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, 2010
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
(State or other jurisdiction of
incorporation or organization) 56-2248952
(I.R.S. Employer
Identification No.)

10720 Sikes Place

Charlotte, North Carolina 28277

(Address of principal executive offices, including zip code)

(704) 815-7700

(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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

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 10, 2010 there were 20,469,305 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, 2010 was approximately $206.0 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 in 2011 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		17
	Item 1B.	Unresolved Staff Comments		28
	Item 2.	Properties		28
	Item 3.	Legal Proceedings		28
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		29
	Item 6.	Selected Financial Data		31
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		55
	Item 8.	Financial Statements and Supplementary Data
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		109
	Item 9A.	Controls and Procedures		109
	Item 9B.	Other Information		111
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance		112
	Item 11.	Executive Compensation		112
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stock-holder Matters		112
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		112
	Item 14.	Principal Accounting Fees and Services		112
PART IV
	Item 15.	Exhibits, Financial Statements Schedules		112
SIGNATURES				117
EX-2.4
EX-3.2
EX-10.27
EX-10.28
EX-10.29
EX-10.48
EX-21.1
EX-23.1
EX-23.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

i

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:

•  our examination of strategic alternatives,

•  the impact of federal and state healthcare reform initiatives,

•  changes in Medicare and Medicaid reimbursement levels,

•  the impact of governmental entity audits,

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

•  difficulties in executing our strategy,

•  our ability to consummate asset sales and other transactions,

•  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 these statements are made in good faith based upon assumptions our management believes are reasonable on the date they are made, 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. 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 2010” refers to our fiscal year ended September 30, 2010.

ii

PART I

Item 1.   Business

Overview

We were incorporated as MedCath Corporation in Delaware in 2001. We are 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 as of September 30, 2010, had ownership interests in and operated ten hospitals, including eight in which we owned 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 majority focus on cardiovascular care. Each of our hospitals has a 24-hour emergency room staffed by emergency department physicians.

As noted below under “Our Strategic Options Review” on March 1, 2010, we announced our intention to sell the Company, our individual assets or a combination thereof. Since this announcement, we have sold two of our majority owned hospitals that were classified as discontinued operations as of September 30, 2010, our equity interest in one of our minority owned hospitals, and a minority venture owned by our MedCath Partners division. As a result, we currently own interests in seven hospitals, including six in which we own a majority interest. In addition, we have an agreement to sell one of the seven remaining hospitals.

The hospitals in which we had an ownership interest as of September 30, 2010 had a total of 825 licensed beds, 117 of which are related to Arizona Heart Hospital (“AzHH”) and Heart Hospital of Austin (“HHA”) whose assets, liabilities, and operations are included within discontinued operations. AzHH and HHA were sold on October 1, 2010 and November 1, 2010, respectively. Our seven hospitals that currently comprise our continuing operations have 653 licensed beds and are located in six states: Arizona, Arkansas, California, Louisiana, New Mexico, and Texas.

In addition to our hospitals, we currently own and/or manage eight cardiac diagnostic and therapeutic facilities. Seven of these facilities are located at hospitals operated by other parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining facility is not located at a hospital and offers only diagnostic procedures. We refer to our diagnostics division as “MedCath Partners.” For financial data and other information of this and other segments of our business see Note 20 to our audited consolidated financial statements in this report on Form 10-K for financial information by segment.

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and therefore, we file reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). The reports, statements and other information we submit to the SEC 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 a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers, like us, that file electronically.

We maintain a website at www.medcath.com that investors and interested parties can access and obtain copies, free-of-charge, our proxy statements, 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 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

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 our 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 this or them.

1

Our Strategic Options Review

On March 1, 2010, we announced that our Board of Directors had formed a Strategic Options Committee to consider the sale either of our equity or the sale of our individual hospitals and other assets. We retained Navigant Capital Advisors as our financial advisor to assist in this process. Since announcing the exploration of strategic alternatives on March 1, 2010, we have completed several transactions, including:

•  The disposition of Arizona Heart Hospital (Phoenix, Arizona) in which we sold the majority of the hospital’s assets to Vanguard Health Systems for $32.0 million, plus retained working capital. The transaction was completed effective October 1, 2010. We anticipate that we will receive final net proceeds of approximately $31.5 million from the transaction after payment of retained known liabilities, payment of taxes related to the transaction and collection of the hospital’s accounts receivable. The $31.5 million in estimated net proceeds is prior to any reserves, if any, required in management’s judgment to address any potential contingent liabilities.

•  The disposition of our wholly owned subsidiary that held 33.3% ownership of Avera Heart Hospital of South Dakota located in Sioux Falls, SD to Avera McKennan for $20.0 million, plus a percentage of the hospital’s available cash. The transaction was completed October 1, 2010. We estimate that we will receive final net proceeds from the transaction of approximately $16.0 million, after closing costs and payment of estimated taxes related to the transaction and prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

•  The disposition of Heart Hospital of Austin (Texas) in which we and the physician owners sold substantially all of the hospital’s assets to St. David’s Healthcare Partnership L.P. for approximately $83.8 million, plus retained working capital. The transaction was completed effective November 1, 2010. We anticipate that we will receive final net proceeds of approximately $24.1 million from the transaction after repayment of third party debt and a related prepayment fee, payment of all known retained liabilities of the partnership, payment of taxes related to the transaction, collection of the partnerships accounts receivable, and distributions to the hospital’s minority partners. The $24.1 million in estimated net proceeds is prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

•  The disposition of our approximate 27.0% ownership interest in Southwest Arizona Heart and Vascular, LLC (Yuma, AZ) to the joint venture’s physician partners for $7.0 million. The transaction was completed effective November 1, 2010. We estimate that final net proceeds from the transaction will total approximately $6.9 million, after closing costs and income tax benefit related to a tax loss on the transaction, but prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

In addition, we announced on November 8, 2010, that we, along with our physician investors, had entered into a definitive agreement to sell substantially all the assets of TexSan Heart Hospital (San Antonio, Texas) to Methodist Healthcare System of San Antonio for $76.25 million, plus retained working capital. The transaction, which is subject to regulatory approval and other customary closing conditions, is anticipated to close during our second quarter of fiscal 2011, which ends March 31, 2011. We anticipate that we will receive approximately $58.0 million from the transaction after payment of all retained known liabilities of the partnership, payment of taxes related to the transaction, collection of the partnership’s accounts receivable, and distributions to the hospital’s minority partners. The $58.0 million in estimated net proceeds is prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

We cannot assure our investors that our continuing efforts to enhance stockholder value will be successful, or whether future transactions will involve a sale of our equity, a sale of our remaining individual hospitals or other assets, or a combination of these alternatives. We continue to consider all practicable alternatives to maximize stockholder value. Although the strategic alternatives process is on-going and expected to continue during our fiscal 2011 and potentially beyond, we have begun to consider a number of scenarios for distributing available cash to our stockholders such as special cash dividends, and/or distributions to stockholders following future sales of individual hospitals or other assets, in the context of a dissolution of the Company and following repayment of all bank debt and termination of our credit facility. If our common equity is sold in a merger or other similar transaction, then stockholders would receive consideration in exchange for their shares in accordance with terms of that transaction.

2

Many unknown variables, including those related to seeking any approvals which may be required, will affect the amount, timing and mechanics of any potential distributions to stockholders. Until further progress is made in the strategic alternative process, we are unable to determine the approach that best meets the interests of MedCath’s stockholders. In addition, the summary of net proceeds from the asset and other sales described in this annual report are only preliminary estimates relating to those transactions. Final amounts available to stockholders will be diminished by asset and corporate wind-down related operating and other expenses, our continued debt service obligations, tax treatment, inability to collect all amounts owed to us, any required reserves to address potential liabilities, including retained and contingent liabilities and/or other unforeseen events.

Our Hospitals

As of September 30, 2010 we had ownership interests in and operated ten hospitals. Since September 30, 2010, we have sold our interests in three of these hospitals and have entered into an agreement to sell one additional hospital. The following table identifies key characteristics of our hospitals as of September 30, 2010.

		MedCath			Opening	Licensed			Cath		Operating
Hospital	Location	Ownership			Date	Beds			Labs		Rooms
Arkansas Heart Hospital	Little Rock, AR		70.3	%	March 1997		112			6		3
Bakersfield Heart Hospital	Bakersfield, CA		53.3	%	October 1999		47			4		3
Heart Hospital of New Mexico	Albuquerque, NM		74.8	%	October 1999		55			5		4
Harlingen Medical Center(1)	Harlingen, TX		34.8	%	October 2002		112			2		10
Louisiana Heart Hospital	St. Tammany Parish, LA		89.2	%	February 2003		137			3		7
Texsan Heart Hospital(4)	San Antonio, TX		69.0	%	January 2004		120			4		4
Hualapai Mountain Medical Center	Kingman, AZ		82.5	%	October 2009		70	(2)		1		4
Hospitals Disposed Subsequent to September 30, 2010
Arizona Heart Hospital(3)	Phoenix, AZ		70.6	%	June 1998		59			3		4
Heart Hospital of Austin(3)	Austin, TX		70.9	%	January 1999		58			6		4
Avera Heart Hospital of South Dakota(1) (3)	Sioux Falls, SD		33.3	%	March 2001		55			4		3

(1)	We did not have a majority ownership interest in these hospitals as of September 30, 2010. We use the equity method of accounting for these hospitals, which means that we include in our consolidated statements of income a percentage of the hospitals’ reported net income (loss) for each reporting period.
(2)	Hualapai Mountain Medical Center is designed to accommodate 106 inpatient beds, but initially opened with 70 licensed beds.
(3)	The Company disposed of its interest in Avera Heart Hospital of South Dakota and substantially all of the assets of Arizona Heart Hospital on October 1, 2010. The Company sold substantially all of the assets of Heart Hospital of Austin on November 1, 2010.
(4)	In November 2010, the Company entered into an agreement to dispose of its interest in TexSan Heart Hospital. We expect this transaction to close during our second fiscal quarter of 2011, which ends March 31, subject to required approvals and customary closing conditions.

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 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.

3

Managed Diagnostic and Therapeutic Facilities.  As of September 30, 2010 we owned and/or managed the operations of eight cardiac diagnostic and therapeutic facilities (two are located at Coastal Carolina Heart, LLC). On November 1, 2010, we disposed of our interest in Southwest Arizona Heart and Vascular, LLC. The following table provides information about our facilities.

					MedCath		Termination
					Management		or Next
		MedCath			Commencement		Renewal
Facility/Entity	Location	Ownership			Date		Date
Joint Ventures:
Blue Ridge Cardiology Services, LLC(1)	Morganton, NC		50.00	%		2004		Dec. 2014
Central New Jersey Heart Services, LLC(1)	Trenton, NJ		14.80	%		2007		Mar 2017
Coastal Carolina Heart, LLC(1)	Wilmington, NC		9.20	%		2007		July 2013
Managed Ventures:
Margaret R. Pardee Memorial Hospital(1)	Hendersonville, NC		100	%(2)		2004		Month-to-month
Duke Health Raleigh Hospital(1)	Raleigh, NC		100	%(2)		2006		Dec. 2012
Caldwell Cardiology Services	Lenoir, NC		100	%(2)		2006		Mar. 2012
Presbyterian Hospital Matthews	Matthews, NC		100	%(2)		2010		May 2015

(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 percentage refers to the fact that we own 100% of the entity that has the management agreement with the facility.

Except when the requirements of applicable law require us to modify our services or when physicians have an ownership interest in a joint venture providing management services to hospitals, 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 subject to the oversight of the applicable hospital. The physicians who supervise or perform diagnostic and therapeutic procedures at these facilities have complete control over the delivery of cardiovascular healthcare services. In some cases, the management agreements for these centers 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. Either party may terminate most of these agreements for cause or upon the occurrence of specified material adverse changes in the business of the facilities.

Interim Mobile Catheterization Labs.  We maintain a rental fleet of mobile 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. Our rental 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

Our hospitals offer a wide range of inpatient and outpatient medical services. These services can include cardiology, surgery, orthopedics, diagnostic and emergency room services, laboratory, radiology, respiratory, nutrition/dietary, intensive care units and pharmacy.

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

4

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.

•  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.

5

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, 2010, we employed 2,362 persons, including 1,678 full-time and 684 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 believe we offer our employees competitive wages and benefits and offer a professional work environment that we believe helps us recruit and retain the staff we need to operate our hospitals and other facilities.

We have experienced attrition at our corporate office as a result of our strategic alternatives process. We have offered stay bonuses to many of our employees to encourage them to remain during the process.

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, and policies and procedures.

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.

Insurance

Like most healthcare 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

We compete primarily with other cardiovascular care providers, principally for-profit and not-for-profit general acute care hospitals. 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 and are more established than we are and, 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.

6

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 (“PPS”). 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 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 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 began 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 were 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 were phased in over a two-year period.

CMS published the inpatient prospective payment system rule (“IPPS”) for 2009 on August 19, 2008. In addition to provisions which relate to IPPS payments, the 2009 IPPS final rule also contained provisions related to the Emergency Medical Treatment and Active Labor Act (“EMTALA”) and the Section 1877 of the Social Security Act, commonly known as the Stark Law, which will be discussed under the applicable EMTALA and Stark sections of this document. CMS also expanded the list of codes of hospital-acquired conditions for which CMS will not pay as secondary diagnoses unless the condition was present on admission. Due to the late enactment of the Medicare Improvements for Patient and Providers Act (“MIPPA”), CMS was unable to publish final rates in the 2009 IPPS final rule.

CMS issued the IPPS rule for 2010 on July 31, 2009. The Final IPPS rule for 2010 provides acute care hospitals with an inflation update of 2.1 percent in their 2010 payment rates. The Final IPPS rule also adds four new measures for which hospitals must submit data under the Reporting Hospital Quality Data for Annual Payment Update (“RHQDAPU”) program to receive the full market basket update.

7

CMS published an updated IPPS for 2010 on May 21, 2010 which included a 0.25% market basket reduction and a related reduction to the outlier threshold. The market basket adjustment applies to discharges on or after April 1, 2010 and before October 1, 2010.

CMS published the IPPS for 2011 on July 30, 2010, which includes the following payment and policy changes effective for discharges on or after October 1, 2010, the beginning of the Company’s fiscal 2011: a net inflation update of 2.35%; a net increase of 1.25% for MS-DRG capital payments; an additional reduction of 2.9% to the operating and capital rate updates to recoup 50% of the estimated overpayments in 2008 and 2009 due to hospital coding and documentation processes in connection with the transition to MS-DRGs; a decrease in the cost outlier threshold from $23,135 to $23,075; and the addition of 12 new quality measures to the RHQDAPU program set and the retirement of one measure (10 of the new measures will be considered in determining a hospital’s 2012 update; the remaining two measures to be reported in 2011 will be considered in a hospital’s 2013 update).

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 health insurance program for low-income individuals, which is funded jointly by the federal and individual state governments and administered locally by each state. 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. As noted above, the Final IPPS rule also adds four new measures for which hospitals must submit data under the RHQDAPU program to receive the full market basket update.

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

8

medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients.

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 healthcare 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.

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 or whether these payors will elect to audit paid claims and attempt to recover resulting overpayments. Modifications in methodology or reductions in payment or future audits by these payors 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 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 healthcare 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 healthcare facilities are in substantial compliance with current federal, state, and local regulations and standards.

The Medicare Modernization Act

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.

Health Care Reform Laws

In March 2010, President Obama signed the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (“Health Care Reform Laws”) thereby making it effective.

9

The new law will result in sweeping changes across the health care industry. The primary goal of this comprehensive legislation is to extend health coverage to approximately 32 million uninsured legal U.S. residents through a combination of public program expansion and private sector health insurance reforms. To fund the expansion of insurance coverage, the legislation contains measures designed to promote quality and cost efficiency in health care delivery and to generate budgetary savings in the Medicare and Medicaid programs. As described below, the Health Care Reform Laws effectively prevents new physician-owned hospitals after March 23, 2010 and limits the capacity and amounts of physician ownership in existing physician-owned hospitals. We are unable to predict the full impact of the Health Care Reform Laws at this time due to the law’s complexity and current lack of implementing regulations or interpretive guidance. However, we expect that several provisions of the Health Care Reform Laws will have a material effect on our business as further described under Item 1A. Risk Factors.

The healthcare industry continues to attract much legislative interest and public attention. Recent proposals that have been considered include changes in Medicare, Medicaid, and other state and federal programs and cost controls on hospitals. We cannot predict the final impact of the Health Care Reform Laws or other 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. Such effects may include material and adverse changes to the amounts of reimbursement received by our facilities.

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, 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 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, 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 freestanding diagnostic facility are certified to participate or are enrolled in the Medicare and Medicaid programs.

Emergency Medical Treatment and Active Labor Act.  The Emergency Medical Treatment and Active Labor Act impose requirements as to the care that must be provided to anyone who seeks care at facilities providing emergency medical services. In addition, CMS 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, such as the availability of on call physicians and obligations of recipient hospitals with specialized capabilities. 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, equipment, 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 equipment, beds or services. Currently, we do not operate any hospitals in states that have adopted certificate of need 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

10

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 prohibit physician ownership in healthcare facilities or otherwise restrict 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. For example 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

11

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,

•  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 other facilities. Physicians own interests in each of our hospitals, some of our cardiac catheterization laboratories and in entities that provide only management services to certain non-affiliated hospitals. 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, medical director 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 healthcare 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 federal or state 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 physicians or any of their immediate family members have a direct or indirect ownership or compensation arrangement unless an exception applies. The term “designated health services,” includes 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. Additionally, there is an exception for certain indirect ownership and compensation arrangements. 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.

12

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.

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. Currently, 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 disclosure requirement may face civil penalties of $10,000 per day that they are in violation. As noted below, the Health Care Reform Laws also subject a physician-owned hospital to reporting requirements and extensive disclosure requirements on the hospital’s website and in any public advertisements. 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 July 2007 as part of proposed revisions to the Medicare physician fee schedule 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. CMS finalized these proposed changes to the Stark Law in the 2009 IPPS final rule published on August 19, 2008. These changes were effective October 1, 2009. Specifically, the 2009 IPPS final rule limits the ability of hospitals to enter into under arrangements with physicians and physician-owned entities and thus, physician-owned joint venture entities deemed to be “performing DHS” will have to comply with one of the more limited Stark Law “ownership” exceptions, rather than the previously acceptable Stark Law “compensation” exceptions. In addition, the 2009 IPPS final rule finalized the prohibition on per unit compensation in space and equipment lease transactions. Effective October 1, 2009, we restructured certain equipment lease transactions with physicians that include per unit or per use compensation as well as certain of our arrangements with community hospitals in order to comply with these new rules and regulations. While we believe that such restructured arrangements comply with applicable law, we cannot be assured, however, that if reviewed, government officials will agree with our interpretation of applicable law.

There have been few enforcement actions taken and relatively few cases interpreting the Stark Law to date. 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 other exceptions as appropriate for other financial arrangements with physicians. The single freestanding diagnostic facility that we own does not furnish any designated health services as defined under the Stark Law, and thus referrals to it is not subject to the Stark Law’s prohibitions.

13

The Health Care Reform Laws also made changes to the Stark Law, effectively preventing new physician-owned hospitals after March 23, 2010 and limiting the capacity and amount of physician ownership in existing physician-owned hospitals. As revised, the Stark law prohibits physicians from referring Medicare patients to a hospital in which they have an ownership or investment interest unless the hospital has physician ownership and a Medicare provider agreement as of March 23, 2010 (or, for those hospitals under development, as of December 31, 2010). A physician-owned hospital that meets these requirements will still be subject to restrictions that limit the hospital’s aggregate physician ownership and, with certain narrow exceptions for high Medicaid hospitals, prohibit expansion of the number of operating rooms, procedure rooms or beds. The legislation also subjects a physician-owned hospital to reporting requirements and extensive disclosure requirements on the hospital’s website and in any public advertisements.

Moreover, as noted above, states in which we operate also have 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, since 2005 the OIG has issued nine 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 healthcare 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 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

14

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.

We are the subject of a civil investigative demand and an investigation by the Department of Justice as further described under Item 1A — Risk Factors — Companies within the healthcare industry continue to be the subject of federal and state investigations.

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 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.

15

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,

•  complying with applicable safeguards concerning patient protected health information, 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 healthcare 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, the Administrative Simplification Subtitle of HIPAA and related privacy and security regulations also require healthcare entities engaged in clinical research to maintain the privacy of patient identifiable medical information. See “— Privacy and Security Requirements.” We have implemented 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 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.

16

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 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.

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 all 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 Jacque Sokolov. The compliance committee of the board meets at least quarterly.

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. 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.

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.

Our efforts to enhance stockholder value may not be successful.

On March 1, 2010, we announced that our Board of Directors had formed a Strategic Options Committee to consider the sale of either MedCath or the sale of our individual hospitals and other assets. Since March 2010, we have announced the completion of sales involving MedCath’s interests in Arizona Heart Hospital, Avera Heart Hospital of South Dakota, Heart Hospital of Austin and the minority ownership interest our MedCath Partners division held in Southwest Arizona Heart and Vascular, LLC. We have also announced a definitive agreement to sell

17

substantially all of the assets of TexSan Heart Hospital, which is expected to close during the fiscal quarter ending March 31, 2011, subject to required approvals and customary closing conditions.

We cannot assure you that our continuing efforts to enhance stockholder value will succeed. The strategic alternatives process is on-going and we continue to consider all practicable alternatives, including the sale of MedCath, a sale of MedCath’s individual hospitals or other assets, or a combination of these alternatives. There will be risks associated with any alternative, including whether we will obtain approvals that may be required in order to sell an individual hospital or a sale or transaction involving the entire company and the total proceeds received thereof. Moreover, the timing and terms of any transaction will depend on a variety of factors, some of which are beyond our control. Until further progress is made in the strategic alternatives process, we are unable to determine the approach that best meets the interests of our stockholders and whether the approach we select will be successful. A delay in or failure to complete one or more transactions could have a material adverse effect on our stock price and the amount of any potential distributions to our stockholders.

We cannot predict the timing, amount or mechanics of any potential distributions to our stockholders.

We have begun to consider a number of scenarios for distributing available cash to our stockholders such as special cash dividends, distributions to stockholders following future sales of individual hospitals or other assets or distributions in the context of a dissolution. If MedCath’s common equity is sold in a merger or other similar transaction, stockholders would receive consideration in exchange for their shares in accordance with the terms of that transaction.

Although our Amended Credit Facility permits the payment of dividends and the repurchase of our stock under certain circumstances, we believe these circumstances are not achievable at this time. Therefore, any dividend or stock repurchase can only occur once the outstanding amount is repaid and the Amended Credit Facility is terminated.

Many unknown variables will affect the amount, timing and mechanics of any potential distributions to stockholders. Factors that could have a material adverse effect on the amount of any potential distributions include, but are not limited to, a failure to obtain any required approvals, asset and corporate wind-down related operating and other expenses, MedCath’s debt service obligations, tax treatment, inability to collect amounts owed to MedCath and any required reserves to address potential liabilities, including retained and contingent liabilities of both MedCath and of its individual hospitals, and/or other unforeseen events. These and other factors, such as the procedures established under Delaware law for the dissolution of a Delaware corporation, could also delay the timing of any potential distributions.

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.

18

Material decisions regarding the operations or sale of our facilities require consent of our physician and community hospital partners, which may limit our ability 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, including those relating to the disposition of assets or the hospital. They may do so through their representatives on the governing 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, such as a sale of a hospital. 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. These rights to approve material decisions could 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.

Unfavorable or unexpected results at one of our hospitals or in one of our markets could significantly impact our consolidated operating results and the value received upon an asset disposition.

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.

We may continue to incur impairment losses on our long lived assets

Long-lived assets of the Company are reviewed for impairment annually and whenever events or changes in circumstances indicate that their carrying value has become impaired. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined by the Company using a discounted cash flow analysis and/or independent third party market offers. Our strategic alternatives process and operating results may provide information in the future that may indicate additional impairment of our long-lived assets.

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.

19

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 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 but also the entity that has performed the designated health service CMS finalized these proposed changes to the Stark Law in the 2009 IPPS final rule published on August 19, 2008. These changes were effective October 1, 2009. Specifically, the 2009 IPPS final rule limits the ability of hospitals to enter into under arrangements with physicians and physician-owned entities and thus, physician-owned joint venture entities deemed to be “performing Designated Health Services (DHS)” will have to comply with one of the more limited Stark Law “ownership” exceptions, rather than the previously acceptable Stark Law “compensation” exceptions. In addition, the 2009 IPPS final rule finalized the prohibition on per unit compensation in space and equipment lease transactions. We have restructured certain space and equipment lease transactions with physicians that include per unit or per use compensation effective October 1, 2009 as well certain arrangements with community hospitals. We cannot yet predict the full impact of this restructuring on our financial performance. While we believe that such restructured arrangements comply with applicable law, we cannot be assured, however, that government officials will agree with our interpretation of applicable law.

The Health Care Reform Laws also made changes to the Stark Law, effectively preventing new physician-owned hospitals after March 23, 2010, and limiting the capacity and amount of physician ownership in existing physician-owned hospitals. As revised, the Stark law prohibits physicians from referring Medicare patients to a hospital in which they have an ownership or investment interest unless the hospital has physician ownership and a Medicare provider agreement as of March 23, 2010 (or, for those hospitals under development, as of December 31, 2010). A physician-owned hospital that meets these requirements will still be subject to restrictions that limit the hospital’s aggregate physician ownership and, with certain narrow exceptions for high Medicaid hospitals, prohibit expansion of the number of operating rooms, procedure rooms or beds. The legislation also subjects a physician-owned hospital to reporting requirements and extensive disclosure requirements on the hospital’s website and in any public advertisements. Possible further 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. There also can be no assurance the CMS will not promulgate additional regulations under the Stark Law that may change or adversely impact our arrangements with referring physicians.

20

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, including the Health Care Reform Laws. 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. In addition, many payors, including Medicare and other government payors, are increasingly developing payment policies that result in more procedures being performed on an outpatient basis rather than on an inpatient basis. Such policies will result in decreased revenues for our hospitals, since outpatient procedures are generally reimbursed at a lower rate than inpatient procedures. 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 began 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 were 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.” CMS published the inpatient prospective payment system rule for 2009 on August 19, 2008. Due to the late enactment of the Medicare Improvements for Patient and Providers Act (“MIPPA”), CMS did not publish the final wage indices and payment rates for the 2009 IPPS final rule until October 2008. CMS issued the IPPS rule for 2010 on July 31, 2009. The Final IPPS rule for 2010 provides acute care hospitals with an inflation update of 2.1 percent in their 2010 payment rates. The Final IPPS rule also adds four new measures for which hospitals must submit data under the RHQDAPU program to receive the full market basket update.

CMS published an amended IPPS for 2010 on May 21, 2010 which included a 0.25% market basket reduction and a related reduction to the outlier threshold. The market basket adjustment applies to discharges on or after April 1, 2010 and before October 1, 2010.

CMS published the IPPS for 2011 on July 30, 2010, which includes the following payment and policy changes effective for discharges on or after October 1, 2010, the beginning of the Company’s fiscal 2011: a net inflation update of 2.35%; a net increase of 1.25% for MS-DRG capital payments; an additional reduction of 2.9% to the operating and capital rate updates to recoup 50% of the estimated overpayments in 2008 and 2009 due to hospital coding and documentation processes in connection with the transition to MS-DRGs; a decrease in the cost outlier threshold from $23,135 to $23,075; and the addition of 12 new quality measures to the RHQDAPU program set and the retirement of one measure (10 of the new measures will be considered in determining a hospital’s 2012 update; the remaining two measures to be reported in 2011 will be considered in a hospital’s 2013 update).

During the fiscal years ended September 30, 2010 and 2009, we derived 55.5% and 54.3%, respectively, of our net revenue from the Medicare and Medicaid programs. Changes in laws or regulations governing the Medicare and Medicaid 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 such as audits and recoupments, 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 or if third-party payors elect to audit paid claims and recoup paid amounts.

21

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.

Current or future legislative initiatives, government regulations or other government actions may have a material adverse effect on us.

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

22

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 healthcare 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 eight hospitals in which we owned 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 United States in November 2007.

During fiscal years 2008 and 2007 we refunded certain reimbursements to CMS related to carotid artery stent procedures performed during prior fiscal years at two of the Company’s consolidated subsidiary hospitals. The DOJ initiated an investigation related to our return of these reimbursements. As a result of the DOJ’s investigation, the Company began negotiating settlement agreements during the second quarter of fiscal 2009 with the DOJ whereby we are expected to pay approximately $0.8 million to settle and obtain releases from any federal civil false claims liability related to the DOJ’s investigation. The DOJ allegations do not involve patient care, and relate solely to whether the procedures were properly reimbursable by Medicare. The settlement does not include any finding of wrong-doing or any admission of liability. As of September 30, 2010, both settlement agreements have been executed and we have paid the United States $0.8 million related to this matter.

In March 2010, the DOJ issued a civil investigative demand (“CID”) pursuant to the federal False Claims Act to one of our hospitals. The CID requested information regarding Medicare claims submitted by our hospital in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) during the period 2002 to the present. We have complied with all information requested by the DOJ for this hospital. Because we are in the early stages of this investigation, we are unable to evaluate the outcome of this investigation.

In September 2010, we received a letter from the DOJ advising us of an investigation that will assess whether certain of our other hospitals have submitted ICD claims excluded from Medicare coverage. As a follow-up to its letter, the DOJ has provided us with additional information regarding claims which potentially may be excluded from coverage. We understand that the DOJ has delivered similar CIDs and letters to many other hospitals and

23

hospital systems across the country as well as to the ICD manufacturers themselves. We are fully cooperating and have entered into a tolling agreement with the government in this investigation. Our revenue arising from ICD procedures is material. However, to date, the DOJ has not asserted any claims against any of our hospitals. Because we are in the early stages of this investigation, we are unable to evaluate the outcome of this investigation.

Future audits by Recovery Audit Contractors (“RAC”) could have a material adverse effect on our reported financial results.

In 2005, the CMS began using RACs to detect Medicare overpayments not identified through existing claims review mechanisms. The RAC program relies on private auditing firms to examine Medicare claims filed by healthcare providers and fees are paid to the RACs on a contingency basis.

RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. The CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments will be subject to the Medicare appeals process. The Health Care Reform Laws expand the RAC program’s scope to include Medicaid claims by requiring all states to enter into contracts with RACs by December 31, 2010.

Even though we believe the claims for reimbursement submitted to the Medicare and Medicaid program by our facilities have been accurate, we are unable to reasonably estimate what the potential result of future RAC audits or other reimbursement matters could be.

Audits by Third-party Payors could also have a material adverse effect on our reported financial results.

Third-party payors have the right in some cases under contract to conduct post payment audits in order to detect potential overpayments. While we believe that our claims submitted to these third-party payors are in compliance with our contractual arrangements, we are unable to predict whether such payors will identify overpayments and seek to recover such payments and if so, what the potential results would be.

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.

24

Growth of self-pay patients and a deterioration in the collectability 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. We may have greater amounts of uninsured receivables in the future and if the collectability 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. As we expand the scope of hospital services at our hospitals we may face even greater levels of competition from other larger general acute care hospitals in our markets that also provide those services. 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.

A hospital system with which one of our established hospitals competes recently announced a collaboration with one of the leading cardiac services physician groups in that market, some of whose physicians have historically used our hospital and are investors in that hospital. It is possible that similiar collaboration at our other hospitals could result in a decrease in the use of our hospitals by physicians, with a resulting decrease in the revenue and financial performance of our hospitals.

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. 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 to obtain privileges at our hospitals or other facilities,

•  suffered any damage to their reputation,

•  exited the market entirely,

•  experienced financial issues within their medical practice or other major changes in its composition or leadership, or

•  align with another healthcare provider resulting in significant reduction in use of our facilities.

Historically, the medical staff at each hospital ranges from approximately 100 to 400 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

25

commitment, or any other obligation or arrangement that requires the physician to refer patients to any of our hospitals or other facilities.

From time to time physicians who are leaders of their medical groups and who use our hospitals may retire or otherwise cease practicing medicine or using our facilities for a variety of reasons. Those medical groups may not replace those physician leaders or may replace them with physicians who choose not to use our hospitals. Losing the utilization of our hospitals by those physicians and other physicians in their medical groups may result in material decreases in our revenue and financial performance.

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 certain 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.

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, which 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, or systems acquired in the future, 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 using 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,

26

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 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.

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.

California state law could have a material adverse impact on our financial results or cause significant changes to our existing approach to control of patient medical information.

Effective January 1, 2009, California licensed general acute hospitals are subject to increased administrative penalties associated with survey deficiencies impacting the health or safety of a patient, the unlawful or unauthorized access, use, or disclosure of a patient’s medical information and are required to screen specific patients for certain hospital-related infections and must maintain an infection control policy. Deficiencies constituting immediate jeopardy to the health or safety of a patient are subject to graduated penalties of up to a maximum $100,000 per violation (up from a maximum of $25,000 per violation). Deficiencies not constituting immediate jeopardy to the health or safety of a patient are subject to penalties up to a maximum of $25,000 per violation (up from a maximum of $17,500 per violation). Penalties for violation of the unlawful or unauthorized access are up to $25,000 per patient and a maximum of $17,500 for each subsequent access, use or disclosure of the patient’s medical information.

We believe we are in compliance with this new California provisions, but there can be no assurance that applicable regulatory agencies or individuals may challenge that assertion.

On January 8, 2009, the California Supreme Court ruled in Prospect Medical Group, Inc., et al. v. Northridge Emergency Medical Group, et al. (2009) 45 Cal. 4^th 497, that under California’s Knox-Keene statute, healthcare providers may not bill patients for covered emergency out patient services for which health plans or capitated payors are invoiced by the provider but fail to pay the provider. The California Supreme Court held that the only recourse for healthcare providers is to pursue the payors directly. The Prospect decision does not apply to amounts that the health plan or capitated payor is not obligated to pay under the terms of the insured’s policy or plan. Although the decision only considered emergency providers and referred to HMOs and capitated payors, future court decisions on how the so-called “balance billing” statute is interpreted does pose a risk to healthcare providers that perform emergency or other out-patient services in the state of California.

A purported class action law suit was recently filed by an individual against the Bakersfield Heart Hospital. In the complaint the plaintiff alleges that under California law, and specifically under the Knox-Keene Healthcare Service Plan Act of 1975, and under the Health and Safety Code of California that California prohibits the practice of “balance billing” patients who are provided “emergency services” as defined under California law. On November 24, 2010, the court granted the Bakersfield Heart Hospital’s motion to strike plantiff’s class allegations.

27

Texas state law may adversely impact our results of operations by causing reductions in our reimbursements under the Medicaid program administered by the Texas Health and Human Services Commission.

The Texas Health and Human Services Commission is in the process of rebasing the Medicaid Standard Dollar Amount (“SDA”) rates for all Texas acute care hospitals. The rebased SDA rates will be implemented for admissions occurring on or after November 1, 2010. The state released preliminary data in May 2010 with a deadline of June 21, 2010 for hospitals to request a review. Based on comments received from hospitals, the state has implemented a “10/38” plan for the state fiscal year that began September 1, 2010 under which decreases in individual hospital reimbursement levels will be capped at 10% and increases will be capped at 38%. We estimate that the rebasing will decrease net revenues for our continuing operations in Texas by $0.1 million in the fiscal 2011. The state intends to eliminate the “10/38” plan for the state fiscal year beginning September 1, 2011. The impact on future years may be material to our net revenues due to the elimination of the caps starting in our fiscal 2012.

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 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 or other joint ventures 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.

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 (a minority owned hospital), which are leased. As previously noted, the Company disposed of its interest in the Heart Hospital of Austin on November 1, 2010. 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 known litigation, individually or in the aggregate, will have a material adverse effect upon our business, financial condition or results of operations.

28

PART II

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

Our common stock trades on the Nasdaq Global Market^® under the symbol “MDTH.” At December 10, 2010, there were 20,469,305 shares of common stock outstanding, the sale price of our common stock per share was $13.60, and there were 63 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, 2010	High		Low
First Quarter	$	9.99	$	6.69
Second Quarter		12.94		6.62
Third Quarter		11.20		7.75
Fourth Quarter		10.24		7.00

Year Ended September 30, 2009	High		Low
First Quarter	$	18.28	$	5.89
Second Quarter		10.47		5.70
Third Quarter		12.86		7.02
Fourth Quarter		13.63		8.43

Although our Amended Credit Facility permits the payment of dividends and the repurchase of our stock under certain circumstances, we believe these circumstances are not achievable at this time. Therefore, any dividend or stock repurchase can only occur once the outstanding amount is repaid and the Amended Credit Facility is terminated. See Note 9 to our consolidated financial statements contained elsewhere in this report.

During August 2007, our board of directors approved a stock repurchase program of up to $59.0 million. Since the Board’s approval of the stock repurchase program, the Company has repurchased 1,885,461 shares of common stock at a total cost of $44.4 million, with a remaining $14.6 million available to be repurchased under the approved stock repurchase program. No shares were repurchased during fiscal 2010.

29

The following graph illustrates, for the period from September 30, 2005 through September 30, 2010, 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 9/30/05 in stock or index, including reinvestment of dividends. Fiscal year ending September 30.

Copyright ^© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

30

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, 2010, 2009, 2008, 2007 and 2006.

	Year Ended September 30,
	2010			2009			2008			2007			2006
Consolidated Statement of Operations Data:
(in thousands, except per share data)
Net revenue	$	442,496		$	419,733		$	414,155		$	474,290		$	444,841
Impairment of long-lived assets and goodwill	$	66,822		$	51,500		$	—		$	—		$	458
(Loss) income from continuing operations before income taxes	$	(67,672	)	$	(42,644	)	$	32,140		$	32,307		$	(377	)
(Loss) income from continuing operations, net of taxes	$	(51,956	)	$	(51,655	)	$	10,645		$	10,983		$	(7,579	)
Income from discontinued operations, net of taxes	$	3,585		$	1,373		$	10,345		$	544		$	20,155
Net (loss) income	$	(48,371	)	$	(50,282	)	$	20,990		$	11,527		$	12,576
(Loss) earnings from continuing operations attributable to MedCath Corporation common stockholders per share, basic	$	(2.62	)	$	(2.62	)	$	0.53		$	0.53		$	(0.41	)
(Loss) earnings from continuing operations attributable to MedCath Corporation common stockholders per share, diluted	$	(2.62	)	$	(2.62	)	$	0.53		$	0.51		$	(0.39	)
(Loss) earnings per share, basic	$	(2.44	)	$	(2.55	)	$	1.05		$	0.56		$	0.67
(Loss) earnings per share, diluted	$	(2.44	)	$	(2.55	)	$	1.04		$	0.54		$	0.64
Weighted average number of shares, basic(a)		19,842			19,684			19,996			20,872			18,656
Weighted average number of shares, diluted(a)		19,842			19,684			20,069			21,511			19,555
Balance Sheet and Cash Flow Data:
(in thousands)
Total assets	$	494,538		$	590,448		$	653,456		$	678,567		$	785,849
Total long-term obligations	$	99,841		$	115,231		$	121,989		$	148,484		$	286,928
Net cash provided by operating activities	$	43,294		$	63,633		$	52,008		$	58,225		$	65,634
Net cash (used in) provided by investing activities	$	(16,956	)	$	(63,790	)	$	(5,805	)	$	(28,591	)	$	10,064
Net cash used in financing activities	$	(41,009	)	$	(50,210	)	$	(78,028	)	$	(80,116	)	$	(22,165	)
Selected Operating Data (consolidated)(b):
Number of hospitals		6			5			5			5			6
Licensed beds(c)		541			471			392			304			416
Staffed and available beds(d)		455			385			347			287			399
Admissions(e)		22,010			19,894			20,962			26,497			27,482
Adjusted admissions(f)		32,567			28,692			28,337			36,311			37,061
Patient days(g)		82,105			75,817			75,185			89,100			91,420
Adjusted patient days(h)		121,940			109,281			101,383			121,689			123,229
Average length of stay(i)		3.73			3.81			3.59			3.36			3.33
Occupancy(j)		49.4	%		54.0	%		59.4	%		85.1	%		62.8	%
Inpatient catheterization procedures(k)		10,219			10,167			11,922			13,418			13,151
Inpatient surgical procedures(l)		5,234			5,064			4,732			5,978			6,042
Hospital net revenue	$	428,122		$	400,170		$	392,775		$	449,835		$	418,039

(a)	See Note 15 to the consolidated financial statements included elsewhere in this report.
(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,

31

	Harlingen Medical Center ceased to be a consolidated subsidiary due to the sale of a portion of our interests in 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 were incorporated as Medcath Corporation 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 as of September 30, 2010, had ownership interests in and operated ten hospitals, including eight in which we owned a majority interest.

As noted below, we sold two of our majority owned hospitals that were classified as discontinued operations as of September 30, 2010 and our equity interest in one of our minority owned hospitals. As a result, we currently own interests in seven hospitals. In addition, we have an agreement to sell one of the seven remaining hospitals. Each of our majority-owned hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services with a majority focus on cardiovascular care. Each of our hospitals has a 24-hour emergency room staffed by emergency department physicians. During May 2009 we completed our 79 licensed bed expansion at Louisiana Medical Center and Heart Hospital (“LMCHH”) and built space for an additional 40 beds at that hospital. During October 2009, we opened a new acute care hospital, Hualapai Mountain Medical Center (“HMMC”), in Kingman, Arizona. This hospital is designed to accommodate a total of 106 licensed beds, with an initial opening of 70 of its licensed beds. The hospitals in which we had an ownership interest as of September 30, 2010 had a total of 825 licensed beds, 117 of which are related to Arizona Heart Hospital (“AzHH”) and Heart Hospital of Austin (“HHA”) whose assets, liabilities, and operations are included within discontinued operations. AzHH and HHA were sold on October 1, 2010 and November 1, 2010, respectively. Our seven hospitals that currently comprise our continuing operations have 653 licensed beds and are located in six states: Arizona, Arkansas, California, Louisiana, New Mexico, and Texas.

32

In addition to our hospitals, we currently own and/or manage eight cardiac diagnostic and therapeutic facilities. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining facility is not located at a hospital and offers only diagnostic procedures. We refer to our diagnostics division as “MedCath Partners.”

Pursuant to a settlement (“Settlement Agreement”) that we entered into on August 14, 1995 with the State of North Carolina Department of Human Resources (now known as the Division of Health Service Regulation (“DHSR”)), we obtained authority to operate nine cardiac catheterization laboratories anywhere in the state of North Carolina without obtaining a CON. The rights under the Settlement Agreement were subsequently assigned to MedCath Partners in connection with a reorganization by us. MedCath Partners is required to comply with certain notice requirements for replacement of any equipment comprising these labs and has historically notified the DHSR when MedCath Partners is changing the location of any labs located within the State. However, the DHSR takes the position that MedCath Partners must own and provide the services of the equipment which comprises each lab — the CON exemption applies only when MedCath Partners is operating one of these specific nine labs. For financial data and other information of this and other segments of our business see Note 20 to our audited consolidated financial statements in this report on Form 10-K for financial information by segment.

On March 1, 2010, we announced that our Board of Directors had formed a Strategic Options Committee to consider the sale either of the Company or the sale of our individual hospitals and other assets. We retained Navigant Capital Advisors as our financial advisor to assist in this process. Since announcing the exploration of strategic alternatives on March 1, 2010, we have completed several transactions, including:

•  The disposition of Arizona Heart Hospital (Phoenix, Arizona) in which we sold the majority of the hospital’s assets to Vanguard Health Systems for $32.0 million, plus retained working capital. The transaction was completed effective October 1, 2010. We anticipate that we will receive final net proceeds of approximately $31.5 million from the transaction after payment of retained known liabilities, payment of taxes related to the transaction and collection of the hospital’s accounts receivable. The $31.5 million in estimated net proceeds is prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

•  The disposition of our wholly owned subsidiary that held 33.3% ownership of Avera Heart Hospital of South Dakota located in Sioux Falls, SD to Avera McKennan for $20.0 million, plus a percentage of the hospital’s available cash. The transaction was completed October 1, 2010. We estimate that we will receive final net proceeds from the transaction of approximately $16.0 million, after closing costs and payment of estimated taxes related to the transaction and prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

•  The disposition of Heart Hospital of Austin (Texas) in which we and our physician owners sold substantially all of the hospital’s assets to St. David’s Healthcare Partnership L.P. for approximately $83.8 million, plus retained working capital. The transaction was completed effective November 1, 2010. We anticipate that it will receive final net proceeds of approximately $24.1 million from the transaction after repayment of third party debt and a related prepayment fee, payment of all known retained liabilities of the partnership, payment of taxes related to the transaction, collection of the partnerships accounts receivable, and distributions to the hospital’s minority partners. The $24.1 million in estimated net proceeds is prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

•  The disposition of our approximate 27.0% ownership interest in Southwest Arizona Heart and Vascular, LLC (Yuma, Az) to the joint venture’s physician partners for $7.0 million. The transaction was completed effective November 1, 2010. We estimate that final net proceeds from the transaction will total approximately $6.9 million, after closing costs and income tax benefit related to a tax loss on the transaction, but prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

In addition, we announced on November 8, 2010, that we, along with physician partners, had entered into a definitive agreement to sell substantially all the assets of TexSan Heart Hospital (San Antonio, Texas) to Methodist Healthcare System of San Antonio for $76.25 million, plus retained working capital. The transaction, which is subject to regulatory approval and other customary closing conditions, is anticipated to close during our second

33

quarter of fiscal 2011, which ends March 31, 2011. We anticipate that we will receive approximately $58.0 million from the transaction after payment of all retained known liabilities of the partnership, payment of taxes related to the transaction, collection of the partnership’s accounts receivable, and distributions to the hospital’s minority partners. The $58.0 million in estimated net proceeds is prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

We cannot assure our investors that our continuing efforts to enhance stockholder value will be successful, or whether future transactions will involve a sale of the Company, a sale of our individual hospitals or other assets, or a combination of these alternatives. We continue to consider all practicable alternatives to maximize stockholder value. Although the strategic alternatives process is on-going and expected to continue during our fiscal 2011 and potentially beyond, we have begun to consider a number of scenarios for distributing available cash to our stockholders such as special cash dividends, and/or distributions to stockholders following future sales of individual hospitals or other assets, in the context of a dissolution and following repayment of all bank debt and termination of our credit facility. If our common equity is sold in a merger or other similar transaction, then stockholders would receive consideration in exchange for their shares in accordance with the terms of that transaction.

Many unknown variables, including those related to seeking any approvals which may be required, will affect the amount, timing and mechanics of any potential distributions to stockholders. Until further progress is made in the strategic alternative process, we are unable to determine the approach that best meets the interests of our stockholders. Final amounts available to stockholders could be diminished by asset and corporate wind-down related operating and other expenses, continued debt service obligations, tax treatment, inability to collect all amounts owed, any required reserves to address liabilities, including retained and contingent liabilities and/or other unforeseen events.

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, the hospitals in which we hold a minority interest are 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 income in accordance with the equity method of accounting.

As described above, we entered into definitive agreements to sell certain assets and liabilities of Arizona Heart Hospital, LLC and Heart Hospital IV, LP (Heart Hospital of Austin), during fiscal 2010. We sold our equity interests in Heart Hospital of Lafayette and Cape Cod Cardiology Services LLC in fiscal 2008 and 2009, respectively, and the net assets of Dayton Heart Hospital and Sun City Cardiac Center Associates in fiscal 2008 and 2009, respectively. Accordingly, for all periods presented, the results of operations for these entities have been excluded from continuing operations and are reported in income (loss) from discontinued operations, net of taxes.

Same Facility Hospitals.  Same facility hospitals include 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, 2010, we exclude the results of operations of Hualapai Mountain Medical Center, which opened in October 2009.

34

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	2010			2009			2008
Hospital		97.3	%		95.9	%		95.5	%
MedCath Partners		2.6	%		4.0	%		4.4	%
Corporate and other		0.1	%		0.1	%		0.1	%
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 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	2010			2009			2008
Medicare		51.2	%		51.4	%		52.1	%
Medicaid		4.3	%		2.9	%		3.2	%
Commercial and other, including self-pay		44.5	%		45.7	%		44.7	%
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, audits, investigations, executive orders and freezes and funding reductions, all of which may significantly affect our business. In addition, reimbursement is generally subject to adjustment and possible recoupment following audit by all third party payors, including commercial payors and the contractors who administer the Medicare program for CMS as well as the OIG. 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 Item 1 Business and Item 1A Risk Factors.

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

35

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 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. Patients that receive charity care discounts must provide a complete and accurate application, be in need of non-elective care and meet certain federal poverty guidelines established by the U.S. Department of Health and Human Services. 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 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 facility 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.

36

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. 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 healthcare 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 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.

Professional Liability Risk.  We are self-insured for medical malpractice up to certain maximum liability amounts. Although the amounts accrued are actuarially determined based on analysis of historical trends of losses, settlements, litigation costs and other factors, the amounts we will ultimately disburse could differ from such accrued amounts.

Long-Lived Assets.  Long-lived assets, which include finite lived intangible 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 our strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. See Notes 4 and 13 for a discussion of impairment charges that the Company has recorded to write-down certain long-lived assets.

Basis of Presentation — Effective October 1, 2009, the Company adopted a new accounting standard which establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This new accounting standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This new accounting standard generally requires the Company to clearly identify and present ownership interests in subsidiaries held by parties other than the Company in the consolidated financial statements within the equity section but separate from the Company’s equity. However, in instances in which certain redemption features that are not solely within the control of the issuer are present, classification of noncontrolling interests outside of permanent equity is required. It also requires the amounts of consolidated net income attributable to the Company and to the noncontrolling interests to be clearly identified and presented on the face of the consolidated statements of operations; changes in ownership interests to be accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary to be measured at fair value. The implementation of this accounting standard results in the cash flow impact of certain transactions with noncontrolling interests being classified within financing activities. Such treatment is consistent with the view that under this new accounting standard, transactions between the Company

37

and noncontrolling interests are considered to be equity transactions. The adoption of this new accounting standard has been applied retrospectively for all periods presented.

Upon the occurrence of certain fundamental regulatory changes, the Company could be obligated, under the terms of certain of its investees’ operating agreements, to purchase some or all of the noncontrolling interests related to certain of the Company’s subsidiaries. While the Company believes that the likelihood of a change in current law that would trigger such purchases was remote as of September 30, 2010, the occurrence of such regulatory changes is outside the control of the Company. As a result, these noncontrolling interests totaling $11,554 and $7,448 as of September 30, 2010 and 2009, respectively, that are subject to this redemption feature are not included as part of the Company’s equity and are carried as redeemable noncontrolling interests in equity of consolidated subsidiaries on the Company’s consolidated balance sheets.

Profits and losses are allocated to the noncontrolling interest in the Company’s subsidiaries in proportion to their ownership percentages and reflected in the aggregate as net income attributable to noncontrolling interests. If, however, the cumulative net losses of a hospital exceed its initial capitalization and committed capital obligations of our partners, then we 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 (with the exception of losses incurred at Harlingen Medical Center, which are shared proratably based on each investors ownership percentage). 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 disproportionate losses to be allocated 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 2010, 2009 and 2008, our disproportionate recognition of earnings and losses in our hospitals had a net (negative)/positive impact of $(12.2) million, $(2.2) million, and $0.6 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, 2010, we have $13.4 million of cumulative disproportionate losses allocated to us. 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.

The physician partners of the Company’s subsidiaries typically are organized as general partnerships, limited partnerships or limited liability companies that are not subject to federal income tax. Each physician partner shares in the pre-tax earnings of the subsidiary in which it is a partner. Accordingly, the income or loss attributable to noncontrolling interests in each of the Company’s subsidiaries are generally determined on a pre-tax basis. In accordance with this new accounting standard, total net income attributable to noncontrolling interests are presented after net (loss) income.

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.

38

The Company is required to file federal and state tax returns in the United States. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with respect to the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes and associated penalties and interest.

The Company accrues an amount for its estimate of probable additional income tax liability. The Company recognizes the impact of an uncertain income tax position on the income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. As of September 30, 2010, the Company does not have accruals for any uncertain income tax positions.

Share-Based Compensation — Compensation expense for share-based awards made to employees and directors are recognized based on the estimated fair value of each award over the awards’ vesting period. We estimate the fair value of share-based payment awards on the date of grant using, either an option-pricing model for stock options or the closing market value of our stock for restricted stock and restricted stock units, and 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.

We calculated the share-based compensation expense for each stock option on the date of grant by using a Black-Scholes option pricing model. The key assumptions used in the Black-Scholes option pricing model are the expected life of the stock option, the risk free interest rate and expected volatility. The expected volatility used in the Black-Scholes option pricing model incorporates historical share-price volatility and was based on an analysis of historical prices of our stock. The expected volatility reflects the historical volatility for a duration consistent with the contractual life of the options. The expected life of the stock options granted represents the period of time that the options are expected to be outstanding. The risk-free interest rates are based on zero-coupon United States Treasury yields in effect at the date of grant consistent with the expected exercise timeframes.

Stock options awarded to employees are fully vested at the time of grant, with the condition that the optionee is prohibited from selling the share of stock acquired upon exercise of the option for a specified period of time. As a result, total share-based compensation is recorded for stock options on the option grant date.

During fiscal 2009 and 2010 we granted shares of restricted stock and restricted stock units to employees and directors, respectively. Restricted stock granted to employees, excluding executives of the Company, vest in equal annual installments over a three year period. Executives of the Company (defined by us as vice president or higher) received two restricted stock grants. The first grant of restricted stock vests in equal annual installments over a three year period. The second grant of restricted stock vests over a three year period based on established performance conditions. All unvested restricted stock granted to employees becomes fully vested upon a change in control of the Company as defined in the Company’s 2006 Stock Option and Award Plan. Restricted stock units granted to directors are fully vested at the date of grant and are paid in the form of common stock upon each applicable director’s termination of service on the board.

Recent Accounting Pronouncements:  See Note 2 of our consolidated financial statements included elsewhere in this report for additional disclosures.

39

Results of Operations

Fiscal Year 2010 Compared to Fiscal Year 2009

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
	2010			2009			$			%			2010			2009
	(In thousands except percentages)
Net revenue	$	442,496		$	419,733		$	22,763			5.4	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		151,990			141,315			10,675			7.6	%		34.3	%		33.7	%
Medical supplies expense		113,588			111,253			2,335			2.1	%		25.7	%		26.5	%
Bad debt expense		46,887			39,068			7,819			20.0	%		10.6	%		9.3	%
Other operating expenses		104,327			90,603			13,724			15.1	%		23.6	%		21.6	%
Pre-opening expenses		866			3,563			(2,697	)		(75.7	)%		0.2	%		0.9	%
Depreciation		26,895			22,818			4,077			17.9	%		6.1	%		5.4	%
Amortization		32			891			(859	)		(96.4	)%		—			0.2	%
Impairment of long-lived assets and goodwill		66,822			51,500			15,322			29.8	%		15.1	%		12.3	%
Loss on disposal of property, equipment and other assets		57			192			(135	)		(70.3	)%		—			—
Loss from operations		(68,968	)		(41,470	)		(27,498	)		66.3	%		(15.6	)%		(9.9	)%
Other income (expenses):
Interest expense		(4,548	)		(3,746	)		(802	)		21.4	%		(1.0	)%		(0.9	)%
Loss on early extinguishment of debt		—			(6,702	)		6,702			100.0	%		—			(1.6	)%
Interest and other income		84			217			(133	)		(61.3	)%		—			0.1	%
Loss on note receiveable		(1,507	)		—			(1,507	)		(100.0	)%		(0.3	)%		—
Equity in net earnings of unconsolidated affiliates		7,267			9,057			(1,790	)		(19.8	)%		1.5	%		2.1	%
Loss from continuing operations before income taxes		(67,672	)		(42,644	)		(25,028	)		58.7	%		(15.3	)%		(10.2	)%
Income tax benefit		(26,662	)		(362	)		(26,300	)		7265.2	%		(6.0	)%		(0.1	)%
Loss from continuing operations		(41,010	)		(42,282	)		1,272			(3.0	)%		(9.4	)%		(10.1	)%
Income from discontinued operations, net of taxes		5,028			9,527			(4,499	)		(47.2	)%		1.2	%		2.3	%
Net loss		(35,982	)		(32,755	)		(3,227	)		9.9	%		(8.1	)%		(7.8	)%
Less: Net income attributable to noncontrolling interest		(12,389	)		(17,527	)		5,138			(29.3	)%		(2.8	)%		(4.2	)%
Net loss attributable to MedCath Corporation	$	(48,371	)	$	(50,282	)	$	1,911			(3.8	)%		(10.9	)%		(12.0	)%
Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes	$	(51,956	)	$	(51,655	)	$	(301	)		0.6	%		(11.7	)%		(12.3	)%
Income from discontinued operations, net of taxes		3,585			1,373			2,212			161.1	%		0.8	%		0.3	%
Net loss	$	(48,371	)	$	(50,282	)	$	1,911			(3.8	)%		(10.9	)%		(12.0	)%

40

Net revenue.  Below is selected procedural and net revenue data for the fiscal years ended September 30, 2010 and 2009.

	Hospital Division Continuing Operations
	Year Ended September 30,
													Increase
	2010			%			2009			%			(Decrease)
Admission and Principal Procedures(1):
Inpatient admissions		22,010			27	%		19,894			30	%		10.6	%
Outpatient procedures(2)		26,050			31	%		21,933			33	%		18.8	%
ED and heart saver program		35,084			42	%		24,256			37	%		44.6	%
Total procedures		83,144			100	%		66,083			100	%		25.8	%
MDC 5 procedures(3)		14,862						14,420						3.1	%
IP Drug Eluting Stents		2,382						2,141						11.3	%
IP Bare Metal Stents		1,357						1,588						(14.5	)%
OP Drug Eluting Stents		1,151						1,027						12.1	%
OP Bare Metal Stents		778						796						(2.3	)%
Non MDC 5 procedures		68,282						51,663						32.2	%
ED visits		30,017						19,769						51.8	%
Net Revenue(1):
Inpatient net revenue		70.1	%					72.1	%					(2.8	)%
Outpatient net revenue		21.5	%					21.4	%					0.5	%
ED and HeartSaver CT program		8.4	%					6.5	%					29.2	%
Total net revenue		100.0	%					100.0	%
Total charity care	$	7,538					$	4,266						76.7	%

(1)	Procedures refer to the total cases billed and revenues recognized.
(2)	Excludes emergency department and our HeartSaver CT program.
(3)	Major Diagnostic Category (“MDC”) 5 corresponds to a circulatory system principal diagnosis. We have historically referred to MDC 5 procedures as our “core procedures.”

Same Facility Hospitals.  Same facility hospitals include 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 year ended September 30, 2010, we exclude the results of operations of Hualapai Mountain Medical Center, which opened in October 2009. During the years ended September 30, 2010 and 2009, the Company incurred $0.9 million and $3.6 million, respectively, in pre-opening expenses related to projects under development at Hualapai Mountain Medical Center.

Net revenue increased 5.4% to $442.5 million for our fiscal year ended September 30, 2010 from $419.7 million for our fiscal year ended September 30, 2009. Of this $22.8 million increase in net revenue, our Hospital Division generated a $28.0 million increase, our MedCath Partners Division decreased by $5.2 million, and the Corporate and other division remained flat. The Hospital Division increase was attributable to an increase in our net patient revenue while the hospital division other operating revenue remained the same during the 2010 fiscal year compared to the 2009 fiscal year. Net revenue on a same facility basis was as follows:

	Fiscal Year Ended September 30,
					Increase/						% of Net
					(Decrease)						Revenue
	2010		2009		$			%			2010			2009
	(In thousands except percentages)
Net revenue	$	415,424	$	419,733	$	(4,309	)		(1.0	)%		100.0	%		100.0	%

41

Net revenue is comprised of net patient revenue and other operating revenue. Our same facility net patient revenue increased approximately $1.1 million during fiscal 2010 compared to fiscal 2009 while our other operating revenue decreased approximately $5.4 million, of which $5.2 million was experienced in our MedCath Partners Division. Beginning in our first quarter of fiscal 2010, our MedCath Partners Division renegotiated certain management contracts. As a result, certain personnel expenses once incurred by and reimbursed to our MedCath Partners Division, were no longer incurred as a result of employees no longer being employed by MedCath Partners. Therefore, the decline in other operating revenue was offset by a reduction in salary expenses due to this change.

Our same facility hospital division inpatient net revenue decreased approximately $6.4 million while our inpatient admissions increased by 2.3%. The inpatient net revenue decrease was offset by an increase in outpatient revenue, including emergency department revenue of approximately $4.2 million, driven by an increase in outpatient cases of approximately 7.4%.

Our inpatient net revenue decline was primarily due to a $9.6 million decrease in open heart revenue, a $4.6 million decrease in non-drug eluting stent net revenue, and a $2.1 million decrease in AICD net revenue offset by a $2.6 million increase in drug-eluting stent revenue and a $8.3 million increase in non-cardiovascular net inpatient revenue. We believe the decline in open heart surgeries and the use of AICD’s is indicative that less invasive cardiac procedures, such as stents, and pharmaceutical treatments have been successful for patients at our hospitals. Our non-cardiovascular net inpatient revenue has increased as we have diversified our services and have provided musculoskeletal procedures at certain of our hospitals and also experienced an increase in patient cases related to respiratory and digestive care.

Our same facility emergency department visits and net revenue increased 9.5% and 10.1%, respectively, during fiscal 2010 compared to fiscal 2009, driven primarily by our expansion and marketing efforts. In addition, we experienced an increase in outpatient AICD implants, pacer implants and EP studies/ablations, which experienced a 5.2% increase in cases and a 9.1% increase in net revenue.

Our same facility net revenue was impacted by an overall increase in deductions for uncompensated care of $3.3 million. We commonly refer to these deductions as charity care. Charity care was $7.5 million for fiscal 2010 compared to $4.3 million for fiscal 2009. Charity care is recorded for patients that meet certain federal poverty guidelines and request charity consideration in line with our policy. The number of patients that qualified for charity care increased during fiscal 2010 compared to fiscal 2009.

During fiscal 2009 we recognized net negative contractual adjustments to our net revenue of $4.5 million related to the filing of prior years Medicare cost reports as well as other Medicare and Medicaid settlement adjustments. Therefore, these adjustments had a year over year positive impact of $4.5 million to net revenue.

Personnel expense.  Personnel expense increased 7.6% to $152.0 million for fiscal 2010 from $141.3 million for fiscal 2009. As a percentage of net revenue, personnel expense increased slightly from 33.7% to 34.3% for the comparable periods. Personnel expense on a same facility basis was as follows:

	Fiscal Year Ended September 30,
					Increase/						% of Net
					(Decrease)						Revenue
	2010		2009		$			%			2010			2009
	(In thousands except percentages)
Personnel expense	$	137,433	$	141,315	$	(3,882	)		(2.7	)%		33.1	%		33.7	%

We recognized share-based compensation expense of $3.1 million and $2.4 million for the fiscal years ended September 2010 and 2009, respectively. The $0.7 million increase in share-based compensation expense was offset by a $6.2 million decrease in personnel expense. $2.1 million of the personnel expense decrease was the result of a reduction in workforce in our Partners Division as a result of renegotiating certain management contracts whereby we no longer employed the employees of certain ventures. In addition, the Hospital Division’s contract labor has declined as we align our expenses with our patient revenues and admissions. Our bonus expense increased approximately $1.1 million during fiscal 2010 compared to fiscal 2009 as the criteria for the attainment of bonuses were met during fiscal 2010 for certain of our hospitals.

42

Medical supplies expense.  Medical supplies expense increased 2.1% to $113.6 million, or 25.7% of net revenue, for fiscal 2010 from $111.3 million, or 26.5% of net revenue, for fiscal 2009. Medical supplies expense on a same facility basis was as follows:

	Fiscal Year Ended September 30,
					Increase/						% of Net
					(Decrease)						Revenue
	2010		2009		$			%			2010			2009
			(In thousands except percentages)
Medical supplies expense	$	108,579	$	111,253	$	(2,674	)		(2.4	)%		26.1	%		26.5	%

Our same facility medical supplies expense decreased as a result of a 9.9% reduction in open heart surgeries and a 10.1% reduction in AICD implantations, procedures that have higher net revenue per case as compared to other procedures performed at our hospitals. With less open heart and AICD net revenue, medical supplies will increase as a percentage of net revenue. The supply expense decrease was partially offset by an increase in the utilization of higher cost per unit devices.

Bad debt expense.  Bad debt expense increased 20.0% to $46.9 million for fiscal 2010 from $39.1 million for fiscal 2009. Bad debt expense on a same facility basis was as follows:

	Fiscal Year Ended September 30,
					Increase/					% of Net
					(Decrease)					Revenue
	2010		2009		$		%			2010			2009
	(In thousands except percentages)
Bad debt expense	$	43,206	$	39,068	$	4,138		10.6	%		10.4	%		9.3	%

We have experienced an increase in bad debt expense primarily related to an increase in the uncollectibility of the self-pay balance after insurance and an 8.1% increase in self-pay net revenue during fiscal 2010 compared to fiscal 2009.

