10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the quarterly period ended December 31, 2004

Commission File Number 000-33009

MEDCATH CORPORATION

(Exact name of registrant as specified in its charter)

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

10720 Sikes Place, Suite 300
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)

(704) 708-6600
(Registrant’s telephone number, including area code)

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ  No o

As of January 31, 2005, there were 18,172,461 shares of $0.01 par value common stock outstanding.

1

MEDCATH CORPORATION

FORM 10-Q

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2004 and September 30, 2004		3
Consolidated Statements of Operations for the Three Months Ended December 31, 2004 and 2003		4
Consolidated Statement of Stockholders’ Equity for the Three Months Ended December 31, 2004		5
Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2004 and 2003		6
Notes to Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosures About Market Risk		27
Item 4. Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 6. Exhibits		29
SIGNATURES		30
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MEDCATH CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

	December 31,			September 30,
	2004			2004
	(Unaudited)
Current assets:
Cash and cash equivalents	$	116,365		$	72,310
Accounts receivable, net		96,194			92,797
Medical supplies		23,719			22,205
Due from affiliates		209			136
Deferred income tax assets		12,212			11,972
Prepaid expenses and other current assets		8,341			7,802
Current assets of discontinued operations		1,941			6,602
Total current assets		258,981			213,824
Property and equipment, net		405,909			410,908
Investments in and advances to affiliates, net		4,047			6,029
Goodwill		70,100			70,100
Other intangible assets, net		10,456			10,746
Other assets		13,153			13,473
Long-term assets of discontinued operations		402			33,355
Total assets	$	763,048		$	758,435
Current liabilities:
Accounts payable	$	48,465		$	46,372
Income tax payable		413			533
Accrued compensation and benefits		20,580			25,914
Accrued property taxes		5,526			6,565
Other accrued liabilities		20,261			15,968
Current portion of long-term debt and obligations under capital leases		10,427			9,872
Current liabilities of discontinued operations		2,629			1,720
Total current liabilities		108,301			106,944
Long-term debt		343,885			346,006
Obligations under capital leases		5,087			5,641
Deferred income tax liabilities		11,361			13,693
Other long-term obligations		7,344			7,330
Total liabilities		475,978			479,614
Minority interest in equity of consolidated subsidiaries		17,571			15,173
Commitments and contingencies
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; 18,158,337 issued and 18,089,437 outstanding at December 31, 2004 and 18,090,186 issued and 18,021,286 outstanding at September 30, 2004		182			181
Paid-in capital		359,926			358,656
Accumulated deficit		(90,175	)		(94,715	)
Accumulated other comprehensive loss		(40	)		(80	)
Treasury stock, 68,900 shares at cost		(394	)		(394	)
Total stockholders’ equity		269,499			263,648
Total liabilities and stockholders’ equity	$	763,048		$	758,435

See notes to consolidated financial statements.

3

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

	Three Months Ended December 31,
	2004			2003
Net revenue	$	184,760		$	155,123
Operating expenses:
Personnel expense		57,213			47,012
Medical supplies expense		52,486			41,977
Bad debt expense		11,484			13,788
Other operating expenses		38,400			31,520
Pre-opening expenses		—			3,016
Depreciation		9,736			9,723
Amortization		290			290
(Gain)/loss on disposal of property, equipment and other assets		3			(84	)
Total operating expenses		169,612			147,242
Income from operations		15,148			7,881
Other income (expenses):
Interest expense		(7,998	)		(6,320	)
Interest income		390			231
Other income, net		5			4
Equity in net earnings of unconsolidated affiliates		769			577
Total other expenses, net		(6,834	)		(5,508	)
Income from continuing operations before minority interest, income taxes and discontinued operations		8,314			2,373
Minority interest share of earnings of consolidated subsidiaries		(3,999	)		(1,091	)
Income from continuing operations before income taxes and discontinued operations		4,315			1,282
Income tax expense		1,723			517
Income from continuing operations		2,592			765
Income (loss) from discontinued operations, net of taxes		1,948			(1,698	)
Net income (loss)	$	4,540		$	(933	)
Earnings (loss) per share, basic
Continuing operations	$	0.14		$	0.04
Discontinued operations		0.11			(0.09	)
Earnings (loss) per share, basic	$	0.25		$	(0.05	)
Earnings (loss) per share, diluted
Continuing operations	$	0.14		$	0.04
Discontinued operations		0.10			(0.09	)
Earnings (loss) per share, diluted	$	0.24		$	(0.05	)
Weighted average number of shares, basic		18,045			17,949
Dilutive effect of stock options		932			—
Weighted average number of shares, diluted		18,977			17,949

See notes to consolidated financial statements.

4

MEDCATH CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

										Accumulated
										Other
	Common Stock				Paid-in		Accumulated			Comprehensive			Treasury Stock
	Shares		Par Value		Capital		Deficit			Loss			Shares		Amount			Total
Balance, September 30, 2004		18,022	$	181	$	358,656	$	(94,715	)	$	(80	)		69	$	(394	)	$	263,648
Exercise of stock options		68		1		1,270		—			—			—		—			1,271
Comprehensive income:
Net income		—		—		—		4,540			—			—		—			4,540
Change in fair value of interest rate swaps, net of income tax expense		—		—		—		—			40			—		—			40
Total comprehensive income																			4,580
Balance, December 31, 2004		18,090	$	182	$	359,926	$	(90,175	)	$	(40	)		69	$	(394	)	$	269,499

See notes to consolidated financial statements.

5

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Three Months Ended December 31,
	2004			2003
Net income (loss)	$	4,540		$	(933	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Bad debt expense		11,484			13,788
Depreciation and amortization expense		10,026			10,013
(Gain)/loss on disposal of property, equipment and other assets		3			(84	)
Amortization of loan acquisition costs		401			389
Undistributed earnings of unconsolidated affiliates		1,898			2,272
Minority interest share of earnings of consolidated subsidiaries		3,999			1,091
Deferred income taxes		1,723			(517	)
Change in assets and liabilities that relate to operations:
Accounts receivable		(14,881	)		(16,159	)
Medical supplies		(1,514	)		(1,133	)
Prepaids and other assets		(645	)		414
Accounts payable and accrued liabilities		423			3,683
Net cash provided by continuing operations		17,457			12,824
Net cash used in discontinued operations		(7,700	)		(6,538	)
Net cash provided by operating activities		9,757			6,286
Investing activities:
Purchases of property and equipment		(5,251	)		(19,444	)
Proceeds from sale of property and equipment		50			1,214
Proceeds from sale of discontinued operations		42,500			—
Other investing activities		151			43
Net cash provided by (used in) continuing operations		37,450			(18,187	)
Net cash used in discontinued operations		—			(8,808	)
Net cash provided by (used in) investing activities		37,450			(26,995	)
Financing activities:
Proceeds from issuance of long-term debt		—			25,539
Repayments of long-term debt		(1,506	)		(26,326	)
Repayments of obligations under capital leases		(711	)		(1,054	)
Payments of loan acquisition costs		—			(223	)
Investments by minority partners		3,509			—
Distributions to minority partners		(5,677	)		(3,579	)
Repayments from minority partners		89			61
Proceeds from exercised stock options		1,144			179
Net cash used in continuing operations		(3,152	)		(5,403	)
Net cash provided by discontinued operations		—			11,265
Net cash provided by (used in) financing activities		(3,152	)		5,862
Net increase (decrease) in cash and cash equivalents		44,055			(14,847	)
Cash and cash equivalents:
Beginning of period		72,310			93,231
End of period	$	116,365		$	78,384
Supplemental schedule of noncash investing and financing activities:
Capital expenditures financed by capital leases	$	212		$	532
Capital expenditures included in accrued construction & development		126			79
Deferred tax asset related to exercised stock options		—			79
Notes received for sale of land		—			1,098
Notes received from minority interest in development hospitals		—			400

See notes to consolidated financial statements

6

MEDCATH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except per share data)

1. Business and Organization

     MedCath Corporation (the Company) is a healthcare provider focused primarily on the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in partnership with physicians whom it believes have established reputations for clinical excellence as well as with community hospital systems. Each of the Company’s majority-owned hospitals (collectively, the Hospital Division) is a freestanding licensed general acute care hospital, that provides a wide range of health services, and the medical staff at each hospital includes qualified physicians in various specialties. The Company opened its first hospital in 1996, and as of December 31, 2004 has ownership interests in and operates 12 hospitals. These hospitals include 11 majority-owned hospitals and one in which the Company owns a minority interest. The Company’s 12 hospitals have a total of 727 licensed beds, of which 686 were staffed and available at December 31, 2004, and are located in eight states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota, and Texas.

     In addition to its hospitals, the Company owns and/or manages cardiac diagnostic and therapeutic facilities (the Diagnostics Division). The Company began its cardiac diagnostic and therapeutic business in 1989, and as of December 31, 2004 owns and/or manages 26 cardiac diagnostic and therapeutic facilities. Twelve of these facilities are located at hospitals operated by other parties and offer invasive diagnostic and sometimes therapeutic procedures. The remaining 14 facilities are not located at hospitals and offer only diagnostic services. The Company also provides consulting and management services (CCM) tailored primarily to cardiologists and cardiovascular surgeons, which is included in the corporate and other division.

2. Summary of Significant Accounting Policies

     Basis of Presentation - The Company’s unaudited interim consolidated financial statements as of December 31, 2004 and for the three months ended December 31, 2004 and 2003 have been prepared in accordance with accounting principles generally accepted in the United States of America (hereafter, generally accepted accounting principles) and pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These unaudited interim consolidated financial statements reflect, in the opinion of management, all material adjustments (consisting only of normal recurring adjustments) necessary to fairly state the results of operations and financial position for the periods presented. All intercompany transactions and balances have been eliminated. The results of operations for the three months ended December 31, 2004 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2005 or future fiscal periods.

     Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the SEC, although the Company believes the disclosure is adequate to make the information presented not misleading. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004. During the three months ended December 31, 2004, the Company has not made any material changes in the selection or application of its critical accounting policies as set forth its Annual Report on Form 10-K for the year ended September 30, 2004.

     Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles 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.

     Stock-Based Compensation - As of December 31, 2004, the Company has two stock-based compensation plans: a stock option plan under which it may grant incentive stock options and nonqualified stock options to officers and other key employees and an outside director’s stock option plan under which it may grant nonqualified stock options to nonemployee directors. The Company accounts for stock options under both of these plans in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, as permitted under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The Company also provides prominent disclosure of the information required by SFAS No. 148, Accounting for Stock-Based Compensation, in its annual and interim financial statements.

     Under APB Opinion No. 25, compensation cost is determined based on the intrinsic value of the equity instrument award. No stock-based employee compensation cost is reflected in net income for the three months ended December 31, 2004 and 2003, as all options granted during those periods under the Company’s stock option plans had an exercise price equal to the market value of the underlying shares of common stock at the date of grant.

7

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Had compensation expense for the Company’s stock options been recognized based on the fair value of the option award at the grant date under the methodology prescribed by SFAS No. 123, the Company’s net income would have been impacted as follows:

	Three Months Ended December 31,
	2004		2003
Net income (loss), as reported	$	4,540	$	(933	)
Deduct: Total stock-based employee compensation expense determined under fair value method, net of related income taxes		620		454
Proforma net income (loss)	$	3,920	$	(1,387	)
Earnings (loss) per share, basic
As reported	$	0.25	$	(0.05	)
Pro forma	$	0.22	$	(0.08	)
Earnings (loss) per share, diluted
As reported	$	0.24	$	(0.05	)
Pro forma	$	0.21	$	(0.08	)

     New Accounting Pronouncement - In December 2004, the Financial Accounting Standard Board (the FASB) issued Statement 123R, Share-Based Payment, to be effective for interim or annual periods beginning after June 15, 2005. Accordingly, Statement 123R will become effective in the fourth quarter of fiscal 2005 for the Company. Statement 123R requires all share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized as an operating expense in the statement of operations. The cost is recognized over the requisite service period based on fair values measured on grant dates and the new standard may be adopted using either the modified prospective transition method or the modified retrospective transition method. The Company is currently evaluating its share-based employee compensation programs, the potential impact of Statement 123R on its consolidated financial position and results of operations and alternative adoption methods.

3. Discontinued Operations

     On November 5, 2004, the Company and local Milwaukee physicians, who jointly owned The Heart Hospital of Milwaukee (HHM), entered into an agreement with Columbia St. Mary’s, a Milwaukee-area hospital group, to close HHM and sell certain assets, primarily comprised of real property and equipment, to Columbia St. Mary’s for $42.5 million. The sale was completed on December 1, 2004 and the Company recognized a gain on the sale of the assets, net of allocated goodwill, of approximately $9.3 million.

     In connection with the agreement to sell the assets of HHM, the Company closed the facility prior to the completion of the sale. As a part of the closure, the Company incurred termination benefits and contract termination costs of approximately $2.2 million. In addition, the Company wrote-off approximately $1.4 million related to the net book value of certain assets abandoned as a part of the closure of the facility.

     Transaction proceeds were used by HHM to pay intercompany secured debt, which totaled approximately $37.0 million on the date of the closing, as well as transaction costs and hospital operating expenses of approximately $2.0 million. The remaining proceeds from the divestiture, combined with proceeds from the liquidation of the assets not sold to Columbia St. Mary’s, will be used to satisfy certain liabilities of HHM.

8

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     The results of operations of HHM are as follows:

	Three Months Ended December 31,
	2004			2003
Revenues	$	1,553		$	1,503
Restructuring and write-off charges		(3,635	)		—
Operating expenses		(3,278	)		(5,134	)
Loss from operations		(5,360	)		(3,631	)
Other income (expense):
Gain on sale of assets		9,344			—
Minority interest and other, net		(474	)		790
Income tax (expense) benefit		(1,562	)		1,143
Net income (loss)	$	1,948		$	(1,698	)

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

	December 31,		September 30,
	2004		2004
Cash	$	1,903	$	462
Accounts receivable, net		38		851
Other current assets		—		5,289
Current assets	$	1,941	$	6,602
Property and equipment, net	$	402	$	28,455
Goodwill		—		4,900
Noncurrent assets	$	402	$	33,355
Accounts payable	$	396	$	605
Accrued liabilities		671		1,115
Income taxes payable		1,562		—
Total current liabilities	$	2,629	$	1,720

4. Accounts Receivable

     Accounts receivable, net, consists of the following:

	December 31,			September 30,
	2004			2004
Receivables, principally from patients and third-party payors	$	105,531		$	102,485
Receivables, principally from billings to hospitals for various cardiovascular procedures		4,007			3,990
Amounts due under management contracts		2,868			2,698
Other		3,638			2,095
		116,044			111,268
Less allowance for doubtful accounts		(19,850	)		(18,471	)
Accounts receivable, net	$	96,194		$	92,797

9

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

5. Equity Investments

     The Company accounts for all but one of its owned and operated hospitals as consolidated subsidiaries. The Company owns minority interests in Avera Heart Hospital of South Dakota and certain diagnostic ventures and neither has substantive control over the businesses nor is the primary beneficiary under the revised version of FASB Interpretation No. 46 Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. Therefore, the Company is unable to consolidate the results of operations and financial position of these entities, but rather is required to account for its minority ownership interest in the hospital and other ventures as equity investments.

     The following represents summarized financial information of Avera Heart Hospital of South Dakota:

	Three Months Ended December 31,
	2004		2003
Net revenue	$	15,197	$	13,365
Operating income	$	2,804	$	2,285
Net income	$	2,223	$	1,612

	December 31,		September 30,
	2004		2004
Current assets	$	11,841	$	19,592
Non-current assets	$	37,077	$	36,620
Current liabilities	$	9,672	$	10,085
Non-current liabilities	$	29,679	$	30,984

6. Goodwill and Other Intangible Assets

     As required by SFAS No. 142, Goodwill and Other Intangibles, the Company has designated September 30, its fiscal year end, as the date it will perform the annual goodwill impairment test for all of its reporting units. Goodwill of a reporting unit will also be tested between annual tests if an event occurs or circumstances change that indicate that impairment may exist. During the three months ended December 31, 2004, no events or circumstances changed that indicated interim impairment testing was necessary and as such, no impairment was recognized during the three months ended December 31, 2004. The Company’s other intangible assets, net, included the following:

	December 31, 2004					September 30, 2004
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Management contracts	$	20,598	$	(11,127	)	$	20,598	$	(10,844	)
Other		1,446		(461	)		1,446		(454	)
Total	$	22,044	$	(11,588	)	$	22,044	$	(11,298	)

     Amortization expense recognized for the management contracts and other intangible assets totaled $0.3 million for the three months ended December 31, 2004 and 2003.

