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                                                                   EXHIBIT 10.46

                             1998 STOCK OPTION PLAN

                              FOR KEY EMPLOYEES OF

                     MEDCATH HOLDINGS, INC. AND SUBSIDIARIES

1.       Purpose of Plan

         The 1998 Stock Option Plan for Key Employees of MedCath Holdings, Inc.
and Subsidiaries (the "Plan") is designed:

         (a)      to promote the long term financial interests and growth of
MedCath Holdings, Inc. (the "Company") and its subsidiaries by attracting and
retaining management personnel with the training, experience and ability to
enable them to make a substantial contribution to the success of the Company's
business;

         (b)      to motivate management personnel by means of growth-related
incentives to achieve long range goals; and

         (c)      to further the alignment of interests of participants with
those of the stockholders of the Company through opportunities for increased
stock, or stock-based, ownership in the Company.

2.       Definitions

         As used in the Plan, the following words shall have the following
meanings:

         (a)      "Board of Directors" means the Board of Directors of the
Company.

         (b)      "Code" means the Internal Revenue Code of 1986, as amended.

         (c)      "Committee" means the Compensation Committee of the Board of
Directors.

         (d)      "Common Stock" or "Share" means Common Stock of the Company
which may be authorized but unissued, or issued and reacquired.

         (e)      "Employee" means a person, including an officer, in the
regular full-time employment of the Company or of its Subsidiaries who, in the
opinion of the Committee is, or is expected to be, responsible for the
management, growth or protection of some part or all of the business of the
Company. Notwithstanding the foregoing, "Employee" may also mean a person
including an officer, employed by the Company on a less than full-time basis, if
approved by the Committee.

         (f)      "Employee Stockholder's Agreement" means an agreement dated as
of July 31, 1998 between the Company and a Participant that sets forth the terms
and conditions and limitations applicable to any Shares purchased pursuant to
Options granted under this Plan.
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         (g)      "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

         (h)      "Fair Market Value" of a Share means:

                  (i)      As of any date the Shares are not listed on a
         national securities exchange or traded on the Nasdaq National Market
         System and during the 180 day period following the effectiveness of an
         underwritten public offering of the Shares, the quotient of Amount A
         divided by Amount B, where:

                  Amount A is the amount determined by the following formula:

                  (Consolidated EBITDA for the immediately preceding fiscal year
                  of the Company times 9) minus Consolidated Debt as of the last
                  day of the immediately preceding fiscal year of the Company
                  plus Consolidated Unrestricted Cash as of the last day of the
                  immediately preceding fiscal year of the Company plus
                  (Unconsolidated Affiliate Interest for the immediately
                  preceding fiscal year of the Company times 8); and

                  Amount B is the number of fully diluted Shares outstanding as
                  of such date (including the number of Shares that would be
                  issued if all outstanding Options and all outstanding options
                  under the MedCath Holdings, Inc. Outside Directors' Stock
                  Option Plan as of said date that are vested and exercisable
                  immediately prior to said date and have option exercise prices
                  that are less than the Fair Market Value of the Shares
                  underlying such options were exercised).

                  (ii)     As of any other date, the closing sale price at which
         the Shares are sold regular way on a national securities exchange or
         the Nasdaq National Market on said date, or, if no sales occur on such
         date, then on the next preceding date on which there were such sales of
         the Shares.

         (i)      "Management Stockholders' Agreement" means an agreement dated
as of July 31, 1998 between the Company and a Participant that sets forth the
terms and conditions and limitations applicable to any Shares purchased pursuant
to Options granted under this Plan.

         (j)      "Option Agreement" means an agreement between the Company and
a Participant that sets forth the terms, conditions and limitations applicable
to a grant of Options pursuant to the Plan.

         (k)      "Option" means an option to purchase shares of the Common
Stock. Options can be either incentive stock options under Section 422 of the
Code or non-qualified stock options.

         (l)      "Participant" means an Employee, or other person having a
relationship with the Company or one of its Subsidiaries, to whom one or more
grants of Options have been made and such grants have not all been forfeited or
terminated under the Plan.


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         (m)      "Stockholder's Agreements" shall mean the Employee
Stockholder's Agreement and the Management Stockholder's Agreement,
collectively.

