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                                                                   EXHIBIT 10.30





                               OPERATING AGREEMENT
                                       OF
                       HEART HOSPITAL OF SOUTH DAKOTA, LLC
                   A NORTH CAROLINA LIMITED LIABILITY COMPANY
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                                TABLE OF CONTENTS
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                       HEART HOSPITAL OF SOUTH DAKOTA, LLC
                   A North Carolina Limited Liability Company


<TABLE>
<S>                                                                                                                  <C>
ARTICLE I    DEFINITIONS......................................................................................        1

ARTICLE II   FORMATION AND AGREEMENT OF
LIMITED LIABILITY COMPANY.....................................................................................        2
         SECTION 2.1  Company Formation; Effective Date.......................................................        2
         SECTION 2.2  Name of Company.........................................................................        2
         SECTION 2.3  Purposes and Business Objectives........................................................        2
         SECTION 2.4  Statement of Philosophy and Values......................................................        3
         SECTION 2.5  Registered Agent and Office; Principal Place of Business................................        4
         SECTION 2.6  Commencement and Term...................................................................        4

ARTICLE III  MEMBERS AND CAPITAL CONTRIBUTIONS................................................................        4
         SECTION 3.1  Initial Capital Contributions of Members................................................        4
         SECTION 3.2  Liability of Members - For Capital......................................................        5
         SECTION 3.3  Maintenance of Capital Accounts; Withdrawals of Capital;
         Withdrawals from the Company.........................................................................        5
         SECTION 3.4  Interest on Capital Contributions or Capital Accounts...................................        6
         SECTION 3.5  Additional Funding......................................................................        6
         SECTION 3.6  Enforcement of Commitments..............................................................        7
         SECTION 3.7  NCHI Documentation......................................................................        8
         SECTION 3.8. Reserved Powers of Initial Members......................................................        9
         SECTION 3.9. Appointment of Board of Directors.......................................................        9
         SECTION 3.10 Additional Obligations of McKennan and Company..........................................       10
         SECTION 3.11 Obligations Relating to Real Property...................................................       10

ARTICLE IV   NAMES AND ADDRESSES OF MEMBERS...................................................................       11

ARTICLE V    MANAGEMENT OF THE COMPANY........................................................................       11
         SECTION 5.1  General Authority and Powers of the Board of Directors..................................       11
         SECTION 5.2  Restrictions on Authority of the Board of Directors.....................................       11
         SECTION 5.3  Duties of the Board of Directors........................................................       12
         SECTION 5.4  Delegation by the Board of Directors....................................................       13
         SECTION 5.5  Right to Rely Upon the Authority of the Manager.........................................       13
         SECTION 5.6  Company Expenses; Purchase of Goods and Services from Members...........................       13
         SECTION 5.7  No Management by Members................................................................       15
         SECTION 5.8  Consent by Members to Exercise of Certain Rights
         and Powers by Board of Directors.....................................................................       16
         SECTION 5.9. Meetings, Quorum and Vote of the Board of Directors.....................................       16
</TABLE>


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<TABLE>
<S>                                                                                                                  <C>
         SECTION 5.10 Other Business of Members...............................................................       17
         SECTION 5.11 Board of Directors' Standard of Care....................................................       19
         SECTION 5.12 Limitation of Liability.................................................................       20
         SECTION 5.13 Indemnification of the Directors........................................................       20
         SECTION 5.14 Certain Decisions of the Board of Directors.............................................       20
         SECTION 5.15 Managed Care............................................................................       21

ARTICLE VI   DISTRIBUTIONS AND ALLOCATIONS....................................................................       22
         SECTION 6.1  Distributions of Cash Flow from Operations and Cash
         from Sales or Refinancing............................................................................        22
         SECTION 6.2  Profits.................................................................................        22
         SECTION 6.3  Losses..................................................................................        22
         SECTION 6.4  Code Section 704(c) Tax Allocations.....................................................        23
         SECTION 6.5  Miscellaneous...........................................................................        23

ARTICLE VII  DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS............................................        24
         SECTION 7.1  No Termination by Certain Acts of Member................................................        24
         SECTION 7.2  Dissolution.............................................................................        24
         SECTION 7.3  Dissolution and Final Liquidation.......................................................        24
         SECTION 7.4  Termination.............................................................................        26
         SECTION 7.5  Payment in Cash.........................................................................        26
         SECTION 7.6  Termination of Noncompetition Covenants.................................................        26

ARTICLE VIII REMOVAL OR WITHDRAWAL OF MANAGERS AND
MEMBERS AND TRANSFER OF MEMBERS' MEMBERSHIP AND/OR
ECONOMIC INTERESTS............................................................................................        26
         SECTION 8.1  Members - Restriction on Transfer.......................................................        26
         SECTION 8.2  Condition Precedent to Transfer of Membership Interest..................................        28
         SECTION 8.3  Substitute Member - Conditions to Fulfill...............................................        28
         SECTION 8.4  Allocations Between Transferor and Transferee...........................................        28
         SECTION 8.5  Rights, Liabilities of, and Restrictions on Assignee....................................        29
         SECTION 8.6  Repurchase of Interests in Certain Event................................................        29

ARTICLE IX   RECORDS, ACCOUNTINGS AND REPORTS.................................................................        31
         SECTION 9.1  Books of Account........................................................................        31
         SECTION 9.2  Access to Records.......................................................................        31
         SECTION 9.3  Bank Accounts and Investment of Funds...................................................        31
         SECTION 9.4  Fiscal Year.............................................................................        32
         SECTION 9.5  Accounting Reports......................................................................        32
         SECTION 9.5  Tax Matters Partner.....................................................................        32

ARTICLE X    MEETINGS AND VOTING RIGHTS OF MEMBERS............................................................        33
         SECTION 10.1 Meetings................................................................................        33
         SECTION 10.2 Voting Rights of Members................................................................        33
ARTICLE XI   AMENDMENTS.......................................................................................        34
         SECTION 11.1 Authority to Amend by the Board of Directors............................................        34
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<TABLE>
<S>                                                                                                                   <C>
         SECTION 11.2  Restrictions on the Board of Directors' Amendments:
         Amendments by Members................................................................................        34
         SECTION 11.3  Amendments to Certificates.............................................................        35

ARTICLE XII  MISCELLANEOUS....................................................................................        35
         SECTION 12.1  Limited Power of Attorney..............................................................        35
         SECTION 12.2  Waiver of Provisions...................................................................        35
         SECTION 12.3  Interpretation and Construction........................................................        35
         SECTION 12.4  Governing Law..........................................................................        35
         SECTION 12.5  Partial Invalidity.....................................................................        36
         SECTION 12.6  Binding on Successors..................................................................        36
         SECTION 12.7  Notices and Delivery...................................................................        36
         SECTION 12.8  Counterpart Execution; Facsimile Execution.............................................        36
         SECTION 12.9  Statutory Provisions...................................................................        36
         SECTION 12.10 Waiver of Partition....................................................................        37
         SECTION 12.11 Change in Law..........................................................................        37
         SECTION 12.12 Investment Representations of the Members..............................................        39
         SECTION 12.14 Referrals to Hospital and Ownership of Shares of
         Common Stock of MedCath Holdings, Inc................................................................        40
         SECTION 12.15 Acknowledgments Regarding Legal Representation.........................................        40
         SECTION 12.16 Exhibits...............................................................................        41
         SECTION 12.16 Arbitration............................................................................        41
</TABLE>


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                               OPERATING AGREEMENT
                                       OF
                       HEART HOSPITAL OF SOUTH DAKOTA, LLC
                   A North Carolina Limited Liability Company


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

         THIS OPERATING AGREEMENT (the "Agreement") of Heart Hospital of South
Dakota, LLC (the "Company"), a North Carolina Limited Liability Company is made
and entered into by and among Persons whose names addresses and taxpayer
identification numbers are listed on the Information Exhibit (Exhibit A) as of
the date the Company is formed in accordance with Section 2.1.

                                    RECITALS

         A.       The Company has been formed to develop, own and operate an
acute care hospital which hospital shall be located in or near Sioux Falls,
South Dakota and shall specialize in all aspects of cardiology and
cardiovascular care and surgery which the Board of Directors may agree upon;

         B.       It is intended that the hospital will be a low-cost, high
quality provider of medical services within the Sioux Falls area in a manner
which is consistent with the national health care policy of lowering the costs
of health care;

         C.       The Capital Contributions and active involvement of the
Members are necessary to enable the Company to achieve its objectives.

                                    ARTICLE I

                                   DEFINITIONS

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

              FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY

         SECTION 2.1       COMPANY FORMATION; EFFECTIVE DATE.

         The Company was formed upon the filing of the Articles of Organization
with the North Carolina Secretary of State in accordance with the provisions of
the Act. Upon the effectiveness of this Agreement, the Persons listed on the
attached Information Exhibit shall be admitted to the Company as Members and the
Persons who executed the Articles shall be withdrawn as Members (unless they are
listed on the Information Exhibit), all without the necessity of any further act
or instrument and without causing the dissolution of the Company. This Agreement
shall be effective as of the date the Company was formed.

         SECTION 2.2       NAME OF COMPANY.

         The name of the Company is Heart Hospital of South Dakota, LLC.

         SECTION 2.3       PURPOSES AND BUSINESS OBJECTIVES.

         The principal purposes and business objectives of the Company are as
follows:

                  (a)      To develop, own and operate a Hospital specializing
         in the diagnosis and treatment of cardiovascular disease and
         cardiovascular and vascular surgery in Sioux Falls, South Dakota which
         would include, but not be limited to, the following:

                           (i)      Services and facilities to meet all
                  requirements of the State of South Dakota, Medicare, JCAHO and
                  other credentialing or licensing bodies or agencies in order
                  to have the Hospital licensed as an acute care hospital and to
                  perform cardiology and cardiovascular surgical services of
                  every type or nature and to be eligible to obtain appropriate
                  reimbursements therefore;

                           (ii)     Approximately 70,000 to 90,000 square feet
                  in a building to be constructed in accordance with plans and
                  specifications approved by the Company;

                           (iii)    Approximately 48 to 60 medical/surgical
                  beds;

                           (iv)     3 heart catheterization laboratories;

                           (v)      3 heart surgical suites;

                           (vi)     All appropriate support services and
                  systems; and


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                           (vii)    Appropriate Equipment and services with
                  respect to the facilities described above and as otherwise
                  reasonably necessary or appropriate for the diagnosis and
                  treatment of cardiovascular disease, including but not limited
                  to invasive and non-invasive cardiac testing, interventional
                  treatment including percutaneous transluminal coronary
                  angioplasty and atherectomy, and cardiac surgery which would
                  include, but not be limited to, bypass grafts and valve
                  surgery.

                  The above size, number and scope of facilities of the Hospital
         are only preliminary estimates. The Board of Directors are authorized
         to finally make all determinations with respect thereto; provided that
         the Board of Directors shall not unreasonably refuse to allow services
         or procedures generally performed by cardiologists, cardiovascular or
         vascular surgeons at hospitals to be provided at the Hospital.

                  (b)      To lease or acquire real property located near the
corner of 69th Street and Louise in Sioux Falls and to construct a suitable
building thereon in which the Hospital shall be located;

                  (c)      Any other purpose reasonably related to (a) and (b)
above.

         SECTION 2.4       STATEMENT OF PHILOSOPHY AND VALUES.

         Notwithstanding anything in this Agreement to the contrary, the Company
and the Hospital shall be operated in accordance with the following philosophy
and values at all times:

                  (a)      The Company and the Hospital shall be operated in
         accordance with the mission of Avera McKennan ("McKennan") and the
         Ethical and Religious Directives for Catholic Health Care Services, as
         promulgated by the United States Catholic Conference;

                  (b)      The Hospital shall seek to participate in all public
         health care financing programs applicable to its business including the
         Medicare and Medicaid programs:

                  (c)      The Board of Directors shall adopt and adhere to the
         policies of McKennan, as they may be reasonably amended from time to
         time, for providing care for those patients who are unable to pay for
         Hospital care;

                  (d)      The medical staff of the Hospital shall be open to
         any physician who meets the qualifications stated in the Bylaws, Rules
         and Regulations of the Medical Staff;

                  (e)      The Company shall adopt and adhere to a conflict of
         interest policy with respect to contracts between the Company and
         Members or Directors;

                  (f)      All medical decisions and all policies and procedures
         relating to the delivery of medical services at the Hospital shall be
         made by those physicians who are members of the medical staff of the
         Hospital as provided in the Bylaws, Rules and Regulations of the
         medical staff.


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         SECTION 2.5       REGISTERED AGENT AND OFFICE; PRINCIPAL PLACE OF
                           BUSINESS.

         The registered agent and office of the Company shall be as indicated in
the Articles of Organization, as amended from time to time. The principal place
of business of the Company shall be at such location in Sioux Falls, South
Dakota as selected by the Board of Directors from time to time. The Board of
Directors shall promptly notify the Members of any changes in the Company's
registered agent, registered office, or principal place of business.

         SECTION 2.6       COMMENCEMENT AND TERM.

         The Company commenced on the filing of the Articles of Organization in
the Office of the Secretary of State of North Carolina, as required by Section
2.1 hereof, and shall continue until December 31, 2060, unless sooner terminated
or dissolved as provided herein; provided, however, that the termination date
may be extended for up to an additional forty (40) years in five (5) year
increments upon the election of the Board of Directors. The consent of each
Director to such extension shall not be unreasonably withheld or delayed.

                                   ARTICLE III

                        MEMBERS AND CAPITAL CONTRIBUTIONS

         SECTION 3.1       INITIAL CAPITAL CONTRIBUTIONS OF MEMBERS.

                  (a)      The initial Capital Contributions of the Initial
                           Members shall equal $3,600,000.00:

                  (b)      Such initial Capital Contribution shall be made as
                           follows:

                           (i)      SFHM shall own a 33 1/3% Membership Interest
                                    in the Company and shall contribute to the
                                    Company for its Membership Interest 33 1/3%
                                    of the aggregate amount of such initial
                                    Capital Contributions.

                           (ii)     NCHI shall own a 33 1/3% Membership Interest
                                    and shall contribute to the Company for its
                                    Membership Interest an amount equal to
                                    33 1/3% of such initial Capital
                                    Contributions.

                           (iii)    McKennan shall own a 33 1/3% Membership
                                    Interest in the Company and shall contribute
                                    to the Company for its Membership Interest
                                    33 1/3% of the aggregate amount of such
                                    initial Capital Contributions.

                  (c)      It is anticipated that other qualified investors
                           approved by the Initial Members will contribute up to
                           an additional $400,000.00 to the Company,


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                           which investors would become Members and would own,
                           in the aggregate, up to a ten percent (10%)
                           Membership Interest in the Company. In such event,
                           the Membership Interests of each of the Initial
                           Members shall be reduced equally in order to reflect
                           such additional Capital Contributions. If by
                           September 1, 1999 or a later date approved by the
                           Board of Directors, sufficient additional qualified
                           investors approved by the Initial Members have not
                           been admitted as Members, then each Initial Member
                           shall make equal additional Capital Contributions in
                           order to bring the initial Capital Contributions to a
                           total of $4,000,000.00 and the ownership of the
                           Initial Members will be increased proportionately.

                  (d)      The Initial Members shall make their initial Capital
                           Contributions upon their admission as Members of the
                           Company:

                  (e)      Members admitted after the formation of the Company
                           shall contribute their initial Capital Contribution
                           upon their admission as Members to the Company.

                  (f)      The Members may be liable to the Company for amounts
                           distributed to them as a return of capital as
                           provided by the Act. Members shall not be required to
                           contribute any additional capital to the Company
                           except as provided in Section 3.5.

         SECTION 3.2       LIABILITY OF MEMBERS - FOR CAPITAL.

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

         SECTION 3.3       MAINTENANCE OF CAPITAL ACCOUNTS; WITHDRAWALS OF
CAPITAL; WITHDRAWALS FROM THE COMPANY.

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

         Except as otherwise expressly provided in this Agreement, a Member may
not withdraw from the Company without the written consent of the Initial
Members. In no case shall a


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Member have the right to have its Interest redeemed by the Company unless
approved by the Board.

         SECTION 3.4       INTEREST ON CAPITAL CONTRIBUTIONS OR CAPITAL
                           ACCOUNTS.

