MedCath Corporation

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 March 31, 2007

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of April 30, 2007, there were 21,203,344 shares of $0.01 par value common stock outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

MEDCATH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)


	March 31,			September 30,
	2007			2006
Current assets:
Cash and cash equivalents	$	129,185		$	193,654
Accounts receivable, net		102,042			93,584
Medical supplies		18,371			19,761
Deferred income tax assets		11,821			11,998
Prepaid expenses and other current assets		7,677			7,039
Current assets of discontinued operations		8,599			6,940

Total current assets		277,695			332,976
Property and equipment, net		330,550			338,152
Investments in affiliates		7,321			7,803
Goodwill		62,740			62,490
Other intangible assets, net		6,702			7,082
Other assets		8,778			10,662
Long-term assets of discontinued operations		21,955			26,684

Total assets	$	715,741		$	785,849


Current liabilities:
Accounts payable	$	39,458		$	38,748
Income tax payable		2,793			1,207
Accrued compensation and benefits		22,358			22,801
Other accrued liabilities		15,061			19,172
Current portion of long-term debt and obligations under capital leases		4,487			39,093
Current liabilities of discontinued operations		12,207			14,680

Total current liabilities		96,364			135,701
Long-term debt		207,839			285,067
Obligations under capital leases		1,591			1,552
Deferred income tax liabilities		19,752			19,752
Other long-term obligations		299			309

Total liabilities		325,845			442,381

Minority interest in equity of consolidated subsidiaries		21,821			25,808

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; 21,201,744 issued and 21,132,844 outstanding at March 31, 2007; 19,159,998 issued and 19,091,098 outstanding at September 30, 2006		212			192
Paid-in capital		440,303			391,261
Accumulated deficit		(71,994	)		(73,348	)
Accumulated other comprehensive loss		(52	)		(51	)
Treasury stock, 68,900 shares at cost		(394	)		(394	)

Total stockholders’ equity		368,075			317,660

Total liabilities and stockholders’ equity	$	715,741		$	785,849

See notes to unaudited consolidated financial statements.

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


	Three Months Ended March 31,						Six Months Ended March 31,
	2007			2006			2007			2006
Net revenue	$	192,491		$	183,270		$	368,040		$	346,883
Operating expenses:
Personnel expense		61,356			65,023			118,531			117,516
Medical supplies expense		50,649			51,671			98,819			97,865
Bad debt expense		15,445			15,555			29,276			28,610
Other operating expenses		37,323			35,385			73,788			71,173
Depreciation		8,772			8,647			17,641			17,205
Amortization		127			252			379			504
Loss (gain) on disposal of property, equipment and other assets		802			(38	)		859			59

Total operating expenses		174,474			176,495			339,293			332,932

Income from operations		18,017			6,775			28,747			13,951
Other income (expenses):
Interest expense		(5,768	)		(8,384	)		(13,226	)		(16,305	)
Loss on early extinguishment of debt		(662	)		(364	)		(5,142	)		(1,370	)
Interest and other income, net		1,808			1,336			4,533			2,733
Equity in net earnings of unconsolidated affiliates		1,482			1,410			2,920			2,475

Total other expenses, net		(3,140	)		(6,002	)		(10,915	)		(12,467	)

Income from continuing operations before minority interest, income taxes and discontinued operations		14,877			773			17,832			1,484
Minority interest share of earnings of consolidated subsidiaries		(3,960	)		(4,790	)		(6,440	)		(7,608	)

Income (loss) from continuing operations before income taxes and discontinued operations		10,917			(4,017	)		11,392			(6,124	)
Income tax expense (benefit)		5,106			(1,609	)		5,327			(2,451	)

Income (loss) from continuing operations		5,811			(2,408	)		6,065			(3,673	)
Income (loss) from discontinued operations, net of taxes		439			468			(4,711	)		400

Net income (loss)	$	6,250		$	(1,940	)	$	1,354		$	(3,273	)


Earnings (loss) per share, basic
Continuing operations	$	0.28		$	(0.13	)	$	0.30		$	(0.20	)
Discontinued operations		0.02			0.03			(0.23	)		0.02

Earnings (loss) per share, basic	$	0.30		$	(0.10	)	$	0.07		$	(0.18	)

Earnings (loss) per share, diluted
Continuing operations	$	0.27		$	(0.13	)	$	0.29		$	(0.20	)
Discontinued operations		0.02			0.03			(0.23	)		0.02

Earnings (loss) per share, diluted	$	0.29		$	(0.10	)	$	0.06		$	(0.18	)


Weighted average number of shares, basic		21,019			18,618			20,568			18,559
Dilutive effect of stock options and restricted stock		625			—			634			—

Weighted average number of shares, diluted		21,644			18,618			21,202			18,559

See notes to unaudited consolidated financial statements.

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


	Six Months Ended March 31,
	2007			2006
Net income (loss)	$	1,354		$	(3,273	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss (income) from discontinued operations, net of taxes		4,711			(400	)
Bad debt expense		29,276			28,610
Depreciation		17,641			17,205
Amortization		379			504
Excess income tax benefit on exercised stock options		(1,661	)		(340	)
Loss on disposal of property, equipment and other assets		859			59
Share-based compensation expense		3,149			10,623
Amortization of loan acquisition costs		2,121			2,146
Equity in earnings of unconsolidated affiliates, net of dividends received		478			348
Minority interest share of earnings of consolidated subsidiaries		6,440			7,608
Change in fair value of interest rate swaps		—			(136	)
Deferred income taxes		2,309			(3,358	)
Change in assets and liabilities that relate to operations:
Accounts receivable		(37,734	)		(36,048	)
Medical supplies		1,390			(1,257	)
Prepaids and other assets		(874	)		(1,202	)
Accounts payable and accrued liabilities		(2,687	)		3,782

Net cash provided by operating activities of continuing operations		27,151			24,871
Net cash provided by (used in) operating activities of discontinued operations		(4,805	)		1,247

Net cash provided by operating activities		22,346			26,118

Investing activities:
Purchases of property and equipment		(10,360	)		(16,690	)
Proceeds from sale of property and equipment		671			304

Net cash used in investing activities of continuing operations		(9,689	)		(16,386	)
Net cash provided by (used in) investing activities of discontinued operations		658			(1,073	)

Net cash used in investing activities		(9,031	)		(17,459	)

Financing activities:
Proceeds from issuance of long-term debt		—			60,000
Repayments of long-term debt		(111,606	)		(72,690	)
Repayments of obligations under capital leases		(981	)		(1,100	)
Payments of loan acquisition costs		—			(1,879	)
Distributions to minority partners		(10,581	)		(9,795	)
Repayments from minority partners, net		154			610
Proceeds from issuance of common stock, net		39,658			—
Excess income tax benefit on exercised stock options		1,661			340
Proceeds from exercised stock options		4,594			1,514

Net cash used in financing activities of continuing operations		(77,101	)		(23,000	)
Net cash used in financing activities of discontinued operations		(683	)		(1,178	)

Net cash used in financing activities		(77,784	)		(24,178	)


Net decrease in cash and cash equivalents		(64,469	)		(15,519	)
Cash and cash equivalents:
Beginning of period		193,654			140,172

End of period	$	129,185		$	124,653


Supplemental schedule of noncash investing and financing activities:
Increase in accrual for purchases of property and equipment	$	427		$	—
Capital expenditures financed by capital leases	$	782		$	1,156

See notes to unaudited consolidated financial statements.

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

1. Business and Organization

MedCath Corporation (the Company) primarily focuses on the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in partnership with physicians, most of whom are cardiologists and cardiovascular surgeons. While each of the Company’s majority-owned hospitals (collectively, the hospital division) is licensed as a general acute care hospital, the Company focuses on serving the unique needs of patients suffering from cardiovascular disease. As of March 31, 2007, the Company owned and operated eleven hospitals, together with its physician partners, who own an equity interest in the hospitals where they practice. The Company’s existing hospitals had a total of 667 licensed beds, of which 646 were staffed and available, and were located in eight states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota, and Texas.

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

The Company accounts for all but one of its owned and operated hospitals as consolidated subsidiaries. The Company owns a minority interest in Avera Heart Hospital of South Dakota and neither has substantive control over the hospital nor is its primary beneficiary under the revised version of Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN No. 46-R). Therefore, the Company is unable to consolidate the hospital’s results of operations and financial position, but rather is required to account for its minority ownership interest in the hospital as an equity investment.

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

2. Summary of Significant Accounting Policies

Basis of Presentation - The Company’s unaudited interim consolidated financial statements as of March 31, 2007 and for the three and six months ended March 31, 2007 and 2006 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 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 and six months ended March 31, 2007 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2007 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, 2006. During the six months ended March 31, 2007, the Company has not made any material changes in the selection or application of its critical accounting policies as set forth in its Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

Restatements and Reclassifications – In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), hospitals sold or classified as held for sale are required to be reported as discontinued operations. During fiscal 2006, the Company completed the sale of its equity interest in Tucson Heart Hospital and decided to seek to dispose of its interest in Heart Hospital of Lafayette and entered into a confidentiality and exclusivity agreement with a potential buyer, therefore classifying the hospital as held for sale. In February 2007, the Company and a group of local physicians and investors entered into a letter of intent, subject to the fulfillment of certain conditions, including the physicians’ and investors’ sufficient arrangement of financing, which will result in the local group acquiring the Company’s interest in Heart Hospital of Lafayette and therefore owning 100% of the heart hospital. In accordance with the provisions of SFAS No. 144, the results of operations of these hospitals for the three and six months ended March 31, 2007 and 2006 are reported as discontinued operations. Many of the provisions of SFAS No. 144 involve judgment in determining whether a hospital will be reported as continuing or discontinued operations. Such judgments include whether a hospital will be sold, the period required to complete the disposition and the likelihood of changes to a plan for sale. If in future periods the Company determines that a hospital should be either reclassified from continuing operations to discontinued operations or from discontinued operations to continuing operations, previously reported consolidated statements of operations are reclassified in order to reflect the current classification.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

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

The Company has reclassified the prior period loss on early extinguishment of debt to be consistent with the current year presentation. The loss had previously been recorded as a component of interest expense.

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.