10

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

7. Long-Term Debt

     Long-term debt consists of the following:

	December 31,			September 30,
	2004			2004
Senior notes	$	150,000		$	150,000
Senior secured credit facility		99,500			99,750
Real estate investment trust loans		57,667			57,899
Notes payable to various lenders		44,489			45,628
Master credit facility and bank mortgage loans		—			—
		351,656			353,277
Less current portion		(7,771	)		(7,271	)
Long-term debt	$	343,885		$	346,006

     Senior Notes — On July 7, 2004, the Company’s wholly-owned subsidiary, MedCath Holdings Corp. (the Issuer), completed an offering of $150.0 million in aggregate principal amount of 9 7/8% senior notes (the Senior Notes) in a private placement to qualified institutional buyers. In November 2004, the unregistered Senior Notes were exchanged for registered Senior Notes. The Senior Notes, which mature on July 15, 2012, pay interest semi-annually, in arrears, on January 15 and July 15 of each year, beginning January 15, 2005. The Senior Notes are redeemable, in whole or in part, at any time on or after July 15, 2008 at a designated redemption amount, plus accrued and unpaid interest and liquidated damages, if any, to the applicable redemption date. The Company may redeem up to 35% of the aggregate principal amount of the Senior Notes on or before July 15, 2007 with the net cash proceeds from certain equity offerings. In event of a change in control in the Company or the Issuer, the Company must offer to purchase the Senior Notes at a purchase price of 101% of the aggregate principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption.

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

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

     Senior Secured Credit Facility — Concurrent with the offering of the Senior Notes, on July 7, 2004, the Issuer entered into a $200.0 million senior secured credit facility (the Senior Secured Credit Facility) with a syndicate of banks and other institutional lenders. The Senior Secured Credit Facility provides for a seven-year term loan facility (the Term Loan) in the amount of $100.0 million and a five-year senior secured revolving credit facility (Revolving Facility) in the amount of $100.0 million, which includes a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit and a $10.0 million sub-limit for swing-line loans. There were no borrowings under the Revolving Facility at December 31, 2004; however, the Company has letters of credit outstanding of $1.5 million, which reduces availability under the Revolving Facility to $98.5 million.

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

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

11

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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

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

     Real Estate Investment Trust (REIT) Loans — From 1994 to 1997, the Company entered into mortgage loans with real estate investment trusts for the purpose of financing the land acquisition and construction costs for several of its hospitals. As of December 31, 2004, the Company’s REIT loan balance includes the outstanding indebtedness of two hospitals. The interest rates on the outstanding REIT loans are based on a rate index tied to U.S. Treasury Notes plus a margin that is determined on the completion date of the hospital, and subsequently increases per year by 20 basis points. The principal and interest on the REIT loans are payable monthly over seven-year terms from the completion date of each hospital using extended period amortization schedules and include balloon payments at the end of each respective term. One loan is subject to extension for an additional seven years at the option of the Company. Borrowings under the REIT loans are collateralized by a pledge of the Company’s interest in the related hospitals’ property, equipment and certain other assets.

     As of December 31, 2004, in accordance with the related hospital operating agreements and as required by the lenders, the Company guaranteed 100% of the obligations of its subsidiary hospitals for the bank mortgage loans made under the REIT loans. The Company receives a fee from the minority partners in the subsidiary hospitals as consideration for providing guarantees in excess of the Company’s ownership percentage in the subsidiary hospitals. The guarantees expire concurrent with the terms of the related real estate loans and would require the Company to perform under the guarantee in the event of the subsidiary hospitals failing to perform under the related loans. The total amount of this real estate debt is secured by the subsidiary hospitals’ underlying real estate, which was financed with the proceeds from the debt. The amount of such REIT loans December 31, 2004 was approximately $57.7 million, of which the Company guaranteed the entire amount. The average interest rate as of December 31, 2004 and September 30, 2004 on the REIT loans were 10.44% and 10.29%, respectively. Because the Company consolidates the subsidiary hospitals’ results of operations and financial position, both the assets and the accompanying liabilities are included in the assets and long-term debt on the Company’s consolidated balance sheets.

     Notes Payable to Various Lenders — The Company acquired substantially all of the medical and other equipment for its hospitals and certain diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories under installment notes payable to equipment lenders collateralized by the related equipment. In addition, two facilities in the Diagnostics Division financed leasehold improvements through notes payable collateralized by the leasehold improvements. Amounts borrowed under these notes are payable in monthly installments of principal and interest over 4 to 7 year terms. Interest is at fixed and variable rates ranging from 5.06% to 9.57%. The Company has guaranteed certain of its subsidiary hospitals’ equipment loans. The Company receives a fee from the minority partners in the subsidiary hospitals as consideration for providing guarantees in excess of the Company’s ownership percentage in the subsidiary hospitals. These guarantees expire concurrent with the terms of the related equipment loans and would require the Company to perform under the guarantee in the event of the subsidiaries’ failure to perform under the related loan. At December 31, 2004, the total amount of notes payable was approximately $44.5 million, of which $36.1 million was guaranteed by the Company. Because the Company consolidates the subsidiary hospitals’ results of operations and financial position, both the assets and the accompanying liabilities are included in the assets and long-term debt on the Company’s consolidated balance sheets. These notes payable contain various covenants and restrictions including the maintenance of specific financial ratios and amounts and payment of dividends.

     Notes payable to various lenders include a debt commitment to finance Heart Hospital of Lafayette’s equipment purchases. Heart Hospital of Lafayette began submitting funding requests to finance equipment purchases in March 2004. Interest on borrowings under the facility accrued at prime, plus a margin, until July 1, 2004, at which time interest became fixed based on a specific Treasury Note yield, plus a margin. Principal amounts on borrowings incurred after April 1, 2004 and before July 1, 2004 will be repaid over a 78 month period beginning February 1, 2005. Interest on borrowings incurred after July 1, 2004 accrued interest at prime, plus a margin, until December 31, 2004 at which time interest became fixed based on a specific Treasury Note yield, plus a margin. Principal amounts on borrowings incurred after July 1, 2004 and before December 31, 2004 will be repaid over a 78 month period beginning July 31, 2005. As of December 31, 2004, Heart Hospital of Lafayette had borrowed $9.5 million of the $12.0 million available. Funding requests under this facility are no longer permitted.

12

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

     Debt Covenants — The Company was in compliance with all covenants in the instruments governing its outstanding debt at December 31, 2004.

     Guarantees of Unconsolidated Affiliate’s Debt — The Company has guaranteed approximately 50% of the real estate and 30% of the equipment debt of its unconsolidated affiliate hospital. The Company provides these guarantees in exchange for a fee from that affiliate hospital. At December 31, 2004, the affiliate hospital was in compliance with all covenants in the instruments governing its debt. The total amount of the affiliate hospital’s real estate and equipment debt was approximately $26.4 million and $8.1 million at December 31, 2004. Accordingly, the real estate debt and the equipment debt guaranteed by the Company was approximately $13.2 million and $2.4 million, respectively, at December 31, 2004. These guarantees expire concurrent with the terms of the related real estate and equipment loans and would require the Company to perform under the guarantee in the event of the affiliate hospital’s failure to perform under the related loan. The total amount of this affiliate hospital’s debt is secured by the hospital’s underlying real estate and equipment, which were financed with the proceeds from the debt. Because the Company does not consolidate the affiliate hospital’s results of operations and financial position, neither the assets nor the accompanying liabilities are included in the value of the assets and liabilities on the Company’s balance sheets.

     Interest Rate Swaps — Three of the Company’s consolidated hospitals entered into fixed interest rate swaps during the fourth quarter of fiscal year 2001. These fixed interest rate swaps effectively fixed the interest rate on the hedge portion of the related debt at 4.92% plus an applicable margin for two of the hospitals and at 4.60% plus an applicable margin for the other hospital. These interest rate swaps were accounted for as cash flow hedges prior to the repayment of the outstanding balances of the bank mortgage debt for these three hospitals as part of the July 7, 2004 financing transaction. The Company did not terminate the interest rate swaps as part of the financing transaction. Since July 7, 2004, the fixed interest rate swaps have not been utilized as a hedge of variable rate debt obligations, and accordingly, changes in the valuation of the interest rate swaps have been recorded directly to earnings as component of interest expense. The fair value of the interest rate swaps at December 31, 2004 was an obligation of $0.8 million resulting in an unrealized gain of approximately $0.4 million during the first quarter of fiscal 2005.

8. Liability Insurance Coverage

     On June 30, 2004, the Company entered into a new one-year claims-made policy providing coverage for claim amounts in excess of $3.0 million of retained liability per claim, subject to an additional amount of retained liability of $2.0 million per claim and $4.0 million in the aggregate for claims reported during the policy year at one of its hospitals. Because of the Company’s self-insured retention levels, the Company recognizes an liability for its estimate of amounts, up to the amount of the Company’s retained liability it believes may be paid to resolve each malpractice claim. As of December 31, 2004 and September 30, 2004, the total estimated liability for the Company’s self-insured retention on medical malpractice claims, including an estimated amount for incurred but not reported claims, was approximately $6.0 million and $5.4 million, respectively, which is included in current liabilities in the Company’s consolidated balance sheets.

9. Per Share Data

     The calculation of diluted earnings per share considers the potentially dilutive effect of options to purchase 2,671,342 and 3,049,266 shares of common stock outstanding at December 31, 2004 and 2003, respectively, at prices ranging from $4.75 to $25.00. Of these options, 20,000 and 3,049,266 were not included in the calculation of diluted earnings per share for the three months ended December 31, 2004 and 2003, respectively, as such shares were anti-dilutive for the periods.

10. Litigation

     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 against the Company by various claimants, and additional claims that may be asserted for known incidents through December 31, 2004. 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 attempting to protect its interests in all such claims and actions.

     Management believes, based on advice of counsel and the Company’s experience with past lawsuits and claims, that, taking into account the applicable liability insurance coverage and recorded reserves, the results of those lawsuits and potential lawsuits will not have a material adverse effect on the Company’s financial position or future results of operations and cash flows.

11. Reportable Segment Information

     The Company’s reportable segments consist of the Hospital Division and the Diagnostics Division. Financial information concerning the Company’s operations by each of the reportable segments as of and for the periods indicated is as follows:

13

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

	Three Months ended December 31,
	2004			2003
Net revenue:
Hospital Division	$	171,229		$	139,930
Diagnostics Division		12,629			13,361
Corporate and other		902			1,832
Consolidated totals	$	184,760		$	155,123
Income (loss) from operations:
Hospital Division	$	15,167		$	6,694
Diagnostics Division		1,757			2,703
Corporate and other		(1,776	)		(1,516	)
Consolidated totals	$	15,148		$	7,881
Depreciation and amortization:
Hospital Division	$	8,227		$	8,110
Diagnostics Division		1,510			1,599
Corporate and other		289			304
Consolidated totals	$	10,026		$	10,013
Interest expense (income), net:
Hospital Division	$	7,703		$	7,109
Diagnostics Division		73			159
Corporate and other		(168	)		(1,179	)
Consolidated totals	$	7,608		$	6,089
Capital expenditures:
Hospital Division	$	3,891		$	15,973
Diagnostics Division		962			557
Corporate and other		398			2,914
Consolidated totals	$	5,251		$	19,444

	December 31,		September 30,
	2004		2004
Aggregate identifiable assets:
Hospital Division	$	590,507	$	623,527
Diagnostics Division		43,210		43,215
Corporate and other		129,331		91,693
Consolidated totals	$	763,048	$	758,435

     Substantially all of the Company’s net revenue in its Hospital Division and Diagnostics Division is derived directly or indirectly from patient services. The amounts presented for Corporate and other primarily include general overhead and administrative expenses, cash and cash equivalents, other assets and operations of the Company not subject to separate segment reporting.

12. Guarantor/Non-Guarantor Financial Statements

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

14

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

MEDCATH CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2004

								Non-
	Parent		Issuer		Guarantors			Guarantors			Eliminations			MedCath
Current assets:
Cash and cash equivalents	$	—	$	—	$	98,204		$	18,161		$	—		$	116,365
Accounts receivable, net		—		—		4,114			92,080			—			96,194
Medical supplies		—		—		116			23,603			—			23,719
Due from affiliates		—		—		39			170			—			209
Deferred income tax assets		—		—		12,212			—			—			12,212
Intercompany notes and other receivables		—		—		24,935			—			(24,935	)		—
Prepaid expenses and other current assets		—		—		5,452			2,889			—			8,341
Current assets of discontinued operations		—		—		—			1,941			—			1,941
Total current assets		—		—		145,072			138,844			(24,935	)		258,981
Property and equipment, net		—		—		22,802			383,107			—			405,909
Investments in and advances to affiliates, net		—		—		3,231			816			—			4,047
Investments in subsidiaries		269,499		269,499		(22,455	)		(64	)		(516,479	)		—
Goodwill		—		—		70,100			—			—			70,100
Other intangible assets, net		—		—		9,471			985			—			10,456
Intercompany notes receivable		—		—		317,886			—			(317,886	)		—
Other assets		—		—		9,528			3,625			—			13,153
Long-term assets of discontinued operations		—		—		—			402			—			402
Total assets	$	269,499	$	269,499	$	555,635		$	527,715		$	(859,300	)	$	763,048
Current liabilities:
Accounts payable	$	—	$	—	$	485		$	47,980		$	—		$	48,465
Income tax payable		—		—		413			—						413
Accrued compensation and benefits		—		—		7,168			13,412			—			20,580
Accrued property taxes		—		—		76			5,450			—			5,526
Other accrued liabilities		—		—		12,130			8,131			—			20,261
Intercompany notes and other payables		—		—		—			24,935			(24,935	)		—
Current portion of long- term debt and obligations under capital leases		—		—		1,981			8,446			—			10,427
Current liabilities of discontinued operations		—		—		1,562			1,067			—			2,629
Total current liabilities		—		—		23,815			109,421			(24,935	)		108,301
Long- term debt		—		—		248,265			95,620			—			343,885
Obligations under capital leases		—		—		2,695			2,392			—			5,087
Intercompany notes payable		—		—		—			317,886			(317,886	)		—
Deferred income tax liabilities		—		—		11,361			—			—			11,361
Other long- term obligations		—		—		—			7,344			—			7,344
Total liabilities		—		—		286,136			532,663			(342,821	)		475,978
Minority interest in equity of consolidated subsidiaries						—			—			17,571			17,571
Total stockholders’ equity		269,499		269,499		269,499			(4,948	)		(534,050	)		269,499
Total liabilities and stockholders’ equity	$	269,499	$	269,499	$	555,635		$	527,715		$	(859,300	)	$	763,048

15

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

MEDCATH CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2004

								Non-
	Parent		Issuer		Guarantors			Guarantors			Eliminations			MedCath
Current assets:
Cash and cash equivalents	$	—	$	—	$	56,122		$	16,188		$	—		$	72,310
Accounts receivable, net		—		—		3,784			89,013			—			92,797
Medical supplies		—		—		106			22,099			—			22,205
Due from affiliates		—		—		109			27			—			136
Deferred income tax assets		—		—		11,972			—			—			11,972
Intercompany notes and other receivables		—		—		23,274			—			(23,274	)		—
Prepaid expenses and other current assets		—		—		5,150			2,652			—			7,802
Current assets of discontinued operations		—		—		4,198			2,404			—			6,602
Total current assets		—		—		104,715			132,383			(23,274	)		213,824
Property and equipment, net		—		—		23,297			387,611			—			410,908
Investments in and advances to affiliates, net		—		—		5,212			817			—			6,029
Investments in subsidiaries		263,648		263,648		(28,741	)		(31	)		(498,524	)		—
Goodwill		—		—		70,100			—			—			70,100
Other intangible assets, net		—		—		9,753			993			—			10,746
Intercompany notes receivables		—		—		349,370			—			(349,370	)		—
Other assets		—		—		9,898			3,575			—			13,473
Long-term assets of discontinued operations		—		—		4,900			28,455			—			33,355
Total assets	$	263,648	$	263,648	$	548,504		$	553,803		$	(871,168	)	$	758,435
Current liabilities:
Accounts payable	$	—	$	—	$	697		$	45,675		$	—		$	46,372
Income tax payable		—		—		533			—			—			533
Accrued compensation and benefits		—		—		8,641			17,273			—			25,914
Accrued property taxes		—		—		53			6,512			—			6,565
Other accrued liabilities		—		—		7,519			8,449			—			15,968
Intercompany notes and other payables		—		—		—			20,955			(20,955	)		—
Current portion of long- term debt and obligations under capital leases		—		—		2,010			7,862			—			9,872
Current liabilities of discontinued operations		—		—		—			4,039			(2,319	)		1,720
Total current liabilities		—		—		19,453			110,765			(23,274	)		106,944
Long- term debt		—		—		248,750			97,256			—			346,006
Obligations under capital leases		—		—		2,960			2,681			—			5,641
Intercompany notes payable		—		—		—			315,126			(315,126	)		—
Deferred income tax liabilities		—		—		13,693			—			—			13,693
Other long- term obligations		—		—		—			7,330			—			7,330
Long-term liabilities of discontinued operations		—		—		—			34,244			(34,244	)		—
Total liabilities		—		—		284,856			567,402			(372,644	)		479,614
Minority interest in equity of consolidated subsidiaries		—		—		—			—			15,173			15,173
Total stockholders’ equity		263,648		263,648		263,648			(13,599	)		(513,697	)		263,648
Total liabilities and stockholders’ equity	$	263,648	$	263,648	$	548,504		$	553,803		$	(871,168	)	$	758,435