         No interest shall be paid to any Member based solely on its Capital
Contributions or Capital Account. The preceding sentence shall not prevent the
Company from earning interest on its bank accounts and investments and
distributing such earnings to the Member in accordance with Articles VI and VII.

         SECTION 3.5       ADDITIONAL FUNDING.

         If from time to time, the Board of Directors reasonably determines
(which determination shall not be unreasonably withheld or delayed) that funds
in addition to that contemplated by Sections 3.1 and 3.2 are necessary or
appropriate for the development or operation of the Hospital, then:

                  (a)      First, on terms and conditions reasonably acceptable
         to the Board of Directors, SFHM or one of its Affiliates shall loan the
         Company up to Twelve Million Dollars ($12,000,000.00) at the Prime Rate
         plus one percent (1%) per annum which loan shall be secured by the
         Company's assets. Interest shall be paid monthly in arrears. Funds
         initially shall be advanced hereunder through the period ending no
         later that the first (1st) anniversary of the opening of the Hospital.
         Amounts then outstanding shall be repaid with interest on a schedule to
         be agreed upon by the Company and SFHM prior to the date the first
         advances are made hereunder. To the extent the Company repays such loan
         from time to time in amounts which are in excess of scheduled principal
         amounts such amounts of excess principal payments may be reborrowed by
         the Company on mutually acceptable terms. The parties acknowledge that
         the Company intends to seek construction, mortgage and equipment
         financing from third party lenders and lessors and that the loans set
         forth in this subsection (a) are not intended to be used for such
         purposes; provided that at SFHM's discretion, such loans may be used
         for such purposes on a short-term basis pending closing of third-party
         financing therefor;

                  (b)      Second, the Board of Directors thereafter shall use
         commercially reasonable efforts to borrow such funds from a bank or
         other lender on terms and conditions reasonably acceptable to the Board
         of Directors. All loans obtained hereunder shall be subject to the
         approval of the Board of Directors, which approval shall not be
         unreasonably withheld or delayed. In the event that SFHM determines and
         provides written notice thereof to McKennan that SFHM or its Affiliates
         must provide, and they have elected to so provide, guarantees or
         collateral security to any lender or lessor who is providing loans or
         lease financing to the Company only on the condition that adequate
         guarantees or collateral security be provided to such lender or
         lessors, then McKennan agrees to provide, on a several basis,
         guarantees of any such loans or lease financing, or additional
         collateral security for such loans or leases, on the same terms and
         conditions as are then being provided from time to time by SFHM and its
         Affiliates, it being acknowledged and agreed that 50% of any such
         guarantees or collateral security shall be


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         provided by SFHM and its Affiliates, and 50% thereof shall be provided
         by McKennan. McKennan and SFHM agree to execute guarantees, provide
         customary covenants, representations and warranties and to provide such
         financial statements as are required from time to time by parties
         providing loans or lease financing to the Company.

                  (c)      Third, if loans as provided in (a) have been fully
         advanced for their intended purpose and loans as provided in (b) above
         are not available, the Board of Directors may through written notice
         require that the Members contribute additional capital to the Company
         pro rata according to their respective Membership Interests, provided
         however, a Member's maximum obligation for such additional Capital
         Contributions shall be limited to an additional amount equal to the
         Member's initial Capital Contribution pursuant to Section 3.1;

                  (d)      Fourth, if additional funds are thereafter needed by
         the Company, SFHM or one of its Affiliates may, but shall not be
         required to, loan such funds to the Company at the Prime Rate plus one
         percent (1%) per annum which loan shall be secured by the Company's
         assets. Interest shall be paid monthly in arrears and principal shall
         be repaid according to a schedule to be agreed upon by the Company and
         SFHM or its Affiliate;

                  (e)      Fifth, if additional funds are thereafter needed by
         the Company, the Board of Directors shall request additional Capital
         Contributions from the Members and each Member may elect whether or not
         to contribute its pro rata portion of such additional capital
         requirements as optional Capital Contributions. The other Members may
         elect to contribute optional Capital Contributions not contributed by
         any Member hereunder. Thereafter, the Board of Directors shall
         reasonably adjust the percentage Membership Interest of each Member
         (based on the aggregate of all Capital Contributions made by all of the
         Members in accordance with this Agreement) in the event any Member
         elected not to make optional Capital Contributions pursuant to this
         Section 3.5(e); and

                  (f)      Sixth, if adequate funds have not been obtained or
         raised in accordance with (a) through (e) above (including, without
         limitation, taking into consideration funds made available by Members
         for amounts which are in excess of their obligations hereunder), then
         the Board of Directors may elect to dissolve the Company provided,
         however, if any Members or any of their Affiliates (i) have any
         outstanding loans to the Company or are committed to provide such loans
         or (ii) are providing a guaranty or are committed to provide a guaranty
         for any indebtedness of the Company, then only those Members alone upon
         unanimous approval of such Members, upon at least fifteen (15) days
         prior written notice to the other Members, shall be entitled to so
         dissolve the Company due to the Company not having sufficient funds to
         meet its financial obligations or liabilities as they come due.

         SECTION 3.6       ENFORCEMENT OF COMMITMENTS.

         In the event any Member ("Delinquent Member") fails to make a mandatory
Capital Contribution as provided in Section 3.1 or Section 3.5 or an optional
Capital Contribution as agreed to by the Member under Section 3.5 (the
"Commitment"), the Board of Directors shall


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give the Delinquent Member a Notice of the failure to meet the Commitment. If
the Delinquent Member fails to perform the Commitment (including any costs
associated with the failure to meet the Commitment and interest on such
obligation at the Default Interest Rate) within ten (10) business days of the
giving of Notice, the Board of Directors may take such action, including but not
limited to enforcing the Commitment in the court of appropriate jurisdiction in
the state in which the principal office of the Company is located or the state
of the Delinquent Member's address as then reflected in the Agreement. Each
Member expressly agrees to the jurisdiction of such courts but only for the
enforcement of Commitments. The other Members may elect to contribute additional
amounts equal to any amount of the Commitment not contributed by such Delinquent
Member. The contributing Member shall be entitled at its election to treat the
amounts contributed pursuant to this Section either as a Capital Contribution or
as a loan from the contributing Member bearing interest at the Default Rate
secured by the Delinquent Member's Interest in the Company. If the contributing
Member elects to contribute such amount as a Capital Contribution, the
percentage Membership Interests of the Members shall be adjusted
proportionately. Until the contributing Member is fully repaid for such loan
made as a result of the default by the Delinquent Member and only if the
contributing Member agrees to accept repayment of such amount, the contributing
Member shall be entitled to all distributions to which the Delinquent Member
would have been entitled had such Commitment been fulfilled thereby.
Notwithstanding the foregoing, no Commitment or other obligation to make an
additional Capital Contribution may be enforced by a creditor of the Company
unless the Member expressly consents to such enforcement or to the assignment of
the obligation to such creditor. Notwithstanding anything herein to the
contrary, the Directors designated by the non-delinquent Members may take all
actions contemplated by this Section 3.6 without the consent of the Directors
designated by the Delinquent Member.

         SECTION 3.7       MEMBER DOCUMENTATION.

         Prior to the execution of this Agreement, NCHI and any other Member
(other than SFHM and McKennan) that are Entities (an "Investor Entity") shall
have delivered to the Company copies of all documents, instruments and
agreements related to the formation, ownership and governance of the Investor
Entity and its owners ("the Investor Entity Documents"). None of the Investor
Entity Documents will be altered or amended without the consent of the Board of
Directors, which consent shall not be unreasonably withheld. Contemporaneously
with the Investor Entity's admission as a Member of the Company, the members of
the Investor Entity shall each execute an Addendum to Subscription Agreement
under which, among other things, those individuals agree to be personally bound
by the terms and conditions of Section 5.10 hereof. Additionally (unless such
requirement is waived by the Board), the members of the Investor Entity shall
also execute a Hospital Professional Services Agreement with the Company and a
Right of First Refusal Agreement with an Affiliate of SFHM. No Person shall be
admitted hereafter as a member of the Investor Entity unless such Person also
executes such Addendum to Subscription Agreement, the Hospital Professional
Services Agreement and the Right of First Refusal Agreement so that they are
bound thereby to the same extent as are members of the Investor Entity as of the
date hereof.


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         SECTION 3.8.      RESERVED POWERS OF INITIAL MEMBERS.

         The following actions are the only actions which can be taken by the
Members and shall require the unanimous consent of the Initial Members:

                  (a)      Amendments to the Articles of Organization or the
         Operating Agreement of the Company;

                  (b)      A merger, consolidation, liquidation, or similar
         reorganization or transfer of a substantial portion of the Company's
         assets;

                  (c)      A sale, lease encumbrance or other transfer of all or
         substantially all of the Company's assets, except for encumbrances
         incurred in connection with financing provided to the Company;

                  (d)      Admission of new Members to the Company;

                  (e)      Any amendment of the Company's Statement of
         Philosophy and Values and any action which is inconsistent with the
         Company's Statement of Philosophy and Values;

                  (f)      Approval and authorization of disproportionate
         distributions or allocations of profits, losses or assets of the
         Company, except as specifically permitted elsewhere in this Operating
         Agreement;

                  (g)      The name of the Hospital, provided that such name
         shall include in it the words "Heart Hospital" and the Members shall
         each be entitled to require that they be identified with the name as
         affiliates of the Hospital; and

                  (h)      Any amendment to the Company's policy that the
         Company shall commit at least the lesser of 1.5% of its net income or
         $100,000.00 per year to support local causes and charities selected by
         the Board of Directors whose missions are consistent with those of the
         Company.

         SECTION 3.9.      APPOINTMENT OF BOARD OF DIRECTORS.

         The Initial Members shall appoint a Board of Directors as follows:

         (a)      SFHM shall appoint three (3) Directors;

         (b)      NCHI shall appoint three (3) Directors; and

         (c)      McKennan shall appoint three (3) Directors.

         A Member shall have the right, with or without cause, to remove,
substitute or replace any Director which it appointed.


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         SECTION 3.10      ADDITIONAL OBLIGATIONS OF MCKENNAN AND COMPANY.

         McKennan hereby further agrees as follows:

         (a)      In the event that McKennan desires, subject to the terms
hereof, to sell any material portion of its assets or 50% or more, in the
aggregate, of its direct or indirect ownership, or, if another nonprofit Entity
or its members or trustees become the members or trustees of McKennan and
thereby gain control of McKennan, such assets or ownership may be sold, or
control taken, only to or by a Person (the "McKennan Successor") that: (i) will
not be in violation of Section 5.10 and (ii) first agrees in writing, prior to
the closing of the transaction with the McKennan Successor, in form satisfactory
to SFHM and NCHI, that such Person and its Affiliates (and its successors and
assigns) will be bound by the terms and conditions of this Section 3.10 and
Section 5.10. Such agreement shall be for the express benefit of SFHM and NCHI.
Additionally, if requested to do so by the Board of Directors (acting without
the vote of Directors designated by McKennan), McKennan will require that the
McKennan Successor also acquire McKennan's Membership Interest and assume and
fulfill all of McKennan's liabilities and obligations hereunder. McKennan will
make information reasonably available from time to time and shall execute
reasonable agreements in order to implement the intent of this subsection 3.10;

         (b)      If requested by McKennan, the Company and McKennan shall enter
into a consulting services agreement on terms acceptable to them under which the
Company will provide training to McKennan's employees involved in providing
cardiac services to the extent permitted by Section 5.10(b) and other services
agreed upon by the Company and McKennan. McKennan will provide fair market value
compensation to the Company for such services;

         (c)      The Company will satisfy initial hiring needs by hiring
employees of McKennan, subject, however, to the Company's needs for such
employees and to such employees' meeting the Company's job qualifications.

         SECTION 3.11      OBLIGATIONS RELATING TO REAL PROPERTY.

         The Company intends to lease or purchase a portion of approximately 53
acres of real property located near 69th and Louise in Sioux Falls (the
"Development") subject to the following:

         (a)      The agreement by the developer thereof to lease or sell
sufficient land on which to develop the Hospital for a purchase price or rent
equal to the fair market value thereof as determined by a qualified independent
real estate appraiser acceptable to McKennan, SFHM, NCHI and the developer;

         (b)      The developer shall record a restriction acceptable to the
developer, McKennan, NCHI and SFHM prohibiting any Person from using any part of
the Development for a purpose which, if conducted by a Member would violate
Section 5.10 hereof;


                                       10
<PAGE>   15

         (c)      The agreement will contain other commercially reasonable terms
and conditions, including without limitation, terms obligating the developer to
execute commercially reasonable documents required by third parties providing
financing to the Company which will require among other things, a first priority
lien on the Company's interest in the Property.

                                   ARTICLE IV

                         NAMES AND ADDRESSES OF MEMBERS

         The names and addresses of the Members are as indicated on the
Information Exhibit, attached hereto which may be amended by the Board of
Directors from time to time.

                                    ARTICLE V

                            MANAGEMENT OF THE COMPANY

         SECTION 5.1       GENERAL AUTHORITY AND POWERS OF THE BOARD OF
                           DIRECTORS.

         Except as set forth in those provisions of this Agreement that
specifically require the vote, consent, approval or ratification of the Members,
the Board of Directors shall have complete authority and exclusive control over
the management of the business and affairs of the Company. Subject to the terms
and conditions of this Agreement and except as otherwise provided herein, all
Material Agreements and Material Decisions with respect to the business and
affairs of the Company shall be approved or made by the Board of Directors in
accordance with Section 5.14 hereof. No Member has the actual or apparent
authority to cause the Company to become bound in any contract, agreement or
obligation, and no Member shall take any action purporting to be on behalf of
the Company. No Director shall cause the Company to become bound to any
contract, agreement or obligation, and no Director shall take any other action
on behalf of the Company, unless such matter has received the vote, consent,
approval or ratification as required pursuant to this Agreement with respect to
such matter or except as provided below with respect to the authority and
actions of SFHM.

         The day-to-day management of the business and affairs of the Company
shall be the responsibility of SFHM pursuant to the terms of the Management
Agreement, which management shall be subject to decisions, guidelines and
policies made or established by the Board of Directors hereunder, provided,
however, decisions relating to medical and clinical practice at the Hospital
shall be made exclusively by the qualified medical personnel of the Hospital
under the direction of a member of the Hospital's medical staff.

         SECTION 5.2       RESTRICTIONS ON AUTHORITY OF THE BOARD OF DIRECTORS.

         The Board of Directors shall not do any of the following:

                  (a)      Act in contravention of this Agreement;


                                       11
<PAGE>   16

                  (b)      Act in any manner which would make it impossible to
         carry on the express business purposes of the Company;

                  (c)      Commingle the Company funds with those of any other
         Person;

                  (d)      Admit an additional Member without the approval of
         the Initial Members or except as otherwise provided in this Agreement.

                  (e)      Alter the primary purposes of the Company as set
         forth in Section 2.3;

                  (f)      Possess any property or assign the rights of the
         Company in specific property for other than a Company purpose;

                  (g)      Employ, or permit the employ of, the funds or assets
         of the Company in any manner except for the exclusive benefit of the
         Company;

                  (h)      Make any payments of any type, directly or
         indirectly, to anyone for the referral of patients to the Hospital in
         order to use the Hospital or to provide other services; or

                  (i)      Sell all or substantially all of the assets of the
         Company or merge the Company with or into any other Entity without the
         approval of the Initial Members;

         SECTION 5.3       DUTIES OF THE BOARD OF DIRECTORS.

         The Board of Directors shall do the following:

                  (a)      Diligently and faithfully devote such of its time to
         the business of the Company as may be necessary to properly conduct the
         affairs of the Company, however, the individual Directors shall not be
         required to devote their full time to such duties;

                  (b)      Use its best efforts to cause the Company to comply
         with such conditions as may be required from time to time to permit the
         Company to be classified for federal income tax purposes as a
         partnership and not as an association taxable as a corporation;

                  (c)      File and publish all certificates, statements, or
         other instruments required by law for the formation and operation of
         the Company as a limited liability company in all appropriate
         jurisdictions;

                  (d)      Use their commercially reasonable best efforts to
         cause the Company to obtain and keep in force during the term of the
         Company fire and extended coverage and public liability and
         professional liability insurance with such issuers and in such amounts
         as the Board of Directors shall deem advisable, but in amounts not less
         (and deductible amounts not greater) than those customarily maintained
         with respect to the business equipment and property comparable to the
         Company's;


                                       12
<PAGE>   17

                  (e)      Have a fiduciary duty to conduct the affairs of the
         Company in the best interests of the Company and of the Members,
         including the safekeeping and use of all funds and assets, whether or
         not in its immediate possession and control, and it shall not employ or
         permit others besides the Board of Directors to employ such funds or
         assets in any manner except for the benefit of the Company.