Share-Based Compensation - On October 1, 2005, the Company adopted SFAS No. 123-R (revised 2004), Share-Based Payment (SFAS No. 123-R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS No. 123-R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model and to expense the value of the portion of the award that is ultimately expected to vest over the requisite service period in the Company’s statement of operations. On September 30, 2005, the compensation committee of the board of directors approved a plan to accelerate the vesting of substantially all unvested stock options previously awarded to employees with the condition that the optionee enter into a sale restriction agreement which provides that if the optionee exercises a stock option prior to its originally scheduled vesting date while employed by the Company, the optionee will be prohibited from selling the share of stock acquired upon exercise of the option until the date the option would have become vested had it not been accelerated. All new stock options granted since September 30, 2005 have immediate vesting with the same sale restriction. As a result, share-based compensation is recorded on the option grant date.

The Company adopted SFAS No. 123-R using the modified prospective transition method, which requires the application of the accounting standard as of October 1, 2005, the first day of the Company’s fiscal year 2006. The Company’s financial statements as of and for the three and six months ended March 31, 2007 and 2006 reflect the impact of SFAS No. 123-R.

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

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


	For the Three Months Ended March 31,						For the Six Months Ended March 31,
	2007			2006			2007			2006
Expected life	5-8 years			6-8 years			5-8 years			6-8 years
Risk- free interest rate		4.48 - 4.86	%		4.31% - 4.79	%		4.44% - 4.86	%		4.26% - 4.79	%
Expected volatility		39%			40% - 44%			39%			40% - 44%

Goodwill and Long-Lived Assets — Goodwill represents acquisition costs in excess of the fair value of net identifiable tangible and intangible assets of businesses purchased. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), the Company evaluates goodwill annually on September 30 for impairment, or earlier if indicators of potential impairment exist. In accordance with SFAS No. 144, long-lived assets, other than goodwill, are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The determination of whether or not goodwill and/or long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of the Company’s reporting units. Changes in the Company’s strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

amounts of intangible assets.

3. Discontinued Operations

During September 2006, the Company decided to seek to dispose of its interest in Heart Hospital of Lafayette (HHLf) and entered into a confidentiality and exclusivity agreement with a potential buyer. In February 2007, the Company and a group of local physicians and investors entered into a letter of intent, subject to the fulfillment of certain conditions, including the physicians’ and investors’ arrangement of sufficient financing, which will result in the local group acquiring the Company’s interest in HHLf and therefore owning 100% of the heart hospital. Pursuant to the provisions of SFAS No. 144, the consolidated financial statements for the three and six months ended March 31, 2007 and 2006 have been restated to give effect to HHLf as a discontinued operation.

At March 31, 2007, the Company was in violation of a financial covenant under a $9.1 million equipment loan to HHLf, which is guaranteed by MedCath, and which is classified as a discontinued operation, and anticipates continuing to be in violation of this covenant in future periods. Accordingly, the total outstanding balance of this loan has been included in current liabilities of discontinued operations on the consolidated balance sheet as of March 31, 2007.

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

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


	Three Months Ended March 31,						Six Months Ended March 31,
	2007			2006			2007			2006
Net revenue	$	8,994		$	25,263		$	16,730		$	46,770
Impairment of goodwill and long-lived assets		—			—			(4,100	)		—
Operating expenses		(8,690	)		(24,375	)		(16,682	)		(45,875	)

Income (loss) from operations		304			888			(4,052	)		895
Other income (expenses), net		114			(108	)		(76	)		(228	)

Income (loss) before income taxes		418			780			(4,128	)		667
Income tax expense (benefit)		(21	)		312			583			267

Net income (loss)	$	439		$	468		$	(4,711	)	$	400

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


	March 31,		September 30,
	2007		2006
Cash and cash equivalents	$	2,371	$	721
Accounts receivable, net		4,843		4,967
Other current assets		1,385		1,252

Current assets	$	8,599	$	6,940


Property and equipment, net	$	21,558	$	22,636
Investments in affiliates		242		817
Goodwill		—		3,050
Other assets		155		181

Long-term assets	$	21,955	$	26,684


Accounts payable	$	1,780	$	3,721
Accrued liabilities		1,301		1,151
Current portion of long-term debt and obligations under capital leases		9,126		9,808

Current liabilities	$	12,207	$	14,680

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

4. Accounts Receivable

Accounts receivable, net, consists of the following:


	March 31,			September 30,
	2007			2006
Receivables, principally from patients and third-party payors	$	155,177		$	111,765
Receivables, principally from billings to hospitals for various cardiovascular procedures		4,110			4,218
Amounts due under management contracts		2,789			4,651
Other		4,494			2,355

		166,570			122,989
Less allowance for doubtful accounts		(64,528	)		(29,405	)

Accounts receivable, net	$	102,042		$	93,584

5. Equity Investments

The Company owns minority interests in Avera Heart Hospital of South Dakota and certain diagnostic ventures and neither has substantive control over the ventures nor is the primary beneficiary. Therefore, the Company does not consolidate the results of operations and financial position of these entities, but rather accounts 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 March 31,				Six Months Ended March 31,
	2007		2006		2007		2006
Net revenue	$	17,171	$	15,905	$	34,490	$	31,251
Income from operations	$	4,441	$	4,032	$	8,918	$	7,511
Net income	$	4,163	$	3,830	$	8,347	$	6,843


	March 31,		September 30,
	2007		2006
Current assets	$	17,026	$	19,219
Long-term assets	$	33,329	$	33,868
Current liabilities	$	8,103	$	7,825
Long-term liabilities	$	21,725	$	23,176

6. Long-term Debt

Long-term debt consists of the following:


	March 31,			September 30,
	2007			2006
Senior Notes	$	101,961		$	138,135
Notes payable to various lenders		108,820			144,196
Senior Secured Credit Facility		—			40,045

		210,781			322,376
Less current portion		(2,942	)		(37,309	)

Long-term debt	$	207,839		$	285,067

During the six months ended March 31, 2007, the Company entered into the following transactions:

Senior Notes – The Company repurchased $36.2 million of its outstanding senior notes using the proceeds from the Company’s secondary public offering, which was declared effective by the Securities and Exchange Commission on November 6, 2006. The Company incurred a repurchase premium of $3.5 million and approximately $1.0 million in write-off of deferred loan acquisition costs in connection with the repurchase. These costs are reported as a loss on early extinguishment of debt in the consolidated

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

statement of operations for the six months ending March 31, 2007.

Notes Payable to Various Lenders — During March 2007, the Company paid off $11.1 million of equipment debt outstanding at one of its hospitals. Due to the early prepayment, the Company wrote off approximately $38,000 of deferred loan acquisition costs

and incurred approximately $112,000 in early prepayment fees. These costs are reported as a loss on early extinguishment of debt in the consolidated statement of operations for the three and six months ending March 31, 2007. Further, one of the Company’s real estate investment trust loans matured in December 2006 and, accordingly, the outstanding balance of $21.2 million was paid.

Senior Secured Credit Facility – During January 2007, the Company paid off its outstanding $39.9 million senior secured credit facility. In connection with the early repayment, the Company wrote off approximately $0.5 million in deferred loan acquisition costs. These costs are reported as a loss on early extinguishment of debt in the consolidated statement of operations for the three and six months ending March 31, 2007.

Debt Covenants — At March 31, 2007, the Company was in violation of a financial covenant under a $9.1 million equipment loan to Heart Hospital of Lafayette, which is guaranteed by MedCath, and which is classified as a discontinued operation, and anticipates continuing to be in violation of this covenant in future periods. Accordingly, the total outstanding balance of this loan has been included in current liabilities of discontinued operations on the consolidated balance sheet as of March 31, 2007. The Company was in compliance with all other covenants in the instruments governing its outstanding debt as of March 31, 2007.

7. Liability Insurance Coverage

During June 2005, the Company entered into a new one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $3.0 million of retained liability per claim. During June 2006, the Company entered into a new one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $2.0 million of retained liability per claim. At both June 2005 and June 2006, the Company also purchased additional insurance to reduce the retained liability per claim to $250,000 for the MedCath Partners division.

Because of the Company’s self-insured retention levels, the Company is required to recognize an estimated expense/liability for the amount of the retained liability applicable to each malpractice claim. As of March 31, 2007 and September 30, 2006, the total estimated liability for the Company’s self-insured retention on medical malpractice claims, including an estimated amount for incurred but not reported claims, was approximately $5.5 million and $5.9 million, respectively, which is included in current liabilities on the consolidated balance sheets.

8. Contingencies and Commitments

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

The Company is involved in various claims and legal actions in the ordinary course of business, including malpractice claims arising from services provided to patients that have been asserted by various claimants and additional claims that may be asserted for known incidents through March 31, 2007. These claims and legal actions are in various stages, and some may ultimately be brought to trial. Moreover, additional claims arising from services provided to patients in the past and other legal actions may be asserted in the future. The Company is protecting its interests in all such claims and actions.

The U.S. Department of Justice, or DOJ, is conducting an investigation of a clinical trial conducted at one of our hospitals. The investigation concerns alleged improper federal healthcare program billings from 1998-2002 because certain endoluminal graft devices were implanted either without an approved investigational device exception or outside of the approved protocol. Recently, the DOJ reached a settlement under the False Claims Act with the medical practice whose physicians conducted the clinical trial. The Company engaged outside counsel to conduct an internal review of the hospital’s monitoring of the clinical trial and, based upon the conclusions of that review, advised the DOJ in writing in May 2005 that management believes the hospital complied fully with applicable internal policy and federal requirements. The Company is engaged in ongoing discussions with the DOJ regarding the parties’ respective positions on any federal healthcare program claims arising from the clinical trial. The DOJ’s investigation could result in the imposition of material obligations and penalties against the hospital. Although the Company is not admitting any liability, and a claim has not been filed against the Company, the Company is interested in promptly resolving the matter through an administrative resolution. Accordingly, the Company has recorded a $5.8 million reduction in net revenue for the six month period ended March 31, 2007, to establish a reserve for repayment of a portion of Medicare reimbursement related to hospital inpatient

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

services provided to patients in 1998-2002 in accordance with SFAS No. 5, Accounting for Contingencies.

