing operations	$	(0.07	)	$	(0.13	)	$	0.30		$	0.23
Discontinued operations		—		$	0.03			(0.05	)		0.32
Earnings (loss) per share, diluted	$	(0.07	)	$	(0.10	)	$	0.25		$	0.55
Weighted average number of shares, basic		18,501			18,618			18,630			18,872
Dilutive effect of stock options and restricted stock		—			—			661			1,037
Weighted average number of shares, diluted		18,501			18,618			19,291			19,909

86

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

19.   Reportable Segment Information

The Company’s reportable segments consist of the hospital division and the MedCath Partners division.

Financial information concerning the Company’s operations by each of the reportable segments as of and for the years ended September 30 are as follows:

	Year Ended September 30,
	2007			2006			2005
Net revenue:
Hospital Division	$	668,364		$	652,380		$	617,295
MedCath Partners Division		48,337			51,269			50,781
Corporate and other		2,258			2,725			3,925
Consolidated totals	$	718,959		$	706,374		$	672,001
Income (loss) from operations:
Hospital Division	$	67,723		$	62,586		$	57,943
MedCath Partners Division		8,634			9,843			8,601
Corporate and other		(13,278	)		(24,910	)		(11,841	)
Consolidated totals	$	63,079		$	47,519		$	54,703
Depreciation and amortization:
Hospital Division	$	28,069		$	29,187		$	28,691
MedCath Partners Division		5,677			5,884			6,181
Corporate and other		487			729			1,150
Consolidated totals	$	34,233		$	35,800		$	36,022
Interest expense (income), net:
Hospital Division	$	29,791		$	34,755		$	31,358
MedCath Partners Division		(67	)		40			213
Corporate and other		(14,898	)		(7,862	)		(2,659	)
Consolidated totals	$	14,826		$	26,933		$	28,912
Capital expenditures:
Hospital Division	$	32,362		$	18,735		$	14,365
MedCath Partners Division		855			8,759			2,265
Corporate and other		4,182			2,957			2,335
Consolidated totals	$	37,399		$	30,451		$	18,965

	September 30,
	2007		2006
Aggregate identifiable assets:
Hospital Division	$	533,675	$	541,013
MedCath Partners Division		34,021		40,626
Corporate and other		101,719		204,210
Consolidated totals	$	669,415	$	785,849

Substantially all of the Company’s net revenue in its hospital division and MedCath Partners division is derived directly or indirectly from patient services. The amounts presented for corporate and other primarily include management and consulting fees, general overhead and administrative expenses, financing activities, certain cash and cash equivalents, prepaid expenses, other assets and operations of the business not subject to segment reporting.

All of the Company’s goodwill is recorded at the Corporate and other segment.

87

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

20.   Guarantor/Non-Guarantor Financial Statements

The following tables present the condensed consolidated financial information for each of the Parent, the Issuer, the Guarantors and the subsidiaries of the Issuer that are not Guarantors (the Non-Guarantors), together with consolidating eliminations, as of and for the periods indicated.

MEDCATH CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2007

							Non-
	Parent		Issuer		Guarantors		Guarantors			Eliminations			MedCath
Current assets:
Cash and cash equivalents	$	—	$	—	$	80,044	$	60,337		$	—		$	140,381
Accounts receivable, net		—		—		5,372		81,622						86,994
Other current assets		—		—		20,772		17,542			(4,062	)		34,252
Current assets of discontinued operations		—		—		17,227		9,764			(16,205	)		10,786
Total current assets		—		—		123,415		169,265			(20,267	)		272,413
Property and equipment, net		—		—		17,434		279,366			—			296,800
Investments in subsidiaries		385,624		385,624		64,739		(62	)		(835,925	)		—
Goodwill		—		—		62,740		—			—			62,740
Intercompany notes receivable		—		—		221,838		—			(221,838	)		—
Other long-term assets		—		—		15,045		3,668			—			18,713
Long-term assets of discontinued operations		—		—		18,110		18,749			(18,110	)		18,749
Total assets	$	385,624	$	385,624	$	523,321	$	470,986		$	(1,096,140	)	$	669,415
Current liabilities:
Accounts payable	$	—	$	—	$	1,087	$	32,160		$	—		$	33,247
Income tax payable		—		—		11,124		—			—			11,124
Accrued compensation and benefits		—		—		6,617		12,940			—			19,557
Other current liabilities		—		—		4,077		14,122			(4,062	)		14,137
Current portion of long- term debt and obligations under capital leases		—		—		473		3,635			—			4,108
Current liabilities of discontinued operations		—		—		—		27,404			(16,205	)		11,199
Total current liabilities		—		—		23,378		90,261			(20,267	)		93,372
Long- term debt		—		—		101,904		44,494			—			146,398
Obligations under capital leases		—		—		397		1,409			—			1,806
Intercompany notes payable		—		—		—		221,838			(221,838	)		—
Deferred income tax liabilities		—		—		12,018		—			—			12,018
Other long- term obligations		—		—		—		460			—			460
Long-term liabilities of discontinued operations		—		—		—		18,110			(18,110	)		—
Total liabilities		—		—		137,697		376,572			(260,215	)		254,054
Minority interest in equity of consolidated subsidiaries		—		—		—		—			29,737			29,737
Total stockholders’ equity		385,624		385,624		385,624		94,414			(865,662	)		385,624
Total liabilities and stockholders’ equity	$	385,624	$	385,624	$	523,321	$	470,986		$	(1,096,140	)	$	669,415

88

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

MEDCATH CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2006

								Non-
	Parent		Issuer		Guarantors			Guarantors			Eliminations			MedCath
Current assets:
Cash and cash equivalents	$	—	$	—	$	177,972		$	15,682		$	—		$	193,654
Accounts receivable, net		—		—		6,079			87,505			—			93,584
Other current assets		—		—		18,978			22,023			(2,203	)		38,798
Current assets of discontinued operations		—		—		9,298			6,940			(9,298	)		6,940
Total current assets		—		—		212,327			132,150			(11,501	)		332,976
Property and equipment, net		—		—		22,929			315,223			—			338,152
Investments in subsidiaries		317,660		317,660		(2,760	)		(62	)		(632,498	)		—
Goodwill		—		—		62,490			—			—			62,490
Intercompany notes receivable		—		—		196,768			—			(196,768	)		—
Other long-term assets		—		—		20,406			5,141			—			25,547
Long-term assets of discontinued operations		—		—		21,337			23,634			(18,287	)		26,684
Total assets	$	317,660	$	317,660	$	533,497		$	476,086		$	(859,054	)	$	785,849
Current liabilities:
Accounts payable	$	—	$	—	$	1,916		$	36,832		$	—		$	38,748
Accrued compensation and benefits		—		—		7,745			15,056			—			22,801
Other current liabilities		—		—		6,534			16,047			(2,202	)		20,379
Current portion of long- term debt and obligations under capital leases		—		—		1,311			37,782			—			39,093
Current liabilities of discontinued operations		—		—		—			23,979			(9,299	)		14,680
Total current liabilities		—		—		17,506			129,696			(11,501	)		135,701
Long- term debt		—		—		177,667			107,400			—			285,067
Obligations under capital leases		—		—		912			640			—			1,552
Intercompany notes payable		—		—		—			196,769			(196,769	)		—
Deferred income tax liabilities		—		—		19,752			—			—			19,752
Other long- term obligations		—		—		—			309			—			309
Long-term liabilities of discontinued operations		—		—		—			18,287			(18,287	)		—
Total liabilities		—		—		215,837			453,101			(226,557	)		442,381
Minority interest in equity of consolidated subsidiaries		—		—		—			—			25,808			25,808
Total stockholders’ equity		317,660		317,660		317,660			22,985			(658,305	)		317,660
Total liabilities and stockholders’ equity	$	317,660	$	317,660	$	533,497		$	476,086		$	(859,054	)	$	785,849

89

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

MEDCATH CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

	Year Ended September 30, 2007
								Non-
	Parent		Issuer		Guarantors			Guarantors			Eliminations			MedCath
Net revenue	$	—	$	—	$	30,932		$	695,652		$	(7,625	)	$	718,959
Total operating expenses		—		—		45,970			617,535			(7,625	)		655,880
Income (loss) from operations		—		—		(15,038	)		78,117			—			63,079
Interest expense		—		—		(23,201	)		(9,194	)		—			(32,395	)
Interest and other income (expense), net		—		—		28,400			(20,545	)		—			7,855
Equity in net earnings of unconsolidated affiliates		11,527		11,527		35,201			—			(52,516	)		5,739
Income from continuing operations before minority interest, income taxes and discontinued operations		11,527		11,527		25,362			48,378			(52,516	)		44,278
Minority interest share of earnings of consolidated subsidiaries		—		—		—			—			(14,575	)		(14,575	)
Income from continuing operations before income taxes and discontinued operations		11,527		11,527		25,362			48,378			(67,091	)		29,703
Income tax expense		—		—		12,476			—			—			12,476
Income from continuing operations		11,527		11,527		12,886			48,378			(67,091	)		17,227
Loss from discontinued operations, net of taxes		—		—		(1,359	)		(4,341	)		—			(5,700	)
Net income	$	11,527	$	11,527	$	11,527		$	44,037		$	(67,091	)	$	11,527

	Year Ended September 30, 2006
								Non-
	Parent		Issuer		Guarantors			Guarantors			Eliminations			MedCath
Net revenue	$	—	$	—	$	31,230		$	683,243		$	(8,099	)	$	706,374
Total operating expenses						58,609			608,345			(8,099	)		658,855
Income (loss) from operations		—		—		(27,379	)		74,898			—			47,519
Interest expense		—		—		(21,221	)		(11,989	)		—			(33,210	)
Interest and other income (expense), net		—		—		30,357			(22,624	)		—			7,733
Equity in net earnings of unconsolidated affiliates		12,576		12,576		42,522			—			(62,755	)		4,919
Income from continuing operations before minority interest, income taxes and discontinued operations		12,576		12,576		24,279			40,285			(62,755	)		26,961
Minority interest share of earnings of consolidated subsidiaries		—		—		—			—			(15,521	)		(15,521	)
Income (loss) from continuing operations before income taxes and discontinued operations		12,576		12,576		24,279			40,285			(78,276	)		11,440
Income tax expense		—		—		4,729			—			—			4,729
Income from continuing operations		12,576		12,576		19,550			40,285			(78,276	)		6,711
Income (loss) from discontinued operations, net of taxes		—		—		(6,974	)		12,839			—			5,865
Net income	$	12,576	$	12,576	$	12,576		$	53,124		$	(78,276	)	$	12,576

90

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

MEDCATH CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

	Year Ended September 30, 2005
								Non-
	Parent		Issuer		Guarantors			Guarantors			Eliminations			MedCath
Net revenue	$	—	$	—	$	31,749		$	648,632		$	(8,380	)	$	672,001
Total operating expenses						45,656			580,022			(8,380	)		617,298
Income (loss) from operations		—		—		(13,907	)		68,610			—			54,703
Interest expense		—		—		(22,427	)		(9,405	)		—			(31,832	)
Interest and other income (expense), net		—		—		24,854			(21,836	)		—			3,018
Equity in net earnings of unconsolidated affiliates		8,791		8,791		33,170			—			(47,396	)		3,356
Income from continuing operations before minority interest, income taxes and discontinued operations		8,791		8,791		21,690			37,369			(47,396	)		29,245
Minority interest share of earnings of consolidated subsidiaries		—		—		—			—			(15,968	)		(15,968	)
Income from continuing operations before income taxes and discontinued operations		8,791		8,791		21,690			37,369			(63,364	)		13,277
Income tax expense		—		—		5,643			—			—			5,643
Income from continuing operations		8,791		8,791		16,047			37,369			(63,364	)		7,634
Income (loss) from discontinued operations, net of taxes		—		—		(7,256	)		8,413			—			1,157
Net income	$	8,791	$	8,791	$	8,791		$	45,782		$	(63,364	)	$	8,791

MEDCATH CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

	Year Ended September 30, 2007
							Non-
	Parent			Guarantors			Guarantors			Eliminations			MedCath
Net cash (used in) provided by operating activities	$	—		$	(13,958	)	$	69,887		$	—		$	55,929
Net cash (used in) provided by investing activities		(7,883	)		(29,539	)		948			7,883			(28,591	)
Net cash provided by (used in) financing activities		7,883			(54,431	)		(26,180	)		(7,883	)		(80,611	)
(Decrease) increase in cash and cash equivalents		—			(97,928	)		44,655			—			(53,273	)
Cash and cash equivalents:
Beginning of period		—			177,972			15,682			—			193,654
End of period	$	—		$	80,044		$	60,337		$	—		$	140,381

91

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

MEDCATH CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

	Year Ended September 30, 2006
							Non-
	Parent			Guarantors			Guarantors			Eliminations			MedCath
Net cash provided by operating activities	$	—		$	6,539		$	58,426		$	—		$	64,965
Net cash provided by (used in) investing activities		(9,196	)		56,191			(20,373	)		(16,558	)		10,064
Net cash provided by (used in) financing activities		9,196			(7,587	)		(39,714	)		16,558			(21,547	)
Increase (decrease) in cash and cash equivalents		—			55,143			(1,661	)		—			53,482
Cash and cash equivalents:
Beginning of year		—			122,829			17,343			—			140,172
End of year	$	—		$	177,972		$	15,682		$	—		$	193,654

	Year Ended September 30, 2005
						Non-
	Parent			Guarantors		Guarantors			Eliminations			MedCath
Net cash provided by operating activities	$	—		$	6,375	$	54,872		$	—		$	61,247
Net cash provided by (used in) investing activities		(8,731	)		17,898		21,700			(8,065	)		22,802
Net cash provided by (used in) financing activities		8,731			42,434		(71,875	)		8,065			(12,645	)
Increase in cash and cash equivalents		—			66,707		4,697			—			71,404
Cash and cash equivalents:
Beginning of year		—			56,122		12,646			—			68,768
End of year	$	—		$	122,829	$	17,343		$	—		$	140,172

21.   Subsequent Events

The Company completed the disposition of Heart Hospital of Lafayette to the Heart Hospital of Acadiana on November 30, 2007. The Company had previously announced that it had entered into a letter of intent to sell its interest in Heart Hospital of Lafayette to certain of the hospital’s physician partners. Heart Hospital of Acadiana is co-owned by Our Lady of Lourdes, a Lafayette, Louisiana community hospital and local physicians.

The aggregate purchase price and other settlement amounts related to the transaction, which was structured as an asset sale, totaled $25 million, subject to customary post-closing adjustments. Since September 30, 2006, the Company has reported the operations of Heart Hospital of Lafayette as an asset held for sale.

The Board of Directors approved a stock repurchase program of up to $59.0 million in August 2007. Stock purchases can be made from time to time in the open market or in privately negotiated transactions in accordance with applicable federal and state securities laws and regulations. The repurchase program may be discontinued at any time. Subsequent to the approval of the stock repurchase program, the Company purchased 523,263 shares of common stock at a total cost of $12.3 million.

92

INDEPENDENT AUDITORS’ REPORT

To Heart Hospital of South Dakota, LLC:

We have audited the accompanying balance sheets of Heart Hospital of South Dakota, LLC (the Company) as of September 30, 2007 and 2006 and the related statements of operations, members’ capital, and cash flows for each of the three years in the period ended September 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2007 in conformity with accounting principles generally accepted in the United States of America.

/s/  Deloitte & Touche LLP

December 14, 2007

Charlotte,North Carolina

93

HEART HOSPITAL OF SOUTH DAKOTA, LLC

BALANCE SHEETS
(In thousands)

	September 30,
	2007		2006
Current assets:
Cash	$	14,159	$	10,332
Accounts receivable, net		7,208		7,223
Medical supplies		1,112		1,330
Prepaid expenses and other current assets		362		334
Total current assets		22,841		19,219
Property and equipment, net		32,745		33,446
Other assets		427		422
Total assets	$	56,013	$	53,087
Current liabilities:
Accounts payable	$	2,601	$	1,781
Accrued compensation and benefits		2,431		2,155
Other accrued liabilities		841		840
Current portion of long-term debt		2,272		3,049
Total current liabilities		8,145		7,825
Long-term debt		21,019		22,952
Other long-term obligations		282		224
Total liabilities		29,446		31,001
Members’ capital		26,567		22,086
Total liabilities and members’ capital	$	56,013	$	53,087

See notes to financial statements.

94

HEART HOSPITAL OF SOUTH DAKOTA, LLC

STATEMENTS OF OPERATIONS
(In thousands)

	Year Ended September 30,
	2007			2006			2005
Net revenue	$	66,342		$	61,345		$	58,977
Operating expenses:
Personnel expense		21,246			19,372			18,994
Medical supplies expense		15,917			14,367			14,838
Bad debt expense		1,721			939			1,142
Other operating expenses		9,979			9,333			9,021
Depreciation		1,915			2,504			3,443
Loss on disposal of property, equipment and other assets		33			8			99
Total operating expenses		50,811			46,523			47,537
Income from operations		15,531			14,822			11,440
Other income (expenses):
Interest expense		(1,711	)		(1,845	)		(2,470	)
Interest and other income, net		617			501			281
Total other expenses, net		(1,094	)		(1,344	)		(2,189	)
Net income	$	14,437		$	13,478		$	9,251

See notes to financial statements.

95

HEART HOSPITAL OF SOUTH DAKOTA, LLC

STATEMENTS OF MEMBERS’ CAPITAL
(In thousands)

										Accumulated Other
	Sioux Falls									Comprehensive Income (Loss)
	Hospital			North Central						Sioux Falls			North Central
	Management,			Heart Institute			Avera			Hospital			Heart Institute			Avera
	Inc.			Holdings, PLLC			McKennan			Management, Inc.			Holdings, PLLC			McKennan			Total
Balance, September 30, 2004	$	5,174		$	5,174		$	5,174		$	(126	)	$	(126	)	$	(126	)	$	15,144
Distributions to members		(2,667	)		(2,667	)		(2,667	)		—			—			—			(8,001	)
Comprehensive income:
Net income		3,084			3,083			3,084			—			—			—			9,251
Change in fair value of interest rate swap		—			—			—			176			176			176			528
Total comprehensive income																				9,779
Balance, September 30, 2005	$	5,591		$	5,590		$	5,591		$	50		$	50		$	50		$	16,922
Distributions to members		(2,648	)		(2,647	)		(2,647	)		—			—			—			(7,942	)
Comprehensive income:
Net income		4,493			4,493			4,492			—			—			—			13,478
Change in fair value of interest rate swap		—			—			—			(124	)		(124	)		(124	)		(372	)
Total comprehensive income																				13,106
Balance, September 30, 2006	$	7,436		$	7,436		$	7,436		$	(74	)	$	(74	)	$	(74	)	$	22,086
Distributions to members		(3,299	)		(3,299	)		(3,298	)		—			—			—			(9,896	)
Comprehensive income:
Net income		4,813			4,812			4,812			—			—			—			14,437
Change in fair value of interest rate swap		—			—			—			(20	)		(20	)		(20	)		(60	)
Total comprehensive income																				14,377
Balance, September 30, 2007	$	8,950		$	8,949		$	8,950		$	(94	)	$	(94	)	$	(94	)	$	26,567

See notes to financial statements.

96

HEART HOSPITAL OF SOUTH DAKOTA, LLC

STATEMENTS OF CASH FLOWS
(In thousands)

	Year Ended September 30,
	2007			2006			2005
Net income	$	14,437		$	13,478		$	9,251
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense		1,721			939			1,142
Depreciation		1,915			2,504			3,443
Amortization of loan acquisition costs		38			66			119
Loss on disposal of property, equipment and other assets		33			8			99
Change in assets and liabilities that relate to operations:
Accounts receivable		(1,706	)		(1,938	)		(122	)
Medical supplies		218			(143	)		(60	)
Prepaid expenses and other assets		(71	)		10			(33	)
Accounts payable and accrued liabilities		1,055			(456	)		(169	)
Due to affiliates		40			—			(90	)
Net cash provided by operating activities		17,680			14,468			13,580
Investing activities:
Purchases of property and equipment		(1,240	)		(1,291	)		(2,262	)
Proceeds from sale of property and equipment		(7	)		1			165
Net cash used in investing activities		(1,247	)		(1,290	)		(2,097	)
Financing activities:
Proceeds from issuance of long-term debt		347			—			500
Repayments of long-term debt		(3,057	)		(4,770	)		(4,926	)
Payments of loan acquisition costs		—			(64	)		—
Distributions to members		(9,896	)		(7,942	)		(8,001	)
Net cash used in financing activities		(12,606	)		(12,776	)		(12,427	)
Net increase (decrease) in cash		3,827			402			(944	)
Cash:
Beginning of year		10,332			9,930			10,874
End of year	$	14,159		$	10,332		$	9,930
Supplemental cash flow disclosures:
Interest paid	$	1,677		$	1,775		$	2,351

See notes to financial statements.

97

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO FINANCIAL STATEMENTS

(All tables in thousands)

1.   Organization

Heart Hospital of South Dakota, LLC, doing business as Avera Heart Hospital of South Dakota, (the Company) is a North Carolina limited liability company that was formed on June 18, 1999 to develop, own, and operate an acute-care hospital located in South Dakota, specializing in all aspects of cardiology and cardiovascular surgery. The hospital commenced operations on March 20, 2001. At September 30, 2007 and 2006, Sioux Falls Hospital Management, Inc., North Central Heart Institute Holdings, PLLC, and Avera McKennan each held a 331/3% interest in the Company.

Sioux Falls Hospital Management, Inc., an indirectly wholly owned subsidiary of MedCath Corporation (MedCath), acts as the managing member in accordance with the Company’s operating agreement. The Company will cease to exist on December 31, 2060, unless the members elect earlier dissolution. The termination date may be extended for up to an additional 40 years in five-year increments at the election of the Company’s board of directors.

2.   Summary of Significant Accounting Policies

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. There is a reasonable possibility that actual results may vary significantly from those estimates.

Fair Value of Financial Instruments — The Company considers the carrying amounts of significant classes of financial instruments on the balance sheets, including cash, accounts receivable, net, accounts payable, accrued liabilities and long-term debt to be reasonable estimates of fair value due either to their length to maturity or the existence of variable interest rates underlying such financial instruments that approximate prevailing market rates at September 30, 2007 and 2006. The Company has no financial instruments on the balance sheets for which the carrying amounts and estimated fair values differed significantly at September 30, 2007 and 2006.

Cash — Cash consists of currency on hand and demand deposits with financial institutions.

Concentrations of Credit Risk — The Company grants credit without collateral to its patients, most of whom are insured under payment arrangements with third-party payors, including Medicare, Medicaid, and commercial insurance carriers. The following table summarizes the percentage of gross accounts receivable from all payors at September 30:

	2007			2006
Medicare and Medicaid		43	%		44	%
Commercial		35	%		37	%
Other, including self-pay		22	%		19	%
		100	%		100	%

Allowance for Doubtful Accounts — Accounts receivable primarily consist of amounts due from third-party payors and patients. To provide for accounts receivable that could become uncollectible in the future, the Company establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. The Company estimates this allowance based on such factors as payor mix, aging and its historical collection experience and write-offs.

Medical Supplies — Medical supplies consist primarily of supplies necessary for diagnostics, catheterization and surgical procedures and general patient care and are stated at the lower of first-in, first-out (FIFO) cost or market.

98

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO FINANCIAL STATEMENTS — (Continued)

Property and Equipment — Property and equipment are recorded at cost and depreciated principally on a straight-line basis over the estimated useful lives of the assets, which generally range from 25 to 40 years for buildings and improvements, 25 years for land improvements, and from 3 to 10 years for equipment and software. Repairs and maintenance costs are charged to operating expense while betterments are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the related cost and accumulated depreciation with any resulting gain or loss reflected in income from operations.

Long-Lived Assets — Long-lived assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of these assets and their eventual disposition are less than their carrying amount. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in the Company’s strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. No impairment charges of long-lived assets were necessary for the years ended September 30, 2007, 2006 and 2005.

Other Assets — Other assets primarily consist of loan acquisition costs, which are costs associated with obtaining long-term financing (Loan Costs). The Loan Costs are being amortized using the straight-line method, over the life of the related debt, which approximates the effective interest method. The Company recognizes the amortization of Loan Costs as a component of interest expense. Amortization expense recognized for Loan Costs totaled approximately $38,000, $66,000 and $119,000 for the years ended September 30, 2007, 2006 and 2005, respectively.

Revenue Recognition — Amounts the Company receives for treatment of patients covered by governmental programs such as Medicare and Medicaid and other third-party payors such as commercial insurers, health maintenance organizations and preferred provider organizations are generally less than established billing rates. Payment arrangements with third-party payors may include prospectively determined rates per discharge or per visit, a discount from established charges, per diem payments, reimbursed costs (subject to limits) and/or other similar contractual arrangements. As a result, net revenue for services rendered to patients is reported at the estimated net realizable amounts as services are rendered. The Company accounts for the differences between the estimated realizable rates under the reimbursement program and the standard billing rates as contractual adjustments.

The majority of the Company’s contractual adjustments are system-generated at the time of billing based on either government fee schedules or fee schedules contained in managed care agreements with various insurance plans. Portions of the Company’s contractual adjustments are performed manually and these adjustments primarily relate to patients that have insurance plans with whom the Company does not have contracts containing discounted fee schedules, also referred to as non-contracted payors, patients that have secondary insurance plans following adjudication by the primary payor, uninsured self-pay patients and charity care patients. Estimates of contractual adjustments are made on a payor-specific basis and based on the best information available regarding the Company’s interpretation of the applicable laws, regulations and contract terms. While subsequent adjustments to the systematic contractual allowances can arise due to denials, short payments deemed immaterial for continued collection effort and a variety of other reasons, such amounts have not historically been significant.

The Company continually reviews the contractual estimation process to consider and incorporate updates to the laws and regulations and any changes in the contractual terms of its programs. Final settlements under some of these programs are subject to adjustment based on audit by third parties, which can take several years to determine. From a procedural standpoint, the Company subsequently adjusts those settlements as new information is obtained from audits or review by the fiscal intermediary, and, if the result of the of the fiscal intermediary audit or review impacts other unsettled and open costs reports, then the Company recognizes the impact of those adjustments.

99

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO FINANCIAL STATEMENTS — (Continued)

A significant portion of the Company’s net revenue is derived from federal and state governmental healthcare programs, including Medicare and Medicaid, which, combined, accounted for 53% , 53% and 55% of the Company’s net revenue during the years ended September 30, 2007, 2006 and 2005, respectively. Medicare payments for inpatient acute services and certain outpatient services are generally made pursuant to a prospective payment system. Under this system, a hospital is paid a prospectively-determined fixed amount for each hospital discharge based on the patient’s diagnosis. Specifically, each discharge is assigned to a diagnosis-related group (DRG). Based upon the patient’s condition and treatment during the relevant inpatient stay, each DRG is assigned a fixed payment rate that is prospectively set using national average costs per case for treating a patient for a particular diagnosis. The DRG rates are adjusted by an update factor each federal fiscal year, which begins on October 1. The update factor is determined, in part, by the projected increase in the cost of goods and services that are purchased by hospitals, referred to as the market basket index. DRG payments do not consider the actual costs incurred by a hospital in providing a particular inpatient service; however, DRG payments are adjusted by a predetermined adjustment factor assigned to the geographic area in which the hospital is located.

While hospitals generally do not receive direct payment in addition to a DRG payment, hospitals may qualify for additional capital-related cost reimbursement and outlier payments from Medicare under specific circumstances. Medicare payments for non-acute services, certain outpatient services, medical equipment, and education costs are made based on a cost reimbursement methodology and are under transition to various methodologies involving prospectively determined rates. The Company is reimbursed for cost-reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by the Company and audits thereof by the Medicare fiscal intermediary. Medicaid payments for inpatient and outpatient services are made at prospectively determined amounts and cost based reimbursement, respectively.

The Company provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported as net revenue.

Advertising — Advertising costs are expensed as incurred. During the years ended September 30, 2007, 2006 and 2005, the Company incurred approximately $597,000, $544,000 and $348,000, respectively, of advertising expenses.

Income Taxes — The Company has elected to be treated as a limited liability company for federal and state income tax purposes. As such, all taxable income or loss of the Company is included in the income tax returns of the respective members. Accordingly, no provision has been made for federal or state income taxes in the accompanying financial statements.

Members’ Share of Net Income and Loss — In accordance with the membership agreement, net income and loss are first allocated to the members based on their respective ownership percentages. If the cumulative losses of the Company exceed its initial capitalization and committed capital obligations of its members, Sioux Falls Hospital Management, Inc., the Company’s managing member, is required, due to at-risk capital position, by accounting principles generally accepted in the United States of America, to recognize a disproportionate share of the Company’s losses that otherwise would be allocated to all of its members on a pro rata basis. In such cases, Sioux Falls Hospital Management, Inc. will recognize a disproportionate share of the Company’s future profits to the extent it has previously recognized a disproportionate share of the Company’s losses.

Market Risk — The Company’s policy for managing risk related to its exposure to variability in interest rates, commodity prices, and other relevant market rates and prices includes consideration of entering into derivative instruments (freestanding derivatives), or contracts or instruments containing features or terms that behave in a manner similar to derivative instruments (embedded derivatives) in order to mitigate its risks. In addition, the Company may be required to hedge some or all of its market risk exposure, especially to interest rates, by creditors who provide debt funding to the Company. The Company recognizes all derivatives as either assets or liabilities in the balance sheets and measures those instruments at fair value in accordance with Statement of Financial

100

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO FINANCIAL STATEMENTS — (Continued)

Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (an Amendment of FASB Statement No. 133) and as amended by SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.

3.   Accounts Receivable

Accounts receivable, net, at September 30 is as follows:

	2007			2006
Receivables, principally from patients and third-party payors	$	8,230		$	7,764
Other receivables		160			245
		8,390			8,009
Allowance for doubtful accounts		(1,182	)		(786	)
Accounts receivable, net	$	7,208		$	7,223

Activity for the allowance for doubtful accounts for the years ended September 30 is as follows:

	2007			2006
Balance, beginning of year	$	786		$	1,150
Bad debt expense		1,721			939
Write-offs, net of recoveries		(1,325	)		(1,303	)
Balance, end of year	$	1,182		$	786

4.   Property and Equipment

Property and equipment, net, at September 30 is as follows:

	2007			2006
Land and improvements	$	1,327		$	1,327
Buildings and improvements		31,642			31,642
Equipment and software		18,871			18,546
Construction in progress		343			—
		52,183			51,515
Less accumulated depreciation		(19,438	)		(18,069	)
	$	32,745		$	33,446

101

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO FINANCIAL STATEMENTS — (Continued)

5.   Long-Term Debt

Long-term debt at September 30 is as follows:

	2007			2006
Bank mortgage loan	$	22,212		$	23,718
Installment notes payable to equipment lenders		731			2,283
Equipment loan		348			—
		23,291			26,001
Less current portion		(2,272	)		(3,049	)
	$	21,019		$	22,952

Bank Mortgage Loan — The Company financed its building and land through a bank mortgage loan dated June 29, 2000. Under the terms of the loan, interest-only payments were due through June 2002, which represented the first 24 months following the closing of the loan. Thereupon, the loan converted to a term loan with principal and interest payments due monthly, based on a 240-month amortization schedule with interest determined using the LIBOR rate plus an applicable margin of 2.75%. The loan was originally scheduled to mature on July 10, 2003 but was amended to extend the maturity date to September 30, 2008. During February 2006, this loan was refinanced and extended through December 2015 with an interest rate of the LIBOR rate plus an applicable margin of 1.25%. At September 30, 2007 and 2006, the interest rate on this loan is 6.97% and 6.58%, respectively. Until the date of refinancing, MedCath and Avera McKennan guaranteed 50% of the outstanding balance of the bank mortgage loan.

At September 30, 2005, the Company had four interest rate swaps, which qualified as cash flow hedges, outstanding for a total notional amount of approximately 80% of the bank mortgage loan’s outstanding balance. Two of the swaps effectively fixed LIBOR at 4.18% (4.18% Swaps) for approximately 60% of the bank mortgage loan’s outstanding balance. The remaining two swaps effectively fixed LIBOR at 3.46% (3.46% Swaps) for approximately 20% of the bank mortgage loan’s outstanding balance. The Company terminated the 4.18% Swaps and the 3.46% Swaps during the year ended September 30, 2006 and entered into a new interest rate swap (the Swap), which qualifies as a cash flow hedge and which effectively fixes LIBOR at 5.21% for approximately 80% of the bank mortgage loan’s outstanding balance. At both September 30, 2007 and 2006, the Company’s effective interest rate on the notional amount of the Swap is 6.46%. During fiscal 2007 and 2006, the Company recognized interest expense based upon the fixed interest rates provided under the swaps, while the change in the fair value of the swaps is recorded as other comprehensive income (loss) and as an adjustment to the derivative liability in the balance sheets. The derivative liability is $282,000 and $224,000 at September 30, 2007 and 2006, respectively, and is included in other long-term obligations on the balance sheets. Future changes in the fair value of the Swap will be recorded based upon the variability in the market interest rates until maturity in December 2015.

The bank mortgage loan agreement contains certain restrictive covenants, which require the maintenance of specific financial ratios and amounts. The Company is in compliance with these restrictive covenants at September 30, 2007.

Notes Payable to Equipment Lenders — The Company acquired substantially all of its equipment under installment notes payable to equipment lenders collateralized by the related equipment, which has a net book value of approximately $1.3 million and $1.9 million at September 30, 2007 and 2006, respectively. Amounts borrowed under these notes are payable in monthly installments of principal and interest over five-year and seven-year terms. The notes have annual fixed rates of interest ranging from 6.4% to 9.3%. MedCath and Avera McKennan have each guaranteed 30% of $731,000 of the installment notes payable to equipment lenders as of September 30, 2007.

The Company also had a $2.5 million working capital line of credit that was provided by the real estate lender, and was subject to the interest rate, covenants, guarantee and collateral of the real estate loan which was scheduled

102

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO FINANCIAL STATEMENTS — (Continued)

to expire in June 2006 but during fiscal 2006 was extended to December 2008. No amounts were outstanding under this line of credit at September 30, 2007 or 2006.

Future maturities of long-term debt, as of September 30, 2007, are as follows:

Fiscal Year:
2008	$	2,272
2009		1,592
2010		1,575
2011		1,579
2012		1,584
Thereafter		14,689
	$	23,291

6.   Commitments and Contingencies

Operating Leases — The Company leases certain equipment under noncancelable operating leases. The total rent expense under operating leases was approximately $100,000 during the years ended September 30, 2007, 2006 and 2005 and is included in other operating expenses. The future approximate minimum payments on noncancelable operating leases as of September 30, 2007 were $50,000 for fiscal 2008.

Commitments — The Company provides guarantees to certain non-investor physician groups for funds required to operate and maintain services for the benefit of the hospital’s patients requiring radiology services. These guarantees extend for the duration of the underlying service agreements and the maximum potential future payments that the Company could be required to make under these guarantees was approximately $150,000 through March 2008 as of September 30, 2007. The Company would only be required to pay this maximum amount if none of the physician groups collected fees for services performed during the guarantee period.

Contingencies — Laws and regulations governing the Medicare and Medicaid programs are complex, subject to interpretation and may be modified. The Company believes that it is in compliance with such laws and regulations and it is not aware of any investigations involving allegations of potential wrongdoing. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action, including substantial fines and criminal penalties, as well as repayment of previously billed and collected revenue from patient services and exclusion from the Medicare and Medicaid programs. Medicare and Medicaid cost reports have been audited by the fiscal intermediary through September 30, 2005 and September 30, 2004, respectively.

The Company is involved in various claims and legal actions in the ordinary course of business. Moreover, claims arising from services provided to patients in the past and other legal actions may be asserted in the future. The Company is protecting its interests in all such claims and actions.

Management does not believe, taking into account the applicable liability insurance coverage and the expectations of counsel with respect to the amount of potential liability, the outcome of any such claims and litigation, individually or in the aggregate, will have a materially adverse effect on the Company’s financial position or results of operations.

7.   Related-Party Transactions

MedCath provides working capital to the Company under a revolving credit note with a maximum borrowing limit of $12.0 million. The loan is collateralized by the Company’s accounts receivable from patient services. There

103

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO FINANCIAL STATEMENTS — (Continued)

are no amounts outstanding under the working capital loan as of September 30, 2007 and 2006. No interest was paid in fiscal 2007, 2006 or 2005 because the working capital loan was paid off monthly.

MedCath and Avera McKennan received debt guarantee fees for their guarantee of 50% of the Company’s outstanding bank mortgage loan until the loan was refinanced in February 2006. In addition, at September 30, 2007, 2006 and 2005 MedCath and Avera McKennan each guarantee 30% of $731,000, $2.3 million and $5.5 million, respectively, of the Company’s outstanding equipment debt. The total amount of such debt guarantee fees are approximately $2,000 each, for the year ended September 30, 2007, $23,000 each, for the year ended September 30, 2006 and $63,000 each, for the year ended September 30, 2005. No amounts are due as of September 30, 2007 or 2006.

MedCath allocated corporate expenses to the Company for costs in the following categories, which are included in operating expenses in the statements of operations, during the years ended September 30:

	2007		2006		2005
Management fees	$	1,296	$	1,236	$	1,167
Hospital employee group insurance		4,130		3,656		3,458
Other		28		72		65
	$	5,454	$	4,964	$	4,690

The other category above consists primarily of support services provided by MedCath and consolidated purchased services paid for by MedCath for which it receives reimbursement at cost in lieu of the Company’s incurring these services directly. Support services include but are not limited to training, treasury, and development. Consolidated purchased services include, but are not limited to insurance coverage, professional services, software maintenance and licenses purchased by MedCath under its consolidated purchasing programs and agreements with third-party vendors for the direct benefit of the Company.

The Company pays Avera McKennan and North Central Heart Institute Holdings, PLLC for various services, including labor, supplies and equipment purchases. The amounts paid during the years ended September 30, were as follows:

	2007		2006		2005
Avera McKennan	$	1,018	$	931	$	1,102
North Central Heart Institute Holdings		779		791		859
Total	$	1,797	$	1,722	$	1,961

8.   Employee Benefit Plan

The Company participates in MedCath’s defined contribution retirement savings plan (the 401(k) Plan), which covers all employees. The 401(k) Plan allows eligible employees to contribute from 1% to 25% of their annual compensation on a pretax basis. The Company, at its discretion, may make an annual contribution of up to 30% of an employee’s pretax contribution, up to a maximum of 6% of compensation. This annual contribution percentage was increased to 30% for fiscal 2007 from 25% for fiscal 2006. The Company’s contributions to the 401(k) Plan were approximately $231,000, $176,000 and $167,000 during the years ended September 30, 2007, 2006 and 2005, respectively.

104

Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A.   Controls and Procedures.

The President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation of the Company’s disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K, that the Company’s disclosure controls and procedures were effective as of the end of the fiscal year covered by this report to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

No change in the Company’s internal control over financial reporting was made during the most recent fiscal quarter covered by this report that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (as defined in Securities Exchange Act Rule 13a-15(f)). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation and the reliability of financial reporting. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2007. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, the Company’s internal control over financial reporting was effective as of September 30, 2007 based on those criteria.

Deloitte & Touche LLP, an independent registered public accounting firm, which audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on management’s assessment of internal control over financial reporting, which is included below.

105

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

MedCath Corporation

Charlotte, North Carolina

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that MedCath Corporation and subsidiaries (the Company) maintained effective internal control over financial reporting as of September 30, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of the company’s principal executive and principal financial officers, or persons performing similar functions and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of September 30, 2007, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by COSO. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2007, based on the criteria established in Internal Control — Integrated Framework issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of September 30, 2007 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended and our report dated December 14, 2007 expressed an unqualified opinion on those financial statements, and contained an explanatory paragraph regarding the Company’s adoption of the provisions of Statement of Financial Accounting Standards No. 123-R, Share-Based Payment, effective October 1, 2005.

/s/  Deloitte & Touche LLP

Charlotte, North Carolina

December 14, 2007

106

Item 9B.   Other Information

None.

107

PART III

Item 10.   Directors and Executive Officers of the Registrant

The information required by this Item with respect to directors is incorporated by reference to information provided under the headings “Election of Directors,” “Corporate Governance,” “Other Matters-Section 16(a) Beneficial Ownership Compliance” and “Accounting and Audit Matters-Audit Committee Financial Expert” and elsewhere in the Company’s proxy statement to be filed with the Commission on or before January 28, 2008 in connection with the Annual Meeting of Stockholders of the Company scheduled to be held on March 5, 2008 (the 2008 Proxy Statement). Some of the information required by this Item with respect to executive officers is provided under the heading “Executive Officers” in Part I of this report.

Item 11.   Executive Compensation.

The information required by this Item is incorporated by reference to information provided under the headings “Executive Compensation” and “Corporate Governance-Compensation of Directors” and elsewhere in the 2008 Proxy Statement.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item is incorporated by reference to information provided under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation-Equity Compensation Plan Information” and elsewhere in the 2008 Proxy Statement.

Item 13.   Certain Relationships and Related Transactions.

The information required by this Item is incorporated by reference to information provided under the heading “Certain Transactions” and elsewhere in the 2008 Proxy Statement.

Item 14.   Principal Accounting Fees and Services.

The information required by this Item is incorporated by reference to information provided under the heading “Accounting and Audit Matters” and elsewhere in the 2008 Proxy Statement.

PART IV

Item 15.   Exhibits, Financial Statement Schedules.

(a)(1) The financial statements as listed in the Index under Part II, Item 8, are filed as part of this report.

(2) Financial Statement Schedules.  All schedules have been omitted because they are not required, are not applicable or the information is included in the selected consolidated financial data or notes to consolidated financial statements appearing elsewhere in this report.

(3) The following list of exhibits includes both exhibits submitted with this report and those incorporated by reference to other filings:

Exhibit
No.				Description
	3	.1	—	Amended and Restated Certificate of Incorporation of MedCath Corporation(1)
	3	.2	—	Bylaws of MedCath Corporation(1)
	4	.1	—	Specimen common stock certificate(1)
	4	.2	—	Stockholders’ Agreement dated as of July 31, 1998 by and among MedCath Holdings, Inc., MedCath 1998 LLC, Welsh, Carson, Anderson & Stowe VII, L.P. and the several other stockholders (the Stockholders’ Agreement)(1)

108

Exhibit
No.				Description
	4	.3	—	First Amendment to Stockholder’s agreement dated as of June 1, 2001 by and among MedCath Holdings, Inc., the KKR Fund and the WCAS Stockholders(1)
	4	.4	—	Registration Rights Agreement dated as of July 31, 1998 by and among MedCath Holdings, Inc., MedCath 1998 LLC, Welsh, Carson, Anderson & Stowe VII, L.P., WCAS Healthcare Partners, L.P. And the several stockholders parties thereto (the Registration Rights Agreement)(1)
	4	.5	—	First Amendment to Registration Rights Agreement dated as of June 1, 2001 by and among MedCath Holdings, Inc. and the persons listed in Schedule I attached hereto(1)
	4	.6	—	Form of 97/8% Senior Note due 2012(12)
	4	.7	—	Indenture dated as of July 7, 2004 among MedCath Holdings Corp., as issuer (the Issuer), MedCath Corporation and the subsidiaries of the Issuer named therein, as guarantors (the Guarantors), and U.S. Bank National Association, as trustee (the Trustee), relating to the 97/8% Senior Notes due 2012(12)
	4	.9	—	Credit Agreement, dated as of July 7, 2004, among MedCath Corporation, as a parent guarantor, MedCath Holdings Corp., as the borrower, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, Wachovia Bank, National Association, as syndication agent, and the other lenders party thereto(12)
	4	.10	—	Collateral Agreement, dated as of July 7, 2004, by and among MedCath Corporation, MedCath Holdings Corp., the Subsidiary Guarantors, as identified on the signature pages thereto and any Additional Grantor (as defined therein) who may become party to the Collateral Agreement, in favor of Bank of America, N.A., as administrative agent for the ratable benefit of the banks and other financial institutions from time to time parties to the Credit Agreement, dated as of July 7, 2004, by and among the MedCath Corporation, MedCath Holdings Corp. and the lenders party thereto(12)
	10	.1	—	Operating Agreement of the Little Rock Company dated as of July 11, 1995 by and among MedCath of Arkansas, Inc. and several other parties thereto (the Little Rock Operating Agreement)(1)(6)
	10	.2	—	First Amendment to the Little Rock Operating Agreement dated as of September 21, 1995(1)(6)
	10	.3	—	Amendment to Little Rock Operating Agreement effective as of January 20, 2000(1)(6)
	10	.4	—	Amendment to Little Rock Operating Agreement dated as of April 25, 2001(1)
	10	.8	—	Operating Agreement of Arizona Heart Hospital, LLC entered into as of January 6, 1997 (the Arizona Heart Hospital Operating Agreement)(1)(6)
	10	.9	—	Amendment to Arizona Heart Hospital Operating Agreement effective as of February 23, 2000(1)(6)
	10	.10	—	Amendment to Operating Agreement of Arizona Heart Hospital, LLC dated as of April 25, 2001(1)
	10	.11	—	Agreement of Limited Partnership of Heart Hospital IV, L.P. as amended by the First, Second, Third and Fourth Amendments thereto entered into as of February 22, 1996 (the Austin Limited Partnership Agreement)(1)(6)
	10	.12	—	Fifth Amendment to the Austin Limited Partnership Agreement effective as of December 31, 1997(1)(6)
	10	.13	—	Amendment to Austin Limited Partnership Agreement effective as of July 31, 2000(1)(6)
	10	.14	—	Amendment to Austin Limited Partnership Agreement dated as of March 30, 2001(1)
	10	.15	—	Amendment to Austin Limited Partnership Agreement dated as of May 3, 2001(1)
	10	.16	—	Guaranty made as of November 11, 1997 by MedCath Incorporated in favor of HCPI Mortgage Corp(1)
	10	.17	—	Operating Agreement of Heart Hospital of BK, LLC amended and restated as of September 26, 2001(the Bakersfield Operating Agreement)(2)(6)
	10	.18	—	Second Amendment to Bakersfield Operating Agreement effective as of December 1, 1999(1)(6)
	10	.19	—	Amended and Restated Operating Agreement of effective as of September 6, 2002 of Heart Hospital of DTO, LLC (the Dayton Operating Agreement)(10)(6)
	10	.20	—	Amendment to New Mexico Operating Agreement and Management Services Agreement) effective as of October 1, 1998(1)(6)
	10	.21	—	Amended and Restated Operating Agreement of Heart Hospital of New Mexico, LLC.(3)(6)

109

Exhibit
No.				Description
	10	.22	—	Guaranty made as of September 24, 1998 by MedCath Incorporated, St. Joseph Healthcare System, SWCA, LLC and NMHI, LLC in favor of Health Care Property Investors, Inc(1)
	10	.23	—	Amended and Restated Guaranty made as of October 1, 2001 by MedCath Incorporated, St. Joseph Healthcare System, SWCA, LLC and NMHI, LLC in favor of Health Care Property Investors, Inc.(3)
	10	.24	—	Termination and Release dated October 1, 2000 by and among Heart Hospital of DTO, LLC, DTO Management, Inc., Franciscan Health Systems of the Ohio Valley, Inc. and ProWellness Health Management Systems, Inc(1)(6)
	10	.25	—	Operating Agreement of Heart Hospital of South Dakota, LLC effective as of June 8, 1999 Sioux Falls Hospital Management, Inc. and North Central Heart Institute Holdings, PLLC (the Sioux Falls Operating Agreement)(1)(6)
	10	.26	—	First Amendment to Sioux Falls Operating Agreement of Heart Hospital of South Dakota, LLC effective as of July 31, 1999(1)(6)
	10	.27	—	Limited Partnership Agreement of Harlingen Medical Center LP effective as of June 1, 1999 by and between Harlingen Hospital Management, Inc. and the several partners thereto(1)(6)
	10	.28	—	Operating Agreement of Louisiana Heart Hospital, LLC effective as of December 1, 2000 by and among Louisiana Hospital Management, Inc. and the several parties thereto (Louisiana Operating Agreement)(1)(6)
	10	.29	—	Amendment to Louisiana Operating Agreement effective as of December 1, 2000(1)(6)
	10	.30	—	Second Amendment to Louisiana Operating Agreement effective as of December 1, 2000(1)(6)
	10	.31	—	Limited Partnership Agreement of San Antonio Heart Hospital, L.P. effective as of September 17, 2001(2)(6)
	10	.32	—	Operating Agreement of Heart Hospital of Lafayette, LLC effective as of December 5, 2001 (Lafayette Operating Agreement)(4)(6)
	10	.33	—	First Amendment to Lafayette Operating Agreement effective as of December 5, 2001(4)(6)
	10	.34	—	Second Amendment to Lafayette Operating Agreement effective as of December 5, 2001(4)(6)
	10	.35	—	Third Amendment to Lafayette Operating Agreement effective as of December 5, 2001(4)(6)
	10	.36	—	Management Services Agreement for the Heart Hospital of Lafayette. LLC dated September 5, 2001(4)(6)
	10	.37	—	1998 Stock Option Plan for Key Employees of MedCath Holdings, Inc. and Subsidiaries(1)
	10	.38	—	Outside Directors’ Stock Option Plan(1)
	10	.39	—	Amended and Restated Directors Option Plan(4)
	10	.40	—	Form of Heart Hospital Management Services Agreement(1)
	10	.41	—	Fourth Amendment to the Operating Agreement of Heart Hospital of Lafayette, LLC as of February 7, 2003(8)
	10	.42	—	Fifth Amendment to the Operating Agreement of Lafayette Heart Hospital, LLC(6)(9)
	10	.43	—	Engagement Letter dated October 30, 2003 between MedCath Corporation and Sokolov, Sokolov, Burgess(13)
	10	.44	—	Addendum to Engagement Letter dated as of February 5, 2004 between MedCath Corporation and Sokolov, Sokolov, Burgess(13)
	10	.45	—	Engagement Letter dated February 17, 2004 between MedCath Corporation, Arizona Heart Hospital, Arizona Heart Institute and Sokolov, Sokolov, Burgess(13)
	10	.46	—	Agreement for Purchase and Sale, dated November 4, 2004(14)
	10	.47	—	Amended and Restated Employment Agreement dated September 30, 2005 by and between MedCath Corporation and John T. Casey(15)
	10	.48	—	Amended and Restated Employment Agreement dated September 30, 2005 by and between MedCath Corporation and James E. Harris(15)
	10	.49	—	Amended and Restated Employment Agreement dated September 30, 2005 by and between MedCath Corporation and Thomas K. Hearn(15)

110

Exhibit
No.				Description
	10	.50	—	Amended and Restated Employment Agreement dated September 30, 2005 by and between MedCath Corporation and Grant Wicklund(15)
	10	.51	—	Amended and Restated Employment Agreement dated September 30, 2005 by and between MedCath Corporation and Joan McCanless(15)
	10	.52	—	Sample Agreement to Accelerate Vesting of Stock Options and Restrict Sale of Related Stock Effective September 30, 2005(15)
	10	.53	—	Consulting Services Agreement dated October 27, 2005 by and between MedCath Corporation and French Healthcare Consulting, Inc.(15)
	10	.54	—	Separation and Release Agreement effective November 25, 2005 by and between MedCath Corporation and Charles R. Slaton(15)
	10	.55	—	Guaranty made as of December 28, 2005 by MedCath Corporation and Harlingen Medical Center Limited Partnership in favor of HCPI Mortgage Corp.(16)
	10	.56	—	Employment agreement dated February 21, 2006, by and between MedCath Corporation and O. Edwin French(17)
	10	.57	—	MedCath Corporation 2006 Stock Option and Award Plan effective March 1, 2006
	10	.58	—	Employment agreement dated March 27, 2006, by and between MedCath Corporation and Phil Mazzuca(17)
	10	.59	—	Consulting agreement effective August 4, 2006 by and between MedCath Incorporated and SSB Solutions(18)
	10	.60	—	Resignation letter of John T. Casey dated August 16, 2006
	10	.61	—	First Amendment to the September 30, 2005 Amended and Restated Employment Agreement by and between MedCath Corporation and James E. Harris dated September 1, 2006
	10	.62	—	First Amendment to the September 30, 2005 Amended and Restated Employment Agreement by and between MedCath Corporation and Thomas K. Hearn dated September 1, 2006
	10	.63	—	First Amendment to the September 30, 2005 Amended and Restated Employment Agreement by and between MedCath Corporation and Joan McCanless dated September 1, 2006
	10	.64	—	First Amendment to the February 21, 2006 Employment Agreement by and between MedCath Corporation and O. Edwin French dated September 1, 2006
	10	.65	—	First Amendment to the March 27, 2006 Employment Agreement by and between MedCath Corporation and Phil Mazzuca dated September 1, 2006
	10	.66	—	LLC Interest Purchase Agreement, dated as of August 14, 2006, by and among Carondelet Health Network, an Arizona non-profit corporation, Southern Arizona Heart, Inc., a North Carolina corporation, and MedCath Incorporated, a North Carolina corporation(19)
	10	.67	—	Operating Agreement of HMC Management Company, LLC, effective as of June 29, 2007(6)
	10	.68	—	Amended and Restated Operating Agreement of Coastal Carolina Heart, LLC, effective as of July 1, 2007(6)
	10	.69	—	Amended and Restated Limited Partnership Agreement of Harlingen Medical Center, Limited Partnership, effective as of July 10, 2007(6)
	10	.70	—	Amended and Restated Operating Agreement of HMC Realty, LLC, effective as of July 10, 2007(6)
	12	.0	—	Ratio of earnings to fixed charges
	21	.1	—	List of Subsidiaries
	23	.1	—	Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
	23	.2	—	Consent of Deloitte & Touche LLP, Independent Auditors
	31	.1	—	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	—	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	—	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	—	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

111

(1)	Incorporated by reference from the Company’s Registration Statement on Form S-1 (File no. 333-60278).
(2)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2001.
(3)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2001.
(4)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
(5)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
(6)	Certain portions of these exhibits have been omitted pursuant to a request for confidential treatment filed with the Commission.
(7)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002.
(8)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
(9)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
(10)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003.
(11)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2003.
(12)	Incorporated by reference from the Company’s Registration Statement on Form S-4 (File No. 333-119170).
(13)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended September 30, 2004.
(14)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004.
(15)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended September 30, 2005.
(16)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.
(17)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.
(18)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
(19)	Incorporated by reference from the Company’s Current Report on Form 8-K filed September 7, 2006.