         SECTION 5.4       DELEGATION BY THE BOARD OF DIRECTORS.

         Subject to restrictions otherwise provided herein, the Board of
Directors may at any time employ any other Person, including Persons and
Entities employed by, affiliated with, or related to any Director or any Member
to perform services for the Company and its business, and may delegate all or
part of their authority or control to any such other Persons, provided that such
employment or delegation shall not relieve the Board of Directors of its
responsibilities and obligations under this Agreement or under the laws of the
State of North Carolina nor will it make any such Person a Member of the
Company.

         SECTION 5.5       RIGHT TO RELY UPON THE AUTHORITY OF THE MANAGER.

         Persons dealing with the Company may rely upon the representation of
the Manager that such Manager is the manager of the Company and that such
Manager has the authority to make any commitment or undertaking on behalf of the
Company. No Person dealing with the Manager shall be required to determine its
authority to make any such commitment or undertaking. In addition, no purchaser
from the Company shall be required to determine the sole and exclusive authority
of the Manager to sign and deliver on behalf of the Company any instruments of
transfer with respect thereto or to see to the application or distribution of
revenues or proceeds paid or credited in connection therewith, unless such
purchaser shall have received written notice from the Company affecting the
same.

                           SECTION 5.6       COMPANY EXPENSES; PURCHASE OF GOODS
                           AND SERVICES FROM MEMBERS.

                  (a)      In general, the Company's expenses shall be billed
         directly to and paid by the Company. The Company shall reimburse SFHM
         and its Affiliates for (i) the Organization Expenses listed on Schedule
         5.6; (ii) the actual costs to the Manager or its Affiliates of goods,
         services, and materials used for and by the Company; and (iii) all
         reasonable travel expenses incurred after the date of this Agreement
         and other out-of-pocket expenses incurred by Manager and the Directors
         in the development and management of the Company and its business. The
         reimbursement for expenses provided for in this Section 5.6(a) shall be
         made to SFHM and the Directors or their Affiliates regardless of
         whether any distributions are made to the Members under Article VI and
         Article VII.

                  Goods and services may be purchased from Members or their
         Affiliates as long as they are of a substantially the same quality and
         price as could be obtained from an unrelated third party. It is
         intended that SFHM and its Affiliates shall have the first


                                       13
<PAGE>   18

         opportunity to provide information and accounting and human resource
         services to be purchased by the Company and that McKennan shall have
         the first opportunity to provide other support services to be purchased
         by the Company which McKennan is qualified to provide. Any such
         purchase of goods and services by the Company from Members is further
         subject to the following:

                           (x)      Other than for reimbursement for
                  out-of-pocket travel costs and expenses (airfare, lodging and
                  other similar expenses), the Company shall not be charged for
                  the time of senior management of MedCath and of its Hospital
                  Division;

                           (y)      To the extent that the Company is purchasing
                  services from SFHM or its Affiliates, reimbursement shall
                  include the expenses for each full-time equivalent, or a
                  portion thereof, assigned directly to the business of the
                  Hospital even though such person may be employed outside of
                  the Sioux Falls area;

                           (z)      The actual costs of the information system
                  (hardware and software) incurred by SFHM or its Affiliates for
                  the direct benefit of the Company shall be reimbursed by the
                  Company.

                  (b)      The Company shall also pay the following expenses of
         the Company anticipated to be incurred by the Company in the course of
         the development, construction and operation of the Hospital:

                           (i)      All development and operational expenses of
                  the Company, which may include, but are not limited to:
                  expenses as set forth in Section 5.14, the salary and related
                  expenses of employees and staff of the Hospital, all costs of
                  borrowed money, taxes, and assessments on the Hospital, and
                  other taxes applicable to the Company; expenses in connection
                  with the acquisition, maintenance, leasing, refinancing,
                  operation, and disposition of the Equipment, furniture and
                  fixtures of the Hospital (including legal, accounting, audit,
                  commissions, engineering, appraisal, and the other fees); and
                  the maintenance of the Hospital and its equipment, which may
                  be performed by SFHM or one of its Affiliates as long as the
                  charges to the Company for such service are no greater than
                  the charges for such service from a third party service
                  provider;

                           (ii)     In addition to reimbursements and other
                  amounts due hereunder, an Operating and Licensing Fee shall be
                  paid to SFHM pursuant to the Management Agreement;

                           (iii)    A medical director's fee in an amount
                  approved by the Board of Directors to be paid to the medical
                  director of the Hospital pursuant to the Medical Director
                  Agreement; and

                           (iv)     All fees and expenses paid to third parties
                  for accounting, legal, documentation, professional, and
                  reporting services to the Company, which may


                                       14
<PAGE>   19

                  include, but are not limited to: preparation and documentation
                  of Company bookkeeping, accounting and audits; preparation and
                  documentation of budgets, cash flow projections, and working
                  capital requirements; preparation and documentation of Company
                  state and federal tax returns; and taxes incurred in
                  connection with the issuance, distribution, transfer,
                  registration, and recordation of documents evidencing
                  ownership of a Membership Interest in the Company or in
                  connection with the business of the Company; expenses in
                  connection with preparing and mailing reports required to be
                  furnished to the Members for tax reporting or other purposes,
                  including reports, if any, that may be required to be filed
                  with any federal or state regulatory agencies, or expenses
                  associated with furnishing reports to Members which the Board
                  of Directors deems to be in the best interest of the Company;
                  expenses of revising, amending, converting, modifying, or
                  terminating the Company or this Agreement; costs incurred in
                  connection with any litigation in which the Company is
                  involved as well as any examination, investigation, or other
                  proceedings conducted by any regulatory agency involving the
                  Company; costs of any computer equipment or services used for
                  or by the Company; and the costs of preparing and
                  disseminating informational material and documentation
                  relating to a potential sale, refinancing, or other
                  disposition of the Hospital or the Equipment.

                           (v)      An annual guaranty fee shall be payable to
                  SFHM or one of its Affiliates and McKennan in the event that
                  SFHM or one of its Affiliates and McKennan guarantee (and such
                  guarantees have been approved by the applicable third-party
                  lenders) any financing, lease, or other obligation or
                  liability of the Company as set forth in Section 3.5(b), equal
                  to a total of one and one-quarter (1 1/4%) percent per annum
                  of the amount so guaranteed from time to time by SFHM or one
                  of its Affiliates and McKennan multiplied by the aggregate
                  percentage Membership Interest in the Company owned by the
                  Members other than SFHM and McKennan (the "Guarantee Fee").
                  Said fee shall be payable by the Company in monthly
                  installments each year during which any such guarantee of SFHM
                  or one of its Affiliates and McKennan remains in effect and
                  shall be paid one-half (1/2) to SFHM and one-half (1/2) to
                  McKennan. No such fee shall be paid unless any such guaranty
                  is currently effective and the dollar amount of such fee shall
                  accordingly decline as the amount of any liability required to
                  be guaranteed declines. In the event that McKennan withdraws
                  as a Member in accordance with the terms and conditions of
                  Section 8.7, then the entire Guarantee Fee shall thereafter be
                  paid only to SFHM and its Affiliates. Further, in the event
                  that McKennan is released from its obligations and liabilities
                  with respect to any guarantee of any indebtedness of the
                  Company in accordance with the terms and conditions of Section
                  12.11(b), then thereafter the entire Guarantee Fee shall be
                  paid solely to SFHM and its Affiliates.

         SECTION 5.7       NO MANAGEMENT BY MEMBERS.

         The Members shall take no part in, or at any time interfere in any
manner with, the management, conduct, or control of the Company's business and
operations and shall have no


                                       15
<PAGE>   20

right or authority to act for or bind the Company except as set forth in this
Agreement. The rights and powers of such Members shall not extend beyond those
set forth in this Agreement and those granted under the Articles of Organization
and any attempt to participate in the control of the Company in a manner
contrary to the rights and powers granted herein and under the Articles of
Organization shall be null and void and without force and effect. Subject to the
decisions and judgment with respect to all professional medical or clinical
matters of qualified medical personnel, the Board of Directors shall have the
right to determine when and how the operations of the Company shall be
conducted. The exercise by any other Member of any of the rights granted to the
Members hereunder shall not be deemed to be taking part in the control of the
business of the Company and shall not constitute a violation of this Section.

                           SECTION 5.8       CONSENT BY MEMBERS TO EXERCISE OF
                           CERTAIN RIGHTS AND POWERS BY BOARD OF DIRECTORS.

         By its execution hereof, each Member expressly consents to the exercise
by the Board of Directors of the rights, powers, and authority conferred on the
Board of Directors by this Agreement.

         SECTION 5.9.      MEETINGS, QUORUM AND VOTE OF THE BOARD OF DIRECTORS.

                  (a)      The Board of Directors shall meet at least quarterly.
         Notice of any meeting, regular or special, shall be delivered to each
         Director personally, by telephone, by electronic mail, by facsimile
         transmission or in writing at least five business days before the
         meeting.

                  (b)      An emergency meeting of the Board of Directors may be
         called by the Director upon shorter notice. Action taken at the
         emergency meeting shall be valid so long as the meeting is attended by
         at least two Board members who are representatives of each Initial
         Member and the action is approved in accordance with (e) below.

                  (c)      The Board of Directors shall elect one of its members
         to preside over the meetings as the Chairperson and one of its members,
         as the Secretary, to oversee the preparation and delivery of meeting
         notices and the preparation of minutes of the meetings of the Board of
         Directors and Members.

                  (d)      A quorum of the Board of Directors shall be necessary
         for to conduct business at any meeting. A quorum shall consist of six
         (6) Directors and must include two Directors designated by each Initial
         Member. A Director may attend a meeting by telephone or other
         electronic means and be considered present for purposes of a quorum so
         long as the telephone or other connection allows each Director to hear
         and be heard by all other Directors.

                  (e)      Except as provided in Section 5.14 or as otherwise
         expressly provided in this Agreement, any action taken by the Board of
         Directors shall require the affirmative vote of at least two (2)
         Directors appointed by each Initial Member.


                                       16
<PAGE>   21

                  (f)      Any action which is required to be or may be taken at
         a meeting of the Board of Directors may be taken without a meeting if
         consent in writing, either collectively or in counterparts, setting
         forth the action so taken, is signed by the number of Directors
         required for approval as set forth in (e) above.

                  (g)      Attendance at a meeting of the Board of Directors
         constitutes waiver of any objection to the Notice of the meeting.

         SECTION 5.10      OTHER BUSINESS OF MEMBERS.

                  (a)      Subject to the terms and conditions of (b) below, any
         Member may engage independently or with others in other business
         ventures of every nature and description, including without limitation
         the purchase of medical equipment, the rendering of medical services of
         any kind, and the making or management of other investments and neither
         the Company nor any Member shall have any right by virtue of this
         Agreement or the relationship created hereby in or to such other
         ventures or activities or to the income or proceeds derived therefrom,
         and the pursuit of such ventures.

                  (b)      Except as otherwise expressly provided herein, as
         long as any Member owns a Membership Interest in the Company, and for a
         period of three (3) years after a Member ceases for any reason to own a
         Membership Interest in the Company, neither a Member nor any of its
         respective Affiliates, shall hold, directly or indirectly, an
         investment, ownership or other beneficial interest in (x) any hospital,
         or (y) any other Entity (including a sole proprietorship) which
         provides any of the following services or facilities (collective "CV
         Services and Facilities"): cardiac catheterization, angioplasty,
         peripheral angioplasty, atherectomy, stenting and PTCA or other
         cardiovascular surgical procedures or services, in any case within a
         one hundred fifty (150) mile radius of the Hospital (the "Territory");
         provided, however, the restriction set forth above shall be subject to
         the following exceptions:

                           (i)      No Member or Affiliate of a Member who is a
                  physician shall be prohibited from maintaining his or her
                  staff privileges and admitting and treating patients at any
                  other hospital and from billing and receiving professional
                  fees payable as a result of his or her professional medical
                  services provided directly to patients;

                           (ii)     Nothing herein shall prohibit a Member or
                  Affiliate of a Member from owning up to three percent (3%) of
                  the outstanding capital stock of a company whose stock is
                  publicly traded and listed on a nationally recognized
                  securities exchange or from investing in a publicly traded
                  mutual fund or making other investments with the prior written
                  approval of the Board of Directors;

                           (iii)    Affiliates of NCHI may provide diagnostic
                  catheterization services at the 69th Street and Louise
                  Development or in lieu thereof, at its primary offices
                  (located outside of a hospital) and may own an interest in an
                  outpatient surgical


                                       17
<PAGE>   22

                  hospital to be located in the Development as long as no other
                  CV Services and Facilities are included or provided therein;

                           (iv)     Any Member which owns or operates a hospital
                  as of the date hereof, directly or through an Affiliate,
                  within the Territory at the time of the formation of the
                  Company may continue to provide at the location of its
                  existing hospital diagnostic catheterization or such other
                  cardiac services as are necessary to provide emergency care
                  within the standard of the community or to stabilize the
                  medical condition of its patients in preparation for transfer
                  to another facility for treatment of the cardiac condition,

                           (v)      SFHM or its Affiliates may maintain its
                  interest in the catheterization laboratory located in Dakota
                  Dunes, South Dakota and may separately operate a mobile
                  catheterization laboratory within the Territory, but only if
                  either SFHM or an Affiliate thereof is providing such service
                  pursuant to a lease of six (6) months or less to a provider
                  who is already providing cath lab services and if the Board of
                  Directors has elected not to have such service provided by the
                  Company;

                           (vi)     For Affiliates of McKennan (but not McKennan
                  itself) which own hospitals as of the date hereof, the
                  "Territory" shall be limited to the area within a fifty (50)
                  mile radius of the Hospital;

                           (vii)    Each Member and their Affiliates may own
                  interests in other services and facilities providing
                  diagnostic services of any type or nature in the area which is
                  outside of the fifty (50) mile radius of the Hospital, it
                  being acknowledged however that this exception shall not
                  permit Members and their Affiliates to own interests in any
                  Entity or facility providing therapeutic cardiology or
                  cardiovascular services within the remainder of the Territory.

                  (c)      In order to ensure that the Hospital has available to
         it at all times leading and qualified cardiologists and cardiovascular
         surgeons, as of the date hereof the Company is entering into the
         Hospital Professional Services Agreement (the "Professional Service
         Agreement") with North Central Heart Institute, P.C. (the "Practice"),
         which Agreement includes in paragraph 7 thereof certain covenants by
         the Practice and its physicians which are designed to ensure that such
         physicians will be available to the Hospital from time to time in order
         to enable it to meet its objectives of being a quality provider of
         cardiology and cardiovascular services on cost efficient basis. The
         parties acknowledge and agree that the Practice's execution of the
         Professional Service Agreement is further consideration for the
         execution by the Members of this Agreement.

                  (d)      The Company shall not permit the Hospital to provide
         services and procedures which are generally performed by physicians
         other than (x) those typically performed from time to time by
         cardiologists, cardiothoracic surgeons and vascular surgeons and (y)
         other services and procedures of any type or nature required by a
         patient


                                       18
<PAGE>   23

         of the Hospital first admitted for the types of services or procedures
         identified in (x) above;

                  (e)      The Members have reviewed the term and geographical
         restrictions included in Section 5.10(b), and in light of the interests
         of the parties hereto, agree that such restrictions are fair and
         reasonable.

