Medcath Corp – IPO: ‘424B4’ on 7/24/01

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Initial Public Offering (IPO):  Prospectus   —   Rule 424(b)(4)
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Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Medcath Corporation                                  147    761K 

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                                                Filed Pursuant to Rule 424(b)(4)
                                       Registration Statement File No. 333-60278

(MedCath CORPORATION Logo)                                                      

--------------------------------------------------------------------------------

6,000,000 Shares                                                                

Common Stock                                                                    

--------------------------------------------------------------------------------

This is the initial public offering of MedCath Corporation. We are offering     
6,000,000 shares of our common stock. Currently there is no public market for   
these shares. Our common stock will be traded on the Nasdaq National Market     
under the symbol "MDTH."                                                        

INVESTING IN OUR COMMON STOCK INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON    
PAGE 8.                                                                         

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES         
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE   
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.                                                               

                                                                [Download Table]

                                                   PER                 
                                                   SHARE   TOTAL       
                                                                       
Public offering price                              $25.00  $150,000,000
Underwriting discounts and commissions             $1.75   $10,500,000 
Proceeds, before expenses, to MedCath Corporation  $23.25  $139,500,000

We have granted the underwriters the right to purchase up to 900,000 additional 
shares of common stock to cover over-allotments.                                

DEUTSCHE BANC ALEX. BROWN                         BANC OF AMERICA SECURITIES LLC

JPMORGAN                                              

  FIRST UNION SECURITIES, INC.

The date of this prospectus is July 23, 2001.                                   

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[Description of Artwork: Map showing the locations of our heart hospitals,
diagnostic and therapeutic facilities and mobile cardiac catheterization
laboratory routes for which we provide cardiology consulting
and management services.] 

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TABLE OF CONTENTS 

                                                                [Download Table]

                                                              PAGE
                                                                  
Prospectus Summary..........................................    1 
Risk Factors................................................    8 
Special Note Regarding Forward-Looking Statements...........   22 
Use of Proceeds.............................................   23 
Dividend Policy.............................................   23 
Capitalization..............................................   24 
Dilution....................................................   25 
The Going Private Transaction...............................   26 
Selected Consolidated Financial Data and Other                    
  Information...............................................   28 
Management's Discussion and Analysis of Financial Condition       
  and Results of Operations.................................   32 
Business....................................................   52 
Management..................................................   78 
Principal Stockholders......................................   87 
Certain Relationships and Related Party Transactions........   89 
Description of Capital Stock................................   92 
Shares Eligible for Future Sale.............................   96 
Underwriting................................................   99 
Legal Matters...............................................  102 
Change in Accountants.......................................  102 
Experts.....................................................  102 
Where You Can Find More Information.........................  103 
Unaudited Pro Forma Consolidated Financial Data.............  P-1 
Index to Financial Statements...............................  F-1 

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PROSPECTUS SUMMARY

  This summary highlights selected information contained in greater detail
elsewhere in this prospectus and may not contain all of the information that you
should consider before investing in our common stock. You should carefully read 
the entire prospectus, including "Risk Factors" and the financial statements,   
before making an investment decision.                                           

OUR BUSINESS

We focus on the diagnosis and treatment of cardiovascular disease. We 
design, develop, own and operate hospitals in partnership with cardiologists and
cardiovascular surgeons that we believe have established reputations for        
clinical excellence. While each of our hospitals is licensed as a general acute 
care hospital, which provides comprehensive medical care for patients needing a 
wide range of healthcare services, we focus on serving the unique needs of      
patients suffering from cardiovascular disease. We are also committed to        
improving the productivity and work environment of physicians, nurses and other 
medical personnel providing care. Our hospitals are known in the communities    
they serve as heart hospitals. We own and operate eight heart hospitals together
with our physician partners, who own an equity interest in the heart hospital   
where they practice. Our existing hospitals have a total of 460 licensed beds   
and are located in Arizona, Arkansas, California, New Mexico, Ohio, South Dakota
and Texas. We have begun developing our ninth hospital, which will be located in
Texas, and our tenth hospital, which will be located in Louisiana. Both of these
new hospitals are expected to open by late 2002. We intend to begin development 
on one to three new heart hospitals each year.                                  

     In addition to our heart hospitals, we provide cardiovascular care services
in diagnostic and therapeutic facilities located in seven states and through    
mobile diagnostic facilities. Our mobile diagnostic facilities are used by      
physicians to evaluate the functioning of patients' hearts and coronary arteries
and serve areas that do not have the patient volume to support a full-time      
facility. We refer to our mobile diagnostic facilities as mobile cardiac        
catheterization laboratories. We also provide consulting and management services
tailored to cardiologists and cardiovascular surgeons.                          

OUR OPPORTUNITY 

   The American Heart Association estimates that total domestic expenditures
for the treatment of cardiovascular disease were $185.8 billion in 2000 and that
these expenditures have grown at a rate of 5.4% annually since 1997. Of these   
expenditures, 69.1%, or $128.4 billion, was spent on hospital and other         
facility-based charges. The demand for cardiology and cardiovascular disease    
treatment procedures is expected to increase in the future as the population of 
the United States ages, new screening techniques increase physicians' ability to
diagnose cardiovascular disease and new medical devices expand the treatment    
options available to physicians and patients.                                   

   The growth in healthcare expenditures in the United States has led to the
development of a variety of strategies for care management and cost containment,
including managed care and disease management programs. We believe these        
initiatives have fallen short of their objective of controlling costs while     
enhancing care delivery and improving clinical outcomes. Instead, many of these 
initiatives have resulted in constraints that frustrate physicians, patients,   
payors and hospital administrators.                                             

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OUR APPROACH

  Our focus on cardiovascular care, our physician partnerships, our unique
hospital design and staffing model and our investment in technology combine to  
enhance overall operating efficiencies and allow us to provide high-quality,    
cost-effective patient care. Key elements of our approach include:              

    - Cardiovascular disease focus.  By focusing on a single disease category,
       we are able to schedule patient procedures more efficiently and allow our
physicians, nurses, medical technicians and other staff members to
       concentrate on and enhance their professional cardiovascular care skills,
   thereby better serving the needs of patients in the community. We are
also able to invest our available funds primarily in equipment and
    technology for cardiovascular care, rather than allocating those funds
   among the equipment and technology needs of many different healthcare
    services. We believe our focused approach increases patient, physician
and staff satisfaction and allows us to provide high-quality,     
cost-effective patient care.                                      

- Physician partnerships.  At the core of our business model is a     
       physician-partner structure that empowers our physicians by enabling them
 to be involved in developing a heart hospital and to participate in
 strategic and operational decisions at that hospital. Our physician
   partners share decision-making authority with us on strategic matters
      such as site selection, facility size and layout, the hospital marketing
   plan and community outreach programs. They, as well as the many other
physicians practicing at our heart hospitals, also participate in 
     decisions on a wide range of operational matters such as development of
       clinical care protocols, supply selection and usage, equipment purchases,
patient procedure scheduling and local staff and management team  
     selection. We believe that our physician-partnership approach addresses
  the sense of frustration many physicians experience with the current
state of hospital-based healthcare.                               

- Patient-focused care.  Our philosophy is to center care around the  
       patient, and we design, equip, staff and operate our hospitals to deliver
    coordinated patient-focused care. Our approach limits the need to move
     patients and provides ease of access to all necessary medical services,
      allowing us to enhance the overall experience of the patient. Our large,
    single-patient rooms allow physicians and nursing staff to provide, in
each patient's room, all levels of post-surgical care required for
    patients during their stay. Another key element of our patient-focused
approach to cardiovascular care is our investment in technology to
      improve patient access to care providers. We believe our patient-focused
    care reduces patient risk, increases patient and patient family member
    satisfaction, reduces delays in providing patient services and reduces
average length of stay.                                           

We believe that our approach improves the hospital experience for our 
patients, their family members and their care providers and has allowed us to   
achieve a leading market share in each of our markets.                          

OUR STRATEGY

Our objective is to become the leading provider of cardiovascular     
healthcare services in each of the markets we enter. Key elements of our        
strategy to achieve this objective include:                                     

- improving the patient experience,                                   

- partnering with cardiologists and cardiovascular surgeons,          

- developing new heart hospitals,                                     

- achieving superior clinical outcomes, and                           

- applying our experience across our heart hospitals.                 

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OUR HEART HOSPITAL OWNERSHIP AND THE EXCHANGE 

  When we develop a heart hospital we form a venture, which is typically a
limited liability company, with physicians practicing in the market where we    
plan to develop the hospital. In some instances, local market conditions have   
made it advantageous for us to organize a heart hospital with a community       
hospital investing as a partner in addition to physicians. We and our partners  
invest capital and own pro rata interests in the venture based upon the amount  
of capital contributed. After giving effect to the transactions described below,
we will own between 53.3% and 70.9% of the equity of six of the eight heart     
hospitals that we currently operate. We will continue to own a minority interest
in the other two heart hospitals we currently operate. We expect to own at least
51.0% of our ninth and tenth hospitals, which are currently under development.  

  Concurrent with this offering, we will complete a series of transactions
that we undertook to prepare for this public offering and to increase our       
ownership interest in some of our heart hospitals. First, we will establish     
MedCath Corporation as our new holding company by issuing shares of its common  
stock in exchange for all of the outstanding shares of common stock of our      
former holding company, MedCath Holdings, Inc. Second, we will complete a       
transaction in which we offered our partners in some of our heart hospitals the 
opportunity either to exchange a portion of their ownership interests in those  
heart hospitals for shares of our common stock valued at the public offering    
price or to sell a portion of their ownership interests to us for cash. And     
third, we will complete a separate purchase of additional ownership interests in
our Arkansas Heart Hospital for cash. In this prospectus, we refer to these     
transactions collectively as the exchange. When we complete the exchange, we    
will issue a total of 129,478 shares of our common stock and pay a total of     
$25.4 million in cash to our partners in our heart hospitals who have elected to
participate in the exchange. As a result of the exchange, we will increase our  
percentage ownership in five of our heart hospitals and begin consolidating one 
of these hospitals for which we have previously been required to use the equity 
method of accounting. That method required us to include in our statement of    
operations only a percentage of the hospital's reported net income or loss for  
the same period.                                                                

     We have initiated and are continuing to have discussions with our community
hospital partner in our Heart Hospital of New Mexico about possibly acquiring   
for cash its interest in the venture that owns and operates that heart hospital.
We cannot predict whether our efforts to acquire our community hospital         
partner's interest will be successful.                                          

OUR HISTORY 

    Our predecessor company was developed in 1988 and 1989 by our chairman and
our president and chief executive officer and for a number of years was         
primarily engaged in operating mobile and stationary cardiac catheterization    
laboratories. In 1994, our predecessor company completed an initial public      
offering and began developing its first hospital focused on serving the needs of
patients requiring cardiovascular care, which opened in 1996. By July 1998, the 
predecessor company had developed and opened three additional heart hospitals.  
At that time, several private investment partnerships sponsored by Kohlberg     
Kravis Roberts & Co., L.P. and Welsh, Carson, Anderson & Stowe, and members of  
our management team acquired our predecessor company from its public            
stockholders for $19.00 per share in a transaction that valued the total equity 
of the predecessor company at $249.2 million. Please read "The Going Private    
Transaction," which begins on page 26, for a summary of the costs and benefits  
of the going private transaction to our principal stockholders and management.  

Since becoming a private company, we have:                            

- opened five new heart hospitals, three of which were already under  
    development at the time of the going private transaction, and sold one
heart hospital,                                                   

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- improved our process for developing new heart hospitals,            

- begun developing two additional hospitals,                          

 - standardized and, when appropriate, centralized our operations across
financial and operational areas, and                              

     - continued to strengthen our regulatory compliance program at the facility
and corporate levels.                                             

   Following this offering, the private investment partnerships sponsored by
Kohlberg Kravis Roberts & Co., L.P., and Welsh, Carson, Anderson & Stowe,       
individuals affiliated with their sponsors and our management, including two    
officers who participated in the acquisition of our predecessor company, will   
collectively own 66.5% of our outstanding common stock. Accordingly, they will  
together be able to elect our entire board of directors, control our management 
and policies and determine, without the consent of our other stockholders, the  
outcome of any corporate transaction or other matter submitted to our           
stockholders for approval.                                                      

THE DEBT REFINANCING

Concurrent with this offering, we will become a party to a new $190.0 
million credit facility that is intended to be a source of capital for          
refinancing the indebtedness of some of our existing heart hospitals and        
financing our heart hospital development program. Three of our heart hospital   
ventures will borrow a total of up to $80.0 million of this new credit facility 
to refinance portions of their indebtedness. The remaining $110.0 million of    
this facility will be used to fund development of additional heart hospitals.   
Each loan under this new facility will be separately documented, secured by the 
assets of the borrowing hospital only and will not be cross-defaulted with any  
other loan made to any other hospital under this facility. We will guarantee the
obligations of our heart hospital subsidiaries and unconsolidated affiliates for
loans made to them under this new credit facility. Following this offering, one 
of the two heart hospitals in which we own a minority interest intends to       
refinance approximately $30.0 million of its outstanding indebtedness pursuant  
to a separate financing commitment with different lenders.                      

SOME RISKS OF OUR BUSINESS

We have a history of net losses, and we expect to continue to have net
losses for several years, which may increase during periods of accelerated      
development of new heart hospitals. We also have significant indebtedness, which
could limit our flexibility to raise additional capital and develop new heart   
hospitals. We will be required to dedicate a substantial portion of our cash    
flow from operations to the payment of principal and interest on our            
indebtedness, reducing the funds available for our operations. Please read "Risk
Factors" on page 8 for a discussion of these and other risks associated with our
business.                                                                       

--------------------- 

    Our principal executive office is located at 10720 Sikes Place, Suite 300,
Charlotte, NC 28277, and our telephone number is (704) 708-6600. The address of 
our web site is www.medcath.com. The information on our web site is not part of 
this prospectus.                                                                

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THE OFFERING

                                                        [Enlarge/Download Table]
                                                                                           
Common stock offered by MedCath Corporation........ 6,000,000 shares                       

Common stock to be outstanding after this                                                  
  offering......................................... 17,975,526 shares                      

Use of proceeds.................................... We plan to use the net proceeds of this
                                                    offering to repay indebtedness, effect 
                                                    the exchange, develop additional heart 
                                                    hospitals, and for working capital and 
                                                    other corporate purposes               

Nasdaq National Market symbol...................... MDTH                                   

    The number of shares of our common stock outstanding after the offering is
based on shares outstanding as of June 30, 2001. This number of shares includes 
the 129,478 shares of our common stock to be issued in the exchange but does not
include:                                                                        

  - 2,332,165 shares of common stock issuable upon exercise of outstanding
       stock options under our equity incentive plans as of June 30, 2001 with a
weighted average exercise price of $18.17 per share, and          

     - 760,335 shares of common stock reserved and available for future issuance
under our equity incentive plans as of June 30, 2001.             
--------------------- 

 Unless otherwise indicated, all information in this prospectus assumes:

- no exercise of the underwriters' over-allotment option, and         

 - the issuance of shares, payment of cash and increase of our ownership
interests in heart hospitals resulting from the exchange.         
--------------------- 

    References in this prospectus to "we," "us" and "our" for periods prior to
completing the exchange are references to our holding company prior to the      
exchange, MedCath Holdings, Inc., its subsidiaries and unconsolidated           
affiliates, including each of our heart hospitals, and our predecessor company, 
unless the context requires otherwise. For periods subsequent to completing the 
exchange, references to "we," "us" and "our" are references to our holding      
company after the exchange, MedCath Corporation, its subsidiaries and           
unconsolidated affiliates, including each of our heart hospitals, unless the    
context requires otherwise. References in this prospectus to our predecessor    
company are to MedCath Incorporated, which was acquired from its public         
stockholders in July 1998 by several private investment partnerships sponsored  
by Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson, Anderson & Stowe, and 
members of our management team.                                                 

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SUMMARY CONSOLIDATED FINANCIAL DATA 
AND OTHER INFORMATION 

The following table summarizes financial and other information for our
business. You should read the summary consolidated financial data set forth     
below together with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our historical and pro forma consolidated        
financial statements and the notes to those consolidated financial statements   
included elsewhere in this prospectus.                                          

                                                        [Enlarge/Download Table]

                                                      YEAR ENDED                       SIX MONTHS ENDED         
                                                     SEPTEMBER 30,                         MARCH 31,            
                                           ---------------------------------   ---------------------------------
                                                                  PRO FORMA                           PRO FORMA 
                                                                 AS ADJUSTED                         AS ADJUSTED
                                             1999       2000       2000(a)       2000       2001       2001(a)  
                                           --------   --------   -----------   --------   --------   -----------
                                                 (IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)      
                                                                                                                
STATEMENT OF OPERATIONS DATA:                                                                                   
Net revenue............................... $255,756   $332,342    $325,673     $163,413   $194,398    $197,925  
Operating expenses(b).....................  224,126    277,131     269,869      131,722    158,477     162,142  
Depreciation and amortization.............   31,035     38,236      38,532       18,880     19,263      19,732  
Gain on sale of hospital..................                                           --    (13,461)         --  
Impairment of long-lived assets...........   10,935         --          --           --        985         985  
                                           --------   --------    --------     --------   --------    --------  
Income (loss) from operations.............  (10,340)    16,975      17,272       12,811     29,134      15,066  
Interest expense..........................  (21,667)   (29,047)    (23,990)     (14,356)   (13,837)    (11,818) 
Interest income...........................    2,533      3,428       1,502        1,670      1,582         453  
Other income (expense), net...............      168        301         301          260       (351)       (351) 
Equity in net losses of unconsolidated                                                                          
  affiliates..............................   (5,640)    (2,011)       (572)      (1,184)    (1,843)     (1,274) 
                                           --------   --------    --------     --------   --------    --------  
Income (loss) before minority interests                                                                         
  and income taxes........................  (34,946)   (10,354)     (5,487)        (799)    14,685       2,076  
Minority interests........................   (6,322)    (3,305)     (1,982)      (2,804)   (10,440)     (1,695) 
Income tax benefit (expense)..............    1,338         24          24           --       (128)       (128) 
                                           --------   --------    --------     --------   --------    --------  
Net income (loss)......................... $(39,930)  $(13,635)   $ (7,445)    $ (3,603)  $  4,117    $    253  
                                           ========   ========    ========     ========   ========    ========  
Net income (loss) per share, basic:....... $  (3.37)  $  (1.15)   $  (0.41)    $  (0.30)  $   0.35    $   0.01  
                                           ========   ========    ========     ========   ========    ========  
Weighted average number of shares                                                                               
  outstanding, basic:.....................   11,836     11,837      17,966       11,837     11,838      17,967  
                                           ========   ========    ========     ========   ========    ========  
Net income (loss) per share, diluted:..... $  (3.37)  $  (1.15)   $  (0.41)    $  (0.39)  $   0.34    $   0.01  
                                           ========   ========    ========     ========   ========    ========  
Weighted average number of shares                                                                               
  outstanding, diluted:...................   11,836     11,837      17,966       11,837     11,937      18,066  
                                           ========   ========    ========     ========   ========    ========  

CASH FLOW AND OTHER DATA:                                                                                       
Net cash provided by (used in) operating                                                                        
  activities.............................. $  9,988   $ 16,626          --     $(11,500)  $  7,926          --  
Net cash provided by (used in) investing                                                                        
  activities.............................. $(57,571)  $(13,163)         --     $(11,215)  $ 41,544          --  
Net cash provided by (used in) financing                                                                        
  activities.............................. $ 50,430   $(24,274)         --     $ 16,492   $(46,546)         --  
EBITDA, as defined(c)..................... $ 20,863   $ 55,512          --     $ 31,951   $ 48,046          --  
Adjusted EBITDA, as defined(c)............ $ 38,446   $ 56,061          --     $ 32,184   $ 35,927          --  

SELECTED OPERATING DATA:                                                                                        
Number of hospitals(d)....................        4          6           6            6          5           6  
Licensed beds(d)(e).......................      261        355         355          355        295         355  
Beds in service(d)(f).....................      261        355         355          355        295         355  
Admissions(g).............................   14,054     20,511      20,675        9,824     12,737      13,402  
Adjusted admissions(h)....................   16,512     25,213      24,950       12,056     15,421      15,989  
Patient days(i)...........................   62,765     85,239      78,958       41,831     53,799      53,133  
Average length of stay (days)(j)..........      4.5        4.2         3.8          4.3        4.2         4.0  
Inpatient catheterization procedures......    7,687     10,821      10,544        5,132      6,387       6,359  
Inpatient surgical procedures.............    4,657      6,354       5,833        3,060      3,959       3,653  

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                                                        [Enlarge/Download Table]

                                                                 AT MARCH 31, 2001    
                                                             -------------------------
                                                                          PRO FORMA,  
                                                              ACTUAL    AS ADJUSTED(a)
                                                             --------   --------------
                                                                  (IN THOUSANDS)      
                                                                                      
BALANCE SHEET DATA:                                                                   
Cash and cash equivalents................................... $ 10,545      $ 96,197   
Working capital.............................................   20,424       116,778   
Total assets................................................  463,482       612,061   
Long-term debt and capital leases, excluding current                                  
  maturities................................................  215,029       225,088   
Other long-term obligations.................................       89         3,927   
Stockholders' equity........................................  164,749       302,423   

------------                                                                    

(a) See "Unaudited Pro Forma Consolidated Financial Data" beginning on page P-1 
 for information regarding the unaudited pro forma adjustments made to our
historical data including adjustments for this offering.                

(b) Operating expenses include personnel expense, medical supplies expense, bad 
   debt expense, other operating expenses and gains and losses on property and
equipment.                                                              

(c) EBITDA, as defined represents net (loss) income before interest, income     
taxes, depreciation, amortization, equity in earnings (losses) of       
unconsolidated affiliates and minority interests. Adjusted EBITDA, as   
    defined represents EBITDA, as defined adjusted to exclude impairment of long
lived assets, merger costs, gain on sale of hospital, and pre-opening   
expenses, which are expenses incurred prior to the opening of a heart   
  hospital. EBITDA, as defined and Adjusted EBITDA, as defined should not be
considered measures of financial performance under accounting principles
generally accepted in the United States. Items excluded from EBITDA, as 
defined and Adjusted EBITDA, as defined are significant components in   
 understanding and assessing financial performance. EBITDA, as defined and
   Adjusted EBITDA, as defined are key measures used by management to evaluate
our operations and provide useful information to investors. EBITDA, as  
defined and Adjusted EBITDA, as defined should not be considered in     
isolation or as alternatives to net income, cash flows provided by      
   operations, investing or financing activities, or other financial statement
data presented in the consolidated financial statements as indicators of
   financial performance or liquidity. Because EBITDA, as defined and Adjusted
EBITDA, as defined are not measurements determined in accordance with   
  accounting principles generally accepted in the United States and are thus
    susceptible to varying calculations, EBITDA, as defined and Adjusted EBITDA,
as defined as presented may not be comparable to other similarly titled 
measures of other companies.                                            

(d) Hospitals in operation as of end of period.                                 

(e) Licensed beds are the number of beds for which the appropriate state agency 
 licenses a facility regardless of whether the beds are actually available
for patient use.                                                        

(f) Beds in service are the number of beds that are readily available for       
patient use.                                                            

(g) Admissions represent the number of patients admitted for inpatient          
treatment.                                                              

(h) Adjusted admissions is a general measure of combined inpatient and          
    outpatient volume. We computed adjusted admissions by multiplying admissions
 by gross inpatient revenue and then dividing that number by gross patient
revenue.                                                                

(i) Patient days represent the total number of days of care provided to         
inpatients.                                                             

(j) Average length of stay (days) represents the average number of days         
inpatients stay in our hospitals.                                       

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RISK FACTORS

     The purchase of our common stock involves a high degree of risk. You should
consider carefully all of the information contained in this prospectus and, in  
particular, the following risk factors before placing an order for our common   
stock. An investment in our common stock should be made only by persons who can 
afford an investment with a high degree of risk and is suitable only for persons
able to sustain the loss of their entire investment.                            

RISKS RELATED TO OUR BUSINESS 

REDUCTIONS OR CHANGES IN REIMBURSEMENT FROM GOVERNMENT OR THIRD-PARTY PAYORS    
COULD ADVERSELY IMPACT OUR OPERATING RESULTS.                                   

During each of the fiscal years ended September 30, 1999 and 2000, we 
derived approximately 50% of our net revenue from the Medicare and Medicaid     
programs. For the ten-month period ended July 31, 1998 and for the two-month    
period ended September 30, 1998, net revenue from the Medicare and Medicaid     
programs represented approximately 46% of our consolidated net revenue. Our     
operating results may be adversely affected by changes in laws or regulations   
governing the Medicare and Medicaid programs.                                   

     Historically, Congress and some state legislatures have, from time to time,
proposed significant changes in the healthcare system. Many of these changes    
have resulted in limitations on, and in some cases, significant reductions in   
the levels of, payments to healthcare providers for services under many         
government reimbursement programs. Future federal and state legislation or      
action by government agencies may significantly reduce the payments we receive  
for our services to patients covered by Medicare and Medicaid.                  

Our relationships with third-party payors, such as health maintenance 
organizations and preferred provider organizations, from which we derived       
approximately 21.4% of our net revenue during the fiscal year ended September   
30, 2000, are generally governed by negotiated agreements. These agreements set 
forth the amounts we are entitled to receive for our services. We could be      
adversely affected in some of the markets where we operate if we are unable to  
negotiate and maintain favorable agreements with third-party payors. Third-party
payors have undertaken cost-containment initiatives during the past several     
years, including revising payment methods and monitoring healthcare             
expenditures. We may not be able to maintain existing relationships or establish
new relationships with third-party payors on favorable terms.                   

OUR SIGNIFICANT INDEBTEDNESS COULD LIMIT OUR FLEXIBILITY TO RAISE ADDITIONAL    
CAPITAL AND DEVELOP NEW HEART HOSPITALS.                                        

We have significant indebtedness and will continue to have significant
indebtedness following this offering. As of March 31, 2001, we had total debt of
approximately $244.5 million, or approximately 64.4% of our total               
capitalization, and had guaranteed $58.4 million of debt of our unconsolidated  
affiliates. Concurrent with this offering, we will become a party to a new      
credit facility that will provide us up to $190.0 million. This new credit      
facility is intended to be a source of capital for refinancing the indebtedness 
of some of our existing heart hospitals and financing the development of new    
heart hospitals. We will guarantee the obligations of our heart hospital        
subsidiaries and unconsolidated affiliates for loans made to them under this    
facility. After giving effect to the refinancing, the exchange and the use of a 
portion of the proceeds of this offering to pay down outstanding amounts under  
our revolving credit facility, as of March 31, 2001, we would have had total    
debt of approximately $254.6 million, or approximately 47.9% of our total       
capitalization, and had guaranteed $37.3 million of debt of our unconsolidated  
affiliates.                                                                     

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Our heart hospital development strategy requires substantial capital  
resources. In addition, the operation of our existing heart hospitals and other 
facilities requires ongoing capital expenditures. We do not anticipate          
generating material amounts of cash from our operating activities in fiscal 2001
and 2002. Consequently, we must rely on external sources of capital to fund our 
hospital development and other activities. While we believe that our existing   
sources of debt financing, together with the proceeds of this offering and the  
new $190.0 million credit facility, will be sufficient to finance our heart     
hospital development program and other capital expenditures and working capital 
requirements for the next 12 months, we may need to obtain additional debt or   
equity financing from other sources in the future to fund our hospital          
development program. We may be unable to obtain sufficient financing on terms   
satisfactory to us, or at all. If that were to occur, our development activities
would have to be curtailed or eliminated and our financial results would be     
adversely affected.                                                             

The degree to which we are leveraged could have other important       
consequences to you, including the following:                                   

   - we must dedicate a substantial portion of our cash flow from operations
    to the payment of principal and interest on our indebtedness, reducing
the funds available for our operations,                           

  - as of March 31, 2001, $95.9 million of our borrowings were at variable
       rates of interest, making us vulnerable to increases in interest rates. A
   one hundred basis point change in interest rates on our variable rate
    debt would have resulted in interest expense fluctuating approximately
$1.4 million for fiscal year 2000,                                

     - the terms of our credit arrangements contain numerous financial and other
restrictive covenants, including restrictions on paying dividends,
incurring additional indebtedness and selling assets, and         

- from time to time, we may violate financial or other restrictive    
       covenants in our credit agreements. We cannot assure you that our lenders
       would agree to waive any violations or that we would be able to refinance
our indebtedness if they did not.                                 

WE HAVE GUARANTEED A PERCENTAGE OF THE DEBT OF OUR HEART HOSPITAL VENTURES DEBT 
THAT EXCEEDS OUR PERCENTAGE OF OWNERSHIP IN THOSE VENTURES.                     

   Although we own less than 100% of the interests in the ventures formed to
develop, own and operate our heart hospitals, we guarantee all or a significant 
percentage of the debt that each venture incurs to finance the land, building   
and equipment of the heart hospital. Our partners are responsible for and are   
allocated a fee, which is paid to us, for providing this guarantee to the extent
that the percentage of the venture's debt that we guarantee exceeds our         
percentage of ownership in the venture. If a heart hospital venture were to     
default in making payments on its debt, we would be obligated to pay a          
percentage of the venture's debt that exceeds our percentage of ownership in the
venture.                                                                        

WE HAVE A HISTORY OF NET LOSSES, AND WE MAY CONTINUE TO GENERATE NET LOSSES FOR 
SEVERAL YEARS.                                                                  

   We generated net losses of $1.3 million, before giving effect to the sale
of McAllen Heart Hospital, in the first six months of the current fiscal year.  
We generated net losses of $13.6 million in fiscal 2000, $39.9 million in fiscal
1999 and $2.6 million in the two months ended September 30, 1998. Our           
predecessor company generated a net loss of $2.5 million in the ten months ended
July 31, 1998. Our new heart hospitals typically incur net losses during their  
early years of operation that could be significant. We expect to continue to    
generate net losses, which may increase during periods of accelerated           
development of new heart hospitals, particularly if we experience unanticipated 
delays in the start-up phase of new heart hospitals.                            

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WE MAY EXPERIENCE UNANTICIPATED DELAYS IN DEVELOPING NEW HEART HOSPITALS OR IN  
ACHIEVING EXPECTED OPERATING RESULTS FOR NEW HEART HOSPITALS.                   

   In the most recent fiscal year, our heart hospital division accounted for
81.6% of our net revenue, and we expect this percentage to increase as we       
develop additional heart hospitals at an anticipated rate of one to three new   
hospitals per year. Our development strategy depends on our ability to identify 
attractive markets in which to open new heart hospitals. We may have difficulty 
in identifying potential markets that satisfy our criteria for developing a new 
heart hospital. Identifying physician partners and negotiating and implementing 
the terms of a heart hospital venture with them can be a lengthy and complex    
process. As a result, we may not be able to develop new heart hospitals at the  
rate we currently anticipate.                                                   

 Our initial rate of growth in local market share and net revenue varies
from market to market depending upon the time of year the hospital opens, our   
ability to educate physicians in the market about the benefits of our approach  
to patient care, the patient demographics of a particular market, the number and
type of competitors in the market and their reactions to increased competition  
and the number and type of payors. This variability makes it difficult for us to
accurately forecast how long it will take for a particular hospital to begin    
achieving positive operating results. The number of months required for our     
heart hospitals to begin generating operating income has ranged from three to   
thirteen months. Through September 30, 2000 the cumulative operating income     
(loss), including pre-opening expenses, generated by our heart hospitals has    
ranged from cumulative operating income of $2.9 million to cumulative operating 
losses of $12.9 million. Moreover, delays in completing construction or         
receiving required regulatory approvals can cause unanticipated delays in       
opening a hospital, resulting in higher than expected pre-opening expenses. The 
pre-opening expenses for our four most recently opened heart hospitals have     
ranged from $3.3 million to $6.5 million.                                       

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

LOSSES INCURRED BY NEW HEART HOSPITALS DURING THEIR EARLY YEARS OF OPERATIONS   
COULD LEAD TO VOLATILITY IN OUR RESULTS OF OPERATIONS.                          

Because our heart hospitals are owned as joint ventures, each heart   
hospital's profits and losses are generally allocated for accounting purposes to
us and our physician and community hospital partners based on our and their     
ownership percentages in the particular hospital. If, however, the cumulative   
losses of a heart hospital exceed the total of the capital we and they          
contributed to the hospital venture when we formed it and any additional amounts
of capital they have agreed to contribute to the venture, generally accepted    
accounting principles require us to recognize 100% of the hospital's losses,    
instead of the smaller share of the losses that normally would be allocated to  
us based upon our percentage ownership. This allocation to us of a greater share
of a heart hospital's losses during its early years of operation could lead to  
volatility in our results of operations and would increase our net losses. When 
the same heart hospital has income, we will recognize 100% of that income to the
extent we have previously recognized a greater share of the hospitals losses.   

 The initial amount of capital contributed to each of our five operating
heart hospitals in which we currently own a majority interest, or over which we 
exercise substantive control, and whose results of operations are consolidated  
with ours was approximately $3.0 million. In each                               

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case, we contributed between 51% and 53% of that amount and our partners        
collectively contributed the balance. As of September 30, 2000, the cumulative  
operating income (losses), including pre-opening expenses, of these five heart  
hospitals ranged from cumulative operating income of $2.9 million to cumulative 
operating losses of $12.9 million. As of the same date, the aggregate amount of 
cumulative losses of these five heart hospitals was $32.5 million, and the total
amount of these cumulative losses allocated to us in excess of our share of them
based upon our percentage ownership in the ventures was $10.9 million.          

   As of September 30, 2000 we had two heart hospitals open which we did not
consolidate in our financial statements. As of September 30, 2000, the aggregate
amount of the cumulative losses of these two heart hospitals was $26.4 million, 
and the total amount of their cumulative losses allocated to us in excess of our
share of losses based upon our percentage ownership was $11.9 million. See      
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations" for a discussion of this risk and other aspects of our business     
operations and strategy that could lead to volatility in our results of         
operations                                                                      

WE DEPEND ON OUR RELATIONSHIPS WITH THE PHYSICIANS WHO USE OUR FACILITIES.      

 Our business depends upon the efforts and success of the physicians who
provide healthcare services at our facilities and the strength of our           
relationships with these physicians. The physicians who use our facilities are  
not employed by the heart hospitals or other facilities at which they provide   
services. Each member of the medical staffs at our heart hospitals may also     
serve on the medical staffs of, and practice at, hospitals not owned by us.     

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

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

     - failed to maintain the quality of care provided or to otherwise adhere to
professional standards at our heart hospitals or other facilities,

- suffered any damage to their reputation,                            

- exited the market entirely, or                                      

- experienced major changes in its composition or leadership.         

  Based upon the general knowledge our management has of the operations of
our heart hospitals, we estimate that at most of our heart hospitals the        
majority of the patient admissions and procedures performed are attributable to 
20% or less of the total number of physicians on the hospital's medical staff.  
The medical staff at each hospital ranges from 150 to 300 physicians depending  
upon the size of the hospital and the number of practicing physicians in the    
market. If we fail to maintain our relationships with the physicians in this    
group at a particular heart hospital, many of whom are investors in our heart   
hospitals, the revenues of that hospital would be reduced. None of the          
physicians practicing at our heart hospitals has a legal commitment, or any     
other obligation or arrangement, that requires the physician to refer patients  
to any of our hospitals or other facilities.                                    

OUR HOSPITALS FACE COMPETITION FOR PATIENTS FROM OTHER HOSPITALS.               

     The hospital industry is highly competitive. Our hospitals face competition
for patients from other hospitals in our markets. In some of our markets, such  
as Sioux Falls, South Dakota, we may have only one competitor. In other markets,
such as Phoenix, Arizona, our heart hospitals compete for patients with the     
heart programs of numerous other hospitals in the same market. In most of our   
markets we compete for market share of cardiovascular procedures with three to  
six hospitals. Some of these hospitals are part of large for profit or          
not-for-profit hospital systems with greater financial resources than we have   
available to us, and all of them have                                           

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been operating in the markets they serve for many years. When we open a new     
heart hospital, we generally will not be successful unless we capture           
significant market share for cardiovascular procedures from existing hospitals  
already operating in the market. We believe that six of our eight heart         
hospitals rank first or second in market share of several key cardiovascular    
diagnostic and therapeutic procedures performed in their markets. We believe our
other two heart hospitals rank third in market share of those procedures        
performed in the markets they serve.                                            

A NATIONWIDE SHORTAGE OF QUALIFIED NURSES COULD AFFECT OUR ABILITY TO GROW AND  
DELIVER QUALITY, COST-EFFECTIVE CARDIOVASCULAR CARE SERVICES.                   

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

     We employ between 75 and 125 nurses at each of our heart hospitals with the
number employed at a particular hospital depending upon the size of the         
hospital, the stage of the hospital's development and the hospital's patient    
census. When we need to hire a replacement member of our nursing staff, it can  
take as long as six weeks to recruit for the position. We estimate the cost of  
recruiting and training a replacement nurse to be between $10,000 and $20,000.  

    In response to the shortage of qualified nurses, we have increased and are
likely to have to continue to increase our wages and benefits to recruit and    
retain nurses or to engage expensive contract nurses until we hire permanent    
staff nurses. For example, during our most recently-ended fiscal year, we       
experienced increases in our hourly wages paid to nursing staff at our heart    
hospitals that ranged from six to eight percent. We may not be able to increase 
the rates we charge to offset these increased costs. Also, the shortage of      
qualified nurses has in the past and may in the future delay our ability to     
achieve our operational goals at a new heart hospital on schedule by limiting   
the number of patient beds available during the start-up phase of the hospital. 

WE MAY BE REQUIRED TO ACQUIRE AND IMPLEMENT COSTLY NEW INFORMATION SYSTEMS TO   
COMPLY WITH NEW FEDERAL AND STATE LEGISLATIVE EFFORTS AND REGULATORY INITIATIVES
RELATING TO PATIENT PRIVACY.                                                    

     We believe our hospitals and other healthcare facilities are in substantial
compliance with existing state and federal laws and regulations relating to     
patient privacy, but there are currently numerous legislative and regulatory    
initiatives at the state and federal levels addressing patient privacy concerns.
In particular, the Health Insurance Portability and Accountability Act of 1996  
contains provisions that will require us to upgrade our computer systems and to 
adopt new business procedures designed to protect the privacy of each of our    
patient's individual health information. On April 14, 2001, the final health    
privacy regulations issued by the Department of Health and Human services under 
the Health Insurance Portability and Accountability Act became effective. These 
privacy regulations generally require compliance within two years. They are     
expected to have a significant financial impact on the healthcare industry      
because they impose extensive new requirements and restrictions on the use and  
disclosure of identifiable patient information. Much of the required upgrading  
of our computer systems will be done as part of the normal annual maintenance   
and upgrade of our software and be included in the maintenance fees we pay our  
software vendor. We estimate the total incremental cost over the                

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next two to three years of upgrading our computer systems and implementing new  
business procedures to protect the privacy of health information to be between  
$1.5 million and $2.0 million. Unforeseen difficulties in complying with these  
and other new privacy regulations could require us to spend substantial         
additional sums, which could have an adverse effect on our financial results    
during the periods those additional expenses are incurred. Additionally, if we  
fail to comply with the new regulations under the Health Insurance Portability  
and Accountability Act, we could suffer civil penalties up to $925,000 per      
calendar year for each violation and criminal penalties with fines up to        
$250,000.                                                                       

IF WE FAIL TO COMPLY WITH THE EXTENSIVE LAWS AND GOVERNMENT REGULATIONS         
APPLICABLE TO US, WE COULD SUFFER PENALTIES OR BE REQUIRED TO MAKE SIGNIFICANT  
CHANGES TO OUR OPERATIONS.                                                      

   We are required to comply with extensive and complex laws and regulations
at the federal, state and local government levels. We believe we are in         
substantial compliance with current laws and regulations that relate to, among  
other things:                                                                   

- licensure, certification and accreditation,                         

- billing for services,                                               

- relationships with physicians and other referral sources, including 
physician self-referral and fraud and abuse,                      

- adequacy and quality of medical care,                               

- quality of medical equipment and services,                          

- qualifications of medical and support personnel,                    

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

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

- building codes,                                                     

- environmental protection,                                           

- clinical research,                                                  

- operating policies and procedures, and                              

- addition of facilities and services.                                

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

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

- criminal penalties,                                                 

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

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

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

IF THE ANTI-KICKBACK, PHYSICIAN SELF-REFERRAL OR OTHER FRAUD AND ABUSE LAWS ARE 
MODIFIED, INTERPRETED DIFFERENTLY OR IF OTHER REGULATORY RESTRICTIONS ARE       
ISSUED, WE COULD INCUR SIGNIFICANT SANCTIONS AND LOSS OF REIMBURSEMENT.         

The federal anti-kickback statute prohibits the offer, payment,       
solicitation or receipt of any form of remuneration in return for referring     
items or services payable by Medicare, Medicaid or any other federal healthcare 
program. The anti-kickback statute also prohibits any form of remuneration in   
return for purchasing, leasing, or ordering or arranging for or recommending the
purchasing, leasing or ordering of items or services payable by these programs. 
The anti-kickback statute is very broad in scope and many of its provisions have
not been uniformly or definitively interpreted by existing case law, regulations
or advisory opinions. Violations of the anti-kickback statute may result in     
substantial civil or criminal penalties, including criminal fines of up to      
$25,000 or imprisonment and civil penalties of up to $50,000 for each violation,
plus three times the amount claimed and exclusion from participation in the     
Medicare, Medicaid, and other federal healthcare reimbursement programs. Any    
exclusion of our heart hospitals or diagnostic and therapeutic facilities from  
these programs would result in significant reductions in revenue and would have 
a material adverse effect on our business.                                      

    The federal physician self-referral law, commonly referred to as the Stark
Law, prohibits a physician from making a referral for a designated health       
service to an entity if the physician or a member of the physician's immediate  
family has a financial relationship with the entity. Designated health services 
include inpatient and outpatient hospital services, certain types of radiology  
services, radiation therapy services and supplies and clinical laboratory       
services. There are various ownership and compensation arrangement exceptions to
the self-referral prohibition. The exception that permits physicians to invest  
in our heart hospitals allows a physician to make a referral to a hospital if   
the physician is authorized to perform services at the hospital and owns an     
interest in the entire hospital, as opposed to an ownership interest in a       
department or subdivision of the hospital. Another exception that will permit   
physicians who will own shares of our common stock to continue to make referrals
to our heart hospitals is the exception for ownership of publicly traded        
securities in a company such as ours that has stockholders' equity exceeding    
$75.0 million at the end of its most recent fiscal year or on average during the
three previous fiscal years. This exception applies if the physician acquired   
the security on terms generally available to the public and the security is     
traded on one of the major exchanges. A proposed amendment to the Stark Law     
would add as a requirement to the exception for a physician's ownership in an   
entire hospital that the physician purchase the ownership interest on terms     
generally available to the public. If enacted as proposed, this provision would 
apply only to ownership and other investment interests purchased by physicians  
on or after the effective date of this proposed amendment. This as well as other
possible amendments to the Stark Law could require us, however, to change the   
manner in which we establish relationships with physicians to develop a heart   
hospital. We cannot predict whether this or any other amendment to the Stark Law
will be enacted or the effect they might have on us. Many states in which we    
operate also have adopted, or are considering adopting, similar physician self- 
referral laws. Some of these laws prohibit referrals of patients by physicians  
in certain cases and others require disclosure of the physician's interest in   
the healthcare facility if the physician refers a patient to the facility. Some 
of these state laws apply even if the payment for care does not come from the   
government.                                                                     

    Federal law also contains provisions imposing civil monetary penalties for
various fraudulent and/or abusive practices, including, among others, hospitals 
which knowingly make payments                                                   

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to a physician as an inducement to reduce or limit medically necessary care or  
services provided to Medicare or Medicaid beneficiaries. The Office of Inspector
General of the U.S. Department of Health and Human Services, known as the OIG,  
issued a Special Advisory Bulletin on physician incentive compensation, referred
to as gainsharing arrangements, that also warns that other joint ventures       
between hospitals and physicians may implicate this provision as well as the    
anti-kickback statute, and specifically refers to specialty hospitals. We       
believe that the ownership distributions paid to physicians by our heart        
hospitals do not constitute payments made to physicians under gainsharing       
arrangements. We cannot assure you, however, that the OIG or any other federal  
agency charged with enforcement of the anti-kickback statute will agree with    
this interpretation or that new laws or regulations or future changes in the    
interpretation of existing laws and regulations will not adversely affect our   
business.                                                                       

  The federal anti-kickback statute, the Stark Law and similar federal and
state statutes that may also involve private payors are, however, subject to    
different interpretations with respect to many important provisions. Violations 
of these laws may result in substantial civil or criminal penalties, including  
large civil monetary penalties and exclusion from participation in the Medicare,
Medicaid and other healthcare programs. Exclusion of our heart hospitals or     
diagnostic and therapeutic facilities from these programs likely would result in
significant loss of revenues and likely would have a material adverse effect on 
us. In addition, we could be forced to expend considerable resources responding 
to an investigation or enforcement action under these laws and regulations.     
Further judicial or agency interpretation of existing laws or further           
legislative restrictions on physician ownership, investment in, or other        
financial relationships with healthcare facilities could have a material adverse
effect on us.                                                                   

OTHER COMPANIES WITHIN THE HEALTHCARE INDUSTRY CONTINUE TO BE THE SUBJECT OF    
FEDERAL AND STATE INVESTIGATIONS, WHICH INCREASES THE RISK THAT WE MAY BECOME   
SUBJECT TO INVESTIGATIONS IN THE FUTURE.                                        

   Both federal and state government agencies as well as private payors have
heightened and coordinated civil and criminal enforcement efforts as part of    
numerous ongoing investigations of healthcare organizations including hospital  
companies. These investigations relate to a wide variety of topics, including:  

- cost reporting and billing practices,                               

- quality of care,                                                    

- financial relationships with referral sources, and                  

- medical necessity of services provided.                             

    In addition, the OIG and the U.S. Department of Justice have, from time to
time, undertaken national enforcement initiatives that focus on specific billing
practices or other suspected areas of abuse. Moreover, healthcare providers are 
subject to civil and criminal false claims laws, including the federal False    
Claims Act, which allows private parties to bring what are called whistleblower 
lawsuits against private companies doing business with or receiving             
reimbursement under government programs. Some states have adopted similar state 
whistleblower and false claims provisions. Publicity associated with the        
substantial amounts paid by other healthcare providers to settle these lawsuits 
may encourage current and former employees of ours and other healthcare         
providers to seek to bring more whistleblower lawsuits. Some of our activities  
could become the subject of governmental investigations or inquiries. For       
example, we have significant Medicare and Medicaid billings, and heart hospital 
and other healthcare facility venture arrangements involving physician          
investors. We are not aware of any governmental investigations involving any of 
our facilities, our executives or managers. Any future investigations of us, our
executives or managers could result in significant liabilities or penalties to  
us, as well as adverse publicity.                                               

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IF LAWS GOVERNING THE CORPORATE PRACTICE OF MEDICINE CHANGE, WE MAY BE REQUIRED 
TO RESTRUCTURE SOME OF OUR RELATIONSHIPS.                                       

     The laws of various states in which we operate or may operate in the future
do not permit business corporations to practice medicine, exercise control over 
physicians who practice medicine or engage in various business practices, such  
as fee-splitting with physicians. The interpretation and enforcement of these   
laws vary significantly from state to state. We are not required to obtain a    
license to practice medicine in any jurisdiction in which we own or operate a   
heart hospital or other facility because our facilities are not engaged in the  
practice of medicine. The physicians who use our facilities to provide care to  
their patients are individually licensed to practice medicine. In most          
instances, the physicians and physician group practices are not affiliated with 
us other than through the physicians' ownership interests in the ventures that  
own and operate our facilities and the service agreements we have with some     
physicians.                                                                     

   We also provide consulting and management services to some physicians and
physician group practices. Although we believe that our arrangements with these 
and other physicians and physician group practices comply with applicable laws, 
we cannot assure you that a government agency charged with enforcement of these 
laws, or a private party, might not assert a contrary position. If our          
arrangements with these physicians and physician group practices were deemed to 
violate state corporate practice of medicine, fee-splitting or similar laws, or 
if new laws were enacted rendering these arrangements illegal, we may be        
required to restructure our relationships with physicians and physician groups  
which may have a material adverse effect on our business.                       

IF GOVERNMENT LAWS OR REGULATIONS CHANGE OR THE ENFORCEMENT OR INTERPRETATION OF
THEM CHANGE, WE MAY BE OBLIGATED TO PURCHASE SOME OR ALL OF THE OWNERSHIP       
INTERESTS OF THE PHYSICIANS ASSOCIATED WITH US.                                 

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

    - make illegal the referral of Medicare or other patients to our hospitals
by physicians affiliated with us,                                 

- create the substantial likelihood that cash distributions from the  
ventures to our physician partners will be illegal, or            

   - make illegal the ownership by our physician partners of their interests
in the ventures.                                                  

   At this time, we are not aware of any amendments or proposed changes that
would trigger this obligation. After completion of the exchange that will be    
completed concurrent with this offering, physician ownership of our hospitals   
will range from 8.0% to 49.0%. Our estimate of the range of the current cost of 
purchasing the remaining physician interests in our hospitals is $51.9 million  
to $61.3 million. From time to time after completion of the offering we may     
voluntarily seek to increase our ownership interest in one or more of our       
hospitals. We may seek to use shares of our common stock to purchase physicians'
ownership interests instead of cash. If we use shares of our common stock to    
purchase a significant amount of the physicians' ownership interests, your      
interest would be diluted. If the use of our stock is not permitted or          
attractive to us or our physician partners, we may use cash or promissory notes 
to purchase the physicians' ownership interests. Our existing capital resources 
may not be sufficient for the acquisition or the use of cash may limit our      
ability to use our capital resources elsewhere, limiting our growth and         
impairing our operations. The creation of these obligations and the possible    
adverse effect on our affiliation with these physicians could have a material   
adverse effect on us.                                                           

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WE MAY HAVE A SPECIAL LEGAL RESPONSIBILITY TO OUR PARTNERS IN OUR HEART         
HOSPITALS THAT MAY PREVENT US FROM ACTING SOLELY IN OUR BEST INTERESTS.         

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

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

MATERIAL DECISIONS REGARDING THE OPERATIONS OF OUR HEART HOSPITALS REQUIRE      
CONSENT OF OUR PHYSICIAN AND COMMUNITY HOSPITAL PARTNERS, AND WE MAY BE UNABLE  
AS A RESULT TO TAKE ACTIONS THAT WE BELIEVE ARE IN OUR BEST INTEREST.           

The physician and community hospital partners in our heart hospital   
ventures participate in material strategic and operating decisions we make for  
our heart hospitals. They do so either through their representatives on the     
governing board of the venture or a requirement in the venture's governing      
documents that we obtain the consent of their representatives before taking     
specified material actions. These actions include such matters as employing key 
members of the heart hospital's management team, adopting the heart hospital's  
annual operating budget and making capital expenditures in excess of specified  
amounts. We must also generally obtain the consent of our community hospital    
partners and our physician partners or their representatives before making any  
material amendments to the operating or partnership agreement for the venture or
admitting additional members or partners. Although they have not done so to     
date, these rights to approve material decisions could in the future limit our  
ability to take actions that we believe are in our best interest and the best   
interest of the heart hospital venture. We may not be able to resolve favorably 
any dispute regarding material decisions at a heart hospital with our physician 
or community hospital partners.                                                 

WE DEPEND ON OUR KEY MANAGEMENT PERSONNEL.                                      

     We are highly dependent on our senior management team, which has many years
of experience with addressing the broad range of concerns and issues that our   
partners typically have when they consider entering into a joint venture        
arrangement to develop, own and operate a heart hospital. Our senior management 
team has also established a strong track record of working cooperatively with   
our partners on a variety of strategic matters related to the successful        
operation of a heart hospital.                                                  

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 We have employment agreements with the members of our senior management
team that include non-competition and non-solicitation provisions, but we do not
maintain key man life insurance policies on any of them. The loss of key        
management personnel or our inability to attract, retain and motivate sufficient
numbers of qualified management personnel could have a material adverse effect  
on us. If David Crane, our chief executive officer, Michael G. Servais, our     
chief operating officer, or any of our other executive officers resign their    
positions or otherwise are unable to serve, our management expertise and ability
to develop new heart hospitals and deliver healthcare services efficiently could
be weakened.                                                                    

UNINSURED RISKS FROM LEGAL ACTIONS RELATED TO PROFESSIONAL LIABILITY COULD      
ADVERSELY AFFECT OUR CASH FLOW AND OPERATING RESULTS.                           