112

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Medcath Corporation

By:  /s/  O. Edwin French

O. Edwin French

President, Chief Executive Officer

(principal executive officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/  O. Edwin French O. Edwin French	President and Chief Executive Officer (principal executive officer)	December 14, 2007
/s/  James E. Harris James E. Harris	Executive Vice President and Chief Financial Officer (principal financial officer)	December 14, 2007
/s/  Lora Ramsey Lora Ramsey	Vice President — Controller (principal accounting officer)	December 14, 2007
/s/  Adam H. Clammer Adam H. Clammer	Director	December 14, 2007
/s/  Edward A. Gilhuly Edward A. Gilhuly	Director	December 14, 2007
/s/  John B. McKinnon John B. McKinnon	Director	December 14, 2007
/s/  Robert S. McCoy, Jr. Robert S. McCoy, Jr.	Director	December 14, 2007
/s/  Galen D. Powers Galen D. Powers	Director	December 14, 2007
/s/  Paul B. Queally Paul B. Queally	Director	December 14, 2007
/s/  Jacque J. Sokolov, MD Jacque J. Sokolov, MD	Director	December 14, 2007
/s/  John T. Casey John T. Casey	Director	December 14, 2007

113

EX-10.67

Exhibit 10.67

HMC MANAGEMENT COMPANY, LLC
A North Carolina Limited Liability Company

OPERATING AGREEMENT

OPERATING AGREEMENT
OF
HMC MANAGEMENT COMPANY, LLC
a North Carolina Limited Liability Company

     THIS OPERATING AGREEMENT, is made and entered into as of the 29^th day of June, 2007, by and among HMC MANAGEMENT COMPANY, LLC, the North Carolina limited liability company which is the subject of this Agreement (the “Company”), and HARLINGEN HOSPITAL MANAGEMENT, INC., its sole member (the “Member”).

ARTICLE I

DEFINITIONS AND GLOSSARY OF TERMS

     “Act” shall mean the North Carolina Limited Liability Company Act set forth at Chapter 57C, Article 1, North Carolina General Statutes.

     “Agreement” shall mean this Operating Agreement as amended from time to time.

     “Articles” shall mean the articles of organization, together with any amendments thereto, required to be filed by the Company pursuant to the Act.

     “Cash Flow” shall mean cash available to the Company as a result of the operations of the Company and the sale or refinancing of Company property after (i) payment of all expenses, costs, amortization of indebtedness of the Company, (ii) acquisition of investments or other capital assets and (iii) the establishment of reasonable reserves for working capital, debt service, contingencies, investments, and replacements.

     “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor federal revenue law and any final treasury regulations, revenue rulings, and revenue procedures thereunder or under any predecessor federal revenue law.

     “Company” shall refer to the limited liability company created under this Agreement and the Articles.

     “Distributions” shall mean distributions of cash or other property made by the Company to the Member from any source.

     “Income” shall mean the net income (including tax exempt income) of the Company or any separately allocable item thereof.

     “Interest” shall mean all of the rights created under this Agreement or under the Act of the Member with respect to the Company and the Company property.

     “Losses” shall mean the net loss of the Company or any separately allocable deduction of the Company, including expenditures of the Company not deductible in computing its taxable income and not properly chargeable to a capital account.

     “Manager” shall mean any person appointed by the Member to act as a manager of the Company.

     Certain other capitalized terms not defined above shall have the meanings given such terms in the Agreement.

ARTICLE II

FORMATION; NAME; PURPOSES; OFFICE; TERM

     SECTION 2.1. Company Formation. The Company shall be formed as a limited liability company under and pursuant to the Act. The Member shall execute and file all such instruments or documents and shall do or cause to be done all filing, recording, or other acts, as may be necessary or appropriate from time to time to comply with the requirements of law for the formation and/or operation of a limited liability company in the State of North Carolina.

     SECTION 2.2. Name of Company. The name of the Company shall be HMC Management Company, LLC.

     SECTION 2.3. Purposes. The purposes of the Company are as follows:

     (a) To act as general partner of Harlingen Medical Center, Limited Partnership, a North Carolina limited partnership (the “Partnership”);

     (b) To do all things reasonably incidental to the purposes described in subsection (a); and

     (c) All such other purposes which the Member may determine.

     The Company may execute, deliver and perform all contracts and other undertakings and engage in all activities and transactions as may be necessary or advisable to carry out the foregoing objects and purposes.

     SECTION 2.4. Registered Office and Principal Place of Business. The registered office of the Company shall be maintained at 10720 Sikes Place, Suite 300, Charlotte, North Carolina 28277, or at such other place as the Member may determine, and the initial registered agent at such address shall be Blair Todt. The principal place of business of the Company shall be maintained at such place as the Member may determine.

     SECTION 2.5. Commencement and Term. The Company shall commence upon the filing of the Articles in the office of the Secretary of State of the State of North Carolina, as required by Section 2.1 hereof, and shall continue indefinitely, until terminated as provided herein.

ARTICLE III

CAPITAL CONTRIBUTIONS, LIABILITY OF MEMBER

     SECTION 3.1. Initial Contributions. The Member may at its discretion, but is not obligated to, contribute capital to the Company from time to time. Initially, the Member will contribute to the capital of the Company a receivable from HMC Realty, LLC, a Texas limited liability company, in the principal amount of $317,696, which the Company will thereupon further contribute to the capital of the Partnership, all pursuant to a Contribution and Assignment of Receivable among the Company, the Member and the Partnership.

     SECTION 3.2. Limited Liability of Member. The Member shall have no personal liability for any debts or losses of the Company beyond its Interest, except as provided by law. Except as may be required under the Act, the Member shall not be liable for any debts or losses of capital or profits of the Company or be required to contribute or lend funds to the Company. The Company herewith indemnifies and holds harmless the Member from any and all loss, damage, liability, or expense incurred by it at any time by reason of or arising out of any act performed by it on behalf of the Company or in furtherance of the interest of the Company.

ARTICLE IV

MANAGEMENT OF THE COMPANY

     SECTION 4.1 Management; Identification of Company in Contracts. The management of the Company shall be vested in the Manager. In all contracts, agreements and undertakings of the Company, the Company shall be identified as a limited liability company.

     SECTION 4.2 Number, Tenure and Qualifications of Managers. The Manager(s) of the Company may be appointed, removed and replaced from time to time by the Member in its sole discretion. Managers are not required to be residents of North Carolina or Members of the Company. The initial Manager of the Company shall be James A. Parker, to serve until his successor is duly appointed.

     SECTION 4.3 Exclusive Control of Manager. Subject to the terms and provisions of this Agreement, the Manager shall have exclusive management and control of the affairs of the Company and shall have the power and authority to do all things necessary or appropriate to carry out the purposes of the Company.

     SECTION 4.4 Duties of Manager. The Manager will diligently and faithfully devote such time to the management, supervision, and administration of the business and operations

of the Company as may be required to carry out the purposes of the Company in accordance with the applicable law. The Manager may appoint officers or other delegates to assist him in his management of the Company.

     SECTION 4.5 Limitations on Powers of Manager and Officers. Notwithstanding the authority granted to the Manager in this Article IV, without the prior written approval of the Member, neither the Manager nor any officer or delegate shall have any authority to:

     (a) Do any act in contravention of the articles of organization, this Agreement or the Act;

     (b) Do any act which would make it impossible to carry on the ordinary business of the Company;

     (c) Possess Company property, or assign, transfer or pledge the rights of the Company in specific Company property for other than a Company purpose or the benefit of the Company, or commingle the funds of the Company with the funds of any other person;

     (d) Admit a person as a Member of the Company;

     (e) Cause or permit the Company to redeem or repurchase Company Interests;

     (f) Sell all or substantially all of the assets of the Company in a single transaction or series of related transactions;

     (g) Cause or permit the Company to merge or consolidate with any other entity; or

     (h) Terminate or dissolve the Company.

     SECTION 4.6 Other Business of Member and Managers. The Member or any Manager may engage independently or with others in other business ventures of any kind, render advice or services of any kind to other investors or ventures, or make or manage other investments or ventures. Neither the Company nor the Member shall have any right by virtue of this Agreement or the relationship created hereby in or to such other ventures or activities or to the income or proceeds derived therefrom, and the pursuit of such ventures, even if competitive with the business of the Company, shall not be deemed wrongful or improper under this Agreement. Nothing herein shall be deemed to negate or modify any separate agreement among the Manager, the Member and the Company, or any of them, with respect to restrictions on competition.

     SECTION 4.7 Indemnification of Manager. The Company herewith indemnifies and holds harmless the Manager from any and all loss, damage, liability, or expense incurred by him at any time by reason of or arising out of any act performed by him on behalf of the Company or in furtherance of the interest of the Company, except for liability for breach of fiduciary duty, gross negligence, willful misconduct, or fraud; provided, that the satisfaction of any indemnification and

any holding harmless shall be from and limited to Company assets and the Member shall not have any personal liability on account thereof.

ARTICLE V

ALLOCATIONS AND DISTRIBUTIONS

     SECTION 5.1. Allocation of Income and Losses. All Income and Losses for each calendar year, or fraction thereof, as the case may be, shall be allocated in full to the Member.

     SECTION 5.2. Distributions of Cash Flow. Distributions of Cash Flow shall be made at the sole discretion of the Member.

     SECTION 5.3. Distributions and Payments Upon Termination and Winding Up. In the event of the termination and winding up of the Company, the assets of the Company (after any allocations and distributions pursuant to Sections 5.1 and 5.2 hereof) shall be applied and distributed in the following priorities:

     (a) First, to the discharge of debts and obligations of the Company, including loans from the Member;

     (b) Second, to fund reserves for contingent liabilities;

     (c) Third, to the Member.

ARTICLE VI

DISSOLUTION OF THE COMPANY

     SECTION 6.1. Dissolution of the Company. The Company shall be dissolved upon the happening of any of the following events, whichever shall first occur:

     (a) the death, dissolution, adjudication of incapacity, voluntary filing or involuntary adjudication of bankruptcy, or the liquidation, receivership or assignment for the benefit of creditors of the Member, or other event of withdrawal under the Act; or

     (b) upon the written determination of the Member.

     SECTION 6.2. Winding Up and Liquidation.

     (a) Upon the dissolution of the Company, its assets shall be sold and liquidated, and its affairs shall be wound up as soon as practicable thereafter by the Member. In winding up the Company and liquidating the assets thereof, the Member, its successors or assigns, or any person designated by the Member for such purpose, may arrange for the collection and disbursement to the Member of any future receipts from the Company property or other sums to which the Company may be entitled, or may with the approval of the Member sell the Company’s assets to any person on such terms and for such consideration as shall be approved by the Member.

     (b) Upon the dissolution of the Company, the assets, if any, of the Company available for distribution and any Net Proceeds from the liquidation of any such assets, shall be applied and distributed to the payment of liquidating Distributions as provided under Section 5.3 above.

ARTICLE VII

MISCELLANEOUS PROVISIONS

     SECTION 7.1. Amendment, Interpretation and Construction. This Agreement contains the entire operating agreement of the Company and the Member may amend or modify this agreement at any time. Where the context so requires, the masculine shall include the feminine and the neuter and the singular shall include the plural. The headings and captions in this Agreement are inserted for convenience and identification only and are in no way intended to define, limit, or expand the scope or intent of this Agreement or any provision hereof. Unless otherwise specified, the references to Section and Article in this Agreement are to the Sections and Articles of this Agreement.

     SECTION 7.2. Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. The parties hereto hereby submit to the jurisdiction of the courts of the State of North Carolina for the adjudication of any matter arising with respect to this Agreement.

     SECTION 7.3. Partial Invalidity. In the event that any part or provision of this Agreement shall be determined to be invalid or unenforceable, the remaining parts and provisions of this Agreement which can be separated from the invalid, unenforceable provision or provisions shall continue in full force and effect.

     SECTION 7.4. Binding on Successors. The terms, conditions, and provisions of this Agreement shall inure to the benefit of, and be binding upon the Company and the Member and their respective heirs, successors, distributees, legal representatives, and permitted assigns. However, none of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Company.

     SECTION 7.5. Statutory Provisions. Any statutory or regulatory reference in this Agreement shall include a reference to any successor to such statute or regulation and/or revision thereof.

     IN WITNESS WHEREOF, the undersigned have executed this Operating Agreement as of the day and year first above written.

COMPANY:	HMC MANAGEMENT COMPANY, LLC
	By:	Harlingen Hospital Management, Inc., its sole Member
	By:
	Title:
MEMBER:	HARLINGEN HOSPITAL MANAGEMENT, INC.
	By:
	Title:

EX-10.68

Exhibit 10.68

AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

Effective as of the 1^st day of July, 2007

TABLE OF CONTENTS
TO THE
AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

ARTICLE I DEFINITIONS			2
ARTICLE II FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY			2
	SECTION 2.1	Company Formation; Effective Date	2
	SECTION 2.2	Name of Company	2
	SECTION 2.3	Purposes and Business Objectives	2
	SECTION 2.4	Registered Agent and Office; Principal Place of Business	3
	SECTION 2.5	Commencement and Term	3
ARTICLE III MEMBERS AND CAPITAL CONTRIBUTIONS			4
	SECTION 3.1	Capital Contributions of Members	4
	SECTION 3.2	Liability of Members - For Capital	4
	SECTION 3.3	Maintenance of Capital Accounts; Withdrawals of Capital; Withdrawals from the Company	4
	SECTION 3.4	Interest on Capital Contributions or Capital Accounts	5
	SECTION 3.5	Additional Funding	5
	SECTION 3.6	Enforcement of Commitments	6
	SECTION 3.7	Member Documentation	7
	SECTION 3.8	Reserved Powers of Members	7
	SECTION 3.9	Appointment of Board of Directors	8
	SECTION 3.10	Involvement of Investor Members and/or Owners	8
ARTICLE IV NAMES AND ADDRESSES OF MEMBERS			9
ARTICLE V MANAGEMENT OF THE COMPANY			9
	SECTION 5.1	General Authority and Powers of MedCath and the Board of Directors; Delegation of MedCath	9
	SECTION 5.2	Restrictions on Authority of the Board of Directors and MedCath	11
	SECTION 5.3	Duties of the Board of Directors	12
	SECTION 5.4	Delegation by the Board of Directors and MedCath	12
	SECTION 5.5	Right to Rely Upon the Authority of MedCath	12
	SECTION 5.6	Company Expenses	13
	SECTION 5.7	No Management by Members	15
	SECTION 5.8	Consent by Members to Exercise of Certain Rights and Powers by Board of Directors	16
	SECTION 5.9	Meetings and Vote of the Board of Directors	16
	SECTION 5.10	Other Business of Members	16
	SECTION 5.11	Board of Directors’ Standard of Care	20
	SECTION 5.12	Limitation of Liability	20
	SECTION 5.13	Indemnification of the Directors	21
	SECTION 5.14	Purchase of Goods and Services from Members	21
	SECTION 5.15	Certain Decisions of the Board of Directors	21

i

	SECTION 5.16	Indemnity by the Company	22
	SECTION 5.17	Responsibility of MedCath	22
	SECTION 5.18	Force Majeure	23
ARTICLE VI DISTRIBUTIONS AND ALLOCATIONS			23
	SECTION 6.1	Distributions of Cash Flow from Operations and Cash from Sales or Refinancing	23
	SECTION 6.2	Profits	24
	SECTION 6.3	Losses	24
	SECTION 6.4	Code Section 704(c) Tax Allocations	24
	SECTION 6.5	Miscellaneous	25
	SECTION 6.6	Special Allocations of Guarantee and Financing Fees	25
ARTICLE VII DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS			26
	SECTION 7.1	No Termination by Certain Acts of Member	26
	SECTION 7.2	Dissolution/No Dissolution Upon Termination of Management and Service Agreement	26
	SECTION 7.3	Dissolution and Final Liquidation	26
	SECTION 7.4	Termination	28
	SECTION 7.5	Payment in Cash	28
ARTICLE VIII REMOVAL OR WITHDRAWAL OF MEMBERS AND TRANSFER OF MEMBERS’ MEMBERSHIP AND/OR      ECONOMIC INTERESTS			28
	SECTION 8.1	Members - Restriction on Transfer	28
	SECTION 8.2	Condition Precedent to Transfer of Membership Interest	30
	SECTION 8.3	Substitute Member - Conditions to Fulfill	30
	SECTION 8.4	Allocations Between Transferor and Transferee	31
	SECTION 8.5	Rights, Liabilities of, and Restrictions on Assignee	31
	SECTION 8.6	Repurchase of Interests in Certain Event	31
	SECTION 8.7	Death of a Member	32
ARTICLE IX RECORDS, ACCOUNTINGS AND REPORTS			33
	SECTION 9.1	Books of Account	33
	SECTION 9.2	Access to Records	33
	SECTION 9.3	Bank Accounts and Investment of Funds	33
	SECTION 9.4	Fiscal Year	33
	SECTION 9.5	Accounting Reports	33
	SECTION 9.6	Tax Matters Partner	34
ARTICLE X MEETINGS AND VOTING RIGHTS OF MEMBERS			34
	SECTION 10.1	Meetings	34
	SECTION 10.2	Voting Rights of Members	35
ARTICLE XI AMENDMENTS			36
	SECTION 11.1	Authority to Amend by the Board of Directors	36
	SECTION 11.2	Restrictions on the Board of Directors’ Amendments: Amendments by Members	36
	SECTION 11.3	Amendments to Articles of Organization	37
ARTICLE XII MISCELLANEOUS			37
	SECTION 12.1	Limited Power of Attorney	37
	SECTION 12.2	Waiver of Provisions	37
	SECTION 12.3	Interpretation and Construction	37

ii

SECTION 12.4	Governing Law	38
SECTION 12.5	Partial Invalidity	38
SECTION 12.6	Binding on Successors	38
SECTION 12.7	Notices and Delivery	38
SECTION 12.8	Counterpart Execution; Facsimile Execution	38
SECTION 12.9	Statutory Provisions	39
SECTION 12.10	Waiver of Partition	39
SECTION 12.11	Change in Law	39
SECTION 12.12	Investment Representations of the Members	40
SECTION 12.13	Acknowledgments Regarding Legal Representation	41
SECTION 12.14	Dispute Resolution	41
SECTION 12.15	Exhibits	42

iii

AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

     THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE NORTH CAROLINA SECURITIES ACT IN RELIANCE UPON THE REPRESENTATION OF EACH PURCHASER OF THE SECURITIES THAT THE SAME ARE BEING ACQUIRED FOR INVESTMENT PURPOSES. THESE SECURITIES MAY ACCORDINGLY NOT BE RESOLD OR OTHERWISE TRANSFERRED OR CONVEYED IN THE ABSENCE OF REGISTRATION OF THE SAME PURSUANT TO THE APPLICABLE SECURITIES LAWS UNLESS AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS FIRST OBTAINED THAT SUCH REGISTRATION IS NOT THEN NECESSARY. ANY TRANSFER CONTRARY HERETO SHALL BE VOID.

     THIS AMENDED AND RESTATED OPERATING AGREEMENT (the “Agreement”) of Coastal Carolina Heart, LLC (the “Company”), a North Carolina Limited Liability Company is made and entered into by and among Persons whose names, addresses and taxpayer identification numbers are listed on the Information Exhibit (Exhibit A).

RECITALS

     A. The Company was formed by MedCath Diagnostics, LLC, now known as MedCath Partners, LLC (“MedCath”), and the Investor Members on June 15, 2001 to develop, own, and operate a facility (the “Facility”) located in Wilmington, North Carolina where the services of an outpatient cardiac catheterization laboratory is providing cardiac catheterization procedures on an outpatient basis. The Company now intends to manage the inpatient and outpatient diagnostic and interventional cardiac catheterization and electrophysiology laboratories (the “Cath Labs”) at New Hanover Regional Medical Center, a general acute care hospital located in Wilmington, North Carolina (the “Hospital”) as well as to continue to own and operate the Facility.

     B. It is intended that the management services that will be provided by the Company hereafter will enhance the Hospital’s clinical capabilities within the Cath Labs and bring a higher level of care to the Wilmington, North Carolina region through the provision of efficient, quality cardiac services.

     C. The Hospital now wishes to become a Member of the Company. The Capital Contributions and involvement of all of the Members are necessary to enable the Company to achieve its objectives.

     D. The Members now wish to amend and restate the original operating agreement of the Company to reflect this intended purpose as well as to reflect the Membership Interest of the Hospital in the Company.

ARTICLE I

DEFINITIONS

     Unless otherwise indicated, capitalized words and phrases in this Agreement shall have the meanings set forth in the attached Glossary of Terms (Exhibit B).

ARTICLE II

FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY

     SECTION 2.1 Company Formation; Effective Date.

     The Company was formed upon the filing of the Articles of Organization with the North Carolina Secretary of State in accordance with the provisions of the Act on June 15, 2001. This Agreement shall be effective as of the date that this Agreement has been executed by the Required Members of the Company as set forth in Section 11.2 (the “Effective Date”). Upon the Effective Date, the Persons listed on the attached Information Exhibit shall be admitted to the Company as Members, all without the necessity of any further act or instrument and without causing the dissolution of the Company.

     SECTION 2.2 Name of Company.

     The name of the Company is Coastal Carolina Heart, LLC.

     SECTION 2.3 Purposes and Business Objectives.

     Subject to and as supplemented by the provisions of this Section, the principal purposes and business objectives of the Company are as follows:

     (a) To continue to own and operate the Facility to provide cardiovascular services and peripheral vascular services using the services of one or more cardiac catheterization laboratories provided by MedCath and to manage a mobile cardiac catheterization laboratory route within the Territory using the services of one or more cardiac catheterization laboratories provided by MedCath;

     (b) To lease or acquire real property, and if appropriate to construct a suitable building, in which the Facility shall be located, and the personal property, the equipment and other personalty to be utilized in the operation of the Facility;

     (c) To enhance, manage, oversee and administer the Cath Labs;

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     (d) To establish and arrange for the operation of a mobile route to provide cardiac catheterization services to hospitals and other locations approved by the Board of Directors; and

     (e) To exercise all other powers necessary to or reasonably connected with the Company’s business (as determined by the Board of Directors) which may by legally exercised by limited liability companies under the Act and permitted by North Carolina law.

     The Members expressly agree and acknowledge that the Company is intended to provide and assist with the provision of healthcare services to the surrounding community as a whole and to promote the health of a broad cross-section of that community, including through the provision of an appropriate level of charity care consistent with the overall mission of the Hospital. In that regard, the Company shall be operated and managed in a manner that will not cause the Hospital to act contrary to its tax-exempt purpose or in a manner that is likely to adversely affect its tax-exempt status under Section 501(c)(3) of the Code, or generate income for the Hospital which is subject to federal taxation. The duty of the Company to operate in a manner that furthers the charitable purposes of the Hospital as described above overrides any duty of the Company to operate for the financial benefit of the Members. Whenever this Agreement refers to the tax-exempt status of the Hospital, or the tax-exempt nature of any income generated by the Company and allocated to the Hospital, the parties shall construe this Agreement to refer to tax-exemption under Section 501(c)(3) of the Code and to the lack of applicability of the unrelated business income tax to any income allocated to the Hospital. Any references to tax-exempt status or the tax-exempt nature of any income shall apply equally to the Hospital or any tax-exempt Affiliate of the Hospital which is a transferee of the Hospital’s Membership Interest.

     SECTION 2.4 Registered Agent and Office; Principal Place of Business.

     The registered agent and registered office of the Company shall be as indicated in the Articles of Organization as amended from time to time. The principal place of business of the Company shall be at such location in the greater Wilmington, North Carolina area as selected by the Board of Directors from time to time. The Board of Directors shall promptly notify the Members of any changes in the Company’s registered agent, registered office, or principal place of business.

     SECTION 2.5 Commencement and Term.

     The Company commenced on the filing of the Articles of Organization with the Office of the Secretary of State of North Carolina on June 15, 2001, and shall continue until December 31, 2021, unless sooner terminated or dissolved as provided herein; provided, however, that the termination date may be extended for up to an additional forty (40) years in five (5) year increments upon the consent of the Required Members.

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ARTICLE III

MEMBERS AND CAPITAL CONTRIBUTIONS

     SECTION 3.1 Capital Contributions of Members.

     (a) MedCath and the Investor Members made initial Capital Contributions set forth below to the Company on such dates as are reflected in the records of the Company. Based upon the $9,416,000 value of their Membership Interests (the “Current Value of Original Interests”) and Hospital’s additional Capital Contribution to the Company in connection with its admission as a Member of the Company, at $43,000,000, the Members upon the Effective Date, hold the Percentage Membership Interests set forth below:

     (i) MedCath shall hold a 9.2% Membership Interest;

     (ii) Investor Members shall hold a 8.8% Membership Interest, Members; and

     (iii) The Hospital shall hold an 82.0 % Membership Interest.

     (b) As of the Effective Date, the Membership Interests and Capital Account balance of MedCath, the Investor Members and the Hospital are set forth in the Information Exhibit assuming all such Capital Contributions have been made.

     SECTION 3.2 Liability of Members — For Capital.

     The liability of each Member for capital shall be limited to the amount of his, her or its agreed Capital Contribution as a Member as provided in Section 3.1 and Section 3.5, except that the Members may be liable to the Company for amounts distributed to them as a return of capital as provided by the Act. The Members shall not be required to contribute any additional capital to the Company except as provided in Section 3.5.

     SECTION 3.3 Maintenance of Capital Accounts; Withdrawals of Capital; Withdrawals from the Company.

     An individual Capital Account shall be maintained for each Member in accordance with the requirements of the Code and the Regulations promulgated thereunder. No Member shall be entitled to withdraw or to make demand for withdrawal of any part of its Capital Account or to receive any distribution except as provided herein. Except as otherwise provided in this Agreement, each Member shall look solely to the assets of the Company for the return of its Capital Contributions and shall have no right or power to demand or receive property other than cash from the Company. No Member shall have priority over any other Member as to the return of its Capital Contributions, distributions or allocations, except as provided in this Agreement.

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     Except as otherwise provided in Article VIII, a Member may not withdraw from the Company without the written consent of the Required Members. In no case shall a Member have the right to have its Membership Interest redeemed by the Company unless approved by the Required Members.

     SECTION 3.4 Interest on Capital Contributions or Capital Accounts.

     No interest shall be paid to any Member based solely on its Capital Contributions or Capital Account. The preceding sentence shall not prevent the Company from earning interest on its bank accounts and investments and distributing such earnings to the Member in accordance with Articles VI and VII.

     SECTION 3.5 Additional Funding.

     If, from time to time, the Board of Directors reasonably determines (which determination shall not be unreasonably withheld or delayed) that funds in addition to that contemplated by Section 3.1 are necessary or appropriate for the business of the Company, including but not limited to the operation or management of the Facility or the Cath Labs, then:

     (a) First, the Board of Directors shall use commercially reasonable efforts to borrow such funds from a bank or other lender on terms and conditions reasonably acceptable to the Board of Directors. All loans obtained hereunder shall be subject to the approval of the Board of Directors, which approval shall not be unreasonably withheld or delayed;

     (b) Second, if loans as provided in (a) above are not reasonably available, the Board of Directors may through written notice require that the Members contribute additional capital to the Company pro rata according to their respective Membership Interests. Notwithstanding the foregoing, a Member’s maximum obligation for such additional Capital Contributions shall be limited to an additional amount equal to the following:

     (i) Investor Members (pro rata, based on the proportion that each individual Investor Member’s membership interest bears to the percentage membership interests held by Investor Members in the aggregate) – $92,400 from all Investors Members in the aggregate;

     (ii) MedCath       -$96,600; and

     (iii) Hospital       -$861,000.

     Notwithstanding the foregoing, Hospital shall not be required to contribute additional capital to the extent such capital is to be used solely to improve, modernize or expand the Facility and such capital requirements shall be met solely by contributions from the Investor Members and MedCath up to the limits in this subsection (b) and from amounts

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made as optional capital contributions by any Member pursuant to the following subsection (c).

     (c) Third, if additional funds are thereafter needed by the Company, the Board of Directors shall request additional Capital Contributions from the Members and each Member may elect whether or not to contribute its pro rata portion of such additional capital requirements as optional Capital Contributions. The other Members may elect to contribute optional Capital Contributions not contributed by any Member hereunder. Thereafter, the Board of Directors shall reasonably adjust the percentage Membership Interest of each Member (based on the aggregate of all Capital Contributions made by all of the Members in accordance with this Agreement) in the event any Member elected not to make optional Capital Contributions pursuant to this Section 3.5(c); and

     (d) Fourth, if adequate funds have not been obtained or raised in accordance with (a) through (c) above (including, without limitation, taking into consideration funds made available by Members for amounts which are in excess of their obligations hereunder), then the Board of Directors may elect to dissolve the Company provided, however, if any Members or any of their Affiliates (i) have any outstanding loans to the Company or are committed to provide such loans or (ii) are providing a guaranty or are committed to provide a guaranty for any indebtedness of the Company, then only those Members alone upon unanimous approval of such Members, upon at least fifteen (15) days prior written notice to the other Members, shall be entitled to so dissolve the Company due to the Company not having sufficient funds to meet its financial obligations or liabilities as they come due.

     SECTION 3.6 Enforcement of Commitments.

     In the event any Member (a “Delinquent Member”) fails to make a mandatory Capital Contribution as provided in Section 3.1 or Section 3.5(b) or an optional Capital Contribution as agreed to in writing by the Delinquent Member under Section 3.5(c) (the “Commitment”), the Board of Directors shall give the Delinquent Member a notice of the failure to meet the Commitment. If the Delinquent Member fails to perform the Commitment (including any costs associated with the failure to meet the Commitment and interest on such obligation at the Default Rate) within ten (10) business days of the giving of notice, the Board of Directors may take such action necessary to enforce the Commitment, including but not limited to enforcing the Commitment in a court of appropriate jurisdiction in the state in which the principal office of the Company is located or the state of the Delinquent Member’s address as then reflected in the Agreement. Each Member expressly agrees to the jurisdiction of such courts but only for the enforcement of Commitments. The other Members may elect to contribute additional amounts equal to any amount of the Commitment not contributed by such Delinquent Member. The contributing Member shall be entitled at its election to treat the amounts contributed pursuant to this Section either as a Capital Contribution or as a loan from the contributing Member bearing interest at the Default Rate secured by the Delinquent Member’s Membership Interest in the Company. If the contributing Member elects to contribute such amount as a Capital Contribution, the percentage Membership Interests of the Members shall be adjusted proportionately as determined by the Board of Directors based on amounts actually contributed.

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Until the contributing Member is fully repaid for such loan made as a result of the default by the Delinquent Member and only if the contributing Member agrees to accept repayment of such amount, the contributing Member shall be entitled to all distributions to which the Delinquent Member would have been entitled had such Commitment been fulfilled thereby. Notwithstanding the foregoing, no Commitment or other obligation to make an additional Capital Contribution may be enforced by a creditor of the Company unless the Delinquent Member expressly consents to such enforcement or to the assignment of the obligation to such creditor. Notwithstanding anything herein to the contrary, (i) if the Delinquent Member is a Director, if a Director is a direct or indirect owner of a Delinquent Member or if a Director is appointed by a Delinquent Member (each, a “Conflicted Director”), then the Directors who are not Conflicted Directors may take all actions contemplated by this Section 3.6 without the consent or participation of the Conflicted Directors; and (ii) no Delinquent Member may participate in any vote or other action in which Members are entitled to participate hereunder.

     SECTION 3.7 Member Documentation.

     If at any time any Investor Member is an Entity, such Investor Member that is an Entity shall have delivered to MedCath as manager of the Company copies of all documents, instruments and agreements related to the formation, ownership and governance of the Investor Member that is an Entity (the “Investor Documents”). None of the Investor Documents will be altered or amended without the consent of MedCath, which consent shall not be unreasonably withheld following review of the Investor Documents by MedCath for the purpose of ensuring (a) that the Company’s ownership is in compliance with applicable law and (b) that the Investor Documents include terms that will enable the Company to enforce the obligations of this Agreement against the applicable Investor Member that is an Entity. If MedCath has not provided the Investor Member that is an Entity with MedCath’s written objections to a proposed alteration or amendment to Investor Documents within thirty (30) days of the receipt by MedCath of such proposed alteration or amendment, then such alteration or amendment shall be deemed to have been consented to by MedCath. Contemporaneously with such Investor Member’s admission as a Member of the Company: (i) the Investor Member shall execute appropriate documentation under which, among other things, it agrees to be bound by the terms and conditions of this Agreement; and (ii) the Owners shall each execute appropriate documentation under which, among other things, those individuals agree to be personally bound by the terms and conditions of Article III, and Sections 5.10, 8.1, 8.6, 8.7, 12.11 and 12.13 hereof.

     SECTION 3.8 Reserved Powers of Members.

     The following are actions which can be taken only by the Members and shall require the consent of the Required Members, either by vote thereof at a meeting of the Members or by written consent of the Required Members:

     (a) Amendments to the Article of Organization of the Company or this Agreement, except as specifically permitted in Section 11.1;

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     (b) Approval and authorization of disproportionate distributions or allocations of profits, losses or assets of the Company, except as specifically permitted elsewhere in this Agreement; and

     (c)Extension of the term of the Company.

     SECTION 3.9 Appointment of Board of Directors.

     (a) The initial Board of Directors shall consist of five (5) Directors who shall be appointed as follows:

     (i) MedCath shall appoint one (1) Director;

     (ii) Hospital shall appoint three (3) Directors; and

     (iii) The Investor Members shall appoint one (1) Director, which Director shall be appointed or removed either (i) by a vote of a majority of the percentage Membership Interests of the Investor Members at a meeting held pursuant to Section 10.1(b); or (ii) by written consent of a majority of the percentage Membership Interests of the Investor Members.

     (b) A Director shall serve on the Board of Directors until removed by the Member or group of Members appointing such Director. A Member or group of Members shall have the right, with or without cause, to remove, substitute or replace any Director which it or they appointed.

     SECTION 3.10 Involvement of Investor Members and/or Owners.

     The nature of the management services that Company intends to provide to the Hospital contemplates the integral involvement of the Investor Members in the performance of the services, and as such the involvement of Investor Members in the functions required of them is a condition of each Investor Member’s continued ownership in the Company. All Investor Members and Physician Owners agree that they must be active Medical Staff Members in good standing at the Hospital and possess education and training that enables them to perform the required physician involvement activities. Further, the Investor Members and Physician Owners hereby agree to perform such functions and responsibilities as are reasonably assigned to them by the Board of Directors taking into consideration the needs and requirements of the Hospital which may include, but are not limited to, Investor Member and Physician Owner participation in:

     (a) One or more task force(s) to establish and implement procedures for performance improvement, utilization management, and peer review for the Cath Labs and the Facility which shall in all events be performed under the performance improvement and peer review function of the Hospital;

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     (b) The evaluation of clinical competencies and performance evaluation processes for patient care personnel performing services in the Cath Labs and the Facility;

     (c) The evaluation of the impact of new and emerging technologies and making recommendations for both new and existing technology to be offered in the Cath Labs and the Facility;

     (d) The development of clinical protocols, policies and procedures to be implemented in the Cath Labs and the Facility and the performance of periodic review and evaluation of the same to make recommendations for necessary revisions; and

     (e) The evaluation of supply utilization in the Cath Labs and the Facility.

     The Board of Directors shall delegate to MedCath and MedCath hereby accepts the task of implementing an appropriate system to monitor and document each Investor Member’s compliance with the involvement requirements determined by the Board of Directors and revised from time to time, including assignment of Investor Members to specific functions.

ARTICLE IV

NAMES AND ADDRESSES OF MEMBERS

     The names and addresses of the Members are as indicated on the Information Exhibit attached hereto as Exhibit A, which may be amended by the Board of Directors from time to time in accordance with the provisions of this Agreement.

ARTICLE V

MANAGEMENT OF THE COMPANY

     SECTION 5.1 General Authority and Powers of MedCath and the Board of Directors; Delegation of MedCath.

     (a) Except as set forth in those provisions of this Agreement that specifically require the vote, consent, approval or ratification of the Members and subject to (b) and (c) below, the Board of Directors shall have complete authority and exclusive control over the management of the business and affairs of the Company. Subject to the terms and conditions of this Agreement and except as otherwise provided herein, all Material Agreements and Material Decisions and other decisions required to be made by the Board of Directors under the terms of this Agreement shall be approved or made in accordance with Sections 5.9 and 5.15 hereof. Subject to the terms and conditions of this Agreement including Section 3.8 and except as otherwise provided herein, the Board of Directors shall make decisions concerning the following:

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     (i) All Material Agreements and Material Decisions with respect to the business affairs of the Company;

     (ii) Annual capital and operating budgets for the Company;

     (iii) Any change in the criteria and/or schedule for the Cash Distributions made to the Members as set forth in Section 6.1;

     (iv) Admission of new Members pursuant to Article VIII except as expressly permitted by this Agreement;

     (v) Repurchase of Membership Interests pursuant to Section 8.6; and

     (vi) The determination of whether the Company will engage any physician to serve as Medical Director for the Company and the duties and associated compensation to be paid to any such Medical Directors; provided, however, that in all events the terms of such agreements shall comply with applicable law and the compensation paid shall be documented as representing fair market value for the services rendered.

     No Member has the actual or apparent authority to cause the Company to become bound in any contract, agreement or obligation, and no Member shall take any action purporting to be on behalf of the Company. No Director shall cause the Company to become bound to any contract, agreement or obligation, and no Director shall take any other action on behalf of the Company, unless such matter has received the vote, consent, approval or ratification as required pursuant to this Agreement with respect to such matter or except as provided below with respect to the authority and actions of MedCath;

     (b) Subject to the terms of this Agreement, the day-to-day management of the business and affairs of the Company shall be the responsibility of MedCath, which management shall be subject to decisions, guidelines and policies made or established by the Board of Directors hereunder, provided, however, that decisions relating to the medical and clinical practice of the Cath Labs shall be made exclusively by the qualified medical personnel of the Hospital under the direction of a member of the Hospital’s medical staff; and

     (c) Notwithstanding any provision herein to the contrary, the Board of Directors shall (i) not cause the Company to engage in any activities or take any action which is inconsistent with the tax-exempt status of the Hospital, and (ii) cause the Company to conduct its activities and transactions so that the charitable purposes of the Hospital referenced in Section 2.3 take precedence over any profit-making motives. All Members are aware of the limitations on the activities of the Company under this Section and agree that the decision of the Board of Directors to forego an action or activity which would be inconsistent with the tax-exempt status of the Hospital or to take or forego an action or activity in a manner so that the charitable purposes in Section 2.3 take precedence over any profit-making motives shall not be a breach of the duty of loyalty or

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any other duty of the Directors to the Company or its Members. The Company hereby adopts and agrees to operate in accordance with the charity care policy attached hereto as Exhibit C and incorporated herein by reference, which has been proposed by Hospital (the “Charity Policy”). Notwithstanding any other provision of this Operating Agreement to the contrary, in the event of any dispute over the initiation or approval of actions (including decisions regarding the Company’s Charity Policy and decisions to provide care to indigent patients without the expectation of payment and the provision in any budget for such care) which are necessary or appropriate to further the charitable purposes described in Section 2.3 which is not agreed to by the Board of Directors as a whole shall only require the approval of the Directors appointed by the Hospital. If after submission to the Board of Directors, the Board does not reach agreement in any amendments to the Company’s Charity Policy, then the Directors appointed by the Hospital shall have the sole authority to amend the Company’s Charity Policy from time to time.

     SECTION 5.2 Restrictions on Authority of the Board of Directors and MedCath.

     The Board of Directors (and any of its delegates, including MedCath) shall not do any of the following:

     (a) Act in contravention of this Agreement;

     (b) Act in any manner which would make it impossible to carry on the express business purposes of the Company;

     (c) Commingle the Company funds with those of any other Person except that the Board of Directors shall permit MedCath to manage the Company funds as a part of the cash management program of MedCath’s affiliate, MedCath Incorporated;

     (d) Alter the primary purposes of the Company as set forth in Section 2.3;

     (e) Possess any property or assign the rights of the Company in specific property for other than a Company purpose;

     (f) Employ, or permit the employment of, the funds or assets of the Company in any manner except for the exclusive benefit of the Company;

     (g) Make any payments of any type, directly or indirectly, to anyone for the referral of patients to the Cath Labs or Facility in order to use the Cath Labs or the Facility or to provide other services;

     (h) Sell all or substantially all of the assets of the Company or merge the Company with or into any other Entity without the approval of the Required Members; or

     (i)Extend the term of this Agreement.

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     SECTION 5.3 Duties of the Board of Directors.

     The Board of Directors shall do the following:

     (a) Diligently and faithfully devote such of its time to the business of the Company as may be necessary to properly conduct the affairs of the Company, however, the individual Directors shall not be required to devote their full time to such duties;

     (b) Use its best efforts to cause the Company to comply with such conditions as may be required from time to time to permit the Company to be classified for federal income tax purposes as a partnership and not as an association taxable as a corporation;

     (c) File and publish all certificates, statements, or other instruments required by law for the formation and operation of the Company as a limited liability company in all appropriate jurisdictions;

     (d) Use its commercially reasonable best efforts to cause the Company to obtain and keep in force during the term of the Company fire and extended coverage and public liability and professional liability, and E & O insurance (including coverage for the Directors) with such issuers and in such amounts as the Board of Directors shall deem advisable, but in amounts not less (and deductible amounts not greater) than those customarily maintained by businesses comparable to the Company’s; and

     (e) Have a fiduciary duty to conduct the affairs of the Company in the best interests of the Company, including the safekeeping and use of all funds and assets, whether or not in its immediate possession and control, and it shall not employ or permit others besides the Board of Directors to employ such funds or assets in any manner except for the benefit of the Company.

     SECTION 5.4 Delegation by the Board of Directors and MedCath.

     Subject to restrictions otherwise provided herein, the Board of Directors or MedCath may at any time employ any other Person, including Persons and Entities employed by, affiliated with, or related to any Director or any Member to perform services for the Company and its business, and may delegate all or part of their authority or control to any such other Persons, provided that such employment or delegation shall not relieve the Board of Directors or MedCath of their respective responsibilities and obligations under this Agreement or under the laws of the State of North Carolina nor will it make any such Person a Member of the Company.

     SECTION 5.5 Right to Rely Upon the Authority of MedCath.

     Persons dealing with the Company may rely upon the representation of MedCath that MedCath is the manager of the Company and that MedCath has the authority to make any commitment or undertaking on behalf of the Company to the extent permitted hereunder. No Person dealing with MedCath shall be required to determine its authority to make any such commitment or undertaking. In addition, no purchaser from the Company shall be required to determine the sole and exclusive authority of MedCath to sign and deliver on behalf of the Company any instruments of transfer with respect thereto or to see to the application or

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distribution of revenues or proceeds paid or credited in connection therewith, unless such purchaser shall have received written notice from the Company affecting the same.

     SECTION 5.6 Company Expenses.

     (a) For management services provided to the Company, the Company shall pay to MedCath, beginning upon the Commencement Date as defined in Section 4.01 of the Management and Service Agreement, an annual management fee equal to Seven Hundred Fifty Thousand Dollars ($750,000) for those services provided by MedCath as further described on Exhibit D attached hereto. The fee shall be payable in monthly installments of Sixty Two Thousand Five Hundred Dollars ($62,500) on or before the fifteenth (15^th) day following the end of each month and fees for any partial month shall be pro-rated;

     (b) The Company shall also pay the following expenses of the Company:

     (i) all expenses incurred by MedCath or its Affiliate in connection with necessary corporate filings for the Company with the North Carolina Secretary of State, related taxes, and registration and filing fees, and expenses incurred after the Effective Date related to the amendment of this Agreement;

     (ii) the actual costs to MedCath or its Affiliates of goods, services, and materials used for and by the Company (not to exceed the acquisition cost of such goods, services and materials) for those services not included in Exhibit D (costs not exclusively incurred for the benefit of the Company shall be pro-rated according to the relative benefit received by the Company);

     (iii) the recruitment, salary and related expenses of employees and staff of the Company;

     (iv) all costs of borrowed money, taxes, and assessments on the Company, and other taxes applicable to the Company; expenses in connection with the acquisition, maintenance, leasing, refinancing, operation, and disposition of the Equipment, furniture and fixtures of the Cath Labs;

     (v) all reasonable travel and other out-of-pocket expenses incurred by MedCath in the development and management of the Company and its business to the extent consistent with any budget approved in the manner set forth in this Agreement or consistent with policies established by the Board of Directors. The reimbursement for expenses and payment of fees to MedCath provided for in this Section shall be made to MedCath or its Affiliates regardless of whether any distributions are made to the Members under Article VI and Article VII; and

     (vi) all fees and expenses paid to third parties for accounting, legal, documentation, professional, and reporting services to the Company (to the extent such fees and expenses are not for services MedCath is obligated to provide pursuant to Exhibit D), which may include, but are not limited to: preparation and

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documentation of Company audits; preparation and documentation of Company state and federal income tax returns; and taxes incurred in connection with the issuance, distribution, transfer, registration, and recordation of documents evidencing ownership of a Membership Interest in the Company or in connection with the business of the Company; expenses in connection with preparing and mailing reports required to be furnished to the Members for tax reporting or other purposes, including reports, if any, that may be required to be filed with any federal or state regulatory agencies, or expenses associated with furnishing reports to Members which the Board of Directors deems to be in the best interest of the Company; expenses of revising, amending, converting, modifying, or terminating the Company or this Agreement; costs incurred in connection with any litigation in which the Company is involved as well as any examination, investigation, or other proceedings conducted by any regulatory agency involving the Company; allocable costs of any computer equipment or services used for or by the Company; and the costs of preparing and disseminating informational material and documentation relating to a potential sale, refinancing, or other disposition of the Equipment.

     (c) Guarantee and Financing Fee. In the event that, at the Company’s request, any Member of the Company, its Affiliates or MedCath Incorporated either (x) provide a guarantee of any indebtedness of the Company which is acceptable to and required by the Company’s lenders or (y) provide loans to the Company (“Financing Members”) and such guarantees or loans are not provided on a pro rata basis by all other Members of the Company (the “NonFinancing Members”), then the Financing Members shall be paid an annual guarantee and financing fee equal to (a) the amount of such indebtedness which is guaranteed, or loans made, by the Financing Members, multiplied by (b) .0075, multiplied by (c) the percentage Membership Interest in the Company owned by the NonFinancing Members (the “Guarantee and Financing Fee”). The Guarantee and Financing Fee shall be paid quarterly and the expense thereof shall be allocated to the NonFinancing Members as follows:

     (i) The Guarantee and Financing Fee shall be deducted from the Cash Distributions otherwise distributable to the NonFinancing Members and shall be paid to the Financing Members;

     (ii) To the extent that at the time such Guarantee and Financing Fee is due to be paid hereunder there are no anticipated Cash Distributions, then the Company shall pay such Guarantee and Financing Fee to the Financing Members and the amount of such payments shall be charged to the Capital Accounts of the NonFinancing Members;

     (iii) When Cash Distributions become available for distribution to the Members in the future, the Cash Distributions otherwise distributable to the NonFinancing Members shall first be retained by the Company to the extent that amounts were previously charged to the Capital Accounts of the NonFinancing

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Members in accordance with subsection (ii) above and any remaining Cash Distributions shall be distributed to the Members in accordance with Section 6.1.

     (d) Once a budget has been approved by the Board of Directors, MedCath shall have the authority to expend Company funds consistent with the budget (including the specific line item categories) and sign all agreements related thereto, including reimbursement to MedCath and its Affiliates for goods and services provided to the Company. In addition, MedCath may make additional expenditures beyond the budget in an amount reasonably related to additional revenues or increased patient or procedure volumes to the extent those additional expenditures will not cause the actual gross margin between the Company’s net patient revenues and operating expenses to be less than the gross margin between net patient revenues and operating expenses as reflected in the approved budget.