16

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended December 31, 2004

	Parent		Issuer		Guarantors			Non- Guarantors			Eliminations			MedCath
Net revenue	$	—	$	—	$	8,014		$	179,188		$	(2,442	)	$	184,760
Total operating expenses						10,149			161,905			(2,442	)		169,612
Income (loss) from operations		—		—		(2,135	)		17,283			—			15,148
Interest expense		—		—		(5,533	)		(2,465	)		—			(7,998	)
Interest income (expense)		—		—		5,636			(5,246	)		—			390
Other income, net		—		—		—			5			—			5
Equity in net earnings of affiliates		4,540		4,540		14,758			—			(23,069	)		769
Income before minority interest, income taxes and discontinued operations		4,540		4,540		12,726			9,577			(23,069	)		8,314
Minority interest share of earnings of consolidated subsidiaries		—		—		—			—			(3,999	)		(3,999	)
Income before income taxes and discontinued operations		4,540		4,540		12,726			9,577			(27,068	)		4,315
Income tax expense		—		—		(1,724	)		—			1			(1,723	)
Income from continuing operations		4,540		4,540		11,002			9,577			(27,067	)		2,592
Income (loss) from discontinued operations		—		—		(6,462	)		8,410			—			1,948
Net income	$	4,540	$	4,540	$	4,540		$	17,987		$	(27,067	)	$	4,540

MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended December 31, 2003

	Parent			Issuer			Guarantors			Non- Guarantors			Eliminations			MedCath
Net revenue	$	—		$	—		$	8,066		$	148,946		$	(1,889	)	$	155,123
Total operating expenses								10,349			138,782			(1,889	)		147,242
Income (loss) from operations		—			—			(2,283	)		10,164			—			7,881
Interest expense		—			—			(402	)		(5,918	)		—			(6,320	)
Interest income (expense)		—			—			1,421			(1,190	)		—			231
Other income, net		—			—			—			4			—			4
Equity in net earnings of affiliates		(933	)		(933	)		(295	)		—			2,738			577
Income before minority interest, income taxes and discontinued operations		(933	)		(933	)		(1,559	)		3,060			2,738			2,373
Minority interest share of earnings of consolidated subsidiaries		—			—			—			—			(1,091	)		(1,091	)
Income before income taxes and discontinued operations		(933	)		(933	)		(1,559	)		3,060			1,647			1,282
Income tax expense		—			—			(517	)		—			—			(517	)
Income from continuing operations		(933	)		(933	)		(2,076	)		3,060			1,647			765
Income (loss) from discontinued operations		—			—			1,143			(2,841	)		—			(1,698	)
Net income (loss)	$	(933	)	$	(933	)	$	(933	)	$	219		$	1,647		$	(933	)

17

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended December 31, 2004

							Non-
	Parent			Guarantors			Guarantors			Eliminations			MedCath
Net cash provided by (used in) operating activities	$	—		$	(1,271	)	$	11,028		$	—		$	9,757
Net cash provided by (used in) investing activities		(1,270	)		9,859			33,681			(4,820	)		37,450
Net cash provided by (used in) financing activities		1,270			33,494			(42,736	)		4,820			(3,152	)
Increase in cash and cash equivalents		—			42,082			1,973			—			44,055
Cash and cash equivalents:
Beginning of period		—			56,122			16,188			—			72,310
End of period	$	—		$	98,204		$	18,161		$	—		$	116,365

MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended December 31, 2003

							Non-
	Parent			Guarantors			Guarantors			Eliminations			MedCath
Net cash provided by (used in) operating activities	$	—		$	2,457		$	3,829		$	—		$	6,286
Net cash provided by (used in) investing activities		(258	)		725			(22,526	)		(4,936	)		(26,995	)
Net cash provided by (used in) financing activities		258			(14,932	)		15,600			4,936			5,862
Decrease in cash and cash equivalents		—			(11,750	)		(3,097	)		—			(14,847	)
Cash and cash equivalents:
Beginning of period		—			77,911			15,320			—			93,231
End of period	$	—		$	66,161		$	12,223		$	—		$	78,384

18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis of our results of operations and financial condition should be read in conjunction with the interim unaudited consolidated financial statements and related notes included elsewhere in this report, as well as the audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.

Overview

     General. We are a healthcare provider focused primarily on 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 as well as with community hospital systems. We opened our first hospital in 1996 and currently have ownership interests in and operate 12 hospitals. We have majority ownership of 11 of these 12 hospitals and a minority interest in one. Each of our majority-owned hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services, and the medical staff at each of our hospitals includes qualified physicians in various specialties. Our hospitals have a total of 727 licensed beds and are located in eight states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota, and Texas.

     In addition to our hospitals, we own and/or manage cardiac diagnostic and therapeutic facilities. We began our cardiac diagnostic and therapeutic business in 1989. We currently own and/or manage 26 cardiac diagnostic and therapeutic facilities. Twelve of these facilities are located at hospitals operated by other parties and offer invasive diagnostic and sometimes therapeutic procedures. The remaining 14 facilities are not located at hospitals and offer only diagnostic services. We also provide consulting and management services tailored primarily to cardiologists and cardiovascular surgeons.

     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 one hospital in which we hold a minority interest at December 31, 2004, Avera Heart Hospital of South Dakota, is excluded from the net revenue and operating expenses of our consolidated company and our consolidated hospital division. Similarly, a number of our diagnostic and therapeutic facilities are not consolidated. Our minority interest in these entities’ results of operations for the periods discussed is recognized as part of the equity in net earnings of unconsolidated affiliates in our statements of operations in accordance with the equity method of accounting.

     Upon applying the new accounting principles set forth by Interpretation No. 46, effective March 31, 2004, we began consolidating in our diagnostics division, a managed entity in which we do not hold any equity ownership interest and have not historically consolidated. The consolidation of this managed entity’s results of operations began April 1, 2004 and resulted in an increase in our net revenue of $3.9 million and an increase in our operating expenses of $3.9 million, for the three months ended December 31, 2004, but did not have any impact on our net income since the managed entity operates at breakeven as a result of our management fee structure.

     During the first quarter of 2004, we closed The Heart Hospital of Milwaukee and sold substantially all of the hospital’s assets. Accordingly, for the three months ended December 31, 2004 and 2003, the results of operations and the related gain on the sale of the assets, have been excluded from continuing operations and instead, are reported in income (loss) from discontinued operations.

     Same Facility Hospitals. We include in our same facility data 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 three months ended December 31, 2004, we exclude the results of operations of Texsan Heart Hospital, which opened in January 2004, and Heart Hospital of Lafayette, which opened in March 2004.

     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 presented.

	Three Months Ended December 31,
Division	2004			2003
Hospital		92.7	%		90.2	%
Diagnostics		6.8	%		8.6	%
Corporate and other		0.5	%		1.2	%
Net Revenue		100.0	%		100.0	%

     Revenue Sources by Payor. We receive payments for our services rendered to patients from the Medicare and Medicaid programs,

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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 the periods indicated below.

	Three Months Ended December 31,
Payor	2004			2003
Medicare		49.1	%		45.8	%
Medicaid		4.3	%		4.0	%
Commercial and other, including self-pay		46.6	%		50.2	%
Total consolidated net revenue		100.0	%		100.0	%

     A significant portion of our net revenue is derived from federal and state governmental healthcare programs, including Medicare and Medicaid. 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; however, our payor mix may fluctuate in future periods due to changes in reimbursement, market and industry trends with self-pay patients and other similar factors.

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

Results of Operations

      Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003

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

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	Three Months Ended December 31,
							Increase / (Decrease)						% of Net Revenue
	2004			2003			$			%			2004			2003
				(in thousands)
Net revenue	$	184,760		$	155,123		$	29,637			19.1	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		57,213			47,012			10,201			21.7	%		31.0	%		30.3	%
Medical supplies expense		52,486			41,977			10,509			25.0	%		28.4	%		27.1	%
Bad debt expense		11,484			13,788			(2,304	)		(16.7	)%		6.2	%		8.9	%
Other operating expenses		38,400			31,520			6,880			21.8	%		20.8	%		20.3	%
Pre-opening expenses		—			3,016			(3,016	)		(100.0	)%		—			1.9	%
Depreciation		9,736			9,723			13			0.1	%		5.3	%		6.3	%
Amortization		290			290			—			—			0.2	%		0.2	%
(Gain)/loss on disposal of property, equipment and other assets		3			(84	)		87			(103.6	)%		0.0	%		(0.1	)%
Total operating expenses		169,612			147,242			22,370			15.2	%		91.8	%		94.9	%
Income from operations		15,148			7,881			7,267			92.2	%		8.2	%		5.1	%
Other income (expenses):
Interest expense		(7,998	)		(6,320	)		(1,678	)		26.6	%		(4.3	)%		(4.1	)%
Interest income		390			231			159			68.8	%		0.2	%		0.1	%
Other income, net		5			4			1			25.0	%		0.0	%		0.0	%
Equity in net earnings of unconsolidated affiliates		769			577			192			33.3	%		0.4	%		0.4	%
Total other expenses, net		(6,834	)		(5,508	)		(1,326	)		24.1	%		(3.7	)%		(3.6	)%
Income from continuing operations before minority interest, income taxes and discontinued operations		8,314			2,373			5,941			250.4	%		4.5	%		1.5	%
Minority interest share of earnings of consolidated subsidiaries		(3,999	)		(1,091	)		(2,908	)		266.5	%		(2.2	)%		(0.7	)%
Income from continuing operations before income taxes and discontinued operations		4,315			1,282			3,033			236.6	%		2.3	%		0.8	%
Income tax expense		1,723			517			1,206			233.3	%		0.9	%		0.3	%
Income from continuing operations		2,592			765			1,827			238.8	%		1.4	%		0.5	%
Income (loss) from discontinued operations, net of taxes		1,948			(1,698	)		3,646			214.7	%		1.1	%		(1.1	)%
Net income (loss)	$	4,540		$	(933	)	$	5,473			586.6	%		2.5	%		(0.6	)%

     The following tables present, for the periods indicated, selected operating data on a consolidated basis and same facility basis:

	Three Months Ended December 31,
	2004			2003			% Change
Selected Operating Data (consolidated) (a):
Number of hospitals		11			9
Licensed beds (b)		672			580
Staffed and available beds (c)		631			524
Admissions (d)		10,891			9,588			13.6	%
Adjusted admissions (e)		14,293			12,093			18.2	%
Patient days (f)		37,158			34,088			9.0	%
Adjusted patient days (g)		48,393			42,944			12.7	%
Average length of stay (days) (h)		3.41			3.56			(4.2	)%
Occupancy (i)		64.0	%		70.7	%
Inpatient catheterization procedures		5,808			4,654			24.8	%
Inpatient surgical procedures		2,775			2,322			19.5	%

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	Three Months Ended December 31,
	2004			2003			% Change
Selected Operating Data (same facility):
Number of hospitals		9			9
Licensed beds (b)		580			580
Staffed and available beds (c)		547			524
Admissions (d)		9,874			9,588			3.0	%
Adjusted admissions (e)		13,129			12,093			8.6	%
Patient days (f)		33,344			34,088			(2.2	)%
Adjusted patient days (g)		44,049			42,944			2.6	%
Average length of stay (days) (h)		3.38			3.56			(5.1	)%
Occupancy (i)		66.3	%		70.7	%
Inpatient catheterization procedures		5,100			4,654			9.6	%
Inpatient surgical procedures		2,531			2,322			9.0	%

(a)	Selected operating data includes consolidated hospitals reported in continuing operations as of the end of the period, but does not include the hospitals which are accounted for using the equity method or as discontinued operations in our consolidated financial statements.
(b)	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.
(c)	Staffed and available beds represent the number of beds that are readily available for patient use as of the end of the period.
(d)	Admissions represent the number of patients admitted for inpatient treatment.
(e)	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.
(f)	Patient days represent the total number of days of care provided to inpatients.
(g)	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.
(h)	Average length of stay (days) represents the average number of days inpatients stay in our hospital.
(i)	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.

     Net Revenue. Net revenue increased 19.1% to $184.8 million for the three months ended December 31, 2004, the first quarter of our fiscal year 2005, from $155.1 million for the three months ended December 31, 2003, the first quarter of our fiscal year 2004. The growth was comprised of a $31.3 million increase in our hospital division, which was offset in part by a $0.7 million decrease in our diagnostics division and a $0.9 million decrease in our cardiology consulting and management operations.

     Of the $31.3 million increase in hospital division net revenue, $18.2 million was attributable to net revenue growth from our two new hospitals: Texsan Heart Hospital, which opened January 13, 2004, and Heart Hospital of Lafayette, which opened March 2, 2004. The remaining $13.1 million increase in hospital division net revenue was due to growth among our same facility hospitals. On a consolidated basis, hospital admissions increased 13.6% and adjusted admissions increased 18.2% for the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. Also on a consolidated basis, inpatient catheterization procedures increased 24.8% and inpatient surgical procedures increased 19.5% for the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004, while average length of stay decreased 4.2% to 3.41 days for the current fiscal quarter compared to 3.56 days for the same prior fiscal quarter.

     The net $13.1 million increase in net revenue contributed by our same facility hospitals, along with the overall increases in admissions of 3.0%, adjusted admissions of 8.6%, inpatient catheterization procedures of 9.6% and inpatient surgical procedures of 9.0% at these hospitals was largely due to the growth in volume at substantially all of our facilities period over period.

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     The $0.7 million decrease in our diagnostics division net revenue was the net result of certain changes in this division. New diagnostic and therapeutic businesses developed and opened since the first quarter of fiscal 2004 contributed an increase of $0.8 million, which was offset by a $1.2 million decrease resulting from the dissolution of one of our hospital-based facilities, Gaston Cardiology Services, LLC, in November 2003 and a $0.3 million decrease in our same facility diagnostics division net revenue. The decrease in same facility revenue was primarily the net result of a decline in the number of procedures performed in our mobile cardiac catheterization laboratories, partially offset by growth in the number of procedures performed at our other facilities, including new services added, during the first three months of fiscal 2005 compared to the first three months of fiscal 2004.

     Personnel expense. Personnel expense increased 21.7% to $57.2 million for the first quarter of fiscal 2005 from $47.0 million for the first quarter of fiscal 2004. As a percentage of net revenue, personnel expense increased to 31.0% from 30.3% for the comparable periods. The $10.2 million increase in personnel expense was principally incurred in our hospital division, with our two new hospitals accounting for $7.4 million of the increase and our same facility hospitals accounting for an additional $3.5 million increase. The growth in our same facility hospitals’ personnel expense was primarily attributable to the additional staffing to support the increase in admissions, inpatient catheterization and surgical procedures in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004, as well as cost of living adjustments given to employees during the first quarter of 2005. The increase in the hospital division personnel costs was offset in part due to a change in the physician management contracts in our cardiology consulting and management operations whereby certain reimbursed costs are no longer being passed through our operations.

     Medical supplies expense. Medical supplies expense increased 25.0% to $52.5 million for the first quarter of fiscal 2005 from $42.0 million for the first quarter of fiscal 2004. This $10.5 million increase in medical supplies expense was primarily incurred in our hospital division, with our two new hospitals and our same facility hospitals accounting for $4.8 million and $5.8 million of the increase, respectively. The increase in same facility hospitals’ medical supplies expense was largely attributable to the increases in catheterization and surgical procedures performed during the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. In addition, the increase in surgical procedures during 2005 was disproportionately comprised of cardiac procedures that use high-cost medical devices and supplies, such as automatic implantable cardioverter defibrillators (AICD) and drug-eluting stents. During the first quarter of fiscal 2005, we experienced a 25.1% increase in the number of AICD procedures compared to the first quarter of fiscal 2004. We have experienced a general trend over recent fiscal quarters in which the number of surgical procedures involving AICD and other higher cost medical devices and supplies has increased as a component of our mix of procedures. In addition, the increased usage of drug-eluting stents contributed to higher medical supplies expense during the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. We estimate in our hospital division that during the first quarter of fiscal 2005, 81.6% of our cardiac procedures involving stents utilized drug-eluting stents compared to 44.8% in the first quarter of fiscal 2004. In addition, our average utilization rate for drug-eluting stents in this division was 1.4 stents per case during the first quarter of fiscal 2005. As a percentage of net revenue, medical supplies expense increased to 28.4% for the first quarter of fiscal 2005 from 27.1% for the first quarter of fiscal 2004. Similarly, hospital division medical supplies expense per adjusted patient day increased 13.7% for the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004, due to the increase in procedures that use high-cost devices and supplies.

     Our medical supplies expense may continue to increase in future periods as new technologies are introduced into the cardiovascular care market and as we continue to experience increased utilization of AICD and drug-eluting stents that use high-cost devices. The amount of increase in our medical supplies expense and the relationship to net revenue in future periods will depend on many factors such as the introduction, availability, cost and utilization of the specific new technology by physicians in providing patient care, as well as any changes in reimbursement amounts we may receive from Medicare and other payors. Our medical supplies expense in future periods will remain sensitive to changes in case mix of procedures at our hospitals as surgical procedures typically involve higher cost medical supplies than catheterization procedures.

