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                                                                   Exhibit 10.26

                                                               February 20, 1998

                                 FIRST AMENDMENT
                                       TO
                          PRIVATE PLACEMENT MEMORANDUM
                                       OF
                HEART HOSPITAL OF NEW MEXICO, LLC (the "Company")
                                     AND TO
                       OPERATING AGREEMENT OF THE COMPANY
                                     AND TO
                          MANAGEMENT SERVICES AGREEMENT

         This First Amendment ("Amendment") amends the December 1, 1997 Private
Placement Memorandum ("Memorandum") of the Company and further amends the
Operating Agreement attached as Exhibit B to the Memorandum (the "Operating
Agreement") and the Management Services Agreement attached as Exhibit D to the
Memorandum (the "Management Agreement") in accordance with the following:

         1.       The Contingency Agreement attached as Exhibit E to the
                  Memorandum is hereby deleted in its entirety from the
                  Memorandum and will not be entered into by the Company or the
                  parties thereto as St. Joseph Healthcare System ("SJHS") has
                  determined that the Contingency Agreement is no longer
                  necessary as a condition for their becoming a member of the
                  Company.

         2.       The Operating Agreement of the Company is hereby amended as
                  follows:

                           (a)      Section 2.4 is amended by:

                                    (i)      Deleting current Section 2.4(a) and
                           substituting in lieu thereof the following:

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

                                    (ii)     The following is added as a new
                                             subsection 2.4(h):

                                             (h)      The Hospital will not be
                                    operated in a manner which is inconsistent
                                    with the mission and charitable purposes of
                                    SJHS.

                           (b)      Section 3.2 is amended by deleting therefrom
                  the reference to January 1, 1998 as the date upon which the
                  first installment of capital contributions is due and
                  substituting in lieu thereof, February 20, 1998.


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                           (c)      The following is added at the end of Section
                  3.6(c)(i):

                                    In any event, however, a Member shall retain
                                    the right to appoint at least one (1) Board
                                    member.

                           (d)      Section 3.8 is amended as follows:

                                    (i)      Subsection 3.8(f) is deleted in its
                           entirety and the following is added in lieu thereof:

                                             (f)      Any alteration or
                                    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;

                                    (ii)     Subsection 3.8(h) is hereby deleted
                           in its entirety and the following new Subsections (h)
                           and (i) are added in lieu thereof:

                                            (h)       Any action, which in the
                                    reasonable opinion of counsel, would give
                                    rise to regulatory and/or criminal penalties
                                    or liability or would prevent SJHS from
                                    receiving referrals of patients from the
                                    Hospital or physicians who are direct or
                                    indirect investors in the Company; and

                                            (i)       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.

                           (e)      Subsection 4.8(e) is deleted in its entirety
                  and the following is added in lieu thereof:

                                    (e)      Any action taken by the Board of
                           Directors shall require the affirmative vote of at
                           least a majority of the Directors (at least one of
                           whom shall have been appointed by either NMHM or
                           SJHS) present at a meeting at which a quorum is
                           present, except that the following actions shall
                           require the consent of at least one Board member
                           appointed by SJHS, NMHM and one appointed by either
                           NMHI, LLC or SWCA, LLC:

                                            (i)      the determination of the
                                    annual budget of the Company and any
                                    material amendments or modifications
                                    thereof, including material expenditures in
                                    excess thereof; and

                                            (ii)      any maintenance and/or
                                    capital improvement expenditures not
                                    included in an annual budget and in excess
                                    of


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                                    Twenty-Five Thousand Dollars ($25,000.00) or
                                    resulting in an aggregate expenditure
                                    outside of the budget by more than five
                                    percent (5%) thereof unless matched or
                                    supported by revenue in excess of that
                                    reflected in such budget.

                           (f)      The current Section 11.10 shall hereafter be
                  referred to as 11.10(a) and the following is hereby attached
                  as 11.10(b):

                                    (i)      In the event, that nationally
                           recognized tax counsel of SJHS, but who prior to
                           their engagement for purposes of this Agreement have
                           not previously represented SJHS or any of its
                           Affiliates with respect to this transaction, and
                           which tax counsel is selected with the approval of
                           NMHM, which approval shall not be unreasonably
                           withheld, reasonably determines in writing after
                           regular consultation with NMHM, the other Members and
                           their counsel, and offer 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)
                           SJHS' Membership Interest in the Company, both
                           directly and alternatively through a for-profit
                           affiliate of SJHS (the "SJHS Sub") of which SJHS is
                           the sole shareholder to which it assigns (or to which
                           it is entitled to assign under the terms of this
                           Agreement) its Membership Interest or (y) SJHS'
                           obligation under Section 3.6(a)(i) to guarantee a
                           portion of the Company's indebtedness, will result in
                           SJHS losing its tax-exempt status, SJHS may give
                           notice in writing to the Company, SWCA, NMHI and NMHM
                           of that fact. Thereafter, 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 SJHS 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 SJHS of its
                                    Membership Interest to its for-profit
                                    affiliate alone will not enable SJHS to
                                    avoid the loss of its tax-exempt status and
                                    (z) if SJHS' being released from its
                                    obligations and liabilities to guarantee any
                                    indebtedness of the Company will avoid SJHS'
                                    loss of its tax-exempt status, then
                                    conditioned upon (1) an annual cash payment
                                    by the SJHS Sub to NMHM (to be made from
                                    time to time upon presentation of invoices
                                    therefor on a quarterly basis) equal to two
                                    percent (2%) (the "Guarantee Fee") of the
                                    outstanding balance of the principal