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

Commitments — Some of the Company’s hospitals provide guarantees to certain physician groups for funds required to operate and maintain services for the benefit of the hospital’s patients including emergency care services and anesthesiology services, among others. These guarantees extend for the duration of the underlying service agreements and the maximum potential future payments that the Company could be required to make under these guarantees was approximately $4.5 million as of March 31, 2007. The Company would only be required to pay this maximum amount if none of the physician groups collected fees for services performed during the guarantee period.

9. Per Share Data

The calculation of diluted earnings (loss) per share considers the potential dilutive effect of options to purchase 1,773,612 and 2,882,968 shares of common stock at prices ranging from $4.75 to $30.48, which were outstanding at March 31, 2007 and 2006, respectively, as well as 208,077 and 238,023 shares of restricted stock which were outstanding at March 31, 2007 and 2006, respectively. Of the outstanding stock options, 30,000 and 2,882,968 have not been included in the calculation of diluted earnings (loss) per share for the three and six months ended March 31, 2007 and 2006, respectively, because the options were anti-dilutive. The 238,023 shares of restricted stock have not been included in the calculation of diluted net earnings (loss) per share for the three and six months ended March 31, 2006, because the restricted stock was anti-dilutive.

10. Stock Compensation Plans

Effective October 1, 2005, the Company adopted the MedCath Corporation 2006 Stock Option and Award Plan (the Stock Plan), which provides for the issuance of stock options, restricted stock and restricted stock units to employees of the Company. The Stock Plan is administered by the compensation committee of the board of directors, who has the authority to select the employees eligible to receive awards. This committee also has the authority under the Stock Plan to determine the types of awards, select the terms and conditions attached to all awards, and, subject to the limitation on individual awards in the Stock Plan, determine the number of shares to be awarded. At March 31, 2007, the maximum number of shares of common stock which can be issued through awards granted under the Stock Plan is 1,750,000. The Stock Plan will expire, and no awards may be granted thereunder, after September 30, 2015.

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

Activity for the option plans was as follows:


	For the Three Months Ended
	March 31, 2007					March 31, 2006
				Weighted-					Weighted-
	Number of			Average		Number of			Average
	Stock Options			Exercise Price		Stock Options			Exercise Price
Outstanding stock options, beginning of period		1,848,909		$	19.21		2,168,968		$	14.06

Granted		151,000			28.52		830,000			21.75
Exercised		(139,747	)		14.46		(84,650	)		9.97
Cancelled		(86,550	)		25.88		(31,350	)		20.72


Outstanding stock options, end of period		1,773,612		$	19.37		2,882,968		$	16.33

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued


	For the Six Months Ended
	March 31, 2007					March 31, 2006
				Weighted-					Weighted-
	Number of			Average		Number of			Average
	Stock Options			Exercise Price		Stock Options			Exercise Price
Outstanding stock options, beginning of period		2,070,472		$	18.80		2,409,618		$	13.50

Granted		195,000			28.54		864,500			21.78
Exercised		(341,746	)		13.35		(132,300	)		10.65
Cancelled		(150,114	)		23.34		(258,850	)		11.11


Outstanding stock options, end of period		1,773,612		$	19.37		2,882,968		$	16.33

The following table summarizes information for options outstanding and exercisable at March 31, 2007:


	Number		Weighted-
	Outstanding		Average		Weighted-
	and		Remaining		Average
Range of Prices	Exercisable		Life (years)		Exercise Price
$4.75 - 15.80		266,112		7.10	$	12.28
15.91 - 18.26		126,500		8.67		16.21
19.00 - 20.19		279,500		3.26		19.04
21.49 - 21.49		500,000		8.90		21.49
21.66 - 22.50		320,000		9.01		22.45
23.65 - 27.71		167,500		9.15		26.61
27.80 - 30.24		74,000		9.58		29.41
30.35 - 30.48		40,000		9.90		30.38

$4.75 - 30.48		1,773,612		7.94	$	19.37

Under SFAS No. 123-R, share-based compensation expense recognized for the three and six months ended March 31, 2007 was $2.1 million and $3.1 million, respectively, which had the effect of decreasing net income by $1.2 million or $0.05 per basic and diluted share and $1.7 million or $0.08 per basic and diluted share for the respective periods. The compensation expense recognized represents the compensation related to restricted stock awards over the vesting period, as well as the value of all stock options issued during the period as all such options vest immediately. The total intrinsic value of options exercised during the three and six months ended March 31, 2007 was $1.8 million and $4.6 million, respectively, and the total intrinsic value of options outstanding at March 31, 2007 was $12.0 million.

During the fiscal year ended September 30, 2006, the Company granted to employees 270,836 shares of restricted stock, which vest at various dates through March 2009. The compensation expense, which represents the fair value of the stock measured at the market price at the date of grant, less estimated forfeitures, is recognized on a straight-line basis over the vesting period. Unamortized compensation expense related to restricted stock amounted to $2.6 million at March 31, 2007.

11. Reportable Segment Information

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

Financial information concerning the Company’s operations by each of the reportable segments as of and for the periods indicated is as follows:

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued


	Three Months Ended March 31,						Six Months Ended March 31,
	2007			2006			2007			2006
Net revenue:
Hospital Division	$	179,026		$	168,718		$	341,249		$	318,815
MedCath Partners Division		12,976			13,832			25,782			26,462
Corporate and other		489			720			1,009			1,606

Consolidated totals	$	192,491		$	183,270		$	368,040		$	346,883


Income (loss) from operations:
Hospital Division	$	20,506		$	16,981		$	31,793		$	25,840
MedCath Partners Division		2,308			3,404			4,895			5,883
Corporate and other		(4,797	)		(13,610	)		(7,941	)		(17,772	)

Consolidated totals	$	18,017		$	6,775		$	28,747		$	13,951


Depreciation and amortization:
Hospital Division	$	7,369		$	7,307		$	14,817		$	14,530
MedCath Partners Division		1,451			1,425			2,924			2,853
Corporate and other		79			167			279			326

Consolidated totals	$	8,899		$	8,899		$	18,020		$	17,709


Interest expense (income), net:
Hospital Division	$	7,926		$	8,903		$	15,857		$	17,364
MedCath Partners Division		(16	)		14			(33	)		40
Corporate and other		(3,944	)		(1,486	)		(6,946	)		(2,434	)

Consolidated totals	$	3,966		$	7,431		$	8,878		$	14,970


Capital expenditures:
Hospital Division	$	5,336		$	5,057		$	8,156		$	10,977
MedCath Partners Division		340			3,101			474			4,508
Corporate and other		1,203			287			1,730			1,205

Consolidated totals	$	6,879		$	8,445		$	10,360		$	16,690


	March 31,		September 30,
	2007		2006
Aggregate identifiable assets:
Hospital Division	$	537,961	$	541,013
MedCath Partners Division		36,955		40,626
Corporate and other		140,825		204,210

Consolidated totals	$	715,741	$	785,849

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

12. Secondary Public Offering

An additional 1.7 million shares of the Company’s common stock were registered and sold to the public under the Securities Act of 1933, as amended, on a Registration Statement on Form S-3 (File No. 333-137756) that was declared effective by the Securities and Exchange Commission on November 6, 2006. The net proceeds to the Company from the offering were approximately $39.7 million. The proceeds were used to repurchase $36.2 million of the Company’s outstanding 9 ^7/8 % senior notes due 2012 and pay approximately $3.5 million in premiums and expenses associated with the note repurchase.

13. Guarantor/Non-Guarantor Financial Statements

The following tables present the condensed consolidated financial information for each of MedCath Corporation (the Parent), MedCath Holdings Corporation (the Issuer), all 95% or greater owned domestic subsidiaries of the Issuer (the Guarantors) and the subsidiaries of the Issuer that are not Guarantors (the Non-Guarantors), together with consolidating eliminations, as of and for the periods indicated.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

MEDCATH CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2007


								Non-
	Parent		Issuer		Guarantors			Guarantors			Eliminations			MedCath
Current assets:
Cash and cash equivalents	$	—	$	—	$	116,593		$	12,592		$	—		$	129,185
Accounts receivable, net		—		—		6,543			95,499			—			102,042
Other current assets		—		—		24,912			21,437			(8,480	)		37,869
Current assets of discontinued operations		—		—		14,234			8,599			(14,234	)		8,599

Total current assets		—		—		162,282			138,127			(22,714	)		277,695
Property and equipment, net		—		—		21,331			309,219			—			330,550
Investments in subsidiaries		368,075		368,075		(9,539	)		(62	)		(726,549	)		—
Goodwill		—		—		62,740			—			—			62,740
Intercompany notes receivable		—		—		232,578			—			(232,578	)		—
Other long-term assets		—		—		17,587			5,214			—			22,801
Long-term assets of discontinued operations		—		—		18,065			21,955			(18,065	)		21,955

Total assets	$	368,075	$	368,075	$	505,044		$	474,453		$	(999,906	)	$	715,741


Current liabilities:
Accounts payable	$	—	$	—	$	394		$	39,064		$	—		$	39,458
Accrued compensation and benefits		—		—		6,422			15,936			—			22,358
Other current liabilities		—		—		7,258			19,076			(8,480	)		17,854
Current portion of long-term debt and obligations under capital leases		—		—		700			3,787			—			4,487
Current liabilities of discontinued operations		—		—		—			26,441			(14,234	)		12,207

Total current liabilities		—		—		14,774			104,304			(22,714	)		96,364
Long-term debt		—		—		101,880			105,959			—			207,839
Obligations under capital leases		—		—		563			1,028			—			1,591
Intercompany notes payable		—		—		—			232,578			(232,578	)		—
Deferred income tax liabilities		—		—		19,752			—			—			19,752
Other long- term obligations		—		—		—			299			—			299
Long-term liabilities of discontinued operations		—		—		—			18,065			(18,065	)		—

Total liabilities		—		—		136,969			462,233			(273,357	)		325,845
Minority interest in equity of consolidated subsidiaries		—		—		—			—			21,821			21,821
Total stockholders’ equity		368,075		368,075		368,075			12,220			(748,370	)		368,075

Total liabilities and stockholders’ equity	$	368,075	$	368,075	$	505,044		$	474,453		$	(999,906	)	$	715,741