In recent years, physicians, hospitals, diagnostic centers and other  
healthcare providers have become subject, in the normal course of business, to  
an increasing number of legal actions alleging negligence in performing         
services, negligence in allowing unqualified physicians to perform services or  
other legal theories as a basis for liability. Many of these actions involve    
large monetary claims and significant defense costs. We do not employ any of the
physicians who conduct cardiovascular surgical procedures at our heart hospitals
or perform diagnostic or therapeutic procedures in our other healthcare         
facilities. The governing documents for the medical staffs of each of our heart 
hospitals require physicians who conduct surgical procedures at them to meet all
licensing and specialty credentialing requirements and to maintain their own    
professional liability insurance. Additionally, to protect us from the cost of  
these claims, we maintain professional malpractice liability insurance and      
general liability insurance coverage in amounts and with deductibles that we    
believe to be appropriate for our operations. Currently we maintain professional
liability insurance that provides primary coverage on a claims made basis of    
$1.0 million per incident and $3.0 million in annual aggregate amount. In       
addition, we currently maintain multiple layers of umbrella liability insurance 
the aggregate amount of which is $40.0 million. Some of the claims against us,  
however, could exceed the scope of our coverage in effect or coverage of        
particular claims or damages could be denied. In addition, we may not be able to
obtain adequate insurance at a reasonable cost in the future. Professional      
liability lawsuits could also have an adverse effect on our client base by      
damaging our reputation.                                                        

RISKS RELATED TO THIS OFFERING

BECAUSE THE INVESTMENT PARTNERSHIPS SPONSORED BY KOHLBERG KRAVIS ROBERTS & CO., 
L.P. AND WELSH, CARSON, ANDERSON & STOWE, INDIVIDUALS AFFILIATED WITH THEIR     
SPONSORS AND OUR MANAGEMENT CONTROL US, THEY WILL TOGETHER BE ABLE TO DETERMINE 
THE OUTCOME OF ALL MATTERS SUBMITTED TO OUR STOCKHOLDERS FOR APPROVAL,          
REGARDLESS OF THE PREFERENCES OF OUR OTHER STOCKHOLDERS.                        

Following the offering and after giving effect to the exchange, the   
investment partnerships sponsored by Kohlberg Kravis Roberts & Co., L.P. and    
Welsh, Carson, Anderson & Stowe that acquired our predecessor company from its  
public stockholders in 1998, individuals affiliated with their sponsors and our 
management, including two officers who participated in the acquisition of our   
predecessor company, will collectively own 66.5% of our outstanding common      
stock. Accordingly they will together be able to:                               

- elect our entire board of directors,                                

- control our management and policies, and                            

    - determine, without the consent of our other stockholders, the outcome of
     any corporate transaction or other matter submitted to our stockholders
    for approval, including mergers, consolidations and the sale of all or
substantially all of our assets.                                  

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They will also be able to prevent or cause a change in control and will be able 
to amend our certificate of incorporation and bylaws at any time. Their         
interests may conflict with the interests of other holders of common stock and  
they may take action affecting us with which you disagree.                      

    We have a stockholders agreement that will be effective upon completion of
this offering with the investment partnerships sponsored by Kohlberg Kravis     
Roberts & Co., L.P. and Welsh, Carson, Anderson & Stowe and individuals         
affiliated with their sponsors, which, following this offering, will own 31.0%  
and 30.1% respectively of our outstanding common stock. This agreement will     
provide that, immediately after this offering, the investment partnership       
sponsored by Kohlberg Kravis Roberts & Co., L.P., will be entitled to designate 
four directors and the investment partnerships of Welsh, Carson, Anderson &     
Stowe VII, L.P. will be entitled to designate three directors.                  

   Under the stockholders' agreement, the following actions also require the
separate approval of a majority of the shares held by the affiliates of Kohlberg
Kravis Roberts & Co., L.P. and a majority of the shares held by affiliates of   
Welsh, Carson, Anderson & Stowe:                                                

 - appointment, dismissal or replacement of our chief executive officer,

- mergers or consolidations with or into another corporation,         

    - sales, transfers or disposals of all or substantially all of our assets,
and                                                               

   - acquiring, purchasing or investing in any material assets, or disposing
    of any material assets, other than in the ordinary course of business.

OUR STOCK PRICE MAY FLUCTUATE AFTER THIS OFFERING. AS A RESULT, INVESTORS IN OUR
COMMON STOCK MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE INITIAL     
PUBLIC OFFERING PRICE.                                                          

   Prior to this offering, there has been no public market for shares of our
common stock. We have negotiated the initial public offering price with the     
underwriters. The initial public offering price may not be indicative of the    
price at which our common stock will trade following completion of this         
offering. In addition, an active market may not develop following completion of 
this offering or, if developed, may not be maintained.                          

Healthcare service providers have been especially subject to sharp    
fluctuations in the market price of their publicly traded securities. The market
price of our common stock may also be influenced by other factors, some of which
are beyond our control, including:                                              

- changes in prevailing reimbursement rates,                          

- changes in governmental regulations or their interpretations,       

- variations in quarterly operating results,                          

- changes in financial estimates by securities analysts,              

- announcements by us or our competitors of significant contracts,    
acquisitions, strategic relationships, joint ventures or capital  
commitments,                                                      

- future sales of our common stock,                                   

- investor perceptions of us and the healthcare industry, and         

- general economic conditions.                                        

    As a result, investors in our common stock may not be able to resell their
shares at or above the initial public offering price. In addition, the stock    
market in general, and the Nasdaq National Market in particular, have           
experienced during the last two years extreme price and volume fluctuations that
have often been unrelated or disproportionate to the operating                  

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performance of individual companies. These broad market and industry factors may
materially reduce the market price of our common stock, regardless of our       
operating performance.                                                          

IF EXISTING STOCKHOLDERS SELL THEIR COMMON STOCK, YOU COULD LOSE A SIGNIFICANT  
PART OF YOUR INVESTMENT.                                                        

 Sales of a substantial number of shares of common stock into the public
market after the offering, or the perception that these sales could occur, could
have a material adverse effect on our stock price. Based on the number of shares
outstanding as of June 30, 2001, after this offering we will have outstanding   
17,975,526 shares of common stock of which 11,975,526 will have been issued in  
the exchange. All of the shares issued in the exchange are subject to lockup    
agreements which provide that, subject to certain exceptions, the shares may not
be sold or otherwise transferred until 180 days after the effective date of the 
registration statement of which this prospectus is a part without the prior     
written consent of Deutsche Banc Alex. Brown Inc. At the expiration of the      
lockup period, 484,379 of those shares may be sold without restriction. The     
balance of those shares may also be sold, but subject to restrictions, including
limitations on the number of shares that may be sold within any three-month     
period, that are described in "Shares Eligible for Resale." Most of the balance 
of these shares are held by affiliates of Kohlberg, Kravis Roberts & Co., L.P.  
and Welsh, Carson, Anderson & Stowe which have registration rights to cause us  
to file, at our expense, registration statements under the Securities Act       
covering resales of their shares. These shares, along with shares held by others
who can participate in the registrations, will represent 64.9% of our           
outstanding common stock after this offering.                                   

INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.  

   The price you pay for shares of our common stock sold in this offering is
substantially higher than the per share value of our net assets, after giving   
effect to the exchange and this offering. At the initial public offering price  
of $25.00 per share, investors in this offering would have contributed 44.9% of 
our total equity as of March 31, 2001, but would have owned only 33.4% of our   
outstanding shares. This dilution is due in large part to the fact that prior   
investors paid an average price of $18.31 per share when they purchased their   
shares of common stock, which is substantially less than the initial public     
offering price of $25.00 per share.                                             

PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD DISCOURAGE A TAKEOVER
YOU MAY CONSIDER FAVORABLE OR PREVENT THE REMOVAL OF OUR CURRENT BOARD OF       
DIRECTORS AND MANAGEMENT.                                                       

Some provisions of our certificate of incorporation and bylaws may    
discourage, delay or prevent a merger or acquisition that you may consider      
favorable or prevent the removal of our current board of directors and          
management. These provisions:                                                   

- authorize the issuance of "blank check" preferred stock,            

  - provide for a classified board of directors with staggered, three-year
terms,                                                            

- prohibit cumulative voting in the election of directors,            

- prohibit our stockholders from acting by written consent without the
approval of our board of directors,                               

- limit the persons who may call special meetings of stockholders, and

     - establish advance notice requirements for nominations for election to the
board of directors or for proposing matters to be approved by     
stockholders at stockholder meetings.                             

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  In addition, our certificate of incorporation prohibits the amendment of
many of these provisions in our certificate of incorporation by our stockholders
unless the amendment is approved by the holders of at least 80% of our shares of
common stock.                                                                   

   Delaware law may also discourage, delay or prevent someone from acquiring
or merging with us.                                                             

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 

Some of the statements under "Prospectus Summary," "Risk Factors,"    
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations," "Business," and elsewhere in this prospectus 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, including the risks described in "Risk Factors" and those that   
are not yet identified or that we currently believe are immaterial, that could  
cause actual results to differ materially from those projected in these         
statements. The forward-looking statements contained in this prospectus include,
among other issues, statements about the following:                             

- demographic changes,                                                

- changes in medical or other technology,                             

- changes in Medicare and Medicaid payment levels,                    

- our ability, when appropriate, to enter into managed care provider  
arrangements and the terms of those arrangements,                 

     - our ability to successfully develop additional heart hospitals, open them
according to plan and gain significant market share in the market,

   - the availability and terms of capital to fund our development strategy,

- our relationships with physicians who use our hospitals,            

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

- competition from other hospitals,                                   

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

- our information systems,                                            

- changes in generally accepted accounting principles, and            

- liability and other claims asserted against us.                     

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 prospectus might not occur. Our forward-looking statements speak only as
of the date of this prospectus 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.                                    

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USE OF PROCEEDS 

  We expect to receive approximately $135.7 million ($156.6 million if the
underwriters' over-allotment is exercised in full) in net proceeds from the sale
of our common stock in this offering, after deducting the underwriting discounts
and commissions and estimated offering expenses, including the estimated        
expenses of officers and directors insurance, payable by us.                    

We intend to use the net proceeds:                                    

   - to pay all amounts outstanding under our revolving credit facility, the
balance of which was $24.7 million at March 31, 2001,             

     - to purchase for $25.4 million ownership interests of some of our partners
in five of our heart hospitals in the exchange,                   

- to develop additional heart hospitals, and                          

    - for working capital and other corporate purposes, including the possible
acquisition of additional interests in our heart hospitals.       

The foregoing represents our current expectations regarding the use of
proceeds. The actual amount and timing of some of these expenditures will depend
on future events and cannot be predicted with certainty. We will have broad     
discretion when allocating a significant portion of the proceeds. Pending their 
application to the intended uses, we will invest the net proceeds in short-term 
investment-grade debt securities.                                               

We anticipate we will need to reborrow significant amounts under our  
corporate revolving credit facility in the future. The facility provides for    
$100.0 million in availability, $10.0 million of which is designated for        
short-term borrowings. Affiliates of Deutsche Banc Alex. Brown Inc. and Banc of 
America Securities LLC, two of the underwriters of this offering, are lenders   
under our corporate revolving credit facility and collectively will receive     
37.5% of any outstanding amounts we pay under that credit facility. See         
"Underwriting."                                                                 

DIVIDEND POLICY 

   We have never declared or paid any cash dividends on our common stock and
do not anticipate paying cash dividends on our common stock for the foreseeable 
future. The terms of our credit agreements also restrict us from paying cash    
dividends and making other distributions to our stockholders. We anticipate that
we will retain all earnings, if any, to develop and expand our business. Payment
of dividends in the future will be at the discretion of our board of directors  
and will depend upon our financial condition and operating results.             

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CAPITALIZATION

    The following table presents our short-term debt and our capitalization as
of March 31, 2001:                                                              

- on an actual basis, and                                             

- on a pro forma basis as adjusted to reflect:                        

     - the exchange, including the consolidation of one heart hospital and the
issuance of 129,478 shares of common stock to our heart hospital
partners,                                                       

- the refinancing, and                                              

   - the sale of 6,000,000 shares of common stock in this offering and the
application of the net proceeds from that sale.                 

                                                        [Enlarge/Download Table]

                                                                AS OF MARCH 31, 2001   
                                                              -------------------------
                                                                           PRO FORMA   
                                                               ACTUAL    AS ADJUSTED(2)
                                                              --------   --------------
                                                                   (IN THOUSANDS)      
                                                                                       
Short-term debt(1)..........................................  $ 29,422      $ 25,577   
                                                              ========      ========   
Long-term debt obligations:                                                            
  Real Estate Investment Trust loans........................    65,845        54,548   
  Bank mortgage loans.......................................    69,597       101,476   
  Revolving credit facility.................................    18,000            --   
  Other notes payable.......................................    52,222        58,349   
  Capital lease obligations.................................     9,365        10,715   
  Other long-term obligations...............................        89         3,927   
                                                              --------      --------   
          Total long-term debt obligations..................   215,118       229,015   
                                                              --------      --------   
Stockholders' equity:                                                                  
  Preferred stock; $0.01 par value: 10,000,000 shares                                  
     authorized and no shares issued and outstanding, actual                           
     and pro forma as adjusted..............................        --            --   
  Common stock; $0.01 par value: 20,000,000 shares                                     
     authorized, actual; and 50,000,000 shares authorized,                             
     pro forma as adjusted; 11,838,548 shares issued and                               
     outstanding, actual; and 17,968,026 shares issued and                             
     outstanding, pro forma as adjusted(3)..................       119           180   
  Paid-in capital...........................................   216,701       355,576   
  Deficit...................................................   (52,071)      (53,333)  
                                                              --------      --------   
          Total stockholders' equity........................   164,749       302,423   
                                                              --------      --------   
                 Total capitalization.......................  $379,867      $531,438   
                                                              ========      ========   

------------                                                                    

(1) Includes current maturities of long-term debt and obligations under capital 
 lease and short-term borrowings under our working capital line of credit.

(2) Reflects the consolidation of one heart hospital that as of March 31, 2001  
was accounted for using the equity method of accounting but will, upon  
completion of the exchange, be consolidated.                            

(3) Excludes 2,332,165 shares of common stock issuable upon exercise of         
outstanding stock options under our equity incentive plans and 760,335  
   shares of common stock reserved and available for future issuance under our
equity incentive plans as of June 30, 2001.                             

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DILUTION

Our net tangible book value as of March 31, 2001 was $66.4 million, or
$5.61 per share. Net tangible book value per share of common stock represents   
the amount of our total tangible assets less total liabilities, divided by the  
number of shares of common stock outstanding as of March 31, 2001.              

Net tangible book value dilution per share represents the difference  
between the amount per share paid by new investors who purchase shares in this  
offering and the pro forma net tangible book value per share of common stock    
immediately after completion of this offering. After giving effect to the sale  
of 6,000,000 shares of common stock in this offering and the issuance of 129,478
shares of common stock in the exchange to our heart hospital partners at the    
initial public offering price of $25.00 per share, and after deducting estimated
underwriting discounts and commissions and offering expenses payable by us, our 
pro forma net tangible book value at March 31, 2001 would have been $171.2      
million, or $9.53 per share.                                                    

   This represents an immediate increase in net tangible book value of $3.92
per share to existing stockholders, and an immediate dilution in net tangible   
book value of $15.47 per share to new investors in the offering, as illustrated 
in the following table:                                                         

                                                                [Download Table]
                                                                             
Initial public offering price per share.....................          $ 25.00
                                                                      -------
  Net tangible book value per share at March 31, 2001.......  $5.61          
                                                              -----          
  Increase per share attributable to new investors..........  $3.92          
                                                              -----          
Pro forma net tangible book value per share after the                        
  offering..................................................          $  9.53
                                                                      -------
Net tangible book value dilution per share to new                            
  investors.................................................          $ 15.47
                                                                      =======

   The following table summarizes as of March 31, 2001, on a pro forma basis
to reflect the same adjustments described above, the number of shares of common 
stock purchased from us, the total consideration paid and the average price per 
share paid by:                                                                  

- the existing holders of common stock, and                           

    - the new investors in the offering and the exchange, assuming the sale of
       6,000,000 shares offered hereby and the issuance of 129,478 shares to our
heart hospital partners.                                          

The calculations are based upon total consideration given by new and  
existing stockholders, before any deduction of estimated underwriting discounts 
and commissions and offering expenses.                                          

                                                        [Enlarge/Download Table]

                                  SHARES OUTSTANDING     TOTAL CONSIDERATION     AVERAGE 
                                 ---------------------  ----------------------  PRICE PER
                                   NUMBER      PERCENT     AMOUNT      PERCENT    SHARE  
                                 -----------   -------  ------------   -------  ---------
                                                                                         
Existing stockholders...........  11,838,548     65.9%  $216,820,166     58.6%   $18.31  
New investors...................   6,129,478     34.1%  $153,236,950     41.4%   $25.00  
                                 -----------    -----   ------------   ------            
          Total.................  17,968,026    100.0%  $370,057,116    100.0%           
                                 ===========    =====   ============   ======            

     The foregoing discussion and tables assume no exercise of outstanding stock
options. As of June 30, 2001, there were options outstanding to purchase a total
of 2,332,165 shares of common stock at a weighted average exercise price of     
$18.17 per share and 760,335 shares of common stock reserved for future issuance
under our equity incentive plans. To the extent any of these stock options are  
exercised, there will be further dilution to new investors.                     

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THE GOING PRIVATE TRANSACTION 

BACKGROUND                                                                      

Our predecessor company was developed in late 1988 and 1989 and for a 
number of years was primarily engaged in operating mobile and stationary cardiac
catheterization laboratories. In 1994, our predecessor company completed an     
initial public offering and began developing its first heart hospital, which    
opened in 1996. In July 1998, our predecessor company was acquired by investment
partnerships sponsored by Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson,
Anderson & Stowe, individuals affiliated with Welsh, Carson, Anderson & Stowe   
and a management group that included Stephen R. Puckett, the predecessor        
company's chairman and chief executive officer, and David Crane, the predecessor
company's chief operating officer. At the time of the going private transaction,
an investment partnership sponsored by Welsh, Carson, Anderson & Stowe owned    
approximately 7.5% of our predecessor company's outstanding shares and had two  
representatives on its board of directors.                                      

REASONS FOR THE GOING PRIVATE TRANSACTION AND THIS OFFERING                     

    In its evaluation of the going private transaction, a special committee of
our predecessor company's board of directors considered a number of factors. The
committee believed that the market price of our predecessor company's common    
stock did not reflect the value inherent in its then emerging heart hospital    
development strategy. The committee also was concerned that the market price of 
the common stock was too susceptible to significant fluctuations based on the   
performance of a single heart hospital. This was due primarily to the fact that 
the predecessor company's operating base of only four heart hospitals was not   
yet generating cash flow and earnings sufficient to absorb the development costs
and pre-opening expenses associated with the three hospitals then under         
development. The committee also considered that the predecessor company might be
managed more effectively at that point in its development as a private company  
not subject to pressures from public stockholders and market professionals to   
maintain and increase earnings per share.                                       

    Since becoming a private company, we have opened five new heart hospitals,
three of which were already under development at the time of the going private  
transaction, and sold one heart hospital. We have also improved our process for 
developing new heart hospitals, begun developing two additional hospitals,      
standardized and, when appropriate, centralized our operations across financial 
and operational areas and continued to strengthen our regulatory compliance     
program at the facility and corporate levels. As a result of the increase in the
number of our heart hospitals and corresponding improvements in our development 
process, infrastructure and operational expertise, we believe that this is an   
appropriate time for us to access the capital markets to fund the execution of  
our heart hospital development strategy.                                        

COSTS AND BENEFITS OF THE TRANSACTION TO PRINCIPAL STOCKHOLDERS AND MANAGEMENT  

    The $19.00 per share cash consideration paid to the public stockholders of
our predecessor company in the going private transaction valued the total equity
of the predecessor company at $249.2 million. The purchase price for the equity 
of the predecessor company and related transaction fees and expenses of $19.6   
million, of which $6.6 million was included in the purchase price, were funded  
with $203.5 million in cash, $25.6 million of equity-in-kind contributions and  
$33.0 million in new debt incurred by our predecessor company. The investment   
partnerships sponsored by Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson,
Anderson & Stowe contributed substantially all of the cash consideration.       
Messrs. Puckett and Crane made equity-in-kind contributions valued at $12.5     
million and $2.2 million, respectively, and agreed to waive payments of $778,337
and $630,321, respectively, due to them under their employment agreements as a  
result of the change in control. In connection with the going                   

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private transaction, Messrs. Puckett and Crane received cash payments of $12.3  
million and $2.8 million, respectively, for shares and options not contributed  
to the acquiring company, the termination of their employment agreements and    
entering into covenants not to compete.                                         

  The following table illustrates the appreciation since the going private
transaction in the value of common stock purchased or contributed by the        
investment partnerships sponsored by Kohlberg Kravis Roberts & Co., L.P. and    
Welsh, Carson, Anderson & Stowe, Messrs. Puckett and Crane and the directors    
affiliated with Welsh, Carson, Anderson & Stowe, based upon the initial public  
offering price of $25.00 per share.                                             

                                                        [Enlarge/Download Table]

                                                         PURCHASE                    APPRECIATION 
                                                         PRICE /        VALUE AT         UPON     
                                            NUMBER OF  CONTRIBUTION  INITIAL PUBLIC  COMPLETION OF
                STOCKHOLDER                  SHARES       VALUE      OFFERING PRICE    OFFERING   
                -----------                 ---------  ------------  --------------  -------------
                                                                                                  
MedCath 1998 LLC........................... 5,568,522  $105,801,918   $139,213,050    $33,411,132 
Welsh, Carson, Anderson & Stowe VII, L.P... 5,071,867  $ 96,365,473   $126,796,675    $30,431,202 
Stephen R. Puckett.........................   594,022  $ 11,286,418   $ 14,850,550    $ 3,564,132 
David Crane................................   105,924  $  2,012,556   $  2,648,100    $   635,544 
WCAS Healthcare Partners, L.P..............    52,632  $  1,000,008   $  1,315,800    $   315,792 
Paul B. Queally............................     3,947  $     74,993   $     98,675    $    23,682 
D. Scott Mackesy...........................     1,316  $     25,004   $     32,900    $     7,896 

The following table illustrates the increases, since the going private
transaction, in the value of options that were assumed or granted in connection 
with or after the going private transaction to Messrs. Puckett and Crane and the
directors affiliated with Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson,
Anderson & Stowe, based upon the initial public offering price of $25.00 per    
share.                                                                          

                                                                [Download Table]

                                                INCREASE IN OPTION VALUE  
                                               ---------------------------
                                               EXERCISABLE   UNEXERCISABLE
                                               -----------   -------------
                                                                          
Stephen R. Puckett...........................  $1,753,170     $1,189,974  
David Crane..................................  $1,776,786     $2,100,000  
David H.S. Chung.............................  $   45,000             --  
Edward A. Gilhuly............................  $   45,000             --  
Paul B. Queally..............................  $   45,000             --  
D. Scott Mackesy.............................  $   33,000             --  

The stockholder and registration rights agreements entered into by the
investment partnerships sponsored by Kohlberg Kravis Roberts & Co., L.P. and    
Welsh, Carson, Anderson & Stowe and Messrs. Puckett and Crane in connection with
the going private transaction are described elsewhere in the prospectus under   
the heading "Certain Relationships and Related Party Transactions." The         
employment agreements entered into with Messrs. Crane and Puckett and the       
employee stock option plan adopted in connection with the going private         
transaction are described elsewhere in this prospectus under the headings       
"Management -- Employment Agreements" and "-- Employee Stock Option Plan."      

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SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER INFORMATION

     The historical consolidated balance sheet data as of September 30, 1996 and
1997, and the related consolidated statement of operations and cash flow data   
for each of the years then ended are derived from audited consolidated financial
statements that are not included in this prospectus. The historical consolidated
statement of operations and cash flow data for the ten month period ended July  
31, 1998 are derived from the consolidated financial statements, together with  
the notes thereto, of our predecessor company, which were audited by Ernst &    
Young LLP and are included elsewhere in this prospectus. The historical         
consolidated statement of operations and cash flow data for the two month period
ended September 30, 1998 and the related consolidated balance sheet data as of  
September 30, 1998 are derived from our consolidated financial statements, which
were audited by Ernst & Young LLP and are included elsewhere in this prospectus.
The historical consolidated statement of operations and cash flow data and the  
related consolidated balance sheet data as of and for the years ended September 
30, 1999 and 2000 are derived from our consolidated financial statements, which 
were audited by Deloitte & Touche LLP and are included elsewhere in this        
prospectus. The historical consolidated statement of operations and cash flow   
data, and the related consolidated balance sheet data, as of and for the six    
months ended March 31, 2000 and 2001 are derived from our unaudited consolidated
financial statements included elsewhere in this prospectus. In our opinion, the 
unaudited interim consolidated financial statements have been prepared on the   
same basis as the audited consolidated financial statements and reflect all     
adjustments, consisting of normal recurring adjustments, necessary for a fair   
presentation of our consolidated results of operations, cash flows and financial
condition for these periods. The unaudited interim consolidated results of      
operations are not necessarily indicative of the consolidated results of        
operations for any other interim period or for any fiscal year as a whole. The  
unaudited pro forma consolidated financial data for the year ended September 30,
2000 and as of and for the six months ended March 31, 2001 are derived from the 
unaudited pro forma consolidated financial data included elsewhere in this      
prospectus. You should read the summary selected consolidated financial and     
other information in conjunction with "Unaudited Pro Forma Consolidated         
Financial Data," "Management's Discussion and Analysis of Financial Condition   
and Results of Operations" and our consolidated financial statements and the    
accompanying notes as indicated. All of these materials are contained later in  
this prospectus.                                                                

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                                                        [Enlarge/Download Table]

                              PREDECESSOR COMPANY(A)                     MEDCATH HOLDINGS, INC.              
                          -------------------------------   -------------------------------------------------
                                                                                       YEAR ENDED            
                                                                                      SEPTEMBER 30,          
                              YEAR ENDED       TEN MONTHS    TWO MONTHS     ---------------------------------
                            SEPTEMBER 30,        ENDED          ENDED                              PRO FORMA 
                          ------------------    JULY 31,    SEPTEMBER 30,                         AS ADJUSTED
                           1996       1997        1998          1998          1999       2000       2000(b)  
                          -------   --------   ----------   -------------   --------   --------   -----------
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)                       
                                                                                                             
STATEMENT OF OPERATIONS                                                                                      
 DATA:                                                                                                       
Net revenue.............  $66,191   $110,910    $155,897       $34,574      $255,756   $332,342    $325,673  
Personnel expense.......   18,310     29,986      44,204        10,804        77,406     96,884      95,616  
Medical supplies                                                                                             
 expense................    9,742     17,561      26,957         8,295        60,875     82,780      80,526  
Bad debt expense........      735      2,083       4,842         1,227        13,021     16,668      14,646  
Other operating                                                                                              
 expenses(c)............   20,858     32,599      45,347        10,797        71,510     80,868      79,092  
Depreciation and                                                                                             
 amortization...........    6,649     12,855      19,549         4,215        31,035     38,236      38,532  
Gain on sale of                                                                                              
 hospital...............       --         --          --            --            --         --          --  
Loss (gain)on disposal                                                                                       
 of property and                                                                                             
 equipment..............       --         --         380            --         1,314        (69)        (11) 
Impairment of long-lived                                                                                     
 assets.................       --         --          --            --        10,935         --          --  
Merger expenses(d)......       --         --       6,590            --            --         --          --  
                          -------   --------    --------       -------      --------   --------    --------  
Income (loss) from                                                                                           
 operations.............    9,897     15,826       8,028          (764)      (10,340)    16,975      17,272  
Interest expense........   (2,107)    (5,236)     (9,221)       (2,385)      (21,667)   (29,047)    (23,990) 
Interest income.........    1,584      2,218       1,504           380         2,533      3,428       1,502  
Other income (expense),                                                                                      
 net....................       --         --          --            --           168        301         301  
Equity in net earnings                                                                                       
 (losses) of                                                                                                 
 unconsolidated                                                                                              
 affiliates.............      104         --          34          (842)       (5,640)    (2,011)       (572) 
                          -------   --------    --------       -------      --------   --------    --------  
Income (loss) before                                                                                         
 minority interests,                                                                                         
 income taxes and                                                                                            
 extraordinary loss.....    9,478     12,808         345        (3,611)      (34,946)   (10,354)     (5,487) 
Minority interests......     (979)    (1,539)     (2,832)         (377)       (6,322)    (3,305)     (1,982) 
                          -------   --------    --------       -------      --------   --------    --------  
Income (loss) before                                                                                         
 income taxes and                                                                                            
 extraordinary loss.....    8,499     11,269      (2,487)       (3,988)      (41,268)   (13,659)     (7,469) 
Income tax (expense)                                                                                         
 benefit................   (3,297)    (4,315)        (34)        1,365         1,338         24          24  
                          -------   --------    --------       -------      --------   --------    --------  
Income (loss) before                                                                                         
 extraordinary loss.....    5,202      6,954      (2,521)       (2,623)      (39,930)   (13,635)     (7,445) 
Extraordinary loss......       --       (230)         --            --            --         --          --  
                          -------   --------    --------       -------      --------   --------    --------  
Net income (loss).......  $ 5,202   $  6,724    $ (2,521)      $(2,623)     $(39,930)  $(13,635)   $ (7,445) 
                          =======   ========    ========       =======      ========   ========    ========  
Net income (loss) per                                                                                        
 share, basic:..........       --         --          --       $ (0.22)     $  (3.37)  $  (1.15)   $  (0.41) 
                                                               =======      ========   ========    ========  
 Weighted average number                                                                                     
   of shares, basic                                                                                          
   (e)..................       --         --          --        11,861        11,836     11,837      17,966  
                                                               =======      ========   ========    ========  
Net income (loss) per                                                                                        
 share, diluted:........       --         --          --       $ (0.22)     $  (3.37)  $  (1.15)   $  (0.41) 
                                                               =======      ========   ========    ========  
 Weighted average number                                                                                     
   of shares, diluted                                                                                        
   (e)..................       --         --          --        11,861        11,836     11,837      17,966  
                                                               =======      ========   ========    ========  


                               MEDCATH HOLDINGS, INC.                                                        
                          ---------------------------------                                                  
                                  SIX MONTHS ENDED                                                           
                                      MARCH 31,                                                              
                          ---------------------------------                                                  
                                                 PRO FORMA                                                   
                                                AS ADJUSTED                                                  
                            2000       2001       2001(b)                                                    
                          --------   --------   -----------                                                  
                          (IN THOUSANDS, EXCEPT PER SHARE DATA)                                              
                                                                                                             
STATEMENT OF OPERATIONS                                                                                      
 DATA:                                                                                                       
Net revenue.............  $163,413   $194,398    $197,925                                                    
Personnel expense.......    45,825     54,211      56,472                                                    
Medical supplies                                                                                             
 expense................    41,246     48,421      49,281                                                    
Bad debt expense........     5,269     10,527      10,393                                                    
Other operating                                                                                              
 expenses(c)............    39,395     45,452      46,130                                                    
Depreciation and                                                                                             
 amortization...........    18,880     19,263      19,732                                                    
Gain on sale of                                                                                              
 hospital...............        --    (13,461)         --                                                    
Loss (gain)on disposal                                                                                       
 of property and                                                                                             
 equipment..............       (13)      (134)       (134)                                                   
Impairment of long-lived                                                                                     
 assets.................        --        985         985                                                    
Merger expenses(d)......        --         --          --                                                    
                          --------   --------    --------                                                    
Income (loss) from                                                                                           
 operations.............    12,811     29,134      15,066                                                    
Interest expense........   (14,356)   (13,837)    (11,818)                                                   
Interest income.........     1,670      1,582         453                                                    
Other income (expense),                                                                                      
 net....................       260       (351)       (351)                                                   
Equity in net earnings                                                                                       
 (losses) of                                                                                                 
 unconsolidated                                                                                              
 affiliates.............    (1,184)    (1,843)     (1,274)                                                   
                          --------   --------    --------                                                    
Income (loss) before                                                                                         
 minority interests,                                                                                         
 income taxes and                                                                                            
 extraordinary loss.....      (799)    14,685       2,076                                                    
Minority interests......    (2,804)   (10,440)     (1,695)                                                   
                          --------   --------    --------                                                    
Income (loss) before                                                                                         
 income taxes and                                                                                            
 extraordinary loss.....    (3,603)     4,245         381                                                    
Income tax (expense)                                                                                         
 benefit................        --       (128)       (128)                                                   
                          --------   --------    --------                                                    
Income (loss) before                                                                                         
 extraordinary loss.....    (3,603)     4,117         253                                                    
Extraordinary loss......        --         --          --                                                    
                          --------   --------    --------                                                    
Net income (loss).......  $ (3,603)  $  4,117    $    253                                                    
                          ========   ========    ========                                                    
Net income (loss) per                                                                                        
 share, basic:..........  $  (0.30)  $   0.35    $   0.01                                                    
                          ========   ========    ========                                                    
 Weighted average number                                                                                     
   of shares, basic                                                                                          
   (e)..................    11,837     11,838      17,967                                                    
                          ========   ========    ========                                                    
Net income (loss) per                                                                                        
 share, diluted:........  $  (0.30)  $   0.34    $   0.01                                                    
                          ========   ========    ========                                                    
 Weighted average number                                                                                     
   of shares, diluted                                                                                        
   (e)..................    11,837     11,937      18,066                                                    
                          ========   ========    ========                                                    

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                                                        [Enlarge/Download Table]

                               PREDECESSOR COMPANY(a)                    MEDCATH HOLDINGS, INC.             
                          --------------------------------   -----------------------------------------------
                                                                                       YEAR ENDED           
                                                                                      SEPTEMBER 30,         
                              YEAR ENDED        TEN MONTHS    TWO MONTHS     -------------------------------
                             SEPTEMBER 30,        ENDED          ENDED                                      
                          -------------------    JULY 31,    SEPTEMBER 30,                         PRO FORMA
                            1996       1997        1998          1998          1999       2000      2000(b) 
                          --------   --------   ----------   -------------   --------   --------   ---------
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)                       
                                                                                                            
CASH FLOW AND OTHER                                                                                         
 DATA:                                                                                                      
Net cash provided by                                                                                        
 (used in) operating                                                                                        
 activities.............  $  7,115   $ 14,992    $  6,024       $ 1,069      $  9,988   $ 16,626        --  
Net cash provided by                                                                                        
 (used in) investing                                                                                        
 activities.............  $(98,693)  $(55,016)   $(89,772)      $(2,519)     $(57,571)  $(13,163)       --  
Net cash provided by                                                                                        
 (used in) financing                                                                                        
 activities.............  $ 89,782   $ 52,605    $ 83,121       $10,055      $ 50,430   $(24,274)       --  
EBITDA, as defined(f)...  $ 16,546   $ 28,451    $ 27,577       $ 3,451      $ 20,863   $ 55,512        --  
Adjusted EBITDA, as                                                                                         
 defined(f).............  $ 16,546   $ 28,681    $ 34,167       $ 5,198      $ 38,446   $ 56,061        --  
SELECTED OPERATING DATA:                                                                                    
Number of                                                                                                   
 hospitals(g)...........         1          2           3             3             4          6         6  
Licensed beds(g)(h).....        60        144         203           203           261        355       355  
Beds in service(g)(i)...        60        116         182           182           261        355       355  
Admissions(j)...........     1,304      4,056       5,688         1,200        14,054     20,511    20,675  
Adjusted                                                                                                    
 admissions(k)..........     1,499      4,717       6,652         1,407        16,512     25,213    24,950  
Patient days(l).........     6,770     20,791      29,746         5,823        62,765     85,239    78,958  
Average length of stay                                                                                      
 (days)(m)..............       5.2        5.1         5.2           4.9           4.5        4.2       3.8  
Inpatient                                                                                                   
 catheterization                                                                                            
 procedures.............        --      2,402       3,416           740         7,687     10,821    10,544  
Inpatient surgical                                                                                          
 procedures.............        --      1,570       2,126           492         4,657      6,354     5,833  


                              MEDCATH HOLDINGS, INC.                                                        
                          -------------------------------                                                   
                                 SIX MONTHS ENDED                                                           
                                     MARCH 31,                                                              
                          -------------------------------                                                   

                                                PRO FORMA                                                   
                            2000       2001      2001(b)                                                    
                          --------   --------   ---------                                                   
                          (IN THOUSANDS, EXCEPT PER SHARE DATA)                                             
                                                                                                            
CASH FLOW AND OTHER                                                                                         
 DATA:                                                                                                      
Net cash provided by                                                                                        
 (used in) operating                                                                                        
 activities.............  $(11,500)  $  7,926        --                                                     
Net cash provided by                                                                                        
 (used in) investing                                                                                        
 activities.............  $(11,215)  $ 41,544        --                                                     
Net cash provided by                                                                                        
 (used in) financing                                                                                        
 activities.............  $ 16,492   $(46,546)       --                                                     
EBITDA, as defined(f)...  $ 31,951   $ 48,046        --                                                     
Adjusted EBITDA, as                                                                                         
 defined(f).............  $ 32,184   $ 35,927        --                                                     
SELECTED OPERATING DATA:                                                                                    
Number of                                                                                                   
 hospitals(g)...........         6          5         6                                                     
Licensed beds(g)(h).....       355        295       355                                                     
Beds in service(g)(i)...       355        295       355                                                     
Admissions(j)...........     9,824     12,737    13,402                                                     
Adjusted                                                                                                    
 admissions(k)..........    12,056     15,421    15,989                                                     
Patient days(l).........    41,831     53,799    53,133                                                     
Average length of stay                                                                                      
 (days)(m)..............       4.3        4.2       4.0                                                     
Inpatient                                                                                                   
 catheterization                                                                                            
 procedures.............     5,132      6,387     6,359                                                     
Inpatient surgical                                                                                          
 procedures.............     3,060      3,959     3,653                                                     

                                                        [Enlarge/Download Table]

                                                                                  MEDCATH HOLDINGS, INC.                  
                                       PREDECESSOR COMPANY(a)   ----------------------------------------------------------
                                       -----------------------                                        MARCH 31, 2001      
                                            SEPTEMBER 30,               SEPTEMBER 30,            -------------------------
                                       -----------------------  ------------------------------                PRO FORMA   
                                          1996         1997       1998       1999       2000      ACTUAL    AS ADJUSTED(b)
                                       ----------   ----------  --------   --------   --------   --------   --------------
                                                                (IN THOUSANDS)                                            
                                                                                                                          
CONSOLIDATED BALANCE SHEET DATA:                                                                                          
Cash and cash equivalents and short-                                                                                      
 term investments.....................  $ 61,693     $ 42,951   $ 25,585   $ 28,432   $  7,621   $ 10,545      $ 96,197   
Working capital.......................  $ 64,816     $ 47,498   $ 34,434   $ 35,435   $ 14,306   $ 20,424      $116,778   
Total assets..........................  $181,681     $259,008   $489,011   $472,285   $486,078   $463,482      $612,061   
Long-term debt and capital leases,                                                                                        
 excluding current maturities.........  $ 45,896     $ 98,863   $217,635   $235,698   $248,101   $215,029      $225,088   
Other long-term obligations...........        --           --         --   $  3,295   $    151   $     89      $  3,927   
Stockholders' equity..................  $120,245     $127,137   $215,024   $174,260   $160,625   $164,749      $302,423   

------------                                                                    

(a) In July 1998, affiliates of Kohlberg Kravis Roberts & Co., L.P. and Welsh,  
Carson, Anderson & Stowe and members of our management team acquired our
 predecessor company from its public stockholders in a merger transaction.
(b) See "Unaudited Pro Forma Consolidated Financial Data" beginning on page P-1 
for information regarding the unaudited pro forma adjustments made to   
MedCath's historical data.                                              
(c) Under our predecessor company's accounting policies, through July 31, 1998, 
 organization costs were capitalized and amortized using the straight-line
   method over five years, and start-up costs incurred prior to the opening of
heart hospitals and other new facilities were capitalized and amortized 
 using the straight-line method over two to three years beginning with the
   commencement of operations. As of the completion of the merger described in
note (a) above, we adopted the provisions of Statement of Position 98-5 
  "Reporting on the Costs of Start-up Activities." Accordingly, organization
   and start-up costs have been expensed as incurred in the periods subsequent
to July 31, 1998.                                                       
(d) Includes the fees and expenses incurred in executing the merger transaction 
discussed in footnote (a) above.                                        
(e) See Note 10 to consolidated financial statements included elsewhere in this 
prospectus.                                                             
(f) EBITDA, as defined represents net income (loss) before interest, income     
taxes, depreciation, amortization, equity in income of unconsolidated   
  subsidiaries and minority interest. Adjusted EBITDA, as defined is defined
  as EBITDA, as defined adjusted to exclude impairment of long-lived assets,
   merger costs, extraordinary loss, gain on sale of hospital, and pre-opening
   expenses (costs incurred prior to the opening of a heart hospital). EBITDA,
    as defined and adjusted EBITDA, as defined should not be considered measures
of financial performance under accounting                               

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principles generally accepted in the United States. Items excluded from 
EBITDA, as defined and adjusted EBITDA, as defined are significant      
   components in understanding and assessing financial performance. EBITDA, as
   defined and adjusted EBITDA, as defined are key measures used by management
to evaluate our operations and provide useful information to investors. 
   EBITDA, as defined and adjusted EBITDA, as defined should not be considered
in isolation or as alternatives to net income, cash flows generated by  
   operations, investing or financing activities, or other financial statement
data presented in the consolidated financial statements as indicators of
   financial performance or liquidity. Because EBITDA, as defined and adjusted
EBITDA, as defined are not measurements determined in accordance with   
  accounting principles generally accepted in the United States and are thus
    susceptible to varying calculations, these measurements as presented may not
be comparable to similarly titled measurements of other companies.      
(g) Hospitals in operation as of end of period.                                 
(h) Licensed beds are the number of beds for which the appropriate state agency 
 licenses a facility regardless of whether the beds are actually available
for patient use.                                                        
(i) Beds in service are the number of beds that are readily available for       
patient use.                                                            
(j) Admissions represent the number of patients admitted for inpatient treatment
for all periods except the year ended September 30, 1996. The number    
included for that year represents discharges, as admissions data is not 
available.                                                              
(k) Adjusted admissions is a general measure of combined inpatient and          
    outpatient volume. We computed adjusted admissions by multiplying admissions
 by gross inpatient revenue and then dividing that number by gross patient
revenue.                                                                
(l) Patient days represent the total number of days of care provided to         
inpatients.                                                             
(m) Average length of stay (days) represents the average number of days         
inpatients stay in our hospitals.                                       

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

The following discussion and related financial data should be read in 
conjunction with the consolidated financial statements and related notes        
included elsewhere in this prospectus.                                          

OVERVIEW                                                                        

   We develop, own and operate hospitals focused on providing cardiology and
cardiovascular services. While each of our heart hospitals is licensed as a     
general acute care hospital, we design and operate our heart hospitals with a   
focus on the unique needs of patients suffering from cardiovascular disease.    
Since January 1994, we have developed nine heart hospitals in seven states,     
including Arizona, Arkansas, California, New Mexico, Ohio, South Dakota and     
Texas. As of May 31, 2001, we had eight heart hospitals in operation with a     
total of 460 licensed beds and had sold one hospital in McAllen, Texas. We have 
begun development on our ninth hospital, which will be located in Texas, and our
tenth hospital, which will be located in Louisiana. Our two hospitals under     
development are expected to have a total of 158 licensed beds. Our heart        
hospital division accounted for 81.6% of our net revenue for our fiscal year    
ended September 30, 2000. In addition to our heart hospitals, we provide        
cardiovascular care services in diagnostic and therapeutic facilities in seven  
states and through mobile cardiac catheterization laboratories. We also provide 
consulting and management services tailored to cardiologists and cardiovascular 
surgeons.                                                                       

HEART HOSPITAL OWNERSHIP                                                        

Each of our hospitals is organized as a limited liability company or  
limited partnership, with one of our wholly owned subsidiaries serving as the   
manager or general partner and typically holding approximately 51% of the       
ownership interest in the entity. Our physician partners typically own the      
remaining ownership interests as members or limited partners. In some instances,
local market conditions have made it advantageous for us to organize a heart    
hospital with a community hospital investing as a partner in addition to        
physicians. In those instances, we generally hold a minority interest in the    
hospital with the community hospital and physician partners owning the remaining
interests also as minority partners. We include in our consolidated financial   
statements heart hospitals over which we exercise substantive control, including
all hospitals in which we own more than a 50% interest and one hospital in which
we own less than a 50% interest but over which we have substantive control. We  
use the equity method of accounting for heart hospitals in which we hold less   
than a 50% interest and over which we do not exercise substantive control.      
Concurrent with our initial public offering, we will complete the exchange that 
will increase our ownership interest in five of our heart hospitals. As a result
of the exchange, we will begin consolidating the Tucson Heart Hospital for which
we have previously been required to use the equity method of accounting.        

GOING PRIVATE TRANSACTION                                                       

     Our predecessor company was developed in late 1988 and 1989 by our chairman
and our president and chief executive officer, and for a number of years was    
primarily engaged in operating mobile and other cardiac catheterization         
laboratories. In 1994, our predecessor company completed an initial public      
offering and began developing its first heart hospital, which opened in 1996. By
July 1998, our predecessor company had developed and opened three additional    
heart hospitals. In July 1998, several private investment partnerships sponsored
by Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson, Anderson & Stowe,     
individuals affiliated with their sponsors, and members of our management team  
acquired our predecessor company from its public stockholders for $19.00 per    
share in an transaction that valued the total equity of the predecessor company 
at $249.2 million. The purchase price for the equity of the predecessor company 
and related transaction fees and expenses of $19.6 million, of which            

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$6.6 million was included in the purchase price, were funded with $203.5 million
in cash, $25.6 million of equity-in-kind contributions and $33.0 million in new 
debt incurred by our predecessor company. We recorded goodwill in connection    
with our going private transaction of $116.1 million. Based on our assessment of
its useful life, we are currently amortizing this goodwill over 40 years.       

SALE OF MCALLEN HEART HOSPITAL                                                  

  During 2000, we were approached with two offers to buy our McAllen Heart
Hospital, in which we owned a 50.2% interest. On March 1, 2001, the hospital was
sold to an affiliate of Universal Health Services, Inc. for approximately $56.0 
million. Approximately $38.0 million of the sale proceeds were used to repay the
hospital's long-term debt, including intercompany debt. The net proceeds of the 
sale have been and will be distributed to the owners of the hospital based on   
their respective ownership percentages.                                         

THE EXCHANGE                                                                    

   Concurrent with our initial public offering, we will complete a series of
transactions that we undertook to prepare for this offering. To increase our    
ownership in some of our heart hospitals, we offered our partners in those      
hospitals the opportunity either to exchange a portion of their ownership       
interests in the heart hospital for shares of our common stock valued at the    
public offering price or to sell a portion of their ownership interests to us   
for cash. We have also entered into a separate agreement to purchase additional 
ownership interests in our Arkansas Heart Hospital for cash. When we complete   
the exchange, we will issue a total of 129,478 shares of common stock and pay a 
total of $25.4 million in cash to our partners. The shares of common stock      
issued in the exchange will be in addition to the shares sold in the public     
offering. The table below indicates our heart hospital ownership percentages in 
these five hospitals before and after we complete the exchange.                 

                                                        [Enlarge/Download Table]

                                                                           MEDCATH OWNERSHIP 
                                                                          -------------------
                                                                           BEFORE     AFTER  
NAME                                                        LOCATION      EXCHANGE   EXCHANGE
----                                                     ---------------  --------   --------
                                                                                             
Arizona Heart Hospital.................................. Phoenix, AZ        51.0%      70.6% 
Arkansas Heart Hospital................................. Little Rock, AR    51.0%      70.3% 
Dayton Heart Hospital................................... Dayton, OH         52.5%      66.5% 
Heart Hospital of Austin................................ Austin, TX         51.5%      70.9% 
Tucson Heart Hospital................................... Tucson, AZ         33.3%      58.6% 

NEW HOSPITAL DEVELOPMENT                                                        

As of June 30, 2001, we had two hospitals under development. The first
hospital, which will focus on cardiovascular care as well as orthopedics,       
neurology, obstetrics and gynecology, will be located in Harlingen, Texas. The  
second hospital is a heart hospital that will be located near the adjacent towns
of Slidell and Covington, Louisiana. We expect to begin construction on the     
hospital in Texas in June 2001 and on the hospital in Louisiana later in 2001.  
We plan to open both hospitals in late 2002. We have identified two additional  
locations in which we are actively considering the development of heart         
hospitals. The following table sets forth certain expected characteristics of   
our two hospitals under development.                                            

                                                        [Enlarge/Download Table]

                                                  MEDCATH   LICENSED  CATH  OPERATING
NAME                            LOCATION         OWNERSHIP    BEDS    LABS    ROOMS  
----                      ---------------------  ---------  --------  ----  ---------
                                                                                     
Harlingen Medical Center      Harlingen, TX        51.1%      112      2        7    
Louisiana Heart Hospital  Slidell/Covington, LA    51.0%       46      3        3    

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Once a new heart hospital venture is formed and the partners have     
contributed their capital, it typically takes approximately 18 to 24 months to  
develop the heart hospital. The development costs for our four most recently    
opened hospitals, including the cost of equipment and capitalized construction  
period interest, have ranged from $38.0 million to $48.0 million depending on   
the size of the hospital and its location. These costs were incurred throughout 
the construction period, with approximately 56% of the costs being incurred in  
the last six months before opening the hospital. In addition, we incur          
pre-opening expenses throughout the development process, with the majority of   
these expenses incurred during the six to eight month period immediately prior  
to opening the heart hospital. Pre-opening expenses for our four most recently  
opened hospitals have ranged between $3.3 million and $6.5 million per hospital.
Approximately 41.8% of these pre-opening expenses were for personnel and 7.0%   
for marketing and advertising. The balance was distributed among several        
categories including staff recruitment and relocation, office and equipment     
rentals, travel and meals for the staff and other operating expenses such as    
property taxes, legal expenses, insurance and utilities. We expect to begin     
development on between one and three new heart hospitals each year.             

HOSPITAL PERFORMANCE                                                            

Our hospitals typically experience significant growth in local market 
share, net revenue, EBITDA, as defined and operating income during the first    
several years of operations. This period varies from market to market due to a  
number of factors, including demographics, the number and type of competitors   
and number and type of payors. The following table sets forth the aggregate net 
revenue, Adjusted EBITDA, as defined and operating (loss) income in the last    
three fiscal years of the two heart hospitals that we opened in fiscal 1998, one
of which was not consolidated, and the two hospitals that we opened in fiscal   
1999. The dates on which we opened these hospitals are set forth in the table   
under "Business -- Our Heart Hospitals."                                        

                                                        [Enlarge/Download Table]

                                                         FISCAL YEAR ENDED SEPTEMBER 30, 
                                                         --------------------------------
                                                           1998        1999        2000  
                                                         --------   ----------   --------
                                                                  (IN THOUSANDS)         
                                                                                         
Net revenue:                                                                             
  1998 heart hospitals.................................. $ 27,398    $ 74,039    $102,132
  1999 heart hospitals(1)...............................       --    $ 26,028    $ 75,808
Adjusted EBITDA, as defined:                                                             
  1998 heart hospitals.................................. $   (915)   $ 14,076    $ 21,838
  1999 heart hospitals(1)...............................       --    $    758    $ 13,507
Adjusted operating (loss) income(2):                                                     
  1998 heart hospitals.................................. $ (4,995)   $  6,633    $ 13,644
  1999 heart hospitals(1)...............................       --    $ (3,010)   $  5,047

---------------                                                                 

(1) One of the heart hospitals that we opened in September 1999 was not         
  consolidated in fiscal 1999. Due to a change in the substantive control of
this hospital, we began consolidating it in fiscal 2000.                
(2) Adjusted operating (loss) income excluding pre-opening expenses incurred    
prior to the opening of a heart hospital. Fiscal 1998 also excludes the 
write-off of previously capitalized start-up costs upon adoption of     
Statement of Position No. 98-5 by these heart hospitals.                

REVENUE RECOGNITION                                                             

Amounts we receive for treatment of patients covered by governmental  
programs such as Medicare and Medicaid and other third-party payors such as     
commercial insurers and health maintenance organizations, are generally less    
than our established billing rates. As a result, net revenue for services       
rendered to patients is reported at the estimated net realizable amounts from   
patients, third-party payors and others as services are rendered. Final         
settlements under these programs are subject to adjustment based on             
administrative review and audit by third parties. We record adjustments to the  
estimated billings as contractual adjustments in the periods that such          
adjustments become known.                                                       

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  Management fee revenue in our diagnostic services division is recognized
under fixed-rate and percentage-of-income arrangements as services are rendered.
In some cases, this division also recognizes management fee revenue under cost  
reimbursement and equipment lease arrangements. Our cardiology consulting and   
management division recognizes management fee revenue under various             
percentage-of-income and cost reimbursement arrangements.                       