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                                    amount of debt of the Company then
                                    guaranteed by SJHS and its affiliates plus
                                    the amount which thereafter would, absent
                                    the operation of this subsection
                                    11.10(b)(i)(B) have been guaranteed by SJHS,
                                    (2) the execution and delivery by the SJHS
                                    Sub of a reimbursement agreement providing
                                    for the SJHS Sub's reimbursement of NMHM for
                                    all amounts of principal, interest and other
                                    costs paid by NMHM or its Affiliates under
                                    its guarantees of the Company's indebtedness
                                    which absent the application of this
                                    subsection would have been paid by SJHS or
                                    its Affiliates, and (3) the approval of such
                                    arrangement by the Company's lenders, then
                                    NMHM and its parent MedCath Incorporated
                                    shall assume all liability and obligation of
                                    SJHS and its affiliates for their guaranty
                                    of the Company's debt.

                                    Rather than assigning its guarantee to NMHM
                                    and paying the Guarantee Fee as provided
                                    above, SJHS and its affiliates shall have
                                    the right to use any other commercially
                                    reasonable alternative for obtaining a
                                    release of SJHS 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.

                                            (C)       If the parties have failed
                                    to renegotiate the Agreement in a mutually
                                    acceptable manner as provided in (A) above
                                    and the arrangement set forth in (B) above
                                    will not avoid SJHS' loss of its tax-exempt
                                    status, then SJHS may provide written notice
                                    of its election to withdraw from the
                                    Company. Within one hundred eighty (180)
                                    days of the date of the notice, SJHS shall
                                    receive a refund of its Initial Capital
                                    Contribution and any Additional Capital
                                    Contribution, as those terms are used in the
                                    Operating Agreement of the Company, and SJHS
                                    shall relinquish its Membership Interest in
                                    the Company and any of the Company's
                                    directors, officers or managers appointed by
                                    SJHS shall tender their resignations.

                                            (D)       Company, SWCA, NMHI and
                                    NMHM shall use commercially reasonable
                                    efforts to obtain a release of SJHS from any
                                    guaranty of the debts of Company and, in the
                                    event they are unable to do so, Company,
                                    SWCA, NMHI and NMHM shall, severally based
                                    upon their relative ownership of the
                                    Company, indemnify and hold SJHS harmless
                                    from any such guaranty and shall obtain the
                                    release of SJHS at the first available
                                    opportunity.

                                            (E)       Within thirty (30) days,
                                    either SJHS or the Company may give the
                                    other notice that it intends to terminate
                                    any hospital services agreement between them
                                    (the "Hospital Services


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                                    Agreement"). If either party terminates the
                                    Hospital Services Agreement, SJHS shall
                                    continue to provide the services set forth
                                    in the Agreement until such time as the
                                    Company can find a replacement for the
                                    service, but not to exceed one hundred
                                    eighty (180) days. If neither party gives
                                    notice of termination within thirty (30)
                                    days, the Hospital Services Agreement will
                                    continue in force and effect according to
                                    its terms.

                                            (F)       Commencing as of the
                                    withdrawal date and continuing for a period
                                    of five (5) years after the date of the
                                    Medicare certification of the Hospital, SJHS
                                    will not compete directly or indirectly with
                                    the Company, in an area within a radius of
                                    fifty (50) miles of the hospital owned and
                                    operated by the Company, by providing
                                    diagnosis or treatment of cardiovascular
                                    disease or cardiothoracic and vascular
                                    surgery services or facilities (as an owner,
                                    manager or otherwise) except

                                                     (1)       SJHS may continue
                                             to provide diagnostic cardiac
                                             catheterization and such cardiac
                                             services as are necessary to
                                             stabilize the medical condition of
                                             its patients in preparation for
                                             transfer to another facility for
                                             treatment of the cardiovascular
                                             disease or providing cardio-
                                             thoracic or vascular surgery;

                                                     (2)       To the extent
                                             that SJHS seeks to obtain the
                                             services of Company's Heart
                                             Hospital to enable SJHS to
                                             fulfill obligations under managed
                                             care agreements, Company shall sell
                                             those services to SJHS at a price
                                             and upon terms which are no less
                                             favorable than it provides to any
                                             other substantially similar managed
                                             care provider; and

                                                     (3)       Company shall not
                                            provide acute care hospital services
                                            except as needed by a cardiology,
                                            vascular or cardiovascular patient
                                            of the heart hospital or as
                                            necessary to stabilize a patient in
                                            preparation for transfer to another
                                            facility for treatment of that
                                            condition.

                                    The parties agree that the terms of this
                                    subsection (f) are fair and reasonable in
                                    light of the important interests of each
                                    party hereto.