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

MEDCATH CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2006


								Non-
	Parent		Issuer		Guarantors			Guarantors			Eliminations			MedCath
Current assets:
Cash and cash equivalents	$	—	$	—	$	177,972		$	15,682		$	—		$	193,654
Accounts receivable, net		—		—		6,079			87,505			—			93,584
Other current assets		—		—		18,978			22,023			(2,203	)		38,798
Current assets of discontinued operations		—		—		9,298			6,940			(9,298	)		6,940

Total current assets		—		—		212,327			132,150			(11,501	)		332,976
Property and equipment, net		—		—		22,929			315,223			—			338,152
Investments in subsidiaries		317,660		317,660		(2,760	)		(62	)		(632,498	)		—
Goodwill		—		—		62,490			—			—			62,490
Intercompany notes receivable		—		—		196,768			—			(196,768	)		—
Other long-term assets		—		—		20,406			5,141			—			25,547
Long-term assets of discontinued operations		—		—		21,337			23,634			(18,287	)		26,684

Total assets	$	317,660	$	317,660	$	533,497		$	476,086		$	(859,054	)	$	785,849


Current liabilities:
Accounts payable	$	—	$	—	$	1,916		$	36,832		$	—		$	38,748
Accrued compensation and benefits		—		—		7,745			15,056			—			22,801
Other current liabilities		—		—		6,534			16,047			(2,202	)		20,379
Current portion of long-term debt and obligations under capital leases		—		—		1,311			37,782			—			39,093
Current liabilities of discontinued operations		—		—		—			23,979			(9,299	)		14,680

Total current liabilities		—		—		17,506			129,696			(11,501	)		135,701
Long-term debt		—		—		177,667			107,400			—			285,067
Obligations under capital leases		—		—		912			640			—			1,552
Intercompany notes payable		—		—		—			196,769			(196,769	)		—
Deferred income tax liabilities		—		—		19,752			—			—			19,752
Other long-term obligations		—		—		—			309			—			309
Long-term liabilities of discontinued operations		—		—		—			18,287			(18,287	)		—

Total liabilities		—		—		215,837			453,101			(226,557	)		442,381
Minority interest in equity of consolidated subsidiaries		—		—		—			—			25,808			25,808
Total stockholders’ equity		317,660		317,660		317,660			22,985			(658,305	)		317,660

Total liabilities and stockholders’ equity	$	317,660	$	317,660	$	533,497		$	476,086		$	(859,054	)	$	785,849

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2007


	Parent		Issuer		Guarantors			Non- Guarantors			Eliminations			MedCath
Net revenue	$	—	$	—	$	7,683		$	187,139		$	(2,331	)	$	192,491
Total operating expenses		—		—		13,370			163,435			(2,331	)		174,474

Income (loss) from operations		—		—		(5,687	)		23,704			—			18,017
Interest expense		—		—		(3,189	)		(2,579	)		—			(5,768	)
Loss on early extinguishment of debt		—		—		(512	)		(150	)		—			(662	)
Interest and other income (expense), net		—		—		7,117			(5,309	)		—			1,808
Equity in net earnings of unconsolidated affiliates		6,250		6,250		14,756			—			(25,774	)		1,482

Income from continuing operations before minority interest, income taxes and discontinued operations		6,250		6,250		12,485			15,666			(25,774	)		14,877
Minority interest share of earnings of consolidated subsidiaries		—		—		—			—			(3,960	)		(3,960	)

Income from continuing operations before income taxes and discontinued operations		6,250		6,250		12,485			15,666			(29,734	)		10,917
Income tax expense		—		—		5,106			—			—			5,106

Income from continuing operations		6,250		6,250		7,379			15,666			(29,734	)		5,811
Income (loss) from discontinued operations, net of taxes		—		—		(1,129	)		1,568			—			439

Net income	$	6,250	$	6,250	$	6,250		$	17,234		$	(29,734	)	$	6,250

MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2006


	Parent			Issuer			Guarantors			Non- Guarantors			Eliminations			MedCath
Net revenue	$	—		$	—		$	7,839		$	177,640		$	(2,209	)	$	183,270
Total operating expenses								21,981			156,723			(2,209	)		176,495

Income (loss) from operations		—			—			(14,142	)		20,917			—			6,775
Interest expense		—			—			(4,960	)		(3,424	)		—			(8,384	)
Loss on early extinguishment of debt		—			—			(364	)		—			—			(364	)
Interest and other income (expense), net		—			—			6,768			(5,432	)		—			1,336
Equity in net earnings of unconsolidated affiliates		(1,940	)		(1,940	)		9,097			—			(3,807	)		1,410

Income (loss) from continuing operations before minority interest, income taxes and discontinued operations		(1,940	)		(1,940	)		(3,601	)		12,061			(3,807	)		773
Minority interest share of earnings of consolidated subsidiaries		—			—			—			—			(4,790	)		(4,790	)

Income (loss) from continuing operations before income taxes and discontinued operations		(1,940	)		(1,940	)		(3,601	)		12,061			(8,597	)		(4,017	)
Income tax benefit		—			—			(1,609	)		—			—			(1,609	)

Income (loss) from continuing operations		(1,940	)		(1,940	)		(1,992	)		12,061			(8,597	)		(2,408	)
Income from discontinued operations, net of taxes		—			—			52			416			—			468

Net income (loss)	$	(1,940	)	$	(1,940	)	$	(1,940	)	$	12,477		$	(8,597	)	$	(1,940	)

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended March 31, 2007


	Parent		Issuer		Guarantors			Non-Guarantors			Eliminations			MedCath
Net revenue	$	—	$	—	$	16,384		$	356,281		$	(4,625	)	$	368,040
Total operating expenses		—		—		25,191			318,727			(4,625	)		339,293

Income (loss) from operations		—		—		(8,807	)		37,554			—			28,747
Interest expense		—		—		(7,630	)		(5,596	)		—			(13,226	)
Loss on early extinguishment of debt		—		—		(4,992	)		(150	)		—			(5,142	)
Interest and other income (expense), net		—		—		14,690			(10,157	)		—			4,533
Equity in net earnings of unconsolidated affiliates		1,354		1,354		17,725			—			(17,513	)		2,920

Income before minority interest, income taxes and discontinued operations		1,354		1,354		10,986			21,651			(17,513	)		17,832
Minority interest share of earnings of consolidated subsidiaries		—		—		—			—			(6,440	)		(6,440	)

Income before income taxes and discontinued operations		1,354		1,354		10,986			21,651			(23,953	)		11,392
Income tax expense		—		—		5,327			—			—			5,327

Income from continuing operations		1,354		1,354		5,659			21,651			(23,953	)		6,065
Loss from discontinued operations, net of taxes		—		—		(4,305	)		(406	)		—			(4,711	)

Net income	$	1,354	$	1,354	$	1,354		$	21,245		$	(23,953	)	$	1,354

MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended March 31, 2006


	Parent			Issuer			Guarantors			Non-Guarantors			Eliminations			MedCath
Net revenue	$	—		$	—		$	15,376		$	335,855		$	(4,348	)	$	346,883
Total operating expenses								34,358			302,922			(4,348	)		332,932

Income (loss) from operations		—			—			(18,982	)		32,933			—			13,951
Interest expense		—			—			(10,542	)		(5,763	)		—			(16,305	)
Loss on early extinguishment of debt		—			—			(1,370	)		—			—			(1,370	)
Interest and other income (expense), net		—			—			14,257			(11,524	)		—			2,733
Equity in net earnings of unconsolidated affiliates		(3,273	)		(3,273	)		10,486			—			(1,465	)		2,475

Income (loss) from continuing operations before minority interest, income taxes and discontinued operations		(3,273	)		(3,273	)		(6,151	)		15,646			(1,465	)		1,484
Minority interest share of earnings of consolidated subsidiaries		—			—			—			—			(7,608	)		(7,608	)

Income (loss) from continuing operations before income taxes and discontinued operations		(3,273	)		(3,273	)		(6,151	)		15,646			(9,073	)		(6,124	)
Income tax benefit		—			—			(2,451	)		—			—			(2,451	)

Income (loss) from continuing operations		(3,273	)		(3,273	)		(3,700	)		15,646			(9,073	)		(3,673	)
Income (loss) from discontinued operations, net of taxes		—			—			427			(27	)		—			400

Net income (loss)	$	(3,273	)	$	(3,273	)	$	(3,273	)	$	15,619		$	(9,073	)	$	(3,273	)

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended March 31, 2007


							Non-
	Parent			Guarantors			Guarantors			Eliminations			MedCath
Net cash provided by (used in) operating activities	$	—		$	(13,976	)	$	36,322		$	—		$	22,346
Net cash provided by (used in) investing activities		(6,255	)		19,244			(28,275	)		6,255			(9,031	)
Net cash provided by (used in) financing activities		6,255			(66,647	)		(11,137	)		(6,255	)		(77,784	)

Decrease in cash and cash equivalents		—			(61,379	)		(3,090	)		—			(64,469	)
Cash and cash equivalents:
Beginning of period		—			177,972			15,682			—			193,654

End of period	$	—		$	116,593		$	12,592		$	—		$	129,185

MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended March 31, 2006


							Non-
	Parent			Guarantors			Guarantors			Eliminations			MedCath
Net cash provided by (used in) operating activities	$	—		$	(3,505	)	$	29,623		$	—		$	26,118
Net cash provided by (used in) investing activities		(1,854	)		14,462			(31,921	)		1,854			(17,459	)
Net cash provided by (used in) financing activities		1,854			(22,655	)		(1,523	)		(1,854	)		(24,178	)

Decrease in cash and cash equivalents		—			(11,698	)		(3,821	)		—			(15,519	)
Cash and cash equivalents:
Beginning of period		—			122,829			17,343			—			140,172

End of period	$	—		$	111,131		$	13,522		$	—		$	124,653

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the 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, 2006.

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. We also have partnerships with community hospital systems. We also manage the cardiovascular program of various hospitals operated by other parties. We opened our first hospital in 1996 and currently have ownership interests in and operate eleven hospitals, including ten in which we own a majority interest. Each of our majority-owned hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services with a focus on cardiovascular care. Each of our owned hospitals has a twenty-four hour emergency room staffed by emergency department physicians. The hospitals in which we have ownership interests have a total of 667 licensed beds and are located in predominately high growth markets in eight states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota, and Texas.