     (e) MedCath shall be paid the amounts due MedCath to (i) manage the Company’s mobile route to provide mobile cardiac catheterization services and (ii) provide the services of one of MedCath’s cardiac catheterization laboratories that it is authorized to operate within North Carolina, pursuant to the terms of the Mobile Services Agreement attached hereto as Exhibit E, as such agreement may be amended from time to time.

     (f) MedCath shall be paid all amounts due MedCath accruing after the Effective Date under the Amended and Restated Management and Services Agreement by and between the Company and MedCath attached hereto as Exhibit F, as such agreement may be amended from time to time.

     SECTION 5.7 No Management by Members.

     Except as provided hereinafter, the Members shall take no part in, or at any time interfere in any manner with, the management, conduct, or control of the Company’s business and operations and shall have no right or authority to act for or bind the Company except as set forth in this Agreement. The rights and powers of such Members shall not extend beyond those set forth in this Agreement and those granted under the Articles of Organization of the Company and any attempt to participate in the control of the Company in a manner contrary to the rights and powers granted herein and under the Articles of Organization of the Company shall be null and void and without force and effect. Subject to the decisions and judgment with respect to all professional medical or clinical matters of qualified medical personnel, the Board of Directors shall have the right to determine when and how the operations of the Company shall be conducted. The exercise by any Member of any of the rights granted to the Member hereunder shall not be deemed to be taking part in the control of the business of the Company and shall not constitute a violation of this Section.

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     SECTION 5.8 Consent by Members to Exercise of Certain Rights and Powers by Board of Directors.

     By its execution hereof, each Member expressly consents to the exercise by the Board of Directors of the rights, powers, and authority conferred on the Board of Directors by this Agreement.

     SECTION 5.9 Meetings and Vote of the Board of Directors.

     (a) The Board of Directors shall meet regularly but in no event less than annually. Notice of any meeting, regular or special, shall be delivered to each Director personally, by telephone, by electronic mail, by facsimile transmission or in writing at least five (5) business days before the meeting; provided, however, an emergency meeting of the Board of Directors may be called by any Director upon shorter notice;

     (b) Notice of any meeting (whether regular, emergency or special) shall specify the purpose for which the meeting is called; provided, however, that the business of any emergency meeting shall be limited to the purpose stated in the notice;

     (c) The Board of Directors shall elect one of its members to preside over the meetings as the Chairperson and one of its members, as the Secretary, to oversee the preparation and delivery of meeting notices and the preparation of minutes of the meetings of the Board of Directors and Members;

     (d) A Director may attend a meeting by telephone or other electronic means and be considered present for all purposes, including a quorum, so long as the telephone or other connection allows each Director to hear and be heard by all other Directors;

     (e) Except as otherwise expressly provided in this Agreement, any action taken by the Board of Directors shall require the affirmative vote of at least two (2) Directors appointed by the Hospital, and either one (1) Director appointed by MedCath, or one (1) Director appointed by the Investor Members;

     (f) Any action which is required to be or may be taken at a meeting of the Board of Directors may be taken without a meeting if consent in writing including the required votes, either collectively or in counterparts, setting forth the action so taken, is signed by the required number of Directors as set forth in (e) above; and

     (g) Attendance at a meeting of the Board of Directors constitutes a waiver of any objection to the notice of the meeting.

     SECTION 5.10 Other Business of Members.

     (a) Subject to (b) below, any Member may engage independently or with others in other business ventures of every nature and description, including without limitation the purchase of medical equipment, the rendering of medical services of any kind, and the making or management of other investments and neither the Company nor

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any Member shall have any right by virtue of this Agreement or the relationship created hereby in or to such other ventures or activities or to the income or proceeds derived therefrom, and the pursuit of such ventures;

     (b) Except as specifically provided in this Section 5.10, as long as any Member owns a Membership Interest in the Company and for a period of two (2) years thereafter, neither the Member, Investor Entity, Owner, Practice nor any of their respective Affiliates, shall hold, directly or indirectly, an investment, ownership or other beneficial interest in any Entity (including a sole proprietorship) operating a Competing Business within the North Carolina counties of New Hanover, Pender, and Brunswick (the “Territory”). The term “Competing Business” means a business which (i) provides management, administrative or consulting services to (A) one or more cardiac catheterization laboratories performing diagnostic or interventional procedures or electrophysiology procedures, (B) a hospital that provides cardiac services similar to those provided in the Cath Labs, (C) any other facility focused primarily on cardiac inpatient or outpatient services similar to those provided in the Cath Labs from time to time at the Hospital, or (D) a business that manages inpatient or outpatient diagnostic or interventional cardiac catheterization services similar to those provided in the Cath Labs, or (ii) provides any of the following services or facilities: diagnostic and interventional cardiac catheterization and electrophysiology procedures including pacemakers, AICDs and other electrophysiology devices, emergent and elective PCI, external counterpulsation, or any other service or procedure then being provided or managed by the Company. Notwithstanding the terms of this Section 5.10 (b):

     (i) No Member or Owner who is a physician shall be prohibited from engaging in the practice of medicine, maintaining his or her staff privileges and admitting and treating patients at any other hospital or health care facility, from personally performing professional medical services directly for his or her patients at any hospital or facility, or billing and receiving professional fees as a result of his or her professional medical services from any payor;

     (ii) Nothing herein shall prohibit a Member, Owner, Practice or their Affiliates from owning up to three percent (3%) of the outstanding capital stock of a company which operates a Competing Business and whose stock is publicly traded and listed on a nationally recognized securities exchange or from investing in a publicly traded mutual fund or making other investments with the prior written approval of the Board of Directors;

     (iii) Nothing herein shall prevent: (a) Hospital from conducting any activities of the Hospital, including the continued operation of the Cath Labs; or (b) from contracting for management services for the Cath Labs with any Person or Entity other than Company or its Affiliates after (i) Hospital ceases to own a Membership Interest in the Company and (ii) termination of the Management and Service Agreement, provided that no current or former indirect or direct Owner of Company holds any ownership or other interest in the Person or Entity providing such management services for the Cath Labs;

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     (iv) Nothing herein shall restrict Members or any of their respective Affiliates from conducting any competing activities, or holding any ownership or other interest in any Entity that is engaged in a Competing Business in either case outside of the Territory;

     (v) Nothing herein shall prevent Hospital from: (a) acquiring, managing, leasing or operating an acute care hospital even if such hospital owns, leases or operates cardiac catheterization laboratories providing diagnostic or interventional cardiac catheterization or electrophysiology procedures so long as no Member or Owner (other than Hospital) has an ownership or other beneficial interest in such transaction except as approved by the Company’s Board of Directors; (b) owning or operating (in whole or in part) diagnostic radiology services furnished in a setting outside a cardiac catheterization laboratory. Moreover, Hospital’s participation in the following ventures within the Territory shall not be subject to this Section 5.10 to the extent in force as of the Effective Date: Porters Neck Imaging, LLC; South Atlantic Radiation Oncology, LLC; Atlantic SurgiCenter, LLC; and Dosher/NHRMC, LLC;

     (vi) Notwithstanding the above, the restrictions set forth in this Section 5.10 shall not apply to Hospital in the event (A) Hospital terminates the Management Services Agreement during the Initial or any Renewal Term for default of the Company pursuant to Section 4.02(c) of such agreement; provided, however, that in the case of a termination under Section 4.02(c)(ii), Hospital shall not be released from its obligations under this Section 5.10 unless and until the arbitrators have finally determined the existence of a default by the Company and that Hospital did not cause such default as more specifically provided in Sections 4.02(e) and 5.12 of the Management Services Agreement, or (B) Hospital elects not to renew or extend the term of the Management Services Agreement, provided that in the case of this (B) during the two-year period following such termination no current or former indirect or direct Owner of Company may hold any ownership or other interest in any Person or Entity providing management services to the Cath Labs; and

     (vii) Notwithstanding any other term of this Agreement, Hospital shall have no rights, whether asserted under this Agreement or otherwise, to prevent MedCath, the Investor Members, and Owners from continuing to own and operate the Company and to continue to pursue all aspects of the Company’s business following the date that Hospital is no longer a Member of the Company.

     (c) In the event that any Member, during the period that such Member holds a Membership Interest in the Company, wishes to participate (directly or indirectly) in the ownership, management or operation of a Competing Business within any of the following counties: Duplin, Columbus, Bladen, or Onslow, or any other North Carolina county where the Company’s mobile route is then operated, then such Member shall provide the Company with written notice of the terms of the proposed transaction to the Company and its Members, specifying all material terms of the proposed transaction (the “Notice”). Thereafter the Company, acting through the Board of Directors, shall for a

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period of fifteen (15) days, have the right to elect to participate in the proposed transaction in place of the notifying Member; provided, however, Company shall have no right to participate in and neither MedCath nor Hospital shall be prohibited from participating in any existing agreement to which MedCath or Hospital, respectively, is a party as of the Effective Date (other than the mobile lab agreement between MedCath and Southeastern Cardiology which MedCath is assigning to Company). As the date hereof, Hospital and MedCath each represent that neither it nor any of their respective Affiliates have any existing agreements within Duplin, Columbus, Bladen, or Onslow counties. No Director representing the notifying Member shall vote against participation in the proposed transaction. Thereafter, Company shall then have sixty (60) days following receipt of the Notice to agree to all material terms and conditions of the proposed transaction set forth in the Notice, in which event such transaction shall be entered into by the Company. The Board of Directors and the Members shall act in good faith in the negotiation of the proposed transaction and the Members shall reasonably consent to an extension of such sixty (60) day period up to an additional sixty (60) day period if the Board of Directors reasonably recommends such an extension due to external factors not within the control of the Members. In the event that the Company acting through the Board of Directors does not elect to participate in the transaction within the fifteen (15) day period, or if after electing, does not agree to the material terms and conditions of the proposed transaction within sixty (60) days following receipt of the Notice, the notifying Member may enter into the transaction set forth in the Notice but only if such transaction is consummated during the one hundred and twenty (120) day period following the Notice. In the event that such notifying Member fails to enter into such transaction within such one hundred and twenty (120) day period, then the terms and conditions of this subsection (c) shall again apply. In no event shall the Company’s decision not to participate in the proposed transaction alter the continuing obligations of the notifying Member under Section 5.10(b). Notwithstanding anything contained in this subsection (c), the Company shall not participate in any transaction which would cause MedCath to be in violation of any agreement to which MedCath is a party as of the Effective Date within any North Carolina county other than Duplin, Columbus, Bladen, or Onslow;

     (d) The Members and Owners have reviewed the term and geographical restrictions included in Section 5.10, and in light of the interests of the Members and Owners, agree that such restrictions are fair and reasonable;

     (e) If there is a breach or threatened breach of the provisions of this Section 5.10 of this Agreement, in addition to other remedies at law or equity, the non-breaching parties shall be entitled to injunctive relief. The Members and Owners desire and intend that the provisions of this Section 5.10 shall be enforced to the fullest extent permissible under the law and public policies applied, but the unenforceability or modification of any particular paragraph, subparagraph, sentence, clause, phrase, word, or figure shall not be deemed to render unenforceable the remainder of this Section 5.10. Should any such paragraph, subparagraph, sentence, clause, phrase, word, or figure be adjudicated to be wholly invalid or unenforceable, a court with applicable authority is hereby authorized to “blue pencil” or modify this Section, the balance of this Section 5.10 shall thereupon be

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modified in order to render the same valid and enforceable and the unenforceable portion of this Section 5.10 shall be deemed to have been deleted from this Agreement;

     (f) The Company, the Board of Directors and the Members agree that the benefits to any Member, Owner, Practice or their Affiliates hereunder do not require, are not payment for, and are not in any way contingent upon the referral, admission or any other arrangement for the provision of any item or service offered by the Company to patients of such Member, any Owner, Practice or their Affiliates or in any facility, laboratory, cardiac catheterization facility or other health care operation controlled, managed or operated by the Company and nothing herein is intended to prohibit any Investor Member or Owner who is a physician from practicing medicine at any other facility;

     (g) The Investor Members and Investor Entities shall cause each of their existing and future Owners to agree in writing to be personally bound by the terms of this Section 5.10 for as long as they are Owners and for two (2) years after they cease to be Owners, provided that the Investor Member associated with such Owner remains subject to the restrictions of this Section.

     SECTION 5.11 Board of Directors’ Standard of Care.

     Each Director shall act in a manner he or she believes in good faith to be in the best interest of the Company and with such care as an ordinarily prudent Person in a like position would use under similar circumstances. In discharging his or her duties, each Director shall be fully protected in relying in good faith upon the records required to be maintained under this Agreement and upon such information, opinions, reports and statements by any of its other Directors, Members, or agents, or by any other Person as to matters each Director reasonably believes are within such other Person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, income or losses of the Company or any other facts pertinent to the existence and amount of assets from which distributions to Members might properly be paid.

     Notwithstanding anything herein to the contrary, a Director or Member shall have the right to vote or approve Company matters in accordance with the terms of this Agreement regardless of the personal interest of any Member or Director in the outcome of any vote, decision or matter. In any case, a Director who has a personal interest in the outcome of any vote, decision, or matter shall notify the other Directors of such personal interest prior to the applicable vote or decision of the Board of Directors, provided that such additional notification shall not be required if such conflict is reasonably obvious based upon the circumstances then existing.

     SECTION 5.12 Limitation of Liability.

     A Director shall not be liable to the Company or the Members for any action taken in managing the business or affairs of the Company if he or she performs the duty of his or her

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office in compliance with the standard contained in Section 5.11. No Director has guaranteed nor shall have any obligation with respect to the return of a Member’s Capital Contribution or share of income from the operation of the Company. Furthermore, no Director shall be liable to the Company or to any Member for any loss or damage sustained by the Company or any Member except loss or damage resulting from gross negligence or intentional misconduct or knowing violation of law or a transaction for which such Director received a personal benefit in violation or breach of the provisions of this Agreement.

     SECTION 5.13 Indemnification of the Directors.

     (a) Each Director shall be indemnified by the Company against any losses, judgments, liabilities, expenses, including attorneys’ fees and amounts paid in settlement of any claims sustained by such Director arising out of any action or inaction of the Director in his or her capacity as a Director of the Company to the fullest extent allowed by law, provided that the same were not the result of gross negligence or willful misconduct on the part of the Director and provided that the Director, in good faith, reasonably determined that such course of conduct was in the best interest of the Company; provided, however, that such indemnification and agreement to hold harmless shall be recoverable only out of Company assets and available insurance coverage. Subject to applicable law, the Company shall advance expenses incurred with respect to matters for which a Director may be indemnified hereunder;

     (b) If at any time, the Company has insufficient funds to furnish indemnification as herein provided, it shall provide such indemnification if and as it generates sufficient funds and prior to any cash distributions, pursuant to Article VI or Article VII hereof, to the Members;

     (c) The Board of Directors may cause the Company to purchase and maintain insurance on behalf of any current or past Director against any liability asserted against or incurred by such Director while serving in his or her capacity as a Director of the Company.

     SECTION 5.14 Purchase of Goods and Services from Members.

     Goods and services may be purchased from Members or their Affiliates as long as they are of substantially the same quality and price as could be obtained from an unrelated third party in an arm’s length transaction.

     SECTION 5.15 Certain Decisions of the Board of Directors.

     (a) The Board of Directors shall be deemed to have specifically approved all expenditures proposed by MedCath under this Article V that are substantially consistent with the Budget Exhibit (Exhibit G) or any subsequently approved operating or capital budget when funded from additional Capital Contributions made to the Company by the Members pursuant to Section 3.5 above;

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     (b) The annual operating and capital budgets to be proposed by MedCath hereunder shall be approved by the Board of Directors as provided above subject to the following:

     (i) No Director shall unreasonably withhold its approval of budgets which are within the reasonable revenue expectations of the Company and which are in compliance (both as to terms and availability of financing) with agreements with the Company’s lenders and other parties providing financing to the Company; and

     (ii) In the event that the Board of Directors is unable to approve an annual budget, MedCath shall be authorized to operate the Company pursuant to this Agreement under the previous year’s budget increased by the lesser of five percent (5%) or the percentage increase during the previous year in the Consumer Price Index for Medical Items as published by the United States Department of Labor, Bureau of Labor Statistics for the region that is most proximate to Wilmington, North Carolina, and as further adjusted by MedCath in accordance with Section 5.6(d), until a new budget is approved.

     SECTION 5.16 Indemnity by the Company.

     The Company agrees to indemnify, defend and hold MedCath, its directors, officers, employees and agents, harmless from and against any and all loss, claim, cause of action, demand, penalty, liability, action, damage or deficiency, lawsuit or other proceeding against MedCath in its capacity as manager of the Company, resulting or arising from (a) acts or omissions of the Company, its Members, officers, employees (unless due to the gross negligence or willful misconduct of MedCath), (b) any liability or obligation of the Company, except those which MedCath created in violation of this Article V; (c) any nonfulfillment of the Company of any of its covenants or agreements under this Article V; (d) any violation of law by the Company; and (e) any loss or damage, reasonable attorney’s fees and other costs and expenses incident to any of (a) through (d); provided, the above indemnification and “hold harmless” provisions shall not apply, to the extent that any such item in (a) – (e) is attributable to the gross negligence or willful misconduct of MedCath. The indemnity covenants set forth in this Section 5.16 shall survive the termination of this Agreement for any reason.

     SECTION 5.17 Responsibility of MedCath.

     MedCath agrees to utilize ordinary care and diligence in rendering the management services to the Company under this Agreement. MedCath shall not be liable to the Company for any matters arising from any act or omission of MedCath or its employees, officers, agents or subcontractors in providing such services, unless such act or omission constitutes gross negligence or willful misconduct. MedCath agrees to indemnify, defend and hold Company, its directors, officers, employees and agents, harmless from and against any and all loss, claim, cause of action, demand, penalty, liability, action, damage or deficiency, lawsuit or other proceeding against Company resulting or arising from (a) acts or omissions of MedCath, its Affiliates, officers, or employees which constitute gross negligence, willful misconduct, or (b)

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MedCath willfully exceeding the authority granted to MedCath under this Agreement (unless due to the gross negligence or willful misconduct of Company or its Members other than MedCath) and any directly resulting loss or damage, reasonable attorney’s fees and other costs and expenses. The indemnity covenants set forth in this Section shall survive the termination of this Agreement for any reason.

     SECTION 5.18 Force Majeure.

     MedCath shall not be liable nor shall it be deemed to be in default for any delay or failure in performance under this Article V or other interruption of service or employment deemed resulting directly or indirectly from Acts of God, civil or military authority, acts of public enemy, war, accidents, fires, explosions, earthquakes, floods, failure of transportation, strikes or other work interruptions by MedCath’s employees or any similar or dissimilar cause beyond the reasonable control of MedCath. Further, MedCath shall not be in default under this Article V if the default resulted from actions taken by MedCath in material conformance with the request or direction of the Board of Directors or if the Board of Directors failed to take reasonable action recommended by MedCath to enable it to meet its obligations hereunder.

ARTICLE VI

DISTRIBUTIONS AND ALLOCATIONS

     SECTION 6.1 Distributions of Cash Flow from Operations and Cash from Sales or Refinancing.

     Prior to the dissolution of the Company, and subject to the terms and conditions to which the Company is bound with respect to its lenders (“Loan Conditions”), Cash Flow from Operations and Cash from Sales or Refinancing, if any, remaining after repayment of any amounts currently due with respect to loans made by the Members to the Company, shall be distributed quarterly by the Company as Cash Distributions according to the relative percentage Membership Interests of the Members at such times as the Board of Directors deems appropriate; provided, however, that to the extent possible, any Guarantee and Financing Fee shall be deducted from the Cash Distributions otherwise distributable to the NonFinancing Members and paid to the Financing Members as set forth in Section 5.6(c). Notwithstanding anything herein to the contrary, no distributions shall be made to Members if prohibited by the Act or any other applicable law.

     The Board of Directors shall, to the extent permitted by the Loan Conditions and subject to the availability of Cash Flow from Operations and using commercially reasonable efforts, distribute cash annually pro rata to Members in an amount which is sufficient to enable them to pay income taxes, if any, which arise from the taxable income of the Company. In computing taxable income of each Member, the taxable income of each Member for the current year shall be reduced by any cumulative tax losses incurred in prior years (after reduction by taxable income in prior years). Such distributions shall assume for all Members the highest combined

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federal and state tax rates applicable to any Member with respect to his or its Profits from the Company.

     SECTION 6.2 Profits.

     Except as provided in the Regulatory Allocations Exhibit (Exhibit H) and subject to Section 6.6, Profits shall be allocated as follows:

     (a) First, to the Members who have been allocated Losses pursuant to Subsection 6.3(b) below in proportion to such Losses until the cumulative Profits allocated pursuant to this Subsection 6.2(a) equal the cumulative prior allocations of Losses under that Subsection;

     (b) Next, to the Members who have been allocated Losses pursuant to Subsection 6.3(a) below in proportion to such Losses until the cumulative Profits allocated pursuant to this Subsection 6.2(b) equal the cumulative prior allocations of Losses under that Subsection;

     (c) All remaining Profits shall be allocated to the Members in accordance with their percentage Membership Interests.

     For these purposes, only Losses for periods beginning on or after the Effective Date shall be considered.

     SECTION 6.3 Losses.

     Except as provided in the Regulatory Allocations Exhibit (Exhibit H) and subject to Section 6.6, Losses shall be allocated as follows:

     (a) First, Losses shall be allocated to the Members with positive Adjusted Capital Account balances in proportion to those balances;

     (b) All remaining Losses shall be allocated to the Members in accordance with their percentage Membership Interests.

     SECTION 6.4 Code Section 704(c) Tax Allocations.

     Income, gain, loss, and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its initial Agreed Value pursuant to any method allowable under Code Section 704(c) and the Regulations promulgated thereunder.

     In the event the Agreed Value of any Company asset is adjusted after its contribution to the Company, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take into account any variation between the adjusted basis of such asset for federal

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income tax purposes and its Agreed Value pursuant to any method allowable under Code Section 704(c) and the Regulations promulgated thereunder.

     Any elections or other decisions relating to allocations under this Section shall be determined by the Board of Directors. Absent a determination by the Board of Directors, the remedial allocation method under Regulation Section 1.704-3(d) shall be used. Allocations pursuant to this Section are solely for purposes of federal, state, and local taxes and shall not be taken into account in computing any Member’s Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement.

     SECTION 6.5 Miscellaneous.

     (a) Allocations Attributable to Particular Periods. For purposes of determining Profits, Losses or any other items allocable to any period, such items shall be determined on a daily, monthly, or other basis, as determined by the Board of Directors using any permissible method under Code Section 706 and the Regulations thereunder;

     (b) Other Items. Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction, credit and any other allocations not otherwise provided for shall be divided among the Members in the same proportion as they share Profits or Losses, as the case may be, for the year;

     (c) Tax Consequences; Consistent Reporting. The Members are aware of the income tax consequences of the allocations made by this Article and by the Regulatory Allocations and hereby agree to be bound by those allocations as reflected on the information returns of the Company in reporting their shares of Company income and loss for income tax purposes. Each Member agrees to report its distributive share of Company items of income, gain, loss, deduction and credit on its separate return in a manner consistent with the reporting of such items to it by the Company. Any Member failing to report consistently, and who notifies the Internal Revenue Service of the inconsistency as required by law, shall reimburse the Company for any legal and accounting fees incurred by the Company in connection with any examination of the Company by federal or state taxing authorities with respect to the year for which the Member failed to report consistently.

     SECTION 6.6 Special Allocations of Guarantee and Financing Fees.

     Any and all deductions, losses or reductions to Capital Accounts attributable to the payment by the Company of Guarantee and Financing Fees shall be allocated to the NonFinancing Members in accordance with their relative percentage Membership Interests.

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ARTICLE VII

DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS

     SECTION 7.1 No Termination by Certain Acts of Member.

     Neither the transfer of interest, withdrawal from the Company, bankruptcy, insolvency, dissolution, liquidation or other disability, nor the legal incompetency of any Member shall result in the termination or dissolution of the Company or affect its continuance in any manner whatsoever.

     SECTION 7.2 Dissolution/No Dissolution Upon Termination of Management and Service Agreement.

     The Company shall be dissolved upon the happening of any of the following events, whichever shall first occur:

     (a) The election to dissolve the Company in accordance with the terms of Section 3.5(d) hereof;

     (b) The expiration of the term of the Company as provided in Section 2.5 hereof;

     (c) The adjudication of bankruptcy of the Company;

     (d) Upon the written consent of the Required Members;

     (e) In accordance with Section 12.11 hereof; and

     (f) The entry of a decree of judicial dissolution or the administrative dissolution of the Company as provided in the Act;

     Upon the occurrence of the events of dissolution set forth at this Section 7.2, MedCath shall promptly take such steps as are required to dissolve the Company, including, but not limited to, the winding up of the affairs of the Company and, upon the completion of the winding up, the filing of necessary documents as required under the Act.

     The termination of the Management and Service Agreement by and between Company and Hospital shall not result in a dissolution of the Company, but shall be governed by the terms of the Contribution Agreement (the “Contribution Agreement”) executed by and among the Members, including without limitation Section 7 of such Contribution Agreement.

     SECTION 7.3 Dissolution and Final Liquidation.

     (a) Upon any dissolution of the Company, the Company shall not terminate, but shall cease to engage in further business except to the extent necessary to perform

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existing contracts and preserve the value of its assets. Its assets shall be liquidated and its affairs shall be wound up as soon as practical thereafter by MedCath or, if for any reason there is no MedCath, by another Person designated by the Board of Directors. In winding up the Company and liquidating assets, MedCath, or other Person so designated for such purpose, may arrange, either directly or through others, for the collection and disbursement to the Members of any future receipts from the operation and management of the Cath Labs and the Facility or other sums to which the Company may be entitled, and shall sell the Company’s assets to any Person, including any Member or any Affiliate thereof, on such terms and for such consideration as shall be consistent with obtaining the fair market value thereof, as such fair market value is approved by the Members pursuant to Section 3.8;

     (b) Upon any such dissolution and liquidation of the Company, the net assets, if any, of the Company available for distribution, including any cash proceeds from the liquidation of Company assets, shall be applied and distributed in the following manner or order, to the extent available:

     (i) To the payment of or creation of reserves for all debts, liabilities, and obligations to all creditors of the Company (other than the Members or their Affiliates) and the expenses of liquidation;

     (ii) To the payment of all debts and liabilities (including interest), and further including without limitation any accrued but unpaid Guarantee and Financing Fees, owed to the Members or their Affiliates as creditors; and

     (iii) The balance to the Members with positive Capital Account balances after taking into account all other adjustments during the Fiscal Year in which liquidation occurs.

     (c) The Members shall look solely to the assets, if any, of the Company for any return of their Capital Contributions and, if the assets of the Company remaining after payment or discharge of the Company’s debts and liabilities, or provision therefor, are insufficient to return all or any part of the Capital Contributions, no Member shall have any right of recourse against the Directors or other Members or to charge the Board of Directors or other Members for any amounts except as provided herein and except to the extent otherwise provided by the Act and/or North Carolina law;

     (d) Upon such dissolution, reasonable time shall be allowed for the orderly liquidation of the assets of the Company and the discharge of liabilities to creditors so as to minimize the losses normally attendant to a liquidation;

     (e) The Capital Accounts of the Members, as adjusted, shall be utilized by the Company for the purpose of making distributions to those Members with positive balances in their respective Capital Accounts pursuant to Section 7.3(b). In making such distributions, the Board of Directors or the Person winding up the affairs of the Company shall distribute all funds available for distribution to the Members (after establishing any

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reserves that the Board of Directors or the Person winding up the affairs of the Company deems reasonably necessary pursuant to Section 7.3(b)) prior to the later of (i) the end of the taxable year in which the event which caused the termination and dissolution of the Company occurs, or (ii) ninety (90) days after the occurrence of such event. The Board of Directors in its sole discretion, or the Person winding up the affairs of the Company, in its discretion, may elect to have the Company retain any installment obligations owed to the Company until collected in full so long as any portion of the reserves which are later determined to be unnecessary, and all collections on such installment obligations which are not deemed to be reasonably necessary by the Board of Directors or the Person winding up the affairs of the Company to add to such reserves are distributed as soon as practicable in accordance with the provisions of Section 7.3(b) as modified by this Section.

     SECTION 7.4 Termination.

     Upon completion of the dissolution, winding up, distribution of the liquidation proceeds and any other Company assets, the Company shall terminate.

     SECTION 7.5 Payment in Cash.

     Any payments made to any Member pursuant to this Article VII shall be made only in cash.

ARTICLE VIII

REMOVAL OR WITHDRAWAL OF MEMBERS AND TRANSFER OF MEMBERS’
MEMBERSHIP AND/OR ECONOMIC INTERESTS

     SECTION 8.1 Members — Restriction on Transfer.

     (a) Except as otherwise set forth in this Section or in this Agreement, no Membership Interest or any portion thereof, shall be validly sold or assigned whether voluntarily, involuntarily or by operation of law, and no purported assignee shall be recognized by the Company for any purpose, unless such Membership Interest shall have been transferred in accordance with the provisions of this Agreement and in compliance with such additional restrictions as may be imposed by any federal or state securities regulatory authority or law and with the approval of the Board of Directors. In no event, however, shall a Member transfer or sell all or any of its Membership Interest to any party which, if a Member, would be in violation of Section 5.10(b) hereof;

     (b) Except as otherwise set forth in this Section or in this Agreement, a Member may transfer, sell or assign its entire Membership Interest only if it has received the approval of the Board of Directors. Subject to the foregoing: (i) the Company first for a period of fifteen (15) days, and thereafter the other Members in proportion to their Membership Interest in the Company for a period of fifteen (15) days, shall have the

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right, but not the obligation, to purchase all, but not less than all, of the Membership Interest proposed to be transferred, which right shall be exercisable on the terms and for the purchase price set forth in writing in a bona fide offer made for the Membership Interests by a third-party (the “Right of First Refusal”), and (ii) there shall have been filed with the Company a duly executed and acknowledged counterpart of the instrument making such assignment signed by both the assignor and assignee and such instrument evidences the written acceptance by the assignee of all of the terms and provisions of the Agreement, represents that such assignment was made in accordance with all applicable laws and regulations and the assignee shall have represented to the Company in writing that it meets the investor suitability standards established by the appropriate state of residence and the investor suitability standards established by the Company. The Board of Directors shall use reasonable care to determine that transfers are in accordance with applicable laws and regulations, including obtaining an opinion of counsel to that effect. Any Member that assigns all of its Membership Interest shall cease to be a Member of the Company. Any Membership Interests acquired by the Company pursuant to Section 8.1 may, subject to applicable law, be re-offered by the Company to suitable investors;

     (c) Except as permitted in (d) below, any dissolution, liquidation, merger (unless Members or their Affiliates existing prior to such merger own at least fifty-one percent (51%) of the surviving entity after the merger or unless both parties to such merger are majority owned by parties who are Members or their Affiliates prior to such merger) or sale of a Member which is an Entity (a sale shall include a transfer of fifty percent (50%) or more of its ownership interests or of substantially all of its assets or any other transaction or series of related transactions intended to accomplish, in substance, a sale of such Entity), which event shall not occur, subject to (d) below, without the written consent of the Board of Directors, shall constitute an offer by such Member to sell such Member’s Membership Interest to the Company and the other Members pursuant to Section 8.6 for a purchase price equal to the lesser of (i) two (2) multiplied by the net income (as reasonably determined by the Company’s independent public accountants) of the Company for the twelve (12) month period ending as of the calendar quarter most recently ended prior to such event multiplied by the percentage Membership Interest of such Member in the Company (the “Formula Purchase Price”), or (ii) the Capital Contributions of the Member less all amounts distributed to such Member by the Company. The Formula Purchase Price shall be paid in three (3) equal annual installments, the first third of which shall be paid upon the determination of the Formula Purchase Price and the remaining two (2) installments of which shall be paid on the first and second anniversary of such date (the “Payment Method”). The remaining two (2) installments shall bear interest at the Prime Rate as of the date of the determination of the Formula Purchase Price. Accrued interest shall be paid as of the dates payments of principal are due as provided above according to the Payment Method;

     (d) Notwithstanding anything herein to the contrary, MedCath may assign its Membership Interest in the Company, its rights to designate Directors hereunder, and its rights as Manager of the Company to any party (i) who assumes in writing the obligations of MedCath under this Agreement and who purchases fifty-one percent (51%) or more of MedCath, or (ii) purchases fifty-one percent (51%) or more of MedCath Corporation,

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MedCath Holdings, Inc., MedCath Incorporated’s and their subsidiaries’ assets or capital stock if such purchaser (in the case of an asset sale) assumes in writing the obligations of MedCath Partners, LLC (and as to MedCath Corporation and MedCath Incorporated, their respective successor(s), as applicable, assume in writing their respective guarantee obligations assumed specifically under this Agreement), hereunder, or (iii) to a party under control of, common control with, or which controls MedCath. Hospital may also assign Hospital’s Membership Interest in the Company and its rights to designate Directors hereunder to any party who acquires or succeeds to fifty-one percent (51%) or more of Hospital’s assets or outstanding ownership interests or a party under control of, common control with, or which controls Hospital, so long as the Hospital requires such party to assume simultaneously in writing the obligations of Hospital under this Agreement and the Management and Service Agreement.

     MedCath may also assign its Membership Interest in the Company to a financial institution (a “Lender”) as collateral security for repayment of indebtedness for borrowed funds by MedCath Incorporated or its Affiliates; provided, however, that a Lender will not have the right to vote on behalf of MedCath as a Member of the Company unless and until the Lender forecloses on MedCath’s Membership Interest in the Company.

     SECTION 8.2 Condition Precedent to Transfer of Membership Interest.

     Notwithstanding anything herein to the contrary, no transfer of Membership Interest may be made if such transfer (a) constitutes a violation of the registration provisions of the Securities Act of 1933, as amended, or the registration provisions of any applicable state securities laws; or (b) if after such transfer the Company will not be classified as a partnership for federal income tax purposes. The Company may require, as a condition precedent to transfer of Membership Interest, delivery to the Company, at the proposed transferor’s expense, of an opinion of counsel satisfactory (both as to the counsel and substance of the opinion) to the Company that the transfer will not violate any of the foregoing restrictions.

     SECTION 8.3 Substitute Member — Conditions to Fulfill.

     No assignee of a Member’s Membership Interest in the Company shall have the right to become a Substitute Member in place of its assignor unless, in addition to any other requirement herein, all of the following conditions are satisfied:

     (a) The Company, and if applicable the other Members, have waived their respective rights, pursuant to Section 8.1 to purchase the Membership Interest held by the assignee;

     (b) The duly executed and acknowledged written instrument of assignment which has been filed with the Company sets forth that the assignee becomes a Substitute Member in place of the assignor;

     (c) The assignor and assignee execute and acknowledge such other instruments as the Board of Directors may deem reasonably necessary or desirable to

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effect such admission, including, but not limited to, the written acceptance and adoption by the assignee of the provisions of this Agreement;

     (d) The payment by the assignee of all costs to the Company associated with the transaction, including but not limited to legal fees, transfer fees, and filing fees; and

     (e) Except as otherwise permitted in Section 8.1(d), the assignment shall have been approved by the Company’s Board of Directors.

     SECTION 8.4 Allocations Between Transferor and Transferee.

     Upon the transfer of a Member’s Membership Interest, all items of income, gain, loss, deduction and credit attributable to the Membership Interest so transferred shall be allocated between the transferor and the transferee by taking into account their varying interests during the Fiscal Year in accordance with Code Section 706(d), using any conventions permitted by law and agreed to by the transferor and transferee at the time of transfer. Distributions as called for by this Agreement shall be made to the holder of record of the Membership Interest on the date of distribution. Notwithstanding anything contained in this Agreement to the contrary, the Company shall be entitled to treat the assignor of any assigned Membership Interest as the absolute owner thereof in all respects, and shall incur no liability for distributions made in good faith to such assignor in reliance on the Company records as they exist until such time as the written assignment has been received by, and recorded on the books of the Company. For purposes of this Article VIII, the effective date of an assignment of any Membership Interest shall be the last day of the month specified in the written instrument of assignment.

     SECTION 8.5 Rights, Liabilities of, and Restrictions on Assignee.

     No assignee of a Membership Interest shall have the right to participate in the Company, inspect the books of account of the Company or exercise any other right of a Member unless and until admitted as a Substitute Member. Notwithstanding the failure or refusal to admit an assignee as a Substitute Member, such assignee shall be entitled to receive the share of income, credit, gain, expense, loss and deduction and cash distributions provided hereunder that is assigned to it, and, upon demand, may receive copies of all reports thereafter delivered pursuant to the requirements of this Agreement; provided, however, that the Company shall have first received notice of such assignment and all required consents thereto shall have been obtained and other conditions precedent to transfer thereof shall have been satisfied. The Company’s tax returns shall be prepared to reflect the interests of assignees as well as Members.

     SECTION 8.6 Repurchase of Interests in Certain Event.

     (a) In the discretion of the Board of Directors, the Company may, but is not obligated to, repurchase a Member’s Membership Interest upon: (i) a breach by the Member or any of its Affiliates of the Member’s obligations contained in Article III, Sections 5.10, and 8.1 of this Agreement; or (ii) an application being made by a Member for the appointment of a receiver, trustee or custodian for any of the Member’s assets, a petition being filed under any section or chapter of the federal Bankruptcy Code or any

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similar law or regulation by or against a Member, a Member making an assignment for the benefit of its creditors, or a Member becoming insolvent or failing generally to pay its debts as they become due;

     (b) Each Member agrees to sell its Membership Interest to the Company in the event the Company elects to exercise the rights of repurchase granted under Section 8.6(a) and the purchase price shall be paid according to the Payment Method and shall be the lower of (i) the Capital Contributions of the Member less all amounts distributed to such Member by the Company, and (ii) the Formula Purchase Price;

     (c) The Directors designated solely by any Member or any Director who is a Member, or who is an Owner of a Member, if such Member’s activities give rise to the event set forth in Section 8.6(a) shall not have a vote hereunder and a majority of the other Directors shall make all decisions under this Section 8.6 with respect to such activities;

     (d) Notwithstanding anything herein to the contrary, the repurchase of the Economic Interest or Membership Interest of any Member under Section 8.6(a) shall not become effective unless and until such Member and its Affiliates are fully released from their liability as guarantors for any indebtedness of the Company and unless and until all amounts loaned by such Member or its Affiliates to the Company are paid in full.

     SECTION 8.7 Death of a Member.

     Heirs of Members who are individuals shall be entitled to inherit the Membership Interests of a deceased Member, provided that upon a Member’s death (or the death of an individual that owns a Member) such interests shall be automatically converted to an Economic Interest only in the Company until such heir agrees in writing to all of the terms and conditions of this Agreement and such other reasonable terms as may be established by the Board of Directors, in which event such interest shall again become a Membership Interest in the Company. Notwithstanding the previous sentence, within one hundred twenty (120) days of the Company first learning of the death of an individual or of an individual that owns a Member, the Company shall have the option to purchase the Membership Interest owned by such deceased Member directly or through an Entity, and the estate of the deceased individual shall be obligated to sell such Membership Interest to the Company, in accordance with the terms of this Section 8.7. The Company may exercise its option by giving written notice thereof to the estate of the deceased individual, or the appropriate representative thereof, within such one hundred twenty (120) day period. The purchase price for such Membership Interest shall equal the Formula Purchase Price. The purchase price shall be paid according to the Payment Method. The outstanding amounts due from the Company to the estate of the deceased individual shall bear interest at Prime Rate as of the date of such individual’s death. Accrued interest shall be paid as of the dates payments of principal are due as provided above. The agreements for the formation and governance of Investor Members that are Entities shall provide for the disposition of the ownership interest of a deceased owner of such Investor Members, which disposition shall be subject to the approval of MedCath and Hospital.

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ARTICLE IX

RECORDS, ACCOUNTINGS AND REPORTS

     SECTION 9.1 Books of Account.

     At all times during the continuance of the Company, the Board of Directors shall maintain or cause to be maintained true and full financial records and books of account showing all receipts and expenditures, assets and liabilities, income and losses, and all other records necessary for recording the Company’s business and affairs including those sufficient to record the allocations and distributions required by the provisions of this Agreement.

     SECTION 9.2 Access to Records.

     The books of account and all documents and other writings of the Company, including the Articles of Organization and any amendments thereto, shall at all times be kept and maintained at the principal office of the Company or elsewhere as decided by the Board of Directors. Each Member or its designated representatives shall, upon reasonable notice to the Company, have access to such financial books, records and documents during reasonable business hours and may inspect and make copies of any of them.

     SECTION 9.3 Bank Accounts and Investment of Funds.

     (a) MedCath shall open and maintain, on behalf of the Company, a bank account or accounts in a federally insured bank or savings institution as it shall determine, in which all monies received by or on behalf of the Company shall be deposited. All withdrawals from such accounts shall be made upon the signature of such person or persons as MedCath may from time to time designate;

     (b) Any funds of the Company which MedCath may determine are not currently required for the conduct of the Company’s business may be deposited with a federally insured bank or savings institution or invested in short term debt obligations (including obligations of federal or state governments and their agencies, commercial paper, certificates of deposit of commercial banks, savings banks or savings and loan associations) as shall be determined by MedCath in its sole discretion.

     SECTION 9.4 Fiscal Year.

     The Fiscal Year and accounting period of the Company shall end on September 30 of each year.

     SECTION 9.5 Accounting Reports.

     As soon as reasonably practicable after the end of each fiscal year but in no event later than 120 days after the end thereof, each Member shall be furnished an annual accounting

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showing the financial condition of the Company at the end of such fiscal year and the result of its operations for the fiscal year then ended, which annual accounting shall be prepared on an accrual basis in accordance with generally accepted accounting principles applied on a consistent basis and shall be delivered to each of the Members promptly after it has been prepared. It shall include a balance sheet as of the end of such Fiscal Year and statements of income and expense, each Member’s equity, and cash flow for such Fiscal Year. The Company shall be audited on an annual basis by a firm of independent certified public accountants engaged by MedCath on behalf of the Company which shall also be the accounting firm of MedCath; provided that the Hospital may also elect for a separate audit to take place at Hospital’s expense and MedCath shall cooperate fully with such audit. The audit may be a simple audit provided that the audit report shall set forth the distributions to the Members for such Fiscal Year and shall separately identify distributions from (i) operating revenue during such Fiscal Year, (ii) operating revenue from a prior period which had been held as reserves, (iii) proceeds from the sale or refinancing of the Equipment, and (iv) unexpended proceeds received from the sale of Membership Interests. Any Member, at such Member’s sole cost and expense, may obtain an audit of the Company by an independent certified public accountant at any time upon notice to MedCath. Following the Effective Date, MedCath shall also cause to be prepared and distributed to the Members quarterly financial statements.

     SECTION 9.6 Tax Matters Partner.

     Hospital shall act as the “Tax Matters Partner” of the Company as that term is defined Section 6231 of the Code.

ARTICLE X

MEETINGS AND VOTING RIGHTS OF MEMBERS

     SECTION 10.1 Meetings.

     (a) Meetings of the Members of the Company for any purpose may be called by the Board of Directors, or by any Member that owns, or any group of Members that own in the aggregate, at least a five percent (5%) Membership Interest in the Company. Such meetings shall be held in the Wilmington, North Carolina area. A Member may attend a meeting by telephone or other electronic means and be considered present for purposes of a quorum so long as the telephone or other connection allows each Member to hear and be heard by all other Members. A quorum of the Members shall be necessary to conduct business at any Members’ meeting. A quorum shall consist of MedCath, Hospital and Investor Members holding a majority of the percentage Membership Interests of the Investor Members. The Members present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal during such meeting of that number of Members whose absence would cause less than a quorum;

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     (b) Meetings of the Investor Members of the Company for any purpose may be called by Investor Members who, in the aggregate, own at least fifteen percent (15%) of the Membership Interests in the Company. Such meetings shall be held in the Wilmington, North Carolina area. A quorum of Investor Members shall be necessary to conduct business at any Investor Members meeting. Investor Members holding a majority of the percentage Membership Interests of the Investor Members shall constitute a quorum at any meeting of the Investor Members of the Company. An Investor Member may attend a meeting by telephone or other electronic means and be considered present for purposes of a quorum so long as the telephone or other connection allows each Investor Member to hear and be heard by all other Investor Members;

     (c) A notice of any such meeting shall be given by mail, not less than ten (10) days nor more than sixty (60) days before the date of the meeting, to each Member at its address as specified in Section 12.7. Such notice shall be in writing, and shall state the place, date and hour of the meeting, and shall indicate by whom it is being issued. The notice shall state the purpose or purposes of the meeting. If a meeting is adjourned to another time or place, and if any announcement of the adjournment of time or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting;

     (d) Each Member may authorize any Person or Persons to act for the Member by proxy in all matters in which a Member is entitled to participate, whether by waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Member or its attorney-in-fact. No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Member executing it.

     SECTION 10.2 Voting Rights of Members.

     (a) Each Member shall take no part in or interfere in any manner with the control, conduct or operation of the Company, and shall have no right or authority to act for or bind the Company except as provided herein. Votes or decisions, to the extent taken or to be made, of the Members may be cast by a duly authorized representative of the Member designated by written notice to the Company and each Member. Such votes may be cast at any duly called meeting of the Company or in writing within ten (10) days after written request therefor. Except as otherwise provided herein, any matters requiring the consent or approval of the Members shall require the affirmative vote of the Required Members. Each Member shall be entitled to the number of votes equal to the percentage Membership Interest of such Member;

     (b) No Member shall have the right or power to vote to: (i) withdraw or reduce the Member’s Capital Contributions except as a result of the dissolution and liquidation of the Company or as otherwise provided by law or this Agreement; (ii) bring an action for partition against the Company; (iii) cause the termination and dissolution of the Company by court decree or otherwise, except as set forth in this Agreement; or (iv) demand or receive property other than cash in return for its Capital Contributions.

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ARTICLE XI

AMENDMENTS

     SECTION 11.1 Authority to Amend by the Board of Directors.

     Notwithstanding Section 3.8 of this Agreement, the Board of Directors may amend this Agreement or the Articles of Organization of the Company without the consent of the Required Members for the following purposes only:

     (a) To admit additional Members or Substitute Members but only in accordance with and if permitted by the other terms of this Agreement;

     (b) To preserve the legal status of the Company as a limited liability company under the Act or other applicable state or federal laws if such does not change the substance hereof, and the Company has obtained the written opinion of its counsel to that effect;

     (c) To cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, to clarify any provision of this Agreement, or to make any other provisions with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement;

     (d) To satisfy the requirements of the Code and Regulations with respect to limited liability companies or of any federal or state securities laws or regulations, provided such amendment does not adversely affect the Membership Interests of Members and is necessary or appropriate in the written opinion of counsel and any amendment under this subsection (d) shall be effective as of the date of this Agreement; and

     (e) To the extent that it can do so without materially reducing the economic return on investment in the Company to any Member, to satisfy any requirements of federal or state legislation or regulations, court order, or action of any governmental administrative agency with respect the operation of the Cath Labs or the Facility.

     Any proposed amendment by a member of the Board of Directors consistent with the above requirements shall not be unreasonably delayed or rejected by any other member of the Board of Directors.

SECTION 11.2 Restrictions on the Board of Directors’ Amendments: Amendments by Members.

     Except as provided in Section 11.1, amendments to this Agreement shall be made only upon the consent of the Required Members. Upon termination of the Management and Service

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Agreement and the reversion of the NHRMC Contribution (as defined in the Contribution Agreement) to Hospital pursuant to the terms of the Contribution Agreement, the Investor Members and MedCath shall promptly consent to amend this Agreement to reflect the terms of this Agreement prior to the Effective Date including necessary provisions to address any changed circumstances, with MedCath then holding a fifty-one (51%) percent Membership Interest and the Investor Members holding in the aggregate a forty-nine (49%) percent Membership Interest in the Company, or if different, the actual proportion of each of the Company’s then Members’ actual Capital Contributions to the aggregate Capital Contributions made by all Members other than Hospital. No amendment shall be made pursuant to Section 11.1 above which would materially and adversely affect the federal income tax treatment to be afforded each Member, materially and adversely affect the Membership Interests and liabilities of each Member as provided herein, materially change the purposes of the Company, extend or otherwise modify the term of the Company, or materially change the method of allocations and distributions as provided in Article VI and Article VII.

SECTION 11.3 Amendments to Articles of Organization.

     Following any amendments to this Agreement, MedCath shall prepare, execute and file for recording such documents amending the Articles of Organization as and if required under the Act.

ARTICLE XII

MISCELLANEOUS

     SECTION 12.1 Limited Power of Attorney.

     Upon the execution hereof, each Member hereby irrevocably constitutes and appoints the Directors it has appointed as its true and lawful attorney in the Member’s name and on the Member’s behalf to take at any time all such action which such Directors are expressly authorized to perform, or which a Member is expressly required to perform, under this Agreement.

     SECTION 12.2 Waiver of Provisions.

     The waiver of compliance at any time with respect to any of the provisions, terms or conditions of this Agreement shall not be considered a waiver of such provision, term or condition itself or of any of the other provisions, terms or conditions hereof.

     SECTION 12.3 Interpretation and Construction.

     This Agreement constitutes the entire agreement among the Members with respect to the subject matter hereto. Any modification or amendment to this Agreement must be accomplished in accordance with the provisions of Article III and Article XI. Any amendment approved consistent with the terms of this Agreement shall be binding on all Members whether a Member

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voted to approve such amendment or not. Where the context so requires, the masculine shall include the feminine and the neuter, and the singular shall include the plural. The headings and captions in this Agreement are inserted for convenience and identification only and are in no way intended to define, limit or expand the scope and intent of this Agreement or any provision thereof. The references to Section and Article in this Agreement are to the Sections and Articles of this Agreement.

     SECTION 12.4 Governing Law.

     This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, exclusive of its conflict of law rules.

     SECTION 12.5 Partial Invalidity.

     In the event that any part or provision of this Agreement shall be determined to be invalid or unenforceable, the remaining parts and provisions of said Agreement which can be separated from the invalid or unenforceable provision and shall continue in full force and effect.

     SECTION 12.6 Binding on Successors.

     The terms, conditions and provisions of this Agreement shall inure to the benefit of, and be binding upon the Members and their respective heirs, successors, distributees, legal representatives, and assigns. However, none of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Company.

     SECTION 12.7 Notices and Delivery.

     (a) To Members. Any notice to be given hereunder at any time to any Member or any document reports or returns required by this Agreement to be delivered to any Member, may be delivered personally or mailed to such Member, postage prepaid, addressed to the Member at such times as the Member shall by notice to the Company have designated as the Member’s address for the mailing of all notices hereunder or, in the absence of such notice, to the address set forth in the Information Exhibit (Exhibit A) hereof. Any notice, or any document, report or return so delivered or mailed shall be deemed to have been given or delivered to such Member at the time it is mailed, as the case may be;

     (b) To the Company. Any notice to be given to the Company hereunder shall be delivered personally or mailed to the Company, by certified mail, postage prepaid, addressed to the Company at its registered office. Any notice so delivered or mailed shall be deemed to have been given to the Company at the time it is delivered or mailed, as the case may be.