Total uncompensated care, which includes charity care deductions recorded as a reduction to patient revenue and bad debt expense, was $50.7 million for fiscal 2010, or 12.5% of same facility Hospital Division net patient revenue, compared to $43.3 million, or 10.8% of same facility Hospital Division net patient revenue for fiscal 2009.

Other operating expenses.  Other operating expenses increased 15.1% to $104.3 million for fiscal 2010 from $90.6 million for fiscal 2009. Other operating expense on a same facility basis was as follows:

	Fiscal Year Ended September 30,
					Increase/					% of Net
					(Decrease)					Revenue
	2010		2009		$		%			2010			2009
	(In thousands except percentages)
Other operating expense	$	94,028	$	90,603	$	3,425		3.8	%		22.6	%		21.6	%

Notable increases and (decreases) in our same facility other operating expenses were as follows:

Professional fees	$	2,575
Employee benefits	$	2,343
Repairs and maintenance	$	825
Corporate salaries and bonuses, net	$	(234	)
Professional liability insurance	$	(992	)
Advertising	$	(1,045	)

Our professional fees increased $2.6 million during fiscal 2010 compared to fiscal 2009. Professional fees increased $3.8 million due to the expenses incurred related to the review and implementation of our strategic alternatives as well as fees incurred related to entering into definitive agreements to sell the Heart Hospital of Austin, Arizona Heart Hospital and Avera Heart Hospital of South Dakota, which were all completed subsequent to September 30, 2010, and TexSan Heart Hospital, which was announced subsequent to September 30, 2010. This

43

increase was partially offset by a decline in professional fees associated with growth initiatives and other non-recurring internal projects that were incurred during fiscal 2009.

Corporate employee benefits expense has increased due to an increase in specific claims expense for our employees during fiscal 2010 compared to the same period of the prior year. Since we are self-insured for medical claims and our medical claims expense can fluctuate based on the total number of claims we experience for any given period.

Corporate salaries and wages have declined $1.7 million due to attrition in employees related to the announcement that we are considering our strategic alternatives and a reduction in hiring of new employees offset by a $0.7 million increase in severance expense as a result of exploring these options. The alternatives include, but are not limited to, the possible sale of all or parts of the Company. This decline was offset by a $0.5 million increase in stay-on bonus expense incurred to retain employees during the strategic alternatives process.

We incurred specific large dollar professional liability insurance claims for certain of our hospitals during fiscal 2009. In contrast, we experienced favorable claim experience during fiscal 2010. As a result of the reduction in specific claims during fiscal 2010 and favorable claim experience for the current policy year, our overall professional liability insurance cost has declined $1.0 million.

We increased our marketing and advertising budget during fiscal 2009 to promote several of our facility expansions and certain direct mailing and radio programs to increase market share. Our advertising expenses declined $1.0 million during fiscal 2010 to better align our operating expenses with our revenues and also as a result of the review of our strategic alternatives.

Depreciation.  Depreciation increased 17.9% to $26.9 million for the fiscal year ended September 30, 2010 as compared to $22.8 million for the fiscal year ended September 30, 2009. The increase in depreciation is the direct result of expansion at several of our facilities, the opening of Hualapai Mountain Medical Center on October 15, 2009, as well as the purchase of newer computer equipment to replace outdated hardware.

Impairment of long-lived assets and goodwill.  Impairment of long-lived assets and goodwill increased 29.8% to $66.8 million for fiscal 2010 compared to $51.5 million for fiscal 2009. In fiscal 2010, the Company recognized impairments of property and equipment primarily related to the Hospital Division due to declines in operating performance as well as the ongoing review of strategic alternatives for the Company. When a cash flow projection or independent third party market offers indicated impairment existed, the Company reduced long-lived assets to their estimated fair value. In fiscal 2009, the Company recognized an impairment indicator relative its goodwill which was all related to the Hospital Division due to the overall financial performance of the Company and resulting decline in market capitalization. Subsequent analysis determined that the Hospital Division’s carrying value was in excess of its fair value and that the implied fair value of the goodwill was zero.

Interest expense.  Interest expense increased 21.4% to $4.5 million for fiscal 2010 compared to $3.7 million for fiscal 2009. The Company would have experienced a decrease due to capitalization of $2.7 million of interest on our capital expansion projects in fiscal 2009. The Company did not capitalize any interest in fiscal 2010. The decrease in pre-capitalization interest expense is primarily attributable to the overall reduction in our outstanding debt.

Loss on early extinguishment of debt.  During December 2008, we redeemed all of our outstanding 97/8% Senior Notes for $111.2 million, which included the payment of a repurchase premium of $5.0 million and accrued interest of $4.2 million. The Senior Notes were redeemed through borrowings under the Senior Secured Credit Facility and available cash on hand. In addition, we incurred $2.0 million in expenses related to the write-off of previously incurred financing costs associated with the Senior Notes. There was no loss on early extinguishment of debt for fiscal 2010.

Interest and other income, net.  Interest and other income, net decreased 61.3% to $0.1 million for fiscal 2010 compared to $0.2 million for fiscal 2009. The decrease is a result of the decrease in cash balances and the decrease in interest earned on cash balances during fiscal 2010.

44

Loss on note receivable.  Our corporate and other division entered into a note receivable agreement with a third party during 2008. The note receivable was deemed uncollectable and a loss of $1.5 million was recorded in fiscal 2010 due to our determination of the third party’s inability to repay the note and the insufficiency of the value of the collateral securing the note. There were no similar losses recorded in fiscal 2009.

Equity in net earnings of unconsolidated affiliates.  Equity in net earnings of unconsolidated affiliates decreased to $7.3 million in fiscal 2010 from $9.1 million in fiscal 2009. Earnings from operating activity of our unconsolidated affiliates remained relatively flat during fiscal 2010 compared to fiscal 2009 and our ownership interest in those entities remained materially the same for the two periods. However, the Company recognized a $1.9 million writedown of its investment in Southwest Arizona Heart and Vascular, LLC in fiscal 2010 based on the expected proceeds from the disposition of the Company’s interest to be received in fiscal 2011. Also, the Company expects a decline in future equity in net earnings of unconsolidated affiliates due to the disposition of its interest in Avera Heart Hospital of South Dakota on October 1, 2010 and the disposition of its interest in Southwest Arizona Heart and Vascular, LLC on November 1, 2010.

Net income attributable to noncontrolling interest.  Noncontrolling interest share of earnings of consolidated subsidiaries decreased $5.1 million in fiscal 2010 compared to fiscal 2009. Net income attributable to noncontrolling interests on a same facility basis was as follows:

	Fiscal Year Ended September 30,
					Increase/						% of Net
					(Decrease)						Revenue
	2010		2009		$			%			2010			2009
	(In thousands except percentages)
Net income attributable to noncontrolling interest	$	10,502	$	17,527	$	(7,025	)		(40.1	)%		2.5	%		4.2	%

Net income attributable to noncontrolling interest represents the portion of net income allocated to the minority owners of our consolidated subsidiaries. We allocate earnings to the minority owners based on their pro-rata share of earnings for the given period unless we are in disproportionate share accounting. During fiscal 2010 we allocated more losses disproportionate to our ownership interest where the minority owner’s capital balance has been reduced to zero per the partnership operating agreements. As a result of absorbing more losses during fiscal 2010, the total share of income allocated to minority owners has increased relative to our total net income. 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 profit recognition.

In addition, we incurred approximately $2.9 million in expense, net of tax, related to the redemption feature of a redeemable noncontrolling interest put option entered into with the minority interest holders at one of our hospitals during the fourth quarter of fiscal 2010. We classified the redeemable noncontrolling interest as temporary equity in the Consolidated Balance Sheets, outside of stockholders’ equity. We recorded the redeemable noncontrolling interest at the redemption value, net of tax, as prescribed in the operating agreement and accounting literature.

Income tax (benefit) expense.  Income tax benefit was $(26.7) million for fiscal 2010 compared to $(0.4) million for fiscal 2009, which represented an effective tax rate of (39.4%) and (0.8%), respectively. The fiscal 2010 effective rate is above our federal statutory rate of (35.0%) primarily due to the effect of the adoption of a new accounting pronouncement regarding noncontrolling interest (see Note 2), which requires the net income or loss attributable to noncontrolling interest be including in the determination of pretax income or loss in the Company’s effective rate calculation. The fiscal 2009 effective rate is below our federal statutory rate of 35.0% primarily due to the non-deductibility for income tax purposes of a majority of the $51.5 million impairment expense related to goodwill.

Income from discontinued operations, net of taxes.  Income from discontinued operations, net of taxes, principally reflects the operating results of Heart Hospital IV, LP (a/ka/ Heart Hospital of Austin, “HHA”), Arizona Heart Hospital LLC (“AzHH”), Cape Cod Cardiology Services LLC (“Cape Cod”), and Sun City Cardiac Center Associates (“Sun City”). Net income from discontinued operations was $5.0 million for fiscal 2010 compared to $9.5 million for fiscal 2009. Income from discontinued operations, net of taxes during fiscal 2010 is principally the income from operations of HHA, offset by operating losses at other discontinued entities, principally losses at

45

AzHH. Income from discontinued operations, net of taxes, includes the gains on the sale of Cape Cod and Sun City during fiscal 2009 and income from operations of HHA, partially offset by operating losses of other discontinued entities, principally losses at AzHH.

Fiscal Year 2009 Compared to Fiscal Year 2008

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,
							Increase/
							(Decrease)						% of Net Revenue
	2009			2008			$			%			2009			2008
	(In thousands except percentages)
Net revenue	$	419,733		$	414,155		$	5,578			1.3	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		141,315			136,009			5,306			3.9	%		33.7	%		32.8	%
Medical supplies expense		111,253			104,616			6,637			6.3	%		26.5	%		25.3	%
Bad debt expense		39,068			33,070			5,998			18.1	%		9.3	%		8.0	%
Other operating expenses		90,603			84,230			6,373			7.6	%		21.6	%		20.3	%
Pre-opening expenses		3,563			786			2,777			353.3	%		0.9	%		0.2	%
Depreciation		22,818			21,714			1,104			5.1	%		5.4	%		5.3	%
Amortization		891			32			859			2684.4	%		0.2	%		0.0	%
Impairment of long-lived assets and goodwill		51,500			—			51,500			100.0	%		12.3	%		—
Loss on disposal of property, equipment and other assets		192			124			68			54.8	%		—			0.0	%
(Loss) income from operations		(41,470	)		33,574			(75,044	)		(223.5	)%		(9.9	)%		8.1	%
Other income (expenses):
Interest expense		(3,746	)		(11,242	)		7,496			(66.7	)%		(0.9	)%		(2.7	)%
Loss on early extinguishment of debt		(6,702	)		—			(6,702	)		(100.0	)%		(1.6	)%		—
Interest and other income		217			1,917			(1,700	)		(88.7	)%		0.1	%		0.5	%
Equity in net earnings of unconsolidated affiliates		9,057			7,891			1,166			14.8	%		2.1	%		1.9	%
(Loss) income from continuing operations before income taxes		(42,644	)		32,140			(74,784	)		(232.7	)%		(10.2	)%		7.8	%
Income tax (benefit) expense		(362	)		8,296			(8,658	)		(104.4	)%		(0.1	)%		2.0	%
(Loss) income from continuing operations		(42,282	)		23,844			(66,126	)		(277.3	)%		(10.1	)%		5.8	%
Income from discontinued operations, net of taxes		9,527			19,004			(9,477	)		(49.9	)%		2.3	%		4.6	%
Net (loss) income		(32,755	)		42,848			(75,603	)		(176.4	)%		(7.8	)%		10.3	%
Less: Net income attributable to noncontrolling interest		(17,527	)		(21,858	)		4,331			(19.8	)%		(4.2	)%		(5.3	)%
Net (loss) income attributable to MedCath Corporation	$	(50,282	)	$	20,990		$	(71,272	)		(339.6	)%		(12.0	)%		5.1	%
Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes	$	(51,655	)	$	10,645		$	(62,300	)		(585.3	)%		(12.3	)%		2.6	%
Income from discontinued operations, net of taxes		1,373			10,345			(8,972	)		(86.7	)%		0.3	%		2.5	%
Net (loss) income	$	(50,282	)	$	20,990		$	(71,272	)		(339.6	)%		(12.0	)%		5.1	%

46

Net revenue.  Below is selected procedural and net revenue data for the fiscal years ended September 30, 2009 and 2008.

	Hospital Division Continuing Operations
	Year Ended September 30,
													Increase
	2009			%			2008			%			(Decrease)
Admission and Principal Procedures(1):
Inpatient admissions		19,894			30	%		20,962			34	%		(5.1	)%
Outpatient procedures(2)		21,933			33	%		18,757			31	%		16.9	%
ED and heart saver program		24,256			37	%		21,147			35	%		14.7	%
Total procedures		66,083			100	%		60,866			100	%		8.6	%
MDC 5 procedures(3)		14,420						15,909						(9.4	)%
IP Drug Eluting Stents		2,141						2,165						(1.1	)%
IP Bare Metal Stents		1,588						2,645						(40.0	)%
OP Drug Eluting Stents		1,027						471						118.0	%
OP Bare Metal Stents		796						445						78.9	%
Non MDC 5 procedures		51,663						44,957						14.9	%
ED visits		19,769						17,127						15.4	%
Net Revenue(1):
Inpatient net revenue		72.1	%					77.4	%					(6.8	)%
Outpatient net revenue		21.4	%					16.7	%					28.1	%
ED and HeartSaver CT program		6.5	%					5.9	%					10.2	%
Total net revenue		100.0	%					100.0	%
Total charity care	$	4,266					$	12,176						(65.0	)%

(1)	Procedures refer to the total cases billed and revenues recognized.
(2)	Excludes emergency department and our HeartSaver CT program.
(3)	Major Diagnostic Category (“MDC”) 5 corresponds to a circulatory system principal diagnosis. We have historically referred to MDC 5 procedures as our “core procedures.”

Net revenue increased 1.3% to $419.7 million for our fiscal year ended September 30, 2009 from $414.2 million for our fiscal year ended September 30, 2008. Of this $5.5 million increase in net revenue, our Hospital Division generated a 1.8%, or $7.0 million increase, our MedCath Partners Division generated a $1.4 million decrease and our Corporate and other Division generated a $0.1 million decrease.

We continued to experience a shift from inpatient to outpatient procedures in our Hospital Division during fiscal 2009. Our inpatient admissions were down 5.1% for the 2009 fiscal year compared to the 2008 fiscal year; however our outpatient procedures, excluding emergency department visits, increased 16.0% as a result of the shift from inpatient to outpatient procedures. Our emergency department visits increased 15.4% during fiscal 2009 compared to fiscal 2008, driven primarily by our expansion and marketing efforts. Total outpatient net patient revenue excluding emergency department and our Heart Saver program net revenue increased from 22.6% of total hospital net revenue for fiscal 2008 to 27.9% for fiscal 2009.

During 2009 we established a consolidated primary care physician group at one of our hospitals. Net revenue for fiscal 2009 includes $1.0 million related to this new group. The related expenses are also reported as a component of income from operations.

Our net revenue was positively impacted by an overall decrease in deductions for uncompensated care of 65.0% or $7.9 million. We commonly refer to these deductions as charity care. Charity care was $4.3 million for fiscal 2009 compared to $12.2 million for fiscal 2008. Charity care is recorded for patients that meet certain federal

47

poverty guidelines and request charity consideration in line with our policy. The number of patients that qualified for charity care decreased during fiscal 2009 compared to fiscal 2008.

During fiscal 2009 and 2008, we recognized net negative contractual adjustments to our net revenue of $4.5 million and $0.4 million, respectively, related to the filing of prior years Medicare cost reports as well as other Medicare and Medicaid settlement adjustments. Therefore, these adjustments had a year over year negative impact of $4.1 million to net revenue.

Personnel expense.  Personnel expense increased 3.9% to $141.3 million for fiscal 2009 from $136.0 million for fiscal 2008. As a percentage of net revenue, personnel expense increased from 32.8% to 33.7%.

We recognized share-based compensation expense of $2.4 million and $5.0 million for the fiscal years ended September 2009 and 2008, respectively. The $2.6 million decrease in share-based compensation expense was offset by an increase in personnel expense related to cost of living wage adjustments made during the first quarter of fiscal 2009 and an increase in our Hospital Division benefit costs related to our self-insured medical plan due to an increase in employee related medical claims during fiscal 2009.

Medical supplies expense.  Medical supplies expense increased 6.3% to $111.3 million, or 26.5% of net revenue, for fiscal 2009 from $104.6 million, or 25.3% of net revenue, for fiscal 2008. We experienced an increase in expense related to AICD’s, heart valves, drug-eluting stents and vascular graft supplies during fiscal 2009 offset by a reduction in expense for bare metal stents, orthopedic and chargeable medical supplies. The increase in AICD’s, heart valves, drug-eluting stents and vascular graft supplies was directly related to a combination of a higher utilization of supplies per procedure, an increase in the number of procedures performed or the use of higher cost supplies for these procedures. Conversely, the reduction in bare metal stents and orthopedic supplies is the direct result of lower utilization of supplies per procedure and lower cost for the units used per procedure.

Bad debt expense.  Bad debt expense increased 18.1% to $39.1 million for fiscal 2009 from $33.1 million for fiscal 2008. Total uncompensated care, which includes charity care deductions recorded as a reduction to patient revenue and bad debt expense, was $43.3 million for fiscal 2009, or 10.8% of Hospital Division net patient revenue, compared to $45.2 million, or 11.2% of Hospital Division net patient revenue for fiscal 2008. We have experienced an increase in bad debt expense primarily related to an increase in the uncollectibility of the self-pay balance after insurance and a reduction in patients that qualify for charity care and/or government assistance. The reduction in total uncompensated care to net revenue is due to improved collections during fiscal 2009.

Other operating expenses.  Other operating expenses increased 7.6% to $90.6 million for fiscal 2009 from $84.2 million for fiscal 2008. This increase is mainly driven by clinical and non-clinical contract services due to the growth in volume at several of our facilities, particularly emergency department visits, as well as increased maintenance costs at our hospitals as machinery warranties have expired at several of our facilities. These increases have been offset by a decline in administrative contract services and collection agency fees as these services are brought in-house to control costs and gain efficiencies. In addition, we incurred a $1.3 million increase in costs related to a new primary care physician group at one of our hospitals.

Pre-opening expenses.  We incurred $3.6 million and $0.8 million in pre-opening expenses during fiscal 2009 and 2008. Pre-opening expenses represent costs specifically related to projects under development. As of September 30, 2009 and 2008, we had one hospital under development, Hualapai Medical Center in Kingman, Arizona, which opened on October 15, 2009. 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 increased 5.1% to $22.8 million for the fiscal year ended September 30, 2009 as compared to $21.7 million for the fiscal year ended September 30, 2008. The increase in depreciation is the direct result of expansion at several of our facilities as well as the purchase of newer computer equipment to replace outdated hardware.

Impairment of goodwill.  Impairment of long-lived assets increased 100.0% to $51.5 million for fiscal 2009 as compared to zero for fiscal 2008. In fiscal 2009, the Company recognized an impairment charge to write off its goodwill which was all related to the Hospital Division due to the overall financial performance of the Company and recent appraisals indicating that the Hospital Division’s carrying value was in excess of its fair value. Such analyses

48

resulted in an implied value of the goodwill as zero. There were no such similar impairment charges recognized in fiscal 2008.

Interest expense.  Interest expense decreased 66.7% to $3.7 million for fiscal 2009 compared to $11.2 million for fiscal 2008. This $7.5 million decrease in interest expense is primarily attributable to the overall reduction in our outstanding debt, a decrease in the interest rate on our outstanding debt, and the capitalization of interest on our capital expansion projects. Capitalized interest was $2.7 million for fiscal 2009 compared to $1.3 million for fiscal 2008.

Loss on early extinguishment of debt.  During December 2008, we redeemed all of our outstanding 97/8% Senior Notes for $111.2 million, which included the payment of a repurchase premium of $5.0 million and accrued interest of $4.2 million. The Senior Notes were redeemed through borrowings under the Senior Secured Credit Facility and available cash on hand. In addition, we incurred $2.0 million in expenses related to the write-off of previously incurred financing costs associated with the Senior Notes. There was no loss on early extinguishment of debt for fiscal 2008.

Interest and other income, net.  Interest and other income, net decreased 88.7% to $0.2 million for fiscal 2009 compared to $1.9 million for fiscal 2008. The decrease is a result of the decrease in cash balances and the decrease in interest earned on cash balances during fiscal 2009.

Equity in net earnings of unconsolidated affiliates.  Equity in net earnings of unconsolidated affiliates increased $1.2 million to $9.1 million in fiscal 2009 from $7.9 million in fiscal 2008. The increase is attributable to a $1.6 million growth in earnings for our unconsolidated affiliates related to our Partners Division offset by a reduction of $0.4 million related to the Hospital Division. The increase for our Partners Division is the result of a new minority owned venture that had a full year of operations in fiscal 2009. The decline for our Hospital Division is the result of an overall net decrease in income from our two minority owned hospitals.

Net income attributable to noncontrolling interest.  Noncontrolling interest share of earnings of consolidated subsidiaries decreased $4.3 million in fiscal 2009 compared to fiscal 2008. The decline is the result of an overall net decrease in income before minority interest of certain of our established hospitals. 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 profit recognition.

Income tax (benefit) expense.  Income tax benefit was $(0.4) million for fiscal 2009 compared to an income tax expense of $8.3 million for fiscal 2008, which represented an effective tax rate of (0.8%) and 25.8%, respectively. The fiscal 2009 effective rate is below our federal statutory rate of 35.0% primarily due to the non-deductibility for income tax purposes of a majority of the $51.5 million impairment expense related to goodwill.

Income from discontinued operations, net of taxes.  Income from discontinued operations, net of taxes, principally reflects the operating results of Heart Hospital IV, LP (a/ka/ Heart Hospital of Austin, “HHA”), Arizona Heart Hospital LLC (“AzHH”), Dayton Heart Hospital, Cape Cod Cardiology Services LLC (“Cape Cod”), Sun City Cardiac Center Associates (“Sun City”) and the Heart Hospital of Lafayette. Net income from discontinued operations was $9.5 million for fiscal 2009 compared to $19.0 million for fiscal 2008. Income from discontinued operations, net of taxes, includes the gains on the sale of Cape Cod and Sun City during fiscal 2009 and income from operations of HHA, partially offset by operating losses of other discontinued entities, principally losses at AzHH. Income from discontinued operations, net of taxes, for fiscal 2008 includes the gain recorded as a result of the sale of certain assets of Dayton Heart Hospital, the income from operations of HHA, Cape Cod and Sun City partially offset by operating losses of Dayton Heart Hospital prior to the sale and AzHH.

49

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,
	2010			2010			2010			2009			2009
	(In thousands)
Statement of Operations Data:
Net Revenue	$	110,527		$	111,963		$	114,007		$	106,000		$	103,600
Impairment of long-lived assets and goodwill		29,257			22,813			14,752			—			51,500
Loss from operations		(29,547	)		(22,667	)		(13,366	)		(3,388	)		(54,616	)
Equity in net earnings of unconsolidated affiliates		397			2,262			3,092			1,516			2,013
Net income attributable to noncontrolling interest		(6,671	)		(2,354	)		(2,524	)		(840	)		(7,646	)
Loss from continuing operations, net of taxes		(25,722	)		(14,360	)		(9,351	)		(2,523	)		(53,214	)
Income (loss) from discontinued operations, net of taxes		4,034			1,544			(1,858	)		(133	)		(5,392	)
Net loss	$	(21,688	)	$	(12,816	)	$	(11,209	)	$	(2,656	)	$	(58,606	)
Earnings (loss) per share, basic
Continuing operations	$	(1.29	)	$	(0.72	)	$	(0.47	)	$	(0.13	)	$	(2.70	)
Discontinued operations		0.20			0.08			(0.10	)		—			(0.27	)
Earnings (loss) per share, basic	$	(1.09	)	$	(0.64	)	$	(0.57	)	$	(0.13	)	$	(2.97	)
Earnings (loss) per share, diluted
Continuing operations	$	(1.29	)	$	(0.72	)	$	(0.47	)	$	(0.13	)	$	(2.70	)
Discontinued operations		0.20			0.08			(0.10	)		—			(0.27	)
Earnings (loss) per share, diluted	$	(1.09	)	$	(0.64	)	$	(0.57	)	$	(0.13	)	$	(2.97	)
Weighted average number of shares, basic		19,898			19,897			19,829			19,743			19,740
Dilutive effect of stock options and restricted stock		—			—			—			—			—
Weighted average number of shares, diluted		19,898			19,897			19,829			19,743			19,740
Cash Flow Data:
Net cash provided by operating activities	$	12,113		$	12,273		$	15,373		$	3,535		$	9,805
Net cash provided by provided by (used in) investing activities	$	384		$	(1,996	)	$	(6,108	)	$	(9,236	)	$	858
Net cash (used in) financing activities	$	(4,509	)	$	(9,119	)	$	(5,960	)	$	(21,421	)	$	(1,871	)

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;

50

•  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

The cash provided by continuing operations from operating activities decreased $15.6 million to $30.4 million for fiscal 2010 from $46.0 million for fiscal 2009, respectively. The decrease is primarily attributed to an increase in outstanding net accounts receivable due to the addition of Hualapai Mountain Medical Center, our new hospital which opened during fiscal 2010 and an increase in net patient revenues.

Our investing activities from continuing operations used net cash of $14.9 million for fiscal 2010 compared to net cash used of $82.1 million for fiscal 2009. Net cash used by investing activities for fiscal 2009 was primarily capital expenditures for the development of our hospital in Kingman, Arizona and expansion projects at two of our existing hospitals. There were no similar large scale expansions or developments in fiscal 2010.

Our financing activities from continuing operations used net cash of $31.8 million during fiscal 2010 compared to net cash used of $43.8 million during fiscal 2009. The $12.0 million decrease of net cash used for financing activities is principally due to the net overall long-term debt payments in fiscal 2009 related to the repurchase of our outstanding Senior Notes as further discussed in Note 9 of the consolidated financial statements included elsewhere in this report.

Capital Expenditures.  Cash paid for property and equipment for fiscal years 2010 and 2009 was $16.4 million and $87.0 million, respectively. The decrease is primarily related to the development of our hospital in Kingman, Arizona which opened in October 2009 and the expansion projects at two of our existing hospitals, which were completed during fiscal 2009. The cash paid for property and equipment during fiscal year 2010 represents $8.0 million related to payments on the completion of the hospital in Kingman, Arizona and $8.4 million related to maintenance capital expenditures.

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, 2010, which are due as follows (in thousands):

	Payments Due by Fiscal Year
	2011		2012		2013		2014		2015		Thereafter		Total
Long-term debt	$	14,063	$	52,500	$	—	$	—	$	—	$	—	$	66,563
Obligations under capital leases		2,609		2,266		1,884		1,589		761		—		9,109
Total debt		16,672		54,766		1,884		1,589		761		—		75,672
Other long-term obligations(1)		7,946		3,640		752		—		—		—		12,338
Interest on indebtedness		2,511		946		220		119		23		—		3,819
Operating leases		1,724		1,601		1,562		1,300		397		99		6,683
Total	$	28,853	$	60,953	$	4,418	$	3,008	$	1,181	$	99	$	98,512

(1) Other long-term obligations include revenue guarantees related to contracts for physician services or to physician recruiting arrangements. In addition, the Company has deferred some of the costs associated with these guarantees, see Note 12.

During November 2008, we amended and restated our Senior Secured Credit Facility (the “Amended Credit Facility”). The Amended Credit Facility provides for a three-year term loan facility in the amount of $75.0 million (the “Term Loan”) and a revolving credit facility in the amount of $85.0 million (the “Revolver”), 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

51

for swing-line loans. At our request and approval from our lenders, the aggregate amount available under the Amended Credit Facility may be increased by an amount up to $50.0 million. Borrowings under the Amended 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 Amended Credit Facility continues to be guaranteed jointly and severally by us and certain of our existing and future, direct and indirect, wholly owned subsidiaries and continues to be secured by a first priority perfected security interest in all of the capital stock or other ownership interests owned by us and our subsidiary guarantors in each of their subsidiaries, and, subject to certain exceptions in the Amended Credit Facility, all other present and future assets and properties of the MedCath and the subsidiary guarantors and all intercompany notes.

The Amended Credit Facility requires compliance with certain financial covenants including a consolidated senior secured leverage ratio test, a consolidated fixed charge coverage ratio test and a consolidated total leverage ratio test. The Amended Credit Facility also contains customary restrictions on, among other things, our and our 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; and entering into transactions with affiliates.

The Amended Credit Facility contains events of default, including cross-defaults to certain indebtedness, change of control events, and events of default customary for syndicated commercial credit facilities. Upon the occurrence of an event of default, we could be required to immediately repay all outstanding amounts under the Amended Credit Facility.

On August 13, 2010, the Company and its lenders amended and restated the Senior Secured Credit Facility (the “First Amendment”). The Company entered into the First Amendment to provide additional financial and liquidity flexibility in connection with its previously announced effort to explore strategic alternatives. The First Amendment contains modifications of certain financial covenants and other requirements of the Amended Credit Facility, including, but not limited to: modifications to certain definitions contained in the Amended Credit Facility, including the definitions of certain financial terms to permit additional add backs (such as an add back for charges and professional expenses incurred in connection with asset dispositions), subject to maximum amounts in certain cases, and to the multiple applied to certain of the financial metrics derived in accordance with such definitions, for certain financial covenant calculations; increasing the amount of permitted guarantees of indebtedness by $10 million; amending the asset dispositions covenant to permit additional asset dispositions subject to no events of default and require that any net cash proceeds from an asset disposition or series of asset dispositions in excess of $50 million from the date of the First Amendment be applied 50% to repay the outstanding Term Loan amounts under the Amended Credit Facility and 50% to repay amounts outstanding under the Revolver or cash collateralize letters of credit to the extent outstanding and permanently reduce the Revolver by 50% of the net cash proceeds, which could shorten the term of the Revolver based on the amount of such permanent commitment reductions. In addition, any mandatory prepayments of the Revolver will also reduce the revolving credit commitment by a corresponding amount. The Revolver including letters of credit will not be permitted to remain outstanding after the full repayment of the Term Loan. The First Amendment also provides for a reduction in amount of the Revolver from $85 million to $59.5 million as of the date of the First Amendment. Under terms of the First Amendment, the fixed charge coverage ratio is not tested at either September 30, 2010 or December 31, 2010, and will be retested at the fiscal quarter ending March 31, 2011 and subsequent fiscal quarters. The maturity date of both the Term Loan and Revolver is November 10, 2011.

During the third quarter of fiscal 2010, we repaid the remaining $4.2 million note payable obligations to certain equipment lenders on behalf of its consolidated subsidiary, TexSan Heart Hospital.

During December 2008 we redeemed our outstanding 97/8% senior notes (the “Senior Notes”) issued by MedCath Holdings Corp., a wholly owned subsidiary for $111.2 million, which included the payment of a repurchase premium of $5.0 million and accrued interest of $4.2 million. The Senior Notes were redeemed through borrowings under the Amended Credit Facility and available cash on hand. In addition to the aforementioned repurchase premium we incurred $2.0 million in expense related to the write-off of previously incurred financing costs associated with the Senior Notes. The repurchase premium and write off of previously incurred financing costs have been included in the consolidated statement of income as loss on early extinguishment of debt.

52

At September 30, 2010, we had $75.7 million of outstanding long-term debt and obligations under capital leases, of which $16.7 million was classified as current. Our Term Loan under our Amended Credit Facility had an outstanding amount of $66.6 million as of September 30, 2010. The remaining outstanding long-term debt and obligations under capital leases of $9.1 million was due to various lenders to our Hospital Division and MedCath Partners Division. No amounts were outstanding under our Revolver. The maximum availability under our Revolver is $59.5 million which was reduced by outstanding letters of credit totaling $1.7 million as of September 30, 2010.

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, 2009, TexSan Heart Hospital was in violation of financial covenants which govern its equipment loans outstanding. Accordingly, the total outstanding balance of $6.1 million has been included in the current portion of long-term debt and obligations under capital leases in our consolidated balance sheet at that date. These loans were fully repaid as of September 30, 2010. The covenant violations did not result in any other non-compliance related to the covenants governing our other outstanding debt arrangements. At September 30, 2010 we were in compliance with all of our covenants.

At September 30, 2010, we guaranteed either all or a portion of the obligations of our subsidiary hospitals for equipment. 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. Access to available borrowings under our Amended Credit Facility is dependent on the Company’s ability to maintain compliance with the financial covenants contained in the Amended Credit Facility. Deterioration in the Company’s operating results could result in failure to maintain compliance with these covenants, which would restrict or eliminated access to available funds.

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 from operations and asset sales will be sufficient to finance our strategic plans, capital expenditures and our working capital requirements for the next 12 to 18 months. Repayment of the outstanding balance under our Amended Credit Facility prior to its November 2011 maturity date will be dependent on existing cash, cash flow from operations and cash from asset sales.

Intercompany Financing Arrangements.  We provide secured real estate, equipment and working capital financings to our majority-owned hospitals.

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 13 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 3 to 7 years. The intercompany equipment loans accrue interest at rates ranging from 4.87% to 8.58%. The weighted average interest rate for the intercompany equipment loans at September 30, 2010 was 7.21%.

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 often 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

53

hospital’s working capital needs. These funds are advanced pursuant to cash management agreements with the individual hospital 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.

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 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.

Retained Obligations Subsequent to Disposition.  Included in discontinued operations are certain liabilities that the Company has retained upon the disposition of the related entity, including those that have been disposed since September 30, 2010. As the Company’s hospitals are organized as partnerships, upon disposition of the related operations, assets and certain liabilities, the partnerships are responsible for the resolution of outstanding payables, remaining obligations, including those related to cost reports, obligations and wind down of the respective tax filings of the partnership. The Company has reported all known obligations in its consolidated balance sheets as of September 30, 2010 and 2009. However, as the ultimate resolution of the outstanding payables and obligations may take in excess of one year, our estimates may prove incorrect and result in the Company paying amounts in excess of those recorded at the respective balance sheet date.

Off-Balance Sheet Arrangements.  The Company’s off-balance sheet arrangements consist of guarantees of consolidated and unconsolidated subsidiary equipment loans and operating leases that are reflected in the table above and as discussed in Notes 9 and 12, respectively, in the consolidated financial statements.

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 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.

54

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. Currently one of our hospitals in which we have a minority interest and account for under the equity method entered into an interest rate swap during fiscal 2006 for purposes of hedging variable interest payments on long term debt outstanding for that hospital. The interest rate swap is accounted for as a cash flow hedge by the hospital whereby changes in the fair value of the interest rate swap flow through comprehensive income of the hospital. Potential losses of earnings and cash flows due to the market risk of the aforementioned interest rate swap are immaterial.

Interest Rate Risk

Our Amended Credit Facility borrowings expose us to risks caused by fluctuations in the underlying interest rates. The total outstanding balance of our Amended Credit Facility was $66.6 million at September 30, 2010. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $0.7 million during the fiscal year ended September 30, 2010.

55

INDEX TO FINANCIAL STATEMENTS

MEDCATH CORPORATION AND SUBSIDIARIES

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		57
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 2010 and 2009		58
Consolidated Statements of Operations for the Years Ended September 30, 2010, 2009 and 2008		59
Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2010, 2009 and 2008		60
Consolidated Statements of Cash Flows for the Years Ended September 30, 2010, 2009 and 2008		61
Notes to Consolidated Financial Statements		62

HEART HOSPITAL OF SOUTH DAKOTA, LLC

	Page
INDEPENDENT AUDITORS’ REPORT		96
FINANCIAL STATEMENTS:
Balance Sheets as of September 30, 2010 and 2009		97
Statements of Income for the Years Ended September 30, 2010, 2009 and 2008		98
Statements of Members’ Capital for the Years Ended September 30, 2010, 2009 and 2008		99
Statements of Cash Flows for the Years Ended September 30, 2010, 2009 and 2008		100
Notes to Financial Statements		101

56

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, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

We conducted our audits 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 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, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2010, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for non-controlling interests effective October 1, 2009.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2010, based on Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 14, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.

DELOITTE & TOUCHE LLP

Charlotte, North Carolina

December 14, 2010

57

MEDCATH CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

	September 30,
	2010			2009
Current assets:
Cash and cash equivalents	$	34,835		$	28,267
Accounts receivable, net (See Note 6)		48,540			49,314
Income tax receivable		6,188			—
Medical supplies		13,481			13,001
Deferred income tax assets		13,327			12,161
Prepaid expenses and other current assets		13,583			13,077
Current assets of discontinued operations		38,356			61,045
Total current assets		168,310			176,865
Property and equipment, net (See Note 7)		223,182			302,717
Other assets		15,653			24,796
Deferred income tax assets		9,063			—
Non-current assets of discontinued operations		78,330			86,070
Total assets	$	494,538		$	590,448
Current liabilities :
Accounts payable	$	19,267		$	26,838
Income tax payable		—			297
Accrued compensation and benefits		18,153			14,314
Other accrued liabilities		18,291			21,750
Current portion of long-term debt and obligations under capital leases		16,672			21,074
Current liabilities of discontinued operations		28,130			32,358
Total current liabilities		100,513			116,631
Long-term debt		52,500			66,563
Obligations under capital leases		6,500			4,255
Deferred income tax liabilities		—			13,874
Other long-term obligations		5,053			8,533
Long-term liabilities of discontinued operations		35,968			36,062
Total liabilities		200,534			245,918
Commitments and contingencies (See Note 12)
Redeemable noncontrolling interest (See Note 2)		11,534			7,448
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; 22,423,666 issued and 20,469,305 outstanding at September 30, 2010 21,595,880 issued and 20,150,556 outstanding at September 30, 2009		216			216
Paid-in capital		457,725			455,259
Accumulated deficit		(139,791	)		(91,420	)
Accumulated other comprehensive loss		(444	)		(360	)
Treasury stock, at cost; 1,954,361 shares at September 30, 2010 1,445,324 shares at September 30, 2009		(44,797	)		(44,797	)
Total MedCath Corporation stockholders’ equity		272,909			318,898
Noncontrolling interest		9,561			18,184
Total equity		282,470			337,082
Total liabilities and equity	$	494,538		$	590,448

See notes to consolidated financial statements.

58

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Year Ended September 30,
	2010			2009			2008
Net revenue	$	442,496		$	419,733		$	414,155
Operating expenses:
Personnel expense		151,990			141,315			136,009
Medical supplies expense		113,588			111,253			104,616
Bad debt expense		46,887			39,068			33,070
Other operating expenses		104,327			90,603			84,230
Pre-opening expenses		866			3,563			786
Depreciation		26,895			22,818			21,714
Amortization		32			891			32
Impairment of long lived assets and goodwill		66,822			51,500			—
Loss on disposal of property, equipment and other assets		57			192			124
Total operating expenses		511,464			461,203			380,581
(Loss) income from operations		(68,968	)		(41,470	)		33,574
Other income (expenses):
Interest expense		(4,548	)		(3,746	)		(11,242	)
Loss on early extinguishment of debt		—			(6,702	)		—
Interest and other income		84			217			1,917
Loss on note receiveable		(1,507	)		—			—
Equity in net earnings of unconsolidated affiliates		7,267			9,057			7,891
Total other income (expense), net		1,296			(1,174	)		(1,434	)
(Loss) income from continuing operations before income taxes		(67,672	)		(42,644	)		32,140
Income tax (benefit) expense		(26,662	)		(362	)		8,296
(Loss) income from continuing operations		(41,010	)		(42,282	)		23,844
Income from discontinued operations, net of taxes		5,028			9,527			19,004
Net (loss) income		(35,982	)		(32,755	)		42,848
Less: Net income attributable to noncontrolling interest		(12,389	)		(17,527	)		(21,858	)
Net (loss) income attributable to MedCath Corporation	$	(48,371	)	$	(50,282	)	$	20,990
Amounts attributable to MedCath Corporation common stockholders:
(Loss) income from continuing operations, net of taxes	$	(51,956	)	$	(51,655	)	$	10,645
Income from discontinued operations, net of taxes		3,585			1,373			10,345
Net (loss) income	$	(48,371	)	$	(50,282	)	$	20,990
(Loss) earnings per share, basic
(Loss) income from continuing operations attributable to MedCath Corporation common stockholders	$	(2.62	)	$	(2.62	)	$	0.53
Income from discontinued operations attributable to MedCath Corporation common stockholders		0.18			0.07			0.52
(Loss) earnings per share, basic	$	(2.44	)	$	(2.55	)	$	1.05
(Loss) earnings per share, diluted
(Loss) income from continuing operations attributable to MedCath Corporation common stockholders	$	(2.62	)	$	(2.62	)	$	0.53
Income from discontinued operations attributable to MedCath Corporation common stockholders		0.18			0.07			0.51
(Loss) earnings per share, diluted	$	(2.44	)	$	(2.55	)	$	1.04
Weighted average number of shares, basic		19,842			19,684			19,996
Dilutive effect of stock options and restricted stock		—			—			73
Weighted average number of shares, diluted		19,842			19,684			20,069

See notes to consolidated financial statements.

59

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

																											Redeemable
												Accumulated															Noncontrolling
												Other			Treasury									Total			Interest
	Common Stock					Paid-in			Accumulated			Comprehensive			Stock						Noncontrolling			Equity			(Temporary
	Shares			Par Value		Capital			Deficit			Loss			Shares			Amount			Interest			(Permanent)			Equity)
Balance, September 30, 2007		21,271		$	213	$	447,688		$	(61,821	)	$	(62	)		69		$	(394	)	$	21,141		$	406,765		$	8,596
Cumulative impact of change in accounting principle		—			—		—			(307	)		—			—			—			—			(307	)		—
Exercise of stock options, including income tax benefit		282			3		4,741			—			—			—			—			—			4,744			—
Share buy back		—			—		—			—			—			1,885			(44,403	)		—			(44,403	)		—
Share-based compensation expense		—			—		4,978			—			—			—			—			—			4,978			—
Tax impact of cancellation of stock options		—			—		(1,913	)		—			—			—			—			—			(1,913	)		—
Acquisitions and other transactions impacting noncontrolling interest		—			—		—			—			—			—			—			344			344			(115	)
Distributions to noncontrolling interest		—			—		—			—			—			—			—			(23,152	)		(23,152	)		(4,005	)
Comprehensive income:																									—
Net income		—			—		—			20,990			—			—			—			17,290			38,280			4,568
Change in fair value of interest rate swaps, net of income tax benefit(*)		—			—		—			—			(117	)		—			—			—			(117	)		—
Total comprehensive income																									38,163
Balance, September 30, 2008		21,553			216		455,494			(41,138	)		(179	)		1,954			(44,797	)		15,623			385,219			9,044
Stock awards, including cancelations and income tax effects		43			—		(1,826	)		—			—			—			—			—			(1,826	)		—
Restricted stock awards, inlcuding cancelations		—			—		1,591			—			—			(509	)		—			—			1,591			—
Distributions to noncontrolling interest		—			—		—						—			—			—			(11,436	)		(11,436	)		(4,895	)
Acquisitions and other transactions impacting noncontrolling interest		—			—		—			—			—			—			—			(118	)		(118	)		(102	)
Comprehensive loss:
Net (loss) income		—			—		—			(50,282	)		—			—			—			14,115			(36,167	)		3,401
Change in fair value of interest rate swaps, net of income tax benefit(*)		—			—		—			—			(181	)		—			—			—			(181	)		—
Total comprehensive loss																									(36,348	)
Balance, September 30, 2009		21,596			216		455,259			(91,420	)		(360	)		1,445			(44,797	)		18,184			337,082			7,448
Stock awards, including cancelations and income tax benefit		363			—		2,646			—			—			—			—			—			2,646			—
Tax withholdings for vested restricted stock awards		(44	)		—		(293	)		—			—			—			—			—			(293	)		—
Transfer of restricted shares from treasury stock		509														509
Distributions to noncontrolling interest		—			—		—			—			—			—			—			(14,956	)		(14,956	)		(3,560	)
Acquisitions and other transactions impacting noncontrolling interest		—			—		—			—			—			—			—			72			72			(77	)
Sale of equity interest		—			—		113			—			—			—			—			27			140			—
Comprehensive loss:
Net (loss) income		—			—		—			(48,371	)		—			—			—			6,234			(42,137	)		7,723
Change in fair value of interest rate swap, net of income tax benefit(*)		—			—		—			—			(84	)		—			—			—			(84	)		—
Total comprehensive loss																									(42,221	)		7,723
Balance, September 30, 2010		22,424		$	216	$	457,725		$	(139,791	)	$	(444	)		1,954		$	(44,797	)	$	9,561		$	282,470		$	11,534

(*) Tax benefits were $0.1 million for each of the years ended September 30, 2010, 2009 and 2008.

See notes to consolidated financial statements.

60

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended September 30,
	2010			2009			2008
Net (loss) income	$	(35,982	)	$	(32,755	)	$	42,848
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Income from discontinued operations, net of taxes		(5,028	)		(9,527	)		(19,004	)
Bad debt expense		46,887			39,068			33,070
Depreciation		26,895			22,818			21,714
Amortization		32			891			32
Excess income tax benefit on stock awards and options		—			—			(608	)
Loss on disposal of property, equipment and other assets		57			192			124
Share-based compensation expense		3,148			2,390			4,978
Loss on early extinguishment of debt		—			6,702			—
Amortization of loan acquisition costs		994			937			828
Impairment of long-lived assets and goodwill		66,822			51,500			—
Equity in earnings of unconsolidated affiliates, net of distributions received		4,089			928			(224	)
Deferred income taxes		(22,982	)		(3,322	)		3,032
Change in assets and liabilities that relate to operations:
Accounts receivable		(46,112	)		(30,248	)		(27,137	)
Medical supplies		(480	)		(3,093	)		(1,178	)
Prepaid and other assets		(6,854	)		(389	)		960
Accounts payable and accrued liabilities		(1,050	)		(27	)		(20,740	)
Net cash provided by operating activities of continuing operations		30,436			46,065			38,695
Net cash provided by operating activities of discontinued operations		12,858			17,568			13,313
Net cash provided by operating activities		43,294			63,633			52,008
Investing activities:
Purchases of property and equipment		(16,368	)		(86,990	)		(58,083	)
Proceeds from sale of property and equipment		611			1,750			975
Changes in cash restricted for investment		—			3,154			(3,154	)
Investments in affiliates		—			—			(9,530	)
Purchase of equity interest		—			—			(3,694	)
Sale of interest in equity method investment		836			—			—
Net cash used in investing activities of continuing operations		(14,921	)		(82,086	)		(73,486	)
Net cash (used in) provided by investing activities of discontinued operations		(2,035	)		18,296			67,681
Net cash used in investing activities		(16,956	)		(63,790	)		(5,805	)
Financing activities:
Proceeds from issuance of long-term debt		—			83,479			—
Repayments of long-term debt		(19,491	)		(116,300	)		(2,879	)
Repayments of obligations under capital leases		(1,951	)		(933	)		(945	)
Distributions to noncontrolling interest		(10,285	)		(10,294	)		(16,366	)
Investment by noncontrolling interest		109			207			—
Sale of equity interest in subsidiary		140			—			—
Proceeds from the exercise of stock options		—			77			4,317
Purchase of treasury shares		—			—			(44,403	)
Tax withholding of vested restricted stock awards		(293	)		—			—
Excess income tax benefit on stock awards and options		—			—			608
Net cash used in financing activities of continuing operations		(31,771	)		(43,764	)		(59,668	)
Net cash used in financing activities of discontinued operations		(9,238	)		(6,446	)		(18,360	)
Net cash used in financing activities		(41,009	)		(50,210	)		(78,028	)
Net decrease in cash and cash equivalents		(14,671	)		(50,367	)		(31,825	)
Cash and cash equivalents:
Beginning of period		61,701			112,068			143,893
End of period	$	47,030		$	61,701		$	112,068
Cash and cash equivalents of continuing operations		34,835			28,267			92,844
Cash and cash equivalents of discontinued operations		12,195			33,434			19,224

See notes to consolidated financial statements.

61

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. As of September 30, 2010, the Company had ownership interests in and operated ten hospitals, including eight in which the Company owned a majority interest.

As noted below under “Our Strategic Options Review”, subsequent to year end the Company sold two of its majority owned hospitals that were classified as discontinued operations as of September 30, 2010 and its equity interests in one of its minority owned hospitals. As a result, the Company currently owns interests in seven hospitals. In addition, the Company has an agreement to sell one of the seven remaining hospitals. Each of the Company’s majority-owned hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services with a majority focus on cardiovascular care. Each of our hospitals has a 24-hour emergency room staffed by emergency department physicians. During May 2009 the Company completed a 79 licensed bed expansion at Louisiana Medical Center and Heart Hospital (“LMCHH”) and built space for an additional 40 beds at that hospital. During October 2009, the Company opened a new acute care hospital, Hualapai Mountain Medical Center (“HMMC”), in Kingman, Arizona. This hospital is designed to accommodate a total of 106 licensed beds, with an initial opening of 70 of its licensed beds. The hospitals in which the Company had an ownership interest as of September 30, 2010 had a total of 825 licensed beds, 117 of which are related to Arizona Heart Hospital (“AzHH”) and Heart Hospital of Austin (“HHA”) whose assets, liabilities, and operations are included within discontinued operations. AzHH and HHA were sold on October 1, 2010 and November 1, 2010, respectively. The Company’s seven hospitals that currently comprise continuing operations have 653 licensed beds and are located in six states: Arizona, Arkansas, California, Louisiana, New Mexico, and Texas.

In addition to the hospitals, the Company currently owns and/or manages eight cardiac diagnostic and therapeutic facilities. Seven of these facilities are located at hospitals operated by other parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining facility is not located at a hospital and offers only diagnostic procedures. The Company refers to its diagnostics division as “MedCath Partners.” For financial data and other information of this and other segments of our business see Note 20.

The Company accounts for all but two of its owned and operated hospitals as consolidated subsidiaries. The Company owns a noncontrolling interest in the Avera Heart Hospital of South Dakota (which was sold on October 1, 2010) and Harlingen Medical Center as of September 30, 2010. Therefore, the Company is unable to consolidate these hospitals’ results of operations and financial position, but rather is required to account for its noncontrolling interests in these hospitals as equity investments.

During fiscal 2010, the Company entered into definitive agreements or sold its interests in AzHH, HHA and certain assets of the MedCath Partners Division. During fiscal 2009 the Company sold its equity interest in Cape Cod Cardiology Services, LLC (“Cape Cod”) and the net assets of Sun City Cardiac Center Associates (“Sun City”). During fiscal 2008, the Company sold its equity interest in Heart Hospital of Lafayette and certain assets of Dayton Heart Hospital. The results of operations of these entities are reported as discontinued operations for all periods presented. The Company uses judgment in determining whether an entity will be reported as continuing or discontinued operations under the provisions of accounting principles generally accepted in the United States (“GAAP”). Such judgments include whether an entity 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 an entity should be either reclassified from continuing operations to discontinued operations or from discontinued operations to continuing operations, previously reported consolidated statements of income are reclassified in order to reflect the current classification. See Note 3.

62

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our Strategic Options Review Process

On March 1, 2010, the Company announced that its Board of Directors had formed a Strategic Options Committee to consider the sale either of its equity or the sale of its individual hospitals and other assets. The Company retained Navigant Capital Advisors as its financial advisor to assist in this process. Since announcing the exploration of strategic alternatives on March 1, 2010, the Company has completed several transactions, including:

•  The disposition of Arizona Heart Hospital (Phoenix, Arizona) in which the Company sold the majority of the hospital’s assets to Vanguard Health Systems for $32.0 million, plus retained working capital. The transaction was completed effective October 1, 2010.

•  The disposition of the Company’s wholly owned subsidiary that held 33.3% ownership of Avera Heart Hospital of South Dakota located in Sioux Falls, SD to Avera McKennan for $20.0 million, plus a percentage of the hospital’s available cash. The transaction was completed October 1, 2010.

•  The disposition of Heart Hospital of Austin (Texas) in which the Company and the physician owners sold substantially all of the hospital’s assets to St. David’s Healthcare Partnership L.P. for approximately $83.8 million, plus retained working capital. The transaction was completed effective November 1, 2010.

•  The disposition of the Company’s approximate 27.0% ownership interest in Southwest Arizona Heart and Vascular, LLC (Yuma, AZ) to the joint venture’s physician partners for $7.0 million. The transaction was completed effective November 1, 2010.

In addition, the Company announced on November 8, 2010, that it, along with physician investors, had entered into a definitive agreement to sell substantially all the assets of TexSan Heart Hospital (San Antonio, Texas) to Methodist Healthcare System of San Antonio for $76.25 million, plus retained working capital. The transaction, which is subject to regulatory approval and other customary closing conditions, is anticipated to close during the second quarter of fiscal 2011, which ends March 31, 2011. This facility does not qualify for discontinued operations treatment at September 30, 2010.

2.   Summary of Significant Accounting Policies and Estimates

Changes in Basis of Presentation — Effective October 1, 2009, the Company adopted a new accounting standard which establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This new accounting standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This new accounting standard generally requires the Company to clearly identify and present ownership interests in subsidiaries held by parties other than the Company in the consolidated financial statements within the equity section but separate from the Company’s equity. However, in instances in which certain redemption features that are not solely within the control of the issuer are present, classification of noncontrolling interests outside of permanent equity is required. It also requires the amounts of consolidated net income attributable to the Company and to the noncontrolling interests to be clearly identified and presented on the face of the consolidated statements of operations; changes in ownership interests to be accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary to be measured at fair value. The implementation of this accounting standard results in the cash flow impact of certain transactions with noncontrolling interests being classified within financing activities. Such treatment is consistent with the view that under this new accounting standard, transactions between the Company and noncontrolling interests are considered to be equity transactions. The adoption of this new accounting standard has been applied retrospectively for all periods presented.

63

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Upon the occurrence of certain fundamental regulatory changes, the Company could be obligated, under the terms of certain of its investees’ operating agreements, to purchase some or all of the noncontrolling interests related to certain of the Company’s subsidiaries. While the Company believes that the likelihood of a change in current law that would trigger such purchases was remote as of September 30, 2010, the occurrence of such regulatory changes is outside the control of the Company. As a result, these noncontrolling interests totaling $11,534 and $7,448 as of September 30, 2010 and 2009, respectively, that are subject to this redemption feature are not included as part of the Company’s equity and are carried as redeemable noncontrolling interests in equity of consolidated subsidiaries on the Company’s consolidated balance sheets.

Profits and losses are allocated to the noncontrolling interest in the Company’s subsidiaries in proportion to their ownership percentages and reflected in the aggregate as net income attributable to noncontrolling interests. The physician partners of the Company’s subsidiaries typically are organized as general partnerships, limited partnerships or limited liability companies that are not subject to federal income tax. Each physician partner shares in the pre-tax earnings of the subsidiary in which it is a partner. Accordingly, the income or loss attributable to noncontrolling interests in each of the Company’s subsidiaries are generally determined on a pre-tax basis. In accordance with this new accounting standard, total net income attributable to noncontrolling interests are presented after net (loss) income.

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 the Company holds less than a 50% interest, has significant influence but does not have control, and is not the primary beneficiary.

Use of Estimates — The preparation of financial statements in conformity with GAAP 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.

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 large financial institutions. Deposits held with financial institutions typically exceed the insurance provided by the Federal Deposit Insurance Corporation. The Company has not experienced any losses on its deposits of cash and cash equivalents.

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 Company has not experienced significant losses related to receivables from individual patients or groups of patients in any particular industry or geographic area. Accounts receivable of the Hospital Division represents 96.2% and 90.3% of total accounts receivable for the Company as of September 30, 2010 and 2009, respectively. The following table summarizes the percentage of net accounts receivable from all payors for the Hospital Division at September 30:

	2010			2009
Medicare and Medicaid		46	%		42	%
Commercial and other		42	%		43	%
Self-pay		12	%		15	%
		100	%		100	%

64

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cash and Cash Equivalents — The Company considers currency on hand, demand deposits, and all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents.

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 consists of amounts due from billings to hospitals for various cardiovascular care services performed in its MedCath Partners Division. 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 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, 15 to 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 construction until the facility is operational, at which time depreciation begins using the straight-line method over the estimated useful life of the applicable constructed assets. The Company did not capitalize interest during the year ended September 30, 2010. The Company capitalized interest of $2.7 million and $1.3 million, respectively, during the years ended September 30, 2009 and 2008.

Goodwill — Goodwill represents acquisition costs in excess of the fair value of net identifiable tangible and intangible assets of businesses purchased. All of the Company’s goodwill was recorded within the Hospital Division segment, see Note 20. The Company evaluated 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 unit. See Note 4 for additional disclosure related to the Company’s annual impairment evaluation of goodwill.

Other Assets — Other assets primarily consist of investments in affiliates (see Note 8), loan acquisition costs and assets associated with management contracts and physician related revenue guarantees (see Note 12). Loan acquisition costs (“Loan Costs”) are costs associated with obtaining long-term financing. Loan Costs, net of accumulated amortization, were $1.1 million and $2.1 million as of September 30, 2010 and 2009, respectively. Loan Costs are being amortized using the straight-line method, which approximates the effective interest method, as a component of interest expense over the life of the related debt. Amortization expense recognized for Loan Costs totaled $1.0 million, $1.0 million, and $0.9 million for the years ended September 30, 2010, 2009 and 2008, respectively.

Long-Lived Assets — Long-lived assets, such as property, equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined by management through various valuation techniques including, but not limited to, discounted cash

65

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

flow models, quoted market comparables and third party indications of value obtained in conjunction with the Company’s evaluation of Strategic Alternatives. 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. See Note 4 for the impairment charges recorded to property and equipment and Note 13 for further discussions as to the Company’s determination of fair value.

Other Long-Term Obligations — Other long-term obligations consist of physician revenue guarantees and other long term contracts. See Note 12 for further discussion of these physician guarantees.

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.

Comprehensive Income (Loss) — Comprehensive income or loss is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

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’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 decreased net revenue by $0.3 million, $5.1 million and $0.7 million for continuing operations in the years ended September 30, 2010, 2009

66

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and 2008, respectively. The Company recognized adjustments that decreased net revenue by $0.1 million and $0.9 million for discontinued operations in the years ended September 30, 2009 and 2008, respectively. The Company recognized immaterial adjustments to net revenue for discontinued operations for the year ended September 30, 2010.

The Company records charity care deductions as a reduction to gross revenue. Patients that receive charity care discounts must provide a complete and accurate application, be in need of non-elective care and meet certain federal poverty guidelines established by the U.S. Department of Health and Human Services.

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 55.5%, 54.3% and 55.3% of the Company’s net revenue during the years ended September 30, 2010, 2009 and 2008, 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. In addition, some hospitals with high levels of low income patients qualify for Medicare Disproportionate Share Hosptial (“DSH”) reimbursement as an add on to DRG payments. Medicare payments for most outpatient services are based on prospective payments using ambulatory payment classifications (“APCs”). Other outpatient services, including outpatient clinical laboratory, are reimbursed through a variety of fee schedules. The Company is reimbursed for DSH payments and cost-reimbursable items at tentative rates, 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 based upon methodologies specific to the state in which hospitals are located and are made at prospectively determined amounts, such as DRGs; reasonable costs or charges; or fee schedule. Depending upon the state in which hospitals are located, Medicaid payments may be made at tentative rates with final settlement determined after submission of annual cost reports by the hospitals and audits or reviews thereof by the states’ Medicaid agencies.

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 facility 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.

Segment Reporting.  Operating segments are components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and evaluate performance. Two or more operating segments may be aggregated into a single reportable segment if the segments have similar economic and overall industry characteristics, such as customer class, products and service. There is no aggregation within the Company’s reportable segments. The description of the

67

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company’s reportable segments, consistent with how business results are reported internally to management and the disclosure of segment information is discussed in Note 20.

Advertising — Advertising costs are expensed as incurred. During the years ended September 30, 2010, 2009 and 2008, the Company incurred $2.2 million, $2.6 million and $2.0 million of advertising expenses, respectively.

Pre-opening Expenses — Pre-opening expenses consist of operating expenses incurred during the development of new ventures prior to opening for business. Such costs specifically relate to the Company’s development of the Hualapai Mountain Medical Center in Kingman, Arizona and are expensed as incurred. The Company incurred $0.9 million, $3.6 million and $0.8 million, respectively, of pre-opening expenses during the years ended September 30, 2010, 2009 and 2008.

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 53.3% 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 noncontrolling interest in the hospital with the community hospital and physician partners owning the remaining interests also as noncontrolling interest partners. In such instances, the hospital is accounted for under the equity method of accounting. Profits and losses of hospitals accounted for under either the consolidated or equity methods are 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 will 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 — Compensation expense for share-based awards made to employees and directors are recognized based on the estimated fair value of each award over each applicable awards vesting period. The Company estimates the fair value of share-based payment awards on the date of grant using, either an option-pricing model for stock options or the closing market value of the Company’s stock for restricted stock and restricted stock units, and expenses 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.

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 has been determined based on an annual analysis of historical and expected exercise and cancellation behavior. 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

68

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

historical volatilities of the Company’s common stock and the common stock of comparable publicly traded companies.

	Year Ended September 30,
	2009	2008
Expected life	5-8 years	5-8 years
Risk- free interest rate	1.36-3.59%	2.34-4.56%
Expected volatility	44-49%	33-41%

Stock options awarded to employees are fully vested at the time of grant, with the condition that the optionee is prohibited from selling the share of stock acquired upon exercise of the option for a specified period of time. As a result, total share-based compensation is recorded for stock options on the option grant date.

During fiscal 2010 and 2009 the Company granted shares of restricted stock and restricted stock units to employees and directors, respectively. Restricted stock granted to employees, excluding executives of the Company, vest in equal annual installments over a three year period. Executives of the Company defined by the Company as vice president or higher, received two separately equal grants. The first grant of restricted stock vests in equal annual installments over a three year period, the second grant of restricted stock vests over a three year period based on established performance conditions. All unvested restricted stock granted to employees becomes fully vested upon a change in control of the Company as defined in the Company’s 2006 Stock Option and Award Plan. Restricted stock units granted to directors are fully vested at the date of grant and are paid in the form of common stock upon each applicable director’s termination of service on the board.

Subsequent Events — In connection with preparation of the consolidated financial statements for fiscal year ended September 30, 2010, the Company has evaluated subsequent events for potential recognition and disclosures through the date these consolidated financial statements were issued, as filed in Form 10-K with the Securities and Exchange Commission (“SEC”).

Recent Accounting Pronouncements — The following is a summary of new accounting pronouncements that have been adopted or that may apply to the Company.

Recently Adopted Accounting Pronouncements — In December 2007, the FASB issued a new accounting standard that establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This new accounting standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The Company adopted this new standard on October 1, 2009. Upon adoption, a portion of noncontrolling interests was reclassified to a separate component of total equity within our consolidated balance sheets.

In April 2008, the FASB issued a new accounting standard which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. The new accounting standard applies to intangible assets that are acquired individually or with a group of other assets and intangible assets acquired in both business combinations and asset acquisitions. The Company adopted this new standard on October 1, 2009 with no impact to its consolidated financial statements.

Effective the first quarter of fiscal 2009, the Company adopted a new accounting standard issued by the FASB that defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. In February 2008, the FASB delayed the effective date of this new standard for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company elected to defer implementation of this standard

69

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

until October 1, 2009 as it relates to the Company’s non-financial assets and non-financial liabilities that are not permitted or required to be measured at fair value on a recurring basis. The Company adopted this standard on October 1, 2009 with no impact to its consolidated financial statements. See Note 13.

Recent Accounting Pronouncements:

In June 2009, the FASB issued a new accounting standard that amends the consolidation guidance that applies to variable interest entities (“VIE”). The amendments will significantly affect the overall consolidation analysis. The provisions of this new accounting standard revise the definition and consideration of VIEs, primary beneficiary, and triggering events in which a company must re-evaluate its conclusions as to the consolidation of an entity. This new accounting standard is effective as of the beginning of the first fiscal year after November 15, 2009, fiscal 2011 for the Company. The adoption of this standard is not expected to have any impact on our consolidated financial position or results of operations.

In August 2010, the FASB issued Accounting Standard Updates (“ASU”) 2010-24, “Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries,” which clarifies that a health care entity should not net insurance recoveries against a related claim liability. The guidance provided in this ASU is effective as of the beginning of the first fiscal year beginning after December 15, 2010, fiscal 2012 for the Company. The Company is evaluating the potential impacts the adoption of this ASU will have on our consolidated financial statements.