                  (f)      If there is a breach or threatened breach of the
         provisions of this Section 5.10 of this Agreement, in addition to other
         remedies at law or equity, the non-breaching parties shall be entitled
         to injunctive relief. The parties desire and intend that the provisions
         of this Section 5.10 shall be enforced to the fullest extent
         permissible under the law and public policies applied, but the
         unenforceability or modification of any particular paragraph,
         subparagraph, sentence, clause, phrase, word, or figure shall not be
         deemed to render unenforceable the remainder of this Section 5.10.
         Should any such paragraph, subparagraph, sentence, clause, phrase,
         word, or figure be adjudicated to be wholly invalid or unenforceable, a
         court with applicable authority is hereby authorized to "blue pencil"
         or modify this Section, the balance of this Section 5.10 shall
         thereupon be modified in order to render the same valid and enforceable
         and the unenforceable portion of this Section 5.10 shall be deemed to
         have been deleted from this Agreement.

                  (g)      The Company, the Board of Directors and the Members
         agree that the benefits to any Member hereunder do not require, are not
         payment for, and are not in any way contingent upon the referral,
         admission or any other arrangement for the provision of any item or
         service offered by the Company to patients of such Member or any
         physician owner or Affiliate of such Member or any physician owner or
         Affiliate of such Member in any facility, laboratory, cardiac
         catheterization facility or other health care operation controlled,
         managed or operated by the Company and nothing herein is intended to
         prohibit any party from practicing medicine at any other facility.

                  (h)      If a Member is a legal entity and not an individual,
         such Member shall cause each of its existing and future Affiliates to
         agree in writing to be personally bound by the terms of this Section
         5.10.

         SECTION 5.11      BOARD OF DIRECTORS' STANDARD OF CARE.

         Each Director shall act in a manner he or she believes in good faith to
be in the best interest of the Company and with such care as an ordinarily
prudent Person in a like position would use under similar circumstances. In
discharging its duties, each Director shall be fully protected in relying in
good faith upon the records required to be maintained under this Agreement and
upon such information, opinions, reports and statements by any of its other
Directors, Members, or agents, or by any other Person as to matters each
Director reasonably believes are within such other Person's professional or
expert competence and who has been selected with reasonable care by or on behalf
of the Company, including information, opinions, reports or statements as to the
value and amount of the assets, liabilities, income or losses of the Company or
any other facts pertinent to the existence and amount of assets from which
distributions to members might properly be paid.


                                       19
<PAGE>   24

         Notwithstanding anything herein to the contrary, a Director or Member
shall have the right to vote or approve Company matters in accordance with the
terms of this Agreement regardless of the personal interest of any Member or
Director in the outcome of any vote, decision or matter.

         SECTION 5.12      LIMITATION OF LIABILITY.

         A Director shall not be liable to the Company or its Members for any
action taken in managing the business or affairs of the Company if it performs
the duty of its office in compliance with the standard contained in Section
5.11. No Director has guaranteed nor shall have any obligation with respect to
the return of a Member's Capital Contribution or share of income from the
operation of the Company. Furthermore, no Director, its Affiliates or its
employees (collectively, its "Agents") shall be liable to the Company or to any
Member for any loss or damage sustained by the Company or any Member except loss
or damage resulting from gross negligence or intentional misconduct or knowing
violation of law or a transaction for which such Director or Agent received a
personal benefit in violation or breach of the provisions of this Agreement.

         SECTION 5.13      INDEMNIFICATION OF THE DIRECTORS.

                  (a)      Each Director and its Agents shall be indemnified by
         the Company against any losses, judgments, liabilities, expenses,
         including attorneys' fees and amounts paid in settlement of any claims
         sustained by such Director arising out of any action or inaction of the
         Director and its Agents in its capacity as a Director of the Company to
         the fullest extent allowed by law, provided that the same were not the
         result of gross negligence or willful misconduct on the part of the
         Director or an Agent and provided that the Director or an Agent, in
         good faith, reasonably determined that such course of conduct was in
         the best interest of the Company; provided, however, that such
         indemnification and agreement to hold harmless shall be recoverable
         only out of Company assets. Subject to applicable law, the Company
         shall advance expenses incurred with respect to matters for which a
         Director may be indemnified hereunder.

                  (b)      If at any time, the Company has insufficient funds to
         furnish indemnification as herein provided, it shall provide such
         indemnification if and as it generates sufficient funds and prior to
         any cash distributions, pursuant to Article VI or Article VII hereof,
         to the Members.

         SECTION 5.14      CERTAIN DECISIONS OF THE BOARD OF DIRECTORS.

                  (a)      As long as SFHM and/or its Affiliates and/or McKennan
         are (i) providing a guaranty or are committed to provide a guaranty for
         any indebtedness of the Company, and/or (ii) have any outstanding loans
         to the Company or are committed to provide such loans, then
         notwithstanding anything in this Agreement to the contrary, all
         decisions and actions to be made by the Board of Directors with respect
         to any loan, lease or other similar financing of the development,
         construction or operation of the Hospital or the


                                       20
<PAGE>   25

         Company's affairs (all of which shall be on fair market value terms and
         conditions), including without limitation the decisions with respect to
         incurring any indebtedness or the refinancing thereof, shall be made by
         the Directors designated by SFHM and McKennan and shall be subject to
         the consent of at least one of the Directors appointed by NCHI, which
         consent shall not be unreasonably withheld; provided, the application
         of the Company's funds toward the repayment of all or a portion of any
         financing of the Company provided by third party lenders in excess of
         amounts then required to be paid (i.e., voluntary prepayments) shall be
         made only with the consent of the Board of Directors.

                  (b)      The Board of Directors shall be deemed to have
         specifically approved all expenditures proposed by SFHM under the
         Management Agreement that are substantially consistent with the
         Development Budget Exhibit or an approved operating budget when funded
         from additional Capital Contributions made to the Company by the
         Members pursuant to Section 3.5 above.

                  (c)      The development and annual operating budgets to be
         proposed by SFHM under the Management Agreement shall be approved by
         the Board of Directors as provided above subject to the following:

                           (i)      The Board of Directors shall be deemed to
                  have approved a development budget which is substantially
                  consistent with the attached Development Budget Exhibit to
                  this Agreement;

                           (ii)     No Director shall unreasonably withhold its
                  approval of budgets which are within the reasonable revenue
                  expectations of the Hospital and which are in compliance (both
                  as to terms and availability of financing) with agreements
                  with the Company's lenders and other parties providing
                  financing to the Company; and

                           (iii)    In the event that the Board of Directors are
                  unable to approve an annual budget, SFHM shall be authorized
                  to operate the Company pursuant to the Management Agreement
                  under the previous year's budget increased by the greater of
                  5% or the increase during the previous year in the Consumer
                  Price Index for Medical Items until a new budget is approved.

         SECTION 5.15      MANAGED CARE.

         The Initial Members shall negotiate in good faith with each other
regarding theirs and the Hospital's joint participation in managed care plans,
including without limitation, plans sponsored by McKennan, McKennan or its
Affiliates, including without limitation, Avera Health Plans, Inc., all of which
shall be on terms and conditions acceptable to the Initial Members.


                                       21
<PAGE>   26

                                   ARTICLE VI

                          DISTRIBUTIONS AND ALLOCATIONS

                           SECTION 6.1       DISTRIBUTIONS OF CASH FLOW FROM
                           OPERATIONS AND CASH FROM SALES OR REFINANCING.

         Prior to the dissolution of the Company, and subject to the terms and
conditions to which the Company is bound with respect to its lenders ("Loan
Conditions"), Cash Flow from Operations and Cash from Sales or Refinancing, if
any, remaining after repayment of any amounts currently due with respect to
loans made by the Members to the Company shall be distributed as Cash
Distributions according to the relative percentage Membership Interests of the
Members at such times as the Board of Directors deems appropriate.
Notwithstanding anything herein to the contrary, no distributions shall be made
to Members if prohibited by the Act or any other applicable law.

         The Board of Directors shall, to extent permitted by the Loan
Conditions and subject to the availability of Cash Flow from Operations,
distribute cash annually pro rata to Members in an amount which is sufficient to
enable them to pay income taxes which arise from Profits of the Company. Such
distributions shall assume for all Members the highest combined federal and
state tax rates applicable to any Member with respect to his or its Profits from
the Company.

         SECTION 6.2       PROFITS.

         Except as provided in the Regulatory Allocations Exhibit, Profits shall
be allocated as follows:

         (a)      First, to the Members who have been allocated Losses pursuant
to Subsection 6.3(a) below until the cumulative Profits allocated pursuant to
this Subsection 6.2(a) equal the cumulative prior allocations of Losses under
that Subsection.

         (b)      Next, to the Members who have been allocated Losses pursuant
to Subsection 6.3(b) below until the cumulative Profits allocated pursuant to
this Subsection 6.2(b) equal the cumulative prior allocations of Losses under
that Subsection.

         (c)      All remaining Profits shall be allocated to the Members in
accordance with their percentage Membership Interests.

         SECTION 6.3       LOSSES.

         Except as provided in the Regulatory Allocations Exhibit, Losses shall
be allocated as follows:

         (a)      First, Losses shall be allocated to the Members with positive
Adjusted Capital Account balances in proportion to those balances.


                                       22
<PAGE>   27

         (b)      All remaining Losses shall be allocated to the Members in
accordance with their percentage Membership Interests.

         SECTION 6.4       CODE SECTION 704(C) TAX ALLOCATIONS.

         Income, gain, loss, and deduction with respect to any property
contributed to the capital of the Company shall, solely for tax purposes, be
allocated among the Members so as to take account of any variation between the
adjusted basis of such property to the Company for federal income tax purposes
and its initial Agreed Value pursuant to any method allowable under Code Section
704(c) and the Regulations promulgated thereunder.

         In the event the Agreed Value of any Company asset is adjusted after
its contribution to the Company, subsequent allocations of income, gain, loss
and deduction with respect to such asset shall take into account any variation
between the adjusted basis of such asset for federal income tax purposes and its
Agreed Value pursuant to any method allowable under Code Section 704(c) and the
Regulations promulgated thereunder.

         Any elections or other decisions relating to allocations under this
Section shall be determined by the Board of Directors. Absent a determination by
the Board of Directors, the remedial allocation method under Regulation Section
1.704-3(d) shall be used. Allocations pursuant to this Section are solely for
purposes of federal, state, and local taxes and shall not be taken into account
in computing any Member's Capital Account or share of Profits, Losses, other
items, or distributions pursuant to any provision of this Agreement.

         SECTION 6.5       MISCELLANEOUS.

         (a)      Allocations Attributable to Particular Periods. For purposes
of determining Profits, Losses or any other items allocable to any period, such
items shall be determined on a daily, monthly, or other basis, as determined by
the Board of Directors using any permissible method under Code Section 706 and
the Regulations thereunder.

         (b)      Other Items. Except as otherwise provided in this Agreement,
all items of Company income, gain, loss, deduction, credit and any other
allocations not otherwise provided for shall be divided among the Members in the
same proportion as they share Profits or Losses, as the case may be, for the
year.

         (c)      Tax Consequences; Consistent Reporting. The Members are aware
of the income tax consequences of the allocations made by this Article and by
the Regulatory Allocations and hereby agree to be bound by those allocations as
reflected on the information returns of the Company in reporting their shares of
Company income and loss for income tax purposes. Each Member agrees to report
its distributive share of Company items of income, gain, loss, deduction and
credit on its separate return in a manner consistent with the reporting of such
items to it by the Company. Any Member failing to report consistently, and who
notifies the Internal Revenue Service of the inconsistency as required by law,
shall reimburse the Company for any legal and accounting fees incurred by the
Company in connection with any examination of the Company


                                       23
<PAGE>   28

by federal or state taxing authorities with respect to the year for which the
Member failed to report consistently.

                                   ARTICLE VII

              DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS

         SECTION 7.1       NO TERMINATION BY CERTAIN ACTS OF MEMBER.

         Neither the transfer of interest, withdrawal from the Company,
bankruptcy, insolvency, dissolution, liquidation or other disability, nor the
legal incompetency of any Member shall result in the termination or dissolution
of the Company or affect its continuance in any manner whatsoever.

         SECTION 7.2       DISSOLUTION.

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

                  (a)      The election to dissolve the Company in accordance
         with the terms of Section 3.5(f) hereof;

                  (b)      The expiration of the term of the Company as provided
         in Section 2.5 hereof;

                  (c)      The adjudication of bankruptcy of the Company;

                  (d)      Upon the written consent of the Initial Members;

                  (e)      In accordance with Section 12.11 hereof; and

                  (f)      The entry of a decree of judicial dissolution or the
         administrative dissolution of the Company as provided in the Act.

         SECTION 7.3       DISSOLUTION AND FINAL LIQUIDATION.

                  (a)      Upon any dissolution of the Company, the Company
         shall not terminate, but shall cease to engage in further business
         except to the extent necessary to perform existing contracts and
         preserve the value of its assets. Its assets shall be liquidated and
         its affairs shall be wound up as soon as practical thereafter by the
         Manager or if for any reason there is no Manager, or by another Person
         designated by the Board of Directors. In winding up the Company and
         liquidating assets, the Manager, or other Person so designated for such
         purpose, may arrange, either directly or through others, for the
         collection and disbursement to the Members of any future receipts from
         the Hospital or other sums to which the Company may be entitled, and
         shall sell the Company's interest


                                       24
<PAGE>   29

         in the Hospital and the Equipment to any Person, including any Member
         or any Affiliate thereof, on such terms and for such consideration as
         shall be consistent with obtaining the fair market value thereof, as
         such fair market value is approved by the Members.

                  (b)      Upon any such dissolution and liquidation of the
         Company, the net assets, if any, of the Company available for
         distribution, including any cash proceeds from the liquidation of
         Company assets, shall be applied and distributed in the following
         manner or order, to the extent available:

                           (i)      To the payment of or creation of reserves
                  for all debts, liabilities, and obligations to all creditors
                  of the Company (other than the Members or their Affiliates)
                  and the expenses of liquidation;

                           (ii)     To the payment of all debts and liabilities
                  (including interest) owed to the Members or their Affiliates
                  as creditors; and

                           (iii)    The balance to the Members with positive
                  Capital Account balances after taking into account all other
                  adjustments during the Fiscal Year in which liquidation
                  occurs.

                  (c)      The Members shall look solely to the assets, if any,
         of the Company for any return of their Capital Contributions and, if
         the assets of the Company remaining after payment or discharge of the
         Company's debts and liabilities, or provision therefor, are
         insufficient to return all or any part of the Capital Contributions, no
         Member shall have any right of recourse against the Directors or other
         Members or to charge the Board of Directors or other Members for any
         amounts except as provided herein and except to the extent otherwise
         provided by the Act and/or North Carolina law.

                  (d)      Upon such dissolution, reasonable time shall be
         allowed for the orderly liquidation of the assets of the Company and
         the discharge of liabilities to creditors so as to minimize the losses
         normally attendant to a liquidation.

                  (e)      The Capital Accounts of the Members, as adjusted,
         shall be utilized by the Company for the purpose of making
         distributions to those Members with positive balances in their
         respective Capital Accounts pursuant to Section 7.3(b). In making such
         distributions, the Board of Directors or the Person winding up the
         affairs of the Company shall distribute all funds available for
         distribution to the Members (after establishing any reserves that the
         Board of Directors deems or the Person winding up the affairs of the
         Company deems reasonably necessary pursuant to Section 7.3(b)) prior to
         the later of (a) the end of the taxable year in which the event occurs
         which caused the termination and dissolution of the Company, or (b)
         ninety (90) days after the occurrence of such event. The Board of
         Directors in its sole discretion, or the Person winding up the affairs
         of the Company, in its discretion, may elect to have the Company retain
         any installment obligations owed to the Company until collected in full
         so long as any portion of the reserves which are later determined to be
         unnecessary, and all collections on such installment obligations which
         are not deemed to be reasonably necessary by the Board of


                                       25
<PAGE>   30

         Directors or the Person winding up the affairs of the Company to add to
         such reserves are distributed as soon as practicable in accordance with
         the provisions of Section 7.3(b) as modified by this Section.

         SECTION 7.4       TERMINATION.

         Upon completion of the dissolution, winding up, distribution of the
liquidation proceeds and any other Company assets, the Company shall terminate.

         SECTION 7.5       PAYMENT IN CASH.

         Any payments made to any Member pursuant to this Article VII shall be
made only in cash unless otherwise approved by the Board.

         SECTION 7.6       TERMINATION OF NONCOMPETITION COVENANTS.