     SECTION 12.8 Counterpart Execution; Facsimile Execution.

     This Agreement may be executed in any number of counterparts with the same effect as if all of the Members had signed the same document. Such executions may be transmitted to the

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Company and/or the other Members by facsimile and such facsimile execution shall have the full force and effect of an original signature. All fully executed counterparts, whether original executions or facsimile executions or a combination, shall be construed together and constitute one and the same agreement.

     SECTION 12.9 Statutory Provisions.

     Any statutory reference in this Agreement shall include a reference to any successor to such statute and/or revision thereof.

     SECTION 12.10 Waiver of Partition.

     Each Member does hereby waive any right to partition or the right to take any other action which might otherwise be available to such party for the purpose of severing its relationship with the Company or such Member’s interest in the assets held by the Company from the interests of other Members until the end of the term of both this Company and any successor company formed pursuant to the terms hereof.

     SECTION 12.11 Change in Law.

     If due to any new law, rule or regulation, or due to an interpretation or enforcement of any existing law, rule or regulation, health care counsel reasonably selected by MedCath or Hospital and reasonably approved by the Board of Directors which approval shall not be unreasonably withheld, determines in writing that it is reasonably likely that the relationships established between any of the parties to this Agreement and the transactions contemplated hereunder including any Member or its Affiliates and/or successors or assigns will not comply with any law, rule, regulation or interpretation thereof (“Applicable Law”) or reasonably threatens the tax-exempt status of the Hospital or the tax-exempt nature of any income generated by the Company that is allocated to Hospital, then the Members shall be given notice thereof (a “Change of Law Event”). If the Required Members disagree with whether a Change of Law Event exists and that disagreement is not resolved among such parties within the following thirty (30) days, then that disagreement shall be resolved by arbitration under Section 12.14 hereof. If a Change of Law Event is determined to exist, then the Members hereby agree first, to negotiate in good faith to restructure the relationships established under this Agreement so as to bring them into compliance with such applicable laws while at the same time preserving the material benefits of each of the Members. In the event that a specific proposal for the restructuring of this Agreement is approved by the Board of Directors and the Required Members, such restructured agreement shall become binding upon all Members of the Company. The approval of any such proposal for the restructuring of this Agreement shall not be unreasonably withheld or delayed by any Member. Second, in the event that within ninety (90) days following the Company’s receipt of legal advice in writing from such health care counsel regarding Applicable Law the parties hereto are unable to negotiate an acceptable restructuring of their relationship, then, if MedCath’s ownership is not involved in such non-compliance, then MedCath, or at MedCath’s option, its Affiliate shall, within the following ninety (90) day period, purchase the Membership Interests of each Member (including the Hospital) whose ownership is involved with such noncompliance with Applicable Law for a purchase price equal to the greater of: (a) the Formula

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Purchase Price or (b) the amount of the Capital Contributions made by such Member to the Company together with interest thereon computed at the Prime Rate as of the date of this Agreement from the date of such contribution through the date upon which the purchasing Members pays all amounts due under the terms of this Section 12.11. For these purposes, distributions to the Members by the Company after the Effective Date of this Agreement (and whether before or after health care counsel determined there was a problem under an Applicable Law or before or after the exercise of the purchase option) shall be treated as payments by MedCath or its Affiliate. Such purchase price shall be paid in accordance with the Payment Method, plus interest at the Prime Rate as of the date of that the first installment of principal is due. Accrued interest shall be paid as of the dates payments of principal are due as provided above.

     SECTION 12.12 Investment Representations of the Members.

     (a) Each Member or individual executing this Agreement on behalf of an Entity which is a Member hereby represents and warrants to the Company and to the Members that such Member has acquired such Member’s Membership Interest in the Company for investment solely for such Member’s own account with the intention of holding such Membership Interest for investment, without any intention of participating directly or indirectly in any distribution of any portion of such Membership Interest and without the financial participation of any other Person in acquiring such Membership Interest in the Company;

     (b) Each Member or individual executing this Agreement on behalf of an Entity which is a Member hereby acknowledges that such Member is aware that such Member’s Membership Interest in the Company has not been registered (i) under the Securities Act of 1933, as amended (the “Federal Act”), (ii) under applicable North Carolina securities laws, or (iii) under any other state securities laws. Each Member or individual executing this Agreement on behalf of an Entity which is a Member further understands and acknowledges that his representations and warranties contained in this Section are being relied upon by the Company and by the Members as the basis for the exemption of the Members’ Membership Interest in the Company from the registration requirements of the Federal Act and from the registration requirements of applicable North Carolina securities laws and all other state securities laws. Each Member or individual executing this Agreement on behalf of an Entity which is a Member further acknowledges that the Company will not and has no obligation to recognize any sale, transfer, or assignment of all or any part of such Member’s Membership Interest in the Company to any Person unless and until the provisions of this Agreement hereof have been fully satisfied;

     (c) Each Member or individual executing this Agreement on behalf of an Entity which is a Member hereby acknowledges that prior to his execution of this Agreement, such Member received a copy of this Agreement and that such Member has examined this Agreement or caused this Agreement to be examined by such Member’s representative or attorney. Each Member or individual executing this Agreement on behalf of an Entity which is a Member hereby further acknowledges that such Member or

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such Member’s representative or attorney is familiar with this Agreement and with the Company’s business plans. Each Member or individual executing this Agreement on behalf of an Entity which is a Member acknowledges that such Member or such Member’s representative or attorney has made such inquiries and requested, received, and reviewed any additional documents necessary for such Member to make an informed investment decision and that such Member does not desire any further information or data relating to the Company or to the Members. Each Member or individual executing this Agreement on behalf of an Entity which is a Member hereby acknowledges that such Member understands that the purchase of such Member’s Membership Interest in the Company is a speculative investment involving a high degree of risk and hereby represents that such Member has a net worth sufficient to bear the economic risk of such Member’s investment in the Company and to justify such Member’s investing in a highly speculative venture of this type.

     SECTION 12.13 Acknowledgments Regarding Legal Representation.

     Each of the Members hereunder acknowledge and agree that Moore & Van Allen, PLLC is counsel for MedCath, MedCath Incorporated and their Affiliates, and may, upon approval of the Board of Directors, also serve as counsel for the Company from time to time. Each of the Members hereby acknowledges and consents to such representation. Each Member other than MedCath further acknowledges and agrees that they shall have no attorney-client relationship with Moore & Van Allen, PLLC as a result of Moore & Van Allen, PLLC’s representation of the Company from time to time.

     SECTION 12.14 Dispute Resolution.

     Subject to the right of any party to seek an injunction or other equitable relief from a court with applicable authority, any controversy, dispute or disagreement arising out of or relating to this Agreement shall be resolved by binding arbitration, which shall be conducted in Wilmington, North Carolina in accordance with the American Health Lawyers Association Alternative Dispute Resolution Service Rules of Procedure for Arbitration. Each party shall select an arbitrator from a list provided by the American Health Lawyers Association Alternative Dispute Resolution Service (“Service”) within ten (10) days after the list is provided. After the two (2) arbitrators are selected, the arbitrators shall meet promptly to resolve the matter. If the arbitrators are unable to resolve the matter within sixty (60) days after the selection of the second arbitrator, then a third arbitrator shall be appointed by the two arbitrators, or if they cannot agree, the third arbitrator shall be selected by the arbitrators from a list provided by the Service. Promptly after the third arbitrator has been selected, the three arbitrators shall resolve the matter. No arbitrator shall be selected who previously represented any Member, Owner, or any Affiliate in any capacity. A decision by a majority of the arbitrators shall resolve the matter. Any decision rendered by a majority of the arbitrators shall be final and binding on the parties and shall be enforceable in any court having jurisdiction thereof. The arbitrators shall have the authority to require the losing Party to pay all costs associated with such arbitration, including expenses and fees of arbitrators. Costs shall include reasonable legal, consulting, and other fees incurred by a Party in the course of such arbitration.

41

     SECTION 12.15 Exhibits.

     The Exhibits to this Agreement, each of which is incorporated by reference, are:

EXHIBIT A:	Information Exhibit
EXHIBIT B:	Glossary of Terms
EXHIBIT C:	Charity Policy
EXHIBIT D:	Description of services included in management fee paid to MedCath
EXHIBIT E:	Mobile Catheterization Agreement
EXHIBIT F:	Amended and Restated Management and Services Agreement dated June, 2001
EXHIBIT G	Budget Exhibit
EXHIBIT H:	Regulatory Allocations

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the following execution pages, to be effective as of the date described in Article II.

[EXECUTIONS APPEAR ON THE FOLLOWING PAGES]

42

EXECUTION PAGE
TO THE
AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

MEMBERS:

MedCath Partners, LLC

By:

Title:

New Hanover Regional Medical Center

By:

Title:

By:

Title:

INVESTOR MEMBERS:

William Smith, M.D.

James Forrester, M.D.

James Sheerin, M.D.

Paul Payne, M.D.

43

Lance Lewis, M.D.

Mark Murphy, M.D.

David Weaver, M.D.

Linda P. Calhoun, M.D.

James R. Harper, Jr., M.D.

Peter J. Wiegman, M.D.

Hemantkumar Patel, M.D.

James W. Snyder, M.D.

Praful Patel, M.D.

David T. Sawyer, M.D.

Robert G. Everhart, M.D.

Tim Winslow, M.D.

Damian A. Brezinski, M.D.

Christopher C. Barber, M.D.

Frank A. Hobart, M.D.

44

Michael J. Moeller, M.D.

William Crafford, M.D.

William P. Buchanan, Sr., M.D.

Martin James Conley, Jr., M.D.

William R. Holt, Jr., M.D.

Robert A. Ver Nooy, Jr., M.D.

Andrew H. Bishop, M.D.

45

EXHIBIT A
TO THE
AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

INFORMATION EXHIBIT

			Maximum
			Mandatory
			Additional
	Effective Date		Capital		Percentage
Name and Address	Capital Accounts		Contributions		Membership Interest
MedCath Partners, LLC c/o MedCath Incorporated 10720 Sikes Place, Suite 300 Charlotte, NC 28277	$	4,802,000	$	96,600		9.2	%
New Hanover Regional Medical Center 2131 South 17th Street Wilmington, NC 28401	$	43,000,000	$	861,000		82.0	%
Investor Members:
William Smith, M.D. 5128 Somersett Lane Wilmington, NC 28409	$	177,462	$	3,554		.338	%
James Forrester, M.D. 5137 Nicholas Creek Circle Wilmington, NC 28409	$	177,462	$	3,554		.338	%
James Sheerin, M.D. 4450 Fireside Court Wilmington, NC 28412	$	177,462	$	3,554		.338	%
Paul Payne, M.D. 1642 Verrazzano Drive Wilmington, NC 28405	$	177,462	$	3,554		.338	%

			Maximum
			Mandatory
			Additional
	Effective Date		Capital		Percentage
Name and Address	Capital Accounts		Contributions		Membership Interest
Lance Lewis, M.D. 708 Forrest Hills Drive Wilmington, NC 28405	$	177,462	$	3,554		.338	%
Mark Murphy, M.D. 5109 Nicholas Creek Circle Wilmington, NC 28409	$	177,462	$	3,554		.338	%
David Weaver, M.D. 2134 Harbor Way Drive Wilmington, NC 28405	$	177,462	$	3,554		.338	%
Linda P. Calhoun, M.D. 106 Chimney Lane Wilmington, NC 28409	$	177,462	$	3,554		.338	%
James R. Harper, Jr., M.D. 813 Gull Point Road Wilmington, NC 28405-5264	$	177,462	$	3,554		.338	%
Peter J. Wiegman, M.D. 2403 N. Lumina Avenue Wrightsville Beach, NC 28480	$	177,462	$	3,554		.338	%
Hemantkumar Patel, M.D. 2314 Tattersalls Drive Wilmington, NC 28403	$	177,462	$	3,554		.338	%
James W. Snyder, M.D. 925 Rabbit Run Road Wilmington, NC 28409	$	177,462	$	3,554		.338	%
Praful Patel, M.D. 2113 Forest Lagoon Place Wilmington, NC 28405	$	177,462	$	3,554		.338	%
David T. Sawyer, M.D. 3617 St. Francis Drive Wilmington, NC 28409	$	177,462	$	3,554		.338	%
Robert G. Everhart, M.D. 2015 Pembroke Jones Drive Wilmington, NC 28405-4303	$	177,462	$	3,554		.338	%

A-2

			Maximum
			Mandatory
			Additional
	Effective Date		Capital		Percentage
Name and Address	Capital Accounts		Contributions		Membership Interest
Tim Winslow, M.D. 6 West Atlanta Street Wrightsville Beach, NC 28480	$	177,462	$	3,554		.338	%
Damian A. Brezinski, M.D. 1604 Physicians Drive Wilmington, NC 28401	$	177,462	$	3,554		.338	%
Christopher C. Barber, M.D. 6431 Shinnwood Road Wilmington, NC 28409	$	177,462	$	3,554		.338	%
Frank A. Hobart, M.D. 2805 Oleander Drive Wilmington, NC 28403	$	177,462	$	3,554		.338	%
Michael J. Moeller, M.D. 715 Colonial Drive Wilmington, NC 28403	$	177,462	$	3,554		.338	%
William Crafford, M.D. 1515 Doctors Circle Bldg C Wilmington, NC 28401	$	177,462	$	3,554		.338	%
William P. Buchanan, Sr., M.D. P.O. Box 1107 Wrightsville Beach, NC 28480	$	177,462	$	3,554		.338	%
Martin James Conley, Jr., M.D. 920 Rabbit Run Wilmington, NC 28409	$	177,462	$	3,554		.338	%
William R. Holt, Jr., M.D. 1825 Starfix Terrace Wilmington, NC 28405	$	177,462	$	3,554		.338	%
Robert A. Ver Nooy, Jr., M.D. 6608 Carmel Trail Wilmington, NC 28411-9796	$	177,462	$	3,554		.338	%
Andrew H. Bishop, M.D. 7530 Masonboro Sound Road Wilmington, NC 28409	$	177,462	$	3,554		.338	%

A-3

			Maximum
			Mandatory
			Additional
	Effective Date		Capital		Percentage
Name and Address	Capital Accounts		Contributions		Membership Interest
Total: Investor Members	$	4,614,000	$	92,400		8.8	%
Total:	$	52,416,000	$	1,050,000		100	%

A-4

EXHIBIT B
TO THE
AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

GLOSSARY OF TERMS

     As used in this Agreement, the following terms shall have the following definitions (unless otherwise expressly provided herein).

     “Act” means the North Carolina Limited Liability Company Act, as in effect in North Carolina and set forth at N.C. Gen. Stat. §§ 57C-1-01 through 57C-10-07 (or any corresponding provisions of succeeding law).

     “Adjusted Capital Account” means, with respect to any Member, such Person’s Capital Account (as defined below) as of the end of the relevant Fiscal Year increased by any amounts which such Person is obligated to restore, or is deemed to be obligated to restore pursuant to the next to last sentences of Regulations Section 1.704-2(g)(1) (share of minimum gain) and Regulations Section 1.704-2(i)(5) (share of member nonrecourse debt minimum gain) and decreased by the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6).

     “Affiliate” means with respect to a Person, (i) any relative of such Person; (ii) any officer, director, trustee, partner, manager, employee or holder of ten percent (10%) or more of any class of the outstanding voting securities or of an equity interest of such Person; or (iii) Entity or holder of ten percent (10%) or more of the outstanding voting securities or of an equity interest of any Entity, controlling, controlled by, or under common control with such Person. Affiliates shall also include each individual holding or owning an ownership interest in the Investor Members or Investor Entities.

     “Agreed Value” means with respect to any noncash asset of the Company an amount determined and adjusted in accordance with the following provisions:

     (a) The initial Agreed Value of any noncash asset contributed to the capital of the Company by any Member shall be its gross fair market value, as agreed to by the contributing Member and the Company.

     (b) The initial Agreed Value of any noncash asset acquired by the Company other than by contribution by a Member shall be its adjusted basis for federal income tax purposes.

     (c) The initial Agreed Values of all the Company’s noncash assets, regardless of how those assets were acquired, shall be reduced by depreciation or amortization, as

the case may be, determined in accordance with the rules set forth in Regulations Section 1.704-1(b)(2)(iv)(f) and (g).

     (d) The Agreed Values, as reduced by depreciation or amortization, of all noncash assets of the Company, regardless of how those assets were acquired, shall be adjusted from time to time to equal their gross fair market values (taking Code Section 7701(g) into account), as agreed to by the Members in writing, as of the following times:

     (i) the acquisition of a Membership Interest or an additional Membership Interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution;

     (ii) the distribution by the Company of more than a de minimis amount of money or other property as consideration for all or part of a Membership Interest in the Company;

     (iii) the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); or

     (iv) in connection with the grant of Membership Interests in the Company (other than a de minimis interest) as consideration for the provision of services to or for the benefit of the Company.

     If, upon the occurrence of one of the events described in (i), (ii) or (iii) above the Members do not agree in writing on the gross fair market values of the Company’s assets, it shall be deemed that the fair market values of all the Company’s assets equal their respective Agreed Values immediately prior to the occurrence of the event and thus no adjustment to those values shall be made as a result of such event.

     “Agreement” means this Operating Agreement, as amended from time to time.

     “Applicable Law” has the meaning set forth at Section 12.11 of the Agreement.

     “Articles of Organization” means the Articles of Organization of the Company, as filed with the Secretary of State of North Carolina as the same may be amended from time to time.

     “Board of Directors,” “Director” or “Directors” means those persons appointed by the Members, pursuant to Section 3.9 of the Operating Agreement, and given the power and authority under Article V of the Operating Agreement to manage the Company. The terms “Director” or “Directors” is used for convenience, but is intended to have the same meaning as the terms “Manager” or “Managers” in the Act.

     “Bylaws, Rules and Regulations of the Medical Staff” means those bylaws, rules and regulations adopted for each Hospital’s Medical Staff.

B-2

     “Capital Account” means with respect to each Member or assignee an account maintained and adjusted in accordance with the following provisions:

     (a) Each Person’s Capital Account shall be increased by Person’s Capital Contributions, such Person’s distributive share of Profits, any items in the nature of income or gain that are allocated pursuant to the Regulatory Allocations and the amount of any Company liabilities that are assumed by such Person or that are secured by Company property distributed to such Person.

     (b) Each Person’s Capital Account shall be decreased by the amount of cash and the Agreed Value of any Company property distributed to such Person pursuant to any provision of this Agreement, such Person’s distributive share of Losses, any items in the nature of loss or deduction that are allocated pursuant to the Regulatory Allocations, and the amount of any liabilities of such Person that are assumed by the Company or that are secured by any property contributed by such Person to the Company.

     In the event any Membership Interest is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Membership Interest.

     In the event the Agreed Values of the Company assets are adjusted pursuant to the definition of Agreed Value contained in this Agreement, the Capital Accounts of all Members shall be adjusted simultaneously to reflect the aggregate adjustments as if the Company recognized gain or loss equal to the amount of such aggregate adjustment.

     The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such regulations. In the event the Board of Directors shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed to comply with such Regulation, the Board of Directors may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Member pursuant to Articles VI or VII hereof upon the dissolution of the Company. In the event the Board of Directors shall determine such adjustments are necessary or appropriate to comply with Regulations Section 1.704-1(b)(2)(iv), the Board of Directors shall adjust the amounts debited or credited to Capital Accounts with respect to (i) any property contributed by the Members or distributed to the Members and (ii) any liabilities secured by such contributed or distributed property or assumed by the Members. The Board of Directors shall also make any other appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). In the event any Membership Interest in the Company is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Membership Interest.

     “Capital Contribution” means with respect to any Member, the amount of money and the initial Agreed Value of any property (other than money) contributed to the Company with respect to the Membership Interest of such Member.

B-3

     “Cash Distributions” means net cash distributed to Members resulting from Cash Flow from Operations or Cash from Sales or Refinancing, but shall not include cash payments made to MedCath Partners, LLC as its management fee for services rendered pursuant to Article V hereof or any amount in repayment of loans made by the Members to the Company.

     “Cash Flow from Operations” means net cash funds provided from operations, exclusive of Cash from Sales or Refinancing, of the Company or investment of any Company funds, without deduction for depreciation, but after deducting cash funds used to pay or establish a reserve for expenses, debt payments, capital improvements, and replacements and for such other items as the Board of Directors reasonably determines to be necessary or appropriate and subject to Loan Conditions.

     “Cash from Sales or Refinancing” means the net cash proceeds received by the Company from or as a result of any Sale or Refinancing of property after deducting (i) all expenses incurred in connection therewith, (ii) any amounts applied by the Board of Directors in their sole and absolute discretion toward the payment of any indebtedness and other obligations of the Company then due and payable, including payments of principal and interest on mortgages, (iii) the payment of any other expenses or amounts owed by the Company to other parties to the extent then due and payable, and (iv) the establishment of any reserves deemed necessary by the Board of Directors in their sole and absolute discretion. If the proceeds of any sale or refinancing are paid in more than one installment, each such installment shall be treated as a separate Sale or Refinancing for the purposes of this definition.

     “Cath Labs” has the meaning set forth at Recital A of the Agreement.

     “Change of Law Event” has the meaning set forth at Section 12.11 of the Agreement.

     “Code” means the Internal Revenue Code of 1986, as amended from time to time. Any reference herein to a specific section(s) of the Code shall be deemed to include a reference to any corresponding provision of future law.

     “Commitment” has the meaning set forth at Section 3.6 of the Agreement.

     “Company” means and shall refer to Coastal Carolina Heart, LLC, which was created upon the filing of the Articles of Organization with the Office of the Secretary of State of North Carolina and to be continued under this Agreement, as amended from time to time.

     “Competing Business” has the meaning set forth at Section 5.10(b) of the Agreement.

     “Conflicted Director” has the meaning set forth at Section 3.6 of the Agreement.

     “Default Rate” means a per annum rate of return on a specified principal sum, compounded monthly, equal to the greater of (a) the Prime Rate plus 500 basis points, or (b) 18%, but in no event greater than the highest rate allowed by law.

B-4

     “Delinquent Member” has the meaning set forth at Section 3.6 of the Agreement.

     “Economic Interest” means and shall refer to that portion of the Membership Interest of a Member in the economic rights and benefits of the Company, including but not limited to all Profits, Losses and Cash Distributions. Such an Economic Interest will be measured by an amount equal to the Member’s percentage Membership Interest in the Company as the same may be adjusted from time to time.

     “Economic Interest Owner” means a Person who has validly acquired a Member’s Economic Interest as permitted under this Agreement but who has not become a Member. Such Person shall be entitled to the allocations of Profits and Losses and Cash Distributions under Articles VI and VII to which the previous owner of the Economic Interest would have been entitled had such previous owner retained the Economic Interest. Unless and until such Economic Interest Owner is admitted as a Substitute Member, it shall be a mere assignee of a Member.

     “Effective Date” has the meaning set forth at Section 2.1 of the Agreement.

     “Entity” means any general partnership, limited partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association or any foreign trust or foreign business organization.

     “Equipment” means the appropriate equipment required from time to time in connection with the development and operation of the Cath Labs.

     “Federal Act” has the meaning set forth at Section 12.12(b) of the Agreement.

     “Financing Members” has the meaning set forth at Section 5.6(c) of the Agreement.

     “Fiscal Year” means, with respect to the first year of the Company, the period beginning upon the formation of the Company and ending on the next September 30, with respect to subsequent years of the Company, the twelve month period beginning October 1 and ending September 30, and, with respect to the last year of the Company, the portion of the period beginning October 1 and ending with the date of the final liquidating distributions.

     “Formula Purchase Price” has the meaning set forth at Section 8.1(c) of the Agreement.

     “Guarantee and Financing Fee” has the meaning set forth at Section 5.6(c) of the Agreement.

     “Hospital” means the general acute care hospital located at 2131 S. 17^th Street in Wilmington, North Carolina known as New Hanover Regional Medical Center.

     “Initial Members” shall mean MedCath Partners, LLC, Hospital and those Investor Members who make initial Capital Contributions to the Company under Section 3.1.

B-5

     “Investor Documents” has the meaning set forth at Section 3.7 of the Agreement.

     “Investor Entity” means an Entity that has a direct or indirect ownership interest in an Investor Member.

     “Investor Members” shall mean the parties admitted as investors in the Company in accordance with the terms of this Agreement other than MedCath Partners, LLC and Hospital.

     “Lender” has the meaning set forth at Section 8.1(d) of the Agreement.

     “Loan Conditions” has the meaning set forth at Section 6.1 of the Agreement.

     “Management and Service Agreement” means the agreement by and between the Hospital and the Company pursuant to which Company will manage the Cath Labs.

     “Material Agreement” means any binding agreement which may not be canceled upon less than ninety (90) days notice and which calls for the expenditure of funds, or involves an obligation for financing, in excess of $100,000.00 including amendments and renewals to same, exclusive of agreements or other obligations (including those with MedCath) that are included in any budget, development plan, financing or construction contract approved by the Board of Directors as adjusted in Section 5.6(d) and Section 5.15(b). “Material Agreement” shall also include any agreement between Company and MedCath; provided, however that those agreements attached to this Agreement as exhibits are deemed approved by the Board of Directors.

     “Material Decision” means any decisions regarding approvals of the annual operating and capital budgets for the Company; the selection of the Cath Labs and the Facility’s senior administrator; strategic planning for the Company; the execution of managed care contracts for the Facility; the expansion of the Company’s services provided at the Facility; the expansion of the Company’s services within the Territory; and the approval on behalf of Company of quality and other benchmarks for the Cath Labs, the schedule for implementation of such benchmarks in the Cath Labs and the consequences, if any, under the Management Services Agreement for failure to implement such benchmarks.

     “MedCath” shall mean MedCath Partners, LLC, who shall serve as manager of the Company.

     “Member” means and shall refer to the organizers of the Company (unless or until any such organizer has withdrawn) and each of the Persons identified as “Members” in the then applying Information Exhibit attached hereto and incorporated herein by this reference or admitted as a Member in accordance with the terms of this Agreement.

     “Membership Interest” means all of a Member’s rights in the Company, including without limitation the Member’s share of Profits, Losses, Cash Distributions and other benefits of the Company, any right to vote, any right to participate in the management of the business and affairs of the Company, including the right to vote on, consent to, or otherwise participate in any

B-6

decision or action of or by the Members granted pursuant to this Operating Agreement or the Act. The percentage Membership Interest of each Member, their Capital Contributions and other related information shall be listed on the Information Exhibit. The percentage Membership Interests generally shall be based upon the pro rata Capital Contribution of each Member.

     “NonFinancing Members” has the meaning set forth at Section 5.6(c) of the Agreement.

     “Owner” means an individual who, through an Investor Entity or otherwise, has a direct or indirect ownership interest in an Investor Member.

     “Payment Method” has the meaning set forth at Section 8.1(c) of the Agreement.

     “Person” means any individual or Entity, and the heirs, executors, administrators, legal representatives, successors, and assigns of such individual or Entity where the context so permits.

     “Practice” means the Entity or sole proprietorship through which an Owner primarily conducts his medical office practice.

     “Prime Rate” means the rate of interest as of the relevant day or time period as announced by the Bank of America, N.A. or its successor in interest from time to time as its prime or reference rate.

     “Profits and Losses” means, for each Fiscal Year or other period, an amount equal to the Company’s taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(l) shall be included in taxable income or loss), with the following adjustments:

     (a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses shall be added to such taxable income or loss;

     (b) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses, shall be subtracted from such taxable income or loss;

     (c) Gain or loss resulting from dispositions of Company assets shall be computed by reference to the Agreed Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Agreed Value.

     “Refinancing” means any borrowing incurred or made to recapitalize the Company or the equity investment in, or to refinance any loan used to finance the acquisition of property.

B-7

     “Regulations” means rules, orders, and regulations issued pursuant to or under the authority of the Code and shall include revisions to and succeeding provisions as appropriate.

     “Regulatory Allocations” means those allocations of items of Company income, gain, loss or deduction set forth on the Regulatory Allocations Exhibit and designed to enable the Company to comply with the alternate test for economic effect prescribed in Regulations Section 1.704-1(b)(2)(ii)(d), and the safe-harbor rules for allocations attributable to nonrecourse liabilities prescribed in Regulations Section 1.704-2.

     “Required Members” shall mean MedCath Partners, LLC, Hospital and a majority of the percentage Membership Interests held by the Investor Members.

     “Right of First Refusal” has the meaning set forth at Section 8.1(b) of the Agreement.

     “Sale” means the sale, exchange, involuntary conversion (other than a casualty followed by reconstruction), condemnation, or other disposition of property by the Company, except for dispositions of inventory items and personal property in the ordinary course of business and in connection with the replacement of such property.

     “Substitute Member” means an assignee of a Member who has been admitted to the Company and granted all the rights of a Member in place of its assignor pursuant to the provisions of this Agreement. A Substitute Member, upon its admission as such, shall replace and succeed to the rights, privileges, and liabilities of the Member from whom it acquired its interest in the Company.

     “Territory” has the meaning set forth at Section 5.10(b) of the Agreement.

B-8

EXHIBIT C
TO THE
AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

CHARITY POLICY

I. CHARITY CARE POLICY:

As part of our charitable mission, Coastal Carolina Heart, LLC (“Company”) is committed to providing benefits to the Community. This policy addresses financial assistance for the uninsured and the underinsured.

Company will provide medically necessary services at no charge to patients who meet the specific criteria defined herein. These criteria are objectively determined and shall be consistently applied. Company uses the Federal Poverty Guidelines to qualify patients for the Financial Assistance Program.

Other payment resources (i.e., Medicaid, Crime Victims Assistance, Vocational Rehabilitation, etc) must be reviewed and evaluated before an account is considered for financial assistance to ensure that Company’s assets are prudently managed in providing financial assistance. However, a financial assistance application will be provided to all patients who demonstrate the potential of non-payment due to financial need and as requested.

An applicant who is approved for financial assistance will be eligible for services for a period of one year unless other resources are located to satisfy the account or their financial situation improves. A new application would then be requested. Accounts deemed bad debt, with the exception of those deemed within the current fiscal year, are not covered by charity care application/approval and will not be considered charity care.

Partial balances that cannot be settled due to financial hardship can be adjusted to financial assistance if an application is completed and approved. It is important to distinguish between individuals who can afford to pay and choose not to (Bad Debt), and those who cannot afford to pay (Financial Assistance).

Company periodically reviews its financial assistance policy to ensure that our mission is fulfilled to provide medically necessary health care to eligible uninsured or underinsured patients in need of such services. Company reserves the right to revise, modify or change this policy as necessary or appropriate.

II. PROCEDURE:

1. If it becomes apparent that a patient account cannot be settled through other means, then the patient will be given a Financial Assistance application and as requested. Accompanying this application will be full, explicit instructions for its completion, along with a request for the

documents necessary to support potential patient assets and liabilities. These documents include:

A. Copy of a pay stub
B. Copy of most recent tax return
C. Copy of disability award
D. Unemployment payments
E. Statement of wages from employer
F. Current bank statements

2. After the application has been received it will be documented as such on the patient account. The application is then reviewed for completeness. Completeness is defined as all pertinent information provided on the face of the application and signed by the patient, guardian and or spouse. Incomplete applications are documented in the patient account and are temporarily denied, until completed. Normal billing procedures will continue. If a complete, conforming application is approved, this will be noted on the patient account and the balance will be adjusted using the appropriate adjustment code. Accounts deemed bad debt, with the exception of those deemed within the current fiscal year, are not covered by charity care application/approval and will not be considered charity care.

3. When reviewing the application, the facility representative will use the income guidelines provided along with all other available information. Credit report will be acquired and used to validate the application. The decision to grant or reject an application must be made on an objective basis with documentation to support each decision. There will be no bias in this decision based on any demographic information, such as race, gender, immigration status, etc.

4. Company uses the Federal poverty guidelines to determine eligibility for financial assistance. The Federal poverty guidelines are published and updated annually in February by the U.S. Department of Health and Human Services. The Department of Health and Human Services updates on its web site (http://aspe.os.dhhs.gov/poverty/Xxcomputations.htm — Xx meaning the specific year; i.e., 04 for 2004). A patient’s income and family size must be at or below 200% of the Federal poverty guidelines to receive 100% financial assistance.

5. There may be individuals that apply for Financial Assistance prior to receiving medical services at Company. In these cases, a facility representative will review the application as if the patient had an active Medical Record, and will approve or deny based on the guidelines stated above. These applicants will receive a Financial Assistance Card with their date of birth and name to serve as an identifier.

6. Patients may exceed the poverty guidelines but may still be eligible for financial assistance when additional criteria such as catastrophic medical costs are considered. If the total patient account balance is greater than the amount exceeding the Federal poverty guidelines then the patient will qualify. Other obligations will be evaluated to determine if they are for basic needs or luxury items. This qualification may be a one time economic hardship or for ongoing financial assistance depending upon the medical situation/debt.

C-2

7. If a patient is underinsured, they may also qualify for either economic hardship or for ongoing financial assistance. These instances will be reviewed on a case-by-case basis for eligibility under the guidelines stated in this policy.

8. The Manager or designee will make a determination on each application within ten working days of the receipt of a completed application. If Manager has questions, he may call the Hospital’s Controller. Approval is made upon review of the following:

A. A completed financial assistance application
B. A copy of the patient’s credit report
C. Review of all income* sources
D. Homeless individuals may provide a statement from a shelter or other resource

9. Patients will be notified of the decision regarding their application in writing within twenty days.

10. Performance Expectations: The thorough exploration of possible sources of payment and proper and timely completion of applications are expected of all team members. Failure to meet these expectations may negatively affect a team member’s performance review.

11. Conflict of Interest: A team member will not make financial assistance decisions on patient accounts of relatives or friends. Any such account must be transferred to an unrelated team member or a member of management.

*

INCOME: Refers to total cash receipts before taxes from all sources. This includes but are not limited to: wages and salaries before any deductions, receipts from self-employment or from own farm or business; regular payments from public assistance, social security, unemployment and workmen’s compensation, strike benefits from union funds, veteran’s allotments or other regular support from an absent family member or someone not living in the household; government employee pensions, private pensions and regular insurance or annuity payments, and; income from dividends, interest, rents, royalties, or income from estates and trusts, food stamps, savings, bank account, any assets drawn down as withdrawals from a bank, sale of property, house or car, tax refunds, gifts, one-time insurance payments or compensation for injury. Total income from all household members** must be used, unless applicant is considered an unrelated individual, i.e., border, lodger, ward, or an employee of household.

**

Household members are any persons living in the same house (unit) for the purpose of shelter, whether or not they are related by marriage, blood, or adoption.

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FINANCIAL ASSISTANCE SCALE
Updated FPG 01/24/06

Updated FPG 2/18/05
Revised as of 10/1/05

			Corporation
	Federal		Charity
	Poverty		Guidelines
Family Size	Guidelines		(200% of FPG)
1	$	9,800	$	19,600
2	$	13,200	$	26,400
3	$	16,600	$	33,200
4	$	20,000	$	40,000
5	$	23,400	$	46,800
6	$	26,800	$	53,600
7	$	30,200	$	60,400
8	$	33,600	$	67,200
For each additional person, add		3,400	$	6,800

SOURCE: Federal Register, Vol. 71, No. 15, January 24, 2006, pp. 3848-3849

C-4

EXHIBIT D
TO THE
AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

DESCRIPTION OF MEDCATH SERVICES INCLUDED IN FEE PAID PURSUANT TO
SECTION 5.6 (a)

     The day-to-day management and operation of the Company’s business and affairs shall be the responsibility of MedCath, and in that regard shall include the following services:

q	Services of MedCath Partners, LLC Executive Management Team located in Charlotte, North Carolina
q	Facilitate strategic planning for Company
q	Perform Clinical Management Services for Company, including:

Assist the Company to implement a Preventive Maintenance Program concerning equipment owned by the Company or Hospital equipment for which Company is responsible for maintenance

Coordinate with Investor Members the development of Policies and Procedures for Cath Labs, including without limitation, incorporating Hospital Standards and Continual Updating as requested from time to time

Provide support for Company and Hospital Clinical and Administrative Staff providing services in the Cath Labs

Coordinate with Investor Members, Hospital and the Company for the Performance Improvement Program Design for the Cath labs

Provide access to MedCath Incorporated’s Supply Procurement, Coordination & Negotiation and Inventory Management

Assist Company in Design of Scheduling, Forms and Emergency Protocols for the Cath Labs

Support the Company in providing services to the Cath Labs for JCAHO Survey Preparation/Readiness and CLIA Compliance

Order inventory for Cath Labs and Facility and coordinate receipt of supplies

Coordinate Physicist Inspection of Cath Labs

Coordinate with Hospital on behalf of Company concerning Physician and Patient Satisfaction Surveys Collection and Compilation in the Cath Labs

Collection, Analysis and Reporting of Clinical and Financial Outcome Data for the Company

Assist the Company in the development of Educational Materials for Patients, Managed Care and Other Payor Organizations concerning the Cath Labs

Prepare annual Report Card for the Program, including outcomes

Provide proprietary materials of MedCath related to community outreach initiatives for use by Company in providing services to the Hospital.

q Perform Clinical Risk Management Services for Company, including:

Evaluate Statistical Trends in the Cath Labs from variance Reporting and Claims and Development of Action Plan

Coordinate with Hospital defense of Reported Cases with the Insurance Carrier and Defense Attorneys

q Perform Human Resource Management Services for Company Employees, including:

Recruit, Screen and Hire Company Personnel consistent with MedCath Incorporated’s policies and procedures

Health & Retirement Benefits Management

Health & 401(k) Open Enrollment & Ongoing Plan Management

Reporting and Compliance

Individual Summary Annual Reports

Employee Support: Claims Investigation, Employee Records

Workers’ Compensation reporting and claims administration

Management of leaves of absence

Policy & Procedure Management for Human Resources function (Compliance with JCAHO)

D-2

Human Resources Support of On-Site Manager

Discipline Company employees and administer Employee Satisfaction Surveys

Interpret MedCath Incorporated HR Policies & Procedures as applicable to Company employees

q Perform Information Technology Services for Company, including:

Manage Telecommunications and Computer (Hardware, Software, and Internet) Issues for Company systems, if any

Support Company Employees in use of MedCath Incorporated information systems (E-mail, Software Training, Maintenance Repairs, and Upgrades)

q Provide Financial Reporting Function, including:

Capital and Operating Budget Preparation for the Company

Coordination of Audit Process as to Company’s financial statements

Guidance/Coordination of Accounting Policies for Company

Financial Reporting for Company to its Members

Monthly Income Statements and Balance Sheets for Company

q Perform Accounts Payable Function for Company, including:

Compare/Validate Purchase Orders, Receivers, Invoices

Process all invoices and Checks

Reconcile all Operating Bank Account

Maintain Vendor Records and Transaction Files

Annual 1099 Preparation & Filing with IRS

q Perform Accounts Receivable Function for Company, including:

Billing & Collections for amounts due Company by Hospital and Facility

Cooperate with Hospital to agree upon a mutually acceptable efficient and effective system for the Company to submit invoices for services rendered to Hospital

D-3

q Perform Payroll Services for Company, including:

Process Bi-Monthly Payroll

Coordinate and Monitors Payroll Tax Requirements

W-2 Processing for Company employees

Quarterly and Annual Reporting Requirements w/State, Local, and Federal Agencies

q Perform Tax Services for Company, including:

Coordinate Preparation & Filing of State and Federal Tax Returns and K-1s for Company and its members

Calculate and File Quarterly Estimated Income Taxes for the Company

Coordinate Sales and Use Tax Returns for the Company

q Manage Corporate Compliance Program for Company, including:

Manage Program and Educate Employees

Investigate and Report Compliance Issues as Appropriate and in conjunction with the Hospital when involving Hospital matters

D-4

EXHIBIT E
TO THE
AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

MOBILE CATHETERIZATION AGREEMENT

EXHIBIT F
TO THE
AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

MANAGEMENT AND SERVICES AGREEMENT

EXHIBIT G
TO THE
AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

BUDGET EXHIBIT

NewCo — New Hanover

Year One Operating Budget

	Month One		Month Two		Month Three		Quarter One		Quarter Two		Quarter Three		Quarter Four		Year One
Patient revenue	$	2,494,598	$	2,494,598	$	2,494,598	$	7,483,794.25	$	7,483,794.25	$	7,483,794.25	$	7,483,794.25	$	29,935,177
Other operating revenue		4,841		4,841		4,841		14,523		14,523		14,523		14,523		58,093
Net revenue	$	2,499,439	$	2,499,439	$	2,499,439	$	7,498,318	$	7,498,318	$	7,498,318	$	7,498,318	$	29,993,270
Personnel expense		252,842		252,842		252,842		758,525		758,525		758,525		758,525		3,034,099
Medical supplies expense		953,415		953,415		953,415		2,860,246		2,860,246		2,860,246		2,860,246		11,440,982
Bad debt expense		14,076		14,076		14,076		42,228		42,228		42,228		42,228		168,912
Rent		9,446		9,446		9,446		28,338		28,338		28,338		28,338		113,352
Equipment Lease		64,363		64,363		64,363		193,090		193,090		193,090		193,090		772,362
Equipment Lease — Existing		25,000		25,000		25,000		75,000		75,000		75,000		75,000		300,000
Medical Director Fee		5,271		5,271		5,271		15,814		15,814		15,814		15,814		63,254
Maintenance & Repair		26,082		26,082		26,082		78,247		78,247		78,247		78,247		312,990
Insurance		15,268		15,268		15,268		45,804		45,804		45,804		45,804		183,217
Other operating expenses		46,419		46,419		46,419		139,257		139,257		139,257		139,257		557,029
Management Fees		119,570		119,570		119,570		358,711		358,711		358,711		358,711		1,434,844
EBITDAP	$	967,686	$	967,686	$	967,686	$	2,903,058	$	2,903,058	$	2,903,058	$	2,903,058	$	11,612,231
Pre-Opening Costs		100,000														100,000
EBITDA	$	867,686	$	967,686	$	967,686	$	2,903,058	$	2,903,058	$	2,903,058	$	2,903,058	$	11,512,231
Income (Loss) from operations	$	867,686	$	967,686	$	967,686	$	2,903,058	$	2,903,058	$	2,903,058	$	2,903,058	$	11,512,231
Net income (loss)	$	867,686	$	967,686	$	967,686	$	2,903,058	$	2,903,058	$	2,903,058	$	2,903,058	$	11,512,231

EXHIBIT H
TO THE
AMENDED AND RESTATED OPERATING AGREEMENT
OF
COASTAL CAROLINA HEART, LLC
A North Carolina Limited Liability Company

REGULATORY ALLOCATIONS

     This Exhibit contains special rules for the allocation of items of Company income, gain, loss and deduction that override the basic allocations of Profits and Losses in the Agreement to the extent necessary to cause the overall allocations of items of Company income, gain, loss and deduction to have substantial economic effect pursuant to Regulations Section 1.704-1(b) and shall be interpreted in light of that purpose. Subsection (a) below contains special technical definitions. Subsections (b) through (h) contain the Regulatory Allocations themselves. Subsections (i), (j) and (k) are special rules applicable in applying the Regulatory Allocations.

     (a) Definitions Applicable to Regulatory Allocations. For purposes of the Agreement, the following terms shall have the meanings indicated:

     (i) “Company Minimum Gain” means the same as the meaning of “partnership minimum gain” set forth in Regulations Section 1.704-2(d), and is generally the aggregate gain the Company would realize if it disposed of its property subject to Nonrecourse Liabilities in full satisfaction of each such liability, with such other modifications as provided in Regulations Section 1.704-2(d). In the case of Nonrecourse Liabilities for which the creditor’s recourse is not limited to particular assets of the Company, until such time as there is regulatory guidance on the determination of minimum gain with respect to such liabilities, all such liabilities of the Company shall be treated as a single liability and allocated to the Company’s assets using any reasonable basis selected by MedCath Partners, LLC.

     (ii) “Member Nonrecourse Deductions” means losses, deductions or Code Section 705(a)(2)(B) expenditures attributable to Member Nonrecourse Debt under the general principles applicable to “partner nonrecourse deductions” set forth in Regulations Section 1.704-2(i)(2).

     (iii) “Member Nonrecourse Debt” means any Company liability with respect to which one or more but not all of the Members or related Persons to one or more but not all of the Members bears the economic risk of loss within the meaning of Regulations Section 1.752-2 as a guarantor, lender or otherwise.

     (iv) “Member Nonrecourse Debt Minimum Gain” means the minimum gain attributable to Member Nonrecourse Debt as determined pursuant to

Regulations Section 1.704-2(i)(3). In the case of Member Nonrecourse Debt for which the creditor’s recourse against the Company is not limited to particular assets of the Company, until such time as there is regulatory guidance on the determination of minimum gain with respect to such liabilities, all such liabilities of the Company shall be treated as a single liability and allocated to the Company’s assets using any reasonable basis selected by MedCath Partners, LLC.

     (v) “Nonrecourse Deductions” means losses, deductions, or Code Section 705(a)(2)(B) expenditures attributable to Nonrecourse Liabilities (see Regulations Section 1.704-2(b)(1)). The amount of Nonrecourse Deductions for a Fiscal Year shall be determined pursuant to Regulations Section 1.704-2(c), and shall generally equal the net increase, if any, in the amount of Company Minimum Gain for that taxable year, determined generally according to the provisions of Regulations Section 1.704-2(d), reduced (but not below zero) by the aggregate distributions during the year of proceeds of Nonrecourse Liabilities that are allocable to an increase in Company Minimum Gain, with such other modifications as provided in Regulations Section 1.704-2(c).

     (vi) “Nonrecourse Liability” means any Company liability (or portion thereof) for which no Member bears the economic risk of loss under Regulations Section 1.752-2.

     (vii) “Regulatory Allocations” means allocations of Nonrecourse Deductions provided in Paragraph (b) below, allocations of Member Nonrecourse Deductions provided in Paragraph (c) below, the minimum gain chargeback provided in Paragraph (d) below, the member nonrecourse debt minimum gain chargeback provided in Paragraph (e) below, the qualified income offset provided in Paragraph (f) below, the gross income allocation provided in Paragraph (g) below, and the Code Section 754 adjustment provided in Paragraph (h) below.

     (b) Nonrecourse Deductions. All Nonrecourse Deductions for any Fiscal Year shall be allocated to the Members in accordance with their percentage Membership Interests.

     (c) Member Nonrecourse Deductions. All Member Nonrecourse Deductions for any Fiscal Year shall be allocated to the Member who bears the economic risk of loss under Regulations Section 1.752-2 with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable.

     (d) Minimum Gain Chargeback. If there is a net decrease in Company Minimum Gain for a Fiscal Year, each Member shall be allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Member’s share of such net decrease in Company Minimum Gain, determined in accordance with Regulations Section 1.704-2(g)(2) and the definition of Company Minimum Gain set forth above. This provision is intended to comply with the minimum

H-2

gain chargeback requirement in Regulations Section 1.704-2(f) and shall be interpreted consistently therewith.

     (e) Member Nonrecourse Debt Minimum Gain Chargeback. If there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt for any Fiscal Year, each Member who has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt as of the beginning of the Fiscal Year, determined in accordance with Regulations Section 1.704-2(i)(5), shall be allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Member’s share of the net decrease in Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Regulations Sections 1.704-2(i)(4) and (5) and the definition of Member Nonrecourse Debt Minimum Gain set forth above. This Paragraph is intended to comply with the member nonrecourse debt minimum gain chargeback requirement in Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

     (f) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Company income and gain (consisting of a pro rata portion of each item of Company income, including gross income, and gain for such year) shall be allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, any deficit in such Member’s Adjusted Capital Account created by such adjustments, allocations or distributions as quickly as possible.

     (g) Gross Income Allocation. In the event any Member has a deficit in its Adjusted Capital Account at the end of any Fiscal Year, each such Member shall be allocated items of Company gross income and gain, in the amount of such Adjusted Capital Account deficit, as quickly as possible.

     (h) Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.

     (i) Curative Allocations. The Regulatory Allocations are intended to comply with certain requirements of the Treasury Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Profits and Losses pursuant to this Paragraph (i). Therefore, notwithstanding any other provision of this Exhibit F (other than the Regulatory Allocations), the Members shall make such

H-3

offsetting special allocations of Profits and Losses in whatever manner they determine appropriate so that, after such offsetting allocations are made, each Member’s Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of the Agreement and all Profits and Losses were allocated pursuant to Article VI. In exercising such discretion under this Paragraph (i), the Members shall take into account future Regulatory Allocations under this Exhibit F that, although not yet made, are likely to offset other Regulatory Allocations previously made.

     (j) Ordering. The allocations in this Exhibit to the extent they apply shall be made before the allocations of Profits and Losses under Article VI and in the order in which they appear above.

     (k) Waiver of Minimum Gain Chargeback Provisions. If the Tax Matters Partner determines that (i) either of the two minimum gain chargeback provisions contained in this Exhibit would cause a distortion in the economic arrangement among the Members, (ii) it is not expected that the Company will have sufficient other items of income and gain to correct that distortion, and (iii) the Members have made Capital Contributions or received net income allocations that have restored any previous Nonrecourse Deductions or Member Nonrecourse Deductions, then the Tax Matters Partner shall have the authority, but not the obligation, after giving notice to the Members, to request on behalf of the Company the Internal Revenue Service to waive the minimum gain chargeback or member nonrecourse debt minimum gain chargeback requirements pursuant to Regulations Sections 1.704-2(f)(4) and 1.704-2(i)(4). The Company shall pay the expenses (including attorneys’ fees) incurred to apply for the waiver. The Tax Matters Partner shall promptly copy all Members on all correspondence to and from the Internal Revenue Service concerning the requested waiver.

[THE REMAINDER OF THIS PAGE INTENTIONALLY HAS BEEN LEFT BLANK.]