In August 2010, the FASB issued ASU 2010-23, “Health Care Entities (Topic 954): Measuring Charity Care for Disclosure,” which requires a company in the healthcare industry to use its direct and indirect costs of providing charity care as the measurement basis for charity care disclosures. This ASU also requires additional disclosures of the method used to identify such costs. The guidance provided in this ASU is effective for fiscal years beginning after December 15, 2010, fiscal 2012 for the Company. The adoption of this ASU is not expected to have any impact on our consolidated financial position or results of operations.

In December 2010, the FASB approved the issuance of an ASU whereby a health care entity is required to present the provision for bad debts as a component of net revenues within the revenue section of the statement of operations. However, on December 8, 2010, due to implementation and operational concerns, the FASB decided to re-expose the issue for a 60-day comment period. As currently drafted, a health care entity is required to disclose the following by major payor sources of revenue:

a. Its policy for considering collectability in the timing and amount of revenue and bad debt recognized

b. Patient service revenue (net of contractual allowances and discounts) before any provision for bad debts

c. A tabular reconciliation, describing the material activity in the allowance for doubtful accounts for the period.

Public entities will be required to provide the new disclosures and statement of operations presentation in fiscal years beginning after December 15, 2010, and interim periods within those years, with early adoption permitted. Nonpublic entities will be required to provide the new disclosures and statement of operations presentation in fiscal years beginning after December 15, 2011, with early adoption permitted. The requirement to report the provision for bad debts as a component of net revenue will be applied retrospectively for all periods presented, while the new disclosure requirements will be applied prospectively. The Company is evaluating the potential impacts the adoption of this ASU will have on our financial statements.

3.   Discontinued Operations

As required under GAAP, the Company has classified the results of operations of the following entities within income from discontinued operations, net of taxes and the assets and liabilities of these entities have been classified

70

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

within current and non-current assets and current and long-term liabilities of discontinued operations on the consolidated balance sheets.

During September 2010, the Company entered into an agreement to sell its subsidiary that provided consulting and management services tailored primarily to cardiologists and cardiovascular surgeons. Such subsidiary’s operations had historically been included in the Corporate and other division. Such subsidiary was sold in October 2010 for an immaterial loss.

During July, August and September 2010, the MedCath Partners Division of the Company sold or entered into agreements to sell certain assets of the Division, which, net of taxes resulted in immaterial losses. The associated losses from these sales that have closed as of September 30, 2010 have been included in income (loss) from discontinued operations on the consolidated statement of operations for the year ended September 30, 2010.

During August 2010, the Company entered into a definitive agreement to sell certain of the hospital assets, plus certain net working capital of AzHH for $32.0 million and the assumption of capital leases of $0.3 million. The transaction closed on October 1, 2010 with the limited liability company which owned AzHH retaining all accounts receivable and the hospital’s remaining liabilities. The final purchase price is subject to certain post-closing working capital and other adjustments. As part of its assessment of long-lived assets in June 2010, the Company recognized an impairment charge of $5.2 million based on the potential sales value of AzHH. Accordingly, the Company expects to recognize a nominal gain/loss on the sale in fiscal 2011.

During February 2010, the Company entered into an agreement to sell substantially all of the assets of HHA for $83.8 million plus retention of working capital to St. David’s Healthcare Partnership, L.P. The transaction closed on November 1, 2010.

During September 2009, the MedCath Partners Division of the Company sold the assets of Sun City for $16.9 million, which resulted in a gain of $3.2 million, net of taxes. The associated gain from the sale has been included in income (loss) from discontinued operations on the consolidated statement of operations for the year ended September 30, 2009.

During December 2008, the MedCath Partners Division of the Company sold its equity interest in Cape Cod for $6.9 million, which resulted in a gain of $4.0 million, net of taxes. The associated gain from the sale has been included in income (loss) from discontinued operations on the consolidated statement of operations for the year ended September 30, 2009.

During May 2008, the Hospital Division of the Company sold the net assets of Dayton Heart Hospital (“DHH”) to Good Samaritan Hospital for $47.5 million pursuant to a definitive agreement. The total gain recognized, net of taxes, was $3.4 million and is included in income (loss) from discontinued operations on the consolidated statement of operations for the year ended September 30, 2008. As part of the gain resulting from the disposition of DHH, $4.6 million of goodwill was written off.

In accordance with the terms of the sale, DHH and Good Samaritan Hospital entered into an indemnification agreement for a period of eighteen months from the date of the sale. DHH agreed to indemnify Good Samaritan Hospital from certain exposures arising subsequent to the date of sale, including environmental exposure and exposure resulting from the breach of representations or warranties made in accordance with the sale. The indemnification period expired in November 2010 without the Company incurring any payments under this agreement.

As of September 30, 2010 and 2009 the Company had reserved $9.8 million and $9.6 million, respectively, for Medicare outlier payments received by DHH during the year ended September 30, 2004, which are included in current liabilities of discontinued operations in the consolidated balance sheets.

During fiscal 2007, the Company entered into an agreement to dispose of its interest in the Heart Hospital of Lafayette (“HHLf”). The sale of HHLf was completed during the year ended September 30, 2008, resulting in an

71

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

immaterial loss recorded as part of income (loss) from discontinued operations for the year ended September 30, 2008.

The results of operations and the assets and liabilities of discontinued operations included in the consolidated statements of operations and consolidated balance sheets are as follows:

	Year Ended September 30,
	2010			2009			2008
Net revenue	$	169,757		$	195,778		$	235,453
Gain (loss) from dispositions, net		(151	)		12,055			3,399
Income before income taxes		2,462			16,655			21,588
Income tax (benefit) expense		(2,566	)		7,128			2,584
Net income		5,028			9,527			19,004
Less: Net income attributable to noncontrolling interest		(1,443	)		(8,154	)		(8,659	)
Net income attributable to MedCath Corporation	$	3,585		$	1,373		$	10,345

	Year Ended September 30,
	2010		2009
Cash and cash equivalents	$	12,195	$	33,434
Accounts receivable, net		18,868		21,419
Other current assets		7,293		6,192
Current assets of discontinued operations	$	38,356	$	61,045
Property and equipment, net	$	74,711	$	83,209
Other intangible assets, net		—		37
Other assets		3,619		2,824
Long-term assets of discontinued operations	$	78,330	$	86,070
Accounts payable	$	21,828	$	24,037
Accrued liabilities		5,987		8,151
Current portion of long-term debt and obligations under capital leases		315		170
Current liabilities of discontinued operations	$	28,130	$	32,358
Long-term debt and obligations under capital leases	$	35,302	$	35,700
Other long-term obligations		666		362
Long-term liabilities of discontinued operations	$	35,968	$	36,062

Included in the Company’s discontinued liabilities is a Real Estate Investment Trust Loan (the “REIT Loan”) aggregating $34.6 million and $35.3 million as of September 30, 2010 and 2009, respectively. 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. The REIT Loan required monthly, interest-only payments for ten years, at which time the loan was due in full, maturing January 2016. The interest rate on this loan is 81/2%. Upon the disposition of the Company’s interest in the related hospital, the REIT Loan was repaid in full in November 2010.

72

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.   Asset Impairment Charges

2010 Impairment Charges

During the year ended September 30, 2010, as more fully discussed in Note 1, the Company’s Board of Directors was in the process of conducting a review of strategic alternatives for the Company. Additionally, management noted a decline in operating performance at certain facilities during 2010. The Company performed impairment analyses using undiscounted cash flows at the end of each respective reporting period in 2010 to determine if the carrying amounts of fixed assets were not recoverable. As a result of the decline in operating performance as well as changes in the timing and source of anticipated cash flows for certain facilities the Company determined that the carrying value of these facilities was not fully recoverable. The Company then compared the fair value of those assets to their respective carrying values in order to determine the amount of the impairment. As a result approximately $66.8 million of fixed asset impairment charges were recorded during the year ended September 30, 2010. The Company’s fair value estimates were determined by management based on discounted cash flow models, market comparables, signed letters of intent to sell certain facilities, and third party indications of value obtained in conjunction with the Company’s evaluation of strategic alternatives.

The Company’s fair value estimates could change by material amounts in subsequent periods. Many factors and assumptions can impact the estimates, including the hospitals’ future financial results, the impact of future decisions relative to the Company’s Strategic Alternatives Review, and changes in health care industry trends and regulations. The impairments do not include the costs of closing or selling the hospitals or other future operating costs, which could be substantial. See Note 13 for further discussions as to the Company’s determination of fair value.

In addition, the MedCath Partners Division recorded charges to earnings of $0.1 million and $1.8 million for the write-down of the Company’s investment in Tri-County Heart New Jersey, LLC and Southwest Arizona Heart and Vascular Center, LLC, respectively. The MedCath Partners Division received indicators of value in relation to selling the Company’s interests in these businesses, evaluated the carrying values and determined that there was a loss in value that was other than temporary. Accordingly, the Company recorded an impairment charge of $1.9 million against the Company’s investments, which has been included in equity in net earnings of unconsolidated affiliates.

2009 Goodwill Impairment Charge

The first step of the Company’s annual impairment test was performed as of September 30, 2009, initially using a combination of a discounted cash flow, market multiple, and comparable transaction methods. However, the reconciliation of the fair value of the Hospital Division reporting unit to the Company’s market capitalization at September 30, 2009, resulted in a fair value that indicated an implied control premium that did not appear reasonable. During the fourth quarter of fiscal 2009, the Company’s stock price underperformed comparable companies as well as the broader markets, and the Company experienced a decline in its fourth quarter operating results. As a result of these events, the Company placed more reliance on the discounted cash flow method and used this method to estimate the fair value which resulted in a fair value that was below the carrying value of the Hospital Division reporting unit.

The second step of the Company’s impairment analysis involved allocating the fair value of the Hospital Division reporting unit, as derived in the first step discussed above, to the assets and liabilities of the Hospital Division reporting unit. This process requires significant management estimates and judgments, and is used to determine the implied fair value of the Hospital Division reporting unit’s goodwill. The Company incorporated recent appraisals and other information in its analysis, and concluded the implied fair value of goodwill was zero. As a result the entire balance of $60.2 million of goodwill (including $8.7 million related to businesses classified as discontinued operations in 2010) was impaired in the fourth quarter of fiscal 2009.

73

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.   Business Combinations and Hospital Development

Purchase of Additional Interests in Hospitals — During September 2008, the Company purchased an additional 3.7% ownership interest in the TexSan Heart Hospital for $1.2 million. Additionally, during June 2008 the Company acquired an additional 14.29% ownership interest in the TexSan Heart Hospital, by converting $9.5 million of intercompany debt to equity. As discussed in Note 4, the Company wrote-off all its goodwill in the year ended September 30, 2009.

During July 2008, the Company purchased an additional 3.0% interest in the Heart Hospital of New Mexico for $2.5 million. As discussed in Note 4, the Company wrote-off all its goodwill in the year ended September 30, 2009.

Change in Ownership Due to Cancellation of Stock Subscription Receivable — Upon the formation of Hualapai Mountain Medical Center the minority owners entered into stock subscription agreements whereby they paid for their ownership in two installments. At the date of formation, the amount due from the minority owners was recorded as a stock subscription receivable. During the fourth quarter of fiscal 2010, several minority owners did not submit the final installment. As a result, and per the partnership operating agreement, the proportionate ownership was transferred to the Company and the stock subscription receivable was reduced accordingly. As a result, the Company’s ownership in HMMC increased from 79.00% to 82.49%.

Diagnostic and Therapeutic Facilities Development — During April 2008, the Company paid $8.5 million to acquire a 27.4% interest in Southwest Arizona Heart and Vascular LLC a joint venture with the Heart Lung Vascular Center of Yuma. The joint venture provides cardiac catheterization lab services to Yuma Regional Medical Center in Arizona.

During February 2008, the Company paid $1.0 million to acquire a 33.33% interest in a joint venture with Solaris Health Systems LLC and individual physician members to manage two cardiac catheterization laboratories located in New Jersey.

New Hospital Development — In August 2007, the Company announced a venture to construct a new 106 inpatient bed capacity general acute care hospital, Hualapai Mountain Medical Center, which is located in Kingman, Arizona. The hospital is accounted for as a consolidated subsidiary since the Company, through its wholly-owned subsidiary, owns 82.49% of the interest in the venture with physician partners owning the remaining 17.51%. Further, the Company exercises substantive control over the hospital. Construction of Hualapai Mountain Medical Center began during fiscal year 2007. The facility was completed and opened during October 2009 with 70 licensed beds, and the capacity for an additional 36 beds to facilitate future growth.

In May 2007, the Company and its physician partners announced a 119 bed general acute care expansion of its hospital located in St. Tammany Parish, Louisiana. The expansion was completed during May 2009, with 79 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, was renamed the Louisiana Medical Center and Heart Hospital.

74

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6.   Accounts Receivable

Accounts receivable, net, consists of the following:

	September 30,
	2010			2009
Receivables, principally from patients and third-party payors	$	119,869		$	109,901
Receivables, principally from billings to hospitals for various cardiovascular procedures		1,027			1,494
Other		2,667			5,280
		123,563			116,675
Less allowance for doubtful accounts		(75,023	)		(67,361	)
Accounts receivable, net	$	48,540		$	49,314

Activity for the allowance for doubtful accounts is as follows:

	Year Ended September 30,
	2010			2009
Balance, beginning of year	$	67,361		$	42,648
Bad debt expense		46,887			39,068
Write-offs, net of recoveries		(39,225	)		(14,355	)
Balance, end of year	$	75,023		$	67,361

7.   Property and Equipment

Property and equipment, net, consists of the following:

	September 30,
	2010			2009
Land	$	22,001		$	26,694
Buildings		186,806			227,914
Equipment		186,983			188,903
Construction in progress		25			17,362
Total, at cost		396,815			460,873
Less accumulated depreciation		(172,633	)		(158,156	)
Property and equipment, net	$	223,182		$	302,717

As further discussed in Note 4, during the year ended September 30, 2010 the Company recorded impairment charges of $66.8 million for the write down of certain property and equipment.

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, see Note 9.

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 the Company 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

75

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

exercise significant influence (including investments where the Company has a less than 20% ownership), are accounted for under the equity method. The Company additionally considers if it is the primary beneficiary of (and therefore should consolidate) any entity whose operations the Company does not control. At September 30, 2010, all of the Company’s investments in unconsolidated affiliates are accounted for using the equity method.

Variable Interest Entities

Investments in unconsolidated affiliates accounted for under the equity method (which are included in Other assets on the consolidated balance sheets) consist of the following:

	Year Ended September 30,
	2010			2009
Avera Heart Hospital of South Dakota	$	8,730		$	9,143
Harlingen Medical Center		5,839			5,621
HMC Realty, LLC		(14,044	)		(11,909	)
Southwest Arizona Heart and Vascular, LLC		7,000			8,757
Other		1,465			2,443
	$	8,990		$	14,055

In August 2010, the Company entered into an agreement with Avera McKennan for the sale of its interest in Avera Heart Hospital of South Dakota whereby Avera McKennan would purchase a MedCath subsidiary which was the indirect owner of a one-third ownership interest and which held management rights in Avera Heart Hospital of South Dakota. The transaction closed on October 1, 2010.

As further discussed in Note 22, the Company sold its equity interest in Southwest Arizona Heart and Vascular Center, LLC on November 1, 2010. Pursuant to such pending sale, the Company recognized a write down of its investment of $1.8 million to record the Company’s investment in such business at its net realizable value expected from the sale proceeds.

The Company’s ownership percentage for each investment accounted for under the equity method is presented in the table below:

Investee	Ownership
Avera Heart Hospital of South Dakota(a)		33.3	%
Harlingen Medical Center(a)		34.8	%
HMC Realty LLC(a)		36.1	%
Southwest Arizona Heart and Vascular, LLC(b)		27.0	%
All Other:
Blue Ridge Cardiology Services, LLC(b)		50.0	%
Austin Development Holding, Inc.(a)		50.0	%
Central New Jersey Heart Services, LLC(b)		14.8	%
Coastal Carolina Heart, LLC(b)		9.2	%

(a)	Included in the Hospital Division
(b)	Included in MedCath Partners Division

Accumulated deficit includes $9.3 million, $9.3 million, and $10.3 million of undistributed earnings from unconsolidated affiliates accounted for under the equity method at September 30, 2010, 2009, and 2008, respectively. Distributions received from unconsolidated affiliates accounted for under the equity method were $11.4 million, $10.0 million and $7.7 million during the years ended September 30, 2010, 2009 and 2008, respectively.

76

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following tables represent summarized combined financial information of the Company’s unconsolidated affiliates accounted for under the equity method.

	Year Ended September 30,
	2010		2009		2008
Net revenue	$	219,561	$	225,843	$	215,707
Income from operations	$	45,142	$	47,736	$	43,053
Net income	$	36,065	$	38,797	$	34,004

	September 30,
	2010		2009
Current assets	$	58,690	$	68,174
Long-term assets	$	144,402	$	148,993
Current liabilities	$	23,922	$	25,770
Long-term liabilities	$	121,524	$	122,629

9.   Long-Term Debt

Long-term debt consists of the following:

	September 30,
	2010			2009
Amended Credit Facility	$	66,563		$	80,000
Notes payable to various lenders		—			6,054
		66,563			86,054
Less current portion		(14,063	)		(19,491	)
Long-term debt	$	52,500		$	66,563

Senior Secured Credit Facility — During November 2008, the Company amended and restated its then outstanding senior secured credit facility (the “Amended Credit Facility”). The Amended Credit Facility provides for a three-year term loan facility in the amount of $75.0 million (the “Term Loan”) and a revolving credit facility in the amount of $85.0 million (the “Revolver”), 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. At the request of the Company and approval from its lenders, the aggregate amount available under the Amended Credit Facility may be increased by an amount up to $50.0 million. Borrowings under the Amended 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. At September 30, 2010 the Term Loan bore interest at 3.26%. The $66.6 million outstanding under the Amended Credit Facility at September 30, 2010 related to the Term Loan. No amounts were outstanding under the Revolver as of September 30, 2010. At September 30, 2009, $75.0 million was outstanding under the Term Loan and $5.0 million was outstanding under the Revolver.

The Amended Credit Facility continues to be guaranteed jointly and severally by the Company and certain of the Company’s existing and future, direct and indirect, wholly owned subsidiaries and is secured by a first priority perfected security interest in all of the capital stock or other ownership interests owned by the Company and subsidiary guarantors in each of their subsidiaries, and, subject to certain exceptions in the Amended Credit Facility, all other present and future assets and properties of the Company and the subsidiary guarantors and all intercompany notes.

The Amended Credit Facility requires compliance with certain financial covenants including a consolidated senior secured leverage ratio test, a consolidated fixed charge coverage ratio test and a consolidated total leverage ratio test. The Amended Credit Facility also contains customary restrictions on, among other things, the Company and 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; and enter into transactions with affiliates.

77

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Amended Credit Facility contains events of default, including cross-defaults to certain indebtedness, change of control events, and other events of default customary for syndicated commercial credit facilities. Upon the occurrence of an event of default, the Company could be required to immediately repay all outstanding amounts under the Amended Credit Facility.

The Company is required to make mandatory prepayments of principal in specified amounts upon the occurrence of certain events identified in the Amended Credit Facility and is permitted to make voluntary prepayments of principal under the Amended Credit Facility. The Term Loan is subject to amortization of principal in quarterly installments, which began March 31, 2010. The maturity date of both the Term Loan and the Revolver is November 10, 2011.

On August 13, 2010, the Company and its lenders amended and restated the Senior Secured Credit Facility (the “First Amendment”). The Company entered into the First Amendment to provide additional financial and liquidity flexibility in connection with its previously announced effort to explore strategic alternatives. The First Amendment contains modifications of certain financial covenants and other requirements of the Amended Credit Facility; including, but not limited to: modifications to certain definitions contained in the Amended Credit Facility, including the definitions of certain financial terms to permit additional add backs (such as an add back for charges and professional expenses incurred in connection with asset dispositions), subject to maximum amounts in certain cases, and to the multiple applied to certain of the financial metrics derived in accordance with such definitions, for certain financial covenant calculations; increasing the amount of permitted guarantees of indebtedness by $10 million; amending the asset dispositions covenant to permit additional asset dispositions subject to no events of default and require that any net cash proceeds from an asset disposition or series of asset dispositions in excess of $50 million from the date of the First Amendment be applied 50% to repay the outstanding Term Loan amounts under the Amended Credit Facility and 50% to repay amounts outstanding under the Revolver or cash collateralize letters of credit to the extent outstanding and permanently reduce the Revolver by 50% of the net cash proceeds, which could shorten the term of the Revolver based on the amount of such permanent commitment reductions. In addition, any mandatory prepayments of the Revolver will also reduce the revolving credit commitment by a corresponding amount. The Revolver including letters of credit will not be permitted to remain outstanding after the full repayment of the Term Loan. The First Amendment also provides for a reduction in amount of the Revolver from $85 million to $59.5 million as of the date of the First Amendment. Under terms of the First Amendment, the fixed charge coverage ratio is not tested at either September 30, 2010 or December 31, 2010, and will be retested at the fiscal quarter ending March 31, 2011 and subsequent fiscal quarters.

Senior Notes — During December 2008, the Company redeemed its then outstanding 97/8% senior notes (the “Senior Notes”) issued by MedCath Holdings Corp., a wholly owned subsidiary of the Company, for $111.2 million, which included the payment of a repurchase premium of $5.0 million and accrued interest of $4.2 million. The Senior Notes were redeemed through borrowings under the Credit Facility and available cash on hand. In addition to the aforementioned repurchase premium, the Company incurred $2.0 million in expense related to the write-off of previously incurred financing costs associated with the Senior Notes. The repurchase premium and write off of previously incurred financing costs have been included in the consolidated statements of operations as loss on early extinguishment of debt for the year ended September 30, 2009.

Notes Payable to Various Lenders — The Company acquired various medical and other equipment for a hospital with installment notes payable to an equipment lender collateralized by the related equipment. Amounts borrowed under these notes are payable in monthly installments of principal and interest over a 7 year term with fixed interest rates of 6.74% to 7.71%. The Company had guaranteed these equipment loans. The Company received 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, see Note 12. These guarantees expired concurrent with the repayment of the related equipment loans. During June 2010, the Company repaid the remaining $4.2 million note payable obligations to certain equipment lenders on behalf of its consolidated subsidiary, TexSan Heart Hospital. At September 30, 2010, there are no notes payable to various lenders outstanding.

78

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Debt Covenants  — At September 30, 2009, the Company was in violation of financial covenants under equipment loans at its consolidated subsidiary TexSan Heart Hospital. Accordingly, the total outstanding balance for these loans of $6.1 million was included in the current portion of long-term debt and obligations under capital leases on the Company’s consolidated balance sheet. The covenant violations did not result in any other non-compliance related to the remaining covenants governing the Company’s outstanding debt; therefore the Company was in compliance with all other covenants. Furthermore, these loans were paid in-full as of September 30, 2010. As of September 30, 2010, the Company was in compliance with all covenants governing its outstanding debt.

Interest Rate Swaps — During the year ended September 30, 2006 one of the hospitals in which the Company has a noncontrolling interest and consequently accounts for under the equity method, entered into an interest rate swap for purposes of hedging variable interest payments on long term debt outstanding for that hospital. The interest rate swap is accounted for as a cash flow hedge by the hospital whereby changes in the fair value of the interest rate swap flow through comprehensive income of the hospital. The Company recorded its proportionate share of comprehensive income within stockholders’ equity in the consolidated balance sheets based on the Company’s ownership interest in that hospital.

Future Maturities — Presented below are the future maturities of long-term debt at September 30, 2010.

	Debt
Fiscal Year	Maturity
2011	$	14,063
2012		52,500
	$	66,563

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 2015. 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 $3.2 million and $3.0 million) at September 30, 2010 and 2009, respectively, are $9.2 million and $2.7 million, respectively, and are included in property and equipment on the consolidated balance sheets. Lease payments during the years ended September 30, 2010, 2009, and 2008 were $2.3 million, $1.1 million and $1.1 million, respectively, and include interest of $0.4 million, $0.2 million, and $0.1 million, respectively.

Future minimum lease payments at September 30, 20010 are as follows:

	Minimum
Fiscal Year	Lease Payment
2011	$	3,106
2012		2,607
2013		2,104
2014		1,708
2015		789
Total future minimum lease payments		10,314
Less amounts representing interest		(1,205	)
Present value of net minimum lease payments		9,109
Less current portion		(2,609	)
	$	6,500

79

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11.   Liability Insurance Coverage

During June 2010 and 2009, the Company entered into a 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, for each respective fiscal year. 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, 2010 and September 30, 2009, 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 $3.1 million and $4.0 million, respectively, which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on actuarial estimates using the Company’s historical experience with claims and assumptions about future events.

In addition to reserves for medical malpractice, the Company also maintains reserves for self-insured workman’s compensation, healthcare and dental coverage. The total estimated reserve for self-insured liabilities for workman’s compensation, employee health and dental claims was $3.5 million and $3.1 million as of September 30, 2010 and September 30, 2009, respectively, which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on historical experience with claims. The Company maintains commercial stop loss coverage for health and dental insurance program of $175,000 per plan participant.

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 2017. Total rent expense under noncancelable rental commitments was approximately $1.5 million, $2.2 million and $2.3 million for the years ended September 30, 2010, 2009 and 2008, respectively, and is included in other operating expenses in the accompanying consolidated statements of income.

The approximate future minimum rental commitments under noncancelable operating leases as of September 30, 2010 are as follows:

	Rental
Fiscal Year	Commitment
2011	$	1,724
2012		1,601
2013		1,562
2014		1,300
2015		397
Thereafter		99
	$	6,683

Put and Call Options — During August 2010, the Company amended its partnership agreement with one of its hospitals, whereby call and put options were added relative to the Company’s noncontrolling interest in the hospital. The call option will allow the Company to acquire all of the noncontrolling interest in the hospital owned by physician investors for the net amount of the physician investors unreturned capital contributions adjusted upward for any proportionate share of additional proceeds upon a disposition transaction. The put option allows the Company’s noncontrolling shareholders in the hospital to put their shares to the Company for the net amount of the physician investors unreturned capital contributions at any time before August 31, 2011. The noncontrolling shareholders’ recorded basis in their partnership interest was zero prior to the amendment of this agreement.

80

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accordingly, the Company has recognized a redeemable noncontrolling interest of $2.9 million (net of taxes of $1.6 million) as of September 30, 2010 and included the corresponding expense as a loss allocable to noncontrolling interests.

During September 2010, the Company entered into a call agreement with one of its hospitals whereby the Company may exercise the call right to purchase the noncontrolling interest owned by physician investors for an amount equal to the net amount of the physician investors unreturned capital contributions ($2.7 million at September 30, 2010).

Contingencies — 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 the Company. In addition, reimbursement is generally subject to adjustment following audit by third party payors, including commercial payors as well as the contractors who administer the Medicare program for the 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. The Company believes that adequate provisions have 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 net revenue, there is a possibility that recorded estimates will change by a material amount in the future.

In 2005, CMS began using recovery audit contractors (“RAC”) to detect Medicare overpayments not identified through existing claims review mechanisms. RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments will be subject to the Medicare appeals process. The Health Care Reform Laws expand the RAC program’s scope to include Medicaid claims by requiring all states to enter into contracts with RACs by December 31, 2010. The Company believes the claims for reimbursement submitted to the Medicare and Medicaid programs by the Company’s facilities have been accurate, however the Company is unable to reasonably estimate what the potential result of future RAC audits or other reimbursement matters could be.

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, 2010. 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.

During fiscal years 2008 and 2007, the Company refunded certain reimbursements to CMS related to carotid artery stent procedures performed during prior fiscal years at two of the Company’s consolidated subsidiary hospitals. The U.S. Department of Justice (“DOJ”) initiated an investigation related to the Company’s return of these reimbursements. As a result of the DOJ’s investigation, the Company began negotiating settlement agreements during the second quarter of fiscal 2009 with the DOJ whereby the Company was expected to pay $0.8 million to settle and obtain releases from any federal civil false claims liability related to the DOJ’s investigation. The DOJ allegations do not involve patient care, and relate solely to whether the procedures were properly reimbursable by Medicare. The settlement does not include any finding of wrong-doing or any admission of liability. During fiscal 2010, the Company paid $0.8 million initially accrued within other accrued liabilities on

81

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the consolidated balance sheet as of September 30, 2009. As of September 30, 2010, both settlement agreements have been executed.

In March 2010, the DOJ issued a civil investigative demand (“CID”) pursuant to the federal False Claims Act to one of the Company’s hospitals. The CID requested information regarding Medicare claims submitted by the hospital in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) during the period 2002 to the present. The Company has complied with all information requested by the DOJ for this hospital.

In September 2010, the Company received a letter from the DOJ advising it that an investigation is being conducted to determine whether certain of their other hospitals have submitted claims excluded from coverage. The period of time covered by the investigation is 2003 to the present. The letter states that the DOJ’s data indicates that many of the Company’s hospitals have claims for the implantation of ICD’s which were not medically indicated and/or otherwise violated Medicare payment policy. The Company understands that the DOJ has submitted similar requests to many other hospitals and hospital systems across the country as well as to the ICD manufacturers themselves. The Company is fully cooperating and has entered into a tolling agreement with the government in this investigation; to date, the DOJ has not asserted any claim against the Company’s other hospitals. Because the Company is in the early stages of this investigation, the Company is unable to evaluate the outcome of this investigation. The Company’s total ICD net revenue is a material component of total net patient revenue.

On January 8, 2009, the California Supreme Court ruled in Prospect Medical Group, Inc., et al. v. Northridget Emergency Medical Group, et al. (2009) 45 Cal. 4th 497, that under California’s Knox-Keene statute healthcare providers may not bill patients for covered emergency out patient services for which health plans or capitated payors are invoiced by the provider but fail to pay the provider. The California Supreme Court held that the only recourse for healthcare providers is to pursue the payors directly. The Prospect decision does not apply to amounts that the health plan or capitated payor is not obligated to pay under the terms of the insured’s policy or plan. Although the decision only considered emergency providers and referred to HMOs and capitated payors, future court decisions on how the so-called “balance billing” statute is interpreted does pose a risk to healthcare providers that perform emergency or other out-patient services in the state of California.

During October, 2009, a purported class action law suit was filed by an individual against the Bakersfield Heart Hospital, a consolidated subsidiary of the Company. In the complaint the plaintiff alleges that under California law, and specifically under the Knox-Keene Healthcare Service Plan Act of 1975 and under the Health and Safety Code of California, California prohibits the practice of “balance billing” for patients who are provided emergency services. On November 24, 2010, the court granted the Bakersfield Heart Hospital’s motion to strike plaintiff’s class allegations.

In addition to reserves for medical malpractice, the Company also maintains reserves for self-insured workman’s compensation, healthcare and dental coverage. The total estimated reserve for self-insured liabilities for workman’s compensation, employee health and dental claims was $3.5 million and $3.1 million as of September 30, 2010 and September 30, 2009, respectively, which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on historical experience with claims. The Company maintains commercial stop loss coverage for health and dental insurance program of $175,000 per plan participant.

The Company has evaluated the provisions of the Health Care Reform Laws. The Company is unable to predict at this time the full impact of the Health Care Reform Laws on the Company and its consolidated financial statements.

Commitments — The Company’s consolidated subsidiary 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 and anesthesiology services, among other services. These guarantees extend for the duration of the underlying service agreements. As of September 30, 2010, the maximum potential future payments that the Company could be required to make under these guarantees was approximately $28.2 million ($0.7 million related

82

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to discontinued operations) through June 2013. At September 30, 2010 the Company had total liabilities of $13.0 million ($0.7 million related to discontinued operations) for the fair value of these guarantees, of which $7.9 million is in other accrued liabilities and $0.3 million is in current liabilities of discontinued operations, and $4.4 million is in other long term obligations and $0.4 million is in long-term liabilities of discontinued operations. Additionally, the Company had assets of $13.3 million ($0.7 million related to discontinued operations) representing the future services to be provided by the physicians, of which $7.8 million is in prepaid expenses and other current assets and $0.3 million in current assets of discontinued operations, and $4.8 million is in other assets and $0.4 million in non-current assets of discontinued operations.

13.   Fair Value Measurements

As described in Note 2 Recently Adopted Accounting Pronouncements, the Company adopted the accounting standard issued by the FASB that defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements. The Company is required to provide additional disclosures about fair value measurements for each major category of assets and liabilities measured at fair value on a non-recurring basis. Our non-financial assets and liabilities not permitted or required to be measured at fair value on a recurring basis typically relate to long-lived assets held and used and long-lived assets held for sale (including investments in affiliates). Fair values were determined as follows:

•  Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to non-financial assets and liabilities.

•  Level 2 inputs utilize data points that are observable, such as independent third party market offers.

•  Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of discounted cash flows or third party appraisals.

			Significant
	Quoted		Other		Significant		Year Ended
	Market		Observable		Unobservable		9/30/10
	Price		Inputs		Inputs		Total
	(Level 1)		(Level 2)		(Level 3)		Impairments
Continuing Operations
Hospital Division certain long-lived assets	$	—	$	33,545	$	33,122	$	63,678
Partners Division certain long-lived assets		—		—		7,935		800
Partners Division Investments in Affiliates		—		7,400		—		1,915
Corporate and other certain long-lived assets		—		—		4,880		2,344
Discontinued Operations
Hospital Division certain long-lived assets	$	—	$	32,000	$	—	$	5,249
Partners Division certain long-lived assets		—		—		—		—
Corporate and other certain long-lived assets		—		—		—		—

As described in Note 4, we recorded $63.7 million, $0.8 million and $2.3 million impairment charges in continuing operations in the fiscal year ended September 30, 2010 for the write-down of buildings, land, equipment and other long-lived assets in the Hospital Division, Partners Division and Corporate and other, respectively. The Hospital Division charge relates to one of our hospitals due to a decline in the fair value of real estate in the market in which the hospitals operate and a decline in the estimated fair value of equipment based on discounted cash flows. In addition, the Hospital Division charge relates to one of our hospitals that received a letter of intent from a third party buyer. As described in Note 8, we recorded a $1.9 million write-down of investments in affiliates related to

83

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

two of the Partners Division affiliates in which the Company has entered into agreements or disposed of its interest in such affiliates. As described in Note 3, we recorded a $5.2 million impairment charge in discontinued operations related to a hospital in which the Company entered into an agreement to dispose of its interest.

Based on Level 3 inputs, the estimated fair value of long-term debt, including the current portion, at September 30, 2010 was $108.1 million ($41.5 million related to discontinued operations) as compared to a carrying value of $101.2 million ($34.6 million related to discontinued operations). Based on Level 3 inputs, at September 30, 2009, the estimated fair value of long-term debt, including the current portion, was $127.6 million ($41.4 million related to discontinued operations) as compared to a carrying value of $121.4 million ($35.3 million related to discontinued operations). 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 market information. The fair value of the Company’s variable rate debt was determined to approximate its carrying value due to the underlying variable interest rates.

The Company’s cash equivalents are measured utilizing Level 1 or Level 2 inputs.

84

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14.   Income Taxes

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

	Year Ended September 30,
	2010			2009			2008
Current tax expense (benefit)
Federal	$	(7,255	)	$	1,864		$	3,931
State		747			899			2,758
Total current tax expense (benefit)		(6,508	)		2,763			6,689
Deferred tax expense (benefit)
Federal		(19,179	)		(3,302	)		2,365
State		(975	)		177			(758	)
Total deferred tax expense (benefit)	$	(20,154	)	$	(3,125	)	$	1,607
Total income tax expense (benefit)	$	(26,662	)	$	(362	)	$	8,296

The components of net deferred taxes are as follows:

	Year Ended September 30,
	2010			2009
Deferred tax liabilities:
Property and equipment	$	6,794		$	24,481
Equity investments		2,151			2,151
Accrued liabilities		1,060			—
Gain on sale of partnership units		2,461			2,461
Other		—			568
Total deferred tax liabilities		12,466			29,661
Deferred tax assets:
Net operating and economic loss carryforward	$	5,118		$	4,447
Basis difference in investment in subsidiaries		15,768			5,642
Allowances for doubtful accounts and other reserves		7,396			8,859
Accrued liabilities		3,830			3,736
Intangibles		2,185			2,293
Share based compensation expense		4,623			4,531
Management contracts		330			586
Other		216			545
Total deferred tax assets		39,466			30,639
Valuation allowance		(4,610	)		(2,691	)
Net deferred tax asset (liability)	$	22,390		$	(1,713	)

As of September 30, 2010 and 2009, the Company had recorded a valuation allowance of $4.6 million and $2.7 million, respectively, primarily related to state net operating loss carryforwards. The valuation allowance increased by approximately $1.9 million during the year ended September 30, 2010 due to a current year loss incurred in certain states.

85

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company has state net operating loss carryforwards of approximately $116.3 million that began to expire in 2009.

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

	Year Ended
	September 30,
	2010			2009			2008
Statutory federal income tax rate		(35.0	)%		(35.0	)%		35.0	%
State income taxes, net of federal effect		(2.9	)%		0.8	%		4.6	%
State valuation allowances on NOLs		2.8	%		1.3	%		(2.0	)%
Noncontrolling interest		(4.1	)%		(7.7	)%		(14.4	)%
Share-based compensation expense		0.0	%		0.0	%		1.2	%
Penalties		0.0	%		0.1	%		0.0	%
Goodwill		0.0	%		39.9	%		0.0	%
Other non-deductible expenses and adjustment		(0.2	)%		(0.2	)%		1.4	%
Effective income tax rate		(39.4	)%		(0.8	)%		25.8	%

In June 2006, the FASB issued a new accounting standard that established a single model to address the accounting for uncertain tax positions. The new accounting standard clarified the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The new accounting standard also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company adopted the new accounting standard effective October 1, 2007. As a result of the implementation, the Company recognized a $0.3 million net increase to the reserves for uncertain tax positions. This increase was accounted for as a cumulative effect adjustment and recognized as a reduction in beginning retained earnings in the consolidated balance sheet. Including the cumulative effect adjustment, the Company had approximately $2.4 million of unrecognized tax benefits as of October 1, 2007 and $0.5 million as of September 30, 2009 recorded in other accrued liabilities on the consolidated balance sheets. There is no unrecognized tax benefit as of September 30, 2010. Of the balance at September 30, 2009 $0.3 million represented the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in any future periods. It is not expected that the amount of unrecognized tax benefits will change in the next twelve months.

The Company includes interest related to tax issues as part of interest expense in the consolidated financial statements. The Company records applicable penalties, if any, related to tax issues within the income tax provision. The Company did not have an accrual for interest as of September 30, 2010 and had $0.2 million accrued for interest as of September 30, 2009. The interest impact for the unrecognized tax liabilities was $(0.2) million to the consolidated financial results for fiscal 2010. There were no penalties recorded for the unrecognized tax benefits.

Following is a reconciliation of the Company’s unrecognized tax benefits:

	Year Ended
	September 30,
	2010			2009			2008
Beginning Balance	$	519		$	1,234		$	2,424
Additions based on tax positions of prior years		—			—			640
Settlements		—			(514	)		—
Reductions for positions of prior years		(519	)		(201	)		(1,830	)
Ending Balance	$	—		$	519		$	1,234

86

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Under the normal three year federal statute of limitations, the Company may be subject to examination by the Internal Revenue Service (“IRS”) back to September 30, 2007. In addition, the Company files income tax returns in multiple states and local jurisdictions. Generally, the Company is subject to state and local audits going back to years ended September 30, 2007; however, due to existing net operating loss carryforwards, the state can audit back to September 30, 1998 and September 30, 1999 in a few significant states.

In the ordinary course of the Company’s business there are transactions where the ultimate tax determination is uncertain. The Company believes that is has adequately provided for income tax issues not yet resolved with federal, state and local tax authorities. If an ultimate tax assessment exceeds the Company’s estimate of tax liabilities, an additional charge to expense would result.

15.   Per Share Data

Basic — The calculation of basic earnings per share includes 150,900 and 101,500 of restricted stock units that have vested but as of September 30, 2010 and 2009, respectively, have not been converted into common stock. No restricted stock units vested as of September 30, 2008. See Note 16 as it relates to restricted stock units granted to directors of the Company.

Diluted — The calculation of diluted earnings per share considers the potential dilutive effect of options to purchase 932,137, 1,027,387, and 1,776,837 shares of common stock at prices ranging from $9.95 to $33.05, which were outstanding at September 30, 2010, 2009 and 2008, respectively, as well as 694,322, 552,827 and 123,982 shares of restricted stock which were outstanding at September 30, 2010, 2009 and 2008, respectively. Of the outstanding stock options and restricted stock, 1,580,214, and 947,000 have not been included in the calculation of diluted earnings (loss) per share at September 30, 2009 and 2008, respectively, because the options and restricted stock were anti-dilutive. No options or restricted stock were included in the calculation of diluted earnings per share at September 30, 2010, as the consideration of such shares would be anti-dilutive due to the loss from continuing operations, net of tax.

16.   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 granted during the year ended September 30, 2008 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. 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. No options may be granted under the 1998 Stock Option Plan after July 31, 2008. At September 30, 2010, 420,137 options were outstanding under the 1998 Option Plan.

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, 2010 have been granted at an exercise price equal to or greater than

87

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. Effective March 5, 2008, the Director’s Plan was amended to increase the maximum number of common stock shares which can be issued under the Director’s Plan to 550,000, of which 192,900 were outstanding as of September 30, 2010.

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, 2010, the maximum number of shares of common stock which can be issued through awards granted under the Stock Plan was 1,750,000 of which 1,203,385 were outstanding as of September 30, 2010.

Stock options granted to employees 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 as of the date of grant, 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 restrictions depending on the optionee’s employment status and length of time the options were held prior to exercise.

The Company recognized share-based compensation expense for the fiscal years ended September 30, 2010, 2009 and 2008 of $3.1 million, $2.4 million and $5.0 million, respectively. The associated tax benefits related to the compensation expense recognized for fiscal 2010, 2009 and 2008 was $1.3 million, $1.0 million and $2.0 million, respectively. No options were granted during the fiscal year ended September 30, 2010. The weighted-average grant-date fair value of options granted during the fiscal years ended September 30, 2009 and 2008 was $9.75 and $10.53, respectively. No options were exercised during fiscal 2010. The total intrinsic value of options exercised during fiscal 2008 was $1.4 million. The total intrinsic value of options exercised during fiscal 2009 was immaterial. There was no intrinsic value of options outstanding at September 30, 2010.

Stock Options

Stock option activity for the Company’s stock compensation plans during the years ended September 30, 2010, 2009 and 2008 was as follows:

				Weighted-
	Number of			Average
	Options			Exercise Price
Outstanding options, September 30, 2007		1,727,112		$	19.11
Granted		480,000			24.51
Exercised		(269,996	)		15.99
Cancelled		(160,279	)		26.93
Outstanding options, September 30, 2008		1,776,837		$	22.15
Granted		82,000			17.46
Exercised		(7,000	)		10.95
Cancelled		(824,450	)		21.65
Outstanding options, September 30, 2009		1,027,387		$	22.25
Cancelled		(95,250	)		25.86
Outstanding options, September 30, 2010		932,137		$	21.89

88

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes information for options outstanding and exercisable at September 30, 2010:

Options Outstanding and Exercisable
	Number of
	Options		Weighted-		Weighted-
	Outstanding		Average		Average
Range of	and		Remaining		Exercise
Prices	Exercisable		Life (years)		Price
$ 9.95 - 15.80		108,137		4.24	$	13.69
16.10 - 18.26		20,500		4.05		17.15
19.00 - 21.01		59,500		3.20		19.48
21.49 - 21.49		500,000		5.39		21.49
21.66 - 23.65		30,500		5.04		22.35
23.79 - 27.71		142,000		6.60		26.56
27.80 - 29.68		36,500		6.30		29.06
30.35 - 33.05		35,000		6.64		32.89
$ 9.95 - 33.05		932,137		5.34	$	21.89

Restricted Stock Awards

During the year ended September 30, 2006, the Company granted to employees 270,836 shares of restricted stock units, which vested 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, was recognized on a straight-line basis over the vesting period.

During fiscal 2010 and 2009, the Company granted to employees 401,399 and 599,645 shares of restricted stock, respectively. There were no grants to employees during fiscal 2008. Restricted stock granted to employees, excluding executives of the Company, vest annually on December 31 over a three year period. Executives of the Company (defined by the Company as vice president or higher) received two equal grants of restricted stock. The first grant vests annually in equal installments on December 31 over a three year period. The second grant vests annually on December 31 over a three year period if certain performance conditions are met. All unvested restricted stock granted to employees becomes fully vested upon a change in control of the Company as defined in the Company’s 2006 Stock Option and Award Plan. During fiscal 2010 and 2009, the Company granted 89,600 and 101,500 shares of restricted stock units to directors. There were no grants to directors during fiscal 2008. Restricted stock units granted to directors are fully vested at the date of grant and are paid in shares of common stock upon each applicable director’s termination of service on the board. At September 30, 2010 the Company had $3.0 million of unrecognized compensation expense associated with restricted stock awards.

89

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Activity for the Company’s restricted stock issued under the Stock Plan during the years ended September 30, 2010, 2009 and 2008 was as follows:

	Number of
	Restricted			Weighted-
	Stock Awards			Average
	and Units			Grant Price
Outstanding restricted stock awards and units, September 30, 2007		193,982		$	19.72
Vested		(21,448	)		20.50
Cancelled		(48,552	)		20.50
Outstanding restricted stock awards and units, September 30, 2008		123,982		$	19.28
Granted		701,145			9.00
Vested		(52,106	)		20.50
Cancelled		(118,694	)		11.19
Outstanding restricted stock awards and units, September 30, 2009		654,327		$	9.64
Granted		490,999			7.24
Vested		(181,214	)		8.48
Cancelled		(79,827	)		8.21
Outstanding restricted stock awards and units, September 30, 2010		884,285		$	8.67

17.   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 50% of their annual compensation on a pre-tax basis. The Company, at its discretion, may make an annual contribution of up to 40% of an employee’s pretax contribution, up to a maximum of 6% of compensation. The Company’s contributions to the 401(k) Plan for the years ended September 30, 2010, 2009 and 2008 were approximately $1.9 million, $1.8 million and $1.7 million, respectively.

18.   Related Party Transactions

As compensation for the Company’s guarantee of certain unconsolidated affiliate hospitals long term debt, the Company receives a debt guarantee fee; see Note 9 for further discussion. Debt guarantee fees recorded in net revenues in the consolidated statement of operations were $0.4 million for the years ended September 30, 2010, 2009 and 2008. Additionally the Company receives a management fee from unconsolidated affiliates. Management fees recorded within net revenues in the consolidated statement of operations were $4.4 million, $5.0 million, and $5.4 million for the years ended September 30, 2010, 2009 and 2008, respectively. At September 30, 2010 and 2009 the Company had $1.3 million and $1.6 million of outstanding fees recorded of which $0.4 million and $1.0 million was recorded within accounts receivable, net and $0.9 million and $0.5 million within prepaid expenses and other current assets, respectively, in the consolidated balance sheets primarily related to management, insurance and legal fees charged to unconsolidated affiliates, see Note 8 for further discussion regarding unconsolidated affiliates of the Company.

90

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

19.   Summary of Quarterly Financial Data (Unaudited)

Summarized quarterly financial results were as follows:

	Year Ended September 30, 2010
	First			Second			Third			Fourth
	Quarter			Quarter (*)			Quarter (*)			Quarter (*)
Net revenue	$	106,000		$	114,007		$	111,963		$	110,527
Operating expenses		109,388			127,373			134,630			140,074
Loss from operations		(3,388	)		(13,366	)		(22,667	)		(29,547	)
Loss from continuing operations, net of taxes		(2,523	)		(9,351	)		(14,360	)		(25,722	)
(Loss) income from discontinued operations, net of taxes		(133	)		(1,858	)		1,544			4,034
Net loss	$	(2,656	)	$	(11,209	)	$	(12,816	)	$	(21,688	)
(Loss) earnings per share, basic
Continuing operations	$	(0.13	)	$	(0.47	)	$	(0.72	)	$	(1.29	)
Discontinued operations		—			(0.10	)		0.08			0.20
(Loss) earnings per share, basic	$	(0.13	)	$	(0.57	)	$	(0.64	)	$	(1.09	)
(Loss) earnings per share, diluted
Continuing operations	$	(0.13	)	$	(0.47	)	$	(0.72	)	$	(1.29	)
Discontinued operations		—			(0.10	)		0.08			0.20
(Loss) earnings per share, diluted	$	(0.13	)	$	(0.57	)	$	(0.64	)	$	(1.09	)
Weighted average number of shares, basic		19,743			19,829			19,897			19,898
Dilutive effect of stock options and restricted stock		—			—			—			—
Weighted average number of shares, diluted		19,743			19,829			19,897			19,898

(*) The second, third and fourth quarters of fiscal 2010 includes $14.7 million; $22.8 million; and $29.3 million, respectively, impairment of property and equipment as discussed in Note 4.

As a result of the classification of certain businesses as discontinued operations as discussed in Note 3, the Company has recast the presentation of the results of such businesses for all periods as compared to the presentation in the respective quarterly report as filed on Form 10-Q. In fiscal year 2010, this resulted in (i) a reduction in revenues of $41,260 in the first quarter, $20,902 in the second quarter and $19,884 in the third quarter; (ii) a reduction in operating expenses of $40,715 in the first quarter, $25,168 in the second quarter and $19,676 in the third quarter; (iii) an increase in loss from operations of $545 in the first quarter, a decrease of $4,266 in the second quarter and an increase of $208 in the third quarter; (iv) an increase in loss from continuing operations, net of taxes of $12 in the first quarter, a decrease of $2,648 in the second quarter and an increase of $205 in the third quarter; and (v) a decrease in loss from discontinued operations, net of taxes of $12 in the first quarter, an increase in loss of $2,648 in the second quarter and an increase in income of $205 in the third quarter.

91

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Year Ended September 30, 2009
	First			Second		Third			Fourth
	Quarter			Quarter		Quarter			Quarter (*)
Net revenue	$	105,717		$	107,156	$	103,260		$	103,600
Operating expenses		100,566			100,311		102,109			158,216
Income (loss) from operations		5,151			6,845		1,151			(54,616	)
(Loss) income from continuing operations, net of taxes		(2,538	)		3,597		500			(53,214	)
Income (loss) from discontinued operations, net of taxes		4,784			1,985		(4	)		(5,392	)
Net income (loss)	$	2,246		$	5,582	$	496		$	(58,606	)
Earnings (loss) per share, basic
Continuing operations	$	(0.13	)	$	0.18	$	0.03		$	(2.70	)
Discontinued operations		0.24			0.10		—			(0.27	)
Earnings (loss) per share, basic	$	0.11		$	0.28	$	0.03		$	(2.97	)
Earnings (loss) per share, diluted
Continuing operations	$	(0.13	)	$	0.18	$	0.03		$	(2.70	)
Discontinued operations		0.24			0.10		—			(0.27	)
Earnings (loss) per share, diluted	$	0.11		$	0.28	$	0.03		$	(2.97	)
Weighted average number of shares, basic		19,599			19,664		19,733			19,740
Dilutive effect of stock options and restricted stock		—			26		—			—
Weighted average number of shares, diluted		19,599			19,690		19,733			19,740

(*) The fourth quarter of fiscal 2009 includes $51.5 million impairment of goodwill as discussed in Note 4.

As a result of the classification of certain businesses as discontinued operations as discussed in Note 3, the Company has recast the presentation of the results of such businesses for all periods as compared to the presentation in the respective quarterly report as filed on Form 10-Q for fiscal 2010. In fiscal year 2009, this resulted in (i) a reduction in revenues of $44,528 in the first quarter, $23,611 in the second quarter, $21,328 in the third quarter and $44,366 in the fourth quarter; (ii) a reduction in operating expenses of $42,687 in the first quarter, $22,324 in the second quarter, $22,334 in the third quarter and $52,544 in the fourth quarter; (iii) a decrease in income from operations of $1,841 in the first quarter, a decrease of $1,287 in the second quarter, an increase of $1,006 in the third quarter and a increase of $8,178 in the fourth quarter; (iv) an increase in loss from continuing operations, net of taxes of $623 in the first quarter, a decrease in income of $623 in the second quarter, an increase in income of $477 in the third quarter and a decrease in loss of $8,686 in the fourth quarter; and (v) an increase in income from discontinued operations, net of taxes of $623 in the first quarter, an increase in income of $623 in the second quarter and a decrease in income of $477 in the third quarter and a decrease in income of $8,686 in the fourth quarter.

20.   Reportable Segment Information

The Company’s reportable segments consist of the Hospital Division and the MedCath Partners Division. The Hospital Division consists of freestanding, licensed general acute care hospitals that provide a wide range of health services with a focus on cardiovascular care. MedCath Partners Division consists of cardiac diagnostic and therapeutic facilities that are either freestanding or located within unrelated hospitals. MedCath Partners Division provides management services to facilities or operates facilities directly on a contracted basis.

92

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

There is no aggregation of operating segments within each reportable segment. The Company believes these reportable business segments properly align the various operations of the Company with how the chief operating decision maker views the business. The Company’s chief operating decision maker regularly reviews financial information about each of these reportable business segments in deciding how to allocate resources and evaluate performance.

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,
	2010			2009			2008
Net revenue:
Hospital Division	$	430,625		$	402,671		$	395,626
MedCath Partners Division		11,440			16,645			18,070
Corporate and other		431			417			459
Consolidated totals	$	442,496		$	419,733		$	414,155
(Loss) income from operations(*):
Hospital Division	$	(53,470	)	$	(39,891	)	$	64,387
MedCath Partners Division		(1,536	)		7,203			(361	)
Corporate and other		(13,962	)		(8,782	)		(30,452	)
Consolidated totals	$	(68,968	)	$	(41,470	)	$	33,574
Depreciation and amortization:
Hospital Division	$	23,084		$	18,350		$	16,939
MedCath Partners Division		3,186			4,708			4,066
Corporate and other		657			651			741
Consolidated totals	$	26,927		$	23,709		$	21,746
Interest expense (income) including intercompany, net:
Hospital Division	$	15,964		$	14,132		$	16,927
MedCath Partners Division		14			(5	)		—
Corporate and other		(11,586	)		(10,599	)		(7,591	)
Consolidated totals	$	4,392		$	3,528		$	9,336
Equity in net earnings of unconsolidated affiliates:
Hospital Division	$	5,143		$	5,045		$	5,502
MedCath Partners Division		1,969			3,785			2,157
Corporate and other		155			227			232
Consolidated totals	$	7,267		$	9,057		$	7,891
Capital expenditures:
Hospital Division	$	15,371		$	82,995		$	70,079
MedCath Partners Division		209			—			1,890
Corporate and other		788			4,755			3,891
Consolidated totals	$	16,368		$	87,750		$	75,860

(*) Included in (loss) income from operations for fiscal 2010 are impairment charges of $63.6 million, $0.9 million and $2.3 million in the Hospital Division, MedCath Partners Division and Corporate and other, respectively. Included in (loss) income from operations for fiscal 2009 is an impairment charge of $51.5 million in the Hospital Division as discussed in Note 4.

93

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	September 30,
	2010		2009
Aggregate identifiable assets:
Hospital Division	$	414,656	$	517,849
MedCath Partners Division		20,210		27,205
Corporate and other		59,672		45,394
Consolidated totals	$	494,538	$	590,448
Investments in affiliates:
Hospital Division	$	508	$	2,834
MedCath Partners Division		8,382		11,075
Corporate and other		100		146
Consolidated totals	$	8,990	$	14,055

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 includes general overhead and administrative expenses and financing activities as components of (loss) income from operations and certain cash and cash equivalents, prepaid expenses, other assets, and operations of the business not subject to separate segment reporting within identifiable assets.

The Hospital Division assets include $115.2 million and $126.4 million of assets related to discontinued operations as of September 30, 2010 and 2009, respectively. The MedCath Partners Division assets included $1.5 million and $20.8 million of assets related to discontinued operations as of September 30, 2010 and 2009, respectively.

21.   Treasury Stock

During fiscal 2007, the board of directors approved a stock repurchase program of up to $59.0 million. During fiscal 2008 1,885,461 million shares of common stock, with a total cost of $44.4 million, were repurchased by the Company under this program. There were no repurchases of common stock during fiscal 2010 and 2009.

22.   Supplemental Cash Flow Disclosures

Supplemental disclosures of cash flow information for the years ended September 30, 2010, 2009 and 2008 are presented below.

	Year Ended September 30,
	2010		2009		2008
Supplemental disclosure of cash flow information:
Interest paid	$	3,526	$	7,499	$	11,682
Income taxes paid	$	634	$	6,212	$	26,777
Supplemental schedule of noncash investing and financing activities:
Capital expenditures financed by capital leases	$	5,318	$	4,186	$	1,324
Accrued capital expenditures	$	3,847	$	7,826	$	15,229
Subsidiary stock issued in exchange for services at fair market value	$	185	$	—	$	—

94

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

23.   Subsequent Events

As further discussed in Note 4, the Company disposed of i) its interest in AzHH on October 1, 2010; ii) its interest in a subsidiary that provides consulting services in October 2010; and iii) its interest in HHA on November 1, 2010. Such entities met the requirements under GAAP to be presented as discontinued operations as of September 30, 2010.

In connection with the sale of HHA, $34.8 million of third party long-term debt was repaid with the proceeds along with an $11.1 million prepayment penalty.

In addition to the above dispositions, the Company sold its minority equity interest in Southwest Arizona Heart and Vascular Center, LLC for $7.0 million on November 1, 2010 and its minority equity interest in Avera Heart Hospital of South Dakota on October 1, 2010 for $20.0 million.

The Company entered into a definitive agreement in November 2010 to dispose of its interest in TexSan Heart Hospital. This transaction is expected to close in the second fiscal quarter of 2011, which ends March 31, subject to regulatory approval and customary closing conditions. The entity did not meet the requirements under GAAP to be presented as a discontinued operation as of September 30, 2010, therefore, its operations are included in the current operations of the Company in this annual report. However, commencing with the first quarter of 2011, TexSan Heart Hospital will be classified as a discontinued operation in the Company’s filings.

The Company has entered into transition services agreements with the buyers of its sold assets that extend into fiscal 2011. Additionally, subsequent to September 30, 2010, the Company entered into a Managed Services Agreement with McKesson Technologies, Inc. (McKesson) whereby McKesson would employ the majority of the Company’s information technology employees effective November 1, 2010.

During December 2010, the Company exercised its call right with one of its hospitals under a Put/Call Agreement. The Put/Call Agreement permits the Company to call the minority equity equal to the net amount of the minority equity holders unreturned capital contributions adjusted upward for any proportionate share of additional proceeds upon a disposition of the hospital. The call right is in effect for up to one year upon notice of the Company’s intent to exercise its call right.

95

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, 2010, 2009 and 2008, and the related statements of income, members’ capital, and cash flows for each of the three years in the period ended September 30, 2010. 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 at September 30, 2010 and 2009, and the results of its operations and its cash flows for each of the three years ended September 30, 2010, in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Charlotte, North Carolina

December 14, 2010

96

HEART HOSPITAL OF SOUTH DAKOTA, LLC

BALANCE SHEETS

(In thousands)

	September 30,
	2010		2009
Current assets:
Cash	$	15,890	$	14,202
Accounts receivable, net		5,482		5,918
Medical supplies		1,124		1,211
Prepaid expenses and other current assets		1,060		1,429
Total current assets		23,556		22,760
Property and equipment, net		34,584		33,769
Other assets		466		901
Total assets	$	58,606	$	57,430
Current liabilities:
Accounts payable	$	1,472	$	1,910
Accrued compensation and benefits		2,828		2,543
Accrued property taxes		698		690
Other accrued liabilities		1,001		1,153
Current portion of long-term debt		3,126		2,064
Total current liabilities		9,125		8,360
Long-term debt		21,103		19,390
Other long-term obligations		2,189		2,250
Total liabilities		32,417		30,000
Members’ capital		26,189		27,430
Total liabilities and members’ capital	$	58,606	$	57,430

See notes to financial statements.

97

HEART HOSPITAL OF SOUTH DAKOTA, LLC

STATEMENTS OF INCOME

(In thousands)

	Year Ended September 30,
	2010			2009			2008
Net revenue	$	65,556		$	66,962		$	67,041
Operating expenses:
Personnel expense		20,360			21,707			22,308
Medical supplies expense		14,939			15,047			14,627
Bad debt expense		2,144			2,457			1,036
Other operating expenses		10,511			9,721			9,365
Depreciation		3,196			2,615			2,139
Loss on disposal of property, equipment and other assets		22			10			140
Total operating expenses		51,172			51,557			49,615
Income from operations		14,384			15,405			17,426
Other income (expenses):
Interest expense		(1,306	)		(1,322	)		(1,441	)
Interest and other income, net		165			159			453
Total other expenses, net		(1,141	)		(1,163	)		(988	)
Net income	$	13,243		$	14,242		$	16,438

See notes to financial statements.

98

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, 2007	$	8,950		$	8,949		$	8,950		$	(94	)	$	(94	)	$	(94	)	$	26,567
Distributions to members		(4,254	)		(4,253	)		(4,253	)		—			—			—			(12,760	)
Comprehensive income:
Net income		5,480			5,479			5,479			—			—			—			16,438
Change in fair value of interest rate swap		—			—			—			(194	)		(194	)		(193	)		(581	)
Total comprehensive income																				15,857
Balance, September 30, 2008	$	10,176		$	10,175		$	10,176		$	(288	)	$	(288	)	$	(287	)	$	29,664
Distributions to members		(5,189	)		(5,189	)		(5,189	)		—			—			—			(15,567	)
Comprehensive income:
Net income		4,747			4,748			4,747			—			—			—			14,242
Change in fair value of interest rate swap		—			—			—			(303	)		(303	)		(303	)		(909	)
Total comprehensive income																				13,333
Balance, September 30, 2009	$	9,734		$	9,734		$	9,734		$	(591	)	$	(591	)	$	(590	)	$	27,430
Distributions to members		(4,689	)		(4,689	)		(4,689	)		—			—			—			(14,067	)
Comprehensive income:
Net income		4,415			4,414			4,414			—			—			—			13,243
Change in fair value of interest rate swap		—			—			—			(139	)		(139	)		(139	)		(417	)
Total comprehensive income																				12,826
Balance, September 30, 2010	$	9,460		$	9,459		$	9,459		$	(730	)	$	(730	)	$	(729	)	$	26,189

See notes to financial statements.

99

HEART HOSPITAL OF SOUTH DAKOTA, LLC

STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended September 30,
	2010			2009			2008
Net income	$	13,243		$	14,242		$	16,438
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense		2,144			2,457			1,036
Depreciation		3,196			2,615			2,139
Amortization of loan acquisition costs		39			39			39
Loss on disposal of property, equipment and other assets		22			10			140
Change in assets and liabilities that relate to operations:
Accounts receivable		(1,708	)		(1,294	)		(909	)
Medical supplies		87			(9	)		(90	)
Prepaid expenses and other assets		(182	)		856			(87	)
Accounts payable and accrued liabilities		219			(1,830	)		117
Net cash provided by operating activities		17,060			17,086			18,823
Investing activities:
Purchases of property and equipment		(4,085	)		(3,613	)		(2,112	)
Proceeds from sale of property and equipment		5			6			18
Net cash used in investing activities		(4,080	)		(3,607	)		(2,094	)
Financing activities:
Proceeds from issuance of long-term debt		5,455			1,780			—
Repayments of long-term debt		(2,680	)		(2,032	)		(1,586	)
Distributions to members		(14,067	)		(15,567	)		(12,760	)
Net cash used in financing activities		(11,292	)		(15,819	)		(14,346	)
Net change in cash		1,688			(2,340	)		2,383
Cash:
Beginning of year		14,202			16,542			14,159
End of year	$	15,890		$	14,202		$	16,542
Supplemental cash flow disclosures:
Interest paid	$	1,306		$	1,322		$	1,441

See notes to financial statements.

100

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2010 and 2009, Sioux Falls Hospital Management, Inc., North Central Heart Institute Holdings, PLLC, and Avera McKennan each held a 33 ^1/3 % interest in the Company. See Note 9 for information relative to the subsequent sale of Sioux Falls Hospital Management, Inc.’s interest, which was effective on October 1, 2010.

Sioux Falls Hospital Management, Inc., an indirectly wholly owned subsidiary of MedCath Corporation (“MedCath”), acted as the managing member in accordance with the Company’s operating agreement through October 1, 2010 (see Note 9). 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 to be reasonable estimates of fair value at September 30, 2010 and 2009.

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 net realizable accounts receivable from all payors at September 30:

	2010			2009
Medicare and Medicaid		38	%		42	%
Commercial and Other		53	%		51	%
Self-pay		9	%		7	%
		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 cost or market.

Property and Equipment — Property and equipment are recorded at cost and depreciated 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

101

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2010 and 2009.