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                                            (G)       Except as provided herein
                                    or in the Agreement for Land Purchase, SJHS
                                    shall be released from any further
                                    obligation to the Company, SWCA, NMHI or
                                    NMHM.

                                    (ii)     In the event that SJHS withdraws
                           from the Company in accordance with the terms of this
                           Agreement, then SWCA, NMHI and NMHM, upon their
                           written and mutual agreement, shall have the right to
                           offer SJHS' interest in the Company (including all
                           rights and benefits and all liabilities and
                           obligations, the "SJHS Interest") to a third party
                           acceptable to the SWCA, NMHI and NMHM (a "Third Party
                           Sale"). In the event that a Third Party Sales does
                           not occur within ninety (90) days after the
                           withdrawal by SJHS from the Company, then the SJHS
                           Interest shall be divided as follows unless otherwise
                           agreed to by SWCA, NMHI and NMHM:

                                            (A)       If (1) substantially all
                                    financing and loans to the Company for the
                                    purchase of the land and construction and
                                    equipping of the Hospital are nonrecourse to
                                    the parties or (2) both SWCA and NMHI and/or
                                    their direct and indirect investors are
                                    willing to provide additional security or
                                    guaranties provided theretofore by SJHS,
                                    which security or guaranties are acceptable
                                    to the parties providing loans or other
                                    financing to the Company so that such loans
                                    are not terminated or defaulted as a result
                                    of SJHS' withdrawal; then half of the SJHS
                                    Interest shall be allocated or assigned to
                                    NMHM, and the remaining half of the SJHS
                                    Interest shall be divided so that 36.58% of
                                    such half of the SJHS Interest is allocated
                                    and assigned to SWCA and 63.42% of such half
                                    of the SJHS Interest is allocated and
                                    assigned to NMHI, and each party shall be
                                    responsible for all allocable capital
                                    contributions, guaranties, obligations and
                                    liabilities, and the related benefits
                                    thereto which relate to or arise in
                                    connection with their pro rata portion of
                                    the SJHS Interest.

                                            (B)       If the circumstances of
                                    neither (A)(1) nor (A)(2) above occur, and
                                    if NMHM or its affiliates are able to, agree
                                    to, and do provide all guaranties and/or
                                    other security required at any time in
                                    connection with all financing and loans to
                                    the Company for the purchase of the land and
                                    construction and equipping of the Hospital,
                                    then the SJHS Interest shall be purchased
                                    and divided 3.29% to SWCA, 5.71% to NMHI and
                                    twenty-six percent (26%) to NMHM. In such
                                    event, all obligations, liabilities and
                                    benefits of the Company shall be shared pro
                                    rata by SWCA, NMHI and NMHM based upon their
                                    Membership Interest therein, except that
                                    NMHM alone shall provide all guaranties
                                    required from time to time with respect to
                                    debt of the Company.


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                                            (C)       Upon the withdrawal of
                                    SJHS hereunder, except to the extent
                                    negotiated otherwise in a Third Party Sale,
                                    the Operating Agreement shall be amended to
                                    provide that SWCA and NMHI shall each
                                    continue to have the right to appoint two
                                    (2) directors of the Company and NMHM shall
                                    have the right to appoint four (4) directors
                                    of the Company.

                                    (iii)    If there is a breach or threatened
                           breach of this Agreement, in addition to other
                           remedies at law or equity, the nonbreaching party
                           shall be entitled to injunctive relief. The parties
                           desire and intend that the provisions of this
                           Agreement 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 Agreement.
                           Should any such paragraph, subparagraph, sentence,
                           clause, phrase, word or figure be adjudicated to be
                           wholly invalid or unenforceable, the balance of this
                           Agreement shall thereupon be modified in order to
                           render the same valid and enforceable and the
                           unenforceable portion of this Agreement shall be
                           deemed to have been deleted from this Agreement.

         4.       The following changes are hereby made to the Management
Agreement:

                           (a)      The following is added as a new second
                                    sentence to Section 2.2:

                           Owner retains the right to overrule the Manager or to
                           direct the Manager to overrule the Manager or to
                           direct the Manager to operate the Hospital in a
                           different manner in any case where the Owner
                           reasonably determines that the change is necessary to
                           ensure that the Hospital is operated in accordance
                           with the law or as necessary to ensure that the
                           Hospital is operated in a manner consistent with the
                           charitable mission of St. Joseph Healthcare System.

                           (b)      The following is added as a new Section 2.3:

                                    2.3      Reserved Powers of Owner. Subject
                  to the terms of this Agreement, Owner reserves the right to
                  approve, reject or modify any recommendation of the Manager or
                  to direct that the Manager operate the Hospital in accordance
                  with the policies of the Owner. At any time during the term of
                  this Agreement, Owner may change its policies, subject to the
                  terms of its Operating Agreement.


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         5.       This Amendment may be executed in any number of counterparts
with the same effect as if all Members had signed the same document. Such
executions may be transmitted to the Company and/or the 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.

         6.       Except as provided in this Amendment, the Memorandum and the
Exhibits thereto remain in their current form.



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