H-4

EX-10.69

Exhibit 10.69

AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
HARLINGEN MEDICAL CENTER, LIMITED PARTNERSHIP
A North Carolina Limited Partnership

TABLE OF CONTENTS
TO THE
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
HARLINGEN MEDICAL CENTER, LIMITED PARTNERSHIP
A North Carolina Limited Partnership

ARTICLE I DEFINITIONS	2
ARTICLE II FORMATION AND AGREEMENT OF LIMITED PARTNERSHIP	2
SECTION 2.1 Partnership Formation; Effective Date	2
SECTION 2.2 Name of Partnership	2
SECTION 2.3 Purposes and Investment Objectives	2
SECTION 2.4 Registered Agent and Office; Principal Place of Business	3
SECTION 2.5 Commencement and Term	3
ARTICLE III PARTNERS AND CAPITAL CONTRIBUTIONS	3
SECTION 3.1 Capital Contributions of Partners	3
SECTION 3.2 Liability of Partners-For Capital	4
SECTION 3.3 Maintenance of Capital Accounts; Withdrawals of Capital; Withdrawals from the Partnership	4
SECTION 3.4 Interest on Capital Contributions or Capital Accounts	5
SECTION 3.5 Additional Funding	5
SECTION 3.6 Enforcement of Commitments	6
SECTION 3.7 Tax Treatment of Conversion	6
ARTICLE IV NAMES AND ADDRESSES OF PARTNERS	7
ARTICLE V MANAGEMENT OF THE PARTNERSHIP	7
SECTION 5.1 General Authority and Powers of the General Partner	7
SECTION 5.2 Restrictions on Authority of the General Partner	10
SECTION 5.3 Duties of the General Partner	10
SECTION 5.4 Delegation by the General Partner	11
SECTION 5.5 Right to Rely Upon the Authority of the General Partner	11
SECTION 5.6 Partnership Expenses	11
SECTION 5.7 No Management by Limited Partners	13
SECTION 5.8 Consent by Limited Partners to Exercise of Certain Rights and Powers by the General Partner	14
SECTION 5.9 Other Business of Partners	14
SECTION 5.10 General Partner’s Standard of Care	15
SECTION 5.11 Limitation of Liability	15
SECTION 5.12 Indemnification of the General Partner	16
SECTION 5.13 Election and Replacement of Investor Representatives; Appointment of Hospital Representative	16
SECTION 5.14 Role of and Decisions by Investor Representatives	16
SECTION 5.15 Purchase of Goods and Services from the General Partner	17
SECTION 5.16 Decisions by the General Partner	17
ARTICLE VI DISTRIBUTIONS AND ALLOCATIONS	17
SECTION 6.3 Losses	19
SECTION 6.4 Code Section 704(c) Tax Allocations	19
SECTION 6.5 Miscellaneous	20
ARTICLE VII DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS	21
SECTION 7.1 No Termination by Certain Acts of Partner	21
SECTION 7.2 Dissolution	21

i

SECTION 7.3 Dissolution and Final Liquidation	21
SECTION 7.4 Termination	23
SECTION 7.5 Payment in Cash	23
SECTION 7.6 Goodwill and Trade Name	23
SECTION 7.7 Termination of Noncompetition Covenants	23
ARTICLE VIII REMOVAL OR WITHDRAWAL OF GENERAL PARTNER AND PARTNERS AND TRANSFER OF PARTNERS’ PARTNERSHIP AND/OR ECONOMIC INTERESTS	23
SECTION 8.1 General Partner-Transfers	23
SECTION 8.2 Partners’ Right to Continue When Partnership has no General Partner	24
SECTION 8.3 Relationship with Substitute General Partner	24
SECTION 8.4 Investor Limited Partners-Restriction on Transfer	24
SECTION 8.5 Hospital Limited Partne- Restriction on Transfer	25
SECTION 8.6 Condition Precedent to Transfer of Economic Interest and/or Partnership Interest	27
SECTION 8.7 Substitute Partner Conditions to Fulfill	27
SECTION 8.8 Allocations Between Transferor and Transferee	27
SECTION 8.9 Rights, Liabilities of, and Restrictions on Assignee	28
SECTION 8.10 Death of a Partner	28
SECTION 8.11 Repurchase of Interests in Certain Event	29
SECTION 8.12 Permissible Transfers by Limited Partners	29
SECTION 8.13 Sale of Partnership	29
ARTICLE IX RECORDS, ACCOUNTINGS AND REPORTS	29
SECTION 9.1 Books of Account	29
SECTION 9.2 Access to Records	30
SECTION 9.3 Bank Accounts and Investment of Funds	30
SECTION 9.4 Fiscal Year	30
SECTION 9.5 Accounting Reports	31
SECTION 9.6 Tax Returns	31
ARTICLE X MEETINGS AND VOTING RIGHTS OF PARTNERS	31
SECTION 10.1 Meetings	31
SECTION 10.2 Voting Rights of Partners	32
ARTICLE XI AMENDMENTS	32
SECTION 11.1 Authority to Amend by General Partner	32
SECTION 11.2 Restrictions on General Partner’s Amendments: Amendments by Limited Partners	33
SECTION 11.3 Amendments to Certificate	33
ARTICLE XII MISCELLANEOUS	34
SECTION 12.1 Revocable Limited Power of Attorney	34
SECTION 12.2 Waiver of Provisions	34
SECTION 12.3 Interpretation and Construction	34
SECTION 12.4 Governing Law	34
SECTION 12.5 Partial Invalidity	34
SECTION 12.6 Binding on Successors	34
SECTION 12.7 Notices and Delivery	34
SECTION 12.8 Counterpart Execution; Facsimile Execution	35
SECTION 12.9 Statutory Provisions	35
SECTION 12.10 Waiver of Partition	35
SECTION 12.11 Change In Law	35
SECTION 12.12 Investment Representations of the Partners	36
SECTION 12.13 Authorization and Release of Investor Representatives	37
SECTION 12.14 Referrals to Hospital and Ownership of Shares of Common Stock of MedCath Holdings, Inc. and/or MedCath Incorporated	37

ii

SECTION 12.15 Acknowledgments Regarding Legal Representation	37
SECTION 12.16 Exhibits	37

iii

AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
HARLINGEN MEDICAL CENTER, LIMITED PARTNERSHIP
A North Carolina Limited Partnership

     THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE TEXAS SECURITIES ACT IN RELIANCE UPON THE REPRESENTATION OF EACH PURCHASER OF THE SECURITIES THAT THE SAME ARE BEING ACQUIRED FOR INVESTMENT PURPOSES. THESE SECURITIES MAY ACCORDINGLY NOT BE RESOLD OR OTHERWISE TRANSFERRED OR CONVEYED IN THE ABSENCE OF REGISTRATION OF THE SAME PURSUANT TO THE APPLICABLE SECURITIES LAWS UNLESS AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP IS FIRST OBTAINED THAT SUCH REGISTRATION IS NOT THEN NECESSARY. ANY TRANSFER CONTRARY HERETO SHALL BE VOID.

     THIS AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT of Harlingen Medical Center, Limited Partnership, a North Carolina Limited Partnership is made and entered into on the                      day of July, 2007 (the “Effective Date”) by and among the Persons whose names, addresses and taxpayer identification numbers are listed on the Information Exhibit.

RECITALS

     A. The Partnership was formed in accordance with the original Limited Partnership Agreement of the Partnership by and among the General Partner and the original Investor Limited Partners (as amended by an Amendment to Limited Partnership Agreement dated July 3, 2001 and a Second Amendment to Limited Partnership Agreement dated September 26, 2001, the “Original Limited Partnership Agreement”);

     B. The Partnership owns and operates a general acute care hospital which is located in Harlingen, Texas and provides medical care and surgery services agreed upon by the General Partner and the Investor Representatives;

     C. It is intended that the hospital will continue to be a low-cost, high quality provider of medical services within the Harlingen, Texas area in a manner which is consistent with the national health care policy of lowering the costs of health care;

     D. In lieu of the procedures set forth in that certain Convertible Note Purchase Agreement (the “Convertible Note Purchase Agreement”) dated December 27, 2005 by and between the Partnership and the Hospital Limited Partner, the Hospital Limited Partner has agreed to convert certain loans made to the Partnership (the “Convertible Loans”) into the percentage Partnership Interest reflected on the Information Exhibit for the Hospital Limited Partner and to be admitted as a Limited Partner of the Partnership;

     E. The Capital Contributions, Convertible Loans and involvement of the Limited Partners are necessary to enable the Partnership to achieve its objectives; and

     F. The Partners desire to amend and restate the Original Limited Partnership Agreement to reflect the new percentage Partnership Interests set forth on the Information Exhibit, to reflect the

assignment of the general partner interest to a new General Partner, and to set forth the respective rights and obligations of the parties hereto.

     NOW THEREFORE, in consideration of the foregoing, the parties hereby amend in its entirety and restate the Original Limited Partnership Agreement to read as follows:

ARTICLE I

DEFINITIONS

     Unless otherwise indicated, capitalized words and phrases in this Limited Partnership Agreement shall have the meanings set forth in the attached Glossary of Terms.

ARTICLE II

FORMATION AND AGREEMENT OF LIMITED PARTNERSHIP

     SECTION 2.1 Partnership Formation; Effective Date.

     The Partnership was formed on June 1, 1999 upon the filing of the Certificate of Limited Partnership with the Secretary of State of North Carolina in accordance with the provisions of the Act. The General Partner shall execute or cause to be executed all other such certificates or documents, and shall do or cause to be done all such filing, recording, or other acts, as may be necessary or appropriate from time to time to comply with the requirements of law for the continuation and/or operation of a limited partnership in the State of North Carolina, and other documents to reflect the admission of additional Partners to the Partnership. Any costs incurred by the General Partner in connection with the foregoing shall be reimbursed promptly upon the completion of such action. This Agreement shall be effective as of the date set forth in the introductory paragraph hereof.

     SECTION 2.2 Name of Partnership.

     The name of the Partnership is Harlingen Medical Center, Limited Partnership.

     SECTION 2.3 Purposes and Investment Objectives.

     The principal purposes of the Partnership are as follows:

     (a) To develop, own and operate the Hospital and related facilities and provide related services, including, but not limited to, the following:

     (i) Services and facilities to meet all requirements of the State of Texas, Medicare, JCAHO and other credentialing or licensing bodies or agencies in order to have the Hospital licensed as a general acute care hospital and to perform medical and surgical services and to be eligible to obtain appropriate reimbursements therefore;

     (ii) All appropriate support services and systems; and

     (iii) Appropriate Equipment and services with respect to the facilities described above and as otherwise reasonably necessary or appropriate.

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     (b) Any other purpose reasonably related to (a) above.

     SECTION 2.4 Registered Agent and Office; Principal Place of Business.

     The registered agent and office of the Partnership shall be as indicated in the Certificate of Limited Partnership, as amended from time to time. The principal place of business of the Partnership shall be at such location in Harlingen, Texas as selected by the General Partner from time to time. The General Partner shall promptly notify the Partners of any changes in the Partnership’s registered agent, registered office, or principal place of business.

     SECTION 2.5 Commencement and Term.

     The Partnership commenced on the filing of the Certificate of Limited Partnership in the Office of the Secretary of State of North Carolina, as required by Section 2.1 hereof, and shall continue until December 31, 2060, unless sooner terminated or dissolved as provided herein; provided, however, that the termination date may be extended for up to an additional forty (40) years in five (5) year increments upon the election of the General Partner. In the event the General Partner does not elect to extend the term hereof, the Investor Representatives may instead elect to extend the term hereof, subject to the General Partner’s consent which shall not be unreasonably withheld or delayed.

ARTICLE III

PARTNERS AND CAPITAL CONTRIBUTIONS

     SECTION 3.1 Capital Contributions of Partners.

(a) The initial Capital Contributions of HHM, HPHI and the Investor Limited Partners equaled the greater of:

(i) $8,000,000.00; or

(ii) 10% of Project Costs.

(b) Such initial Capital Contribution were made as follows:

(i)	HHM owns a 1% General Partnership Interest in the Partnership and contributed to the Partnership for its General Partnership Interest at least 1% of the aggregate amount of such initial Capital Contributions.
(ii)	HPHI owns a 50% Limited Partnership Interest in the Partnership and contributed to the Partnership for its Limited Partnership Interest at least 50% of the aggregate amount of such initial Capital Contributions.
(iii)	The Investor Limited Partners own in the aggregate up to a 49% Limited Partnership Interest and contributed to the Partnership for their Limited Partnership Interest an amount equal in the aggregate to at least 49% of such initial Capital Contributions.

The specific amounts of initial Capital Contributions actually made were finally reflected in the books and records of the Partnership.

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(c)	As of the date that each original Limited Partner subscribed for a Partnership Interest, such Limited Partner made an initial Capital Contribution to the Partnership assuming that total initial Capital Contributions equaled $8,000,000.00. Once the General Partner finally determined the amount of Project Costs, if 10% of such Project Costs exceeded $8,000,000.00, then the General Partner provided written notice to all Partners thereof and informed all original Partners of any additional Capital Contribution which they were required to make to the Partnership. Upon such written request, all original Limited Partners made such additional Capital Contributions to the Partnership no later than 15 days after the date of such written notice from the General Partner.
(d)	The Hospital Limited Partner has made a capital contribution to the Partnership by conversion of a portion of the Convertible Loans as described on the Information Exhibit, in lieu of the procedures described in the Convertible Note Purchase Agreement and the Convertible Notes issued in connection therewith.
(e)	HMC Management has made a capital contribution to the Partnership by assigning to the Partnership a portion of a loan owed by HMC Realty, LLC (by assumption and assignment from the Partnership) to MedCath Finance Co., LLC, an affiliate of HMC Management, as described on the Information Exhibit. HMC Management has made a further capital contribution to the Partnership by conversion of the unassigned portion of such loan as described on the Information Exhibit.
(f)	The Partners may be liable to the Partnership for amounts distributed to them as a return of capital as provided by the Act. Partners shall not be required to contribute any additional capital to the Partnership except as provided in Section 3.5.
(g)	The Capital Contributions shall also include any additional Capital Contributions made by the Partners prior to the Effective Date.

     SECTION 3.2 Liability of Partners — For Capital.

     The liability of each Partner for capital shall be limited to the amount of its agreed Capital Contribution as a Partner as provided in Section 3.1 and Section 3.5, except that the Partners may be liable to the Partnership for amounts distributed to them as a return of capital as provided by the Act. The Partners shall not be required to contribute any additional capital to the Partnership except as provided in Section 3.5.

     SECTION 3.3 Maintenance of Capital Accounts; Withdrawals of Capital; Withdrawals from the Partnership.

     An individual Capital Account shall be maintained for each Partner in accordance with requirements of the Code and the Regulations promulgated thereunder. No Partner shall be entitled to withdraw or to make demand for withdrawal of any part of its Capital Account or to receive any distribution except as provided herein. Except as otherwise provided in this Agreement, each Partner shall look solely to the assets of the Partnership for the return of its Capital Contributions and shall have no right or power to demand or receive property other than cash from the Partnership. No Partner shall have priority over any other Partner as to the return of its Capital Contributions, distributions or allocations, except as provided in this Agreement.

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     Except as otherwise provided herein, a Partner may not withdraw from the Partnership without the written consent of the General Partner and the Majority Vote of the Investor Limited Partners and in no case shall a Partner have the right to have its Interest redeemed by the Partnership unless approved by the General Partner and by the Majority Vote of the Investor Limited Partners.

     SECTION 3.4 Interest on Capital Contributions or Capital Accounts.

     No interest shall be paid to any Partner based solely on its Capital Contributions or Capital Account. The preceding sentence shall not prevent the Partnership from earning interest on its bank accounts and investments and distributing such earnings to the Partner in accordance with Articles VI and VII.

     SECTION 3.5 Additional Funding.

     If from time to time, the General Partner reasonably determines that funds in addition to that contemplated by Sections 3.1 and 3.2 are necessary or appropriate for the development or operation of the Hospital, then:

     (a) First, the General Partner shall use commercially reasonable efforts to borrow such funds from a bank or other lender on terms and conditions reasonably acceptable to the General Partner. All loans obtained hereunder shall be subject to the approval of the Investor Representatives, which approval shall not be unreasonably withheld or delayed;

     (b) Second, if loans as provided in (a) above are not available, the General Partner may through written notice require that the Partners contribute additional capital to the Partnership pro rata according to their respective Partnership Interests, provided however, the maximum obligation for such additional Capital Contributions for HMC Management, HPHI and the Investor Limited Partners shall be limited to an additional amount equal to such Partners’ initial Capital Contribution pursuant to Section 3.1; provided further that the Hospital Limited Partner may elect whether or not to contribute its pro rata portion of such additional capital requirements but shall be diluted in the manner described in Section 3.5(c) if it elects not to contribute its pro rata portion of such additional capital requirements.

     (c) Third, if additional funds are thereafter needed by the Partnership, the General Partner shall request additional Capital Contributions from the Partners and each Partner may elect whether or not to contribute its pro rata portion of such additional capital requirements as optional Capital Contributions. The other Partners may elect to contribute optional Capital Contributions not contributed by any Partner hereunder. Thereafter, the General Partner shall reasonably adjust the percentage Partnership Interest of each Partner (based on the aggregate of all Capital Contributions made by all of the Partners in accordance with this Agreement) in the event any Partner (including the Hospital Limited Partner) elected not to make optional Capital Contributions pursuant to this Section 3.5(c) or in the event the Hospital Limited Partner elected not to make Capital Contributions pursuant to Section 3.5(b);

     (d) At any stage of the process under this Section 3.5, if additional funds are needed by the Partnership, the General Partner or one of its Affiliates may, but shall not be required to, loan all or any portion of such funds to the Partnership at the Prime Rate plus one percent (1%) per annum which loan shall be secured by the Partnership’s assets. Interest shall be paid monthly in arrears and principal shall be repaid according to a schedule to be agreed upon by the Investor Representatives and the General Partner or its Affiliate; and

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     (e) Finally, if funds are not available in accordance with (a) through (d) above, then the General Partner may elect to dissolve the Partnership.

     SECTION 3.6 Enforcement of Commitments.

     In the event any Partner (a “Delinquent Partner”) fails to make a mandatory Capital Contribution as provided in Section 3.1 or Section 3.5 or an optional Capital Contribution as agreed to by the Partner under Section 3.5 (the “Commitment”), the General Partner shall give the Delinquent Partner a Notice of the failure to meet the Commitment. If the Delinquent Partner fails to perform the Commitment (including any costs associated with the failure to meet the Commitment and interest on such obligation at the Default Interest Rate) within ten (10) business days of the giving of Notice, the General Partner may take such action, including but not limited to enforcing the Commitment in the court of appropriate jurisdiction in the state in which the principal office of the Partnership is located or the state of the Delinquent Partner’s address as then reflected in the Agreement. Each Partner expressly agrees to the jurisdiction of such courts but only for the enforcement of Commitments. The other Partners may elect to contribute additional amounts equal to any amount of the Commitment not contributed by such Delinquent Partner. The contributing Partner shall be entitled at its election to treat the amounts contributed pursuant to this Section either as a Capital Contribution or as a loan from the contributing Partner bearing interest at the Default Rate secured by the Delinquent Partner’s Interest in the Partnership. If the contributing Partner elects to contribute such amount as a Capital Contribution, the percentage Partnership Interests of the Partners shall be adjusted proportionately. Until the contributing Partner is fully repaid for such loan made as a result of the default by the Delinquent Partner and only if the contributing Partner agrees to accept repayment of such amount, the contributing Partner shall be entitled to all distributions to which the Delinquent Partner would have been entitled had such Commitment been fulfilled thereby. Notwithstanding the foregoing, no Commitment or other obligation to make an additional Capital Contribution may be enforced by a creditor of the Partnership unless the Partner expressly consents to such enforcement or to the assignment of the obligation to such creditor.

     SECTION 3.7 Tax Treatment of Conversion.

     Notwithstanding any provision herein to the contrary, the conversion, if any, of the Convertible Loans shall be treated for US federal income tax purposes in a manner that (i) is consistent with the proposed Regulations pertaining to noncompensatory partnership options published by the Treasury Department and IRS in the Federal Register on January 22, 2003 (REG-103580-02), as amended, or (ii) complies with the requirements of any final Regulations and associated guidance promulgated by the Treasury Department and IRS regarding the tax consequences associated with the Partnership’s issuance of noncompensatory partnership options, including the requirement to make any corrective allocations contemplated by proposed Regulations Section 1.704-1(b)(2)(iv)(s) (or the corresponding provision of any final Regulations and associated guidance by the Treasury Department and IRS regarding the tax consequences pertaining to noncompensatory partnership options), if and to the extent that any such final Regulations and associated guidance are applicable to any conversion of the Convertible Loans; provided, however, that (i) any elections required to be made by the Partnership or otherwise contemplated in connection with the foregoing shall be made by the Partnership only with the consent of the Hospital Limited Partner, which consent shall not be unreasonably withheld, and (ii) the Partnership and Partners shall use the remedial allocation method provided under Regulation Section 1.704-3(d) in connection with any corrective allocations contemplated by proposed Regulations Section 1.704-1(b)(2)(iv)(s) (or the corresponding provision of any final Regulations and associated guidance by the Treasury Department and IRS regarding the tax consequences pertaining to noncompensatory partnership options). The Partners acknowledge and agree that Agreed Values and Capital Accounts may be adjusted in connection with the foregoing.

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     SECTION 3.8 Limitation on Hospital Limited Partner’s Contribution Right

     Notwithstanding any provision herein to the contrary, any right herein of the Hospital Limited Partner’s to make a Capital Contribution shall be limited to the extent that a Capital Contribution would result in the Hospital Limited Partner having a percentage Partnership Interest that exceeds forty-nine percent (49%) at any time during the term of this Agreement.

ARTICLE IV

NAMES AND ADDRESSES OF PARTNERS

     The names and addresses of the Partners are as indicated on the Information Exhibit, attached hereto and as amended from time to time.

ARTICLE V

MANAGEMENT OF THE PARTNERSHIP

     SECTION 5.1 General Authority and Powers of the General Partner.

     Except as set forth in those provisions of this Agreement that specifically require the vote, consent, approval or ratification of the Partners, the General Partner shall have complete authority and exclusive control over the management of the business and affairs of the Partnership. Subject to the terms and conditions of this Agreement and except as otherwise provided herein, all Material Agreements and Material Decisions with respect to the business and affairs of the Partnership shall be approved or made by the General Partner with the consent of the Investor Representatives in accordance with Section 5.16 hereof which in all cases shall not be unreasonably withheld or delayed. No Limited Partner has the actual or apparent authority to cause the Partnership to become bound in any contract, agreement or obligation, and no Limited Partner shall take any action purporting to be on behalf of the Partnership. The General Partner shall not cause the Partnership to become bound to any contract, agreement or obligation, and the General Partner shall not take any other action on behalf of the Partnership, unless such matter has received the vote, consent, approval or ratification if, and as, required pursuant to this Agreement with respect to such matter or except as provided below with respect to the authority and actions of the General Partner.

     The day-to-day management of the business and affairs of the Partnership shall be the responsibility of the General Partner, provided, however, decisions relating to medical and clinical practice at the Hospital shall be made exclusively by the qualified medical personnel of the Hospital. Subject in all cases to the foregoing, the General Partner shall have the right and the power, if, as, and when it, from time to time, deems necessary or appropriate on behalf of the Partnership, subject only to the terms and conditions of this Agreement:

     (a) To negotiate and execute on behalf of the Partnership all documents, instruments and agreements reasonably necessary or appropriate to lease, acquire and/or construct the Hospital and/or the real property on which the Hospital is or will be located, and to borrow funds to finance such lease, acquisition and/or construction (it being acknowledged that the Hospital may be an existing building or may be a newly constructed building);

     (b) To prepare a budget for the development of the Hospital and thereafter, annual operating budgets;

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     (c) To acquire the Equipment and enter into loans or other financing arrangements therefor;

     (d) To handle the negotiation and execution of all other agreements regarding the purchase of goods or services for the Hospital;

     (e) To establish and maintain procedures for quality assurance, peer review and granting privileges to physicians with other specialties at the Hospital, subject to the terms of the Hospital and medical staff bylaws adopted for the Hospital;

     (f) To expend all or portions of the Partnership’s capital and income in furtherance of or relating to the Partnership’s business and purposes, including, but not limited to, payment of all ongoing operational expenses, payment of commissions, organization expenses, professional fees, rental fees, and management fees, and to invest in short-term debt obligations (including, but not limited to, obligations of federal and state governments and their agencies, commercial paper, and certificates of deposit of commercial banks, or savings banks or savings and loan associations) such of the Partnership’s funds as are temporarily not required for the development or operation of the Partnership and the payment of Partnership obligations; provided, that the General Partner shall establish cash management guidelines;

     (g) To employ or retain on such terms and for such compensation as the General Partner may reasonably determine, such persons, firms, or corporations as the General Partner may deem advisable, including without limitation qualified medical and other employees necessary or appropriate to operate the Hospital, attorneys, accountants, financial and technical consultants, supervisory managing agents, insurance brokers, brokers and loan brokers, appraisers, architects and engineers, who may also provide such services to the General Partner, provided that the selection of the senior administrator of the Hospital shall be a Material Decision;

     (h) To execute leases, deeds, contracts, rental agreements, construction contracts, sales agreements, and management contracts;

     (i) To exercise all rights, powers, and privileges of the Partnership as lessee with respect to the Hospital or rights held by the Partnership;

     (j) To consent to the modification, renewal, or extension of any obligations to the Partnership of any Person or of any agreement to which the Partnership is a party or of which it is a beneficiary;

     (k) To execute in furtherance of any or all of the purposes of the Partnership, any deed, lease, deed of trust, security interest, mortgage, promissory note, bill of sale, assignment, contract, or other instrument purporting to purchase or convey or encumber in whole or in part the Equipment or the Hospital or other real or personal property of the Partnership;

     (l) To prepay in whole or in part, refinance, recast, increase, modify, or extend any security interest, deed of trust, or mortgage affecting the Hospital and in connection therewith to execute any extensions or renewals thereof on the Hospital and to grant security interests in any of the Equipment or the Hospital;

     (m) To adjust, compromise, settle, or refer to arbitration any claim against or in favor of the Partnership, and to institute, prosecute, and defend any actions or proceedings relating to the Partnership, its business, and properties;

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     (n) To acquire and enter into any contract of insurance which the General Partner deems necessary or appropriate for the protection of the Partnership and the General Partner, for the conservation of the Partnership or its assets, or for any purpose beneficial to the Partnership; however, neither the General Partner nor its Affiliates shall be compensated for providing insurance brokerage services relating to obtaining such insurance;

     (o) To prepare or cause to be prepared reports, statements, and other relevant information for distribution to the Partners, including annual reports;

     (p) To open accounts and deposit and maintain funds in the name of the Partnership in banks or savings and loan associations; provided, however, that the Partnership’s funds shall not be commingled with the funds of any other Person;

     (q) To cause the Partnership to make or revoke any of the elections referred to in Section 754 of the Internal Revenue Code of 1986 as amended or any similar provisions enacted in lieu thereof;

     (r) To make all decisions related to generally accepted principles of accounting to be applied on a consistent basis and federal income tax elections;

     (s) To possess and exercise, subject to the restrictions contained in this Agreement, any and all of the rights, powers and privileges of a general partner under the Act;

     (t) To execute, acknowledge, and deliver any and all documents or instruments in connection with any or all of the foregoing;

     (u) To modify or otherwise improve the Hospital, subject to the restrictions contained in this Agreement;

     (v) To manage, direct, and guide the operation of the Hospital including all necessary acts relating thereto, other than medical or clinical matters which shall be under the direction of the Investor Representatives and other agreed upon qualified medical personnel;

     (w) To establish minimum insurance requirements for all physicians practicing at the Hospital;

     (x) To admit as Partners additional investors who have been proposed for Partner status by the General Partner and approved by the Investor Representatives, which approval shall be given or withheld in the sole and absolute discretion of the Investor Representatives;

     (y) To sell assets of the Partnership, subject to the restrictions contained in this Agreement; and

     (z) To prepare Medical Staff Bylaws (the approval of which shall constitute a Material Decision) which shall provide that the medical staff of the Hospital will be open to qualified physicians who meet the Hospital’s credentialing criteria, it being acknowledged that exclusive contracts may be entered into upon the approval of the General Partner and the Investor Representatives.

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     SECTION 5.2 Restrictions on Authority of the General Partner.

     The General Partner shall not do any of the following:

     (a) Act in contravention of this Agreement;

     (b) Act in any manner which would make it impossible to carry on the express business purposes of the Partnership;

     (c) Commingle the Partnership funds with those of any other Person;

     (d) Admit an additional General Partner, except as provided in this Agreement;

     (e) Admit an additional Partner, except as provided in this Agreement;

     (f) Alter the primary purposes of the Partnership as set forth in Section 2.3;

     (g) Possess any property or assign the rights of the Partnership in specific property for other than a Partnership purpose;

     (h) Employ, or permit the employ of, the funds or assets of the Partnership in any manner except for the exclusive benefit of the Partnership;

     (i) Make any payments of any type, directly or indirectly, to anyone for the referral of patients to the Hospital in order to use the Hospital or to provide other services; or

     (j) Sell all or substantially all of the assets of the Partnership or merge the Partnership with or into any other Entity without (i) the approval of a Majority Vote of the Investor Limited Partners and (ii) complying with the requirements of the Right of First Offer set forth on the Information Exhibit which incorporates the provisions of Article XVI of the Convertible Note Purchase Agreement, if applicable.

     SECTION 5.3 Duties of the General Partner.

     The General Partner shall do the following:

     (a) Diligently and faithfully devote such of its time to the business of the Partnership as may be necessary to properly conduct the affairs of the Partnership and, perform the duties for which it will receive a Management Fee as provided in Section 5.6(b), or otherwise, however, the General Partner shall not be required to devote its full time to such duties;

     (b) Use its best efforts to cause the Partnership to comply with such conditions as may be required from time to time to permit the Partnership to be classified for federal income tax purposes as a partnership and not as an association taxable as a corporation;

     (c) File and publish all certificates, statements, or other instruments required by law for the formation and operation of the Partnership as a limited partnership in all appropriate jurisdictions;

     (d) Cause the Partnership to obtain and keep in force during the term of the Partnership fire and extended coverage and public liability and professional liability insurance with such issuers and in such amounts as the General Partner shall deem advisable, but in

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amounts not less (and deductible amounts not greater) than those customarily maintained with respect to the business equipment and property comparable to the Partnership’s;

     (e) Have a fiduciary duty to conduct the affairs of the Partnership in the best interests of the Partnership and of the Partners, including the safekeeping and use of all funds and assets, whether or not in its immediate possession and control, and it shall not employ or permit others besides the General Partner to employ such funds or assets in any manner except for the benefit of the Partnership; and

     (f) Deliver to the Secretary of State of North Carolina for filing an annual statement in accordance with the Act and make any similar filings required under Texas law.

     SECTION 5.4 Delegation by the General Partner.

     Subject to restrictions otherwise provided herein, the General Partner may at any time employ any other Person, including Persons and Entities employed by, affiliated with, or related to the General Partner to perform services for the Partnership and its business, and may delegate all or part of their authority or control to any such other Persons, provided that such employment or delegation shall not relieve the General Partner of its responsibilities and obligations under this Agreement or under the laws of the State of North Carolina nor will it make any such Person a Partner or General Partner of the Partnership.

     SECTION 5.5 Right to Rely Upon the Authority of the General Partner.

     Persons dealing with the Partnership may rely upon the representation of the General Partner that such General Partner is a general partner of the Partnership and that such General Partner has the authority to make any commitment or undertaking on behalf of the Partnership. No Person dealing with the General Partner shall be required to determine its authority to make any such commitment or undertaking. In addition, no purchaser from the Partnership shall be required to determine the sole and exclusive authority of the General Partner to sign and deliver on behalf of the Partnership any instruments of transfer with respect thereto or to see to the application or distribution of revenues or proceeds paid or credited in connection therewith, unless such purchaser shall have received written notice from the Partnership affecting the same.

     SECTION 5.6 Partnership Expenses.

     (a) In general, the Partnership’s expenses shall be billed directly to and paid by the Partnership. The Partnership shall reimburse the General Partner or its Affiliates for: (i) all Organization Expenses incurred by the General Partner or its Affiliates in connection with the formation of the Partnership; (ii) following consultation with the Investor Representatives, the costs to the General Partner or its Affiliates of goods, services, and materials used for and by the Partnership; and (iii) all reasonable travel and other out-of-pocket expenses incurred by the General Partner in the development and management of the Partnership and its business provided that after the opening of the Hospital (i.e. the date upon which it receives preliminary Medicare and Medicaid certification) employees of the General Partner and MedCath Incorporated who are not employed full-time for the benefit of the Hospital shall not be reimbursed for their travel and other similar expenses. The parties specifically recognize that the General Partner and its Affiliates have incurred legal fees, filing fees, and other out-of-pocket costs for the benefit of the Partnership, including costs connected with the preparation of securities law and health care law compliance documentation and filings, real estate acquisition matters and formation and registration of the Partnership, and agree that the General Partner shall be reimbursed for these amounts. The reimbursement for expenses provided for in this Section 5.6(a) shall be made to the

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General Partner or their Affiliates regardless of whether any distributions are made to the Partners under Article VI and Article VII.

     (b) The Partnership shall also pay the following expenses of the Partnership:

     (i) All development and operational expenses of the Partnership, which may include, but are not limited to: the salary and related expenses of employees and staff of the Hospital, all costs of borrowed money, taxes, and assessments on the Hospital, and other taxes applicable to the Partnership; expenses in connection with the acquisition, maintenance, leasing, refinancing, operation, and disposition of the Equipment, furniture and fixtures of the Hospital (including legal, accounting, audit, commissions, engineering, appraisal, and the other fees); and the maintenance of the Hospital and its Equipment, which may be performed by the General Partner or one of its Affiliates as long as the charges to the Partnership for such service are no greater than the charges for such service from a third party service provider;

     (ii) In addition to reimbursements and other amounts due hereunder, a Management Fee shall be paid to the General Partner, which for periods prior to the opening of the Hospital for business shall equal One Hundred Twenty Thousand Dollars ($120,000.00), which amount shall be paid in full on the date the Hospital is opened, and for periods after the opening of the Hospital for business shall equal one and one-half percent (1¹/2%) of the Hospital’s Net Revenues (defined below) for a month and shall be payable monthly on or before the tenth (10th) day following the end of each month. For purposes of this Agreement, “Net Revenues” shall mean all revenues of the Hospital net of contract allowances and bad debt adjustments, all determined on a monthly basis in accordance with GAAP on an accrual basis;

     (iii) A medical director’s fee in an amount approved by the General Partner and the Investor Representatives to be paid to the medical director of the Hospital which fee shall first accrue commencing as of the date on which the Hospital is first ready to receive patients and shall be payable monthly on the last day of each month based on actual time worked at an agreed upon rate and for an agreed upon number of hours each month; and

     (iv) All fees and expenses paid to third parties for accounting, legal, documentation, professional, and reporting services to the Partnership, which may include, but are not limited to: preparation and documentation of Partnership bookkeeping, accounting and audits; preparation and documentation of budgets, cash flow projections, and working capital requirements; preparation and documentation of Partnership state and federal tax returns; and taxes incurred in connection with the issuance, distribution, transfer, registration, and recordation of documents evidencing ownership of a Partnership Interest or Economic Interest in the Partnership or in connection with the business of the Partnership; expenses in connection with preparing and mailing reports required to be furnished to the Partners or Economic Interest Owners for tax reporting or other purposes, including reports, if any, that may be required to be filed with any federal or state regulatory agencies, or expenses associated with furnishing reports to Partners which the General Partner deems to be in the best interest of the Partnership; expenses of revising, amending, converting, modifying, or terminating the Partnership or this Agreement; costs incurred in connection with any litigation in which the Partnership is involved as well as any examination, investigation, or other proceedings conducted by any regulatory agency involving the Partnership; costs of any computer equipment or services used for or by the Partnership; and the costs of preparing

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and disseminating informational material and documentation relating to a potential sale, refinancing, or other disposition of the Hospital or the Equipment.

     (c) Guarantee Fee. In the event that any Partner of the Partnership or its Affiliates provide a guarantee of any indebtedness of the Partnership which is acceptable to and required by the Partnership’s lenders (“Guarantor Partners”) and such guarantees are not provided on a pro rata basis by all other Partners of the Partnership (the “Nonguarantor Partners”), then the Guarantor Partners shall be paid an annual guarantee fee equal to (a) the amount of such indebtedness which is guaranteed by the Guarantor Partners or its Affiliates, multiplied by (b) .0075, multiplied by (c) the percentage Partnership Interest in the Partnership owned by the Nonguarantor Partners (the “Guarantee Fee”). The Guarantee Fee shall be paid quarterly and the expense thereof shall be allocated to the Nonguarantor Partners as follows:

     (i) The Guarantee Fee shall be deducted from the Cash Distributions otherwise distributable to the Nonguarantor Partners and shall be paid to the Guarantor Partners;

     (ii) To the extent that at the time such Guarantee Fee is due to be paid hereunder there are no anticipated Cash Distributions, then the Partnership shall pay such Guarantee Fee to the Guarantor Partners and the amount of such payments shall be charged to the Capital Accounts of the Nonguarantor Partners;

     (iii) When Cash Distributions (or, if necessary, liquidating distributions) become available for distribution to the Partners in the future, the Cash Distributions (or liquidating distributions) otherwise distributable to the Nonguarantor Partners shall first be retained by the Partnership to the extent that amounts were previously charged to the Capital Accounts of the Nonguarantor Partners in accordance with (ii) above and any remaining Cash Distributions (or liquidating distributions) shall be distributed to the Partners in accordance with Section 6.1 or 7.3, as appropriate.

     Loans made by MedCath Finance Company or its Affiliates to the Partnership shall be considered the provision of a guarantee of indebtedness for purposes of calculating the Guarantee Fee.

     SECTION 5.7 No Management by Limited Partners.

     The Limited Partners shall take no part in, or at any time interfere in any manner with, the management, conduct, or control of the Partnership’s business and operations and shall have no right or authority to act for or bind the Partnership except as set forth in this Agreement. The rights and powers of such Limited Partners shall not extend beyond those set forth in this Agreement and those granted under the Certificate of Limited Partnership and any attempt to participate in the control of the Partnership in a manner contrary to the rights and powers granted herein and under the Certificate of Limited Partnership shall be null and void and without force and effect. Subject to the decisions and judgment with respect to all professional medical or clinical matters of qualified medical personnel, the General Partner, in conjunction with the Investor Representatives when applicable, shall have the right to determine when and how the operations of the Partnership shall be conducted. The exercise by any Limited Partner of any of the rights granted to the Limited Partner hereunder shall not be deemed to be taking part in the control of the business of the Partnership and shall not constitute a violation of this Section.

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     SECTION 5.8 Consent by Limited Partners to Exercise of Certain Rights and Powers by the General Partner.

     By its execution hereof, each Limited Partner expressly consents to the exercise by the General Partner of the rights, powers, and authority conferred on the General Partner by this Agreement.

     SECTION 5.9 Other Business of Partners.

     (a) Subject to (b) below, any Partner, including the General Partner, may engage independently or with others in other business ventures of every nature and description, including without limitation the purchase of medical equipment, the rendering of medical services of any kind, and the making or management of other investments and neither the Partnership nor any Partner shall have any right by virtue of this Agreement or the relationship created hereby in or to such other ventures or activities or to the income or proceeds derived therefrom, and the pursuit of such ventures.

     (b) As long as any Partner owns a Partnership Interest in the Partnership, and for a period of five (5) years after a Partner ceases for any reason to own a Partnership Interest in the Partnership, other than with respect to investments made, equipment owned or services provided on or prior to March 1, 1999, all of which the Partners will disclose in writing to the General Partner upon request (a Partner may replace any such existing equipment after March 1, 1999 as long as it does not constitute a new service or facility which is otherwise restricted hereunder), neither a Partner nor any of its respective Affiliates, shall hold, directly or indirectly, an investment, ownership or other beneficial interest in (i) any hospital (ii) other Person (including a sole proprietorship) which provides any of the services or facilities to be provided by the Hospital or (iii) any outpatient surgery center, in any case within Cameron County, Texas (the “Territory”), provided that (i) no Partner who is a physician shall be prohibited from maintaining his or her staff privileges at any other hospital and (ii) nothing herein shall prohibit a Partner from owning up to three percent (3%) of the outstanding capital stock of a company whose stock is publicly traded and listed on a nationally recognized securities exchange or from investing in a publicly traded mutual fund. In addition, the General Partner or its Affiliates may separately operate a mobile catheterization laboratory within the Territory, but only if either the General Partner or an Affiliate thereof is providing such service pursuant to a lease of six (6) months or less to a provider who is already providing cath lab services or if the Investor Representatives have elected not to have such service provided by the Partnership.

     Notwithstanding the foregoing, the restrictions of this Section 5.9(b) shall not apply to the Hospital Limited Partner.

     (c) In order to ensure that the Hospital has available to it at all times leading and qualified physicians, the Partnership has entered into the Hospital Professional Services Agreements (the “Professional Services Agreements”) with the Investor Limited Partners or their medical practices (the “Practices”), which Agreements includes in paragraph 7 thereof certain covenants by the Practices and its physicians which are designed to ensure that such physicians will be available to the Hospital from time to time in order to enable it to meet its objectives of being a quality provider of medical services on a cost efficient basis. The parties acknowledge and agree that the Practices’ execution of the Professional Services Agreements is further consideration for the execution by all of the Partners of this Agreement.

     (d) The Partners, including the General Partner, have reviewed the terms, conditions and geographical restrictions included in Sections 5.9(b) and (c) and in light of the interests of the parties hereto, agree that such restrictions are fair and reasonable.

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     (e) If there is a breach or threatened breach of the provisions of this Section 5.9 of this Agreement, in addition to other remedies at law or equity, the non-breaching party shall be entitled to injunctive relief. The parties desire and intend that the provisions of this Section 5.9 shall be enforced to the fullest extent permissible under the law and public policies applied, but the unenforceability or modification of any particular paragraph, subparagraph, sentence, clause, phrase, word, or figure shall not be deemed to render unenforceable the remainder of this Section 5.9. Should any such paragraph, subparagraph, sentence, clause, phrase, word, or figure be adjudicated to be wholly invalid or unenforceable, the balance of this Section 5.9 shall thereupon be modified in order to render the same valid and enforceable and the unenforceable portion of this Section 5.9 shall be deemed to have been deleted from this Agreement.

     (f) The Partnership, the General Partner and the Limited Partners agree that the benefits to any Limited Partner hereunder do not require, are not payment for, and are not in any way contingent upon the referral, admission or any other arrangement for the provision of any item or service offered by the General Partner or the Partnership to patients of such Limited Partner in any facility, laboratory or other health care operation controlled, managed or operated by the General Partner or the Partnership and nothing herein is intended to prohibit any party from practicing medicine at any other facility.

     (g) If a Limited Partner is a legal entity and not an individual, such Limited Partner shall cause each of its existing and future Affiliates to agree in writing to be personally bound by the terms of this Section 5.9.

     SECTION 5.10 General Partner’s Standard of Care.

     The General Partner shall act in a manner it believes in good faith to be in the best interest of the Partnership and with such care as an ordinarily prudent Person in a like position would use under similar circumstances. In discharging its duties, the General Partner shall be fully protected in relying in good faith upon the records required to be maintained under this Agreement and upon such information, opinions, reports and statements by any Partners, or agents, or by any other Person as to matters the General Partner reasonably believes are within such other Person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Partnership, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, income or losses of the Partnership or any other facts pertinent to the existence and amount of assets from which distributions to Partners might properly be paid.

     Notwithstanding anything herein to the contrary, the General Partner or Partner shall have the right to vote or approve Partnership matters in accordance with the terms of this Agreement regardless of the personal interest of any Partner or the General Partner in the outcome of any vote, decision or matter.

     SECTION 5.11 Limitation of Liability.

     The General Partner shall not be liable to the Partnership, or its Partners, for any action taken in managing the business or affairs of the Partnership if it performs the duty of its office in compliance with the standard contained in Section 5.10. The General Partner has not guaranteed nor shall have any obligation with respect to the return of a Partner’s Capital Contribution or share of income from the operation of the Partnership. Furthermore, the General Partner, its Affiliates or its employees (collectively, its “Agents”) shall not be liable to the Partnership or to any Partner for any loss or damage sustained by the Partnership or any Partner except loss or damage resulting from gross negligence or intentional misconduct or knowing violation of law or a transaction for which such General Partner or Agent received a personal benefit in violation or breach of the provisions of this Agreement.

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     SECTION 5.12 Indemnification of the General Partner.

     (a) The General Partner and its Agents (as defined in Section 5.11) shall be indemnified by the Partnership against any losses, judgments, liabilities, expenses, including attorneys’ fees and amounts paid in settlement of any claims sustained by them arising out of any action or inaction of the Partner or its Agents in its capacity as the General Partner of the Partnership (or, in the case of an Agent, within the scope of the General Partner’s authority) to the fullest extent allowed by law, provided that the same were not the result of gross negligence or willful misconduct on the part of the General Partner or an Agent and provided that the General Partner or an Agent, in good faith, reasonably determined that such course of conduct was in the best interest of the Partnership; provided, however, that such indemnification and agreement to hold harmless shall be recoverable only out of Partnership assets. Subject to applicable law, the Partnership shall advance expenses incurred with respect to matters for which the General Partner may be indemnified hereunder.

     (b) If at any time, the Partnership has insufficient funds to furnish indemnification as herein provided, it shall provide such indemnification if and as it generates sufficient funds and prior to any cash distributions, pursuant to Article VI or Article VII hereof, to the Partners.

     SECTION 5.13 Election and Replacement of Investor Representatives; Appointment of Hospital Representative.

          (a) In accordance with the procedures outlined in Section 10.2 herein, the Investor Limited Partners shall elect five (5) Investor Representatives by Majority Vote of the Investor Limited Partners to serve for one year terms or until a successor is duly elected. At any time, in accordance with Section 10.2, the Investor Limited Partners may replace individual Investor Representatives and elect a new Investor Representative by Majority Vote of Investor Limited Partners to replace such Investor Representative.

          (b) The Hospital Limited Partner shall be entitled to appoint an independent nonvoting representative (the “Hospital Representative”) who shall be permitted to attend all meetings of the General Partner and the Investor Representatives; provided that the Hospital Representative shall not have access to competitive or proprietary information and shall not be permitted to attend any portion of such meetings which relates to competitive or proprietary information, in each case as determined collectively by the General Partner and the Investor Representatives in their reasonable discretion. The Partnership shall reimburse the Hospital Representative for all reasonable travel and other out-of-pocket expenses incurred by the Hospital Representative in attending meetings of the Investor Limited Partners or Investor Representatives.

     SECTION 5.14 Role of and Decisions by Investor Representatives.

     Notwithstanding anything herein to the contrary, the Investor Representatives shall take no action nor make any decision on behalf of the Partnership except to the extent they are expressly authorized to do so under this Agreement in their capacity as Investor Representatives. Except as otherwise expressly provided herein, all references to decisions to be made or objections given by the Investor Representatives shall be deemed to be made upon the affirmative vote, consent, or approval or objection of a majority of the Investor Representatives.

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     SECTION 5.15 Purchase of Goods and Services from the General Partner.

     Goods and services may be purchased from the General Partner or its Affiliates as long as they are of substantially the same quality and price as could be obtained from an unrelated third party.

     SECTION 5.16 Decisions by the General Partner.

     Except as provided in this Agreement, decisions and actions to be taken by the Partnership shall be deemed to have been made only upon the affirmative approval or consent of the General Partner and the Investor Representatives. In the event a decision, approval or consent is requested of the Investor Representatives by the General Partner, it shall be deemed to have been affirmatively made if the Investor Representatives fail to respond to any such written request therefor within five (5) days of notice thereof by the General Partner. Notwithstanding anything in this Agreement to the contrary, all decisions and actions to be made by the General Partner with respect to any loan, lease or other similar financing of the development, construction or operation of the Hospital or the Partnership’s affairs, including without limitation the decisions with respect to incurring any indebtedness or the refinancing thereof, shall be made by the General Partner and shall be subject to the consent of the Investor Representatives, which consent shall not be unreasonably withheld; provided, the application of the Partnership’s funds toward the repayment of all or a portion of any financing of the Partnership in excess of amounts then required to be paid (i.e., voluntary prepayments) shall be made only with the consent of the General Partner and the Investor Representatives. The Investor Representatives shall be deemed to have specifically approved all expenditures proposed by the General Partner that are substantially consistent with the Development Budget Exhibit or an approved operating budget when funded from additional Capital Contributions made to the Partnership by the Partners pursuant to Section 3.5 above.

     The development and annual operating budgets to be proposed by the General Partner shall be approved by the General Partner and the Investor Representatives as provided above subject to the following:

     (a) The Investor Representatives shall be deemed to have approved a development budget which is substantially consistent with the attached Development Budget Exhibit to this Agreement;

     (b) The Investor Representatives shall not unreasonably withhold its approval of budgets which are within the reasonable revenue expectations of the Hospital and which are in compliance (both as to terms and availability of financing) with agreements with the Partnership’s lenders and other parties providing financing to the Partnership; and

     (c) In the event that the General Partner and the Investor Representatives are unable to approve an annual budget, the General Partner shall be authorized to operate the Partnership under the previous year’s budget increased by the greater of 5% or the increase during the previous year in the Consumer Price Index for Medical Items until a new budget is approved.

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ARTICLE VI

DISTRIBUTIONS AND ALLOCATIONS

     SECTION 6.1 Distributions of Cash Flow from Operations and Cash from Sales or Refinancing.

     (a) Prior to the dissolution of the Partnership, Cash Flow from Operations and Cash from Sales or Refinancing, if any, remaining after repayment of any amounts then due on loans made by the Partners to the Partnership and after payment of any Cash Distributions pursuant to Section 6.7, shall be distributed annually by the Partnership as Cash Distributions following the end of such Fiscal Year. Such Cash Distributions shall be made according to the relative percentage Partnership Interests of the Partners and Economic Interest Owners.

     (b) To the extent possible, any Guarantee Fee shall be deducted from the Cash Distributions otherwise distributable to the Nonguarantor Partners pursuant to paragraph (a) of this Section 6.1 and paid to the Guarantor Partners as set forth in Section 5.6(c). Notwithstanding anything herein to the contrary, no distributions shall be made to Partners if prohibited by the Act.

     SECTION 6.2 Profits.

     Except as provided in the Regulatory Allocations Exhibit and subject to Section 6.6, Profits shall be allocated as follows:

     (a) First, to the General Partner to the extent of the amount equal to the remainder, if any, of (i) the cumulative Losses allocated to the General Partner pursuant to Section 6.3(e) for all prior Fiscal Years, less (ii) the cumulative Profits allocated to the General Partner pursuant to this Section 6.2(a) for all prior Fiscal Years;

     (b) Second, to the Limited Partners pro rata in proportion to and to the extent of the amount equal to the remainder, if any, of (i) the cumulative Losses allocated to the Limited Partners pursuant to Section 6.3(e) for all prior Fiscal Years, less (ii) the cumulative Profits allocated to the Limited Partners pursuant to this Section 6.2(b) for all prior Fiscal Years;

     (c) Third, to the Partners pro rata in proportion to and to the extent of the amount equal to the remainder, if any, of (i) the cumulative Losses allocated to the Partners pursuant to Section 6.3(d) for all prior Fiscal Years, less (ii) the cumulative Profits allocated to the Partners pursuant to this Section 6.2(c) for all prior Fiscal Years;

     (d) Fourth, to the Partners pro rata in proportion to and to the extent of the amount equal to the remainder, if any, of (i) the cumulative Losses allocated to the Partners pursuant to Section 6.3(c) for all prior Fiscal Years, less (ii) the cumulative Profits allocated to the Partners pursuant to this Section 6.2(d) for all prior Fiscal Years;

     (e) Fifth, to the Partners until the cumulative Profits allocated pursuant to this Section 6.2(e) (net of Losses allocated pursuant to Section 6.3(b)) equals the aggregate Cash Distributions made for all years with respect to which any Partner’s Cash Distributions were adjusted pursuant to Section 6.1(b), pro rata in accordance with the relative difference, with respect to each Partner, between (i) such aggregate Cash Distributions and (ii) the cumulative Profits previously allocated pursuant to this Section 6.2(e) (net of Losses allocated pursuant to Section 6.3(b)); and

     (f) Finally, all remaining Profits shall be allocated to the Partners in accordance with their percentage Partnership Interests.