Other Assets — Other assets include of loan acquisition costs, which are costs associated with obtaining long-term financing (“Loan Costs”). Loan Costs, net of accumulated amortization, were $0.2 million as of September 30, 2010 and 2009. The Loan Costs are being amortized using the straight-line method, which approximates the effective interest method, as a component of interest expense over the life of the debt. Amortization expense recognized for Loan Costs totaled $39,000 for the years ended September 30, 2010, 2009 and 2008. At September 30, 2009, other assets also included the long-term portion of the asset relating to the benefit for future physician services of $0.5 million. This balance is now classified as current based on the related physician agreement.

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. The Company cannot predict at this time what impact the future audits by such third parties will have on the Company.

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 48%, 51% and 53%, respectively, of

102

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the Company’s net revenue during the years ended September 30, 2010, 2009 and 2008. 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 Medicare severity diagnosis-related group (“MS-DRG”). Based upon the patient’s condition and treatment during the relevant inpatient stay, each MS-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 MS-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. MS-DRG payments do not consider the actual costs incurred by a hospital in providing a particular inpatient service; however, MS-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 MS-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. Any discounts provided to these patients are recorded as a reduction to gross patient revenue. During the years ended September 30, 2010, 2009 and 2008, the Company provided charity care of $0.2 million, $0.5 million and $0.1 million, respectively.

Advertising — Advertising costs are expensed as incurred. During the years ended September 30, 2010 and 2009, the Company incurred $0.5 million and for the year ended September 30, 2008 , the Company incurred $0.3 million 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, will 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.

Subsequent Events — In connection with preparation of the financial statements for the year ended September 30, 2010, the Company has evaluated subsequent events for potential recognition and disclosures through December 14, 2010, the date these financial statements were issued. See Note 9.

New Accounting Pronouncements — In August 2010, the FASB issued Accounting Standard Updates (“ASU”) 2010-24, “Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries,” which clarifies that a health care entity should not net insurance recoveries against a related claim liability. The guidance provided in this ASU is effective as of the beginning of the first fiscal year beginning after December 15, 2010, fiscal 2012 for the Company. The Company is evaluating the potential impacts the adoption of this ASU will have on our financial statements.

103

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In August 2010, the FASB issued ASU 2010-23, “Health Care Entities (Topic 954): Measuring Charity Care for Disclosure,” which requires a company in the healthcare industry to use its direct and indirect costs of providing charity care as the measurement basis for charity care disclosures. This ASU also requires additional disclosures of the method used to identify such costs. The guidance provided in this ASU is effective for fiscal years beginning after December 15, 2010, fiscal 2012 for the Company. The adoption of this ASU is not expected to have any impact on our financial position or results of operations.

In December 2010, the FASB approved the issuance of an ASU whereby a health care entity is required to present the provision for bad debts as a component of net revenues within the revenue section of the statement of operations. However, on December 8, 2010, due to implementation and operational concerns, the FASB decided to re-expose the issue for a 60-day comment period. As currently drafted, a health care entity is required to disclose the following by major payor sources of revenue:

a. Its policy for considering collectability in the timing and amount of revenue and bad debt recognized

b.	Patient service revenue (net of contractual allowances and discounts) before any provision for bad debts
c.	A tabular reconciliation, describing the material activity in the allowance for doubtful accounts for the period.

Public entities will be required to provide the new disclosures and statement of operations presentation in fiscal years beginning after December 15, 2010, and interim periods within those years, with early adoption permitted. Nonpublic entities will be required to provide the new disclosures and statement of operations presentation in fiscal years beginning after December 15, 2011, with early adoption permitted. The requirement to report the provision for bad debts as a component of net revenue will be applied retrospectively for all periods presented, while the new disclosure requirements will be applied prospectively. The Company is evaluating the potential impacts the adoption of this ASU will have on our financial statements.

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 derivatives and measures those instruments at fair value.

3.   Accounts Receivable

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

	2010			2009
Receivables, principally from patients and third-party payors	$	7,055		$	7,213
Other receivables		112			86
		7,167			7,299
Allowance for doubtful accounts		(1,685	)		(1,381	)
Accounts receivable, net	$	5,482		$	5,918

104

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	2010			2009
Balance, beginning of year	$	1,381		$	764
Bad debt expense		2,144			2,457
Write-offs, net of recoveries		(1,840	)		(1,840	)
Balance, end of year	$	1,685		$	1,381

4.   Property and Equipment

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

	2010			2009
Land and improvements	$	1,384		$	1,384
Buildings and improvements		32,233			32,161
Equipment and software		23,737			23,007
Construction in progress		224			—
		57,578			56,552
Less accumulated depreciation		(22,994	)		(22,783	)
	$	34,584		$	33,769

5.   Long-Term Debt

Long-term debt at September 30 is as follows:

	2010			2009
Bank mortgage loan	$	17,694		$	19,200
Equipment loans		6,535			2,254
		24,229			21,454
Less current portion		(3,126	)		(2,064	)
	$	21,103		$	19,390

Bank Mortgage Loan — The Company’s bank mortgage loan used to finance its building and land, was refinanced during February 2006 to extend its maturity date through December 2015 with an interest rate of the LIBOR rate plus an applicable margin of 1.25%. At September 30, 2010 and 2009, the interest rate on this loan was 1.56%.

During the year ended September 30, 2006 the Company entered into an interest rate swap (the “Swap”), to fix the LIBOR at 5.21% for approximately 80% of the bank mortgage loan’s outstanding balance. The Company accounts for the Swap as a cash flow hedge against changes in interest rates, and therefore the underlying liability reflected in these disclosures is not measured at fair value. At September 30, 2010 and 2009, the Company’s effective interest rate on the notional amount of the Swap is 5.58% and 5.76%, effectively. During fiscal 2010 and 2009, the Company recognized interest expense based upon the fixed interest rate provided under the Swap, while the change in the fair value of the Swap is recorded as other comprehensive income (loss) and as an adjustment to the derivative liability in the balance sheets. The derivative liability was $2.2 million and $1.8 million at September 30, 2010 and 2009, 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.

105

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The bank mortgage loan agreement contains certain restrictive covenants, which require the maintenance of specific financial ratios and amounts. The Company was in compliance with these restrictive covenants at September 30, 2010.

Notes Payable to Equipment Lenders — The Company has acquired equipment under equipment loans collateralized by the related equipment, which had a net book value of approximately $6.3 million and $2.2 million at September 30, 2010 and 2009, respectively. The Company has acquired equipment under the following notes:

Date of Acquisition	Amount
June 2010	$	1,432
March 2010		1,629
October 2009		2,394
October 2008		1,779
January 2008		785
September 2007		348

Amounts borrowed under these notes are payable in monthly installments of principal and interest over five-year terms. The notes have annual fixed rates of interest ranging from 3.7% to 6.4%.

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 to expire in December 2008. During fiscal 2009 it was extended to December 2010 and during October 2010 it was extended to December 2012. No amounts were outstanding under this line of credit at September 30, 2010 or 2009.

Future maturities of long-term debt, as of September 30, 2010, are as follows:

Fiscal Year:
2011	$	3,126
2012		3,200
2013		3,074
2014		2,703
2015		1,961
Thereafter		10,165
	$	24,229

6.   Commitments and Contingencies

Operating Leases  — The Company leases certain medical equipment under noncancelable operating leases. Total rent expense under these operating leases was $94,000 during the year ended September 30, 2010 and is included in other operating expenses. There was no rent expense for noncancelable operating leases during the year ended September 30, 2009. Approximate future minimum payments are $94,000 for fiscal 2011 and nothing thereafter.

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. 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 $1.3 million through March 2011 as of September 30, 2010. At September 30, 2010 the Company has recorded a liability of $0.5 million for the fair value of these guarantees, which is in other accrued liabilities. Additionally, the Company has recorded an asset of $0.5 million representing the future services to be provided by the physicians, which is in prepaid expenses and other current assets.

106

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2008 and September 30, 2007, respectively.

In March 2010, the DOJ issued a civil investigative demand (“CID”) pursuant to the federal False Claims Act to one of MedCath’s affiliated hospitals. The CID requested information regarding Medicare claims submitted by that hospital in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) during the period 2002 to the present.

On September 17, 2010, MedCath received a letter from the DOJ advising that an investigation is being conducted to determine whether certain of its hospitals, including the Company, have submitted claims excluded from coverage. The period of time covered by the investigation is 2003 to the present. The letter states that the DOJ’s data indicates that many of MedCath’s hospitals have claims for the implantation of ICD’s which were not medically indicated and/or otherwise violated Medicare payment policy. The Company understands that the DOJ has submitted similar requests to many other hospitals and hospital systems across the country as well as to the ICD manufacturers themselves. MedCath is fully cooperating with the government in this investigation; to date, the DOJ has not asserted any claim against the Company specifically. Because MedCath is in the early stages of this investigation, the Company is unable to evaluate the outcome of this investigation.

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 are no amounts outstanding under the working capital loan as of September 30, 2010 and 2009. No interest was paid in fiscal 2010, 2009 or 2008 because the working capital loan was paid off monthly.

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

	2010		2009		2008
Management fees	$	1,318	$	1,330	$	1,349
Hospital employee group insurance		4,196		4,674		4,621
Other		446		104		81
	$	5,960	$	6,108	$	6,051

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.

107

HEART HOSPITAL OF SOUTH DAKOTA, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. At September 30, 2010 and 2009, $0.4 million and $30,000, respectively, was due for these allocated expenses and is included in other accrued liabilities.

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:

	2010		2009		2008
Avera McKennan	$	937	$	1,023	$	999
North Central Heart Institute Holdings		923		391		546
Total	$	1,860	$	1,414	$	1,545

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 50% of their annual compensation on a pretax basis. The Company, at its discretion, may make an annual contribution of up to 40% of an employee’s pretax contribution, up to a maximum of 6% of compensation. The Company’s contributions to the 401(k) Plan were $0.3 million during the years ended September 30, 2010, 2009 and 2008.

9.   Subsequent Events

On October 1, 2010, Sioux Falls Hospital Management, Inc. sold its interest in the Company to Avera McKennan, which then became a 662/3% owner of the Company. In conjunction with this transaction, Sioux Falls Hospital Management, Inc. resigned as managing member of the Company and the Company and MedCath entered into a transitional services agreement whereby MedCath would continue to provide certain management services to the Company through July 31, 2011. In conjunction with the management services agreement, MedCath also remitted $1.23 million for the assumption on October 1, 2010 of employee health insurance claims which had previously been the responsibility of MedCath. MedCath remitted this amount to the Company on September 30, 2010. The Company recorded liabilities of approximately $0.6 million as of September 30, 2010 relative to this payment and the remaining $0.6 million was recorded as a reduction of other operating expense for the year ending September 30, 2010. The Company’s 401(k) Plan was transferred into a new plan as a result of the sale with no impact to plan participants.

108

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, 2010. 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, 2010 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 our internal control over financial reporting, which is included below.

109

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

MedCath Corporation

Charlotte, North Carolina

We have audited the internal control over financial reporting of MedCath Corporation and subsidiaries (the “Company”) as of September 30, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements based on our audits.

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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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 the 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, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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, 2010 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended and our report dated December 14, 2010 expressed an unqualified opinion on those financial statements (such report expresses an unqualified opinion and includes an explanatory paragraph regarding the change in accounting for non-controlling interests effective October 1, 2009).

DELOITTE & TOUCHE LLP

Charlotte, North Carolina

December 14, 2010

110

Item 9B.   Other Information

None.

111

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”, “Accounting and Audit Matters-Audit Committee Financial Expert”, “Executive Compensation and Other Information”, and elsewhere in the Company’s proxy statement to be filed hereafter in connection with the Annual Meeting of Stockholders in 2011.

Item 11.   Executive Compensation.

The information required by this Item is incorporated by reference to information provided under the headings “Executive Compensation and Other Information” and “Corporate Governance-Compensation of Directors” and elsewhere in the 2011 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 and Other Information-Equity Compensation Plan Information” and elsewhere in the 2011 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 2011 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 2011 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
	2	.1	—	Asset Purchase Agreement By and Between Heart Hospital of DTO, LLC and Good Samaritan Hospital(14)
	2	.2	—	Assignment and Assumption Agreement by and between MedCath Partners, LLC, Cape Cod Cardiac Cath, Inc., Cape Cod Hospital, and Cape Cod Cardiology Services, LLC.(15)
	2	.3	—	Asset Purchase Agreement by and among Sun City Cardiac Center Associates, Sun City Cardiac Center, Inc., MedCath Partners, LLC, MedCath Incorporated, and Banner Health(17)
	2	.4	—	Asset Purchase Agreement made and entered into as of August 6, 2010 by and between VHS Of Phoenix, Inc., dba Phoenix Baptist Hospital, and Arizona Heart Hospital, LLC

112

Exhibit
No.				Description
	2	.5	—	Equity Purchase Agreement by and between Avera McKennan as Buyer and SFHM, Inc. as Seller dated as of August 27, 2010(19)
	2	.6	—	Asset Purchase Agreement made and entered into as of February 16, 2010 by and between St. David’s Healthcare Partnership, L.P., LLP, and Heart Hospital IV, L.P.(20)
	3	.1	—	Amended and Restated Certificate of Incorporation of MedCath Corporation(1)
	3	.2	—	Amended and Restated Bylaws of MedCath Corporation
	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)
	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	—	Amended and Restated Credit Agreement, dated as of November 10, 2008, among MedCath Corporation, as a parent guarantor, MedCath Holdings Corp., as the borrower, certain of the subsidiaries of MedCath Corporation party thereto from time to time, as subsidiary guarantors, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and each of the lenders party thereto from time to time.(13)
	4	.7	—	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(7)
	4	.8	—	First Amendment dated as of August 13, 2010 to the Amended and Restated Credit Agreement dated as of November 10, 2008, among MedCath, MedCath Holdings Corp., as borrower, certain of the subsidiaries of MedCath party thereto from time to time, as subsidiary guarantors, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and each of the lenders party thereto from time to time(18)
	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)(5)
	10	.2	—	First Amendment to the Little Rock Operating Agreement dated as of September 21, 1995(1)(5)
	10	.3	—	Amendment to Little Rock Operating Agreement effective as of January 20, 2000(1)(5)
	10	.4	—	Amendment to Little Rock Operating Agreement dated as of April 25, 2001(1)
	10	.5	—	Operating Agreement of Arizona Heart Hospital, LLC entered into as of January 6, 1997 (the Arizona Heart Hospital Operating Agreement)(1)(5)
	10	.6	—	Amendment to Arizona Heart Hospital Operating Agreement effective as of February 23, 2000(1)(5)
	10	.7	—	Amendment to Operating Agreement of Arizona Heart Hospital, LLC dated as of April 25, 2001(1)
	10	.8	—	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)(5)
	10	.9	—	Fifth Amendment to the Austin Limited Partnership Agreement effective as of December 31, 1997(1)(5)
	10	.10	—	Amendment to Austin Limited Partnership Agreement effective as of July 31, 2000(1)(5)
	10	.11	—	Amendment to Austin Limited Partnership Agreement dated as of March 30, 2001(1)
	10	.12	—	Amendment to Austin Limited Partnership Agreement dated as of May 3, 2001(1)

113

Exhibit
No.				Description
	10	.13	—	Guaranty made as of November 11, 1997 by MedCath Incorporated in favor of HCPI Mortgage Corp(1)
	10	.14	—	Operating Agreement of Heart Hospital of BK, LLC amended and restated as of September 26, 2001(the Bakersfield Operating Agreement)(2)(5)
	10	.15	—	Second Amendment to Bakersfield Operating Agreement effective as of December 1, 1999(1)(5)
	10	.16	—	Amended and Restated Operating Agreement of effective as of September 6, 2002 of Heart Hospital of DTO, LLC (the Dayton Operating Agreement)(6)(5)
	10	.17	—	Amendment to New Mexico Operating Agreement and Management Services Agreement) effective as of October 1, 1998(1)(5)
	10	.18	—	Amended and Restated Operating Agreement of Heart Hospital of New Mexico, LLC.(3)(5)
	10	.19	—	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	.20	—	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)(5)
	10	.21	—	First Amendment to Sioux Falls Operating Agreement of Heart Hospital of South Dakota, LLC effective as of July 31, 1999(1)(5)
	10	.22	—	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)(5)
	10	.23	—	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)(5)
	10	.24	—	Amendment to Louisiana Operating Agreement effective as of December 1, 2000(1)(5)
	10	.25	—	Second Amendment to Louisiana Operating Agreement effective as of December 1, 2000(1)(5)
	10	.26	—	Limited Partnership Agreement of San Antonio Heart Hospital, L.P. effective as of September 17, 2001(2)(5)
	10	.27	—	Put/Call Agreement dated as of August 20, 2010 by and among San Antonio Hospital Management, Inc., San Antonio Holdings, Inc., MedCath Incorporated, S.A.H.H. Hospital Management, LLC, and S.A.H.H. Investment Group, Ltd. and S.A.H.H. Management Company, LLC.
	10	.28	—	Operating Agreement of Doctors Community Hospital, LLC effective as of March 15, 2007
	10	.29	—	Call Agreement dated as of October 4, 2010 by and amount Hualapai Mountain Medical Center Management, Inc. and the undersigned Investor Members of Hualapai Mountain Medical Center, LLC.
	10	.30*	—	1998 Stock Option Plan for Key Employees of MedCath Holdings, Inc. and Subsidiaries(1)
	10	.31*	—	Outside Directors’ Stock Option Plan(1)
	10	.32*	—	Amended and Restated Directors Option Plan(4)
	10	.33	—	Form of Heart Hospital Management Services Agreement(1)
	10	.34*	—	Amended and Restated Employment Agreement dated September 30, 2005 by and between MedCath Corporation and Joan McCanless(8)
	10	.35	—	Sample Agreement to Accelerate Vesting of Stock Options and Restrict Sale of Related Stock Effective September 30, 2005(8)
	10	.36	—	Guaranty made as of December 28, 2005 by MedCath Corporation and Harlingen Medical Center Limited Partnership in favor of HCPI Mortgage Corp.(9)
	10	.37*	—	Employment agreement dated February 21, 2006, by and between MedCath Corporation and O. Edwin French(10)
	10	.38*	—	MedCath Corporation 2006 Stock Option and Award Plan effective March 1, 2006(12)
	10	.39	—	Consulting agreement effective August 4, 2006 by and between MedCath Incorporated and SSB Solutions(11)
	10	.40*	—	First Amendment to the September 30, 2005 Amended and Restated Employment Agreement by and between MedCath Corporation and Joan McCanless dated September 1, 2006(12)

114

Exhibit
No.				Description
	10	.41*	—	First Amendment to the February 21, 2006 Employment Agreement by and between MedCath Corporation and O. Edwin French dated September 1, 2006(12)
	10	.42	—	Operating Agreement of HMC Management Company, LLC, effective as of June 29, 2007(5)
	10	.43	—	Amended and Restated Operating Agreement of Coastal Carolina Heart, LLC, effective as of July 1, 2007(5)
	10	.44	—	Amended and Restated Limited Partnership Agreement of Harlingen Medical Center, Limited Partnership, effective as of July 10, 2007(5)
	10	.45	—	Amended and Restated Operating Agreement of HMC Realty, LLC, effective as of July 10, 2007(5)
	10	.46*	—	Amendment to Amended and Restated Outside Directors’ Stock Option Plan(14)
	10	.47*	—	Employment Agreement dated June 23, 2008 by and between MedCath Corporation and David Bussone(16)
	10	.48*	—	Employment, Confidentiality and Non-Compete Agreement by and between MedCath Incorporated and James A Parker (Effective Date February 18, 2001)
	10	.49*	—	Amendment to Employment, Confidentiality and Non-Compete Agreement (Effective Date February 18, 2001) dated August 14, 2009 by and between MedCath Corporation and James A. Parker(16)
	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

*	Indicates a management contract or compensatory plan or agreement.
(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)	Certain portions of these exhibits have been omitted pursuant to a request for confidential treatment filed with the Commission.
(6)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003.
(7)	Incorporated by reference from the Company’s Registration Statement on Form S-4 (File No. 333-119170).
(8)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended September 30, 2005.
(9)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.
(10)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.
(11)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
(12)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended September 30, 2006.
(13)	Incorporated by reference from the Company’s Current Report on Form 8-K filed November 14, 2008.

115

(14)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2008.
(15)	Incorporated by reference from the Company’s Current Report on Form 8-K filed January 5, 2009
(16)	Incorporated by reference from the Company’s Current Report on Form 8-K filed August 17, 2009
(17)	Incorporated by reference from the Company’s Current Report on Form 8-K filed October 1, 2009
(18)	Incorporated by reference from the Company’s Current Report on Form 8-K filed August 19, 2010
(19)	Incorporated by reference from the Company’s Current Report on Form 8-K filed September 1, 2010
(20)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.

116

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, 2010
/s/  James A. Parker James A. Parker	Executive Vice President and Chief Financial Officer (principal financial officer)	December 14, 2010
/s/  Lora Ramsey Lora Ramsey	Vice President — Controller (principal accounting officer)	December 14, 2010
/s/  Pamela G. Bailey Pamela G. Bailey	Director	December 14, 2010
/s/  Woodrin Grossman Woodrin Grossman	Director	December 14, 2010
/s/  Robert S. Mccoy, Jr. Robert S. Mccoy, Jr.	Director	December 14, 2010
/s/  James A. Deal James A. Deal	Director	December 14, 2010
/s/  Jacque J. Sokolov, Md Jacque J. Sokolov, Md	Director	December 14, 2010
/s/  John T. Casey John T. Casey	Director	December 14, 2010

117

EX-2.4

Exhibit 2.4

ASSET PURCHASE AGREEMENT

BY

AND

BETWEEN

VHS OF PHOENIX, INC.,
dba PHOENIX BAPTIST HOSPITAL

AND

ARIZONA HEART HOSPITAL, LLC

Dated as of August 6, 2010

TABLE OF CONTENTS

	Page
ARTICLE 1 DEFINITIONS		1
1.1 Definitions		1
1.2 Interpretation		8
1.3 Schedules		9
ARTICLE 2 SALE OF PURCHASED ASSETS AND CERTAIN RELATED MATTERS		10
2.1 Sale of Purchased Assets		10
2.2 Excluded Assets		11
2.3 Assumed Liabilities		13
2.4 Excluded Liabilities		13
2.5 Purchase Price		14
2.6 Interim Cash Purchase Price		14
2.7 Final Cash Purchase Price		15
2.8 Dispute of Adjustments/Reconciliation of Final Cash Purchase Price		15
2.9 Proration		15
2.10 Inventory		15
ARTICLE 3 CLOSING		16
3.1 Closing		16
3.2 Actions of Buyer at Closing		16
3.3 Actions of Seller at Closing		17
3.4 Additional Acts		18
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER		18
4.1 Organization, Qualification and Capacity		18
4.2 Powers; Consents; Absence of Conflicts With Other Agreements, Etc		19
4.3 Binding Agreement		19
4.4 Sufficient Resources		19
4.5 Litigation		19
4.6 Statements True and Correct		19
4.7 No Other Representations and Warranties		19
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLER		20
5.1 Incorporation, Qualification and Capacity		20
5.2 Powers; Consents; Absence of Conflicts With Other Agreements, Etc		20
5.3 Affiliates and Minority Interests		21
5.4 No Outstanding Rights		21
5.5 Binding Agreement		21
5.6 Seller Financial Information		21
5.7 Permits and Approvals		22
5.8 Intellectual Property		22
5.9 Medicare Participation/Accreditation		23
5.10 Regulatory Compliance		24
5.11 Scheduled Contracts		24
5.12 Encumbrances; Real Property		25
5.13 Personal Property		26
5.14 Insurance		26
5.15 Employee Benefit Plans		26
5.16 Hospital Employees and Employee Relations		28

	Page
5.17 Litigation or Proceedings		29
5.18 Tax Matters		29
5.19 Environmental Matters		30
5.20 Inventory		31
5.21 Absence of Changes		32
5.22 Medical Staff Matters		33
5.23 Sufficiency of Purchased Assets		33
5.24 Transactions with Affiliates		33
5.25 Solvency		33
5.26 Statements True and Correct		33
5.27 No Other Representations and Warranties		33
ARTICLE 6 COVENANTS OF BUYER		34
6.1 Notification of Certain Matters		34
6.2 Approvals		34
6.3 Buyer’s Efforts to Close		34
ARTICLE 7 COVENANTS OF SELLER		34
7.1 Information		34
7.2 Operations		35
7.3 Negative Covenants		36
7.4 Notification of Certain Matters		37
7.5 Additional Financial Information		37
7.6 No-Shop Clause		37
7.7 Title Policies and Surveys		38
7.8 Seller’s Efforts to Close		38
ARTICLE 8 CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER		38
8.1 Compliance with Covenants		38
8.2 Action/Proceeding		39
8.3 Representations and Warranties		39
8.4 Deliveries of Buyer		39
ARTICLE 9 CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER		39
9.1 Compliance with Covenants		39
9.2 Approvals and Permits		39
9.3 Action/Proceeding		39
9.4 Representations and Warranties		40
9.5 Deliveries of Seller		40
9.6 Extraordinary Events		40
9.7 Termination Statements		40
9.8 Certificate of Insurance		40
9.9 Material Consents		40
9.10 Title Insurance		40
9.11 Corporate Integrity Agreement		40
ARTICLE 10 TRANSITIONAL ARRANGEMENTS		40
10.1 Transition Patients		40
10.2 Seller’s Cost Reports		41
10.3 Employees; Benefits		42
10.4 Misdirected Payments		43
ARTICLE 11 ADDITIONAL AGREEMENTS		44
11.1 Allocations		44
11.2 Termination Prior to Closing		44

- ii -

	Page
11.3 Buyer Preservation and Seller Access to Records After the Closing		45
11.4 Reproduction of Documents		46
11.5 Tax Matters		46
11.6 Consents to Assignment; Permits		46
11.7 Seller Non-Competition Agreement		46
11.8 Casualty		47
11.9 Change of Name		48
11.10 Transition Services Agreement		48
11.11 Supplemental Reporting Endorsement		48
ARTICLE 12 REMEDIES; LIMITATION ON DAMAGES		49
12.1 No Survival Period		49
12.2 Right to Seek Damages: Limitation on Damages		49
12.3 Specific Performance		49
ARTICLE 13 GENERAL		49
13.1 Consents, Approvals and Discretion		49
13.2 Legal Fees and Costs		50
13.3 Dispute Resolution; Choice of Law		50
13.4 Benefit; Assignment		50
13.5 No Brokerage		50
13.6 Cost of Transaction		51
13.7 Confidentiality		51
13.8 Press Release		52
13.9 Waiver of Breach		52
13.10 Notice		52
13.11 Severability		53
13.12 No Inferences		53
13.13 Divisions and Headings of this Agreement		53
13.14 No Third-Party Beneficiaries		53
13.15 Tax and Medicare Advice and Reliance		53
13.16 Entire Agreement; Amendment		53
13.17 Knowledge		54
13.18 Multiple Counterparts		54
13.19 Disclaimer of Warranties		54
13.20 Schedules		54
13.21 Guarantee of Buyer’s Obligations		55
13.22 Guarantee of Seller’s Obligations		55
13.23 Right to Take Limited Liability Company and Corporate Action		55

- iii -

LIST OF SCHEDULES

Schedule 1.1A	Capital Lease Obligations
Schedule 1.1B	Net Working Capital
Schedule 1.1C	Furniture and Equipment
Schedule 1.1D	Material Consents
Schedule 1.1E	Real Property
Schedule 2.1(c)	Assumed Contracts
Schedule 2.1(e)	Assumed Software
Schedule 2.2(b)	Excluded Contracts
Schedule 2.2(d)	Excluded Assets
Schedule 2.2(i)	Excluded Intellectual Property
Schedule 5.2	Required Approvals for Seller
Schedule 5.3	Affiliates and Minority Interests in Seller
Schedule 5.4	Rights Regarding Purchased Assets
Schedule 5.6	Historical Financial Information
Schedule 5.7	Permits
Schedule 5.8	Intellectual Property
Schedule 5.9	Medicare Participation/Accreditation
Schedule 5.10	Regulatory Compliance
Schedule 5.11	Scheduled Contracts
Schedule 5.12(a)	Permitted Encumbrances
Schedule 5.12(b)	Notices of Violation
Schedule 5.12(c)	Leased Property of Seller
Schedule 5.14	Insurance
Schedule 5.15	Employee Benefit Plans
Schedule 5.16(a)	Labor Disputes
Schedule 5.16(b)	Hospital Employees
Schedule 5.17	Litigation or Proceedings against Seller
Schedule 5.18	Tax Matters
Schedule 5.19	Environmental Matters; EHS Permits
Schedule 5.21	Certain Seller Changes
Schedule 5.24	Transactions with Affiliates
Schedule 10.3	COBRA Beneficiaries
Schedule 11.1	Allocations

LIST OF EXHIBITS

Exhibit A	Transition Services Agreement
Exhibit B	General Warranty of Title
Exhibit C	Affidavit of Value
Exhibit D	FIRPTA Certificate

ASSET PURCHASE AGREEMENT

     THIS ASSET PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of August 6, 2010 by and between VHS OF PHOENIX, INC., a Delaware corporation, dba PHOENIX BAPTIST HOSPITAL (“Buyer”), and ARIZONA HEART HOSPITAL, LLC, an Arizona limited liability company (“Seller”).

W I T N E S S E T H:

     WHEREAS, Seller owns and operates the Arizona Heart Hospital located in Phoenix, Arizona (the “Hospital”) and the Purchased Assets (as defined herein); and

     WHEREAS, Seller desires to sell the Hospital and the Purchased Assets to Buyer, and to assign the Assumed Liabilities to Buyer, all as more fully set forth herein.

     NOW, THEREFORE, for and in consideration of the premises, and the agreements, covenants, representations and warranties hereinafter set forth, and other good and valuable consideration, the receipt and adequacy of which are forever acknowledged and confessed, the parties hereto agree as follows:

ARTICLE 1
DEFINITIONS

     1.1 Definitions. As used herein the terms below shall have the following meanings:

     “Accrued PTO” has the meaning set forth in Section 2.3(d).

     “Agency Receivables” has the meaning set forth in Section 2.2(f).

     “Additional Financial Statements” has the meaning set forth in Section 7.5.

     “Affiliate” means, as to the Person in question, any Person that directly or indirectly controls, is controlled by, or is under common control with, the Person in question and any successors or assigns of such Person; and the term “control” means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person whether through ownership of voting securities, by Contract or otherwise; provided that, with respect to Seller, “Affiliate” shall not include direct or indirect equityholders, officers or directors of MedCath Corporation and shall not include any equityholder of Seller other than Manager and its Affiliates; and provided further that, with respect to Buyer, “Affiliate” shall not include direct or indirect equityholders, officers or directors of Vanguard Health Systems, Inc.

     “Agreement” means this Agreement, as amended or supplemented, together with all Exhibits and Schedules attached or delivered with respect hereto or expressly incorporated herein by reference.

     “Applicable Rate” means the “prime rate” as quoted in the “Money Rates” section of The Wall Street Journal on the day of the Effective Time.

     “Approval” means any approval, authorization, consent, notice, qualification or registration, or any extension, modification, amendment or waiver of any of the foregoing, of or from any Governmental Entity.

     “Assumed Contracts” has the meaning set forth in Section 2.1(c).

     “Assumed Liabilities” has the meaning set forth in Section 2.3.

     “Baseline Balance Sheet” has the meaning set forth in Section 5.6(a)(i).

     “Baseline Balance Sheet Date” means December 31, 2009.

     “Buyer” has the meaning set forth in the Preamble hereto.

     “Capital Lease Obligations” means, as of the date of determination, an amount equal to the aggregate amount outstanding under capital lease obligations of the Seller under capital leases (including the current portions thereof), in each case identified on Schedule 1.1A, in each case determined in accordance with GAAP. The amount of Capital Lease Obligations as of the Baseline Balance Sheet Date was $419,547.00 , as set forth on Schedule 1.1A.

     “CERCLA” has the meaning set forth in the definition of Environmental Laws.

     “Change in Control Transaction” means (i) a transaction in which a Person is or becomes the beneficial owner, directly or indirectly, of securities of MedCath Corporation representing 50% or more of the total voting power represented by MedCath Corporation’s then outstanding voting securities; (ii) a merger or consolidation in which MedCath Corporation is a party and in which the equityholders of MedCath Corporation before such merger or consolidation do not retain, directly or indirectly, at a least majority of the beneficial interest in the voting equity interests of the Person that survives or results from such merger or consolidation; or (iii) a sale or disposition by MedCath Corporation or its Affiliates of all or substantially all of MedCath Corporation’s assets or those of its Affiliates existing as of the date hereof (excluding the Hospital) either to a single or multiple buyers thereof. Notwithstanding the foregoing, in no event shall the acquisition of voting securities by one or more Persons (even if such offering represents 50% or more of the total voting power represented by MedCath Corporation’s then outstanding voting securities) in a public offering constitute a Change in Control Transaction.

     “Closing” has the meaning set forth in Section 3.1.

     “Closing Balance Sheet” means the balance sheet of Seller in respect of the Hospital as of the Effective Time. The Closing Balance Sheet shall be prepared in accordance with GAAP (except as provided in Schedule 5.6), applied on a basis consistent with the Baseline Balance Sheet.

     “Closing Date” has the meaning set forth in Section 3.1.

     “COBRA” has the meaning set forth in Section 10.3(d).

     “Code” means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.

- 2 -

     “Confidentiality Agreement” has the meaning set forth in Section 13.8.

     “Continuing Employee” has the meaning set forth in Section 10.3(b).

     “Contract” means any binding written or oral contract, commitment, instrument, lease (including the lease of real property), or other arrangement or agreement.

     “Cost Reports” has the meaning set forth in Section 10.2.

     “De Minimis Contract” means any Contract that does not contain an exclusivity, right of first refusal, right of first opportunity, non-compete or similar provision restricting Seller from engaging in any business or conducting business with any Person and that either (a) requires total expenditures subsequent to the Effective Time of not more than $25,000, or (b) can be terminated without cause or penalty within ninety (90) days after the Effective Time without the expenditure of more than $25,000 within such ninety (90) day period. A De Minimis Contract also shall not include (i) any contracts which affect the ownership, use of, or title to the Real Property, (ii) contracts with referral sources, (iii) contracts which relate to Intellectual Property other than “shrink-wrapped” or “click-wrapped” software which shall be De Minimis Contracts, (iv) collective bargaining agreements or other contracts with labor unions, or (v) contracts with any director, officer or equity holder of Seller, Manager or any of their Affiliates.

     “DRG Transition Patient” has the meaning set forth in Section 10.1(a).

     “Drop Dead Date” has the meaning set forth in Section 11.2(a)(ii).

     “EEOC” means the Equal Employment Opportunity Commission and any state law equivalents.

     “Effective Time” has the meaning set forth in Section 3.1.

     “Encumbrance” means any claim, charge, easement, encumbrance, conditional sales agreement, right of first refusal, option, encroachment, security interest, mortgage, lien, pledge or restriction, whether imposed by Contract, Law, equity or otherwise.

     “Environmental Condition” as to either party, means any event, circumstance or conditions related in any manner whatsoever to: (i) the current or past presence or Release of any Hazardous Materials in or into the environment; or (ii) the on-site or off-site treatment, storage, disposal or other handling of any Hazardous Material originating on or from the Real Property; or (iii) the placement of structures or Hazardous Materials into waters of the United States; or (iv) the presence of any Hazardous Materials in any building, structure or workplace or on any portion of the Real Property; or (v) any violation of Environmental Laws at or on any part of the Real Property, or arising from the activities of the Seller or any Affiliate of the Seller at the Hospital.

     “Environmental Laws” means any and all federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, guidelines, policies or requirements of any governmental authority (including common law) relating to pollution, the environment, emissions, discharges, releases, or threatened releases of pollutants, contaminants, chemicals, pesticides, or industrial, infectious, toxic or hazardous substances or wastes into the environment (including ambient air, surface water, groundwater, land surface or subsurface strata) or otherwise relating to the processing,

- 3 -

generation, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, infectious, toxic, or hazardous substances or wastes, including the Comprehensive Environmental Recovery, Compensation, and Liability Act, as amended, 42 U.S.C. § 9601, et seq. (“CERCLA”); the Resource Conservation and Recovery Act, as amended, 42 U.S.C. § 6901, et seq. (“RCRA”), the Clean Air Act, 42 U.S.C § 7401, et seq., the Federal Water Pollution Control Act, 33 U.S.C. §1251, et seq., the Occupational Safety and Health Act, 29 U.S.C. § 600, et seq. (“OSHA”), and any similar state or local Laws.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

     “ERISA Controlled Group” means a group of Persons considered to be aggregated with each other pursuant to Section 414(b), (c), (m) or (o) of the Code.

     “Excluded Assets” has the meaning set forth in Section 2.2.

     “Excluded Contracts” has the meaning set forth in Section 2.2(b).

     “Excluded Liabilities” has the meaning set forth in Section 2.4.

     “Exhibits” means the exhibits to this Agreement.

     “Final Capital Lease Obligations Calculation” means a calculation of the aggregate amount of the Capital Lease Obligations as of the Effective Time as reflected on the Closing Balance Sheet. The Final Capital Lease Obligations Calculation shall be prepared using the same methodologies and assumptions used in connection with the preparation of the determination of the Capital Lease Obligations set forth on Schedule 1.1A and in a manner consistent with GAAP and Seller’s historical accounting policies.

     “Final Cash Purchase Price” means an amount equal to (i) $32,000,000, plus or minus (ii) the Final NWC Calculation, minus (iii) the Final Capital Lease Obligations Calculation.

     “Final NWC Calculation” means a calculation of the Net Working Capital as of the Effective Time. The Final NWC Calculation shall be prepared using the same methodologies and assumptions used in connection with the preparation of the determination of Net Working Capital set forth on Schedule 1.1B and in a manner consistent with GAAP and Seller’s historical accounting policies, except that the line item “Accrued paid time off for employees” will be adjusted to eliminate any Accrued PTO in respect of Hospital Employees who do not become Continuing Employees as of the Effective Time.

     “FIRPTA” means the Foreign Investment Real Property Tax Act of 1980, as amended, and the rules and regulations promulgated thereunder.

     “Furniture and Equipment” means all equipment (including movable equipment), machinery, tenant improvements (regardless of whether they are accounted for on the books of Seller), vehicles, furniture or furnishings that are held or used by Seller in the business or operation of the Hospital (other than Excluded Assets), including all such equipment, machinery, tenant improvements, vehicles, furniture or furnishings that have been fully depreciated for accounting purposes. The Furniture and Equipment shall include without limitation the items listed on Schedule 1.1C.

- 4 -

     “GAAP” means United States generally accepted accounting principles and practices as in effect from time to time, as modified as described in Schedule 5.6 and applied consistently by Seller throughout the periods involved.

     “Government Programs” means the federal Medicare, all applicable state Medicaid and successor programs.

     “Governmental Entity” means any government or any agency, bureau, board, directorate, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign.

     “Hazardous Materials” means any petroleum, petroleum products, fuel oil, derivatives of petroleum products or fuel oil, explosives, reactive materials, ignitable materials, corrosive materials, pollutants, contaminants, hazardous chemicals, hazardous wastes, hazardous substances, extremely hazardous substances, toxic substances, toxic chemicals, radioactive materials, asbestos-containing materials, black mold stachybotrys chartarum (toxic mold)-containing materials, urea formaldehyde foam insulation, transformers or other equipment that contain polychlorinated biphenyls and radon gas, medical waste, biomedical waste, infectious materials and any other element, compound, mixture, solution or substance which may pose a present or potential hazard to human health or safety or to the environment, and which is regulated by or subject to regulation or standards of liability under any Environmental Law.

     “Historical Financial Information” has the meaning set forth in Section 5.6(a).

     “Hospital” has the meaning set forth in the recitals hereto.

     “Hospital Employees” has the meaning set forth in Section 5.16(b).

     “Intellectual Property” means, all patents, trademarks, trade dress, trade names, service marks, symbols, logos, internet websites, domain names, fictitious and assumed business names, registered and unregistered copyrights and any renewal rights, applications and registrations and goodwill for any of the foregoing, to the extent held or used primarily or exclusively in or ancillary to the business or operation of the Hospital.

     “Interim Balance Sheet” means the balance sheet of Seller in respect of the Hospital as of the Interim Balance Sheet Date. The Interim Balance Sheet shall be prepared in accordance with GAAP (except as provided in Schedule 5.6), applied on a basis consistent with the Baseline Balance Sheet.

     “Interim Balance Sheet Date” means the most recently ended calendar month prior to the Closing Date for which financial statements are available for Seller in respect of the Hospital.

     “Interim Cash Purchase Price” means an amount equal to (i) $32,000,000, plus or minus (ii) the Interim NWC Calculation, minus (iii) the Interim Capital Lease Obligations Calculation.

     “Interim Capital Lease Obligations Calculation” means a calculation of the aggregate amount of the Capital Lease Obligations as of the Interim Balance Sheet Date as reflected on the Interim Balance Sheet. The Interim Capital Lease Obligations Calculation shall be prepared using the same methodologies and assumptions used in connection with the preparation of the determination of

- 5 -

the Capital Lease Obligations set forth on Schedule 1.1A and in a manner consistent with GAAP and Seller’s historical accounting policies.

     “Interim NWC Calculation” means a calculation of the Net Working Capital as of the Interim Balance Sheet Date. The Interim NWC Calculation shall be prepared using the same methodologies and assumptions used in connection with the preparation of the determination of Net Working Capital set forth on Schedule 1.1B and in a manner consistent with GAAP and Seller’s historical accounting policies.

     “Inventory” means all usable inventory, supplies, foodstuffs or other disposable items held or used in the business or operation of the Hospital.

     “Law” means any constitutional provision, statute, ordinance or other law, rule, regulation or order of any Governmental Entity.

     “Manager” means AHH Management, Inc., a North Carolina corporation and the manager of Seller.

     “Material Adverse Effect” shall mean any fact, circumstance, event, change, effect, condition or occurrence that, individually or in the aggregate, has had or is reasonably likely to have a material adverse effect on the business, operations, assets, liabilities, property, financial condition, or results of operations of the Purchased Assets and the Hospital, taken as a whole; provided, however, that any adverse effect arising out of, resulting from or attributable to any of the following shall not constitute or be deemed to contribute to a Material Adverse Effect, and otherwise shall not be taken into account in determining whether a Material Adverse Effect has occurred: (i) a fact, circumstance, event, change, effect or occurrence, or series of such items to the extent affecting the United States economy generally, (ii) any change in law generally applicable to owners and operators of hospitals in the United States or the State of Arizona, (iii) the negotiation, execution or the announcement of, or the performance of obligations under, this Agreement or any of the initial Schedules, or (iv) any changes or any proposed changes in GAAP or the interpretation thereof.

     “Material Consent” means the consent of the counterparty of any Assumed Contract listed on Schedule 1.1D.

     “Medicaid” means Title XIX of the Social Security Act.

     “Medicaid Transition Patient” has the meaning set forth in Section 10.1(b).

     “Medicare” means Title XVIII of the Social Security Act.

     “Net Working Capital” means, as of the date of determination, an amount equal to the following with respect to the Seller, in each instance as determined in accordance with GAAP and in a manner consistent with Seller’s historical accounting policies, consistently applied: (a) the sum of the amounts reflected in the entries (or line items) on the applicable balance sheet entitled (i) “Inventories” (to the extent usable by Buyer after the Effective Time); and (ii) “Prepaid expenses” (to the extent of benefit to Buyer after the Effective Time); minus (b) the amounts reflected in the entries (or line items) on the applicable balance sheet entitled “Accrued paid time off for employees” (including employer FICA and any other estimated employer taxes thereon). The Net Working Capital as of the Baseline Balance Sheet Date was $1,863,588.00, as set forth on Schedule 1.1B.

- 6 -

     “OSHA” has the meaning set forth in the definition of Environmental Laws.

     “Permit” means any license or permit required to be issued by any Governmental Entity.

     “Permitted Encumbrances” has the meaning set forth in Section 5.12(a).

     “Person” means an association, a corporation, a limited liability company, an individual, a partnership, a limited liability partnership, a trust or any other entity or organization, including a Governmental Entity.

     “Plans” has the meaning set forth in Section 5.15(a).

     “Purchased Assets” has the meaning set forth in Section 2.1.

     “RCRA” has the meaning set forth in the definition of Environmental Laws.

     “Real Property” means all the real property described on Schedule 1.1E, which constitutes all real property owned or leased by Seller or any Seller Affiliate and held or used in the business or operation of the Hospital (other than Excluded Assets), together with all leases and subleases therein (including all security deposits, if any, held by Seller in connection with any such leases or subleases), improvements, buildings or fixtures located thereon or therein (including all warranties, to the extent assignable, relating to such improvements, buildings or fixtures, all easements, rights of way, and other appurtenances thereto (including appurtenant rights in and to public streets), permits and approvals including, without limitation, conditional use permits, zoning variances, occupancy permits and similar approvals issued by any Governmental Entity with respect to such real property or any interest therein, all architectural plans or design specifications relating to the development thereof, and all claims and recorded or unrecorded interests therein, including any and all options to acquire such real property.

     “Release” means any release, threatened release, spill, emission, leaking, pumping, pouring, emitting emptying, escape, injunction, deposit, disposal, discharge, dispersal, dumping, leasing or migration of Hazardous Material in the indoor or outdoor environment, including through or in the air, soil, surface water, groundwater, or other subsurface media.

     “Retirement Plans” has the meaning set forth in Section 5.15(g).

     “Returns” has the meaning set forth in Section 5.18(a).

     “Scheduled Contracts” has the meaning set forth in Section 5.11.

     “Schedules” means the disclosure schedules to this Agreement.

     “Seller” has the meaning set forth in the Preamble hereto.

     “Seller Affiliate” means Seller, the Manager and any Affiliate of Seller. Without limiting the foregoing, Seller Affiliate shall not include any physician or Affiliate of a physician that is or has been a direct or indirect member of Seller.

- 7 -

     “Senior Management” means individuals holding the following titles with respect to the Hospital: Chief Executive Officer, who on the date hereof is Don Jaffee; Compliance Officer, who on the date hereof is Brenda Condrick; Vice President of Clinical Services, who on the date hereof is Shanna Woyak; and Senior Vice President of Operations, MedCath Corporation, who on the date hereof is David Covert.

     “Survival Period” has the meaning set forth in Section 12.1.

     “Taxes” has the meaning set forth in Section 5.18(b).

     “Title Commitment” has the meaning set forth in Section 5.12

     “Title Company” means First American Title in Phoenix, Arizona.

     “Transition Patients” has the meaning set forth in Section 10.1.

     “Transition Patient Services” has the meaning set forth in Section 10.1.

     “Transition Services Agreement” has the meaning set forth in Section 11.10.

     “TRICARE” means the Department of Defense’s managed healthcare program for active duty military, active duty service families, retirees and their families and other beneficiaries.

     “Warn Act” shall have the meaning set forth in Section 10.3(b).

     1.2 Interpretation. In this Agreement, unless the context otherwise requires:

     (a) references to this Agreement are references to this Agreement and to the Exhibits and Schedules;

     (b) references to Articles and Sections are references to articles and sections of this Agreement;

     (c) references to any party to this Agreement shall include references to its respective successors and permitted assigns;

     (d) references to a judgment shall include references to any order, writ, injunction, decree, determination or award of any court or tribunal or arbitrator in a binding arbitration;

     (e) the terms “hereof,” “herein,” “hereby,” and derivative or similar words will refer to this entire Agreement;

     (f) references to any document (including this Agreement) are references to that document as amended, consolidated, supplemented, novated or replaced by the parties from time to time;

     (g) unless the context requires otherwise, references to any Law are references to that Law in effect from time to time (except for the representations and warranties in which

- 8 -

those references would also be to the date of this Agreement), and shall also refer to all rules and regulations promulgated thereunder;

     (h) the word “including” (and all derivations thereof) shall mean including, without limitation;

     (i) references to time are references to Mountain Standard or Daylight time (as in effect on the applicable day) unless otherwise specified herein;

     (j) the gender of all words herein include the masculine, feminine and neuter, and the number of all words herein include the singular and plural;

     (k) the terms “date hereof,” “date of this Agreement” and similar terms shall mean the date set forth in the opening paragraph of this Agreement; and

     (l) The section headings and subheadings in this Agreement and the Schedules are for convenience of reference only and shall not affect the meaning or interpretation of this Agreement or the express description of the Schedules.

     1.3 Schedules. Buyer and Seller hereby acknowledge and agree as follows:

     (a) the Schedules and any disclosures made in or by virtue of them are integral parts of this Agreement as if fully set forth in this Agreement and all statements appearing therein shall be deemed to be representations;

     (b) the fact that any items of information are contained in the Schedules shall not be construed as an admission of liability under any applicable law, or to mean that such information is required to be disclosed in or by this Agreement, or to mean that such information is material. Such information shall not be used as a basis for interpreting the terms “material,” “materially,” “materiality” or any similar qualification in the Agreement. Nothing in the Schedules constitutes an admission of any liability or obligation of Seller to any third party, nor an admission against Buyer’s interest;

     (c) items disclosed on one particular Schedule relating to one section of the Agreement are deemed to be constructively disclosed or listed on other Schedules relating to other sections of the Agreement to the extent it is reasonably apparent on the face of such other Schedules that such disclosure is applicable to such other Schedules;

     (d) the section headings and subheadings in the Schedules are for convenience of reference only and shall not be deemed to alter or affect the express description of the Schedules as set forth in this Agreement; and

     (e) nothing in the Schedules shall be deemed adequate to disclose an exception to a representation made in this Agreement unless the Schedule identifies the exception with reasonable particularity and, without limiting the generality of the foregoing, the mere listing of a document as an exception to any representation shall not be deemed to disclose the contents of such document as an exception to any representation unless an exception to a representation is reasonably apparent on its face from such listing , provided however, this subsection (e) shall not be interpreted to limit the terms of subsection (c ) above.

- 9 -

ARTICLE 2
SALE OF PURCHASED ASSETS AND CERTAIN RELATED MATTERS

     2.1 Sale of Purchased Assets. At Closing, but effective as of the Effective Time, and subject to the terms and conditions of this Agreement, other than the Excluded Assets, Seller shall sell, transfer, convey, assign and deliver to Buyer, and Buyer shall purchase from Seller, all rights, title, and interest in and to all assets of every description, and whether real, personal or mixed, tangible or intangible, owned or leased by Seller and held or used in the business or operation of the Hospital, including the following items (collectively, the “Purchased Assets”):

     (a) All Furniture and Equipment, including the Furniture and Equipment listed on Schedule 1.1C;

     (b) Good and marketable title in fee simple absolute to the Real Property owned by Seller, and, to the extent permitted by law, any rights of Seller against third parties under general warranty deeds, related to any such Real Property, together with all plants, buildings, structures, improvements, construction in progress, appurtenances, covenants, easements, servitudes and fixtures situated thereon, forming a part thereof, or in any manner belonging to or pertaining to such interests of Seller;

     (c) (i) All of the interest of Seller and its Affiliates in all Scheduled Contracts that are listed on Schedule 2.1(c), (ii) all De Minimis Contracts that relate primarily or exclusively to the operation of the Hospital, and (iii) all Contracts representing Capital Lease Obligations (collectively, the “Assumed Contracts”), but excluding the Excluded Contracts;

     (d) All Permits and Approvals issued or granted by Governmental Entities to the extent assignable under applicable Law and which are held or used by the Seller Affiliates and relate to the ownership, development and business or operation of the Hospital or the Purchased Assets (including any pending Permits and Approvals related to any Purchased Assets);

     (e) All computer hardware, software, and data processing equipment owned by Seller or used primarily in the business or operation of the Hospital or the operation of the Purchased Assets which, in the case of software, is listed on Schedule 2.1(e) unless it is a De Minimis Contract, and, to the extent assignable or transferable, all rights in all warranties of any manufacturer or vendor with respect thereto;

     (f) All Inventory;

     (g) Assumable prepaid expenses to the extent of the benefit to Buyer after the Effective Time, claims for refunds and rights to offset in respect thereof (in each case to the extent included in the Final NWC Calculation);

     (h) To the extent transferable or assignable under applicable Law, all financial, patient, employee and medical staff records held or used by Seller or any Seller Affiliates primarily or exclusively in the business or operation of the Hospital (but specifically excluding any records maintained by Affiliates of Seller in connection with the provision of services by such Affiliates for the benefit of Seller which are not required for the operation of the Hospital after Closing);

- 10 -

     (i) All Intellectual Property, including Seller’s rights in the name Arizona Heart Hospital;

     (j) Seller’s goodwill in respect of the Purchased Assets and the Hospital;

     (k) Any insurance proceeds relating to the Purchased Assets to the extent provided in Section 11.8; and

     (l) All tax records related to the business, operation or ownership of the Hospital including ad valorem and sales and use Tax returns and records (but specifically excluding income Tax returns, franchise Tax returns and supporting materials for such returns such as working papers).

     2.2 Excluded Assets. Notwithstanding anything to the contrary, Seller is not selling, and Buyer is not purchasing the following assets which shall remain the property of Seller after the Effective Time (the “Excluded Assets”):

     (a) All restricted and unrestricted cash and cash equivalents, including investments in marketable securities, certificates of deposit, bank accounts and promissory notes, except to the extent such assets are included in the determination of the Final NWC Calculation;

     (b) All (i) Contracts entered into by MedCath Corporation or MedCath Incorporated for the benefit of Seller and one or more other hospitals which other hospitals are unrelated to the operation of the Hospital, (ii) Contracts with managed care organizations, health maintenance organizations, insurers and similar third party payors (except to the extent set forth on Schedule 2.1(c)); provided, that, subject to the terms and conditions set forth in the Confidentiality Agreement, Seller shall make such Contracts available for inspection by an independent third party designated by Buyer, (iii) Contracts that are both not listed on Schedule 5.11 and that are not De Minimis Contracts that relate to the operations of the Hospital, (iv) the Corporate Integrity Agreement described in Schedule 5.17, and (v) Contracts listed as Excluded Contracts on Schedule 2.2(b) (collectively, the “Excluded Contracts”);

     (c) The corporate record books, minute books, and corporate seals and all records of any kind that Seller is required by Law to retain in its own possession together with those records maintained by Seller with respect to its Affiliates;

     (d) Such other property and assets, if any, specifically described on Schedule 2.2(d);

     (e) Any claims or rights against third parties related to the Purchased Assets (including the Assumed Contracts), contractual or otherwise, accruing or arising prior to the Effective Time, except to the extent (i) included in the determination of the Final NWC Calculation, or (ii) such claim or right would also relate to a period after the Effective Time, but only to the extent such right or claim relates to periods after the Effective Time;

     (f) All rights to settlement and retroactive adjustments, if any, for open cost reporting periods ending prior to the Effective Time (whether open or closed) arising from or against the U.S. Government under the terms of the Medicare program or TRICARE and

- 11 -

against any state under its Medicaid program and against any third-party payor programs that settle on a cost report basis (“Agency Receivables”);

     (g) All rights of Seller under this Agreement or any agreement contemplated hereby;

     (h) All (i) claims for refunds of Taxes and all other Tax assets for periods prior to the Effective Time, (ii) Federal and State income tax returns for periods prior to the Effective Time, and (iii) books and records created for the purpose of complying with Federal and State Tax Laws;

     (i) All data processing equipment, proprietary computer software and Intellectual Property utilized in connection with the provision of services by Affiliates of Seller for the benefit of Seller that are listed on Schedule 2.2(i);

     (j) All accounts receivable of Seller, and all rights to payment, whether billed or unbilled, recorded or unrecorded, accrued and existing, whether or not written off, in connection with the operation of the Hospital;

     (k) That portion of the names and symbols used in connection with the operation and marketing of the Hospital which is the name “MedCath” or any variants thereof;

     (l) Any proprietary information contained in (i) Seller’s employee or operation manuals or (ii) any films or videos used by Seller for operational or training purposes;

     (m) All intercompany accounts of Seller and its Affiliates;

     (n) All of Seller’s insurance proceeds arising in connection with the operation of the Hospital or the Purchased Assets prior to the Effective Time, except to the extent provided in Section 11.8;

     (o) All assets used by Seller and its Affiliates in rendering corporate services to the Seller Affiliates or the Hospital that are located outside the Hospital, except to the extent such assets are reflected on the Baseline Balance Sheet;

     (p) Any assets used or operated by MedCath Corporation or MedCath Incorporated on a company-wide or region-wide basis that are located outside of the Hospital, except to the extent such assets are reflected on the Baseline Balance Sheet;

     (q) To the extent permitted by Sections 7.2 and 7.3 hereof, all assets disposed of or exhausted prior to the Effective Time, including Inventory, prepaid expenses and Furniture and Equipment, except to the extent such assets are included in the determination of the Final NWC Calculation; and

     (r) All provider numbers and related agreements related to any Government Programs and TRICARE.

- 12 -

     2.3 Assumed Liabilities. At Closing, but effective as of the Effective Time, Buyer agrees to assume the future payment and performance of the following liabilities of Seller and its Affiliates (collectively, the “Assumed Liabilities”):

     (a) all obligations and liabilities that arise or accrue on or after the Effective Time under the Assumed Contracts;

     (b) the Capital Lease Obligations;

     (c) subject to Section 2.9, ad valorem and personal property Taxes not yet due and payable for calendar year in which the Closing occurs;

     (d) obligations and liabilities as of the Effective Time in respect of (i) accrued paid time off of Continuing Employees (including employer FICA and any other estimated employer taxes thereon) (the “Accrued PTO”), but only to the extent such Accrued PTO is included in the determination of the Final NWC Calculation; and (ii) obligations and liabilities assumed by Buyer under Section 10.3 and any related payroll Taxes;

     (e) the Permitted Encumbrances; and

     (f) one-half of any escrow fees or any state or local recording fees relating to the Real Estate which may arise upon the consummation of the transactions contemplated herein.

     2.4 Excluded Liabilities. Except as expressly provided to the contrary in Section 2.3 with respect to Assumed Liabilities, Buyer is not obligated to pay or assume any liability of any type or nature, including the following, whether fixed or contingent, recorded or unrecorded, known or unknown (collectively, the “Excluded Liabilities”):

     (a) current liabilities, accounts payable, long-term liabilities (including capital leases), and all indebtedness and obligations or guarantees of Seller, except to the extent included in the Final Capital Lease Obligations Calculation or the determination of the Final NWC Calculation;

     (b) any obligation or liability accruing or arising during the period prior to the Effective Time in connection with (i) any Assumed Contract, (ii) the operation of the Hospital, including all malpractice and general liability claims, whether or not same are pending, threatened, known or unknown prior to Closing, or (iii) any Governmental Programs or other third-party payor programs, including recoupment of previously paid or reimbursed amounts;

     (c) any obligation or liability accruing, arising out of, or relating to any (i) Excluded Contract, (ii) Seller Plan, or (iii) Excluded Asset;

     (d) (i) any federal, state or local Tax obligations of Seller and its Affiliates, including any income Tax, any franchise Tax, any Tax recapture and any sales and/or use Tax and any payroll or withholding Tax (other than any ad valorem and personal property Taxes) that are not included in the Final NWC Calculation or prorated as of the Effective Time), and (ii) federal, state or local income Tax obligations or liabilities of Seller and its Affiliates resulting from the consummation of the transactions contemplated by this Agreement;

- 13 -

     (e) any state and local transfer, sales and recording fees and similar Taxes which may arise upon the consummation of the transactions contemplated herein (including, for the avoidance of doubt, any Taxes measured by income or gain), but excluding one-half of any escrow fees or any state or local recording fees relating to the Real Estate which may arise upon the consummation of the transactions contemplated herein;

     (f) any obligation or liability for claims by or on behalf of employees of Seller and its Affiliates relating to periods prior to the Effective Time, including liability for any pension, profit sharing, deferred compensation, or any other employee health and welfare benefit plans, liability for any EEOC claim and any discrimination or retaliation claim, wage and hour claim, unemployment compensation claim or workers’ compensation claim, and liability for all employee wages and benefits, including sick, vacation and holiday pay and Taxes or other liability related thereto in respect of employees of Seller and its Affiliates, except to the extent that accruals for such obligations are included in the determination of the Final NWC Calculation;

     (g) any obligation or liability under the Environmental Laws for clean-up or remediation costs or expenses, or Losses for any Environmental Condition which existed or occurred prior to the Effective Time, except to the extent such obligation, liability or Environmental Condition is exacerbated after the Effective Time by Buyer’s gross negligence or intentional misconduct;

     (h) any obligation or liability accruing, arising out of, or relating to any federal, state or local investigations of, or claims or actions against, Seller or any of its Affiliates or any of their employees, medical staff, agents, vendors or representatives which existed or occurred prior to the Effective Time; and

     (i) any obligation or liability accruing, arising out of or relating to any violation of, or alleged violation of, or non-compliance with, or any alleged non-compliance with, any Law pertaining to the Purchased Assets, the Hospital or the operation thereof, which existed or occurred prior to the Effective Time with respect to the period prior to the Effective Time.

     2.5 Purchase Price. Subject to the terms and conditions hereof, in reliance on the representation and warranties herein set forth and as consideration for the sale and purchase of the Hospital and the Purchased Assets set forth herein, in addition to assuming the Assumed Liabilities, Buyer shall tender to Seller an amount equal to the Final Cash Purchase Price. On the Closing Date, Buyer shall wire transfer an amount equal to the Interim Cash Purchase Price in immediately available federal funds to an account designated by Seller in writing at least five business days prior to Closing. The amount of the Interim Cash Purchase Price will be further and finally adjusted and settled after Closing as provided in Section 2.7.

     2.6 Interim Cash Purchase Price. At least five business days prior to the Closing Date Seller shall deliver to Buyer (i) the Interim Balance Sheet, (ii) the Interim NWC Calculation and (iii) the Interim Capital Lease Obligations Calculation, including the delivery of all back-up materials as may be reasonably requested by Buyer to support the calculations. Based upon such exchange of information, the parties shall determine, calculate, and agree, in writing, upon the Interim Cash Purchase Price.

- 14 -

     2.7 Final Cash Purchase Price. Not more than 45-days after the Closing Date Seller shall deliver to Buyer (i) the Closing Balance Sheet, (ii) the Final NWC Calculation and (iii) the Final Capital Lease Obligations Calculation, including the delivery of all back-up materials as may be reasonably requested by Buyer to support the calculations. Subject to Section 2.8, based upon such exchange of information, the parties shall determine, calculate and agree, in writing, upon the Final Cash Purchase Price.

     2.8 Dispute of Adjustments/Reconciliation of Final Cash Purchase Price. Within 30-days after the date on which Buyer has received the information to be provided by Seller pursuant to Section 2.7, Buyer shall, in a written notice to Seller, either accept or describe in reasonable detail any proposed adjustments to the calculations exchanged and the reasons therefor, and shall include pertinent calculations. If Buyer fails to deliver notice of acceptance or objection to such calculations within such 30-day period, then Buyer shall be deemed to have accepted the calculations presented by Seller. In the event that Buyer and Seller are not able to agree on the Final Cash Purchase Price within 30-days from and after the receipt by Seller of any objections raised by Buyer, Buyer and Seller shall each have the right to require that such disputed determination be submitted to PricewaterhouseCoopers for computation or verification of accounting issues (not legal issues) in accordance with the provisions of this Agreement. The results of such accounting firm’s report shall be binding upon Buyer and Seller, and such accounting firm’s fees and expenses for each disputed determination shall be borne equally by the parties. Appropriate payment shall be made by Buyer or Seller, as appropriate, by wire transfer of immediately available federal funds promptly upon (and in all events within five business days after) agreement between Seller and Buyer on the Final Cash Purchase Price or determination of the Final Cash Purchase Price in accordance with this Section as follows: either (i) Buyer shall pay Seller the amount by which the Final Cash Purchase Price exceeds the Interim Cash Purchase Price or (ii) Seller shall pay Buyer the amount by which the Interim Cash Purchase Price exceeds the Final Cash Purchase Price. At all reasonable times following delivery by Seller of the information and calculations required by Section 2.7, Seller shall make available to Buyer and its agents all books and records of Seller related to the determination of the Interim Cash Purchase Price and the Final Cash Purchase Price, including all accounting work papers and journal entries underlying the determination of the Interim Cash Purchase Price and the Final Cash Purchase Price or any component thereof. Any amounts due under this Section 2.8 shall bear interest from the date due hereunder until paid at a rate equal to the Applicable Rate per annum.

     2.9 Proration. To the extent feasible at the Closing, Buyer and Seller shall prorate as of the Effective Time, in accordance with their respective obligations herein, any costs or payments relating to the Purchased Assets that relate to periods both before and after the Effective Time which become due and payable after the Closing Date with respect to (i) the Assumed Contracts, (ii) ad valorem or similar Taxes, duties or fees, if any, on the Real Property, (iii) personal property Taxes on the Purchased Assets, and (iv) all utilities servicing the Hospital, including water, sewer, telephone, electricity and gas service, in each case to the extent not included in the determination of the Final NWC Calculation. Any above-described obligations which are not known at least five (5) business days prior to the Closing Date shall be similarly apportioned, subject to the above, and paid by the responsible party as soon as practicable after the Closing.