SOURCES OF REVENUE BY DIVISION                                                  

The largest percentage of net revenue is attributable to our hospital 
division, which reflects our continuing strategic focus and investment in new   
hospitals. Based on our continued investment in the development of heart        
hospitals, we believe our hospital division's percentage of net revenue will    
continue to increase.                                                           

   The following table sets forth the percentage contribution of each of our
divisions to net revenue in the periods indicated, pro forma to reflect the sale
of our McAllen Heart Hospital and the consolidation of the Tucson Heart Hospital
resulting from the exchange.                                                    

                                                        [Enlarge/Download Table]

                                                                  PRO FORMA              
                                                      ---------------------------------- 
                                                        YEAR ENDED      SIX MONTHS ENDED 
                                                      SEPTEMBER 30,        MARCH 31,     
                                                      --------------    ---------------- 
DIVISION                                              1999     2000     2000       2001  
--------                                              -----    -----    -----      ----- 
                                                                                         
Hospital.............................................  74.3%    81.2%    80.1%      83.4%
Diagnostic services..................................  17.0%    12.6%    13.9%      10.9%
Cardiology consulting and management services........   8.4%     5.9%     5.9%       5.5%
Corporate and other..................................   0.3%     0.3%     0.2%       0.2%
                                                      -----    -----    -----      ----- 
          Net revenue................................ 100.0%   100.0%   100.0%     100.0%
                                                      =====    =====    =====      ===== 

SOURCES OF REVENUE 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 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 elderly people, our proportion of revenue derived    
from the Medicare program is higher than in most general acute care hospitals.  
Our newly opened hospitals typically have a lower percentage of revenue derived 
from patients covered by commercial insurers and health maintenance             
organizations, as contracts with these payors are negotiated only after a new   
hospital has been in operation for a long enough period of time to develop a    
reputation for providing quality care in its market. The following table sets   
forth the percentage of consolidated hospital net revenue we earned by category 
of payor in our last two fiscal years and the six months ended March 31, 2001.  

                                                        [Enlarge/Download Table]

                                                           YEAR ENDED                     
                                                          SEPTEMBER 30,                   
                                                          -------------   SIX MONTHS ENDED
PAYOR                                                     1999    2000     MARCH 31, 2001 
-----                                                     -----   -----   ----------------
                                                                                          
Medicare and Medicaid....................................  65.6%   61.3%        66.7%     
Commercial and other.....................................  34.4%   38.7%        33.3%     
                                                          -----   -----        -----      
  Total hospital net revenue............................. 100.0%  100.0%       100.0%     
                                                          =====   =====        =====      

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  Payments we receive from the Medicare and Medicaid programs for services
rendered to patients also comprise a significant part of our total net revenue. 
The following table sets forth the percentage of consolidated net revenue we    
earned by category of payor in our last two fiscal years and the six months     
ended March 31, 2001.                                                           

                                                        [Enlarge/Download Table]

                                                           YEAR ENDED         SIX MONTHS  
                                                          SEPTEMBER 30,         ENDED     
                                                       -------------------  --------------
PAYOR                                                    1999       2000    MARCH 31, 2001
-----                                                  --------   --------  --------------
                                                                                          
Medicare and Medicaid.................................    49.8%      50.2%        55.6%   
Commercial and other..................................    50.2%      49.8%        44.4%   
                                                       --------   --------     --------   
          Total net revenue...........................   100.0%     100.0%       100.0%   
                                                       ========   ========     ========   

  We expect the net revenue that we receive from the Medicare program as a
percentage of total net revenue to increase because the percentage of our total 
net revenue generated by our heart hospitals will continue to increase as we    
open new heart hospitals. Other factors that will cause our percentage of       
hospital revenue received from Medicare to increase include our focus on        
cardiovascular disease, which disproportionately affects elderly people, the    
general aging of the population and the restoration of some payments under the  
Balanced Budget Refinement Act of 1999 and the Benefits Improvement and         
Protection Act of 2000.                                                         

    The payment rates under the Medicare program for inpatients are based on a
prospective payment system, which correlates to the physician's diagnosis of the
patient's illness. While these rates are indexed for inflation annually, the    
increases have historically been less than actual inflation. A reduced rate of  
increase in Medicare payments may have an adverse impact on our net revenue. We 
are also reimbursed by non-governmental payors using a variety of payment       
methodologies, such as fee-for-service charges and rates based on               
diagnosis-related groups, or DRGs. We maintain a strict policy against accepting
managed care agreements that are not DRG-based. We limit the amount of per diem 
contracts we accept from managed care organizations because we believe these    
contracts do not reimburse us sufficiently for the efficiencies that we achieve 
in our hospitals. We do not accept capitation contracts from any payors.        

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RESULTS OF OPERATIONS                                                           

The following table presents, for the periods indicated, information  
expressed as a percentage of net revenue. This information has been derived from
the consolidated statements of operations included elsewhere in this prospectus.

                                                        [Enlarge/Download Table]

                         PREDECESSOR        MEDCATH                                    YEAR ENDED         
                           COMPANY       HOLDINGS, INC.       COMBINED(a)             SEPTEMBER 30,       
                         TEN MONTHS        TWO MONTHS             YEAR         ---------------------------
                            ENDED            ENDED               ENDED                          PRO FORMA 
                          JULY 31,       SEPTEMBER 30,       SEPTEMBER 30,                     AS ADJUSTED
                            1998              1998                1998         1999    2000      2000(b)  
                         -----------   ------------------  ------------------  -----   -----   -----------
                                                                                                          
Net revenue............     100.0%           100.0%              100.0%        100.0%  100.0%     100.0%  
Personnel expense......      28.4%            31.2%               28.9%         30.3%   29.2%      29.4%  
Medical supplies                                                                                          
 expense...............      17.3%            24.0%               18.5%         23.8%   24.9%      24.7%  
Bad debt expense.......       3.1%             3.5%                3.2%          5.1%    5.0%       4.5%  
Other operating                                                                                           
 expenses..............      29.1%            31.2%               29.5%         28.0%   24.3%      24.3%  
Depreciation...........       7.6%             9.5%                7.9%          9.9%    9.1%       9.2%  
Amortization...........       5.0%             2.6%                4.5%          2.3%    2.5%       2.7%  
Loss (gain) on disposal                                                                                   
 of property and                                                                                          
 equipment.............       0.2%              --                 0.2%          0.5%     --         --   
Gain on sale of                                                                                           
 hospital..............        --               --                  --            --      --         --   
Impairment of long-                                                                                       
 lived assets..........        --               --                  --           4.3%     --         --   
Merger expenses........       4.2%              --                 3.5%           --      --         --   
Income (loss) from                                                                                        
 operations............       5.1%            (2.2)%               3.8%         (4.0)%   5.1%       5.3%  
Interest expense.......      (5.9)%           (6.9)%              (6.1)%        (8.5)%  (8.7)%     (7.4)% 
Interest income........       1.0%             1.1%                1.0%          1.0%    1.0%       0.5%  
Other income (expense),                                                                                   
 net...................        --               --                  --           0.1%    0.1%       0.1%  
Equity in net losses of                                                                                   
 unconsolidated                                                                                           
 affiliates............        --%            (2.4)%              (0.4)%        (2.2)%  (0.6)%     (0.2)% 
Income (loss) before                                                                                      
 minority interests and                                                                                   
 income taxes..........       0.2%           (10.4)%              (1.7)%       (13.7)%  (3.1)%     (1.7)% 
Minority interests.....      (1.8)%           (1.1)%              (1.7)%        (2.5)%  (1.0)%     (0.6)% 
Income (loss) before                                                                                      
 income taxes..........      (1.6)%          (11.5)%              (3.4)%       (16.1)%  (4.1)%     (2.3)% 
Income tax benefit                                                                                        
 (expense).............        --              3.9%                0.7%          0.5%     --         --   
Net income (loss)......      (1.6)%           (7.6)%              (2.7)%       (15.6)%  (4.1)%     (2.3)% 


                              SIX MONTHS ENDED                                                            
                                  MARCH 31,                                                               
                         ---------------------------                                                      
                                          PRO FORMA                                                       
                                         AS ADJUSTED                                                      
                         2000    2001      2001(b)                                                        
                         -----   -----   -----------                                                      
                                                                                                          
Net revenue............  100.0%  100.0%     100.0%                                                        
Personnel expense......   28.0%   27.9%      28.5%                                                        
Medical supplies                                                                                          
 expense...............   25.2%   24.9%      24.9%                                                        
Bad debt expense.......    3.2%    5.4%       5.3%                                                        
Other operating                                                                                           
 expenses..............   24.1%   23.4%      23.3%                                                        
Depreciation...........    9.1%    7.7%       7.7%                                                        
Amortization...........    2.4%    2.2%       2.2%                                                        
Loss (gain) on disposal                                                                                   
 of property and                                                                                          
 equipment.............     --    (0.1)%     (0.1)%                                                       
Gain on sale of                                                                                           
 hospital..............     --    (6.9)%       --                                                         
Impairment of long-                                                                                       
 lived assets..........     --     0.5%       0.5%                                                        
Merger expenses........     --      --         --                                                         
Income (loss) from                                                                                        
 operations............    7.8%   15.0%       7.6%                                                        
Interest expense.......   (8.8)%  (7.1)%     (6.0)%                                                       
Interest income........    1.0%    0.8%       0.2%                                                        
Other income (expense),                                                                                   
 net...................    0.2%   (0.2)%     (0.2)%                                                       
Equity in net losses of                                                                                   
 unconsolidated                                                                                           
 affiliates............   (0.7)%  (0.9)%     (0.6)%                                                       
Income (loss) before                                                                                      
 minority interests and                                                                                   
 income taxes..........   (0.5)%   7.6%       1.0%                                                        
Minority interests.....   (1.7)%  (5.4)%     (0.9)%                                                       
Income (loss) before                                                                                      
 income taxes..........   (2.2)%   2.2%       0.2%                                                        
Income tax benefit                                                                                        
 (expense).............     --    (0.1)%     (0.1)%                                                       
Net income (loss)......   (2.2)%   2.1%       0.1%                                                        

------------                                                                    

(a) The statement of operations of the Predecessor Company for the ten months   
   ended July 31, 1998 is combined with the statement of operations of MedCath
Holdings, Inc. for the two months ended September 30, 1998. The combined
presentation is not in conformity with accounting principles generally  
accepted in the United States but is included for comparative purposes. 
(b) See "Unaudited Pro Forma Consolidated Financial Data" beginning on page P-1 
 for information regarding the unaudited pro forma adjustments made to our
historical consolidated financial data.                                 

SIX MONTHS ENDED MARCH 31, 2001 COMPARED TO SIX MONTHS ENDED MARCH 31, 2000     

  Net revenue increased $31.0 million, or 19.0%, to $194.4 million for the
six months ended March 31, 2001, the first six months of our fiscal year 2001,  
from $163.4 million for the six months ended March 31, 2000, the first six      
months of our fiscal year 2000. Of the $31.0 million increase in net revenue,   
$29.4 million was generated by our hospital division. Of the $29.4 million      
increase in our hospital division, $18.1 million was generated by one heart     
hospital that opened near the end of fiscal 1999 and one that opened near the   
beginning of fiscal 2000. Generally, the number of procedures, and therefore net
revenue, is lower during the first few months following the opening of a new    
heart hospital than in later periods when the heart hospital has established    
itself in the market. These two new heart hospitals followed this trend and an  
increasing number of procedures were performed throughout their first year of   

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operation. The remaining $11.3 million increase in the hospital division's net  
revenue was primarily due to a $14.5 million increase resulting from an         
increased number of procedures performed in our heart hospitals that had been   
open for more than 12 months as of March 31, 2000, offset in part by a $3.5     
million decrease resulting from the sale of McAllen Heart Hospital on March 1,  
2001. The remaining $1.6 million increase in net revenue was primarily due to an
increase in management fees paid to us by physician practices under management  
in our cardiology consulting and management division. Net revenue in our        
diagnostic services division was approximately the same in both fiscal periods. 

  Personnel expense increased $8.4 million, or 18.3%, to $54.2 million for
the first six months of fiscal 2001 from $45.8 million for the first six months 
of fiscal 2000. Of the $8.4 million increase in personnel expense, $4.4 million 
was due to one heart hospital that opened near the end of fiscal 1999 and one   
that opened near the beginning of fiscal 2000. These new heart hospitals        
experienced a significant increase in the number of procedures performed between
the first six months of fiscal 2000 and fiscal 2001, and consequently, the      
staffing requirements in the hospitals during the first six months of fiscal    
2001 were considerably higher than in the first six months of fiscal 2000. The  
remaining $4.0 million increase was due to higher health costs, higher wage     
rates, increased hospital staffing to support the growth in number of procedures
performed, and increased use of agency nurses in our heart hospitals that had   
been open for more than 12 months as of March 31, 2000, offset in part by the   
decrease in personnel expense resulting from the sale of McAllen Heart Hospital 
on March 1, 2001. The increased use of agency nurses was primarily in response  
to the nationwide shortage of qualified nurses, and the cost of these agency    
nurses is generally higher than our employee nurses. Personnel expense in our   
diagnostic services and our cardiology consulting and management divisions were 
approximately the same in both fiscal years. As a percentage of net revenue,    
personnel expenses remained relatively flat at 27.9% for the first six months of
fiscal 2001 compared to 28.0% for the first six months of fiscal 2000. We expect
personnel expense to increase in future periods as we continue to develop new   
hospitals and continue to increase wage rates and benefits to recruit and retain
nurses and other hospital staff.                                                

     Medical supplies expense increased $7.2 million, or 17.5%, to $48.4 million
for the first six months of fiscal 2001 from $41.2 million for the first six    
months of fiscal 2000. Of the $7.2 million increase in medical supplies expense,
$2.4 million was due to one heart hospital that opened near the end of fiscal   
1999 and one that opened near the beginning of fiscal 2000. These new heart     
hospitals experienced a significant increase in the number of procedures        
performed between the first six months of fiscal 2000 and fiscal 2001, and      
consequently, the volume of medical supplies used during the first six months of
fiscal 2001 was considerably higher than during the first six months of fiscal  
2000. The remaining $4.8 million increase was primarily due to a higher number  
of procedures performed at heart hospitals that had been opened for more than 12
months as of March 31, 2000 and an increased level of unreimbursed research     
activities in one of our heart hospitals, offset in part by the decrease in     
medical supplies expense resulting from the sale of McAllen Heart Hospital on   
March 1, 2001. As a percentage of net revenue, medical supplies expense         
decreased to 24.9% for the first six months of fiscal 2001 from 25.2% for the   
first six months of fiscal 2000. This decrease was due to reduced pricing       
realized from volume purchasing opportunities partially offset by the cost of   
medical supplies used in connection with an increased level of unreimbursed     
research activities in one of our heart hospitals. We expect medical supplies   
expense to increase in future periods as we continue to develop new heart       
hospitals and increase the number of procedures performed at our existing heart 
hospitals.                                                                      

     Bad debt expense increased $5.2 million, or 98.1%, to $10.5 million for the
first six months of fiscal 2001 from $5.3 million for the first six months of   
fiscal 2000. Of the $5.2 million increase in bad debt expense, $1.7 million was 
due to one heart hospital that opened near the end of fiscal 1999 and one that  
opened near the beginning of fiscal 2000. The                                   

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remaining $3.5 million increase was due to a higher number of procedures        
performed at heart hospitals that had been open for more than 12 months as of   
March 31, 2000, an increase in the bad debt reserves for self-pay revenue and   
other reserves in our heart hospitals. As a percentage of net revenue, bad debt 
expense increased to 5.4% for the first six months of fiscal 2001 from 3.2% for 
the first six months of fiscal 2000.                                            

     Other operating expenses increased $6.1 million, or 15.5%, to $45.5 million
for the first six months of fiscal 2001 from $39.4 million for the first six    
months of fiscal 2000. Other operating expenses include maintenance, rent,      
property taxes, utilities, meals and entertainment, advertising, travel,        
professional fees, contract services and support services provided to operating 
divisions by our corporate office. Of the $6.1 million increase in other        
operating expenses, $3.1 million was due to one heart hospital that opened near 
the end of fiscal 1999 and one that opened near the beginning of fiscal 2000.   
The remaining $3.0 million increase was primarily in property taxes and utility 
costs in certain of our markets and an increase in contract services in our     
heart hospitals that had been open for more than 12 months as of March 31, 2000.
These increases in our hospital division were offset in part by the decrease    
resulting from the sale of McAllen Heart Hospital on March 1, 2001. Our         
cardiology consulting and management division also incurred an increase in other
operating expenses consistent with the net revenue growth in its operations. As 
a percentage of net revenue, other operating expenses decreased to 23.4% for the
first six months of fiscal 2001 from 24.1% for the first six months of fiscal   
2000. This trend is expected to continue in future periods as these expenses,   
many of which do not increase proportionately to net revenue, are compared with 
an increasing net revenue base. We expect our other operating expenses to       
increase in future periods as we continue to develop new heart hospitals.       

     Depreciation and amortization increased $383,000, or 2.0%, to $19.3 million
for the first six months of fiscal 2001 from $18.9 million for the first six    
months of fiscal 2000. This increase was due to depreciation on capital         
expenditures related to equipment and information systems made since March 31,  
2000 and an increase in the amortization of a specific practice management      
contract to reflect a reduction in its estimated economic life. These increases 
were partially offset by a decrease in depreciation on diagnostic equipment that
was fully depreciated after the first quarter of fiscal 2000 and a decrease in  
depreciation resulting from the sale of the McAllen Heart Hospital on March 1,  
2001.                                                                           

On March 1, 2001, McAllen Heart Hospital, in which we owned a 50.2%   
interest, was sold to an affiliate of Universal Health Services, Inc. for       
approximately $56.0 million. Approximately $38.0 million of the sale proceeds   
were used to repay the hospital's long-term debt, including intercompany amounts
paid to us, which we then used to repay amounts outstanding under our revolving 
credit facility. After the write-off of approximately $10.3 million of our      
goodwill and step-up basis in McAllen Heart Hospital, which arose from our going
private transaction in fiscal 1998 as previously discussed, we recognized a net 
gain of $13.5 million in our consolidated results of operations for the first   
six months of fiscal 2001. Approximately $8.0 million was recognized in earnings
allocated to minority interests as a result of the sale. This minority interest 
amount was determined before the write-off of our goodwill and step-up basis and
after the allocation of amounts to us for recovery of disproportionate losses of
McAllen Heart Hospital, which we had previously recognized in our consolidated  
results of operations.                                                          

In March 2001, we recognized an impairment of long-lived assets due to
unfavorable development with a physician group under a management contract in   
our cardiology consulting and management division that caused us to reevaluate  
the management contract. As a result, we recognized a non-cash impairment charge
of $985,000 in March 2001 to adjust the long-lived assets of those management   
contracts to the anticipated future discounted cash flows.                      

Interest expense decreased $519,000, or 3.6%, to $13.8 million for the
first six months of fiscal 2001 from $14.4 million for the first six months of  
fiscal 2000. This decrease in interest                                          

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expense was due to a reduction in our average total outstanding indebtedness    
during the first six months of fiscal 2001 compared to the first six months of  
fiscal 2000. The debt reduction was primarily due to the sale of McAllen Heart  
Hospital and the use of our portion of the proceeds from that sale, along with  
cash provided by our other operations, to pay down debt under our revolving     
credit facility. Interest income remained constant at approximately $1.6 million
for the first six months of fiscal 2001 compared to $1.7 million for the first  
six months of fiscal 2000.                                                      

  Equity in net losses of unconsolidated affiliates increased $659,000, or
54.9%, to $1.8 million for the first six months of fiscal 2001 from $1.2 million
for the six months of fiscal 2000. Equity in net losses of unconsolidated       
affiliates represents our share of the net losses of heart hospitals in which we
own less than a 50% equity interest and over which we do not exercise           
substantive control, or an equity heart hospital. The increase was primarily due
to pre-opening losses incurred at an equity heart hospital that opened near the 
end of the first six months of fiscal 2001 and an increase in operating expenses
at another of our equity heart hospitals. These increases were partially offset 
by an improvement in operating results at one of our equity heart hospitals,    
which was in the early stage of operations during the first six months of fiscal
2000.                                                                           

     Earnings allocated to minority interests increased $7.6 million, or 271.4%,
to $10.4 million for the first six months of fiscal 2001 from $2.8 million for  
the first six months of fiscal 2000. Earnings allocated to minority interests   
represent the allocation of profits and losses to minority owners in our        
consolidated heart hospitals. A heart hospital's profits and losses are         
generally allocated for accounting purposes to its owners based on their        
respective ownership percentages. If the cumulative losses of a heart hospital  
exceed its initial capitalization and committed capital obligations of our      
partners, then for accounting purposes we are required by generally accepted    
accounting principles to recognize a disproportionate share of the hospital's   
losses that otherwise would be allocated to all owners on a pro rata basis. In  
such cases, we will recognize a disproportionate share of the hospital's future 
profits to the extent we have previously recognized a disproportionate share of 
the hospital's losses. The $7.6 million increase in earnings allocated to       
minority interests for the first six months of fiscal 2001 was primarily due to 
the allocation of the gain on the sale of the McAllen Heart Hospital to the     
minority owners, as previously discussed, and an increase in operating results  
in one of our consolidated heart hospitals and a decrease in the earnings of two
of our other consolidated heart hospitals.                                      

Income tax expense increased slightly due to state taxes in one of our
markets. We are currently operating in a net operating loss position and        
consequently have little current income tax liability. During the three months  
ended March 31, 2001, the Company recognized tax expense from the utilization of
net operating losses to reduce taxable income principally generated from the    
sale of McAllen Heart Hospital. The tax expense was offset by the tax benefit   
resulting from the reversal of the valuation allowance previously placed on the 
net operating loss deferred tax asset utilized.                                 

YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999         

 Net revenue increased $76.5 million, or 29.9%, to $332.3 million in our
fiscal year ended September 30, 2000 from $255.8 million in our fiscal year     
ended September 30, 1999. Our hospital division generated a $77.4 million       
increase in net revenue, offset in part by a $19.8 million decrease in net      
revenue resulting from the deconsolidation of one of our heart hospitals. In    
July 1999, we sold a one-third interest in one of our heart hospitals to a      
community hospital. As a result of this sale, our financial statements reflect a
deconsolidation of this hospital as of July 31, 1999 and use of the equity      
method of accounting for our investment in this hospital subsequent to that     
date. Consequently, our net revenue included ten months of operations for that  
heart hospital in fiscal 1999 and none in fiscal 2000, thereby resulting in a   
$19.8 million                                                                   

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offset to the net revenue increases in the hospital division. Of the $77.4      
million increase in hospital division net revenue, $63.7 million was generated  
by one heart hospital that opened near the end of fiscal 1999 and one that      
opened near the beginning of fiscal 2000. The hospital that was opened near the 
end of fiscal 1999 was accounted for as an unconsolidated affiliate during      
fiscal 1999 based on our ownership of less than a 50% equity interest and not   
exercising substantive control under the terms of the heart hospital's operating
agreement. During the first quarter of fiscal 2000, we began exercising         
substantive control over this hospital and, accordingly, included it in our     
consolidated financial statements for fiscal 2000. The remaining $13.7 million  
increase in hospital division net revenue was due to a $33.5 million increase   
resulting from a higher number of procedures performed in our heart hospitals   
that had been open for more than nine months as of September 30, 1999 and $2.8  
million in proceeds from the favorable settlement of a business interruption    
insurance claim. The increase in our hospital division net revenue was partially
offset by a decrease in net revenue in our cardiology consulting and management 
services division of $1.0 million due to the termination of management contracts
with two physician practices in fiscal 1999. Net revenue in our diagnostic      
services division was approximately the same in both fiscal years.              

  Personnel expense increased by $19.5 million, or 25.2%, to $96.9 million
for fiscal 2000 from $77.4 million for fiscal 1999. Our hospital division       
incurred a $21.1 million increase in personnel expense, $20.2 million of which  
was due to one heart hospital that opened near the end of fiscal 1999 and one   
that opened near the beginning of fiscal 2000. In addition to a longer period of
operations included in fiscal 2000, these new heart hospitals also experienced a
significant increase in number of procedures and, consequently, the staffing    
requirements during fiscal 2000 were considerably higher than in fiscal 1999.   
The remaining increase was at hospitals that had been open for more than nine   
months as of September 30, 1999, due to higher health benefit costs, higher wage
rates and increased use of agency nurses. The increases in personnel expense    
described above were offset in part by a $7.6 million decrease attributed to the
deconsolidation of one heart hospital in late fiscal 1999. As a percentage of   
net revenue, personnel expense decreased to 29.2% in fiscal year 2000 from 30.3%
in fiscal year 1999 due primarily to pre-opening staffing of one heart hospital 
that opened near the end of fiscal 1999 and one that opened near the beginning  
of fiscal 2000 and revenue growth in heart hospitals that had been open for more
than nine months as of September 30, 1999, offset in part by higher health      
benefit costs, higher wage rates and increased use of agency nurses in fiscal   
2000.                                                                           

Medical supplies expense increased $21.9 million, or 36.0%, to $82.8  
million for fiscal 2000 from $60.9 million for fiscal 1999. Of the $21.9 million
increase in medical supplies expense, $14.6 million was due to one heart        
hospital that opened near the end of fiscal 1999 and one that opened near the   
beginning of fiscal 2000. These two new hospitals experienced a significant     
increase in the number of procedures performed and, consequently, the volume of 
medical supplies used was considerably higher in fiscal 2000 than in fiscal     
1999. The remaining increase was due to a higher number of procedures performed 
in our heart hospitals that had been open for more than nine months as of       
September 30, 1999 and an increased level of unreimbursed research activities in
one of our heart hospitals, offset in part by a $4.3 million decrease attributed
to the deconsolidation of one heart hospital in late fiscal 1999. As a          
percentage of net revenue, medical supplies expense increased to 24.9% in fiscal
year 2000 from 23.8% in fiscal year 1999. This increase was due to a shift in   
procedure mix in one of our heart hospitals to procedures that use higher cost  
supplies and the cost of medical supplies used in connection with an increased  
level of unreimbursed research activities in one of our heart hospitals. This   
increase was offset in part by reduced pricing realized from volume purchasing  
opportunities.                                                                  

 Bad debt expense increased $3.7 million, or 28.5%, to $16.7 million for
fiscal 2000 from $13.0 million for fiscal 1999. This increase was due in part to
one heart hospital that opened                                                  

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near the end of fiscal 1999 and one that opened near the beginning of fiscal    
2000. The increase was also due to an increase in the number of procedures      
performed at hospitals that had been open for more than nine months as of       
September 30, 1999 and an increase in reserves for self-pay revenue in two of   
our markets. The increase in bad debt expense was offset in part by a $620,000  
decrease attributed to the deconsolidation of one heart hospital in late fiscal 
year 1999. As a percentage of net revenue, bad debt expense remained constant   
between fiscal 1999 and 2000.                                                   

     Other operating expenses increased $9.4 million, or 13.1%, to $80.9 million
for fiscal 2000 from $71.5 million for fiscal 1999. Our hospital division       
incurred an $11.8 million increase in other operating expenses due to a $12.1   
million increase in operating expenses at one hospital that opened near the end 
of fiscal 1999 and one that opened near the beginning of fiscal 2000, offset in 
part by a $5.0 million decrease attributed to the deconsolidation of one heart  
hospital near the end of 1999. The remaining $4.7 million increase in our       
hospital division was due to an increase in the number of procedures performed  
in hospitals that had been open for more than nine months as of September 30,   
1999. Additionally, we experienced increases in maintenance, property taxes, and
utilities costs in certain of our markets, an increase in purchased contract    
services and support services provided by our corporate office and a $1.6       
million decrease in our cardiology consulting and management division due to the
termination of management contracts with two physician practices near the end of
fiscal 1999. As a percentage of net revenue, other operating expenses decreased 
to 24.3% in fiscal year 2000 from 28.0% in fiscal year 1999. This decrease was  
due to the increased net revenue arising from a higher number of procedures     
performed versus operating expenses that are primarily fixed.                   

     Depreciation and amortization increased by $7.2 million, or 23.2%, to $38.2
million in fiscal 2000 from $31.0 million in fiscal 1999. This increase was due 
to the opening of our two heart hospitals near the end of 1999, depreciation on 
capital expenditures related to equipment and information systems made since the
end of fiscal 1999 and an increase in the amortization of a specific practice   
management contract to reflect a reduction in its estimated economic life. These
increases were partially offset by a decrease in depreciation on diagnostic     
equipment that was fully depreciated at the end of fiscal 1999 and the          
deconsolidation of one heart hospital near the end of fiscal 1999.              

 In fiscal 1999, we recognized an impairment of long-lived assets due to
unfavorable developments in the physician practice management industry that     
caused us to reevaluate our cardiology consulting and management business. As a 
result, we recognized a non-cash charge of $10.9 million in fiscal 1999.        

Interest expense increased $7.3 million, or 33.6%, to $29.0 million in
fiscal 2000 from $21.7 million in fiscal 1999. Of this $7.3 million increase,   
$6.4 million was due to an increased level of debt associated with the          
development of two heart hospitals near the end of fiscal 1999, offset in part  
by the decrease attributed to the deconsolidation of one heart hospital in late 
fiscal 1999. The remaining increase in interest expense was due to increases in 
the market rates underlying our variable rate revolver combined with an increase
in the average outstanding balance during fiscal 2000. Interest income increased
$895,000 from fiscal 1999 due to an increase in interest on outstanding amounts 
due from one of our unconsolidated heart hospitals during fiscal 2000.          

   Equity in net losses of unconsolidated affiliates decreased $3.6 million,
or 64.3%, to $2.0 million in fiscal 2000 from $5.6 million in fiscal 1999.      
Equity in net losses of unconsolidated affiliates represents our share of the   
net losses of heart hospitals in which we own less than a 50% equity interest   
and over which we do not exercise substantive control. This decrease was        
primarily due to the consolidation of one of our heart hospitals in fiscal 2000 
as previously discussed, offset by the deconsolidation of one of our heart      
hospitals in fiscal 1999.                                                       

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    Earnings allocated to minority interests decreased $3.0 million, or 47.6%,
from $6.3 million in fiscal 1999 to $3.3 million in fiscal 2000. The $3.0       
million decrease in earnings allocated to minority interests for fiscal 2000 was
due to a decrease in earnings in two of our consolidated heart hospitals and the
net loss from the heart hospital consolidated during fiscal 2000, offset in part
by an increase attributed to the earnings of the heart hospital that was        
deconsolidated in fiscal 1999. The decrease in earnings at the two consolidated 
hospitals was primarily due to the opening of one of those heart hospitals in   
late fiscal 1999 and a reimbursement of overpayments by a fiscal intermediary at
the other heart hospital.                                                       

   Income tax expense increased due to state taxes in one of our markets. We
are currently operating in a net operating loss position and consequently have  
little current income tax liability.                                            

YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO COMBINED YEAR ENDED SEPTEMBER 30, 1998

     We are comparing the actual historical results of operations for the fiscal
year ended September 30, 1999 to our predecessor company's ten months ended July
31, 1998 combined with our two months ended September 30, 1998. This combined   
presentation is not in conformity with accounting principles generally accepted 
in the United States but is included for comparative purposes. Under our        
predecessor company's accounting policies, through July 31, 1998, organization  
costs were capitalized and amortized using the straight-line method over five   
years, and pre-opening expenses of heart hospitals and other new facilities were
capitalized and amortized using the straight-line method over two or three years
beginning with the commencement of operations. Upon completion of the going     
private transaction in July 1998, we adopted the provisions of Statement of     
Position 98-5 "Reporting on Costs of Start-up Activities." Accordingly,         
organization and pre-opening expenses have been expensed as incurred in periods 
subsequent to July 31, 1998.                                                    

  Net revenue increased $65.3 million, or 34.3%, to $255.8 million for the
fiscal year ended September 1999 from $190.5 million for the combined fiscal    
year ended September 30, 1998. The $65.3 million increase in net revenue        
included a $73.8 million increase in net revenue generated by our hospital      
division and a $6.0 million increase in our diagnostic services division, offset
in part by a $14.1 million decrease in our cardiology consulting and management 
division and a $486,000 decrease in our corporate and other operations. Of the  
$73.8 million increase in net revenues by our hospital division, $5.5 million   
was generated by our heart hospitals that had been open for more than 12 months 
as of September 30, 1998, $43.1 million was generated by two heart hospitals    
that opened during combined fiscal 1998, and the remaining $25.2 million was    
generated by a heart hospital that opened during fiscal 1999. The $43.1 million 
increase in net revenue from our two heart hospitals that opened during combined
fiscal 1998 was net of the effect of the deconsolidation of one of those heart  
hospitals in fiscal 1999. In July 1999, we sold a one-third interest in this    
heart hospital to a community hospital in that heart hospital's geographic      
market. As a result of this sale, our financial statements reflect a            
deconsolidation of this heart hospital as of July 31, 1999 and the use of the   
equity method of accounting for our investment in this hospital subsequent to   
that date. Consequently, our net revenue included almost a full year of         
operations for this heart hospital in combined fiscal 1998 compared to only ten 
months in fiscal 1999. Of the $6.0 million increase in net revenue of our       
diagnostic services division, $4.5 million was due to the opening of a second   
catheterization laboratory at one of our diagnostic facilities, an increase in  
diagnostic procedures at one of our diagnostic facilities, which opened near the
end of combined fiscal 1998, and an increase in procedures at our other         
diagnostic facilities that had been open for more than 12 months as of September
30, 1998. The remaining $1.5 million increase was due to the addition of four   
new diagnostic management contracts during fiscal 1999. The $14.1 million       
decrease in                                                                     

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net revenue of our cardiology consulting and management division was primarily  
due to the termination of management contracts with two physician practices in  
fiscal 1999.                                                                    

  Personnel expense increased by $22.4 million, or 40.7%, to $77.4 million
for fiscal 1999 from $55.0 million for combined fiscal 1998. Our hospital       
division incurred a $24.0 million increase in personnel expense, of which $9.3  
million was incurred by two heart hospitals that opened during combined fiscal  
1998, net of the effect of the deconsolidation of one of those heart hospitals  
in late fiscal 1999, and $9.2 million was incurred by a heart hospital that     
opened during fiscal 1999. These new heart hospitals experienced an increase in 
the number of procedures performed between combined fiscal year 1998 and fiscal 
year 1999 and, consequently, the staffing requirements in the hospitals         
increased between combined fiscal 1998 and fiscal 1999. Another $3.1 million of 
the increase in the hospital division was due to pre-opening personnel costs    
incurred in fiscal 1999 for a heart hospital that opened shortly after the end  
of that fiscal year. The remaining $2.4 million increase in the hospital        
division was at heart hospitals that had been open for more than 12 months as of
September 30, 1998, and was due to increases in staffing requirements to meet   
increases in procedures performed during fiscal 1999 compared to combined fiscal
1998. The diagnostic services division incurred a $1.8 million increase in      
personnel expense which was primarily due to the increase in staffing in fiscal 
1999 related to our new diagnostic facilities, the growth in procedures at      
existing diagnostic facilities, and the addition of four new diagnostic         
management contracts as previously discussed. The increases in personnel expense
described above were offset in part by a $4.4 million decrease in our cardiology
consulting and management division due to the termination of management         
contracts with two physician practices in fiscal 1999. As a percentage of net   
revenue, personnel expense increased to 30.3% in fiscal 1999 from 28.9% in      
combined fiscal 1998 due primarily to pre-opening staffing at one heart hospital
that opened shortly after the end of fiscal 1999 offset in part by revenue      
growth in heart hospitals that had been open for more than 12 months as of      
September 30, 1998.                                                             

Medical supplies expense increased $25.6 million, or 72.5%, to $60.9  
million for fiscal 1999 from $35.3 million for combined fiscal 1998. Our        
hospital division accounted for $22.0 million of this increase in medical       
supplies expense, of which $12.8 million was incurred by two heart hospitals    
that opened during combined fiscal 1998, net of the effect of the               
deconsolidation of one of those heart hospitals in late fiscal 1999, and $6.4   
million was incurred by a heart hospital that opened during fiscal 1999. The    
remaining $2.8 million increase was primarily incurred by one heart hospital    
that completed its first year of operation during combined fiscal 1998. Our new 
heart hospitals experienced an increase in the number of procedures performed   
between combined fiscal year 1998 and fiscal year 1999 and, consequently, the   
volume of medical supplies used increased between combined fiscal 1998 and      
fiscal 1999. The diagnostic division accounted for the remaining $3.6 million   
increase in medical supplies expense, which was primarily due to opening of new 
diagnostic facilities, the growth in existing diagnostic facilities, and the    
addition of four new diagnostic management contracts in fiscal 1999. As a       
percentage of net revenue, medical supplies expense increased to 23.8% in fiscal
1999 from 18.5% in combined fiscal 1998. This increase was due to pre-opening   
medical supplies costs incurred in fiscal 1999 for a heart hospital that opened 
during the fiscal year combined with an increased level of unreimbursed research
activities at one of our heart hospitals that opened during combined fiscal     
1998.                                                                           

  Bad debt expense increased $6.9 million, or 113.1%, to $13.0 million for
fiscal 1999 from $6.1 million for combined fiscal 1998. The hospital division   
accounted for $4.4 million of this increase in bad debt expense, of which $1.4  
million was due to the two heart hospitals that opened during combined fiscal   
1998, net of the effect of the deconsolidation of one of those heart hospitals  
in late fiscal 1999, and $774,000 was due to a heart hospital that opened during
fiscal 1999. The remaining $2.2 million increase in our hospital division was   
due to a higher number of procedures performed and an increase in the bad debt  
reserves at our heart                                                           

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hospitals open for more than 12 months as of September 30, 1998. As a percentage
of net revenue, bad debt expense increased to 5.1% in fiscal 1999 from 3.2% in  
combined fiscal 1998.                                                           

Other operating expenses increased $15.4 million, or 27.5%, to $71.5  
million for fiscal 1999 from $56.1 million for combined fiscal 1998, exclusive  
of the $6.6 million of fees and expenses incurred in connection with our        
privatization transaction in July 1998 that have been separately reported in our
results of operations for combined fiscal 1998. Our hospital division accounted 
for a $16.6 million increase in other operating expenses, of which $6.1 million 
was generated by two heart hospitals that opened during combined fiscal         
1998 - net of a $200,000 decrease attributed to the deconsolidation of one of   
those heart hospitals in late fiscal 1999 - $6.5 million was generated by a     
heart hospital that opened during fiscal 1999, and $2.4 million was due to      
pre-opening other operating expenses incurred in fiscal 1999 for a heart        
hospital that opened shortly after the end of that fiscal year. The remaining   
$1.6 million increase in our hospital division was primarily due to an increase 
in the number of procedures performed in hospitals that had been open for more  
than 12 months as of September 30, 1998 offset by a decrease in the hospital    
division administrative operating expenses. Our diagnostic division incurred a  
$1.6 million increase in other operating expenses that was primarily due to the 
opening of new diagnostic facilities, the growth in existing facilities, and the
addition of four new diagnostic management contracts in fiscal 1999. Our        
cardiology consulting and management division incurred a decrease of $8.0       
million that was primarily due to the termination of management contracts with  
two physician practices in fiscal 1999. The remaining increase in other         
operating expenses was due to increased costs in our corporate and other        
operations and the effects of our adopting the provisions of Statement of       
Position 98-5 "Reporting on Costs of Start-Up Activities" upon completing the   
going private transaction in July 1998, exclusive of the $6.6 million of merger 
costs in fiscal 1998, as previously discussed above. As a percentage of net     
revenue, other operating expenses decreased from 29.5% in combined fiscal 1998  
to 28.0% in fiscal 1999. This decrease was due to a higher number of procedures 
performed, and therefore increased net revenue, versus operating expenses that  
are primarily fixed in our hospital division, the termination of the management 
contracts in our cardiology consulting and management division that had lower   
margins than our other businesses, and the decrease in corporate and other      
expenses as previously discussed.                                               

  Depreciation and amortization increased $7.2 million, or 30.3%, to $31.0
million for fiscal 1999 from $23.8 million for combined fiscal 1998. This       
increase was due to a $10.2 million increase in depreciation, offset in part by 
a $2.9 million decrease in amortization. Of the $10.2 million increase in       
depreciation, the hospital division incurred a $7.3 million increase, which was 
primarily due to the opening of our two new heart hospitals during combined     
fiscal 1998, net of the effect of the deconsolidation of one of those heart     
hospitals in fiscal 1999, the opening of a new heart hospital in fiscal 1999,   
and depreciation on capital expenditures related to equipment and information   
systems made since the end of fiscal 1998. The remaining $2.9 million increase  
in depreciation was primarily due to depreciation on capital expenditures       
related to equipment and information systems made since the end of fiscal 1998  
in our diagnostic services division and corporate and other operations, and     
changes in the estimated useful lives of certain capital equipment in our       
diagnostic services division. The $2.9 million decrease in amortization between 
combined fiscal 1998 and fiscal 1999 is primarily due to the decrease in        
amortization in our hospital division resulting from the change in accounting   
treatment of organization and start-up costs are previously discussed, offset in
part by an increase in amortization over 40 years of the $116.1 million of      
goodwill resulting from the privatization transaction in combined fiscal 1998.  

   Loss on disposal of property and equipment increased $934,000, or 245.8%,
to $1.3 million for fiscal 1999 from $380,000 for combined fiscal 1998 due to   
disposals of equipment                                                          

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in our diagnostic services division. No significant disposals of property were  
made during fiscal 1999 or combined fiscal 1998 in any of our other divisions.  

 In fiscal 1999, we recognized an impairment of long-lived assets due to
unfavorable developments in the physician practice management industry that     
caused us to reevaluate management contracts within our cardiology consulting   
and management division. As a result, we adjusted the carrying value of the     
long-lived assets in this division to their estimated fair value, which included
adjustments of goodwill to zero and management contracts to $11.7 million,      
resulting in non-cash impairment charges of $4.5 million and $6.4 million,      
respectively, for a total of $10.9 million.                                     

 Interest expense increased $10.1 million, or 87.1%, to $21.7 million in
fiscal 1999 from $11.6 million in combined fiscal 1998. This increase was due to
the debt incurred that was associated with the addition of two new heart        
hospitals during combined fiscal 1998, which were open for all of fiscal year   
1999 and the incurrence of $33.0 million of debt used to partially finance the  
going private transaction at July 31, 1998. Interest income increased by        
$649,000, or 34.2%, to $2.5 million in fiscal 1999 from $1.9 million in combined
fiscal 1998.                                                                    

   Equity in net losses of unconsolidated affiliates increased $4.8 million,
or 594.1%, to $5.6 million in fiscal 1999 from $808,000 in combined fiscal 1998.
Equity in net losses of unconsolidated affiliates represents our share of the   
net losses of heart hospitals in which we own less than a 50% equity interest   
and over which we do not exercise substantive control. This increase was due to 
the deconsolidation of one of our heart hospitals in fiscal 1999 as previously  
discussed, and losses incurred at equity heart hospitals that were under        
development during fiscal 1999 and opened at the end of fiscal 1999 and         
beginning of fiscal 2000.                                                       

    Earnings allocated to minority interests increased $3.1 million, or 96.9%,
to $6.3 million in fiscal 1999 from $3.2 million in combined fiscal 1998. Of    
this $3.1 million increase in earnings allocated to minority interests, our     
hospital division accounted for a $6.6 million increase that was offset in part 
by a $3.5 million decrease in our diagnostic services division and our corporate
and other operations. Of the $6.6 million increase in the hospital division, our
consolidated heart hospitals that had been open for more than 12 months as of   
September 30, 1998 generated a $3.2 million increase resulting from a net       
increase in their earnings for fiscal 1999 compared to combined fiscal 1998. The
remaining $3.4 million increase in the hospital division was due to our         
recognizing a disproportionate share of the earnings and losses in fiscal 1999  
of our consolidated heart hospitals that opened during combined fiscal 1998 and 
our consolidated heart hospitals that were under development during fiscal 1999.
Of the $3.5 million decrease in our diagnostic services and corporate and other 
operations, $3.2 million was due to the effects of our adopting the provisions  
of Statement of Position 98-5 "Reporting on Costs of Start-up Activities" upon  
completing the going private transaction in July 1998, as previously discussed  
above, and $350,000 was due to recognizing a disproportionate share of the      
earnings and losses in fiscal 1999 of certain of our diagnostic ventures.       

     Our effective income tax rate for the ten-month period ending July 31, 1998
was (1.4%) while the effective tax rate for the two-month period ended September
30, 1998 was 34.2%. The reason for the change in our effective tax rate was due 
to our ability to recognize the benefit of a net operating loss carryback.      

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SELECTED QUARTERLY RESULTS OF OPERATIONS                                        

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

                                                        [Enlarge/Download Table]

                                                       THREE MONTHS ENDED                       
                                 ---------------------------------------------------------------
                                 MARCH 31,   JUNE 30,   SEPTEMBER 30,   DECEMBER 31,   MARCH 31,
                                   2000        2000         2000            2000         2001   
                                 ---------   --------   -------------   ------------   ---------
                                                         (IN THOUSANDS)                         
                                                                                                
STATEMENT OF OPERATIONS DATA:                                                                   
Net revenue.....................  $89,202    $84,211       $84,718        $91,201      $103,197 
Income (loss) from operations...  $ 8,248    $  (360)      $ 4,524        $ 6,008      $ 23,126 
Equity in net (losses) earnings                                                                 
  of unconsolidated                                                                             
  affiliates....................  $   626    $  (368)      $  (458)       $(1,081)     $   (762)
Minority interests..............  $(1,653)   $   632       $(1,134)       $  (205)     $(10,235)
Net income (loss)...............  $   802    $(5,575)      $(4,457)       $(1,519)     $  5,636 
OTHER DATA:                                                                                     
EBITDA, as defined..............  $17,896    $10,230       $13,331        $15,636      $ 32,410 

     Our results of operations historically have fluctuated on a quarterly basis
and can be expected to continue to be subject to quarterly fluctuations.        
Cardiovascular procedures can often be scheduled ahead of time, permitting some 
patients to choose to undergo the procedure at a time and location of their     
preference. In the past, this has affected the results of operations of our     
heart hospitals. For example, many of the patients of Arizona Heart Hospital are
part-time residents in Arizona during the winter months. Hence, this hospital   
has historically experienced higher occupancy rates during the winter months    
than during the remainder of the year.                                          

LIQUIDITY AND CAPITAL RESOURCES                                                 

     Our consolidated working capital was $20.4 million at March 31, 2001, $14.3
million at September 30, 2000, $35.4 million at September 30, 1999 and $34.4    
million at September 30, 1998. The increase of $6.1 million from September 30,  
2000 to March 31, 2001 resulted primarily from an increase in accounts          
receivable at our newly opened hospitals, offset by an increase in short-term   
borrowings. The decrease of $21.1 million from September 30, 1999 to September  
30, 2000 primarily resulted from the use of cash and cash equivalents and cash  
provided by operations to pay down our revolving credit facility by $7.9        
million, repay other debt in the amount of $11.4 million net of borrowings, make
distributions to minority partners in the amount of $5.2 million and partially  
fund capital expenditures. The increase of $1.0 million from September 30, 1998 
to September 30, 1999 resulted from cash provided by operating activities in the
amount of $10.0 million and $54.1 million in borrowings, offset by $57.7 million
in capital equipment purchases and $4.0 million in distributions to minority    
partners.                                                                       

     Our operating activities provided net cash of $7.9 million during the first
six months of fiscal 2001, generated net cash of $16.6 million in fiscal 2000   
and generated net cash of $10.0 million in fiscal 1999. The $7.9 million cash   
provided by operating activities was a result of cash flow provided by our      
operations offset by an increase in accounts receivable. The $16.6 million of   
net cash generated from operating activities in fiscal 2000 was a result of cash
flow provided by our operations and the collection of a $6.5 million insurance  
recovery receivable offset by an increase in accounts receivable. Increases in  
accounts receivable in each of these periods was due primarily to increases in  
net revenue at one heart hospital opened near the end                           

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of fiscal 1999 and one that opened near the beginning of fiscal 2000. The $10.0 
million of net cash generated from operating activities in fiscal 1999 was a    
result of cash flow provided by our operations and an increase in accounts      
payable offset by an increase in accounts receivable. During fiscal 1999, we    
used cash flow generated from operations and an increase in accounts payable    
primarily to fund an increase in accounts receivable. The increase in accounts  
receivable and accounts payable during fiscal 1999 was due primarily to one     
heart hospital that was opened early in the year.                               

 Our investing activities generated net cash of $41.5 million during the
first six months of fiscal 2001, used net cash of $13.2 million in fiscal 2000  
and used net cash of $57.6 million in fiscal 1999. The $41.5 million of net cash
provided by investing activities was due to the sale of the McAllen Heart       
Hospital offset in part by equipment purchases, related hospital development    
expenditures and advances made to heart hospitals in which we do not own a      
majority interest. In each of the fiscal years 2000 and 1999, the net cash used 
in investing activities consisted primarily of equipment purchases, hospital    
development expenditures, and advances made to heart hospitals in which we do   
not own a majority interest.                                                    

  Our financing activities used net cash of $46.5 million during the first
six months of fiscal 2001, used net cash of $24.3 million in fiscal year 2000   
and generated net cash of $50.4 million in fiscal 1999. Net cash used in        
financing activities during the first six months of fiscal 2001 was a result of 
repayments of long-term debt and capital leasing of obligations under $56.8     
million, and distribution to, net of investments by, minority partners of $7.4  
million offset by proceeds from the issuance of long-term debt, net of loan     
acquisition costs and deferred fees, of $13.1 million and net borrowings of     
short-term debt of $4.6 million. Of the $54.6 million in repayments of long-term
debt were repayments of $36.7 million as a result of the sale of the McAllen    
Heart Hospital. The net cash used in financing activities during fiscal 2000 was
a result of repayments of long-term debt and obligations under capital leases of
$88.3 million, and distributions to, net of investments by, minority partners of
$5.2 million, offset by the proceeds of net short-term borrowings and proceeds  
from the issuance of long-term debt, net of payments of loan acquisition costs  
and deferred fees, of $69.1 million. Included in the repayment of long-term debt
and proceeds from issuance of long-term debt, net of loan acquisition and       
deferred fees, is the refinancing of one of our heart hospitals during fiscal   
2000. Net cash generated by financing activities during fiscal 1999 was a result
of proceeds from the issuance of long-term debt, net of loan acquisition costs  
and deferred fees, repayments of long-term debt and repayments of obligations   
under capital leases of $52.9 million, offset by the repurchase of common stock 
from a former executive officer, net of proceeds from issuance of common stock  
of $2.3 million, and distributions to, net of investments by, minority partners 
of $160,000. Included in the proceeds from the issuance of long-term debt were  
the original financings of two of our heart hospitals opened during fiscal 1999 
and one of our heart hospitals that opened near the beginning of fiscal 2000.   