         (n)      "Subsidiary" means any corporation, partnership, limited
liability company, association, joint venture or other entity whose accounts are
consolidated with the accounts of the Company in the Company's consolidated
financial statements.

         (o)      "Consolidated Unrestricted Cash" as of any date means the sum
of (i) the unrestricted cash and cash equivalents reportable on a consolidated
balance sheet of the Company and the Subsidiaries prepared as of such date in
accordance with GAAP and the Company's accounting policies plus (ii) the
aggregate exercise price for all outstanding Options and all outstanding options
under the MedCath Holdings, Inc. Outside Directors' Stock Option Plan as of said
date that (A) are vested and exercisable immediately prior to said date and (B)
have option exercise prices that are less than the Fair Market Value of the
Shares underlying such options.

         (p)      "Consolidated Debt" as of any date means the long and
short-term debt reportable on a consolidated balance sheet of the Company and
the Subsidiaries prepared as of such date in accordance with GAAP and the
Company's accounting policies.

         (q)      "Consolidated EBITDA" for a period means the difference
between (i) the sum of (A) Consolidated Net Income for such period plus (B) the
amounts which have been deducted in the determination of Consolidated Net Income
for such period for pre-hospital opening expense, interest expense, total
federal, state, local and foreign income taxes and depreciation and amortization
expense minus (ii) the amount described in clause (i) allocable to minority
interests in the Subsidiaries.

         (r)      "Consolidated Net Income" for a period means the consolidated
net operating income of the Company and the Subsidiaries (excluding (i)
non-recurring transactions and items and (ii) Unconsolidated Affiliate Interest)
after interest expense, income and similar taxes and depreciation and
amortization for such period, all as determined in accordance with GAAP and the
Company's accounting policies applied on a consistent basis.

         (s)      "GAAP" means generally accepted accounting principles in the
United States applied on a consistent basis.

         (t)      "Unconsolidated Affiliate Interest" for a period means the
Company's interest in the net income or loss of unconsolidated affiliates for
such period as determined in accordance with the equity method of accounting
under GAAP and the Company's accounting policies applied on a consistent basis.

3.       Administration of Plan

         (a)      The Plan shall be administered by the Committee; provided,
however, that the members of the Committee shall qualify to administer the Plan
for purposes of Rule 16b-3 (and any other applicable rule) promulgated under
Section 16(b) of the Exchange Act to the extent that the Company is subject to
such rule. The Committee may adopt its own rules of procedure,


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and action of a majority of the members of the Committee taken at a meeting, or
action taken without a meeting by unanimous written consent, shall constitute
action by the Committee. The Committee shall have the power and authority to
administer, construe and interpret the Plan, to make rules for carrying it out
and to make changes in such rules. Any such interpretations, rules and
administration shall be consistent with the basic purposes of the Plan.

         (b) The Committee may delegate to the Chief Executive Officer and to
other senior officers of the Company its duties under the Plan subject to such
conditions and limitations as the Committee shall prescribe except that only the
Committee may designate and make Option grants to Participants who are subject
to Section 16 of the Exchange Act.

         (c) The Committee may employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company, and the
officers and directors of the Company shall be entitled to rely upon the advice,
opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon all Participants, the Company and all other interested
persons. No member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan or
Option grants, and all members of the Committee shall be fully protected by the
Company with respect to any such action, determination or interpretation.

4.       Eligibility

         The Committee may from time to time make Option grants under the Plan
to such Employees, or other persons having a relationship with the Company or
any of its Subsidiaries, and in such form and having such terms, conditions and
limitations as the Committee may determine. No Option grants may be made under
this Plan to directors of the Company or any of its Subsidiaries who are not
also employed by the Company or one of its Subsidiaries. Options may be granted
singly, in combination or in tandem. The terms, conditions and limitations of
each Option grant under the Plan shall be set forth in an Option Agreement, in a
form approved by the Committee, consistent, however, with the terms of the Plan
and the applicable Stockholder's Agreement.