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     SECTION 6.3 Losses.

     Except as provided in the Regulatory Allocation Exhibit and subject to Section 6.6, Losses shall be allocated as follows:

     (a) First, to the Partners that have been allocated Profits pursuant to Section 6.2(f) until the cumulative Losses allocated pursuant to this Section 6.3(a) equals the cumulative prior allocations of Profits pursuant to Section 6.2(f);

     (b) Second, to the Partners that have been allocated Profits pursuant to Section 6.2(e) until the cumulative Losses allocated pursuant to this Section 6.3(b) equals the cumulative prior allocations of Profits pursuant to Section 6.2(e);

     (c) Third, Losses shall be allocated to the Partners with positive Adjusted Capital Account balances in proportion to those balances;

     (d) Finally, all remaining Losses shall be allocated to the Partners in accordance with their percentage Partnership Interests.

     (e) Notwithstanding the foregoing, Losses allocated pursuant to this Section 6.3 shall not exceed the maximum amount of Losses that can be so allocated without causing any Limited Partner to have an Adjusted Capital Account deficit at the end of any Fiscal Year. In the event some but not all of the Limited Partners would have Adjusted Capital Account deficits as a consequence of an allocation of Losses pursuant to this Section 6.3, the limitation set forth in this Section 6.3(e) shall be applied on a Limited Partner-by-Limited Partner basis so as to allocate the maximum permissible Losses to each Limited Partner under Regulations Section 1.704-1(b)(2)(ii)(d). All Losses in excess of the limitations set forth in this Section 6.3(e) shall be allocated to the General Partner.

     SECTION 6.4 Code Section 704(c) Tax Allocations.

     Income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Agreed Value pursuant to any method allowable under Code Section 704(c) and the Regulations promulgated thereunder.

     In the event the Agreed Value of any Partnership asset is adjusted after its contribution to the Partnership, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take into account any variation between the adjusted basis of such asset for federal income tax purposes and its Agreed Value pursuant to any method allowable under Code Section 704(c) and the Regulations promulgated thereunder.

     Any elections or other decisions relating to allocations under this Section shall be determined by the General Partner. Absent a determination by the General Partner, and subject to the requirements of Section 3.7 hereof, the remedial allocation method under Regulation Section 1.704-3(d) shall be used. Allocations pursuant to this Section are solely for purposes of federal, state, and local taxes and shall not be taken into account in computing any Partner’s Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement.

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     SECTION 6.5 Miscellaneous.

     (a) Allocations Attributable to Particular Periods. For purposes of determining Profits, Losses or any other items allocable to any period, such items shall be determined on a daily, monthly, or other basis, as determined by the General Partner using any permissible method under Code Section 706 and the Regulations thereunder.

     (b) Other Items. Except as otherwise provided in this Agreement, all items of Partnership income, gain, loss, deduction, credit and any other allocations not otherwise provided for shall be divided among the Partners in the same proportion as they share Profits or Losses, as the case may be, for the year.

     (c) Tax Consequences; Consistent Reporting. The Partners are aware of the income tax consequences of the allocations made by this Article and by the Regulatory Allocations and hereby agree to be bound by those allocations as reflected on the information returns of the Partnership in reporting their shares of Partnership income and loss for income tax purposes. Each Partner agrees to report its distributive share of Partnership items of income, gain, loss, deduction and credit on its separate return in a manner consistent with the reporting of such items to it by the Partnership. Any Partner failing to report consistently, and who notifies the Internal Revenue Service of the inconsistency as required by law, shall reimburse the Partnership for any legal and accounting fees incurred by the Partnership in connection with any examination of the Partnership by federal or state taxing authorities with respect to the year for which the Partner failed to report consistently.

     (d) Economic Interest Owners. Each Economic Interest Owner shall be entitled to the distributions and allocations to which its predecessor in interest would have been entitled under this Article VI had it retained the Economic Interest acquired by the Economic Interest Owner.

     SECTION 6.6 Special Allocations of Guarantee Fees.

     Any and all deductions, losses or reductions to Capital Accounts attributable to the payment by the Partnership of Guarantee Fees shall be allocated to the Nonguarantor Partners in accordance with their relative percentage Partnership Interests.

     SECTION 6.7 Tax Distributions.

     The General Partner shall, to the extent permitted by applicable law, and subject to the availability of Cash Flow from Operations or Cash from Sales or Refinancing, distribute cash annually to the Partners, pro rata in accordance with the relative percentage Partnership Interests of such Partners, in an amount which is sufficient to enable them to pay income taxes which arise from allocations to them of the taxable income of the Partnership; provided, however, that the foregoing shall not require the sale of any Partnership assets or any refinancing for the purpose of making such distributions. In computing taxable income of each Partner, the taxable income of each Partner for the current year shall be reduced by any cumulative tax losses incurred in prior years (after reduction by taxable income in prior years). Such distributions shall assume for all Partners the highest combined federal and state tax rates applicable to any Partner with respect to his or its allocation of taxable income from the Partnership.

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ARTICLE VII

DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS

     SECTION 7.1 No Termination by Certain Acts of Partner.

     Neither the transfer of interest, withdrawal from the Partnership, bankruptcy, insolvency, dissolution, liquidation or other disability, nor the legal incompetency of any Partner shall result in the termination or dissolution of the Partnership or affect its continuance in any manner whatsoever.

     SECTION 7.2 Dissolution.

     The Partnership shall be dissolved upon the happening of any of the following events, whichever shall first occur:

     (a) The election by the General Partner to dissolve the Partnership in accordance with the terms of Section 3.5(f) hereof;

     (b) If there is no longer a General Partner of the Partnership, unless the Partnership is continued by the consent of not less than a majority in interest of the remaining Partners within ninety (90) days after notice of such event, effective as of the date of such event. If there is no remaining General Partner, the remaining Partners owning at least 51% of the Partnership Interests which are owned by the remaining Partners shall, if they desire to continue the Partnership, elect a Substitute General Partner who shall assume all of the rights and duties of the General Partner under this Agreement (which Substitute General Partner accepts such election);

     (c) Upon the written agreement of the General Partner and the Investor Representatives;

     (d) The expiration of the term of the Partnership as provided in Section 2.5 hereof;

     (e) The adjudication of bankruptcy of the Partnership;

     (f) In accordance with Section 12.11 hereof; and

     (g) The entry of a decree of judicial dissolution or the administrative dissolution of the Partnership as provided in the Act.

     SECTION 7.3 Dissolution and Final Liquidation.

     (a) Upon any dissolution of the Partnership, the Partnership shall not terminate, but shall cease to engage in further business except to the extent necessary to perform existing contracts and preserve the value of its assets. Its assets shall be liquidated and its affairs shall be wound up as soon as practical thereafter by the General Partner, or if for any reason there is no General Partner, by another Person designated by HPHI and a Majority Vote of the Investor Limited Partners. In winding up the Partnership and liquidating assets, the General Partner, or other Person so designated for such purpose, may arrange, either directly or through others, for the collection and disbursement to the Partners of any future receipts from the Hospital or other sums to which the Partnership may be entitled, and shall sell the Partnership’s interest in the Hospital and the Equipment to any Person, including the General Partner or any Affiliate thereof, on such terms and for such consideration as shall be consistent with obtaining the fair market

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value thereof, as such fair market value is approved by HPHI and a Majority Vote of the Investor Limited Partners.

     (b) Upon any such dissolution and liquidation of the Partnership, the net assets, if any, of the Partnership available for distribution, including any cash proceeds from the liquidation of Partnership assets, shall be applied and distributed in the following manner or order, to the extent available:

     (i) To the payment of or creation of reserves for all debts, liabilities, and obligations to all creditors of the Partnership (other than the Partners or their Affiliates) and the expenses of liquidation;

     (ii) To the payment of all debts and liabilities (including interest), and further including without limitation any accrued but unpaid Guarantee Fees, owed to the Partners or their Affiliates as creditors; and

     (iii) The balance to the Partners with positive Capital Account balances after taking into account all other adjustments during the Fiscal Year in which liquidation occurs.

     (c) The Partners intend that the allocations provided under Article VI will produce final Capital Account balances for the Partners that permit liquidating distributions pursuant to Section 7.3(b)(iii) to be made in the order and priorities set forth in Section 6.1 (after taking into account all previous distributions made to the Partners pursuant to Section 6.1). If the allocations otherwise made under Article VI would fail to produce such final Capital Account balances, the General Partner shall cause the allocations made under Article VI to be made in a manner that achieves the foregoing intent as close as possible.

     (d) The Partners shall look solely to the assets, if any, of the Partnership for any return of their Capital Contributions and, if the assets of the Partnership remaining after payment or discharge of the Partnership’s debts and liabilities, or provision therefor, are insufficient to return all or any part of the Capital Contributions, no Partner shall have any right of recourse against the General Partner or other Partners or to charge the General Partner or other Partners for any amounts except as provided herein and except to the extent otherwise provided by the Act and/or North Carolina law.

     (e) Upon such dissolution, reasonable time shall be allowed for the orderly liquidation of the assets of the Partnership and the discharge of liabilities to creditors so as to minimize the losses normally attendant to a liquidation.

     (f) The Capital Accounts of the Partners, as adjusted, shall be utilized by the Partnership for the purpose of making distributions to those Partners with positive balances in their respective Capital Accounts pursuant to Section 7.3(b). In making such distributions, the General Partner or the Person winding up the affairs of the Partnership shall distribute all funds available for distribution to the Partners and Economic Interest Owners (after establishing any reserves that the General Partner deem or the Person winding up the affairs of the Partnership deems reasonably necessary pursuant to Section 7.3(b)) prior to the later of (i) the end of the taxable year in which the event occurs which caused the termination and dissolution of the Partnership, or (ii) ninety (90) days after the occurrence of such event. The General Partner in its sole discretion, or the Person winding up the affairs of the Partnership, in its discretion, may elect to have the Partnership retain any installment obligations owed to the Partnership until collected in full so long as any portion of the reserves which are later determined to be unnecessary, and all

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collections on such installment obligations which are not deemed to be reasonably necessary by the General Partner or the Person winding up the affairs of the Partnership to add to such reserves are distributed as soon as practicable in accordance with the provisions of Section 7.3(b) as modified by this Section.

     (g) Each Economic Interest Owner shall be entitled to the distributions to which its predecessor in interest would have been entitled pursuant to this Article VII had it retained the Economic Interest acquired by the Economic Interest Owner.

     SECTION 7.4 Termination.

     Upon completion of the dissolution, winding up, distribution of the liquidation proceeds and any other Partnership assets, the Partnership shall terminate.

     SECTION 7.5 Payment in Cash.

     Any payments made to any Partner pursuant to this Article VII shall be made only in cash.

     SECTION 7.6 Goodwill and Trade Name.

     Upon the dissolution of the Partnership, the firm or trade name of the Partnership and any goodwill associated therewith shall become the sole property of the General Partner, provided that distributions and allocations otherwise due to the General Partner shall not be reduced as a result of the General Partner becoming entitled to such assets.

     SECTION 7.7 Termination of Noncompetition Covenants.

     The Partners shall have no continuing liability, or obligation under Section 5.9(b) after the second (2nd) anniversary of the dissolution of the Partnership; provided that if there is a material breach of this Agreement by the General Partner which is not cured within thirty (30) days thereafter and which results in a dissolution and termination of the Partnership, then the Investor Limited Partners shall have no further liability under Section 5.9(b) after the dissolution and termination of the Partnership.

ARTICLE VIII

REMOVAL OR WITHDRAWAL OF GENERAL PARTNER AND PARTNERS AND
TRANSFER OF PARTNERS’ PARTNERSHIP AND/OR ECONOMIC INTERESTS

     SECTION 8.1 General Partner — Transfers.

     (a) The General Partner and HPHI may sell or pledge their Partnership Interests or transfer or assign any of HMC Management’s rights and duties as a General Partner to any Person who assumes in writing HMC Management’s obligations and liabilities arising under this Agreement, except that in no event shall they sell their Partnership Interests or assign HMC Management’s rights and duties as a General Partner to any Person who owns a hospital located within three (3) miles of the Hospital without the approval by a Majority Vote of Investor Limited Partners.

     (b) No Investor Limited Partner may assign its rights to be an Investor Representative herein. Upon the withdrawal or resignation of an Investor Representative, a

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substitute therefore who must be an Investor Limited Partner, or an owner of a Limited Partner that is an Entity, may be elected by a Majority Vote of the Investor Limited Partners.

     (c) Any resignation or withdrawal by the General Partner as a general partner shall not constitute the General Partner’s withdrawal as a Partner.

     SECTION 8.2 Partners’ Right to Continue When Partnership has no General Partner.

     If at any time there is no remaining General Partner, a meeting of the Partners shall be held at the principal place of business of the Partnership within forty-five (45) days after the happening of such event to consider whether to continue the Partnership on the same terms and conditions as are contained in this Agreement (except that the General Partner may be different) and to select a General Partner for the Partnership, or whether to wind up the affairs of the Partnership, liquidate its assets and distribute the proceeds therefrom in accordance with Article VII hereof. The Partnership may be continued and a new General Partner (who accepts such appointment) selected by the Partners within ninety (90) days of the occurrence of the event described in Section 7.2(b) with respect to the last General Partner. The new General Partner shall execute, acknowledge, file or record (as appropriate) Certificate of Limited Partnership and a Limited Partnership Agreement, or amendments to those documents, and such other documents as may be required by the Act. The continuance of the Partnership pursuant to the terms of this Section 8.2 is conditioned upon (i) any amendment required by the Act of the Certificate of Limited Partnership to reflect the foregoing change and, if applicable, compliance by the Partnership with any notice provisions of the Act and (ii) delivery to the withdrawing General Partner of an indemnification agreement by the Partnership, in form and substance reasonably satisfactory to the withdrawing General Partner, indemnifying and holding the withdrawing General Partner harmless against all future liabilities of the Partnership.

     SECTION 8.3 Relationship with Substitute General Partner.

     The relationship of the Partners to any Person that has either acquired the Partnership Interest of the General Partner or has been elected as a successor General Partner as provided herein shall be governed by this Agreement. If such Person was not previously a General Partner, then such Person, as Substitute General Partner, shall have all the rights and powers of its predecessor General Partner under this Agreement; provided, such Person assumes in writing the obligations of such General Partner under this Agreement and any arising thereafter, and accepts and adopts all the terms and provisions of this Agreement in writing. The withdrawing General Partner shall be liable for all of its covenants and obligations under this Agreement for all periods prior to its withdrawal until such liability is assumed by a Substitute General Partner.

     SECTION 8.4 Investor Limited Partners — Restriction on Transfer.

     Except as otherwise set forth in this Section or in this Agreement, no Economic Interest and/or Partnership Interest of an Investor Limited Partner or any portion thereof, shall be validly sold or assigned whether voluntarily, involuntarily or by operation of law, and no purported assignee shall be recognized by the Partnership for any purpose, unless such Economic Interest and/or Partnership Interest shall have been transferred in accordance with the provisions of this Agreement and in compliance with such additional restrictions as may be imposed by the General Partner to comply with requirements imposed by any federal or state securities regulatory authority and unless the General Partner’s consent is obtained. In no event, however, shall an Investor Limited Partner transfer or sell all or any of its Economic Interest and/or Partnership Interest to (x) any Person who, if a Partner, would be in violation of Section 5.9(b) hereof or (y) any Person who owns a hospital located within three (3) miles of the Hospital without the consent of the General Partner and the Majority Vote of Investor Limited Partners. Except as otherwise set forth in this Section or in this Agreement, an Investor Limited Partner may transfer, sell or assign its

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entire Economic Interest and/or Partnership Interest if it has received the approval of the General Partner, not to be unreasonably withheld, provided however: (a) other Investor Limited Partners first for a period of fifteen (15) days, thereafter the General Partner for a period of fifteen (15) days and thereafter the Partnership for a period of fifteen (15) days shall have the right, but not the obligation, to purchase all, but not less than all, of the Economic Interest and/or Partnership Interest proposed to be transferred, which right shall be exercisable on the terms and for the purchase price set forth in writing in a bona fide offer made for the Interests by a third-party, and (b) there shall have been filed with the Partnership a duly executed and acknowledged counterpart of the instrument making such assignment signed by both the assignor and assignee and such instrument evidences the written acceptance by the assignee of all of the terms and provisions of the Agreement, represents that such assignment was made in accordance with all applicable laws and regulations and the assignee shall have represented to the Partnership in writing that it meets the investor suitability standards established by the appropriate state of residence, or, in the absence thereof, the investor suitability standards established by the Partnership. The General Partner shall use reasonable care to determine that transfers are in accordance with applicable laws and regulations, including obtaining an opinion of counsel to that effect. Any Investor Limited Partner that assigns all its Partnership Interest shall cease to be a Partner of the Partnership. Any Partnership Interests acquired by the Partnership pursuant to Section 8.4 shall, subject to applicable law, be re-offered by the Partnership to suitable investors.

     Notwithstanding anything in this Section to the contrary, in the event that any Investor Limited Partner wishes to sell his Partnership Interest to the Partnership or to another Person whether or not currently an Investor Limited Partner, the right of first refusal procedure set forth above shall not apply at the election and upon the approval of the General Partner, HPHI and the Investor Representatives. In such event, either the General Partner, HPHI and the Investor Representatives may agree on behalf of the Partnership to repurchase the Partnership Interest of the divesting Investor Limited Partner or the Partnership Interest may be sold to another Person who is otherwise a qualified investor in the Partnership and fulfills all of the obligations required of each Investor Limited Partner. The purchase price for the Partnership Interest of the divesting Investor Limited Partner shall be based upon the fair market value of the Partnership Interest as reasonably agreed upon by the General Partner and the divesting Investor Limited Partner and shall be payable according to the Payment Method, unless the General Partner, HPHI, and the Investor Representatives approve payment of the purchase price in a lump sum.

     Any dissolution, liquidation, merger (unless Investor Limited Partners or their Affiliates existing prior to such merger own at least fifty-one percent (51%) of the surviving entity after the merger or unless both parties to such merger are majority owned by parties who are Investor Limited Partners or their Affiliates prior to such merger) or sale of an Investor Limited Partner which is an Entity (a sale shall include a transfer of fifty percent (50%) or more of its ownership interests or of substantially all of its assets or any other transaction or series of related transactions intended to accomplish, in substance, a sale of such Entity) shall constitute an offer by such Investor Limited Partner to sell such Investor Limited Partner’s Interest pursuant to Section 8.4 for the Formula Purchase Price (as defined in Section 8.10 below).

     SECTION 8.5 Hospital Limited Partner — Restriction on Transfer.

     Except as otherwise set forth in this Section or in this Agreement, no Economic Interest and/or Partnership Interest of the Hospital Limited Partner or any portion thereof, shall be validly sold or assigned whether voluntarily, involuntarily or by operation of law, and no purported assignee shall be recognized by the Partnership for any purpose, unless such Economic Interest and/or Partnership Interest shall have been transferred in accordance with the provisions of this Agreement and in compliance with such additional restrictions as may be imposed by the General Partner to comply with requirements imposed by any federal or state securities regulatory authority and unless the General Partner’s consent is obtained. In no event, however, shall the Hospital Limited Partner transfer or sell all or any of its

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Economic Interest and/or Partnership Interest to any Person who, if a Partner, would be in violation of Section 5.9(b) hereof. Except as otherwise set forth in this Section or in this Agreement, the Hospital Limited Partner may transfer, sell or assign its entire Economic Interest and/or Partnership Interest if it has received the approval of the General Partner and the Investor Representatives, not to be unreasonably withheld, provided however: (a) the General Partner, HPHI and the Investor Limited Partners, on a pro rata basis, first for a period of fifteen (15) days, and thereafter the Partnership for a period of fifteen (15) days shall have the right, but not the obligation, to purchase all, but not less than all, of the Economic Interest and/or Partnership Interest proposed to be transferred, which right shall be exercisable on the terms and for the purchase price set forth in writing in a bona fide offer made for the Interests by a third-party, and (b) there shall have been filed with the Partnership a duly executed and acknowledged counterpart of the instrument making such assignment signed by both the assignor and assignee and such instrument evidences the written acceptance by the assignee of all of the terms and provisions of the Agreement, represents that such assignment was made in accordance with all applicable laws and regulations and the assignee shall have represented to the Partnership in writing that it meets the investor suitability standards established by the appropriate state of residence, or, in the absence thereof, the investor suitability standards established by the Partnership. The General Partner shall use reasonable care to determine that transfers are in accordance with applicable laws and regulations, including obtaining an opinion of counsel to that effect. Upon assigning all its Partnership Interest, the Hospital Limited Partner shall cease to be a Partner of the Partnership. Any Partnership Interests acquired by the Partnership pursuant this Section shall, subject to applicable law, be re-offered by the Partnership to suitable investors.

     Notwithstanding anything in this Section to the contrary, in the event that the Hospital Limited Partner wishes to sell its Partnership Interest to the Partnership or to another Person whether or not currently a Investor Limited Partner, the right of first refusal procedure set forth above shall not apply at the election and upon the approval of the General Partner, HPHI and the Investor Representatives. In such event, either the General Partner, HPHI and the Investor Representatives may agree on behalf of the Partnership to repurchase the Partnership Interest of the divesting Hospital Limited Partner or the Partnership Interest may be sold to another Person who is otherwise a qualified investor in the Partnership and fulfills all of the obligations required of a Limited Partner. The purchase price for the Partnership Interest of the divesting Hospital Limited Partner shall be based upon the fair market value of the Partnership Interest as reasonably agreed upon by the General Partner and the divesting Hospital Limited Partner and shall be payable according to the Payment Method, unless the General Partner, HPHI, and the Investor Representatives approve payment of the purchase price in a lump sum.

     Any dissolution, liquidation, merger (unless the Hospital Limited Partner or its Affiliates existing prior to such merger own at least fifty-one percent (51%) of the surviving entity after the merger or unless both parties to such merger are majority owned by the Hospital Limited Partner or its Affiliates prior to such merger) or sale of the Hospital Limited Partner (a sale shall include a transfer of fifty percent (50%) or more of its ownership interests or of substantially all of its assets or any other transaction or series of related transactions intended to accomplish, in substance, a sale of the Hospital Limited Partner) or any transaction that results in the ability of a third party to elect or designate a majority of the board of directors or trustees of the Hospital Limited Partner shall constitute an offer by the Hospital Limited Partner to sell its Interest pursuant to this Section 8.5 for the Formula Purchase Price (as defined in Section 8.10 below); provided, however, that upon any such event, the Partnership may elect to require the Hospital Limited Partner to require that any third party that purchases, merges with or otherwise so controls the Hospital Limited Partner or its affiliates to assume as a condition to the closing of such transaction, in writing and in a form reasonably satisfactory to the General Partner, all of the Hospital Limited Partner’s rights and obligations under this Agreement.

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     SECTION 8.6 Condition Precedent to Transfer of Economic Interest and/or Partnership Interest.

     Notwithstanding anything herein to the contrary, no transfer of an Economic Interest and/or Partnership Interest may be made if such transfer (a) constitutes a violation of the registration provisions of the Securities Act of 1933, as amended, or the registration provisions of any applicable state securities laws; (b) if after such transfer the Partnership will not be classified as a partnership for federal income tax purposes; and (c) if when taken together with other prior transfers, results in a “termination” of the Partnership for federal income tax purposes. The Partnership may require, as a condition precedent to transfer of an Economic Interest and/or Partnership Interest, delivery to the Partnership, at the proposed transferor’s expense, of an opinion of counsel satisfactory (both as to the counsel and substance of the opinion) to the General Partner that the transfer will not violate any of the foregoing restrictions.

     SECTION 8.7 Substitute Partner — Conditions to Fulfill.

     No assignee of a Partner’s Partnership Interest in the Partnership shall have the right to become a Substitute Partner in place of its assignor unless, in addition to any other requirement herein, all of the following conditions are satisfied:

     (a) The Partnership has waived its right pursuant to Section 8.4 to purchase the Partnership Interest held by the assignee;

     (b) The duly executed and acknowledged written instrument of assignment which has been filed with the Partnership sets forth that the assignee becomes a Substitute Partner in place of the assignor;

     (c) The assignor and assignee execute and acknowledge such other instruments as the General Partner may deem reasonably necessary or desirable to effect such admission, including, but not limited to, the written acceptance and adoption by the assignee of the provisions of this Agreement;

     (d) The written consent of the General Partner to such substitution is obtained, which consent may be withheld in the General Partner’s sole and absolute discretion; and

     (e) The payment by the assignee of all costs to the Partnership associated with the transaction, including but not limited to legal fees, transfer fees, and filing fees.

     SECTION 8.8 Allocations Between Transferor and Transferee.

     Upon the transfer of a Partner’s Economic Interest or Partnership Interest, all items of income, gain, loss, deduction and credit attributable to the Economic Interest or Partnership Interest so transferred shall be allocated between the transferor and the transferee in such manner as the transferor and transferee agree at the time of transfer; provided such allocation does not violate federal or state income tax law. If the General Partner, in its sole discretion, deems such laws violated, then such allocation shall be made pro rata for the fiscal year based upon the number of days during the applicable fiscal year of the Partnership that the Economic Interest or Partnership Interest so transferred was held by the transferor and transferee, without regard to the results of Partnership activities during the period in which each was the holder, or in such other manner as the General Partner deems necessary to comply with federal or state income tax laws. Distributions as called for by this Agreement shall be made to the holder of record of the Economic Interest or Partnership Interest on the date of distribution. Notwithstanding anything contained in this Agreement to the contrary, both the Partnership and the General Partner shall be entitled to treat the assignor of any assigned Economic Interest or Partnership Interest as the absolute owner

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thereof in all respects, and shall incur no liability for distributions made in good faith to such assignor in reliance on the Partnership records as they exist until such time as the written assignment has been received by, and recorded on the books of the Partnership. For purposes of this Article VIII, the effective date of an assignment of any Economic Interest or Partnership Interest shall be the last day of the month specified in the written instrument of assignment.

     SECTION 8.9 Rights, Liabilities of, and Restrictions on Assignee.

     No assignee of a Partner’s Economic Interest or Partnership Interest shall have the right to participate in the Partnership, inspect the books of account of the Partnership or exercise any other right of a Partner unless and until admitted as a Substitute Partner. Notwithstanding the General Partner’s failure or refusal to admit an assignee as a Substitute Partner, such assignee shall be entitled to receive the share of income, credit, gain, expense, loss and deduction and cash distributions provided hereunder that is assigned to it, and, upon demand, may receive copies of all reports thereafter delivered pursuant to the requirements of this Agreement; provided, the Partnership shall have first received notice of such assignment and all required consents thereto shall have been obtained and other conditions precedent to transfer thereof shall have been satisfied. The Partnership’s tax returns shall be prepared to reflect the interests of assignees as well as Partners.

     SECTION 8.10 Death of a Partner.

     Heirs of Partners shall be entitled to inherit the Partnership Interests of a deceased Investor Limited Partner or of an Investor Limited Partner owned by an individual who has deceased, provided that upon such death such interests shall be automatically converted to an Economic Interest only in the Partnership until such heir agrees in writing to all of the terms and conditions of this Agreement and such other reasonable terms as may be established by the General Partner as a condition to such heir becoming an Investor Limited Partner, in which event such interest shall again become a Partnership Interest in the Partnership. Notwithstanding the previous sentence at any time within nine (9) months of the death of an Investor Limited Partner (or of an individual that owns such Investor Limited Partner) the other Investor Limited Partners for a period of fifteen (15) days following written notice to them, thereafter the General Partner for a period of fifteen (15) days and thereafter the Partnership for a period of fifteen (15) days shall have the option to purchase the Partnership Interest of the deceased Investor Limited Partner or of an Investor Limited Partner owned by an individual who has deceased, and the estate of the deceased individual shall be obligated to sell such Partnership Interest to the other Partners or the Partnership, in accordance with the terms of this Section 8.9. The other Partners or the Partnership must exercise their option by giving written notice thereof to the estate of the deceased Partner, or the appropriate representative thereof, within the time periods set forth above and in all events within such nine (9) month period. The purchase price for such Partnership Interest shall equal the greater of (i) five (5) multiplied by the net income (as reasonably determined by the Partnership’s accountants) of the Partnership for the twelve (12) month period ending as of the calendar quarter most recently ended prior to the death of such Partner multiplied by the percentage Partnership Interest of such Partner in the Partnership (the “Formula Purchase Price”); (ii) the Capital Contributions of the applicable Investor Limited Partner less all amounts distributed to the applicable Investor Limited Partner by the Partnership and (iii) the fair market value of such applicable Investor Limited Partner’s Partnership Interest determined by an independent appraiser reasonably selected by the General Partner provided that the expenses thereof shall be deducted from the proceeds of such sale. The purchase price shall be paid (the “Payment Method”) in three (3) equal annual installments, the first third of which shall be paid upon the determination of the purchase price and the remaining two (2) installments of which shall be paid on the first and second anniversary of such date. The outstanding amounts due from the Partnership to the estate of the deceased Partner shall bear interest at Prime Rate as of the date of such Partner’s death. Accrued interest shall be paid as of the dates payments of principal are due as provided above.

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     SECTION 8.11 Repurchase of Interests in Certain Event.

     (a) In the discretion of the General Partner, the Partnership may, but is not obligated to, repurchase a Partner’s Economic Interest or Partnership Interest upon such Partner’s breach of the Partner’s obligations contained in Article III, Sections 5.9, 8.1(b), 8.4, 8.9, 12.1 and 12.11 of this Agreement.

     (b) Each Partner agrees to sell its Partnership Interest to the Partnership in the event the General Partner elects to exercise the right of repurchase granted under Section 8.10(a) and the purchase price shall be the lower of (x) the Capital Contributions of the Partner less all amounts distributed to such Partner by the Partnership and (y) the Formula Purchase Price.

     SECTION 8.12 Permissible Transfers by Limited Partners.

     Notwithstanding anything in this Agreement to the contrary, one or more Limited Partners may elect within ninety (90) days of the Effective Date or, if not Limited Partners on the Effective Date, within thirty (30) days after acquiring a Partnership Interest in the Partnership, to assign its or their Partnership Interests to a corporation, limited liability company or limited partnership formed and maintained for the sole purpose of holding such Partnership Interests if such assignee is owned by the assigning Limited Partner(s) or such assignee’s owners are substantially identical to the owners of such Limited Partner(s) as long as such assignee and its Affiliates agree in writing to be bound by all the terms and conditions of this Agreement and the General Partner first approves in writing the terms of all documents creating and constituting such Entity.

     SECTION 8.13 Sale of Partnership.

     For so long as the Hospital Limited Partner retains its Partnership Interest, the Hospital Limited Partner shall have a right of first offer to purchase the Hospital or the controlling equity interests of the Partnership if the Partnership or the Partners other than the Hospital Limited Partner determine to market the Hospital or a controlling interest in the Partnership for sale. The Partnership or the Partners other than the Hospital Limited Partner, as the case may be, shall give written notice of their desire to sell the Hospital or a controlling interest in the Partnership, as the case may be, and the Hospital Limited Partner and the Partnership or the Partners other than the Hospital Limited Partner, as the case may be, shall negotiate in good faith for up to forty-five (45) days after receipt of such notice regarding the terms of such purchase and sale. If the Hospital Limited Partner and the Partnership (or the Partners other than the Hospital Limited Partner) are unable to agree to terms of the purchase and sale within such forty-five (45)-day period, the Partnership (or the Partners other than the Hospital Limited Partner) shall be permitted to sell the Hospital or a controlling interest in the Partnership to a third party on commercially reasonable terms.

ARTICLE IX

RECORDS, ACCOUNTINGS AND REPORTS

     SECTION 9.1 Books of Account.

     At all times during the continuance of the Partnership, the General Partner shall maintain or cause to be maintained true and full financial records and books of account showing all receipts and expenditures, assets and liabilities, income and losses, and all other records necessary for recording the Partnership’s business and affairs including those sufficient to record the allocations and distributions required by the provisions of this Agreement.

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     SECTION 9.2 Access to Records.

     The books of account and all documents and other writings of the Partnership, including the Certificate of Limited Partnership and any amendments thereto, shall at all times be kept and maintained by the General Partner or, if required by law, at the registered office of the Partnership. Each Partner or its designated representatives shall, upon reasonable notice to the General Partner, be granted access to such financial and accounting books, records and other documents and writings during reasonable business hours and shall have the right to inspect and make copies of any of such books, records and other documents and writings, which information may be used solely in connection with such Partner’s investment in the Partnership. In addition to the foregoing rights, any one or more Limited Partners holding in the aggregate twenty percent (20%) of the Partnership Interests shall have the right to retain, at their sole cost and expense and upon reasonable notice to the General Partner, a firm of independent certified public accountants to review and/or audit the financial and accounting books and records of the Partnership, the results of which may be used solely in connection with such Limited Partners’ investment in the Partnership.

     SECTION 9.3 Bank Accounts and Investment of Funds.

     (a) the General Partner shall open and maintain, on behalf of the Partnership, a bank account or accounts in a federally insured bank or savings institution as it shall determine, in which all monies received by or on behalf of the Partnership shall be deposited. All withdrawals from such accounts shall be made upon the signature of such Person or Persons as the General Partner may from time to time designate.

     (b) Any funds of the Partnership which the General Partner may determine are not currently required for the conduct of the Partnership’s business may be deposited with a federally insured bank or savings institution or invested in short-term debt obligations (including obligations of federal or state governments and their agencies, commercial paper, certificates of deposit of commercial banks, savings banks or savings and loan associations) as shall be determined by the General Partner in its sole discretion.

SECTION 9.4 Fiscal Year.

The Fiscal Year and accounting period of the Partnership shall end on September 30 of each year.

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     SECTION 9.5 Accounting Reports.

     As soon as reasonably practicable after the end of each fiscal year but in no event later than 120 days after the end thereof, each Partner shall be furnished an annual accounting showing the financial condition of the Partnership at the end of such fiscal year and the result of its operations for the fiscal year then ended, which annual accounting shall be prepared on an accrual basis in accordance with generally accepted accounting principles applied on a consistent basis and shall be delivered to each of the Partners promptly after it has been prepared. It shall include a balance sheet as of the end of such Fiscal Year and statements of income and expense, each Partner’s equity, and cash flow for such Fiscal Year. At the General Partner’s election the Partnership shall either be audited or such annual accountings shall be either reviewed or compiled by a firm of independent certified public accountants engaged by the General Partner on behalf of the Partnership. The report shall set forth the distributions to the Partners for such Fiscal Year and shall separately identify distributions from (i) operating revenue during such Fiscal Year, (ii) operating revenue from a prior period which had been held as reserves, (iii) proceeds from the sale or refinancing of the Equipment, and (iv) unexpended proceeds received from the sale of Partnership Interests. Following the opening of the Hospital, the General Partner shall also cause to be prepared and distributed to the Partners quarterly financial statements following the General Partner’s public announcement of its results for such quarter in a form and containing such information as reasonably determined by the General Partner.

     SECTION 9.6 Tax Returns.

     The General Partner shall cause income tax returns for the Partnership to be prepared, at Partnership expense, and timely filed with the appropriate authorities. As soon as is reasonably practicable, and in any event on or before the expiration of 75 days following the end of each Fiscal Year, each Partner shall be furnished with a statement to be used in the preparation of the Partner’s tax returns, showing the amounts of any Profits or Losses allocated to the Partner, and the amount of any distributions made to the Partner, pursuant to this Agreement, along with a reconciliation of the annual report with information furnished to Partners for income tax purposes.

ARTICLE X

MEETINGS AND VOTING RIGHTS OF PARTNERS

     SECTION 10.1 Meetings.

     (a) Meetings of the Partners of the Partnership for any purpose may be called by the General Partner, any Investor Representative or by Limited Partners holding in the aggregate ten percent (10%) of the Partnership Interests. Such request shall state the purpose of the proposed meeting and the matters proposed to be acted upon thereat. Such meetings shall be held in the Harlingen, Texas area.

     (b) A notice of any such meeting shall be given by mail, not less than fifteen (15) days nor more than sixty (60) days before the date of the meeting, to each Partner at its address as specified in Section 12.7. Such notice shall be in writing, and shall state the place, date and hour of the meeting, and shall indicate that it is being issued at or by the direction of the General Partner or by the Limited Partners, as the case may be. The notice shall state the purpose or purposes of the meeting. If a meeting is adjourned to another time or place, and if any announcement of the adjournment of time or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting.

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     (c) Each Partner may authorize any Person or Persons to act for the Partner by proxy in all matters in which a Partner is entitled to participate, whether by waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Partner or its attorney-in-fact. No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Partner executing it.

     SECTION 10.2 Voting Rights of Partners.

     (a) Each Partner shall take no part in or interfere in any manner with the control, conduct or operation of the Partnership, and shall have no right or authority to act for or bind the Partnership except as provided herein. Votes or decisions, to the extent taken or to be made, of the Partners may be cast at any duly called meeting of the Partnership or in writing within ten (10) days after written request therefor. Each Partner shall be entitled to the number of votes equal to the percentage Partnership Interest of such Partner.

     (b) No Partner shall have the right or power to vote to: (i) withdraw or reduce the Partner’s Capital Contributions except as a result of the dissolution and liquidation of the Partnership or as otherwise provided by law or this Agreement; (ii) bring an action for partition against the Partnership; (iii) cause the termination and dissolution of the Partnership by court decree or otherwise, except as set forth in this Agreement; or (iv) demand or receive property other than cash in return for its Capital Contributions.

     (c) The Hospital Limited Partner shall not be entitled to vote (i) on any matter if counsel for the Partnership reasonably determines that the exercise of such voting rights would be reasonably likely to violate any laws or regulations applicable to the ownership or operation of hospitals in general and the Hospital, in particular; (ii) on any proposed transaction, bid or other matter with respect to which the Hospital is (or is reasonably likely to be) a competitor of the Hospital Limited Partner or any of its Affiliates; or (iii) on any matter that relates to contracts or arrangements between the Partnership and the Hospital Limited Partner or its affiliates.

ARTICLE XI

AMENDMENTS

     SECTION 11.1 Authority to Amend by General Partner.

     Except as otherwise provided by Section 11.2, this Agreement and the Certificate of Limited Partnership of the Partnership may be amended by the General Partner with the approval of the Investor Representatives which approval shall not be unreasonably withheld or delayed:

     (a) To admit additional Partners or Substitute Partners but only in accordance with and if permitted by the other terms of this Agreement;

     (b) To preserve the legal status of the Partnership as a limited partnership under the Act or other applicable state or federal laws if such does not change the substance hereof, and the Partnership has obtained the written opinion of its counsel to that effect;

     (c) To cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, to clarify any provision of this Agreement, or to

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make any other provisions with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement;

     (d) To satisfy the requirements of the Code and Regulations with respect to limited partnerships or of any federal or state securities laws or regulations, provided such amendment does not adversely affect the Partnership Interests of Partners and is necessary or appropriate in the written opinion of counsel and any amendment under this subsection (d) shall be effective as of the date of this Agreement;

     (e) To the extent that it can do so without materially reducing the economic return on investment in the Partnership to any Partner, to satisfy any requirements of federal or state legislation or regulations, court order, or action of any governmental administrative agency with respect the operation or ownership of the Hospital;

     (f) Subject to the terms of Section 2.5, to extend the term of the Partnership; and

     (g) Upon written notice to all Partners, the General Partner may elect to create a governing body of up to nine (9) members to serve as the governing body of the Hospital. In such event, the governing body members shall include, in addition to the General Partner or its designee, the president or chief executive officer of the Hospital who shall be designated by the General Partner and three (3) additional General Partners elected from time to time by the Investor Limited Partners one of whom must be the medical director of the hospital. The remaining members of the governing body shall be elected from time to time by the General Partner. The General Partner may delegate to such governing body such duties and responsibilities of the General Partner as the General Partner deems necessary or appropriate. Notwithstanding the foregoing, in the event the governing body is so created, the Investor Limited Partners shall continue to have the right to elect Investor Representatives who shall be designated to make decisions which are specifically authorized to be made by the Investor Representatives under this Agreement and the General Partner shall continue to have the right to make decisions with respect to matters which are reserved for the General Partner at the time the number of General Partners is so expanded.

     SECTION 11.2 Restrictions on General Partner’s Amendments: Amendments by Limited Partners.

     Except as provided in Section 11.1, amendments to this Agreement shall be made only upon the consent of the General Partner, HPHI and with a Majority Vote of Investor Limited Partners; provided that any amendment to this Agreement that would amend the rights of the Hospital Limited Partner expressly set forth in this Agreement in any material manner shall also require the consent of the Hospital Limited Partner. Except as set forth in this Section 11.2, no amendment shall be made pursuant to Section 11.1 which would materially and adversely affect the federal income tax treatment to be afforded each Partner, materially and adversely affect the Partnership Interests and liabilities of each Partner as provided herein, materially change the purposes of the Partnership, extend or otherwise modify the term of the Partnership, or materially change the method of allocations and distributions as provided in Article VI and Article VII.

     SECTION 11.3 Amendments to Certificate.

     In making any amendments to this Agreement, there shall be prepared, executed and filed for recording by the General Partner such documents amending the Certificate of Limited Partnership as required under the Act.

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ARTICLE XII

MISCELLANEOUS

     SECTION 12.1 Revocable Limited Power of Attorney.

     Upon the execution hereof, each Limited Partner hereby revocably constitutes and appoints the General Partner as its true and lawful attorney in the Limited Partner’s name and on the Limited Partner’s behalf to take at any time all such action which the General Partner is expressly authorized to perform, or which a Limited Partner is expressly required to perform, under this Agreement.

     SECTION 12.2 Waiver of Provisions.

     The waiver of compliance at any time with respect to any of the provisions, terms or conditions of this Agreement shall not be considered a waiver of such provision, term or condition itself or of any of the other provisions, terms or conditions hereof.

     SECTION 12.3 Interpretation and Construction.

     This Agreement contains the entire agreement among the Partners and any modification or amendment hereto must be accomplished in accordance with the provisions of Article XI and Article XII. Where the context so requires, the masculine shall include the feminine and the neuter, and the singular shall include the plural. The headings and captions in this Agreement are inserted for convenience and identification only and are in no way intended to define, limit or expand the scope and intent of this Agreement or any provision thereof. The references to Section and Article in this Agreement are to the Sections and Articles of this Agreement.

     SECTION 12.4 Governing Law.

     This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, exclusive of its conflict of law rules.

     SECTION 12.5 Partial Invalidity.

     In the event that any part or provision of this Agreement shall be determined to be invalid or unenforceable, the remaining parts and provisions of said Agreement which can be separated from the invalid or unenforceable provision and shall continue in full force and effect.

     SECTION 12.6 Binding on Successors.

     The terms, conditions and provisions of this Agreement shall inure to the benefit of, and be binding upon the parties hereto and their respective heirs, successors, distributees, legal representatives, and assigns. However, none of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Partnership.

     SECTION 12.7 Notices and Delivery.

     (a) To Partners. Any notice to be given hereunder at any time to any Partner or any document reports or returns required by this Agreement to be delivered to any Partner, may be delivered personally or mailed to such Partner, postage prepaid, addressed to the Partner at such times as the Partner shall by notice to the Partnership have designated as the Partner’s address for

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the mailing of all notices hereunder or, in the absence of such notice, to the address set forth in Article IV hereof. Any notice, or any document, report or return so delivered or mailed shall be deemed to have been given or delivered to such Partner at the time it is mailed, as the case may be.

     (b) To the Partnership. Any notice to be given to the Partnership hereunder shall be delivered personally or mailed to the Partnership, by certified mail, postage prepaid, addressed to the Partnership at its registered office. Any notice so delivered or mailed shall be deemed to have been given to the Partnership at the time it is delivered or mailed, as the case may be.

     SECTION 12.8 Counterpart Execution; Facsimile Execution.

     This Agreement may be executed in any number of counterparts with the same effect as if all of the Partners had signed the same document. Such executions may be transmitted to the Partnership and/or the other Partners by facsimile and such facsimile execution shall have the full force and effect of an original signature. All fully executed counterparts, whether original executions or facsimile executions or a combination, shall be construed together and constitute one and the same agreement.

     SECTION 12.9 Statutory Provisions.

     Any statutory reference in this Agreement shall include a reference to any successor to such statute and/or revision thereof.

     SECTION 12.10 Waiver of Partition.

     Each party does hereby waive any right to partition or the right to take any other action which might otherwise be available to such party for the purpose of severing its relationship with the Partnership or such party’s interest in the assets held by the Partnership from the interests of other Partners until the end of the term of both this Partnership and any successor partnership formed pursuant to the terms hereof.

     SECTION 12.11 Change In Law.

     If due to any new law, rule or regulation, or due to an interpretation or enforcement of any existing law, rule or regulation, health care counsel reasonably selected by the General Partner determines in writing that it is reasonably likely that the relationships established between any of the parties to this Agreement including any of their Affiliates and/or successors or assigns will not comply with any law, rule, regulation or interpretation thereof (“Applicable Law”), then the parties hereto hereby agree first, to negotiate in good faith to restructure the relationships established under this Agreement so as to bring them into compliance with such applicable laws while at the same time preserving the material benefits of each of the parties hereto. In the event that a specific proposal for the restructuring of this Agreement is approved by the General Partner and a Majority Vote of Investor Limited Partners, such restructured agreement shall become binding upon all Partners of the Partnership. Second, in the event that within forty-five (45) days following the Partnership’s receipt of legal advice in writing from such health care counsel regarding Applicable Law the parties hereto are unable to negotiate an acceptable restructuring of their relationship, then the General Partner shall have the option, within the following forty-five (45) day period, to purchase the Partnership Interests of some or all of the Limited Partners whose ownership is involved with such noncompliance with Applicable Law for a purchase price equal to the greater of: (a) the Formula Purchase Price or (b) the amount of the Capital Contributions made by each such Partner to the Partnership together with interest thereon computed at the Prime Rate as of the date of this Agreement from the date of such contribution through the date upon which the General Partner pays all amounts due under the terms of this Section 12.11. For these purposes, distributions to the Partners by the Partnership

35

after the effective date of this Agreement (and whether before or after health care counsel determined there was a problem under an Applicable Law or before or after the exercise of the purchase option) shall be treated as payments by the General Partner. Such purchase price shall be paid in accordance with the Payment Method. Third, in the event that the General Partner does not exercise its option to purchase Partnership Interests of a Partner whose ownership causes the Partnership not to be in compliance with Applicable Law, such Partners may elect in writing within the following forty-five (45) day period, to require that the Partnership be dissolved, in which event the Partnership shall be dissolved in accordance with the terms of this Agreement.

     SECTION 12.12 Investment Representations of the Partners.

     (a) Each Partner or individual executing this Agreement on behalf of an Entity which is a Partner hereby represents and warrants to the Partnership and to the Partners that such Partner has acquired such Partner’s Partnership Interest in the Partnership for investment solely for such Partner’s own account with the intention of holding such Partnership Interest for investment, without any intention of participating directly or indirectly in any distribution of any portion of such Partnership Interest, including an Economic Interest, and without the financial participation of any other Person in acquiring such Partnership Interest in the Partnership.

     (b) Each Partner or individual executing this Agreement on behalf of an entity which is a Partner hereby acknowledges that such Partner is aware that such Partner’s Partnership Interest in the Partnership has not been registered (i) under the Securities Act of 1933, as amended (the “Federal Act”), (ii) under applicable Texas securities laws, or (iii) under any other state securities laws. Each Partner or individual executing this Agreement on behalf of an Entity which is a Partner further understands and acknowledges that his representations and warranties contained in this Section are being relied upon by the Partnership and by the Partners as the basis for the exemption of the Partners’ Partnership Interest in the Partnership from the registration requirements of the Federal Act and from the registration requirements of applicable Texas securities laws and all other state securities laws. Each Partner or individual executing this Agreement on behalf of an Entity which is a Partner further acknowledges that the Partnership will not and has no obligation to recognize any sale, transfer, or assignment of all or any part of such Partner’s Partnership Interest, including an Economic Interest in the Partnership to any Person unless and until the provisions of this Agreement hereof have been fully satisfied.

     (c) Each Partner or individual executing this Agreement on behalf of an Entity which is a Partner hereby acknowledges that prior to his execution of this Agreement, such Partner received a copy of this Agreement and that such Partner has examined this Agreement or caused this Agreement to be examined by such Partner’s representative or attorney. Each Partner or individual executing this Agreement on behalf of an Entity which is a Partner hereby further acknowledges that such Partner or such Partner’s representative or attorney is familiar with this Agreement and with the Partnership’s business plans. Each Partner or individual executing this Agreement on behalf of an Entity which is a Partner acknowledges that such Partner or such Partner’s representative or attorney has made such inquiries and requested, received, and reviewed any additional documents necessary for such Partner to make an informed investment decision and that such Partner does not desire any further information or data relating to the Partnership or to the Partners. Each Partner or individual executing this Agreement on behalf of an Entity which is a Partner hereby acknowledges that such Partner understands that the purchase of such Partner’s Partnership Interest in the Partnership is a speculative investment involving a high degree of risk and hereby represents that such Partner has a net worth sufficient to bear the economic risk of such Partner’s investment in the Partnership and to justify such Partner’s investing in a highly speculative venture of this type.

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     SECTION 12.13 Authorization and Release of Investor Representatives.

     Each of the Investor Limited Partners hereby authorizes the Investor Representatives to make the decisions to be made by the Investor Representatives hereunder and hereby release and hold harmless the Investor Representatives from any and all claims, liabilities, losses or damages which any of them may have now or in the future resulting from any decision made by the Investor Representatives hereunder unless due to the gross negligence or willful misconduct of such Investor Representative.

     SECTION 12.14 Referrals to Hospital and Ownership of Shares of Common Stock of MedCath Holdings, Inc. and/or MedCath Incorporated.

     Each Limited Partner agrees that if in the reasonable opinion of health care counsel to the General Partner or its Affiliates, referrals of patients to the Hospital by the Limited Partner or ownership of shares of common stock in MedCath Holdings, Inc. and/or MedCath Incorporated by the Limited Partner would cause or constitute a violation of any federal or state law, rule or regulation, then, as applicable,

     (a) the Limited Partner shall not refer patients to the Hospital; and

     (b) the Limited Partner shall not acquire, nor continue to own any of shares of common stock of MedCath Holdings, Inc. and/or MedCath Incorporated.

     SECTION 12.15 Acknowledgments Regarding Legal Representation.