     Bad debt expense. Bad debt expense decreased 16.7% to $11.5 million for the first quarter of fiscal 2005 from $13.8 million for the first quarter of fiscal 2004. This $2.3 million decrease in bad debt expense was driven by our same facilities hospitals, which had a net $3.5 million decrease, which was partially offset by our two new hospitals, as they incurred a $1.2 million increase for the comparable periods. The $3.5 million decrease in our same facility hospitals’ bad debt expense was partially driven by a significant increase of self-pay admissions and emergency room visits in one of our markets during the first quarter of 2004. We have since improved the Medicaid qualification process at this hospital. We have also seen a decrease in admissions from payors that typically result in difficult co-pay collections. In addition, our same facility hospitals’ days of net revenue in accounts receivable, based on first fiscal quarter net revenue, was 48 days as of December 31, 2004 compared to 53 days as of December 31, 2003. As a percentage of net revenue, bad debt expense was 6.2% for the first quarter of fiscal 2005 as compared to 8.9% for the first quarter of fiscal 2004. While payor mix has a significant impact on bad debt expense, we anticipate future bad debt expense as a percentage of revenue to approximate or be slightly higher than those recognized in the first quarter of 2005.

     Other operating expenses. Other operating expenses increased 21.8% to $38.4 million for the first quarter of fiscal 2005 from

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$31.5 million for the first quarter of fiscal 2004. This $6.9 million increase in other operating expense was primarily due to a $6.3 million increase generated by our hospital division, with our diagnostics division and our corporate and other division each experiencing increases of $0.3 million as well. Of the $6.3 million increase in our hospital division’s other operating expense, our two new hospitals accounted for $4.0 million and our same facility hospitals for the remaining $2.3 million. This increase in our same facility hospitals’ other operating expense was primarily attributable to incremental maintenance costs due to the expiration of the warranty period at some of the newer same facilities as well as higher property taxes period-to-period. The $0.3 million increase in our diagnostics division was primarily due to the diagnostic and therapeutic businesses developed and opened since the first quarter of fiscal 2004. The $0.3 million increase in our corporate and other division’s other operating expense was driven by additional corporate activities to support the overall growth in operations.

     Pre-opening expenses. There were no pre-opening expenses incurred for the first quarter of fiscal 2005 versus $3.0 million was incurred for the first quarter of fiscal 2004. Pre-opening expenses represent expenses specifically related to projects under development, primarily new hospitals. Upon opening Heart Hospital of Lafayette during the second quarter of fiscal 2004, we have completed our hospital expansion plans that commenced in 2001 following completion of our initial public offering, and we do not currently have any other hospitals under development. Accordingly, we are no longer incurring pre-opening expenses. 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.

     Interest expense. Interest expense increased 26.6% to $8.0 million for the first quarter of fiscal 2005 compared to $6.3 million for the first quarter of fiscal 2004. This $1.7 million increase in interest expense was primarily attributable to the fact that as a result of the July 7, 2004 refinancing transaction, our overall cost of borrowings on debt increased compared to the debt that was repaid. In addition, we capitalized approximately $0.5 million of interest expense as part of the capitalized construction costs of our hospitals that were under development during the first quarter of fiscal 2004.

     Earnings allocated to minority interests. Earnings allocated to minority interests increased to $4.0 million for the first quarter of fiscal 2005 from $1.1 million for the first quarter of fiscal 2004. This $2.9 million increase was primarily due to changes in the operating results of our individual hospitals and the respective basis for allocating such earnings or losses among us and our partners on either a pro rata basis or disproportionate basis during the first quarter of fiscal 2005 compared to the same period of fiscal 2004. Our earnings allocated to minority interests increased partially due to an increase in earnings of certain of our same facility hospitals which were allocated to our minority partners on a pro rata basis. In addition, during the first quarter of 2004, we shared losses at our two newest hospitals with our minority partners on a pro rata basis; however, during the first quarter of 2005, we were required to recognize a disproportionate 100% of the hospitals losses such that no amounts were allocated to our minority partners. For a more complete discussion of our accounting for minority interests, including the basis for the disproportionate allocation accounting, see “Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.

     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. As of December 31, 2004, we had remaining cumulative disproportionate loss allocations of approximately $27.7 million that we may recover in future periods. However, we may be required to recognize additional disproportionate losses, depending on the results of operations of each of our hospitals. We could also be required to recognize disproportionate losses at our other hospitals not currently in disproportionate allocation depending on their results of operations in future periods.

     Income taxes. Income tax expense was $1.7 million for the first quarter of fiscal 2005 compared to $0.5 million for the first quarter of fiscal 2004, which represents an effective tax rate of approximately 40% for both periods. The increase in income tax expense in the comparable periods reflects the overall increase in taxable income for the first quarter of 2005 as compared to the first quarter of 2004. The Company continues to have federal and state net operating loss carry forwards available from prior periods to offset the majority of its current tax liabilities.

     Income (loss) from discontinued operations. During the first quarter of 2005, the Company closed and sold substantially all of the assets of The Heart Hospital of Milwaukee. Accordingly, The Heart Hospital of Milwaukee is accounted for as discontinued operations. Income from discontinued operations in the first quarter of 2005 reflects the gain on the sale of the assets of approximately $9.3 million, partially offset by operating losses, shut-down costs and the overall income tax expense associated with the facility. The loss from discontinued operations in the first quarter of 2004 represents the operating losses, net of the tax benefit of such losses, of the facility during the period.

Liquidity and Capital Resources

     Working Capital and Cash Flow Activities. Our consolidated working capital was $150.7 million at December 31, 2004 and $106.9 million at September 30, 2004. The increase of $43.8 million in working capital primarily resulted from increases in cash and cash equivalents and accounts receivable, combined with a decrease in accrued compensation and benefits, offset in part by an increase in accounts payable and other accrued liabilities.

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     The increase in cash and cash equivalents was driven by the gross cash received of $42.5 million as a result of the sale of The Heart Hospital of Milwaukee during the first quarter of fiscal 2005. The increase in accounts receivable, net, was primarily attributable to the growth in our net revenue during the first quarter of fiscal 2005 as compared to the fourth quarter of fiscal 2004. The decrease in accrued compensation and benefits can be mainly attributed to the payment during the quarter of bonuses accrued as of September 30, 2004 and the increase in other accrued liabilities was due to higher accrued interest on debt as such interest is paid semi-annually, in arrears, on January 15 and July 15.

     Our operating activities provided net cash of $9.8 million for the first three months of fiscal 2005 compared to net cash provided of $6.3 million for the first three months of fiscal 2004. The improvement in operating cash flow is a direct result of the overall improvement in the net income period to period. This improvement was partially offset by various fluctuations in components of working capital in the periods.

     Our investing activities provided net cash of $37.5 million for the first three months of fiscal 2005 compared to net cash used of $27.0 million for the first three months of fiscal 2004. The $37.5 million of net cash provided by investing activities in the first three months of fiscal 2005 was primarily due to the proceeds from the sale of The Heart Hospital of Milwaukee, offset in part by capital expenditures for the period. The $27.0 million of net cash used by investing activities for the first three months of fiscal 2004 was primarily due to our capital expenditures, related mostly to our hospitals under development, including $8.8 million of cash used for The Heart Hospital of Milwaukee. This use of cash was partially offset by the proceeds from the sale of certain property and equipment. Even though we have completed our hospital expansion plans and we do not currently have any other hospitals under development, we expect to continue to use cash in investing activities in future periods. The amount will depend largely on the type and size of strategic investments we make in future periods.

     Our financing activities used net cash of $3.2 million for the first three months of fiscal 2005 compared to net cash provided of $5.9 million for the first three months of fiscal 2004. The $3.2 million of net cash used by financing activities for the first three months of fiscal 2005 was primarily the result of distributions to, net of investments by, minority partners and the repayment of long-term debt and obligations under capital leases. The $5.9 million of net cash provided by financing activities for the first three months of fiscal 2004 was the result of proceeds from the issuance of long-term debt, inclusive of debt transactions included as a part of discontinued operations, offset in part by repayments of long-term debt and obligations under capital leases obligations as well as distributions to minority partners.

     Capital Expenditures. Expenditures for property and equipment for the first three months of fiscal years 2005 and 2004 were $5.3 million and $19.4 million, respectively. For the first quarter of fiscal 2005, our capital expenditures principally were focused on improvements to and expansion of our same facilities, whereas approximately $12.4 million of expenditures where made in the first quarter of 2004 for our two newest facilities. We expect our capital expenditures will continue to decrease for the second and third quarters of fiscal 2005 as compared to the same periods in fiscal 2004, as we opened our last hospital under development in March 2004. The amount of capital expenditures we incur in future periods will depend largely on the type and size of strategic investments we make in future periods.

     Obligations and Availability of Financing. At December 31, 2004, we had $359.4 million of outstanding debt, $10.4 million of which was classified as current. Of the $359.4 million of outstanding debt, $150.0 million was outstanding under our 9 7/8% senior notes, $99.5 million was outstanding under our new credit facility and $105.2 million was outstanding to lenders to our hospitals. The $105.2 million outstanding to lenders to our hospitals included $9.5 million borrowed under a $12.0 million debt commitment to finance Heart Hospital of Lafayette’s equipment purchases and $4.0 million outstanding under capital leases obligations. The remaining $4.7 million of debt was outstanding to lenders to our diagnostic services and corporate and other divisions under capital leases and other miscellaneous indebtedness, primarily equipment notes payable.

     No amounts were outstanding under our $100.0 million revolving credit facility at December 31, 2004. At the same date, however, we had letters of credit outstanding of $1.5 million, which reduced our availability under this facility to $98.5 million, subject to limitations on our total indebtedness as stipulated under other debt agreements.

     In addition to the $359.4 million of outstanding debt at December 31, 2004, we had $6.1 million of a working capital note due to a community hospital investor partner at one of our hospitals that will be repaid as funds are available and is included in other long-term obligations.

     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 December 31, 2004, we were in compliance with all debt covenants in the instruments governing our outstanding debt.

     At December 31, 2004, we guaranteed either all or a portion of the obligations of our subsidiary hospitals for equipment and other notes payable. We provide these guarantees in accordance with the related hospital operating agreements, and we receive a fee for providing these guarantees from the hospitals or the physician investors.

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     We also guarantee approximately 50% of the real estate and 30% of the equipment debt of Avera Heart Hospital of South Dakota, the one hospital in which we owned a minority interest at December 31, 2004, and therefore do not consolidate the hospital’s results of operation and financial position. We provide such guarantee in exchange for a fee from the hospital. At December 31, 2004,Avera Heart Hospital of South Dakota was in compliance with all covenants in the instruments governing its debt. The total amount of the affiliate hospital’s real estate and equipment debt was approximately $26.4 million and $8.1 million, respectively, at December 31, 2004. Accordingly, the real estate debt and the equipment debt guaranteed by us was approximately $13.2 million and $2.4 million, respectively, at December 31, 2004.

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

     Intercompany Financing Arrangements. Concurrent with our new financing, we provided secured real estate and equipment financings to our majority-owned hospitals. The aggregate amount of the intercompany real estate, equipment and working capital loans outstanding as of December 31, 2004 was $352.5 million.

     Each intercompany real estate loan is separately documented and secured with a lien on the borrowing hospital’s real estate, building and equipment and certain other assets. Each intercompany real estate loan amortizes based on a 20-year term, matures on June 30, 2011 and accrues interest at variable rates based on LIBOR plus an applicable margin. The weighted average interest rate for the intercompany real estate loans at December 31, 2004 was 5.66%.

     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 1 to 7 years. The intercompany equipment loans accrue interest at fixed rates ranging from 5.75% to 7.50% or variable rates based on LIBOR plus and applicable margin. The weighted average interest rate for the intercompany equipment loans at December 31, 2004 was 6.60%.

     We receive a fee from the minority partners in the subsidiary hospitals as consideration for providing these intercompany real estate and equipment loans. We use intercompany financing arrangements to provide cash support to individual hospitals for their working capital needs, including the needs of our new hospitals during the ramp-up period and any periodic or on-going needs of our hospitals. 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 subordinated to each hospital’s third-party 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 the borrowing hospital’s accounts receivable. Also as part of our intercompany financing and cash management structure, we sweep cash from individual hospitals as amounts are available in excess of the individual hospital’s working capital needs. These funds are advanced pursuant to cash management agreements with the individual 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. As of December 31, 2004 and September 30, 2004, we held $92.8 million and $88.8 million, respectively, of intercompany notes and related accrued interest, net of advances from our hospitals. The increase of approximately $4.0 million was primarily attributable to the funding of working capital at our newest hospitals. The aggregate amount of these intercompany loans and cash advances outstanding fluctuates from time to time depending upon our hospitals’ needs for capital resources.

     On December 1, 2004, we completed the sale of certain assets of The Heart Hospital of Milwaukee for $42.5 million. Of the $42.5 million in proceeds received, approximately $37.0 million was used to repay The Heart Hospital of Milwaukee’s intercompany secured loans, thereby increasing our consolidated cash position on such date. As part of the terms of the sale, we were required to close the hospital. As such, we incurred costs associated with the closing of the hospital, in addition to costs associated with completing the sale and additional operating expenses. As stipulated by the covenants of our Senior Credit Facility, within 300 days after the receipt of the net proceeds, we may use the proceeds for capital expenditures or other permitted investments, or identify a similar usage of the proceeds, so long as such usage occurs within 300 days of the date identified. Any net proceeds not identified or invested within this time period will then be used to repay principal of senior secured indebtedness.

Forward-Looking Statements

     Some of the statements and matters discussed in our Annual Report on Form 10-K for the year ended September 30, 2004, in this report and in exhibits to these reports 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-

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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 and its exhibits include, among others, statements about the following:

•   the impact of the Medicare Prescription Drug Improvement and Modernization Act of 2003 and other healthcare reform initiatives,

•   changes in Medicare and Medicaid reimbursement levels,

•   Unanticipated delays in achieving expected operating results at our newest hospitals,

•   Difficulties in executing our strategies,

•   our relationships with physicians who use our hospitals,

•   competition from other hospitals,

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

•   our information systems,

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

•   liability and other claims asserted against us,

•   changes in medical or other technology, and

•   market specific or general economic downturns.

Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that we will achieve our goals. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report and exhibits might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. Other than as may be required by federal securities laws to disclose material developments related to previously disclosed information, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We urge you to review carefully all of the information in this report and the discussion of risk factors filed as Exhibit 99.1 — Risk Factors to our Annual Report on Form 10-K for the year ended September 30, 2004, before making an investment decision with respect to our common stock. A copy of this annual report, including exhibits, is available on the internet site of the SEC at http://www.sec.gov or through our website at http://www.medcath.com.

Item 3. 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 or contracts or instruments containing features or terms that behave in a manner similar to derivative instruments in order to mitigate our risks. In addition, we may be required to hedge some or all of our market risk exposure, especially to interest rates, by creditors who provide debt funding to us. To date, we have only entered into the fixed interest rate swaps as discussed below.

     As required by their mortgage loans, three of our consolidated hospitals entered into fixed interest rate swaps during the fourth quarter of fiscal year 2001. These fixed interest rate swaps effectively fixed the interest rate on the hedged portion of the related debt at 4.92% plus the applicable margin for two of the hospitals and at 4.60% plus the applicable margin for the other hospital. These interest rate swaps were accounted for as cash flow hedges prior to the repayment of the outstanding balances of the mortgage debt for these three hospitals as part of the July 7, 2004 financing transaction. We did not terminate the interest rate swaps as part of the financing transaction. Since July 7, 2004, the fixed interest rate swaps have not been utilized as a hedge of variable debt obligations, and accordingly, changes in the valuation of the interest rate swaps have been recorded directly to earnings as a component of interest expense. The fair value of the interest rate swaps at December 31, 2004 was an obligation of approximately $0.8 million. We recognized an unrealized gain of approximately $0.4 million for the three months ended December 31, 2004 due to changes in the fair value of these swaps.

     Our primary market risk exposure relates to interest rate risk exposure through that portion of our borrowings that bear interest

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based on variable rates. Our debt obligations at December 31, 2004 included approximately $121.4 million of variable rate debt at an approximate average interest rate of 4.79%. A one hundred basis point change in interest rates on our variable rate debt would have resulted in interest expense fluctuating approximately $0.3 million for the three months ended December 31, 2004.

Item 4. Controls and Procedures

     The 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, as of December 31, 2004, that the Company’s disclosure controls and procedures are effective 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 executive vice president 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 fiscal quarter ended December 31, 2004 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     In November 2004, we filed a complaint in the North Carolina Superior Court, County of Mecklenburg, against Quadramed Corporation (Quadramed) alleging that the Quadramed had committed a material breach of the Master Software License and Services Agreement, dated November 20, 2002, by and between QuadraMed Affinity and MedCath, and all other incorporated agreements (collectively, the Contract) in respect of uncured deficiencies in the products and performance obligations under the Contract and seeking at least $5.0 million in damages, plus litigation costs. On December 2004, Quadramed filed a motion to dismiss our complaint and also filed a counterclaim against us seeking no less than $1.14 million in damages for our alleged breach of the Contract by failing to pay licensing fees due Quadramed.

     We believe that, in accordance with the contract terms, Quadramed’s allegations are without merit. We will vigorously defend ourselves against this counterclaim and will seek redress through all applicable remedies for any injuries suffered by us in connection with this matter.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     On July 27, 2001, we completed an initial public offering of our common stock pursuant to our Registration Statement on Form S-1 (File No. 333-60278) that was declared effective by the SEC on July 23, 2001. We expect to use the remaining approximate $11.0 million of proceeds from the offering to fund development activities, working capital requirements and other corporate purposes. Although we have identified these intended uses of the remaining proceeds, we have broad discretion in the allocation of the net proceeds from the offering. Pending this application, we will continue to invest the net proceeds of the offering in cash and cash-equivalents, such as money market funds or short-term interest bearing, investment-grade securities.