     2.10 Inventory. Seller, accompanied by a representative of Buyer, shall conduct a physical inventory of the Inventory as near in time as possible to the Effective Time, with the results of such physical inventory to be adjusted to the Effective Time. Seller shall provide to Buyer a copy of Seller’s policies and procedures to be utilized by Seller in taking the inventory not less than five business days prior to conducting the physical inventory. Seller shall provide Buyer with at least five

- 15 -

business days advance notice of the taking of the physical inventory and Buyer shall have the right to observe the taking of such inventory as set forth above. All inventory items shall be valued at the lesser of cost or current market value. The parties acknowledge that the inventory to be taken pursuant to this Section 2.10 may not be conducted until immediately prior to the Closing Date and, as such, the results of such inventory may not be available until some time after the Closing Date. Accordingly, the parties agree that for purposes of the Interim Cash Purchase Price, the Interim NWC Calculation shall include the book value of the Inventory with respect to the operation of the Hospital as reflected on the Baseline Balance Sheet. For purposes of the Final Cash Purchase Price, the portion of Net Working Capital attributable to the Inventory shall be the value of the Inventory as determined pursuant to this Section 2.10, excluding any inventory (i) that is determined by Seller (during the physical inventory) to be damaged, obsolete or otherwise no longer usable, including without limitation because such Inventory has expired or are sample items, or (ii) that is consigned and therefore is owned by a third party.

ARTICLE 3
CLOSING

     3.1 Closing. Subject to the satisfaction or waiver by the appropriate party of all the conditions precedent to Closing specified in Articles 8 and 9, the consummation of the sale and purchase of the Hospital and the Purchased Assets and the other transactions contemplated by and described in this Agreement (the “Closing”) shall take place at the offices of Moore & Van Allen PLLC, Suite 4700, 100 North Tryon Street, Charlotte, North Carolina 28202, or by facsimile transmission and United States or overnight mail of the originally executed documents, on such date which shall be promptly following the satisfaction and/or waiver of the conditions set forth in Articles 8 and 9 as reasonably agreed to by Buyer and Seller, or at such other date and/or at such other location as the parties hereto may mutually designate in writing (the “Closing Date”). The parties shall use commercially reasonable efforts to cause the conditions set forth in Articles 8 and 9 to be satisfied so that a pre-closing will occur on September 30, 2010 (but the Interim Cash Purchase Price and the transfer of title to the Purchased Assets will not be delivered, and the deed to the Owned Real Property will not be recorded, until the later to occur of the Closing or October 1, 2010). For all purposes, the Closing shall be deemed to be effective as of 12:01 a.m. local Phoenix, Arizona time on October 1, 2010 (the “Effective Time”).

          In the event that that the Closing does not take place on or before October 1, 2010 but occurs on or prior to October 15, 2010, then the parties shall reasonably agree on appropriate amendments, if any, to this Agreement to reflect such Closing Date but to continue to make the Effective Time as of 12:01 a.m. local Phoenix, Arizona time on October 1, 2010. In the event that the Closing does not take place on or before October 15, 2010 but it does occur on or prior to the Drop Dead Date, then subject to the other terms of this Agreement, it is anticipated that the Closing Date shall be on October 31, 2010 and in such event the Effective Time shall be deemed to be as of 12:01 a.m. local Phoenix, Arizona time on November 1, 2010.

     3.2 Actions of Buyer at Closing. At the Closing and unless otherwise waived in writing by Seller, Buyer shall deliver to Seller the following:

     (a) An amount equal to the Interim Cash Purchase Price by wire transfer of immediately available funds to an account designated by Seller;

- 16 -

     (b) One or more Assignments of Contracts and Assumption of Liabilities duly executed by Buyer, pursuant to which Buyer shall assume the future payment and performance of the Assumed Contracts and the Assumed Liabilities;

     (c) Copies of resolutions duly adopted by the board of directors of Buyer, authorizing and approving Buyer’s performance of the transactions contemplated hereby and the execution and delivery of this Agreement and the documents described herein, certified as true and of full force and effect as of Closing, by the appropriate officers of Buyer;

     (d) A certificate of Buyer certifying that the conditions set forth in Sections 8.1 and 8.3 have been satisfied;

     (e) Certificates of incumbency for the respective officers of Buyer and Vanguard Health Systems, Inc. executing this Agreement and any other document contemplated herein dated as of the Closing Date;

     (f) Certificates of existence and good standing of Buyer from its state of organization dated the most recent practical date prior to Closing;

     (g) The Transition Services Agreement, duly executed by Buyer; and

     (h) Such other instruments and documents Seller reasonably deems necessary to effect the transactions contemplated hereby.

     3.3 Actions of Seller at Closing. At the Closing and unless otherwise waived in writing by Buyer, Seller shall deliver to Buyer the following:

     (a) Subject only to the Permitted Encumbrances, deeds containing special warranty of title, duly executed by Seller in recordable form, conveying to Buyer good and marketable fee simple title to the Real Property along with an affidavit of value duly executed by Seller, which deed and affidavit of value shall be in substantially the same form as the forms of Exhibit B and Exhibit C attached hereto;

     (b) One or more assignments of lease, duly executed by Seller or one of its Affiliates, assigning to Buyer Seller’s interest as lessor under or sublessor under Contracts that lease space to third parties;

     (c) One or more Bills of Sale and Assignment, duly executed by Seller transferring to Buyer valid title to all tangible assets which are a part of the Purchased Assets and valid title to all intangible assets which are a part of the Purchased Assets, free and clear of all Encumbrances other than the Assumed Liabilities and the Permitted Encumbrances;

     (d) Assignments of Contracts and Assumption of Liabilities duly executed by Seller assigning to Buyer Seller’s interest in any Assumed Contracts and copies of any third party consents (and, if applicable, estoppel certificates for real estate leases containing the statements prescribed under any such real estate lease) received by Seller in connection with such Assumed Contracts; provided, however, that obtaining a third party consent to the assignment of an Assumed Contract shall not be a condition to Closing unless it is a Material Consent set forth on Schedule 1.1D.

- 17 -

     (e) Copies of resolutions duly adopted by Seller and the Manager, authorizing and approving Seller’s performance of the transactions contemplated hereby and the execution and delivery of this Agreement and the documents described herein, certified as true and in full force and effect as of Closing by an appropriate officer of the Manager;

     (f) A certificate of Seller certifying that the conditions set forth in Section 9.1 and Section 9.4 have been satisfied;

     (g) Certificates of incumbency for the respective officers of Seller, Manager and MedCath Corporation executing this Agreement and any other document contemplated herein dated as of the Closing Date;

     (h) Certificates of existence and good standing of Seller and Manager from their respective states of organization dated the most recent practical date prior to Closing and, to the extent reasonably available during the time between the date of this Agreement and the Closing Date, state and local tax clearance certificates of Seller and Manager;

     (i) A FIRPTA certificate, executed by Seller certifying Seller’s U.S. taxpayer identification number and that Seller is not a foreign Person, within the meaning of Section 1445 of the Code in the form of Exhibit D attached hereto;

     (j) The Transition Services Agreement, duly executed by the appropriate Affiliate of Seller;

     (k) A list of source or access codes to computers, combinations to safe(s), and the location or keys to safe deposit boxes, if any; and

     (l) Such other instruments and documents as Buyer reasonably deems necessary to effect the transactions contemplated hereby.

     3.4 Additional Acts. From time to time after Closing, Seller shall execute and deliver such other instruments of conveyance and transfer, and take such other actions as Buyer reasonably may request, to convey and transfer full right, title and interest to, vest in, and place Buyer in legal and actual possession of, any and all of the Purchased Assets. Seller shall also furnish Buyer with such information and documents in its possession or under its control, or which Seller can execute or cause to be executed, as will enable Buyer to prosecute any and all petitions, applications, claims and demands relating to or constituting a part of the Purchased Assets or the Assumed Liabilities.

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER

     As of the date hereof and as of the Closing Date (except to the extent any of the following speaks as of a specific date, such as the date hereof), Buyer represents and warrants to Seller the following:

     4.1 Organization, Qualification and Capacity. Buyer is a corporation duly organized and validly existing in good standing under the Laws of the State of Delaware and is duly qualified and authorized to transact business in the State of Arizona. The execution and delivery by Buyer of this

- 18 -

Agreement and the documents described herein, the performance by Buyer of its obligations under this Agreement and the documents described herein and the consummation by Buyer of the transactions contemplated by this Agreement and the documents described herein have been duly and validly authorized and approved by all necessary actions on the part of Buyer, none of which actions have been modified or rescinded and all of which actions remain in full force and effect.

     4.2 Powers; Consents; Absence of Conflicts With Other Agreements, Etc. The execution, delivery and performance of this Agreement and the documents described herein by Buyer and the consummation by Buyer of the transactions contemplated by this Agreement and documents described herein, as applicable:

     (a) are not in contravention or violation of the terms of the certificate of incorporation, limited partnership agreement, operating agreement or similar governing document of Buyer;

     (b) except for material Approvals and Permits needed to operate the Hospital, Buyer and its Affiliates do not need to make any filing or registration with any Governmental Entity; and

     (c) will not conflict in any material respect with, nor result in any material breach or contravention of, any material Contract to which Buyer is a party or by which Buyer is bound.

     4.3 Binding Agreement. This Agreement and all documents to which Buyer or any of its Affiliates will become a party hereunder are and will constitute the valid and legally binding obligations of Buyer and/or such Affiliates and are and will be enforceable against it in accordance with the respective terms hereof or thereof, except as enforceability may be restricted, limited or delayed by applicable bankruptcy or other Laws affecting creditors’ rights generally and except as enforceability may be subject to general principles of equity.

     4.4 Sufficient Resources. Buyer has access to sufficient financial resources, and at the Closing Buyer will possess sufficient funds, to permit Buyer to deliver the Interim Cash Purchase Price in accordance with Section 2.5 and the Final Cash Purchase Price in accordance with Section 2.7, subject to satisfaction of the conditions precedent to Buyer’s obligations to close the transactions contemplated by this Agreement.

     4.5 Litigation. There is no claim, action, suit, proceeding or investigation pending or, to the knowledge of Buyer, threatened against or affecting Buyer that has or would reasonably be expected to have a material adverse effect on the ability of Buyer to perform this Agreement or any aspect of the transactions contemplated hereby.

     4.6 Statements True and Correct. This Agreement and the Schedules prepared by Buyer do not include, as of the date hereof and as of the Closing Date, any untrue statement of a material fact or omit to state any material fact necessary to make the statements made in this Agreement with respect to Buyer not misleading.

     4.7 No Other Representations and Warranties. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS ARTICLE 4, BUYER MAKES NO EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY, AND BUYER HEREBY DISCLAIMS ANY SUCH REPRESENTATION OR WARRANTY WITH RESPECT TO THE

- 19 -

EXECUTION AND DELIVERY OF THIS AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLER

     As of the date hereof and as of the Closing Date (except to the extent any of the following speaks as of a specific date, such as the date hereof), Seller represents and warrants to Buyer the following:

     5.1 Incorporation, Qualification and Capacity. Seller is a limited liability company duly organized and in existence under the Laws of the State of Arizona. The Manager is a corporation duly organized and validly existing in good standing under the laws of the State of North Carolina and is duly qualified and authorized to transact business in the State of Arizona. Seller is duly authorized, qualified to do business and in good standing under all applicable Laws of any Governmental Entity having jurisdiction over the business and operation of the Purchased Assets to own its properties and conduct its business in the place and manner now conducted. The execution and delivery by Seller of this Agreement and the documents described herein, the performance by Seller of its obligations under this Agreement and the documents described herein and the consummation by Seller of the transactions contemplated by this Agreement and the documents described herein have been duly and validly authorized and approved by all necessary corporate actions on the part of Seller and corporate actions on the part of the Manager, none of which actions have been modified or rescinded and all of which actions remain in full force and effect.

     5.2 Powers; Consents; Absence of Conflicts With Other Agreements, Etc. The execution, delivery and performance of this Agreement and the documents described herein by Seller of the transactions contemplated by this Agreement and documents described herein, as applicable:

     (a) are not in contravention or violation of the terms of the operating agreement of Seller;

     (b) except as set forth on Schedule 5.2, do not require any Approval or Permit of, or filing or registration with, or other action by, any Governmental Entity to be made or sought by Seller or any of its Affiliates;

     (c) assuming the Approvals and Permits set forth on Schedule 5.2 are obtained, will not conflict in any material respect with, or result in any violation of or default under (with or without notice or lapse of time or both), or give rise to a right of termination, cancellation, acceleration or augmentation of any obligation or to loss of a material benefit under, or result in the creation of any material Encumbrance (other than Permitted Encumbrances) upon any of the Purchased Assets under (i) any Assumed Contract or (ii) any Law applicable to the operation of the Hospital or any of the Purchased Assets; provided, that no representation or warranty is given with respect to consents or approvals required to assign any of the Assumed Contracts;

     (d) do not violate any Law to which the Seller is subject with respect to the Purchased Assets; and

- 20 -

     (e) do not conflict with or result in a breach or violation of any material Contract to which Seller is a party or by which Seller is bound; provided, that no representation or warranty is made with respect to consents or approvals required to assign any of the Assumed Contracts.

     5.3 Affiliates and Minority Interests. Schedule 5.3 sets forth a true and complete list of (i) any subsidiaries of Seller, and (ii) any interest in another Person held by Seller.

     5.4 No Outstanding Rights. Except as set forth on Schedule 5.4, there are no outstanding rights (including any rights of first refusal or offer or rights of reverter), options, or Contracts made on Seller’s behalf giving any Person any current or future right to require Seller or any of its Affiliates or, following the Effective Time, Buyer, to sell or transfer to such Person or to any third party any of the Purchased Assets.

     5.5 Binding Agreement. This Agreement and all documents to which Seller will become a party hereunder are and will constitute the valid and legally binding obligations of Seller and are and will be enforceable against it in accordance with the respective terms hereof or thereof, except as enforceability may be restricted, limited or delayed by applicable bankruptcy or other Laws affecting creditors’ rights generally and except as enforceability may be subject to general principles of equity.

     5.6 Seller Financial Information.

     (a) Schedule 5.6 hereto contains the following financial statements and financial information (collectively, the “Historical Financial Information”):

     (i) unaudited balance sheets of the Hospital dated as of September 30, 2009 and as of the Baseline Balance Sheet Date (the “Baseline Balance Sheet”); and

     (ii) unaudited statements of operations of the Hospital for the twelve-month period ended on September 30, 2009 and for the three month period ended on the Baseline Balance Sheet Date.

Except as disclosed on Schedule 5.6, the financial statements included in the Historical Financial Information have been prepared, and the Additional Financial Statements have been and will be prepared, in accordance with GAAP in all material respects, applied on a consistent basis throughout the periods indicated and in a manner consistent with Seller’s accounting policies, and Seller has not changed any accounting policy or methodology since the applicable date thereof. Except as set forth on Schedule 5.6, the balance sheets contained in the Historical Financial Information present fairly, in all material respects, and the balance sheets in the Additional Financial Statements present fairly and will present fairly, in all material respects, the financial condition of the Hospital as of the dates indicated thereon, and the statements of operations contained in the Historical Financial Information present fairly, and the statements of operations contained in the Additional Financial Statements present fairly and will present fairly, in all material respects, the results of operations of the Hospital for the periods covered.

     (b) Except as set forth on Schedule 5.6 and except for (i) liabilities that are disclosed in this Agreement, Contracts entered into in connection herewith and schedules and exhibits hereto and thereto, and (ii) liabilities that were incurred after the Baseline Balance Sheet Date in the ordinary course of business, as of the date hereof, there are no material liabilities of any nature of Seller or any of its Affiliates relating to the Hospital, the Purchased

- 21 -

Assets, or the Assumed Liabilities that are required in accordance with GAAP to be disclosed on the financial statements of Seller.

     5.7 Permits and Approvals.

     (a) Set forth on Schedule 5.7 is a true and complete description of all Permits and Approvals currently issued or granted by a Governmental Entity and owned or held by or issued to Seller in connection with the operation of the Hospital or the Purchased Assets, and such Permits and Approvals constitute all of the Permits and Approvals necessary for the conduct of the business and operation of the Hospital as currently conducted and the use of the Purchased Assets by Seller, all of which are in full force and effect.

     (b) The Hospital is in compliance in all material respects with all Permits and Approvals required by Law to be held by Seller. There is not now pending nor, to the knowledge of Seller, threatened in writing any action by or before any Governmental Entity to revoke, cancel, rescind, modify or refuse to renew any of such Permits and Approvals, and all of such Permits and Approvals are and shall be in good standing now and as of the Effective Time.

     5.8 Intellectual Property. Except for Intellectual Property constituting Excluded Assets:

     (a) Seller owns, is licensed or otherwise possesses all necessary rights to use, all Intellectual Property used in the Hospital or in connection with the Purchased Assets.

     (b) To the knowledge of Seller, there is no unauthorized use, disclosure, infringement or misappropriation of any Intellectual Property rights of Seller, or of any material Intellectual Property rights of any third party to the extent licensed by or through Seller, by any third party, including any employee or former employee of Seller, relating in any way to any of the Purchased Assets. Other than in the ordinary course of business or otherwise reflected in the Historical Financial Information, there are no royalties, fees or other payments payable by Seller or any of its Affiliates to any Person by reason of the ownership, use, sale or disposition of Intellectual Property related to any of the Purchased Assets.

     (c) Except as set forth on Schedule 5.8, Seller and its Affiliates are not nor will be as a result of the execution and delivery of this Agreement or any of the documents described herein or the performance of their obligations under this Agreement or any of the documents described herein, in material breach of any license, sublicense or other Contract relating to the Intellectual Property or the Intellectual Property rights of any third party related to any of the Purchased Assets; provided, that no representation or warranty is made with respect to the consents needed or obtained with respect to any license, sublicense or other Contract relating to the Intellectual Property.

     (d) Except as set forth on Schedule 5.8, neither Seller nor any of its Affiliates has any patents, registered or unregistered trademarks or service marks, or registered or unregistered copyrights related to any of the Purchased Assets. Except as set forth on Schedule 5.17, neither Seller nor any of its Affiliates has been served with process in any suit, action or proceeding which involves a claim of infringement of any patents, trademarks, service marks, copyrights or violation of any trade secret or other proprietary right of any third party related to any of the Purchased Assets. To the knowledge of Seller, the business of the

- 22 -

Hospital does not infringe any Intellectual Property or other proprietary right of any third party. Neither Seller nor any Affiliate of Seller has brought any action, suit or proceeding for infringement of Intellectual Property or breach of any license or Contract involving Intellectual Property related to any of the Purchased Assets against any third party.

     5.9 Medicare Participation/Accreditation.

     (a) The Hospital is a “provider” with valid and current provider agreements and with one or more provider numbers with the Government Programs. The Hospital is a “provider” with valid and current provider agreements and with one or more provider numbers with TRICARE or its successor programs. Except as set forth on Schedule 5.9, the Hospital is in compliance with the conditions of participation for the Government Programs in all material respects and has received all Approvals or qualifications necessary for capital reimbursement on the Purchased Assets. Except as set forth on Schedule 5.9, there is not pending, nor to the knowledge of Seller threatened, any proceeding or investigation under the Government Programs involving Seller, the Hospital or any of the Purchased Assets. The cost reports of Seller and the Hospital for the Government Programs and for payment or reimbursement of any other Agency Receivables for the fiscal years through 2009, required to be filed on or before the date hereof have been properly filed and are complete and correct in all material respects. Except as disclosed on Schedule 5.9, Seller is in material compliance with filing requirements with respect to cost reports of the Hospital. True and correct copies of all such reports for the two (2) most recent fiscal years of Seller and the Hospital have been furnished to Buyer. Except as disclosed on Schedule 5.9 and except for claims, actions and appeals in the ordinary course of business, there are no material claims, actions or appeals pending before any commission, board or agency, including any fiscal intermediary or carrier, Governmental Entity or the Administrator of the Centers for Medicare & Medicaid Services, with respect to any Government Program cost reports or claims filed on behalf of Seller with respect to the Hospital on or before the date of this Agreement, or any disallowances by any commission, board or agency in connection with any audit of such cost reports.

     (b) Except as disclosed on Schedule 5.9, all billing practices of Seller with respect to the Hospital to all third party payors, including the Government Programs and private insurance companies, are in material compliance with all applicable Laws, regulations and polices of such third party payors.

     (c) Seller has provided Buyer true and complete copies of the most recent Joint Commission accreditation survey report and deficiency list for the Hospital, if any, and each plan of correction, if any. Seller is duly accredited with no contingencies by the Joint Commission. Except as disclosed on Schedule 5.9, since January 1, 2007 there have been no events at the Hospital that constitute a “sentinel event” as defined by the Joint Commission or that constitute an immediate threat or jeopardy to patient health or safety. With respect to the Hospital, Seller has previously delivered to Buyer, a true and complete copy of the most recent Statement and Deficiencies and Plan of Correction on Form HCFA-2567; the most recent state licensing report and list of deficiencies, if any; the most recent fire marshal’s survey and deficiency list, if any, and the corresponding plans of correction or other responses.

     (d) Neither Seller nor any of its Affiliates nor to the knowledge of Seller, any partner, member, director, officer or employee of Seller nor any of its Affiliates, nor any agent acting on behalf of or for the benefit of any of the foregoing, has directly or indirectly in

- 23 -

connection with the Hospital: (i) offered or paid any remuneration, in cash or in kind, to, or made any financial arrangements with, any past, present or potential customers, past or present suppliers, patients, medical staff members, contractors or third party payors of Seller or the Hospital in order to obtain business or payments from such Persons except as permitted under applicable Law; or (ii) given or agreed to give, or is aware that there has been made or that there is any agreement to make, any gift or gratuitous payment of any kind, nature or description (whether in money, property or services) to any customer or potential customer, supplier or potential supplier, contractor, third party payor or any other Person other than in connection with promotional or entertainment activities in the ordinary course of business and is otherwise permitted by applicable Law.

     5.10 Regulatory Compliance. Except as set forth on Schedule 5.10, Seller is, and since January 1, 2007 Seller has been, in compliance in all material respects with all applicable statutes, rules, regulations and requirements of Governmental Entities having jurisdiction over the Hospital and the Purchased Assets and the business operation of the Hospital and the Purchased Assets. Seller has timely filed all forms, applications, reports, statements, data and other information required to be filed with Governmental Entities. To Seller’s knowledge, no action or proceeding alleging or based upon a violation of any Law (i) is currently pending, or (ii) if not currently pending and determined adverse to Seller, could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect. To Seller’s knowledge, since January 1, 2007 Seller has not been threatened by any Person with any action or proceeding alleging or based upon a violation of any Law. Except as described in Section 5.17, neither Seller nor Manager, nor any of their Affiliates are parties to or otherwise bound by (i) a corporate integrity agreement with the Office of Inspector General of the United States Department of Health and Human Services or written agreement with such Governmental Entity to establish or maintain a corporate integrity program applicable to the Hospital or the Purchased Assets, or (ii) a settlement or other agreement with any other Governmental Entity that imposes continuing obligations on the Hospital or the Purchased Assets or contains obligations that have not been fully discharged.

     5.11 Scheduled Contracts.

     (a) Attached hereto as Schedule 5.11 is a list of all Contracts to which Seller is a party or to which any of Seller Affiliates is a party with respect to the operation of the Hospital (this representation shall not be breached if a DeMinimis Contract is not listed on Schedule 5.11), including all provider network agreements, clinical affiliation agreements, medical director agreements, consulting agreements, management services agreements, professional services agreements, transfer agreements, recruitment agreements, employment agreements, real estate lease agreements, personal property lease agreements, supply agreements and software agreements, including the Excluded Contracts (other than De Minimis Contracts it being acknowledged that Schedule 5.11 includes certain Excluded Contracts such as those with managed care organizations, health maintenance organizations, insurers and similar third party payors). Schedule 5.11 clearly identifies those Contracts that are Excluded Contracts and that will not be assumed by Buyer. Contracts which are listed on Schedule 5.11 and not designated therein as an Excluded Contract are referred to herein as the “Scheduled Contracts.” Each Scheduled Contract (i) is a lawful, valid and legally binding obligation of the Seller or the applicable Affiliate of Seller, and is in full force and effect (or constitutes a month-to-month Contract under which goods or services are being provided after the expiration of its original term), and Seller or the applicable Affiliate of Seller has duly performed in all material respects its obligations under each Scheduled Contract to which it is a party to the extent that such

- 24 -

obligations to perform have accrued, and (ii) except for any breaches resulting from the failure to obtain the consent of the counterparty thereto to the assignment of same to Buyer, no material breach or default, alleged material breach or default, or event which would (with the passage of time, notice or both) constitute a material breach or default under any Scheduled Contract by Seller or the applicable Affiliate of Seller or, to the knowledge of Seller, and except as set forth on Schedule 5.11, any other party or obligor with respect thereto, has occurred, except to the extent said breach or default would not constitute a Material Adverse Effect. Seller has made available or delivered to Buyer true and correct copies of all Scheduled Contracts, including all amendments and supplements thereto.

     (b) To Seller’s knowledge, Seller has performed all material obligations relating to the Purchased Assets and the business of the Hospital, and is not in breach or default, nor do any circumstances exist which with or without notice or lapse of time, or both, would result in breach or default, nor is there any claim of such breach or default with respect to any obligation to be performed, under any Scheduled Contract, guaranty, indenture or loan agreement relating to the Purchased Assets or the business of the Hospital, which breach or default or its consequences might have a Material Adverse Effect on the Purchased Assets or the business of the Hospital.

     5.12 Encumbrances; Real Property.

     (a) There are no Encumbrances (other than Permitted Encumbrances) on the Purchased Assets. Seller owns the Purchased Assets and will convey such assets and fee simple interest in the Real Property and all buildings and improvements located thereon to Buyer subject to (i) any lien for Taxes not yet due and payable, (ii) liens securing the Capital Lease Obligations or the Assumed Liabilities, (iii) any lease obligations, including Seller’s obligations as lessor or landlord under any Scheduled Contract set forth on Schedule 5.11, which are assumed in writing by Buyer, (iv) all Encumbrances reflected on the survey described in Section 7.7(b) that are reasonably approved by Buyer and that do not materially interfere with the operations of the Purchased Assets in a manner consistent with the current use by the Seller, and (v) all Encumbrances designated as “Title Policy Permitted Encumbrances” as defined in Schedule 7.2(a) attached hereto (the foregoing items (i) through (v) being referred to herein as the “Permitted Encumbrances”). Seller agrees that title to the Real Property shall not be altered between the date of this Agreement and the Effective Time, except to the extent not restricted by Sections 7.2 and 7.3.

     (b) (i) All buildings and improvements located on the Real Property conform in all material respects with all applicable zoning regulations, building codes and restrictions, public health, platting, subdivision and other similar Laws and regulations, and, except as described on Schedule 5.12(b), Seller has not received written notice of an outstanding violation of any applicable ordinance or other Law, order, regulation or requirement, and has not received written notice of condemnation, lien, assessment or the like, relating to any part of the Real Property or the operation thereof; (ii) all of the Real Property is serviced by all necessary utilities, including water, sewage, gas, cable, electricity and telephone, and Seller is not aware of any inadequacies with respect to such utilities; (iii) to the knowledge of Seller, none of the buildings or improvements on the Real Property is located in a flood hazard area; (iv) all of the buildings and improvements located on the Real Property are fully accessible by public roads and, to the knowledge of the Seller, no fact or condition exists that would result in the termination of the current access to or from any building or improvement to any presently

- 25 -

existing highways and roads adjoining or situated on the Real Property; and (v) each building or improvement on the Real Property has direct access to a public street adjoining the Real Property.

     (c) Except as set forth on Schedule 5.12(c), no real property used in the business or operation of the Hospital is subject to a leasehold or subleasehold estate (in which Seller is the tenant or subtenant).

     (d) The Real Property comprises all of the real property owned or leased by Seller that is associated with or employed in the operation of the Hospital.

     (e) Except for those tenants in possession of the Real Property under the Scheduled Contracts described in Schedule 5.11, no Person other than Seller possesses, or claims possession of, adverse or not, any Real Property, whether as lessee, tenant at sufferance, trespasser or otherwise.

     5.13 Personal Property. Seller presently owns and will hold as of immediately prior to the Effective Time good and marketable title to all tangible personal property assets and valid title to all intangible assets included in the Purchased Assets free and clear of all Encumbrances, except Permitted Encumbrances and rights of owners under Assumed Contracts. All medical and leased equipment included within the Purchased Assets has been maintained in all material respects in accordance with the Hospital’s maintenance logs which are current and accurate in all material respects and which have been made available or delivered to Buyer.

     5.14 Insurance. Schedule 5.14 sets forth a true and complete list of all insurance policies or self insurance funds maintained by Seller as of the date of this Agreement covering the ownership and operation of the Purchased Assets or the Hospital, indicating the types of insurance, policy numbers, terms, identity of insurers and amounts and coverages (including applicable deductibles). All of such policies are now and will be until the Effective Time in full force and effect on an occurrence basis (with the exception of the Seller’s professional liability insurance which is in full force and effect on a claims-made basis) with no premium arrearages. Such policies of insurance shall not be assigned to Buyer as part of the Purchased Assets and Buyer acknowledges that all of the coverages listed on Schedule 5.14 with respect to the Purchased Assets will cease as of the Effective Time.

     5.15 Employee Benefit Plans.

     (a) Schedule 5.15 contains a true and complete list of all the following agreements, plans or other Contracts, covering any employee of the Hospital, which are presently in effect: (i) employee benefit plans within the meaning of Section 3(3) of ERISA, and (ii) any other employee benefit plan, program, policy, or arrangement, whether written or unwritten, formal or informal, which Seller currently sponsors, or to which Seller has any outstanding present or future obligations to contribute or other liability, whether voluntary, contingent or otherwise (collectively, the “Plans”). None of the Plans provide any post-employment medical or similar benefits except to the extent required by applicable Law. With respect to each Plan, the Seller has provided or made available to the Buyer a current, accurate and complete copy (or, to the extent no such copy exists, an accurate description) thereof and, to the extent applicable: (i) any related trust agreement or other funding instrument; (ii) the most recent determination letter, if applicable; (iii) any summary plan description and other material written communications (or a description of any material oral communications) by the Seller

- 26 -

concerning the extent of the benefits provided under a Plan; and (iv) for the most recent year (A) the Form 5500 and attached schedules, (B) audited financial statements, and (C) actuarial valuation report.

     (b) The Purchased Assets are not, and Seller does not reasonably expect them to become, subject to an Encumbrance imposed under the Code or under Title I or Title IV of ERISA including liens arising by virtue of Seller being a member of an ERISA Controlled Group.

     (c) Neither Seller nor any member of Seller’s ERISA Controlled Group has sponsored, contributed to or had an “obligation to contribute” (as defined in ERISA Section 4212) to a “multiemployer plan” (as defined in ERISA Section 4001(a)(3) or 3(37)(A)) on or after September 26, 1980, on behalf of any employees of the Hospital.

     (d) Neither Seller nor any member of Seller’s ERISA Controlled Group has at any time sponsored or contributed to a “single employer plan” (as defined in ERISA Section 4001(a)(14)) to which at least two or more of the “contributing sponsors” (as defined in ERISA Section 4001(a)(13)) are not members of the same ERISA Controlled Group.

     (e) Each Plan has been established and administered in all material respects in accordance with its terms, and in compliance with the applicable provisions of ERISA, the Code and other applicable Laws, rules and regulations. Except as set forth on Schedule 5.15, there are no material actions, audits or claims pending or, to Seller’s knowledge, threatened against Seller with respect to Seller’s maintenance of the Plans, other than routine claims for benefits. No non-exempt “prohibited transaction” (as such term is defined in Section 406 of ERISA and Section 4975 of the Code) or “accumulated funding deficiency” (as such term is defined in Section 302 of ERISA and Section 412 of the Code (whether or not waived)) has occurred with respect to any Plan.

     (f) Seller and each member of Seller’s ERISA Controlled Group have complied in all material respects with the continuation coverage requirements of Section 1001 of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, ERISA Sections 601 through 608 and Section 5000 of the Code.

     (g) All of Seller’s Plans that are intended to satisfy Section 401 of the Code (“Retirement Plans”) from which assets may be involved in a “direct rollover” (as defined in Section 401(a)(31) of the Code) to an employee benefit plan maintained by Buyer have obtained a favorable determination letter or opinion letter and have complied with the requirements of Section 401(a) of the Code. Seller has not incurred any current or projected liability in respect of post-employment or post-retirement health, medical or life insurance benefits for current, former or retired employees of Seller, except as legally required under Section 4980B of the Code or any other applicable Law.

     (h) Except as set forth on Schedule 5.15, no Plan exists that, as a result of the execution of the this transaction), could result in (i) severance pay or any increase in severance pay upon any termination of employment after the date of this Agreement; (ii) accelerate the time of payment or vesting or result in any payment or funding (though a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or result in any

- 27 -

other material obligation pursuant to, any of the Plan; or (iii) result in payments which would not be deductible under Section 280G of the Code.

     (i) Each Plan that is a “nonqualified deferred compensation plan” (as defined under Section 409A of the Code) has been operated and administered in compliance with Section 409A of the Code; and no compensation shall be includable in the gross income of any current or former employee, officer, director or consultant of Seller or any Affiliate as a result of the operation of Section 409A of the Code with respect to any applicable arrangements or agreements in effect prior to the Effective Time. Seller does not have any actual or potential liability with respect to any Plan subject to Code Section 409A, including, but not limited, any obligation to make any gross-up, make-whole, or additional payment with respect to taxes, interest, or penalties imposed under Section 409A of the Code.

     5.16 Hospital Employees and Employee Relations.

     (a) Except as set forth on Schedule 5.16(a), (i) there is no pending or, to Seller’s knowledge, threatened employee strike, work stoppage or labor dispute, (ii) to Seller’s knowledge, no union representation exists or is contemplated with respect to any Hospital Employees, no demand has been made for recognition by a labor organization by or with respect to any Hospital Employees, no union organizing activities by or with respect to any Hospital Employees are taking place, and none of the Hospital Employees is represented by any labor union or organization, (iii) no collective bargaining agreement exists or is currently being negotiated by Seller or any Seller Affiliate, (iv) there is no unfair labor practice claim against Seller or any Seller Affiliate before the National Labor Relations Board, or any strike, dispute, slowdown, or stoppage pending or, to Seller’s knowledge, threatened against or involving the Hospital and none has occurred, (v) Seller is in compliance in all material respects with all Laws and Contracts respecting employment and employment practices, labor relations, terms and conditions of employment, and wages and hours, (vi) neither Seller nor any Seller Affiliate is engaged in any unfair labor practices, (vii) there are no pending or, to Seller’s knowledge, threatened complaints or charges before any Governmental Entity regarding employment discrimination, safety or other employment-related charges or complaints, wage and hour claims, unemployment compensation claims, workers’ compensation claims or the like, and (viii) except as otherwise provided in this Agreement, neither Buyer nor any Buyer Affiliate will be subject to any claim or liability for severance pay as a result of the consummation of the transactions contemplated by this Agreement through the Effective Time.

     (b) Schedule 5.16(b) sets forth a list of all of the employees of Seller and each other Seller Affiliate who works primarily or exclusively for the benefit of the business conducted at the Hospital (the “Hospital Employees”) as of the date of such Schedule and the following information for each Hospital Employee: current salary or wage rate, accrued paid time off, periods of service, date of hire, department and job title or other summary of the responsibilities as well as an indication as to whether such Hospital Employee is part-time, full-time or on a leave of absence and the type of leave; provided, that salary and wage rate information may be excluded from Schedule 5.16(b) so long as Seller delivers a true and correct schedule of such salary and wage rate information to Buyer concurrently with the delivery of Schedule 5.16(b) to Buyer. Except as set forth in Schedule 5.16(b), as of the date hereof, all wages and remuneration of any kind, including without limitation all commissions and bonuses, payable to Hospital Employees, consultants, or contractors of Seller for services performed on or prior to the date hereof have been paid in full (or accrued in full on the

- 28 -

Baseline Balance Sheet) and there are no outstanding agreements, understandings or commitments of Seller with respect to any unpaid wages and remuneration of any kind, including without limitation commissions, bonuses or increases in compensation.

     (c) All necessary visa or work authorization petitions have been timely and properly filed on behalf of any employees requiring a visa stamp, I-94 status document, employment authorization document or other immigration document to legally work in the United States, and all paperwork retention requirements with respect to such applications and petitions have been met. No employee has ever worked without employment authorization from the Department of Homeland Security or any other Government Entity that must authorize such employment and Seller has complied with applicable immigration laws with respect to the employment of foreign nationals. Seller has timely and properly completed I-9 forms for all employees hired since the effective date of the Immigration Reform and Control Act of 1986 and has lawfully retained and re-verified all such I-9 forms. There are no actions or proceedings pending or threatened against Seller relating to Seller’s compliance with local, state or federal immigration regulations, including compliance with immigration laws. Seller has not received any letters from the Social Security Administration regarding the failure of an employee’s social security number to match his or her name in the Social Security Administration database and Seller has not received any letters or other correspondence from the Department of Homeland Security or other Governmental Entity regarding the employment authorization of any employees of Seller.

     5.17 Litigation or Proceedings.

     (a) Schedule 5.17 contains an accurate list and summary description of all litigation and proceedings which are currently pending with respect to the Hospital, the Purchased Assets or the business conducted thereon to which Seller is a party. Seller is a party to the Corporate Integrity Agreement described on Schedule 5.17 and to no other Corporate Integrity Agreement. The Corporate Integrity Agreement is an Excluded Contract. Except to the extent set forth on Schedule 5.17, there are no material claims, actions, suits, audits, compliance reports or information requests, proceedings or investigations pending, or to the knowledge of Seller, threatened against or affecting Seller or the Purchased Assets or the business conducted thereon.

     (b) Other than as set forth on Schedule 5.17, neither Seller nor any other Seller Affiliate is subject to any outstanding judgment, order or decree with respect to the Purchased Assets.

     (c) There is no claim, action, suit, proceeding or investigation pending or, to the knowledge of Seller, threatened against or affecting Seller that has or would reasonably be expected to have a Material Adverse Effect on Seller’s ability to perform this Agreement or any aspect of the transactions contemplated hereby.

     5.18 Tax Matters. Except as set forth on Schedule 5.18:

     (a) All Tax returns, including income Tax returns, sales Tax returns, employee payroll Tax returns, employee unemployment Tax returns and franchise Tax returns, for periods prior to the Effective Time which are required have been filed by Seller (collectively “Returns”) have been filed within the time (including any valid extensions thereof) and in the

- 29 -

manner provided by Law, and all Returns are or will be true and correct and accurately reflect the Tax liabilities of Seller in all material respects, and all amounts shown due on such Tax returns have been paid on a timely basis.

     (b) All federal, state, county and local income, franchise, margin, payroll, withholding, property, sales, use and all other taxes, penalties, interest and any other statutory additions (“Taxes”) which have become due with respect to the Purchased Assets have been timely paid.

     (c) There are no Tax liens on any of the Purchased Assets other than liens for Taxes not yet due.

     (d) Proper and accurate amounts have been withheld by Seller for all periods prior to the Effective Time in compliance with the payroll Tax and other withholding provisions of all applicable Laws, and all of such amounts have been duly and validly remitted to the proper taxing authority.

     (e) No notice of a claim or pending investigation has been received, or to the knowledge of Seller, has been threatened, by any state, local or other jurisdiction in which Seller does not currently file Tax returns, alleging that Seller has a duty to file Tax returns and pay Taxes or is otherwise subject to the taxing authority of such jurisdiction, nor has Seller received any notice or questionnaire from such jurisdiction which suggests or asserts that Seller may have a duty to file such returns and pay such Taxes, or otherwise is subject to the taxing authority of such jurisdiction.

     5.19 Environmental Matters. Except as set forth on Schedule 5.19:

     (a) Seller is and for the past five years has been in compliance in all material respects with, and the Real Property, the Purchased Assets and all improvements on the Real Property are and have been for the past five years in compliance in all material respects with, all Environmental Laws.

     (b) Seller has obtained or has taken appropriate steps, as required by Environmental Laws, to obtain all environmental, health and safety permits, consents, licenses and other authorizations necessary for the operation of its respective business and the Hospital, the Purchased Assets and the ownership and/or operation of the Real Property (collectively, “EHS Permits”), all EHS Permits are in good standing, and the Seller is currently and has at all times been in compliance in all material respects with all terms and conditions of EHS Permits. A list of such EHS Permits is set forth on Schedule 5.19.

     (c) Seller has caused no conditions that could reasonably be expected to result in any material liability under any Environmental Law with respect to the Hospital or the Real Property, nor is Seller responsible for any liability of any other Person under any Environmental Law with respect to the Hospital or the Real Property.

     (d) There are no pending or, to the knowledge of Seller, threatened actions, suits, orders, claims, legal proceedings or other proceedings based on, and Seller has not received any formal or informal written notice of, any complaint, order, directive, citation, notice of responsibility, notice of potential responsibility, or information request from any Governmental

- 30 -

Entity or any other Person or, nor does Seller know of any fact(s) which would reasonably be expected to form the basis for any such actions or notices arising out of or attributable to any Environmental Condition.

     (e) The Seller has operated, and, to the knowledge of Seller, the Real Property contains, no underground improvements, including treatment or storage tanks, or aboveground storage tanks, or piping associated with any such tanks, used currently or in the past for the management of Hazardous Materials, and Seller has not used any portion of the Real Property as a dump or landfill.

     (f) There are not now and there have not been Hazardous Materials used, generated or stored by Seller in the conduct of its business or on the Real Property or at the Hospital except in accordance with Environmental Laws; Seller has not, and to the knowledge of Seller, no other person has, caused or permitted any Release of Hazardous Materials at the Hospital or the Real Property requiring any reporting, investigative, response, removal or remedial action pursuant to any applicable Environmental Law; including, without limitation, into or upon the soil, surface water or groundwater; and, to the knowledge of Seller, there is not located on the Real Property or at the Hospital any polychlorinated biphenyls (“PCBs”), asbestos, or lead-based paint.

     (f) No Encumbrance in favor of any Person relating to or in connection with any claim under any Environmental Law has been filed or has attached to the Real Property, other than Permitted Encumbrances.

     (g) Seller has received no written notice that it is or may be held liable pursuant to Environmental Laws on account of any Environmental Condition at any other facility to which Seller or anyone else sent or transported, direct or indirectly, Hazardous Materials, including any Hazardous Materials relating to or resulting from the Hospital or the operation or use of the Purchased Assets.

     (h) Neither this Agreement nor the consummation of the transactions that are the subject of this Agreement will result in any obligations for site investigation or cleanup, or notice or Consent to or of government agencies or third parties, pursuant to any of the so called “transaction triggered” or “responsible property transfer” Environmental laws or any other Environmental Law.

     (i) Seller has delivered to Buyer copies of all environmental audits, investigations, reports, permits, registrations and other material environmental documents that are in the possession or control of Seller, any related entities, and their respective environmental consultants or attorneys, including any affecting or relating to Seller, the Real Property, the Hospital, or the Purchased Assets.

     The representations set forth in this Section 5.19 are the sole representations of Seller with respect to environmental matters, Environmental Conditions, Hazardous Materials and compliance with Environmental Law.

     5.20 Inventory. All of the Inventory existing on the date hereof will exist as of the Effective Time, except for Inventory exhausted or added in the ordinary course of business between the date of this Agreement and the Effective Time. Except to the extent of reserves reflected in the Closing

- 31 -

Balance Sheet, all of the Inventory on hand on the date of this Agreement and which will be on hand as of the Effective Time consists and will consist, in all material respects, of items of a quality usable or saleable in the ordinary and usual course of business.

     5.21 Absence of Changes. Except as set forth in Schedule 5.21, between the Baseline Balance Sheet Date and the date hereof, there has not been any transaction or occurrence in which Seller or any Seller Affiliate, in connection with the Hospital and Purchased Assets, has:

     (a) suffered any material damage, destruction or loss with respect to or affecting any of the Purchased Assets;

     (b) disposed of or permitted to lapse any right to the use of any Intellectual Property which is material to the operation of the Hospital;

     (c) made any capital expenditure commitment in excess of $100,000 for additions to property, plant, equipment, intangible or capital assets or for any other purpose, other than for emergency repairs or replacement;

     (d) sold, transferred or otherwise disposed of any of the Purchased Assets, except in the ordinary course of business and only with comparable replacement thereto to the extent such was the type of asset that Seller would have replaced in the ordinary course of business based upon its past practices;

     (e) granted or incurred any obligation for any increase in the compensation of any employee who is employed at the Hospital (including any increase pursuant to any Plans or other commitment), except in the ordinary course of business in accordance with Seller’s personnel policies;

     (f) made any change in any method of accounting or accounting principle, practice, or policy;

     (g) agreed, so as to legally bind Buyer or affect the Purchased Assets, whether in writing or otherwise, to take any of the actions set forth in this Section 5.21 and not otherwise permitted by this Agreement;

     (h) paid or agreed to pay to any Person damages, fines, penalties or other amounts in respect of a violation or alleged violation of any Law;

     (i) has instituted any new, or terminated or amended any existing Plan, except for amendments required to comply with applicable Law;

     (j) entered into or agreed to enter into any material transaction outside the ordinary course of the Hospital; or

     (k) no Material Adverse Effect has occurred and no events or circumstances have occurred that could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect.

- 32 -

     5.22 Medical Staff Matters. Seller has delivered to Buyer correct and complete copies of the bylaws and rules and regulations of the medical staff of the Hospital. Seller has also delivered to Buyer a list setting forth the name and age of each member of the Hospital’s medical staff (designated as active, associate, consulting, courtesy or other), and the degree (M.D., D.O., etc.), title, specialty and board certification, if any, of each such Hospital medical staff member. Seller has disclosed to Buyer all adverse actions taken by Seller (or recommended or taken by any committee of the Hospital’s medical staff) since January 1, 2007 against medical staff members or applicants. Any disclosures have been and will be made in such a manner as to protect the confidentiality of the Persons involved in the matters described thereon. Since January 1, 2007 Seller has not made a report to the National Practitioners Data Bank of any current or former member of the medical staff of the Hospital.

     5.23 Sufficiency of Purchased Assets. Except for the Excluded Assets and for the services to be provided by Seller and its Affiliates pursuant to the Transition Services Agreement, the Purchased Assets constitute, in the aggregate, all the assets and property used by Seller or any of its Affiliates in connection with the operation of the Hospital as currently conducted.

     5.24 Transactions with Affiliates. Except as set forth on Schedule 5.24 hereto and except to the extent specifically identified in the Historical Financial Information, since January 1, 2007, to the knowledge of Seller no director, officer, employee or other individual who is an Affiliate of Seller, or any Person who is related by blood, marriage or adoption to any of such Persons has: (i) borrowed money from or loaned money to Seller in any amount which remains outstanding; (ii) had any agreement with Seller (other than employment agreements, claims for compensation, benefits, expense reimbursement and similar claims and agreements in the ordinary course of business); or (iii) owned any interest in any property or assets (tangible or intangible) used in the operation of the business at the Hospital.

     5.25 Solvency. Seller, after Closing as a result of the transactions contemplated by this Agreement, will have sufficient resources to either pay or settle in full its debts as they become due. Seller has no intention of filing a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or any portion of such Seller’s property and, to Seller’s knowledge, no other Person has filed or threatened to file such a petition against any Seller.

     5.26 Statements True and Correct. This Agreement and the Schedules prepared by Seller do not include, as of the date hereof and as of the Closing Date, any untrue statement of a material fact or omit to state any material fact necessary to make the statements made in this Agreement with respect to Seller and the Purchased Assets not misleading.

     5.27 No Other Representations and Warranties. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS ARTICLE 5 (INCLUDING THE SCHEDULES), SELLER MAKES NO EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY, AND SELLER HEREBY DISCLAIMS ANY SUCH REPRESENTATION OR WARRANTY WITH RESPECT TO THE EXECUTION AND DELIVERY OF THIS AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

- 33 -

ARTICLE 6
COVENANTS OF BUYER

     6.1 Notification of Certain Matters. At any time from the date of this Agreement to the Closing Date, Buyer shall give prompt written notice to Seller of (i) the occurrence, or failure to occur, of any event that has caused any representation or warranty of Buyer contained in this Agreement to be untrue in any material respect, and (ii) any failure of Buyer to comply with or satisfy, in any material respect, any covenant, condition or agreement to be complied with or satisfied by it under this Agreement. Such notice shall provide a reasonably detailed description of the relevant circumstances.

     6.2 Approvals. Between the date of this Agreement and the Closing Date, except to the extent that this Agreement otherwise designates Seller with that specific responsibility, Buyer will use commercially reasonable efforts to (i) take all reasonable steps to obtain, as promptly as practicable, all Approvals and Permits of any Governmental Entities required for Buyer to consummate the transactions contemplated by this Agreement, and Seller will reasonably cooperate with Buyer in those efforts, and (ii) provide such other information and communications to any Governmental Entity as may be reasonably requested.

     6.3 Buyer’s Efforts to Close. Buyer shall use commercially reasonable efforts to satisfy all of the conditions precedent to its or Seller’s obligations under this Agreement to the extent that Buyer’s action or inaction can control or influence the satisfaction of such conditions.

ARTICLE 7
COVENANTS OF SELLER

     7.1 Information.

     (a) Between the date of this Agreement and the Closing Date, to the extent permitted by Law, Seller shall afford to the authorized representatives and agents of Buyer reasonable access to and the right to inspect the plants, properties, books and records of Seller relating to the Purchased Assets (including the Hospital’s medical staff credentialing and peer review files), and will furnish Buyer with such additional financial and operating data and other information as to the business and properties of Seller relating to the Purchased Assets as Buyer may from time to time reasonably request; provided, however, that Buyer may not conduct invasive environmental, health or safety investigations upon the Real Property or at the Hospital or of the Purchased Assets, including any sampling or testing of soils, surface water, groundwater, ambient air, or improvements at, on or under Real Property, or sampling or testing of the Hospital or the Purchased Assets (collectively, “Buyer’s Tests”), without Seller’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. Seller’s failure to object in writing within five business days after receipt of Buyer’s written request to conduct Buyer’s Tests shall be deemed approval by Seller. Any disapproval by Seller of any of Buyer’s Tests shall be in writing, describing with specificity the basis for disapproval and suggesting reasonable modifications to Buyer’s Tests in order to obtain Seller’s approval. The right of access and inspection of Buyer shall be made in such a manner as not to interfere unreasonably with the operation of the Hospital or the Purchased Assets. In this regard, Buyer agrees that such inspection shall not take place, and no employees or other personnel at the Hospital shall be contacted by the representatives of Buyer, without first coordinating such contact or inspection with Jack Huber of Navigant Capital Advisors, LLC or his or her designee.

- 34 -

     (b) Notwithstanding the foregoing, Buyer understands that with respect to documents and information deemed by Seller in good faith to be market sensitive or competitive in nature, (i) Seller will identify such documents and information to Buyer, (ii) if requested by Buyer, Seller will provide such documents and information to the outside attorneys and accountants of Buyer (who will be bound by confidentiality obligations) for their review, and (iii) any report by such attorneys and accountants to Buyer with respect to such documents and information will be in writing to confirm that any market sensitive or competitive information is not made available to Buyer.

     7.2 Operations. From the date hereof until the Effective Time, Seller shall with respect to the business operations of the Hospital or otherwise regarding the Purchased Assets, without the prior written consent of Buyer:

     (a) carry on its business related to the Purchased Assets in substantially the same manner as it has heretofore and not make any material change in personnel, operations, finance, accounting policies, or the Purchased Assets other than in the ordinary course of business;

     (b) keep all Assumed Contracts which are material to the operation of the Hospital in full force and effect and perform all obligations under all of the Assumed Contracts so as to not create any material breach under such Assumed Contracts;

     (c) keep in full force and effect present insurance policies or other comparable insurance benefiting the Purchased Assets and the conduct of the Hospital, and maintain reserves in an amount and in the manner comparable in all material respects to the amount and manner in which such reserves have historically been maintained by Seller;

     (d) take all commercially reasonably actions to deliver to Buyer title to the Purchased Assets free and clear of all Encumbrances (except for the Permitted Encumbrances);

     (e) reasonably cooperate with Buyer to obtain appropriate consents, certificates and other instruments or documents as Buyer may reasonably request; provided, that Seller shall take all commercially reasonable actions to obtain appropriate consents to the Assumed Contracts; provided, however, the parties agree and acknowledge that the consent of the counterparty thereto of any Assumed Contract is not a condition precedent to Closing unless it is a Material Consent;

     (f) maintain and preserve its business organization with respect to the Hospital intact and use its commercially reasonable efforts to retain its present employees at the Hospital and maintain its relationship with physicians, medical staff, suppliers, customers and others having business relations with the Hospital;

     (g) permit and allow reasonable access by Buyer to make offers of employment to Seller’s personnel in accordance with Section 10.3, and to establish relationships with physicians, medical staff and others having business relations with Seller; provided that Buyer shall have complied with the terms of Section 7.1 in connection with such access;

     (h) comply in all material respects with all Laws applicable to the conduct of the business and operation of the Hospital;

- 35 -

     (i) maintain all Approvals and Permits relating to the Hospital, Purchased Assets and Assumed Liabilities in good standing;

     (j) promptly notify Buyer of any material and adverse change to the Purchased Assets;

     (k) maintain the Purchased Assets in accordance with Seller’s past practices in all material respects; and

     (l) reasonably cooperate with Buyer’s efforts to obtain provider-based status for the Hospital following the Closing, including providing access to the Hospital’s medical staff members, committees and records as needed to obtain all appropriate bylaw amendments, consents, approvals and other documents reasonably required for the Hospital to be clinically integrated with Phoenix Baptist Hospital.

     7.3 Negative Covenants. From the date hereof to the Effective Time, Seller will not, with respect to the business or operation of the Hospital or otherwise regarding the Purchased Assets, without the prior written consent of Buyer:

     (a) increase compensation or benefits payable or to become payable or make a bonus payment to or otherwise enter into one or more bonus or severance contracts with any employee or agent or under any personal services agreement, except in the ordinary course of business consistent with Seller’s payroll policies;

     (b) sell, assign or otherwise transfer or dispose of any Purchased Assets with a book value in excess of $10,000, except in the ordinary course of business and then only so long as comparable replacement assets are acquired in connection thereto if such replacement would have occurred in accordance with the Seller’s prior practices in the original course of business;

     (c) (i) amend, modify or terminate any Assumed Contract which is material to the operations of the Hospital or (ii) cancel or permit the cancellation or lapse of insurance coverage on the Purchased Assets or the Hospital;

     (d) except for the Permitted Encumbrances, create, assume or permit to exist any new material Encumbrance upon any of the Purchased Assets;

     (e) make any capital expenditure commitment for additions to property, plant, equipment, intangible or capital assets or for any other purpose, other than for emergency repairs or replacement, which, together with the capital expenditure commitment made by Seller between the Baseline Balance Sheet Date and the date hereof, other than for emergency repairs or replacement, exceeds $575,000;

     (f) take any material action outside the ordinary course of the Hospital’s business;

     (g) create, incur, assume, guarantee or otherwise become liable for any material liability or obligation, or agree to do any of the foregoing, except in the ordinary course of the Hospital’s business consistent with Seller’s past practices;

- 36 -

     (h) materially change any accounting method, policy or practice or reduce any reserves in the Historical Financial Information; and

     (i) terminate, amend or otherwise modify any Plan, except for amendments required to comply with this Agreement or applicable Law.

     7.4 Notification of Certain Matters. At any time from the date of this Agreement to the Closing Date, Seller shall give prompt written notice to Buyer of (i) the occurrence, or failure to occur, of any event that has caused any representation or warranty of Seller contained in this Agreement to be untrue in any material respect, and (ii) any failure of Seller to comply with or satisfy, in any material respect, any covenant, condition or agreement to be complied with or satisfied by it under this Agreement. Such notice shall provide a reasonably detailed description of the relevant circumstances.

     7.5 Additional Financial Information. Within fifteen (15) days following the end of each calendar month prior to the Closing Date, Seller will deliver to Buyer copies of the unaudited balance sheet and the related unaudited statement of operations relating to the Hospital for each month then ended (all such financial statements are referred to herein as the “Additional Financial Statements”). In the event Buyer reasonably determines that in order to comply with applicable laws, including, without limitation, Buyer’s reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (pursuant to contractual obligations or otherwise), Buyer must obtain audited or unaudited financial statements of Seller with respect to the operations of the Hospital for additional periods not covered by the Historical Financial Information (the “Other Financial Statements”), Seller shall use its good faith efforts to cooperate with Buyer in the preparation of such Other Financial Statements, the cost of which shall be borne by Buyer. If Buyer determines that audited financial statements are required, such audited financial statements shall be accompanied by an opinion of its accountants and will fairly present the financial position and results of operations of Seller with respect to the operation of the Hospital as of and for the periods then ended. The audited financial statements delivered pursuant to this Section 7.5 shall be prepared in conformity with GAAP and shall meet the requirements of Regulation S-X promulgated under the Exchange Act. Buyer shall bear all costs and expenses related to the preparation and delivery of any audited financial statements requested by Buyer pursuant to this Section 7.5. Notwithstanding Seller’s obligations under this Section 7.5, nothing contained in this Section 7.5 shall be deemed a condition of Closing.

     7.6 No-Shop Clause. From and after the date of the execution and delivery of this Agreement by Seller until the earlier of the Effective Time or the termination of this Agreement, Seller shall not (and will not permit any Affiliate or any other Person acting for or on behalf of Seller or any of its Affiliates), without the prior written consent of Buyer (i) offer for lease or sale its assets (or any material portion thereof) or any ownership interest in any entity owning any of the Purchased Assets; (ii) solicit offers to lease or buy all or any material portion of its assets or any ownership interest in any entity owning any of the Purchased Assets; (iii) hold discussions with any party (other than Buyer) looking toward such an offer or solicitation or looking toward a merger or consolidation of Seller; (iv) enter into any agreement with any party (other than Buyer) with respect to the lease, sale or other disposition of its assets (or any material portion thereof) or any ownership interest Seller or with respect to any merger, consolidation or similar transaction involving Seller; or (v) furnish or cause to be furnished any information with respect to Seller or its assets to any Person that Seller or such Affiliate or any such Person acting for or on their behalf knows or has reason to believe is in the process of considering any such acquisition, merger, consolidation, combination or reorganization, provided the foregoing shall not prevent MedCath Corporation or Persons acting for or on its behalf from including any information it deems required by Law in any of its filings with the Securities and

- 37 -

Exchange Commission. Nothing in this Section 7.6, however, shall apply to or otherwise restrict any actions, negotiations or agreements in respect of any transaction involving a sale of equity, merger, combination, a sale of all or substantially all of its assets or similar transaction involving MedCath Corporation or its Affiliates to any other Person, so long as the Purchased Assets are excluded from any such transaction.

     7.7 Title Policies and Surveys.

     (a) Seller shall cause the Title Company to issue and deliver to Buyer as of the Effective Time a 2006 ALTA title insurance policy (“Title Policy”) in the form attached hereto at Schedule 7.7(a) (“Title Policy”) subject only to the Title Policy Permitted Encumbrances (as defined in Schedule 7.7(a)), together with such title insurance endorsements as reasonably requested by Buyer. The amount of title insurance coverage shall, at Buyer’s election, be allocated among the parcels comprising the Real Property as reasonably determined by Buyer. Seller agrees to deliver any information as may be required by the Title Company in connection with the issuance of the Title Policy. Seller also agrees to provide an affidavit of title and/or such other information as the Title Company may reasonably require in order for the Title Company to insure over the “gap” (i.e., the period of time between the effective date of the Title Company’s last bringdown of title to such Real Property and the Effective Time).

     (b) Buyer shall cause an as-built survey of the Real Property to be prepared by a registered land surveyor or engineer, licensed in the State of Arizona, which survey is acceptable to Buyer, Seller and Title Company, reflecting all improvements visible on the ground and all easements and rights of way of record or on the ground and conforming to current ALTA/ACSM Minimum Detail Requirements for Land Title Surveys, sufficient to cause the Title Company to delete the standard printed survey exceptions from the title policy. Such survey shall contain a surveyor’s certificate reasonably acceptable to Buyer and shall be certified to Seller, Buyer, the Title Company and to such other parties as Buyer may designate prior to the Closing. Such survey shall show access from the land to dedicated roads and shall include a flood plain certification.

     (c) Seller shall pay the premium costs related to the standard owner’s title policy and Buyer shall be responsible for the costs associated with any extended owner’s title insurance policy (including all endorsements), and Buyer shall be responsible for all costs associated with any surveys referenced in this Section 7.7.

     7.8 Seller’s Efforts to Close. Seller shall use commercially reasonable efforts to satisfy all of the conditions precedent to its or Buyer’s obligations under this Agreement to the extent that Seller’s action or inaction can control or influence the satisfaction of such conditions.

ARTICLE 8
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER

     The obligations of Seller hereunder are subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived in writing by Seller:

     8.1 Compliance with Covenants. Buyer shall have in all material respects performed all obligations and complied with all covenants and conditions required by this Agreement to be performed or complied with by it at or prior to the Closing Date; provided that if Seller has knowledge

- 38 -

of such failure of Buyer to perform or comply, this condition will be deemed to be satisfied unless Buyer was given written notice of such failure to perform or comply and did not or could not cure such failure to perform or comply within 15 days after receipt of such notice.

     8.2 Action/Proceeding. No court or any other Governmental Entity shall have issued an order restraining or prohibiting the transactions herein contemplated; and no Governmental Entity with jurisdiction over the Hospital shall have commenced or threatened in writing to commence any action or suit before any court of competent jurisdiction or other Governmental Entity that seeks to restrain or prohibit the consummation of the transactions herein contemplated.

     8.3 Representations and Warranties. The representations and warranties of Buyer contained in this Agreement that are qualified by any type of materiality standard shall be true in all respects, and the representations and warranties of Buyer that are not so qualified shall be true in all material respects, when made and as of the Closing Date, as though such representations and warranties had been made as of the Closing Date (unless made only as of a specific date in which case they shall be true as of such date).

     8.4 Deliveries of Buyer. All of the actions of Buyer at Closing as described in Section 3.2 shall have been satisfied or waived by Seller.

ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER

     The obligations of Buyer hereunder are subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived in writing by Buyer:

     9.1 Compliance with Covenants. Seller shall have in all material respects performed all obligations and complied with all covenants and conditions required by this Agreement to be performed or complied with by it at or prior to the Closing Date; provided that if Buyer has knowledge of such failure of Seller to perform or comply, this condition will be deemed to be satisfied unless Seller was given written notice of such failure to perform or comply and did not or could not cure such failure to perform or comply within 15 days after receipt of such notice.

     9.2 Approvals and Permits. Buyer shall have either received, to the extent required to be received by applicable Law, or, to the extent not required to be received by applicable Law, obtained reasonable verbal assurances that following Closing Buyer will receive, all required Approvals and Permits from all Governmental Entities whose approval is required to consummate the transactions herein contemplated, except for any such Approvals and Permits the failure of which to obtain would not have or be reasonably likely to have a Material Adverse Effect. Buyer shall also have received reasonable verbal assurances that Buyer will be permitted to operate the Hospital following the Closing as a provider-based facility of Phoenix Baptist Hospital under Buyer’s existing Approvals and Permits for Phoenix Baptist Hospital.

     9.3 Action/Proceeding. No court or any other Governmental Entity shall have issued an order restraining or prohibiting the transactions herein contemplated; and no Governmental Entity with jurisdiction over the Hospital shall have commenced or threatened in writing to commence any action or suit before any court of competent jurisdiction or other Governmental Entity that seeks to restrain or prohibit the consummation of the transactions herein contemplated or otherwise seeks a remedy which

- 39 -

would materially and adversely affect the ability of Buyer to enjoy the use and enjoyment of the Purchased Assets.

     9.4 Representations and Warranties. All representations and warranties of Seller contained in this Agreement that are qualified by any type of materiality standard shall be true in all respects, and all other representations and warranties of Seller that are not so qualified shall be true in all material respects, when made and as of the Closing Date, as though such representations and warranties had been made as of the Closing Date (unless made only as of a specific date in which case they shall be true as of such date).

     9.5 Deliveries of Seller. All of the actions of Seller at Closing as described in Section 3.3 shall have been satisfied or waived by Buyer.

     9.6 Extraordinary Events. Seller shall not (i) be in receivership or dissolution, (ii) have made any assignment for the benefit of creditors, (iii) have admitted in writing its inability to pay its debts as they mature, (iv) have been adjudicated a bankrupt, (v) have filed a petition in voluntary bankruptcy, a petition or answer seeking reorganization, or an arrangement with creditors under the federal bankruptcy law or any other similar law or statute of the United States or any state (and no such petition has been filed against any it), or (vi) have entered into any document or agreement to do any of the foregoing as of the Closing Date.