5.       Grants

         From time to time, the Committee, in its sole discretion, will
determine the forms and amounts of Options to be granted to Participants,
including whether such Options shall be incentive stock options or non-qualified
stock options. At the time of an Option grant, the Committee shall determine,
and shall include in the Option Agreement or other Plan rules, the option
exercise period, the option price, and such other conditions or restrictions on
the grant or exercise of the Option as the Committee deems appropriate. In
addition to other restrictions contained in the Plan, an Option granted under
this Paragraph 5, (i) may not be exercised more than 10 years after the date it
is granted and (ii) may not have an option exercise price less than the par
value of the Common Stock on the date the Option is granted. Payment of the
option price shall be made in cash or in shares of Common Stock, or a
combination thereof, in accordance with the terms of the Plan, the Option
Agreement and of any applicable guidelines of


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the Committee in effect at the time; provided, however, that any Options granted
in replacement of options held by a Participant pursuant to any MedCath, Inc.
stock option plan shall be subject to such other terms and conditions as
provided for in the applicable Stockholder's Agreement and other related
documents.

         Options may be granted prior to the effective date of the Plan (as
determined pursuant to Paragraph 13 herein); provided, however, that no Option
shall be Exercisable prior to the date of the approval of the Plan by the
stockholders of the Company.

6.       Limitations and Conditions

         (a)      The number of Shares available under this Plan shall be
____________ shares of the authorized Common Stock as of the effective date of
the Plan, all of which are available for grants of incentive stock options. The
number of Shares subject to Options under this Plan to any one Participant shall
not be more than ____________ Shares. The foregoing limitations shall not
include the number of Shares in respect of which Options are granted in respect
of options on shares of common stock of MedCath, Inc. that were rolled over into
the Company and this Plan pursuant to the applicable Stockholder's Agreement
between the Company and certain employees. Unless restricted by applicable law,
Shares related to Options that are forfeited, terminated, cancelled or expire
unexercised, shall immediately become available to be subject to Option grants.

         (b)      No Options shall be granted under the Plan beyond ten years
after the effective date of the Plan, but the terms of Options granted on or
before the expiration of the Plan may extend beyond such expiration. At the time
an Option is granted or amended or the terms or conditions of an Option are
changed, the Committee may provide for limitations or conditions on such grant
or purchase consistent with the terms of the applicable Stockholder's Agreement.

         (c)      Nothing contained herein shall affect the right of the Company
to terminate any Participant's employment at any time or for any reason, subject
to the terms and conditions of any other agreement a Participant may have with
the Company.

         (d)      Other than as specifically provided with regard to the death
of a Participant or this Section 6(d), no benefit under the Plan shall be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, or charge, and any attempt to do so shall be void. No such
benefit shall, prior to receipt thereof by the Participant, be in any manner
liable for or subject to the debts, contracts, liabilities, engagements, or
torts of the Participant; provided, however, the Participant may, for purposes
of estate or gift tax planning purposes, transfer any Options granted to the
Participant to any family member, trust, or other estate or gift tax planning
vehicle, so long as any such permitted transferee agrees to be bound by all
terms and conditions to which the transferring Participant is subject and such
Participant is designated as the exclusive authorized representative for
purposes of making any decisions with respect to such transferred Options.

         (e)      Participants shall not be, and shall not have any of the
rights or privileges of, stockholders of the Company in respect of any Shares
purchasable in connection with any Option


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grant unless and until certificates representing any such Shares have been
issued by the Company to such Participants.

         (f)      No election as to benefits or exercise of Options may be made
during a Participant's lifetime by anyone other than the Participant except by a
legal representative appointed for or by the Participant.

         (g)      Absent express provisions to the contrary, any grant of
Options under this Plan shall not be deemed compensation for purposes of
computing benefits or contributions under any retirement plan of the Company or
its Subsidiaries and shall not affect any benefits under any other benefit plan
of any kind now or subsequently in effect under which the availability or amount
of benefits is related to level of compensation. This Plan is not a "Retirement
Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of
1974, as amended.

         (h) Unless the Committee determines otherwise, no benefit or promise
under the Plan shall be secured by any specific assets of the Company or any of
its Subsidiaries, nor shall any assets of the Company or any of its Subsidiaries
be designated as attributable or allocated to the satisfaction of the Company's
obligations under the Plan.

7.       Transfers and Leaves of Absence

         For purposes of the Plan, unless the Committee determines otherwise:
(a) a transfer of a Participant's employment without an intervening period of
separation among the Company and any Subsidiary shall not be deemed a
termination of employment, and (b) a Participant who is granted in writing a
leave of absence shall be deemed to have remained in the employ of the Company
during such leave of absence.