Our total long-term debt has increased from $171.6 million at the     
completion of the going private transaction to $225.1 million, pro forma as     
adjusted, at March 31, 2001. A portion of this additional indebtedness was      
incurred to pay the purchase price for the equity of our predecessor company. We
used the balance of this additional long-term debt primarily to complete        
construction of the three heart hospitals that we had in development or under   
construction prior to the going private transaction and the balance to make     
subordinated working capital loans to our operating heart hospitals. The major  
effects of our increased indebtedness have been an increase in our interest     
expense, an increase in our amortization of deferred loan fees and an increase  
in our use of cash flow to pay debt service. Although it contributed to an      
increase in our losses, we do not believe our increased indebtedness has        
materially inhibited our ability to fund needed capital expenditures or conduct 
development activities to increase the number of heart hospitals we own and     
operate.                                                                        

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   Our heart hospital ventures finance their land, building and construction
costs through mortgage loans and equipment through secured purchase money notes.
We guarantee all or a significant portion of these obligations. Each of the     
heart hospitals, as borrower, and we as guarantor, are subject to financial     
covenants related to these loans. Each of these loans is secured by the assets  
of the borrowing hospital only and is not cross-defaulted with loans made to any
other hospital. During the early stages of a hospital's development, we         
generally fund its working capital needs by borrowing under our revolving credit
facility and lending the proceeds to the hospital. These loans bear interest at 
market rates.                                                                   

As of March 31, 2001, we had $244.5 million of outstanding debt, $29.4
million of which was classified as current. Of the $244.5 million of outstanding
debt, $204.7 million was outstanding to lenders to our heart hospitals, $24.7   
million was outstanding to lenders under our revolving credit facility and $15.1
million was outstanding under capital leases and other miscellaneous            
indebtedness. As of March 31, 2001, we had outstanding borrowings under our     
revolving facility of $24.7 million, of which $6.7 million were classified as   
short-term. Additionally, we had letters of credit issued of $10.4 million, and 
consequently had availability of additional borrowings of $64.9 million. We     
expect the level of long-term indebtedness to increase in the future as we      
develop new hospitals. The development and construction of the hospitals in     
Texas and Louisiana will require us to incur additional long-term debt of       
between $80.0 million and $90.0 million.                                        

    Our revolving credit facility provides for $100.0 million in availability,
$10.0 million of which is designated for short-term borrowings. This revolving  
credit facility matures on January 31, 2005 and borrowings under this facility  
bear interest at either the LIBOR or Prime Rate plus various applicable margins 
which are based upon financial covenant ratio tests. As of March 31, 2001, our  
weighted average interest rate under this facility was 8.65%. We are required to
pay a quarterly unused commitment fee at a rate of 0.375%. Our revolving credit 
facility includes various restrictive covenants, including restrictions on      
certain types of additional indebtedness, investments, asset sales, capital     
expenditures, dividends, sale and leasebacks, contingent obligations,           
transactions with affiliates, changes in our corporate structure, and           
fundamental changes. The covenants also require maintenance of various ratios   
regarding leverage levels and debt service coverage.                            

    Concurrent with the completion of this offering, we will become a party to
a new credit facility that will provide $190.0 million in available credit to be
used for refinancing the indebtedness of some of our existing heart hospitals   
and financing our heart hospital development program. This facility will provide
for loans directly to the venture that owns the hospital, will be secured by the
assets of that venture only and will not be cross-defaulted with any other loan 
made to any other hospital under this facility. This loan will be guaranteed by 
our principal operating subsidiary. Three of our heart hospital ventures will   
borrow up to $80.0 million to refinance portions of their term loan indebtedness
at the closing of this offering. The remaining $110.0 million of this facility  
will be used during the next two to three years to partially fund the           
development of additional heart hospitals. This indebtedness will also require  
maintenance of various ratios regarding leverage levels and debt service        
coverage. Following this offering, one of the two heart hospitals in which we   
own a minority interest intends to refinance approximately $30.0 million of its 
outstanding indebtedness pursuant to a separate financing commitment with       
different lenders.                                                              

    As of March 31, 2001, we were in violation of a financial covenant for one
of our consolidated heart hospitals and one of our unconsolidated affiliates was
in violation of a financial covenant under a mortgage loan that we guarantee.   
These violations have been cured by waivers from the lenders. We cannot assure  
you that we will be in compliance with financial covenants of our debt at these 
and other heart hospitals for any periods subsequent to March 31, 2001. We      
believe, however, that based upon relationships with our existing lenders we    
will be able to obtain appropriate waivers or other cures for any such          
violations.                                                                     

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  We believe that internally generated cash flows and borrowings under our
revolving credit facility, together with the net proceeds of this offering and  
borrowings under the new $190.0 million credit facility, will be sufficient to  
finance our heart hospital development program, other capital expenditures and  
our working capital requirements for the next 12 months. If the amount we       
require for future heart hospital development exceeds these available sources of
capital, we will need to increase our credit facilities or obtain additional    
capital by other means.                                                         

REIMBURSEMENT, LEGISLATIVE AND REGULATORY CHANGES                               

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

INFLATION                                                                       

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                      

   We do not have any financial instruments held for trading purposes and do
not hedge any of our market risks with derivative instruments. We expect,       
however, that we will enter into a hedging agreement in connection with the new 
$190.0 million credit facility.                                                 

 Our primary market risk exposure relates to interest rate risk exposure
through that portion of our borrowings that bear interest based on floating     
rates. Our debt obligations at March 31, 2001 include $95.9 million of variable 
rate debt at an approximate average rate of 8.8% at March 31, 2001. A one       
hundred basis point change in interest rates on our variable rate debt would    
have resulted in interest expense fluctuating approximately $800,000 for fiscal 
year 1999, $1.4 million for fiscal year 2000, and $600,000 for the six months   
ended March 31, 2001.                                                           

RECENT AND PROPOSED ACCOUNTING PRONOUNCEMENTS                                   

 In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for   
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137,      
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the 
Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for      
Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133     
establishes accounting and reporting standards for derivative instruments,      
including certain derivative instruments embedded in other contracts,           
collectively referred to as derivatives, and for hedging activities. SFAS No.   
133 requires that an entity recognize all derivatives on the balance sheet at   
fair value. The accounting for changes in the fair value of a                   

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derivative depends on the use of the derivative. SFAS No. 133 is effective for  
all fiscal quarters of fiscal years beginning after June 15, 2000; accordingly, 
we adopted SFAS No. 133, as amended, on October 1, 2000. We have determined the 
impact of SFAS No. 133 will not be material to our consolidated financial       
statements.                                                                     

    In July 2001 the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangibles. SFAS No. 141 eliminates the            
pooling-of-interests method of accounting for business combinations and         
identifies criteria for the establishment of identifiable intangible assets     
separate from goodwill resulting from a business combination. SFAS No. 142      
eliminates the amortization of goodwill and requires that goodwill be subjected 
to an annual impairment test. Certain provisions of these statements will be    
effective for business combinations completed after June 30, 2001. We are       
required to adopt the remaining provisions for our 2003 fiscal year beginning   
October 1, 2002. However, early adoption is permitted for our 2002 fiscal year  
beginning October 1, 2001.                                                      

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BUSINESS

OVERVIEW                                                                        

We focus on the diagnosis and treatment of cardiovascular disease. We 
design, develop, own and operate heart hospitals in partnership with            
cardiologists and cardiovascular surgeons that we believe have established      
reputations for clinical excellence. While each of our hospitals is licensed as 
a general acute care hospital, which provides comprehensive medical care for    
patients needing a wide range of healthcare services, we focus on serving the   
unique needs of patients suffering from cardiovascular disease. We are also     
committed to improving the productivity and work environment of physicians,     
nurses and other medical personnel providing care. As of June 30, 2001, we owned
and operated eight heart hospitals, together with our physician partners, who   
own an equity interest in the heart hospital where they practice. Our existing  
heart hospitals have a total of 460 licensed beds and are located in Arizona,   
Arkansas, California, New Mexico, Ohio, South Dakota and Texas. We have begun   
developing our ninth hospital, which will be located in Texas, and our tenth    
hospital, which will be located in Louisiana. Both of these new hospitals are   
expected to open by late 2002. We intend to begin development on one to three   
new heart hospitals each year.                                                  

     In addition to our heart hospitals, we provide cardiovascular care services
in diagnostic and therapeutic facilities located in seven states and through    
mobile cardiac catheterization laboratories. Our mobile diagnostic facilities   
are used by physicians to evaluate the functioning of patients' hearts and      
coronary arteries and serve areas that do not have the patient volume to support
a full-time facility. We also provide consulting and management services        
tailored to cardiologists and cardiovascular surgeons.                          

    Each of our heart hospitals is a freestanding, licensed general acute care
hospital that includes an emergency department, operating rooms, catheterization
laboratories, pharmacy, laboratory, radiology department, cafeteria and food    
service and is capable of providing a full complement of healthcare services.   
While our focus is on the treatment of cardiovascular disease in our heart      
hospitals, we have a complete staff of other specialists at each hospital that  
can treat the multi-disciplinary needs of our patients. The medical staff at    
each of our hospitals is open to all qualified physicians performing healthcare 
services in the market.                                                         

     Our predecessor company was developed in late 1988 and 1989 by our chairman
and our president and chief executive officer and for a number of years was     
primarily engaged in operating mobile and other cardiac catheterization         
laboratories. In 1994, our predecessor company conducted an initial public      
offering and began developing its first heart hospital, which opened in 1996. By
July 1998, the predecessor company had developed and opened three additional    
heart hospitals. At that time, several private investment partnerships sponsored
by Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson, Anderson & Stowe, and 
members of our management team acquired our predecessor company from its public 
stockholders. Since becoming a private company, we have:                        

- opened five new heart hospitals, three of which were already under  
    development at the time of the going private transaction, and sold one
heart hospital,                                                   

- improved our process for developing new heart hospitals,            

- begun developing two additional hospitals,                          

 - standardized and, when appropriate, centralized our operations across
financial and operational areas, and                              

     - continued to strengthen our regulatory compliance program at the facility
and corporate levels.                                             

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CARDIOVASCULAR CARE MARKET OPPORTUNITY                                          

   The American Heart Association estimates that total domestic expenditures
for the treatment of cardiovascular disease were approximately $185.8 billion in
2000 and that these expenditures have grown at a rate of 5.4% annually since    
1997. Of these expenditures, 69.1%, or approximately $128.4 billion, was spent  
on hospital and other facility-based charges. Cardiovascular disease is a       
progressive illness that develops without symptoms over a number of years and   
frequently goes undiagnosed until the patient suffers an acute episode such as a
stroke or heart attack. Cardiovascular disease includes coronary heart disease, 
hypertensive disease - which is a risk factor for more serious cardiovascular   
diseases - rheumatic fever/rheumatic heart disease, stroke and congenital       
cardiovascular defects. The American Heart Association estimates that           
approximately 61 million Americans have one or more types of cardiovascular     
disease. Cardiovascular disease claimed 950,000 lives, representing 40.6% of all
deaths, in the United States in 1998. This represented 105,500 more lives than  
the next five leading causes of death combined, including cancer, chronic       
obstructive pulmonary disease, accidents, pneumonia/influenza and diabetes      
mellitus.                                                                       

   Most of the invasive procedures physicians perform to treat patients with
cardiovascular disease, such as coronary artery angioplasties with stent        
placement and coronary artery bypass graft surgery, are performed in hospitals  
on an inpatient basis. Cardiovascular disease creates the largest demand for    
hospital bed use in the United States, being the first listed diagnosis of 6.3  
million inpatients in 1998. Approximately 12.4 million of the estimated 61      
million Americans suffering from cardiovascular disease have coronary heart     
disease, which generates the single greatest demand for cardiac diagnostic and  
therapeutic procedures.                                                         

According to the American Heart Association, it is estimated that     
physicians performed the following number of procedures to diagnose and treat   
cardiovascular disease in 1998:                                                 

- 553,000 coronary artery bypass graft operations,                    

- 539,000 coronary artery angioplasty procedures,                     

- 1.3 million inpatient cardiac catheterization procedures, and       

- 472,000 outpatient cardiac catheterization procedures.              

The demand for cardiology and cardiovascular disease diagnosis and    
treatment procedures is expected to increase in the future as people age 55 and 
older, the primary recipients of cardiac care services, increase in number and  
represent a growing proportion of the total population. According to the U.S.   
Census Bureau, the proportion of Americans over age 55 is currently 21.2% and is
expected to increase to 27.5% by 2015. Additionally, demand for cardiac care    
services continues to grow as a result of advances in technology. For example,  
ultrafast computerized tomography now allows cardiologists and radiologists to  
screen apparently healthy individuals to detect coronary heart disease at an    
earlier stage. This quick and non-invasive procedure helps identify patients for
treatment that may otherwise have had a fatal heart attack as the first and only
symptom of coronary heart disease. Other medical devices in development, such as
surgically implanted electrical devices to correct cardiac electrical           
malfunction in patients suffering from congestive heart failure, are expected to
increase the options available to physicians to treat cardiovascular disease and
increase the number of procedures performed.                                    

   Our heart hospitals are part of the broader market for hospital services,
which was the single largest category of healthcare expenditures at $415        
billion, or 31.7% of total domestic healthcare spending in 2000. The hospital   
services market is currently benefiting from the aging population and a benign  
to favorable pricing and political environment. As hospitals remain the primary 
setting for healthcare delivery, the U.S. Health Care Financing Administration  
expects hospital services to remain the largest category of healthcare spending.

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     Cardiovascular programs are generally one of the most profitable parts of a
hospital's operations. Other factors making these programs particularly         
attractive to hospitals are the non-elective nature of the procedures performed 
and the high portion of the patient population eligible for Medicare            
reimbursement, which is the most reliable payor for cardiovascular procedures.  
The increasing demand for cardiovascular care in the hospital setting is,       
however, set against the backdrop of significant cost containment efforts,      
including managed care and disease management programs. We believe these        
initiatives have fallen short of their objective of controlling costs while     
enhancing efficiency and quality of care, and have often resulted in constraints
that frustrate physicians, patients, payors and hospital administrators. Common 
points of contention physicians and patients have with these initiatives        
include:                                                                        

- the limitations imposed upon physician and patient choice by managed
       care, particularly as it relates to access to specialist services and new
medical technologies,                                             

- an overall lack of confidence in the viability of disease management
  programs as they relate to cost containment and quality of care, and

     - the resulting constraints placed upon a physician's and patient's ability
to manage the patient's care.                                     

In addition, there are aspects of the operations of many traditional  
general acute care hospitals that contribute to physician frustration and       
dissatisfaction. In some markets, hospitals do not have readily available       
cardiac monitored beds, catheterization laboratories or sufficient operating    
rooms capable of handling open heart procedures, which becomes a limiting factor
on physicians' ability to schedule procedures. This leads to frequent scheduling
conflicts with other surgical procedures. Additionally, in a market where only  
one hospital has a heart program, we believe the administration of that hospital
has increased leverage over the physicians providing cardiovascular care and    
less incentive to be responsive to their concerns. And in markets where several 
hospitals have heart programs, there is a risk that none of these programs may  
have a sufficient volume of cardiac procedures to ensure high-quality,          
patient-focused care.                                                           

We believe that the size and growth of the cardiovascular care        
market - coupled with the high level of frustration and dissatisfaction that    
physicians feel with many aspects of the modern healthcare system - creates an  
attractive market opportunity for an innovative company like ours.              

OUR APPROACH                                                                    

We focus on the diagnosis and treatment of cardiovascular disease. We 
develop, own and operate heart hospitals in partnership with physicians with the
goal of improving the quality of care and enhancing the overall experience of   
patients and physicians. Key elements of our approach include:                  

- Cardiovascular disease focus                                              

We design and operate our hospitals with a focus on serving the unique
   needs of patients suffering from cardiovascular disease and improving the
work environment of physicians, nurses and other medical personnel    
providing care. We have developed an innovative facility design and   
  infrastructure specifically tailored to the cardiovascular care delivery
system that combines staff, equipment and physical layout to deliver  
high-quality, cost-effective care. Because the clinical protocols and 
procedures for treatment of patients with cardiovascular disease are  
 generally the same throughout the United States, we are able to use our
standard facility design - with only small variations - in each of the
     markets in which we develop a heart hospital. Innovative characteristics of
our heart hospitals include:                                          

     - universal, single-patient rooms that allow our staff to provide all
      levels of post-surgical care in one room during a patient's entire
stay in our hospital,                                       

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      - centrally located inpatient services such as radiology, pharmacy and
laboratories in close proximity to the patient rooms, and   

       - nursing stations in close proximity to every patient room that permit
    close monitoring of patients, encourage staff communication with
patients and shorten travel distances.                      

   By focusing on a single disease category, we are able to schedule patient
procedures more efficiently and allow our physicians, nurses, medical 
 technicians and other staff members to concentrate on and enhance their
   professional cardiovascular care skills, thereby better serving the needs
of patients in the community. We are also able to invest our available
     funds primarily in equipment and technology for cardiovascular care, rather
 than allocating those funds among the equipment and technology needs of
many different healthcare services as occurs at general acute care    
     hospitals. We believe our focused approach increases patient, physician and
  staff satisfaction and allows us to provide high-quality, cost-effective
patient care.                                                         

- Physician partnerships                                                    

 At the core of our business model is a physician-partner structure that
 empowers our physicians by enabling them to be involved in developing a
     heart hospital and to participate in strategic and operational decisions at
   the hospital. Our physician partners share decision-making authority with
   us on various strategic matters such as site selection, facility size and
    layout, the hospital marketing plan and community outreach programs. They,
as well as other physicians practicing at our heart hospitals, also   
 participate in decisions on a wide range of operational matters such as
development of clinical care protocols, supply selection and usage,   
equipment purchases, patient procedure scheduling and local staff and 
management team selection. We believe that our physician-partnership  
     approach addresses the sense of frustration many physicians experience with
the current state of hospital-based healthcare.                       

- Patient-focused care                                                      

    Our philosophy is to center care around the patient rather than expect the
   patient to adapt to our facilities and staff. We design, equip, staff and
 operate our hospitals to deliver coordinated patient-focused care. This
  approach limits the need to move patients and provides ease of access to
all necessary medical services, allowing us to enhance the overall    
     experience of the patient. Our large, single-patient rooms allow physicians
and nursing staff to provide, in the patient's room, all levels of    
   post-surgical care required for our patients during their entire stay. In
  most general acute care facilities, which have a limited number of rooms
  with cardiovascular monitoring capabilities, patients are required to be
     transferred repeatedly within the facility during the course of their stay.
Moving patients almost always involves risk to the patient, new care  
  providers and an unsettling reorientation period for the patient and the
patient's family. We believe moving patients also reduces physician   
   efficiency, results in delays in providing the services patients need and
   can lead to a longer patient stay. Another key element of patient-focused
    care is our investment in technology. For example, we invest in technology
that facilitates communication between patients and care providers by:

  - allowing patients and their family members to easily contact and
   directly communicate with specific members of the nursing staff
regardless of where the nurse is located at that time, and  

  - electronically providing information about the patient's medical
         condition directly to the members of the nursing staff providing care
    to the patient rather than through a central monitoring station.

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   Our patient-focused, physician-partner approach to providing quality care
has allowed us to achieve a leading market share in each of our markets. Our    
focus on cardiovascular care, physician partnerships, unique hospital design,   
staffing and investment in technology combine to enhance overall operating      
efficiencies, reduce operating costs and allow us to provide high-quality,      
cost-effective patient care. For example, we are able to reduce labor costs by  
moving patients less frequently and having fewer administrative and supervisory 
personnel in our hospitals. In our hospital division, labor costs represented   
approximately 30% of net revenue for fiscal year 1999, fiscal year 2000 and the 
six month period ended March 31, 2001. In comparison, we believe labor costs    
represent approximately 40% of net revenue in the average for-profit hospital   
and approximately 45% to 50% in the average not-for-profit hospital. Our cost   
savings allow us to invest in technology that increases physician productivity  
and improves the patient experience.                                            

OUR STRATEGY                                                                    

Our objective is to become the leading provider of cardiovascular     
healthcare services in each of the markets we enter. Key elements of our        
strategy to achieve this objective include:                                     

- Improving the patient experience                                          

     Our philosophy, developed in partnership with physicians, is to center care
around the patient. We have designed our hospitals, particularly the  
    patient rooms, around the requirements of our patients in order to improve
   their experience and the quality of their care. Our large, single-patient
rooms are capable of handling all of our patients' needs during their 
 entire stay, including critical care, telemetry and post-surgical care.
  This allows us to avoid moving our patients repeatedly and to have their
    care provided by the same group of staff members during their entire stay.
 For patients and their families, this creates a familiarity with, and a
high level of trust in, their care providers while enabling the care  
  providers to understand each patient's needs on an individual basis. The
   design of our rooms and our unlimited visiting hours also allow patients'
   family members to be involved in their care. For example, the size of our
    patient rooms lets us provide sleeping arrangements for family members who
   desire to stay with the patient during the patient's recovery. We believe
   our patient care staffing ratios are equal to or better than those of our
    competitors. We also believe that our patient care staff is more available
   to our patients because of our unique facility design and our investments
in technology.                                                        

We monitor and evaluate patient satisfaction in our heart hospitals by
 conducting patient surveys. These performance surveys have consistently
demonstrated a high level of patient satisfaction with our facilities,
   staff and care coordination. For example, in patient satisfaction surveys
   conducted in our heart hospitals, 98% of our patients who completed these
surveys indicated that they would return to our heart hospital for any
future cardiac procedures. And more than 97% indicated that they were 
    satisfied with the physical comfort of our hospital, the patient education
  we provided and the way in which we allowed family members to be closely
involved in their care.                                               

- Partnering with cardiologists and cardiovascular surgeons                 

   We partner with cardiologists and cardiovascular surgeons that we believe
have established reputations for clinical excellence. These physician 
partners, who own an equity interest in the heart hospital where they 
  practice, participate in decisions on strategic matters at that hospital
  such as site selection, facility size and layout, the hospital marketing
   plan and community outreach programs. They, as well as the numerous other
physicians providing services in our hospitals, also participate in   
 decisions on a wide range of operational matters such as development of
   clinical care protocols, supply selection and usage, equipment purchases,
patient procedure scheduling and local staff and management team      

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selection. Our physician partners are empowered by their role in the  
    development of a new heart hospital and in the strategic decisions we make
     affecting the hospital. We believe that our physician partners take greater
pride and interest in a hospital they view as their own and that the  
   influence they have over decisions in the hospital motivates them to help
    us provide patient-focused care on a cost-effective basis. The opportunity
  to have a role in how our hospitals are managed encourages our physician
 partners to share new ideas, concepts and practices. By partnering with
     highly regarded physicians, we are able to rapidly introduce the advantages
     of our heart hospital to other physicians who look to these specialists for
 guidance on how to care for their patients with cardiovascular disease.

- Developing new heart hospitals                                            

     We intend to begin development on one to three new heart hospitals annually
in markets where we can establish relationships with highly regarded  
     cardiologists and cardiovascular surgeons. Before entering a new market, we
    use publicly available information to analyze a variety of market factors,
including growth characteristics, Medicare reimbursement rates and    
 strengths and weaknesses of existing hospitals. Our facility design for
     each new heart hospital focuses on improving physician and staff efficiency
 and providing higher quality patient care than is typically provided in
 general acute care facilities. We expect to leverage our experience and
    expertise from the development of our existing heart hospitals to continue
to improve our heart hospital development program. All of our heart   
  hospitals are designed for possible future expansion in an efficient and
rapid manner.                                                         

- Achieving superior clinical outcomes                                      

We believe that by focusing on diagnosing and treating cardiovascular 
    disease we can improve the quality of cardiovascular care, which allows us
to achieve superior clinical outcomes for our patients. We assess the 
    quality of cardiovascular care - that is, the degree to which our services
    increase the likelihood of desired health outcomes - by monitoring several
    key criteria, including mortality rates, patient acuity, average length of
   stay and patient satisfaction. We believe our hospitals generally achieve
 lower mortality rates and a shorter average length of stay for patients
    with generally higher acuity levels as compared to our competitors in each
    of our markets. For example, using 1999 MedPar data for patients receiving
a broad range of cardiovascular procedures in our first five heart    
   hospitals, we have derived the average length of stay, mortality rate and
     complicated case severity index for those patients and compared the results
    to comparable data for patients receiving care for the same cardiovascular
     procedures at a group of ten hospitals comprised of the top two competitors
   of each of our first five heart hospitals. In 1999, the average length of
   stay for patients in our first five heart hospitals was 4.8 days compared
    to an average of 5.5 days for the competitor group; our mortality rate was
  2.0% compared to 3.2% for the competitor group; and our complicated case
severity index was 1.21 compared to 0.90 for the competitor group. We 
 operate all of our heart hospitals under a quality assurance program to
    provide an objective assessment of the quality of the services we provide.
     All of our heart hospitals that have been open for more than six months are
accredited by the Joint Commission on Accreditation of Healthcare     
Organizations, an independent accrediting organization that is widely 
recognized in the hospital industry.                                  

- Applying our experience across our heart hospitals                        

   Our cost-effective operations reflect the impact of shared experiences of
physicians and hospital management at each of our heart hospitals. We 
     encourage our hospital management and physician partners to regularly share
information and implement best practices, which is made easier by our 
     standard facility design and operational similarities. We share information
through regular meetings of our hospital management teams to          

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enable them to discuss new practices and methodologies such as supply 
  selection and management and scheduling efficiencies. We also coordinate
   opportunities for our physician partners to discuss - both on an informal
     basis and at our annual meeting of our physician partners - such matters as
clinical protocols, patient management and procedure techniques. These
   efforts have allowed all of our hospitals to benefit from the innovations
that occur at one hospital and our hospital managers and physicians to
     become more efficient and productive. For example, physicians at one of our
heart hospitals initially informed us of the benefits of ultrafast    
 computerized tomography, the most advanced technology available for the
early detection of coronary heart disease. Using the results of this  
non-invasive procedure, cardiologists and radiologists are able to    
 determine a person's current risk for a heart attack. After sharing the
  results of this physician-driven initiative with physicians at our other
 hospitals and gaining their support, we acquired ultrafast computerized
tomography scanning equipment at five of our heart hospitals.         

OUR HEART HOSPITALS                                                             

We currently own and operate eight heart hospitals. We have begun     
development on our ninth hospital, which will focus on cardiovascular care as   
well as orthopedics, neurology, obstetrics and gynecology and will be located in
Texas. We have also begun developing a heart hospital in Louisiana, which will  
be our tenth hospital. Both of these hospitals under development are expected to
open by late 2002. We have also identified two additional locations in which we 
are actively considering the development of heart hospitals. We expect to begin 
development on one to three new heart hospitals each year. Once a new heart     
hospital venture is formed and the partners have contributed their capital, it  
typically takes approximately 18 to 24 months to develop the heart hospital.    

The following table identifies key characteristics of our eight heart 
hospitals and the two hospitals we have under development. Our ownership        
percentage in the table gives effect to the exchange.                           

                                                        [Enlarge/Download Table]

                                                       PRO FORMA  OPENING DATE                            
                                                        MEDCATH    (SCHEDULED    LICENSED  CATH  OPERATING
HOSPITAL                              LOCATION         OWNERSHIP  OPENING DATE)    BEDS    LABS    ROOMS  
--------                        ---------------------  ---------  -------------  --------  ----  ---------
                                                                                                          
Arkansas Heart Hospital            Little Rock, AR      70.3%      Mar. 1997        84      6        3    
Tucson Heart Hospital                Tucson, AZ         58.6%      Oct. 1997        60      4        3    
Arizona Heart Hospital               Phoenix, AZ        70.6%      June 1998        59      4        3    
Heart Hospital of Austin             Austin, TX         70.9%      Jan. 1999        58      4        3    
Dayton Heart Hospital                Dayton, OH         66.5%      Sept. 1999       47      4        3    
Bakersfield Heart Hospital         Bakersfield, CA      53.3%      Oct. 1999        47      4        3    
Heart Hospital of New Mexico       Albuquerque, NM      24.0%      Oct. 1999        55      4        3    
Heart Hospital of South Dakota     Sioux Falls, SD      33.3%      Mar. 2001        50      3        3    
Harlingen Medical Center            Harlingen, TX       51.1%     (late 2002)      112      2        7    
Louisiana Heart Hospital        Slidell/Covington, LA   51.0%     (late 2002)       46      3        3    

We have initiated and are continuing to have discussions with our community     
hospital partner in our Heart Hospital of New Mexico about possibly acquiring   
for cash its interest in the venture that owns and operates the hospital. We    
cannot predict whether our efforts to acquire our community hospital partner's  
interest will be successful.                                                    

    Before designing and constructing our first heart hospital in 1994, we met
frequently with our physician partners to analyze the operations, facilities and
work flow of existing hospitals and found what we believed to be many           
inefficiencies in the way cardiovascular care was provided in existing          
hospitals. Based upon this analysis, we designed a hospital that would enhance  
physician and staff productivity and allow for the provision of high-quality,   
patient-focused care. Based upon subsequent operating experience and input from 
physicians at our                                                               

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other heart hospitals, we have further refined our basic heart hospital layout  
to allow us to combine site selection, facility size and layout, staff and      
equipment in an optimal manner to deliver quality cardiovascular care. We       
believe that a newly constructed and equipped heart hospital enjoys a           
significant competitive advantage over hospitals that have been repeatedly      
renovated and expanded over several decades, which often results in an          
inefficient layout and workflow. We also believe that a hospital and staff with 
a clear focus on diagnosing and treating cardiovascular disease can provide     
higher quality care and be more cost effective than general acute care hospitals
that seek to provide multiple healthcare services to patients with a wide       
variety of diseases.                                                            

The innovative characteristics of our heart hospitals include:        

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

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

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

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

  Extra capacity for critical cardiac procedures.  We design and
construct our heart hospitals with more operating rooms and cardiac   
 catheterization laboratories than we believe are available in the heart
     program of a typical general acute care hospital. This feature of our heart
 hospitals insures that the physicians practicing in our heart hospitals
will experience fewer conflicts in scheduling procedures for their    
  patients. In addition, all of our operating rooms are designed primarily
for cardiovascular procedures, which allows them to be used more      
efficiently by physicians and staff.                                  

  Our physician partners in our heart hospital ventures participate in the
material strategic and operating decisions we make for a heart hospital. They do
so either through their representatives on the governing board of the venture or
through a requirement in the venture's governing documents that we obtain the   
consent of their representatives before taking certain actions. In those        
ventures where we have a community hospital partner as well as physician        
partners, the community hospital partner also participates in these decisions,  
which include such matters as site selection, facility size and layout and      
selection and employment of the key                                             

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members of the heart hospital's senior management team. After a hospital opens  
and begins operating, the members of the hospital's senior management team, who 
are employed by us, make all routine operating decisions for the heart hospital.
We must generally obtain the approval or consent, however, of our partners      
before taking action on matters such as adopting the heart hospital's annual    
operating budget and making capital expenditures in excess of specified amounts.
We must also generally obtain the consent of our partners or their              
representatives before making any material amendments to the operating or       
partnership agreement for the heart hospital venture or admitting additional    
members or partners. The operating or partnership agreement for each heart      
hospital venture contains provisions specifying the criteria for, and timing of,
distributions to the partners as well as provisions limiting redemptions, and   
restricting the transfer, of ownership interests. In some of our hospital       
ventures, we must obtain the consent of our partners before making any          
distributions.                                                                  

Our heart hospitals have different operating characteristics than     
traditional general acute care hospitals. For example, in our hospital division,
our labor costs represent approximately 30% of our net revenue as compared, we  
believe, to approximately 40% of net revenue in the average for-profit hospital 
and approximately 45% to 50% in the average not-for-profit hospital. We achieve 
our cost-effective operating results in a number of ways, including:            

   - designing our heart hospitals to reduce the labor costs associated with
transporting patients, equipment and supplies. We believe these   
   transportation costs may account for as much as 6% of a general acute
care hospital's labor expense. The delays and lack of coordination
     associated with transporting patients around a large general acute care
      hospital also hinders the physicians' ability to provide quality care on
a timely basis and can result in patient dissatisfaction,         

   - eliminating duplicative layers of administrative and support personnel.
  We staff our heart hospitals with only four non-caregiving employees
 including a president, vice president of finance, vice president of
     nursing and vice president of business development. This staffing model
      greatly reduces administrative costs associated with traditional general
acute care hospitals,                                             

    - using working team leaders to supervise our nurses and medical technical
personnel at each of our heart hospitals. These team leaders spend
     approximately one third of their time supervising medical personnel and
       their remaining time providing cardiovascular care services. This working
team leader approach reduces the need for supervisory personnel,  

    - centralizing our non-clinical hospital support services such as finance,
    management information systems, regulatory compliance and managed care
contracting, as appropriate, and                                  

 - investing in technology and training our physicians, nurses and other
 staff members so that they are familiar with all details of quality
cardiovascular care, can work more efficiently and provide        
patient-focused care.                                             

   All of our heart hospitals operate under a quality assurance program and,
except for the Heart Hospital of South Dakota, which opened in March 2001, are  
accredited by the Joint Commission on Accreditation of Healthcare Organizations.
The Joint Commission conducted its initial survey of the Heart Hospital of South
Dakota in April 2001, and we expect to receive a final accreditation report     
within six to eight weeks after the date of completion of the survey. We assess 
the quality of cardiovascular care provided at each of our heart hospitals by   
focusing on several key criteria, including mortality rates, patient acuity,    
average length of stay and patient satisfaction. We believe our hospitals       
generally achieve lower mortality rates and a shorter average length of stay for
patients with generally higher acuity levels as compared to our competitors in  
each of our markets. For example, using 1999 MedPar data for patients receiving 
a broad range of cardiovascular procedures in our first five heart hospitals, we
have                                                                            

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derived the average length of stay, mortality rate and complicated case severity
index for those patients and compared the results to comparable data for        
patients receiving care for the same cardiovascular procedures at a group of ten
hospitals comprised of the top two competitors of each of our first five heart  
hospitals. In 1999, the average length of stay for patients in our first five   
heart hospitals was 4.8 days compared to an average of 5.5 days for the         
competitor group; our mortality rate was 2.0% compared to 3.2% for the          
competitor group; and our complicated case severity index was 1.21 compared to  
0.90 for the competitor group. We believe we enhance the quality of patient care
by providing a center that fosters excellence for cardiovascular care in each of
our markets. This allows our physicians, nurses, medical technicians and other  
staff members to concentrate on and enhance their professional cardiovascular   
care skills.                                                                    

   We monitor patient satisfaction in our heart hospitals through the use of
patient care surveys that we and independent third parties conduct. These       
performance surveys have consistently demonstrated a high level of patient      
satisfaction with our facilities, staff and care coordination. For example, in  
performance surveys conducted in our heart hospitals, 98% of our patients who   
completed them indicated they would return to our heart hospitals for any future
cardiovascular procedures. In addition, more than 97% of the patients who       
completed surveys indicated that they were satisfied with the physical comfort  
of our hospital, the patient education we provided and the way in which we      
allowed family members to have unlimited access to them and be closely involved 
in their care. We believe the high marks our heart hospitals consistently       
receive from patients in these surveys help distinguish us from most general    
acute care hospitals.                                                           

OUR HEART HOSPITAL DEVELOPMENT PROGRAM                                          

An important step in developing a new heart hospital is establishing a
relationship with a group of physicians providing cardiovascular care that we   
believe have established reputations for clinical excellence. We regularly      
receive unsolicited inquiries from groups of physicians interested in partnering
with us to take advantage of our hospital development and management expertise  
and access to capital. We also receive referrals to potential partners from our 
physician partners in our existing heart hospitals and from the leaders of      
physician groups to which we provide cardiovascular care consulting services.   
Our experience has been that physician groups most interested in partnering with
us are those whose members wish to improve their current practice environment.  
Since these physicians frequently have pre-existing relationships with our      
existing physician partners in other markets, they can quickly conduct their own
informal evaluation to understand the benefits of partnering with us to develop 
a heart hospital.                                                               

    An equally important step in developing a new heart hospital is performing
a detailed market analysis using publicly available data from a number of       
sources. We use a disciplined, data-driven process, which includes extensive    
demographic research, the use of publicly available information from Medicare   
and other sources and sophisticated modeling of potential operating results for 
a new heart hospital. The process includes an analysis of the:                  

  - overall market size for cardiovascular care, including the surrounding
communities,                                                      

- projected population growth in the market, particularly for the     
population group over the age of 55 because they are the primary  
recipients of cardiovascular care services,                       

  - Medicare reimbursement rates, which vary depending upon the wage index
for the market,                                                   

- effect on reimbursement due to payor mix, including managed care    
penetration of the market,                                        

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    - competitive strengths and weaknesses of each hospital in the market, and

- licensing and regulatory requirements, including certificate of need
requirements.                                                     

DIAGNOSTIC AND THERAPEUTIC FACILITIES                                           

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

Managed Diagnostic and Therapeutic Facilities                               

We manage the operations of nine cardiac diagnostic and therapeutic   
facilities. Five of these facilities are located at hospitals operated by other 
parties and offer invasive therapeutic procedures. The remaining four are not   
located at hospitals and offer only diagnostic services. We have ownership      
interests in three of these facilities. The following table provides information
about the nine facilities.                                                      

                                                        [Enlarge/Download Table]

                                                                           MEDCATH      INITIAL TERM  
                                                                          MANAGEMENT         OF       
                                                                         COMMENCEMENT    MANAGEMENT   
FACILITY                                           LOCATION                  DATE         AGREEMENT   
--------                                           --------              ------------  ---------------
                                                                                                      
Cardiac Testing Centers........................... Summit, NJ                1992         35 years    
Sun City Cardiac Center........................... Sun City, AZ              1992         40 years    
Heart Institute of Northern Arizona............... Kingman, AZ               1994         40 years    
Cape Cod Hospital(1).............................. Hyannis, MA               1995         20 years    
Wake Heart Cardiac Diagnostic Center.............. Raleigh, NC               1996         40 years    
Gaston Cardiology Services(1)(2).................. Gastonia, NC              1996         32 years    
Colorado Peaks Cardiovascular Lab(1).............. Colorado Springs, CO      1999         20 years    
Angleton Danbury Diagnostic Center................ Angleton, TX              1999          3 years    
Mercy Medical Center.............................. Springfield, OH           1999           1 year    

---------------                                                                 

(1) We have an ownership interest in each of these facilities.                  
(2) Our hospital partner in this facility has the option to terminate our       
   management agreement in 2003 and acquire all of the facility's equipment at
its net book value.                                                     

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

Mobile Catheterization Laboratories Serving Hospital Networks               

    We are the largest and most experienced provider of mobile catheterization
services to hospital networks in the United States. Mobile laboratories serving 
hospital networks are moved, usually on a daily basis, from one hospital to     
another in a particular hospital network or                                     

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geographic area. Each mobile laboratory is fully equipped and operated by our   
medical technicians and nurses, which provides a hospital or physician group    
with a turnkey catheterization laboratory. Our mobile laboratories permit a     
group of hospitals located in geographic proximity to one another, each with    
limited cardiovascular patient volume, to offer cardiovascular services through 
shared access to equipment and personnel. This also allows hospitals and        
physicians to offer cardiovascular care services while avoiding the substantial 
capital expenditures and operating expenses needed to purchase and operate the  
equipment required to perform these services. We currently have contracts with  
39 hospitals for our mobile laboratories. These hospitals pay for the use of our
mobile laboratories on a fixed-fee-per-procedure basis and reimburse us for most
of the costs incurred in performing procedures. In most instances, the hospitals
are obligated to pay a minimum monthly amount regardless of the number of       
procedures performed in the mobile laboratories while they are located at the   
hospital.                                                                       

Interim Mobile Catheterization Labs                                         

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

CARDIOVASCULAR PROCEDURES                                                       

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

Invasive Procedures                                                         

 Atherectomy.  This procedure is used to remove concentrations of plaque
from coronary arteries.                                                         

Cardiac catheterization.  This procedure utilizes catheters, contrast 
agents and sophisticated diagnostic instruments to evaluate the functioning of  
the heart and the coronary arteries.                                            

     Coronary artery bypass graft surgery.  Coronary artery bypass graft surgery
is an open heart surgical procedure through which the flow of blood to the heart
is bypassed around sections of one or more coronary arteries that have become   
clogged with plaque by using vein or artery grafts taken from other areas of the
body.                                                                           

     Pacemaker installation.  A pacemaker emits electrical signs that aid in the
regulation of a patient's abnormal heart rate.                                  

   Percutaneous transluminal coronary angioplasty.  This procedure, which is
commonly called angioplasty, uses the techniques of cardiac catheterization to  
open coronary arteries that have become clogged with concentrations of plaque.  
This procedure allows patients suffering from coronary heart disease to avoid or
defer coronary artery bypass graft surgery. This procedure also commonly is used
to clear blockages in arteries supplying blood to other parts of the body.      

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    Stent installation.  A stent is a tiny metal sleeve surgically placed into
a coronary or other artery when a patient undergoes angioplasty as an adjunct   
treatment to reduce the incidence of restinosis, which is the renarrowing of a  
vessel.                                                                         

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

Non-Invasive Procedures                                                     

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

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

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

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

Ultrafast computerized tomography.  This test detects the buildup of  
calcified plaque in coronary arteries before the patient experiences any        
symptoms.                                                                       

CARDIOLOGY CONSULTING AND MANAGEMENT SERVICES                                   

   We provide consulting services to three physician groups and manage three
additional physician practices that include primarily cardiologists and         
cardiovascular surgeons. The consulting services we provide to these groups     
include advising on:                                                            

  - positioning the physicians to adapt to the demands of the managed care
market by partnering highly-skilled administrative personnel with 
physicians and medical personnel,                                 

- methodologies to increase operating efficiencies,                   

- methodologies to improve the utilization of existing facilities and 
equipment, and                                                    

- incorporating advanced technology into their practices and improving
their information systems.                                        

CLINICAL TRIAL SITE MANAGEMENT SERVICES                                         

We coordinate and assist in the conduct of clinical trials of         
pharmaceuticals and medical devices for the treatment of cardiovascular disease 
in collaboration with physicians at several of our heart hospitals. Our services
include employing, training and managing on-site clinical research coordinators 
and providing regulatory affairs project management and quality assurance       
support. In addition, we implement standard operating procedures and working    
guidelines, insure compliance with guidelines issued by the Food and Drug       
Administration and the International Congress on Harmonization and assist with  
audit preparation. We have long-term clinical research agreements with five     
physician-based research centers and two of our heart hospitals.                

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COMPLIANCE PROGRAM                                                              

   We have a compliance program that is consistent with guidelines issued by
the Office of Inspector General of the Department of Health and Human Services. 
As part of this compliance program, we adopted a Code of Ethics and designated  
compliance officers at the corporate level and at individual heart hospitals.   
Our program includes an anonymous reporting system, compliance training         
programs, auditing and monitoring programs and a disciplinary system to enforce 
our code of ethics and other compliance policies. It also includes a process for
screening all employees through applicable federal and state databases of       
sanctioned individuals. Auditing and monitoring activities include claims       
preparation and submission, and also cover issues such as coding, billing, cost 
reporting and financial arrangements with physicians and other referral sources.
These areas are also the focus of our specialized training programs. The        
compliance committee of our board of directors oversees the compliance program. 

EMPLOYEES                                                                       

   As of June 30, 2001, we employed 3,369 persons, including 2,294 full-time
and 1,075 part-time employees. None of our employees is a party to a collective 
bargaining agreement, and we consider our relationship with our employees to be 
good. There currently is a nationwide shortage of nurses and other medical      
support personnel, which makes recruiting and retaining these employees         
difficult. We provide competitive wages and benefits and offer our employees a  
professional work environment that we believe helps us recruit and retain the   
staff we need to operate our hospitals and other facilities.                    

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

PROPERTIES                                                                      

Our corporate offices are located in Charlotte, North Carolina. We    
currently lease approximately 32,580 square feet of commercial office space at  
that location.                                                                  

  Each of the ventures we have formed to develop a heart hospital owns the
land and buildings of the hospital, with the exception of the land underlying   
the Heart Hospital of Austin, which we lease. Each venture has pledged its      
interest in the land and hospital building to secure the term debt incurred to  
develop the heart hospital. Each venture formed to own and operate a diagnostic 
and therapeutic facility leases its facility.                                   

ENVIRONMENTAL MATTERS                                                           

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

INSURANCE                                                                       

    Like most healthcare companies, we are subject to claims and legal actions
in the ordinary course of business. To cover these claims, we maintain          
professional malpractice liability insurance and general liability insurance in 
amounts we believe are sufficient for our operations.                           

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Currently we maintain professional liability insurance that provides primary    
coverage on a claims made basis of $1.0 million per incident and $3.0 million in
annual aggregate amount. In addition, we currently maintain multiple layers of  
umbrella liability insurance the aggregate amount of which is $40 million. Some 
of the claims against us, however, could exceed the scope of our coverage in    
effect or coverage of particular claims or damages could be denied. In addition,
we may not be able to obtain adequate insurance at a reasonable cost in the     
future.                                                                         

COMPETITION                                                                     

  In executing our business strategy, we compete with other cardiovascular
care providers, primarily for-profit and not-for-profit general acute care      
hospitals. In some of our markets, such as Sioux Falls, South Dakota, we may    
have only one competitor. In other markets, such as Phoenix, Arizona, our heart 
hospitals compete for patients with the heart programs of numerous other        
hospitals in the same market. In most of our markets we compete for market share
of cardiovascular procedures with from three to six hospitals. Some of these    
hospitals are part of large for profit or not-for-profit hospital systems with  
greater financial resources than we have available to us, and all of them have  
been operating in the markets they serve for many years. When we open a new     
heart hospital, we generally will not be successful unless we capture           
significant market share from existing hospitals already operating in the       
market. We believe that six of our eight heart hospitals rank first or second in
market share of key cardiovascular surgical procedures performed in their       
markets. We believe our other two heart hospitals rank third in market share of 
those procedures performed in the markets they serve. The principal competitors 
of each of our heart hospitals are identified below.                            

                                                                [Download Table]
                                                                              
Arkansas Heart Hospital                     Dayton Heart Hospital             
  - Baptist Medical Center                    - Good Samaritan Hospital       
  - St. Vincent Infirmary Medical Center      - Kettering Memorial Hospital   
Tucson Heart Hospital                       Bakersfield Heart Hospital        
  - Tucson Medical Center                     - Bakersfield Memorial Hospital 
  - University Medical Center                 - San Joaquin Community Hospital
Arizona Heart Hospital                      Heart Hospital of New Mexico      
  - Good Samaritan Medical Center             - Presbyterian Hospital         
  - Phoenix Regional Medical Center           - Lovelace Health Systems       
Heart Hospital of Austin                    Heart Hospital of South Dakota    
  - Seton Medical Center                      - Sioux Valley Hospital         
  - St. David's Hospital                                                      

  Some of the hospitals that compete with our heart hospitals are owned by
governmental agencies or not-for-profit corporations supported by endowments and
charitable contributions and can finance capital expenditures and operations on 
a tax-exempt basis. Some of our competitors are larger, are more established,   
have greater geographic coverage, offer a wider range of services or have more  
capital or other resources than we do. If our competitors are able to finance   
capital improvements, recruit physicians, expand services or obtain favorable   
managed care contracts at their facilities, we may experience a decline in      
market share. We are not aware of any other company pursuing a strategy of      
developing and owning multiple heart hospitals in partnership with cardiologists
and cardiovascular surgeons. We believe our experience in developing and        
operating heart hospitals, managing diagnostic and therapeutic centers and the  
constructive relationships that we have developed with numerous cardiologists   
and cardiovascular surgeons give us a significant advantage over potential      
competitors that might adopt a similar business strategy in the future. In      
operating our heart hospitals, particularly in performing outpatient procedures,
we compete with free-standing diagnostic and therapeutic facilities located in  
the same markets.                                                               

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We are not aware of any national competitors in the mobile cardiac    
catheterization laboratory business seeking to serve networks of hospitals. It  
is possible that some of the hospitals currently served by our mobile           
catheterization laboratories may elect to install their own facilities. There   
are several other companies offering cardiac catheterization laboratories for   
rental on a short-term basis.                                                   

LEGAL PROCEEDINGS                                                               

  We are currently involved in a dispute with Sun City Health Corporation,
which owns Boswell Hospital where the Sun City Cardiac Center is located,       
regarding the pricing arrangement for inpatient procedures. The Sun City Cardiac
Center has been providing services to the hospital's patients for many years    
under a pricing arrangement based upon an expired written agreement. From 1993  
until May 1999, Sun City Health Corporation paid the amounts billed to them     
under that pricing arrangement. In May 1999, Sun City Health Corporation        
unilaterally began to discount the amount of the center's charges and has       
continued to discount them since, reducing the center's revenue by approximately
$3.0 million per year. We subsequently filed suit in the Superior Court for     
Maricopa County Arizona, on behalf of the center to recover the unpaid amounts  
of the charges. Sun City Health Corporation recently agreed to submit the       
dispute over the pricing arrangement to arbitration. Sun City Health Corporation
has the right to establish its own cardiac catheterization laboratory, but would
first have to purchase the business of the Sun City Cardiac Center at its fair  
market value.                                                                   

Our Bakersfield Heart Hospital filed a lawsuit in June 2001 against   
PacifiCare of California and SecureHorizons USA, Inc. in Superior Court of      
California, County of Kern, seeking payment for services rendered by the        
Bakersfield Hospital to patients insured by these parties. Our claim as of April
30, 2001 was for at least $6.2 million plus other amounts set forth in the      
complaint. We believe we will prevail in our efforts to get a judgment for the  
amounts we are owed for these services, but we cannot assure you that we will   
collect the amounts we believe are owed to us. Our revenues could be adversely  
affected if we do not prevail on our claim or are unable to collect a judgment  
rendered in our favor. We have made provisions in our consolidated financial    
statements to report the amounts receivable from these parties at their net     
realizable value in accordance with accounting principles generally accepted in 
the United States.                                                              

    We are involved in other litigation and proceedings in the ordinary course
of our business. We do not believe the outcome of any such litigation,          
individually or in the aggregate, will have a material adverse effect upon our  
business, financial condition or results of operations.                         

GOVERNMENT REGULATION                                                           

Overview                                                                    

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

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participate in these programs. We believe that our hospitals and other health   
care facilities are in substantial compliance with current federal, state, and  
local regulations and standards.                                                

Licensure and certification                                                 

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

Certification.  In order to participate in the Medicare program, each 
provider must meet applicable regulations of the Department of Health and Human 
Services relating to, among other things, the type of facility, equipment,      
personnel, standards of medical care and compliance with applicable state and   
local laws. All hospitals and our diagnostic and therapeutic facilities are     
certified to participate in the Medicare and Medicaid programs.                 

  Emergency Medical Treatment and Active Labor Act.  The Emergency Medical
Treatment and Active Labor Act imposes requirements as to the care that must be 
provided to anyone who seeks care at facilities providing emergency medical     
services. Regulations have recently been adopted that expand the areas within a 
hospital system that must provide emergency treatment. Sanctions for failing to 
fulfill these requirements include exclusion from participation in the Medicare 
and Medicaid programs and civil money penalties. In addition, the law creates   
private civil remedies that enable an individual who suffers personal harm as a 
direct result of a violation of the law to sue the offending hospital for       
damages and equitable relief. A hospital that suffers a financial loss as a     
direct result of another participating hospital's violation of the law also has 
a similar right. Although we believe that our emergency care practices are in   
compliance with the law, we cannot assure you that governmental officials       
responsible for enforcing the law or others will not assert we are in violation 
of these laws.                                                                  

Certificate of Need laws.  In some states, the construction of new    
facilities, the acquisition of existing facilities or the addition of new beds  
or services may be subject to review by state regulatory agencies under a       
certificate of need program. These laws generally require appropriate state     
agency determination of public need and approval prior to the addition of beds  
or services. Currently, we do not operate any hospitals in states that have     
adopted certificate of need laws. However, these laws may limit our ability to  
acquire or develop new facilities in states that have such laws.                

Professional licensure.  Healthcare professionals at our hospitals and
diagnostic and therapeutic facilities are required to be individually licensed  
or certified under applicable state law. We take steps to ensure that our       
employees and agents have all necessary licenses and certifications, and we     
believe that our employees and agents comply with all applicable state laws.    

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

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we, or the transactions in which we are involved, are in violation of these     
laws. These laws may also be interpreted by the courts in a manner inconsistent 
with our interpretations.                                                       

Fraud and Abuse Laws                                                        

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

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

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

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

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

 - use of free or significantly discounted office space or equipment for
physicians in facilities usually located close to the hospital,   

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

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 - free training for a physician's office staff including management and
laboratory techniques,                                            

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

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

- payment of the costs of a physician's travel and expenses for       
conferences,                                                      

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

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

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

Physician self-referral law.  Section 1877 of the Social Security Act,
commonly known as the Stark Law, prohibits physicians from referring Medicare   
and Medicaid patients for certain designated health services to entities in     
which they or any of their immediate family members have a direct or indirect   
ownership or compensation arrangement unless an exception applies. Sanctions for
violating the Stark Law include civil monetary penalties, including up to       
$15,000 for each improper claim and $100,000 for any circumvention scheme, and  
exclusion from the Medicare or Medicaid programs. There are various ownership   
and compensation arrangement exceptions to the self-referral prohibition,       
including an exception for a physician's ownership in an entire hospital (as    
opposed to an ownership interest in a hospital department) if the physician is  
authorized to perform services at the hospital. There is also an exception for  
ownership of publicly traded securities in a company such as ours that has      
shareholder equity exceeding $75 million at the end of its most recent fiscal   
year or on average during the three previous fiscal years, as long as the       
physician acquired the security on terms generally available to the public and  
the security is traded on one of the major exchanges. There are also exceptions 
for many of the customary financial arrangements between physicians and         
providers, including employment contracts, personal service arrangements,       
isolated financial transactions, payments by physicians, leases, and recruitment
agreements, as long as these arrangements meet certain conditions.              