     9.7 Termination Statements. Seller shall have delivered to Buyer fully executed UCC termination statements or other releases or conveyances relating to all Encumbrances that are not Permitted Encumbrances.

     9.8 Certificate of Insurance. Seller shall have purchased and delivered to Buyer a copy of the certificate of insurance issued by the insurer for the “tail-end” insurance pursuant to Section 11.11, including the delivery of proof that the insurance is fully paid and coverage is a first dollar policy.

     9.9 Material Consents. Seller shall have delivered to Buyer all Material Consents.

     9.10 Title Insurance. Seller shall have caused the Title Company to issue and deliver to Buyer a proforma title insurance policy in accordance with Section 7.7.

     9.11 Corporate Integrity Agreement. The reasonable verbal assurances Buyer received from the Office of the Inspector General that following Closing Buyer will not be a successor, assignee or transferee under the Corporate Integrity Agreement described in Schedule 5.17 shall not have been revoked or materially changed.

ARTICLE 10
TRANSITIONAL ARRANGEMENTS

     10.1 Transition Patients. To compensate Seller for services rendered and medicine, drugs and supplies provided before the Effective Time (the “Transition Patient Services”) with respect to patients admitted to the Hospital before the Effective Time (or who were in the Hospital’s emergency department or in observation beds as of the Effective Time and immediately thereafter admitted to the Hospital) but who are not discharged until after the Effective Time (such patients being referred to herein as the “Transition Patients”), the parties shall take the following actions:

- 40 -

     (a) Medicare, TRICARE and Other DRG Transition Patients. As soon as practicable after the Effective Time, Seller shall deliver to Buyer a schedule itemizing the Transition Patient Services provided by Seller to Transition Patients whose care is reimbursed by the Medicare, TRICARE or other third party payor program on a diagnostic related group basis, case rate or similar basis (each a “DRG Transition Patient”). Buyer shall pay to Seller an amount equal to (i) the DRG and outlier payments, the case rate payments or other similar payments received by Buyer on behalf of each DRG Transition Patient, multiplied by a fraction, the numerator of which shall be the total charges for Transition Patient Services provided to such DRG Transition Patient by Seller, and the denominator of which shall be the sum of the total charges for all services provided to such DRG Transition Patient both before and after the Effective Time, which amount shall be reduced by (ii) any deposits or co-payments made by such DRG Transition Patient to Seller. Buyer shall make all payments to Seller under this Section 10.1(a) by the fifteenth day of the month immediately following the month after receipt of each DRG or outlier payment, case rate payment or other similar payment accompanied by copies of remittances and other supporting documentation as reasonably required by Seller.

     (b) Medicaid Transition Patients. As of the Effective Time, Seller shall prepare cut-off billings for Transition Patient Services provided by Seller to Transition Patients whose care is reimbursed by Medicaid (each a “Medicaid Transition Patient”) based upon the applicable Medicaid per diem rate schedule for Arizona hospitals. Seller shall be entitled to receive all amounts collected in respect of such cut-off billings. If a Medicaid Transition Patient qualifies for outlier reimbursement, such outlier reimbursement shall be allocated between Seller and Buyer. Buyer shall pay to Seller an amount equal to (i) the outlier payment received from Medicaid for each Medicaid Transition Patient, multiplied by a fraction, the numerator of which shall be the total charges for Transition Patient Services provided by Seller to such Medicaid Transition Patient, and the denominator of which shall be the sum of the total charges for all services provided to such Medicaid Transition Patient both before and after the Effective Time, which amount shall be reduced by (ii) any deposits or co-payments made by such Medicaid Transition Patient to Seller. Buyer shall make all payments to Seller under this Section 10.1(b) by the fifteenth day of the month immediately following the month after receipt of each per diem and outlier payment accompanied by copies of remittances and other supporting documentation as reasonably required by Seller.

     (c) Other Patients. As of the Effective Time, Seller shall prepare cut-off billings for Transition Patient Services provided by Seller for all patients not covered by Sections 10.1(a) and 10.1(b). Seller shall be entitled to receive all amounts collected in respect of such cut-off billings. Buyer shall remit to Seller any amounts Buyer receives on or after the Effective Time with respect to the Transition Patient Services rendered to such cost-based Transition Patients, including any periodic interim payments or portions thereof applicable to the period prior to the Effective Time.

     10.2 Seller’s Cost Reports. Seller will timely prepare and file all cost reports relating to Seller for periods ending prior to the Effective Time or required as a result of the consummation of the transactions set forth herein, including terminating cost reports for the Medicare, Medicaid and TRICARE programs (the “Cost Reports”). Buyer shall forward to Seller any and all correspondence relating to Cost Reports within 15 business days after receipt by Buyer. Buyer shall remit any receipts of funds relating to Cost Reports promptly after receipt by Buyer and shall forward to Seller any demand for payments within ten business days after receipt by Buyer. Seller shall retain all rights to

- 41 -

Agency Receivables and to Cost Reports including any amounts receivable or payable in respect of such reports or reserves relating to such reports, including bad debt. Such rights shall include the right to appeal any Medicare determinations relating to Agency Receivables and Cost Reports. Buyer, upon reasonable notice, during normal business hours and at the sole cost and expense of Seller, will use commercially reasonable efforts to cooperate with Seller in regard to the preparation, filing, handling and appeal of any Cost Reports. Such cooperation shall include the providing of statistics and obtaining files if in the possession of Buyer and the coordination with Seller pursuant to adequate notice of Medicare and Medicaid exit conferences or meetings as well as providing to appropriate parties (including the Provider Reimbursement Review Board), as determined to be reasonably necessary by Seller, a letter acknowledging that Seller retained all rights to such appeals, and that Buyer agrees that Seller has the right to pursue such appeals, either on Seller’s behalf, or to the extent required by Law, as a representative of Buyer. Seller shall retain the originals of Cost Reports, correspondence, work papers and other documents relating to Cost Reports and the Agency Receivables. Seller will furnish copies of such documents (other than work papers) to Buyer prior to the Closing to the extent then existing if requested by Buyer.

     10.3 Employees; Benefits.

     (a) As of the Effective Time, Buyer or an Affiliate of Buyer shall offer employment to all active Hospital Employees upon substantially similar terms and conditions with respect to base salary and wages, job duties, titles and responsibilities (other than reporting responsibilities). Seller acknowledges that all employment offers are subject to the reasonably satisfactory completion by Buyer of its customary employee background checks and pre-employment screenings. Seller shall terminate, as of the Effective Time, those Hospital Employees who accept Buyer’s (or its Affiliates) offer of employment. Seller shall be responsible for any and all liabilities and obligations resulting from the termination of any such Hospital Employee as set forth in this Section 10.3(a) that accrue as of the Effective Time, except for Accrued PTO to the extent included in the determination of the Final NWC Calculation. Seller also shall be responsible for all liabilities and obligations to pay amounts due to any Hospital Employee who does not accept an offer of employment from Buyer (or its Affiliate).

     (b) The term “Continuing Employee” as used in this Agreement means a Hospital Employee who accepts employment with Buyer or one of its Affiliates as of the Effective Time. All Continuing Employees will be retained as employees-at-will (except to the extent that such Continuing Employees are parties to the Assumed Contracts providing for other employment terms as disclosed on Schedule 5.11, in which case such Continuing Employees shall be retained in accordance with the terms of such Assumed Contracts). Buyer shall provide each Continuing Employee with employee benefits, including but not limited to health and welfare benefits substantially consistent with similarly-situated employees at Phoenix Baptist Hospital. With respect to such employee benefits, Buyer shall honor the Continuing Employees’ prior service credit under the Seller’s current welfare plans for purposes of eligibility and satisfying pre-existing condition limitations in the welfare benefit plans of Buyer to the extent lawful and provided for under the policies and contracts of Buyer. Buyer shall honor prior length of service for purposes of eligibility and vesting in the service-based plans of Buyer, but shall not accrue benefits or make contributions to such plans with respect to prior service. Buyer will elect to carry over, and give credit for, the Accrued PTO for the Continuing Employees based on the valid records of Seller to the extent the value of such time is included in the determination of the Final NWC Calculation. Participation in Buyer’s employee

- 42 -

programs and plans described in this Section 10.3 shall begin as soon as administratively feasible after the Effective Time for participating Continuing Employees (and eligible dependents) and for all other Continuing Employees who, given their Seller service, have met the age and service requirements for participation under the respective programs and plans.

     Buyer shall employ a sufficient number of Continuing Employees at the Hospital for at least a 90-day period following the Closing Date so as not to constitute a “plant closing” or “mass layoff” (as those terms are used in the Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101 et seq., the “WARN Act”), with respect to the Hospital. Buyer shall be liable and responsible for any notification required under the WARN Act (or under any similar state or local Law) and shall indemnify Seller and its Affiliates from any claims arising out of a breach of this covenant; provided, however, if with respect to the period prior to Closing, Seller takes any action with respect to Hospital Employees that would constitute a “plant closing” or “mass layoff” (as those terms are used in the WARN Act), then Seller shall be liable and responsible for any notification required under the WARN Act (or under any similar state or local Law) in connection with Seller’s taking such action and shall indemnify Buyer from any claims arising out of such actions.

     (c) Immediately prior to the Effective Time, Seller will, at its expense or at the expense of the applicable Plan, (i) terminate all Plans, if any, relating solely to Hospital Employees, (ii) terminate the participation of all Hospital Employees from all other Plans, (iii) cause all Continuing Employees to be one hundred percent (100%) vested in their accrued benefits under each Retirement Plan, (iv) take such actions as are necessary to make, or cause such Plans to make, timely appropriate distributions to such Hospital Employees to the extent required or permitted by, and in accordance with, such Plans and applicable Law, and (v) comply with all applicable Laws in connection with the foregoing. Seller shall indemnify and hold harmless Buyer from and against any and all liabilities and obligations whatsoever with respect to the Plans or the acts or omissions of Seller under this Section 10.3.

     (d) Buyer shall provide continued health and medical coverage to the extent required under Section 4980B of the Code and Sections 601 through 608 of ERISA (“COBRA”) to each current or former employee of the Hospital (and their spouses, dependents and beneficiaries) who is classified as an “M&A Qualified Beneficiary” (as defined in Treasury Regulation Section 54.4980B-9, Q&A 4) with respect to “qualifying events” (as such term is defined by COBRA), each of which is listed on Schedule 10.3.

     (e) Notwithstanding any provision herein to the contrary, no term of this Agreement shall be deemed to (i) create any Contract with any Continuing Employee, (ii) give any Continuing Employee the right to be retained in the employment of Buyer or any of its Affiliates, or (iii) interfere with the right of Buyer to terminate employment of any Continuing Employee at any time. Nothing in this Agreement shall diminish the right of Buyer to change or terminate its policies regarding salaries, benefits and other employment matters at any time or from time to time. The representations, warranties, covenants and agreements contained herein are for the sole benefit of the parties hereto, and the Continuing Employees are not intended to be and shall not be construed as beneficiaries hereof.

     10.4 Misdirected Payments. If either party receives any amount from patients or third-party payors which, under the terms of this Agreement, belongs to the other party, the party receiving such amount shall remit within ten business days said full amount to the other party. Any amounts due

- 43 -

under this Section 10.4 shall bear interest from the date due hereunder until paid at a rate equal to the Applicable Rate per annum.

ARTICLE 11
ADDITIONAL AGREEMENTS

     11.1 Allocations. Buyer and Seller shall reasonably agree prior to the Closing Date upon an allocation of the Purchased Assets among the various classes of assets in accordance with the provisions of Section 1060 of the Code and applicable Treasury Regulations, and attach such allocation hereto as Schedule 11.1. The parties agree that any Tax returns, or other Tax information they may file or cause to be filed with any Governmental Entity shall be prepared and filed consistent with such agreed upon allocation. In this regard, the parties agree that they will each properly prepare, exchange with each other, and timely file Form 8594 in accordance with Section 1060 of the Code.

     11.2 Termination Prior to Closing.

     (a) Notwithstanding anything in this Agreement to the contrary, this Agreement and the transactions contemplated by this Agreement may not be terminated, except prior to Closing as follows:

     (i) by mutual consent in writing of Seller and Buyer;

     (ii) by Buyer or Seller at any time after November 1, 2010 (the “Drop Dead Date”), if the Closing has not occurred by such date; provided, that the right to terminate this Agreement under this Section 11.2(a)(ii) is not available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur by such date;

     (iii) by Seller if Buyer breaches in any material respect any of the representations, warranties, covenants or other agreements of Buyer contained in this Agreement, which breach cannot be or has not been cured within thirty (30) days after the giving of written notice by Seller to Buyer specifying such breach;

     (iv) by Buyer if Seller breaches in any material respect any of Seller’s representations, warranties, covenants or other agreements contained in this Agreement, which breach cannot be or has not been cured within thirty (30) days after the giving of written notice by Buyer to Seller specifying such breach;

     (v) by Buyer or Seller, if any court or any other Governmental Entity issues an order restraining or prohibiting such party from consummating the sale and purchase of the Purchased Assets as provided herein and such order becomes final and non-appealable;

     (vi) by Buyer pursuant to the terms and conditions of Section 11.8; or

     (vii) by Buyer pursuant to the terms and conditions of Section 13.20.

     (b) In the event that this Agreement is terminated pursuant to Section 11.2(a), all further obligations of the parties under this Agreement shall terminate without further liability

- 44 -

of any party to another; provided that (i) nothing in this Section 11.2 shall relieve Seller or Buyer of any liability for an intentional breach of any covenant in this Agreement prior to the date of termination, which liability shall be subject to the limitations set forth in Article 12.2 of this Agreement, (ii) the parties shall be entitled to seek the remedy of specific performance as set forth in Section 12.3 and (iii) in the event that Seller violates the terms of Section 7.6 hereof by completing the lease or sale its assets (or any material portion thereof) or any material portion of the ownership interest in any entity owning any of the Purchased Assets with any third party (a “7.6 Prohibited Transaction”), then Buyer may seek damages from Seller arising from such 7.6 Prohibited Violation subject to the limitations in Section 12.2 hereof. Notwithstanding anything in this Section 11.2, or any other Section of this Agreement, to the contrary, in no event shall Seller have any liability to Buyer, and Buyer shall have no claim against Seller, for damages of any type or nature arising from any violation or breach of any representations or warranties made by Seller to Buyer in this Agreement.

     11.3 Buyer Preservation and Seller Access to Records After the Closing.

     (a) After the Closing, Buyer shall keep and preserve in their original form for a period of at least five years all medical and other records of the Hospital existing as of the Closing and transferred to Buyer hereunder for such period as required by applicable Law. For purposes of this Agreement, the term “records” includes all documents, electronic data and other compilations of information in any form. Buyer acknowledges that as a result of entering into this Agreement and operating the Hospital it and its Affiliates will gain access to patient and other information which is subject to rules and regulations regarding confidentiality. Buyer shall abide by any such rules and regulations relating to the confidential information that it acquires. Buyer shall maintain the patient records held at the Hospital or delivered to Buyer as of the Effective Time at the Hospital after the Effective Time in accordance with applicable Law (including, if applicable, Section 1861(v)(i)(I) of the Social Security Act (42 U.S.C. § 1395(V)(1)(i)), and requirements of relevant insurance carriers, all in a manner consistent with the maintenance of patient records generated at the Hospital after the Effective Time. Upon reasonable notice, during normal business hours and upon the receipt by Buyer of appropriate consents and authorizations, Buyer shall afford to representatives of Seller, including its counsel and accountants, full and complete access to, and the right to make copies of, the records transferred to Buyer as of the Effective Time for purposes of pending litigation involving a patient to whom such records refer, reimbursement for Transition Patient Services, or any other reasonable business purpose.

     (b) Buyer shall use commercially reasonable efforts to cooperate with Seller and its insurance carriers in connection with the defense of claims made by third parties against Seller in respect of alleged events occurring while Seller operated the Hospital; provided, Seller shall reimburse Buyer its reasonable and documented out-of-pocket expenses incurred in providing such cooperation. Such cooperation shall include, without limitation, making all of the Buyer’s employees reasonably available for interviews, depositions, hearings and trial; and making all of the Buyer’s employees reasonably available to assist in the securing and giving of evidence and in obtaining the presence and cooperation of witnesses, all of which shall be done without payment of any fees or expenses to Buyer or to such employees; provided, however, that Seller shall pay all reasonable and documented out-of-pocket expenses incurred by such employees (including for travel).

- 45 -

     11.4 Reproduction of Documents. This Agreement and all documents relating hereto, including (i) consents, waivers and modifications which may hereafter be executed, (ii) the documents delivered at the Closing, and (iii) financial statements, certificates and other information previously or hereafter furnished to Seller or Buyer, may, subject to the provisions of Section 13.8, be reproduced by Seller and by Buyer by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and Seller and Buyer may destroy any original documents so reproduced. Seller and Buyer agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial, arbitral or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by Seller or Buyer in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.

     11.5 Tax Matters. Following the Closing, the parties shall use commercially reasonable efforts to cooperate with each other and shall provide to the other, as reasonably requested by and at the expense of the requesting party, all information, records or documents relating to Tax liabilities of the requesting party for all periods ending on or prior to the Effective Time and shall preserve all such information, records and documents (to the extent a part of the assets exchanged and delivered as of the Effective Time) at least until the expiration of any applicable statute of limitations or extensions thereof; provided, that neither party shall be required to provide any of its income Tax returns (or supporting materials including working papers and Tax provisions) or those of any Affiliate. Each party shall retain all Tax returns and supporting materials received pursuant to Section 2.1 at least until the expiration of any applicable statute of limitations or extensions with respect thereto.

     11.6 Consents to Assignment; Permits. Seller, with Buyer’s cooperation shall be responsible for obtaining any and all consents to assign any Assumed Contract in connection with the transactions contemplated hereby. However, obtaining any such consent shall not be a condition of Closing, unless it is a Material Consent, and if consent to the assignment of any Assumed Contract is not obtained as of the Closing, unless it is an Assumed Contract requiring a Material Consent, Seller will cooperate in any reasonable arrangement with Buyer designed to provide for Buyer with respect to time periods on or after the Effective Time the benefits and obligations under any such Assumed Contract, including, at Buyer’s expense, enforcement of any and all rights of Seller against the other party or parties thereto arising out of the breach or cancellation by such other party or otherwise. Buyer shall be responsible for obtaining any and all Permits and Approvals necessary or desirable for Buyer to operate the Hospital as a second campus location under Phoenix Baptist Hospital’s existing acute care hospital license.

     11.7 Seller Non-Competition Agreement.

     (a) Seller recognizes and acknowledges that (i) the entering into this Agreement by Buyer is induced primarily because of the covenants and assurances made by Seller hereunder, (ii) the covenant not to compete of Seller (including Manager, MedCath Corporation or their Affiliates) is necessary to insure the continuation of the operations by Buyer and its Affiliates of the Hospital subsequent to the Effective Time, and (iii) irreparable harm and damage will be done to Buyer in the event that Seller (including Manager, MedCath Corporation or their Affiliates) competes with Buyer and its Affiliates within the area specified in this Section 11.7. Therefore, in consideration of the premises and as a necessary inducement for Buyer to enter into this Agreement and consummate the transactions set forth herein, Seller agrees that for a period of five years from and after the Effective Time, Seller (including Manager, MedCath Corporation or their Affiliates) shall not, directly or indirectly, own any interest in, manage,

- 46 -

operate, control, participate in the management or control of, be employed by, provide consulting services to, lend money to or maintain or continue any interest whatsoever (financial or otherwise) in any business or operation that competes with the health care services provided at the Hospital (including without limitation a general acute care or specialty hospital, outpatient surgery, diagnostic or invasive imaging, etc.) that is located within a 25-mile radius of the Hospital.

     (b) The parties hereto acknowledge and agree that any remedy at law for any breach of the provisions of Section 11.7(a) hereof would be inadequate, and Buyer hereby consents to the granting by any court of competent jurisdiction of an injunction or other equitable relief restraining any breach or threatened breach thereof, without the necessity of posting a bond, cash or otherwise, and without the necessity of actual monetary loss being proved or a party’s establishing the inadequacy of any remedy at law. To the extent that a court of competent jurisdiction determines that this Section 11.7 is illegal, invalid or unenforceable in any respect, the illegal, invalid or unenforceable provision shall be reformed to the maximum number or years and/or the maximum geographic radius permitted by Arizona law. Such injunctive relief shall be in addition to any other remedies that may be available to Buyer under this Agreement, at law or in equity.

     (c) Notwithstanding anything in this Section 11.7 to the contrary, a Person that (i) owns and operates, or has entered into a binding agreement to purchase and operate, one or more healthcare facilities, which if owned by Seller would breach the covenants of Seller under Section 11.7(a), prior to the date a Change in Control Transaction is announced, and (ii) enters into a Change in Control Transaction with MedCath Corporation or its Affiliates, may continue to own, operate and expand the healthcare facilities owned by such Person, or that are acquired pursuant to a binding agreement that was in effect, immediately prior to the announcement of a Change in Control Transaction without being in violation of the covenants set forth in Section 11.7(a).

     (d) In no event shall any Person (other than an Affiliate of MedCath) that purchases one or more hospital facilities from MedCath Corporation or one of its Affiliates (by the acquisition of either the assets thereof or the equity securities of such Affiliate) in a transaction that is not a Change in Control Transaction, either be considered an assignee or successor of Seller or its Affiliates for purposes of this Section 11.7 or otherwise be bound by this Section 11.7.

     11.8 Casualty. If, prior to the Effective Time, any part of the Purchased Assets is destroyed or damaged by fire or the elements or by any other cause, or there is a material interruption of services at the Hospital, Seller shall within ten (10) days after such casualty provide written notice thereof to Buyer. Such notice shall include copies of all insurance policies then in force relating to the Purchased Assets covering such casualty and Seller’s initial good faith estimate of the cost to repair such damage or destruction. Notwithstanding anything contained herein to the contrary, Buyer shall be required to close the transactions contemplated by this Agreement so long as the insurers under such insurance policies confirm unconditionally the amount of proceeds to be disbursed under such insurance policies on account of such casualty and the amount is sufficient in Buyer’s reasonable judgment to completely repair such damage or destruction. At the Effective Time, Seller shall transfer to Buyer the proceeds (or the right to the proceeds) of any applicable casualty insurance. Notwithstanding the foregoing, if the reasonably expected amount to completely repair any such damage or destruction is greater than $3,000,000, or if there is a material interruption of services at the Hospital, such damage or destruction

- 47 -

shall be deemed a Material Adverse Effect and Buyer may elect to terminate this Agreement in its entirety by written notice to Seller without penalty.

     11.9 Change of Name. On or before the Effective Time, Seller shall (a) amend its charter and take all other actions necessary to change its name to one sufficiently dissimilar to Seller’s present name to avoid confusion, and (b) take all actions requested by Buyer to enable Buyer to use any names acquired by Buyer at the Effective Time. From and after the Effective Time, Seller shall make no further use of (i) the name “Arizona Heart Hospital, LLC” or any derivative thereof, or (ii) any other name that is sufficiently similar to “Arizona Heart Hospital, LLC” so as to potentially cause confusion.

     11.10 Transition Services Agreement. As of Closing, Affiliates of Seller and of Buyer will execute and deliver the Transition Services Agreement (“Transition Services Agreement”), pursuant to which, as of the Effective Time, an Affiliate of Seller will provide certain specified transition services to and for the benefit of Buyer and its Affiliates in substantially the form attached hereto as Exhibit A. The Transition Services Agreement shall include, without limitation, an agreement for the provision of (a) information technology services and (b) billing services. The term of the Transition Services Agreement shall be for a period of 6 (six) months following the Closing Date; provided that Buyer and its Affiliates shall have the right to terminate the Transition Services Agreement without cause at an earlier date to the extent such right is expressly set forth in the Transition Services Agreement The services to be provided by an Affiliate of Seller under the Transition Services Agreement shall be those services that both are (i) currently being provided to Seller or the Hospital, and (ii) selected by Buyer and identified in the Transition Services Agreement. The fees payable by Buyer under the Transition Services Agreement for the services provided shall be the same as or calculated in the same manner as the fees currently paid by Seller for such services, as such current fees are reflected in the statement of operations of the Hospital for the period ended as of the Baseline Balance Sheet Date. In addition, Buyer will reimburse Seller for all reasonable and documented direct internal (excluding any overhead allocations) and out-of-pocket costs incurred by Seller in connection with (i) the transition of Buyer on to the systems provided by Seller and its Affiliates pursuant the Transition Services Agreement, and (ii) the transition of Buyer from such systems to systems utilized by Buyer and its Affiliates and (iii) for the costs and expenses of any third party to whom responsibility for services under Transition Services Agreement are subcontracted (subject to the terms of the Transition Services Agreement) by Seller. Seller shall provide Buyer with an invoice containing reasonable detail of such costs. Buyer shall pay such invoice within 30-days after receipt, absent any dispute over amounts to be paid. Upon request, Seller shall provide Buyer with reasonable back-up documentation that supports the costs reflected on the invoice. All monies received or collected by Seller and its Affiliates after the Effective Time through the performance of billing services with respect to accounts receivable shall be deposited in an account under the control of Buyer or its Affiliates, or held in trust by Seller or its Affiliates on behalf of Buyer and its Affiliates and maintained separately from any Seller funds, as further described in the Transition Services Agreement. The Transition Services Agreement shall be upon such terms and conditions as are customary in similar circumstances and reasonably acceptable to the parties thereto.

     11.11 Supplemental Reporting Endorsement. Seller, at its sole cost and expense, will obtain a supplemental insurance policy providing for extended reporting periods for claims made on or after the Effective Time in respect of events occurring prior to the Effective Time to insure against professional liabilities of Seller relating to all periods prior to the Effective Time and to have the effect of converting its current professional liability insurance into occurrence coverage. Such “tail end” insurance shall have the term and limits of coverage as reflected in Schedule 11.11. Seller shall deliver to Buyer evidence of such supplemental reporting endorsement at Closing.

- 48 -

ARTICLE 12
REMEDIES; LIMITATION ON DAMAGES

     12.1 No Survival Period. The representations and warranties contained Sections 4 and 5 of this Agreement shall survive only until the Closing and not thereafter (the “Survival Period”).The parties intend to shorten the statute of limitations and agree that no claims or causes of action may be brought against Buyer or Seller at any time based upon, directly or indirectly, any of the representations or warranties contained in this Agreement or any agreements contained in Article 6 or, except as expressly set forth in Section 11.2(b)(iii), Article 7 or any termination of this Agreement; provided however, for the avoidance of doubt, this Section 12.1 shall not affect any rights to bring claims after the Survival Period permitted under the terms of Section 12.2.

     12.2 Right to Seek Damages: Limitation on Damages.

     (a) Subject to the limitations set forth in this Article 12, nothing in this Agreement shall limit the right of either party to seek to recover damages from the other party hereto if, but only if, any of the following events occur:

     (i) As expressly permitted under the terms of Section 11.2(b),

     (ii) The other party’s failure to fulfill its obligations under any covenant or other agreement set forth in this Agreement which by its terms is intended to be performed after Closing, or

     (iii) In the case of Buyer, Seller’s failure to pay or satisfy Excluded Liabilities or Excluded Assets, and in the case of Seller, Buyer’s failure to pay or satisfy Assumed Liabilities or Purchased Assets.

     (b) NOTWITHSTANDING ANYTHING TO THE CONTRARY ELSEWHERE IN THIS AGREEMENT, NO PARTY TO THIS AGREEMENT (OR ANY OF ITS AFFILIATES) SHALL, IN ANY EVENT, BE LIABLE TO ANY OTHER PARTY (OR ANY OF ITS AFFILIATES) FOR SPECIAL, CONSEQUENTIAL, PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES, COSTS, EXPENSES, CHARGES OR CLAIMS.

     12.3 Specific Performance. Notwithstanding the right of each party to terminate this Agreement pursuant to Section 11.2(a), in the event of a breach by either party of its obligation to consummate the transactions contemplated by this Agreement or a breach by either party of a covenant prior to or following the Closing, the non-breaching party shall be entitled to specific performance to force the breaching party to consummate the transactions contemplated by this Agreement or to enforce the covenant, such relief to be without the necessity of posting a bond, cash or otherwise (unless required by applicable Law).

ARTICLE 13
GENERAL

     13.1 Consents, Approvals and Discretion. Except as herein expressly provided to the contrary, whenever this Agreement requires any consent or approval to be given by either party or

- 49 -

either party must or may exercise discretion, the parties agree that such consent or approval shall not be unreasonably withheld, conditioned or delayed and such discretion shall be reasonably exercised.

     13.2 Legal Fees and Costs. In the event either party elects to incur legal expenses to enforce or interpret any provision of this Agreement by judicial or arbitral means, the prevailing party will be entitled to recover such legal expenses, including attorney’s fees, costs and necessary disbursements, in addition to any other relief to which such party shall be entitled.

     13.3 Dispute Resolution; Choice of Law. In the event there occurs a dispute between Seller, on the one hand, and Buyer, on the other hand, regarding the interpretation of, or otherwise arising out of, this Agreement (a “Dispute”), the parties shall follow the procedures set forth below:

          (a) A party which in good faith believes that a Dispute exists shall provide written notice to the other parties to this Agreement, with such notice setting forth the details of the Dispute (the “Dispute Notice”);

          (b) During the 30-day period following receipt of the Dispute Notice, one or more senior management representatives from each of Seller, on the one hand, and Buyer, on the other hand, shall use their commercially reasonable efforts to meet and confer in order to attempt to resolve the Dispute;

          (c) If the parties are unable to resolve the Dispute during such 30-day period, either Seller or Buyer may notify the other party to this Agreement (the “Mediation Notice”) of their desire to submit the Dispute to non-binding mediation under the Commercial Mediation Procedures of the American Arbitration Association (the “Mediation Procedures”). Seller, on the one hand, and Buyer, on the other hand, will jointly appoint a mutually acceptable mediator; provided, that if Seller and Buyer are unable to agree upon the identity of such a mediator, the mediator shall be determined in accordance with the Mediation Procedures. The mediation shall be conducted in Phoenix, Arizona within 60-days of the Mediation Notice. The costs of such mediation, including the mediator’s fees and expenses, shall be borne equally by Seller, on the one hand, and Buyer, on the other hand.

          (d) No party hereto shall be entitled to file a lawsuit against the other party hereto (with the exception of claims for equitable relief) unless and until (i) all of the procedures described above in Section 13.3 have been followed, and (b) the non-binding mediation described in section 13.3(c) has concluded.

          (e) The parties agree that this Agreement shall be governed by and construed in accordance with the Laws of the State of Arizona without giving effect to any choice or conflict of law provision or rule thereof. Venue shall be in Phoenix, Arizona.

     13.4 Benefit; Assignment. Subject to provisions herein to the contrary, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and assigns. No party may assign this Agreement without the prior written consent of the other party; provided, however, that either party may assign its interest (or a portion thereof) in this Agreement to an Affiliate, but, in such event, the assigning party shall be required to remain obligated hereunder in the same manner as if such assignment had not been effected.

     13.5 No Brokerage. Buyer and Seller represent to each other that no broker has in any way been contracted in connection with the transactions contemplated hereby other than Seller’s or a Seller

- 50 -

Affiliate’s engagement of Navigant Capital Advisors, LLC and Cain Brothers & Company, LLC, the fees and expenses of which shall be borne solely by Seller or a Seller Affiliate. Each of Buyer and Seller agrees to indemnify the other party from and against all loss, cost, damage or expense arising out of claims for fees or commissions of brokers employed or alleged to have been employed by such indemnifying party.

     13.6 Cost of Transaction. Whether or not the transactions contemplated hereby shall be consummated and except as otherwise provided herein, the parties agree as follows:

     (i) Except as provided otherwise elsewhere herein, Buyer will pay the fees, expenses and disbursements of Buyer and its agents, representatives, accountants, and counsel incurred in connection with the subject matter hereof and any amendments hereto; and

     (ii) Except as provided otherwise elsewhere herein, Seller shall pay the fees, expenses and disbursements of Seller and its agents, representatives, accountants, and counsel incurred in connection with the subject matter hereof and any amendments hereto.

     (iii) Seller shall pay the premium costs related to the standard owner’s title policy and Buyer shall be responsible for the costs associated with any extended owner’s title insurance policy (including all endorsements), and Buyer shall be responsible for all costs associated with any surveys referenced in Section 7.7.

     13.7 Confidentiality. The Confidentiality Agreement dated as of May 14, 2009, as amended by the letter amendment to the Confidentiality Agreement dated as of April 13, 2010, (as so amended, the “Confidentiality Agreement”), between Buyer and MedCath Corporation shall remain in full force and effect until the Effective Time, but not thereafter. It is understood by the parties hereto that the information, documents and instruments delivered to Seller by Buyer or the agents of Buyer and the information, documents and instruments delivered to Buyer by Seller or Seller’s agents are of a confidential and proprietary nature. Each of the parties hereto agrees that prior to the Effective Time such party will maintain the confidentiality of all such confidential information, documents or instruments delivered to it by the other party hereto or its agents in connection with the negotiation of this Agreement or in compliance with the terms, conditions and covenants hereof and only disclose such information, documents and instruments to its duly authorized officers, directors, representatives and agents unless (i) compelled to disclose by judicial or administrative process (including, without limitation, in connection with obtaining the necessary Approvals of this Agreement and the transactions contemplated hereby) or by other requirements of Law or (ii) disclosed in an action or proceeding brought by a party hereto in pursuit of its rights or in the exercise of its remedies hereunder; provided, however, that the parties hereto shall not disclose any confidential information not required to be disclosed as part of such permitted disclosure. Each of the parties hereto further agrees that if the transactions contemplated hereby are not consummated, it will return all such documents and instruments and all copies thereof in its possession to the other party to this Agreement. Each of the parties hereto recognizes that any breach of this Section 13.7 would result in irreparable harm to the other party to this Agreement and its Affiliates and that therefore the non-breaching party shall be entitled to an injunction to prohibit any such breach or anticipated breach, without the necessity of posting a bond, cash or otherwise, in addition to all of their other legal and equitable remedies. Nothing in this Section 13.7, however, shall prohibit the use of such confidential information, documents or information for the purpose of securing financing to either party to effect the purchase and sale of assets hereunder or such governmental filings as in the applicable party’s opinion of counsel are (i) required by Law, or (ii) otherwise appropriate. Also, this Section 13.7 shall

- 51 -

not prohibit the disclosure by either party of any information, instruments or documents that are required to be filed with Governmental Entities by or under applicable securities related Laws.

     13.8 Press Release. Except as required by Law, at all times before the Effective Time, neither Buyer nor Seller will issue any report, statement or release to the public with respect to this Agreement and the transactions contemplated hereby without the prior written approval of the other party hereto of the text of any such public report, statement or release. Buyer acknowledges that MedCath Corporation will file, and Seller acknowledges that Vanguard Health Systems, Inc. may file, one or more Forms 8-K with the Securities and Exchange Commission in connection with the transactions contemplated by this Agreement.

     13.9 Waiver of Breach. The waiver by either party of breach or violation of any provision of this Agreement shall not operate as, or be construed to constitute, a waiver of any subsequent breach of the same or other provision hereof.

     13.10 Notice. Any notice, demand or communication required, permitted, or desired to be given hereunder shall be deemed effectively given when personally delivered, when received by telegraphic or other electronic means (including facsimile transmission) or overnight courier, or five (5) days after being deposited in the United States mail, with postage prepaid thereon, certified or registered mail, return receipt requested, addressed as follows:

If to Buyer:	VHS of Phoenix, Inc., dba Phoenix Baptist Hospital
	2000 West Bethany Home Road
	Phoenix, Arizona 85015
	Attention: Chief Executive Officer
	Facsimile: (602) 246-5849
with copies to:	VHS of Phoenix, Inc.
	c/o Vanguard Health Systems, Inc.
	20 Burton Hills Boulevard, Suite 100
	Nashville, Tennessee 37215
	Attention: General Counsel
	Facsimile: (615) 665-6197
	McDermott Will & Emery LLP
	2049 Century Park East, 38th Floor
	Los Angeles, California 90067
	Attention: Gary B. Gertler, Esq.
	Facsimile: (310) 277-4730
If to Seller	c/o MedCath Corporation
	10720 Sikes Place, Suite 300
	Charlotte, North Carolina 28277
	Attention: Chief Financial Officer
	Facsimile: (704) 708-5035

- 52 -

with a copy to:	Moore and Van Allen PLLC
	100 North Tryon Street, Suite 4700
	Charlotte, North Carolina 28202
	Attention: Hal A. Levinson, Esq.
	Facsimile: (704) 331-1159

or to such other address, and to the attention of such other Person or officer as any party may designate.

     13.11 Severability. In the event any provision of this Agreement is held to be invalid, illegal or unenforceable for any reason and in any respect, and if the rights of Buyer and Seller under this Agreement will not be materially or adversely affected thereby, (i) such provision will be fully severable; (ii) this Agreement will be construed and enforced as if the illegal, invalid or unenforceable provision had never compromised a part hereof; (iii) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance here from; and (iv) in lieu of the illegal, invalid or unenforceable provision, there will be added automatically as a part of this agreement a legal, valid and enforceable provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible.

     13.12 No Inferences. Inasmuch as this Agreement is the result of negotiations between sophisticated parties of equal bargaining power represented by counsel, no inference in favor of, or against, either party shall be drawn from the fact that any portion of this Agreement has been drafted by or on behalf of such party.

     13.13 Divisions and Headings of this Agreement. The divisions of this Agreement into articles, sections and subsections and the use of captions and headings in connection therewith are solely for convenience and shall have no legal effect in construing the provisions of this Agreement.

     13.14 No Third-Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of Seller and Buyer and their respective permitted successors or assigns, and it is not the intention of the parties to confer, and this Agreement shall not confer, third-party beneficiary rights upon any other Person.

     13.15 Tax and Medicare Advice and Reliance. Except as expressly provided in this Agreement, none of the parties (nor any of the parties’ respective counsel, accountants or other representatives) has made or is making any representations to any other party (or to any other party’s counsel, accountants or other representatives) concerning the consequences of the transactions contemplated hereby under applicable Tax related Laws or under the Laws governing the Medicare program. Each party has relied solely upon the Tax and Medicare advice of its own employees or of representatives engaged by such party and not on any such advice provided by any other party hereto; provided, that nothing in the foregoing is intended to limit the applicability of either Party’s representations and warranties to the other Party..

     13.16 Entire Agreement; Amendment. This Agreement supersedes all previous Contracts (other than the Confidentiality Agreement) and constitutes the entire agreement of whatsoever kind or nature existing between or among the parties representing the within subject matter and no party shall be entitled to benefits other than those specified herein. As between or among the parties, no oral statement or prior written material not specifically incorporated herein shall be of any force and effect. The parties specifically acknowledge that in entering into and executing this Agreement, the parties

- 53 -

rely solely upon the representations and agreements contained in this Agreement and no others. All prior representations or agreements, whether written or verbal, not expressly incorporated herein are superseded and no changes in or additions to this Agreement shall be recognized unless and until made in writing and signed by all parties hereto. Any amendment or modification to this Agreement shall require the execution by both parties hereto.

     13.17 Knowledge. Whenever any statement herein or in any schedule, exhibit, certificate or other documents delivered to any party pursuant to this Agreement is made “to its knowledge” or words of similar intent or effect of any party or its representative, such person shall make such statement only if such facts and other information which, as of the date the representation is given, are actually known to the party making such statement, which, with respect to Buyer means the actual knowledge of Paul Dorsa and Jim Spalding, and with respect to Seller means the actual knowledge of its Senior Management (or its Affiliate’s Senior Management).

     13.18 Multiple Counterparts. This Agreement may be executed in two or more counterparts, each and all of which shall be deemed an original and all of which together shall constitute but one and the same instrument. The facsimile signature of any party to this Agreement or any Contract delivered in connection with the consummation of the transactions described herein or a PDF copy of the signature of any party to this Agreement or any Contract delivered in connection with the consummation of the transactions described herein delivered by electronic mail for purposes of execution or otherwise, is to be considered to have the same binding effect as the delivery of an original signature on an original Contract.

     13.19 Disclaimer of Warranties. Except as expressly set forth in Article 5 hereof, the Hospital and the Purchased Assets transferred to Buyer will be conveyed by Seller and accepted by Buyer in their physical condition as of the Effective Time, “AS IS, WHERE IS AND WITH ALL FAULTS, DEFECTS, IMPERFECTIONS, LIABILITIES AND NONCOMPLIANCE WITH LAWS,” WITH NO WARRANTY OF HABITABILITY OR FITNESS FOR HABITATION, with respect to the Real Property, and WITH NO WARRANTIES, INCLUDING, THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, with respect to any personal property which is among the Purchased Assets, any and all of which warranties (both express and implied) Seller hereby disclaims. All of the Purchased Assets shall be further subject to normal wear and tear on the land, improvements and equipment in the ordinary course of business up to the Effective Time.

     13.20 Schedules. From and after the date of this Agreement until the Closing Date, the Seller shall update, amend or modify the Schedules relating to the representations and warranties in Article 5, except for Schedule 5.6, to reflect any facts, circumstance or events first arising or, in the case or representations given to the knowledge of Seller, first becoming known to Seller during such period, by providing Buyer with written notice setting forth the proposed update, amendment or modification and specifying the Schedule or Schedules affected thereby; provided, however, that if any such Schedules are updated, amended or modified in a manner that discloses any matter or circumstance that have or could reasonably be likely to have, either individually or in the aggregate with all prior updates, amendments or modifications made to the Schedules pursuant to this Section 13.20, a Material Adverse Effect, Buyer may terminate this Agreement in its entirety by written notice to Seller without penalty pursuant to Section 11.2; and provided, further, that if such new disclosures do not constitute a Material Adverse Effect, nothing herein shall restrict Buyer from seeking any remedy available to Buyer pursuant to this Agreement. From and after the date of this Agreement until the Closing Date, either Party shall have the right to update any Schedules (including Schedule 5.6 in the

- 54 -

case of Seller) unrelated to the representations and warranties in Articles 4 and 5, as the case may be, only upon the prior written consent of the other Party.

     13.21 Guarantee of Buyer’s Obligations. Vanguard Health Systems, Inc., as principal obligor and not merely as a surety, hereby unconditionally guarantees full, punctual and complete performance by Buyer of all of Buyer’s obligations under this Agreement and each of the Closing documents subject to the terms hereof and thereof and so undertakes to Seller that, if and whenever Buyer is in default, Vanguard Health Systems, Inc. will on demand duly and promptly perform or procure the performance of Buyer’s obligations. The foregoing guarantee is a continuing guarantee and will remain in full force and effect until the obligations of Buyer under this Agreement have been duly performed or discharged and will continue to be effective or will be reinstated if any sum paid to Seller must be restored by Seller upon the bankruptcy, liquidation or reorganization of Buyer. Vanguard Health Systems, Inc.’s obligations under this Section 13.21 shall not be affected or discharged in any way by any action or proceeding with respect to Buyer under any federal or state bankruptcy, insolvency or debtor relief laws.

     13.22 Guarantee of Seller’s Obligations. MedCath Corporation, as principal obligor and not merely as a surety, hereby unconditionally guarantees full, punctual and complete performance by Seller of Seller’s obligations under this Agreement and each of the Closing documents subject to the terms hereof and thereof and so undertakes to Buyer and Vanguard Health System that, if and whenever Seller is in default, MedCath Corporation will on demand duly and promptly perform or procure the performance of Seller’s obligations. The foregoing guarantee is a continuing guarantee and will remain in full force and effect until the obligations of Seller under this Agreement have been duly performed or discharged and will continue to be effective or will be reinstated if any sum paid to Buyer must be restored by Buyer upon the bankruptcy, liquidation or reorganization of Seller. MedCath Corporation’s obligations under this Section 13.22 shall not be affected or discharged in any way by any action or proceeding with respect to Seller under any federal or state bankruptcy, insolvency or debtor relief laws. Without limiting any of the foregoing, MedCath Corporation hereby joins in to this Agreement and agrees to abide by the Seller non-compete contained in Section 11.7.

     13.23 Right to Take Limited Liability Company and Corporate Action. Notwithstanding anything in this Agreement, including but not limited to Article 12 and Section 13.22, to the contrary, nothing shall prevent or limit, and Buyer shall not take actions to prevent or limit, (a) Seller at any time after the Effective Time from being dissolved or liquidated, making payments to its creditors or distributions to its members, otherwise terminating its existence and/or taking any other limited liability company act, in each case, as permitted by the Arizona Limited Liability Company Act, or (b) MedCath Corporation and its Affiliates from engaging in or agreeing to a Change in Control Transaction or making payments to its creditors or distributions to its stockholders at any time or from being dissolved or liquidated, and/ or otherwise terminating its existence, in each case, as permitted by the General Corporation Law of Delaware. Any action or proceeding initiated or commenced by Buyer against Seller or MedCath Corporation or their Affiliates asserting a right set forth in this Agreement shall not be deemed to be an action to prevent or limit Seller or MedCath Corporation from being dissolved or liquidated.

*     *     *

[SIGNATURE PAGE FOLLOWS]

- 55 -

     IN WITNESS WHEREOF, the parties hereto have caused this Asset Purchase Agreement to be executed in multiple originals by their authorized officers, all as of the date and year first above written.

BUYER:	VHS OF PHOENIX, INC., a Delaware corporation, dba PHOENIX BAPTIST HOSPITAL
	By:	/s/ Paul T. Dorsa
	Name: Paul T. Dorsa Title: Senior V.P.
SELLER:	ARIZONA HEART HOSPITAL, LLC
	By:	AHH Management, Inc.
	Its:	Manager

By:	/s/ James A. Parker
Name: James A. Parker Title: Treasurer

GUARANTORS:

MEDCATH CORPORATION
a Delaware corporation

By:	/s/ James A. Parker
Name:	James A. Parker
Title:	Executive Vice President and Chief Financial Officer

VANGUARD HEALTH SYSTEMS, INC.

a Delaware corporation

By:	/s/ Paul T. Dorsa
Name:	Paul T. Dorsa
Title:	Senior V. P.

EX-3.2

Exhibit 3.2

AMENDED AND RESTATED BYLAWS

OF

MEDCATH CORPORATION

November 9, 2010

PREAMBLE

     These Bylaws are subject to, and governed by, the General Corporation Law of the State of Delaware (the “Delaware General Corporation Law”) and the amended and restated certificate of incorporation (as the same may be amended and restated from time to time, the “Certificate of Incorporation”) of MedCath Corporation, a Delaware corporation (the “Corporation”). In the event of a direct conflict between the provisions of these Bylaws and the mandatory provisions of the Delaware General Corporation Law or the provisions of the Certificate of Incorporation, such provisions of the Delaware General Corporation Law or the Certificate of Incorporation, as the case may be, will be controlling.

ARTICLE I

OFFICES

     1.1 Registered Office and Agent. The registered office and registered agent of the Corporation shall be as designated from time to time by action of the board of directors of the Corporation (the “Board”) and the appropriate filing by the Corporation in the office of the Secretary of State of the State of Delaware.

     1.2 Other Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board may from time to time determine or as the business of the Corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

     2.1 Annual Meeting. An annual meeting of stockholders of the Corporation shall be held each calendar year on such date and at such time and place, within or without the State of Delaware, as shall be designated from time to time by the Board and stated in the notice of the meeting or in a duly executed waiver of notice of such meeting. At such meeting, the stockholders shall elect directors and transact such other business as may properly be brought

before the meeting. Except as otherwise permitted by law, no stockholder of the Corporation shall require the Board to call an annual meeting of stockholders of the Corporation.

     2.2 Special Meeting. A special meeting of the stockholders may be called, and business to be considered at any such meeting may be proposed, at any time exclusively by the Chairman of the Board, the President of the Company or a majority of the members of the Board, and no stockholder of the Corporation shall require the Board to call a special meeting of stockholders or to propose business at a special meeting of stockholders. A special meeting shall be held on such date and at such time and place as shall be designated by the Board and stated in the notice of the meeting or in a duly executed waiver of notice of such meeting. Only such business shall be transacted at a special meeting as may be stated or indicated in the notice of such meeting or in a duly executed waiver of notice of such meeting.

     2.3 Notice. Written or printed notice stating the place, day, and time of each meeting of the stockholders and, in case of a special meeting, the purpose or purposes for which the meeting is called shall be delivered to each stockholder of record entitled to vote at such meeting and to each director not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, the President of the Company, or the Board. If such notice is to be sent by mail, it shall be directed to each stockholder at his or her address as it appears on the records of the Corporation, unless he or she shall have filed with the Secretary of the Corporation a written request that notices to him or her be mailed to some other address, in which case it shall be directed to him or her at such other address. Attendance of a person at a meeting shall constitute a waiver of notice of each meeting, except when the person attends for the 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.

     2.4 Notice of Stockholder Business at Annual Meeting.

     (a) At an annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of a majority of the members of the Board, or (iii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 2.4, who shall be entitled to vote at such meeting, and who complies with the notice procedures set forth in paragraph (b) of this Section 2.4.

     (b) For business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a) of this Section 2.4, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation at the Corporation’s principal place of business. To be timely, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than forty-five (45) days or more than seventy-five (75) days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the meeting is changed by more than thirty (30) days from such anniversary date, notice by the stockholder to be timely must be received no later than the close of business on the later of the ninetieth (90^th) day prior to the annual meeting or the tenth (10^th) day following the day on which public announcement of the date of the meeting was first made. A stockholder’s notice to the Secretary with respect to

2

business to be brought at an annual meeting shall set forth (1) the nature of the proposed business with reasonable particularity, including the exact text of any proposal to be presented for adoption, and the reasons for conducting that business at the annual meeting, (2) with respect to each such stockholder, that stockholder’s name and address (as they appear on the records of the Corporation), business address and telephone number, residence address and telephone number, and the number of shares of each class of capital stock of the Corporation beneficially owned by that stockholder, and (3) any interest of the stockholder in the proposed business.

     (c) Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.4. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Nothing in this Section 2.4 shall relieve a stockholder who proposes to conduct business at an annual meeting from complying with all applicable requirements, if any, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations thereunder.

     2.5 Voting List. At least ten (10) days before each meeting of stockholders, the Secretary or other officer of the Corporation who has charge of the Corporation’s stock ledger, either directly or through another officer appointed by him or through a transfer agent appointed by the Board, shall prepare a complete list of stockholders entitled to vote thereat, arranged in alphabetical order and showing the address of each stockholder and number of shares registered in the name of each stockholder. For a period of ten (10) days prior to such meeting, such list shall be kept on file at a place within the city where the meeting is to be held, which place shall be specified in the notice of meeting or a duly executed waiver of notice of such meeting or, if not so specified, at the place where the meeting is to be held and shall be open to examination by any stockholder during ordinary business hours. Such list shall be produced at such meeting and kept at the meeting at all times during such meeting and may be inspected by any stockholder who is present.

     2.6 Quorum. At each meeting of stockholders of the Corporation, the holders of a majority of the issued and outstanding shares of capital stock of the Corporation entitled to vote on a matter, present in person or by proxy, shall constitute a quorum for the transaction of business, except as otherwise provided by law, the Certificate of Incorporation, or these Bylaws. When a quorum is once present to commence a meeting of stockholders, it is not broken by the subsequent withdrawal of any stockholders or their proxies.

     2.7 Adjournments. If a quorum shall not be present, in person or by proxy, at any meeting of stockholders or any adjournment thereof, the chairman of the meeting or a majority in interest of the stockholders entitled to vote thereat who are present, in person or by proxy, may adjourn the meeting from time to time, without notice other than announcement at the meeting (unless the Board, after such adjournment, fixes a new record date for the adjourned meeting), until a quorum shall be present, in person or by proxy. At any adjourned meeting at which a quorum shall be present, in person or by proxy, any business may be transacted which may have

3

been transacted at the original meeting had a quorum been present, in person or by proxy; provided that, 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, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting.

     2.8 Required Vote; Withdrawal of Quorum. When a quorum is present at any meeting, the vote of the holders of at least a majority of the outstanding shares entitled to vote who are present, in person or by proxy, shall decide any question brought before such meeting, unless the question is one on which, by law, the Certificate of Incorporation, or these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

     2.9 Method of Voting; Proxies. Except as otherwise provided in the Certificate of Incorporation or these Bylaws, each outstanding share of capital stock of the Corporation, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Elections of directors need not be by written ballot. At any meeting of stockholders, every stockholder having the right to vote may vote either in person or by a proxy executed in writing by the stockholder or by his duly authorized attorney-in-fact. Each such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after three (3) years from the date of its execution, unless otherwise provided in the proxy. If no date is stated in a proxy, such proxy shall be presumed to have been executed on the date of the meeting at which it is to be voted. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power or unless otherwise made irrevocable by law.

     2.10 Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, for any such determination of stockholders, such date in any case to be not more than sixty (60) days and not less than ten (10) days prior to 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 stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the date 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.

     (b) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto.

4

     (c) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting.

     2.11 Conduct of Meeting. The Chairman of the Board, if such office has been filled, and, if not or if the Chairman of the Board is absent or otherwise unable to act, the Chief Executive Officer shall preside at all meetings of stockholders. The Secretary shall keep the records of each meeting of stockholders. In the absence or inability to act of any such officer, such officer’s duties shall be performed by the officer given the authority to act for such absent or non-acting officer under these Bylaws or by some person appointed by the meeting.

     2.12 Inspectors. The Board may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act, the chairman of the meeting shall, or if inspectors shall not have been appointed, the chairman of the meeting may, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request, or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders.

     2.13 Certain Rules of Procedure Relating to Stockholder Meetings. All stockholder meetings, annual or special, shall be governed in accordance with the following rules:

     (a) Only stockholders of record will be permitted to present motions from the floor at any meeting of stockholders.

     (b) The chairman of the meeting shall preside over and conduct the meeting in a fair and reasonable manner, and all questions of procedure or conduct of the meeting shall be decided solely by the chairman of the meeting. The chairman of the meeting shall have all power and authority vested in a presiding officer by law or practice to conduct an orderly meeting. Among other things, the chairman of the meeting shall have the power to adjourn or recess the meeting, to silence or expel persons to ensure the orderly conduct of the meeting, to declare motions or persons out of order, to prescribe rules of conduct and an agenda for the meeting, to impose reasonable time limits on questions and remarks by any stockholder, to limit the number of questions a stockholder may ask, to limit the nature of questions and comments to one subject matter at a time as dictated by any agenda for the meeting, to limit the number of speakers or persons addressing the chairman of the meeting or the meeting, to determine when the polls shall be closed, to limit the attendance at the meeting to stockholders of record, beneficial owners of

5

stock who present letters from the record holders confirming their status as beneficial owners, and the proxies of such record and beneficial holders, and to limit the number of proxies a stockholder may name.

     2.14 Requests For Stockholder List And Corporation Records. Stockholders shall have those rights afforded under the Delaware General Corporation Law to inspect a list of stockholders and other related records and make copies or extracts therefrom. Such request shall be in writing in compliance with Section 220 of the Delaware General Corporation Law. In addition, any stockholder making such a request must agree that any information so inspected, copied or extracted by the stockholder shall be kept confidential, that any copies or extracts of such information shall be returned to the Corporation and that such information shall only be used for the purpose stated in the request. Information so requested shall be made available for inspecting, copying or extracting at the principal executive offices of the Corporation. Each stockholder desiring a photostatic or other duplicate copies of any of such information requested shall make arrangements to provide such duplicating or other equipment necessary in the city where the Corporation’s principal executive offices are located. Alternative arrangements with respect to this Section 2.14 may be permitted in the discretion of the Chief Executive Officer of the Corporation or by vote of the Board.

ARTICLE III

DIRECTORS

     3.1 Management. The business and property of the Corporation shall be managed under the direction of the Board. Subject to the restrictions imposed by law, the Certificate of Incorporation, or these Bylaws, the Board may exercise all the powers of the Corporation and do all such lawful acts and things as are not by law or otherwise directed or required to be exercised or done by the stockholders.

     3.2 Number; Qualification; Election; Eligibility; Term. The number of directors of the Corporation shall be fixed from time to time by the Board, but shall be no less than two (2) and no more than twelve (12). Except as otherwise required by law, the Certificate of Incorporation, or these Bylaws, the directors of the Corporation shall be elected at an annual meeting of stockholders at which a quorum is present by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote on the election of directors or a class of directors. Upon the consummation of a firm commitment underwritten public offering of shares of Common Stock (a “Qualified Public Offering”), the directors of the Corporation shall be divided by the Board into three classes (the “Classified Directors”) with the first class (“Class I”), second class (“Class II”) and third class (“Class III”) each to consist as nearly as practicable of an equal number of directors. The term of office of the Class I directors shall expire at the 2002 annual meeting of stockholders, the term of office of the Class II directors shall expire at the 2003 annual meeting of stockholders, and the term of office of the Class III directors shall expire at the 2004 annual meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, Classified Directors elected to succeed those Classified Directors whose

6

terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders following their election. None of the directors need be a stockholder of the Corporation or a resident of the State of Delaware. Each director must have attained the age of majority. All directors must, in order to be elected, meet the eligibility requirements of Section 3.3.

     3.3 Nomination Of Director Candidates.

     (a) Nominations of persons for election to the Board at a meeting of stockholders may be made (i) by or at the direction of the Board or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 3.3, who shall be entitled to vote for the election of the director so nominated and who complies with the notice procedures set forth in this Section 3.3.

     (b) Nominations by stockholders shall be made pursuant to timely notice in writing to the Secretary of the Corporation at the Corporation’s principal place of business. To be timely, a stockholder’s notice shall be delivered to or mailed and received at the principal executive offices of the Corporation (i) in the case of an annual meeting, not less than forty-five (45) days or more than seventy-five (75) days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is changed by more than thirty (30) days from such anniversary date, notice by the stockholder to be timely must be so received not later than the close of business on the later of the ninetieth (90^th) day prior to the annual meeting or the tenth (10th) day following the date on which public announcement of the date of the meeting was first made, and (ii) in the case of a special meeting at which directors are to be elected, not later than the close of business on the later of the ninetieth (90^th) day prior to the annual meeting or the tenth (10th) day following the day on which public announcement of the date of the meeting was first made. Such notice shall set forth (i) as to each nominee for election as a director, all information relating to such person that would be required to be disclosed in solicitations of proxies for election of directors, or that otherwise would be required, in each case pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to serving as a director if elected and, if applicable, to being named in the proxy statement as a nominee), and (ii) if the nomination is submitted by a stockholder of record, (A) the name and address, as they appear on the records of the Corporation, of such stockholder of record and the name and address of the beneficial owner, if different, on whose behalf the nomination is made and (B) the class and number of shares of the Corporation which are beneficially owned and owned of record by such stockholder of record and such beneficial owner. At the request of the Board, any person nominated by the Board for election as a director shall furnish the Secretary of the Corporation that information required to be set forth in the stockholder’s notice of nomination which pertains to the nominee.

     (c) No person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.3. The election of any director in violation of this Section 3.3 shall be void and of no force or effect. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 3.3, a stockholder shall also comply

7

with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 3.3.

     3.4 Change In Number. If the number of directors that constitutes the whole Board is changed in accordance with the Certificate of Incorporation and these Bylaws, the majority of the whole Board that adopts the change shall also fix and determine the number of directors comprising each class; provided, however, that any increase or decrease in the number of directors shall be apportioned among the classes as equally as possible. No decrease in the number of directors constituting the entire Board shall have the effect of shortening the term of any incumbent director.

     3.5 Removal. Except as otherwise provided in the Certificate of Incorporation, these Bylaws, or by law, at the annual meeting of stockholders or at any special meeting of stockholders called expressly for that purpose, a director of any class of directors may be removed before the expiration date of that director’s term of office, with cause (as defined in Article 5, Section 4 of the Certificate of Incorporation) only, by an affirmative vote of the holders of not less than a majority of the outstanding shares of the class or classes or series of capital stock then entitled to vote at an election of directors or directors of that class or series, voting together as a single class.

     3.6 Resignation. Any director may resign at any time by giving written notice to the Board, the Chairman of the Board, the Chief Executive Officer, the President or the Secretary, which such notice shall be deemed to constitute notice to the Corporation. Such resignation shall take effect upon receipt of such notice or at any later time specified therein and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective.

     3.7 Newly Created Directorships And Vacancies. Vacancies and newly-created directorships resulting from any increase in the authorized number of directors may be filled by a majority vote of the remaining directors then in office, though less than a quorum, or by a sole remaining director, and each director so chosen shall receive the classification of the vacant directorship to which he or she has been appointed or, if it is a newly created directorship, shall receive the classification that a majority of the Board or the sole remaining director designates and shall hold office until the first annual meeting of stockholders held after his appointment for the purpose of electing directors of that classification and until his successor is elected and qualified or, if earlier, until his death, resignation, retirement, disqualification, or removal from office. If there are no directors in office, an election of directors may be held in the manner provided by statute. Except as otherwise provided in these Bylaws, when one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in these Bylaws with respect to the filling of other vacancies.

     3.8 Place Of Meetings. The directors may hold their meetings and may have an office and keep the books of the Corporation, except as otherwise provided by statute, in such place or places within or without the State of Delaware as the Board may from time to time

8

determine or as shall be specified in the notice of such meeting or duly executed waiver of notice of such meeting.

     3.9 Regular Meetings. Regular meetings of the Board shall be held at such times and places as shall be designated from time to time by resolution of the Board. Notice of such regular meetings shall not be required.

     3.10 Special Meetings. Special meetings of the Board shall be held whenever called by the Chairman of the Board, the Chief Executive Officer, the President or at the request in writing of not less than a majority of the directors.

     3.11 Notice Of Special Meetings. The Secretary shall give notice of each special meeting of the Board to each director either (i) by mail not less than forty-eight (48) hours before the date of the meeting, (ii) by telephone, facsimile or telegram not less than twenty-four (24) hours notice or (iii) on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Such notice shall state the place, day and time of the meeting and the purpose or purposes for which the meeting is called. Notice of any such meeting need not be given to any party entitled to notice who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to him or her.

     3.12 Quorum; Majority Vote. At all meetings of the Board, a majority of the directors fixed in the manner provided in these Bylaws shall constitute a quorum for the transaction of business. If at any meeting of the Board there be less than a quorum present, a majority of those present or any director solely present may adjourn the meeting from time to time without further notice. Unless the act of a greater number is required by law, the Certificate of Incorporation, or these Bylaws, the act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the Board. At any time that the Certificate of Incorporation provides that directors elected by the holders of a class or series of stock shall have more or less than one vote per director on any matter, every reference in these Bylaws to a majority or other proportion of directors shall refer to a majority or other proportion of the votes of such directors.

     3.13 Procedure. At meetings of the Board, business shall be transacted in such order as from time to time the Board may determine. The Chairman of the Board, if such office has been filled, and, if not or if the Chairman of the Board is absent or otherwise unable to act, the Chief Executive Officer, if he is a director, shall preside at all meetings of the Board. In the absence or inability to act of either such officer, a chairman shall be chosen by the Board from among the directors present. The Secretary of the Corporation shall act as the secretary of each meeting of the Board unless the Board appoints another person to act as secretary of the meeting. The Board shall keep regular minutes of its proceedings which shall be placed in the minute book of the Corporation.

     3.14 Presumption Of Assent. A director of the Corporation who is present at the meeting of the Board at which action on any corporate matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting

9

before the adjournment thereof or shall forward any dissent by certified or registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who votes in favor of such action.

     3.15 Election Of Officers. The Board may elect the officers of the Corporation at any meeting of the Board at which a quorum shall be present.

     3.16 Compensation. The Board shall have the authority to fix the compensation, including fees and reimbursement of expenses, paid to directors for attendance at regular or special meetings of the Board or any committee thereof; provided, that nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity or receiving compensation therefor.

ARTICLE IV

COMMITTEES

     4.1 Creation; Powers. The Board may, by resolution adopted by a majority of the entire Board, create one or more committees and appoint members of the Board to serve on such committee(s). Each committee shall have and may exercise such of the powers of the Board in the management of the business and affairs of the Corporation as may be provided in such resolution and as permitted by applicable law.

     4.2 Number; Qualification; Term. Each committee shall consist of two or more members appointed by resolution adopted by a majority of the entire Board. The number of committee members may be increased or decreased from time to time by resolution adopted by a majority of the entire Board. Each committee member shall serve as such until the earliest of (i) the expiration of his or her term as director of the Corporation, (ii) his or her resignation as a committee member or as a director, or (iii) his or her removal as a committee member or as a director.

     4.3 Committee Changes. The Board shall have the power at any time to fill vacancies in, to change the membership of, and to discharge any committee.

     4.4 Alternate Members Of Committees. The Board may designate one or more directors as alternate members of any committee. Any such alternate member may replace any absent or disqualified member at any meeting of the committee. If no alternate committee members have been so appointed to a committee or each such alternate committee members is absent or disqualified, the member or members of such committee present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member.