In addition to our hospitals, we currently own and/or manage twenty-six cardiac diagnostic and therapeutic facilities. Eleven of these facilities are located at hospitals operated by other parties and one of these facilities is located at a hospital we own. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining fourteen facilities are not located at hospitals and offer only diagnostic procedures. Effective January 1, 2007, we renamed our diagnostic and therapeutic division to MedCath Partners.

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, Avera Heart Hospital of South Dakota, is excluded from the net revenue and operating results of our consolidated company and our consolidated hospital division. Similarly, a number of our diagnostic and therapeutic facilities are excluded from the net revenue and operating results of our consolidated company and our consolidated MedCath Partners division. Our minority interest in the results of operations for the periods discussed for these entities is recognized as part of the equity in net earnings of unconsolidated affiliates in our statements of operations in accordance with the equity method of accounting.

During the fourth quarter of fiscal 2006, we sold our equity interest in Tucson Heart Hospital and we decided to seek to dispose of our interest in Heart Hospital of Lafayette and entered into a confidentiality and exclusivity agreement with a potential buyer. In February 2007, we entered into a letter of intent with a group of local physicians and investors, subject to the fulfillment of certain conditions, including the physicians’ and investors’ arrangement of sufficient financing, which will result in the local group acquiring our interest in Heart Hospital of Lafayette and therefore owning 100% of the heart hospital. Accordingly, for all periods presented, the results of operations for these two hospitals have been excluded from continuing operations and are reported in income (loss) from discontinued operations, net of taxes.

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


	Three Months Ended March 31,						Six Months Ended March 31,
Division	2007			2006			2007			2006
Hospital		93.0	%		92.1	%		92.7	%		91.9	%
MedCath Partners		6.7	%		7.5	%		7.0	%		7.6	%
Corporate and other		0.3	%		0.4	%		0.3	%		0.5	%

Net Revenue		100.0	%		100.0	%		100.0	%		100.0	%

Revenue Sources by Payor. We receive payments for our services rendered to patients from the Medicare and Medicaid programs, commercial insurers, health maintenance organizations and our patients directly. Generally, our net revenue is determined by a number of factors, including the payor mix, the number and nature of procedures performed and the rate of payment for the procedures. Since cardiovascular disease disproportionately affects those age 55 and older, the proportion of net revenue we derive from the Medicare program is higher than that of most general acute care hospitals. The following table sets forth the percentage of consolidated net revenue we earned by category of payor in the periods indicated.


	Three Months Ended March 31,						Six Months Ended March 31,
Payor	2007			2006			2007			2006
Medicare		42.0	%		46.8	%		42.3	%		46.2	%
Medicaid		3.8	%		4.2	%		4.3	%		4.7	%
Commercial and other, including self-pay		54.2	%		49.0	%		53.4	%		49.1	%
Total consolidated net revenue		100.0	%		100.0	%		100.0	%		100.0	%

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

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

Results of Operations

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

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


	Three Months Ended March 31,
							Increase / Decrease						% of Net Revenue
	2007			2006			$			%			2007			2006
	(in thousands)

Net revenue	$	192,491		$	183,270		$	9,221			5.0	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		61,356			65,023			(3,667	)		(5.6	)%		31.9	%		35.5	%
Medical supplies expense		50,649			51,671			(1,022	)		(2.0	)%		26.3	%		28.2	%
Bad debt expense		15,445			15,555			(110	)		(0.7	)%		8.0	%		8.5	%
Other operating expenses		37,323			35,385			1,938			5.5	%		19.4	%		19.3	%
Depreciation		8,772			8,647			125			1.4	%		4.6	%		4.7	%
Amortization		127			252			(125	)		(49.6	)%		0.1	%		0.1	%
Loss (gain) on disposal of property, equipment and other assets		802			(38	)		840			2210.5	%		0.4	%		—

Total operating expenses		174,474			176,495			(2,021	)		(1.1	)%		90.7	%		96.3	%

Income from operations		18,017			6,775			11,242			165.9	%		9.3	%		3.7	%
Other income (expenses):
Interest expense		(5,768	)		(8,384	)		2,616			31.2	%		(3.0	)%		(4.6	)%
Loss on early extinguishment of debt		(662	)		(364	)		(298	)		(81.9	)%		(0.3	)%		(0.2	)%
Interest and other income, net		1,808			1,336			472			35.3	%		0.9	%		0.7	%
Equity in net earnings of unconsolidated affiliates		1,482			1,410			72			5.1	%		0.8	%		0.8	%

Total other expenses, net		(3,140	)		(6,002	)		2,862			47.7	%		(1.6	)%		(3.3	)%

Income from continuing operations before minority interest, income taxes and discontinued operations		14,877			773			14,104			1824.6	%		7.7	%		0.4	%
Minority interest share of earnings of consolidated subsidiaries		(3,960	)		(4,790	)		830			17.3	%		(2.1	)%		(2.6	)%

Income (loss) from continuing operations before income taxes and discontinued operations		10,917			(4,017	)		14,934			371.8	%		5.6	%		(2.2	)%
Income tax expense (benefit)		5,106			(1,609	)		6,715			417.3	%		2.6	%		(0.9	)%

Income (loss) from continuing operations		5,811			(2,408	)		8,219			341.3	%		3.0	%		(1.3	)%
Income from discontinued operations, net of taxes		439			468			(29	)		(6.2	)%		0.2	%		0.2	%

Net income (loss)	$	6,250		$	(1,940	)	$	8,190			422.2	%		3.2	%		(1.1	)%

The following table presents selected operating data on a consolidated basis for the periods indicated:


	Three Months Ended March 31,
	2007			2006			% Change
Selected Operating Data (a):
Number of hospitals		9			9
Licensed beds (b)		580			580
Staffed and available beds (c)		559			568
Admissions (d)		10,674			10,904			(2.1	)%
Adjusted admissions (e)		14,508			14,081			3.0	%
Patient days (f)		36,961			36,874			0.2	%
Adjusted patient days (g)		50,011			47,748			4.7	%
Average length of stay (days) (h)		3.46			3.38			2.4	%
Occupancy (i)		73.5	%		72.1	%
Inpatient catheterization procedures (j)		5,354			5,653			(5.3	)%
Inpatient surgical procedures (k)		2,727			2,824			(3.4	)%
Hospital net revenue	$	177,944		$	168,055			5.9	%


(a)		Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which 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 at 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 hospitals.

(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.

(j)		Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals’ catheterization labs during the period.

(k)		Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period.

Net Revenue. Net revenue increased 5.0% or $9.2 million to $192.5 million for the three months ended March 31, 2007, the second quarter of our fiscal year 2007, from $183.3 million for the three months ended March 31, 2006, the second quarter of our fiscal year 2006. The increase was attributable to a $9.9 million increase for our hospitals offset by a $0.7 million decrease for our MedCath Partners and corporate and other divisions.

The increase in our hospitals’ net revenue was a result of the following:

	•		On a consolidated basis, hospital adjusted admissions increased 3.0%, revenue per adjusted admission increased 2.8% and adjusted patient days increased 4.7% in the second quarter of fiscal 2007 compared to the second quarter of fiscal 2006. The increase in adjusted admissions can be mainly attributed to the fact that in certain markets we have seen growth in our outpatient services, offset by a reduction in our inpatient volumes of certain of our hospitals. In addition, patient volumes at our newest hospitals continue to grow as those hospitals gain market share. Revenue per adjusted admission expanded during the quarter due to a favorable shift from Medicare to commercial and other payors.

	•		During the second quarter of fiscal 2007, we experienced a $5.4 million increase in net revenue for the second quarter of fiscal 2007 compared to the second quarter of fiscal 2006 as a result of cost report adjustments. The $5.4 million increase includes $2.2 million as a result of the reversal of a reserve for outlier payments received in 2003. We were informed by our Medicare fiscal intermediary that outlier payments received prior to January 1, 2004 would not be disputed.

•

Net revenue was negatively impacted during the second quarter of fiscal 2007 by $3.1 million due to the additional reserve recorded for the settlement of an investigation conducted by the DOJ related to improper billings from 1998-2002 because certain endoluminal graft devices were implanted either without an approved investigational device exception or outside of the approved protocol. See Note 8 – Contingencies and Commitments.

Personnel expense. Personnel expense decreased 5.6% to $61.4 million for the second quarter of fiscal 2007 from $65.0 million for the second quarter of fiscal 2006. The $3.6 million decrease in personnel expense was primarily due to an $8.1 million reduction in share-based compensation offset by a $4.5 million increase in personnel expense for the hospital division. The share-based compensation was high for the second quarter of fiscal 2006 due to the appointment of a new president and chief executive officer as well as a new chief operating officer.

On an adjusted patient day basis, personnel expense increased by 3.6% to $1,130 per adjusted patient day for the second quarter of fiscal 2007 compared to $1,090 per adjusted patient day for the second quarter of fiscal 2006. This increase was driven by the cost of living wage increases, as well as increased staffing at our central business office operations which has improved our overall billing cycle management.

Medical supplies expense. Medical supplies expense decreased 2.0% to $50.6 million for the second quarter of fiscal 2007 from $51.7 million for the second quarter of fiscal 2006. On an adjusted patient day basis, medical supplies expense decreased to $938 per adjusted patient day for the second quarter of fiscal 2007 compared to $1,005 per adjusted patient day for the second quarter of fiscal 2006, which is a 6.6% decrease. As a percentage of net revenue, medical supplies expense decreased to 26.3% as compared to 28.2% for the three months ended March 31, 2007 and 2006, respectively. On an adjusted admissions basis, medical supplies expense decreased 5.1% period to period.

The decrease in medical supplies expense during the three months ended March 31, 2007 is primarily attributable to a change in procedural mix and the result of our supply chain initiatives. The procedural change includes a reduction in our AICD volume and a shift in stent volume from drug eluting stents to bare metal stents. In addition, we have successfully negotiated new contracts with several vendors that have contributed to the reduction in supply expense.