Phase I of the final Stark regulations was issued in January 2001, and
largely goes into effect in 2002. However, the Health Care Financing            
Administration has not finalized the balance of the regulations. Phase II of the
Stark Law regulations is expected to be published in 2001 and will address those
exceptions not addressed in Phase I, and application of the law under the       
Medicaid program. There have been few enforcement actions taken to date and thus
there                                                                           

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is little indication as to how courts will interpret and apply the Stark Law;   
however, enforcement is expected to increase. We believe we have structured our 
financial arrangements with physicians to comply with the statutory exceptions  
included in the Stark Law and the regulatory exceptions in Phase I of the final 
regulations. In particular, we believe that our physician ownership arrangements
meet the Stark whole hospital exception. In addition, we expect to meet the     
exception for publicly traded securities. However, Phase II of the regulations  
may interpret provisions of the Stark law and the Phase I regulations           
differently from the manner in which we have interpreted them. We cannot predict
the final form that such regulations will take or the effect those regulations  
will have on us or our arrangements with physicians.                            

  The Stark Law may also be amended in ways that we cannot predict at this
time, including possible changes to the current physician ownership and         
compensation exceptions. For example, Representative Kleczka recently introduced
a bill, with Representative Stark as a co-sponsor, that would amend the Stark   
Law to add as a requirement to the exception for a physician's ownership in an  
entire hospital that the physician purchase the ownership interest on terms     
generally available to the public. If enacted as proposed, this provision would 
apply only to ownership and other investment interests purchased by physicians  
on or after the effective date of this proposed amendment to the Stark Law.     
Thus, this change in the Stark Law would not apply to the ownership interests of
the physicians who previously invested in the ventures that own and operate our 
existing heart hospitals or of those who invest in ventures formed to develop   
future hospitals as long as their interests are purchased prior to the effective
date. However, this as well as other possible amendments to the Stark Law could 
require us to change the manner in which we establish relationships with        
physicians to develop a heart hospital. We cannot predict whether this or any   
other law or amendment will be enacted or the effect they might have on us.     

Many states in which we operate also have adopted, or are considering 
adopting, similar physician self-referral laws which may prohibit certain       
physician referrals or require certain disclosures. Some of these state laws    
apply regardless of the source of payment for care. These statutes typically    
provide criminal and civil penalties as well as loss of licensure. While there  
is little precedent for the interpretation or enforcement of these state laws,  
we have attempted to structure our financial relationships with physicians and  
others in light of these laws. However, if we are found to have violated these  
state laws, it could result in the imposition of criminal and civil penalties as
well as possible licensure revocation.                                          

Civil monetary penalties.  The Social Security Act contains provisions
imposing civil monetary penalties for various fraudulent and/or abusive         
practices, including, among others, hospitals which knowingly make payments to a
physician as an inducement to reduce or limit medically necessary care or       
services provided to Medicare or Medicaid beneficiaries. In July 1999, the      
Office of Inspector General issued a Special Advisory Bulletin on gainsharing   
arrangements.                                                                   

The Bulletin warns that clinical joint ventures between hospitals and 
physicians may implicate these provisions as well as the anti-kickback statute, 
and specifically refers to specialty hospitals which are marketed to physicians 
in a position to refer patients to the venture, and structured to take advantage
of the exception to the Stark statute for physician investments in "whole       
hospitals." Hospitals specializing in heart, orthopedic and maternity care are  
mentioned, and the Bulletin states that these ventures may induce               
investor-physicians to reduce services to patients through participation in     
profits generated by cost savings, in violation of a civil monetary penalty     
provision. Despite this initial broad interpretation of this civil monetary     
penalty law, in February 2001, the Office of Inspector General issued an        
advisory opinion which declined to sanction a particular gainsharing arrangement
under this civil monetary penalty provision, or the anti-kickback statute,      
because of the specific circumstances and safeguards built into the arrangement.
We believe that the ownership distributions paid to physicians by our heart     
hospitals do not constitute payments made to physicians under                   

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gainsharing arrangements. We cannot assure you, however, that government        
officials will agree with our interpretation of applicable law.                 

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

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

Healthcare industry investigations                                          

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

  Many current healthcare investigations are national initiatives in which
federal agencies target an entire segment of the healthcare industry. One       
example is the federal government's initiative regarding hospitals' improper    
requests for separate payments for services rendered to a patient on an         
outpatient basis within three days prior to the patient's admission to the      
hospital, where reimbursement for such services is included as part of the      
reimbursement for services furnished during an inpatient stay. The government   
has targeted all hospital providers to ensure conformity with this reimbursement
rule. Further, the federal government continues to investigate Medicare         
overpayments to prospective payment system hospitals that incorrectly report    
transfers of patients to other prospective payment system hospitals as          
discharges. Law enforcement authorities, including the Office of the Inspector  
General and the Department of Justice, are also increasing scrutiny of          
arrangements between healthcare providers and potential referral sources to     
ensure that the arrangements are not designed as a mechanism to exchange        
remuneration for patient care referrals and business opportunities.             
Investigators also have demonstrated a willingness to look behind the           
formalities of a business transaction to determine                              

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the underlying purpose of payments between healthcare providers and potential   
referral sources.                                                               

    It is possible that governmental entities could initiate investigations on
these or other subjects in the future at our facilities and that such           
investigations could result in significant costs in responding to such          
investigations and penalties to us, as well as adverse publicity. It is also    
possible that our executives and managers, many of whom have worked at other    
healthcare companies that are or may become the subject of federal and state    
investigations and private litigation, could be included in governmental        
investigations or named as defendants in private litigation. We are not aware of
any material governmental investigations involving any of our facilities, our   
executives or managers. The positions taken by authorities in any future        
investigations of us, our executives or managers or other healthcare providers  
and the liabilities or penalties that may be imposed could have a material      
adverse effect on our business, financial condition and results of operations.  

Clinical Trial Site Management Services                                     

The clinical, and post-marketing support, management, and educational 
services performed by our Heart Research Centers International are subject to   
various regulatory requirements designed to ensure the quality and integrity of 
the data or products of these services. Heart Research Centers International    
provides such services to both sponsors and contract research organizations.    

     The industry standard for conducting preclinical testing is embodied in the
investigational new drugs regulations administered by the Food and Drug         
Administration. Research conducted at institutions supported by funds from the  
National Institutes of Health must also comply with multiple project assurance  
agreements and guidelines administered by the National Institutes of Health and 
the Office of Research Protection of the Department of Health and Human         
Services. The requirements for facilities engaging in pharmaceutical, clinical  
trials, are set forth in the good clinical practice regulations and guidelines. 
Regulations related to good clinical practices and investigational new drugs    
have been mandated by the Food and Drug Administration and have been adopted by 
similar regulatory authorities in other countries. These regulations stipulate  
requirements for facilities, equipment, supplies and personnel engaged in the   
conduct of studies to which these regulations apply. The regulations require    
that written, standard operating procedures are followed during the conduct of  
studies and for the recording, reporting and retention of study data and        
records. To help assure compliance, our Health Research Centers International   
subsidiary has a staff of experienced compliance and quality assurance          
professionals who monitor ongoing compliance with the regulations pertaining to 
good clinical practices and investigational new drugs by performing compliance  
assessments, assisting with audit preparation, coordinating Institutional Review
Board submissions and regulatory filings and conducting quality assurance       
reviews of testing procedures and facilities.                                   

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

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

- obtaining specific written commitments from the investigators,      

- disclosure of conflicts of interest,                                

- verifying that patient informed consent is obtained;                

- instructing investigators to maintain records and reports,          

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- verifying drug or device accountability, and                        

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

  Records for clinical studies must be maintained for specific periods for
inspection by the Food and Drug Administration or other authorities during      
audits. Non-compliance with the good clinical practices or investigational new  
drugs requirements can result in the disqualification of data collected during  
the clinical trial and may lead to debarment of an investigator or a contract   
research organization, such as Heart Research Centers International, if fraud is
detected.                                                                       

   Heart Research Center's standard operating procedures related to clinical
studies are written in accordance with regulations and guidelines appropriate to
a global standard with regional variations in the regions where they will be    
used, thus helping to ensure compliance with good clinical practices. Heart     
Research Centers International also complies with International Congress on     
Harmonization regulations, as appropriate.                                      

 Although we believe that we are currently in compliance in all material
respects with applicable federal, state and international laws, failure to      
comply could subject us to denial of the right to conduct business, fines,      
criminal penalties and other enforcement actions.                               

    Finally, new final rules have been adopted by the Department of Health and
Human Services related to the responsibilities of contract research             
organizations, other healthcare entities and their business associates to       
maintain the privacy of patient identifiable medical information. These rules   
are discussed in more detail in the following section. We intend to comply with 
these rules when they become effective and when compliance is required on April 
14, 2003, and to obtain all required patient authorizations.                    

Privacy and security requirements.  The Administrative Simplification 
Provisions of the Health Insurance Portability and Accountability Act of 1996   
require the use of uniform electronic data transmission standards for healthcare
claims and payment transactions submitted or received electronically. These     
provisions are intended to encourage electronic commerce in the healthcare      
industry. On August 17, 2000, the Department of Health and Human Services       
published final regulations establishing electronic data transmission standards 
that all healthcare providers must use when submitting or receiving certain     
healthcare transactions electronically. Compliance with these regulations is    
required by October 16, 2002. We cannot predict the impact that final           
regulations, when fully implemented, will have on us.                           

     The Administrative Simplification Provisions also require the Department of
Health and Human Services to adopt standards to protect the security and privacy
of health-related information. The Department of Health and Human Services      
proposed regulations containing security standards on August 12, 1998. These    
proposed security regulations have not been finalized, but as proposed, would   
require healthcare providers to implement organizational and technical practices
to protect the security of electronically maintained or transmitted health-     
related information. In addition, the Department of Health and Human Services   
released final regulations containing privacy standards on December 28, 2000.   
These privacy regulations are effective April 14, 2001, but compliance with     
these regulations is not required until April 2003. The privacy regulations will
extensively regulate the use and disclosure of individually identifiable        
health-related information. The security regulations, as proposed, and the      
privacy regulations could impose significant costs on our facilities in order to
comply with these standards. We cannot predict the final form that these        
regulations will take or the impact that final regulations, when fully          
implemented, will have on us.                                                   

    Violations of the Administrative Simplification Provisions could result in
civil penalties of up to $925,000 per type of violation in each calendar year   
and criminal penalties of up to $250,000 per violation. In addition, our        
facilities will continue to remain subject to any state laws that are more      
restrictive than the regulations issued under the Administrative Simplification 
Provisions. These statutes vary by state and could impose additional penalties. 

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Healthcare reform                                                           

    The healthcare industry continues to attract much legislative interest and
public attention. In recent years, an increasing number of legislative proposals
have been introduced or proposed in Congress and in some state legislatures that
would effect major changes in the healthcare system. Proposals that have been   
considered include changes in Medicare, Medicaid and other programs, cost       
controls on hospitals and mandatory health insurance coverage for employees. The
costs of implementing some of these proposals would be financed, in part, by    
reduction in payments to healthcare providers under Medicare, Medicaid, and     
other government programs. We cannot predict the course of future healthcare    
legislation or other changes in the administration or interpretation of         
governmental healthcare programs and the effect that any legislation,           
interpretation, or change may have on us.                                       

Compliance Program                                                          

The Office of Inspector General has issued guidelines to promote      
voluntarily developed and implemented compliance programs for the healthcare    
industry. In February 1998, the Office of Inspector General issued compliance   
program guidance for hospitals. In response to those guidelines, the Company    
adopted a Code of Ethics, designated Compliance Officers in the parent          
corporation and individual hospitals, established a toll free compliance line,  
which permits anonymous reporting, implemented various compliance training      
programs, and developed a process for screening all employees through applicable
federal and state databases.                                                    

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

 It is our policy to require the officers, all employees, members of the
medical staff, and allied health professionals to participate in compliance     
training programs. The board of directors has established a compliance          
committee, which oversees implementation of the compliance program. The         
committee consists of three outside directors, and is chaired by Galen Powers, a
director and former chief counsel for the Health Care Financing Administration, 
where he was responsible for providing legal advice on federal healthcare       
programs, particularly Medicare and Medicaid. The compliance committee of the   
board meets at least quarterly.                                                 

    The corporate compliance officer is appointed by the board, and reports to
the chief executive officer, and to the full board at least quarterly. The      
corporate compliance officer is a vice president, and has a background in       
nursing and hospital administration. Each hospital has its own compliance       
committee that reports to its governing board. The hospital president is also   
the compliance officer. The board of directors' compliance committee assesses   
each hospital's compliance program at least annually. The corporate compliance  
officer regularly visits the hospitals for compliance reviews and provides an   
audit guide to the hospitals to evaluate compliance with our policies and       
procedures.                                                                     

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

Payment                                                                     

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

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    Medicare payments for inpatient acute services are generally made pursuant
to a prospective payment system. Under this system, our hospitals are paid a    
prospectively-determined amount for each hospital discharge based on the        
patient's diagnosis. Specifically, each discharge is assigned to a              
diagnosis-related group. Based upon the patient's condition and treatment during
the relevant inpatient stay, each diagnosis-related group is assigned a payment 
rate that is prospectively set using national average costs per case for        
treating a patient for a particular diagnosis. Such payments do not consider the
actual costs incurred by a hospital in providing a particular inpatient service;
however, diagnosis-related group payments are adjusted by a predetermined       
geographic adjustment factor assigned to the geographic area in which the       
hospital is located. While hospitals generally do not receive direct payment in 
addition to a diagnosis-related group payment, hospitals may qualify for an     
"outlier" payment when the relevant patient's treatment costs are               
extraordinarily high and exceed a specified threshold.                          

 The diagnosis-related group rates are adjusted by an update factor each
federal fiscal year, which begins on October 1. The update factor is determined,
in part, by the projected increase in the cost of goods and services that are   
purchased by hospitals, referred to as the market basket index. The annual      
update factor historically has been lower than the projected increases in the   
market basket index. Diagnosis-related group rate increases were 1.1% for       
federal fiscal year 1995 for urban hospitals, 1.5% for federal fiscal year 1996,
and 2.0% for federal fiscal year 1997. For federal fiscal year 1998, there was  
no increase. The diagnosis-related group rate was increased by the projected    
increase in the market basket index minus 1.9% for federal fiscal year 1999 and 
1.8% for federal fiscal year 2000. For federal fiscal year 2001, the update will
average the market basket index, implemented in two phases during the fiscal    
year. For federal fiscal years 2002 and 2003, hospitals will receive the market 
basket index minus 0.55 percentage points, and in federal fiscal year 2004 and  
subsequently hospitals will receive the full market basket index update. Future 
legislation may increase or decrease diagnosis-related group payment updates, or
otherwise modify Medicare reimbursement to acute hospitals, but we are not able 
to predict the amount of any such reimbursement changes or the effect that such 
changes will have on us.                                                        

    Outpatient services have traditionally been paid at the lower of customary
charges or on a reasonable cost basis. The Balanced Budget Act of 1997          
established a prospective payment system for outpatient hospital services that  
commenced on August 1, 2000. Based upon our early experience with the new       
prospective payment system for outpatient hospital services, we currently do not
expect the new system to have a material adverse effect on our future operating 
results. However, we have been negatively affected to some extent by delays in  
processing our claims under the new reimbursement system subsequent to its      
implementation in August 2000. Moreover, additional changes may be made to the  
new reimbursement system in the future; we are unable to anticipate at this time
the effect, if any, such changes might have on the company.                     

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

Medicaid.  Medicaid is a state-administered program for low income    
individuals which is funded jointly by the federal and individual state         
governments. Most state Medicaid payments for hospitals are made under a        
prospective payment system or under programs that negotiate payment levels with 
individual hospitals. Many states are currently considering significantly       
reducing Medicaid funding, while at the same time expanding Medicaid benefits.  
This could adversely affect future levels of Medicaid payments received by our  
hospitals. We are unable to predict what impact, if any, future Medicaid managed
care systems might have on our operations.                                      

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

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

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

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

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

Commercial insurance.  Our hospitals provide services to individuals  
covered by private healthcare insurance. Private insurance carriers pay our     
hospitals or in some cases reimburse their policyholders based upon the         
hospital's established charges and the coverage provided in the insurance       
policy. Commercial insurers are trying to limit the costs of hospital services  
by negotiating discounts, and including the use of prospective payment systems, 
which would reduce payments by commercial insurers to our hospitals. Reductions 
in payments for services provided by our hospitals to individuals covered by    
commercial insurers could adversely affect us.                                  

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS                                                

   Our directors and executive officers as of June 30, 2001 were as follows:

                                                        [Enlarge/Download Table]

                   NAME                    AGE                        POSITION                       
                   ----                    ---                        --------                       
                                                                                                     
Stephen R. Puckett........................ 47   Chairman of the Board                                
David Crane............................... 44   President and Chief Executive Officer and Director   
Michael G. Servais........................ 54   Executive Vice President and Chief Operating Officer 
James E. Harris........................... 39   Senior Vice President and Chief Financial Officer    
Dennis I. Kelly........................... 43   Senior Vice President of Development                 
R. William Moore, Jr...................... 51   President, Hospital Division                         
Thomas K. Hearn III....................... 40   President, Diagnostic Division                       
A. Kenneth Petronis....................... 41   President, Cardiology Consulting and Management      
                                                  Division                                           
Joan McCanless............................ 47   Vice President Clinical Disease Management/ Corporate
                                                  Compliance Officer                                 
David H.S. Chung.......................... 33   Director                                             
Edward A. Gilhuly......................... 41   Director                                             
Galen Powers.............................. 64   Director                                             
Paul B. Queally........................... 37   Director                                             
Donald E. Steen........................... 54   Director                                             
D. Scott Mackesy.......................... 32   Director                                             
John Casey................................ 55   Director                                             
John B. McKinnon.......................... 66   Director                                             

At the same time that we complete this offering, we will complete the 
exchange, which includes establishing MedCath Corporation as our new holding    
company. All of our directors and executive officers held the same positions    
with our former holding company that they now hold with MedCath Corporation. For
purposes of the information presented below about their experience with us, we  
have combined the periods they held positions with our former holding company   
with the period they have held positions with our new holding company.          

    Stephen R. Puckett has been our chairman of the board since December 1999.
He was a founder of our predecessor company in 1988 and served as chairman of   
the board of directors, president and chief executive officer of our predecessor
company from that time until December 1999 when he became chairman. From 1984 to
1989, Mr. Puckett served as executive vice president and chief operating officer
of the Charlotte Mecklenburg Hospital Authority, a large multi-hospital system, 
and from 1981 to 1983, he served as its senior vice president. Mr. Puckett      
serves as a director of Cardiovascular Diagnostics, Inc. Mr. Puckett received a 
B.A. and an M.S. in Health Management from the University of Alabama at         
Birmingham.                                                                     

David Crane has been our president and chief executive officer since  
December 1999. From 1989 to 1999, Mr. Crane served as executive vice president  
and chief operating officer of MedCath and its predecessor company and has      
served as a director of MedCath and its predecessor company since 1989. From    
1985 to 1989, Mr. Crane was employed by MediVision, Inc., an eye care company.  
He served as chief operating officer of MediVision from 1987 to 1989. From 1982 
to 1985, he was a business and healthcare consultant and manager with Bain &    
Company. Mr. Crane received a B.A. from Yale University and an M.B.A. from      
Harvard Business School.                                                        

Michael G. Servais has been our executive vice president and chief    
operating officer since July 2000. From 1994 to 2000, Mr. Servais served as     
senior vice president and president of                                          

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the hospital division of Universal Health Services, Inc. From 1990 to 1994, he  
was vice president of Universal Health Services, Inc. From 1986 to 1990, Mr.    
Servais was president of Jupiter Hospital Corporation, a privately held hospital
company with seven hospitals and related business entities. From 1981 to 1986,  
he was vice president of hospital operations for a privately held, for-profit   
health care company based in Seattle, Washington. From 1968 to 1981, he held a  
variety of senior management positions in large not-for-profit hospitals in     
southern California. Mr. Servais received his B.S.B.A. from California State    
University at Northridge and his M.P.A. from the University of Southern         
California.                                                                     

James E. Harris has been our senior vice president and chief financial
officer since December 1999. From 1998 to 1999, Mr. Harris was chief financial  
officer for Fresh Foods, Inc., a manufacturer of fully cooked food products.    
From 1987 to 1998, Mr. Harris served in several different officer positions with
The Shelton Companies, a private investment company headquartered in Charlotte, 
North Carolina. Prior to joining The Shelton Companies, Mr. Harris spent two    
years with the Winston-Salem office of Ernst & Young as a senior accountant. Mr.
Harris received his B.S.B.A. from Appalachian State University and his M.B.A.   
from Wake Forest University's Babcock School of Management.                     

 Dennis I. Kelly has been our senior vice president of development since
January 1999. From 1995 to 1999, Mr. Kelly was the vice president of            
governmental and national accounts for Siemens Medical Systems, Inc. Mr. Kelly  
initially joined Siemens in 1983 as a sales representative and held various     
management positions prior to 1995. Mr. Kelly received a B.S. from Westminster  
College and a Registered Technologist, Radiography from the University of Utah. 

R. William Moore, Jr. has been president of the hospital division of  
MedCath and its predecessor company since November 1995. From 1994 to 1995, Mr. 
Moore served as president of our predecessor company's first heart hospital, the
McAllen Heart Hospital. From 1989 to 1994, Mr. Moore was administrator of       
University Hospital, a 130-bed hospital in the Charlotte Mecklenburg Hospital   
Authority's large multi-hospital system. Mr. Moore received a B.A. from Ohio    
Northern University and an M.B.A. from Western Carolina University.             

Thomas K. Hearn III, has been president of the diagnostic division of 
MedCath and its predecessor company since November 1995. From August 1993 to    
November 1995, Mr. Hearn served as president of Decision Support Systems, Inc., 
a healthcare software and consulting firm that he co-founded. Mr. Hearn was     
employed from 1987 to 1993 by the Charlotte Mecklenburg Hospital Authority, a   
large multi-hospital system, where he served as vice president of administration
and administrator of the Authority's Carolinas Heart Institute. From 1985 to    
1987, Mr. Hearn developed managed care products for Voluntary Hospitals of      
America, a consortium of non-profit hospitals. Mr. Hearn received a B.A. from   
the College of William and Mary, and the M.P.H. and M.B.A. degrees from the     
University of Alabama at Birmingham.                                            

 A. Kenneth Petronis has been president of the cardiology consulting and
management division of MedCath and its predecessor company since September,     
1997. From 1993 to 1997, Mr. Petronis was vice president of network management  
for PHP, Inc., a subsidiary of United HealthCare of North Carolina, Inc., the   
largest managed care company in North Carolina. In this role, Mr. Petronis      
oversaw contractual relationships with over 8,000 physicians and 100 hospitals. 
Prior to holding that position, Mr. Petronis was with LeBauer HealthCare, the   
largest multi-specialty clinic in Greensboro, North Carolina, where he was the  
chief executive officer for four years. Mr. Petronis holds a B.A. degree from   
Duke University and an M.B.A. from Northwestern University's Kellogg School.    

  Joan McCanless has been vice president of clinical disease management of
MedCath and its predecessor company since 1996 and corporate compliance officer 
of MedCath since January 1999. From 1993 to 1996, Ms. McCanless served as a     
principal of Decision Support Systems,                                          

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Inc., a healthcare software and consulting firm that she co-founded. Prior to   
co-founding Decision Support Systems, she was employed at the Charlotte         
Mecklenburg Hospital Authority where she served as vice president of            
administration, a department director, head nurse and staff nurse. Ms. McCanless
received her B.S. in Nursing from the University of North Carolina at Charlotte.

  David H.S. Chung joined our board of directors in August 1998. Mr. Chung
has been an executive of Kohlberg Kravis Roberts & Co., L.P. since 1995. From   
1993 to 1995, Mr. Chung was a management consultant at McKinsey & Co. Mr. Chung 
is also a director of Alliance Imaging, Inc., Centric Software, Inc., and       
WorldCrest Group, Inc. Mr. Chung received a B.A. from Harvard College and an    
M.B.A. from Harvard Business School.                                            

     Edward A. Gilhuly joined our board of directors in August 1998. Mr. Gilhuly
has been an executive of Kohlberg Kravis Roberts & Co., L.P. since 1986 and a   
general partner since January 1995, before becoming a member of the limited     
liability company which serves as the general partner of Kohlberg Kravis Roberts
& Co., L.P., in January 1996. He is managing director of Kohlberg Kravis Roberts
& Co. Ltd., the London based affiliate of Kohlberg Kravis Roberts & Co., L.P.   
Mr. Gilhuly is also a director of Owens-Illinois, Inc., Rockwood Specialties,   
Inc. and Layne Christensen Company. Mr. Gilhuly received a B.A. from Duke       
University and an M.B.A. from Stanford University.                              

Galen Powers joined our board of directors in 1999. He is the senior  
founder and has served as president of Powers, Pyles, Sutter & Verville P.C., a 
Washington, D.C. law firm specializing in healthcare and hospital law, since he 
founded the firm in 1983. Mr. Powers was the first chief counsel of the federal 
Health Care Financing Administration and has served as a director and the       
president of the National Health Lawyers Association. He serves as a director   
and a member of the audit committee of Health Management Systems, Inc. and as a 
director of several private companies in the healthcare industry. Mr. Powers    
received a B.A. in History from the University of Michigan and an L.L.B. from   
the University of Michigan Law School.                                          

   Paul B. Queally joined our board of directors in August 1998. Mr. Queally
has been a general partner at Welsh, Carson, Anderson & Stowe since January     
1996. Prior to joining Welsh, Carson, Anderson & Stowe, Mr. Queally was a       
general partner at the Sprout Group, the private equity group of Donaldson      
Lufkin & Jenrette Securities Corporation. Mr. Queally received a B.A. from the  
University of Richmond in 1986 and an M.B.A. from the Columbia Business School  
in 1990. Mr. Queally is currently the chairman of Concentra, Inc. and a director
of United Surgical Partners International, Inc.                                 

Donald E. Steen joined our board of directors in 2000. Mr. Steen is   
currently chairman and chief executive officer of United Surgical Partners      
International, Inc., which he founded in 1998, and a director of Horizon Health 
Corporation and Kinetic Concepts, Inc. From 1995 until 1997, Mr. Steen was      
president of the international group of HCA - The Healthcare Company, formerly  
known as Columbia/HCA Healthcare Corporation and served as president of the     
Western Group of Columbia/HCA from 1994 to 1995. Prior to 1994, Mr. Steen was a 
founder and the chief executive officer of Medical Care International, Inc., a  
New York Stock Exchange company that was the largest operator of ambulatory     
surgery centers in the United States at the time of its merger with Columbia/HCA
in 1994. Mr. Steen is also a member of the board of directors of Horizon Health 
Corporation and Kinetic Concepts, Inc. He received a B.A. from the University of
Missouri - Columbia and is a certified public accountant.                       

 D. Scott Mackesy joined our board of directors in 2000. Mr. Mackesy has
been a principal with Welsh, Carson, Anderson & Stowe since January 1998. From  
January 1996 to January 1998, Mr. Mackesy was senior research analyst and vice  
president at Morgan Stanley Dean Witter in the Investment Research Department   
where he was responsible for research coverage of the facilities-based          
healthcare services sector. Mr. Mackesy graduated from the College of William & 
Mary in 1991.                                                                   

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  John Casey joined our board of directors in 2000. From 1997 to 1999, Mr.
Casey served as chairman and chief executive officer of Physician Reliance      
Network, Inc., a publicly traded company that was, prior to its merger with US  
Oncology, Inc., the largest oncology practice management company in the United  
States. From 1995 to 1997, Mr. Casey was the chief executive officer of         
Intecare, LLC, a company formed for the purpose of developing joint venture     
partnerships with high-quality hospitals and integrated healthcare systems. From
1991 to 1995, Mr. Casey served as president and chief operating officer of      
American Medical International, which, at that time, was the third largest      
publicly held owner and operator of hospitals in the country. In 1995, American 
Medical International merged with National Medical Enterprises to create Tenet  
Healthcare Corporation, where Casey served as vice-chairman. He received a B.S. 
in Economics from Auburn University and an M.S. in Hospital and Health Care     
Administration from the University of Alabama at Birmingham.                    

John B. McKinnon joined our board of directors in 2001. He was also a 
director of MedCath from 1996 until 1998. From 1989 until his retirement in     
1995, he served as the dean of the Babcock Graduate School of Management at Wake
Forest University. From 1986 to 1988, he served as president of Sara Lee        
Corporation. Mr. McKinnon also serves as a director of Ruby Tuesday, Inc., and  
several privately held companies. He received an A.B. from Duke University and  
an M.B.A. from Harvard Business School.                                         

THE BOARD OF DIRECTORS                                                          

Our certificate of incorporation provides for a board of directors    
consisting of three classes. Each class consists, as nearly as possible, of     
one-third of the total number of directors constituting the entire board. The   
term of the initial Class I directors, John B. McKinnon, Galen Powers and Donald
Steen, will terminate on the date of the 2002 annual meeting of stockholders;   
the term of the initial Class II directors, Stephen R. Puckett, D. Scott Mackesy
and John Casey, will terminate on the date of the 2003 annual meeting of        
stockholders; and the term of the initial Class III directors, David Crane,     
Edward A. Gilhuly, David H.S. Chung and Paul B. Queally, will terminate on the  
date of the 2004 annual meeting of stockholders. Beginning in 2002, at each     
annual meeting of stockholders, successors to the class of directors whose term 
expires at that annual meeting will be elected for a three-year term and until  
their respective successors are elected and qualified. A director may only be   
removed with cause by the affirmative vote of the holders of a majority of the  
outstanding shares of capital stock entitled to vote in the election of         
directors.                                                                      

   Our board of directors has established an audit committee, a compensation
committee and a compliance committee.                                           

- The audit committee is comprised of John Casey, John B. McKinnon and
       Galen Powers. The audit committee recommends selection of our independent
auditors, consults with the auditors about our internal accounting
     controls and reviews the scope and results of audits and other services
provided by our independent auditors.                             

     - Our compensation committee is comprised of John Casey, Edward A. Gilhuly,
   Stephen R. Puckett and Paul B. Queally. The compensation committee is
      responsible for reviewing and recommending to the board of directors the
       amount and type of non-stock compensation to be paid to senior management
      and establishing and reviewing general policies relating to compensation
    and benefits of employees and administering our stock option plans. No
     interlocking relationship exists between any member of our compensation
   committee and any member of any other company's board of directors or
compensation committee.                                           

- The compliance committee is comprised of David H.S. Chung, D. Scott 
Mackesy and Galen Powers. The compliance committee oversees the   
implementation of our compliance program, which is described in   
"Business - Government Regulation."                               

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DIRECTOR COMPENSATION                                                           

Directors who are also our executive officers do not receive any      
compensation for their services as a director. Directors who are not our        
executive officers are granted options under our outside directors' option plan 
to purchase 3,500 shares of our common stock upon becoming a director and as of 
the last day of each fiscal year, if the director was re-elected as a director  
or was continuing as a director as of the adjournment of the immediately        
preceding annual stockholders meeting. These options, which are not intended to 
qualify as incentive stock options under Section 422 of the Internal Revenue    
Code, have an exercise price equal to the fair market value of our common stock 
at the date of grant, are exercisable immediately, and expire ten years from the
date of grant. We reimburse all of our directors for any out-of-pocket expenses 
they incur to attend board and committee meetings.                              

EXECUTIVE COMPENSATION                                                          

 The following table below shows the compensation paid or accrued to our
executive officers for the fiscal year ended September 30, 2000.                

SUMMARY COMPENSATION TABLE

                                                        [Enlarge/Download Table]

                                                            LONG-TERM                      
                                                          COMPENSATION                     
                                                             AWARDS                        
                                                          -------------                    
                                    ANNUAL COMPENSATION    SECURITIES                      
                                    --------------------   UNDERLYING        ALL OTHER     
NAME AND PRINCIPAL POSITION   YEAR  SALARY($)   BONUS($)  OPTIONS(#)(1)  COMPENSATION($)(2)
---------------------------   ----  ---------   --------  -------------  ------------------
                                                                                           
David Crane.................  2000  $376,516    $200,000     150,000          $ 3,875      
  President and Chief                                                                      
  Executive Officer                                                                        
Michael G. Servais..........  2000    72,692      30,000     200,000           24,143      
  Executive Vice President                                                                 
  and Chief Operating                                                                      
  Officer(3)                                                                               
James E. Harris.............  2000   180,865     100,000     150,000            2,550      
  Senior Vice President and                                                                
  Chief Financial Officer(4)                                                               
Dennis I. Kelly.............  2000   211,137      68,000      19,000            5,174      
  Senior Vice President of                                                                 
  Development                                                                              
R. William Moore, Jr........  2000   226,236      80,000      86,842            4,517      
  President, Hospital                                                                      
     Division                                                                              
Stephen R. Puckett..........  2000   347,339     160,000     120,000            3,532      
  President and Chief                                                                      
  Executive Officer (until                                                                 
  December 1999)(5)                                                                        

------------                                                                    

(1) Our executive compensation program consists of three principal components:  
  base salary, cash bonuses and long-term incentive compensation in the form
   of stock options. Stock options granted in a particular year may in fact be
   based upon each executive officer's contributions to our performance in the
    prior fiscal year. The number of options granted is based upon provisions of
an executive officer's employment agreement or an evaluation of the     
executive officer's performance by the chief executive officer or the   
compensation committee of the board.                                    

(2) Consists of matching contributions to our 401(k) Plan, a moving allowance in
  the amount of $24,143 paid to Mr. Servais and reimbursement of medical and
dental insurance premiums in the amounts of $1,082, $1,160, $1,160 and  
$1,082 paid to Messrs. Crane, Kelly, Moore and Puckett, respectively.   

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(3) Mr. Servais began his employment as our executive vice president and chief  
operating officer in July 2000.                                         

(4) Mr. Harris began his employment as our senior vice president and chief      
financial officer in December 1999.                                     

(5) Mr. Puckett served as our president and chief executive officer through     
December 1999 and continued as a full time employee through July 2000.  

The following table sets forth the options granted to our executive   
officers during fiscal year 2000 along with the exercise price and expiration   
date of those options.                                                          

OPTION GRANTS IN LAST FISCAL YEAR 

                                                        [Enlarge/Download Table]

                                              INDIVIDUAL GRANTS                                      
                      -----------------------------------------------------------------              
                                                               FAIR VALUE                            
                                                                AT GRANT                             
                      NUMBER OF      % OF TOTAL                DATE OF THE                           
                      SECURITIES      OPTIONS       EXERCISE   SECURITIES                   GRANT    
                      UNDERLYING     GRANTED TO     OR BASE    UNDERLYING                    DATE    
                       OPTIONS      EMPLOYEES IN     PRICE         THE       EXPIRATION    PRESENT   
NAME                  GRANTED(#)   FISCAL YEAR(1)    ($/SH)      OPTIONS        DATE     VALUE ($)(2)
----                  ----------   --------------   --------   -----------   ----------  ------------
                                                                                                     
David Crane..........  150,000         16.1%         $19.00      $18.69        1/10/10      $7.37    
Michael G. Servais...  200,000          21.5          19.00       17.46         7/5/10       5.78    
James E. Harris......  150,000          16.1          19.00       18.69       12/14/09       7.02    
Dennis I. Kelly......   19,000           2.0          19.00       18.69        10/1/09       6.88    
R. William Moore,                                                                                    
  Jr.................   56,842           6.1          19.00       18.69        10/1/09       6.88    
                        30,000           3.2          19.00       17.46         6/1/10       5.89    
Stephen R. Puckett...  120,000          12.9          19.00       17.46         7/1/10       5.78    

---------------                                                                 

(1) In fiscal 2000, we granted to all of our employees options to purchase an   
aggregate of 930,142 shares of our common stock.                        

(2) The grant date present value of each option grant was determined using the  
Black-Scholes option-pricing model, assuming an expected life of eight  
 years, risk-free interest rates ranging from 6.03% to 6.58%, and expected
volatility of 0%.                                                       

The executive officers named in the summary compensation table did not
exercise any stock options during the fiscal year ended September 30, 2000. The 
following table sets forth information regarding options held by our executive  
officers as of September 30, 2000. The dollar values of unexercised in-the-money
options represent the difference between the assumed fair market value of $17.46
per share at September 30, 2000 and the exercise prices of the options.         

                                                        [Enlarge/Download Table]

                                      NUMBER OF SECURITIES           VALUE OF UNEXERCISED     
                                     UNDERLYING UNEXERCISED          IN-THE-MONEY OPTIONS     
                                  OPTIONS AT FISCAL YEAR-END(#)      AT FISCAL YEAR-END($)    
                                  -----------------------------  -----------------------------
NAME                              EXERCISABLE     UNEXERCISABLE  EXERCISABLE     UNEXERCISABLE
----                              -----------     -------------  -----------     -------------
                                                                                              
David Crane......................   196,131          450,000     $  514,601           --      
Michael G. Servais...............        --          200,000             --           --      
James E. Harris..................        --          150,000             --           --      
Dennis I. Kelly..................    12,500           81,500             --           --      
R. William Moore, Jr. ...........    21,053          128,947             --           --      
Stephen R. Puckett...............   270,524          220,000      1,055,235           --      

EMPLOYEE STOCK OPTION PLAN                                                      

    On July 28, 1998, the board of directors of MedCath Holdings, Inc. adopted
the 1998 Stock Option Plan for Key Employees of MedCath Holdings, Inc. and      
Subsidiaries (the "Employee Option Plan"). We will assume all of the rights and 
obligations of MedCath Holdings, Inc. under the Employee Option Plan upon       
completion of the exchange.                                                     

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    The Employee Option Plan provides for the grant of incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code, as well as  
options that do not qualify as incentive stock options. As amended, the Employee
Option Plan authorizes the grant of options to purchase up to 3,000,000 shares  
of our common stock. Any regular full-time employee, including an officer, who, 
in the opinion of the compensation committee of the board, is or is expected to 
be responsible for the management, growth or protection of some part or all of  
the business of our company is eligible to receive grants under the Employee    
Option Plan.                                                                    

   The Employee Option Plan is administered by the compensation committee of
our board of the directors. Generally, the compensation committee has the       
discretion and authority to grant options to eligible individuals and to        
determine the terms and conditions of options, including the vesting schedule   
and exercise price of options. As of June 30, 2001, there were 2,282,165 options
outstanding under the Employee Option Plan.                                     

   The compensation committee may amend the Employee Option Plan at any time
subject to stockholder approval to the extent required by law. No amendment to  
the Employee Option Plan may adversely affect an optionee's right under a       
previously granted option without the consent of the holder of the option. The  
Employee Option Plan also provides that the compensation committee may, in      
connection with certain transactions, fully vest and accelerate the expiration  
date of options outstanding under the Employee Option Plan or, instead of       
accelerating the vesting, provide that the options will remain outstanding and  
exercisable after the occurrence of the transaction in accordance with the terms
of the stock option agreement appropriately adjusted to take into account the   
transaction. Unless terminated earlier by our board, the Employee Option Plan   
will terminate on July 28, 2008.                                                

    The terms and conditions of options granted under the Employee Option Plan
are set forth in stock option agreements between our company and the recipients 
of option grants. Certain options vest during the recipient's employment with   
our company in four equal annual installments on each anniversary of the grant  
date. Other options vest on the earlier of our company's achievement of         
performance targets set forth in the stock option agreements or on the eighth   
anniversary of the date of grant, although options granted to some individuals  
vest immediately on the date of grant. The compensation committee may not grant 
options under the Employee Option Plan that expire later than ten years from the
date of grant. In addition, the compensation committee may not grant incentive  
stock options to any person who is not employed by us on the date of grant, and 
the exercise price of an incentive stock option cannot be less than the fair    
market value of our common stock on the date of grant. The exercise price of any
incentive stock option granted to an owner of more than ten percent of the      
voting power of our common stock cannot be less than 110% of the fair market    
value of our common stock on the date of grant and the term of the option may   
not exceed five years from the date of grant.                                   

By resolution of the compensation committee of MedCath Holdings, Inc. 
effective on October 1, 2000, a portion of the options outstanding under the    
Employee Option Plan were amended from vesting based on the company's           
achievement of performance targets as set forth in the stock option plan        
agreements to a four year fixed vesting schedule.                               

EMPLOYMENT AGREEMENTS                                                           

Employment Agreement with Mr. Crane                                         

We entered into a four year employment agreement with David Crane, our
president and chief executive officer, which commenced on January 1, 2000. This 
agreement provides for an initial term of four years and will automatically     
renew for one additional year unless terminated by either party. Mr. Crane's    
employment agreement provides for an initial base salary of $400,000 annually.  
Mr. Crane is also entitled to an annual cash bonus based on either a            

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measure of our earnings per share, an annual earnings per share target for a    
given year or other performance targets established by the board. The specific  
performance target for a particular year is established prior to the beginning  
of that year.                                                                   

Mr. Crane's employment agreement also contains severance arrangements 
regarding his compensation if his employment is terminated without cause or for 
good reason. If we terminate his employment without cause or if Mr. Crane       
terminates his employment for "good reason," he will be entitled to receive     
severance payments equal to two times his annual base salary at the time of     
termination payable over 12 months and a lump sum cash payment for any accrued  
but not yet paid vacation, compensation and expense reimbursements. He is also  
entitled to continued coverage under our medical, disability and life insurance 
plans at our expense until the earlier of two years from the date of termination
or until he is covered by comparable benefit plans by another employer. If we   
terminate Mr. Crane's employment with cause or if he terminates his employment  
without "good reason," he is only entitled to a lump sum cash payment for any   
accrued but not yet paid vacation, compensation and expense reimbursements. This
agreement also contains a non-competition provision that prohibits Mr. Crane    
from competing with us, either directly or indirectly, for a period of 12 months
following termination of his employment. In addition, he has agreed not to hire 
or solicit our employees during this time.                                      

Agreements with Messrs. Servais, Harris and Kelly                           

  We have also entered into employment agreements with Michael G. Servais,
James E. Harris and Dennis I. Kelly. The following table sets forth the terms of
these agreements that are unique to a particular employee.                      

                                                        [Enlarge/Download Table]

                                                                      EFFECTIVE DATE    INITIAL ANNUAL
NAME OF EXECUTIVE OFFICER                      TITLE                   OF AGREEMENT      BASE SALARY  
-------------------------                      -----                 -----------------  --------------
                                                                                                      
Michael G. Servais.............. Executive Vice President and Chief    May 26, 2000        $300,000   
                                 Operating Officer                                                    
James E. Harris................. Senior Vice President and            October 8, 1999      $225,000   
                                 Chief Financial Officer                                              
Dennis I. Kelly................. Senior Vice President of            December 16, 1998     $200,000   
                                 Development                                                          

  Each of our employment agreements with these executive officers provides
for an initial term of four years, which automatically renews for one additional
year unless terminated by either party. The annual base salary of each executive
officer is subject to annual adjustment at the discretion of our board of       
directors. Each executive officer is entitled to an annual cash bonus based on a
formula set forth in the agreement, which is tied to either a measure of our    
earnings per share, the annual earnings per share target for a given year or    
other performance targets established by the board. These agreements also       
provide for severance arrangements if the executive officer's employment is     
terminated without cause or for "good reason." If we terminate the executive    
officer's employment without cause or if the executive officer terminates       
employment for "good reason," the executive officer is entitled to receive one  
times his annual base salary at the time of termination payable over 12 months, 
except in the case of a termination after a change of control which entitles the
executive officer to payment of two times his annual base salary payable over   
the same period, a lump sum cash payment for any accrued but not yet paid       
vacation, compensation and expense reimbursements payable within 30 days of     
termination and continued coverage under our medical, disability and life       
insurance plans until the earlier of 12 months or until he is covered by        
comparable benefit plans by another employer. If we terminate the executive     
officer's employment with cause or if the executive officer terminates          
employment without "good reason," the executive officer is only entitled to a   
lump sum cash payment for any accrued but not yet paid vacation, compensation   
and expense reimbursements.                                                     

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Each of these employment agreements also contains non-competition and 
non-solicitation provisions. Mr. Servais' and Mr. Harris' non-competition       
provision prohibits the executive officer from competing against us, either     
directly or indirectly, within 50 miles of a facility that either existed or was
being developed during the executive officer's employment for a period of one   
year following termination of employment. Mr. Kelly's non-competition provision 
prohibits the same activities, but does not contain a territory restriction. The
non-solicitation provision in each of these agreements prohibits the executive  
officer from hiring or soliciting our employees during the same one year period.

Employment Agreement with Mr. Moore                                         

We have also entered into an employment agreement with Mr. Moore, the 
president of our hospital division. His initial base salary of $225,000, which  
was established in August 1999, is subject to annual adjustment at the          
discretion of our president. In addition to his base salary, Mr. Moore is       
entitled to participate in our annual bonus compensation plan. If we terminate  
Mr. Moore's employment without cause or if he terminates his employment for     
"good reason," subject to certain restrictions, he is entitled to severance     
payments equal to any accrued but not yet paid additional benefits plus one     
times his annual base salary at the time of termination, except in the case of a
termination after a change of control for which he is entitled to a severance   
payment equal to two times his annual base salary at the time of termination, in
either case payable over 12 months. His employment agreement also contains a 12 
month non-competition provision that prohibits him from competing with us within
75 miles of our headquarters or a facility that existed or was being developed  
during his employment. In addition, Mr. Moore is prohibited from hiring or      
soliciting our employees for one year following termination of his employment.  

Employment Agreement with Mr. Puckett                                       

 Mr. Puckett has a four year employment agreement as our chairman of the
board, which commenced on January 1, 2000. This agreement provides for an       
initial term of four years and automatically renews for one additional year     
unless terminated by either party. Mr. Puckett's employment agreement provides  
for an initial base salary of $100,000. Mr. Puckett has committed to devote at  
least 50 days per year to our business. He will be paid $3,000 per day for each 
day he devotes to our business in excess of 50 days per year.                   

 Mr. Puckett's employment agreement also contains severance arrangements
regarding his compensation if his employment is terminated without cause. If we 
terminate Mr. Puckett's employment without cause, he will be entitled to receive
two times his annual base salary at the time of termination payable over a      
period of 12 months and a lump sum cash payment for any accrued but not yet paid
vacation, compensation and expense reimbursements payable within 30 days of his 
termination. He is also entitled to continued coverage under our medical,       
disability and life insurance plans at our expense until the earlier of two     
years or until he is covered by comparable benefit plans by another employer. If
we terminate Mr. Puckett's employment for cause or if he terminates his         
employment without "good reason," he is only entitled to a lump sum cash payment
for any accrued but not yet paid vacation, compensation and expense             
reimbursements. This agreement also contains a non-competition provision that   
prohibits Mr. Puckett from competing with us, either directly or indirectly, for
a period of 12 months following termination of his employment. In addition, he  
has agreed not to hire or solicit our employees during this time.               

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PRINCIPAL STOCKHOLDERS

    This table presents information concerning the beneficial ownership of the
shares of our common stock as of June 30, 2001 for:                             

- each person we know to be the beneficial owner of 5% or more of the 
outstanding shares of our common stock,                           

    - each of our executive officers listed in the summary compensation table,

- each of our directors, and                                          

- all of our existing officers and directors as a group.              

  Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power over      
securities. Except in cases where community property laws apply or as indicated 
in the footnotes to this table, we believe each stockholder identified in the   
table possesses sole voting and investment power over all shares of common stock
shown as beneficially owned by the stockholder. Shares of common stock subject  
to options that are exercisable within 60 days of June 30, 2001 are considered  
outstanding and beneficially owned by the person holding the options for the    
purpose of computing the percentage ownership of that person but are not treated
as outstanding for the purpose of computing the percentage ownership of another 
person. This table does not reflect any purchases of our common stock that a    
person listed may make in this offering.                                        

Unless indicated below, the address of each individual listed below is
10720 Sikes Place, Suite 300, Charlotte, North Carolina 28277.                  

                                                        [Enlarge/Download Table]

                                                                           PERCENTAGE OF COMMON    
                                                                           STOCK OUTSTANDING(1)    
                                                                        ---------------------------
                                                   NUMBER OF SHARES      BEFORE THE     AFTER THE  
NAME OF BENEFICIAL OWNER                         BENEFICIALLY OWNED(2)  OFFERING (%)   OFFERING (%)
------------------------                         ---------------------  ------------   ------------
                                                                                                   
MedCath 1998 LLC(3)............................        5,568,522            47.0            31.0   
Welsh, Carson, Anderson & Stowe VII, L.P.(4)...        5,071,867            42.8            28.2   
WCAS Healthcare Partners, LP(4)................           52,632               *               *   
David Crane....................................          402,055             3.3             2.2   
Michael G. Servais.............................           33,333               *               *   
James E. Harris................................           25,000               *               *   
Dennis I. Kelly................................           28,167               *               *   
R. William Moore, Jr. .........................           46,053               *               *   
Stephen R. Puckett(5)..........................          886,217             7.3             4.9   
David H.S. Chung(3)............................            7,500               *               *   
Edward A. Gilhuly(3)...........................        5,576,022            47.0            31.0   
Galen Powers...................................            7,500               *               *   
Paul B. Queally(4).............................        5,083,314            42.9            28.5   
Donald E. Steen................................            5,500               *               *   
D. Scott Mackesy...............................            6,813               *               *   
John Casey.....................................            5,500               *               *   
John B. McKinnon...............................            3,500               *               *   
Directors and executive officers as a group (17                                                    
  persons).....................................       12,234,742            96.4            65.0   

------------                                                                    

*  Indicates less than one percent ownership.                                 

(1) The percentages presented assume completion of the exchange and no exercise 
of the underwriters' over-allotment option.                             

(2) The following shares of common stock subject to options currently           
exercisable or exercisable within 60 days of June 30, 2001 are deemed   
outstanding for the purpose of computing the percentage ownership of the
person                                                                  

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holding these options but are not deemed outstanding for computing the  
  percentage ownership of any other person: David Crane, 296,131; Michael G.
Servais, 33,333; James E. Harris, 25,000; Dennis I. Kelly, 28,167; R.   
 William Moore, Jr. 46,053; Stephen R. Puckett, 292,195; David H.S. Chung,
7,500; Edward A. Gilhuly, 7,500; Galen Powers, 7,500; Paul B. Queally,  
  7,500; Donald E. Steen, 5,500; D. Scott Mackesy, 5,500; John Casey, 5,500;
John B. McKinnon, 3,500; and 68,800 by other executive officers.        

(3) MedCath 1998 LLC is a limited liability company of which KKR 1996 Fund, L.P.
 is the managing member. KKR 1996 GP L.L.C. is the sole general partner of
KKR Associates 1996, L.P., which is the sole general partner of KKR 1996
  Fund, L.P. Mr. Gilhuly, a director of MedCath, and Henry R. Kravis, George
R. Roberts, Perry Golkin, Michael T. Tokarz, Paul E. Raether, Michael W.
 Michaelson, James H. Greene, Scott M. Stuart, Todd Fisher, Johannes Huth,
Alexander Navab and Neil Richardson are the members of KKR 1996 GP LLC. 
  Messrs. Kravis and Roberts constitute the management committee of KKR 1996
 GP LLC. Each of the individuals who are the members of KKR 1996 GP L.L.C.
    may be deemed to share beneficial ownership of any shares beneficially owned
by KKR 1996 GP L.L.C. Each of such individuals disclaims beneficial     
   ownership of such shares. Mr. Chung is also an executive of Kohlberg Kravis
 Roberts & Co., L.P. and a limited partner of KKR Associates 1996 L.P. Mr.
 Chung disclaims that he is the beneficial owner of securities in which he
   has no economic interest. The address of each such entity and person is c/o
  Kohlberg Kravis Roberts & Co., 2800 Sand Hill Road, Suite 200, Menlo Park,
California 94025.                                                       

(4) Mr. Queally is associated with Welsh, Carson, Anderson & Stowe VII, L.P. and
    may be deemed to beneficially own all of the shares of common stock owned by
that entity. Their address is 320 Park Avenue, Suite 2500, New York, NY 
10022-6815.                                                             

(5) Includes 450,650 shares held by two limited partnerships controlled by Mr.  
Puckett, which may be deemed to be beneficially owned by Mr. Puckett.   