10

     4.5 Regular Meetings. Regular meetings of any committee may be held without notice at such time and place as may be designated from time to time by resolution by the committee and communicated to all members thereof.

     4.6 Special Meetings. Special meetings of any committee may be held whenever called by any committee member. The committee member calling any special meeting shall cause notice of such special meeting, including therein the time and place of such special meeting, to be given to each committee member at least two (2) days before such special meeting.

     4.7 Quorum; Majority Vote. At meetings of any committee, a majority of the number of members designated by the Board shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting of any committee, a majority of the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The act of a majority of the members present at any meeting at which a quorum is in attendance shall be the act of a committee, unless the act of a greater number is required by law, the Certificate of Incorporation, or these Bylaws.

     4.8 Minutes. Each committee shall cause minutes of its proceedings to be prepared and shall report the same to the Board upon the request of the Board. The minutes of the proceedings of each committee shall be delivered to the Secretary of the Corporation for placement in the minute books of the Corporation.

     4.9 Compensation. Committee members may, by resolution of the Board, be allowed a fixed sum and expenses of attendance, if any, for attending any committee meetings or a stated salary.

     4.10 Responsibility. The designation of any committee and the delegation of authority to it shall not operate to relieve the Board or any director of any responsibility imposed upon it or such director by law.

     4.11 Meeting by Telephone. Members of the Board or of any committee of the Board may participate in and act at any meeting of the Board or committee by means of conference telephone or other communications equipment through which all persons participating in the meeting can hear each other. Participating in such meeting(s) shall be equivalent to attendance and presence in person at the meeting of the person or persons so participating, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

11

     4.12 Action Without A Meeting. Unless otherwise restricted by the Certificate of Incorporation or by these Bylaws, any action required or permitted to be taken at a meeting of the Board, or of any committee of the Board, may be taken without a meeting if a consent or consents in writing, setting forth the action so taken, shall be signed by all the directors or all the committee members, as the case may be, entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a vote of such directors or committee members, as the case may be, and may be stated as such in any certificate or document filed with the Secretary of State of the State of Delaware or in any certificate delivered to any person. Such consent or consents shall be filed with the minutes of proceedings of the board or committee, as the case may be. Faxed signatures of such consent or consents shall be effective for all purposes.

ARTICLE V

OFFICERS

     5.1 Number; Titles; Term Of Office. The officers of the Corporation shall be a Chief Executive Officer, a Secretary, and such other officers as the Board or the Chief Executive Officer may from time to time elect or appoint, including a Chairman of the Board, a President, one or more Vice Presidents (with each Vice President to have such descriptive title, if any, as the Board shall determine), and a Treasurer. Each officer shall hold office until his successor shall have been duly elected and qualified, until his death, until he shall resign or shall have been removed in the manner hereinafter provided, or, in the case of the Chairman of the Board, until he shall cease to be a director. Any two or more offices may be held by the same person. The Chairman of the Board, if any, shall be elected from among the directors. Subject to the foregoing exceptions, none of the officers need be a stockholder or a director of the Corporation or a resident of the State of Delaware.

     5.2 Removal And Resignation. Any officer or agent elected or appointed by the Board may be removed by the Board whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Any officer may resign at any time by giving written notice to the Board, the Chairman of the Board, the Chief Executive Officer, the President or the Secretary, which such notice shall be deemed to constitute notice to the Corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

     5.3 Vacancies. Any vacancy occurring in any office of the Corporation (by death, resignation, removal, or otherwise) may be filled by the Board.

12

     5.4 Authority. Officers shall have such authority and perform such duties in the management of the Corporation as are provided in these Bylaws or as may be determined by resolution of the Board not inconsistent with these Bylaws.

     5.5 Compensation. The compensation, if any, of officers and agents shall be fixed from time to time by the Board; provided, however, that the Board may delegate to a committee of the Board, the Chairman of the Board or the Chief Executive Officer the power to determine the compensation of any officer or agent (other than the officer to whom such power is delegated).

     5.6 Chairman Of The Board. The Chairman of the Board, if elected by the Board, shall have such powers and duties as may be prescribed by the Board. Such officer shall preside at all meetings of the stockholders and of the Board. Such officer may sign, with the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer or another officer of the Corporation thereunto authorized by the Board, certificates for shares of the Corporation and he or she may sign any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed.

     5.7 Chief Executive Officer. The Chief Executive Officer of the Corporation shall have general executive charge, management, and control of the properties and operations of the Corporation in the ordinary course of its business, with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities. The Chief Executive Officer shall have the power to appoint and remove subordinate officers, agents and employees, including Vice Presidents, Assistant Secretaries and Assistant Treasurers, except that the Chief Executive Officer may not remove those elected or appointed by the Board. The Chief Executive Officer shall keep the Board and the Executive Committee (if any) fully informed and shall consult them concerning the business of the Corporation. The Chief Executive Officer may sign, with the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer or another officer of the Corporation thereunto authorized by the Board, certificates for shares of the Corporation and he or she may sign any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed. If the Board has not elected a Chairman of the Board or in the absence, inability to act or refusal to act, of the Chairman of the Board, the Chief Executive Officer shall exercise all of the powers and discharge all of the duties of the Chairman of the Board, except for presiding at meetings of the Board if the Chief Executive Officer is not also a director. As between the Corporation and third parties, any action taken by the Chief Executive Officer in the performance of the duties of the Chairman of the Board shall be conclusive evidence that there is no Chairman of the Board or that the Chairman of the Board is absent or unable or refuses to act.

13

     5.8 President. The President shall have such powers and duties as may be assigned to him by the Board, the Chairman of the Board, or the Chief Executive Officer, and shall exercise the powers of the Chief Executive Officer during that officer’s absence, inability to act or refusal to act. The President may sign, with the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer or another officer of the Corporation thereunto authorized by the Board, certificates for shares of the Corporation and he or she may sign any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed. As between the Corporation and third parties, any action taken by the President in the performance of the duties of the Chief Executive Officer shall be conclusive evidence of the absence or inability or refusal to act of the Chief Executive Officer at the time such action was taken.

     5.9 Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the Board, the Chairman of the Board, the Chief Executive Officer or the President, and (in order of their seniority as determined by the Board, or in the absence of such determination, as determined by the length of time they have held the office of Vice President) shall exercise the powers of the President during that officer’s absence, inability to act or refusal to act. Any Vice President may sign, with the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer or another officer of the Corporation thereunto authorized by the Board, certificates for shares of the Corporation and he or she may sign any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed. As between the Corporation and third parties, any action taken by a Vice President in the performance of the duties of the President shall be conclusive evidence of the absence or inability or refusal to act of the President at the time such action was taken.

     5.10 Treasurer. The Treasurer shall (a) have charge and custody of and be responsible for all funds and securities of the Corporation; receive and give receipts for monies due and payable to the Corporation from any source whatsoever and deposit all such monies in the name of the Corporation in such banks, trust companies or other depositories as shall be selected by the Board; (b) prepare, or cause to be prepared, for submission at each regular meeting of the Board, at each annual meeting of the stockholders, and at such other times as may be required by the Board, the Chairman of the Board (if any) or the Chief Executive Officer, a statement of financial condition of the Corporation in such detail as may be required; (c) sign with the Chairman of the Board (if any), the Chief Executive Officer, the President or any Vice President, certificates for shares of the Corporation and he or she may sign any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed; and (d) in general, perform all the duties incident to the office of Treasurer and such other duties as from

14

time to time may be assigned by the Chairman of the Board (if any), the Chief Executive Officer, the President or the Board.

     5.11 Assistant Treasurers. Each Assistant Treasurer shall have such power and duties as may be assigned to him by the Board, the Chairman of the Board, the Chief Executive Officer or the President. The Assistant Treasurers (in the order of their seniority as determined by the Board or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Treasurer) shall exercise the powers of the Treasurer during that officer’s absence or inability or refusal to act, but such delegation shall not relieve the Treasurer from his responsibilities and liabilities of office.

     5.12 Secretary. Except as otherwise provided in these Bylaws, the Secretary shall (a) record the proceedings of the meetings of the stockholders, the Board and committees of directors in the permanent minute books of the Corporation kept for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws and as required by law; (c) be custodian of the corporate records and of the seal of the Corporation, and see that the seal of the Corporation or a facsimile thereof is affixed to all certificates for shares of the Corporation prior to the issue thereof and to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these Bylaws; (d) keep or cause to be kept a register of the post office address of each stockholder which shall be furnished by such stockholder; (e) sign with the Chairman of the Board (if any), the Chief Executive Officer, the President or any Vice President, certificates for shares of the Corporation and he or she may sign any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed; (f) have general charge of the stock transfer books of the Corporation; and (g) in general, perform all duties normally incident to the office of Secretary and such other duties as from time to time may be assigned by the Chairman of the Board (if any), the Chief Executive Officer, the President or the Board.

     5.13 Assistant Secretaries. Each Assistant Secretary shall have such powers and duties as may be assigned to him by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. The Assistant Secretaries (in the order of their seniority as determined by the Board of Directors or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Secretary) shall exercise the powers of the Secretary during that officer’s absence or inability or refusal to act. The Assistant Secretaries may sign, with the Chairman of the Board, the Chief Executive Officer, the President or any Vice President, certificates for shares of the Corporation and he or she may sign any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments, the issue or execution of which shall have been authorized by a resolution of the Board, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed.

15

ARTICLE VI

CERTIFICATES AND STOCKHOLDERS

     6.1 Certificates For Shares. Certificates for shares of stock of the corporation shall be in such form as shall be approved by the Board. The certificates shall be signed by the Chairman of the Board, the President or a Vice President and also by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer. Any and all signatures on the certificate may be facsimiles, engraved or printed and may be sealed with the seal of the Corporation (which seal may be a facsimile, engraved or printed). If any officer, transfer agent, or registrar who has signed, or whose facsimile signature has been placed upon, a certificate has ceased to be such officer, transfer agent, or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. The certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder’s name and the number of shares.

     6.2 Replacement Of Lost Or Destroyed Certificates. The Board may direct a new certificate or certificates to be issued in place of a certificate or certificates theretofore issued by the Corporation and alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates representing shares to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond with a surety or sureties satisfactory to the Corporation in such sum as it may direct as indemnity against any claim, or expense resulting from a claim, that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost or destroyed.

     6.3 Transfer Of Shares. Shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation or its transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. The Board may appoint a bank or trust company organized under the laws of the United States or any state thereof to act as its transfer agent or registrar, or both, in connection with the transfer of any class or series of securities of the Corporation.

     6.4 Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law.

16

     6.5 Regulations. The Board shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of stock of the Corporation.

     6.6 Legends. The Board shall have the power and authority to provide that certificates representing shares of stock bear such legends as the Board deems appropriate to assure that the Corporation does not become liable for violations of federal or state securities laws or other applicable law.

ARTICLE VII

MISCELLANEOUS PROVISIONS

     7.1 Dividends. Subject to provisions of law and the Certificate of Incorporation, dividends may be declared by the Board at any regular or special meeting and may be paid in cash, in property, or in shares of capital stock of the Corporation. Such declaration and payment shall be at the discretion of the Board.

     7.2 Reserves. There may be created by the Board out of funds of the Corporation legally available therefor such reserve or reserves as the directors from time to time, in their discretion, consider proper to provide for contingencies, to equalize dividends, or to repair or maintain any property of the Corporation, or for such other purpose as the Board shall consider beneficial to the Corporation, and the Board may modify or abolish any such reserve in the manner in which it was created.

     7.3 Books and Records. The Corporation shall keep correct and complete books and records of account, shall keep minutes of the proceedings of its stockholders and Board and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of the shares held by each.

     7.4 Fiscal Year. The fiscal year of the Corporation shall be fixed by the Board; provided, that if such fiscal year is not fixed by the Board and the selection of the fiscal year is not expressly deferred by the Board, the fiscal year shall be the calendar year.

     7.5 Seal. The seal of the Corporation, if any, shall be in such form as from time to time may be approved by the Board. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced.

17

     7.6 Securities Of Other Corporations. With the prior approval of a majority of the Board, the Chairman of the Board, the Chief Executive Officer, the President or any Vice President, the Corporation shall have the power and authority to transfer, endorse for transfer, vote, consent, or take any other action with respect to any securities of another issuer which may be held or owned by the Corporation and to make, execute, and deliver any waiver, proxy or consent with respect to any such securities.

     7.7 Invalid Provisions. If any part of these Bylaws shall be held invalid or inoperative for any reason, the remaining parts, so far as it is possible and reasonable, shall remain valid and operative.

     7.8 Mortgages, Etc. With respect to any deed, deed of trust, mortgage or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the Secretary of the Corporation shall not be necessary to constitute such deed, deed of trust, mortgage or other instrument a valid and binding obligation against the Corporation unless the resolutions, if any, of the Board authorizing such execution expressly state that such attestation is necessary.

     7.9 Headings. The headings used in these Bylaws have been inserted for administrative convenience only and do not constitute matter to be construed in interpretation.

     7.10 References. Whenever herein the singular number is used, the same shall include the plural where appropriate, and words of any gender should include each other gender where appropriate.

     7.11 Amendments. These Bylaws may be altered, amended, or repealed or new Bylaws may be adopted by the Board at any regular meeting of the Board or at any special meeting of the Board if notice of such alteration, amendment, repeal, or adoption of new Bylaws be contained in the notice of such special meeting. In addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Corporation required by law or by the Certificate of Incorporation, the affirmative vote of the holders of not less than eighty percent of the outstanding shares of the Corporation then entitled to vote upon the election of directors, voting together as a single class, shall be required for the alteration, amendment, or repeal of the Bylaws or adoption of new Bylaws by the stockholders of the Corporation.

ARTICLE VIII

INDEMNIFICATION AND ADVANCEMENT OF EXPENSES

     Section 8.1. Right to Indemnification. The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (a “Covered Person”) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”), by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the

18

Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys’ fees) reasonably incurred by such Covered Person. Notwithstanding the preceding sentence, except as otherwise provided in Section 8.3, the Corporation shall be required to indemnify a Covered Person in connection with a proceeding (or part thereof) commenced by such Covered Person only if the commencement of such proceeding (or part thereof) by the Covered Person was authorized in the specific case by the Board.

     Section 8.2. Prepayment of Expenses. The Corporation shall to the fullest extent not prohibited by applicable law pay the expenses (including attorneys’ fees) incurred by a Covered Person in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Covered Person to repay all amounts advanced if it should be ultimately determined that the Covered Person is not entitled to be indemnified under this Article VIII or otherwise.

     Section 8.3. Claims. If a claim for indemnification (following the final disposition of such proceeding) or advancement of expenses under this Article VIII is not paid in full within sixty days after a written claim therefor by the Covered Person has been received by the Corporation, the Covered Person may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim to the fullest extent permitted by law. In any such action the Corporation shall have the burden of proving that the Covered Person is not entitled to the requested indemnification or advancement of expenses under applicable law.

     Section 8.4. Nonexclusivity of Rights. The rights conferred on any Covered Person by this Article VIII shall not be exclusive of any other rights which such Covered Person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these Bylaws, agreement, vote of stockholders or disinterested directors or otherwise.

     Section 8.5. Other Sources. The Corporation’s obligation, if any, to indemnify or to advance expenses to any Covered Person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such Covered Person may collect as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, enterprise or non-profit enterprise.

     Section 8.6. Amendment or Repeal. Any repeal or modification of the provisions of this Article VIII shall not adversely affect any right or protection hereunder of any Covered Person in respect of any proceeding (regardless of when such proceeding is first threatened, commenced or completed) arising out of, or related to, any act or omission occurring prior to the time of such repeal or modification. The indemnification provisions set forth in this Article VIII shall be deemed to be a contract between the Corporation and each director or officer who serves in any such capacity at any time while these provisions as well as relevant provisions of the General Corporation Law of the State of Delaware are in effect and any repeal or modification

19

thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit, or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a contract right may not be modified retroactively without the consent of such director or officer.

     Section 8.7. Other Indemnification and Advancement of Expenses. This Article VIII shall not limit the right of the Corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Covered Persons when and as authorized by appropriate corporate action.

20

EX-10.27

Exhibit 10.27

PUT/CALL AGREEMENT

          This PUT/CALL AGREEMENT (this “Agreement”) dated as of August 20, 2010 by and among SAN ANTONIO HOSPITAL MANAGEMENT, INC., a North Carolina corporation (the “General Partner”), SAN ANTONIO HOLDINGS, INC., an Arizona corporation (formerly known as Venture Holdings, Inc., “SAH”; SAH and the General Partner are sometimes referred to herein as the “MedCath Partners”), MEDCATH INCORPORATED, a North Carolina corporation (“MedCath”), S.A.H.H. HOSPITAL MANAGEMENT, LLC, a Texas limited liability company (the “Investor General Partner”), and S.A.H.H. INVESTMENT GROUP, LTD., a Texas limited partnership (the “Investor Limited Partner”) and S.A.H.H. MANAGEMENT COMPANY, LLC, a Texas limited liability company which is the general partner of the Investor Limited Partner (the “ManageCo GP”; ManageCo GP together with the Investor General Partner and the Investor Limited Partner are sometimes referred to herein collectively as the “Physician Partners”).

RECITALS

1.	The General Partner, SAH, the Investor General Partner and the Investor Limited Partners constitute all of the partners of San Antonio Heart Hospital, LP, a Texas limited partnership (the “Partnership”) pursuant to the Certificate of Limited Partnership filed with the Office of the Secretary of State of Texas on September 17, 2001 and the Limited Partnership Agreement among the Partners, effective such date, as the same may have been and may hereafter be amended or modified (the “Partnership Agreement”).
2.	The Partnership owns and operates a hospital in San Antonio, Texas which does business under the name of TexSAn Heart Hospital (the “Hospital”).
3.	MedCath has proposed selling its equity interest in the General Partner and SAH and in connection therewith, MedCath has received indications of interest from parties desiring to acquire substantially all of the assets of the Partnership.
4.	The terms of the Partnership Agreement require that a sale of substantially all of the assets of the Partnership be approved by all of the General Partner, SAH, the Investor General Partner and the Investor Limited Partner.
5.	MedCath has determined that it does not desire to proceed further with a sale of the Partnership’s assets without establishing a mechanism whereby it may gain assurance that the necessary approvals by the Physician Partners to such a transaction may be obtained.

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties, intending to be legally bound, agree as follows:

ARTICLE I
Definitions

          All terms defined in the Partnership Agreement and not defined in this Agreement shall be used in this Agreement with the respective meaning ascribed thereto in the Partnership Agreement.

ARTICLE II
General Partner Call Right

          Section 2.1 General Partner Call Right. At any time prior to the termination of this Agreement, the General Partner shall have the right, but not the obligation (the “Call Right”), to purchase all, but not less than all, of the Partnership Interests held by the Physician Partners, together but not separately, for the Call Purchase Price (as defined below) in connection with an Asset Sale (as defined below) and in accord with the procedures set forth below. The Call Right may be exercised by the General Partner upon twenty (20) days written notice (the “Call Notice”) to the Physician Partners, and, if exercised and the Asset Sale (as defined below) is closed within the term of this Agreement, the General Partner and the Physician Partners shall have the following rights and obligations:

          (a) Contemporaneously with the closing (the “Asset Sale Closing”) of an Asset Sale (as defined below):

          (i) The General Partner shall pay the First Payment (as defined below) of the Call Purchase Price to the Physician Partners via wire transfer to the account(s) designated by the Physician Partners; provided however, in no event shall the First Payment be less than the Call Floor Amount (as defined below);

          (ii) The Physician Partners shall be deemed to have transferred and assigned to the General Partner or its designee all of their rights, title and interests, both beneficial and of record, in and to any Partnership Interests (the “Partnership Transfer”) and the Physician Partners shall be deemed to have made the representations and warranties set forth in Sections 5.1 and 5.2 in connection therewith, it being acknowledged that this Agreement and the performance by the General Partner of its obligations hereunder shall result in the Partnership Transfer being deemed to have occurred without any further action being required of the Physician Partners hereunder; and

          (iii) The General Partner shall have the right to vote the Irrevocable Proxy of the Physician Partners in the form attached as Exhibit “A” hereto (the “Proxy”), which is being delivered to the General Partner in trust upon execution of this Agreement, and which constitutes and appoints the General Partner as their true and lawful proxy to vote such Physician Partners’ Partnership Interests with respect to a sale, transfer or other disposition of all, a substantial portion or substantially all of the Partnership’s assets and the assumption by the purchaser of

2

such Partnership liabilities as such purchaser agrees in writing to assume (any such sale, transfer or other disposition being an “Asset Sale”); and

          (b) The “Call Purchase Price” shall be an amount equal to the greater of:

          (i) What would have been the Physician Partners’ proportionate share (based on the relative percentage Partnership Interests of the Physician Partners immediately prior to the Asset Sale Closing (“Physician Proportionate Share”)) of the Net Proceeds resulting from the Asset Sale had the Physician Partners continued to own their Partnership Interests immediately following the Asset Sale Closing, minus the amount as of such closing of Guarantee Fees owed by the Physician Partners to the Partnership or any Partner, which Guarantee Fees as of June 30, 2010 were Nine Hundred Forty-Three Thousand Five Hundred Eighty-Three Dollars ($943,583.00), or

          (ii) Four Million Four Hundred Eighty Thousand Dollars ($4,480,000.00) minus the amount as of the Asset Sale Closing of Guarantee Fees owed by any Physician Partners to the Partnership or any Partner (the “Call Floor Amount”).

          (c) The “Net Proceeds” of an Asset Sale shall mean (a) all cash proceeds received by the Partnership from or as a result of an Asset Sale, plus (b) the amount of accounts receivable collected by the Partnership during the one year period after the Asset Sale Closing date minus a collection fee equal to 3% of accounts receivable to be paid to the General Partner or other party designated by the General Partner for collecting accounts receivable to the extent accounts receivable are not among the assets sold in the Asset Sale, minus (c) the total amount of indebtedness, accounts payable, liabilities and other obligations of the Partnership whether known or unknown as of the Asset Sale Closing date, including but not limited to, the outstanding amount of principal and interest on loans to the Partnership from the General Partner or its affiliates which as of June 30, 2010 was Forty Million Eleven Thousand Five Hundred Forty-Five Dollars ($40,011,545), management fees and expenses owed by the Partnership to the General Partner or its affiliates which as of June 30, 2010 was Eight Million Eight Hundred Thirty-Nine Thousand Nine Hundred Fifty-Five Dollars ($8,839,955) and minus (d) all transaction costs and expenses, subject to any limitations with respect thereto in Section 5.17 hereof and in the certificate attached as Exhibit “B”.

          (d) The Call Purchase Price shall be paid to the Physician Partners via wire transfer as follows:

          (i) On the date of the Asset Sale Closing, an amount equal to the Physician Partners share of net cash proceeds paid by the purchaser upon the closing of the Asset Sale minus the amount of Guarantee Fees owed by the Physician Partners to the Partnership or any Partner, minus the Physician Partners Proportionate Share of the following amounts (the “First Payment”):

3

(x)

All known liabilities and obligations of the Partnership which the General Partners will pay upon or following the Asset Sale Closing and the General Partner’s reasonable estimate of additional liabilities and obligations of the Partnership which may become due and payable upon the Asset Sale Closing and during the 30 day period after the Asset Sale Closing. For purposes of estimation only, had the Asset Sale Closing occurred as of June 30, 2010, then the amount retained by the Partnership under this subsection (x) would have been approximately $5,750,000.00, it being acknowledged that no representation is being made that the actual amount so retained on the Asset Sale Closing Date will be the same such amount since liabilities such as employee health insurance claims and the timing of invoices for good and services provided to the hospital by third parties are among the types of liabilities that can affect such amount; and

(y)

Two Million Five Hundred Thousand Dollars $2,500,000.00 which will be used to pay, or create a reserve for, Partnership liabilities and obligations which become known during the one year period after the date of the Asset Sale Closing and which amount may be increased or decreased by the General Partner as of the date of the Asset Sale Closing to reflects events and circumstances then existing (the total amounts in (x) and (y) referred to as the “Reserves”) provided that any increase in the portion of the Reserve established under this subsection (y) may occur upon the Asset Sale Closing only if the General Partner has a good faith basis to so, such as an unanticipated claim for reimbursement under any government program, employee claims, legal actions filed or threatened and other material items.

Notwithstanding anything herein to the contrary, in no event shall the First Payment be less than the Call Floor Amount. The Physician Partners shall be entitled to additional payments under clauses (ii), (iii) and (iv) below if, and only if, the final amount of the Call Purchase Price exceeds the First Payment in which event, such subsequent payments due to the Physician Partners hereunder shall be adjusted to reflect the prior payment of the Call Floor Amount. Any payments under clauses (ii), (iii) and (iv) below shall be calculated and made without duplications. Subject to the foregoing:

4

          (ii) Within 45 days following the date of the Asset Sale Closing, an amount equal to the Physician Partners Proportionate Share of all net accounts receivable collected, if accounts receivable are not among the assets sold as part of the Asset Sale, less Partnership liabilities and obligations paid or accrued, in each case, during the 30 day period following the date of the Asset Sale Closing (the “Second Payment”);

          (iii) Thereafter, if accounts receivable are not among the assets sold as part of the Asset Sale, within 15 days after the end of each calendar quarter prior to the Final Payment, an amount equal to the Physician Partners Proportionate Share of all net accounts receivable collected less Partnership liabilities and obligations paid or accrued during such calendar quarter (the “Quarterly Payments”); and

          (iv) Within 45 days following the one year anniversary of the Asset Sale Closing, the Physician Partners Proportionate Share of (x) all net accounts receivable collected since the last Quarterly Payment, plus (y) any Reserves which are no longer reasonably appropriate to pay, or create further reserves to pay, Partnership liabilities and obligations which thereafter are reasonably estimated by the General Partner; provided that such final payment shall be adjusted if required so that the total amount which has been paid to the Physician Partners in all events equals the Call Purchase Price (the “Final Payment”).

Each payment shall be accompanied by reasonable supporting documentation. On a quarterly basis after the Asset Sale Closing, the General Partner shall be available to meet with representatives of the Physician Partners to review Partnership information, including, but not limited to, financial information and records relating to all payments due to the Physician Partners under this Agreement. While the General Partner shall retain the authority to establish, maintain and adjust the Reserves as set forth herein, it shall consider in good faith requests by the Physician Partners to adjust those Reserves from time to time based upon then current circumstances. Additionally, the Physician Partners shall have the right to audit (using a qualified independent auditor) at their expense (except as provided below), the accuracy of Partnership reporting regarding known amounts of Partnership liabilities paid and accounts receivable collected. If any such audit demonstrates an underpayment to the Physician Partners of 5% or more of any payment due under Section 2.1(d), or an overpayment of fees and expenses due to the General Partner, in either case due to inaccuracies with respect to known amounts of Partnership liabilities paid or accounts receivable collected, then the costs of such audit shall instead be paid by the General Partner. Adjusting payments will be made promptly by the parties hereto with respect to inaccuracies of any amounts paid under this Agreement. Such audit rights may be exercised anytime prior to the 90^th day after the Final Payment is made. All rights of the Physician Partners as set forth in this paragraph, and all rights of the Physician Partners, as partners in the Partnership, to access to the books and records of the Partnership, including but not limited to their rights to meet with the General Partner, access to financial information and records and audit rights, shall survive the General Partner’s exercise of its Call Right.

5

Reserves shall be maintained in interest bearing accounts and any such interest shall be an asset of the Partnership.

If the General Partner exercises the Call Right and an Asset Sale does not close within twelve months of the date of the Call Notice, the exercise of the Call Right shall be cancelled, the Proxy shall terminate, and the Physician Partners shall retain their respective Partnership Interests, provided that such cancellation shall not affect the Put right of the Physician Partners or the right of the General Partner to subsequently exercise the Call Right again prior to the termination of this Agreement. The parties acknowledge that upon payment of the Call Floor Amount as set forth above, the Physician Partners will no longer have the right to exercise the Put under Article III hereof.

          Section 2.2 Covenants of the General Partner. The General Partner covenants and agrees that if it exercises the Call Right and utilizes the resulting Proxy in connection with an Asset Sale transaction, it will do so only in a transaction in which the consideration is payable in cash and the assumption of those Partnership liabilities as the General Partner and the purchaser shall agree.

          Subject to good faith requirements for confidentiality, the General Partner will provide updates from time to time to counsel for the Physician Partners regarding proposed Asset Sales.

          Section 2.3 Officer’s Certificate. The General Partner shall cause the Chief Executive Officer of MedCath to execute and deliver to the Physician Partners an Officer’s Certificate in the form attached hereto as Exhibit “B” at the Asset Sale Closing.

ARTICLE III
Physician Investors’ Put Right

          Section 3.1 Right to Put. At any time prior to the termination of this Agreement subject to the other terms of this Agreement, the Physician Partners, together but not separately, shall have the right to give to the General Partner a notification in writing (the “Put Notice”) that they have elected to sell their Partnership Interests to the General Partner (the “Put”) no later than the twenty (20^th) day after the date on which the Put Notice is given (or if such day is not a business day, then the first business day thereafter) (the “Put Date”) for the Put Purchase Price (as defined below). The “Put Purchase Price” shall mean Four Million Four Hundred Eighty Thousand Dollars ($4,480,000.00) less the amount of any Guarantee Fee owed by any Physician Partners to the Partnership or any Partner.

          Section 3.2 Put Closing Procedures. The General Partner shall, within five (5) days after receiving the Put Notice, give the Physician Partners written notice of the date on which the closing of the Put will occur (the “Put Closing Date”), which shall be no later than the Put Date. On the Put Closing Date, the General Partner shall wire transfer to the account(s) designated by the Physician Partners at least three days prior to the Put Closing Price.

6

ARTICLE IV
Termination

          Section 4.1 Termination. This Agreement shall terminate on the earlier to occur of (i) the date agreed to in writing by all the Partners or (ii) August 31, 2011; provided that any action taken by any Partner in accordance with or pursuant to this Agreement prior to such termination shall be valid and binding on the parties hereto.

ARTICLE V
Miscellaneous

          Section 5.1 Mutual Representations and Warranties. Each party to this Agreement represents and warrants to the other party as follows:

          (a) The execution, delivery and performance by such party of this Agreement and the transactions contemplated thereby have been duly authorized by all necessary corporate partnership or limited liability company action, and do not and will not require any further consents or approvals which have not been obtained, or violate any provision of any law, regulation, order, judgment, injunction or similar matters or breach any agreement presently in effect with respect to or binding on such party;

          (b) This Agreement is the legal, valid and binding obligation of such party enforceable against such party in accordance with their respective terms; and

          (c) All government approvals necessary for the execution, delivery and performance by such party of its obligations under this Agreement and the transactions contemplated hereby have been obtained and are in full force and effect.

          Section 5.2 Physician Partners Additional Representations and Warranties; Waivers. The Physician Partners each represent and warrant that they have good title to their respective Partnership interests free and clear of all liens, security interests or other encumbrances and that upon the closing of any Call or Put transaction under Articles II or III, such unencumbered good title thereto shall be conveyed to the General Partner or its designee. Each of the Partners shall be deemed to also have made the representations and warranties set forth in Section 5.1 and this Section 5.2 as of the date hereof and again effective as of the Call or Put transaction closing dates. The Physician Partners hereby waive and release any rights of first refusal and any other approval or consent rights they may have or otherwise be entitled to exercise in connection with any transaction contemplated by either Articles II or III of this Agreement, whether arising under the Partnership Agreement, under applicable law or any other basis, none of which shall apply to the transactions contemplated by either Articles II or III of this Agreement.

          Section 5.3 Notices and Delivery. Any notice to be given hereunder at any time to any of the parties or any document required by this Agreement to be delivered to any party , may be delivered personally, mailed to such party, postage prepaid, addressed to the party at the addresses below or by email at the email address below followed by a mailed copy. Any notice,

7

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 or emailed, as the case may be.

[add notice addresses]

          Section 5.4 Counterpart Execution; Facsimile Execution. This Agreement may be executed in any number of counterparts with the same effect as if all of the parties had signed the same document. Such executions may be transmitted to the other parties by facsimile or email and such facsimile or email 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 5.5 Benefit; Assignment. Subject to provisions in this Agreement to the contrary, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and assigns. Subject to provisions in this Agreement to the contrary, no party may assign its rights or obligations under this Agreement without the prior written consent of the other parties.

          Section 5.6 Press Release. Except as required by applicable law, no party will issue any report, statement or release to the public with respect to this Agreement and the transactions contemplated hereby without the prior written approval of the other parties hereto of the text of any such public report, statement or release. The Physician Partners acknowledge that MedCath may file one or more Forms 8-K with the Securities and Exchange Commission in connection with the transactions contemplated by this Agreement.

          Section 5.7 Severability. In the event any provision of this Agreement is held to be invalid, illegal or unenforceable for any reason and in any respect, and if the rights of the parties under this Agreement will not be materially or adversely affected thereby, (i) such provision will be fully severable; (ii) this Agreement will be construed and enforced as if the illegal, invalid or unenforceable provision had never compromised a part hereof; (iii) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance here from; and (iv) in lieu of the illegal, invalid or unenforceable provision, there will be added automatically as a part of this agreement a legal, valid and enforceable provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible.

          Section 5.8 No Inferences. Inasmuch as this Agreement is the result of negotiations between sophisticated parties of equal bargaining power represented by counsel, no inference in favor of, or against, either party shall be drawn from the fact that any portion of this Agreement has been drafted by or on behalf of such party.

          Section 5.9 Divisions and Headings of this Agreement. The divisions of this Agreement into articles, sections and subsections and the use of captions and headings in connection therewith are solely for convenience and shall have no legal effect in construing the provisions of this Agreement.

8

          Section 5.10 Third-Party Beneficiaries. Any third party shall be entitled to conclusively rely upon any agreement or instrument executed and delivered by any of the MedCath Partners pursuant to powers or rights granted under this Agreement as valid, binding and enforceable obligations of the Partnership and each of its Partners.

          Section 5.11 Tax and Other Advice and Reliance. None of the parties (nor any of the parties’ respective counsel, accountants or other representatives) has made or is making any representations to any other party (or to any other party’s counsel, accountants or other representatives) concerning the consequences of the transactions contemplated hereby under applicable tax related laws or otherwise. Each party has relied solely upon the advice, including tax advice, of its own employees or of representatives engaged by such party and not on any such advice provided by any other party hereto; provided, that nothing in the foregoing is intended to limit the applicability of any party’s representations and warranties to any other parties.

          Section 5.12 Entire Agreement; Amendment. This Agreement and the Partnership Agreement constitute the entire agreement of whatsoever kind or nature existing between or among the parties representing the within subject matter and no party shall be entitled to benefits other than those specified herein. As between or among the parties, no oral statement or prior written material not specifically incorporated herein shall be of any force and effect. The parties specifically acknowledge that in entering into and executing this Agreement, the parties rely solely upon the representations and agreements contained in this Agreement and no others. All prior representations or agreements, whether written or verbal, not expressly incorporated herein are superseded and no changes in or additions to this Agreement shall be recognized unless and until made in writing and signed by all parties hereto. In the event of any conflict between the terms of the Partnership Agreement and this Agreement, the terms of this Agreement shall prevail.

          Section 5.13 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 5.14 Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, exclusive of its conflict of law rules.

          Section 5.15 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 5.16 Guarantee of General Partners Obligations. MedCath, as principal obligor and not merely as a surety, hereby unconditionally guarantees full, punctual and complete performance by General Partner of all of the General Partner’s obligations under this Agreement and so undertakes to the Physician Partners that, if and whenever the General Partner is in default, MedCath will on demand duly and promptly perform or procure the performance of the General Partner’s obligations. The foregoing guarantee is a continuing guarantee and will

9

remain in full force and effect until the obligations of General Partner under this Agreement have been duly performed or discharged. MedCath’s obligations under this Section 5.17 shall not be affected or discharged in any way by any action or proceeding with respect to the General Partner under any federal or state bankruptcy, insolvency or debtor relief laws.

          Section 5.17 Partnership Advisors and Transaction Expenses. Each of the Partners acknowledge and consent to the Partnership’s retention of Navigant Capital Partners, LLC (“NCA”) as its investment banker and Moore & Van Allen, PLLC as its attorneys in connection with the negotiation and closing of any of the sale or transfer transactions contemplated hereby, and that the fees and the expenses thereof shall be paid by the Partnership or the Partners, pro rata, as the case may be upon the closing of any of the sale or transfer transactions contemplated hereby (and shall be used in determining the Net Proceeds), provided that the expenses of NCA shall not exceed $20,000.00.

[EXECUTIONS APPEAR ON THE FOLLOWING PAGES]

10

The General Partner:
SAN ANTONIO HOSPITAL MANAGEMENT, INC.
By: Title:	/s/ James A. Parker Treasurer
SAH:
SAN ANTONIO HOLDINGS, INC.
By: Title:	/s/ James A. Parker Treasurer
The Investor General:
S.A.H.H. HOSPITAL MANAGEMENT, LLC
By: Title:	/s/ A. C. Rabinowitz, MD President
The Investor Limited Partner:
S.A.H.H. INVESTMENT GROUP, LTD.
By: Title:	/s/ A. C. Rabinowitz, MD Managing Partner
ManageCo GP:
S.A.H.H. MANAGEMENT COMPANY, LLC
By: Title:	/s/ A. C. Rabinowitz, MD President
MedCath:
MEDCATH INCORPORATED
By: Title:	/s/ O. Edwin French President & CEO

11

Exhibit “A”

Irrevocable Proxy

          Each of the Physician Partners hereby irrevocably constitutes and appoints the General Partner, from the date of this Agreement until the termination of this Agreement in accordance with its terms, as their true and lawful proxy, for and in each Physician Partner’s name, place and stead to vote such Physician Partner’s Partnership Interests and any and all other interests in the Partnership of such Physician Partner whether directly or indirectly, beneficially or of record, now owned or hereafter acquired (such Partnership Interests together with all such other equity interests, a “Physician Partner’s Interest”), with respect to any “Asset Sale Transaction” (as hereinafter defined). The foregoing proxy shall include the right to sign each such Physician Partner’s name (as a partner of the Partnership) to any consent, certificate or other document relating to the Partnership that applicable law may permit or require and to cause each such Physician Partner’s Interests to be voted, either at a meeting or by written consent, in accordance with the preceding sentence. Each Physician Partner hereby revokes all other proxies and powers of attorney with respect to each such Physician Partner’s Interests that it may have appointed or granted, to the extent such proxies or powers extend to any Specified Matter. The Partnership will not give a subsequent proxy or power of attorney (and if given, will not be effective) or enter into any other voting agreement with respect to each such Physician Partner’s Interests with respect to any Asset Sale Transaction.

As used herein, “Asset Sale Transaction” means a sale, transfer or other disposition of all, a substantial portion or substantially all of the Partnership’s assets, the assumption by such purchaser of such Partnership liabilities as the purchaser agrees to assume together with such other terms related to such sale, transfer or other disposition as the General Partner determines to be necessary or appropriate on behalf of the Partnership (an “Asset Sale Transaction”).

12

Exhibit “B”

Officer’s Certificate

OFFICER’S CERTIFICATE

FROM:	MedCath Incorporated
TO:	S.A.H.H. Investment Group, LTD and S.A.H.H. Management Company, LLC
CLOSING
DATE:	, 2010

          The undersigned, O. Edwin French, hereby certifies that he is the President and Chief Executive Officer of MedCath Incorporated, a North Carolina corporation (the “Company”), and that, as such officer, is authorized to execute and deliver this Certificate in the name and on behalf of the Company.

          The undersigned further certifies that, as of the date hereof and as of the Closing Date, as hereinafter defined, the following are true and correct:

          1. This Certificate is being delivered in conjunction with that one certain Put/Call Agreement (the “Agreement”) dated as of August ____, 2010 by and among SAN ANTONIO HOSPITAL MANAGEMENT, INC., a North Carolina corporation (the “General Partner”), SAN ANTONIO HOLDINGS, INC., an Arizona corporation (formerly known as Venture Holdings, Inc., “SAH”; SAH and the General Partner are sometimes referred to herein as the “MedCath Partners”), the Company, S.A.H.H. HOSPITAL MANAGEMENT, LLC, a Texas limited liability company (the “Investor General Partner”), and S.A.H.H. INVESTMENT GROUP, LTD., a Texas limited partnership (the “Investor Limited Partner”) and S.A.H.H. MANAGEMENT COMPANY, LLC, a Texas limited liability company which is the general partner of the Investor Limited Partner (the “ManageCo GP”). All capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Agreement.

          2. The Company now, and at the time of the closing of a sale of all or substantially all of the assets of the Hospital (as defined below) as contemplated by the Agreement (the time of such sale being referred to herein as the “Closing Date”), owns all ownership interests, both beneficial and of record, in both of the MedCath Partners.

          3. The sale of all or substantially all of the assets of the hospital (the “Hospital”) owned by San Antonio Heart Hospital, LP, a Texas limited partnership (the “Hospital Partnership”) d/b/a TexSAn Heart Hospital, is not contemplated to be, and shall not be, bundled with or combined from a pricing or other material term standpoint with the sale of any other asset, hospital, facility, or entity owned or controlled, whether directly or indirectly, by the Company or any officers, directors, managers, shareholders, or subsidiaries of the Company.

          4. The only consideration to be paid or accepted for the assets of the Hospital shall be a combination of (i) cash and (ii) assumption of Hospital Partnership Liabilities. The assets of the Hospital shall be sold to the person or entity making the best offer based on (i) cash, (ii) value of assumed liabilities of the Hospital Partnership and (iii) other material terms offered by such purchaser.

13

          5. The Company, whether itself or through Navigant (as defined below), has made commercially reasonable efforts to solicit bids or offers for the assets of the Hospital from potential purchasers of the Hospital, and the General Partner has and will review all bids or offers it receives or is presented with in good faith.

          6. All reasonable potential bidders have and will receive substantially the same information and materials regarding the Hospital.

          7. No person or entity who is not a party to the Agreement, other than Navigant Capital Partners, LLC (“Navigant”) and the Partnerships legal and professional advisors, shall receive any financial or other compensation or benefit from or at the expense of the Partnership as a result of the sale of the assets of the Hospital, other than distributions of sale proceeds made to partners, members or shareholders of the MedCath Partners, the Investor Limited Partner and ManageCo GP.

          8. The only financial or other compensation or benefit to be received by Navigant as a result of or in any way related to the sale of the assets of the Hospital is a fee is 1.35% of the sale price of the Hospital plus expenses not to exceed $20,000.

          9. If the General Partner enters into a transition service agreement in conjunction with any sale of the Hospital such transition service agreement will be negotiated in good faith and any fees and reimbursement of expenses to be paid thereunder shall not exceed fair market value and shall be paid only to the General Partner or its affiliates. ManageCo GP shall be provided with a copy of any transition service agreement at least five (5) days prior to the entry into such agreement, and ManageCo GP shall be informed of any fees and reimbursement of expenses to be paid under such agreement.

          IN WITNESS WHEREOF, the undersigned has executed and delivered this certificate in the name and on behalf of the Company as of the date set forth above.

          /s/ O. Edwin French

O. Edwin French, President and Chief Executive Officer

          The undersigned, _______________, Secretary of the Company, does hereby certify to S.A.H.H. Investment Group, LTD and S.A.H.H. Management Company, LLC that O. Edwin French is the duly elected, qualified and acting President and Chief Executive Officer of the Company, and the signature appearing above is his genuine signature.

          IN WITNESS WHEREOF, I have hereunto signed my name this ____ day of August, 2010.

, Secretary

14

EX-10.28

Exhibit 10.28

OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company

TABLE OF CONTENTS
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company

ARTICLE I DEFINITIONS	1
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 Statement of Philosophy and Values	3
SECTION 2.5 Registered Agent and Office; Principal Place of Business	3
SECTION 2.6 Commencement and Term	4
ARTICLE III MEMBERS AND CAPITAL CONTRIBUTIONS	4
SECTION 3.1 Initial Capital Contributions of Members	4
SECTION 3.2 Liability of Members — For Capital	5
SECTION 3.3 Maintenance of Capital Accounts; Withdrawals of Capital; Withdrawals from the Company	6
SECTION 3.4 Interest on Capital Contributions or Capital Accounts	6
SECTION 3.5 Additional Funding	6
SECTION 3.6 Member Documentation	7
SECTION 3.7 Reserved Powers of Members	8
SECTION 3.8. Appointment of Board of Directors	9
SECTION 3.9 Obligations Relating to Real Property	9
SECTION 3.10 Involvement of Physician Members and/or Owners	10
ARTICLE IV NAMES AND ADDRESSES OF MEMBERS	11
ARTICLE V MANAGEMENT OF THE COMPANY	11
SECTION 5.1 General Authority and Powers of DCHMI and the Board of Directors	11
SECTION 5.2 Restrictions on Authority of the Board of Directors	12
SECTION 5.3 Duties of the Board of Directors	13
SECTION 5.4 Delegation by the Board of Directors	14
SECTION 5.5 Right to Rely Upon the Authority of the Manager	14
SECTION 5.6 Company Expenses	14
SECTION 5.7 No Management by Members	17
SECTION 5.8 Consent by Members to Exercise of Certain Rights and Powers by Board of Directors	17
SECTION 5.9 Meetings, Quorum and Vote of the Board of Directors	17
SECTION 5.10 Other Business of Members	18
SECTION 5.11 Board of Directors’ Standard of Care	21

i

SECTION 5.12 Limitation of Liability	21
SECTION 5.13 Indemnification of the Directors	21
SECTION 5.14 Purchase of Goods and Services from DCHMI	22
SECTION 5.15 Indemnity by the Company	22
SECTION 5.16 Force Majeure	22
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	23
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	25
SECTION 7.1 No Termination by Certain Acts of Member	25
SECTION 7.2 Dissolution	26
SECTION 7.3 Dissolution and Final Liquidation	27
SECTION 7.4 Termination	28
SECTION 7.5 Payment in Cash	28
SECTION 7.6 Termination of Noncompetition Covenants	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	31
SECTION 8.3 Substitute Member — Conditions to Fulfill	31
SECTION 8.4 Allocations Between Transferor and Transferee	31
SECTION 8.5 Rights, Liabilities of, and Restrictions on Assignee	32
SECTION 8.6 Repurchase of Interests in Certain Events	32
SECTION 8.7 Death of a Member	33
ARTICLE IX RECORDS, ACCOUNTINGS AND REPORTS	33
SECTION 9.1 Books of Account	33
SECTION 9.2 Access to Records	34
SECTION 9.3 Bank Accounts and Investment of Funds	34
SECTION 9.4 Fiscal Year	34
SECTION 9.5 Accounting Reports	34
SECTION 9.6 Tax Matters Partner	35
ARTICLE X MEETINGS AND VOTING RIGHTS OF MEMBERS	35
SECTION 10.1 Meetings	35
SECTION 10.2 Voting Rights of Members	35

ii

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	37
SECTION 11.3 Amendments to Certificate of Formation	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	38
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	39
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 Decisions by Directors	41
SECTION 12.14 Referrals to Hospital and Ownership of Shares of Common Stock of MedCath Incorporated	41
SECTION 12.15 Acknowledgments Regarding Legal Representation	42
SECTION 12.16 Arbitration	42
SECTION 12.17 Exhibits	42
SECTION 12.18 Schedules	43

iii

OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company

     THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE ARIZONA 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 OPERATING AGREEMENT (the “Agreement”) of Doctors Community Hospital, LLC (the “Company”), a Delaware 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 has been formed to develop, own and operate a general acute care hospital which hospital shall be located in or near Kingman, Arizona and shall provide inpatient and outpatient care, surgery and other services which the Board of Directors may approve from time to time;

     B. It is intended that the Hospital will be an efficient, quality provider of medical services within the greater Kingman, Arizona area;

     C. The Capital Contributions and active involvement of the Members are necessary to enable the Company to achieve its objectives.

ARTICLE I

DEFINITIONS

     Unless otherwise indicated, capitalized words and phrases in this Operating 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 Certificate of Formation with the Delaware Secretary of State in accordance with the provisions of the Act which shall be the “Effective Date” of this Agreement. Upon the Effective Date, the Persons listed on the attached Information Exhibit shall be admitted to the Company as Members and the Persons who executed the Certificate of Formation shall be withdrawn as Members (unless they are listed on the Information Exhibit), all without the necessity of any further act or instrument and without causing the dissolution of the Company. This Agreement shall be effective as of the date the Company was formed.

     SECTION 2.2 Name of Company.

     The name of the Company is Doctors Community Hospital, LLC.

     SECTION 2.3 Purposes and Business Objectives.

     The principal purposes and business objectives of the Company are as follows:

     (a) To develop, own and operate a general acute care hospital which hospital shall be located in or near Kingman, Arizona and shall provide inpatient and outpatient care, surgery and other services which the Board of Directors may approve from time to time, which would include, but not be limited to, the following:

     (i) Services and facilities to meet all requirements of the State of Arizona, Medicare, Medicaid, the Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”) and other credentialing or licensing bodies or agencies in order to have the Hospital licensed and provide services as a general acute care hospital and to be eligible to obtain appropriate reimbursements therefor;

     (ii) Approximately 200,000 square feet in a building to be constructed in accordance with plans and specifications approved by the Company’s Board of Directors;

     (iii) Approximately seventy-two (72) medical/surgical beds (with expansion space for thirty-three (33) additional beds);

     (iv) Heart catheterization laboratories;

     (v) Surgical suites with space for the development of additional surgical suite;

2

     (vi) All appropriate support services and systems; and

     (vii) Appropriate Equipment and services with respect to the facilities described above and as otherwise reasonably necessary or appropriate for the services to be provided by the Hospital.

     The above size, number and scope of facilities of the Hospital are only preliminary estimates. The Board of Directors is authorized to finally make all determinations with respect thereto.

     (b) To lease or acquire the real property, and to construct a suitable building, where the Hospital shall be located;

     (c) Any other purpose reasonably related to (a) and (b) above.

     SECTION 2.4 Statement of Philosophy and Values.

     Notwithstanding anything in this Agreement to the contrary, the Company and the Hospital shall be operated in accordance with the following philosophy and values in all material respects:

     (a) The Hospital shall seek to participate in all public health care financing programs applicable to its business including the Medicare and Medicaid programs:

     (b) The Board of Directors shall adopt and oversee the adherence to the policies of the Hospital, as they may be reasonably amended from time to time, for providing care for those patients who are unable to pay for Hospital care;

     (c) The medical staff of the Hospital shall be open to any physician or allied health professional who meets the qualifications stated in the Bylaws, Rules and Regulations of the Medical Staff;

     (d) The Company shall adopt and adhere to a conflict of interest policy with respect to contracts between the Company and Members or Directors;

     (e) All medical decisions and all policies and procedures relating to the delivery of medical services at the Hospital shall be made by those physicians who are members of the Hospital’s medical staff or qualified medical personnel of the Hospital under the direction of such a physician as provided in the Bylaws, Rules and Regulations of the Medical Staff.

     SECTION 2.5 Registered Agent and Office; Principal Place of Business.

     The registered agent and office of the Company shall be as indicated in the Certificate of Formation, as amended from time to time. The principal place of business of the Company shall

3

be at such location in the greater Kingman, Arizona 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 2.6 Commencement and Term.

     The Company commenced on the filing of the Certificate of Formation in the Office of the Secretary of State of Delaware, as required by Section 2.1 hereof, and shall continue until terminated as provided in this Agreement.

ARTICLE III

MEMBERS AND CAPITAL CONTRIBUTIONS

     SECTION 3.1 Initial Capital Contributions of Members.

     (a) The initial Capital Contributions of the initial Members listed on Exhibit A attached hereto and incorporated by reference herein (the “Initial Members”) shall equal Seventeen Million Five Hundred Thousand Dollars ($17,500,000).

     (b) Such initial Capital Contribution shall be made as follows:

     (i) DCHMI shall initially own at least a 66.6% Membership Interest in the Company and shall contribute Eleven Million Six Hundred Fifty Thousand Dollars ($11,650,000.00) to the Company for its Membership Interest as its Capital Contribution.

     (ii) The Investor Members shall initially own up to a 33.4% Membership Interest and shall contribute up to Five Million Eight Hundred Fifty Thousand Dollars ($5,850,000.00)(the “Investor Member Maximum”) to the Company for such Membership Interests. A group of Investor Members have previously created an organization and made substantial efforts to organize and develop the proposed hospital. In that connection they have made expenditures and made commitments of time which are valuable to the Company. These items will be assigned a value, as determined by an independent third party appraiser firm (the “Development Contribution”), which amount shall constitute a portion of the Investor Member Maximum and which amount is not anticipated to exceed $240,000.

     (iii) Each Member shall contribute his, her or its initial Capital Contribution (x) sixty percent (60%) in cash upon execution of a subscription agreement for such Member’s Membership Interest and (y) forty percent (40%) in cash (the “Second Payment”) payable upon Manager’s written notice thereof, which amount shall be due approximately one hundred twenty (120) days prior to the date that Manager anticipates that Hospital will be available for its first patient

4

treatment. A Member shall be issued and shall own the portion of Membership Interest paid for by the Second Payment only when the Second Payment has been made by the Member. In the event that a Member fails to deliver the Second Payment in cash when due, DCHMI may elect on behalf of the Company either to (i) cancel such Member’s subscription and to return the initial payment without interest, (ii) institute a legal action to enforce the obligation to make the Second Payment or (iii) maintain the subscription by such Member for a pro rata portion of the Membership Interest to the extent of the 60% payment but only if the amount of such initial 60% payment to the Company was $15,000 or more.

     In the event DCHMI contributes Real Property, as defined in Section 3.9, as part of its Capital Contribution, the value of the property, based upon DCHMI’s purchase price therefore, shall be applied first against DCHMI’s obligation under (iii)(x) above.

     This subsection (iii) shall not apply to the Development Contribution, and the Membership Interest related thereto shall be deemed fully issued upon receipt of the Development Contribution.

     (iv) DCHMI shall have the right to purchase any portion of the Membership Interest described in (ii) above which the Investor Members do not purchase by July 1, 2007. If DCHMI purchases a portion of the Membership Interests described in (ii) above initially offered to Investor Members, the Membership Interests and aggregate Capital Contributions of DCHMI and the Investor Members shall be adjusted proportionately.

     (c) The percentage Membership Interests of each Member shall be finally determined by DCHMI at the end of the initial subscription period, but in no event later than July 1, 2007, based upon the amount of initial Capital Contributions then obligated to be made by each Member as a percentage of all initial Capital Contributions then obligated to be made by all of the Members of the Company (“Initial Percentage Membership Interest”). The Initial Percentage Membership Interest of all Investor Members as of July 1, 2007 is referred to as the “Total Initial Percentage Investor Membership Interest”. The percentage Membership Interests shall be adjusted proportionally by DCHMI if any Member fails to make the Second Payment.

     SECTION 3.2 Liability of Members — For Capital.

     The liability of each Member for capital shall be limited to the amount of 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.

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 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.

     Except as otherwise provided herein, 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 require that his, her or its Membership Interest be 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 other than based solely on his, her or 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.

     The Company is hereby authorized to borrow up to $50,280,000 for real estate acquisition, construction costs and other development costs and up to $9,412,000 for equipment and other related costs from DCHMI’s Affiliate, MedCath Finance Company, LLC (“MFC”) which loans shall be secured by all of the assets of the Company and which shall be based upon fair market value terms and conditions as reasonably proposed by MFC (“MFC Loans”). DCHMI is authorized to execute all necessary or appropriate loan agreements, collateral agreements and promissory notes with MFC in order to document and close the MFC Loans. With the approval of the Board of Directors (which determination shall not be unreasonably withheld or delayed), the amounts of the MFC Loans may be increased to reflect the actual costs to be incurred by the Company.

     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 Sections 3.1, 3.2 and the first paragraph of this Section 3.5 are necessary or appropriate for the development or operation of the Hospital, then:

     (a) The Board of Directors may use commercially reasonable efforts to borrow such funds from a bank, other lender or lessor on terms and conditions reasonably acceptable to the Board of Directors. All loans obtained hereunder shall be subject to the

6

approval of the Board of Directors, which approval shall not be unreasonably withheld or delayed.

     (b) On terms and conditions reasonably acceptable to the Board of Directors, MFC may elect, but shall not be obligated, to make loans to the Company in an amount to be agreed upon by the Company and MFC with market rates of interest which loans shall be secured by all of the Company’s assets;

     (c) If loans as provided above in (a) or (b) are not available or its apparent that efforts to seek such financing are not likely to be successful, the Board of Directors shall request, but not require, that Members make additional Capital Contributions on a pro rata basis. The other Members may elect, pro rata, to contribute optional Capital Contributions not made by any other Member hereunder. Thereafter, DCHMI 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) Forth, if adequate funds have not been obtained or raised in accordance with (a) through (c) above, 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 approval of a majority of such Members (determined based upon their Membership Interests), 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 Member Documentation.

     Prior to the execution of this Agreement, each Investor Member that is an Entity and each Entity with a direct or indirect ownership interest in an Investor Member (each, an “Investor Entity”), if any, shall have delivered to DCHMI copies of all documents, instruments and agreements related to the formation, ownership and governance of the Investor Entities (the “Investor Documents”). None of the Investor Documents will be altered or amended without the consent of DCHMI, which consent shall not be unreasonably withheld. Contemporaneously with the Investor Members’ admission as Members of the Company: (i) the Investor Entities shall each execute an Addendum to Subscription Agreement under which, among other things, they agree to be bound by the terms and conditions of Section 5.10 hereof, and no additional Investor Entities shall be admitted as owners of a Member unless such Investor Entities executes an Addendum to Subscription Agreement; and (ii) the Owners shall each execute an Addendum to Subscription Agreement under which, among other things, those individuals agree to be personally bound by the terms and conditions of Section 5.10 hereof. Additionally (unless such requirement is waived by the Board of Directors), Owners who are physicians (or their Practices) shall also execute a Hospital Professional Services Agreement and Right of First Refusal

7

Agreement with the Company. No Person shall be admitted hereafter as an owner of the Investor Members or Investor Entities unless such Person also executes such Addendum to Subscription Agreement, the Hospital Professional Services Agreement and the Right of First Refusal Agreement (Owners who are physicians or their Practices only) so that they are bound thereby to the same extent as are Owners as of the date hereof.

     SECTION 3.7 Reserved Powers of Members.

     The following actions are the only actions which can be taken by the Members and shall require the consent of the Required Members, either by a vote of the Required Members at a meeting of the Members or by the written consent of the Required Members:

     (a) Except as provided in Section 11.1, amendments to the Certificate of Formation of the Company or this Agreement;

     (b) A merger, consolidation, liquidation, or similar reorganization or transfer of a substantial portion of the Company’s assets; provided, however, that if the Investor Members fail to own at such time, in the aggregate, at least a percentage Membership Interest of the Company equal to the Total Initial Percentage Investor Membership Interest, the Investor Members and the members of the Board of Directors which they elect shall no longer have the right to vote on a merger, consolidation, liquidation, or similar reorganization or transfer of a substantial portion of the Company’s assets and Required Members for such purpose shall mean only DCHMI;

     (c) A sale, lease encumbrance or other transfer of all or substantially all of the Company’s assets, except for encumbrances incurred in connection with loans or other financing provided to the Company; provided, however, that if the Investor Members fail to own at such time, in the aggregate, at least a percentage Membership Interest of the Company equal to the Total Initial Percentage Investor Membership Interest, the Investor Members and the members of the Board of Directors which they elect shall no longer have the right to vote on a sale, lease encumbrance or other transfer of all or substantially all of the Company’s assets and Required Members for such purpose shall mean only DCHMI;

     (d) Admission of new Members to the Company other than those Members who become Members in the offering described in the Confidential Private Placement Memorandum dated March 16, 2007;

     (e) Any alteration or amendment of the Company’s Statement of Philosophy and Values and Purposes and Business Objectives and any action which is inconsistent with the Company’s Statement of Philosophy and Values and Purposes and Business Objectives; and

     (f) Approval and authorization of disproportionate distributions or allocations of profits, losses or assets of the Company, except as specifically permitted elsewhere in this Agreement.

8

     SECTION 3.8. Appointment of Board of Directors.

     The Members shall appoint a Board of Directors as follows:

     (a) DCHMI shall appoint four (4) Directors; provided, however, DCHMI may elect at any time to reduce the number of its appointed Directors to less than four (4) and thereafter to increase such number up to four (4) again; and

     (b) The Investor Members shall appoint four (4) Directors and each such Director shall be an Investor Member or an Owner of an Investor Member; provided, however, Investor Members may elect at any time to reduce the number of its appointed Directors to less than four (4) and to increase such number up to four (4) again.

     Subject to the foregoing, 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.

     The Directors shall have the voting rights set forth in Section 5.9 hereof.

     SECTION 3.9 Obligations Relating to Real Property.

     The Company intends to purchase real property located in Kingman, Arizona (the “Real Property”) subject to the following:

     (a) DCHMI is hereby authorized to complete the purchase of such Real Property on which the Hospital and a medical office building (“MOB”) would be located, consisting of up to thirty-five acres in Kingman, Arizona for a purchase price not to exceed approximately Five Million Three Hundred Thousand ($5,300,000), on behalf of the Company;

     (b) The Real Property contains sufficient acreage for the development by a third party developer, which may include Investor Members, of a MOB adjacent to the Hospital. DCHMI is authorized to sell the site for the MOB to a developer reasonably approved by the Board of Directors based upon the fair market value of such site and upon such other terms and conditions as reasonably approved by the Board of Directors;

     (c) In the event that the Company acquires Real Property which exceeds that which is necessary for the development of the Hospital and the MOB, DCHMI may sell such excess property on behalf of the Company to a thirty party or to Investor Members on fair market value terms; and

     (d) If Real Property is first acquired by DCHMI, DCHMI may contribute the Real Property to the Company as part of DCHMI’s Capital Contributions made pursuant to Section 3.1 (b)(i).

9

     SECTION 3.10 Involvement of Physician Members and/or Owners.

     The nature of the services that Company has been formed to provide at the Hospital contemplates the integral involvement of the Investor Members in the performance of the services, and as such the involvement of Investor Members (or if the Investor Member is an entity, its respective direct or indirect owners who are physicians (“Physician Owners”)) in the functions required of them is a condition of each Investor Member’s direct or indirect continued ownership in the Company. All Investor Members and Physician Owners agree that they must be eligible for active Medical Staff Membership 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, quality standards, and peer review for the Hospital which shall in all events be performed under the performance improvement and peer review function of the Hospital;

     (b) The evaluation of clinical competencies and performance evaluation processes for patient care personnel performing services at the Hospital;

     (c) The evaluation of the impact of new and emerging technologies and making recommendations for both new and existing technology to be offered at the Hospital;

     (d) The development of clinical protocols, policies and procedures to be implemented for the Hospital and the performance of periodic review and evaluation of the same to make recommendations for necessary revisions;

     (e) The evaluation of supply utilization in the Hospital; and

     (f) The development and implementation of physician profiles for those physicians practicing in the Hospital that would be reviewed and benchmarked against available data for other hospitals.

     The Board of Directors hereby delegates to DCHMI the task of implementing a system to monitor and document each Investor Member’s (or as applicable, the Physician Owners) compliance with these involvement requirements as revised from time to time, and the Manager shall have the authority to assign specific functions and responsibilities to each Investor Member and Physician Owner.

10

ARTICLE IV

NAMES AND ADDRESSES OF MEMBERS

     The names and addresses of the initial Members are as indicated on the Information Exhibit attached hereto as Exhibit A, which may be amended by the Manager on behalf of the Board of Directors from time to time.

ARTICLE V

MANAGEMENT OF THE COMPANY

     SECTION 5.1 General Authority and Powers of DCHMI and the Board of Directors.

     (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) 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 with respect to the business and affairs of the Company shall be approved or made by the Board of Directors in accordance with this Section 5.1. 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 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 DCHMI.

     (b) The day-to-day management of the business and affairs of the Company shall be the responsibility of DCHMI pursuant to the terms of the Management Services Agreement, which management shall be subject to decisions, guidelines and policies made or established by the Board of Directors hereunder, provided, however, decisions relating to medical and clinical practice at the Hospital shall be made exclusively by the qualified medical personnel of the Hospital under the direction of a member of the Hospital’s medical staff.

     (c) The Members acknowledge that the Management Services Agreement is an integral part of the plans to develop and operate the Hospital and its execution is a condition to DCHMI’s participation in the Company.

     (d) If DCHMI and/or its Affiliates are (i) providing a guaranty or are committed to provide a guaranty for any indebtedness of the Company for borrowed

11

money (or for any such financing structured as a lease), and/or (ii) have any outstanding loans to the Company or are committed to provide such loans, then notwithstanding anything in this Agreement to the contrary, all decisions and actions to be made by the Board of Directors with respect to any loan, lease or other similar financing of the development, construction or operation of the Hospital or the Company’s affairs, including without limitation the decisions with respect to incurring any indebtedness or the refinancing thereof, shall be made by the Directors designated by DCHMI and, if no event of default on any such loan exists or is reasonably anticipated to exist, shall be subject to the consent of at least one of the Directors appointed by the Investor Members, which consent shall not be unreasonably withheld or delayed.