Bad debt expense. Bad debt expense decreased 0.7% to $15.4 million for the second quarter of fiscal 2007 from $15.6 million for the second quarter of fiscal 2006. As a percentage of net revenue, bad debt expense was 8.0% for the second quarter of fiscal 2007 as compared to 8.5% for the second quarter of fiscal 2006. We have experienced reductions in bad debt expense due to our continued initiatives to improve our registration process to more timely and accurately identify patients eligible for third party benefits and to improve processes surrounding our billing and collection procedures.

Other operating expenses. Other operating expenses increased 5.5% to $37.3 million for the three months ended March 31, 2007 from $35.4 million for the three months ended March 31, 2006. As a percentage of net revenue, other operating expenses remained flat when compared to the same period in fiscal 2006. The $1.9 million increase in other operating expenses was primarily attributable to a $2.4 million increase for our hospitals offset by a $0.5 million decrease associated with the management of our facilities. The current year increase in our hospitals’ other operating expenses is mainly due to increases in contract services due to the growth in volume at several facilities; further, during the current year, we incurred higher maintenance costs at some of our facilities that are relatively new but are beginning to incur maintenance costs on property and equipment after several years of operation. The increase in operating expenses was offset by a decrease in medical malpractice claims for the second quarter of fiscal 2007 as a result of improvement in our historical claims history.

Interest expense. Interest expense decreased 31.2% to $5.8 million for the second quarter of fiscal 2007 compared to $8.4 million for the second quarter of fiscal 2006. This $2.6 million decrease in interest expense is a direct result of the prepayment of debt related to several of our facilities as well as the prepayment of our senior secured notes and our senior notes.

Loss on early extinguishment of debt. Loss on early extinguishment of debt increased to $0.7 million for the first quarter of fiscal 2007 from $0.4 million for the first quarter of fiscal 2006. The loss was comprised of the write-off of deferred loan acquisition costs and prepayment penalties related to the prepayment of debt in both periods. See Liquidity and Capital Resources for further details of the debt prepayment.

Interest and other income, net. Interest and other income, net increased to $1.8 million for the second quarter of fiscal 2007 from

$1.3 million for the second quarter of fiscal 2006. This $0.5 million increase is mainly attributable to interest earned on available cash and cash equivalents as our cash position increased by approximately $4.5 million from the prior comparable period and we maintained a higher cash balance throughout the current year period. The increase in the Company’s cash position resulted from positive operating cash flow, proceeds from the divestiture of Tucson Heart Hospital, and retention of net proceeds from our secondary public offering prior to the repurchase of our senior notes.

Equity in net earnings of unconsolidated affiliates. Equity in net earnings of unconsolidated affiliates remained consistent at approximately $1.4 million in the second quarter of fiscal 2007 and 2006. Equity in net earnings of unconsolidated affiliates is comprised of earnings at the one hospital in which we hold less than a 50% interest, with the remainder being attributable to earnings in various MedCath Partners diagnostic ventures in which we hold less than a 50% interest.

Minority interest share of earnings of consolidated subsidiaries. Minority interest share of earnings of consolidated subsidiaries was $4.0 million for the second quarter of fiscal 2007 as compared to $4.8 million for the first quarter of fiscal 2006. This $0.8 million decrease was primarily due to the net decrease in earnings of certain of our established hospitals and MedCath Partners’ ventures which were allocated to our minority partners on a pro rata basis. 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 March 31, 2007, we had remaining cumulative disproportionate loss allocations of approximately $24.2 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 facilities with minority ownership interests. We could also be required to recognize disproportionate losses at our other facilities not currently in a disproportionate allocation position depending on their results of operations in future periods. For a more complete discussion of our accounting for minority interests, including the basis for disproportionate allocation accounting, see Critical Accounting Policies in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

Income tax expense. The income tax expense was $5.1 million for the second quarter of fiscal 2007 compared to an income tax benefit of $1.6 million for the second quarter of fiscal 2006, which represents an effective tax rate of approximately 46.8% and 40.0% for the respective periods. The overall change in income taxes is due to permanent non-deductible expenses related to incentive stock option expense and penalties reserved related to the settlement with the DOJ. See Note 8 - Contingencies and Commitments.

Income from discontinued operations, net of taxes. During the fourth quarter of fiscal 2006, we sold our equity interest in Tucson Heart Hospital, and we decided to seek to dispose of our interest in Heart Hospital of Lafayette and we entered into a confidentiality and exclusivity agreement with a potential buyer. In February 2007, we, along with a group of local physicians and investors entered into a letter of intent, subject to the fulfillment of certain conditions, including the physicians’ and investors’ arrangement of sufficient financing, which will result in the local group acquiring our interest in Heart Hospital of Lafayette and therefore owning 100% of the heart hospital. Accordingly, these hospitals are accounted for as discontinued operations.

Six Months Ended March 31, 2007 Compared to Six Months Ended March 31, 2006

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


	Six Months Ended March 31,
							Increase / Decrease						% of Net Revenue
	2007			2006			$			%			2007			2006
	(in thousands)
Net revenue	$	368,040		$	346,883		$	21,157			6.1	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		118,531			117,516			1,015			0.9	%		32.2	%		33.9	%
Medical supplies expense		98,819			97,865			954			1.0	%		26.9	%		28.2	%
Bad debt expense		29,276			28,610			666			2.3	%		8.0	%		8.2	%
Other operating expenses		73,788			71,173			2,615			3.7	%		20.0	%		20.5	%
Depreciation		17,641			17,205			436			2.5	%		4.8	%		5.0	%
Amortization		379			504			(125	)		(24.8	)%		0.1	%		0.1	%
Loss on disposal of property, equipment and other assets		859			59			800			1355.9	%		0.2	%		—

Total operating expenses		339,293			332,932			6,361			1.9	%		92.2	%		95.9	%

Income from operations		28,747			13,951			14,796			106.1	%		7.8	%		4.1	%
Other income (expenses):
Interest expense		(13,226	)		(16,305	)		3,079			18.9	%		(3.6	)%		(4.7	)%
Loss on early extinguishment of debt		(5,142	)		(1,370	)		(3,772	)		(275.3	)%		(1.4	)%		(0.4	)%
Interest and other income, net		4,533			2,733			1,800			65.9	%		1.2	%		0.8	%
Equity in net earnings of unconsolidated affiliates		2,920			2,475			445			18.0	%		0.8	%		0.7	%

Total other expenses, net		(10,915	)		(12,467	)		1,552			12.4	%		(3.0	)%		(3.6	)%

Income from continuing operations before minority interest, income taxes and discontinued operations		17,832			1,484			16,348			1101.6	%		4.8	%		0.5	%
Minority interest share of earnings of consolidated subsidiaries		(6,440	)		(7,608	)		1,168			15.4	%		(1.7	)%		(2.2	)%

Income (loss) from continuing operations before income taxes and discontinued operations		11,392			(6,124	)		17,516			286.0	%		3.1	%		(1.7	)%
Income tax expense (benefit)		5,327			(2,451	)		7,778			317.3	%		1.4	%		(0.7	)%

Income (loss) from continuing operations		6,065			(3,673	)		9,738			265.1	%		1.7	%		(1.0	)%
Income (loss) from discontinued operations, net of taxes		(4,711	)		400			(5,111	)		(1277.8	)%		(1.3	)%		0.1	%

Net income (loss)	$	1,354		$	(3,273	)	$	4,627			141.4	%		0.4	%		(0.9	)%

The following table presents selected operating data on a consolidated basis for the periods indicated:


	Six Months Ended March 31,
	2007			2006			% Change
Selected Operating Data (a):
Number of hospitals		9			9
Licensed beds ( b )		580			580
Staffed and available beds ( c )		559			568
Admissions ( d )		20,404			20,809			(1.9	)%
Adjusted admissions ( e )		27,844			26,977			3.2	%
Patient days ( f )		71,050			70,156			1.3	%
Adjusted patient days ( g )		96,505			90,941			6.1	%
Average length of stay (days) ( h )		3.48			3.37			3.3	%
Occupancy ( i )		69.8	%		67.9	%
Inpatient catheterization procedures (j)		10,212			10,588			(3.6	)%
Inpatient surgical procedures (k)		5,265			5,334			(1.3	)%
Hospital net revenue	$	339,002		$	317,469			6.8	%


(a)		Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which 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 at 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 hospitals.


(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.

(j)		Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals’ catheterization labs during the period.

(k)		Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period.

Net Revenue. Net revenue increased 6.1% or $21.1 million to $368.0 million for the six months ended March 31, 2007 from $346.9 million for the six months ended March 31, 2006. The increase was attributable to a $21.5 million increase for our hospitals offset by a $0.4 million decline in net revenue for our MedCath Partners and corporate and other divisions.

The increase in our hospitals’ net revenue of $21.5 million was primarily a result of the following:

	•		An increase in adjusted admissions of 3.2% and revenue per adjusted admission of 3.5% for the six months ended March 31, 2007 compared to the six months ended March 31, 2006.

	•		Net revenue was positively impacted by a higher case mix index (CMI) for the first quarter of fiscal 2007 compared to the prior comparable period. The increase in CMI was due in part to the higher number of open heart surgeries, which were up 7.1% during the first quarter of fiscal 2007 compared to the first quarter of fiscal 2006 and in part due to the companywide focus on improving the revenue cycle process at our facilities. This increase in net revenue was partially offset by a reduction in overall drug eluting stent inpatient revenue due to a decrease in the number of inpatient drug eluting stent procedures performed during the first quarter of fiscal 2007. During the first quarter of fiscal 2007, we experienced an increase in the number of drug eluting procedures performed on an outpatient basis as well as a shift from drug eluting procedures to bare metal procedures. Both outpatient reimbursement and bare metal stent reimbursement are less than inpatient drug eluting stent reimbursement.

	•		Overall, we experienced a $7.0 million increase in net revenue for the first six months of fiscal 2007 compared to the comparable prior period as a result of cost report adjustments. Included in the $7.0 million increase is the reversal of a reserve of $2.2 million that was originally recorded to account for outlier payments that had been received in 2003 plus accrued interest from one of our Medicare fiscal intermediaries. These outlier payments had previously been reserved since, although changes to the outlier formula became effective in August 2003, the fiscal intermediary continued to pay us at amounts calculated under the historical formula until April 2004. During the second quarter of fiscal 2007 we were informed by the fiscal intermediary that outlier payments received prior to January 1, 2004 would not be disputed. We continue to carry a reserve of $8.5 million for outlier payments received in 2004 and accrued interest.