         Members shall have no continuing liability or obligation under Section
5.10(b) after the second anniversary of the dissolution of the Company; provided
that if either (a) as a result of a material default thereunder by SFHM, the
Management Services Agreement has been finally terminated after full compliance
with the terms thereof or (b) the Company has been dissolved and terminated in
accordance with Section 7.2(b) or (e) only, then no Member shall have any
obligation arising under Section 5.10 after the dissolution and termination of
the Company. Additionally, if the Company has been dissolved and terminated in
accordance with Section 7.2(a) then during the two (2) year period thereafter,
NCHI and its Affiliates may, directly or indirectly, invest in or own an
interest in a hospital located within a one hundred fifty (150) mile radius of
the location of the Hospital, which hospital provides or includes CV Services
and Facilities, only if each of SFHM and McKennan are provided with the same
opportunity to own or invest therein which shall require that they be entitled
to own the same percentage interest therein for the same pro rata cost and for
the same duration as NCHI except that they shall not be obligated to provide
professional medical services.

                                  ARTICLE VIII

                REMOVAL OR WITHDRAWAL OF MANAGERS AND MEMBERS AND
            TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS

         SECTION 8.1       MEMBERS - RESTRICTION ON TRANSFER.

         (a)      Except as otherwise set forth in this Section or in this
Agreement, no Membership Interest or any portion thereof, shall be validly sold
or assigned whether voluntarily, involuntarily or by operation of law, and no
purported assignee shall be recognized by the Company for any purpose, unless
such Membership Interest shall have been transferred in accordance with the
provisions of this Agreement and in compliance with such additional restrictions
as may be imposed by any federal or state securities regulatory authority or law
and with the consent of the Board of Directors. In no event, however, shall a
Member transfer or sell


                                       26
<PAGE>   31

all or any of its Membership Interest to any party which, if a Member, would be
in violation of Section 5.10 hereof.

         (b)      Except as otherwise set forth in this Section or in this
Agreement, a Member may transfer, sell or assign its entire Membership Interest
only if it has received the approval of the Board of Directors. Subject to the
foregoing: (i) the Company first for a period of fifteen (15) days, and
thereafter the other Members for a period of fifteen (15) days shall have the
right, but not the obligation, to purchase all, but not less than all, of the
Membership Interest proposed to be transferred, which right shall be exercisable
on the terms and for the purchase price set forth in writing in a bona fide
offer made for the Interests by a third-party (the "Right of First Refusal"),
and (ii) there shall have been filed with the Company a duly executed and
acknowledged counterpart of the instrument making such assignment signed by both
the assignor and assignee and such instrument evidences the written acceptance
by the assignee of all of the terms and provisions of the Agreement, represents
that such assignment was made in accordance with all applicable laws and
regulations and the assignee shall have represented to the Company in writing
that it meets the investor suitability standards established by the appropriate
state of residence, or, in the absence thereof, the investor suitability
standards established by the Company. The Board of Directors shall use
reasonable care to determine that transfers are in accordance with applicable
laws and regulations, including obtaining an opinion of counsel to that effect.
Any Member that assigns all its Membership Interest shall cease to be a Member
of the Company. Any Membership Interests acquired by the Company pursuant to
Section 8.1 shall, subject to applicable law, be re-offered by the Company to
suitable investors.

         (c)      Subject to (d) below, any dissolution, liquidation, merger
(unless Members or their Affiliates existing prior to such merger own at least
fifty-one percent (51%) of the surviving entity after the merger or unless both
parties to such merger are majority owned by parties who are Members or their
Affiliates prior to such merger) or sale of a Member which is an Entity (a sale
shall include a transfer of fifty percent (50%) or more of its ownership
interests or of substantially all of its assets or any other transaction or
series of related transactions intended to accomplish, in substance, a sale of
such Entity), which event shall not occur, subject to (d) below, without the
written consent of the other Board of Directors, shall constitute an offer by
such Member to sell such Member's Interest to the Company and the other Members
pursuant to Section 8.6 for a purchase price equal to five (5) multiplied by the
net income (as reasonably determined by the Company's accountants) of the
Company for the twelve (12) month period ending as of the calendar quarter most
recently ended prior to such event multiplied by the percentage Membership
Interest of such Member in the Company (the "Formula Purchase Price"). Any
transaction which invokes or gives rise to MedCath Physician Management, Inc.'s
right of first refusal with respect to North Central Heart Institute, P.C. under
the Right of First Refusal Agreement between such parties also shall be deemed
to be a sale of NCHI for purposes of this Section 8.1(c).

         (d)      Notwithstanding anything herein to the contrary, SFHM may
assign its Membership Interest in the Company and its rights to designate
Directors hereunder (x) to any party who purchases 51% or more of MedCath
Holdings, Inc.'s, MedCath Incorporated's and their subsidiaries' assets or
capital stock if such purchaser (in the case of an asset sale) assumes in
writing the obligations of SFHM hereunder or (y) to a party under control of,
common control,


                                       27
<PAGE>   32

or which controls, SFHM. SFHM may also assign its Membership Interest in the
Company and its right to designate Directors to a financial institution as
collateral security for repayment of indebtedness for borrowed funds by MedCath
Incorporated or its Affiliates.

         SECTION 8.2       CONDITION PRECEDENT TO TRANSFER OF MEMBERSHIP
                           INTEREST.

         Notwithstanding anything herein to the contrary, no transfer of
Membership Interest may be made if such transfer (a) constitutes a violation of
the registration provisions of the Securities Act of 1933, as amended, or the
registration provisions of any applicable state securities laws; (b) if after
such transfer the Company will not be classified as a partnership for federal
income tax purposes; and (c) if when taken together with other prior transfers,
results in a "termination" of the Company for federal income tax purposes. The
Company may require, as a condition precedent to transfer of Membership
Interest, delivery to the Company, at the proposed transferor's expense, of an
opinion of counsel satisfactory (both as to the counsel and substance of the
opinion) to the Company that the transfer will not violate any of the foregoing
restrictions.

         SECTION 8.3       SUBSTITUTE MEMBER - CONDITIONS TO FULFILL.

         No assignee of a Member's Membership Interest in the Company shall have
the right to become a Substitute Member in place of its assignor unless, in
addition to any other requirement herein, all of the following conditions are
satisfied:

                  (a)      The Company has waived its right pursuant to Section
         8.1 to purchase the Membership Interest held by the assignee;

                  (b)      The duly executed and acknowledged written instrument
         of assignment which has been filed with the Company sets forth that the
         assignee becomes a Substitute Member in place of the assignor;

                  (c)      The assignor and assignee execute and acknowledge
         such other instruments as the Board of Directors may deem reasonably
         necessary or desirable to effect such admission, including, but not
         limited to, the written acceptance and adoption by the assignee of the
         provisions of this Agreement;

                  (d)      The payment by the assignee of all costs to the
         Company associated with the transaction, including but not limited to
         legal fees, transfer fees, and filing fees.

         SECTION 8.4       ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE.

         Upon the transfer of a Membership Interest, all items of income, gain,
loss, deduction and credit attributable to the Membership Interest so
transferred shall be allocated between the transferor and the transferee in such
manner as the transferor and transferee agree at the time of transfer; provided
such allocation does not violate federal or state income tax law. If the Board
of Directors, in its sole discretion, deems such laws violated, then such
allocation shall be made pro rata for the fiscal year based upon the number of
days during the applicable fiscal year of the Company that the Membership
Interest so transferred was held by the transferor and transferee,


                                       28
<PAGE>   33

without regard to the results of Company activities during the period in which
each was the holder, or in such other manner as the Board of Directors deems
necessary to comply with federal or state income tax laws. Distributions as
called for by this Agreement shall be made to the holder of record of the
Membership Interest on the date of distribution. Notwithstanding anything
contained in this Agreement to the contrary, the Company shall be entitled to
treat the assignor of any assigned Membership Interest as the absolute owner
thereof in all respects, and shall incur no liability for distributions made in
good faith to such assignor in reliance on the Company records as they exist
until such time as the written assignment has been received by, and recorded on
the books of the Company. For purposes of this Article VIII, the effective date
of an assignment of any Membership Interest shall be the last day of the month
specified in the written instrument of assignment.

         SECTION 8.5       RIGHTS, LIABILITIES OF, AND RESTRICTIONS ON ASSIGNEE.

         No assignee of a Membership Interest shall have the right to
participate in the Company, inspect the books of account of the Company or
exercise any other right of a Member unless and until admitted as a Substitute
Member. Notwithstanding the failure or refusal to admit an assignee as a
Substitute Member, such assignee shall be entitled to receive the share of
income, credit, gain, expense, loss and deduction and cash distributions
provided hereunder that is assigned to it, and, upon demand, may receive copies
of all reports thereafter delivered pursuant to the requirements of this
Agreement; provided, the Company shall have first received notice of such
assignment and all required consents thereto shall have been obtained and other
conditions precedent to transfer thereof shall have been satisfied. The
Company's tax returns shall be prepared to reflect the interests of assignees as
well as Members.

         SECTION 8.6       REPURCHASE OF INTERESTS IN CERTAIN EVENT.

                  (a)      In the discretion of the Board of Directors, the
         Company may, but is not obligated to, repurchase a Member's Membership
         Interest upon such Member's breach of the Member's obligations
         contained in Article III, Sections 5.10, 8.1, and 12.11 of this
         Agreement.

                  (b)      Each Member agrees to sell its Membership Interest to
         the Company in the event the Company elects to exercise the right of
         repurchase granted under Section 8.6(a) and the purchase price shall be
         the lower of (x) the Capital Contributions of the Member less all
         amounts distributed to such Member by the Company, and (y) the Formula
         Purchase Price.

                  (c)      The Directors designated by the Member whose
         activities give rise to the event set forth in Section 8.6(a) shall not
         have a vote hereunder and the other Directors shall make all decisions
         under this Section 8.6 with respect to such activities.

         SECTION 8.7       WITHDRAWAL BY MCKENNAN.

         Notwithstanding anything herein to the contrary, if at any time
following the fifth (5th) anniversary of the date the Hospital first accepts a
patient and has been certified for Medicare


                                       29
<PAGE>   34

reimbursement, the Board of Trustees of McKennan determines that its involvement
in the Hospital materially interferes with McKennan's strategic mission, then
upon ninety (90) days prior written notice, McKennan may elect to withdraw as a
Member in accordance with the following terms and conditions:

                  (a)      NCHI and SFHM shall purchase McKennan's Membership
         Interest, half by NCHI and half by SFHM, based upon a purchase price
         equal to the total of all Capital Contributions made by McKennan prior
         to its withdrawal hereunder less the amount of all distributions of
         cash paid to McKennan through and including such date, which purchase
         price shall be paid twenty-five percent (25%) upon such withdrawal and
         the remainder in equal annual installments on the following three (3)
         anniversaries of such date which amounts shall bear interest at the
         Prime Rate; provided that if such payment schedule will violate any
         obligation of the Company to its lenders, then such payment schedule
         shall be revised so that it does not place the Company in violation of
         such obligation;

                  (b)      McKennan shall have no further liability or
         obligation under Section 5.10(b) hereof;

                  (c)      McKennan shall not be entitled to use for its own
         benefit or for the benefit of any other Person any information of or
         about the Company or the Hospital which the Company reasonably
         determines to be confidential or proprietary;

                  (d)      The Board of Directors thereafter shall be reduced in
         size by the number of Directors previously designated hereunder by
         McKennan; and

                  (e)      SFHM and its Affiliates shall use their reasonable
         best efforts in order to have McKennan released from liabilities and
         obligations which it incurred on behalf of the Company in accordance
         with the terms of this Agreement, including without limitation, any
         guarantees, in which event the entire Guarantee Fee shall thereafter be
         paid only to SFHM and its Affiliates.

         SECTION 8.8       DEATH OF A MEMBER.

         Heirs of Members who are individuals shall be entitled to inherit the
Membership Interests of a deceased Member, provided that upon a Member's death
(or the death of an individual that owns a Member other than any Initial Member)
such interests shall be automatically converted to an Economic Interest only in
the Company until such heir agrees in writing to all of the terms and conditions
of this Agreement and such other reasonable terms as may be established by the
Board, in which event such interest shall again become a Membership Interest in
the Company. Notwithstanding the previous sentence, within one hundred twenty
(120) days of the Company first learning of the death of an individual or of an
individual that owns a Member (other than the Initial Members), the Company
shall have the option to purchase the Membership Interest owned by such deceased
Member directly or through an Entity, and the estate of the deceased individual
shall be obligated to sell such Membership Interest to the Company, in
accordance with the terms of this Section 8.8. The


                                       30
<PAGE>   35

Company may exercise its option by giving written notice thereof to the estate
of the deceased individual, or the appropriate representative thereof, within
such one hundred twenty (120) day period. The purchase price for such Membership
Interest shall equal the Formula Purchase Price. The purchase price shall be
paid in three (3) equal annual installments, the first third of which shall be
paid upon the determination of the purchase price and the remaining two (2)
installments of which shall be paid on the first and second anniversary of such
date. The outstanding amounts due from the Company to the estate of the deceased
individual shall bear interest at Prime Rate as of the date of such individual's
death. Accrued interest shall be paid as of the dates payments of principal are
due as provided above.

                                   ARTICLE IX

                        RECORDS, ACCOUNTINGS AND REPORTS

         SECTION 9.1       BOOKS OF ACCOUNT.

         At all times during the continuance of the Company, the Board of
Directors shall maintain or cause to be maintained true and full financial
records and books of account showing all receipts and expenditures, assets and
liabilities, income and losses, and all other records necessary for recording
the Company's business and affairs including those sufficient to record the
allocations and distributions required by the provisions of this Agreement.

         SECTION 9.2       ACCESS TO RECORDS.

         The books of account and all documents and other writings of the
Company, including the Articles of Organization and any amendments thereto,
shall at all times be kept and maintained at the principal office of the Company
or elsewhere as decided by the Board of Directors. Each Member or its designated
representatives shall, upon reasonable notice to the Company, have access to
such financial books, records and documents during reasonable business hours and
may inspect and make copies of any of them. Each Member shall be responsible to
ensure that the Member and its Affiliates keep all information of the Company
and the Hospital confidential and that it not be used in any manner which would
be adverse to the best interests of the Company and the Hospital. Without
limitation of the foregoing, it is acknowledged and agreed that information
regarding the operation of the Hospital may be used by the Members in order to
enable them to participate in managed care programs with the Hospital.

         SECTION 9.3       BANK ACCOUNTS AND INVESTMENT OF FUNDS.

                  (a)      SFHM, under the Management Agreement, shall open and
         maintain, on behalf of the Company, a bank account or accounts in a
         federally insured bank or savings institution as it shall determine, in
         which all monies received by or on behalf of the Company shall be
         deposited. All withdrawals from such accounts shall be made upon the
         signature of such person or persons as SFHM may from time to time
         designate.


                                       31
<PAGE>   36

                  (b)      Any funds of the Company which SFHM may determine are
         not currently required for the conduct of the Company's business may be
         deposited with a federally insured bank or savings institution or
         invested in short term debt obligations (including obligations of
         federal or state governments and their agencies, commercial paper,
         certificates of deposit of commercial banks, savings banks or savings
         and loan associations) as shall be determined by SFHM in its sole
         discretion.

         SECTION 9.4       FISCAL YEAR.

         The Fiscal Year and accounting period of the Company shall end on
September 30 of each year.

         SECTION 9.5       ACCOUNTING REPORTS.

         As soon as reasonably practicable after the end of each fiscal year but
in no event later than 120 days after the end thereof, each Member shall be
furnished an annual accounting showing the financial condition of the Company at
the end of such fiscal year and the result of its operations for the fiscal year
then ended, which annual accounting shall be prepared on an accrual basis in
accordance with generally accepted accounting principles applied on a consistent
basis and shall be delivered to each of the Members promptly after it has been
prepared. It shall include a balance sheet as of the end of such Fiscal Year and
statements of income and expense, each Member's equity, and cash flow for such
Fiscal Year. At the election of either the Board of Directors or the Manager the
Company shall be audited by a firm of independent certified public accountants
engaged by the Manager on behalf of the Company which shall also be the
accounting firm of the Manager. The report shall set forth the distributions to
the Members for such Fiscal Year and shall separately identify distributions
from (i) operating revenue during such Fiscal Year, (ii) operating revenue from
a prior period which had been held as reserves, (iii) proceeds from the sale or
refinancing of the Equipment, and (iv) unexpended proceeds received from the
sale of Membership Interests. Following the opening of the Hospital, the Manager
shall also cause to be prepared and distributed to the Members quarterly
financial statements.