     Each of the Partners hereunder acknowledge and agree that Moore & Van Allen, PLLC is counsel for the General Partner and its Affiliates, and may also serve as counsel for the Partnership from time to time. Each of the Partners hereby acknowledges and consents to such representation. Each Partner other than the General Partner further acknowledges and agrees that it shall have no attorney-client relationship with Moore & Van Allen, PLLC as a result of Moore & Van Allen, PLLC’s representation of the Partnership from time to time. Each Partner further consents to Moore & Van Allen’s representation of the Partnership to the extent such firm is requested to do so by the General Partner.

     SECTION 12.16 Exhibits.

     The Exhibits to this Agreement, each of which is incorporated by reference, are:

EXHIBIT A:	Certificate of Limited Partnership.
EXHIBIT B:	Information Exhibit.
EXHIBIT C:	Glossary of Terms.
EXHIBIT D:	Development Budget Exhibit.
EXHIBIT E:	Regulatory Allocations.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the following execution page(s), to be effective as of the date hereof.

[EXECUTIONS APPEAR ON THE FOLLOWING PAGES]

37

EXECUTION PAGE
TO THE
AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF
HARLINGEN MEDICAL CENTER, LIMITED PARTNERSHIP
A North Carolina Limited Partnership

GENERAL PARTNER:

HMC MANAGEMENT COMPANY, LLC

By:

Title:

LIMITED PARTNERS:

HARLINGEN PARTNERSHIP HOLDINGS, INC.

By:

Title:

VALLEY BAPTIST MANAGEMENT SERVICES CORPORATION

By:

Title:

38

For the purpose of acknowledging and agreeing to be bound by the terms of Section 5.9 hereof, the undersigned Affiliates of the Partners other than the General Partner and HPHI hereby execute this Amended and Restated Limited Partnership Agreement.

By:

Title:

By

Title:

39

EXHIBIT A
TO THE
AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF
HARLINGEN MEDICAL CENTER, LIMITED PARTNERSHIP
A North Carolina Limited Partnership

[SEE ATTACHED]

Certificate of Domestic Limited Partnership

EXHIBIT B
TO THE
AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF
HARLINGEN MEDICAL CENTER, LIMITED PARTNERSHIP
A North Carolina Limited Partnership

INFORMATION EXHIBIT

				Additional
	Initial Capital*			Capital	Percentage
Name, Address & TIN	Contribution			Contributions	Partnership Interest
GENERAL PARTNER:
HMC Management Company, LLC. 7621 Little Avenue, Suite 106 Charlotte, NC 28226	$	80,000	$	1,472,304 (Note 1)		3.42	%
LIMITED PARTNERS:
Harlingen Partnership Holdings, Inc. 7621 Little Avenue, Suite 106 Charlotte, NC 28226	$	4,000,000				32.58	%
Investor Limited Partners	$	3,920,000				31.90	%
Valley Baptist Management Services Corporation			$	17,055,400 (Note 2)		32.10	%

Notes:

(1)	HMC Management has made or caused to be made a capital contribution of a portion of an obligation payable by HMC Realty, LLC, in the principal amount of $317,696, and has agreed to convert a portion of a loan obligation in the principal amount of $1,154,607 owed by the Partnership to HMC Management or an affiliate to general partnership interest in the Partnership.
(2)	The Hospital Limited Partner has agreed to convert a portion of a loan obligation in the principal amount of $17,055,393 owed by the Partnership to an affiliate of the Hospital Limited Partner to limited partnership interest in the Partnership.

Sale of Hospital; Right of First Offer
(formerly Article XVI of the Convertible Note Purchase Agreement)

     The Partnership hereby agrees it will not pursue the sale of the Hospital or a controlling interest in the Partnership during the period from December 27, 2005 to December 27, 2008 unless approved by the partners of the Partnership and Hospital Limited Partner; provided, however, that nothing herein will prohibit a sale of a controlling interest in HPH or its parent, MedCath or its Affiliates (other than the Partnership) or a sale of substantially all of the assets of HPH or MedCath or its Affiliates (other than the Partnership). After December 27, 2008, for so long as Hospital Limited Partner owns the Partnership Interest, Hospital Limited Partner shall have a right of first offer to purchase the Hospital or the equity interests of the Partnership if the partners of the Partnership determine to market the Hospital or a controlling interest in the Partnership for sale. The Partnership or the partners of the Partnership, as the case may be, shall give written notice of their desire to sell the Hospital or a controlling interest in the Partnership, as the case may be, and Hospital Limited Partner and the Partnership or the partners of the Partnership, as the case may be, shall negotiate in good faith for up to forty-five (45) days after receipt of such notice regarding the terms of such purchase and sale. If Hospital Limited Partner and the Partnership (or the partners) are unable to agree to terms of the purchase and sale within such forty-five (45)-day period, the Partnership (or the partners) shall be permitted to sell the Hospital or a controlling interest in the Partnership to a third party on commercially reasonable terms.

EXHIBIT C
TO THE
AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF
HARLINGEN MEDICAL CENTER, LIMITED PARTNERSHIP
A North Carolina Limited Partnership

GLOSSARY OF TERMS

     As used in this Agreement, the following terms shall have the following definitions (unless otherwise expressly provided herein).

     “Act” means the North Carolina Revised Uniform Limited Partnership Act, as in effect in North Carolina and set forth at N.C. Gen. Stat. §§ 59-101 through 59-1106 (or any corresponding provisions of succeeding law).

     “Adjusted Capital Account” means, with respect to any Partner or Economic Interest Owner, such Person’s Capital Account (as defined below) as of the end of the relevant Fiscal Year increased by any amounts which such Person is obligated to restore, or is deemed to be obligated to restore pursuant to the next to last sentences of Regulations Section 1.704-2(g)(1) (share of minimum gain) and Regulations Section 1.704-2(i)(5) (share of partner nonrecourse debt minimum gain) and decreased by the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6).

     “Affiliate” means with respect to a Person, (i) any relative of such Person; (ii) any officer, director, trustee, partner, manager, employee or holder of ten percent (10%) or more of any class of the outstanding voting securities or of an equity interest of such Person; or (iii) Entity or holder of ten percent (10%) or more of the outstanding voting securities or of an equity interest of any Entity, controlling, controlled by, or under common control with such Person.

     “Agreed Value” means with respect to any noncash asset of the Partnership an amount determined and adjusted in accordance with the following provisions:

     (a) The initial Agreed Value of any noncash asset contributed to the capital of the Partnership by any Partner shall be its gross fair market value, as agreed to by the contributing Partner and the Partnership.

     (b) The initial Agreed Value of any noncash asset acquired by the Partnership other than by contribution by a Partner shall be its adjusted basis for federal income tax purposes.

     (c) The initial Agreed Values of all the Partnership’s noncash assets, regardless of how those assets were acquired, shall be reduced by depreciation or amortization, as the case may be, determined in accordance with the rules set forth in Regulations Section 1.704-1(b)(2)(iv)(f) and (g).

     (d) The Agreed Values, as reduced by depreciation or amortization, of all noncash assets of the Partnership, regardless of how those assets were acquired, shall be adjusted from time to time to equal their gross fair market values, as agreed to by the Partners in writing, as of the following times:

(i) the acquisition of a Partnership Interest or an additional Partnership Interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution;

(ii)	the distribution by the Partnership of more than a de minimis amount of money or other property as consideration for all or part of a Partnership Interest in the Partnership; and
(iii)	the termination of the Partnership for federal income tax purposes pursuant to Code Section 708(b)(1)(B).

     If, upon the occurrence of one of the events described in (i), (ii) or (iii) above the Partners do not agree in writing on the gross fair market values of the Partnership’s assets, it shall be deemed that the fair market values of all the Partnership’s assets equal their respective Agreed Values immediately prior to the occurrence of the event and thus no adjustment to those values shall be made as a result of such event.

     “Agreement” means this Limited Partnership Agreement, as amended from time to time.

     “Certificate of Limited Partnership” means the Certificate of Limited Partnership of the Partnership, as filed with the Secretary of State of North Carolina as the same may be amended from time to time.

     “Capital Account” means with respect to each Partner or assignee an account maintained and adjusted in accordance with the following provisions:

     (a) Each Person’s Capital Account shall be increased by Person’s Capital Contributions, such Person’s distributive share of Profits, any items in the nature of income or gain that are allocated pursuant to the Regulatory Allocations and the amount of any Partnership liabilities that are assumed by such Person or that are secured by Partnership property distributed to such Person.

     (b) Each Person’s Capital Account shall be decreased by the amount of cash and the Agreed Value of any Partnership property distributed to such Person pursuant to any provision of this Agreement, such Person’s distributive share of Losses, any items in the nature of loss or deduction that are allocated pursuant to the Regulatory Allocations, and the amount of any liabilities of such Person that are assumed by the Partnership or that are secured by any property contributed by such Person to the Partnership.

     In the event any Partnership Interest is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Partnership Interest.

     In the event the Agreed Values of the Partnership assets are adjusted pursuant to the definition of Agreed Value contained in this Agreement, the Capital Accounts of all Partners shall be adjusted simultaneously to reflect the aggregate adjustments as if the Partnership recognized gain or loss equal to the amount of such aggregate adjustment.

     The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such regulations. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed to comply with such Regulation, the General Partner may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Articles VI or VII hereof upon the dissolution of the Partnership. In the event the General Partner shall determine such adjustments are necessary or appropriate to comply with Regulations Section 1.704-1(b)(2)(iv), the General Partner shall adjust the amounts debited or credited to Capital Accounts with

C-5

respect to (i) any property contributed by the Partners or distributed to the Partners and (ii) any liabilities secured by such contributed or distributed property or assumed by the Partners. The General Partner shall also make any other appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). In the event any Partnership Interest in the Partnership is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Partnership Interest.

     “Capital Contribution” means with respect to any Partner, the amount of money and the initial Agreed Value of any property (other than money) contributed to the Partnership with respect to the Partnership Interest of such Partner.

     “Cash Distributions” means net cash distributed to Partners resulting from Cash Flow from Operations or Cash from Sales or Refinancing, but shall not include cash payments made to the General Partner as its Management Fee for services or any amount in repayment of loans made by the Partners to the Partnership.

     “Cash Flow from Operations” means net cash funds provided from operations, exclusive of Cash from Sales or Refinancing, of the Partnership or investment of any Partnership funds, without deduction for depreciation, but after deducting cash funds used to pay or establish a reserve for expenses, debt payments, capital improvements, and replacements and for such other items as the General Partner reasonably determines to be necessary or appropriate; provided, however, that such amount shall be reduced to the extent required to comply with written requirements of the Partnership’s lenders; provided further, that without the consent of the Investor Representatives, the General Partner shall not use such net cash funds for the early repayment of Partnership debt.

     “Cash from Sales or Refinancing” means the net cash proceeds received by the Partnership from or as a result of any Sale or Refinancing of property after deducting (i) all expenses incurred in connection therewith, (ii) any amounts applied by the General Partner in its sole and absolute discretion toward the payment of any indebtedness and other obligations of the Partnership then due and payable, including payments of principal and interest on mortgages, (iii) the payment of any other expenses or amounts owed by the Partnership to other parties to the extent then due and payable, and (iv) the establishment of any reserves deemed necessary by the General Partner in its sole and absolute discretion; provided, however, that such amount shall be reduced to the extent required to comply with written requirements of the Partnership’s lenders. If the proceeds of any sale or refinancing are paid in more than one installment, each such installment shall be treated as a separate Sale or Refinancing for the purposes of this definition.

     “Code” means the Internal Revenue Code of 1986, as amended from time to time. Any reference herein to a specific section(s) of the Code shall be deemed to include a reference to any corresponding provision of future law.

     “Convertible Loans” is defined in Recital D hereto.

     “Convertible Note Purchase Agreement” is defined in Recital D hereto.

     “Default Rate” means a per annum rate of return on a specified principal sum, compounded monthly, equal to the greater of (a) the Prime Rate plus 500 basis points, or (b) 18%, but in no event greater than the highest rate allowed by law.

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     “Economic Interest” means and shall refer to that portion of the Partnership Interest of a Partner in the economic rights and benefits of the Partnership, including but not limited to all Profits, Losses and Cash Distributions. Such an Economic Interest will be measured by an amount equal to the Partner’s percentage Partnership Interest in the Partnership as the same may be adjusted from time to time.

     “Economic Interest Owner” means a Person who has validly acquired a Partner’s Economic Interest as permitted under this Agreement but who has not become a Partner. Such Person shall be entitled to the allocations of Profits and Losses and Cash Distributions under Article VI and VII to which the previous owner of the Economic Interest would have been entitled had such previous owner retained the Economic Interest. Unless and until such Economic Interest Holder is admitted as a Substitute Partner, it shall be a mere assignee of a Partner.

     “Entity” means any general partnership, limited partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association or any foreign trust or foreign business organization.

     “Equipment” means the appropriate equipment and supplies required from time to time in connection with the development and operation of the Hospital.

     “Fiscal Year” means, with respect to the first year of the Partnership, the period beginning upon the formation of the Partnership and ending on the next September 30, with respect to subsequent years of the Partnership, the twelve month period beginning October 1 and ending September 30, and, with respect to the last year of the Partnership, the portion of the period beginning October 1 and ending with the date of the final liquidating distributions.

     “General Partner” means and shall refer to HMC Management. The powers, rights and duties of the General Partner to manage the affairs of the Partnership are specified or designated in this Agreement.

     “HHM” means and shall refer to Harlingen Hospital Management, Inc., which served as the initial General Partner of the Partnership.

     “HMC Management” means and shall refer to HMC Management Company, LLC, a North Carolina limited liability company, assignee of all of HHM’s rights and obligations as General Partner of the Partnership.

     “Hospital” means an acute care general hospital providing medical care and surgery in Harlingen, Texas as further described in Section 2.3 of the Agreement.

     “Hospital Limited Partner” means Valley Baptist Management Services Corporation.

     “HPHI” means Harlingen Partnership Holdings, Inc., which shall be a Limited Partner of the Partnership.

     “Investor Limited Partners” means the Limited Partners other than (a) HPHI and (b) the Hospital Limited Partner.

     “Investor Representatives” means five (5) individuals elected by the Investor Limited Partners in accordance with Section 5.13.

     “Limited Partners” means the Limited Partners listed on the Information Exhibit attached hereto.

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     “Majority Vote of Investor Limited Partners” means and shall refer to the affirmative vote, approval or consent of Investor Limited Partners holding a majority of the percentage Partnership Interests held by the Investor Limited Partners in the aggregate.

     “Management Fee” means the amounts payable to the General Partner pursuant to Section 5.6(b)(ii) for services rendered in managing the operations of the Partnership.

     “Material Agreement” means any binding agreement which may not be canceled upon less than ninety (90) days notice and which calls for the expenditure of funds, or involves an obligation for financing, in excess of $100,000.00 exclusive of agreements or obligations contemplated by any budget, development plan, financing or construction contract approved by the General Partner or agreements incurred in the ordinary course of business such as employment agreements, purchases of supplies and routine services and the like.

     “Material Decision” means any decisions regarding approvals of the development and operating budgets for the Hospital, the selection of the site for the Hospital, the design of the Hospital, the selection of the Hospital’s senior administrator, strategic planning, the execution of managed care contracts and the execution of exclusive contracts to provide physician services to the Hospital.

     “Organization Expenses” means those expenses incurred, either by the Partnership, on behalf of the Partnership or for which the Partnership has agreed to make reimbursement, in connection with the formation of the Partnership including such expenses as: (i) registration fees, filing fees, and taxes; and (ii) legal fees incurred in connection with any of the foregoing.

     “Partner” means and shall refer to the organizers of the Partnership (unless or until any such organizer has withdrawn) and each of the Persons identified as “Partners” in the then applying Information Exhibit attached hereto and incorporated herein by this reference. If a Person is already a Partner immediately prior to the purchase or other acquisition by such Person of an Economic Interest or Partnership Interest, such Person shall have all the rights of a Partner with respect to such purchased or otherwise acquired Partnership Interest or Economic Interest, as the case may be.

     “Partnership” means and shall refer to Harlingen Medical Center, Limited Partnership, which was created upon the filing of the Certificate of Limited Partnership with the Office of the Secretary of State of North Carolina, to be operated under the name Harlingen Medical Center, Limited Partnership, a North Carolina limited partnership, and to continue under this Agreement, as amended from time to time.

     “Partnership Interest” means all of a Partner’s rights in the Partnership, including without limitation the Partner’s share of Profits, Losses, Cash Distributions and other benefits of the Partnership, any right to vote, any right to participate in the management of the business and affairs of the Partnership, including the right to vote on, consent to, or otherwise participate in any decision or action of or by the Partners granted pursuant to this Limited Partnership Agreement or the Act. The percentage Partnership Interest of each Partner, their Capital Contributions and other related information shall be listed on the Information Exhibit. The percentage Partnership Interests generally shall be based upon the pro rata Capital Contribution of each Partner.

     “Person” means any individual or Entity, and the heirs, executors, administrators, legal representatives, successors, and assigns of such individual or Entity where the context so permits.

     “Prime Rate” means the rate of interest as of the relevant day or time period as announced by the Bank of America, N.A. or its successor in interest from time to time as its prime or reference rate.

C-8

     “Profits and Losses” means, for each Fiscal Year or other period, an amount equal to the Partnership’s taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(l) shall be included in taxable income or loss), with the following adjustments:

     (a) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses shall be added to such taxable income or loss;

     (b) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses, shall be subtracted from such taxable income or loss;

     (c) Gain or loss resulting from dispositions of Partnership assets shall be computed by reference to the Agreed Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Agreed Value.

     “Project Costs” shall include, without limitation, all costs incurred by the Partnership in connection with the development and construction of the Hospital, including without limitation, land acquisition costs, equipment costs, architectural, design and engineering costs, legal and accounting costs, construction costs, construction period interest, pre-opening expenses, fees payable to the General Partner or its Affiliates, and other construction and development costs incurred in connection with the construction and development of the Hospital, which total amount shall finally be determined by the General Partner following the opening of the Hospital.

     “Refinancing” means any borrowing incurred or made to recapitalize the Partnership or the equity investment in, or to refinance any loan used to finance the acquisition of property.

     “Regulations” means rules, orders, and regulations issued pursuant to or under the authority of the Code and shall include revisions to and succeeding provisions as appropriate.

     “Regulatory Allocations” means those allocations of items of Partnership income, gain, loss or deduction set forth on the Regulatory Allocations Exhibit and designed to enable the Partnership to comply with the alternate test for economic effect prescribed in Regulations Section 1.704-1(b)(2)(ii)(d), and the safe-harbor rules for allocations attributable to nonrecourse liabilities prescribed in Regulations Section 1.704-2.

     “Sale” means the sale, exchange, involuntary conversion (other than a casualty followed by reconstruction), condemnation, or other disposition of property by the Partnership, except for dispositions of inventory items and personal property in the ordinary course of business and in connection with the replacement of such property.

     “Substitute General Partner” means a General Partner who succeeds the General Partner with all of the specific rights and powers of such General Partner under this Agreement.

     “Substitute Investor Representative” means an Investor Representative who succeeds an Investor Representative with all of the specific rights and powers of such Investor Representative under this Agreement.

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     “Substitute Partner” means an assignee of a Partner who has been admitted to the Partnership and granted all the rights of a Partner in place of its assignor pursuant to the provisions of this Agreement. A Substitute Partner, upon its admission as such, shall replace and succeed to the rights, privileges, and liabilities of the Partner from whom it acquired its interest in the Partnership, to the extent of the Economic Interest assigned.

C-10

EXHIBIT D
TO THE
AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF
HARLINGEN MEDICAL CENTER, LIMITED PARTNERSHIP
A North Carolina Limited Partnership

DEVELOPMENT BUDGET EXHIBIT

[INTENTIONALLY OMITTED]

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EXHIBIT E
TO THE
AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF
HARLINGEN MEDICAL CENTER, LIMITED PARTNERSHIP
a North Carolina limited partnership

REGULATORY ALLOCATIONS

     This Exhibit contains special rules for the allocation of items of Partnership income, gain, loss and deduction that override the basic allocations of Profits and Losses in the Agreement to the extent necessary to cause the overall allocations of items of Partnership income, gain, loss and deduction to have substantial economic effect pursuant to Regulations Section 1.704-1(b) and shall be interpreted in light of that purpose. Subsection (a) below contains special technical definitions. Subsections (b) through (h) contain the Regulatory Allocations themselves. Subsections (i), (j) and (k) are special rules applicable in applying the Regulatory Allocations.

     (a) Definitions Applicable to Regulatory Allocations. For purposes of the Agreement, the following terms shall have the meanings indicated:

(i)	“Partnership Minimum Gain” means the same as the meaning of “partnership minimum gain” set forth in Regulations Section 1.704-2(d), and is generally the aggregate gain the Partnership would realize if it disposed of its property subject to Nonrecourse Liabilities in full satisfaction of each such liability, with such other modifications as provided in Regulations Section 1.704-2(d). In the case of Nonrecourse Liabilities for which the creditor’s recourse is not limited to particular assets of the Partnership, until such time as there is regulatory guidance on the determination of minimum gain with respect to such liabilities, all such liabilities of the Partnership shall be treated as a single liability and allocated to the Partnership’s assets using any reasonable basis selected by the General Partner.
(ii)	“Partner Nonrecourse Deductions” means losses, deductions or Code Section 705(a)(2)(B) expenditures attributable to Partner Nonrecourse Debt under the general principles applicable to “partner nonrecourse deductions” set forth in Regulations Section 1.704-2(i)(2).
(iii)	“Partner Nonrecourse Debt” means any Partnership liability with respect to which one or more but not all of the Partners or related Persons to one or more but not all of the Partners bears the economic risk of loss within the meaning of Regulations Section 1.752-2 as a guarantor, lender or otherwise.
(iv)	“Partner Nonrecourse Debt Minimum Gain” means the minimum gain attributable to Partner Nonrecourse Debt as determined pursuant to Regulations Section 1.704-2(i)(3). In the case of Partner Nonrecourse Debt for which the creditor’s recourse against the Partnership is not limited to particular assets of the Partnership, until such time as there is regulatory guidance on the determination of minimum gain with respect to such liabilities, all such liabilities of the Partnership shall be treated as a single liability and allocated to the Partnership’s assets using any reasonable basis selected by the General Partner.

(v)	“Nonrecourse Deductions” means losses, deductions, or Code Section 705(a)(2)(B) expenditures attributable to Nonrecourse Liabilities (see Regulations Section 1.704-2(b)(1)). The amount of Nonrecourse Deductions for a Fiscal Year shall be determined pursuant to Regulations Section 1.704-2(c), and shall generally equal the net increase, if any, in the amount of Partnership Minimum Gain for that taxable year, determined generally according to the provisions of Regulations Section 1.704-2(d), reduced (but not below zero) by the aggregate distributions during the year of proceeds of Nonrecourse Liabilities that are allocable to an increase in Partnership Minimum Gain, with such other modifications as provided in Regulations Section 1.704-2(c).
(vi)	“Nonrecourse Liability” means any Partnership liability (or portion thereof) for which no Partner bears the economic risk of loss under Regulations Section 1.752-2.
(vii)	“Regulatory Allocations” means allocations of Nonrecourse Deductions provided in Paragraph (b) below, allocations of Partner Nonrecourse Deductions provided in Paragraph (c) below, the minimum gain chargeback provided in Paragraph (d) below, the Partner nonrecourse debt minimum gain chargeback provided in Paragraph (e) below, the qualified income offset provided in Paragraph (f) below, the gross income allocation provided in Paragraph (g) below, and the curative allocations provided in Paragraph (h) below.

     (b) Nonrecourse Deductions. All Nonrecourse Deductions for any Fiscal Year shall be allocated to the Partners in accordance with their percentage Partnership Interests.

     (c) Partner Nonrecourse Deductions. All Partner Nonrecourse Deductions for any Fiscal Year shall be allocated to the Partner who bears the economic risk of loss under Regulations Section 1.752-2 with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable.

     (d) Minimum Gain Chargeback. If there is a net decrease in Partnership Minimum Gain for a Fiscal Year, each Partner shall be allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner’s share of such net decrease in Partnership Minimum Gain, determined in accordance with Regulations Section 1.704-2(g)(2) and the definition of Partnership Minimum Gain set forth above. This provision is intended to comply with the minimum gain chargeback requirement in Regulations Section 1.704-2(f) and shall be interpreted consistently therewith.

     (e) Partner Nonrecourse Debt Minimum Gain Chargeback. If there is a net decrease in Partner Nonrecourse Debt Minimum Gain attributable to a Partner Nonrecourse Debt for any Fiscal Year, each Partner who has a share of the Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt as of the beginning of the Fiscal Year, determined in accordance with Regulations Section 1.704-2(i)(5), shall be allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner’s share of the net decrease in Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Sections 1.704-2(i)(4) and (5) and the definition of Partner Nonrecourse Debt Minimum Gain set forth above. This Paragraph is intended to comply with the Partner nonrecourse debt minimum gain chargeback requirement in Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

     (f) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income, and gain for such year) shall be allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, any deficit in such Partner’s Adjusted Capital Account created by such adjustments, allocations or distributions as quickly as possible.

     (g) Gross Income Allocation. In the event any Partner has a deficit in its Adjusted Capital Account at the end of any Fiscal Year, each such Partner shall be allocated items of Partnership gross income and gain, in the amount of such Adjusted Capital Account deficit, as quickly as possible.

     (h) Curative Allocations. When allocating Profits and Losses under Article VI, such allocations shall be made so as to offset any prior allocations of gross income under Paragraph (g) above to the greatest extent possible so that overall allocations of Profits and Losses shall be made as if no such allocations of gross income occurred.

     (i) Ordering. The allocations in this Exhibit to the extent they apply shall be made before the allocations of Profits and Losses under Article VI and in the order in which they appear above.

     (j) Waiver of Minimum Gain Chargeback Provisions. If the General Partner determines that (i) either of the two minimum gain chargeback provisions contained in this Exhibit would cause a distortion in the economic arrangement among the Partners, (ii) it is not expected that the Partnership will have sufficient other items of income and gain to correct that distortion, and (iii) the Partners have made Capital Contributions or received net income allocations that have restored any previous Nonrecourse Deductions or Partner Nonrecourse Deductions, then the General Partner shall have the authority, but not the obligation, after giving notice to the Partners, to request on behalf of the Partnership the Internal Revenue Service to waive the minimum gain chargeback or Partner nonrecourse debt minimum gain chargeback requirements pursuant to Regulations Sections 1.704-2(f)(4) and 1.704-2(i)(4). The Partnership shall pay the expenses (including attorneys’ fees) incurred to apply for the waiver. The General Partner shall promptly copy all Partners on all correspondence to and from the Internal Revenue Service concerning the requested waiver.

     (k) Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.

[THE REMAINDER OF THIS PAGE INTENTIONALLY HAS BEEN LEFT BLANK.]

EX-10.70

Exhibit 10.70

HMC REALTY, LLC
A Texas Limited Liability Company

AMENDED AND RESTATED OPERATING AGREEMENT

TABLE OF CONTENTS

	Page
ARTICLE I DEFINITIONS AND GLOSSARY OF TERMS		5
ARTICLE II FORMATION; NAME; PURPOSES; OFFICE; TERM		7
SECTION 2.1. Company Formation		7
SECTION 2.2. Name of Company		7
SECTION 2.3. Purposes		7
SECTION 2.4. Registered Office and Principal Place of Business		8
SECTION 2.5. Commencement and Term		8
SECTION 2.6. Representations and Warranties		8
ARTICLE III CAPITAL CONTRIBUTIONS, LIABILITY OF MEMBERS, CAPITAL ACCOUNTS, RETURN OF CAPITAL AND INTEREST ON CAPITAL		9
SECTION 3.1. Initial Contributions		9
SECTION 3.2. Additional Capital Contributions		10
SECTION 3.3. Limited Liability of Members and Managers		10
SECTION 3.4. Maintenance of Capital Accounts; Withdrawals		10
SECTION 3.5. Percentage Interests		10
SECTION 3.6. Additional Members		10
SECTION 3.7. Member Loans		11
SECTION 3.8. Credit Support		11
ARTICLE IV MANAGEMENT OF THE COMPANY		11
SECTION 4.1. Management; Execution of Company Contracts		11
SECTION 4.2. Number, Tenure and Qualifications of Managers; Decisions by Managers		12
SECTION 4.3. Powers and Authority of Managers		12
SECTION 4.4. Managers to Act in Best Interests of Company		14
SECTION 4.5. Other Business of Members		14
SECTION 4.6. Maintenance of Tax Status		15
SECTION 4.7. Liability and Indemnification of the Managers; Expense Advancement		15
ARTICLE V ALLOCATIONS		17
SECTION 5.1. Allocation of Income and Losses		17
SECTION 5.2. Miscellaneous		18
ARTICLE VI DISTRIBUTIONS		18
SECTION 6.1. Distributions		18

	Page
SECTION 6.2. Tax Distributions		19
SECTION 6.3. Distributions In Kind		19
SECTION 6.4. Withholding		19
SECTION 6.5. Right of Offset		20
ARTICLE VII WINDING UP AND TERMINATION OF THE COMPANY		20
SECTION 7.1. Winding Up and Termination of the Company		20
SECTION 7.2. Winding-Up and Liquidation		21
ARTICLE VIII WITHDRAWAL OF MEMBERS AND TRANSFER OF MEMBERS’ INTERESTS		22
SECTION 8.1. Restriction on Transfer and Withdrawal		22
SECTION 8.2. Conditions Precedent to Transfer of Member’s Interest		22
SECTION 8.3. Substitute or Additional Member — Conditions to Fulfill		23
SECTION 8.4. Further Assignment by Assignee		23
SECTION 8.5. Rights and Liabilities of and Restrictions on Assignee		23
SECTION 8.6. Involuntary Transfers; Transfer of Interests in Members		24
ARTICLE IX BOOKS; DEPOSITORY ACCOUNTS; ACCOUNTING REPORTS; ELECTIONS		24
SECTION 9.1. Books of Account		24
SECTION 9.2. Access to Records; Audit		24
SECTION 9.3. Depository Accounts and Investment of Funds		24
SECTION 9.4. Reports		25
SECTION 9.5. Tax Accounting Methods; Periods; Elections		25
ARTICLE X MEETINGS OF MEMBERS		25
SECTION 10.1. Meetings of Members		25
SECTION 10.2. Notice of Meetings of Members		26
SECTION 10.3. Record Date		26
SECTION 10.4. Quorum		26
SECTION 10.5. Organization		27
SECTION 10.6. Actions by Members		27
SECTION 10.7. Proxies		27
SECTION 10.8. Action Without Meeting		27
SECTION 10.9. Meeting by Conference Telephone		27
SECTION 10.10. Registered Members		28
ARTICLE XI MISCELLANEOUS PROVISIONS		28
SECTION 11.1. Waiver of Provisions		28
SECTION 11.2. Amendment		28

ii 

	Page
SECTION 11.3. Interpretation and Construction		28
SECTION 11.4. Governing Law; Jurisdiction		28
SECTION 11.5. Partial Invalidity		28
SECTION 11.6. Binding on Successors		28
SECTION 11.7. Notices and Delivery		28
SECTION 11.8. Counterparts		29
SECTION 11.9. Statutory Provisions		29
SECTION 11.10. Waiver of Partition		29
SECTION 11.11. Tax Matters Member		29
SECTION 11.12. Determination of Matters Not Provided For In This Agreement		29
SECTION 11.13. Further Assurances		29
SECTION 11.14. Arbitration		29

iii 

AMENDED AND RESTATED OPERATING AGREEMENT
OF
HMC REALTY, LLC
a Texas Limited Liability Company

     THIS AMENDED AND RESTATED OPERATING AGREEMENT, is made and entered into as of the ___day of                     , 2007, by and among VALLEY BAPTIST REALTY CORPORATION, a Texas corporation (“VB”), HARLINGEN HOSPITAL MANAGEMENT, INC., a North Carolina corporation (“MedCath”), and HMC PHYSICIANS, LTD., a Texas limited partnership (the “Physician Investor”) (VB, MedCath and the Physician Investor are referred to herein collectively as the “Members”), and HARLINGEN MEDICAL CENTER, LIMITED PARTNERSHIP, a North Carolina limited partnership (the “Hospital”), as the original member of the Company.

RECITALS

A.	The Company has been formed by the Hospital by filing a Certificate of Formation of HMC Realty, LLC with the Secretary of State of Texas. The Hospital has executed an Operating Agreement of the Company effective as of the date of formation (the “Original Agreement”).
B.	The Hospital contributed the Property (as defined herein) to the capital of the Company, subject to an existing mortgage to HCPI Mortgage Corp. In connection with the contribution of the Property, the Company also assumed $11,345,393 in obligations owed by the Hospital to MedCath Finance Co., LLC, an affiliate of MedCath, and $2,944,607 in principal amount of obligations owned by the Hospital to Valley Baptist Health System, an affiliate of VB.
C.	The parties to this Amended and Restated Agreement wish to amend and restate the Original Agreement in its entirety to provide for: (i) the admission of the Physician Investor for a cash capital contribution as described herein; (ii) the admission of VB as a Member in return for a cash capital contribution and the conversion of certain obligations to equity as described herein; (iii) the admission of MedCath as a Member in return for the conversion of a portion of the obligations to equity as described herein; (iv) the withdrawal of the Hospital from membership in the Company; and (v) such other provisions regarding the Company and its affairs as are set forth herein.

     NOW, THEREFORE, the parties hereto hereby amend and restate the Original Agreement in its entirety as follows:

ARTICLE I

DEFINITIONS AND GLOSSARY OF TERMS

     “Acquisition Loan” means a loan from Citicorp Vendor Finance, Inc. or other lender selected by the Managers in the approximate principal amount of $39,000,000.

     “Adjusted Capital Account Deficit” means with respect to any Member, the deficit balance, if any, in such Member’s Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments:

     (i) Credit to such Capital Account any amounts which the Member is obligated to restore or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and

     (ii) Debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-2(b)(2)(ii)(d)(6) of the Regulations.

The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith.

     “Affiliate” with respect to a Member shall mean any person or entity controlling, controlled by, or under common control with such Member.

     “Agreement” shall mean this Amended and Restated Operating Agreement as amended from time to time, which is intended to constitute the “company agreement” of the Company as set forth in the TLLCL.

     “Assigned MedCath Loan” means a portion of the obligation owed to MedCath or its affiliates by the Hospital which has been assigned to and assumed by the Company in the principal amount of $11,345,393.

     “Assigned VB Loan” means a portion of the obligation owed to VB or its affiliates by the Hospital which has been assigned to and assumed by the Company in the principal amount of $2,944,607.

     “Capital Account” shall mean with respect to each Member a financial and tax accounting account maintained and adjusted in accordance with the Treasury Regulations promulgated under Section 704 of the Code.

     “Cash Flow” shall mean cash available to the Company as a result of the operations of the Company and the sale or refinancing of Company property after (i) payment of all expenses, costs, amortization of indebtedness of the Company, (ii) acquisition of investments or other capital assets and (iii) the establishment by the Managers of reasonable reserves for working capital, debt service, contingencies, investments, and replacements, subject however to restrictions upon distribution which the Company agrees upon with its third party lenders.

5

     “Certificate of Formation” shall mean the certificate of formation, together with any amendments thereto, required to be filed by the Company pursuant to the TLLCL and the TBOC.

     “Closing” shall mean the closing of the transaction pursuant to which the Company will acquire the Property.

     “Closing Date” shall mean July 2, 2007, unless the Closing is extended by mutual agreement of the Members.

     “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor federal revenue law and any final treasury regulations, revenue rulings, and revenue procedures thereunder or under any predecessor federal revenue law.

     “Company” shall refer to the limited liability company created under this Agreement and the Certificate of Formation.

     “Credit Support” shall mean any letters of credit, guarantees or other forms of collateral or credit that any Member provides to any lender to the Company.

     “Distributions” shall mean distributions of cash or other property made by the Company to the Members from any source.

     “GAAP” shall mean generally accepted accounting principles, consistently applied.

     “Hospital” shall mean Harlingen Medical Center, Limited Partnership, a North Carolina limited partnership.

     “Income” shall mean the net income (including tax exempt income) of the Company or any separately allocable item thereof as determined in accordance with GAAP.

     “Interest” shall mean all of the rights created under this Agreement or under the TLLCL of each Member with respect to the Company and the Company property.

     “Lease” shall mean the agreement to be entered into between the Company and the Hospital pursuant to which the Hospital will lease the Property from the Company.

     “Loan Closing” shall mean the closing of the transaction pursuant to which the Company, acting through the Managers, will incur the Acquisition Loan.

     “Losses” shall mean the net loss of the Company as determined in accordance with GAAP or any separately allocable deduction of the Company, including expenditures of the Company not deductible in computing its taxable income and not properly chargeable to a capital account.

6

     “Managers” shall refer to the persons appointed as Managers pursuant to Section 4.2 herein and any other persons or entities who may become Managers pursuant to the terms of this Agreement.

     “Members” shall refer collectively to the entities the names of which are listed in the preamble to this Agreement and, in accordance with this Agreement, their successors and assigns.

     “Percentage Interest” shall refer to the entire ownership Interest of a Member, expressed as a percentage.

     “Prime Rate” shall mean the prime rate then in effect at CitiBank, N.A.

     “Property” shall mean the real property and improvements thereon located in Harlingen, Cameron County, Texas, and more particularly described on Exhibit D attached hereto.

     “TLLCL” shall mean the Texas Limited Liability Company Law set forth in the Texas Business Organizations (“TBOC”).

     Certain other capitalized terms not defined above shall have the meanings given such terms in the Agreement.

ARTICLE II

FORMATION; NAME; PURPOSES; OFFICE; TERM

     SECTION 2.1. Company Formation. The Company has been formed as a limited liability company under and pursuant to the TLLCL. The Members shall cause to be executed and filed all such instruments or documents and shall do or cause to be done all filing, recording, or other acts, as may be necessary or appropriate from time to time to comply with the requirements of law for the formation of a limited liability company in the State of Texas.

     SECTION 2.2. Name of Company. The name of the Company shall be HMC Realty, LLC.

     SECTION 2.3. Purposes. The purposes of the Company are as follows:

     (a) To own, operate, finance, improve, maintain, lease to the Hospital or other tenants, and sell or otherwise dispose of the Property;

     (b) To do all things reasonably incidental to the purposes described in subsection (a); and

     (c) All such other lawful purposes to which the Members may consent.

7

     The Company may execute, deliver and perform all contracts and other undertakings and engage in all activities and transactions as may be necessary or advisable to carry out the foregoing objects and purposes.

     SECTION 2.4. Registered Office and Principal Place of Business. The registered office of the Company in Texas shall be maintained at Harlingen Medical Center, 5501 South Expressway 77, Harlingen, TX  78550, or at such other place as the Managers may determine, and the initial registered agent at such address shall be                     . The principal place of business of the Company shall be maintained at the above referenced registered office or at such other place as the Managers may determine.

     SECTION 2.5. Commencement and Term. The Company commenced upon the filing of the Certificate of Formation in the office of the Secretary of State of the State of Texas, as required by Section 2.1 hereof, and shall continue indefinitely until terminated as provided herein and the TLLCL.

     SECTION 2.6 Representations and Warranties. Each member represents and warrants to the other Members as follows:

(a)

MedCath represents, warrants and covenants that (i) it is a corporation duly formed and validly existing under the laws of the State of North Carolina and is duly qualified to transact business in the State of Texas; (ii) the execution, delivery and performance of this Agreement is within its company power and all requisite action has been taken to authorize the execution, delivery and performance of this Agreement; (iii) the execution, delivery and performance of this Agreement will not contravene any provision of its articles of organization, operating agreement, or any contract or agreement to which it is a party; (iv) it has consulted with its own tax and legal advisors regarding its participation in the Company, including without limitation specialists in health care law and regulation; and (v) it is in compliance and will remain in compliance with all laws and regulations applicable to it in connection with its participation in the Company, including without limitation health care laws and regulations.

(b)

VB represents, warrants and covenants that (i) it is a corporation duly formed and validly existing under the laws of the State of Texas; (ii) the execution, delivery and performance of this Agreement is within its corporate power and all requisite corporate action has been taken to authorize the execution, delivery and performance of this Agreement; (iii) the execution, delivery and performance of this Agreement will not contravene any provision of its articles of incorporation, bylaws, or any contract or agreement to which it is a party; (iv) it has consulted with its own tax and legal advisors regarding its participation in the Company, including without limitation specialists in health care law and regulation; and (v) it is in compliance and will remain in compliance with all laws and regulations applicable to it in connection with its participation in the Company, including without limitation health care laws and regulations.

8

(c)	Physician Investor represents, warrants and covenants that (i) it is a limited partnership duly formed and validly existing under the laws of the State of Texas; (ii) the execution, delivery and performance of this Agreement is within its company power and all requisite action has been taken to authorize the execution, delivery and performance of this Agreement; (iii) the execution, delivery and performance of this Agreement will not contravene any provision of its certificate of formation, agreement of limited partnership, or any contract or agreement to which it is a party; (iv) it has consulted with its own tax and legal advisors regarding its participation in the Company, including without limitation specialists in health care law and regulation; and (v) it is in compliance and will remain in compliance with all laws and regulations applicable to it in connection with its participation in the Company, including without limitation health care laws and regulations.
	Physician Investor further covenants that it will give the Managers the right to review all offering memoranda, prospectuses, subscription documents and other materials which will be used in connection with the offering of interests in Physician Investor to investors, and that it will incorporate the Managers’ reasonable comments into any such materials.
(d)	Each of the Members acknowledges and agrees that (i) MedCath, VB and certain members of Physician Investor, including without limitation Dr. Hugo Blake, are also direct or indirect owners of the Hospital and as such may be subject to certain conflicts of interest; (ii) such Member has consulted its own counsel in connection with its participation in the Company and has made its own evaluation of the risks related thereto, including without limitation such potential conflicts of interest; and (iii) the representatives of the Members shall be entitled to take all actions and vote on all matters relating to the Lease and other agreements and arrangements relating to the relationship between the Company and the Hospital, and the Company and its lenders, and all other matters involving the Company, regardless of any such potential conflicts of interest.

ARTICLE III

CAPITAL CONTRIBUTIONS, LIABILITY OF MEMBERS,
CAPITAL ACCOUNTS, RETURN OF CAPITAL AND INTEREST ON CAPITAL

     SECTION 3.1. Initial Contributions. The Hospital formed the Company and made an initial capital contribution to the Company of the Property, subject to certain obligations as described on Exhibit A attached hereto. Upon the execution and effectiveness of this Agreement, the Hospital will withdraw from the Company. The other Members shall make the initial capital contributions to the Company set forth on Exhibit A, including without limitation the conversions of the VB Assigned Loan and a portion of the MedCath Assigned Loan to equity as described on Exhibit A, and shall receive therefor the Interest in the Company set forth on Exhibit A.

9

     SECTION 3.2. Additional Capital Contributions. If the Managers determine that additional capital is required for Company purposes (and no Manager shall fail to vote to approve a capital call which is necessary to fund payments of any type or nature due from the Company with respect to the Acquisition Loan or any refinancing or replacement financing thereof, or other indebtedness for borrowed money, or to enable the Company to fulfill its obligations under the Lease), the existing Members shall make additional contributions to the Company pro rata based on their respective Percentage Interests in an aggregate amount equal to the additional capital required. In the event any Member fails to make the required additional contributions, the other Members may, but shall not be obligated to, make the contribution of the defaulting Member, and in any event if any Member fails to make such additional capital contributions, the Percentage Interests of all of the Members will be adjusted so that each Member’s Percentage Interest shall equal the Percentage determined by dividing the amount of all capital contributions made to the Company by such Member by the total of all capital contributions made to the Company by all Members.

     SECTION 3.3. Limited Liability of Members and Managers. No Member shall have any personal liability for any debts or losses of the Company beyond its Interest, except as provided by law. No Member or Manager shall be liable, responsible or accountable in damages or otherwise to the Company or any other Member for any acts performed in good faith and reasonably believed by the Member or Manager to be within the scope of this Agreement, unless such act or failure to act is attributable to gross negligence, malfeasance, fraud or breach of a provision of this Agreement. No Member shall be personally liable to restore any Adjusted Capital Account Deficit. Other than as provided in Section 3.2 and as may be required under the TLLCL, no Member or Manager shall be liable for any debts or losses of capital or profits of the Company or be required to contribute or lend funds to the Company.

     SECTION 3.4. Maintenance of Capital Accounts; Withdrawals; Individual Capital Accounts shall be maintained for each of the Members. No Member shall be entitled to withdraw any part of his Capital Account or to receive any Distribution or to make any capital contribution except as expressly provided herein. No Member shall be entitled to receive any interest on his contributions to the capital of the Company or with respect to his Capital Account.

     SECTION 3.5. Percentage Interests. Whenever it shall be necessary for voting or other purposes herein specified to determine the Interest of one or more Members in the Company relative to a group of Members or to all Members, that interest shall be determined based on the Percentage Interests of the Members as set forth on Exhibit A attached hereto. Percentage Interests shall be adjusted and Exhibit A shall be amended by the Managers from time to time as may be required to reflect any purchases, sales, withdrawals, additional capital contributions, transfers or other events resulting in a change in Company Interests, including the application of Section 3.2, provided that such events may occur only in accordance with the terms of this Agreement.

     SECTION 3.6. Additional Members. Additional Members may be admitted from time to time upon terms approved by the Managers.

10

     SECTION 3.7. Member Loans. If and only if all Members agree to make such a loan proportionate to their respective Percentage Interests in the Company, and such loans are permitted under the terms of loans to the Company, then all Members together may, but shall not be obligated to, make loans to the Company (individually, an “Optional Loan,” and collectively, the “Optional Loans”), from time to time, to cover Company obligations and operating cash deficits, but only with the consent of all of the Managers. Such Optional Loans shall be evidenced by promissory notes executed by the Company, which shall bear interest at a variable annual rate equal to the Prime Rate or such other rate as the Managers and such lending Member may otherwise agree, which in all events shall be at no less than a fair market rate (the “FMV Rate”). Such Optional Loans shall be repaid by the Company in accordance with Sections 6.1 and 7.2.

     SECTION 3.8. Credit Support. The Members acknowledge and agree that each of the Members or their respective Affiliates (individually, a “Guarantor,” and collectively, the “Guarantors”), shall provide a letter of credit as of the date hereof in the amount set forth on Exhibit A. In the event that any Guarantor is ever required to fund under any such letter of credit described in this Section 3.8, or any collateral pledged by such Guarantor as additional security for any loan is liquidated and applied in repayment of such loan, such funding or application of collateral shall, as the sole and exclusive remedy of such Guarantor, be treated as a loan to the Company made by such Guarantor (individually, a “Guarantor Loan,” and collectively, the “Guarantor Loans”). The Guarantor Loans shall bear interest at the Prime Rate plus two percent (2%), beginning as of the date that the Lender receives the loan funds from the Guarantor or applies such Guarantor’s collateral to payment of the Loan, and shall be payable as provided in Sections 6.1 and 7.2.

ARTICLE IV

MANAGEMENT OF THE COMPANY

     SECTION 4.1. Management; Execution of Company Contracts. The management of the Company shall be vested in the Managers subject to the other terms hereof. All contracts and agreements undertaken by the Company, and any other documents, instruments, certificates and filings shall be executed by one or more of the Managers or such person or entity as may be empowered by this Agreement or designated in writing by the Managers to execute any contract, agreement, document, instrument, certificate or filing, and in such contracts the Company shall be identified as a limited liability company.

     The Managers hereby delegate to and agree that MedCath shall have the duty and responsibility to prepare and maintain the books and records of the Company in accordance with GAAP, to provide all accounting and reporting services and obligations to of the Company to either the Members, Managers or to third parties and to provide or to obtain from a qualified accounting firm tax return preparation and other tax services. MedCath shall be paid annually a fee equal to $75,000 for such services, which fee shall be increased annually as of January 1 of each year by the Consumer Price Index. MedCath may relinquish such duty and responsibility at any time by written notice to the Company, and in such event MedCath will no longer be entitled to such fee and the Managers will appoint another Member or representative of a Member to

11

undertake such functions. The Company also shall pay for any needed services from third party accounting firms approved by the Managers.

     SECTION 4.2. Number, Tenure and Qualifications of Managers; Decisions by Managers. The Company shall have three (3) Managers. Each Member shall have the right to appoint one (1) Manager, and shall have the right to remove and replace its appointed Manager at any time and from time to time. Each Manager shall serve until his or her (i) removal by the Member that appointed such Manager, (ii) resignation as Manager, or (iii) death or total disability. In such case the Member which appointed such Manager shall promptly appoint a replacement Manager. Managers need not be residents of the State of Texas or Members of the Company.

     The initial Managers of the Company shall be as follows:

MedCath appointment	James A. Parker
VB appointment	James G. Springfield
Physician Investor appointment	Hugo Blake, M.D.

     Subject to the other terms of this Agreement, the Managers may take action only upon unanimous consent of all Managers. The Managers may participate in any meeting of such Managers by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation in a meeting shall constitute presence in person at such meeting.

     SECTION 4.3. Powers and Authority of Managers. Subject to the terms and conditions of this Agreement, the Managers shall have exclusive management and control of the affairs of the Company and shall have the power and authority to do all things necessary or appropriate, and to take all steps and to execute all documents and agreements as are necessary or appropriate, to carry out the purposes of the Company, including without limitation the power:

     (a) To cause the Company to acquire the Property at Closing, to incur the Acquisition Loan at the Loan Closing and such indebtedness as may be necessary or desirable for the maintenance, repair, reconstruction, upgrade or improvement of the Property or structures from time to time located thereon, and to acquire the Property, and in connection therewith to repay the remaining outstanding balance of the Assigned MedCath Loan to the holders thereof, and to take all steps and to execute all documents and agreements as are necessary or appropriate to complete all of such transactions;

     (b) To cause the Company to enter into and perform the Lease in such form and substance as may be approved by the Managers, and to take all steps and to execute all documents and agreements as are necessary or appropriate to complete all of such transactions;

     (c) To cause the Company to enter into agreements with respect to the management of the Property upon terms approved by the Managers, and to take all steps and to execute all documents and agreements as are necessary or appropriate to complete all of such transactions;

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     (d) To do such acts and incur such expenses on behalf of the Company as may be reasonably necessary or advisable in connection with the conduct of the Company affairs, specifically including doing acts and incurring expenses necessary to (i) acquire any properties or assets necessary or appropriate for the conduct of the Company’s business, including borrowing money for the acquisition of such properties (subject to the terms hereof) and executing pledges, evidences of liens, mortgages and/or deeds of trust in connection therewith; (ii) do such other acts and incur such costs and expenses as are consistent with the purposes of the Company; and (iii) sell, transfer, exchange or otherwise dispose of the Property or other Company properties or assets;

     (e) To engage such agents, attorneys, accountants, custodians and other advisers and consultants as may be necessary or advisable for the affairs of the Company;

     (f) To open, maintain and close bank accounts and custodial accounts for the Company and to draw checks and other orders for the payment of money;

     (g) To file on behalf of the Company, all required local, state and federal tax returns and other documents relating to the Company, and if in the best interests of the Company, cause the Company to make or revoke if permissible, any of the elections referred to in Sections 108, 709, 754 and 1017 of the Code or any similar provisions enacted in lieu thereof, or make or revoke other elections permitted by the Code.