Net revenue increases were offset by the following for the six months ended March 31, 2007 compared to the six months ended March 31, 2006:

	•		Our net revenue was detrimentally impacted in fiscal 2006 by the temporary suspension of procedures at Arizona Heart Hospital as a result of water damage incurred from a fire at the facility during the first quarter.

	•		Net revenue for the six months ended March 31, 2007 was negatively impacted as a result of recording a $5.8 million reduction in net revenue for a portion of certain federal healthcare billings reimbursed in prior years. See Note 8 – Contingencies and Commitments.

Personnel expense. Personnel expense increased 0.9% to $118.5 million for the first half of fiscal 2007 from $117.5 million for the same period in fiscal 2006. Personnel expense as a percentage of net revenue declined from 33.9% for the first six months of fiscal 2006 to 32.2% for the first six months of fiscal 2007. The $1.0 million decrease in personnel expense was partially due to $10.6 million in share-based compensation recognized during the first six months of fiscal 2006 compared to $3.1 million for the first six months of fiscal 2007. Excluding the share-based compensation, personnel expense increased $8.5 million, or 7.9%.

On October 1, 2005, we adopted SFAS No. 123-R (revised 2004), Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. Using this methodology and since all options are immediately vested, the share-based compensation expense recognized for the six months ended March 31, 2006 was $10.6 million and $3.1 million for the first six months of 2007. Due to the appointment of a new president and chief executive officer as well as a new chief operating officer, the issuance of stock options during the first half of fiscal 2006 was above normal historical activity.

The remaining $8.5 million increase in personnel expense was primarily incurred at our hospitals and can mainly be attributable to cost of living wage adjustments given to employees during the first quarter of fiscal 2007 and increased staffing for permanent and contract labor at certain facilities to support the overall growth in admissions.

Medical supplies expense. Medical supplies expense increased 1.0% to $98.8 million for the six months ended March 31, 2007 from $97.9 million for the six months ended March 31, 2006. The increase in medical supplies expense during the six months ended March 31, 2007 is primarily attributable to the increased volume during the period. While medical supplies expense is down slightly period to period as a percentage of net revenue due to a reduction in the per unit cost for our more expensive supplies, we have experienced an increase in cardiac procedures that use high-cost medical devices and supplies.

Bad debt expense. Bad debt expense increased 2.3% to $29.3 million for the first half of fiscal 2007 from $28.6 million for the first half of fiscal 2006. As a percentage of net revenue, bad debt expense was 8.0% for the six month period of fiscal 2007 as compared to 8.2% for the same period in fiscal 2006. The majority of the decrease in bad debt expense was incurred in the hospital division. We continue to focus on initiatives that have contributed to the reduction in bad debt as a percentage of net revenue. These initiatives include the improvement of our registration process to more timely and accurately identify patients eligible for third party benefits. In addition, we have seen an increase in recoveries of accounts previously written off to bad debt. In addition, self-pay patient revenue comprised 9.6% of hospital division net revenue for first six months of fiscal 2007 as compared to 7.4% in the same period in the prior year.

Other operating expenses. Other operating expenses increased 3.7% to $73.8 million for the six months ended March 31, 2007 from $71.2 million for the six months ended March 31, 2006. As a percentage of net revenue, other operating expenses decreased slightly to 20.0% for the first half of fiscal 2007 from 20.5% for the same period in fiscal 2006. Of the $2.6 million increase in other operating expenses, approximately $4.4 million was incurred in our hospitals and is partially offset by a $1.8 million reduction in expense for our MedCath Partners division and our corporate office expenses. The $4.4 million increase for the hospital division is primarily due to the temporary suspension of procedures and admissions at Arizona Heart Hospital as a result of water damage incurred from a fire at the facility for the first quarter of fiscal 2006. In addition, the increase can be attributed to increased maintenance costs at our hospitals as machinery warranties have expired at several of our facilities.

Interest expense. Interest expense decreased 18.9% to $13.2 million for the first half of fiscal 2007 compared to $16.3 million for the first half of fiscal 2006. This $3.1 million decrease in interest expense is primarily attributable due to the overall reduction in our outstanding debt as we repurchased approximately $36.2 million of our senior notes, repaid $21.2 million of our REIT loan at one of our facilities, repaid $11.1 million of our equipment loan at another of our facilities, and repaid $39.9 million of our senior secured credit facility during the six month period ended March 31, 2007.

Loss on early extinguishment of debt. Loss on early extinguishment of debt increased to $5.1 million for the six months ended March 31, 2007 from $1.4 million for the six months ended March 31, 2006. During the first half of fiscal 2007, this loss was primarily comprised of a $3.5 million repurchase premium and the write off of approximately $1.0 million of deferred loan acquisition costs related to the prepayment of a portion of our senior notes in December 2006. We also incurred $0.5 million in deferred loan acquisition costs in the first six months of fiscal 2007 related to the prepayment of $39.9 million of our senior secured credit facility. During the first six months of fiscal 2006, we expensed approximately $1.4 million of deferred loan acquisition costs related to the prepayment of $58.0 million of the outstanding balance of our senior secured credit facility and the prepayment of $11.9 million of our senior notes.

Interest and other income, net. Interest and other income, net increased to $4.5 million for the six months ended March 31, 2007 from $2.7 million for the six months ended March 31, 2006. This $1.8 million increase is due to higher interest earned on available cash and cash equivalents during the comparable periods, as well as higher rates of return on our short-term investments. The increase in the Company’s cash position resulted from positive operating cash flow, proceeds from the divestiture of Tucson Heart Hospital, and retention of net proceeds from our secondary public offering prior to the repurchase of our senior notes offset by the repayment of our senior secured credit facility.

Equity in net earnings of unconsolidated affiliates. Equity in net earnings of unconsolidated affiliates increased to $2.9 million in the first half of fiscal 2007 from $2.5 million in the first half of fiscal 2006. The increase is attributable to growth in earnings at the one hospital in which we hold less than a 50% interest, with the remainder being attributable to growth in earnings in various MedCath Partners’ diagnostic ventures in which we hold less than a 50% interest.

Minority interest share of earnings of consolidated subsidiaries. Minority interest share of earnings of consolidated subsidiaries was $6.4 million for the period ended March 31, 2007 as compared to $7.6 million for the same period in fiscal 2006. This $0.9 million decrease was primarily due to the net decrease in earnings of certain of our established hospitals which were allocated to our minority partners on a pro rata basis. 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 March 31, 2007, we had remaining cumulative disproportionate loss allocations of approximately $24.2 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 facilities with minority ownership interests. We could also be required to recognize disproportionate losses at our other facilities not currently in a disproportionate allocation position depending on their results of operations in future periods. For a more complete discussion of our accounting for minority interests, including the basis for disproportionate allocation accounting, see Critical Accounting Policies in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

Income tax expense. Income tax expense was $5.3 million for the first half of fiscal 2007 compared to an income tax benefit of $2.5 million for the first half of fiscal 2006, which represents an effective tax rate of approximately 46.8% and 40.0%, respectively. The change in income taxes is due to the permanent non-deductible expenses related to incentive stock option expense and penalties reserved related to the settlement with the DOJ. See Note 8 - Contingencies and Commitments.

Income (loss) from discontinued operations, net of taxes. During the fourth quarter of fiscal 2006, we sold our equity interest in Tucson Heart Hospital, and we decided to seek to dispose of our interest in Heart Hospital of Lafayette and we entered into a confidentiality and exclusivity agreement with a potential buyer. In February 2007, we, along with a group of local physicians and investors entered into a

letter of intent, subject to the fulfillment of certain conditions, including the physicians’ and investors’ arrangement of sufficient financing, which will result in the local group acquiring our interest in Heart Hospital of Lafayette and therefore owning 100% of the heart hospital. Accordingly, these hospitals are accounted for as discontinued operations.

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

Liquidity and Capital Resources

Working Capital and Cash Flow Activities. Our consolidated working capital was $181.3 million at March 31, 2007 and $197.3 million at September 30, 2006. The decrease of $16.0 million in working capital primarily resulted from a decrease in cash and cash equivalents, which was partially offset by an increase in accounts receivable and a decrease in the current portion of long-term debt and obligations under capital leases of $34.6 million. The change in accounts receivable was driven by overall operations, as further described below. The decrease in the current portion of long-term debt and obligations under capital leases is primarily the result of payments in the amounts of $21.2 million and $11.1 million to pay off a REIT loan and an equipment loan, respectively, at two of our facilities and the repayment of the remaining $39.9 million due under our senior secured credit facility. The REIT loan matured in December 2006; therefore, the entire balance was considered current at September 30, 2006. Further, at September 30, 2006, we had received a waiver for a covenant related to the equipment loan; however, since it was our intent to pay the total outstanding balance of the equipment loan during fiscal 2007, the entire balance of the equipment loan was included in the current portion of long-term debt and obligations under capital leases as of September 30, 2006.

During the three months ended March 31, 2007, we reversed a reserve of $2.2 million that was originally recorded to account for outlier payments that had been received in 2003 from one of our Medicare fiscal intermediaries. These outlier payments had previously been reserved since, although changes to the outlier formula became effective in August 2003, the fiscal intermediary continued to pay us at amounts calculated under the historical formula until April 2004. During the second quarter of fiscal 2007 we were informed by the fiscal intermediary that outlier payments received prior to January 1, 2004 would not be disputed. We continue to carry a reserve of $8.5 million for outlier payments received in 2004.

The cash provided by operating activities of continuing operations was $27.2 million and $24.9 million for the first six months of fiscal 2007 and 2006, respectively. The $2.3 million increase was due primarily to an increase in net income and an increase in expenditures recognized such as depreciation, bad debt expense and the stock option expense impact on deferred taxes, which did not require cash outlays, offset by a reduction in working capital as a result of payment on accounts payable and accrued liabilities.