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Item 6. Exhibits

Exhibit
No.	Description
10.1	Agreement for the Purchase and Sale between The Heart Hospital of Milwaukee, LLC, MedCath Corporation and Columbia St. Mary’s Inc., dated November 4, 2004
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal 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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MEDCATH CORPORATION
Dated: February 8, 2005	By:	/s/ JOHN T. CASEY
		John T. Casey
		Chief Executive Officer and Director
		(principal executive officer)
	By:	/s/ JAMES E. HARRIS
		James E. Harris
		Executive Vice President and Chief Financial
		Officer
		(principal financial officer)
	By:	/s/ GARY S. BRYANT
		Gary S. Bryant
		Vice President - Controller
		(principal accounting officer)

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EX-10.1

AGREEMENT FOR PURCHASE AND SALE

     THIS AGREEMENT FOR PURCHASE AND SALE (“Agreement”) is made and entered into this 4th day of November, 2004 (the “Effective Date”) by and between THE HEART HOSPITAL OF MILWAUKEE, LLC, a Delaware limited liability company (“Seller”), MedCath Corporation, a Delaware corporation (collectively “MedCath”) solely for purposes of fulfilling its obligations under Section 17.A below and COLUMBIA ST. MARY’S, INC., a Wisconsin nonstock, not-for-profit corporation (“Purchaser”).

RECITALS

     A. Seller owns and operates The Heart Hospital of Milwaukee (the “Hospital”) and is the owner in fee simple of the real estate and the improvements located at 375 West River Woods Parkway in the City of Glendale, County of Milwaukee, Wisconsin, and

     B. Seller desires to sell to Purchaser the Hospital, which shall include, but not be limited to the Property (as hereinafter defined) and certain assets related to the Hospital and Purchaser desires to purchase the Property and certain assets related to the Hospital from Seller, pursuant to the terms and conditions of this Agreement.

     NOW, THEREFORE, for and in consideration of the covenants and agreements herein contained. Purchaser and Seller hereby agree as follows:

1. Purchase and Sale.

     On the Closing Date (as hereinafter defined), Purchaser shall purchase from Seller, and Seller shall sell, convey, assign and/or transfer to Purchaser, good, indefeasible and marketable title in and to the following real property and good and valid title to the following personal property:

     A. Real Property and Improvements. Subject to Section 1.D below, all of the real estate and improvements owned by Seller and located at or adjacent to the address known as 375 West River Woods Parkway, City of Glendale, County of Milwaukee, Wisconsin (the “Property”) which shall include, but not be limited to the real estate described on attached Exhibit A- The Property shall include but not be limited to: (a) any and all buildings, structures and other improvements and fixtures situated on or attached to all or any portion of the Property; (b) all easements appurtenant to the Property and other easements, grants of right, licenses, privileges or other agreements for the benefit of, belonging to or appurtenant to the Property whether or not situated on the Property; and (c) all right, title and interest of Seller in and to any roads, access points, streets and ways, public or private, open or proposed, in front of or adjoining all or any part of the Property and serving the Property. Seller has provided to Purchaser any survey of the Property in Seller’s possession prior to the Effective Date.

     B. Hospital Assets. Subject to Section 1.C below, the following assets owned by Seller and utilized by Seller to operate the Hospital as of the Effective Date (the “Assets”): (a) all medical equipment utilized by the Hospital to treat and render medical services to patients; (b) all computer hardware and software which is an integral part of the medical equipment, non- medical equipment and all building mechanical and security systems which is necessary to operate such medical equipment, non-medical equipment and building mechanical and security systems; (c) all furniture, fixtures and non-medical equipment; (d) inventory of the Hospital, which shall include, but not be limited to pharmaceuticals, surgical instruments, medical supplies, office supplies; textbooks and manuals related to the medical equipment, non-medical equipment and all building mechanical and security systems; (e) fork lifts and other machinery; (f) all Intellectual Property (as hereinafter defined), including without limitation all rights to the name, “The Heart Hospital of Milwaukee” and any and all derivations thereof; (g) Seller’s phone and facsimile numbers; (h) architectural drawings, surveys and “as built” drawings related to the Property; (i) to the extent legally assignable, all warranties benefiting the Hospital including but not limited to construction, architectural, mechanical, electrical and plumbing systems within the building and equipment warranties; (j) assets listed on the hard asset ledger provided to Purchaser and dated September 30, 2004; (k) Seller goodwill; and (1) any other tangible assets owned by Seller (including but not limited to motor vehicles, if any) and utilized to operate the Hospital as of the Effective Date.

     For purposes of this Agreement, “Intellectual Property” shall mean and include: (a) trademarks, service marks, logos, trade names and corporate names and registrations and applications for registration thereof; (b) copyrights and registrations and applications for registration thereof; (c) mask works and registrations and applications for registration thereof; (d) internet websites, internet domain names and e-mail addresses exclusively relating to the Hospital; (e) other proprietary rights relating to any of the foregoing (including without limitation remedies against infringements thereof and rights of protection of interest therein under the laws of all jurisdictions); and (f) copies and tangible embodiments thereof, together with any developments or enhancements thereof.

     C. Excluded Assets. Notwithstanding anything to the contrary contained in this Agreement, the Assets shall not include any cash; cash equivalents; marketable securities; intercompany receivables; accounts receivable; minute or corporate record books relating to Seller; business records unless specified in Section l.B above; insurance policies of Seller; assets of any employee health or benefit plan; any vendor, service or other contract to which Seller is a party unless listed within the Assumed Liabilities (as hereinafter defined); all computer hardware and software not identified as “Assets” in Section l.B above, patient records, all manuals or information relating to methods of doing business, clinical protocols, procedures and policies which have been developed for use by MedCath Incorporated for use in substantially all of its affiliated hospitals and all other intangible assets of Seller.

     D. Conveyance of Additional Medical Office Building Property. Notwithstanding anything herein to the contrary. Purchaser acknowledges that, prior to Closing, Seller will convey to Glendale Medical Development Partners, LLC, as the owner of the parcel adjacent to the Hospital upon which an office building is being constructed, an approximately three (3) foot strip of land upon which the office building is encroaching (the “Encroachment Parcel”).

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Purchaser represents and covenants that such conveyance will not adversely affect the Property or its use and occupancy and will be in compliance with all laws, rules, regulations and ordinances and shall not breach or violate any existing agreement with or relating in any way to the City of Glendale, the Community Development Authority of the City of Glendale or Glendale Medical Development Partners, LLC. In connection therewith, Purchaser also acknowledges that Seller and Glendale Medical Development Partners, LLC will, prior to Closing: (i) enter into any necessary amendments, if any, to existing agreements so that such conveyance does not violate said agreements including but not limited to that certain Reciprocal Easement and Protective Covenant Agreement and (ii) deliver to Purchaser all documents relating to Seller’s conveyance of the Encroachment Parcel to Glendale Medical Development Partners, LLC.

2. Exclusion of Liabilities and Obligations.

     Except for Assumed Liabilities (as defined herein), Purchaser does not assume, and shall not be obligated to pay, perform or discharge any taxes, debts, liabilities or any other obligations of Seller or its Members, partners, officers or employees of any kind or nature, whether actual, contingent or approved, known or unknown as of the Closing Date (the “Excluded Liabilities”), including, without limitation the following: (a) obligations relating to environmental liabilities relating to the Property or the Assets which resulted from actions or omissions prior to Closing; (b) Seller’s workers’ compensation account or premiums, employee compensation, pension, profit sharing, deferred compensation or other qualified or non-qualified benefit programs (including Seller’s group health insurance plan); (c) liabilities for current or deferred income taxes, taxes in any way related to the Property, the Hospital, Seller’s personal property or the Assets relating to periods through Closing; (d) any contract liabilities or obligations or claims not expressly included within the Assumed Liabilities, including by way of example, professional service agreements, medical director agreements, written employment contracts and written agreements with the City of Glendale or any division of said municipality (i.e., Community Development Authority), except for those certain ongoing obligations of Seller under the Development Agreement (as defined in Section 12.F below) which Purchaser shall be obligated to assume (the “Development Agreement Obligations”); (e) liabilities for medical malpractice or other claims related to tortious, reckless or intentional acts claimed in any way against the Hospital or any of its employees, staff, owner’s, members, partners, agents, contractors, vendors, patients or guests which resulted from actions or omissions prior to Closing; (f) utility charges through the Closing Date; (g) any liabilities arising under any payor contracts or programs, including without limitation, the Medicare and Medicaid programs, including recapture or recoupment of previously paid or reimbursed expenses and liabilities for false claims; (h) obligations and liabilities arising from Seller ceasing operations, including without limitation, liability under state or federal plant closing laws; and (i) accounts payable of any kind unless included within the Assumed Liabilities.

3. Assumed Liabilities.

     In addition to the Purchase Price (as hereinafter defined) and as further consideration provided by Purchaser for the transactions contemplated within this Agreement, Purchaser agrees to assume the liabilities set forth below which shall be referred to as the “Assumed Liabilities”:

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     A. Leasehold obligations of Seller and the Members of Seller, to Glendale Medical Development Partners, LLC, as office tenants for the office building being constructed by Glendale Medical Development Partners, LLC, on the parcel adjacent to the Hospital (the “MOB Leases”); provided such leasehold liabilities are (i) binding on Seller and/or its Members as of the Effective Date, without contingency; (ii) transferred and assigned to Purchaser in a form reasonably acceptable to Purchaser; and (iii) are listed on attached Exhibit B.

     B. Leasehold liabilities of Seller, for furniture, fixtures and medical/non-medical equipment (excluding computers) utilized by Seller to operate the Hospital (the “Equipment Leases”) provided such leasehold liabilities are (i) binding on Seller as of the Effective Date, without contingency; (ii) transferred and assigned to Purchaser in a form reasonably acceptable to Purchaser; and (iii) are listed on attached Exhibit B.

     C. Reciprocal Easement and Protective Covenant Agreement dated March 3, 2004 between Seller and Glendale Medical Development Partners, LLC.

     D. The Development Agreement Obligations of Seller.

     E. Seller shall be responsible for obtaining all necessary third-party consents, if any (the “Consents”) for the transfer of the Assumed Liabilities to Purchaser.

4. Purchase Price.

     A. The aggregate purchase price for the Property and the Assets shall be $42,500,000 (the “Purchase Price”). The Purchase Price shall be payable to Seller at Closing by wire transfer or other funds acceptable to Seller.

     B. No later than fifteen (15) business days after the Effective Date, Seller shall deliver a written proposal to Purchaser allocating the Purchase Price, subject to Purchaser’s approval which shall not be unreasonably withheld, conditioned or delayed.

5. Purchaser’s Inspection of Property.

     A. Access to the Property. Commencing on the Effective Date and continuing through Closing (the “Access Period”), Purchaser, its representatives, agents and contractors shall, at all reasonable times, have the privilege of going upon the Property, as needed, to inspect, examine and test the Property and the Assets, including, but not limited to conducting investigations of the physical status of the Property and the engineering of the Property. This privilege shall also include, but not be limited to, the right to obtain any relevant information necessary to determine subsurface and topographic environmental conditions (including Phase I and Phase II testing if necessary), soil tests, asbestos analysis and mold sampling, all of which tests, studies and reviews shall be performed at Purchaser’s sole cost and expense. Any damage to the Property resulting from Purchaser’s inspections or testing of the Property, including disturbance of the surface or subsurface soils of the land, shall be restored, at Purchaser’s sole cost and expense, to substantially the condition existing as of the Effective Date.

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     B Seller to Provide Documents. Seller represents and warrants that it has provided to Purchaser, prior to the date hereof, copies of any and all documents that are material to the ownership and/or operation of the Property and the Assets, in Seller’s possession, or in the possession of third parties but accessible by Seller, which shall include, but not be limited to the following: appraisals, environmental reports, surveys, soil condition reports, as-built drawings, engineering and/or architectural drawings of the improvements and mechanical, electrical or plumbing systems on the Property and all documents and/or leases that are material to the Assumed Liabilities including, but not limited to, the MOB Leases and the Equipment Leases. If the transaction contemplated within this Agreement does not close, Purchaser shall return all documents to Seller within five (5) business days from the date this Agreement is terminated.

6. Title.

     Purchaser has obtained a preliminary title commitment for the Property issued by a title company licensed to issue title insurance in the State of Wisconsin (the “Title Company”). At Closing, Seller shall convey and transfer to Purchaser good, indefeasible, fee simple and marketable title to the Property free and clear of all liens and encumbrances except municipal zoning ordinances, recorded building and use restrictions and covenants and general taxes levied in the year of Closing (the “Permitted Title Exceptions”). Such conveyance and transfer by Seller to Purchaser shall also be sufficient to enable the Title Company to issue its extended coverage ALTA Owner’s Policy of Title Insurance with the standard exceptions therein deleted (the “Title Policy”) in the amount of the Purchase Price allocated to the Property, subject only to the Permitted Title Exceptions. Seller agrees not to further alter or encumber in any way, title to the Property or Assets after the Effective Date.

7. Closing.

     The closing of the purchase and sale contemplated in this Agreement shall take place on a date determined by Seller which is prior to December 15, 2004, but in no event shall the closing be earlier than two (2) days after Seller has ceased operations (the “Closing Date” or “Closing”). The Closing shall take place at the offices of Purchaser or at such other time, such other place, or on such other date as may be mutually agreed upon by the parties.

     A. Deliverables. At Closing. Seller shall deliver to Purchaser all of Seller’s Deliverables required of Seller as set forth in Section 9, below, and Purchaser shall deliver to Seller the Purchase Price.

     B. Possession. Seller shall deliver possession of the Property and Assets to Purchaser, at Closing, free and clear of any and all encumbrances except for the Assumed Liabilities and the Permitted Title Exceptions.

     C. Transfer Taxes. Seller shall pay any transfer tax or any like or similar transfer tax or imposition due upon the transfer of the Property or the Assets.

     D. Seller’s Closing Costs. Seller shall pay the costs of any cure of title defects required of Seller hereunder, the cost of the title examination, title endorsements and premium

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insuring Purchaser’s fee simple interest in the Property, and the fees and expenses of Seller’s attorneys.

     E. Purchaser’s Closing_Costs. Purchaser shall pay the recording costs, costs of any investigations, studies and appraisals conducted by Purchaser, and the fees and expenses of Purchaser’s attorneys.

     F. Closing Fees. Seller shall pay the fees charged by the Title Company in connection with closing and any escrow services which may be provided by the Title Company,

8. Adjustments.

     The following items shall be credited, debited and otherwise adjusted through the Closing Date and the resulting calculations shall be an adjustment to the Purchase Price, payable at Closing, unless otherwise so provided.

     A. Taxes. All (i) ad valorem and real estate taxes with respect to the Property and (ii) all personal property taxes related to the Assets, accrued or payable for the current year, shall be prorated as of the Closing Date with Seller receiving a credit for any such taxes paid in advance for any period after the Closing Date or with Purchaser receiving a credit for the period prior to and including the Closing Date for which such taxes have not been paid by Seller. Seller shall pay all assessments contemplated with respect to or levied upon the Property prior to Closing. In the event that tax bills for the current year’s taxes are not available on the Closing Date, taxes shall be prorated based upon the tax bills for the previous year and increased or decreased based upon any known increase or decrease in the assessed valuation or the tax rate. Seller and Purchaser hereby agree that the parties shall, if necessary, re-prorate the taxes when actual tax bills for the current year are available after the Closing.

     B. Utility Charges. Any utility charges that have been billed prior to the Closing Date shall be paid by Seller before Closing; all such charges that have accrued but are not billed prior to the Closing Date, shall be charged to Seller, as accrued through the Closing Date, as a credit against the Purchase Price.

     C. Other Liens and Encumbrances. On or before the Closing Date, Seller shall cause any and all assessments, liens, and encumbrances affecting the Property and Assets, which are not Permitted Title Exceptions, including without limitation, any mechanic’s lien, security interest, mortgage or deed of trust, to be satisfied and released. The proceeds due at Closing may be applied by Purchaser or Seller to satisfy or pay any assessments, liens, encumbrances, interests or other charges affecting the Property, which are to be paid, satisfied or released pursuant to this Agreement,

9. Conveyances and Deliveries at Closing.

     On the Closing Date, Seller shall execute and deliver or cause to be delivered to Purchaser the following, which shall be referred to as “Seller’s Deliverables”;

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     A. Bill of Sale. A bill of sale transferring and conveying to Purchaser good title to the Assets, free and clear of all liens, security interests and exceptions of any kind and nature whatsoever,

     B. Assignment and Assumption of Assumed Liabilities. An assignment and assumption of all rights and obligations arising from all Assumed Liabilities assumed by and assigned to Purchaser by Seller, in a form reasonably acceptable to Purchaser and in compliance with Section 3, above. Seller shall also deliver all necessary third-party consents for Purchaser to assume the Assumed Liabilities.

     C. Special Warranty Deed. A Special Warranty Deed transferring and conveying to Purchaser marketable fee simple title to the Property, free and clear of all liens and encumbrances, except only the Permitted Title Exceptions.

     D. Non-Foreign Person Affidavit. An affidavit from Seller in form reasonably satisfactory to Purchaser, certifying that Seller is not a foreign person or entity or non-resident alien under Section 1445 of the Internal Revenue Code of 1986, as amended.