         SECTION 9.6       TAX MATTERS PARTNER.

         SFHM shall act as the "Tax Matters Partner" of the Company as that term
is defined in Section 6231 of the Code.


                                       32
<PAGE>   37

                                    ARTICLE X

                      MEETINGS AND VOTING RIGHTS OF MEMBERS

         SECTION 10.1      MEETINGS.

                  (a)      Meetings of the Members of the Company for any
         purpose may be called by the Board of Directors or any Initial Member.
         Such meetings shall be held in the Sioux Falls, South Dakota area.

                  (b)      A notice of any such meeting shall be given by mail,
         not less than ten (10) days nor more than sixty (60) days before the
         date of the meeting, to each Member at its address as specified in
         Section 12.7. Such notice shall be in writing, and shall state the
         place, date and hour of the meeting, and shall indicate by whom it is
         being issued. The notice shall state the purpose or purposes of the
         meeting. If a meeting is adjourned to another time or place, and if any
         announcement of the adjournment of time or place is made at the
         meeting, it shall not be necessary to give notice of the adjourned
         meeting.

                  (c)      Each Member may authorize any Person or Persons to
         act for the Member by proxy in all matters in which a Member is
         entitled to participate, whether by waiving notice of any meeting, or
         voting or participating at a meeting. Every proxy must be signed by the
         Member or its attorney-in-fact. No proxy shall be valid after the
         expiration of eleven months from the date thereof unless otherwise
         provided in the proxy. Every proxy shall be revocable at the pleasure
         of the Member executing it.

         SECTION 10.2      VOTING RIGHTS OF MEMBERS.

                  (a)      Each Member shall take no part in or interfere in any
         manner with the control, conduct or operation of the Company, and shall
         have no right or authority to act for or bind the Company except as
         provided herein. Votes or decisions, to the extent taken or to be made,
         of the Members may be cast at any duly called meeting of the Company or
         in writing within ten (10) days after written request therefor. Each
         Member shall be entitled to the number of votes equal to the percentage
         Membership Interest of such Member.

                  (b)      No Member shall have the right or power to vote to:
         (i) withdraw or reduce the Member's Capital Contributions except as a
         result of the dissolution and liquidation of the Company or as
         otherwise provided by law or this Agreement; (ii) bring an action for
         partition against the Company; (iii) cause the termination and
         dissolution of the Company by court decree or otherwise, except as set
         forth in this Agreement; or (iv) demand or receive property other than
         cash in return for its Capital Contributions.


                                       33
<PAGE>   38

                                   ARTICLE XI

                                   AMENDMENTS

         SECTION 11.1      AUTHORITY TO AMEND BY THE BOARD OF DIRECTORS.

         Except as otherwise provided by Section 11.2, this Agreement and the
Articles of Organization of the Company may be amended by the Board of
Directors:

                  (a)      To admit additional Members or Substitute Members but
         only in accordance with and if permitted by the other terms of this
         Agreement;

                  (b)      To preserve the legal status of the Company as a
         limited liability company under the Act or other applicable state or
         federal laws if such does not change the substance hereof, and the
         Company has obtained the written opinion of its counsel to that effect;

                  (c)      To cure any ambiguity, to correct or supplement any
         provision herein which may be inconsistent with any other provision
         herein, to clarify any provision of this Agreement, or to make any
         other provisions with respect to matters or questions arising under
         this Agreement which will not be inconsistent with the provisions of
         this Agreement;

                  (d)      To satisfy the requirements of the Code and
         Regulations with respect to limited liability companies or of any
         federal or state securities laws or regulations, provided such
         amendment does not adversely affect the Membership Interests of Members
         and is necessary or appropriate in the written opinion of counsel and
         any amendment under this subsection (d) shall be effective as of the
         date of this Agreement;

                  (e)      To the extent that it can do so without materially
         reducing the economic return on investment in the Company to any
         Member, to satisfy any requirements of federal or state legislation or
         regulations, court order, or action of any governmental administrative
         agency with respect the operation or ownership of the Hospital; and

                  (f)      Subject to the terms of Section 2.6, to extend the
         term of the Company.

                                    SECTION 11.2      RESTRICTIONS ON THE BOARD
                                    OF DIRECTORS' AMENDMENTS: AMENDMENTS BY
                                    MEMBERS.

         Except as provided in Section 11.1, amendments to this Agreement shall
be made only upon the consent of all Initial Members. Except as set forth in
this Section 11.2, no amendment shall be made pursuant to Section 11.1 which
would materially and adversely affect the federal income tax treatment to be
afforded each Member, materially and adversely affect the Membership Interests
and liabilities of each Member as provided herein, materially change the
purposes of the Company, extend or otherwise modify the term of the Company, or
materially change the method of allocations and distributions as provided in
Article VI and Article VII.


                                       34
<PAGE>   39

         SECTION 11.3      AMENDMENTS TO CERTIFICATES.

         In making any amendments to this Agreement, there shall be prepared,
executed and filed for recording by the Board of Directors such documents
amending the Articles of Organization as required under the Act.

                                   ARTICLE XII

                                  MISCELLANEOUS

         SECTION 12.1      LIMITED POWER OF ATTORNEY.

         Upon the execution hereof, each Member hereby irrevocably constitutes
and appoints the Directors it has appointed as its true and lawful attorney in
the Member's name and on the Member's behalf to take at any time all such action
which such Directors is expressly authorized to perform, or which a Member is
expressly required to perform, under this Agreement.

         SECTION 12.2      WAIVER OF PROVISIONS.

         The waiver of compliance at any time with respect to any of the
provisions, terms or conditions of this Agreement shall not be considered a
waiver of such provision, term or condition itself or of any of the other
provisions, terms or conditions hereof.

         SECTION 12.3      INTERPRETATION AND CONSTRUCTION.

         This Agreement, together with the Management Services Agreement, the
Hospital Professional Services Agreement and the Right of First Refusal
Agreement between MedCath Physician Management, Inc. and North Central Heart
Institute, P.C. contain the entire agreement among the Members. Any modification
or amendment hereto must be accomplished in accordance with the provisions of
Article XI and Article XII. Where the context so requires, the masculine shall
include the feminine and the neuter, and the singular shall include the plural.
The headings and captions in this Agreement are inserted for convenience and
identification only and are in no way intended to define, limit or expand the
scope and intent of this Agreement or any provision thereof. The references to
Section and Article in this Agreement are to the Sections and Articles of this
Agreement.

         SECTION 12.4      GOVERNING LAW.

         This Agreement shall be governed by and construed in accordance with
the laws of the State of North Carolina, exclusive of its conflict of law rules.


                                       35
<PAGE>   40

         SECTION 12.5      PARTIAL INVALIDITY.

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

         SECTION 12.6      BINDING ON SUCCESSORS.

         The terms, conditions and provisions of this Agreement shall inure to
the benefit of, and be binding upon the parties hereto and their respective
heirs, successors, distributees, legal representatives, and assigns. However,
none of the provisions of this Agreement shall be for the benefit of or
enforceable by any creditors of the Company.

         SECTION 12.7      NOTICES AND DELIVERY.

                  (a)      To Members. Any notice to be given hereunder at any
         time to any Member or any document reports or returns required by this
         Agreement to be delivered to any Member, may be delivered personally or
         mailed to such Member, postage prepaid, addressed to the Member at such
         times as the Member shall by notice to the Company have designated as
         the Member's address for the mailing of all notices hereunder or, in
         the absence of such notice, to the address set forth in the Information
         Exhibit (Exhibit A) hereof. Any notice, or any document, report or
         return so delivered or mailed shall be deemed to have been given or
         delivered to such Member at the time it is mailed, as the case may be.

                  (b)      To the Company. Any notice to be given to the Company
         hereunder shall be delivered personally or mailed to the Company, by
         certified mail, postage prepaid, addressed to the Company at its
         registered office. Any notice so delivered or mailed shall be deemed to
         have been given to the Company at the time it is delivered or mailed,
         as the case may be.

         SECTION 12.8      COUNTERPART EXECUTION; FACSIMILE EXECUTION.

          This Agreement may be executed in any number of counterparts with the
same effect as if all of the Members had signed the same document. Such
executions may be transmitted to the Company and/or the other Members by
facsimile and such facsimile execution shall have the full force and effect of
an original signature. All fully executed counterparts, whether original
executions or facsimile executions or a combination, shall be construed together
and constitute one and the same agreement.

         SECTION 12.9      STATUTORY PROVISIONS.

         Any statutory reference in this Agreement shall include a reference to
any successor to such statute and/or revision thereof.


                                       36
<PAGE>   41

         SECTION 12.10     WAIVER OF PARTITION.

         Each party does hereby waive any right to partition or the right to
take any other action which might otherwise be available to such party for the
purpose of severing its relationship with the Company or such party's interest
in the assets held by the Company from the interests of other Members until the
end of the term of both this Company and any successor company formed pursuant
to the terms hereof.

         SECTION 12.11     CHANGE IN LAW.

                  (a)      Other than to the extent related to McKennan's
         tax-exempt status, if due to any new law, rule or regulation, or due to
         an interpretation or enforcement of any existing law, rule or
         regulation, health care counsel reasonably selected by SFHM and
         reasonably approved by the Board of Directors, determines in writing
         that it is reasonably likely that the relationships established between
         any of the parties to this Agreement including any of their Affiliates
         and/or successors or assigns will not comply with any law, rule,
         regulation or interpretation thereof ("Applicable Law"), then the
         parties hereto shall be given notice thereof (a "Change of Law Event").
         If the Initial Members disagree with whether a Change of Law Event
         exists and that disagreement is not resolved among such parties within
         the following thirty (30) days, then that disagreement shall be
         resolved by arbitration under Section 12.16 hereof. If a Change of Law
         Event is determined to exist, then the parties hereto hereby agree
         first, to negotiate in good faith to restructure the relationships
         established under this Agreement so as to bring them into compliance
         with such applicable laws while at the same time preserving the
         material benefits of each of the parties hereto. In the event that a
         specific proposal for the restructuring of this Agreement is approved
         by the Board of Directors and the Initial Members, such restructured
         agreement shall become binding upon all Members of the Company. Second,
         in the event that within forty-five (45) days following the Company's
         receipt of legal advice in writing from such health care counsel
         regarding Applicable Law the parties hereto are unable to negotiate an
         acceptable restructuring of their relationship, then, if one or more
         Member's ownership is not involved in such non-compliance, such Members
         shall have the option, within the following forty-five (45) day period,
         to purchase the Membership Interests of each Member whose ownership is
         involved with such noncompliance with Applicable Law for a purchase
         price equal to the greater of: (a) the Formula Purchase Price or (b)
         the amount of the Capital Contributions made by such Member to the
         Company together with interest thereon computed at the Prime Rate as of
         the date of this Agreement from the date of such contribution through
         the date upon which the purchasing Members pays all amounts due under
         the terms of this Section 12.11. For these purposes, distributions to
         the Members by the Company after the effective date of this Agreement
         (and whether before or after health care counsel determined there was a
         problem under an Applicable Law or before or after the exercise of the
         purchase option) shall be treated as payments by the purchasing
         Members. Such purchase price shall be paid in accordance with the
         Payment Method. Third, in the event that the compliant Members do not
         exercise their option to purchase Membership Interests of a Member
         whose ownership causes the Company not to be in compliance with
         Applicable Law, any Member may elect in writing within the following
         forty-five


                                       37
<PAGE>   42

         (45) day period, to require that the Company be dissolved, in which
         event the Company shall be dissolved in accordance with the terms of
         this Agreement.

                  (b)      (i)      In the event, that nationally recognized tax
         counsel of McKennan, but who prior to their engagement for purposes of
         this Agreement have not previously represented McKennan or any of its
         Affiliates with respect to this transaction, and which tax counsel is
         selected with the approval of SFHM, which approval shall not be
         unreasonably withheld (Jones, Day, Reavis and Pogue is hereby approved
         for such purpose), reasonably determines in writing after consultation
         with SFHM, the other Members and their counsel, and after using their
         reasonable best efforts to avoid such determination, that as a result
         of any change in any law or regulation or change in the interpretation
         of an existing law or regulation after the date hereof, that the
         existence of (x) McKennan's Membership Interest in the Company, both
         directly and alternatively through a for-profit subsidiary of McKennan
         of which McKennan is the sole shareholder (the "McKennan's Sub") to
         which it assigns (or to which it is entitled to assign under the terms
         of this Agreement) its Membership Interest or (y) McKennan's obligation
         under Section 3.5(b) to guarantee a portion of the Company's
         indebtedness, will result in McKennan losing its tax-exempt status,
         McKennan may give notice in writing to the Company and the Members of
         that fact (the "Tax-Exempt Event"). Any disagreement among the Initial
         Members regarding whether a Tax-Exempt Event then exists shall first be
         resolved either among the Initial Members themselves during the
         following thirty (30) day period, and absent such resolution, by
         arbitration under Section 12.16. Thereafter, if a Tax-Exempt Event has
         been determined to exist, then the parties agree to the following:

                                    (A)      The parties hereto shall in good
                           faith consider and discuss with one another mutually
                           acceptable alternatives to revise this Agreement in a
                           manner which would prevent McKennan from losing its
                           tax-exempt status but which would not materially
                           alter the substance of the transaction among the
                           parties and would not substantially diminish the
                           material benefits of the transaction to any party.

                                    (B)      If (x) the parties have failed to
                           renegotiate the Agreement in a mutually acceptable
                           manner as provided in (A) above, (y) the assignment
                           by McKennan of its Membership Interest to the
                           McKennan Sub (which McKennan is hereby obligated to
                           do if it will assist in McKennan maintaining its
                           tax-exempt status) will not enable McKennan to avoid
                           the loss of its tax-exempt status and (z) if
                           McKennan's being released from its obligations and
                           liabilities to guarantee any indebtedness of the
                           Company will avoid McKennan's loss of its tax-exempt
                           status, then conditioned upon the execution and
                           delivery by the McKennan Sub of a reimbursement
                           agreement providing for the McKennan Sub's
                           reimbursement of SFHM for all amounts of principal,
                           interest and other costs paid by SFHM or its
                           Affiliates under its guarantees of the Company's
                           indebtedness which absent the application of this
                           subsection would have been paid by McKennan or its
                           Affiliates, and (3) the approval of such arrangement
                           by the Company's lenders, then SFHM and its parent


                                       38
<PAGE>   43

                           MedCath Incorporated shall assume all liability and
                           obligation of McKennan and its affiliates for their
                           guaranty of the Company's debt.

                           Rather than assigning its guarantee to SFHM and
                           paying the Guarantee Fee as provided above, McKennan
                           and its affiliates shall have the right to use any
                           other commercially reasonable alternative for
                           obtaining a release of McKennan from any obligation
                           or liability to guarantee the debts of the Company as
                           long as such alternative does not impose any cost,
                           expense, liability or obligation upon the Company or
                           any of its other Members.

         SECTION 12.12     INVESTMENT REPRESENTATIONS OF THE MEMBERS.

                  (a)      Each Member or individual executing this Agreement on
         behalf of an Entity which is a Member hereby represents and warrants to
         the Company and to the Members that such Member has acquired such
         Member's Membership Interest in the Company for investment solely for
         such Member's own account with the intention of holding such Membership
         Interest for investment, without any intention of participating
         directly or indirectly in any distribution of any portion of such
         Membership Interest and without the financial participation of any
         other Person in acquiring such Membership Interest in the Company.