8.       Adjustments

         In the event of any change in the outstanding Common Stock by reason of
a stock split, spin-off, stock dividend, stock combination or reclassification,
recapitalization or merger, change of control, or other similar event or
corporate change, the Committee shall adjust appropriately the number of Shares
subject to the Plan and available for or covered by Option grants and exercise
prices related to outstanding Option grants and make such other revisions to
outstanding Option grants as it deems are equitably required.

9.       Merger, Consolidation, Exchange, Acquisition, Liquidation or
         Dissolution

         In its absolute discretion, and on such terms and conditions as it
deems appropriate, coincident with or after the grant of any Option, the
Committee may provide that such Option cannot be exercised after (i) the merger
or consolidation of either the Company, MedCath Intermediate Holdings, Inc., or
MedCath Incorporated into another corporation, (ii) the exchange of all or
substantially all of the assets of either the Company, MedCath Intermediate
Holdings, Inc., or MedCath Incorporated for the securities of another
corporation, (iii) the acquisition by another corporation of 80% or more of the
Company's, MedCath Intermediate Holdings, Inc.'s, or MedCath Incorporated's then
outstanding shares of voting stock, or (iv) the recapitalization,


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reclassification, liquidation or dissolution of the Company, MedCath
Intermediate Holdings, Inc., or MedCath Incorporated, (a "Transaction"), and if
the Committee so provides that such Option cannot be exercised, it shall, on
such terms and conditions as it deems appropriate, also provide, either by the
terms of such Option or by a resolution adopted prior to the occurrence of such
Transaction, that, for some reasonable period of time prior to such Transaction,
such Option shall be exercisable as to all shares subject thereto,
notwithstanding anything to the contrary herein (but subject to the provisions
of Paragraph 6(b)) and that, upon the occurrence of such Transaction, such
Option shall terminate and be of no further force or effect; provided, however,
in lieu of so providing that an Option cannot be exercised after a Transaction,
the Committee may provide, in its absolute discretion, that the Option shall
remain exercisable after a Transaction in accordance with its original terms,
except upon exercise of such Option, the holder thereof shall receive the kind
and amount of securities and/or other property, or the cash equivalent thereof,
receivable as a result of such Transaction by the holder of a number of shares
of stock for which such Option could have been exercised immediately prior to
such Transaction.

10.      Amendment and Termination

         The Committee shall have the authority to make such amendments to any
terms and conditions applicable to outstanding Option grants as are consistent
with this Plan provided that, except for adjustments under Paragraph 8 or 9
hereof, no such action shall modify such Option grant in a manner adverse to the
Participant without the Participant's consent except as such modification is
provided for or contemplated in the terms of the Option grant.

         The Board of Directors may amend, suspend or terminate the Plan except
that no such action, other than an action under Paragraph 8 or 9 hereof, may be
taken which would, without shareholder approval, increase the aggregate number
of Shares subject to Options under the Plan, decrease the exercise price of
outstanding Options, change the requirements relating to the Committee or extend
the term of the Plan.

11.      Foreign Options and Rights

         The Committee may grant Options to Employees who are subject to the
laws of nations other than the United States, which Option grants may have terms
and conditions that differ from the terms thereof as provided elsewhere in the
Plan for the purpose of complying with foreign laws.

12.      Withholding Taxes

         The Company shall have the right to deduct from any cash payment made
under the Plan any federal, state or local income or other taxes required by law
to be withheld with respect to such payment. It shall be a condition to the
obligation of the Company to deliver shares upon the exercise of an Option that
the Participant pay to the Company such amount as may be requested by the
Company for the purpose of satisfying any liability for such withholding taxes.
Any Option Agreement may provide that the Participant may elect, in accordance
with any conditions set forth in such Option Agreement, to pay a portion or all
of such withholding taxes from the Participant's regular wages earned from the
Company or in shares of Common Stock.

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13.      Effective Date and Termination Dates

         The Plan shall be effective on and as of the date of its approval by
the stockholders of the Company and shall terminate ten years later, subject to
earlier termination by the Board of Directors pursuant to Paragraph 10.


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