     E. Title Commitment. The Title Policy (or a final markup of the title insurance commitment accepted by Purchaser) at the Closing.

     F. Affidavit of Title. Such affidavits (including but not limited to an owner’s affidavit of liens and possession), gap indemnity agreements, and other evidence of title from Seller, as may be required by the Title Company, on or in forms customarily used by the Title Company, in order to enable the Title Company to issue the Title Policy subject only to the Permitted Title Exceptions, without the standard exceptions and without exception for mechanics or materialmen’s liens, other statutory liens, or for the rights of parties in possession, and with such endorsements or affirmative coverage as Purchaser shall reasonably require.

     G. Lien Waivers. Fully executed lien waivers for all materials and labor supplied to Seller for work performed at the Property within twelve (12) months of the Closing.

     H. Closing Statement. A closing statement accurately setting forth the prorations and adjustments to the Purchase Price as required by this Agreement and such disbursements from the sale proceeds as shall be necessary to pay such costs, and satisfy such liens, taxes, assessments and other encumbrances as required by this Agreement.

     I. Certificate. A statement certifying that (a) all obligations, agreements, promises, and covenants to be performed by Seller under this Agreement have been duly performed; and (b) the warranties, representations and covenants by Seller made pursuant to this Agreement are still true as of the Closing Date.

     J. Assignment of Warranties. To the extent warranties are assignable, an assignment of warranties for the Property shall be included in the Bill of Sale, which shall include but not be limited to, any warranties related to the construction of the improvements on the Property, transferring and assigning to Purchaser all right, title, claim and interest in and to

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any warranties or guarantees concerning the Property which have not by their terms expired, together with the originals of any agreements or certificates evidencing the same.

     K. Noncompetition Agreements. Noncompetition Agreements from the members of Seller (and including MedCath ) to the extent required by Purchaser and in form attached hereto as Exhibit C.

     L. Lease Termination Agreement. A lease termination agreement for the lease between Seller and Wilson Heart Care Associates, Ltd. dated April 30, 2004.

     M. Certificate of Compliance. A Certificate of Compliance issued by the City of Glendale pursuant to all applicable ordinances.

     N. Assignment of Rights and Privileges Under Declaration. An assignment of Seller’s rights and privileges under the Declaration of Restrictive Covenants of the Community Development Authority of the City of Glendale dated the 10^th day of May, 2004, and recorded as Document No. 8280600.

10. Seller’s Representations, Warranties and Covenants.

     Seller, as of the date of execution of this Agreement by Seller, represents, warrants and covenants to and with Purchaser as follows (for purposes of this Section 10, the term “Seller’s Knowledge” or “Knowledge” means knowledge that the following individuals actually knew or should have known: the President or the Vice Presidents of the Hospital or the President or any Vice President of MedCath Incorporated or MedCath Corporation):

     A. Title to Property and Assets. Seller is the owner of good, fee simple, indefeasible and marketable title to the Property and good and valid title to the Assets, free and clear of all liens, claims, encumbrances and restrictions of any kind and nature, except for the Permitted Title Exceptions. As of the Closing, except for the Assumed Liabilities, there are no leases, licenses, option agreements, rights of first refusal or purchase agreements affecting the Property or the Assets, or any parties having any right to possession of the Property or the Assets, and there are no other parties in possession of the Property or the Assets other than Seller.

     B. Compliance of Property With Zoning and Other Laws. To Seller’s Knowledge, the Property and the Assets, including without limitation all improvements thereon, conform to and comply with all applicable zoning, building code and applicable law and ordinances and regulations for operation as a hospital where the failure to so comply would have a material adverse effect on the Property or the Assets and Seller has not received any written notification from any governmental or public authority that the Property or the Assets violate any existing laws or that any work is required to be done upon or in connection with the Property or the Assets to comply with any applicable law.

     C. Environmental Matters. Seller has not used, nor authorized, nor knowingly allowed the use of the Property or the Assets, and to Seller’s Knowledge, and except as disclosed in any environmental reports delivered to Purchaser or obtained by Purchaser, the Property or the Assets have never been used for the generating, handling, treatment, storage, disposal or release

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of any hazardous substance, hazardous material, hazardous waste, solid waste, toxic substance, petroleum or petroleum products, asbestos, radioactive materials, lead-based paint or other words of similar import (herein collectively referred to as “Hazardous Substances”) referred to or defined as such under any applicable local, state or federal law, statute, ordinance, requirement or regulation relating to public health and safety, the protection of the environment or the discharge of solid, liquid or gaseous waste into the environment or the placement of structures or materials into any waters or otherwise affecting the environment (hereinafter collectively referred to as “Environmental Laws”), except for Hazardous Substances used, stored or disposed of in the ordinary course of Seller’s business in compliance with applicable Environmental Laws. Seller has not used, nor authorized, nor Knowingly allowed the use of the Property or the Assets, and, to Seller’s Knowledge and except as disclosed in any environmental reports delivered to Purchaser or environmental reports obtained by Purchaser, the Property or the Assets have never been used, in any manner other than in material compliance with all Environmental Laws. In addition, Seller represents and warrants the following with respect to the period of time during which Seller has owned the Property:

     (i) Seller has received no written notice and to Seller’s Knowledge, there are no claims, actions, suits, proceedings or investigations related to Hazardous Substances pending or threatened against Seller with respect to the ownership, use, condition, or operation of the Property or the Assets, in any court or before or by any federal, state or other governmental or quasi-governmental agency or private arbitration tribunal (hereinafter collectively referred to as “Environmental Litigation”);

     (ii) To Seller’s Knowledge, no release, discharge, spillage or disposal not in compliance with Environmental Laws of any Hazardous Substance (i) has occurred (except for releases, discharges, spillage or disposal which have been investigated, removed or remediated to the extent required by applicable Environmental Law, or (ii) is occurring at the Property;

     (iii) To Seller’s Knowledge and except as may be disclosed in any environmental reports delivered to Purchaser, no soil or water in or under or adjacent to the Property is contaminated by any Hazardous Substance, in any manner or degree requiring further investigation, removal or remediation under applicable Environmental Laws;

     (iv) All waste originating at or from the Property or the Assets containing any Hazardous Substance generated, used, handled, stored, treated or disposed of (directly or indirectly) by Seller and any of Seller’s current or former affiliates and by Seller’s contractors has been disposed of in compliance with all applicable Environmental Laws;

     (v) To Seller’s Knowledge and except as may be disclosed in any environmental reports delivered to Purchaser or obtained by Purchaser, the Property has never been used as a landfill, dump, service station or dry cleaning facility.

     D. Ownership and Condition of Assets. Seller has no Knowledge of any material problems or defects in any of the Assets or the Property. Commencing on the Effective Date and continuing through Closing, Seller shall maintain and utilize all inventory for operation of the

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Hospital at substantially the same levels as in the ordinary course of the Hospital’s business. Seller shall not sell, transfer or use Seller’s supplies, consumables, pharmaceuticals and other inventory outside of its ordinary course of business, or otherwise cause the value of Seller’s supplies, consumables, pharmaceuticals and other inventory to substantially decrease from the value as stated on the year to date August 2004 financial statement previously given to Purchaser by Seller, without the written consent of Purchaser.

     E. Employee Benefit Plans. The phrase, “Employee Benefit Plans,” shall be defined as all employee benefit plans, programs, written agreements or handbooks (including, without limitation, those providing any bonus, deferred compensation, excess benefits, profit sharing, pension, thrift, savings, salary continuation, severance, retirement, supplemental retirement, short- or long-term disability, dental, vision care, hospitalization, major medical, life insurance, accident insurance, vacation, holiday and/or sick leave pay, tuition reimbursement, executive perquisite or other employee benefits) under which or to which Seller contributes to or for the benefit of present and former members, employees, consultants and other agents of Seller or has so contributed at any time. All of the Employee Benefit Plans in all material respects have been, and up to the Closing Date will continue to be, in compliance, both with respect to plan operation and documentation, with ERISA, COBRA, the Internal Revenue Code, as amended, the Americans with Disabilities Act, as amended, the Health Insurance Portability and Accountability Act of 1996, as amended, the Equal Pay Act of 1963, as amended, the Age Discrimination in Employment Act of 1967, as amended, Title VII of the Civil Rights Act of 1964, as amended, all other federal or state laws regulating employment and employee benefits, and all regulations and rulings issued by government agencies responsible for the administration or enforcement of one or more of those laws. To Seller’s Knowledge, no Employee Benefit Plan, nor any trust created thereunder, nor any trustee or administrator thereof, nor any other “disqualified person” or “party in interest,” has engaged in a “prohibited transaction” within the meaning of Section 406 of ERISA or Section 4975 of the Code. Neither Seller nor any other fiduciary of an Employee Benefit Plan has breached any duty owed by Seller or the fiduciary to the participants and beneficiaries of the Employee Benefit Plan. There are no actions, suits or claims pending or, to Seller’s Knowledge, threatened (other than normal claims for benefits) against any Employee Benefit Plan or the assets thereof.

     F. Authority. Seller and MedCath have the full power and authority to enter into and perform their obligations under the terms of this Agreement and this Agreement is the valid and legally binding obligation of Seller and MedCath, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or similar law or general principles of equity.

     G. Compliance with Laws and Contracts. From the Effective Date through Closing, Seller shall continue to comply in all material respects with all laws, ordinances, regulations and orders relating to the Property and the Assets (including, without limitation, the Environmental Laws) and Seller shall further comply in all material respects with the requirements of all liens and encumbrances, agreements and other contractual arrangements to which the Property, Seller or the Assets are subject and make all payments required to be paid thereunder.

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     H. Notice of Revision of Representations Due to Discovery of New Facts. Seller shall notify Purchaser promptly if, prior to the Closing Date, Seller becomes aware of the existence of any fact, transaction, event or occurrence which has made or could reasonably be expected to make any of the warranties and representations of Seller under this Agreement not true with the same force and effect as if made on or as of the date hereof.

     I. Agreements Regarding Property. From the Effective Date through Closing, except pursuant to this Agreement and as contemplated in Section 1.D above, Seller shall not (a) transfer any interest in the Property or the Assets, (b) create any easements, liens, mortgages or encumbrances affecting the Property or Assets, (c) enter into any development or other agreements affecting the Property, or enter into any leases relating to the Property or the Assets, (d) enter into any service, supply, maintenance or other contracts pertaining to the Property or Assets that cannot be canceled without penalty at or before Closing (except as consented to in writing by Purchaser) or (e) permit any changes to the zoning classification of the Property (except as consented to in writing by Purchaser).

     J. Notice and Defense of Actions. From the Effective Date through Closing, Seller shall promptly deliver to Purchaser notice of, and if the same could reasonably be expected to adversely affect the Property, shall defend, at Seller’s sole expense, all actions, suits, claims, demands and other proceedings or matters affecting the Property, or the use, possession or occupancy thereof.

     K. Maintenance of Property. From the Effective Date through Closing, Seller shall keep and maintain all improvements located on the Property and the Assets in substantially the same condition as the Property and Assets were on the Effective Date and in compliance with all applicable laws. Except as required above to keep and maintain the Property or the Assets, Seller shall make no material changes, alterations or improvements to the Property or the Assets.

     L. Exclusive Dealing. In consideration of the substantial time and expense to be incurred by Seller and Purchaser in investigating the transaction contemplated within this Agreement, Seller agrees that, as of the Effective Date until the Closing or earlier termination of this Agreement, Seller will not, directly or indirectly, through any member, officer, director, agent or otherwise, solicit or initiate, discuss or negotiate, or encourage submission of proposals or offers from any entity or individual other than Purchaser, relating to the sale or other disposition of the Hospital, the Property or the Assets. Seller agrees that the obligations created under this Section 10.L can be enforced by Purchaser through remedies at law or in equity, including injunctive relief, in which case Seller will pay all costs incurred by Purchaser if Purchaser is successful in seeking such relief, including, but not limited to. reasonable attorneys’ fees incurred by Purchaser,

     All of the representations, warranties and covenants of Seller set forth above or elsewhere in this Agreement shall survive Closing, subject to Section 17, below. From and after the Effective Date, Seller shall not take any action, or fail to take any action, which would result in a breach of any warranty, representation or covenant contained in this Agreement or result in Seller’s inability to reaffirm any warranty, representation or covenant at Closing, as required hereunder.

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11. Purchaser’s Representations and Warranties and Covenants.

     A. Purchaser, as of the date of the execution of this Agreement by Purchaser, represents and warrants to Seller as follows:

     (i) Purchaser is a non-stock, not-for-profit corporation duly organized, validly existing and in good standing under the laws of the State of Wisconsin. Purchaser has the full power and authority to enter into this Agreement, and this Agreement is the valid and legally binding obligation of Purchaser, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or similar law or general principles of equity.

     (ii) No consent, authorization, or approval of, or filing with or notice to, any governmental authority or third-party is required as a condition to Purchaser’s execution, delivery or performance of this Agreement. The execution, delivery and performance of this Agreement by Purchaser will not conflict with, give rise to a right of termination of, contravene or constitute a default under, or be an event, which with the giving of notice or passage of time or both, will become a default under, or result in the creation of any lien on Purchaser or any of its assets pursuant to any of the terms, conditions or provisions of any law, statute, rule, regulation, order, judgment or decree to which Purchaser is subject, the articles of incorporation or bylaws (or other governing organizational instruments) of Purchaser or under any indenture, mortgage, lease, loan agreement or other agreement or instrument binding upon Purchaser. No order, action, suit or proceeding is pending or threatened against Purchaser that (a) questions the validity or legality of this Agreement or the transactions contemplated hereby or (b) seeks to prevent the consummation of the transactions contemplated by this Agreement.

     (iii) Purchaser has sufficient funds immediately available to consummate the transactions contemplated by this Agreement.

     B. Seller’s Employees and Emergency Room Physicians.

     (i) Seller shall be responsible for and shall satisfy all of its obligations to the employees of the Hospital (the “Seller Employees”) with respect to the period of their respective employment by Seller (including, without limitation, COBRA obligations and obligations under Wisconsin health care continuation of benefits laws).

     (ii) Immediately after the Effective Date, Purchaser and/or Purchaser’s emergency room provider will commence a process to interview, consistent with Purchaser or Purchaser’s emergency room provider’s current hiring practices, policies and procedures, the six (6) emergency room physicians who provide emergency room services to Seller. Purchaser will use reasonable efforts and Purchaser will cause its emergency room provider to use reasonable efforts to hire or otherwise contract with the six (6) emergency room physicians who provide emergency room services to Seller.

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12. Conditions Precedent to Obligations of Purchaser.

     The obligation of Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, on or before the Closing, of each and every one of the following conditions, all or any of which may be waived, in whole or in part, by Purchaser for purposes of consummating such transactions, but without prejudice to any other right or remedy which Purchaser may have hereunder as a result of any misrepresentations by, or breach of any covenant or warranty of, Seller or the Members, employees or officers of Seller contained in this Agreement or any other certificate or instrument furnished by Seller:

     A. Third-Party Consents. Purchaser shall receive the Consents.

     B. Representations True at Closing. The representations and warranties made by Seller shall be true and correct in all material respects through Closing, with the same force and effect as though such representations and warranties had been made on and as of the Closing (except for changes contemplated by this Agreement which do not singly or in the aggregate have a material adverse effect on the Property or the Assets).

     C. Covenants of Seller. Seller shall have duly performed all of the covenants, acts and undertakings to be performed by it on or prior to the Closing.

     D. Seller Deliveries. Seller shall have delivered to Purchaser all of Seller’s Deliverables and all other documents required pursuant to this Agreement.

     E. Cease Hospital Operations. Seller shall cease all business and health care operations conducted by Seller at least two (2) days before Closing, but may conduct normal wind-down activities. Purchaser shall have access to the Property and the Assets after Seller’s business operations have ceased but at least two (2) days prior to Closing for the purpose of conducting inspections to determine that the Property and Assets are in the condition represented and as required to be transferred to Purchaser under this Agreement. All costs, responsibilities and obligations relating to ceasing the business operations of Seller, including without limitation, all responsibilities under any federal, state or local plant closing law, shall be the responsibility of Seller.

     F. City Of Glendale Development Agreement. Subject to the terms below, Purchaser intends to seek to cause the City of Glendale to release Purchaser from any use restriction associated with the Property contained in any document that limits the use of the Property as a cardiac hospital, including but not limited to the Declaration of Restrictive Covenants of the Community Development Authority of the City of Glendale (the “Declaration”) and that certain Development Agreement between Seller and the City of Glendale, dated May 10, 2002 (the “Development Agreement”) and Seller agrees to cooperate as reasonably requested. Assuming Seller has fulfilled its obligation to cooperate as set forth above, Purchaser may not fail to close nor terminate this Agreement solely because it has not obtained the release from the City of Glendale described in this Section 12.F.