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

STOCKHOLDERS' AGREEMENT WITH PRINCIPAL STOCKHOLDERS                             

    We have a stockholders agreement that will be effective upon completion of
this offering with the affiliates of Kohlberg Kravis Roberts & Co., L.P. and    
Welsh, Carson, Anderson & Stowe, which, following this offering, will own 31.0% 
and 30.1% of our outstanding common stock. The stockholders' agreement, which   
governs the voting and certain other rights and obligations of these            
stockholders, provides that each party to the agreement will be entitled to     
designate a specified number of persons for election to our board of directors  
and obligates the other parties to the agreement to vote their shares in favor  
of those designees.                                                             

  As a result, immediately after this offering, the affiliates of Kohlberg
Kravis Roberts & Co., L.P., will be entitled to designate four directors and the
affiliates of Welsh, Carson, Anderson & Stowe VII, L.P. will be entitled to     
designate three directors. The number of directors that each of these affiliates
will be entitled to designate under the stockholders' agreement decreases as    
their percentage ownership of our common stock decreases. The affiliates of     
Kohlberg Kravis Roberts & Co., L.P. and of Welsh, Carson, Anderson & Stowe VII, 
L.P. will each be entitled, however, to designate at least one director so long 
as they own 5% or more of our common stock on a fully-diluted basis.            

   Under the stockholders' agreement, the following actions also require the
separate approval of a majority of the shares held by the affiliates of Kohlberg
Kravis Roberts & Co., L.P. and a majority of the shares held by affiliates of   
Welsh, Carson, Anderson & Stowe:                                                

 - appointment, dismissal or replacement of our chief executive officer,

- mergers or consolidations with or into another corporation,         

    - sales, transfers or disposals of all or substantially all of our assets,
and                                                               

   - acquiring, purchasing or investing in any material assets, or disposing
    of any material assets, other than in the ordinary course of business.

These separate approval rights terminate for each of these groups of  
stockholders when the group's ownership of our common stock is less than 20% of 
our common stock on a fully-diluted basis.                                      

The stockholders' agreement also contains certain restrictions on the 
transfer of each group's respective shares. Among these restrictions is a       
requirement that each of the parties to the stockholders' agreement give us     
prior written notice of a proposed sale or other transfer of their shares,      
except for transfers to affiliates, distributions by a partnership to its       
partners, transfers to spouses or lineal descendants or transfers in connection 
with a public offering. Upon receipt of this notice of proposed sale, we are    
obligated to notify the other parties to the stockholders' agreement, each of   
whom has the right to sell a pro rata portion of its shares to the potential    
purchaser. These rights apply so long as the stockholders' agreement is in      
effect. Each of the parties to the stockholders' agreement has agreed, subject  
to certain exceptions, not to sell or otherwise transfer any shares of our      
common stock until 180 days after the effective date of the registration        
statement of which this prospectus is a part without the prior written consent  
of Deutsche Banc Alex. Brown Inc. See "Shares Eligible for Future Sale."        

  We also have a registration rights agreement with affiliates of Kohlberg
Kravis Roberts & Co., L.P. and Welsh, Carson, Anderson & Stowe VII, L.P. that   
gives each of them the right to require us on multiple occasions to register    
their shares of common stock under the Securities Act, subject to certain       
exceptions stated in the registration rights agreement. See "Shares Eligible for
Future Sale -- Registration Rights."                                            

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PAYMENT OF MONITORING FEES TO PRINCIPAL STOCKHOLDERS                            

  During the fiscal years ended September 30, 1999 and 2000, we paid to an
affiliate of Kohlberg Kravis Roberts & Co., L.P. monitoring fees of $150,000 in 
each of those fiscal years. During the fiscal year ended September 30, 1999, we 
incurred monitoring fees of $150,000, $112,500 of which have been paid, and     
$37,500 of which are payable, to affiliates of Welsh, Carson, Anderson & Stowe. 
For the fiscal year ended September 30, 2000, we accrued, but have not yet paid,
monitoring fees of $150,000 payable to affiliates of Welsh, Carson, Anderson &  
Stowe. Since the going private transaction, principals and employees of both    
Kohlberg Kravis Roberts & Co., L.P. and Welsh Carson Anderson & Stowe have      
provided substantial consulting services, financial and strategic advice and    
other resources to us on a regular basis in addition to the services that       
individuals affiliated with them have provided to us through their service as   
members of our board of directors. We will pay a prorated amount of these annual
monitoring fees to each of them in the current year, but we will not be         
obligated to pay any monitoring fees to them following this offering.           

AGREEMENTS WITH EXECUTIVE OFFICERS                                              

     We have also entered into a management stockholder's agreement with each of
Stephen R. Puckett, our chairman of the board, and David Crane, our president   
and chief executive officer, that restricts their ability to transfer their     
shares of common stock, including a 180-day lock-up provision, which applies to 
public offerings of our common stock. This lock-up period prevents transfers of 
shares of our common stock until 180 days after the effective date of the       
registration statement covering the offering. This agreement grants Mr. Crane   
and Mr. Puckett registration rights whenever we propose to register any of our  
common stock for sale to the public other than registrations on Form S-4 or Form
S-8. See "Shares Eligible for Future Sale -- Registration Rights." This         
agreement also gives us the right prior to July 31, 2003, to acquire shares of  
common stock and stock options held by Mr. Crane and Mr. Puckett in the         
following situations for the following amounts.                                 

     - if their respective employment with us is terminated for cause or if they
     effected a transfer of their shares of common stock in violation of the
      agreement, we may repurchase their shares at a price equal to the lesser
     of $19.00 per share, or the market price per share and certain of their
  options at a price equal to the in-the-money value of those options.

- upon their death or permanent disability or if their respective     
      employment is terminated by them for good reason or by us without cause,
      we may repurchase their shares at the market price per share and certain
  of their options at a price equal to the in-the-money value of those
       options in the case of death or disability or a percentage of the in-the-
       money value of those options in the case of a termination for good reason
by them or without cause by us.                                   

     - if they terminate their respective employment without good reason, we may
     repurchase their shares at the market price per share and their options
for a percentage of the in-the-money value of the options.        

    In addition, under the management stockholder's agreement, in the event of
their death or permanent disability while they are employed by us or if they    
were employed by us until their retirement at age 65 or over, Mr. Crane and Mr. 
Puckett may require us to repurchase their shares at the market price per share 
and their options to purchase common stock for the in-the-money value of those  
options.                                                                        

    In March 2001, Mr. Puckett, Mr. Crane, Dennis I. Kelly and James E. Harris
entered into separate agreements with us that obligate them to exercise on or   
before March 22, 2005 (or, if earlier, no later than the date their employment  
with us terminates) certain stock options we                                    

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have granted to them under the Employee Option Plan prior to the date of the    
agreement that vest and become exercisable during this period. If all of these  
options vest and become exercisable, these executive officers will be obligated 
under these agreements to exercise options to purchase the number of shares set 
forth opposite their names below.                                               

                                                                [Download Table]

NAME                                                         NUMBER OF SHARES
----                                                         ----------------
                                                                             
Stephen R. Puckett.......................................         187,500    
David Crane..............................................         175,000    
Dennis I. Kelly..........................................          26,000    
James E. Harris..........................................          25,000    

    Each of these executive officers also has an employment agreement with us.
See "Management -- Employment Agreements."                                      

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DESCRIPTION OF CAPITAL STOCK

OVERVIEW                                                                        

     Our authorized capital stock consists of 50,000,000 shares of common stock,
$0.01 par value per share, and 10,000,000 shares of preferred stock, $0.01 par  
value per share.                                                                

   Before the closing of the offering, based on share information as of June
30, 2001, there were 11,846,048 shares of common stock outstanding and no shares
of preferred stock outstanding. Based on the number of shares outstanding as of 
June 30, 2001, after the closing of the offering there will be 17,975,526 shares
of common stock outstanding, including 129,478 shares of common stock be issued 
to our physician partners in the exchange.                                      

After the closing of the offering and the exchange, the investment    
partnerships sponsored by and individuals who are affiliated with Kohlberg      
Kravis Roberts & Co., L.P. and Welsh, Carson, Anderson & Stowe and our          
management, including two officers who participated in the acquisition of our   
predecessor company, will beneficially own approximately 66.5% of the           
outstanding common stock. As long as these affiliates of Kohlberg Kravis Roberts
& Co., L.P. and Welsh, Carson, Anderson & Stowe and our management continue to  
own in the aggregate more than 50% of the outstanding shares of our common      
stock, they will collectively have the power to:                                

- elect our entire board of directors,                                

   - determine without the consent of other stockholders, the outcome of any
     corporate transaction or other matter submitted to the stockholders for
approval, including mergers, consolidations and the sale of all or
substantially all of our assets,                                  

- prevent or cause a change in control, and                           

     - approve substantially all amendments to our certificate of incorporation.

  The affiliates of Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson,
Anderson & Stowe have the right under a stockholders' agreement to designate a  
number of directors for election to our board of directors based upon their     
percentage ownership of our outstanding common stock and are obligated to vote  
in favor of each other's designees. See "Certain Relationships and Related Party
Transactions."                                                                  

    The following summary contains material information relating to provisions
of our common stock, preferred stock, certificate of incorporation and bylaws,  
is not intended to be complete and is qualified by reference to the provisions  
of applicable law and to our certificate of incorporation and bylaws included as
exhibits to the registration statement of which this prospectus is a part.      

COMMON STOCK                                                                    

     Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting   
rights. Accordingly, holders of a majority of the outstanding shares of common  
stock entitled to vote in any election of directors may elect all of the        
directors standing for election. Holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the board of directors out
of legally available funds. Upon our liquidation, dissolution or winding-up,    
holders of common stock are entitled to receive ratably our net assets available
for distribution after the payment of all of our liabilities and the payment of 
any required amounts to the holders of any outstanding preferred stock. Holders 
of common stock have no preemptive, subscription, redemption or conversion      
rights. The outstanding shares of common stock are, and the shares sold in the  
offering will be, when issued and paid for, validly issued, fully paid and      
nonassessable. The rights, preferences and privileges of holders of common stock
are subject                                                                     

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to, and may be adversely affected by, the rights of holders of shares of any    
class or series of preferred stock that our board of directors may designate and
issue in the future.                                                            

PREFERRED STOCK                                                                 

     Our board of directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to establish from time to time one
or more classes or series of preferred stock covering up to an aggregate of     
10,000,000 shares of preferred stock, and to issue such shares of preferred     
stock. Each class or series of preferred stock will cover such number of shares 
and will have such preferences, voting powers, qualifications and special or    
relative rights or privileges as is determined by the board of directors, which 
may include, among others, dividend rights, liquidation preferences, voting     
rights, conversion rights, preemptive rights, and redemption rights.            

  The purpose of authorizing the board of directors to establish preferred
stock is to eliminate delays associated with a stockholders vote on the creation
of a particular class or series of preferred stock. The rights of the holders of
common stock will be subject to the rights of holders of any preferred stock    
issued in the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate        
purposes, could have the effect of discouraging, delaying or preventing an      
acquisition of our company at a price which many stockholders find attractive.  
These provisions could also make it more difficult for our stockholders to      
effect certain corporate actions, including the election of directors. We have  
no present plans to issue any shares of preferred stock.                        

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS                             

   Our certificate of incorporation limits the liability of our directors to
us and our stockholders to the fullest extent permitted by Delaware law.        
Specifically, our directors will not be personally liable for money damages for 
breach of fiduciary duty as a director, except for liability:                   

- for any breach of the director's duty of loyalty to us or our       
stockholders,                                                     

- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,                         

     - under Section 174 of the Delaware General Corporation Law, which concerns
  unlawful payments of dividends, stock purchases, or redemptions, and

    - for any transaction from which the director derived an improper personal
benefit.                                                          

  Our certificate of incorporation and bylaws will also contain provisions
indemnifying our directors and officers to the fullest extent permitted by      
Delaware law. The indemnification permitted under Delaware law is not exclusive 
of any other rights to which such persons may be entitled.                      

  In addition, we maintain directors' and officers' liability insurance to
provide our directors and officers with insurance coverage for losses arising   
from claims based on breaches of duty, negligence, error and other wrongful     
acts.                                                                           

At present there is no pending litigation or proceeding involving any 
director or officer, as to which indemnification is required or permitted. We   
are not aware of any threatened litigation or proceeding which may result in a  
claim for such indemnification.                                                 

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ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND        
PROVISIONS OF DELAWARE LAW                                                      

A number of provisions in our certificate of incorporation, bylaws and
Delaware law may make it more difficult to acquire control of us. These         
provisions could deprive the stockholders of opportunities to realize a premium 
on the shares of common stock owned by them. In addition, these provisions may  
adversely affect the prevailing market price of the common stock. These         
provisions are intended to:                                                     

    - enhance the likelihood of continuity and stability in the composition of
the board and in the policies formulated by the board,            

   - discourage certain types of transactions which may involve an actual or
threatened change in control of our company,                      

- discourage certain tactics that may be used in proxy fights, and    

  - encourage persons seeking to acquire control of our company to consult
      first with the board of directors to negotiate the terms of any proposed
business combination or offer.                                    

Staggered board                                                             

    Our certificate of incorporation and bylaws provide that the number of our
directors shall be fixed from time to time by a resolution of a majority of our 
board of directors. Our certificate of incorporation and bylaws also provide    
that the board of directors shall be divided into three classes. The members of 
each class of directors will serve for staggered three-year terms. In accordance
with the Delaware General Corporation Law, directors serving on classified      
boards of directors may only be removed from office for cause. The              
classification of the board has the effect of requiring at least two annual     
stockholder meetings, instead of one, to replace a majority of the members of   
the board. Subject to the rights of the holders of any outstanding class or     
series of preferred stock, vacancies on the board of directors may be filled    
only by a majority of the remaining directors, or by the sole remaining         
director, or by the stockholders if the vacancy was caused by removal of the    
director by the stockholders. This provision could prevent a stockholder from   
obtaining majority representation on the board by enlarging the board of        
directors and filling the new directorships with its own nominees.              

Advance notice procedures for stockholder proposals and director nominations  

  Our bylaws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as       
directors at an annual meeting of stockholders, must provide timely notice      
thereof in writing. To be timely, a stockholder's notice generally must be      
delivered to or mailed and received at our principal executive offices not less 
than 45 or more than 75 days prior to the first anniversary of the date on which
we first mailed our proxy materials for the preceding year's annual meeting of  
stockholders. However, if the date of the annual meeting is advanced more than  
30 days prior to or delayed by more than 30 days after the anniversary of the   
preceding year's annual meeting, to be timely, notice by the stockholder must be
delivered not later than the close of business on the later of 90 days prior to 
the annual meeting or 10 days following the day on which public announcement of 
the date of the meeting is first made. The bylaws also specify certain          
requirements as to the form and content of a stockholder's notice. These        
provisions may preclude stockholders from bringing matters before an annual     
meeting of stockholders or from making nominations for directors at an annual   
meeting of stockholders.                                                        

Stockholder action by written consent                                       

    Our certificate of incorporation eliminates the ability of stockholders to
act by written consent.                                                         

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Special meetings of stockholders                                            

    Our certificate of incorporation further provides that special meetings of
our stockholders may be called only by the chairman of the board of directors,  
the president or a majority of our board of directors.                          

Preferred stock                                                             

The ability of our board to establish the rights and issue substantial
amounts of preferred stock without the need for stockholder approval, while     
providing desirable flexibility in connection with possible acquisitions,       
financings, and other corporate transactions, may among other things,           
discourage, delay, defer, or prevent a change in control of us.                 

Authorized but unissued shares of common stock                              

     The authorized but unissued shares of common stock are available for future
issuance without stockholder approval. These additional shares may be utilized  
for a variety of corporate purposes, including future public offerings to raise 
additional capital, corporate acquisitions, and employee benefit plans. The     
existence of authorized but unissued shares of common stock could render more   
difficult or discourage an attempt to obtain control of us by means of a proxy  
contest, tender offer, merger or otherwise.                                     

Business combination under Delaware law                                     

We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. Section 203 prohibits a publicly held   
Delaware corporation from engaging in a "business combination" with an          
"interested stockholder" for a period of three years following the date the     
person became an interested stockholder, unless:                                

    - the board of directors approved the transaction in which the stockholder
became an interested stockholder prior to the date the interested 
stockholder attained that status,                                 

 - upon consummation of the transaction that resulted in the stockholder
     becoming an interested stockholder, the interested stockholder owned at
      least 85% of the voting stock of the corporation outstanding at the time
  the transaction commenced, excluding shares owned by persons who are
directors and also officers, or                                   

  - on or subsequent to that date, the business combination is approved by
      the board of directors and authorized at an annual or special meeting of
   stockholders by the holders of at least two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.     

Super-majority requirement to amend certificate of incorporation            

 Our certificate of incorporation prohibits the amendment of many of its
provisions by our stockholders unless the amendment is approved by the holders  
of at least 80% of our shares of common stock.                                  

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SHARES ELIGIBLE FOR FUTURE SALE 

Prior to this offering, there has been no public market for any of our
securities. Future sales of substantial amounts of our common stock in the      
public market could materially adversely affect the market price of such        
securities. As described below, only a limited number of shares will be         
available for sale shortly after this offering, due to certain contractual and  
legal restrictions on resale. Nevertheless, sales of substantial amounts of our 
common stock in the public market or the perception that such sales could occur 
after such restrictions lapse could materially adversely affect the market price
of our common stock and our ability to raise equity capital in the future.      

SALE OF UNRESTRICTED SHARES                                                     

   Based on the number of shares outstanding as of June 30, 2001, after this
offering we will have 17,975,526 shares of common stock outstanding. The        
6,000,000 shares of common stock that are to be sold to the public in this      
offering will be freely tradeable without restriction under the Securities Act, 
unless purchased by affiliates of MedCath as that term is defined in Rule 144   
under the Securities Act. In general, under Rule 144 as currently in effect,    
beginning 90 days after the date of this prospectus, an affiliate of ours who   
purchases shares of common stock in this offering would be entitled to sell     
within any three-month period a number of such shares that does not exceed the  
greater of:                                                                     

    - one percent of the number of shares of common stock then outstanding, or

 - the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of notice of such sale.       

Sales of shares purchased by our affiliates in this offering must be made at a  
time when current public information about us is available, through a registered
broker-dealer who is following certain procedures and after the filing of a     
notice with the SEC. Our affiliates generally include all of our directors,     
executive officers and holders of more than 10% of our outstanding shares.      

RESTRICTIONS ON SHARES ISSUED IN THE EXCHANGE                                   

     The remaining 11,975,526 shares of common stock outstanding upon completion
of this offering will have been issued in the exchange. Each holder of shares   
issued in the exchange has entered into a lock-up agreement with the            
underwriters of this offering. Under the lock-up agreement, each holder of our  
shares issued in the exchange has agreed, subject to certain exceptions, not to 
sell or otherwise transfer any shares of our common stock until 180 days after  
the effective date of the registration statement of which this prospectus is a  
part without the prior written consent of Deutsche Banc Alex. Brown Inc.        
Deutsche Banc Alex. Brown Inc. has advised us that it has no present intention  
to release any shares subject to the lockup agreements. In considering whether  
to release any shares subject to a lockup agreement, Deutsche Banc Alex. Brown  
Inc. would consider, among other factors, the particular circumstances          
surrounding the request, including, but not limited to, the number of shares to 
be released, the effect of the released shares on the market for our common     
stock and the hardship of the person requesting a waiver. See "Underwriting."   

   In addition to the restriction on sales imposed by the lock-up agreement,
these shares may be subject to additional restrictions on sale imposed by Rule  
145 under the Securities Act. The existence and nature of these restrictions    
depends upon the status of the holder at the time of the exchange. Persons who  
are neither affiliates of ours nor affiliates of the heart hospital in which    
they surrendered an interest in the exchange will receive 484,379 of the        
exchange shares. These shares may be sold without restriction under Rule 145. An
affiliate of a heart                                                            

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hospital generally includes any member of the governing board of the hospital or
a holder of 10% or more of the outstanding equity interests of the hospital at  
the time of the exchange.                                                       

    Persons who are heart hospital affiliates at the time of the exchange will
receive 92,917 of the exchange shares. These shares will be subject to          
restrictions under Rule 145 that permit sales in the manner described below.    

  - in the first year following the date of this prospectus, sales will be
      permitted if current public information about us is available, the sales
  are made through a registered broker-dealer who is following certain
    procedures and the number of shares sold within any three-month period
does not exceed the greater of:                                   

      - one percent of the number of shares of common stock then outstanding, or

   - the average weekly trading volume of the common stock during the four
calendar weeks preceding such sale,                             

   - in the second year following the date of this prospectus, sales will be
permitted if current public information about us is available, and

   - after the second anniversary of the date of this prospectus, sales will
be permitted without restriction.                                 

  Persons who are affiliates of ours will receive 11,491,147 shares in the
exchange. These shares will continue to be subject to the restrictions on sale  
described in the first bullet point above as long as the person holding those   
shares remains an affiliate of ours. They may be sold free from those           
restrictions, however, if they are registered under the agreements described    
below.                                                                          

REGISTRATION RIGHTS                                                             

 The investment partnerships sponsored by Kohlberg Kravis Roberts & Co.,
L.P. and Welsh, Carson, Anderson & Stowe and individuals affiliated with their  
sponsors are entitled under a registration rights agreement with us to the      
following registration rights for the shares of common stock held by them:      

 - at any time, Kohlberg Kravis Roberts & Co., L.P. may require, on five
       occasions that we use our best efforts to register their shares of common
  stock for public resale, provided the registration request covers at
least 15% of the shares of common stock held by the affiliates of 
    Kohlberg Kravis Roberts & Co., L.P. as of the date of the registration
rights agreement,                                                 

     - at any time, Welsh, Carson, Anderson & Stowe on behalf of its affiliates,
     may require, on four occasions that we use our best efforts to register
       their shares of common stock for public resale, provided the registration
   request covers at least 15% of the shares of common stock held by the
 affiliates of Welsh, Carson, Anderson & Stowe as of the date of the
registration rights agreement,                                    

   - if we register any common stock at any time, either for our own account
     or for the account of other security holders, Kohlberg Kravis Roberts &
      Co., L.P. and Welsh, Carson, Anderson & Stowe are entitled to include in
the registration statement shares of common stock held by their   
 affiliates, subject to the ability of the underwriters to limit the
     number of shares included in the offering in view of market conditions.

  We will bear all registration expenses other than underwriting discounts
and commissions in connection with any registration under the registration      
rights agreement.                                                               

In addition, David Crane and Stephen R. Puckett are entitled to       
registration rights for their shares of common stock pursuant to a management   
stockholder's agreement we entered into                                         

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with each of them. Under this agreement until the later of July 31, 2003 or the 
date Kohlberg Kravis Roberts & Co., L.P. or Welsh, Carson, Anderson & Stowe     
require us to register shares held by their affiliates, Mr. Crane and Mr.       
Puckett are entitled to include in the registration statement shares of common  
stock held by them, subject to the ability of the underwriters to limit the     
number of shares included in the offering in view of market conditions. We will 
bear all registration expenses other than underwriting discounts and commissions
in connection with any registration under either management stockholder's       
agreement.                                                                      

   Additionally, if we register any common stock at any time, either for our
own account or for the account of other security holders, all holders of options
granted under the Employee Option Plan may be entitled to include in the        
registration statement shares of common stock underlying their options. This    
right to include shares in the registration statement is subject to the ability 
of the underwriters to limit the number of shares included based upon market    
conditions and other limitations.                                               

     Registration of the sale of the shares subject to these registration rights
would permit the sale of some of them into the public market immediately without
restriction upon effectiveness of the registration statement. If our existing   
stockholders sell a large number of shares, the market price of our common stock
could decline. The holders of these registration rights have agreed, subject to 
certain exceptions, not to sell or otherwise transfer any shares of our common  
stock until 180 days after the effective date of the registration statement of  
which this prospectus is a part without the prior written consent of Deutsche   
Banc Alex. Brown Inc. See "Certain Relationships and Related Party              
Transactions -- Stockholders' Agreement with Principal Stockholders" and        
"-- Agreements with Executive Officers."                                        

  Until June 1, 2009, our physician partners in the hospital we have begun
developing in Harlingen, Texas, will have the right, exercisable upon notice    
from us that we intend to conduct a public offering of our common stock, to     
exchange up to 25% of their interest in the limited partnership we formed with  
them to develop, own and operate the hospital for shares of our common stock. If
any of our partners in this hospital exercise this exchange right, their        
interest in the partnership will be valued using a formula based on the net     
income of this partnership for the most recent twelve-month period preceding the
giving of the notice of the right to exchange. The number of shares of our      
common stock they would acquire would be based upon the fair market value of our
common stock at the time we completed the exchange. Our partners in this        
hospital would have no registration rights with respect to the shares of our    
common stock they might acquire upon exercise of their exchange rights.         

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UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Banc Alex.     
Brown Inc. and Banc of America Securities LLC, as joint bookrunners, and J.P.   
Morgan Securities Inc. and First Union Securities, Inc. have severally agreed to
purchase from us the following respective number of shares of common stock at a 
public offering price less the underwriting discounts and commissions set forth 
on the cover page of this prospectus:                                           

                                                                [Download Table]

                                                               NUMBER  
UNDERWRITERS                                                  OF SHARES
------------                                                  ---------
                                                                       
Deutsche Banc Alex. Brown Inc...............................  1,774,800
Banc of America Securities LLC..............................  1,774,800
J.P. Morgan Securities Inc..................................    887,400
First Union Securities, Inc.................................    783,000
Bear, Stearns & Co. Inc.....................................     60,000
CIBC World Markets Corp.....................................     60,000
Credit Suisse First Boston Corporation......................     60,000
Goldman, Sachs & Co.........................................     60,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........     60,000
Morgan Stanley & Co. Incorporated...........................     60,000
Robertson Stephens Inc......................................     60,000
Salomon Smith Barney Inc....................................     60,000
UBS Warburg LLC.............................................     60,000
Gerard Klauer Mattison & Co., Inc...........................     30,000
C.L. King & Associates, Inc.................................     30,000
Legg Mason Wood Walker, Incorporated........................     30,000
Raymond James & Associates, Inc.............................     30,000
Redwine & Company, Inc......................................     30,000
Sanders Morris Harris Inc...................................     30,000
Shields & Company...........................................     30,000
Stephens Inc................................................     30,000
                                                              ---------
          Total.............................................  6,000,000
                                                              =========

  As joint bookrunners, Deutsche Banc Alex. Brown Inc. and Banc of America
Securities LLC will have equal responsibility for managing this offering. The   
underwriting agreement provides that the obligations of the several underwriters
to purchase the shares of common stock offered hereby are subject to certain    
conditions precedent and that the underwriters will purchase all of the shares  
of common stock offered by this prospectus, other than those covered by the     
over-allotment option described below, if any of these shares are purchased.    

  We have been advised by the representatives of the underwriters that the
underwriters propose to offer the shares of common stock to the public at the   
public offering price set forth on the cover of this prospectus and to dealers  
at a price that represents a concession not in excess of $1.05 per share under  
the public offering price. The underwriters may allow, and these dealers may    
re-allow, a concession of not more than $0.10 per share to other dealers. After 
the initial public offering, representatives of the underwriters may change the 
offering price and other selling terms.                                         

   We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 900,000 additional 
shares of common stock at the public offering price less the underwriting       
discounts and commissions set forth on the cover page of this prospectus. The   
underwriters may exercise this option only to cover over-allotments made in     
connection with the sale of the common stock offered by this prospectus. To the 
extent that the underwriters exercise this option, each of the underwriters will
become obligated, subject to conditions, to purchase approximately the same     
percentage of these                                                             

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additional shares of common stock as the number of shares of common stock to be 
purchased by it in the above table bears to the total number of shares of common
stock offered by this prospectus. We will be obligated, pursuant to the option, 
to sell these additional shares of common stock to the underwriters to the      
extent the option is exercised. If any additional shares of common stock are    
purchased, the underwriters will offer the additional shares on the same terms  
as those on which the 6,000,000 shares are being offered.                       

The underwriting discounts and commissions per share are equal to the 
public offering price per share of common stock less the amount paid by the     
underwriters to us per share of common stock. The underwriting discounts and    
commissions are 7.0% of the initial public offering price. We have agreed to pay
the underwriters the following discounts and commissions, assuming either no    
exercise or full exercise by the underwriters of the underwriters'              
over-allotment option:                                                          

                                                        [Enlarge/Download Table]

                                                               TOTAL FEES                  
                                              ---------------------------------------------
                                               WITHOUT EXERCISE OF    WITH FULL EXERCISE OF
                              FEES PER SHARE  OVER-ALLOTMENT OPTION   OVER-ALLOTMENT OPTION
                              --------------  ---------------------   ---------------------
                                                                                           
Discounts and commissions                                                                  
  paid by us.................     $1.75            $10,500,000             $12,075,000     

In addition, we estimate that our share of the total expenses of this 
offering, excluding underwriting discounts and commissions, will be             
approximately $3.8 million, including estimated expenses of directors and       
officers insurance.                                                             

   We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act, and to          
contribute to payments the underwriters may be required to make in respect of   
any of these liabilities.                                                       

     Each of our officers and directors, and all of our stockholders have agreed
not to offer, sell, contract to sell or otherwise dispose of, or enter into any 
transaction that is designed to, or could be expected to, result in the         
disposition of any shares of our common stock or other securities convertible   
into or exchangeable or exercisable for shares of our common stock or           
derivatives of our common stock owned by these persons prior to this offering or
common stock issuable upon exercise of options or warrants held by these persons
until 180 days after the effective date of the registration statement of which  
this prospectus is a part without the prior written consent of Deutsche Banc    
Alex. Brown Inc. This consent may be given at any time without public notice.   
Transfers or dispositions can be made during the lock-up period by gift or for  
estate planning purposes or by a partnership or limited liability company to its
partners or members so long as, in each case, the transferee signs a lock-up    
agreement. We have entered into a similar agreement with the representatives of 
the underwriters except that without such consent we may grant options and sell 
shares pursuant to our Employee Option Plan. There are no agreements between the
representatives and any of our stockholders or affiliates releasing them from   
these lock-up agreements prior to the expiration of the lock-up period.         

The representatives of the underwriters have advised us that the      
underwriters do not intend to confirm sales to any account over which they      
exercise discretionary authority.                                               

   In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain, or otherwise affect the    
market price of our common stock. Specifically, the underwriters may over-allot 
shares of our common stock in connection with this offering, thus creating a    
short sales position in our common stock for their own account. A short sales   
position results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. A short sales position may involve either 
"covered" short sales or "naked" short sales. Covered short sales are sales made
for an amount not greater than the underwriters' over-allotment option to       
purchase additional shares in the offering described above. The underwriters may
close out any covered short position by either exercising their over-allotment  
option or purchasing shares in the open market. In determining                  

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the source of shares to close out the covered short position, the underwriters  
will consider, among other things, the price of shares available for purchase in
the open market as compared to the price at which they may purchase shares      
through the over-allotment option. Naked short sales are sales in excess of the 
over-allotment option. The underwriters will have to close out any naked short  
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be        
downward pressure on the price of the shares in the open market after pricing   
that could adversely affect investors who purchase in the offering.             

Accordingly, to cover these short sales positions or to stabilize the 
market price of our common stock, the underwriters may bid for, and purchase,   
shares of our common stock in the open market. These transactions may be        
effected on the Nasdaq National Market or otherwise.                            

    Additionally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the          
underwriting syndicate repurchases shares distributed by that underwriter or    
dealer. Similar to other purchase transactions, the underwriters' purchases to  
cover the syndicate short sales or to stabilize the market price of our common  
stock may have the effect of raising or maintaining the market price of our     
common stock or preventing or mitigating a decline in the market price of our   
common stock. As a result, the price of the shares of our common stock may be   
higher than the price that might otherwise exist in the open market. The        
underwriters are not required to engage in these activities and, if commenced,  
may end any of these activities at any time.                                    

At our request, the underwriters have reserved for sale at the initial
public offering price up to 300,000 shares of our common stock being sold in    
this offering for our vendors, employees, family members of employees,          
directors, investors, customers and other third parties. The number of shares of
our common stock available for the sale to the general public will be reduced to
the extent these reserved shares are purchased. Any reserved shares not         
purchased by these persons will be offered by the underwriters to the general   
public on the same basis as the other shares in this offering.                  

   A prospectus in electronic format is being made available on Internet web
sites maintained by one or more of the lead underwriters of this offering and   
may be made available on web sites maintained by other underwriters. Other than 
the prospectus in electronic format, the information on any underwriter's web   
site and any information contained in any other web site maintained by an       
underwriter is not part of the prospectus or the registration statement of which
the prospectus forms a part.                                                    

PRICING OF THIS OFFERING                                                        

Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price of our common stock was  
determined by negotiation among us and the representatives of the underwriters. 
Among the primary factors that were considered in determining the public        
offering price were:                                                            

- prevailing market conditions,                                       

- our results of operations in recent periods,                        

- the present stage of our development,                               

   - the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be 
comparable to our business, and                                   

- estimates of our business potential.                                

    An affiliate of Banc of America Securities LLC is agent and a lender under
our existing corporate revolving credit facility and will be agent and lender   
under the new credit facility into                                              

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which we plan on entering concurrently with this offering. In addition,         
affiliates of Banc of America Securities LLC are currently lenders to certain of
the ventures that own our heart hospitals. The loans to these ventures will be  
repaid with a portion of the proceeds from the new credit facility.             

An affiliate of Deutsche Banc Alex. Brown Inc. is a lender under our  
existing corporate credit facility. That affiliate and affiliates of J.P. Morgan
Securities Inc. and First Union Securities, Inc. will be lenders under the new  
revolving credit facility into which we plan on entering concurrent with this   
offering.                                                                       

    We intend to use a portion of the net proceeds from this offering to repay
all amounts outstanding under our existing corporate revolving credit facility, 
and, as lenders, the affiliate of Banc of America Securities LLC and Deutsche   
Banc Alex. Brown Inc. will collectively receive 37.5% of any amounts we pay     
under that facility.                                                            

Some of the underwriters or their affiliates have provided investment 
services to us in the past and may do so in the future. They receive customary  
fees and commissions for these services.                                        

LEGAL MATTERS 

Moore & Van Allen PLLC, Charlotte, North Carolina will pass upon the  
validity of the common stock offered for sale by this prospectus. Certain       
matters related to this offering will also be passed upon by Reed Smith LLP, our
regulatory counsel. Certain matters related to this offering will be passed upon
for the underwriters by Willkie Farr & Gallagher, New York, New York.           

CHANGE IN ACCOUNTANTS 

 On January 20, 1999, our board of directors, upon recommendation of the
audit committee, approved the election of Deloitte & Touche LLP as our          
independent auditors to replace Ernst & Young LLP. Deloitte & Touche LLP issued 
an unqualified audit opinion on our consolidated financial statements for each  
of the years ended September 30, 2000 and 1999. Ernst & Young LLP issued an     
unqualified audit opinion on our consolidated financial statements for the year 
ended September 30, 1998. We have not had any disagreements with the current or 
former accountants on any matters of accounting principles or practices,        
financial statement disclosure, or auditing scope of procedure.                 

EXPERTS 

    The consolidated financial statements of MedCath Incorporated (Predecessor
Company) for the ten months ended July 31, 1998 and for the two months ended    
September 30, 1998 of MedCath Holdings, Inc. - the name of our holding company  
prior to the exchange that we will complete concurrently with this offering - as
appearing in this prospectus and registration statement have been audited by    
Ernst & Young LLP, independent auditors as set forth in their report thereon    
appearing elsewhere herein, and are included in reliance upon such report, given
on the authority of said firm as experts in accounting and auditing.            

The consolidated financial statements of MedCath Holdings, Inc. as of 
September 30, 1999 and 2000, and for the years then ended, included in this     
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as 
stated in their report appearing herein, and are included in reliance upon the  
report of such firm given upon their authority as experts in accounting and     
auditing.                                                                       

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WHERE YOU CAN FIND MORE INFORMATION 

We filed a registration statement on Form S-1 with the Commission with
respect to the registration of the common stock offered for sale with this      
prospectus. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits to the registration statement. For  
further information about us, the common stock we are offering by this          
prospectus and related matters, you should review the registration statement,   
including the exhibits filed as a part of the registration statement. Each      
statement in this prospectus referring to a document filed as an exhibit to the 
registration statement is qualified by reference to the exhibit for a complete  
statement of its terms and conditions.                                          

Following this offering, we will file annual, quarterly and current   
reports, and other information with the Commission. So long as we are subject to
the Commission's reporting requirements, we will continue to furnish the reports
and other required information to the Commission. You may read and copy any     
reports and other information we file at the Commission's public reference room 
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Please  
call the Commission at 1-800-SEC-0330 for further information on the operations 
of the public reference room. The Commission also maintains an internet site at 
http://www.sec.gov that contains reports, proxy and information statements, and 
other information regarding issuers that file electronically with the           
Commission. Our filings will be available, using our name or stock trading      
symbol, "MDTH," on the Commission's internet site.                              

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA 

    The unaudited pro forma consolidated statements of operations for the year
ended September 30, 2000 and for the six months ended March 31, 2001 reflect the
historical accounts of MedCath Holdings, Inc. for those periods, adjusted to    
give pro forma effect to the following events, as if those events had occurred  
on October 1, 1999:                                                             

   - the sale of McAllen Heart Hospital, in which we owned a 50.2% ownership
interest;                                                         

   - the exchange that will occur concurrent with this offering, in which we
    will increase our ownership interest in five of our heart hospitals by
  issuing shares of our common stock and/or paying cash to some of our
partners in those hospitals;                                      

  - the refinancing that will occur concurrent with this offering in which
three of our heart hospitals will refinance a portion of their    
      indebtedness with available borrowings under a new $190.0 million credit
facility guaranteed by us; and                                    

  - this offering of our common stock and the effect of the application of
the estimated net proceeds.                                       

 The unaudited pro forma consolidated balance sheet as of March 31, 2001
reflects the historical accounts of MedCath Holdings, Inc. as of that date as   
adjusted to give pro forma effect to the exchange, the debt refinancing and the 
offering as described above, as if those events had occurred on March 31, 2001. 

The sale of McAllen Heart Hospital is not included as a pro forma     
adjustment in our unaudited pro forma consolidated balance sheet as of March 31,
2001 as the sale was consummated on March 1, 2001, and is therefore reflected in
our historical balances, as of March 31, 2001. The unaudited pro forma          
consolidated financial data and accompanying notes should be read in conjunction
with the Consolidated Financial Statements and related notes of MedCath         
Holdings, Inc., which are included in this prospectus. We believe that the      
assumptions used in the following statements provide a reasonable basis on which
to present the unaudited pro forma consolidated financial data. The unaudited   
pro forma consolidated financial data is provided for informational purposes    
only and should not be construed to be indicative of our financial condition,   
results of operations or covenant compliance had the transactions and events    
described above been consummated on the dates assumed, and are not intended to  
project our financial condition on any future date or our results of operations 
for any future period.                                                          

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MEDCATH HOLDINGS, INC.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2000 
(IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                                ADJUSTMENTS TO PRO FORMA                  
                                                                --------------------------------------------------------- 
                                       PRO FORMA                    THE EXCHANGE OFFER                                    
                                      ADJUSTMENTS               --------------------------                                
                                        FOR THE                   TUCSON      CONSOLIDATED                                
                                        MCALLEN                    HEART         HEART          THE DEBT          THE     
                         HISTORICAL     SALE(a)     PRO FORMA   HOSPITAL(b)   HOSPITALS(c)   REFINANCING(d)   OFFERING(e) 
                         ----------   -----------   ----------  -----------   ------------   --------------   ----------- 
                                                                                                                          
Net revenue.............  $332,342     $(42,448)     $289,894     $35,779        $   --         $    --         $    --   
Operating expenses:                                                                                                       
 Personnel expense......    96,884      (13,570)       83,314      12,302            --              --              --   
 Medical supplies                                                                                                         
   expense..............    82,780      (10,315)       72,465       8,061            --              --              --   
 Bad debt expense.......    16,668       (4,036)       12,632       2,014            --              --              --   
 Other operating                                                                                                          
   expenses.............    80,868       (9,537)       71,331       7,761            --              --              --   
 Depreciation...........    30,077       (3,297)       26,780       3,099            --              --              --   
 Amortization...........     8,159         (480)        7,679         389           585              --              --   
 Gain on disposal of                                                                                                      
   property and                                                                                                           
   equipment............       (69)          --           (69)         58            --              --              --   
                          --------     --------      --------     -------        ------         -------         -------   
Income from operations..    16,975       (1,213)       15,762       2,095          (585)             --              --   
Interest expense........   (29,047)       2,215       (26,832)     (2,763)           --           1,078           4,527   
Interest income.........     3,428          (26)        3,402      (1,900)           --              --              --   
Other income, net.......       301           --           301          --            --              --              --   
Equity in net losses of                                                                                                   
 unconsolidated                                                                                                           
 affiliates.............    (2,011)          --        (2,011)      1,439            --              --              --   
                          --------     --------      --------     -------        ------         -------         -------   
Loss before minority                                                                                                      
 interest and income                                                                                                      
 taxes..................   (10,354)         976        (9,378)     (1,129)         (585)          1,078           4,527   
Minority interest in                                                                                                      
 earnings of                                                                                                              
 consolidated                                                                                                             
 subsidiaries...........    (3,305)         (40)       (3,345)        628         1,082            (347)             --   
                          --------     --------      --------     -------        ------         -------         -------   
Loss before income                                                                                                        
 taxes..................   (13,659)         936       (12,723)       (501)          497             731           4,527   
Income tax benefit......        24           --(f)         24          --(f)         --(f)           --(f)           --(f)
                          --------     --------      --------     -------        ------         -------         -------   
Net loss................  $(13,635)    $    936      $(12,699)    $  (501)       $  497         $   731         $ 4,527   
                          ========     ========      ========     =======        ======         =======         =======   
Net loss per share,                                                                                                       
 basic and diluted:(g)..  $  (1.15)                                                                                       
                          ========                                                                                        
Weighted average number                                                                                                   
 of shares:(g)..........    11,837                                                                                        
                          ========                                                                                        



                         PRO FORMA,                                                                                       
                         AS ADJUSTED                                                                                      
                         -----------                                                                                      
                                                                                                                          
Net revenue.............  $325,673                                                                                        
Operating expenses:                                                                                                       
 Personnel expense......    95,616                                                                                        
 Medical supplies                                                                                                         
   expense..............    80,526                                                                                        
 Bad debt expense.......    14,646                                                                                        
 Other operating                                                                                                          
   expenses.............    79,092                                                                                        
 Depreciation...........    29,879                                                                                        
 Amortization...........     8,653                                                                                        
 Gain on disposal of                                                                                                      
   property and                                                                                                           
   equipment............       (11)                                                                                       
                          --------                                                                                        
Income from operations..    17,272                                                                                        
Interest expense........   (23,990)                                                                                       
Interest income.........     1,502                                                                                        
Other income, net.......       301                                                                                        
Equity in net losses of                                                                                                   
 unconsolidated                                                                                                           
 affiliates.............      (572)                                                                                       
                          --------                                                                                        
Loss before minority                                                                                                      
 interest and income                                                                                                      
 taxes..................    (5,487)                                                                                       
Minority interest in                                                                                                      
 earnings of                                                                                                              
 consolidated                                                                                                             
 subsidiaries...........    (1,982)                                                                                       
                          --------                                                                                        
Loss before income                                                                                                        
 taxes..................    (7,469)                                                                                       
Income tax benefit......        24                                                                                        
                          --------                                                                                        
Net loss................  $ (7,445)                                                                                       
                          ========                                                                                        
Net loss per share,                                                                                                       
 basic and diluted:(g)..  $  (0.41)                                                                                       
                          ========                                                                                        
Weighted average number                                                                                                   
 of shares:(g)..........    17,966                                                                                        
                          ========                                                                                        

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MEDCATH HOLDINGS, INC.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2001 
(IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                             ADJUSTMENTS TO PRO FORMA                 
                                                             ---------------------------------------------------------
                                     PRO FORMA                   THE EXCHANGE OFFER                                   
                                    ADJUSTMENTS              --------------------------                               
                                      FOR THE                  TUCSON      CONSOLIDATED                               
                                      MCALLEN                   HEART         HEART          THE DEBT          THE    
                       HISTORICAL     SALE(a)     PRO FORMA  HOSPITAL(b)   HOSPITALS(c)   REFINANCING(d)   OFFERING(e)
                       ----------   -----------   ---------  -----------   ------------   --------------   -----------
                                                                                                                      
Net revenue..........   $194,398     $(20,237)    $174,161     $23,764        $  --           $  --          $   --   
Operating expenses:..                                                                                                 
 Personnel expense...     54,211       (6,076)      48,135       8,337           --              --              --   
 Medical supplies                                                                                                     
   expense...........     48,421       (4,349)      44,072       5,209           --              --              --   
 Bad debt expense....     10,527       (2,194)       8,333       2,060           --              --              --   
 Other operating                                                                                                      
   expenses..........     45,452       (4,071)      41,381       4,749           --              --              --   
 Depreciation........     15,035       (1,324)      13,711       1,622           --              --              --   
 Amortization........      4,228         (299)       3,929         178          292              --              --   
 Gain on disposal of                                                                                                  
   property and                                                                                                       
   equipment.........       (134)          --         (134)         --           --              --              --   
 Gain on sale of                                                                                                      
   hospital..........    (13,461)      13,461           --          --           --              --              --   
 Impairment of                                                                                                        
   long-lived                                                                                                         
   assets............        985           --          985          --           --              --              --   
                        --------     --------     --------     -------        -----           -----          ------   
Income from                                                                                                           
 operations..........     29,134      (15,385)      13,749       1,609         (292)             --              --   
Interest expense.....    (13,837)         895      (12,942)     (1,414)          --             748           1,790   
Interest income......      1,582          (68)       1,514      (1,061)          --              --              --   
Other income, net....       (351)          --         (351)         --           --              --              --   
Equity in net losses                                                                                                  
 of unconsolidated                                                                                                    
 affiliates..........     (1,843)          --       (1,843)        569           --              --              --   
                        --------     --------     --------     -------        -----           -----          ------   
Income (loss) before                                                                                                  
 minority interest                                                                                                    
 and income taxes....     14,685      (14,558)         127        (297)        (292)            748           1,790   
Minority interest in                                                                                                  
 (earnings) losses of                                                                                                 
 consolidated                                                                                                         
 subsidiaries........    (10,440)       8,028       (2,412)        208          694            (185)             --   
                        --------     --------     --------     -------        -----           -----          ------   
Income (loss) before                                                                                                  
 income taxes........      4,245       (6,530)      (2,285)        (89)         402             563           1,790   
Income tax expense...       (128)          --(f)      (128)         --(f)        --(f)           --(f)           --(f)
                        --------     --------     --------     -------        -----           -----          ------   
Net income (loss)....   $  4,117     $ (6,530)    $ (2,413)    $   (89)       $ 402           $ 563          $1,790   
                        ========     ========     ========     =======        =====           =====          ======   
Net income (loss) per                                                                                                 
 share, basic:(g)....   $   0.35                                                                                      
                        ========                                                                                      
Weighted average                                                                                                      
 number of shares,                                                                                                    
 basic(g):...........     11,838                                                                                      
                        ========                                                                                      
Net income (loss) per                                                                                                 
 share,                                                                                                               
 diluted(g):.........   $   0.34                                                                                      
                        ========                                                                                      
Weighted average                                                                                                      
 number of shares,                                                                                                    
 diluted(g):.........     11,937                                                                                      
                        ========                                                                                      



                         PRO FORMA,                                                                                   
                        AS ADJUSTED                                                                                   
                       --------------                                                                                 
                                                                                                                      
Net revenue..........     $197,925                                                                                    
Operating expenses:..                                                                                                 
 Personnel expense...       56,472                                                                                    
 Medical supplies                                                                                                     
   expense...........       49,281                                                                                    
 Bad debt expense....       10,393                                                                                    
 Other operating                                                                                                      
   expenses..........       46,130                                                                                    
 Depreciation........       15,333                                                                                    
 Amortization........        4,399                                                                                    
 Gain on disposal of                                                                                                  
   property and                                                                                                       
   equipment.........         (134)                                                                                   
 Gain on sale of                                                                                                      
   hospital..........           --                                                                                    
 Impairment of                                                                                                        
   long-lived                                                                                                         
   assets............          985                                                                                    
                          --------                                                                                    
Income from                                                                                                           
 operations..........       15,066                                                                                    
Interest expense.....      (11,818)                                                                                   
Interest income......          453                                                                                    
Other income, net....         (351)                                                                                   
Equity in net losses                                                                                                  
 of unconsolidated                                                                                                    
 affiliates..........       (1,274)                                                                                   
                          --------                                                                                    
Income (loss) before                                                                                                  
 minority interest                                                                                                    
 and income taxes....        2,076                                                                                    
Minority interest in                                                                                                  
 (earnings) losses of                                                                                                 
 consolidated                                                                                                         
 subsidiaries........       (1,695)                                                                                   
                          --------                                                                                    
Income (loss) before                                                                                                  
 income taxes........          381                                                                                    
Income tax expense...         (128)                                                                                   
                          --------                                                                                    
Net income (loss)....     $    253                                                                                    
                          ========                                                                                    
Net income (loss) per                                                                                                 
 share, basic:(g)....     $   0.01                                                                                    
                          ========                                                                                    
Weighted average                                                                                                      
 number of shares,                                                                                                    
 basic(g):...........       17,967                                                                                    
                          ========                                                                                    
Net income (loss) per                                                                                                 
 share,                                                                                                               
 diluted(g):.........     $   0.01                                                                                    
                          ========                                                                                    
Weighted average                                                                                                      
 number of shares,                                                                                                    
 diluted(g):.........       18,066                                                                                    
                          ========                                                                                    

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MEDCATH HOLDINGS, INC.