                  (b)      Each Member or individual executing this Agreement on
         behalf of an entity which is a Member hereby acknowledges that such
         Member is aware that such Member's Membership Interest in the Company
         has not been registered (i) under the Securities Act of 1933, as
         amended (the "Federal Act"), (ii) under applicable South Dakota
         securities laws, or (iii) under any other state securities laws. Each
         Member or individual executing this Agreement on behalf of an Entity
         which is a Member further understands and acknowledges that his
         representations and warranties contained in this Section are being
         relied upon by the Company and by the Members as the basis for the
         exemption of the Members' Membership Interest in the Company from the
         registration requirements of the Federal Act and from the registration
         requirements of applicable South Dakota securities laws and all other
         state securities laws. Each Member or individual executing this
         Agreement on behalf of an Entity which is a Member further acknowledges
         that the Company will not and has no obligation to recognize any sale,
         transfer, or assignment of all or any part of such Member's Membership
         Interest in the Company to any Person unless and until the provisions
         of this Agreement hereof have been fully satisfied.

                  (c)      Each Member or individual executing this Agreement on
         behalf of an Entity which is a Member hereby acknowledges that prior to
         his execution of this Agreement, such Member received a copy of this
         Agreement and that such Member has examined this Agreement or caused
         this Agreement to be examined by such Member's representative or
         attorney. Each Member or individual executing this Agreement on behalf
         of an Entity which is a Member hereby further acknowledges that such
         Member or such Member's representative or attorney is familiar with
         this Agreement and with the Company's business plans. Each Member or
         individual executing this Agreement on


                                       39

<PAGE>   44
         behalf of an Entity which is a Member acknowledges that such Member or
         such Member's representative or attorney has made such inquiries and
         requested, received, and reviewed any additional documents necessary
         for such Member to make an informed investment decision and that such
         Member does not desire any further information or data relating to the
         Company or to the Members. Each Member or individual executing this
         Agreement on behalf of an Entity which is a Member hereby acknowledges
         that such Member understands that the purchase of such Member's
         Membership Interest in the Company is a speculative investment
         involving a high degree of risk and hereby represents that such Member
         has a net worth sufficient to bear the economic risk of such Member's
         investment in the Company and to justify such Member's investing in a
         highly speculative venture of this type.

         SECTION 12.13     REFERRALS TO HOSPITAL AND OWNERSHIP OF SHARES OF
COMMON STOCK OF MEDCATH HOLDINGS, INC.

         Each Member agrees that if in the reasonable opinion of health care
counsel of MedCath Incorporated, referrals of patients to the Hospital by a
Member or a physician owner or Affiliate of a Member or ownership of shares of
common stock in MedCath Holdings, Inc. by a Member or a physician owner or
Affiliate of an Owner would cause or constitute a violation of any federal or
state law, rule or regulation, then, as applicable,

         (a)      the Member or a physician owner or Affiliate of an Owner shall
not refer patients to the Hospital; and

         (b)      the Member or a physician owner or Affiliate of an Owner shall
not acquire, nor continue to own any of shares of common stock of MedCath
Holdings, Inc.

         SECTION 12.14     ACKNOWLEDGMENTS REGARDING LEGAL REPRESENTATION.

         (a)      Each of the Members hereunder acknowledge and agree that Moore
& Van Allen, PLLC is counsel for Sioux Falls Hospital Management, Inc., MedCath
Incorporated and their Affiliates, and may, upon approval of the Board of
Directors, also serve as counsel for the Company from time to time. Each of the
Members hereby acknowledges and consents to such representation. Each Member
other than Sioux Falls Hospital Management, Inc. further acknowledges and agrees
that they shall have no attorney-client relationship with Moore & Van Allen,
PLLC as a result of Moore & Van Allen, PLLC's representation of the Company from
time to time.

         (b)      Each of the Members hereunder acknowledge and agree that
Woods, Fuller, Shultz & Smith, P.C. is counsel for NCHI and their Affiliates,
and may, upon approval of the Board of Directors, also serve as counsel for the
Company from time to time. Each of the Members hereby acknowledges and consents
to such representation. Each Member other than NCHI further acknowledges and
agrees that they shall have no attorney-client relationship with Woods, Fuller,
Shultz & Smith, P.C. as a result of Woods, Fuller, Shultz & Smith, P.C.'s
representation of the Company from time to time.


                                       40
<PAGE>   45

         (c)      Each of the Members hereunder acknowledge and agree that
Bierle & Michels is counsel for McKennan and its Affiliates, and may, upon
approval of the Board of Directors, also serve as counsel for the Company from
time to time. Each of the Members hereby acknowledges and consents to such
representation. Each Member other than McKennan further acknowledges and agrees
that they shall have no attorney-client relationship with Bierle & Michels as a
result of Bierle & Michel's representation of the Company from time to time.

         SECTION 12.15     EXHIBITS.

         The Exhibits to this Agreement, each of which is incorporated by
reference, are:

         EXHIBIT A:        Information Exhibit.
         EXHIBIT B:        Glossary of Terms.
         EXHIBIT C:        Development Budget Exhibit.
         EXHIBIT D:        Regulatory Allocations.

         SECTION 12.16     ARBITRATION.

         Subject to the right of any party to seek an injunction or other
equitable relief from a court with applicable authority, any controversy,
dispute or disagreement arising out of or relating to this Agreement shall be
resolved by binding arbitration, which shall be conducted in Sioux Falls, South
Dakota in accordance with the American Health Lawyers Association Alternative
Dispute Resolution Service Rules of Procedure for Arbitration. Such arbitration
shall be conducted by a panel of three (3) arbitrators none of which shall
reside in or practice primarily in South Dakota. Any decision rendered by the
arbitrators shall be final and binding on the parties and shall be enforceable
in any court having jurisdiction thereof.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the following execution page(s), to be effective as of the date described in
Article II.

                  [EXECUTIONS APPEAR ON THE FOLLOWING PAGE(S)]

[***]

[***]    These portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.

                                       41
<PAGE>   46

                                  Schedule 5.6

                             Organizational Expenses

SFHM and its Affiliates shall be reimbursed by the Company for the following
business expenses:

         1.       Legal fees incurred by SFHM and its Affiliates in connection
with the formation, development and management of the Company and its business;

         2.       Filing Fees; and

         3.       Other out-of-pocket expenses incurred by SFHM or its
Affiliates in any of the following activities:

                                    a.       Preparing the Company's Operating
                           Agreement and any related agreements and documents;

                                    b.       Preparing a Private Placement
                           Memorandum related to the sale of membership
                           interests in the Company;

                                    c.       Acquiring real property for the
                           Company;

                                    d.       Obtaining and closing financing on
                           behalf of the Company;

                                    e.       Preparing by-laws for the medical
                           staff of the Hospital;

                                    f.       Preparing professional service
                           agreements on behalf of the Hospital;

                                    g.       Preparing compliance plans for the
                           Hospital;

                                    h.       Obtaining necessary licenses for
                           the Hospital and/or addressing any issues related to
                           such licenses; and

                                    i.       Obtaining healthcare law opinions
                           on behalf of the Company.




<PAGE>   47




                                    EXHIBIT A
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                       HEART HOSPITAL OF SOUTH DAKOTA, LLC
                   A North Carolina Limited Liability Company


                               INFORMATION EXHIBIT

<TABLE>
<CAPTION>
                                     Maximum
                                    Mandatory
                                   Additional
              Initial Capital*       Capital             Percentage
Name          Contribution        Contributions       Membership Interest
----          ------------        -------------       -------------------
<S>           <C>                 <C>                 <C>


[***]

</TABLE>









[***] These portions of this exhibit have been omitted and filed separately with
the Commission pursuant to a request for confidential treatment.




<PAGE>   48



                                    EXHIBIT B
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                       HEART HOSPITAL OF SOUTH DAKOTA, LLC
                   A North Carolina Limited Liability Company


                                GLOSSARY OF TERMS


         As used in this Agreement, the following terms shall have the following
definitions (unless otherwise expressly provided herein).

         "Act" means the North Carolina Limited Liability Company Act, as in
effect in North Carolina and set forth at N.C. Gen. Stat. ss.ss. 57C-1-01
through 57C-10-07 (or any corresponding provisions of succeeding law).

         "Adjusted Capital Account" means, with respect to any Member, such
Person's Capital Account (as defined below) as of the end of the relevant Fiscal
Year increased by any amounts which such Person is obligated to restore, or is
deemed to be obligated to restore pursuant to the next to last sentences of
Regulations Section 1.704-2(g)(1) (share of minimum gain) and Regulations
Section 1.704-2(i)(5) (share of member nonrecourse debt minimum gain) and
decreased by the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4),
(5) and (6).

         "Affiliate" means with respect to a Person, (i) any relative of such
Person; (ii) any officer, director, trustee, partner, manager, employee or
holder of ten percent (10%) or more of any class of the outstanding voting
securities or of an equity interest of such Person; or (iii) Entity or holder of
ten percent (10%) or more of the outstanding voting securities or of an equity
interest of any Entity, controlling, controlled by, or under common control with
such Person. For purposes of McKennan, its Affiliates shall include each Entity
the majority of whose members or directors are also the majority members or
directors of McKennan. For purposes of NCHI, its Affiliates shall also include
each individual holding or owning an ownership interest in NCHI.

         "Agreed Value" means with respect to any noncash asset of the Company
an amount determined and adjusted in accordance with the following provisions:

         (a)      The initial Agreed Value of any noncash asset contributed to
the capital of the Company by any Member shall be its gross fair market value,
as agreed to by the contributing Member and the Company.

         (b)      The initial Agreed Value of any noncash asset acquired by the
Company other than by contribution by a Member shall be its adjusted basis for
federal income tax purposes.


<PAGE>   49

         (c)      The initial Agreed Values of all the Company's noncash assets,
regardless of how those assets were acquired, shall be reduced by depreciation
or amortization, as the case may be, determined in accordance with the rules set
forth in Regulations Section 1.704-1(b)(2)(iv)(f) and (g).

         (d)      The Agreed Values, as reduced by depreciation or amortization,
of all noncash assets of the Company, regardless of how those assets were
acquired, shall be adjusted from time to time to equal their gross fair market
values, as agreed to by the Members in writing, as of the following times:

                  (i)      the acquisition of a Membership Interest or an
                           additional Membership Interest in the Company by any
                           new or existing Member in exchange for more than a de
                           minimis Capital Contribution;

                  (ii)     the distribution by the Company of more than a de
                           minimis amount of money or other property as
                           consideration for all or part of a Membership
                           Interest in the Company; and

                  (iii)    the termination of the Company for federal income tax
                           purposes pursuant to Code Section 708(b)(1)(B).

         If, upon the occurrence of one of the events described in (i), (ii) or
(iii) above the Members do not agree in writing on the gross fair market values
of the Company's assets, it shall be deemed that the fair market values of all
the Company's assets equal their respective Agreed Values immediately prior to
the occurrence of the event and thus no adjustment to those values shall be made
as a result of such event.

         "Agreement" means this Operating Agreement, as amended from time to
time.

         "Articles of Organization" means the Articles of Organization of the
Company, as filed with the Secretary of State of North Carolina as the same may
be amended from time to time.

         "Board of Directors," "Director" or "Directors" means those persons
appointed by the Members, pursuant to Section 3.10 of the Operating Agreement,
and given the power and authority under Article V of the Operating Agreement to
manage the Company. The terms "Director" or "Directors" is used for convenience,
but is intended to have the same meaning as the terms "Manager" or "Managers" in
the Act.

         "Capital Account" means with respect to each Member or assignee an
account maintained and adjusted in accordance with the following provisions:

         (a)      Each Person's Capital Account shall be increased by Person's
Capital Contributions, such Person's distributive share of Profits, any items in
the nature of income or gain that are allocated pursuant to the Regulatory
Allocations and the amount of any Company liabilities that are assumed by such
Person or that are secured by Company property distributed to such Person.

<PAGE>   50

         (b)      Each Person's Capital Account shall be decreased by the amount
of cash and the Agreed Value of any Company property distributed to such Person
pursuant to any provision of this Agreement, such Person's distributive share of
Losses, any items in the nature of loss or deduction that are allocated pursuant
to the Regulatory Allocations, and the amount of any liabilities of such Person
that are assumed by the Company or that are secured by any property contributed
by such Person to the Company.

         In the event any Membership Interest is transferred in accordance with
the terms of this Agreement, the transferee shall succeed to the Capital Account
of the transferor to the extent it relates to the transferred Membership
Interest.

         In the event the Agreed Values of the Company assets are adjusted
pursuant to the definition of Agreed Value contained in this Agreement, the
Capital Accounts of all Members shall be adjusted simultaneously to reflect the
aggregate adjustments as if the Company recognized gain or loss equal to the
amount of such aggregate adjustment.

         The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with such regulations. In the event the Board of Directors shall
determine that it is prudent to modify the manner in which the Capital Accounts,
or any debits or credits thereto, are computed to comply with such Regulation,
the Board of Directors may make such modification, provided that it is not
likely to have a material effect on the amounts distributable to any Member
pursuant to Articles VI or VII hereof upon the dissolution of the Company. In
the event the Board of Directors shall determine such adjustments are necessary
or appropriate to comply with Regulations Section 1.704-1(b)(2)(iv), the Board
of Directors shall adjust the amounts debited or credited to Capital Accounts
with respect to (i) any property contributed by the Members or distributed to
the Members and (ii) any liabilities secured by such contributed or distributed
property or assumed by the Members. The Board of Directors shall also make any
other appropriate modifications in the event unanticipated events might
otherwise cause this Agreement not to comply with Regulations Section
1.704-1(b). In the event any Membership Interest in the Company is transferred
in accordance with the terms of this Agreement, the transferee shall succeed to
the Capital Account of the transferor to the extent it relates to the
transferred Membership Interest.

         "Capital Contribution" means with respect to any Member, the amount of
money and the initial Agreed Value of any property (other than money)
contributed to the Company with respect to the Membership Interest of such
Member.

         "Cash Distributions" means net cash distributed to Members resulting
from Cash Flow from Operations or Cash from Sales or Refinancing, but shall not
include cash payments made to SFHM as its Operating and Licensing Fee for
services rendered pursuant to the Management Agreement or any amount in
repayment of loans made by the Members to the Company.

         "Cash Flow from Operations" means net cash funds provided from
operations, exclusive of Cash from Sales or Refinancing, of the Company or
investment of any Company funds,

<PAGE>   51

without deduction for depreciation, but after deducting cash funds used to pay
or establish a reserve for expenses, debt payments, capital improvements, and
replacements and for such other items as the Board of Directors reasonably
determines to be necessary or appropriate and subject to Loan Conditions.

         "Cash from Sales or Refinancing" means the net cash proceeds received
by the Company from or as a result of any Sale or Refinancing of property after
deducting (i) all expenses incurred in connection therewith, (ii) any amounts
applied by the Board of Directors in their sole and absolute discretion toward
the payment of any indebtedness and other obligations of the Company then due
and payable, including payments of principal and interest on mortgages, (iii)
the payment of any other expenses or amounts owed by the Company to other
parties to the extent then due and payable, and (iv) the establishment of any
reserves deemed necessary by the Board of Directors in their sole and absolute
discretion. If the proceeds of any sale or refinancing are paid in more than one
installment, each such installment shall be treated as a separate Sale or
Refinancing for the purposes of this definition.

         "Code" means the Internal Revenue Code of 1986, as amended from time to
time. Any reference herein to a specific section(s) of the Code shall be deemed
to include a reference to any corresponding provision of future law.

         "Company" means and shall refer to Heart Hospital of South Dakota, LLC,
which was created upon the filing of the Articles of Organization with the
Office of the Secretary of State of North Carolina, to be operated under the
name Heart Hospital of South Dakota, LLC, a North Carolina limited liability
company, and to continue under this Agreement, as amended from time to time.

         "Default Rate" means a per annum rate of return on a specified
principal sum, compounded monthly, equal to the greater of (a) the Prime Rate
plus 500 basis points, or (b) 18%, but in no event greater than the highest rate
allowed by law.

         "Entity" means any general partnership, limited partnership, limited
liability company, corporation (profit or non-profit), joint venture, trust,
business trust, cooperative or association or any foreign trust or foreign
business organization.

         "Equipment" means the appropriate equipment and supplies required from
time to time in connection with the development and operation of the Hospital.

         "Fiscal Year" means, with respect to the first year of the Company, the
period beginning upon the formation of the Company and ending on the next
September 30, with respect to subsequent years of the Company, the twelve month
period beginning October 1 and ending September 30, and, with respect to the
last year of the Company, the portion of the period beginning October 1 and
ending with the date of the final liquidating distributions.