     Purchaser agrees it will not attempt to claim property tax exemption relating to the Assets and Property as long as the Development Agreement survives and, if requested by the City of

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Glendale or the Community Development Authority of the City of Glendale, Purchaser will confirm thereto Purchaser’s obligation to pay such property taxes. If, prior to Closing, as a result of pursuing the objectives identified in the paragraph above, the City of Glendale requires Purchaser to agree to, or indicates that it intends to impose, an increase in the assessed value of the Property or the personal property component of the Assets which are above those amounts for such values as provided in the Development Agreement, then Seller and Purchaser shall be responsible to pay the following percentages of any increase in the amount of taxes owed for the years identified in the paragraph below:

Increase in Taxes	CSM Percentage	HHM Percentage
0% - 10%	100%	0%
10% - 20%	90%	10%
20% - 30%	80%	20%
30% - 40%	70%	30%
40% - 50%	60%	40%
50% - 60%	50%	50%
60% - 70%	40%	60%
70% - 80%	30%	70%
80% - 90%	20%	80%
90% - 100%	10%	90%

The cost, if any, to be borne by Seller, will be measured as the present value of the incremental annual costs of taxes due under the Development Agreement for tax years 2005 through 2011, discounted to a present value at a discount rate of 10%. Any such cost due by Seller will be an adjustment to the Purchase Price.

Seller, in its sole discretion, may determine not to close this transaction if the cost to Seller, based upon the cost sharing agreement set forth in this Section 12.F results in Seller being liable to pay $2,500,000 or more.

13. Notices.

     All notices, consents, approvals and other communications which may be or are required to be given by either Seller or Purchaser under this Agreement shall be properly given if made in writing and sent by (a) hand delivery; or (b) certified mail, return receipt requested; or (c) facsimile or telecopier, provided a confirming copy thereof is thereafter sent in accordance with (a), (b) or (c), or (d) nationally recognized overnight delivery service for next business day delivery (such as U.S. Express Mail, Federal Express, UPS or Airborne Express), with all postage, delivery and other charges paid by the sender and addressed to Purchaser or Seller, as applicable, as follows, or at such other address as each may request in advance in writing. Such notices delivered (i) by hand shall be deemed received upon actual delivery, (ii) by overnight delivery service shall be deemed received on the next business day, (iii) by facsimile or telecopier, on the date the sender receives either electronic or verbal or other acknowledgement of receipt (without regard to the date, if any, that the confirming copy is actually received), and (iv) if mailed, shall be deemed received upon the earlier of actual receipt or two (2) business

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days after mailing. Refusal of delivery shall be deemed effective delivery on the date said delivery was attempted. Said notice addresses are as follows:

If to Seller:	If to Purchaser:
c/o Charles Slaton	Amy L. Marquardt, Esq.
Chief Operating Officer	Columbia St. Maryu's, Inc.
MedCath Incorporated	Vice President Legal & Corporate
10720 Sikes Place	Responsibility Officer
Suite 300	4425 North Port Washington Road
Charlotte, NC 28277	Glendale, WI 53212
Telephone: 704-708-6600	Telephone: 414-326-1734
Facsimile: 704-708-5035	Facsimile: 414-326-1739

With a copy to:

Philip D. Song
General Counsel
MedCath Incorporated
10720 Sikes Place
Suite 300 Charlotte, NC 28277
Telephone: 704-708-6600
Facsimile: 704-708-5035

And a copy to:

Hal Levinson
Moore & Van Allen PLLC
100 North Tryon Street. Suite 4700
Charlotte, North Carolina 28202-4003
Telephone: 704-331-1050
Facsimile: 704-378-2050

14. Condemnation: Casualty.

     In the event that prior to the Closing Date (a) there shall be instituted against any material portion of the Property or material access thereto any proceeding in condemnation, eminent domain or any written request for a conveyance in lieu thereof, or should Seller receive notice that such proceedings are threatened or have been commenced against the Property (hereinafter collectively referred to as “Condemnation Proceedings”) or (b) there shall occur any fire, casualty or damage substantially affecting the physical condition of the Property or the Assets or any portion thereof (hereafter collectively a “Casualty”), then Seller shall give Purchaser immediate notice thereof and Purchaser shall have the right to terminate this Agreement by written notice to Seller within ten (10) days after Purchaser receives notice of such Condemnation Proceedings or Casualty and this Agreement shall be null and void and neither

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party hereto shall have any further rights, obligations or liabilities hereunder except as otherwise specifically provided in this Agreement to survive any termination or expiration hereof. In the event that Purchaser shall not elect to terminate this Agreement pursuant to this Section 14, Purchaser shall be obligated to close the purchase and sale contemplated hereby less the portion of the Property so taken or subject to said Condemnation Proceedings or subject to the damage caused by the Casualty without adjustment of the Purchase Price and Seller shall assign or pay to Purchaser at Closing all of Seller’s right, title and interest in any condemnation award or insurance proceeds payable on account of such Condemnation Proceedings or Casualty or pay to Purchaser all such awards or proceeds previously paid and Seller shall have no obligation to repair or restore the Property. The Closing Date shall be extended, if necessary, to permit ten (10) days for Purchaser to make Purchaser’s election as set forth above.

15. Brokers.

     Seller and Purchaser hereby warrant and represent to the other that such party has not employed (expressly or implied) any investment banker, agent, broker or finder and has made no agreement (express or implied) to pay any agent’s or broker’s commissions or finder’s fees in connection with the Property or the transactions contemplated by this Agreement, except Seller’s agreement with Cain Brothers, all fees under which shall be the responsibility of Seller. Seller and Purchaser shall and do hereby indemnify and defend the other against, and hold the other harmless of and from any and all claims, demands and liabilities for any breach of the foregoing representation and warranty and for any commission or fee payable to or claimed by any agent, broker or finder by the indemnifying party or with whom the indemnifying party made or is alleged to have made an agreement (express or implied) to pay any agent’s, broker’s commission or a finder’s fee. This Section 15 shall survive any termination or expiration hereof prior to Closing.

16. Default.

     A. Purchaser Default. In the event that Purchaser defaults in the observance or performance of its material covenants and obligations hereunder, after written notice by Seller to Purchaser of such default and Purchaser’s failure to cure or commence the cure thereof within fifteen (15) days after receipt of such notice. Seller, at Seller’s option and election, shall be entitled to pursue any or all rights or remedies as may be provided hereunder and at law, in equity or otherwise, including without limitation to terminate this Agreement, to sue Purchaser for specific performance of this Agreement, or to pursue an action for damages resulting from Purchaser’s breach hereunder.

     B. Seller Default. In the event that Seller defaults in the observance or performance of its material covenants and obligations hereunder, after written notice by Purchaser to Seller of such default and Seller’s failure to cure or commence the cure thereof within fifteen (15) days after receipt of such notice, Purchaser, at Purchaser’s option and election, shall be entitled to pursue any or all rights or remedies as may be provided hereunder and at law, in equity or otherwise, including without limitation to terminate this Agreement, to sue Seller for specific performance of this Agreement, or to pursue an action for damages resulting from Seller’s breach hereunder.

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17. Seller’s Indemnification of Purchaser.

     A. Seller’s Indemnification. Seller shall defend and hold Purchaser harmless from and against any and all claims, demands, losses, costs, expenses, obligations, liabilities, damages, recoveries and deficiencies, including interest, penalties and reasonable attorneys’ fees, that Purchaser shall incur or suffer, which arise or result from any inaccuracy or breach of any of the representations or warranties of Seller, or any failure by Seller to perform any of the covenants or agreements in this Agreement or other instrument furnished or to be furnished by Seller under this Agreement or resulting from or arising out of the ownership or operation of the Property or the Assets prior to Closing (including but not limited to any agreements with the City of Glendale but subject to the terms of this Agreement). In addition, Seller will indemnify and hold harmless Purchaser and will reimburse Purchaser for any cost, liabilities, damages, penalties, attorneys’ fees, and costs arising from or in connection with state or federal plant closing laws in regard to any of Seller’s Employees. Purchaser shall promptly notify Seller of the existence of any claim, demand or other matter to which Seller’s indemnification would apply, and shall give Seller a reasonable opportunity to defend the same at its own expense and with counsel of its own selection; provided, however, Purchaser shall at all times have the right to participate in any such defense at its own expense. If Seller shall, within a reasonable time after such notice, fail to defend, Purchaser shall have the right, but not the obligation, to undertake the defense of, and to compromise or settle (exercising reasonable business judgment), the claim or other matter on behalf, for the account, and at the risk, of Seller. Notwithstanding anything herein to the contrary, in no event shall the aggregate indemnity obligation of Seller for breaches of representations or warranties in this Agreement exceed the Purchase Price.

     MedCath shall be jointly and severally liable for Seller’s indemnification obligations as set forth in this Section 17.A up to the following amount: Two Million Dollars ($2,000,000) for the period from the Closing through the first twelve (12) months after the Closing (including for any claims pending at the end of such twelve-month period), which maximum amount shall be reduced to One Million Dollars ($1,000,000.00) for the period from the thirteenth (13th) month through the (24th) month after Closing (including for any claims pending at the end of such twelve-month period). Notwithstanding the foregoing, in no event shall MedCath’s aggregate liability under this Section 17.A exceed Two Million Dollars ($2,000,000.00).

     No amount of indemnity shall be payable by Seller in the case of claims by Purchaser for any breach of a representation or warranty, until and only to the extent that Purchaser has suffered or incurred actual losses resulting from such breaches aggregating in excess of $100,000, whereupon Purchaser shall be entitled to claim indemnification only for the amount in excess of $100,000, subject to the other limitations set forth herein.

     The representations and warranties of each of the parties set forth in this Agreement shall survive the Closing and continue until the date that is twenty-four (24) months after the Closing Date, at which time they shall expire and be of no further force and effect; provided that the representations and warranties of Seller regarding ownership of the Property and the Assets and authority to enter into this Agreement set forth in Sections 10.A and 10.F, respectively, shall survive indefinitely, and the representations and warranties regarding environmental matters set forth in Section 10.C shall survive until the third anniversary of the Closing Date at which time

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they shall expire and be of no further force and effect. Notwithstanding the foregoing, any claim that is asserted in writing prior to the applicable survival end date shall survive until such claim is finally resolved and satisfied.

     B. Purchaser’s Indemnification. Purchaser shall indemnify, defend and hold Seller harmless from and against any and all claims, demands, losses, costs, expenses, obligations, liabilities, damages, recoveries and deficiencies, including interest, penalties and reasonable attorneys’ fees, which Seller shall incur or suffer, which arise, result from or relate to (i) any inaccuracy of, breach of, or failure by Purchaser to perform any of its representations, warranties, covenants or agreements in this Agreement, or (ii) the ownership or use of the Property or Assets after the Closing. Seller shall promptly notify Purchaser of the existence of any claim, demand or other matter to which Purchaser’s indemnification obligations would apply, and shall give Purchaser a reasonable opportunity to defend the same at its own expense and with counsel of its own selection; provided, however, Seller shall at all times have the right to fully participate in any such defense at its own expense. If Purchaser shall, within a reasonable time after such notice, fail to defend, Seller shall have the right, but not the obligation, to undertake the defense of, and to compromise or settle (exercising reasonable business judgment), the claim or other matter on behalf, for the account, and at the risk, of Purchaser.

18. General Provisions.

     A. Change of Name. Simultaneously with Closing, Seller shall amend its Articles of Organization to change its corporate name to a new name which is not related to or similar to or contain the name “Heart Hospital of Milwaukee” or any derivation of the foregoing. Seller shall make available for review duplicate originals of the Amendment to Articles of Organization accomplishing the foregoing, together with checks for the appropriate filing and recording fees to Purchaser at Closing. Seller shall file the Amendment to Articles of Organization with the Secretary of State of Delaware promptly after Closing.

     B. Bulk Sales Law. In the event this transaction is in any way governed by the Bulk Transfers Law set forth in Chapter 406 of the Wisconsin Statutes (“Bulk Transfer Law”), Seller assumes sole responsibility to comply with the Bulk Transfer Law and Seller agrees to indemnify and hold Purchaser harmless from any and all loss, expense, claim, damage or liability, including all attorneys’ fees and costs that Purchaser may incur or become subject to by reason of Seller’s noncompliance with the Bulk Transfer Law.

     C. Agreement Binding. This Agreement shall be binding upon each party hereto and such party’s successors and assigns and shall inure to the benefit of each party hereto and such party’s successors and assigns.

     D. Entire Agreement.This Agreement and all the exhibits referenced herein and annexed hereto contain the entire agreement of the parties hereto with respect to the matters contained herein, and no prior agreement or understanding pertaining to any of the matters connected with this transaction shall be effective for any purpose. Except as may be otherwise provided herein, the agreements embodied herein may not be amended except by an agreement in writing signed by the parties hereto.

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     E. Execution Necessary. This Agreement shall not be binding upon Seller or Purchaser until fully executed and delivered by Seller or Purchaser, as the case may be, and no action taken by Seller or Purchaser shall be deemed an acceptance of this Agreement until this Agreement has been so executed by Seller and Purchaser and delivered to each party as provided herein. In the event of delivery by facsimile, such delivery shall be binding as if an original had been delivered and the delivering party covenants and agrees that originals will be sent that same day by overnight delivery.

     F. Time is of the Essence. Time is of the essence of the transaction contemplated by this Agreement.

     G. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the State of Wisconsin.

     H. Survival. The provisions of this Agreement shall survive the Closing of this transaction subject to the limitations set forth herein, and shall survive to the extent, but only to the extent, expressly set forth herein with respect to any termination or expiration hereof prior to Closing.

     I. Interpretation; Effective Date. The titles, captions and section headings are inserted for convenience only and are in no way intended to interpret, define, limit or expand the scope or content of this Agreement or any provision hereof. If any time period under this Agreement ends on a day other than a Business Day (as hereinafter defined), then the time period shall be extended until the next Business Day. The term “Business Day” shall mean Monday through Friday excluding holidays recognized by the state government of the State in which the Property is located. All references in this Agreement to the “Effective Date” shall be deemed to refer to the date of acceptance of this Agreement as evidenced by the date below on which the last party to execute this Agreement did so execute, and such date shall thereafter be inserted in the first paragraph hereof.

     J. Waiver. Purchaser or Seller, as the case may be, reserves the right to waive, in whole or in part, any provision hereof which is for the benefit of the party so waiving.

     K. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed an original and all of which, taken as a whole, shall be deemed to be one (1) original. This Agreement shall be deemed fully executed when each party whose signature is required has signed and delivered at least one (1) counterpart even though no one (1) counterpart contains the signatures of all of the parties to this Agreement.

     L. Assignment. This Agreement shall be binding upon the respective successors and assigns of the parties. Purchaser may assign this Agreement to any party and the assignee shall be deemed “Purchaser” for all purposes hereunder, but in the event of such assignment. Purchaser shall not be released from any liability or obligation under this Agreement.

     M. Non-Waiver. Unless otherwise expressly provided herein, no waiver by Seller or Purchaser of any provision hereof shall be deemed to have been made unless expressed in writing and signed by such party. No delay or omission in the exercise of any right or remedy

19

accruing to Seller or Purchaser upon any breach under this Agreement shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by Seller or Purchaser of any breach of any term, covenant or condition herein stated shall not be deemed to be a waiver of any other breach, or of a subsequent breach of the same or any other term, covenant or condition herein contained. Each party hereby reserves the right to waive any provision hereof made or intended for the benefit of the waiving party.

     N. Rights Cumulative. All rights, powers, options or remedies afforded to Seller or Purchaser either hereunder or by law shall be cumulative and not alternative, and the exercise of one right, power, option or remedy shall not bar other rights, powers, options or remedies allowed herein or by law, unless expressly provided to the contrary herein.

     O. Exhibits. The exhibits referred to in and attached to this Agreement are incorporated herein in full by reference.

     P. Confidentiality and Public News Announcements. The parties hereto agree to keep the terms of this Agreement confidential, provided that they may disclose the terms of this Agreement to their bankers, accountants and attorneys as necessary. No announcement with respect to this transaction shall be made by any party hereto prior to the Closing. Notwithstanding anything in this Agreement to the contrary, MedCath Corporation and its affiliates may make any public announcement regarding this Agreement or tile this Agreement with any governmental agency as required by any law, rule or regulation.

[SIGNATURES ON NEXT PAGE]

20

     IN WITNESS WHEREOF, the undersigned have, or have caused their duly authorized officers to, set their hands and seals hereto as of the day and year of their acceptance of this Agreement indicated next to their signatures.

SELLER: THE HEART HOSPITAL OF MILWAUKEE, LLC	PURCHASER: COLUMBIA ST. MARY’S. INC.
By: MILWAUKEE HOSPITAL MANAGEMENT, INC., its Manager	By:
	Title:
	Date:
By:
Title:
Date:
MEDCATH: MEDCATH CORPORATION
By:
Title:
Date:

21

EXHIBITS

“A” – Legal Description of Property

“B” – Assumed Liabilities

“C” – Physician and MedCath Form Non-Competition Agreements

22

EXHIBIT A

LEGAL DESCRIPTION OF PROPERTY

Lots 1 and 2 of Certified Survey Map No. 7458, recorded on August 23, 2004, Reel 5907, as Document No. 8848445, a division of Lots 1 and 2 of Certified Survey Map No. 7239, in the Southwest 1/4 and Southeast 1/4 of the Northeast 1/4 of Section 5, Town 7 North, Range 22 East, in the City of Glendale, County of Milwaukee, State of Wisconsin.