---------------                                                                 

(a) Adjustment for the sale of McAllen Heart Hospital, which occurred on March  
1, 2001, computed assuming the transaction was consummated on October 1,
1999. We owned a 50.2% interest in McAllen Heart Hospital. Adjustment   
includes the elimination of the results of operations of McAllen Heart  
Hospital, including minority interest and approximately $429,000 and    
    $179,000 of amortization expense related to goodwill and step-up in basis of
    the property of McAllen Heart Hospital which were included in our historical
   consolidated results of operations for the periods ended September 30, 2000
and March 31, 2001, respectively.                                       
(b) Adjustment for the exchange with some of our partners in Tucson Heart       
    Hospital, computed assuming the exchange was consummated on October 1, 1999.
Upon consummating the exchange, our ownership interest in Tucson Heart  
   Hospital will increase from an unconsolidated minority interest of 33.3% as
reflected in our historical consolidated results of operations to a     
controlling majority ownership interest of 58.6%. Adjustment reflects:  
- consolidation of the results of operations of Tucson Heart Hospital,
including adjustments to minority interest share of losses of     
  consolidated subsidiaries and equity in net losses of unconsolidated
affiliates;                                                       
   - approximately $1.9 million and $1.1 million of interest income included
  in our historical consolidated results of operations for the periods
   ended September 30, 2000 and March 31, 2001, respectively, related to
       advances to Tucson Heart Hospital, which will eliminate in consolidation;
- reduction, as a result of the exchange, in management fees of       
     approximately $410,000 and $320,000 for the periods ended September 30,
2000 and March 31, 2001, respectively, charged to the Tucson Heart
Hospital by the community hospital partner; and                   
     - approximately $99,000 and $49,000 of amortization expense for the periods
ended September 30, 2000 and March 31, 2001, respectively, for the
 approximately $4.0 million in estimated goodwill resulting from the
 exchange transaction for Tucson Heart Hospital, based on an assumed
amortization period of 40 years.                                  
(c) Adjustment for the exchange related to our majority owned and consolidated  
Heart Hospitals in which our partners are participating in the exchange,
including Arizona Heart Hospital, Arkansas Heart Hospital, Dayton Heart 
 Hospital, and Heart Hospital of Austin computed assuming the exchange was
consummated on October 1, 1999. Upon consummating the exchange, our     
ownership interests in these heart hospitals will increase, thereby     
 resulting in adjustments to the amount of minority interests reflected in
our consolidated results of operations. The pro forma adjustments to    
minority interests at certain of the heart hospitals reflect            
    disproportionate allocations of losses or profits to us that would otherwise
 be allocated to all of the heart hospital owners pro rata on the basis of
    their ownership. Such disproportionate allocations are required by generally
accepted accounting principles when the cumulative losses of a heart    
   hospital exceed its capitalization and the committed capital obligations of
  our partners. The pro forma adjustments to amortization expense represents
  the amortization over an assumed period of 40 years of approximately $23.4
million in estimated goodwill resulting from the exchange related to the
  consolidated heart hospitals. The change in our ownership interests in the
    heart hospitals, the related pro forma adjustments to minority interests and
amortization expense is as follows:                                     

                                                                [Download Table]

                                                             HISTORICAL  PRO FORMA
                                                             OWNERSHIP   OWNERSHIP
HEART HOSPITAL                                                INTEREST   INTEREST 
--------------                                               ----------  ---------
                                                                                  
Arizona Heart Hospital......................................    51.0%      70.6%  
Arkansas Heart Hospital.....................................    51.0%      70.3%  
Dayton Heart Hospital.......................................    52.5%      66.5%  
Heart Hospital of Austin....................................    51.5%      70.9%  

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                                                        [Enlarge/Download Table]

                                      PRO FORMA ADJUSTMENT        PRO FORMA ADJUSTMENT   
                                      TO MINORITY INTERESTS          TO AMORTIZATION     
                                    -------------------------   -------------------------
                                    SEPTEMBER 30,   MARCH 31,   SEPTEMBER 30,   MARCH 31,
HEART HOSPITAL                          2000          2001          2000          2001   
--------------                      -------------   ---------   -------------   ---------
                                                       (IN THOUSANDS)                    
                                                                                         
Arizona Heart Hospital.............    $1,157         $ 32          $134          $ 67   
Arkansas Heart Hospital............      (153)         662           303           152   
Dayton Heart Hospital..............        78           --            39            19   
Heart Hospital of Austin...........        --           --           109            54   
                                       ------         ----          ----          ----   
                                       $1,082         $694          $585          $292   
                                       ======         ====          ====          ====   

(d) Adjustment for the decrease in interest expense resulting from the          
refinancing of the indebtedness at three of our existing heart hospitals
  from the available borrowings under the new $190.0 million credit facility
("Refinanced Debt"). The refinancing of the indebtedness of these three 
heart hospitals can total up to $80.0 million. Adjustment is computed   
assuming such refinancing had occurred on October 1, 1999. The assumed  
   interest rate for the Refinanced Debt is 9.00% compared to historical rates
ranging from 8.25% to 12.20%. The aggregate outstanding balance of      
indebtedness that will be refinanced was approximately $80.2 million and
  $78.3 million at September 30, 2000 and March 31, 2001, respectively, plus
    an additional $0.9 million of pre-payment penalties and $2.6 million of loan
    acquisition costs which will be included in the debt refinancing. The effect
    on pro forma income (loss) of a 0.125% variance in the assumed interest rate
   of 9.00% is approximately $165,000 and $83,000 for the year ended September
30, 2000 and the six months ended March 31, 2001, respectively. The     
    adjustment also reflects the net decrease in interest expense resulting from
the write-off of existing loan acquisition costs for the refinanced debt
   which totaled $1.0 million and $740,000 at September 30, 2000 and March 31,
2001, respectively, and the capitalization of $2.6 million of new loan  
   acquisition costs from the refinancing. The existing loan acquisition costs
  were being amortized over the related debt terms, which ranged from 3 to 7
years and the refinancing loan costs are being amortized over the 5-year
term of the refinanced debt.                                            
(e) Adjustment for the decrease in interest expense resulting from the use of   
  the net proceeds from this offering to repay amounts outstanding under our
revolving credit facility. The balance outstanding under this credit    
  facility was approximately $35.1 million and $24.7 million (including $2.1
  million and $6.7 million classified as short-term borrowings) at September
   30, 2000 and March 31, 2001, respectively. The average balances outstanding
under this credit facility and average variable rates were approximately
$52.6 million and 8.6% and $41.3 million and 8.7% during the year ended 
 September 30, 2000 and the six months ended March 31, 2001, respectively.
See "Use of Proceeds".                                                  
(f) We are currently operating in a net operating loss position and consequently
have no significant current income tax liabilities. As of September 30, 
   2000, we had net operating and economic loss carryforwards of approximately
$46.4 million and our effective tax rate was less than 1%. Therefore, we
have assumed an effective tax rate of 0% for the pro forma adjustments  
presented.                                                              
(g) Pro forma basic and diluted net loss per share and related weighted average 
  number of shares outstanding for the year ended September 30, 2000 and the
  six months ended March 31, 2001 have been adjusted to reflect the issuance
 of 129,478 shares of common stock in the exchange and 6,000,000 shares of
  common stock in the offering. The following is a reconciliation of the pro
forma weighted average number of shares for the year ended September 30,
2000 and the six months ended March 31, 2001:                           

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                                                        [Enlarge/Download Table]

                                                     YEAR ENDED       SIX MONTHS ENDED
                                                 SEPTEMBER 30, 2000    MARCH 31, 2001 
                                                 ------------------   ----------------
                                                            (IN THOUSANDS)            
                                                                                      
Weighted average shares -- basic and diluted                                          
  (actual)......................................       11,837              11,838     
Issuance of common stock in the exchange........          129                 129     
Issuance of common stock in the offering........        6,000               6,000     
                                                       ------              ------     
Weighted average shares -- basic and diluted                                          
  (pro forma)...................................       17,966              17,967     
                                                       ======              ======     

     The potentially dilutive effect of options to purchase 2,178,722 shares and
2,240,800 shares of common stock at prices ranging from $4.75 to $19.00 which   
were outstanding at September 30, 2000 and March 31, 2001, respectively, has not
been included in the diluted net income (loss) per share because the options    
were antidilutive. See "Principal Stockholders" and Notes 11 and 12 to our      
Consolidated Financial Statements included elsewhere in this prospectus.        

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MEDCATH HOLDINGS, INC.

PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                     ADJUSTMENTS TO PRO FORMA                               
                                                      ------------------------------------------------------                
                                                          THE EXCHANGE OFFER                                                
                                                      --------------------------                                            
                                                        TUCSON      CONSOLIDATED                                            
                                                         HEART         HEART          THE DEBT        THE        PRO FORMA, 
                                          HISTORICAL  HOSPITAL(a)   HOSPITALS(b)   REFINANCING(c)   OFFERING     AS ADJUSTED
                                          ----------  -----------   ------------   --------------   --------     -----------
                                                                                                                            
Current assets                                                                                                              
 Cash and cash equivalents...............  $ 10,545     $(2,579)      $(22,779)       $     --      $135,700(d)   $ 96,197  
                                                                                                     (24,690)               
 Accounts receivable, net................    69,207      10,231             --              --            --        79,438  
 Medical supplies........................     6,652         783             --              --            --         7,435  
 Due from affiliates.....................       177          --             --              --            --           177  
 Prepaids and other current assets.......     4,859          58             --              --            --         4,917  
                                           --------     -------       --------        --------      --------      --------  
       Total current assets..............    91,440       8,493       $(22,779)             --       111,010       188,164  
Property and equipment, net..............   243,783      26,901             --              --            --       270,684  
Investments in and advances to                                                                                              
 affiliates, net.........................    12,161      (5,216)            --              --            --         6,945  
Goodwill, net............................    89,739       3,958         23,417              --            --       117,114  
Other intangible assets, net.............    21,231         225             --           1,926            --        23,382  
Other assets.............................     5,128         644             --              --            --         5,772  
                                           --------     -------       --------        --------      --------      --------  
       Total assets......................  $463,482     $35,005       $    638        $  1,926      $111,010      $612,061  
                                           ========     =======       ========        ========      ========      ========  
Current liabilities:                                                                                                        
 Short-term borrowings...................  $  6,690     $    --       $     --        $     --      $ (6,690)     $     --  
 Accounts payable........................    19,643       3,240             --              --            --        22,883  
 Income taxes payable....................        67          --             --              --            --            67  
 Accrued compensation and benefits.......     7,438         740             --              --            --         8,178  
 Accrued property taxes..................     2,771         235             --              --            --         3,006  
 Other accrued liabilities...............    11,675          --             --              --            --        11,675  
 Current portion of long-term debt and                                                                                      
   obligations under capital leases......    22,732       2,845             --          (3,361)           --        25,577  
                                                                                         3,361                              
                                           --------     -------       --------        --------      --------      --------  
       Total current liabilities.........    71,016       7,060             --              --        (6,690)       71,386  
Long-term debt...........................   205,664      23,187             --         (74,919)      (18,000)(e)   214,373  
                                                                                        78,441                              
Obligations under capital leases.........     9,365       1,350             --              --                      10,715  
Other long-term obligations..............        89       3,838             --              --            --         3,927  
                                           --------     -------       --------        --------      --------      --------  
       Total liabilities.................   286,134      35,435             --           3,522       (24,690)      300,401  
                                           --------     -------       --------        --------      --------      --------  
Minority interests in equity of                                                                                             
 consolidated subsidiaries...............    12,599      (1,043)        (1,985)           (334)           --         9,237  
Stockholders' equity.....................                                                                                   
 Common stock............................       119          --              1              --            60           180  
 Paid-in capital.........................   216,701         613          2,622              --       135,640       355,576  
 Deficit.................................   (52,071)         --             --          (1,262)           --       (53,333) 
                                           --------     -------       --------        --------      --------      --------  
       Total stockholders' equity........   164,749         613          2,623          (1,262)      135,700       302,423  
                                           --------     -------       --------        --------      --------      --------  
Total liabilities, minority interests,                                                                                      
 and stockholders' equity................  $463,482     $35,005       $    638        $  1,926      $111,010      $612,061  
                                           ========     =======       ========        ========      ========      ========  

(a)  Adjustment for the exchange with our partners in Tucson Heart Hospital,    
  computed assuming the exchange was consummated at the balance sheet date
     presented. Upon consummating the exchange, our ownership interest in Tucson
Heart Hospital will increase from an unconsolidated minority ownership
  interest of 33.3% as reflected in our historical consolidated results of
operations to a controlling majority ownership interest of 58.6%.     
Adjustment determined as of the balance sheet date reflects:          
- the consolidation of the balance sheet of Tucson Heart Hospital,    
including minority interest in equity of consolidated subsidiaries
determined based on the pro forma ownership interest;             
    - adjustment for approximately $186,000 of due from affiliates included in
   our historical balance sheet which will become an eliminating balance
upon consolidating Tucson Heart Hospital;                         

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MEDCATH HOLDINGS, INC.

  - adjustment for approximately $23.5 million of advances to Tucson Heart
   Hospital, net of $18.2 million of investment in Tucson Heart Hospital
that will eliminate upon consolidating Tucson Heart Hospital; and 
- adjustment to reflect the preliminary allocation of the aggregate   
      purchase price for the 25.3% ownership interest in Tucson Heart Hospital
    being acquired in the exchange. Because the carrying amount of the net
 assets underlying the additional ownership interest acquired, which
primarily consist of accounts receivable, inventory, property and 
   equipment, current liabilities and long-term debt and capital leases,
       approximate their fair value, the application of purchase accounting will
     not result in an adjustment to the carrying amount of those net assets.
      Under the exchange, we will assume all interests, rights and obligations
   related to the additional ownership interests being acquired from our
     partners, including any and all existing rights or obligations relating
      to capital investment, surplus or deficit in the hospital. The estimated
    purchase price allocation consists of estimated total consideration of
     approximately $3.3 million ($2.7 million in cash and $614,000 in stock)
     and assumption of minority partner deficit related to acquired interest
of approximately $696,000 for total goodwill of approximately $4.0
 million. The amount of goodwill actually recorded may ultimately be
different from these estimates.                                   

(b)  Adjustment related to our consolidated heart hospitals in which our        
partners are participating in the exchange, including Arizona Heart   
     Hospital, Arkansas Heart Hospital, Dayton Heart Hospital and Heart Hospital
 of Austin computed assuming the exchange was consummated at the balance
sheet date presented. Upon consummating the exchange, our ownership   
interests in these heart hospitals will increase. Because the carrying
amount of the net assets underlying the additional ownership interest 
acquired, which primarily consist of accounts receivable, inventory,  
    property and equipment, current liabilities and long-term debt and capital
leases, approximate their fair value, the application of purchase     
     accounting will not result in an adjustment to the carrying amount of those
  net assets. Under the exchange, we will assume all interests, rights and
 obligations related to the additional ownership interest being acquired
 from our partners, including any and all existing rights or obligations
 relating to capital investment, surplus or deficit in the hospital. The
change in our ownership interests in these heart hospitals and the    
 estimated purchase price allocations determined as of the balance sheet
date are as follows (in thousands):                                   

                                                                [Download Table]

                                ARIZONA   ARKANSAS   DAYTON      HEART            
                                 HEART     HEART     HEART    HOSPITAL OF         
                                HOSPITAL  HOSPITAL  HOSPITAL    AUSTIN      TOTAL 
                                --------  --------  --------  -----------  -------
                                                                                  
Historical ownership                                                              
  interest....................     51.0%     51.0%     52.5%      51.5%         --
Pro forma ownership                                                               
  interest....................     70.6%     70.3%     66.5%      70.9%         --
Estimated total consideration:                                                    
  Cash........................   $4,541   $13,720    $  474     $4,044     $22,779
  Common stock                    2,008        --       300        315       2,623
                                 ------   -------    ------     ------     -------
          Total...............    6,549    13,720       774      4,359      25,402
Estimated minority interest                                                       
  surplus (deficit) balance                                                       
  assumed.....................    1,189     1,580      (784)        --       1,985
                                 ------   -------    ------     ------     -------
Estimated goodwill............   $5,360   $12,140    $1,558     $4,359     $23,417
                                 ======   =======    ======     ======     =======

The amount of goodwill actually recorded may ultimately be different from these 
estimates.                                                                      

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MEDCATH HOLDINGS, INC.

(c) Reflects the refinancing that will occur concurrent with this offering in   
    which three of our heart hospitals will refinance indebtedness under certain
of their debt facilities with available borrowings under a new credit   
    facility guaranteed by us. The aggregate outstanding balance of indebtedness
  that will be refinanced was approximately $78.3 million at March 31, 2001.
The amount refinanced will also include $0.9 million of pre-payment     
penalties and $2.6 million of loan acquisition costs. The $1.9 million  
adjustment to other intangible assets represents the write-off of the   
existing loan acquisition costs for the refinanced debt which totaled   
 $740,000 at March 31, 2001, and the capitalization of $2.6 million of new
loan acquisition costs arising from the refinancing.                    

(d) Net proceeds from the offering which are assumed to be $135.7 million, net  
of $3.8 million in estimated offering costs. Of the net proceeds,       
  approximately $25.4 million will be used for the cash consideration in the
exchange as reflected in notes (a) and (b). See "Use of Proceeds."      

(e) Reflects the repayment after giving effect to the pro forma adjustments for 
    the repayments with a portion of the proceeds from the offering as reflected
    in the pro forma for the McAllen sale in note (a) above of remaining amounts
outstanding under our corporate revolving credit facility, including the
amount of short-term borrowings. See "Use of Proceeds" and "Prospectus  
Summary."                                                               

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INDEX TO FINANCIAL STATEMENTS 

                                                                [Download Table]

                                                              PAGE
                                                              ----
                                                                  
MEDCATH HOLDINGS, INC. AND MEDCATH INCORPORATED (PREDECESSOR      
  COMPANY) CONSOLIDATED FINANCIAL STATEMENTS                      
TEN MONTHS ENDED JULY 31, 1998 (PREDECESSOR COMPANY) AND TWO      
  MONTHS ENDED SEPTEMBER 30, 1998;                                
YEARS ENDED SEPTEMBER 30, 1999 AND 2000 AND                       
SIX MONTHS ENDED MARCH 31, 2000 AND 2001 (UNAUDITED):             
  INDEPENDENT AUDITORS' REPORTS.............................  F-2 
  CONSOLIDATED FINANCIAL STATEMENTS:                              
     Consolidated Balance Sheets............................  F-4 
     Consolidated Statements of Operations..................  F-5 
     Consolidated Statements of Stockholders' Equity........  F-6 
     Consolidated Statements of Cash Flows..................  F-7 
     Notes to Consolidated Financial Statements.............  F-9 

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INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders                                         
MedCath Holdings, Inc.                                                          

 We have audited the accompanying consolidated balance sheets of MedCath
Holdings, Inc. and subsidiaries (the "Company") as of September 30, 1999 and    
2000, and the related consolidated statements of operations, stockholders'      
equity, and cash flows for the years then ended. These financial statements are 
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.                   

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

   In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at September 30,   
1999 and 2000, and the results of its operations and its cash flows for the     
years then ended, in conformity with accounting principles generally accepted in
the United States of America.                                                   

DELOITTE & TOUCHE LLP                                                           

April 23, 2001                                                                  
Charlotte, North Carolina                                                       

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders                                         
MedCath Holdings, Inc.                                                          

 We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of MedCath Holdings, Inc. (the Company) for
the two month period ended September 30, 1998. We have also audited the         
consolidated statements of operations, stockholders' equity, and cash flows of  
MedCath Incorporated (Predecessor Company) for the ten month period ended July  
31, 1998. The financial statements of MedCath Holdings, Inc. are the            
responsibility of the Company's management. The financial statements of MedCath 
Incorporated are the responsibility of the Predecessor Company's management. Our
responsibility is to express an opinion on these financial statements based on  
our audits.                                                                     

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

     In our opinion, the financial statements of MedCath Holdings, Inc. referred
to above present fairly, in all material respects, the consolidated results of  
its operations and its cash flows for the two month period ended September 30,  
1998, in conformity with accounting principles generally accepted in the United 
States. Also, in our opinion, the financial statements of MedCath Incorporated  
referred to above present fairly, in all material respects, the consolidated    
results of its operations and its cash flows for the ten month period ended July
31, 1998, in conformity with accounting principles generally accepted in the    
United States.                                                                  

/s/ Ernst & Young LLP                                                           

November 13, 1998                                                               
Charlotte, North Carolina                                                       

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MEDCATH HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS 
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)

                                                        [Enlarge/Download Table]

                                                                 SEPTEMBER 30,                     
                                                              -------------------      MARCH 31,   
                                                                1999       2000          2001      
                                                              --------   --------   ---------------
                                                                                      (UNAUDITED)  
                                                                                                   
Current assets:                                                                                    
  Cash and cash equivalents.................................  $ 28,432   $  7,621      $ 10,545    
  Accounts receivable, net..................................    39,080     63,916        69,207    
  Insurance recovery receivable.............................     6,531         --            --    
  Medical supplies..........................................     5,415      6,753         6,652    
  Due from affiliates.......................................     1,594        184           177    
  Prepaid expenses and other current assets.................     1,972      3,483         4,859    
                                                              --------   --------      --------    
         Total current assets...............................    83,024     81,957        91,440    
Property and equipment, net.................................   243,378    267,438       243,783    
Investments in and advances to affiliates, net..............     8,312      6,184        12,161    
Goodwill, net...............................................   103,863    100,776        89,739    
Other intangible assets, net................................    27,551     24,366        21,231    
Other assets................................................     6,157      5,357         5,128    
                                                              --------   --------      --------    
         Total assets.......................................  $472,285   $486,078      $463,482    
                                                              ========   ========      ========    

Current liabilities:                                                                               
  Short-term borrowings.....................................  $     --   $  2,127      $  6,690    
  Accounts payable..........................................    13,866     24,199        19,643    
  Income taxes payable......................................       479         53            67    
  Accrued compensation and benefits.........................     6,601      8,141         7,438    
  Accrued property taxes....................................     1,911      3,226         2,771    
  Other accrued liabilities.................................     8,286      6,036        11,675    
  Current portion of long-term debt and obligations under                                          
    capital leases..........................................    16,446     23,869        22,732    
                                                              --------   --------      --------    
         Total current liabilities..........................    47,589     67,651        71,016    
Long-term debt..............................................   233,551    246,093       205,664    
Obligations under capital leases............................     2,147      2,008         9,365    
Other long-term obligations.................................     3,295        151            89    
                                                              --------   --------      --------    
         Total liabilities..................................   286,582    315,903       286,134    
Minority interests in equity of consolidated subsidiaries...    11,443      9,550        12,599    
Stockholders' equity:                                                                              
  Preferred stock, $.01 par value, 10,000,000 shares                                               
    authorized, and no shares issued and outstanding at                                            
    September 30, 2000 and 1999 and March 31, 2001                                                 
  Common stock, $.01 par value, 20,000,000 shares                                                  
    authorized, and 11,836,991 shares issued and outstanding                                       
    at September 30, 2000 and 1999 and 11,838,548 shares at                                        
    March 31, 2001..........................................       119        119           119    
  Paid-in capital...........................................   216,694    216,694       216,701    
  Deficit...................................................   (42,553)   (56,188)      (52,071)   
                                                              --------   --------      --------    
         Total stockholders' equity.........................   174,260    160,625       164,749    
                                                              --------   --------      --------    
         Total liabilities, minority interests, and                                                
           stockholders' equity.............................  $472,285   $486,078      $463,482    
                                                              ========   ========      ========    

See notes to consolidated financial statements. 

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MEDCATH HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS 
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                        [Enlarge/Download Table]

                                        PREDECESSOR                                                            
                                          COMPANY                           THE COMPANY                        
                                        -----------  --------------------------------------------------------- 
                                        TEN MONTHS    TWO MONTHS         YEAR ENDED         SIX MONTHS ENDED   
                                           ENDED         ENDED          SEPTEMBER 30,           MARCH 31,      
                                         JULY 31,    SEPTEMBER 30,   -------------------   ------------------- 
                                           1998          1998          1999       2000       2000       2001   
                                        -----------  -------------   --------   --------   --------   -------- 
                                                                                                               
Net revenue............................  $155,897       $34,574      $255,756   $332,342   $163,413   $194,398 
Operating expenses:                                                                                            
  Personnel expense....................    44,204        10,804        77,406     96,884     45,825     54,211 
  Medical supplies expense.............    26,957         8,295        60,875     82,780     41,246     48,421 
  Bad debt expense.....................     4,842         1,227        13,021     16,668      5,269     10,527 
  Other operating expenses.............    45,347         9,050        71,510     80,868     39,395     45,452 
  Depreciation.........................    11,802         3,300        25,271     30,077     14,945     15,035 
  Amortization.........................     7,747           915         5,764      8,159      3,935      4,228 
  Loss (gain) on disposal of property                                                                          
    and equipment......................       380            --         1,314        (69)       (13)      (134)
  Gain on sale of hospital.............        --            --            --         --         --    (13,461)
  Impairment of long-lived assets......        --            --        10,935         --         --        985 
  Organization and pre-opening costs...        --         1,747            --         --         --         -- 
  Merger expenses......................     6,590            --            --         --         --         -- 
                                         --------       -------      --------   --------   --------   -------- 
        Total operating expenses.......   147,869        35,338       266,096    315,367    150,602    165,264 
                                         --------       -------      --------   --------   --------   -------- 
Income (loss) from operations..........     8,028          (764)      (10,340)    16,975     12,811     29,134 
Other income (expenses):                                                                                       
  Interest expense.....................    (9,221)       (2,385)      (21,667)   (29,047)   (14,356)   (13,837)
  Interest income......................     1,504           380         2,533      3,428      1,670      1,582 
  Other income (expense), net..........        --            --           168        301        260       (351)
  Equity in net earnings (losses) of                                                                           
    unconsolidated affiliates..........        34          (842)       (5,640)    (2,011)    (1,184)    (1,843)
                                         --------       -------      --------   --------   --------   -------- 
        Total other expenses, net......    (7,683)       (2,847)      (24,606)   (27,329)   (13,610)   (14,449)
                                         --------       -------      --------   --------   --------   -------- 
Income (loss) before minority interest                                                                         
  and income taxes.....................       345        (3,611)      (34,946)   (10,354)      (799)    14,685 
Minority interest share of earnings of                                                                         
  consolidated subsidiaries............    (2,832)         (377)       (6,322)    (3,305)    (2,804)   (10,440)
                                         --------       -------      --------   --------   --------   -------- 
Income (loss) before income taxes......    (2,487)       (3,988)      (41,268)   (13,659)    (3,603)     4,245 
Income tax benefit (expense)...........       (34)        1,365         1,338         24         --       (128)
                                         --------       -------      --------   --------   --------   -------- 
Net income (loss)......................  $ (2,521)      $(2,623)     $(39,930)  $(13,635)  $ (3,603)  $  4,117 
                                         ========       =======      ========   ========   ========   ======== 
Net income (loss) per share, basic.....  $  (0.21)      $ (0.22)     $  (3.37)  $  (1.15)  $  (0.30)  $   0.35 
                                         ========       =======      ========   ========   ========   ======== 
Net income (loss) per share, diluted...  $  (0.21)      $ (0.22)     $  (3.37)  $  (1.15)  $  (0.30)  $   0.34 
                                         ========       =======      ========   ========   ========   ======== 
Weighted average number of shares,                                                                             
  basic................................    11,726        11,861        11,836     11,837     11,837     11,838 
                                         ========       =======      ========   ========   ========   ======== 
Weighted average number of shares,                                                                             
  diluted..............................    11,726        11,861        11,836     11,837     11,837     11,937 
                                         ========       =======      ========   ========   ========   ======== 

See notes to consolidated financial statements. 

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MEDCATH HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                           COMMON STOCK                                  
                                          --------------             RETAINED            
                                                    PAR   PAID-IN    EARNINGS            
                                          SHARES   VALUE  CAPITAL    (DEFICIT)   TOTAL   
                                          ------   -----  --------   ---------  -------- 
                                                                                         
PREDECESSOR COMPANY                                                                      
Balance, September 30, 1997.............. 11,169   $112   $109,065   $ 17,960   $127,137 
  Net loss...............................            --         --     (2,521)    (2,521)
  Conversion of Convertible Subordinated                                                 
     Debt................................    437      4      6,230         --      6,234 
  Issuance of Common Stock...............    739      7     10,834         --     10,841 
  Exercise of stock options..............     61      1        774         --        775 
                                          ------   ----   --------   --------   -------- 
Balance, July 31, 1998................... 12,406   $124   $126,903   $ 15,439   $142,466 
                                          ======   ====   ========   ========   ======== 
THE COMPANY                                                                              
Initial capitalization of the Company.... 11,861   $119   $217,528   $     --   $217,647 
  Net loss...............................     --     --         --     (2,623)    (2,623)
Balance, September 30, 1998.............. 11,861    119    217,528     (2,623)   215,024 
  Exercise of stock options..............    106      1        374         --        375 
  Stock repurchase.......................   (130)    (1)    (2,640)        --     (2,641)
  Purchase price adjustment..............     --     --      1,432         --      1,432 
  Net loss...............................     --     --         --    (39,930)   (39,930)
                                          ------   ----   --------   --------   -------- 
Balance, September 30, 1999.............. 11,837    119    216,694    (42,553)   174,260 
  Net loss...............................     --     --         --    (13,635)   (13,635)
                                          ------   ----   --------   --------   -------- 
Balance, September 30, 2000.............. 11,837    119    216,694    (56,188)   160,625 
  Exercise of stock options..............      2     --          7         --          7 
  Net income.............................     --     --         --      4,117      4,117 
                                          ------   ----   --------   --------   -------- 
Balance, March 31, 2001                                                                  
  (Unaudited)............................ 11,839   $119   $216,701   $(52,071)  $164,749 
                                          ======   ====   ========   ========   ======== 

See notes to consolidated financial statements. 

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MEDCATH HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                     PREDECESSOR                             THE COMPANY                           
                                       COMPANY     --------------------------------------------------------------- 
                                    -------------                            YEAR ENDED         SIX MONTHS ENDED   
                                     TEN MONTHS        TWO MONTHS           SEPTEMBER 30,           MARCH 31,      
                                        ENDED            ENDED           -------------------   ------------------- 
                                    JULY 31, 1998  SEPTEMBER 30, 1998      1999       2000       2000       2001   
                                    -------------  ------------------    --------   --------   --------   -------- 
                                                                                                   (UNAUDITED)     
                                                                                                                   
Operating activities:                                                                                              
  Net income (loss)...............    $ (2,521)         $ (2,623)        $(39,930)  $(13,635)  $ (3,603)  $  4,117 
  Adjustments to reconcile net                                                                                     
    income (loss) to net cash                                                                                      
    provided by (used in)                                                                                          
    operating activities:                                                                                          
    Depreciation and                                                                                               
      amortization................      19,549             4,215           31,035     38,236     18,880     19,263 
    Bad debt expense..............          --                --           13,021     16,668      5,269     10,527 
    Impairment of long-lived                                                                                       
      assets......................          --                --           10,935         --         --        985 
    Loss (gain) on disposal of                                                                                     
      property and equipment......          --                --            1,314        (69)       (13)      (134)
    Gain on sale of hospital......          --                --               --         --         --    (13,461)
    Equity in net (earnings)                                                                                       
      losses of unconsolidated                                                                                     
      affiliates..................         (34)              842            5,640      2,011      1,184      1,843 
    Minority interest share of                                                                                     
      earnings of consolidated                                                                                     
      subsidiaries................        (941)              568            6,322      3,305      2,804     10,440 
    Deferred income taxes.........       1,675              (199)          (3,773)        --         --         -- 
  Change in assets and liabilities                                                                                 
    that relate to operations:                                                                                     
    Accounts receivable...........     (19,814)            1,792          (18,900)   (41,214)   (32,067)   (23,909)
    Insurance recovery                                                                                             
      receivable..................          --                --              284      6,531         --         -- 
    Medical supplies..............      (2,197)              246             (888)      (461)      (692)    (1,561)
    Due from affiliates...........          --                --           (1,192)     1,410      1,317          7 
    Prepaid expenses and other                                                                                     
      current assets..............      (1,941)             (777)          (4,583)    (1,079)    (2,501)    (1,692)
    Other.........................         223               142             (217)       514         21         81 
    Accounts payable and other                                                                                     
      liabilities.................      12,025            (3,137)          10,920      4,409     (2,099)     1,420 
                                      --------          --------         --------   --------   --------   -------- 
        Net cash provided by (used                                                                                 
          in) operating                                                                                            
          activities..............       6,024             1,069            9,988     16,626    (11,500)     7,926 
                                      --------          --------         --------   --------   --------   -------- 
Investing activities:                                                                                              
  Net change in cash due to                                                                                        
    merger........................          --            13,515               --         --         --         -- 
  Organization and start-up                                                                                        
    costs.........................      (7,324)               --               --         --         --         -- 
  Purchases of property and                                                                                        
    equipment.....................     (94,118)          (16,696)         (57,661)   (12,284)    (7,979)    (5,924)
  Proceeds from sale of property                                                                                   
    and equipment.................          --                --            1,172      1,023        357      1,340 
  Proceeds from sale of                                                                                            
    hospital......................          --                --               --         --         --     53,798 
  Loans under management                                                                                           
    agreements....................      (2,828)           (2,555)            (722)      (140)       (78)       (53)
  Repayments of loans under                                                                                        
    management agreements.........       1,787               196            5,914        433        196        201 
  Acquisition of management                                                                                        
    contracts.....................      (8,208)               --           (1,416)        --         --            
  Investments in and advances to                                                                                   
    affiliates, net...............          --                --           (7,201)    (4,699)    (6,528)    (7,700)
  Settlement of preacquisition                                                                                     
    contingency...................          --                --            2,300         --         --            

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MEDCATH HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                     PREDECESSOR                             THE COMPANY                           
                                       COMPANY     --------------------------------------------------------------- 
                                    -------------                            YEAR ENDED         SIX MONTHS ENDED   
                                     TEN MONTHS        TWO MONTHS           SEPTEMBER 30,           MARCH 31,      
                                        ENDED            ENDED           -------------------   ------------------- 
                                    JULY 31, 1998  SEPTEMBER 30, 1998      1999       2000       2000       2001   
                                    -------------  ------------------    --------   --------   --------   -------- 
                                                                                                   (UNAUDITED)     
                                                                                                                   
  Cash acquired upon consolidation                                                                                 
    of equity method investee.....    $     --          $     --         $     --   $  2,817   $  2,817   $     -- 
  Investment in unconsolidated                                                                                     
    subsidiary....................        (960)               --               --         --         --         -- 
  Net sales of short-term                                                                                          
    investments...................      20,812             2,924               --         --         --         -- 
  Other investing activities......       1,067                97               43       (313)        --       (118)
                                      --------          --------         --------   --------   --------   -------- 
        Net cash provided by (used                                                                                 
          in) investing                                                                                            
          activities..............     (89,772)           (2,519)         (57,571)   (13,163)   (11,215)    41,544 
                                      --------          --------         --------   --------   --------   -------- 
Financing activities:                                                                                              
  Net borrowings of short-term                                                                                     
    debt..........................          --                --               --      2,127         --      4,563 
  Proceeds from issuance of long-                                                                                  
    term debt.....................      89,966            11,953           70,818     67,925     61,746     13,254 
  Repayments of long-term debt....      (6,269)           (1,384)         (16,681)   (87,253)   (40,550)   (54,631)
  Repayments of obligations under                                                                                  
    capital leases................        (504)             (108)            (888)    (1,075)      (684)    (2,181)
  Payment of loan acquisition                                                                                      
    costs and deferred fees.......      (1,103)              (76)            (393)      (904)      (116)      (165)
  Investments by minority                                                                                          
    partners......................         761                20            3,790         70        110        987 
  Distributions to minority                                                                                        
    partners......................        (505)             (350)          (3,950)    (5,164)    (4,014)    (8,380)
  Proceeds from issuance of common                                                                                 
    stock.........................         775                --              375         --         --          7 
  Repurchase of common stock......          --                --           (2,641)        --         --         -- 
                                      --------          --------         --------   --------   --------   -------- 
        Net cash provided by (used                                                                                 
          in) financing                                                                                            
          activities..............      83,121            10,055           50,430    (24,274)    16,492    (46,546)
                                      --------          --------         --------   --------   --------   -------- 
Net increase (decrease) in cash                                                                                    
  and cash equivalents............        (627)            8,605            2,847    (20,811)    (6,223)     2,924 
Cash and cash equivalents:                                                                                         
  Beginning of period.............      17,607            16,980           25,585     28,432     28,432      7,621 
                                      --------          --------         --------   --------   --------   -------- 
  End of period...................    $ 16,980          $ 25,585         $ 28,432   $  7,621   $ 22,209   $ 10,545 
                                      ========          ========         ========   ========   ========   ======== 

See notes to consolidated financial statements. 

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MEDCATH HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND MERGER                                                      

   MedCath Holdings, Inc. (the "Company") is a developer, owner and operator
of hospitals focused on providing cardiology and cardiovascular services. While 
each of the Company's heart hospitals (collectively, the "Hospital Division") is
licensed as a general acute care hospital, the Company designs and operates its 
heart hospitals with a focus on the unique needs of patients suffering from     
cardiovascular disease. In addition to its heart hospitals, the Company provides
cardiovascular care services in diagnostic and therapeutic facilities and mobile
cardiac catheterization laboratories (the "Diagnostic Division"). The Company   
also provides consulting and management services tailored to cardiologists and  
cardiovascular surgeons (the "Cardiology Consulting and Management Division" or 
"CCM").                                                                         

    On July 31, 1998 (the "Merger Date"), MCTH Acquisitions, Inc., an indirect
wholly-owned subsidiary of the Company, merged (the "Merger") with and into the 
Company's predecessor company, MedCath Incorporated (the "Predecessor Company"),
with the Predecessor Company being the surviving entity and an indirect         
wholly-owned subsidiary of Holdings. The total purchase price was approximately 
$249 million and consisted of $242 million, used to acquire all of the          
outstanding common stock and common stock options of the Predecessor Company,   
and $7 million of related fees and expenses. Funding for the Merger was provided
by $204 million in cash by equity investors in Holdings, and $33 million of     
borrowings under a new revolving line of credit.                                

The Merger was accounted for as a purchase business combination and,  
accordingly, adjustments were made on the Merger Date to reflect the Merger and 
allocation of the $249 million total purchase price to the Company's net assets 
in conformity with the procedures specified by Accounting Principles Board      
Opinion No. 16, "Business Combinations" ("APB 16"). Accordingly, property and   
equipment, intangible assets represented by management contracts and other      
assets and liabilities were revalued from historical cost to fair value at the  
time of the Merger. As a result, the Company's financial information is not     
comparable to Predecessor Company financial information.                        

    The preliminary allocation of the purchase price, subject to adjustment in
accordance with generally accepted accounting principles, was as follows (in    
thousands):                                                                     

                                                                [Download Table]
                                                                        
Working Capital.............................................  $  35,454 
Property, Plant, and Equipment..............................    228,402 
Other Assets................................................     14,763 
Intangible Assets...........................................     33,879 
Goodwill....................................................    116,150 
Liabilities Assumed.........................................   (183,672)
Minority Interest (including excess losses recorded in                  
  stockholders' equity).....................................      4,280 
                                                              --------- 
          Total Purchase Price..............................  $ 249,256 
                                                              ========= 

 As of July 31,1999, all matters were resolved and necessary adjustments
were made to the preliminary purchase price allocation. Adjustments were made to
other intangible assets, the accrual for transaction costs and related deferred 
income taxes, totaling approximately $9.0 million as of September 30, 1999. In  
addition, the Company recorded, as a reclassification to paid-in-capital, an    
adjustment to the preliminary allocation of the purchase price paid in the      
Company's July 31, 1998 acquisition.                                            

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MEDCATH HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                   

    Basis of Consolidation.  The consolidated financial statements include the
accounts of the Company and its subsidiaries that are wholly and majority owned 
and/or over which substantive control is exercised. All intercompany accounts   
and transactions have been eliminated in consolidation. Investments in          
unconsolidated affiliates, in which the Company has 20% or more ownership       
interest and has the ability to exercise significant influence, but not         
substantive control, over the affiliates' operating and financial policies, are 
accounted for using the equity method of accounting.                            

     The Company does not have exclusive authority over all decisions related to
ongoing, major, or central operations of the physician group practices within   
its CCM operations, nor does the Company have the ability to establish          
compensation or implement guidelines for the selection, hiring, and firing of   
the licensed medical professionals. Accordingly, the Company does not have a    
controlling financial interest in those CCM physician practices as defined by   
Emerging Issues Task Force Issue No. 97-2, Consolidation of Physicians' Practice
Entities, and therefore does not include those CCM physician practices in the   
Company's consolidated financial statements.                                    

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

  Use of Estimates.  The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America   
(hereafter, "generally accepted accounting principles") requires management to  
make estimates and assumptions that affect the amounts reported in the          
consolidated financial statements and accompanying notes. Actual results could  
differ from those estimates.                                                    

 Medical Supplies.  Medical supplies consist primarily of laboratory and
surgical supplies, contrast media, and catheters and are stated at the lower of 
first-in, first-out ("FIFO") cost or market.                                    

  Property and Equipment.  Property and equipment are recorded at cost and
are being depreciated principally on a straight-line basis over the estimated   
useful lives of the assets, which generally range from 25 to 40 years for       
buildings and improvements, 25 years for land improvements, and from 3 to 10    
years for equipment and software. Repairs and maintenance costs are charged     
against income while betterments are capitalized as additions to the related    
assets. Retirements, sales, and disposals are recorded by removing the related  
cost and accumulated depreciation with any resulting gain or loss reflected in  
operating income. Amortization of assets recorded under capital leases is       
included in depreciation expense. Interest expense incurred in connection with  
the construction of heart hospitals is capitalized as part of the cost of the   
building until the facility is operational, at which time depreciation begins   
using the straight-line method over the estimated useful life of the building.  

Goodwill and Other Intangible Assets.  Goodwill represents the excess 
purchase price over the fair value of net assets acquired. The cumulative amount
of goodwill amortization at September 30, 1999 and 2000 was $3.2 million and    
$6.3 million, respectively. Other intangible assets consist primarily of        
management contracts, loan acquisition costs and other intangible assets.       
Management contracts consist of amounts paid to acquire certain contracts       
related to cardiac diagnostic and therapeutic facilities and CCM physician      
practices and the value assigned to a certificate of need ("CON") exemption for 
cardiac diagnostic and therapeutic facilities. Loan acquisition costs are the   
costs associated with obtaining long-term financing ("Loan                      
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MEDCATH HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

costs"). The cumulative amount of other intangible assets amortization at       
September 30, 1999 and 2000 was $5.3 million and $10.0 million, respectively.   

Generally accepted accounting principles require that goodwill and all
other intangible assets be amortized over the period benefited. The Company has 
determined that the period benefited by goodwill is 40 years, and accordingly   
goodwill is being amortized on a straight-line basis over 40 years. Similarly,  
intangible assets related to management contracts for cardiac diagnostic and    
therapeutic facilities are being amortized over the related contract lives which
range from 5 to 23 years and the certificate of need exemption is being         
amortized over 8 years based on the related estimated periods of future benefit 
of such intangible assets. Loan costs are being amortized to interest expense   
over the life of the related debt agreements. The Predecessor Company's policy  
was to amortize intangible assets relating to management contracts over the     
terms of the respective contracts, which range from 30 to 40 years, the CON     
exemption over eight years, and goodwill over 40 years.                         

 Impairment of Long-Lived Assets.  The Company follows the provisions of
Accounting Principles Board ("APB") Opinion No. 17, Intangible Assets, and      
Statement of Accounting Standards ("SFAS") No. 121, Accounting for the          
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. In 
accordance with APB Opinion No. 17 and SFAS No. 121, as applicable, the Company 
assesses carrying value of goodwill, intangible assets, and other long-lived    
assets as facts and circumstances suggest that the carrying value of those      
assets may not be recoverable. The Company considers internal and external      
factors relating to each acquired entity and division, including hospital and   
physician contract changes, local market developments, changes in third-party   
reimbursement methodologies, national health care trends, and other publicly    
available information. In accordance with APB No. 17, the Company assesses      
impairment of the intangible assets' reorganization value in excess of amounts  
allocable to identifiable assets and goodwill whenever the Company's operating  
trends have had other than a temporary adverse change. Whenever the external or 
internal factors or operating trends indicate that the goodwill, intangible     
assets and other long-lived assets will not be recoverable, as determined based 
on the expected future undiscounted cash flows of the entity, division, or      
management contract acquired over the remaining amortization period, the        
carrying value of the assets is reduced by the estimated shortfall of discounted
cash flows. The Company uses its current cost of capital as the discount rate in
measuring impairment. No impairment charge was necessary for the year ended     
September 30, 2000.                                                             

 At September 30, 1999, the Company determined that the estimated future
undiscounted cash flows for the Cardiology Consulting and Management Division   
were below the carrying value of its long-lived assets. Accordingly, the Company
adjusted the carrying value of its long-lived assets to their estimated fair    
value, which included adjustments of goodwill to zero and management contracts  
to $11.7 million, resulting in noncash impairment charges of approximately $4.5 
million and $6.4 million, respectively, for a total of $10.9 million. The       
Company also reevaluated the lives associated with the remaining management     
contracts. Estimated useful lives for the management contracts were adjusted to 
between 1 to 7 years based on circumstances that existed at the time. The       
estimated fair value of the long-lived assets was based on anticipated future   
cash flows discounted at a rate commensurate with the risk involved.            
Considerable judgment is necessary to estimate future cash flows. Accordingly,  
actual results could vary significantly from such estimates.                    

     Based on negotiations in March 2001 with a physician group under management
contracts in the CCM Division, the Company determined that the carrying value of
certain long-lived assets may not be recoverable. The Company assessed the      
recoverability of these assets at                                               

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MEDCATH HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

March 31, 2001 by comparing the revised expected future cash flows to the       
carrying value and concluded the carrying value had become impaired.            
Accordingly, the Company recognized noncash impairment charges totaling         
approximately $1.0 million during its second quarter ended March 31, 2001 to    
adjust the long-lived assets to the anticipated future discounted cash flows.   
Considerable judgment is necessary to estimate future cash flows. Accordingly,  
actual results could vary significantly from such estimates.                    

Other Long-Term Obligations.  Other long-term obligations consist of  
amounts due to equipment vendors that the Company has a commitment to refinance 
on a long-term basis.                                                           

  Revenue Recognition.  The Company's heart hospitals have agreements with
third-party payors that provide for payments to the hospitals at amounts        
different from their established rates. Payment arrangements include            
prospectively determined rates per discharge and per visit, reimbursed costs    
(subject to limits), and discounted charges. Net patient service revenue is     
reported at the estimated net realizable amounts from patients, third-party     
payors, and others as services are rendered, including estimated retroactive    
adjustments under reimbursement agreements with third-party payors. Retroactive 
adjustments are accrued on an estimated basis in the period that the related    
services are rendered and adjusted in future periods as final settlements are   
determined. As a result, there is at least a reasonable possibility that        
recorded estimates will change by a material amount in the near term. For the   
ten-month period ended July 31, 1998 and for the two-month period ended         
September 30, 1998, net revenue from Medicare and Medicaid patients represented 
approximately 46% of consolidated net revenue. For the years ended September 30,
1999 and 2000 and the six months ended March 31, 2000 and 2001, net revenue from
Medicare and Medicaid represented approximately 50%, 50%, 53% and 56% of        
consolidated net revenue, respectively. In addition, amounts due from Medicare  
and Medicaid comprise 34%, 34% and 33% of the net accounts receivable balance at
September 30, 1999 and 2000 and March 31, 2001, respectively.                   

The Company's managed diagnostic and therapeutic facilities and mobile
cardiac catheterization laboratories operate under various contracts where      
management fee revenue is recognized under fixed-rate and percentage-of-income  
arrangements as services are rendered. In addition, certain diagnostic and      
therapeutic facilities and mobile cardiac catheterization laboratories recognize
additional revenue under cost reimbursement and equipment lease arrangements.   

    Net revenue from the Company's owned diagnostic and therapeutic facilities
and mobile cardiac catheterization laboratories is reported at the estimated net
realizable amounts due from patients, third-party payors, and others as services
are rendered, including estimated retroactive adjustments under reimbursement   
agreements with third-party payors.                                             

     The Company's CCM physician practices operate under various contracts where
management fee revenue is recognized under various percent-of-income and cost-  
reimbursement arrangements as services are rendered. The Company's management   
fee for the services provided to the CCM physician practices is calculated as a 
percentage of operating income of the practice, ranging from 15% to 20%, plus   
reimbursement of certain expenses incurred in managing the practice. The total  
net revenue derived from the Company's CCM physician practices represented 18%  
of the Company's consolidated net revenue for both the ten-month period ended   
July 31, 1998 and the two-month period ended September 30, 1998, and            
approximately 8%, 6%, 6% and 6% of the Company's consolidated net revenue for   
the years ended September 30, 1999 and 2000 and the six months ended March 31,  
2000 and 2001, respectively.                                                    

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    Advertising.  Advertising costs are expensed as incurred. During the years
ended September 30, 1999 and 2000, the Company incurred approximately $3.5      
million and $3.4 million of advertising expenses, respectively. No advertising  
costs were incurred during the ten months ended July 31, 1998 and the two months
ended September 30, 1998.                                                       

     Organization and Pre-opening Expenses.  Heart hospital pre-opening expenses
are expensed as incurred in accordance with American Institute of Certified     
Public Accountants Statement of Position No. 98-5, Reporting on the Costs of    
Start-Up Activities. The Company recognized pre-opening expenses of $6.6 million
and $549,000 for the years ended September 30, 1999 and 2000, respectively.     

     Under the Predecessor Company's accounting policies, through July 31, 1998,
organization costs were capitalized and amortized using the straight-line method
over five to seven years, and pre-opening expenses incurred prior to the opening
of heart hospitals and other new facilities were capitalized and amortized using
the straight-line method over two to three years beginning with the commencement
of operations.                                                                  

   As of the Merger Date, the Company adopted the provisions of Statement of
Position 98-5, Reporting on the Costs of Start-up Activities. Accordingly,      
organization and pre-opening expenses of $1.7 million were expensed as incurred 
in the two months ended September 30, 1998.                                     

   Income Taxes.  Deferred income taxes are provided for under the liability
method based on temporary differences that arise due to differences between tax 
bases of assets or liabilities and their reported amounts in the consolidated   
financial statements. A valuation allowance is provided for deferred tax assets 
if it is more likely than not that these items will either expire before the    
Company is able to realize their benefit or that future deductibility is        
uncertain.                                                                      

     Members and Partners' Share of Hospital's Net Income and Loss.  Each of the
Company's consolidated hospitals is organized as a limited liability company or 
limited partnership, with one of the Company's wholly-owned subsidiaries serving
as the manager or general partner and typically holding approximately 51% of the
ownership interest in the entity. Physician partners or members typically own   
the remaining ownership interests as members or limited partners. In some       
instances, the Company has organized a heart hospital with a community hospital 
investing as a partner or member in addition to physicians. In those instances, 
the Company generally holds a minority interest in the heart hospital with the  
community hospital and physician partners owning the remaining interests also as
minority partners. These heart hospitals are generally accounted for under the  
equity method of accounting. Profits and losses of heart hospitals accounted for
under either the consolidated or equity methods are generally allocated to its  
owners based on their respective ownership percentages. If the cumulative losses
of a heart hospital exceed its initial capitalization and committed capital     
obligations of the partners or members, the Company is required by generally    
accepted accounting principles, Statement of Position 78-9, Accounting for      
Investments in Real Estate Ventures, to recognize a disproportionate share of   
the hospital's losses that otherwise would be allocated to all of its owners on 
a pro rata basis. In such cases, the Company will recognize a disproportionate  
share of the hospital's future profits to the extent the Company has previously 
recognized a disproportionate share of the hospital's losses.                   

Stock-Based Compensation.  The Company grants stock options and issues
shares under option plans described in Note 11. The Company accounts for stock  
options in accordance with APB Opinion No. 25, Accounting for Stock Issued to   
Employees, as permitted under SFAS No. 123, Accounting for Stock-Based          
Compensation. Under APB Opinion No. 25, compensation cost is determined based on
the intrinsic value of the equity instrument award; and, accordingly,           

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no compensation expense is recognized for options granted with an exercise price
equal to the fair value of the shares at the date of grant. See Note 11 for pro 
forma disclosures required by SFAS No. 123 plus additional information on the   
Company's stock options.                                                        

     Segment Reporting.  The Company has adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131 establishes     
standards for a public company to report annual and interim financial and       
descriptive information about its reportable operating segments and requires    
restatement of prior year information. Operating segments are components of an  
enterprise about which separate financial information is available that is      
evaluated regularly by the chief operating decision maker(s) in deciding how to 
allocate resources and in assessing performance. SFAS No. 131 allows aggregation
of similar operating segments into a single operating segment if the businesses 
have similar economic characteristics and are considered similar under the      
criteria established by SFAS No. 131. The description of the Company's          
reportable segments and the disclosure of segment information pursuant to SFAS  
No. 131 are presented in Note 18.                                               

New Accounting Pronouncements.  In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and  
Hedging Activities (the "Statement"), as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date 
of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative  
Instruments and Certain Hedging Activities. The Statement establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as            
derivatives) and for hedging activities. The Statement requires that an entity  
recognize all derivatives on the balance sheet at fair value. The accounting for
changes in the fair value of a derivative depends on the use of the derivative. 
This Statement is effective for all fiscal quarters of fiscal years beginning   
after June 15, 2000; accordingly, the Company adopted the Statement, as amended,
on October 1, 2000. Management has determined the impact of this Statement will 
not be material on its financial statements.                                    

  Reclassifications.  Certain prior year amounts have been reclassified to
conform with the current period presentation.                                   

Interim Financial Information.  The accompanying unaudited interim    
consolidated financial information as of and for the six months ended March 31, 
2000 and 2001 has been prepared on substantially the same basis as the audited  
consolidated financial statements and includes all adjustments, consisting only 
of normal recurring adjustments, necessary for a fair presentation of the       
consolidated financial information set forth therein. The results for interim   
periods are not necessarily indicative of the results to be expected for the    
entire year.                                                                    

Predecessor Company Accounting Policies.  The Predecessor Company's   
accounting policies are consistent with those of the Company except for the     
accounting for organization and pre-opening expenses and the amortization period
of intangibles. The policies of the Predecessor Company have been described     
above.                                                                          

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

3. BUSINESS COMBINATIONS AND EQUITY INVESTMENTS                                 

    In April 1998, the Predecessor Company, through MPM, acquired a management
service organization which has a 40-year contract to manage the Dayton Heart    
Center, Inc. ("Dayton Heart"), an 11-member cardiology practice located in      
Dayton, Ohio. The acquisition was made through the issuance of common stock of  
the Predecessor Company valued at approximately $1.9 million and $1.9 million in
cash. The intangible asset represented by the management contract acquired was  
amortized over a 40-year period through July 31, 1998, upon which time the      
contract was revalued in accordance with APB 16 and is being amortized by the   
Company over 25 years. The Predecessor Company accounted for the acquisition as 
a purchase business combination and the consolidated results of operations and  
financial position include the operating results, which are not significant, of 
the management service organization from the date of acquisition.               