         "Hospital" means an acute care hospital specializing in all aspects of
cardiology and cardiovascular care and surgery in Sioux Falls, South Dakota, as
further described in Section 2.3 of the Agreement.

<PAGE>   52

         "Initial Members" shall mean [***].

         "Management Agreement" means the Management Agreement by and between
the Company and SFHM pursuant to which SFHM will manage the day-to-day business
and affairs of the Company.

         "Manager" shall mean the party providing management services to the
Hospital pursuant to a management agreement approved by the Board of Directors,
it being acknowledged that SFHM has been selected as the Manager to serve
pursuant to the Management Agreement.

         "Material Agreement" means any binding agreement which may not be
canceled upon less than ninety (90) days notice and which calls for the
expenditure of funds, or involves an obligation for financing, in excess of
$100,000.00 exclusive of agreements or obligations contemplated by any budget,
development plan, financing or construction contract approved by the Board of
Directors or agreements incurred in the ordinary course of business such as
employment agreements, purchases of supplies and routine services and the like.

         "Material Decision" means any decisions regarding approvals of the
development and operating budgets for the Hospital, the selection of the site
for the Hospital, the design of the Hospital, the selection of the Hospital's
President, strategic planning, the execution of managed care contracts and the
execution of exclusive contracts to provide physician services to the Hospital.

         [***]

         "Medical Director Agreement" means the Medical Director Agreement by
and between the Company and a medical director approved by the Board of
Directors.

         "Member" means and shall refer to the organizers of the Company (unless
or until any such organizer has withdrawn) and each of the Persons identified as
"Members" in the then applying Information Exhibit attached hereto and
incorporated herein by this reference or admitted as a Member in accordance with
the terms of this Agreement..

         "Membership Interest" means all of a Member's rights in the Company,
including without limitation the Member's share of Profits, Losses, Cash
Distributions and other benefits of the Company, any right to vote, any right to
participate in the management of the business and affairs of the Company,
including the right to vote on, consent to, or otherwise participate in any
decision or action of or by the Members granted pursuant to this Operating
Agreement or the Act. The percentage Membership Interest of each Member, their
Capital Contributions and other related information shall be listed on the
Information Exhibit. The percentage Membership Interests generally shall be
based upon the pro rata Capital Contribution of each Member.

         [***]

[***] These portions of this exhibit have been omitted and filed separately with
the Commission pursuant to a request for confidential treatment.

<PAGE>   53

         "Operating and Licensing Fee" means the amounts payable to SFHM
pursuant to the Management Agreement for services rendered in managing the
operations of the Company.

         "Organization Expenses" means those expenses incurred, either by the
Company, on behalf of the Company or for which the Company has agreed to make
reimbursement, in connection with the formation of the Company including such
expenses as: (i) registration fees, filing fees, and taxes; and (ii) legal fees
incurred in connection with any of the foregoing.

         "Person" means any individual or Entity, and the heirs, executors,
administrators, legal representatives, successors, and assigns of such
individual or Entity where the context so permits.

         "Prime Rate" means the rate of interest as of the relevant day or time
period as announced by the NationsBank, N.A. or its successor in interest from
time to time as its prime or reference rate.

         "Profits and Losses" means, for each Fiscal Year or other period, an
amount equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss, or deduction required to be stated separately pursuant to
Code Section 703(a)(l) shall be included in taxable income or loss), with the
following adjustments:

         (a)      Any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing Profits or Losses shall be
added to such taxable income or loss;

         (b)      Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Profits or Losses, shall be subtracted from such taxable income or
loss;

         (c)      Gain or loss resulting from dispositions of Company assets
shall be computed by reference to the Agreed Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property differs from its
Agreed Value.

         "Project Costs" shall include, without limitation, all costs incurred
by the Company in connection with the development and construction of the
Hospital, including without limitation, land acquisition costs, equipment costs,
architectural, design and engineering costs, legal and accounting costs,
construction costs, construction period interest, pre-opening expenses, fees
payable to SFHM or its Affiliates, and other construction and development costs
incurred in connection with the construction and development of the Hospital,
which total amount shall finally be determined by SFHM following the opening of
the Hospital.

         "Refinancing" means any borrowing incurred or made to recapitalize the
Company or the equity investment in, or to refinance any loan used to finance
the acquisition of property.

<PAGE>   54

         "Regulations" means rules, orders, and regulations issued pursuant to
or under the authority of the Code and shall include revisions to and succeeding
provisions as appropriate.

         "Regulatory Allocations" means those allocations of items of Company
income, gain, loss or deduction set forth on the Regulatory Allocations Exhibit
and designed to enable the Company to comply with the alternate test for
economic effect prescribed in Regulations Section 1.704-1(b)(2)(ii)(d), and the
safe-harbor rules for allocations attributable to nonrecourse liabilities
prescribed in Regulations Section 1.704-2.

         "Sale" means the sale, exchange, involuntary conversion (other than a
casualty followed by reconstruction), condemnation, or other disposition of
property by the Company, except for dispositions of inventory items and personal
property in the ordinary course of business and in connection with the
replacement of such property.

         [***]

         "Substitute Member" means an assignee of a Member who has been admitted
to the Company and granted all the rights of a Member in place of its assignor
pursuant to the provisions of this Agreement. A Substitute Member, upon its
admission as such, shall replace and succeed to the rights, privileges, and
liabilities of the Member from whom it acquired its interest in the Company.

















[***] These portions of this exhibit have been omitted and filed separately with
the Commission pursuant to a request for confidential treatment.



<PAGE>   55



                                    EXHIBIT C
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                       HEART HOSPITAL OF SOUTH DAKOTA, LLC
                   A North Carolina Limited Liability Company

                           DEVELOPMENT BUDGET EXHIBIT







<PAGE>   56



                                 Sioux Falls, SD
                            Summary of Capital Costs
                                For Fiscal Years
                             (Dollars in thousands)


<TABLE>
<S>                                                      <C>                              <C>
Approximate Size of Facility in Square Feet                                                                 [***]
Expected Cost per square foot                                                                              $[***]
                                                                                          ------------------------
Calculated Construction Cost of Building                                                                    [***]
Estimated Cost of Land                                                                                      [***]
                                                                                          ------------------------
                                                         TOTAL LAND AND BUILDING COST                       [***]

Estimated Cost of Major Equipment                                                                           [***]
Estimated Cost of Minor Equipment                                                                           [***]
                                                                                          ------------------------
                                                                 TOTAL EQUIPMENT COST                       [***]
Calculated Construction Interest                                                                            [***]
                                                                                          ------------------------
                                                                   TOTAL FIXED ASSETS                       [***]
                                                                                          ========================

Estimated Loan Acq. and Org. Costs                                                                          [***]
Estimated Pre-Opening Expenses                                                                              [***]
Cash Balance at Opening                                                                                     [***]
                                                                                          ------------------------
                                                                   TOTAL CAPITAL USES                       [***]

Real Estate Debt                                                                                            [***]
Equipment Debt                                                                                              [***]
Working Capital Debt                                                                                        [***]
                                                                                          ------------------------
                                                                           TOTAL DEBT                       [***]

                                                                   TOTAL MEMBERS' CASH
                                                                         CONTRIBUTION                      $[***]
                                                                                          ------------------------

                                                                TOTAL CAPITAL SOURCES                       [***]
                                                                                          ========================
</TABLE>

See accompanying Summary of Significant Forecast Assumptions and Accounting
Policies.


THIS INFORMATION SHOULD BE READ IN ACCORDANCE WITH OTHER INFORMATION IN THE
PRIVATE PLACEMENT MEMORANDUM. THIS INFORMATION CONSTITUTES PROJECTIONS OF FUTURE
EVENTS. THERE IS NO GUARANTEE THAT THESE RESULTS WILL BE ACCOMPLISHED. ACTUAL
RESULTS MAY VARY SIGNIFICANTLY FROM THESE PROJECTIONS.











[***] These portions of this exhibit have been omitted and filed separately with
the Commission pursuant to a request for confidential treatment.




<PAGE>   57



                                    EXHIBIT D
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                       HEART HOSPITAL OF SOUTH DAKOTA, LLC
                   a North Carolina limited liability company


                             REGULATORY ALLOCATIONS


         This Exhibit contains special rules for the allocation of items of
Company income, gain, loss and deduction that override the basic allocations of
Profits and Losses in the Agreement to the extent necessary to cause the overall
allocations of items of Company income, gain, loss and deduction to have
substantial economic effect pursuant to Regulations Section 1.704-1(b) and shall
be interpreted in light of that purpose. Subsection (a) below contains special
technical definitions. Subsections (b) through (h) contain the Regulatory
Allocations themselves. Subsections (i), (j) and (k) are special rules
applicable in applying the Regulatory Allocations.

         (a)      Definitions Applicable to Regulatory Allocations. For purposes
of the Agreement, the following terms shall have the meanings indicated:

                  (i)      "Company Minimum Gain" means the same as the meaning
                           of "partnership minimum gain" set forth in
                           Regulations Section 1.704-2(d), and is generally the
                           aggregate gain the Company would realize if it
                           disposed of its property subject to Nonrecourse
                           Liabilities in full satisfaction of each such
                           liability, with such other modifications as provided
                           in Regulations Section 1.704-2(d). In the case of
                           Nonrecourse Liabilities for which the creditor's
                           recourse is not limited to particular assets of the
                           Company, until such time as there is regulatory
                           guidance on the determination of minimum gain with
                           respect to such liabilities, all such liabilities of
                           the Company shall be treated as a single liability
                           and allocated to the Company's assets using any
                           reasonable basis selected by SFHM.

                  (ii)     "Member Nonrecourse Deductions" means losses,
                           deductions or Code Section 705(a)(2)(B) expenditures
                           attributable to Member Nonrecourse Debt under the
                           general principles applicable to "partner nonrecourse
                           deductions" set forth in Regulations Section
                           1.704-2(i)(2).

                  (iii)    "Member Nonrecourse Debt" means any Company liability
                           with respect to which one or more but not all of the
                           Members or related Persons to one or more but not all
                           of the Members bears the economic risk of loss within
                           the meaning of Regulations Section 1.752-2 as a
                           guarantor, lender or otherwise.

<PAGE>   58

                  (iv)     "Member Nonrecourse Debt Minimum Gain" means the
                           minimum gain attributable to Member Nonrecourse Debt
                           as determined pursuant to Regulations Section
                           1.704-2(i)(3). In the case of Member Nonrecourse Debt
                           for which the creditor's recourse against the Company
                           is not limited to particular assets of the Company,
                           until such time as there is regulatory guidance on
                           the determination of minimum gain with respect to
                           such liabilities, all such liabilities of the Company
                           shall be treated as a single liability and allocated
                           to the Company's assets using any reasonable basis
                           selected by SFHM.

                  (v)      "Nonrecourse Deductions" means losses, deductions, or
                           Code Section 705(a)(2)(B) expenditures attributable
                           to Nonrecourse Liabilities (see Regulations Section
                           1.704-2(b)(1)). The amount of Nonrecourse Deductions
                           for a Fiscal Year shall be determined pursuant to
                           Regulations Section 1.704-2(c), and shall generally
                           equal the net increase, if any, in the amount of
                           Company Minimum Gain for that taxable year,
                           determined generally according to the provisions of
                           Regulations Section 1.704-2(d), reduced (but not
                           below zero) by the aggregate distributions during the
                           year of proceeds of Nonrecourse Liabilities that are
                           allocable to an increase in Company Minimum Gain,
                           with such other modifications as provided in
                           Regulations Section 1.704-2(c).

                  (vi)     "Nonrecourse Liability" means any Company liability
                           (or portion thereof) for which no Member bears the
                           economic risk of loss under Regulations Section
                           1.752-2.

                  (vii)    "Regulatory Allocations" means allocations of
                           Nonrecourse Deductions provided in Paragraph (b)
                           below, allocations of Member Nonrecourse Deductions
                           provided in Paragraph (c) below, the minimum gain
                           chargeback provided in Paragraph (d) below, the
                           member nonrecourse debt minimum gain chargeback
                           provided in Paragraph (e) below, the qualified income
                           offset provided in Paragraph (f) below, the gross
                           income allocation provided in Paragraph (g) below,
                           and the curative allocations provided in Paragraph
                           (h) below.

         (b)      Nonrecourse Deductions. All Nonrecourse Deductions for any
Fiscal Year shall be allocated to the Members in accordance with their
percentage Membership Interests.

         (c)      Member Nonrecourse Deductions. All Member Nonrecourse
Deductions for any Fiscal Year shall be allocated to the Member who bears the
economic risk of loss under Regulations Section 1.752-2 with respect to the
Member Nonrecourse Debt to which such Member Nonrecourse Deductions are
attributable.

         (d)      Minimum Gain Chargeback. If there is a net decrease in Company
Minimum Gain for a Fiscal Year, each Member shall be allocated items of Company
income and gain for such year (and, if necessary, subsequent years) in an amount
equal to such Member's share of

<PAGE>   59

such net decrease in Company Minimum Gain, determined in accordance with
Regulations Section 1.704-2(g)(2) and the definition of Company Minimum Gain set
forth above. This provision is intended to comply with the minimum gain
chargeback requirement in Regulations Section 1.704-2(f) and shall be
interpreted consistently therewith.

         (e)      Member Nonrecourse Debt Minimum Gain Chargeback. If there is a
net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member
Nonrecourse Debt for any Fiscal Year, each Member who has a share of the Member
Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt as of
the beginning of the Fiscal Year, determined in accordance with Regulations
Section 1.704-2(i)(5), shall be allocated items of Company income and gain for
such year (and, if necessary, subsequent years) in an amount equal to such
Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Regulations Sections 1.704-2(i)(4) and (5) and the definition of Member
Nonrecourse Debt Minimum Gain set forth above. This Paragraph is intended to
comply with the member nonrecourse debt minimum gain chargeback requirement in
Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.

         (f)      Qualified Income Offset. In the event any Member unexpectedly
receives any adjustments, allocations, or distributions described in Regulations
Sections 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Company income and gain
(consisting of a pro rata portion of each item of Company income, including
gross income, and gain for such year) shall be allocated to such Member in an
amount and manner sufficient to eliminate, to the extent required by the
Regulations, any deficit in such Member's Adjusted Capital Account created by
such adjustments, allocations or distributions as quickly as possible.

         (g)      Gross Income Allocation. In the event any Member has a deficit
in its Adjusted Capital Account at the end of any Fiscal Year, each such Member
shall be allocated items of Company gross income and gain, in the amount of such
Adjusted Capital Account deficit, as quickly as possible.

         (h)      Curative Allocations. When allocating Profits and Losses under
Article VI, such allocations shall be made so as to offset any prior allocations
of gross income under Paragraph (g) above to the greatest extent possible so
that overall allocations of Profits and Losses shall be made as if no such
allocations of gross income occurred.

         (i)      Ordering. The allocations in this Exhibit to the extent they
apply shall be made before the allocations of Profits and Losses under Article
VI and in the order in which they appear above.

         (j)      Waiver of Minimum Gain Chargeback Provisions. If SFHM
determines that (i) either of the two minimum gain chargeback provisions
contained in this Exhibit would cause a distortion in the economic arrangement
among the Members, (ii) it is not expected that the Company will have sufficient
other items of income and gain to correct that distortion, and (iii) the Members
have made Capital Contributions or received net income allocations that have
restored any previous Nonrecourse Deductions or Member Nonrecourse Deductions,
then SFHM

<PAGE>   60

shall have the authority, but not the obligation, after giving notice to the
Members, to request on behalf of the Company the Internal Revenue Service to
waive the minimum gain chargeback or member nonrecourse debt minimum gain
chargeback requirements pursuant to Regulations Sections 1.704-2(f)(4) and
1.704-2(i)(4). The Company shall pay the expenses (including attorneys' fees)
incurred to apply for the waiver. SFHM shall promptly copy all Members on all
correspondence to and from the Internal Revenue Service concerning the requested
waiver.

         (k)      Code Section 754 Adjustments. To the extent an adjustment to
the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or
Code Section 743(b) is required, pursuant to Regulations Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts,
the amount of such adjustment to the Capital Accounts shall be treated as an
item of gain (if the adjustment increases the basis of the asset) or loss (if
the adjustment decreases such basis), and such gain or loss shall be specially
allocated to the Members in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of the
Regulations.

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