EXCEPTING THEREFROM that part of the aforedescribed premises lying within the bounds of Lot 2 of Certified Survey Map No. 7239, being a division of Parcel 1 of Certified Survey Map No. 7103, in the Southwest 1/4 and Southeast 1/4 of the Northeast 1/4 of Section 5, Town 7 North, Range 22 East, in the City of Glendale, County of Milwaukee, State of Wisconsin.

Part of Tax Key No. 234-8019

ADDRESS: 375 W. River Parkway

A-1

EXHIBIT B

ASSUMED LIABILITIES

MOB LEASES

1. That certain lease between Glendale Medical Development Partners, LLC and Seller dated June 10, 2004 for approximately 5,302 rentable square feet of floor area within the Medical Office Building.

2. That certain lease between Glendale Medical Development Partners, LLC and Seller dated June 4, 2004 for approximately 2,300 rentable square feet of floor area within the Medical Office Building.

3. That certain lease between Glendale Medical Development Partners, LLC and Seller dated June 11, 2004 for approximately 3,100 rentable square feet of floor area within the Medical Office Building.

EQUIPMENT LEASES

None.

B-1

EXHIBIT C

PHYSICIAN AND MEDCATH FORM NONCOMPETITION AGREEMENTS

C-1

PHYSICIAN MEMBER NONCOMPETITION AGREEMENT

     THIS NONCOMPETITION AGREEMENT (this “Agreement”) is made and entered into as of the _____ day of ___, 2004, by and between _______, (the “Member”), and COLUMBIA ST. MARY’S, INC., a Wisconsin nonstock, not-for-profit corporation (the “Purchaser”).

WITNESSETH:

     WHEREAS, the Member is a member of The Heart Hospital of Milwaukee, LLC, a Delaware limited liability company (“Seller”);

     WHEREAS, Seller owns and operates the Heart Hospital of Milwaukee (the “Hospital”) located at 375 West River Woods Parkway in the City of Glendale, County of Milwaukee, Wisconsin;

     WHEREAS, Seller desires to sell to Purchaser the Hospital and certain assets related to the Hospital, and Purchaser desires to purchase the Hospital and such assets from Seller, pursuant to the terms and conditions of an Agreement for Purchase and Sale by and between Purchaser and Seller (the “Purchase Agreement”);

     WHEREAS, the Member, as a member of Seller, will derive substantial benefit from the purchase by Purchaser of the Hospital and certain other assets of Seller; and

     WHEREAS, in connection with the purchase by Purchaser of the Hospital and certain other assets of Seller, the Member has agreed to enter into this Agreement and to not compete with Purchaser on the terms hereinafter set forth.

     NOW, THEREFORE, in consideration of the premises, the covenants and conditions set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Member and Purchaser hereby agree as follows:

     1. Covenant Not to Compete. The Member agrees that he and any affiliates he controls, may not, directly or indirectly, own all or any portion of, operate, manage, loan money to or hold any management position with, any business, entity, person or organization, or any affiliate thereof, that (a) owns or operates a hospital, (b) owns or operates a free-standing diagnostic or therapeutic center, a substantial portion of whose services is for patients with cardiac diseases, or (c) owns or operates a cardiac catheterization laboratory, within Milwaukee or Ozaukee Counties, Wisconsin for a period of three (3) years after the closing of the transactions contemplated by the Purchase Agreement; provided that nothing contained herein shall prevent any person from owning or acquiring an equity interest of less than five percent (5%) in any entity whose shares are listed on a national security exchange or regularly quoted in the over-the-counter market. Regardless of the above, the Member may (i) serve on the medical staff, perform professional physician services directly for patients and maintain privileges at any hospital or medical office, (ii) serve as medical director, medical staff officer, or serve on any committee at any hospital and at any other healthcare facility he/she chooses, and (iii) may lease, own, provide or use, at the physical location of his/her medical practice, in diagnosing and treating his/her own patients, any medical equipment or service used for diagnostic purposes or

C-2

other medical equipment or service which is, within the standard of care of the Milwaukee medical community, provided by physicians within their medical practice.

     2. Effectiveness. The provisions of this Agreement will only become effective upon the closing of the transactions contemplated by the Purchase Agreement. In the event that such closing does not occur, this Agreement shall be null and void and of no further force or effect.

     3. Execution Necessary. This Agreement shall not be binding upon the Member or Purchaser until fully executed and delivered by the Member or Purchaser, as the case may be, and no action taken by the Member or Purchaser shall be deemed an acceptance of this Agreement until this Agreement has been so executed by the Member and Purchaser and delivered to each party as provided herein. In the event of delivery by facsimile, such delivery shall be binding as if an original had been delivered and the delivering party covenants and agrees that originals will be sent that same day by overnight delivery.

     4. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the State of Wisconsin.

     5. Interpretation. The titles, captions and section headings are inserted for convenience only and are in no way intended to interpret, define, limit or expand the scope or content of this Agreement or any provision hereof.

     6. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed an original and all of which, taken as a whole, shall be deemed to be one (1) original. This Agreement shall be deemed fully executed when each party whose signature is required has signed and delivered at least one (1) counterpart even though no one (1) counterpart contains the signatures of all of the parties to this Agreement.

     7. Non-Waiver. Unless otherwise expressly provided herein, no waiver by the Member or Purchaser of any provision hereof shall be deemed to have been made unless expressed in writing and signed by such party. No delay or omission in the exercise of any right or remedy accruing to the Member or Purchaser upon any breach under this Agreement shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by the Member or Purchaser of any breach of any term, covenant or condition herein stated shall not be deemed to be a waiver of any other breach, or of a subsequent breach of the same or any other term, covenant or condition herein contained. Each party hereby reserves the right to waive any provision hereof made or intended for the benefit of the waiving party.

     8. Rights Cumulative. All rights, powers, options or remedies afforded to the Member or Purchaser either hereunder or by law shall be cumulative and not alternative, and the exercise of one right, power, option or remedy shall not bar other rights, powers, options or remedies allowed herein or by law, unless expressly provided to the contrary herein.

     9. Assignment. This Agreement shall be binding upon the respective successors of the parties. The Member may not assign his rights or delegate his obligations under this Agreement to any other party. Purchaser may not assign its rights or delegate its obligations under this Agreement to any other party without the prior written consent of the Member.

C-3

     10. Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the matters contained herein, and no prior agreement or understanding pertaining to any of the matters connected with this transaction shall be effective for any purpose. Except as may be otherwise provided herein, the agreements embodied herein may not be amended except by an agreement in writing signed by the parties hereto.

     11. Notices. All notices, consents, approvals and other communications which may be or are required to be given by either the Member or Purchaser under this Agreement shall be properly given if made in writing and sent by (a) hand delivery; or (b) certified mail, return receipt requested; or (c) facsimile or telecopier, provided a confirming copy thereof is thereafter sent in accordance with (a), (b) or (c), or (d) nationally recognized overnight delivery service for next business day delivery (such as U.S. Express Mail, Federal Express, UPS or Airborne Express), with all postage, delivery and other charges paid by the sender and addressed to Purchaser or the Member, as applicable, as follows, or at such other address as each may request in advance in writing. Such notices delivered (i) by hand shall be deemed received upon actual delivery, (ii) by overnight delivery service shall be deemed received on the next business day, (iii) by facsimile or telecopier, on the date the sender receives either electronic or verbal or other acknowledgement of receipt (without regard to the date, if any, that the confirming copy is actually received), and (iv) if mailed, shall be deemed received upon the earlier of actual receipt or two (2) business days after mailing. Refusal of delivery shall be deemed effective delivery on the date said delivery was attempted. Said notice addresses are as follows:

If to the Member:	If to Purchaser:
	Amy L. Marquardt, Esq.
	Columbia St. Mary’s, Inc.
	Vice President Legal & Corporate
	Responsibility Officer
Telephone: Facsimile:	4425 North Port Washington Road Glendale, WI 53212
	Telephone: 414-326-1734
	Facsimile: 414-326-1739

C-4

     IN WITNESS WHEREOF, the Member and Purchaser have executed this Noncompetition Agreement as of the date first above written.

MEMBER:

Name:

PURCHASER:

COLUMBIA ST. MARY’S, INC.

By:

     Name:

     Title:

C-5

NONCOMPETITION AGREEMENT

     THIS NONCOMPETITION AGREEMENT (this “Agreement”) is made and entered into as of the             day of November, 2004, by and between MedCath Corporation, a Delaware corporation (“MedCath Corp.”), MedCath Incorporated, a North Carolina corporation (“MedCath Inc.”), and COLUMBIA ST. MARY’S, INC., a Wisconsin non-stock, not-for-profit corporation (the “Purchaser”).

WITNESSETH:

     WHEREAS, MedCath Corp. and MedCath Inc. indirectly own a majority of the membership interests of The Heart Hospital of Milwaukee, LLC, a Delaware limited liability company (“Seller”);

     WHEREAS, Seller owns and operates the Heart Hospital of Milwaukee (the “Hospital”) located at 375 West River Woods Parkway in the City of Glendale, County of Milwaukee, Wisconsin; and

     WHEREAS, Seller desires to sell to Purchaser the Hospital and certain assets related to the Hospital, and Purchaser desires to purchase the Hospital and such assets from Seller, pursuant to the terms and conditions of an Agreement for Purchase and Sale by and between Purchaser and Seller (the “Purchase Agreement”);

     WHEREAS, MedCath Corp. and MedCath Inc. will derive substantial benefit from the purchase by Purchaser of the Hospital and certain other assets of Seller; and

     WHEREAS, in connection with the purchase by Purchaser of the Hospital and certain other assets of Seller, MedCath Corp. and MedCath Inc. have agreed to enter into this Agreement and to not compete with Purchaser on the terms hereinafter set forth.

     NOW, THEREFORE, in consideration of the premises, the covenants and conditions set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

     1. Covenant Not to Compete. MedCath Corp., MedCath Inc., and all of their respective subsidiaries and controlled affiliates may not, directly or indirectly, own all or any portion of, operate or hold any management position with any business, entity, person or organization, or any affiliate thereof, that operates a hospital or provides any diagnostic, treatment or therapeutic services within Milwaukee or Ozaukee Counties, Wisconsin for a period of three (3) years after the closing of the transactions contemplated by the Purchase Agreement; provided that nothing contained herein shall prevent MedCath Corp. or MedCath Inc. or any of their respective subsidiaries or controlled affiliates from owning or acquiring an equity interest of less than five percent (5%) in any entity whose shares are listed on a national security exchange or regularly quoted in the over-the-counter market. This provision does not prohibit MedCath Corp., MedCath Inc. or any of their respective subsidiaries or controlled affiliates from entering into any business relationship of any type or nature regarding any healthcare facility or

C-6

relationship outside of Milwaukee or Ozaukee Counties with a third party that has an interest of any type or nature in any competing facilities in Milwaukee or Ozaukee Counties, as long as MedCath Corp., MedCath Inc. and their respective subsidiaries and controlled affiliates have no economic interest in such competing facilities in Milwaukee or Ozaukee Counties.

     2. Effectiveness. The provisions of this Agreement will only become effective upon the closing of the transactions contemplated by the Purchase Agreement. In the event that such closing does not occur, this Agreement shall be null and void and of no further force or effect.

     3. Execution Necessary. This Agreement shall not be binding upon any party hereto until fully executed and delivered by the other parties hereto, and no action taken by any party hereto shall be deemed an acceptance of this Agreement until this Agreement has been so executed by the other parties hereto and delivered to each party as provided herein. In the event of delivery by facsimile, such delivery shall be binding as if an original had been delivered and the delivering party covenants and agrees that originals will be sent that same day by overnight delivery.

     4. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the State of Wisconsin.

     5. Interpretation. The titles, captions and section headings are inserted for convenience only and are in no way intended to interpret, define, limit or expand the scope or content of this Agreement or any provision hereof.

     6. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed an original and all of which, taken as a whole, shall be deemed to be one (1) original. This Agreement shall be deemed fully executed when each party whose signature is required has signed and delivered at least one (1) counterpart even though no one (1) counterpart contains the signatures of all of the parties to this Agreement.

     7. Non-Waiver. Unless otherwise expressly provided herein, no waiver by any party hereto of any provision hereof shall be deemed to have been made unless expressed in writing and signed by such party. No delay or omission in the exercise of any right or remedy accruing to any party hereto upon any breach under this Agreement shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by any party hereto of any breach of any term, covenant or condition herein stated shall not be deemed to be a waiver of any other breach, or of a subsequent breach of the same or any other term, covenant or condition herein contained. Each party hereby reserves the right to waive any provision hereof made or intended for the benefit of the waiving party.

     8. Rights Cumulative. All rights, powers, options or remedies afforded to any party hereto either hereunder or by law shall be cumulative and not alternative, and the exercise of one right, power, option or remedy shall not bar other rights, powers, options or remedies allowed herein or by law, unless expressly provided to the contrary herein.

C-7

     9. Assignment. This Agreement shall be binding upon the respective successors of the parties. No party hereto may assign its rights or delegate its obligations under this Agreement to any other party without the prior written consent of the other parties hereto.

     10. Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the matters contained herein, and no prior agreement or understanding pertaining to any of the matters connected with this transaction shall be effective for any purpose. Except as may be otherwise provided herein, the agreements embodied herein may not be amended except by an agreement in writing signed by the parties hereto.

     11. Notices. All notices, consents, approvals and other communications which may be or are required to be given by any party under this Agreement shall be properly given if made in writing and sent by (a) hand delivery; or (b) certified mail, return receipt requested; or (c) facsimile or telecopier, provided a confirming copy thereof is thereafter sent in accordance with (a), (b) or (c), or (d) nationally recognized overnight delivery service for next business day delivery (such as U.S. Express Mail, Federal Express, UPS or Airborne Express), with all postage, delivery and other charges paid by the sender and addressed to the applicable party as follows, or at such other address as each may request in advance in writing. Such notices delivered (i) by hand shall be deemed received upon actual delivery, (ii) by overnight delivery service shall be deemed received on the next business day, (iii) by facsimile or telecopier, on the date the sender receives either electronic or verbal or other acknowledgement of receipt (without regard to the date, if any, that the confirming copy is actually received) and (iv) if mailed, shall be deemed received upon the earlier of actual receipt or two (2) business days after mailing. Refusal of delivery shall be deemed effective delivery on the date said delivery was attempted. Said notice addresses are as follows:

If to MedCath Corp. or MedCath Inc.:	If to Purchaser:
c/o Charles Slaton	Amy L. Marquardt, Esq.
Chief Operating Officer	Columbia St. Mary’s, Inc.
MedCath Incorporated	Vice President Legal & Corporate
10720 Sikes Place	Responsibility Officer
Suite 300	4425 North Port Washington Road
Charlotte, NC 28277	Glendale, WI 53212
Telephone: 704-708-6600	Telephone: 414-326-1734
Facsimile: 704-708-5035	Facsimile: 414-326-1739
With a copy to:
Philip D. Song
General Counsel
MedCath Incorporated
10720 Sikes Place Suite 300
Charlotte NC 28277
Telephone: 704-708-6600
Facsimile: 704-708-5035

C-8

And a copy to:

Hal Levinson

Moore & Van Allen PLLC
100 North Tryon Street, Suite 4700
Charlotte, North Carolina 28202-4003
Telephone: 704-331-1050
Facsimile: 704-378-2050

     IN WITNESS WHEREOF, the parties have executed this Noncompetition Agreement as of the date first above written.

MEDCATH CORPORATION

By:

Name:

Title:

MEDCATH INCORPORATION

By:

Name:

Title:

PURCHASER:

COLUMBIA ST. MARY’S, INC.

By:

Name:

Title:

C-9

     IN WITNESS WHEREOF, the undersigned have, or have caused their duly authorized officers to, set their hands and seals hereto as of the day and year of their acceptance of this Agreement indicated next to their signatures.

SELLER:	PURCHASER:
THE HEART HOSPITAL OF	COLUMBIA ST. MARY’S, INC.
MILWAUKEE, LLC
	By:	/s/ Leop. Brideru
By: MILWAUKEE HOSPITAL
MANAGEMENT. INC,	Title:	Leop. Brideru President AND CEO
its Manager	Date:	11-4-04

By:	/s/ Charles Slaton
Title:	Vice President
Date:	November 4 , 2004

MEDCATH:
MEDCATH CORPORATION

By:	/s/ Charles Slaton
Title:	Executive Vice President and Chief Operating Officer
Date:	November 4 , 2004

21

EX-31.1

Exhibit 31.1

CERTIFICATION

I, John T. Casey, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q 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)) 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)	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
(c)	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:	February 8, 2005
By:	/s/ John T. Casey
	John T. Casey
	Chief Executive Officer

31

EX-31.2

Exhibit 31.2

CERTIFICATION

I, James E. Harris, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q 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)) 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)	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
(c)	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:	February 8, 2005
By:	/s/ James E. Harris
	James E. Harris
	Executive Vice President and Chief Financial Officer

32

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 Quarterly Report of MedCath Corporation (the “Company”) on Form 10-Q for the quarter ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John T. Casey, 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 to the best of my knowledge:

(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: February 8, 2005

/s/ John T. Casey

John T. Casey

Chief Executive Officer

33

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 Quarterly Report of MedCath Corporation (the “Company”) on Form 10-Q for the quarter ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Harris, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(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: February 8, 2005

/s/ James E. Harris

James E. Harris

Executive Vice President and Chief Financial Officer

34