Advances to affiliates and losses in excess of investments of         
unconsolidated affiliates accounted for under the equity method consist of the  
following at September 30 (in thousands):                                       

                                                        [Enlarge/Download Table]

                                                    1999                            2000             
                                       ------------------------------  ------------------------------
                                       ADVANCES   INVESTMENT    NET    ADVANCES   INVESTMENT    NET  
                                       --------   ----------   ------  --------   ----------   ------
                                                                                                     
MedCath of Tucson, LLC................ $18,478     $(16,226)   $2,252  $21,844     $(17,665)   $4,179
Heart Hospital of New Mexico, LLC.....      --          181       181      626         (162)      464
Heart Hospital of South Dakota, LLC...      --        1,134     1,134      719          822     1,541
Heart Hospital of DTO, LLC............   7,781       (3,036)    4,745       --           --        --
                                       -------     --------    ------  -------     --------    ------
                                       $26,259     $(17,947)   $8,312  $23,189     $(17,005)   $6,184
                                       =======     ========    ======  =======     ========    ======

    Advances to affiliates bear interest at prime plus 1% (9.50% and 10.50% at
September 30, 1999 and 2000, respectively), and are payable on demand and prior 
to any distribution of earnings.                                                

The combined results of operations and financial position of the      
Predecessor Company's and Company's unconsolidated affiliates are summarized    
below (in thousands):                                                           

                                                        [Enlarge/Download Table]

                                                                            THE COMPANY                           
                                                   -------------------------------------------------------------- 
                              PREDECESSOR COMPANY                           YEAR ENDED         SIX MONTHS ENDED   
                              -------------------                          SEPTEMBER 30,           MARCH 31,      
                               TEN MONTHS ENDED     TWO MONTHS ENDED    -------------------   ------------------- 
                                 JULY 31, 1998     SEPTEMBER 30, 1998     1999       2000       2000       2001   
                              -------------------  ------------------   --------   --------   --------   -------- 
                                                                                                                  
Condensed Statement of                                                                                            
 Operations Information:                                                                                          
 Net revenue.................        $ --               $    33         $ 24,348   $ 72,282   $ 31,576   $ 48,705 
 Income (loss) from                                                                                               
   operations................         (25)               (2,603)           1,798      3,475      1,888      1,406 
 Net loss....................         107                (2,628)         (13,248)    (5,237)    (1,218)    (1,856)
Condensed Balance Sheet                                                                                           
 Information:                                                                                                     
 Current assets..............          --                    --           13,449     20,387     16,675     25,753 
 Noncurrent assets...........          --                    --          104,059     84,989     69,463    110,265 
 Current liabilities.........          --                    --           19,679     17,118     11,431     33,912 
 Noncurrent liabilities......          --                    --          112,730    105,301     88,570    122,046 
 Deficiency..................          --                    --          (14,901)   (17,043)   (13,863)   (19,940)

    During 1999, the Company contributed $4.1 million to a limited partnership
formed to develop Harlingen Medical Center (the "Center") in Harlingen, Texas.  
The Center will focus on cardiovascular care as well as orthopedics, neurology, 
obstetrics and gynecology. The Center is accounted for as a consolidated        
subsidiary since MedCath has a 51% interest in the Center and physician         
investors own the remaining 49%.                                                

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

In 1999, the Company entered into a three-way venture to construct The
Heart Hospital of South Dakota in Sioux Falls, South Dakota. The Company        
contributed $1.2 million towards the venture in fiscal year 1999 and accounts   
for the investment using the equity method. The Company has entered into a      
construction loan with a syndicate bank group that has committed to lend up to  
$32.6 million for the project. As of September 30, 2000, the Company had drawn  
$13.2 million of this loan commitment.                                          

On July 31, 1999, the Company entered into an agreement under which a 
third-party investor, Carondelet Health Network ("Carondelet"), obtained a      
33 1/3% ownership interest in MedCath of Tucson, LLC. As a result of this       
transaction, the financial statements reflect a deconsolidation of MedCath of   
Tucson, LLC as of July 31, 1999 and for the two-month period ended September 30,
1999. This affiliate is accounted for on the equity method subsequent to July   
31, 1999. The schedule below shows a summary of the effect of the               
deconsolidation at July 31, 1999 (in thousands):                                

                                                                [Download Table]

                                                               INCREASE 
                                                              (DECREASE)
                                                              ----------
                                                                        
Current assets..............................................   $ (4,863)
Long-term assets............................................    (29,746)
Current liabilities.........................................     (4,337)
Long-term liabilities.......................................    (45,385)
Minority interests in equity of consolidating entity........         -- 

    As of September 30, 1999, the Company, through its wholly owned subsidiary
DTO Management, Inc., Franciscan Health System of the Ohio Valley and Affiliates
("Franciscan"), and a group of physician and investor members held approximately
36.8%, 31.6% and 31.6% interests, respectively, in Heart Hospital of DTO, LLC.  
Effective October 1, 2000, Heart Hospital of DTO, LLC reached an agreement with 
Franciscan, whereby Franciscan exchanged its ownership interest and ceased being
a member in Heart Hospital of DTO, LLC for a full release from any obligations  
arising from its interest, including the obligation to guarantee debt and pay   
debt guarantee fees. As a result of this agreement, the Company's interest in   
Heart Hospital of DTO, LLC increases to approximately 52.5% and the physician   
and investor members' interest increases to approximately 47.5%. As of October  
31, 1999, the Company determined that it had substantive control over Heart     
Hospital of DTO, LLC and, accordingly, Heart Hospital of DTO, LLC has been      
accounted for as a consolidated subsidiary for the fiscal year ended September  
30, 2000.                                                                       

On March 1, 2001, McAllen Heart Hospital, in which the Company owned a
50.2% interest, was sold to an affiliate of Universal Health Services, Inc. for 
approximately $56.0 million. Approximately $38.0 million of the sale proceeds   
were used to repay the hospital's long-term debt, including intercompany amounts
paid to the Company, which the Company then used to repay amounts outstanding   
under its revolving credit facility. After the write-off of approximately $10.3 
million of goodwill and purchase accounting valuation adjustments in McAllen    
Heart Hospital, which arose from the July 31, 1998 Merger, the Company          
recognized a net gain of $13.5 million in its consolidated results of operations
for the first six months of fiscal 2001. Approximately $8.0 million was         
recognized in earnings allocated to minority interests as a result of the sale. 
This minority interest amount was determined before the write-off of the        
Company's goodwill and the purchase accounting valuation adjustments and after  
the allocation of amounts to the Company for recovery of disproportionate losses
of McAllen Heart Hospital, which had previously been recognized in the Company's
consolidated results of operations.                                             

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The transaction resulted in a taxable gain. The Company recognized tax
expense from the utilization of net operating losses to reduce taxable income   
principally generated from the sale of McAllen Heart Hospital. The tax expense  
was offset by the tax benefit resulting from the reversal of the valuation      
allowance previously placed on the net operating loss deferred tax asset        
utilized.                                                                       

4. ACCOUNTS RECEIVABLE                                                          

Accounts receivable, net, consists of the following (in thousands):   

                                                                [Download Table]

                                                     SEPTEMBER 30,               
                                                   ------------------   MARCH 31,
                                                    1999       2000       2001   
                                                   -------   --------   ---------
                                                                                 
Receivables, principally from patients and                                       
  third-party payors.............................. $33,776   $ 64,052   $ 71,876 
Receivables, principally from billings to                                        
  hospitals for various cardiovascular                                           
  procedures......................................   4,456      5,256     10,139 
Amounts due under management contracts............   3,317      2,898      2,556 
Other.............................................   5,659      5,332      1,965 
                                                   -------   --------   -------- 
                                                    47,208     77,538     86,536 
Less allowance for doubtful accounts..............  (8,128)   (13,622)   (17,329)
                                                   -------   --------   -------- 
Accounts receivable, net.......................... $39,080   $ 63,916   $ 69,207 
                                                   =======   ========   ======== 

Activity for the allowance for doubtful accounts for the years ending 
September 30, 1999 and 2000 was as follows (in thousands):                      

                                                                [Download Table]
                                                                       
Balance, October 1, 1998....................................  $  3,343 
  Bad debt expense..........................................    13,021 
  Write offs, net of recoveries.............................    (8,236)
                                                              -------- 
Balance, September 30, 1999.................................     8,128 
  Bad debt expense..........................................    16,668 
  Write offs, net of recoveries.............................   (11,174)
                                                              -------- 
Balance, September 30, 2000.................................  $ 13,622 
                                                              ======== 

    In 1998, in Phoenix, Arizona, the Company experienced flooding that caused
significant damage and delayed the scheduled opening of the Company's hospital  
there. The Company recorded a $6.5 million insurance receivable at September 30,
1999, representing its best estimate of the amount recoverable for physical     
damages. During the year ended September 30, 2000, the Company collected $9.3   
million, net of attorneys' fees, including a gain of approximately $2.8 million 
resulting from recoveries for the business interruption. Such gain was recorded 
in net revenue.                                                                 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

5. PROPERTY AND EQUIPMENT                                                       

Property and equipment, net consists of the following (in thousands): 

                                                                [Download Table]

                                                                SEPTEMBER 30,    
                                                             ------------------- 
                                                               1999       2000   
                                                             --------   -------- 
                                                                                 
Land........................................................ $ 11,598   $ 14,370 
Buildings...................................................  137,980    161,891 
Major equipment.............................................  141,526    159,167 
Minor equipment.............................................    3,567      4,623 
Other.......................................................      742      5,609 
                                                             --------   -------- 
Total, at cost..............................................  295,413    345,660 
Less accumulated depreciation...............................  (52,035)   (78,222)
                                                             --------   -------- 
Property and equipment, net................................. $243,378   $267,438 
                                                             ========   ======== 

  Substantially all of the Company's property and equipment are pledged as
collateral for various long-term obligations (see Notes 7 and 8).               

6. LONG-TERM DEBT                                                               

Long-term debt consists of the following (in thousands):              

                                                                [Download Table]

                                                                SEPTEMBER 30,    
                                                             ------------------- 
                                                               1999       2000   
                                                             --------   -------- 
                                                                                 
Real Estate Investment Trust ("REIT") loans................. $ 80,538   $ 80,200 
Bank mortgage loans.........................................   58,126     76,422 
Revolving credit facility...................................   43,000     33,000 
Notes payable to various lenders............................   67,192     78,984 
                                                             --------   -------- 
                                                              248,856    268,606 
Less current portion........................................  (15,305)   (22,513)
                                                             --------   -------- 
Long-term debt.............................................. $233,551   $246,093 
                                                             ========   ======== 

 REIT Loans.  From 1994 to 1997, the Company entered into mortgage loans
with real estate investment trusts for the purpose of financing the land        
acquisition and construction costs of three of its majority-owned subsidiary    
heart hospitals, including: MedCath of McAllen LP, d/b/a McAllen Heart Hospital;
MedCath of Little Rock, LLC, d/b/a Arkansas Heart Hospital; and Heart Hospital  
IV, LP, d/b/a Austin Heart Hospital (collectively, the "REIT Heart Hospitals"). 
The interest rates on the REIT Loans range from 3 1/2% to 4 1/4% above a rate   
index tied to U.S. Treasury Notes, that is determined on the completion date of 
the hospital, and subsequently increases by 20 to 22 basis points per year. As  
of September 30, 2000, the interest rates on the REIT Loans ranged from 8.99% to
11.98%. The principal and interest is payable monthly over seven-year terms     
through 2005 using extended period amortization schedules and include balloon   
payments at the end of each respective term. Each is subject to extension for an
additional seven years at the option of the Company. Borrowings under the REIT  
Loans are collateralized by a pledge of the Company's interest in the REIT Heart
Hospitals and the REIT Heart Hospital's land, building, and fixtures and certain
other assets. The Company has guaranteed 25% to 100% of the REIT Loans. At      
September 30, 2000, the Company was also contingently liable for outstanding    
letters of credit of $3.1 million relating to the REIT loans.                   

    Bank Mortgage Loans.  From 1997 to 2000, the Company entered into mortgage
loans with a syndicate of banks for the purposes of financing a portion of the  
land acquisition and                                                            
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

construction costs of its majority-owned subsidiary Heart Hospital of BK, LLC,  
d/b/a Bakersfield Heart Hospital ("BHH"); and Heart Hospital of DTO, LLC, d/b/a 
Dayton Heart Hospital ("DHH"); and refinancing debt at its majority-owned       
subsidiary Arizona Heart Hospital, LLC, d/b/a Arizona Heart Hospital ("AzHH").  
Interest on the bank mortgage loans is payable monthly based on the London      
Interbank Offered Rate ("LIBOR") plus a range of 3.25% to 3.50%.                

     The initial term of the bank mortgage Loan for BHH is for two years through
2001, subject to extension for an additional year at the option of the lender.  
Interest is payable monthly and principal amortization begins in year three     
using extended period amortization schedules and includes balloon payments at   
the end of each respective term. The interest rate on the bank mortgage loan for
BHH will decrease to LIBOR plus 2.75% upon the attainment of certain financial  
ratios. As of September 30, 2000, the interest rate on the bank mortgage loan   
for BHH was 9.25%. Borrowings under the bank mortgage loan of BHH totaled $26.7 
million and $26.6 million as of September 30, 1999 and 2000, respectively, and  
are collateralized by a pledge of the Company's interest in BHH and BHH's land, 
building, and fixtures, and certain other assets. The Company has guaranteed    
100% of the bank mortgage loan of BHH.                                          

   The bank mortgage loan for AzHH can be amortized over 240 months provided
that the entire balance becomes due and payable on March 31, 2007. At September 
30, 2000, the interest rate on the loan was 10.19%. The bank mortgage loan for  
AzHH totaled $31.4 million and $25.0 million as of September 30, 1999 and 2000, 
respectively and is collateralized by a pledge of the Company's interest in     
AzHH, AzHH's land, buildings, fixtures, and certain other assets.               

The initial term of the bank mortgage loan for DHH is for three years 
through 2002, subject to extension for an additional year at the option of DHH. 
Interest is payable monthly at LIBOR plus 3.25% decreasing to LIBOR plus 2.75%  
upon the attainment of certain financial ratios. As of September 30, 2000, the  
interest rate on the bank mortgage loan for DHH was 9.87%. Borrowings under the 
bank mortgage loan of DHH totaled $23.1 million and $24.8 million as of         
September 30, 1999 and 2000, respectively, and are collateralized by a pledge of
the Company's interest in DHH and DHH's land, buildings, fixtures, and certain  
other assets. The Company has guaranteed 100% of the bank mortgage loan of DHH. 
The guarantee decreases to 50% of the outstanding balance once the Company      
maintains certain financial covenants for two consecutive fiscal quarters.      

Revolving Credit Facility.  The Company entered into a $100 million   
revolving credit facility (the "Revolver") dated as of July 31, 1998, with a    
syndicate of banks, the proceeds of which are to be used for general corporate  
purposes. All outstanding borrowings under the Revolver are payable on January  
31, 2005. The Revolver is collateralized by all shares of MedCath Intermediate  
Holdings, Inc. (a wholly owned subsidiary), all intercompany debt owed by each  
of its present and future subsidiaries, and all proceeds from the sales of its  
present and future subsidiaries. Borrowings under the Revolver bear interest at 
variable rates based, at the Company's option, on LIBOR plus an additional      
margin ranging from .875% to 2.25%, based on the Company's performance, or the  
prime rate plus an additional margin ranging to 1.00%, based on the Company's   
performance. As of September 30, 2000, the average interest rate on the         
outstanding Revolver balance was 8.75%.                                         

Of the $100 million in availability under the Revolver, $10 million is
designated for short-term borrowings. At September 30, 2000, $2.1 million was   
outstanding under the short-term portion of the Revolver. No amounts were       
outstanding at September 30, 1999. Short-term                                   

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borrowings bear interest at the prime rate plus 0.75%. At September 30, 2000,   
the interest rate on the outstanding short-term borrowings was 9.5%.            

   Notes Payable.  The Company has acquired substantially all of the medical
and other equipment for its heart hospitals and certain diagnostic and          
therapeutic facilities and mobile cardiac catheterization laboratories under    
installment notes payable to equipment lenders collateralized by the related    
equipment. Amounts borrowed under these notes are payable in monthly            
installments of principal and interest over 5 to 7 year terms. Interest is at   
fixed rates ranging from 7.23% to 10.25%. The Company has guaranteed up to 51%  
of the equipment loans of its majority-owned heart hospitals.                   

   Debt Covenants.  Covenants related to long-term debt prohibit the payment
of dividends and require the maintenance of specific financial ratios and       
amounts and periodic financial reporting. McAllen Heart Hospital and Austin     
Heart Hospital were not in compliance with certain of its financial ratio       
covenants at September 30, 2000. The REIT lender granted waivers to McAllen     
Heart Hospital and agreed to modify the debt covenants. The real estate lender  
granted waivers to Austin Heart Hospital for the guarantor covenant violation   
and agreed to modify the guarantor covenants. At March 31, 2001, Bakersfield    
Heart Hospital was not in compliance with certain financial ratio covenants of  
its loan agreements. The Company has the ability and intent to refinance the BHH
mortgage loan within the next 12 months.                                        

 The Company also must maintain certain financial and negative covenants
under the Revolver. The Company was in compliance with these covenants at       
September 30, 2000 and at March 31, 2001.                                       

    Guarantees of Unconsolidated Affiliates' Debt.  The Company has guaranteed
the real estate and equipment debt of three affiliate hospitals in which it has 
minority interests for which it receives a fee. A schedule of outstanding       
amounts at September 30, 2000 and related guarantee percentages or amounts      
follows (in thousands):                                                         

                                                        [Enlarge/Download Table]

                                                                          GUARANTEE  
                                                             AMOUNT      PERCENTAGE  
                                                           OUTSTANDING    OR AMOUNT  
                                                           -----------  -------------
                                                                                     
MedCath of Tucson, LLC....................... Real estate    $17,369           100%  
                                              Equipment        9,485            51%  
Heart Hospital of New Mexico, LLC............ Real estate     22,605       $10,455   
                                              Equipment       14,675            20%  
Heart Hospital of South Dakota............... Real estate     13,727            50%  

 At September 30, 2000 and March 31, 2001, MedCath of Tucson, LLC was in
violation of certain of its financial covenants on the real estate loans.       
MedCath of Tucson, LLC has received waivers for these financial covenant        
violations.                                                                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

  Future Maturities.  Future maturities of long-term debt at September 30,
2000 are as follows (in thousands):                                             

                                                                [Download Table]

FISCAL YEAR                                                           
-----------                                                           
                                                                      
2001........................................................  $ 22,513
2002........................................................    44,340
2003........................................................    35,160
2004........................................................    45,246
2005........................................................    11,574
Thereafter..................................................   109,773
                                                              --------
                                                              $268,606
                                                              ========

7. OBLIGATIONS UNDER CAPITAL LEASES                                             

     The Company currently leases several diagnostic and therapeutic facilities,
mobile catheterization laboratories, office space, computer software and        
hardware, equipment, and certain vehicles under noncancelable capital leases    
expiring through fiscal year 2005. Some of these leases contain provisions for  
annual rental adjustments based on increases in the consumer price index,       
renewal options, and options to purchase during the lease terms. Amortization of
the capitalized amounts is included in depreciation expense. Total assets under 
capital leases (net of accumulated depreciation of approximately $1,734,000 and 
$2,630,000) at September 30, 1999 and 2000, were approximately $4,910,000 and   
$4,530,000, respectively, and are included in property and equipment. Lease     
payments during the years ended September 30, 1999 and 2000 were $1,119,000 and 
$1,379,000, respectively, and include interest of approximately $231,000 and    
$304,000, respectively.                                                         

Future minimum lease payments at September 30, 2000 are as follows (in
thousands):                                                                     

                                                                [Download Table]

FISCAL YEAR                                                           
-----------                                                           
                                                                      
2001........................................................  $ 1,591 
2002........................................................      872 
2003........................................................      857 
2004........................................................      477 
2005........................................................       45 
                                                              ------- 
Total future minimum lease payments.........................    3,842 
Less amounts representing interest..........................     (478)
                                                              ------- 
Present value of net minimum lease payments.................    3,364 
Less current portion........................................   (1,356)
                                                              ------- 
                                                              $ 2,008 
                                                              ======= 

8. COMMITMENTS AND CONTINGENCIES                                                

    Operating Leases.  One of the Company's subsidiaries leases certain office
space to a physician group under a noncancelable operating lease which commenced
in fiscal year 2000. During fiscal year 2000, the Company received approximately
$485,000 in rental income from this lease.                                      

 The Company currently leases several cardiac diagnostic and therapeutic
facilities, mobile catheterization laboratories, office space, computer software
and hardware equipment, and certain vehicles under noncancelable operating      
leases expiring through fiscal year 2008. Total                                 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

rent expense under all rental commitments was approximately $3.4 million and    
$700,000 for the ten-month period ended July 31, 1998 and for the two-month     
period ended September 30, 1998, respectively, and $2.5 million and $3.6 million
for the years ended September 30, 1999 and 2000, respectively.                  

The approximate future minimum rental income and commitments under    
noncancelable operating leases as of September 30, 2000 are as follows (in      
thousands):                                                                     

                                                                [Download Table]

                                                     RENTAL     RENTAL  
FISCAL YEAR                                          INCOME   COMMITMENT
-----------                                          ------   ----------
                                                                        
2001...............................................  $  485    $ 5,156  
2002...............................................     485      4,831  
2003...............................................     485      4,159  
2004...............................................     485      3,608  
2005...............................................      --      3,266  
Thereafter.........................................      --     11,224  
                                                     ------    -------  
                                                     $1,940    $32,244  
                                                     ======    =======  

Compliance.  Laws and regulations governing the Medicare and Medicaid 
programs are complex, subject to interpretation and may be modified. The Company
believes that it is in compliance with such laws and regulations and it is not  
aware of any investigations involving allegations of its potential wrongdoing.  
While no such regulatory inquiries have been made, 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.         

9. INCOME TAXES                                                                 

    The components of the income tax expense (benefit) for 1998, 1999 and 2000
are as follows (in thousands):                                                  

                                                        [Enlarge/Download Table]

                                                               THE COMPANY           
                                 PREDECESSOR COMPANY  ------------------------------ 
                                 -------------------   TWO MONTHS       YEAR ENDED   
                                                          ENDED       SEPTEMBER 30,  
                                  TEN MONTHS ENDED    SEPTEMBER 31,   -------------- 
                                    JULY 31, 1998         1998         1999     2000 
                                 -------------------  -------------   -------   ---- 
                                                                                     
Current tax (benefit) expense:                                                       
  Federal.......................       $(1,321)          $  (940)     $ 1,879   $ -- 
  State.........................          (320)             (226)         556    (24)
                                       -------           -------      -------   ---- 
          Total current tax                                                          
            (benefit) expense...        (1,641)           (1,166)       2,435    (24)
                                       -------           -------      -------   ---- 
Deferred tax expense (benefit):                                                      
  Federal.......................         1,349              (160)      (3,386)    -- 
  State.........................           326               (39)        (387)    -- 
                                       -------           -------      -------   ---- 
          Total deferred tax                                                         
            expense (benefit)...         1,675              (199)      (3,773)    -- 
                                       -------           -------      -------   ---- 
          Total income tax                                                           
            expense (benefit)...       $    34           $(1,365)     $(1,338)  $(24)
                                       =======           =======      =======   ==== 

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MEDCATH HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

    The components of net deferred taxes at September 30, 1999 and 2000 are as
follows (in thousands):                                                         

                                                                [Download Table]

                                                               1999       2000   
                                                             --------   -------- 
                                                                                 
Deferred tax liabilities:                                                        
  Excess of book over tax bases of property and equipment... $ 13,239   $ 16,575 
  Excess of book over tax bases in equity investments.......       --        529 
  Management contracts......................................    4,339      3,899 
  Other.....................................................      306        278 
                                                             --------   -------- 
          Total deferred tax liabilities....................   17,884     21,281 
                                                             --------   -------- 
Deferred tax assets:                                                             
  Net operating and economic loss carryforward..............   10,678     18,089 
  AMT credit carryforward...................................    1,336      1,336 
  Management contracts......................................    2,798      2,792 
  Nondeductible allowances..................................    3,796      4,616 
  Organization and start-up costs...........................    7,192      5,463 
  Excess of tax over book bases in equity investments.......      938         -- 
  Other.....................................................    1,521      2,761 
                                                             --------   -------- 
          Total deferred tax assets before valuation                             
            allowance.......................................   28,259     35,057 
Valuation allowance on net deferred tax assets..............  (10,375)   (13,776)
                                                             --------   -------- 
          Total deferred tax assets.........................   17,884     21,281 
                                                             --------   -------- 
          Net deferred tax balance.......................... $     --   $     -- 
                                                             ========   ======== 

   At September 30, 1999 and 2000, the Company's net deferred tax assets are
fully offset by a valuation allowance as sufficient positive evidence does not  
exist to support recognition of such assets. The Company will continue to assess
the valuation allowance and, to the extent it is determined that such allowance 
is no longer required, the tax benefit of the remaining net deferred assets will
be recognized in the future.                                                    

   Net operating and economic losses of approximately $46 million will begin
to expire in the years 2015 through 2020.                                       

The differences between the U.S. federal statutory tax rate and the   
effective rate for the ten months ended July 31, 1998 and the two months ended  
September 30, 1998 are as follows:                                              

                                                        [Enlarge/Download Table]

                                                                         THE COMPANY 
                                                                        -------------
                                                   PREDECESSOR COMPANY   TWO MONTHS  
                                                   -------------------      ENDED    
                                                    TEN MONTHS ENDED    SEPTEMBER 30,
                                                      JULY 31, 1998         1998     
                                                   -------------------  -------------
                                                                                     
Statutory federal income tax rate.................         34.0%            34.0%    
State income taxes................................          0.1              4.4     
Tax exempt interest income........................          5.0              0.6     
Goodwill amortization.............................         (8.3)            (4.4)    
Merger expenses...................................        (27.6)              --     
Other.............................................         (4.6)            (0.4)    
                                                          -----             ----     
Effective income tax rate.........................         (1.4)%           34.2%    
                                                          =====             ====     

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MEDCATH HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

The differences between the U.S. federal statutory tax rate and the   
effective rate for 1999 and 2000 are as follows:                                

                                                                [Download Table]

                                                              1999    2000  
                                                              -----   ----- 
                                                                            
Statutory federal income tax rate...........................   34.0%   34.0%
State income taxes..........................................    2.7     3.8 
Permanent differences.......................................   (6.2)  (20.7)
Increase in valuation allowance.............................  (25.2)  (16.9)
Other.......................................................   (2.1)     -- 
                                                              -----   ----- 
Effective income tax rate...................................    3.2%    0.2%
                                                              =====   ===== 

10. PER SHARE DATA                                                              

The calculation of diluted net loss per share considers the potential 
dilutive effect of options to purchase 2,327,542 shares, 1,763,580 shares,      
2,178,722 shares, 2,199,906 shares and 2,382,165 shares of common stock at      
prices ranging from $3.54 to $19.00 which were outstanding at September 30,     
1998, 1999 and 2000 and March 31, 2000 and 2001, respectively. These options    
have not been included in the calculation of diluted net loss per share because 
the options are anti-dilutive.                                                  

 The following table sets forth the reconciliation of basic earnings per
share to diluted earnings per share for the six months ended March 31, 2001:    

                                                        [Enlarge/Download Table]

                                                                WEIGHTED              
                                                                 AVERAGE              
                                                       NET       SHARES      EARNINGS 
                                                     INCOME    OUTSTANDING   PER SHARE
                                                     -------   -----------   ---------
                                                      (IN THOUSANDS, EXCEPT EARNINGS  
                                                                PER SHARE)            
                                                                                      
Basic............................................... $ 4,117     11,838        $0.35  
Effect of dilution:                                                                   
  Stock options.....................................       0         99               
                                                     -------     ------        -----  
Diluted............................................. $ 4,117     11,937        $0.34  
                                                     =======     ======        =====  

11. STOCK OPTION PLANS                                                          

THE COMPANY                                                                     

   On July 28, 1998, the Company's Board of Directors adopted a stock option
plan (the "1998 Stock Option Plan") under which it may grant incentive stock    
options and nonqualified stock options to officers and other key employees.     
Under the 1998 Stock Option Plan, the Board of Directors may grant option awards
and determine the option exercise period, the option exercise price, and such   
other conditions and restrictions on the grant or exercise of the option as it  
deems appropriate. The 1998 Stock Option Plan provides that the option exercise 
price may not be less than the par value of the Common Stock as of the date of  
grant and that the options may not be exercised more than ten years after the   
date of grant. Options, other than replacement options, that have been granted  
during the two month period ended September 30, 1998 and years ended September  
30, 1999 and 2000 were granted at an option exercise price of $19 and become    
exercisable on grading and fixed vesting schedules ranging from 4 to 8 years    
subject to certain performance acceleration features. At September 30, 2000, the
maximum number of shares of Common Stock, which can be issued through awards    
granted under the 1998 Option Plan is 3,000,000, as amended.                    

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

   In connection with the Merger as discussed in Note 1, the Company entered
into agreements with certain management stockholders, whereby those management  
stockholders exchanged options previously granted pursuant to stock option plans
of MedCath Incorporated for options to purchase shares of common stock of the   
Company. These MedCath Incorporated stock options were originally granted during
the period from 1992 to 1998 at option exercise prices which approximated the   
fair value of the underlying stock at the grant dates. The replacement options  
were granted under the 1998 Stock Option Plan and were fully vested on July 31, 
1998.                                                                           

  On July 23, 1999, the Company adopted an outside director's stock option
plan (the "Director's Plan") under which nonqualified stock options may be      
granted to nonemployee directors. Under the Director's Plan, grants of 2,000    
options were granted to each new director upon becoming a member of The Board of
Directors and grants of 2,000 options were made to each continuing director     
after each Annual Stockholders Meeting during the years ended September 30, 1999
and 2000. All options granted under the Director's Plan have been granted at an 
option exercise price of $19.00. Effective September 15, 2000, the Director's   
Plan was amended to increase the number of options granted for future awards    
from 2,000 to 3,500. Options are exercisable immediately upon the date of grant 
and expire ten years from the date of grant. The maximum number of shares of    
Common Stock which can be issued through awards granted under the Director's    
Plan is 100,000.                                                                

   Activity for the option plans during the two month period ended September
30, 1998 and the years ended September 30, 1999 and 2000 was as follows:        

                                                        [Enlarge/Download Table]

                                                 WEIGHTED-                    WEIGHTED-   
                                   NUMBER OF      AVERAGE        OPTIONS       AVERAGE    
                                    OPTIONS    EXERCISE PRICE  EXERCISABLE  EXERCISE PRICE
                                   ---------   --------------  -----------  --------------
                                                                                          
Outstanding options,                                                                      
  July 31, 1998...................        --           --                                 
  Granted......................... 2,327,542       $17.37                                 
Outstanding options,                                                                      
  September 30, 1998.............. 2,327,542       $17.37                                 
  Granted.........................   123,316        19.00                                 
  Exercised.......................  (105,924)        3.54                                 
  Canceled........................  (581,354)       18.69                                 
                                   ---------       ------                                 
Outstanding options,                                                                      
  September 30, 1999.............. 1,763,580       $17.88        158,992        $ 6.28    
  Granted.........................   946,142        19.00                                 
  Canceled........................  (531,000)       19.00                                 
                                   ---------       ------                                 
Outstanding options,                                                                      
  September 30, 2000.............. 2,178,722       $18.10        551,337        $15.44    
                                   =========       ======                                 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

          The following table summarizes information for options outstanding and
exercisable at September 30, 2000:                                    

                                                                [Download Table]

               OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE 
-------------------------------------------------   ---------------------
                            WEIGHTED-   WEIGHTED-               WEIGHTED-
                             AVERAGE     AVERAGE                 AVERAGE 
   RANGE OF     NUMBER OF   REMAINING   EXERCISE    NUMBER OF   EXERCISE 
    PRICES       OPTIONS      LIFE        PRICE      OPTIONS      PRICE  
--------------  ---------   ---------   ---------   ---------   ---------
                                                                         
$   12.00           9,893    5 years     $12.00        9,893     $12.00  
     4.75         133,029    8 years       4.75      133,029       4.75  
    19.00       1,004,658    8 years      19.00      366,790      19.00  
    19.00          95,000    9 years      19.00       20,625      19.00  
    19.00         936,142   10 years      19.00       21,000      19.00  
                ---------                            -------             
$4.75 - 19.00   2,178,722    9 years     $18.10      551,337     $15.44  
                =========                            =======             

The Company accounts for its stock option plans in accordance with APB
Opinion No. 25 as discussed in Note 2. No compensation expense has been         
recognized in the income statement for the stock-based awards for the two months
ended September 30, 1998 and years ended September 30, 1999 and 2000, as the    
estimated fair market value of the Company's stock was less than the option     
exercise prices of the outstanding options at September 30, 1998, 1999 and 2000.

  Had compensation expense for the Company's stock options been recognized
based on the fair value on the grant date under the methodology prescribed by   
SFAS No. 123, the Company's net losses for the years ended September 30 would   
have been impacted as follows (in thousands):                                   

                                                        [Enlarge/Download Table]

                                                   PREDECESSOR                 THE COMPANY                
                                                     COMPANY     ---------------------------------------- 
                                                  -------------                           YEAR ENDED      
                                                   TEN MONTHS        TWO MONTHS          SEPTEMBER 30,    
                                                      ENDED            ENDED          ------------------- 
                                                  JULY 31, 1998  SEPTEMBER 30, 1998     1999       2000   
                                                  -------------  ------------------   --------   -------- 
                                                                                                          
Net loss:                                                                                                 
  As reported....................................    $(2,521)         $(2,623)        $(39,930)  $(13,635)
  Pro forma......................................    $(3,295)         $(2,998)        $(41,076)  $(14,419)

The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following range of        
assumptions used for the option grants which occurred during 1998, 1999 and     
2000:                                                                           

                                                        [Enlarge/Download Table]

                                       PREDECESSOR                    THE COMPANY                  
                                         COMPANY     ----------------------------------------------
                                      -------------                              YEAR ENDED        
                                       TEN MONTHS        TWO MONTHS            SEPTEMBER 30,       
                                          ENDED            ENDED         --------------------------
                                      JULY 31, 1998  SEPTEMBER 30, 1998      1999          2000    
                                      -------------  ------------------  ------------  ------------
                                                                                                   
Expected life........................ 6 - 10 years      4 - 8 years        8 years       8 years   
Risk-free interest rate..............  5.7 - 6.1%           5.5%         4.60 - 5.68%  5.93 - 6.69%
Expected volatility.................. 23.4 - 24.1%           1%               0%            0%     

  The weighted average fair value of options granted during the two months
ended September 30, 1998 with an exercise price equal to the stock price at the 
grant date was $6.05. The weighted average fair value of replacement options    
granted with an exercise price less than the stock price at the grant date for  
the two months ended September 30, 1998 was $15.36. The weighted average fair   
value of options granted during the years ended September 30, 1999 and 2000 with
an exercise price greater than the estimated fair value of the stock at the     
grant date was $5.95 and $6.50, respectively.                                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

PREDECESSOR COMPANY                                                             

   The Predecessor Company's stock option plans provided for the granting of
awards in the form of stock options to key employees and outside members of the 
Board of Directors. The Predecessor Company had reserved 1,646,587 shares of    
common stock for issuance under these plans.                                    

Option plan activity for the period prior to the Merger Date was as   
follows:                                                                        

                                                        [Enlarge/Download Table]

                                                                         WEIGHTED                
                                                                         AVERAGE                 
                                                             NUMBER OF    OPTION     PRICE PER   
                                                              SHARES      PRICE        SHARE     
                                                             ---------   --------  --------------
                                                                                                 
Outstanding options, September 30, 1997.....................   917,627    $12.40   $ 3.54 - 24.00
Granted.....................................................   330,068     14.83    14.56 - 17.13
Exercised...................................................   (60,237)    12.69    12.00 - 13.56
Canceled....................................................   (46,595)    13.47    12.00 - 15.25
                                                             ---------                           
Outstanding options, July 31, 1998.......................... 1,140,863    $13.04   $ 3.54 - 24.00
                                                             =========                           

    The weighted average fair value for options granted with an exercise price
equal to the stock price at the grant date for the ten months ended July 31,    
1998 was $6.45.                                                                 

 As a result of the Merger, each of the option plans was terminated. All
options outstanding under these plans were canceled and option holders received 
from the Company either the difference between $19 per share and the exercise   
price of each option in cash or an equally valued replacement option to purchase
shares of the Company. Total cash payments made in connection with the          
termination of the option plans were approximately $3.0 million. Replacement    
options were granted to purchase 261,489 shares.                                

12. EMPLOYEE BENEFIT PLAN                                                       

     The Company has a defined contribution retirement savings plan (the "401(k)
Plan") which covers all employees who meet minimum service requirements. The    
401(k) Plan allows eligible employees to contribute from 1% to 15% of their     
annual compensation on a pre-tax basis. The Company, at its discretion, may make
an annual contribution of up to 25% of an employee's pre-tax contribution, up to
a maximum of 6% of compensation. The Predecessor Company's contribution to the  
401(k) Plan for the ten months ended July 31, 1998 was approximately $367,000.  
The Company's 401(k) Plan was unchanged as a result of the Merger. The Company's
contribution to the 401(k) Plan for the two months ended September 30, 1998 and 
for the years ended September 30, 1999 and 2000 were approximately $70,000,     
$569,000 and $732,000, respectively.                                            

13. SUPPLEMENTAL CASH FLOW INFORMATION                                          

   Non-cash consideration totaling approximately $12.5 million, and $120,000
for the ten months ended July 31, 1998 and for the two months ended September   
30, 1998, respectively, was given for acquisitions for net assets and management
contracts. During the ten months ended July 31, 1998, long-term debt of $6.2    
million was converted to approximately 437,000 shares of common stock.          

  Interest paid, net of amounts capitalized, for the ten months ended July
31, 1998 and for the two months ended September 30, 1998 was $9.2 million and   
$2.4 million, respectively; for the years ended September 30, 1999 and 2000 was 
approximately $25 million and $30 million, respectively; and for the six months 
ended March 31, 2000 and 2001 was                                               

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

approximately $13.9 million and $14.4 million, respectively. Total interest     
capitalized for the ten months ended July 31, 1998, the two months ended        
September 30, 1998 and the fiscal year ended September 30, 1999 was             
approximately $2.2 million, $500,000 and $2.4 million, respectively. No interest
was capitalized during the year ended September 30, 2000 or the six months ended
March 31, 2000 and 2001.                                                        

  Income taxes paid (refunded), net for the ten months ended July 31, 1998
and for the two months ended September 30, 1998 was $1.5 million and $49,000,   
respectively; for the years ended September 30, 1999 and 2000 were approximately
$(2.3) million and $235,000, respectively; and for the six months ended March   
31, 2000 and 2001 was approximately $291,000 and $80,000, respectively.         

   Capital expenditures financed by capital leases approximated $2.8 million
and $631,000 for the years ended September 30, 1999 and 2000, respectively; and 
$360,000 and $10.1 million for the six months ended March 31, 2000 and 2001,    
respectively.                                                                   

14. RELATED PARTY TRANSACTIONS                                                  

During each of the fiscal years ended September 30, 1999 and 2000 the 
Company incurred $300,000 in monitoring fees to its principal stockholders. The 
Company has included $187,500 in monitoring fees payable to an affiliate of a   
principal stockholder in its consolidated balance sheets at September 30, 1999  
and 2000.                                                                       

15. LITIGATION AND RELATED PROFESSIONAL LIABILITY INSURANCE COVERAGE            

     Litigation.  The Company is involved in various claims and legal actions in
the ordinary course of business, including malpractice claims arising from      
services provided to patients that have been asserted against the Company by    
various claimants, and additional claims that may be asserted for known         
incidents through September 30, 2000. These claims are in various stages of     
processing, and some may ultimately be brought to trial. Moreover, additional   
claims arising from services provided to patients in the past may be asserted.  

Management is of the opinion that, taking into account the applicable 
professional liability insurance coverage and the Company's experience with past
lawsuits and claims, the results of those lawsuits and potential lawsuits will  
not have a material adverse effect on the financial position or results of      
operations of the Company.                                                      

    Malpractice.  The Company is subject to medical malpractice claims arising
in the course of providing services. Effective June 1, 1999, the Company is     
covered for such claims under a "claims-made" three-year combined insurance     
policy with American Continental Insurance Company. Under this policy, coverage 
is contingent on the malpractice claim being made while the policy is in effect,
regardless of when the events that give rise to the claim occurred. Accordingly,
the Company has recorded in its consolidated financial statements an estimated  
liability for claims incurred but not reported.                                 

16. FAIR VALUE OF FINANCIAL INSTRUMENTS                                         

The Company considers the carrying amounts of significant classes of  
financial instruments on the consolidated balance sheets, including cash,       
insurance recovery receivable, due from affiliates, short-term borrowings,      
accounts payable, income taxes payable, accrued liabilities, obligations under  
capital leases, and other long-term obligations to be reasonable estimates of   
fair value due either to their length to maturity or the existence of variable  
interest rates underlying such financial instruments that approximate prevailing
market rates at September 30,                                                   
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

1999 and 2000. The estimated fair value of long-term debt, including the current
portion, at September 30, 1999 and 2000 is approximately $252.8 and $271.7      
million, respectively, as compared to a carrying value of approximately $248.9  
and $268.6 million, respectively. Fair value of the Company's debt was estimated
using discounted cash flow analyses, based on the Company's current incremental 
borrowing rates for similar types of arrangements.                              

17. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)                             

Summarized quarterly financial results were as follows (in thousands, 
except per share amounts):                                                      

                                                                [Download Table]

                                           FIRST    SECOND     THIRD     FOURTH  
                                          QUARTER   QUARTER   QUARTER   QUARTER  
                                          -------   -------   -------   -------- 
                                                                                 
Year ended September 30, 1999:                                                   
  Net revenue............................ $57,201   $72,197   $66,100   $ 60,258 
  Operating expenses.....................  55,218    65,800    64,085     80,993 
  Income (loss) from operations..........   1,983     6,397     2,015    (20,735)
  Net loss...............................  (2,478)     (194)   (3,606)   (33,652)
  Net loss per share, basic and                                                  
     diluted............................. $ (0.21)  $ (0.02)  $ (0.30)  $  (2.84)
Year ended September 30, 2000:                                                   
  Net revenue............................ $74,211   $89,202   $84,211   $ 84,718 
  Operating expenses.....................  69,648    80,954    84,571     80,194 
  Income (loss) from operations..........   4,563     8,248      (360)     4,524 
  Net income (loss)......................  (4,405)      802    (5,575)    (4,457)
  Net income (loss) per share, basic and                                         
     diluted............................. $ (0.37)  $  0.07   $ (0.47)  $  (0.38)

18. REPORTABLE SEGMENT INFORMATION                                              

The Company operates three divisions, the Hospital Division, the      
Diagnostics Division, and the Cardiology Consulting and Management Division as  
discussed in Note 1. The Company's chief operating decision makers regularly    
review financial information about each of these divisions and their underlying 
subsidiaries and businesses in deciding how to allocate resources and in        
assessing performance. The underlying subsidiaries and businesses within each of
the respective divisions have similar services, have similar types of patients  
and sources of revenues, operate in a consistent manner and have similar        
economic and regulatory characteristics. Therefore, the Company's aggregated    
reportable segments consist of the Hospital Division, the Diagnostics Division  
and the Cardiology Consulting and Management Division.                          

  The Company evaluates performance based on several factors, of which the
primary financial measure is income before interest, taxes, depreciation,       
amortization, equity in earnings of unconsolidated affiliates and minority      
interest share of earnings of consolidated subsidiaries ("EBITDA, as defined"). 
EBITDA, as defined is a key internal measure used to evaluate the amount of cash
flow available for debt repayment and funding of additional investments;        
however, it is not a measure defined by generally accepted accounting principles
and should not be considered as an alternative to net income or cash flow data  
prepared in accordance with generally accepted accounting principles. The       
Company's measure of EBITDA, as defined may not be comparable to similarly      
titled measures reported by other companies.                                    

  F-29

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MEDCATH HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

  Financial information concerning the Company's operations by each of the
reportable segments as of and for the periods indicated are as follows (in      
thousands):                                                                     

                                                        [Enlarge/Download Table]

                                                                           THE COMPANY                           
                                  PREDECESSOR     -------------------------------------------------------------- 
                                    COMPANY                                YEAR ENDED         SIX MONTHS ENDED   
                                ----------------                          SEPTEMBER 30,           MARCH 31,      
                                TEN MONTHS ENDED   TWO MONTHS ENDED    -------------------   ------------------- 
                                 JULY 31, 1998    SEPTEMBER 30, 1998     1999       2000       2000       2001   
                                ----------------  ------------------   --------   --------   --------   -------- 
                                                                                                                 
Net revenue:                                                                                                     
 Hospital Division............      $ 97,651           $22,306         $193,792   $271,223   $132,102   $161,468 
 Diagnostics Division.........        29,162             5,863           41,028     41,021     21,806     21,495 
 Cardiology Consulting and                                                                                       
   Management Division........        28,065             6,193           20,192     19,188      9,217     10,981 
 Corporate and other..........         1,019               212              744        910        288        454 
                                    --------           -------         --------   --------   --------   -------- 
Consolidated totals...........      $155,897           $34,574         $255,756   $332,342   $163,413   $194,398 
                                    ========           =======         ========   ========   ========   ======== 
Income (loss) from operations:                                                                                   
 Hospital Division............      $  7,925           $  (625)        $  9,950   $ 20,154   $ 14,082   $ 30,201 
 Diagnostics Division.........         9,812             1,313            4,388      6,649      4,182      2,561 
 Cardiology Consulting and                                                                                       
   Management Division........         2,408               286          (10,032)       317         22       (699)
 Corporate and other..........       (12,117)           (1,738)         (14,646)   (10,145)    (5,475)    (2,929)
                                    --------           -------         --------   --------   --------   -------- 
Consolidated totals...........      $  8,028           $  (764)        $(10,340)  $ 16,975   $ 12,811   $ 29,134 
                                    ========           =======         ========   ========   ========   ======== 
EBITDA, as defined:                                                                                              
 Hospital Division............      $ 22,293           $ 1,914         $ 29,805   $ 46,220   $ 26,812   $ 43,233 
 Diagnostics Division.........        13,858             2,501           12,807     14,485      8,266      6,657 
 Cardiology Consulting and                                                                                       
   Management Division........         3,191               583           (8,616)     2,949      1,242        811 
 Corporate and other..........       (11,765)           (1,547)         (13,133)    (8,142)    (4,369)    (2,655)
                                    --------           -------         --------   --------   --------   -------- 
   Consolidated total EBITDA,                                                                                    
     as defined...............        27,577             3,451           20,863     55,512     31,951     48,046 
   Depreciation and                                                                                              
     amortization.............       (19,549)           (4,215)         (31,035)   (38,236)   (18,880)   (19,263)
   Interest expense, net......        (7,717)           (2,005)         (19,134)   (25,619)   (12,686)   (12,255)
   Equity in net earnings                                                                                        
     (loss) of unconsolidated                                                                                    
     affiliates...............            34              (842)          (5,640)    (2,011)    (1,184)    (1,843)
   Minority interest in                                                                                          
     earnings of consolidated                                                                                    
     subsidiaries.............        (2,832)             (377)          (6,322)    (3,305)    (2,804)   (10,440)
   Income tax benefit                                                                                            
     (expense)................           (34)            1,365            1,338         24         --       (128)
                                    --------           -------         --------   --------   --------   -------- 
Net income (loss).............      $ (2,521)          $(2,623)        $(39,930)  $(13,635)  $ (3,603)  $  4,117 
                                    ========           =======         ========   ========   ========   ======== 
Depreciation and amortization:                                                                                   
 Hospital Division............      $ 14,367           $ 2,539         $ 19,586   $ 26,031   $ 12,664   $ 12,992 
 Diagnostics Division.........         4,046             1,188            8,832      7,836      4,084      4,025 
 Cardiology Consulting and                                                                                       
   Management Division........           783               297            1,110      2,508      1,150      1,453 
 Corporate and other..........           353               191            1,507      1,861        982        793 
                                    --------           -------         --------   --------   --------   -------- 
Consolidated totals...........      $ 19,549           $ 4,215         $ 31,035   $ 38,236   $ 18,880   $ 19,263 
                                    ========           =======         ========   ========   ========   ======== 
Interest expense (income),                                                                                       
 net:                                                                                                            
 Hospital Division............      $ 12,153           $ 2,581         $ 22,419   $ 30,589   $ 14,755   $ 15,100 
 Diagnostics Division.........           237                73              (38)       (13)        11        176 
 Cardiology Consulting and                                                                                       
   Management Division........           157                (6)             (18)       (58)       (18)       (20)
 Corporate and other..........        (4,830)             (643)          (3,229)    (4,899)    (2,062)    (3,001)
                                    --------           -------         --------   --------   --------   -------- 
Consolidated totals...........      $  7,717           $ 2,005         $ 19,134   $ 25,619   $ 12,686   $ 12,255 
                                    ========           =======         ========   ========   ========   ======== 
Capital expenditures:                                                                                            
 Hospital Division............      $ 85,363           $14,139         $ 52,146   $  9,656   $  6,401   $  3,455 
 Diagnostics Division.........         5,971             1,962            5,205      2,015      1,156        979 
 Cardiology Consulting and                                                                                       
   Management Division........           503               196              201       (378)        82          7 
 Corporate and other..........         2,281               399              109        991        340      1,483 
                                    --------           -------         --------   --------   --------   -------- 
Consolidated totals...........      $ 94,118           $16,696         $ 57,661   $ 12,284   $  7,979   $  5,924 
                                    ========           =======         ========   ========   ========   ======== 

  F-30

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MEDCATH HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

                                                                [Download Table]

                                                      YEAR ENDED                
                                                     SEPTEMBER 30,              
                                                  -------------------  MARCH 31,
                                                    1999       2000      2001   
                                                  --------   --------  ---------
                                                                                
Aggregate identifiable assets:                                                  
  Hospital Division.............................. $360,679   $397,047  $368,793 
  Diagnostics Division...........................   62,557     53,176    60,472 
  Cardiology Consulting and Management Division..   16,761     12,415    10,066 
  Corporate and other............................   32,288     23,440    24,151 
                                                  --------   --------  -------- 
Consolidated totals.............................. $472,285   $486,078  $463,482 
                                                  ========   ========  ======== 

    Substantially all of the Company's revenue in its Diagnostics Division and
Hospital Division is derived directly or indirectly from patient services;      
substantially all of the Company's revenue in its Cardiology Consulting and     
Management Division is derived from management and consulting fees. The amounts 
presented for "Corporate and other" primarily include general overhead and      
administrative expenses, financing activities, certain cash and cash            
equivalents, prepaid expenses, enterprise goodwill, other assets and operations 
of the business not subject to segment reporting.                               

19. SUBSEQUENT EVENTS                                                           

     Hospital Development.  In April 2001, the Company entered into a venture to
develop and construct the Louisiana Heart Hospital in St. Tammany Parish,       
Louisiana. The Louisiana Heart Hospital will be accounted for as a consolidated 
subsidiary since the Company has approximately 51% interest in the venture, with
physician investors owning the remaining 49%, and the Company will exercise     
substantive control over the Hospital.                                          

Contract Settlements.  In April 2001, the Company was awarded a $4.2  
million settlement related to a billing dispute with one of our hospital        
partners in the Diagnostics Division. This amount was recognized as net revenue 
during the month of April in the Diagnostics Division. Of the amount, 40% or    
$1.7 million, is recognized as minority interest in the same period.            

********

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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE   
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN   
THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF  
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE    
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.                                                            

TABLE OF CONTENTS 

                                                                [Download Table]

                                          PAGE
                                              
Prospectus Summary......................    1 
Risk Factors............................    8 
Special Note Regarding Forward-Looking        
  Statements............................   22 
Use of Proceeds.........................   23 
Dividend Policy.........................   23 
Capitalization..........................   24 
Dilution................................   25 
The Going Private Transaction...........   26 
Selected Consolidated Financial Data and      
  Other Information.....................   28 
Management's Discussion and Analysis of       
  Financial Condition and Results of          
  Operations............................   32 
Business................................   52 
Management..............................   78 
Principal Stockholders..................   87 
Certain Relationships and Related Party       
  Transactions..........................   89 
Description of Capital Stock............   92 
Shares Eligible for Future Sale.........   96 
Underwriting............................   99 
Legal Matters...........................  102 
Change in Accountants...................  102 
Experts.................................  102 
Where You Can Find More Information.....  103 
Unaudited Pro Forma Consolidated              
  Financial Data........................  P-1 
Index to Financial Statements...........  F-1 

UNTIL AUGUST 17, 2001 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS  
THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN   
THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO  
THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER   
AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.                         

(MedCath CORPORATION Logo)                                                      

6,000,000 SHARES                                                                

COMMON STOCK                                                                    

DEUTSCHE BANC ALEX. BROWN                                                       

BANC OF AMERICA SECURITIES LLC                                                  

JPMORGAN                                                                        

FIRST UNION SECURITIES, INC.                                                    

Prospectus                                                                      

July 23, 2001                                                                   

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