     (e) The Board of Directors shall be deemed to have specifically approved all expenditures proposed by DCHMI under this Article V that are substantially consistent with the Development Budget Exhibit (Exhibit C) or an approved operating budget when funded from additional Capital Contributions made to the Company by the Members pursuant to Section 3.5 above.

     (f) The development and annual operating budgets to be proposed by DCHMI hereunder shall be approved by the Board of Directors as provided above subject to the following:

     (i) The Board of Directors shall be deemed to have approved a development budget which is substantially consistent with the attached Development Budget Exhibit to this Agreement;

     (ii) No Director shall 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 Company’s lenders and other parties providing financing to the Company; and

     (iii) In the event that the Board of Directors is unable to approve an annual budget, DCHMI shall be authorized to operate the Company pursuant to this Agreement under the previous year’s budget increased by the greater of 10% or the amounts which are in reasonable relation to increases in revenues, procedural or patient volumes that exceed those in the prior year’s budget.

     (g) Without DCHMI’s written consent, the Investor Members and the Board of Directors will not approve any change to the construction, design or equipment of the Hospital, if the effect thereof is to materially increase the cost thereof as set forth on the Development Budget Exhibit (Exhibit C) approved hereunder.

     SECTION 5.2 Restrictions on Authority of the Board of Directors.

     The Board of Directors shall not do any of the following:

12

     (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 other than as part of a funds management program of MedCath Incorporated and its Affiliates;

     (d) Admit an additional Member without the approval of the Required Members except as provided otherwise in this Agreement;

     (e) Alter the primary purposes of the Company as set forth in Section 2.3;

     (f) Possess any property or assign the rights of the Company in specific property for other than a Company purpose;

     (g) Employ, or permit the employ of, the funds or assets of the Company in any manner except for the exclusive benefit of the Company;

     (h) 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

     (i) 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, except as set forth in Sections 3.7(b) and (c).

     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, provided, 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; and

     (d) Use their 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

13

public liability and professional liability insurance 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 with respect to the business equipment and property comparable to the Company’s.

     SECTION 5.4 Delegation by the Board of Directors.

     Subject to restrictions otherwise provided herein, the Board of Directors 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 of its responsibilities and obligations under this Agreement or under the laws of the State of Delaware nor will it make any such Person a Member of the Company.

     SECTION 5.5 Right to Rely Upon the Authority of the Manager.

     Persons dealing with the Company may rely upon the representation of the Manager that such Manager is the manager of the Company and that such Manager has the authority to make any commitment or undertaking on behalf of the Company. No Person dealing with the Manager 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 the Manager to sign and deliver on behalf of the Company 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 Company affecting the same.

     SECTION 5.6 Company Expenses.

     (a) The Company shall pay the amounts due to DCHMI under the Management Services Agreement from time to time.

     (b) The Company shall also pay the following expenses of the Company:

     (i) All development and operational expenses of the Company, which may include, but are not limited to: the salary and related expenses of employees and staff of the Hospital and the Hospital President and other members of Hospital’s senior management team who may be employed by MedCath Incorporated, as well as the costs of all employee benefits for such employees whether employed by Hospital or MedCath, including without limitation (as applicable) the employer’s contribution to F.I.C.A., unemployment compensation and other employment taxes, all bonuses, pension or profit sharing plan contributions, worker’s compensation, group life, accident and health insurance premiums, disability and other benefits when applicable, all costs of borrowed money including without limitation all principal, interest and other costs relating to the MFC Loans, taxes, and assessments on the Hospital, and other taxes

14

applicable to the Company; 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 DCHMI or one of its Affiliates as long as the charges to the Company for such services are fair market value, and principal, interest and expenses due on any loans from MFC or other lender of the Company;

     (ii) A medical director’s fee in an amount approved by the Board of Directors which shall be at fair market value to be paid to the Medical Director of the Hospital for services actually rendered pursuant to the Medical Director Agreement;

     (iii) All fees and expenses paid to third parties for accounting, legal, documentation, professional, and reporting services to the Company, which may include, but are not limited to: the legal fees and expenses of Moore & Van Allen, PLLC incurred in preparation and negotiation of this Agreement and the Company’s Private Placement Memorandum, the Management Services Agreement, the Right of First Refusal and the Hospital Professional Services Agreement (collectively referred to as the “Other Documents”); the legal fees and expenses of Mariscal Weeks McIntyre & Friedlander, P.A., counsel for the Investor Members, for its efforts in preparing this Agreement and the Other Documents and for advising the Company on compliance with Arizona law; preparation and documentation of Company bookkeeping, accounting and audits; preparation and documentation of budgets, cash flow projections, and working capital requirements; preparation and documentation of Company state and federal 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; 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 Hospital or the Equipment; and

     (iv) A fair market value consulting fee may be paid to one Investor Member to compensate such individual for their documented time and efforts to

15

assist in the operations and development of the Company’s business prior to the opening of the Hospital.

     (c) Guarantee and Financing Fee. In the event that any Member or its Affiliates, including, without limitation, MFC, 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 “Non-Financing 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 Non-Financing Members (the “Guarantee and Financing Fee”). The annual Guarantee and Financing Fee shall be paid in quarterly installments and the expense thereof shall be allocated to the Non-Financing Members as follows:

     (i) The Guarantee and Financing Fee shall be deducted from the Cash Distributions otherwise distributable to the Non-Financing 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 Non-Financing Members;

     (iii) When Cash Distributions become available for distribution to the Members in the future, the Cash Distributions otherwise distributable to the Non-Financing Members shall first be retained by the Company to the extent that amounts were previously charged to the Capital Accounts of the Non-Financing 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) Operating Budgets. Once a budget has been approved by the Board of Directors, DCHMI shall have the authority to expend up to one hundred and ten percent (110%) of any and all funds which are included in the budget and sign all agreements related thereto, including reimbursement to DCHMI and its Affiliates for goods and services provided to the Company. DCHMI shall have the right to recast the budget by transferring all or part of the funds approved for specific line items to another category or line item by an aggregate amount not to exceed ten percent (10%) of the total budgeted funds. DCHMI is further authorized to make additional expenditures reasonably related to additional revenues or increased patient or procedural volumes.

16

     SECTION 5.7 No Management by Members.

     Except for those management obligations of DCHMI set forth herein and in the Management Services Agreement, 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, the Act, or those granted under the Certificate of Formation and any attempt to participate in the control of the Company in a manner contrary to the rights and powers granted herein, under the Act or Certificate of Formation 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 a Member of any of the rights granted to such Member, including the exercise of any rights granted to DCHMI in its capacity as Manager hereunder, shall not be deemed to be a Member taking part in the control of the business of the Company and shall not constitute a violation of this Section.

     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, Quorum and Vote of the Board of Directors.

     (a) The Board of Directors shall meet at least quarterly. 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.

     (b) An emergency meeting of the Board of Directors may be called by any Director upon shorter notice. Action taken at the emergency meeting shall be valid so long as the meeting is attended by at least three (3) members of the Board of Directors who are appointed by the Investor Members and by members of the Board of Directors who are appointed by of DCHMI who have the authority to cast at least (3) votes on behalf of such Directors, and the action is unanimously approved by the members of the Board of Directors present at such meeting.

     (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.

17

     (d) A quorum of the Board of Directors shall be necessary to conduct business at any meeting. A quorum must include Directors who have the authority to cast at least five (5) votes, including Directors appointed by Investor Members who have the authority to cast at least two (2) votes and Directors appointed by of DCHMI who have the authority to cast at least two (2) votes. A Director 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 Director to hear and be heard by all other Directors.

     (e) Each Director shall have the right to cast one (1) vote on all matters and issues before the Board of Directors, provided that during any period in which DCHMI or the Investor Members have reduced the number of their respective Directors below four (4) in accordance with the provisions of Section 3.8, the Directors appointed by DCHMI or the Investor Members, as applicable, (even if less than 4) shall in all events be entitled to cast four (4) votes on all matters and issues, in which event DCHMI or the Investor Members, as the case may be, shall be entitled to decide how to allocate such votes among its appointed Directors.

     (f) Except as provided in Section 5.1 or as otherwise expressly provided in this Agreement, any action taken by the Board of Directors shall require the affirmative vote of at least a majority of the Directors present at a meeting in which a quorum is present and shall require the vote of Directors appointed by the Investor Members who have the authority to cast at least (2) votes on behalf of the Investor Members and the vote of Directors appointed by DCHMI who have the authority to cast at least two (2) votes on behalf of DCHMI, which affirmative vote or consent shall not be unreasonably withheld or delayed.

     (g) 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 consented to in writing, either collectively or in counterparts, setting forth the action so taken.

     (h) Attendance at a meeting of the Board of Directors constitutes waiver of any objection to the Notice of the meeting.

     (i) A Director may give a written proxy to another Director to vote on any matter or take any other action that a Director is required or permitted to take under this Agreement or under applicable law.

     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 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.

18

     (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 after a Member ceases for any reason to own a Membership Interest in the Company, neither a Member nor any related Investor Entity, Owner, Practice or any of their respective Affiliates, shall hold, directly or indirectly, an investment, ownership or other beneficial interest in (x) any hospital, or (y) any other Entity (including a sole proprietorship) which provides any of the services or facilities, whether on an inpatient or outpatient basis, provided by the Hospital, including, but not limited to, cardiac catheterization laboratories, imaging centers (CT Scanners, MRI, PET, etc.) and ambulatory surgery centers (the “Restricted Services”), in the Territory.

     For purposes of this Agreement, “Territory” shall mean the geographic area bordered by the boundary line pictured on Exhibit D, and which area currently includes the areas having the following zip codes: 86401, 86409, 86411, 86412, 86413, 86429, 86430, 86433, 86437, 86438, 86439, 86442, and 86446.

     Notwithstanding the terms of this Section 5.10 (b):

     (i) No Member or Owner who is a physician or allied health professional shall be prohibited from maintaining his or her staff privileges and admitting and treating patients at any other hospital, as applicable;

     (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 provides healthcare services or supplies 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 any Member, Owner or Practice, or its Affiliates, from (x) continuing to hold an ownership interest in those outpatient facilities listed on Schedule 1 attached hereto which such Member, Owner, Practice or Affiliate held prior to January 1, 2007 provided that each Member, Owner, Practice or Affiliate with any such arrangement with any outpatient facility listed on Schedule 1 is obligated to use their best efforts to prevent any such facility from hereafter adding or expanding to include inpatient facilities or from adding new services and equipment which are not customarily provided by those types of facilities in Phoenix or Kingman Arizona, (y) continuing to provide management or other services to such outpatient facilities listed on Schedule 1 to the extent such Member, Owner, Practice or Affiliate was obligated to provide such services prior to January 1, 2007, or (z) providing services which are incidental to and are customarily provided by a physician or allied health professional in Phoenix or Kingman, Arizona in his or her medical office for the practice of medicine; and

19

     (iv) Nothing herein shall prevent any Member or Owner who is a physician or allied health professional from personally performing professional medical services directly for his or her patients at any hospital or facility and from billing and receiving professional fees as a result of his or her professional medical services from any payor.

     (c) The Members and Owners have reviewed the term and geographical restrictions included in Section 5.10(b), and in light of the interests of the Members and Owners, agree that such restrictions are fair and reasonable.

     (d) In order to ensure that the Hospital has available to it at all times leading and qualified physicians and surgeons, as of the date hereof the Company is entering into the Hospital Professional Services Agreement with each of the Investor Members and Owners who are physicians, or their Practices, which Hospital Professional Services Agreement includes in Section 7 thereof certain covenants by the Owners who are physicians, or their Practices, which are designed to ensure that the Owners who are physicians will be available to the Hospital from time to time in order to enable it to meet its objectives of being an efficient quality provider of hospital services. The Members, Practices, and Owners acknowledge and agree that the execution of the Hospital Professional Services Agreement by the Investor Members, Owners who are physicians and/or their Practices is further consideration for the execution by the Members of this Agreement.

     (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 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 or allied health professional from providing health care services at any other facility.

20

     (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.

     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.

     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 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; provided, however, that the limitation of liability set forth at this Section 5.12 does not apply to any liabilities related to the performance of professional medical services.

     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

21

Company; provided, however, that such indemnification and agreement to hold harmless shall be recoverable only out of Company assets. 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.

     SECTION 5.14 Purchase of Goods and Services from DCHMI.

     Goods and services may be purchased from Members or their Affiliates as long as those occur on fair and reasonable terms.

     SECTION 5.15 Indemnity by the Company.

     The Company agrees to indemnify, defend and hold DCHMI, 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 DCHMI 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 DCHMI), (b) any liability or obligation of the Company, except those which DCHMI 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). The indemnity covenants set forth in this Section 5.15 shall survive the termination of this Agreement for any reason.

     SECTION 5.16 Force Majeure.

     DCHMI 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 DCHMI’s employees or any similar or dissimilar cause beyond the reasonable control of DCHMI. Further, DCHMI shall not be in default under this Article V if the default resulted from actions taken at the request or direction of the Board of Directors or if the Board of Directors failed to take reasonable action recommended by DCHMI to enable it to meet its obligations hereunder.

22

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 Company, and subject to the terms and conditions to which the Company is bound with respect to its lenders, including MFC or other lenders that are Affiliates of DCHMI (“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 annually by the Manager as Cash Distributions according to the relative percentage Membership Interests of the Members at such times as the Board of Directors deems appropriate and after completion of the annual audit of the Company, provided however, the Board of Directors has the authority to make interim distributions if determined to be appropriate by them. Any unpaid Guarantee and Financing Fee shall be deducted from the Cash Distributions otherwise distributable to the Non-Financing Members and paid to the Financing Members as set forth in Section 5.6(c) or retained by the Company as set forth in Section 5.6(c)(iii). Notwithstanding anything herein to the contrary, no distributions shall be made to Members if prohibited by the Act or any other applicable law and unless there are no amounts due, whether principal or interest, on any working capital loans made to the Company by any lender including without limitation DCHMI, MFC, or another Affiliate of MedCath pursuant to Section 3.5.

     (b) Notwithstanding the terms of Section 6.1(a), the Board of Directors shall, to 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 determining the amount, if any, of a distribution from the Company to enable the Members to pay incomes taxes on taxable income of the Company, 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) regardless of whether the tax losses from the prior years were used by any Member as deductions or as carryforwards. Such distributions shall assume for all Members the highest combined federal and state tax rates applicable to any Member with respect to his or its Profits from the Company. Each Member recognizes that there is no assurance that cash will be available to enable distributions to be made to cover taxes at the time such taxes are due.

     SECTION 6.2 Profits.

     Except as provided in the Regulatory Allocations Exhibit (Exhibit E) and subject to Section 6.6, Profits shall be allocated as follows:

23

     (a) First, to the Members who have been allocated Losses pursuant to Section 6.3(a) below until the cumulative Profits allocated pursuant to this Section 6.2(a) equal the cumulative prior allocations of Losses under that Section.

     (b) Next, to the Members who have been allocated Losses pursuant to Section 6.3(b) below until the cumulative Profits allocated pursuant to this Section 6.2(b) equal the cumulative prior allocations of Losses under that Section.

     (c) All remaining Profits shall be allocated to the Members in accordance with their percentage Membership Interests.

     SECTION 6.3 Losses.

     Except as provided in the Regulatory Allocations Exhibit (Exhibit E) 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 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.

24

     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 Non-Financing Members in accordance with their relative percentage Membership Interests.

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.

25

     SECTION 7.2 Dissolution.

     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 2.6 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;

     (f) The entry of a decree of judicial dissolution or the administrative dissolution of the Company as provided in the Act;

     (g) Upon the written election of DCHMI and after prior notice is given by DCHMI at any time to the Investor Members fifteen (15) days prior to the execution by DCHMI on behalf of the Company of definitive agreements for the construction of the Hospital, in the event that DCHMI has determined that the Company and the Hospital do not continue to meet DCHMI’s investment criteria; provided, however, that upon a dissolution under this subsection (g), if, at the time of such election by DCHMI, Investor Members have committed to make initial Capital Contributions of at least Two Million Five Hundred and Five Thousand Dollars ($2,505,000) in the aggregate and have paid at least sixty (60%) of such initial Capital Contributions (or $1,503,000) in cash to Company in accordance with Section 3.1(b)(iii), then DCHMI shall be obligated to pay the reasonable legal fees and expenses of Mariscal Weeks McIntyre & Friedlander, P.A., counsel for the Investor Members, for its efforts in preparing this Agreement and the Company’s Private Placement Memorandum, the Management Services Agreement, the Right of First Refusal and the Hospital Professional Services Agreement, and for assisting the Company in complying with Arizona law applicable to the Company, or

     (h) Upon the written election of either DCHMI or a majority in interest of the Investor Members, in the event that within eighteen (18) months following the earlier of the execution of this Agreement by all Initial Members or the date that all of the Initial Members otherwise become bound under this Agreement, the Company has not commenced construction of the Hospital, unless such period is extended by the mutual written agreement of the Required Members.

26

     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 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 Manager or, if for any reason there is no Manager, by another Person designated by the Board of Directors. In winding up the Company and liquidating assets, the Manager, 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 Hospital or other sums to which the Company may be entitled, and shall sell the Company’s interest in the Hospital and the Equipment 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 Required Members.

     (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 (including but not limited to the Members and their Affiliates) and the expenses of liquidation; and

     (ii) 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 Arizona 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

27

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.

     SECTION 7.6 Termination of Noncompetition Covenants.

     Members shall have no continuing liability or obligation under Section 5.10(b) following the dissolution of the Company.

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 directly or indirectly 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 consent 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.

28

     The Members acknowledge that there is no obligation of the Company or any Member to purchase the Membership Interest of any Member at any time under the terms of this Agreement.

     (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, provided that:

     (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 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”); provided, however, the Board of Directors can in its discretion on a case by case basis approve a sale by an Investor Member without requiring the transferring Investor Member to first comply with the Right of First Refusal requirements; 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, or, in the absence thereof, 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) Subject to (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 pursuant to Section 8.6 for a purchase price equal to five (5) multiplied by the net income (as reasonably determined by the Company’s accountants) of the Company for the twelve (12) month period ending as of the calendar

29

quarter most recently ended prior to such event multiplied by the percentage Membership Interest of such Member in the Company (the “Formula Purchase Price”). 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 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, DCHMI may, upon the approval of at least two (2) of the Board Members appointed by the Investor Members, which determination shall not be unreasonably withheld, assign its Membership Interest in the Company, its rights to designate Directors hereunder, and its rights as manager under the Management Services Agreement to any third party who acquires such Membership Interest and rights and who is not controlled by, controlling, or under common ownership with DCHMI so long as such third party (i) assumes in writing or by operation of law the obligations of DCHMI hereunder, and (ii) would not be in violation of the terms of this Agreement. Notwithstanding anything contained in this Agreement to the contrary, DCHMI may assign its Membership Interest in the Company, its right to designate Directors and its rights under the Management Services Agreement to any party controlled by, controlling or under common ownership with DCHMI without the consent of the Investor Members or the Board of Directors. DCHMI may also assign its Membership Interest in the Company, its right to designate Directors, and its rights under the Management Services Agreement to a financial institution as collateral security for repayment of indebtedness for borrowed funds by MFC, MedCath Incorporated or its Affiliates or by the Company without the consent of the Investor Members or the Board of Directors.

     (e) Notwithstanding anything in this Agreement to the contrary, an Investor Member may, upon the consent of the Board of Directors, assign his, her or its Membership Interest to a trust or family limited partnership that is formed and maintained for the sole benefit of the Investor Member or the individual who owns the Investor Member, as the case may be, and/or his or her immediate family so long as: (i) the Investor Member or individual who owns the Investor Member agrees in writing that he or she continues to be bound by the terms of Section 5.10 of the Agreement and all confidentiality obligations under this Agreement; (ii) the Investor Member or individual who owns the Investor Member agrees in writing that he or she shall remain a trustee, general partner or otherwise exercises control over the trust or family limited partnership as determined by the Board of Directors in its sole discretion; (iii) the Manager first approves in writing the terms of all documents creating and constituting the trust or family limited partnership; (iv) the Company shall continue to have the benefit of its purchase rights under Section 8.6 as if such assignment had not occurred; and (v) the assignment meets such other requirements as reasonably established by the Board of Directors from time to time. Other than (i) through (iv) above, an assignment made under this Section 8.1(e) shall not be subject to any of the restrictions on the transfer of

30

Membership Interests set forth in this Agreement including, but not limited to, the Right of First Refusal set forth at Section 8.1(b).

     (f) Notwithstanding anything contained in this Agreement to the contrary, subsequent to the initial capitalization of the Company, DCHMI will make available for sale a portion of its Membership Interest based on fair market value terms and conditions to qualified investors provided, however, that DCHMI shall not reduce its Membership Interest below 51% except as otherwise provided in this Section 8.1.

     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; (b) if after such transfer the Company 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 Company 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 has waived its right 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 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.

     SECTION 8.4 Allocations Between Transferor and Transferee.

     Upon the transfer of a Membership Interest, all items of income, gain, loss, deduction and credit attributable to the Membership Interest so transferred shall be allocated between the

31

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 Board of Directors, 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 Company that the Membership Interest so transferred was held by the transferor and transferee, without regard to the results of Company activities during the period in which each was the holder, or in such other manner as the Board of Directors 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 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 Events.

     (a) In the discretion of the Board of Directors, the Company may, but is not obligated to, repurchase a Member’s Membership Interest upon a breach by the Member or any of its Affiliates of the Member’s or any of its Affiliate’s obligations contained in Article III, Sections 5.10, 8.1, 12.1 and 12.11 of this Agreement.

     (b) Each Member agrees to sell his, her or 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 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

32

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 DCHMI under Section 8.6(a) shall not become effective unless and until DCHMI 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 DCHMI 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 or a deceased Owner, 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 a Member or Owner, the Company shall have the option to purchase the Membership Interest owned by such deceased Member or Owner, 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.

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.

33

     SECTION 9.2 Access to Records.

     The books of account and all documents and other writings of the Company, including the Certificate of Formation 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) DCHMI 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 DCHMI may from time to time designate.

     (b) Any funds of the Company which DCHMI 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 DCHMI in its sole discretion. DCHMI has the right but not the obligation to invest funds of the Company in any corporate cash management program of MedCath and its Affiliates.

     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 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. At the Manager’s election the Company 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 Manager on behalf of the Company which shall also be the accounting firm of the Manager. 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

34

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. Following the opening of the Hospital, the Manager shall also cause to be prepared and distributed to the Members quarterly financial statements.

     SECTION 9.6 Tax Matters Partner.

     DCHMI 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 any Member that owns, or group of Members that owns in the aggregate, at least thirty-five percent (35%) Membership Interest in the Company. Such meetings shall be held in the Kingman, Arizona 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 Members shall be necessary to conduct business at any Members’ meeting. A quorum shall consist of the Required Members.

     (b) 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.

     (c) 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

35

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.

ARTICLE XI

AMENDMENTS

     SECTION 11.1 Authority to Amend by the Board of Directors.

     Notwithstanding Section 3.7 of this Agreement and except as otherwise provided in Section 11.2, the Board of Directors may amend this Agreement or the Article 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;

36

     (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 or ownership of the Hospital; and

     (f) Subject to the terms of Section 2.6, to extend the term of the Company.

Any amendment proposed by a member of the Board of Directors 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. 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 Certificate of Formation.

     In making any amendments to this Agreement, there shall be prepared, executed and filed for recording by the Board of Directors such documents amending the Certificate of Formation as 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 he, she or it has appointed as his, her or 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.

37

     SECTION 12.3 Interpretation and Construction.

     This Agreement, together with the Management Services Agreement and the Hospital Professional Services Agreement, constitutes the entire agreement among the Members. Any modification or amendment to this Agreement must be accomplished in accordance with the provisions of Article III and Article XI. 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 Delaware, 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

38

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 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 DCHMI and 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 including any Member, Owner, Practice or their Affiliates and/or successors or assigns will not comply with any law, rule, regulation or interpretation thereof (“Applicable Law”), 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 12.16 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 Investor Member. Second, in the event that within forty-five (45) days following the Company’s receipt of legal advice in writing from such health care counsel regarding Applicable

39

Law the parties hereto are unable to negotiate an acceptable restructuring of their relationship, then, if one or more Member’s ownership is not involved in such non-compliance, such Members, within the following forty-five (45) day period, shall have the right to purchase at their election the Membership Interests of each Member 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 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 the purchasing Members. 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. Third, in the event that the compliant Members do not exercise their option to purchase Membership Interests of a Member whose ownership causes the Company not to be in compliance with Applicable Law, any Member may elect in writing within the following forty-five (45) day period, to require that the Company be dissolved, in which event the Company shall be dissolved in accordance with the terms of this Agreement.

     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 and that by executing this Agreement, or holding such Membership Interest, such Member or individual is not in violation of any other agreement or obligation.

     (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 Arizona 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 Arizona 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

40

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 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.

     (d) Each Member or Owner who is a physician hereby represents and warrants that he or she shall apply for and qualify to obtain medical staff privileges at the Hospital in order to be authorized to perform services at the Hospital as required in order to qualify for the Hospital Ownership Exception to the Federal Limitation on Certain Physician Referrals (commonly referred to as the Stark Law) set forth at 42 U.S.C. 1395nn(d)(3) and regulations promulgated thereunder, as amended from time to time.

     SECTION 12.13 Decisions by Directors.

     Each of the Members hereby authorize their respective appointed Directors to make the decisions to be made by the Directors hereunder and hereby release and hold harmless the Directors 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 Directors hereunder unless due to the gross negligence or willful misconduct of such Directors.

     SECTION 12.14 Referrals to Hospital and Ownership of Shares of Common Stock of MedCath Incorporated.

     Each Member agrees that if in the reasonable opinion of health care counsel of MedCath Incorporated, referrals of patients to the Hospital by a Member, Owner, Practice or their Affiliate or ownership of shares of common stock in MedCath Corporation or MedCath Incorporated by a

41

Member, Owner, Practice or their Affiliate would cause or constitute a violation of any federal or state law, rule or regulation, then, as applicable,

     (a) the Member, Owner, Practice or their Affiliate shall not refer patients to the Hospital; and

     (b) the Member, Owner, Practice or their Affiliate shall not acquire, nor continue to own any of shares of common stock of MedCath Corporation or MedCath Incorporated.

     SECTION 12.15 Acknowledgments Regarding Legal Representation.

     Each of the Members hereunder acknowledge and agree that Moore & Van Allen, PLLC is counsel for DCHMI, 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 DCHMI 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 12.16 Arbitration.

     Subject to the right of any Member 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 Phoenix, Arizona in accordance with the American Health Lawyers Association Alternative Dispute Resolution Service Rules of Procedure for Arbitration (the “Rules”). Such arbitration shall be conducted in accordance with the Rules by a panel of three (3) arbitrators none of whom shall reside in or practice primarily in Arizona nor have previously represented any Members, Owners or their Affiliates in any capacity. Any decision rendered by the arbitrators shall be final and binding on the Members 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.

     SECTION 12.17 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:	Development Budget Exhibit.
EXHIBIT D:	Territory.
EXHIBIT E:	Regulatory Allocations.

42

     SECTION 12.18 Schedules.

     Schedule 1 to this Agreement, “Outpatient Facilities”, is incorporated herein by reference.

     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]

43

EXECUTION PAGE
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company

MEMBERS:

Doctors Community Hospital Management, Inc.

By:

Title:

By:

Title:

Name:

Name:

Name:

44

For the purpose of acknowledging and agreeing to be bound by the terms of Article III and Sections 5.10, 8.1, 8.6, 8.7, 12.12 and 12.14 hereof, the undersigned Affiliates of the Members other than DCHMI, Investor Entities and Owners hereby execute this Operating Agreement.

[signature]

[print name]

[print name of entity]

By:

Title:

45

EXHIBIT A
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company

INFORMATION EXHIBIT

	Initial Capital			Percentage
Name and Address	Contribution			Membership Interest
Doctors Community Hospital Management, Inc. c/o MedCath Incorporated 10720 Sikes Place, Suite 300 Charlotte, NC 28277 (704)708-6600 Tax ID#:	$	11,650,000			66.6	%
Investor Members	$	5,850,000	*		33.4	%
	$	17,500,000			100	%

* Assumes that Investor Members have purchased all of the Membership Interests made available to them and fully funded such purchase as provided in Section 3.1. DCHMI may purchase Units not purchased by Investor Members as long as Investor Members purchase at least 167 Units.

A-1

EXHIBIT B
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware 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 Delaware Limited Liability Company Act, as in effect in Delaware 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.

B-1

     (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, 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; and

     (iii) the termination of the Company 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 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.

     “Board of Directors,” “Director” or “Directors” means those persons appointed by the Members, pursuant to Section 3.8 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 the Hospital’s Medical Staff.

     “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-2

     (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.

     “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 DCHMI 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,

B-3

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 or as required by any loan agreement 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, MFC, or to any MedCath Affiliate 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.

     “Certificate of Formation” means the Certificate of Formation of the Company, as filed with the Secretary of State of Delaware as the same may be amended from time to time.

     “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.

     “Company” means and shall refer to Doctors Community Hospital, LLC, which was created upon the filing of the Certificate of Formation with the Office of the Secretary of State of Delaware, to be operated as a Delaware limited liability company, and to continue under this Agreement, as amended from time to time.

     “DCHMI” means Doctors Community Hospital Management, Inc.

     “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.

     “Entity” means any general partnership, limited partnership, limited liability company, limited liability partnership, 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 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

B-4

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.

     “Hospital” means the licensed, general acute care hospital in Kingman, Arizona, as further described in Section 2.3 of the Agreement.

     “Initial Members” shall mean DCHMI and those Investor Members who make initial Capital Contributions to the Company under Section 3.1.

     “Investor Entity” means an Investor Member that is an Entity or an Entity that has a direct or indirect ownership interest in an Investor Member.

     “Investor Members” shall mean the Members other than DCHMI admitted as Members of the Company in accordance with the terms of this Agreement.

     “Management Services Agreement” means the agreement by and between the Company and DCHMI pursuant to which DCHMI will manage the day-to-day business and affairs of the Company.

     “Manager” shall mean DCHMI.

     “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: (1) agreements or obligations contemplated by any budget, development plan, financing or construction contract approved by the Board of Directors as adjusted in Section 5.6(d); or (2) 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.

     “Medical Director” means the individual designated as the medical director of the Hospital pursuant to a Medical Director Agreement.

     “Medical Director Agreement” means the Medical Director Agreement by and between the Company and a medical director approved by the Board of Directors.

     “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

B-5

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 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.

     “Organization Expenses” means those expenses incurred, either by the Company, on behalf of the Company or for which the Company has agreed to make reimbursement, in connection with the formation of the Company including such expenses as: (i) registration fees, filing fees, and taxes; and (ii) legal fees incurred in connection with any of the foregoing.

     “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

B-6

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.

     “Project Costs” shall include, without limitation, all costs incurred by the Company in connection with the development, opening, 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 DCHMI or its Affiliates, projected working capital requirements, and other construction, opening and development costs incurred in connection with the construction, opening, and development of the Hospital, which total amount shall finally be determined by DCHMI following the opening of the Hospital.

     “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.

     “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 DCHMI and the Investor Members owning a majority of the percentage Membership Interests owned by Investor Members in the aggregate.

     “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.

B-7

EXHIBIT C
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company

DEVELOPMENT BUDGET EXHIBIT

Construction Costs	$	48,000,000
Equipment		12,170,000
Land		2,229,000
Pre-Opening Expenses		5,550,000
Working Capital		9,000,000
Total	$	76,950,000

C-1

EXHIBIT D
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company

TERRITORY

D-1

EXHIBIT E
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware 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 DCHMI.

     (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

E-1

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 DCHMI.

     (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 curative allocations 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

E-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) 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 DCHMI 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

E-3

Nonrecourse Deductions, then DCHMI 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. DCHMI shall promptly copy all Members 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 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.

[THE REMAINDER OF THIS PAGE INTENTIONALLY HAS BEEN LEFT BLANK.]

E-4

SCHEDULE 1
TO THE
OPERATING AGREEMENT
OF
DOCTORS COMMUNITY HOSPITAL, LLC
A Delaware Limited Liability Company

OUTPATIENT FACILITIES

[To Be Added]

EX-10.29

Exhibit 10.29

CALL AGREEMENT

This CALL AGREEMENT (this “Agreement”) dated as of October 4, 2010 by and among HUALAPAI MOUNTAIN MEDICAL CENTER MANAGEMENT, INC., a North Carolina corporation (the “Manager”) and the undersigned Investor Members of Hualapai Mountain Medical Center, LLC (the undersigned Investor Members are referred to herein collectively as the “Required Members”).

RECITALS

1.	The Manager and the Required Members are Members of Hualapai Mountain Medical Center, LLC, a North Carolina limited liability company (the “Company”) pursuant to the Operating Agreement among the Company’s Members, as the same may have been and may hereafter be amended or modified (the “Operating Agreement”).
2.	The Company owns and operates a licensed, general acute care hospital in Kingman, Arizona (the “Hospital”).
3.	MedCath has received indications of interest from parties desiring to acquire substantially all of the assets or equity of the Company.
4.	The terms of the Operating Agreement require that a sale of substantially all of the assets of the Company be approved by the Required Members, defined in the Operating Agreement as “Investor Members owning a majority of the percentage Membership Interests owned by Investor Members in the aggregate.”
5.	MedCath has determined that it will proceed to expend its time and resources to further pursue a sale of the Company’s assets only on reliance upon the agreement of the Required Members that any necessary approvals by the Required Members to such a transaction have been given.
6.	The undersigned Required Members are willing to provide such approval through an irrevocable proxy and a Call Right (as herein defined) given to the Manager in consideration for Manager’s expenditure of its time and resources to pursue an asset sale and an agreement by the Manager that, if it exercises its Call Right, that the purchase price due thereunder shall be Call Price (as herein defined).

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties, intending to be legally bound, agree as follows:

ARTICLE I
Definitions

     All terms defined in the Operating Agreement and not defined in this Agreement shall be used in this Agreement with the respective meaning ascribed thereto in the Operating Agreement.

ARTICLE II
Call Rights

     Section 2.1 Call Rights. During the term of this Agreement, the Manager shall have the authority in its discretion, but not the obligation, to cause the Company to enter into an Asset Sale and to execute on behalf of the Company all agreements and instruments related thereto on such terms as the Manager elects in its sole discretion provided that the Manager shall give the Required Member Representative (as defined below) at least twenty (20) days prior written notice of the closing of such Asset Sale (as defined below) together with a summary of the material terms thereof (the “Sale Notice”). Immediately prior to the closing of the Asset Sale, the Manager or its designee shall purchase, and the Required Members shall be obligated to sell all of their Membership Interests in the Company to the Manager or its designee (the “Call Right”) at a purchase price equal to the amount of unreturned Capital Contributions made by the Required Members with respect to their Membership Interests, which as of June 30, 2010 was two million nine hundred three thousand four hundred eighty eight Dollars ($2,903,488.00) less the amount of any Guarantee Fee owed by any Required Members to the Company (the “Call Price”).

     Section 2.2 Irrevocable Proxy. Each of the undersigned Required Members hereby irrevocably constitutes and appoints the Manager, from the date of this Agreement until the termination of this Agreement in accordance with its terms, as their true and lawful proxy, for and in each Required Member’s name, place and stead to vote such Required Member’s Membership Interests and any and all other interests in the Company of such Required Member whether directly or indirectly, beneficially or of record, now owned or hereafter acquired (such Membership Interests together with all such other equity interests, a “Required Member’s Interest”), with respect to any “Specified Matter” (as hereinafter defined). The foregoing proxy shall include the right to sign each such Required Member’s name (as a Member of the Company) to any consent, certificate or other document relating to the Company that applicable law may permit or require and to cause each such Required Member’s Interests to be voted, either at a meeting or by written consent, in accordance with the preceding sentence. Each Required Member hereby revokes all other proxies and powers of attorney with respect to each such Required Member’s Interests that it may have appointed or granted, to the extent such proxies or powers extend to any Specified Matter. The Company will not give a subsequent proxy or power of attorney (and if given, will not be effective) or enter into any other voting agreement with respect to each such Required Member’s Interests with respect to any Specified Matter.

     Notwithstanding anything herein to the contrary, while the Manager may execute an agreement for an Asset Sale at any time during the term of this Agreement in reliance upon the

2

proxy granted to it herein, Manager shall not consummate an Asset Sale in reliance upon the foregoing proxy unless Manager exercises its Call Right as set forth in Section 2.1 above.

     As used herein, “Specified Matter” means any action, decision, determination or election by a Required Member relating to any of the following:

     (i) a sale, transfer or other disposition of all, a substantial portion or substantially all of the Company’s assets, the assumption by the buyer of such assets of such liabilities as Manager and such buyer agree upon together with such other terms related to such sale, transfer or other disposition as the Manager determines to be necessary or appropriate (an “Asset Sale”); and

     (ii) a dissolution, liquidation, winding down and termination of the Company following the closing of a transaction described in clause (i) above.

     In connection with any of the Specified Matters, the Manager is authorized, directed and empowered to take all such action and to execute and file all such purchase and sale agreements and other documents and instruments as it, in its sole discretion, deems necessary or appropriate in its sole discretion, but subject to the other terms of this Agreement, to effectuate any of the Specified Matters as the Manager deems appropriate.

     THE PROXIES AND POWERS GRANTED BY EACH REQUIRED MEMBER PURSUANT TO THIS AGREEMENT ARE COUPLED WITH AN INTEREST AND ARE GIVEN TO SECURE THE PERFORMANCE OF SUCH REQUIRED MEMBER’S COVENANTS UNDER THIS AGREEMENT.

ARTICLE III
Termination

     Section 3.1 Termination. This Agreement shall terminate on the earlier to occur of (i) the date agreed to in writing by Manager and the Required Members or (ii)    October 3   , 2011; provided that any action taken by any Member in accordance with or pursuant to this Agreement prior to such termination shall be valid and binding on the parties hereto.

ARTICLE IV
Miscellaneous

     Section 4.1 Mutual Representations and Warranties. Each party to this Agreement represents and warrants to the other party as follows:

     (a) The execution, delivery and performance by such party of this Agreement and the transactions contemplated thereby have been duly authorized by all necessary corporate, Membership or limited liability company action, and do not and will not require any further consents or approvals which have not been obtained, or violate any

3

provision of any law, regulation, order, judgment, injunction or similar matters or breach any agreement presently in effect with respect to or binding on such party;

     (b) This Agreement is the legal, valid and binding obligation of such party enforceable against such party in accordance with their respective terms; and

     (c) All government approvals necessary for the execution, delivery and performance by such party of its obligations under this Agreement and the transactions contemplated hereby have been obtained and are in full force and effect.

     Section 4.2 Required Members Additional Representations and Warranties; Waivers. The Required Members each represent and warrant that they have good title to their respective Membership Interests free and clear of all liens, security interests or other encumbrances and that upon the exercise of the Call Right and the closing of an Asset Sale, that such unencumbered good title to the Membership Interests of the Required Members shall be conveyed to Manager. The Required Members hereby waive and release any rights of first refusal and any other approval or consent rights they may have or otherwise be entitled to exercise in connection with any transaction contemplated by this Agreement, whether arising under the Operating Agreement, under applicable law or any other basis, none of which shall apply to the transactions contemplated by this Agreement.

     Section 4.3 Notices and Delivery. Any notice to be given hereunder at any time to any of the parties or any document required by this Agreement to be delivered to any party , may be delivered personally, mailed to such party, postage prepaid, addressed to the party at the addresses below or by email at the email address below followed by a mailed copy. 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 or emailed, as the case may be.

[add notice addresses]

     Section 4.4 Counterpart Execution; Facsimile Execution. This Agreement may be executed in any number of counterparts with the same effect as if all of the parties had signed the same document. Such executions may be transmitted to the other parties by facsimile or email and such facsimile or email 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 4.5 Arbitration. 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 Phoenix, Arizona in accordance with the American Health Lawyers Association Alternative Dispute Resolution Service Rules of Procedure for Arbitration. Such arbitration shall be conducted by a panel of three (3) arbitrators none of whom shall reside in or practice primarily in Texas nor have previously represented the parties in any capacity. Any decision rendered by 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

4

losing party to pay all costs associated with such arbitration, including expenses and fees of arbitrators.

     Section 4.6 Benefit; Assignment. Subject to provisions in this Agreement to the contrary, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and assigns. Subject to provisions in this Agreement to the contrary, no party may assign its rights or obligations under this Agreement without the prior written consent of the other parties.

     Section 4.7 Press Release. Except as required by applicable law, no party will issue any report, statement or release to the public with respect to this Agreement and the transactions contemplated hereby without the prior written approval of the other parties hereto of the text of any such public report, statement or release. The Required Members acknowledge that MedCath Corporation may file one or more Forms 8-K with the Securities and Exchange Commission in connection with the transactions contemplated by this Agreement.

     Section 4.8 Severability. In the event any provision of this Agreement is held to be invalid, illegal or unenforceable for any reason and in any respect, and if the rights of the parties under this Agreement will not be materially or adversely affected thereby, (i) such provision will be fully severable; (ii) this Agreement will be construed and enforced as if the illegal, invalid or unenforceable provision had never compromised a part hereof; (iii) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance here from; and (iv) in lieu of the illegal, invalid or unenforceable provision, there will be added automatically as a part of this agreement a legal, valid and enforceable provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible.

     Section 4.9 No Inferences. Inasmuch as this Agreement is the result of negotiations between sophisticated parties of equal bargaining power represented by counsel, no inference in favor of, or against, either party shall be drawn from the fact that any portion of this Agreement has been drafted by or on behalf of such party.

     Section 4.10 Divisions and Headings of this Agreement. The divisions of this Agreement into articles, sections and subsections and the use of captions and headings in connection therewith are solely for convenience and shall have no legal effect in construing the provisions of this Agreement.

     Section 4.11 Third-Party Beneficiaries. Any third party shall be entitled to conclusively rely upon any agreement or instrument executed and delivered by any of the MedCath Members pursuant to powers or rights granted under this Agreement as valid, binding and enforceable obligations of the Company and each of its Members.

     Section 4.12 Tax and Other Advice and Reliance. None of the parties (nor any of the parties’ respective counsel, accountants or other representatives) has made or is making any representations to any other party (or to any other party’s counsel, accountants or other representatives) concerning the consequences of the transactions contemplated hereby under

5

applicable tax related laws or otherwise. Each party has relied solely upon the advice, including tax advice, of its own employees or of representatives engaged by such party and not on any such advice provided by any other party hereto; provided, that nothing in the foregoing is intended to limit the applicability of any party’s representations and warranties to any other parties.

     Section 4.13 Entire Agreement; Amendment. This Agreement and the Operating Agreement constitute the entire agreement of whatsoever kind or nature existing between or among the parties representing the within subject matter and no party shall be entitled to benefits other than those specified herein. As between or among the parties, no oral statement or prior written material not specifically incorporated herein shall be of any force and effect. The parties specifically acknowledge that in entering into and executing this Agreement, the parties rely solely upon the representations and agreements contained in this Agreement and no others. All prior representations or agreements, whether written or verbal, not expressly incorporated herein are superseded and no changes in or additions to this Agreement shall be recognized unless and until made in writing and signed by all parties hereto. In the event of any conflict between the terms of the Operating Agreement and this Agreement, the terms of this Agreement shall prevail.

     Section 4.14 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 4.15 Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona, exclusive of its conflict of law rules.

     Section 4.16 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 4.17 Company Advisors and Transaction Expenses. Each of the Required Members acknowledge and consent to the Company’s retention of Navigant Capital Partners, LLC as its investment banker and Moore & Van Allen, PLLC as its attorneys in connection with the negotiation and closing of any of the sale or transfer transactions contemplated by this Agreement provided that the Manager shall pay the expenses thereof.

     Section 4.18 Representative of the Required Members. The Manager is entitled to rely upon any written agreement, notice or other instrument or document executed by Dr. Paul Kalanathi (the “Required Members Representative”) as constituting a binding notice, exercise or waiver of rights, obligation or other act of each of the Required Members for all purposes under this Agreement.

ARTICLE V
Mutual Releases

     Section 5.1 Mutual Releases

6

     (a) Effective upon the closing of any of the sale or transfer transactions contemplated by this Agreement, the Required Members, on behalf of themselves , and all of their predecessors, successors and past, present, and future parent corporations, direct and indirect subsidiaries, divisions, affiliates, assigns, members, shareholders, directors, officers, agents, legal representatives, insurers, attorneys, and employees forever releases and discharges Manager, MedCath Corporation, MedCath Incorporated and any and all of its predecessors, successors and past, present, and future parent corporations, direct and indirect subsidiaries, divisions, affiliates, including without limitation, MedCath Corporation, and their assigns, members, shareholders, directors, officers, agents, legal representatives, insurers, attorneys, and employees (the “MedCath Releasees”), of and from, and shall indemnify and hold the MedCath Releasees harmless from, any and every demand, claim, right, action, cause of action, contract, damages, or liabilities of whatsoever kind or nature which the Required Members had, now have, or in the future may have, whether now known or unknown, unasserted, unforeseen, unanticipated, or latent, whether sounding in contract or tort, or whether based upon any local, state, municipal, or federal statute, ordinance, or law, whether equitable or legal, arising from or under the Operating Agreement, any professional service agreement, right of first refusal agreement, management agreement or loan agreement between the Company and any of the MedCath Releasees or any of the Physician Releasees or otherwise related to the ownership, management and operation of the Hospital, the performance, or their breach; solely excepting, however, the Reserved Claims (defined below) that are not released.

     (b). Effective upon the closing of any of the sale or transfer transactions contemplated by this Agreement, the Manager, on behalf of itself and the MedCath Releasees, and all of their predecessors, successors and past, present, and future parent corporations, direct and indirect subsidiaries, divisions, affiliates, assigns, members, shareholders, directors, officers, agents, legal representatives, insurers, attorneys, and employees forever releases and discharges the Required Members, and any and all of its predecessors, successors and past, present, and future parent corporations, direct and indirect subsidiaries, divisions, affiliates, and their assigns, members, shareholders, directors, officers, agents, legal representatives, insurers, attorneys, and employees (the “Physician Releasees”), of and from, and shall indemnify and hold the Physician Releasees harmless from, any and every demand, claim, right, action, cause of action, contract, damages, or liabilities of whatsoever kind or nature which the Required Members had, now have, or in the future may have, whether now known or unknown, unasserted, unforeseen, unanticipated, or latent, whether sounding in contract or tort, or whether based upon any local, state, municipal, or federal statute, ordinance, or law, whether equitable or legal, arising from or under the Operating Agreement, any professional service agreement, right of first refusal agreement, management agreement or loan agreement between the Company and any of the MedCath Releasees or any of the Physician Releasees or otherwise related to the ownership, management and operation of the Hospital, the performance, or their breach; solely excepting, however, the Reserved Claims that are not released.

7

     (c) Notwithstanding anything herein to the contrary, the parties do not release or waive the right to enforce any provision of this Agreement or any of the obligations or liabilities arising out of the agreements or instruments executed in connection with the closing of any of the sale or transfer transactions contemplated by this Agreement (the “Reserved Claims”).

[EXECUTIONS APPEAR ON THE FOLLOWING PAGES]

8

The Manager: HUALAPAI MOUNTAIN MEDICAL CENTER MANAGEMENT, INC.
By:	/s/ Duane Scholer
Title: President/CEO

	The Required Members:
Jamal Al-Khatib	Jon C. Schwartz
/s/ Jamal Al-Khatib	/s/ Jon C. Schwartz
Max Lynn Terry	Attiya Salim (IRA Account, Trust)
/s/ Max Lynn Terry	/s/ Attiya Salim
Bashir Azher	Barbara Dorf
/s/ Bashir Azher	/s/ Barbara Dorf
Joyce Matcham	Waldemar Klimach
/s/ Joyce Matcham	/s/ Waldemar Klimach
Dhirendra Patel /s/ Dhirendra Patel	Marie Klimach /s/ Marie Klimach
Laurence Schiff	Jinavog LLC, (Lian Govin)
/s/ Laurence Schiff	/s/ Jay Ashree POA Lian Govin
Carol Newmyer	Belal Sharaf
/s/ Carol Newmyer	/s/ Belal Sharaf
Nicholas Awad	Bashir Chowdhry
/s/ Nicholas Awad	/s/ Bashir Chowdhry
Robert Lock	Mukund Patel
/s/ Robert Lock	/s/ Mukund Patel
Nutan Parikh	Kirsten Mortenson
/s/ Nutan Parikh	/s/ Kirsten Mortenson

9

Michael Mastakas	A. Paul Kalanithi
/s/ Michael Mastakas	/s/ A. Paul Kalanithi
Jim Bates
/s/ Jim Bates

10

EX-10.48

Exhibit 10.48

EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETE AGREEMENT

     This EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETE AGREEMENT (the “Agreement”) is made and entered into by and between MEDCATH INCORPORATED, a North Carolina corporation (the “Company”) and JAMES A. PARKER, a resident of North Carolina (“Employee”) and is effective the 18^th day of February, 2001.

     WHEREAS, the Company desires to employ Employee as a full-time employee and Employee desires to accept that position in accordance with the terms hereof;

     NOW, THEREFORE, it is agreed as follows:

     1. Employment. Employee shall be employed as Treasurer for MedCath Incorporated. For new and valuable consideration described herein, the Company shall employ Employee and Employee accepts employment upon the terms and conditions hereinafter set forth, with such employment to commence on or before February 26, 2001.

     2. Duties. Employee shall be a full-time employee of the Company and, accordingly, shall devote a commensurate amount of time and effort in the performance of Employee’s duties as assigned by the Company.

     While employed by the Company, Employee shall not be engaged in any other business activity whether or not such business activity is pursued for gain, profit, or other pecuniary advantage.

     3. Compensation. For and in consideration of the services to be rendered by Employee hereunder and the Employee’s agreement to comply with the provisions contained in the Agreement, the Company shall pay to Employee a bi-weekly salary of Five Thousand Five Hundred Seventy Six Dollars and Ninety-Two Cents ($5,576.92). While Employee remains employed by the Company, Employee’s salary shall be reviewed by the Company on an annual basis.

     Employee shall be eligible for a sign-on bonus of Twelve Thousand Five Hundred Dollars and Zero Cents ($12,500.00). Employee agrees that if employment is terminated by the Company for cause on or before February 26, 2002, Employee will reimburse the Company the full amount of the bonus paid to him within thirty (30) days of termination. If employment is terminated by the Company without cause, Employee will not be responsible to reimburse any sign-on bonus amount to the Company.

     Employee shall be eligible to participate in an annual bonus compensation plan each fiscal year of employment with the Company, provided that such participation complies with the terms, conditions and guidelines established for eligible employees’ participation. Employee will be eligible for a bonus the first fiscal year of employment of up to forty (40%) percent of Employee’s base compensation, based upon the Company’s review of Employee’s performance. Any bonus for the Employee’s first fiscal year of employment with the Company will be pro-

rated based upon the Employee’s commencement of employment with the Company as of February 26, 2001; Company shall pay Employee at least fifty percent (50%) of such pro-rated, first fiscal year bonus potential. While Employee remains employed by the Company, Employee’s eligibility for, participation in, and terms of the annual bonus compensation plan will be reviewed, and may be revised, by the Company on at least an annual basis. Performance will include, but not be limited to, the accomplishment of any objectives outlined by the Company for Employee. Employee understands that the purpose of the annual bonus compensation plan is to provide participants with an incentive to remain with the Company. Therefore, in order to be eligible for any bonus, Employee must be actively employed by the Company at the time the bonus is paid and satisfy all eligibility criteria imposed by applicable Company policy and law. Employee further understands that the bonus is not actually earned by Employee unless Employee remains actively employed by the Company throughout this period, which includes the date of payment.

     4. Miscellaneous Benefits. During Employee’s employment with the Company, Employee shall be eligible for additional benefits, including life insurance, medical insurance, paid time off, etc., under the same terms and conditions as those which apply to similar employees of the Company, as they may be changed from time to time. Employee shall be entitled to twenty (20) days of vacation annually.

     With regard to business expenses, the Company shall reimburse Employee for reasonable business related expenses incurred in the course of Employee’s employment with the Company, provided those expenses are consistent with the policies established from time to time by the Company. Employee must submit acceptable documentation of the expenses in order to receive reimbursement.

     5. Termination of Employment.

          (a) By the Company for Cause. The Company shall have the right to terminate Employee’s employment immediately and without prior notice in the event that the Company believes it has cause to terminate employment. “Cause” includes, but is not limited to, fraud; dishonesty; disloyalty; conviction of criminal conduct; conduct which is or threatens significant injury to the Company monetarily; conduct which may have a significant or threatened negative impact upon the image of the Company; failure to fulfill the duties assigned to Employee by the Company; violation of this Agreement; submission of a notice of resignation to the Company; engaging in or condoning sexual or other improper harassment; failure to abide by applicable laws, rules, regulations and work rules; or actions or omissions which the Company considers to be of a similar nature or degree.

          In the event that Employee is terminated for cause, Employee shall not be entitled to receive any further salary, bonus or benefit following the date of termination of the Employee’s employment, except as provided by applicable law or Company policy.

          (b) By the Company Without Cause. The Company may terminate Employee’s employment at any time, without cause, by giving Employee at least thirty (30) days written notice thereof. The Company reserves the right to elect to give pay in lieu of notice.

          In the event the Company terminates Employee’s employment without cause, the Company will continue to pay Employee his/her current bi-weekly salary, less applicable lawful deductions, for a period of six (6) months following the date of notice of termination of employment, or until Employee secures other substantially full-time employment or earns, on a monthly basis, at least 75% of Employee’s monthly salary hereunder, whichever occurs first. Employee shall be entitled to receive pro-rata vacation if terminated without cause, plus other benefits as provided by applicable law or by Company policy.

          (c) By Employee. Employee may terminate Employee’s employment with the Company at any time. The Company requests the Employee provide the Company with thirty (30) days written notice. In the event of such termination, Employee shall not be entitled to receive any further salary, bonus or benefit following Employee’s actual termination, except as provided either by applicable law or Company policy. The Company reserves the right to elect to provide pay in lieu of allowing Employee to work during the notice period.

     6. Confidentiality and Non-Disclosure Agreements. During the course of Employee’s employment with the Company, the Company will provide Employee with access to and Employee will be exposed and/or have access to substantial quantities of confidential information relating to the Company’s business (including the business of all affiliates and operations of the Company), such as customer information, vendors, operations and operating procedures, pricing, financial information, technology, marketing strategies, design of facilities, employment practices, contractual agreements, and trade secrets (the “Confidential Information”).

          Employee agrees that both while employed by the Company and following termination of Employee’s employment with the Company at any time in the future:

          (i) Employee will take all reasonable precautions to safeguard all Confidential Information at all times so that it is not communicated to, exposed to, available to, or taken by any unauthorized individual or entity;

          (ii) Employee will not personally use or disclose such information; and

          (iii) Employee will exercise Employee’s best efforts to assure the safekeeping of the Company’s Confidential Information.

          Upon termination of Employee’s employment with the Company, Employee agrees to immediately return to the Company all Confidential Information and other Company property, including without limitation all originals, copies, computer data, or other records or information. It is understood and agreed that Confidential Information and other property of the Company shall remain at all times the property of the Company.

     7. Non-Competition Agreement. Recognizing the fact that Employee will be given or have access to the Confidential Information described in Section 6 above, and that the employee owes a duty of full loyalty to the Company and its name, reputation and operational interests, Employee agrees that during the period of Employee’s employment with the Company, Employee will not engage in or have an interest in, either directly or indirectly, in any manner,

whether as a partner, owner, investor, officer, director, advisor, employee, consultant, or in any other capacity, any Competitive Business.

          Employee further agrees that in the event that Employee’s employment with the Company is terminated for any reason by either party, for a period of one (1) year from the date of termination of employment, Employee will not seek, accept, or engage in any employment or work of a similar or related nature to the work Employee performed for the Company where the employment or work will be with a Competitive Business which is located or operates within fifty (50) miles of:

               (i) any one of the Company or its affiliates’ facilities or a location where the Company or one of its affiliates has provided services during the term of Employee’s employment with the Company, or

               (ii) any location where the Company was actively developing a facility or service before the termination of Employee’s employment with the Company.

          For purposes of this section, “Competitive Business” shall be defined as a hospital or any other health care employer, facility, or service providing primarily cardiology related facilities or services.

     8. Non-Solicitation Agreement. Employee acknowledges and agrees that during the course of Employee’s employment with the Company, Employee will become familiar with many of the Company’s employees, their knowledge, skills, abilities, compensation, benefits, and other matters with respect to such employees not generally known to the public. Employee further acknowledges and agrees that any solicitation, luring away, inducement to have any third party or individual cease or modify its relationship with the Company, or hiring of the employees of the Company, or other direct or indirect participation in such activities, would be highly detrimental to the business of the Company and would cause the Company great and irreparable harm. Consequently, Employee agrees that for a period of one (1) year following the end of Employee’s employment with the Company, Employee will not, directly or indirectly, solicit, lure, or hire any employees of the Company, or induce any third party or individual to cease or modify its relationship with the Company, or assist or aid in any such activity.

     9. Enforcement. In the event that there is a breach of this Agreement by either party, it is understood and agreed that the other party can seek damages and other remedies available to it at law or in equity. In addition to those remedies, however, in the event that Employee breaches Section 6, Section 7 or Section 8 of this Agreement, or in the event that there is a threat of such a breach of either of those sections, the Company shall have the right to seek and shall be entitled to injunctive relief and attorney’s fees and court costs. The parties desire and intend that the provisions of Sections 6, 7, and 8 be enforced to the fullest extent permissible under the law. Employee’s right to receive the payments and benefits after termination of employment, as set forth in Section 5, is conditioned on Employee’s complying with the provisions of Sections 6, 7 and 8. Failure to comply will result in the forfeiture of any rights Employee may have to such benefits.

     In the event that any provision of Section 6, Section 7 or Section 8 of this Agreement is found by any applicable authority to be invalid or unenforceable, the parties agree that either

               (i) the court shall at the time the provision is declared invalid or unenforceable, if permissible by law, modify the invalid or unenforceable provision to reflect, in a lawful manner, the objectives of the parties in entering into these agreements in Sections 6, Section 7 and Section 8 or, in the alternative,

               (ii) the parties or their representatives shall meet within one (1) week of the applicable decision and shall agree to modify that provision which was found to be invalid or unenforceable in order to allow the Company to obtain the objectives, to the extent allowed by law, of the provisions found to be invalid or unenforceable. Should Employee fail or refuse to meet within the one (1) week period, or should no agreement be reached by the parties during the meeting, Employee agrees that the Company may unilaterally modify the provision(s) declared to be invalid or unenforceable to comply with the law, provided that the Company notifies Employee of the change in the language of the Agreement within three (3) weeks of the decision of the Court and pays to Employee the sum of One Hundred Dollars ($100.00). In no event may language unilaterally selected by the Company expand the scope of the Confidentiality, the Non-Competition, or the Non-Solicitation Agreement beyond that originally agreed upon.

     10. Notices. Any written notice required or permitted to be given under this Agreement shall be given to the Company by hand-delivering said notice directly to Employee’s supervisor or by mailing by registered mail or by other reasonable means of delivery providing overnight service, such notice to the Company at the following address:

Mr. Roger Simpson
Vice President Human Resources
MedCath Incorporated
10720 Sikes Place, Suite 300
Charlotte, NC 28277

     Notice to Employee may be given by hand-delivering said notice or by mailing such notice to the last address Employee provided the Company in writing. Notice shall be deemed to have been given one day after depositing said notice with the postal service or other delivery service or, if hand-delivered, when received by the addressee.

     11. Waiver of Breach. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the waiving party.

     12. Assignment. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. Without limiting any other rights of Company hereunder, Employee acknowledges that if upon written notice to Employee, Company assigns this Agreement and its rights hereunder to an affiliate of the Company which, directly or indirectly, owns an interest in and/or is involved in managing the hospital at which Employee provides his fulltime services, then such assignee shall be entitled to the benefit of, and to enforce, all of the Company’s rights under this

Agreement, and further, in such event the reference to Company in Sections 6, 7, 8, and 9 shall continue to mean MedCath Incorporated, the affiliate to which this Agreement has then been assigned and all other affiliates and business operations of MedCath Incorporated. As a personal service contract the rights and obligations of Employee under this agreement may not be assigned by him/her.

     13. Entire Agreement. This Agreement sets forth the entire understanding between the parties with respect to the subject matter hereof and cannot be amended orally, but may only be amended by a writing signed by Employee and either the individual executing the Agreement on behalf of the Company or an individual in a higher position with the Company. This Agreement sets forth the entire agreement between the Company and Employee regarding the matters herein and fully supersedes any prior agreements or understandings between the Company and Employee regarding the matters herein.

     14. Severability. Should any provision of this Agreement be declared illegal or unenforceable by any court of competent jurisdiction and cannot be modified to be enforceable, such provision shall immediately become null and void, leaving the remainder of this Agreement in full force and effect.

     15. Applicable Law. This Agreement shall be construed in accordance with the laws of the State of North Carolina applicable to contracts made and to be performed in North Carolina, without reference to choice of laws principles, and that law shall be applied in connection with its enforcement in other states and jurisdictions to the fullest extent possible.

     16. Counterpart Executions; Facsimiles. This Agreement may be executed in any number of counterparts with the same effect as if all of the parties had signed the same document. Such executions may be transmitted to the parties 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 facsimiles executions or a combination, shall be construed together and shall constitute one and the same agreement.

     17. It is understood and agreed that Employee will not disclose or release the existence or the terms of this Agreement.

     IN WITNESS WHEREOF, the parties hereto execute this Agreement.

COMPANY: MEDCATH INCORPORATED
By:	/s/ James E. Harris
Title:	CFO
Date:	August 7, 2003

EMPLOYEE:	/s/ James A. Parker
	James A. Parker
Date:	August 7, 2003

EX-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
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
DTO Management, Inc.	North Carolina
HHBF, Inc.	North Carolina
Harlingen Hospital Management, Inc.	North Carolina
Harlingen Medical Center, LP	North Carolina
Harlingen Partnership Holdings, Inc.	Arizona
Heart Hospital of BK, LLC	North Carolina
DHH Hospital Co., 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
HHL Company, LLC	Delaware
HMC Management Company, LLC	North Carolina
HMC Realty, LLC	Texas
Hospital Management IV, Inc.	North Carolina
Hualapai Mountain Medical Center, LLC	Delaware
Hualapai Mountain Medical Center Management, LLC	North Carolina
Hualapai Mountain Medical Profees, LLC	Arizona
Interim Diagnostics Solutions, LLC	Delaware
Lafayette Hospital Management, Inc.	North Carolina
LMCHH PCP, LLC	North Carolina
Louisiana Medical Center and Heart Hospital, LLC	North Carolina
Louisiana Heart Hospital Profession Fee, LLC	Louisiana
Louisiana Hospital Management, LLC	North Carolina
MCM Merger, LLC	North Carolina
MedCath of Arkansas, LLC	North Carolina
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
MedCath Staffing, LLC	North Carolina

Name	Jurisdiction of Organization/Incorporation
NM Hospital Management, LLC	North Carolina
Picayune PCP, LLC	North Carolina
San Antonio Hospital Management, Inc.	North Carolina
San Antonio Holdings, Inc.	Arizona
SFHM, Inc.	South Dakota
Sioux Falls Hospital Management, LLC	North Carolina
Southwest Arizona Heart and Vascular Center, LLC	Delware
Sun City Cardiac Center Associates, LLP	Arizona
Venture Holdings, Inc.	Arizona
West 69th, LLC	South Dakota

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-151579, 333-132234, 333-82430 and 333-82432 on Form S-8 of our reports dated December 14, 2010, relating to the consolidated financial statements of MedCath Corporation (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the change in accounting for non-controlling interests effective October 1, 2009), and the effectiveness of MedCath Corporation’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of MedCath Corporation for the year ended September 30, 2010.

DELOITTE & TOUCHE LLP

Charlotte, North Carolina
December 14, 2010

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in Registration Statement Nos. 333-151579, 333-132234, 333-82430 and 333-82432 of MedCath Corporation on Form S-8 of our report dated December 14, 2010 related to the financial statements of Heart Hospital of South Dakota, LLC appearing in this Annual Report on Form 10-K of MedCath Corporation for the year ended September 30, 2010.

DELOITTE & TOUCHE LLP

Charlotte, North Carolina
December 14, 2010

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, 2010

By:	/s/ O. EDWIN FRENCH
	O. Edwin French President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, James A. Parker, 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, 2010

By:	/s/ JAMES A. PARKER
	James A. Parker 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, 2010 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, 2010
	/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, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James A. Parker, 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, 2010
	/s/ JAMES A. PARKER
	James A. Parker Executive Vice President and Chief Financial Officer