     (h) To cause the Company to purchase or bear the cost of any insurance covering the potential liabilities of any person indemnified under Section 4.7;

     (i) To commence or defend litigation that pertains to the Company or any Company assets, provided that the Company shall not bear the expenses of any litigation which arose as a result of the bad faith, gross negligence or willful misconduct of any party indemnified under this Agreement;

     (j) To prepare and file on behalf of the Company any statement, report, return or document required by any state or federal agency or other governmental agency;

     (k) Subject to the other provisions of this Agreement, to enter into, make and perform such contracts, agreements and other undertakings, and to do such other acts, as it may deem necessary or advisable for, or as may be incidental to, the conduct to the business contemplated by Section 2.3, including, without in any manner limiting the generality of the foregoing, contracts, agreements, undertakings and transactions with any Member or with any other person, firm or corporation having any business, financial or other relationship with any Member or Members; provided, however, such transactions with such persons and entities shall be on terms no less favorable to the Company than are generally afforded to unrelated third parties in comparable transactions;

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     (l) To sign or endorse on behalf of the Company any contracts, deeds, mortgages, deeds of trust, notes, stock or other security certificates or other documents or instruments;

     (n) To reimburse any Member, affiliate or related person for any reasonable cost or expense incurred on behalf of the Company in a manner authorized by this Agreement;

     (o) To delegate authority to act for the Company and other duties and responsibilities to officers or other agents as may be designated by the Managers;

     (p) To cause the Company to enter into any merger, consolidation or reorganization; and

     (q) To take such other acts as are incidental to the foregoing matters.

     SECTION 4.4. Managers to Act in Best Interests of Company. In exercising any powers hereunder or otherwise acting for the Company, each of the Managers shall exercise reasonable skill and care and use his best judgment and shall act at all times in what he deems to be the best interests of the Company. The Managers shall not be liable, responsible or accountable in damages or otherwise to the Company or any Member for any acts performed or omitted by him in good faith and within the scope of this Agreement. More specifically, but without limiting the generality of the preceding sentence, the Managers shall not be liable for good faith mistakes of judgment or for losses due to such mistakes or the good faith mistakes of judgment or losses due to such mistakes of any employee, broker or other agent of the Company. Each Manager shall, however, be liable for his actions to the extent they are attributable to gross negligence, willful misconduct and/or fraud.

     Notwithstanding anything herein to the contrary, each Member acknowledges and agrees that (x) each other Member is directly or indirectly also an owner of Harlingen Medical Center Limited Partnership, the Tenant under the Lease, and (y) each Member and its designated Manager may vote on any issue with respect to the business and affairs of the Company and the Tenant based upon its own self-interest, subject to the express obligations set forth herein or in the Tenant’s agreement of limited partnership.

     SECTION 4.5. Other Business of Members. Except as specifically provided to the contrary in any separate written agreement with the Company, any Member may engage independently or with others in other business ventures of any kind, render advice or services of any kind to other investors or ventures, or make or manage other investments or ventures. Neither the Company nor any Member shall have any right by virtue of this Agreement or the relationship created hereby in or to such other ventures or activities or to the income or proceeds derived therefrom, and the pursuit of such ventures, even if competitive with the business of the Company, shall not be deemed wrongful or improper. Nothing herein shall be deemed to negate or modify any separate agreement among the Members and the Company, or their respective Affiliates, or any of them, with respect to restrictions on competition.

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     SECTION 4.6. Maintenance of Tax Status. The Managers shall use their best efforts and take all appropriate action to cause the Company to be classified, for federal income tax purposes, as a partnership and to maintain the Company’s valid existence as a partnership for tax purposes.

     SECTION 4.7. Liability and Indemnification of the Managers; Expense Advancement.

     (a) Exculpation. No Covered Person (as defined in Section 4.7(h)) shall be liable, responsible or accountable in damages or otherwise to the Company or any Member for any acts or omissions performed or omitted by such Covered Person in good faith and reasonably believed by such Covered Person to be in the best interest of the Company. More specifically, but without limiting the generality of the preceding sentence, no Covered Person shall be liable for (i) good faith mistakes of judgment, for any mistakes in fact or law or for damages, claims or losses due to such mistakes or (ii) good faith mistakes of judgment, for any mistakes in fact or law or for damages, claims or losses due to such mistakes of any employee or agent of the Company. Notwithstanding the foregoing, each Covered Person shall be liable for its actions to the extent they are attributable to such Covered Person’s breach of fiduciary duty, gross negligence, willful misconduct and/or fraud.

     (b) Indemnification. To the fullest extent permitted by applicable law, the Company, its receiver or trustee shall indemnify and hold harmless each Covered Person from any and all loss, damage, liability, or expense incurred by such Covered Person at any time by reason of or arising out of any act or omission by such Covered Person for or on behalf of the Company or in furtherance of the interest of the Company, except to the extent such loss, damage, liability, or expense is attributable to such Covered Person’s breach of fiduciary duty, gross negligence, willful misconduct and/or fraud; provided that the satisfaction of any indemnification and any holding harmless shall be from and limited to the Company’s assets and no Member shall have any personal liability on account thereof.

     (c) Advancement of Expenses. Unless otherwise restricted by the Certificate of Formation or the TLLCL, expenses (including legal fees) incurred by a Covered Person in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of such Covered Person to repay such amount if it shall be determined that such Covered Person is not entitled to be indemnified as authorized in Section 4.7(b). Notwithstanding the foregoing, no advance shall be made by the Company to a Covered Person (other than a Covered Person who is or was a Manager, in which event this sentence shall not apply to such Covered Person) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made by the Managers (or if there is no Manager, or Managers to direct, by independent legal counsel (chosen by a majority in Percentage Interest of the disinterested Members), as the case may be, the “Decision-Making Party”) in a written opinion that the facts known to

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the Decision-Making Party at the time such determination is made demonstrate clearly and convincingly that such Covered Person acted in bad faith or in a manner that (i) was outside the scope of authority conferred on such Covered Person, and (ii) was not in the best interests of the Company.

     (d) Enforcement Without the necessity of entering into an express contract, all rights to indemnification and advances to Covered Persons under this Section 4.7 shall be deemed, unless otherwise restricted by the Certificate of Formation or the TLLCL, to be contractual rights and be effective to the same extent and as if provided for in a contract between the Company and such Covered Person. Unless otherwise restricted by the Certificate of Formation or the TLLCL, (i) any right to indemnification or advances granted by this Section 4.7 to a Covered Person shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (A) the claim for indemnification or advances is denied, in whole or in part, by the Company, or (B) no disposition of such claim is made within ninety (90) days of request therefore, and (ii) the claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the reasonable expense of prosecuting the claim. In connection with any claim for indemnification, the Company shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under this Agreement or any applicable law for the Company to indemnify the claimant for the amount claimed. Neither the failure of the Company (including the Decision- Making Party) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he/she/it has met the applicable standard of conduct set forth in this Agreement or any applicable law, nor an actual determination by the Company (including the Decision-Making Party) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a Covered Person to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the Covered Person is not entitled to be indemnified, or to such advancement of expenses, under this Section 4.7 or otherwise shall be on the Company.

     (e) Insurance. Unless otherwise restricted by the Certificate of Formation or the TLLCL, the Company may purchase and maintain insurance on behalf of Covered Persons and such other persons as the Managers shall determine against any liability that may be asserted against or expenses that may be incurred by any such Covered Person in connection with the activities of the Company or such other indemnitees, regardless of whether the Company would have the power to indemnify any such Covered Person or such other indemnitees against such liability under the terms of this Agreement. The Company may enter into indemnity contracts with Covered Persons and such other legal entities and persons as the Managers shall determine and may adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations hereunder and containing such other procedures regarding indemnification as are appropriate.

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     (f) Survival of Rights. The rights conferred on any Covered Person by this Section 4.7 shall continue as to a Covered Person who has ceased to be a Member, Manager or other agent of the Company and shall inure to the benefit of the successors, assigns, heirs, executors and administrators of such Covered Person.

     (g) Amendments . Unless otherwise restricted by the Certificate of Formation or the TLLCL, any repeal or modification of this Section 4.7 shall only be prospective and shall not affect the rights under this Section 4.7 in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any Covered Person.

     (h) Covered Person. For purposes of this Agreement, a “Covered Person” means each Manager and any other entity or person to whom the Managers have delegated management responsibilities.

ARTICLE V

ALLOCATIONS

     SECTION 5.1. Allocation of Income and Losses. After giving effect to the special allocations set forth in Exhibit B hereto, Income and Losses for each calendar year, or fraction thereof, as the case may be, shall be allocated to the Members (and for purposes of Articles V and VI hereof, the term “Member” shall include a transferee of an Interest whether or not such transferee has been admitted to membership in the Company) as follows:

     (a) Income shall be allocated in the following priorities:

          (i) First, to the Members in the amounts and proportions necessary to offset any Losses previously allocated pursuant to Section 5.1(b);

          (ii) Second, to the Members in accordance with their relative Percentage Interests.

     (b) Losses shall be allocated in the following priorities:

          (i) Except as provided in Section 5.1(b)(ii), Losses shall be allocated to the Members in accordance with their relative Percentage Interests.

          (ii) Any Losses allocated pursuant to Section 5.1(b)(i) hereof shall not exceed the maximum amount of Losses that can be so allocated without causing any Member to have an Adjusted Capital Account Deficit at the end of any fiscal year. In the event some but not all of the Members would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 5.1(b)(i), the limitation set forth in this Section 5.1(b)(ii) shall be applied on a Member by Member basis so as to allocate the maximum permissible Loss to each Member under Section 1.704-1(b)(2)(ii)(d) of the Regulations. All Losses in

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excess of the limitation set forth in this Section 5.1(b)(ii) shall be allocated to the Members in accordance with their relative Percentage Interests.

     SECTION 5.2. Miscellaneous.

     (a) For purposes of determining Income, Losses, or any other items allocable to any period, such items shall be determined on a daily, monthly, or other basis, as determined by the Managers using any permissible method under Code Section 706 and the Treasury Regulations thereunder.

     (b) Except as otherwise provided in this Agreement, all items of Company Income, gain, Loss, deduction and any other allocations for any tax period not otherwise provided for, shall be allocated among the Members in the same proportion as they share Income or Losses, as the case may be, for such tax period.

     (c) Except as otherwise provided in Section B.4 of Exhibit B for income tax purposes under the Code and the Regulations, each Company item of income, gain, loss, and deduction shall be allocated among the Members in the same manner as its correlative item of “book” income, gain, loss, or deduction is allocated pursuant to Section 5.1.

     (d) The Members are aware of the income tax consequences of the allocations made by this Article V and hereby agree to be bound by this Article V as reflected on the income tax returns of the Company in reporting their shares of Income and Losses for federal income tax purposes.

ARTICLE VI

DISTRIBUTIONS

     SECTION 6.1. Distributions. Cash Flow shall be paid to the Members on a monthly basis by the Managers as follows:

     (a) First, to any Guarantors, an amount equal to the amount of their respective Guarantor Loans made pursuant to Section 4.7, if any, with such distributions to be applied first to the Guarantor Loans of the most distant date and origin and then applied to the Guarantor Loans of the second most distant date and origin, and so on, until the principal and interest of all Guarantor Loans have been paid in full, and made pro rata among the Guarantors based upon the total amount of Guarantor Loans of even date made by each, to be applied first against interest, then against principal;

     (b) Second, to the Members, respectively, an amount equal to the amount of their respective Optional Loans made pursuant to Section 4.5, if any, with such distributions to be applied first to the Optional Loans of the most distant date and origin and then applied to the Optional Loans of the second most distant date and origin, and so on, until the principal and interest of all Optional Loans have been paid in full, and made

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pro rata among the Members based upon the total amount of Optional Loans of even date made by each, to be applied first against interest, then against principal; and

     c) Thereafter, to the Members in accordance with their respective Percentage Interests.

     Except as otherwise provided herein or unless otherwise agreed to by all of the Members, all Distributions shall be paid to the Members in accordance with their respective Percentage Interests. No Distribution shall be declared and paid if payment of such Distribution would cause the Company to violate any limitation on distributions set forth in the TLLCL or the terms of any financing.

     SECTION 6.2. Tax Distributions. Absent distributions pursuant to Section 6.1 above, the Managers shall, to the extent permitted by the Company’s agreements with third party lenders and subject to the availability of Cash Flow and using commercially reasonable efforts, distribute cash annually to the Members in accordance with their respective Percentage Interests in an amount which is sufficient to enable them to pay income taxes which arise from the taxable income of the Company. In computing the taxable income of each Member for purposes of this Section 6.2, the taxable income of each Member for the current year shall be reduced by any cumulative tax losses incurred in prior years (after reduction by taxable income in prior years). Such distributions shall assume for all Members the highest combined federal and state tax rates applicable to any Member with respect to its taxable income from the Company.

     SECTION 6.3. Distributions In Kind. Distributions in kind of the Company’s assets, in liquidation or otherwise, may be made by the Managers in their sole discretion, and any distributions in kind shall be valued at their then current fair market values, as determined in good faith by the Managers. Prior to any such distribution in kind, the difference between such fair market value of the property to be distributed and the value on the Company’s books for such property shall be credited or charged, as is appropriate, to the Members’ Capital Accounts. Upon the distribution of such property, such fair market value shall be charged to the Capital Account of the Member or Members receiving such distribution.

     SECTION 6.4. Withholding. Each Member hereby authorizes the Company to withhold from or pay on behalf of or with respect to such Member any amount of federal, state, local or foreign taxes that the Managers determine that the Company is required to withhold or pay with respect to any amount distributable or allocable to such Member pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Company pursuant to Code Sections 1441, 1442, 1445 or 1446. Any amount paid on behalf of or with respect to a Member shall constitute a loan by the Company to such Member, which loan shall be repaid by such Member within 15 days after notice from the Managers that such payment must be made unless (a) the Company withholds such payment from a distribution that would otherwise be made to the Member or (b) the Managers determine, in their sole and absolute discretion, that such payment may be satisfied out of the Distributions of the Company that would, but for such payment, be distributed to the Member. Each Member hereby unconditionally and irrevocably grants to the Company a security interest in such Member’s Interest to secure such Member’s obligation to pay to the Company any amounts required to be

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paid pursuant to this Section 6.2. In the event that a Member fails to pay any amounts owed to the Company pursuant to this Section 6.2 when due, the Managers may, in their sole and absolute discretion, elect to make the payment to the Company on behalf of such defaulting Member and shall succeed to all rights and remedies of the Company as against such defaulting Member (including, without limitation, the right to receive Distributions otherwise distributable to such defaulting Member). Any amounts payable by a Member hereunder shall bear interest at the Prime Rate plus two percent (2%) (but not higher than the maximum lawful rate) from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each defaulting Member shall take such actions as the Company or the Manger shall request in order to perfect or enforce the security interest created hereunder.

     SECTION 6.5. Right of Offset. Notwithstanding anything contained in this Agreement to the contrary, unless expressly waived by the Managers, the Company shall retain and have a right of offset against any and all Distributions or payments of cash (including all returns of capital) related to the Interest of each Member respecting all obligations of such Member (and its Affiliates or partners, members or shareholders or any entity owned by it or them) to the Company or its Affiliates, including without limitation obligations to make Capital Contributions and other payments required hereunder and any obligations of the Member (or its Affiliates or partners, members or shareholders or any entity owned by it or them), whether as an obligor, guarantor or otherwise. Such right of offset is exercisable by the Company without regard to any assignment, transfer or other disposition of the Interest.

ARTICLE VII

WINDING UP AND TERMINATION OF THE COMPANY

     SECTION 7.1. Winding Up and Termination of the Company. The Company shall be wound up upon the happening of any of the following events:

     (a) The written consent of the Members to terminate the Company;

     (b) The occurrence of any event which, under the TLLCL or any other applicable law, causes the termination of the Company, except as expressly modified herein;

     (c) The sale of all or a substantial portion of the Company Property, unless the Managers agree in writing at the time of such sale that the sale will not cause the termination of the Company; or

     (d) The bankruptcy, death, termination, winding up, adjudication of incompetence, or withdrawal of the last remaining Member or the transfer or conversion of the entire Interests of the last remaining Member.

     Except as specifically set forth herein, the Company shall not be terminated by the death, incapacity or other event of withdrawal of a Member.

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     SECTION 7.2. Winding-Up and Liquidation.

     (a) Upon the termination of the Company, its assets shall be sold and liquidated, and its affairs shall be wound up as soon as practicable thereafter by the Managers; provided that a reasonable time shall be allowed for the orderly liquidation of the assets of the Company and the discharge of liabilities to creditors so as to minimize the losses normally attendant to a liquidation. In winding up the Company and liquidating the assets thereof, the Managers, or other Person so designated for such purpose, may arrange for the collection and disbursement to the Members of any future receipts from the Company’s assets or other sums to which the Company may be entitled, or may sell the Company’s interest in the Company’s assets to any person, including Affiliates of the Members , on such terms and for such consideration as shall be consistent with obtaining the fair market value thereof.

     (b) Upon the termination of the Company and after the Capital Accounts of the Members have been adjusted to reflect the allocations described in Article V and Exhibit B with respect to all Company transactions and operations occurring prior to final liquidating Distributions, the assets, if any, of the Company available for distribution and any net proceeds from the liquidation of any such assets, shall be applied and distributed in the following manner or order, to the extent available:

          (i) First, to the discharge of debts and obligations of the Company, including Guarantor Loans and Optional Loans from Members;

          (ii) Second, to fund reserves for contingent liabilities;

          (iii) Third, to the Members in accordance with their positive Capital Accounts; and

          (iv) Fourth, to the Members in accordance with their Percentage Interests.

     (c) Upon the termination and commencement of the winding-up of the Company, the Managers or the remaining Members shall cause a certificate of termination to be executed on behalf of the Company and filed with the Secretary of State of the State of Texas, and the Managers and, at the request of the Managers or their designee, each Member shall execute, acknowledge and file any and all other instruments necessary or appropriate to reflect the termination of the Company. The termination of the Company shall be effective as of the day in which the event occurs giving rise to the termination, but the Company shall not terminate until there has been a winding-up the Company’s business and affairs, and the assets of the Company have been distributed as provided in this Section 7.2.

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ARTICLE VIII

WITHDRAWAL OF MEMBERS AND TRANSFER
OF MEMBERS’ INTERESTS

     SECTION 8.1. Restriction on Transfer and Withdrawal. Except as provided in this Agreement, no Member shall transfer or assign its Interest at any time prior to the Company’s winding-up and liquidation without the written consent of the other Members, nor shall any Member voluntarily withdraw from the Company.

     Notwithstanding the foregoing, the following types of transfers (each, a “Permitted Transfer”) shall be permitted and shall not be subject to the restrictions set forth in this Section 8.1 (but shall be subject to the requirements of Sections 8.2 and 8.3):

     (a) Transfers to Affiliates. Each of MedCath and VB shall have the right to assign or transfer all or a portion of its Interest to an Affiliate, provided however that no such assignment or transfer shall relieve the assigning or transferring Member from its obligations and responsibilities herein.

     (b) Transfers Approved by Managers. Any Member may transfer all or a portion of its Interest pursuant to the prior written approval of all of the Managers, which may be withheld or conditioned in the sole discretion of the Managers.

     (c) Transfers of Interests in Physician Investor. The owners and members of the Physician Investor may transfer or assign the interests therein only with the prior written approval of the Managers of the Company. The owners and members of the Physician Investor may pledge or assign their interests in the Physician Investor to third-party lenders, which lenders, upon foreclosure of any such interest, shall be subject to the terms and conditions of the limited partnership agreement of the Physician Investor. The operating agreement or limited partnership agreement of the Physician Investor shall be presented to the Managers for approval and once so approved shall not be amended without the prior written consent of the Managers.

     (d) Transfers as Collateral for Lenders. The Members of the Company are each entitled to pledge or assign their interests in the Company to their third-party lenders, which lenders, upon foreclosure of any such Interest, shall be subject to the terms and conditions of this Agreement.

     SECTION 8.2. Conditions Precedent to Transfer of Member’s Interest. No transfer may be made of all or a portion of any Member’s Interest (i) if such transfer constitutes a violation of the registration provisions of the Securities Act of 1933, as amended, or the registration provisions of any applicable state’s securities provisions; (ii) unless approved by all of the Managers, if after such transfer the Company will be classified other than as a partnership for federal income tax purposes; or (iii) unless approved by all of the Managers, if such transfer, when taken together with other prior transfers, results in a “termination” of the Company for federal income tax purposes. The Company may require, as a condition precedent to any transfer of a Company Interest, delivery to the Company at the proposed transferor’s expense, an opinion

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of counsel satisfactory (both as to the counsel and substance of the opinion) to the Managers that the transfer will not result in the occurrence of any of the foregoing restrictions recited in clauses (i), (ii) or (iii) above.

     SECTION 8.3. Substitute or Additional Member — Conditions to Fulfill. No assignee of a Member’s Interest in the Company or additional Member shall have the right to become a Member in place of his assignor or otherwise unless all of the following conditions are satisfied:

     (a) In the event of an assignment, a duly executed and acknowledged written instrument of assignment has been filed with the Company and sets forth that the assignee becomes a substitute Member in place of the assignor.

     (b) The assignor and assignee or additional Members execute and acknowledge such other instruments as the existing Members may deem necessary or desirable to effect such admission, including, but not limited to, the written acceptance and adoption by the assignee or additional Members of the provisions of this Agreement.

     (c) The written consent of all of the Managers to such substitution or admission of a Member shall be obtained.

     (d) The assignee shall have provided the Company with any notice that may be required by Section 6050K of the Code or other applicable law.

     (e) Payment has been made to the Company of all costs and expenses of admitting any such assignee or additional Members to the Company.

     SECTION 8.4. Further Assignment by Assignee. An assignee of any Interest who does not become a Member and who desires to make a further assignment of such Interest shall be subject to all the provisions of this Article VIII to the same extent and in the same manner as any Member desiring to make an assignment of his Interest.

     SECTION 8.5. Rights and Liabilities of and Restrictions on Assignee. No person shall be recognized as an assignee of an Interest if such Interest was transferred in violation of this Article VII. No assignee of an Interest in the Company shall have the right to participate in the Company, inspect the books of account of the Company, or exercise any other right of a Member until admitted as a Member. Notwithstanding the failure of such assignee to be admitted as a Member, such assignee shall be entitled to receive, with respect to the Interest validly assigned to it, the allocations and distributive shares of Income, Losses, tax credits, and Distributions otherwise pertaining thereto under this Agreement, and, upon demand, may receive copies of all reports thereafter delivered pursuant to the requirements of this Agreement; provided, the Company shall have first received notice of such assignment and all required consents thereto shall have been obtained and other conditions precedent to transfer thereof, as set forth herein or otherwise required by applicable law, shall have been satisfied. The Company’s tax returns shall be prepared to reflect assignees as Members for tax purposes.

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     SECTION 8.6. Involuntary Transfers; Transfer of Interests in Members. The prohibition on transfers of Interests in the Company set forth in Section 8.1(a) shall include and apply to: (i) involuntary transfers of Interests, including without limitation any purported transfer by or pursuant to bankruptcy, attachment, divorce, equitable distribution, or operation of law, and (ii) transfers of shares, membership interests, partnership interests, or other equity ownership interests in the Members, provided however that such prohibition shall apply to a transfer by an equity owner of MedCath or VB only to the extent that such transfer results in a change of ultimate control of such Member. In addition to any other remedy available at law or in equity, the Managers shall not be required to take any purported transfer in violation of this Agreement into account for purposes of this Agreement, or to recognize any purported transferee as a Member or an assignee of a Member.

ARTICLE IX

BOOKS; DEPOSITORY ACCOUNTS; ACCOUNTING REPORTS; ELECTIONS

     SECTION 9.1. Books of Account. At all times during the continuance of the Company, the Company shall maintain or cause to be maintained true and full financial records and books of account showing all receipts and expenditures, assets and liabilities, profits and losses, and all other records necessary for recording the Company’s business and affairs, including those sufficient to record the allocations and Distributions required by the provisions of this Agreement. MedCath shall have the administrative responsibility for maintaining the books of account on behalf of the Company. MedCath may relinquish such responsibility at any time by written notice to the Company, and in such event the Managers will appoint another Member or representative of a Member to maintain the books of account on behalf of the Company.

     SECTION 9.2. Access to Records; Audit. The books of account, tax returns, reports, records, this Agreement, and all documents and other writings of the Company, including the Certificate of Formation, shall at all times be kept and maintained at the principal office of the Company, or at such other place or places as the Managers may determine. Each Member or the Member’s designated representatives shall, upon reasonable notice to the Company, have access to such financial books, tax returns, reports, records, and documents during reasonable business hours and may inspect and make copies of any of them.

     SECTION 9.3. Depository Accounts and Investment of Funds. The Managers may open and maintain on behalf of the Company one or more depository or investment accounts at such times and in such depositories or institutions as they shall determine, in which all monies received by or on behalf of the Company shall be deposited. All withdrawals from such accounts shall be made upon the signature of such person or persons as the Managers may from time to time designate in writing. MedCath shall have the responsibility for maintaining such accounts and investments on behalf of the Company. MedCath may relinquish such responsibility at any time by written notice to the Company, and in such event the Managers will appoint another Member or representative of a Member to maintain such accounts and investments.

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     SECTION 9.4. Reports.

     (a) The Company shall prepare or cause to be prepared, at the end of each fiscal year of the Company, annual financial statements showing the financial condition of the Company at the end of such fiscal year and the results of its operations for the fiscal year then ended, which annual financial statements shall be prepared in accordance with GAAP.

     (b) In addition to the financial statements provided for in Section 9.4(a), the Company shall prepare or cause to be prepared:

     (i) income tax returns for the Company and shall timely file them with the appropriate authorities; and

     (ii) a notice of each Member’s share of the Company Income, Losses and tax credits for federal income tax purposes for each year and any other information necessary or desirable for preparation by each Member of such Member’s federal and state income tax return.

     MedCath shall have the administrative responsibility for preparing and distributing such reports on behalf of the Company. MedCath may relinquish this responsibility at any time by written notice to the Company, and in such event the Managers will appoint another Member or representative of a Member to prepare and distribute such reports.

     SECTION 9.5. Tax Accounting Methods; Periods; Elections. The Company’s annual financial accounting and tax accounting period shall be based upon a fiscal year ending December 31 of each year, unless another accounting period is required by the Code. The Managers may cause the Company to make or refrain from making any election allowable to the Company under the Code, including elections under Section 754 of the Code with respect to Company distributions described in Section 734 of the Code and with respect to transfers of Interests described in Section 743 of the Code. MedCath shall have the administrative responsibility for handling such tax matters on behalf of the Company and pursuant to Section 11.11 herein, shall serve as the “Tax Matters Partner” of the Company. MedCath may relinquish such responsibility upon written notice to the Company and in such event the Managers shall appoint another “Tax Matters Partner.”

ARTICLE X

MEETINGS OF MEMBERS

     SECTION 10.1. Meetings of Members. Meetings of the Members (a) may be called by the Managers and (b) shall be called by the Managers at the request, in writing, of the holders of not less than fifteen percent (15%) in Percentage Interest of the Members, which request shall state the purpose or purposes of the proposed meeting. Business transacted at all

25

meetings held pursuant to this Section 10.1 shall be confined to the purpose or purposes stated in the related notice as set forth in Section 101.352(b) of the TLLCL.

     SECTION 10.2. Notice of Meetings of Members. Written notice stating the location, day and hour of the meeting and, if required by Section 101.352 of the TLLCL, stating the business to be transacted at the meeting, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each Member of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the mail, postage prepaid, directed to the Member at its address as it appears on the records of the Company. Any duly convened meeting may be adjourned by the Members to a later time without further notice other than announcement at the meeting. Any Member may waive notice of any meeting before, during or after the duly convened meeting. The waiver must be signed in writing by the Member entitled to notice and delivered to the Company for inclusion in the Company’s records. A Member’s attendance at or participation in a meeting, whether present in person or represented by proxy, shall constitute a waiver of notice of such meeting, except when such Member or its proxy attends a meeting for the sole and express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, a meeting need be specified in any written waiver of notice.

     SECTION 10.3. Record Date. In order that the Company may determine the Members entitled to notice of or to vote at any meeting of the Members or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of an Interest in the Company or for the purpose of any other lawful action, the Managers may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed: (a) the record date for determining the Members entitled to notice of or to vote at a meeting of such Members shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (b) the record date for determining Members for any other purpose shall be at the close of business on the day on which the Members adopt the resolution relating thereto. A determination of the Members of record entitled to notice of or to vote at a meeting of the Members shall apply to any adjournment of the meeting; provided, however, that the Managers may fix a new record date for the adjourned meeting.

     SECTION 10.4. Quorum. The attendance in person or by proxy of all of the Managers and all of the Members shall constitute a quorum at all meetings of the Members. Once a quorum is present at the meeting of the Members, the subsequent withdrawal from the meeting by any Member prior to adjournment or the refusal of any Member to vote shall not affect any business that is transacted at such meeting prior to such withdrawal. If, however, such quorum shall not be present at the opening of any meeting of the Members, the Members entitled to vote at such meeting, whether present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the holders of the requisite amount of Interests shall be present or represented. At

26

such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days or if, after the adjournment, a new record date is fixed for the adjourned meeting by the Managers, a notice of the adjourned meeting shall be given to each Member of record entitled to vote at the meeting.

     SECTION 10.5. Organization. Meetings of the Members shall be presided over by the Managers, or their designee, and the Managers or their designee shall act as secretary of each meeting.

     SECTION 10.6. Actions by Members. Except for a matter for which the affirmative vote of Members is required by applicable law, the Certificate of Formation or this Agreement, the Managers shall act for the Company in all respects. With respect to a matter for which the affirmative vote of the Members is required by applicable law, the Certificate of Formation or this Agreement, the unanimous vote of the Members shall be required for any act of the Members, whether present in person or represented by proxy. Voting at meetings of the Members need not be by written ballot and need not be conducted by inspectors unless the Managers shall so determine.

     SECTION 10.7. Proxies. Each Member entitled to vote at a meeting of the Members may authorize another person or persons to act for such Member by proxy; provided, however, that no proxy will be effective and recognized by the Managers unless such proxy: (a) is in writing, (b) is signed by the Member authorizing another Person to act on his, her or its behalf, (c) specifies the purpose for which the proxy is being given, and (d) indicates a specific meeting for which the proxy has been authorized. A proxy shall only be effective for the specific meeting (and any adjournments thereof) for which such proxy has been executed. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A Member may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Managers.

     SECTION 10.8. Action Without Meeting. Any action required or permitted to be taken at any meeting of the Members may be taken without a meeting, if a written consent thereto is signed by the holders of an aggregate Percentage Interest sufficient to approve or consent to such action, before or after such action, describing the action taken, and included in the minutes of the meetings of the Members or filed with the Company’s records. A consent transmitted by electronic transmission by a Member or by a person or persons authorized to act for a Member shall be deemed to be written and signed for purposes of this Section 10.8.

     SECTION 10.9. Meeting by Conference Telephone. The Members may participate in any meeting of such Members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation in a meeting shall constitute presence in person at such meeting.

27

     SECTION 10.10. Registered Members. The Company shall be entitled to treat the holder of record of any Interest as the holder in fact of such Interest for all purposes, and accordingly shall not be bound to recognize any equitable or other claim to or interest in such Interest on the part of any other person, whether or not it shall have express or other notice of such claim or interest, except as expressly provided by this Agreement or the laws of the State.

ARTICLE XI

MISCELLANEOUS PROVISIONS

     SECTION 11.1. Waiver of Provisions. The waiver of compliance at any time with respect to any of the provisions, terms, or conditions of this Agreement shall not be considered a waiver of such provision, term, or condition itself or of any of the other provisions, terms, or conditions hereof or bar its enforcement at any time thereafter.

     SECTION 11.2. Amendment. This Agreement contains the entire agreement among the Members and any modification or amendment thereto must be in writing signed by each of the Members.

     SECTION 11.3. Interpretation and Construction. Where the context so requires, the masculine shall include the feminine and the neuter and the singular shall include the plural. The headings and captions in this Agreement are inserted for convenience and identification only and are in no way intended to define, limit, or expand the scope or intent of this Agreement or any provision hereof. Unless otherwise specified, the references to Section and Article in this Agreement are to the Sections and Articles of this Agreement.

     SECTION 11.4. Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The parties hereto hereby submit to the jurisdiction of the courts of the State of Texas for the adjudication of any matter arising with respect to this Agreement.

     SECTION 11.5. Partial Invalidity. In the event that any part or provision of this Agreement shall be determined to be invalid or unenforceable, the remaining parts and provisions of this Agreement which can be separated from the invalid, unenforceable provision or provisions shall continue in full force and effect.

     SECTION 11.6. Binding on Successors. The terms, conditions, and provisions of this Agreement shall inure to the benefit of, and be binding upon the parties hereto and their respective permitted successors and assigns. However, none of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Company (other than a Member who is also a creditor).

     SECTION 11.7. Notices and Delivery.

     (a) To Members. Any notice to be given hereunder at any time to any Member, or any documents, reports, or returns required by this Agreement to be

28

delivered to any Member, may be delivered personally or mailed to such Member, postage prepaid, addressed to him at the address set forth on Exhibit A or such other address as such Member shall by notice to the Company have designated as his or her address for the mailing of all notices hereunder. Any notice, or any document, report, or return so delivered or mailed shall be deemed to have been given or delivered to such Member at the time it is delivered or mailed, as the case may be.

     (b) To the Company. Any notice to be given to the Company hereunder may either be delivered personally or mailed to the Company, by registered or certified mail, postage prepaid, addressed to the Company at its principal office, and shall be copied to each other Member. Any notice so delivered or mailed shall be deemed to have been given to the Company at the time it is delivered or mailed, as the case may be.

     SECTION 11.8. Counterparts. This Agreement may be executed in any number of separate counterparts, each of which shall be deemed an original document, and all counterparts taken together shall constitute but one instrument.

     SECTION 11.9. Statutory Provisions. Any statutory or regulatory reference in this Agreement shall include a reference to any successor to such statute or regulation and/or revision thereof.

     SECTION 11.10. Waiver of Partition. Each party does hereby waive any right to partition or the right to take any other action which might otherwise be available to such party for the purpose of severing its relationship with the Company or its interest in the property held by the Company from the interests of other Members.

     SECTION 11.11. Tax Matters Member. The Managers hereby elect MedCath to act as the “Tax Matters Partner”” as that term is defined in Section 6231 of the Code.

     SECTION 11.12. Determination of Matters Not Provided For In This Agreement. The Managers shall decide any questions arising with respect to the Company and this Agreement which are not specifically or expressly provided for in this Agreement.

     SECTION 11.13. Further Assurances. The Members each agree to cooperate, and to execute and deliver in a timely fashion any and all additional documents necessary to effectuate the purposes of the Company and this Agreement.

     SECTION 11.14. Arbitration. Any dispute, controversy or difference arising out of or in connection with this Agreement or any transaction hereunder shall be finally settled under the Commercial Arbitration Rules of the American Arbitration Association then in effect by three arbitrators selected in accordance with such rules (provided, however, that if the amount in controversy is less than $500,000, then such dispute, controversy or difference shall be finally settled by one arbitrator selected in accordance with such Rules). The arbitrators’ award shall be final and binding on the parties. The arbitration shall be administered by the American Arbitration Association in English and shall take place in Houston, Texas.

29

     (a) Procedure. Once the arbitrators have been selected, a hearing date shall be set within forty-five (45) days thereafter. Written submittals shall be presented and exchanged by the parties no less than fifteen (15) days before the hearing date, including reports prepared by experts upon whom either party intends to rely. At such time the parties shall also exchange copies of all documentary evidence upon which they will rely at the arbitration hearing and a list of the witnesses whom they intend to call to testify at the hearing. Each party shall also make its respective experts available for deposition by the other party prior to the hearing date. The arbitrators shall make their award as promptly as practical after conclusion of the hearing.

     The arbitrators shall not be bound by any rules of evidence or civil procedure, but rather may consider such writings and oral presentations as reasonable businessmen would use in the conduct of their day-to-day affairs, and may require the parties to submit some or all of their presentation orally or in written form as the arbitrator may deem appropriate. It is the intention of the parties to limit live testimony and cross examination to the extent necessary to insure a fair hearing to the parties on the matters submitted to arbitration, and to provide neither party more than two complete business days to present its position. The parties have included the foregoing provisions limiting the scope and extent of the arbitration with the intention of providing for prompt, economic and fair resolution of any dispute submitted to arbitration.

     (b) Award. The arbitrators shall have the discretion to award the costs of arbitration, arbitrators’ fees and the respective attorneys’ fees of each party between the parties as they see fit. Judgment upon the award entered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitrators shall make their award in accordance with applicable law and based on the evidence presented by the parties, and shall include in their written award findings of fact and conclusions of law. The arbitrators shall have the power to award relief both in law and equity, which would be available in a court having jurisdiction over the parties and over the subject matter of the dispute. Such powers shall include, but not be limited to, the power to grant injunctions and require specific performance.

     (c) Statute of Limitations. Any such dispute, controversy or difference settled in arbitration shall be subject to the statute of limitations which would be applicable to an action at law.

30

     IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated Operating Agreement as of the day and year first above written.

MEMBERS:
VALLEY BAPTIST REALTY CORPORATION
By:
	James G. Springfield,
	Chairman and President
HARLINGEN HOSPITAL MANAGEMENT, INC.
By:
Name:
Title:
HMC PHYSICIANS, LTD.
By:
Name:
Title:
HOSPITAL:
The Hospital, as sole initial Member, hereby withdraws from the Company and relinquishes all right, title and interest in and to its interest in the Company:
HARLINGEN MEDICAL CENTER, LIMITED PARTNERSHIP
By: HMC Management Company, LLC, its General Partner
By: Harlingen Hospital Management, Inc., its sole Member

31

By:

Name:

Title:

MANAGERS:

                    James G. Springfield

                    James A. Parker

                    Hugo Blake

32

EXHIBIT A
TO
AMENDED AND RESTATED OPERATING AGREEMENT
OF
HMC REALTY, LLC

Name, Address				Initial
and Taxpayer	Percentage			Capital		Letter of Credit
Identification Number	Interest			Contribution		Amount
Harlingen Medical Center, Limited Partnership		N/A		(Note 1)			N/A
Valley Baptist Realty Corporation		18.66	%	$	4,944,607	$	558,000
P.O. Drawer 2588				(Note 2)
2101 Pease Street Harlingen, Texas 78551 Attn: James G. Springfield, Chairman and President #
Harlingen Hospital Management, Inc.		36.06	%	$	9,555,393	$	1,083,000
10720 Sikes Place, Suite 300				(Note 3)
Charlotte, NC 28277 #56-2141739
HMC Physicians, Ltd. 801 E. Fern #144 McAllen, TX 78501 Attn: Hugo G. Blake, M.D. #26-0144229		45.28	%	$	12,000,000	$	1,359,000
Total		100	%	$	26,500,000	$	3,000,000

Notes:

(1)

The Hospital formed the Company and immediately prior to the effectiveness of this Agreement contributed fee simple title to the Property to the Company, with an agreed gross fair market value of approximately $57,790,000, and subject to certain mortgages and debts in an aggregate principal amount of approximately $57,790,000, and assigned all of its interest in the Company to Harlingen Hospital Management, Inc.. Upon the execution and effectiveness of this Agreement, the Hospital shall have no further interest in the Company or any items of income, loss, deduction, credit or distributions therefrom, and shall have no further rights or obligations pursuant to this Agreement.

33

(2)

Represents $2,000,000 cash contribution and conversion of $2,944,607 of debt represented by the Assigned VB Loan.

(3)

Represents conversion of $9,555,393 of debt represented by a portion of the Assigned MedCath Loan. The remaining principal balance of the Assigned MedCath Loan of $1,790,000 will be repaid in cash upon closing of the Acquisition Loan to the holders thereof (it being acknowledged by the parties that $1,472,303 of such debt is held by Harlingen Hospital Management Inc., by assignment from MedCath Finance Co., LLC and $317,696 of such debt is held by the Hospital)

34

EXHIBIT B
TO
AMENDED AND RESTATED OPERATING AGREEMENT
OF
HMC REALTY, LLC

Special Tax Provisions

For purposes of this Exhibit B, references in the Code or the Regulations to “partner” and “partnership” shall be deemed to refer to “Member” and “Company,” respectively.

     SECTION B.1. Definitions.

     “Company Minimum Gain” shall mean “partnership minimum gain” as defined in Regulations Sections 1.704-2(b)(2) and 1.704-2(d).

     “Member Minimum Gain” means an amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i) of the Regulations.

     “Member Nonrecourse Debt” has the meaning set forth in Section 1.704-2(b)(4) of the Regulations.

     “Member Nonrecourse Deductions” has the meaning set forth in Section 1.704-2(i)(2) of the Regulations. The amount of Member Nonrecourse Deductions with respect to a Member Nonrecourse Debt for a Company fiscal year equals the excess, if any, of the net increase, if any, in the amount of Member Minimum Gain attributable to such Member Nonrecourse Debt during that fiscal year over the aggregate amount of any distributions during that fiscal year to the Member that bears the economic risk of loss for such Member Nonrecourse Debt to the extent such distributions are from the proceeds of such Member Nonrecourse Debt and are allocable to an increase in Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(2) of the Regulations.

     “Nonrecourse Deductions” has the meaning set forth in Section 1.704-2(b) and 2(c) of the Regulations. The amount of Nonrecourse Deductions for a Company fiscal year equals the excess, if any, of the net increase, if any, in the amount of Company Minimum Gain during that fiscal year over the aggregate amount of any distributions during that fiscal year of proceeds of a Nonrecourse Liability that are allocable to an increase in Company Minimum Gain, determined according to the provisions of Section 1.704-2(c) of the Regulations.

     “Nonrecourse Liability” has the meaning set forth in Section 1.704-2(b)(3) of the Regulations.

35

     SECTION B.2 Special Allocations. The following special allocations shall be made in the following order:

     (a) Minimum Gain Chargeback. Notwithstanding any other provision of this Exhibit B, if there is a net decrease in Company Minimum Gain during any Company fiscal year, each Member shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to the portion of such Member’s share of the net decrease in Company Minimum Gain, determined in accordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Section B.2(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith.

     (b) Member Minimum Gain Chargeback. Notwithstanding any other provision of this Exhibit B except Section B.2(a), if there is a net decrease in Member Minimum Gain attributable to a Member Nonrecourse Debt during any Company fiscal year, each Member who has a share of the Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5), shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to the portion of such Member’s share of the net decrease in Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This Section B.2(b) is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith.

     (c) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Company income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible; provided that an allocation pursuant to this Section B.2(c) shall be made if and only to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Exhibit B have been tentatively made as if this Section B.2(c) were not in the Agreement.

     (d) Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Members in accordance with their Percentage Interests.

36

     (e) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i).

     (f) Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.

     SECTION B.3. Curative Allocations.

     (a) The allocations set forth in Section B.2 hereof (the “Regulatory Allocations”) are intended to comply with certain regulatory requirements, including the requirements of Regulations Sections 1.704-1(b) and 1.704-2. The Regulatory Allocations shall be taken into account in the reasonable discretion of the Managers in allocating other items of income, gain, loss and deduction among the Members so that to the extent possible without violating the requirements giving rise to the Regulatory Allocations, the net amount of such allocations of other items and the Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to each such Member if the Regulatory Allocations had not occurred.

     (b) Any income, gain, loss, or deduction realized as a direct or indirect result of the issuance of a Company interest by the Company to a Member (the “Issuance Items”) shall be allocated among the Members so that, to the extent possible, the net amount of such Issuance Items, together with all other allocations under this agreement to each Member, shall be equal to the net amount that would have been allocated to each such Member if the Issuance Items had not been realized.

     SECTION B.4. Overriding Allocations for Contributed Property. In the event of a contribution of property other than cash to the Company, income, gain, loss and deduction with respect to such contributed property shall be shared among the Members for tax purposes so as to take account of the variation between the basis of the property to the Company and its fair market value at the time of contribution in accordance with Code Section 704(c) and Regulations thereunder, with the Managers having authority to make any elections or choose any methods thereunder; provided, that the remedial allocation method under Regulation Section 1.704-3(d) shall be used.

     SECTION B.5. Varying Interest in Company. Allocations to any Member whose Interest changes during a Company fiscal year or to any Member who is a Member for less than

37

a full Company fiscal year shall be made in accordance with Code Section 706(d) and the Treasury Regulations promulgated thereunder to take into account the Member’s varying Interest in the Company during the Company fiscal year.

38

EXHIBIT C
TO
OPERATING AGREEMENT
OF
HMC REALTY, LLC

Description of Property

39

EX-12.0

Exhibit 12.0

MedCath Corporation

Statement of Computation of Ratio of Earnings to Fixed Charges
(Dollars in thousands)

	Fiscal Year Ended September 30,
	2003			2004			2005			2006			2007
Earnings:
Income (loss) from continuing operations before minority interest, income taxes and discontinued operations	$	(51,625	)	$	10,890		$	29,245		$	26,961		$	44,278
Equity method investment earnings		3,541			3,113			3,356			4,919			5,739
		(55,166	)		7,777			25,889			22,042			38,539
Add:
Fixed charges	$	24,901		$	26,169		$	32,197		$	33,645		$	23,118
Amortization of capitalized interest		250			329			283			250			242
Distributed income of equity investees		236			2,666			2,688			2,848			4,160
Less:
Capitalized interest		1,241			386			—			—			173
Minority interest in pre-tax income of subsidiaries that have not incurred fixed charges		3,815			456			1,540			1,521			834
Earnings as adjusted	$	(34,835	)	$	36,099		$	59,517		$	57,264		$	65,052
Fixed Charges:
Third party interest expense	$	21,950		$	23,814		$	30,230		$	30,303		$	21,286
Capitalized interest		1,241			386			—			—			173
Amortization of loan acquisition costs		1,394			1,661			1,602			2,907			1,178
Estimate of the interest within rental expense		316			308			365			435			481
Total fixed charges	$	24,901		$	26,169		$	32,197		$	33,645		$	23,118
Ratio of earnings to fixed charges/ (excess of fixed charges over earnings)	$	(59,736	)		1.38	x		1.85	x		1.70	x		2.81	x

EX-21.1

Exhibit 21.1

EXHIBIT 21.1

MEDCATH CORPORATION SUBSIDIARIES

Name	Jurisdiction of Organization/Incorporation
AHH Management, Inc.	North Carolina
Arizona Heart Hospital, LLC	Arizona
Austin MOB, Inc.	North Carolina
Blue Ridge Cardiology Services, LLC	North Carolina
Cape Cod Cardiology Services, LLC	North Carolina
Central New Jersey Heart Services, LLC	Delaware
Central Park Medical Office Building, LP	Texas
Center for Cardiac Sleep Medicine, LLC	North Carolina
Coastal Carolina Heart, LLC	North Carolina
Colorado Springs Cardiology Services, LLC	Colorado
Doctors Community Hospital, LLC	Delaware
Doctors Community Hospital Management, Inc.	North Carolina
DTO Management, Inc.	North Carolina
Greensboro Heart Center, LLC	North Carolina
HHBF, Inc.	North Carolina
HHM Company, LLC	Delaware
Harlingen Hospital Management, Inc.	North Carolina
Harlingen Medical Center, LP	North Carolina
Harlingen Partnership Holdings, Inc.	Arizona
Heart Hospital of BK, LLC	North Carolina
Heart Hospital of DTO, LLC	North Carolina
Heart Hospital IV, L.P.	Texas
Heart Hospital of New Mexico, LLC	New Mexico
Heart Hospital of San Antonio, LP	Texas
Heart Hospital of South Dakota, LLC	North Carolina
HMC Management Company, LLC	North Carolina
HMC Realty, LLC	Texas
Hospital Management IV, Inc.	North Carolina
Illinois Cardiovascular Services Management, Inc.	North Carolina
Interim Diagnostics Solutions, LLC	Delaware
Lafayette Hospital Management, Inc.	North Carolina
Louisiana Medical Center and Heart Hospital, LLC	North Carolina
Louisiana Heart Hospital Profession Fee, LLC	Louisiana
Louisiana Hospital Management, Inc.	North Carolina
MedCath of Arkansas, Inc.	North Carolina
MedCath Consulting & Management, Inc.	Arizona
MedCath Partners, LLC	North Carolina
MedCath Finance Company, LLC	North Carolina
MedCath Holdings Corp.	Delaware
MedCath Incorporated	North Carolina
MedCath of Little Rock, L.L.C.	North Carolina
MedCath of McAllen, L.P.	North Carolina
MedCath of New Jersey Cardiac Testing Centers, LP	North Carolina
MedCath of Texas, Inc.	North Carolina

Name	Jurisdiction of Organization/Incorporation
Metuchen Nuclear Management, LLC	Delaware
Milwaukee Hospital Management, Inc.	North Carolina
Montana Hospital Management, Inc.	North Carolina
NM Hospital Management, Inc.	North Carolina
San Antonio Hospital Management, Inc.	North Carolina
San Antonio Holdings, Inc.	Arizona
Sioux Falls Hospital Management, Inc.	North Carolina
Sun City Cardiac Center Associates	Arizona
Tri County Heart New Jersey, LLC	Delaware
Venture Holdings, Inc.	Arizona
Wilmington Heart Services, LLC	Delaware

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-82430 and 333-82432 on Form S-8 of our reports dated December 14, 2007, relating to the consolidated financial statements of MedCath Corporation (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of the provisions of Statement of Financial Accounting Standards No. 123-R, Share-Based Payment), and management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of MedCath Corporation for the year ended September 30, 2007.

/s/ DELOITTE & TOUCHE LLP

Charlotte, North Carolina
December 14, 2007

EX-23.2

Exhibit 23.2

INDEPENDENT AUDITORS’ REPORT

We consent to the incorporation by reference in Registration Statement Nos. 333-82430 and 333-82432 on MedCath Corporation on Form S-8, of our report on the financial statements of Heart Hospital of South Dakota LLC dated December 14, 2007, appearing in this Annual Report on Form 10-K of MedCath Corporation for the year ended September 30, 2007.

/s/ DELOITTE & TOUCHE LLP

December 14, 2007
Charlotte, North Carolina

EX-31.1

Exhibit 31.1

CERTIFICATION

I, O. Edwin French, certify that:

1.	I have reviewed this Annual Report on Form 10-K of MedCath Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 14, 2007

By:	/s/ O. EDWIN FRENCH
	O. Edwin French President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, James E. Harris, certify that:

1.	I have reviewed this Annual Report on Form 10-K of MedCath Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 14, 2007

By:	/s/ JAMES E. HARRIS
	James E. Harris Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of MedCath Corporation (the “Company”) on Form 10-K for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, O. Edwin French, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: December 14, 2007
	/s/ O. EDWIN FRENCH
	O. Edwin French President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of MedCath Corporation (the “Company”) on Form 10-K for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Harris, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: December 14, 2007
	/s/ JAMES E. HARRIS
	James E. Harris Executive Vice President and Chief Financial Officer