Our investing activities from continuing operations used net cash of $9.7 million for the first six months of fiscal 2007 compared to net cash used of $16.4 million for the first six months of fiscal 2006. The cash used by investing activities in the first six months of fiscal 2007 and 2006 was primarily for capital expenditures for the comparable periods.

Our financing activities used net cash of $77.8 million for the first six months of fiscal 2007 compared to net cash used of $24.2 million for the first six months of fiscal 2006. The $77.8 million of net cash used for financing activities for the first six months of fiscal 2007 is primarily a result of distributions to minority partners and the repayments of long-term debt and obligations under capital leases, including a payment of $39.9 million to pay off our senior secured credit facility, a payment of $21.2 million to pay off one of our facility’s REIT loans, which matured in December 2006, and a payment of $11.1 million to pay off the equipment loan at another of our facilities. Further, during the six months ended March 31, 2007, we completed a secondary public offering in which we sold an additional 1.7 million shares of common stock. The proceeds from this offering were used to prepay $36.2 million of our senior notes. The $24.2 million of net cash used for financing activities for the first six months of fiscal 2006 is a result of distributions to minority partners and the repayments, net of borrowings, of long-term debt and obligations under capital leases. Further, during the six months ended March 31, 2006, Harlingen Medical Center issued $60.0 million of long-term debt to various third parties. The proceeds from the issuance of this debt, net of loan acquisition costs, were used to prepay $58.0 million of our senior secured credit facility. In addition, in connection with sale of The Heart Hospital of Milwaukee and as stipulated by the indenture governing our senior notes, during the six months ended March 31, 2006 we offered to repurchase up to $30.3 million of senior notes. The tender offer for the notes expired during the period and we accepted for purchase and paid for $11.9 million principal amount of notes tendered prior to the expiration of the tender offer.

Capital Expenditures. Expenditures for property and equipment for the first six months of fiscal years 2007 and 2006 were $10.4 million and $16.7 million, respectively. For both periods, our capital expenditures were principally focused on improvements to and expansion of existing facilities. The amount of capital expenditures we incur in future periods will depend largely on the type and size of strategic investments we make in future periods.

Obligations and Availability of Financing. At March 31, 2007, we had $213.9 million of outstanding debt, $4.5 million of which was classified as current. Of the outstanding debt, $102.0 million was outstanding under our 9 ^7/8 % senior notes and $110.4 million was outstanding to lenders to our hospitals. The remaining $1.5 million of debt was outstanding to lenders for MedCath Partners’ diagnostic services under capital leases and other miscellaneous indebtedness. No amounts were outstanding to lenders under our $100.0 million revolving credit facility at March 31, 2007. At the same date, however, we had letters of credit outstanding of $1.7 million, which reduced our availability under this facility to $98.3 million.

During the six months ended March 31, 2007, we sold 1.7 million shares of common stock to the public. The $39.7 million in net proceeds from this offering were used to repurchase approximately $36.2 million of our outstanding senior notes and to pay

approximately $3.5 million of associated premiums and expenses associated with the note repurchase.

Covenants related to our long-term debt restrict the payment of dividends and require the maintenance of specific financial ratios and amounts and periodic financial reporting. At March 31, 2007, the Company was in violation of a financial covenant under a $9.1 million equipment loan to Heart Hospital of Lafayette, which is guaranteed by MedCath. Heart Hospital of Lafayette is classified as a discontinued operation. Accordingly, the total outstanding balance of this loan has been included in the current liabilities of discontinued operations on the consolidated balance sheet as of March 31, 2007. The Company was in compliance with all other covenants in the instruments governing its outstanding debt at March 31, 2007.

At March 31, 2007, we guaranteed either all or a portion of the obligations of our subsidiary hospitals for equipment and other notes payable. We provide these guarantees in accordance with the related hospital operating agreements, and we receive a fee for providing these guarantees from the hospitals or the physician investors.

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

Intercompany Financing Arrangements. We provide secured real estate, equipment and working capital financings to our majority-owned hospitals. The aggregate amount of the intercompany real estate, equipment and working capital and other loans outstanding as of March 31, 2007 was $273.1 million.

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

Each intercompany equipment loan is separately documented and secured with a lien on the borrowing hospital’s equipment and certain other assets. Amounts borrowed under the intercompany equipment loans are payable in monthly installments of principal and interest over terms that range from 3 to 6 years. The intercompany equipment loans accrue interest at fixed rates ranging from 6.31% to 8.58% or variable rates based on LIBOR plus an applicable margin. The weighted average interest rate for the intercompany equipment loans at March 31, 2007 was 8.14%.

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

We also use intercompany financing arrangements to provide cash support to individual hospitals for their working capital and other corporate needs. We provide these working capital loans pursuant to the terms of the operating agreements between our physician and hospital investor partners and us at each of our hospitals. These intercompany loans are evidenced by promissory notes that establish borrowing limits and provide for a market rate of interest to be paid to us on outstanding balances. These intercompany loans are subordinate to each hospital’s mortgage and equipment debt outstanding, but are senior to our equity interests and our partners’ equity interests in the hospital venture and are secured, subject to the prior rights of the senior lenders, in each instance by a pledge of certain of the borrowing hospital’s assets. Also as part of our intercompany financing and cash management structure, we typically 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 March 31, 2007 and September 30, 2006, we held $74.3 million and $55.5 million, respectively, of intercompany working capital and other notes and related accrued interest, net of advances from our hospitals.

Forward Looking Statements

Some of the statements and matters discussed in this report and in exhibits to this report constitute forward-looking statements. Words such as “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “intends” and “hopes” and variations of such words and similar expressions are intended to identify such forward-looking statements. We have based these statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that we will achieve our goals. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report and its exhibits might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. Other than as may be required by federal securities laws to disclose material developments related to previously disclosed information, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We urge you to review carefully all of the information in this report and the discussion of risk factors in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors and Forward Looking Statements in our Annual Report on Form 10-K for the year ended September 30, 2006, before making an investment decision with respect to our common stock. A copy of this 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 (freestanding derivatives), or contracts or instruments containing features or terms that behave in a manner similar to derivative instruments (embedded derivatives) in order to mitigate our risks. In addition, we may be required to hedge some or all of our market risk exposure, especially to interest rates, by creditors who provide debt funding to us.

Item 4. Controls and Procedures

The President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation of the Company’s disclosure controls and procedures as of March 31, 2007, that the Company’s disclosure controls and procedures were effective as of March 31, 2007 to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are occasionally involved in legal proceedings and other claims arising out of our operations in the normal course of business. See Note 8 — Contingencies and Commitments to the consolidated financial statements.

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 proceeds of approximately $13.8 million 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.

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

The Company’s annual meeting of stockholders was held on March 1, 2007. The stockholders elected the nominees for Class III Director. The stockholders also ratified the selection of Deloitte & Touche LLP as the independent registered public accounting firm for the fiscal year ending September 20, 2007. The votes on these proposals were as follows:

1. Election of Class III Directors:


	For		Withheld
Adam H. Clammer		19,952,589		80,377


	For		Withheld
Edward A. Gilhuly		19,951,689		81,277


	For		Withheld
Paul B. Queally		19,953,495		79,471


	For		Withheld
Jacque J. Sokolov, MD		19,951,512		81,454

2. Ratification of selection of Deloitte & Touche LLP as the independent registered public accounting firm for fiscal year ending September 30, 2007:


For:			20,029,028
Against:			2,215
Abstain:			1,722

Item 6. Exhibits


Exhibit
No.		Description
10.73		Second Amendment to the September 30, 2005 Employment Agreement by and between MedCath Corporation and James E. Harris dated February 12, 2007

10.74		Second Amendment to the September 30, 2005 Amended and Restated Employment Agreement by and between MedCath Corporation and Thomas K. Hearn dated February 12, 2007

10.75		Second Amendment to the September 30, 2005 Amended and Restated Employment Agreement by and between MedCath Corporation and Joan McCanless dated February 12, 2007

10.76		Second Amendment to the February 21, 2006 Employment Agreement by and between MedCath Corporation and O. Edwin French dated February 12, 2007

10.77		Second Amendment to the March 27, 2006 Employment Agreement by and between MedCath Corporation and Phil Mazzuca dated February 12, 2007

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


	MEDCATH CORPORATION
Dated: May 10, 2007	By:	/s/ O. EDWIN FRENCH
		O. Edwin French
		President and Chief Executive Officer (principal executive officer)


	By:	/s/ JAMES E. HARRIS
		James E. Harris
		Executive Vice President and Chief Financial Officer (principal financial officer)


	By:	/s/ LORA RAMSEY
		Lora Ramsey
		Vice President — Controller (principal accounting officer)


	Page
PART I. FINANCIAL INFORMATION		1

Item 1. Unaudited Financial Statements		1

Consolidated Balance Sheets as of March 31, 2007 and September 30, 2006		1

Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2007 and 2006		2

Consolidated Statement of Stockholders’ Equity for the Six Months Ended March 31, 2007		3

Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2007 and 2006		4

Notes to Unaudited Consolidated Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3. Quantitative and Qualitative Disclosures About Market Risk		28

Item 4. Controls and Procedures		28

PART II. OTHER INFORMATION		28

Item 1. Legal Proceedings		28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		28

Item 4. Submission of Matters to a Vote of Security Holders		28

Item 6. Exhibits		29

SIGNATURES		30


										Accumulated
										Other
	Common Stock				Paid-in		Accumulated			Comprehensive			Treasury Stock
	Shares		Par Value		Capital		Deficit			Loss			Shares		Amount			Total
Balance, September 30, 2006		19,091	$	192	$	391,261	$	(73,348	)	$	(51	)		69	$	(394	)	$	317,660
Exercise of stock options, including income tax benefit		342		3		6,252		—			—			—		—			6,255
Secondary public offering		1,700		17		39,641													39,658
Share-based compensation expense		—		—		3,149		—			—			—		—			3,149
Comprehensive income:
Net income		—		—		—		1,354			—			—		—			1,354
Change in fair value of interest rate swap, net of income tax benefit		—		—		—		—			(1	)		—		—			(1	)

Total comprehensive income																			1,353

Balance, March 31, 2007		21,133	$	212	$	440,303	$	(71,994	)	$	(52	)		69	$	(394	)	$	368,075