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                                                                   Exhibit 10.38

                              EMPLOYMENT AGREEMENT

         AGREEMENT, made as of July 31, 1998 by and between MEDCATH,
INCORPORATED a North Carolina corporation (the "Company") and Stephen R. Puckett
("Executive").

                                    RECITALS

         In order to induce Executive to serve as the Chief Executive Officer of
the Company, the Company desires to provide Executive with compensation and
other benefits on the terms and conditions set forth in this Agreement.

         Executive is willing to accept such employment and perform services for
the Company, on the terms and conditions hereinafter set forth.

         It is therefore hereby agreed by and between the parties as follows:

         1.       Employment.

                  1.1      Subject to the terms and conditions of this
Agreement, the Company agrees to employ Executive during the term hereof as its
Chief Executive Officer. In his capacity as the chief executive officer of the
Company, Executive shall report to the board of directors of the Company (the
"Board") and shall have the customary powers, responsibilities and authorities
of a chief executive officer for corporations of the size and character of the
Company, as it exists from time to time, and as are assigned by the Board.

                  1.2      Subject to the terms and conditions of this
Agreement, Executive hereby accepts employment with the Company commencing on
the date hereof, and agrees to devote his full working time and efforts, to the
best of his ability, experience and talent, to the performance of services,
duties and responsibilities in connection therewith. Executive shall perform
such duties and exercise such powers, commensurate with his position, as the
Board shall from time to time


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delegate to him on such terms and conditions and subject to such restrictions as
the Board may reasonably from time to time impose. Executive also agrees to
serve, if elected, as a member of the Board.

                  1.3      Nothing in this Agreement shall preclude Executive
from engaging, so long as, in the reasonable determination of the Board, such
activities do not interfere with his duties and responsibilities hereunder, in
charitable and community affairs, from managing any passive investment made by
him in publicly traded equity securities or other property (provided that no
such investment may exceed 5% of the equity of any entity or, without prior
notice to the Board and subject to Section 13 (b) hereof, from serving as a
member of boards of directors or as a trustee of any other corporation,
association or entity.

         2.       Term of Employment. Executive's term of employment under this
Agreement shall commence on the date hereof and, subject to the terms hereof,
shall terminate on the earlier of (i) July 31, 2002 (the "Termination Date") or
(ii) termination of Executive's employment pursuant to this Agreement; provided,
however, that, unless earlier terminated as a result of Executive's termination
of employment, this Agreement shall automatically renew for one additional year
following the Termination Date unless, at least 90 days prior to the Termination
Date, Executive provides written notice to the Company of his intention not to
continue his employment with the Company for such additional year; provided,
further, that any other termination of employment by Executive (other than for
death, Permanent Disability or Good Reason) may only be made upon 90 days prior
written notice to the Company and any termination of employment by Executive for
Good Reason may only be made upon 30 days prior written notice to the Company.


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         3.       Compensation.

                  3.1      Salary. The Company shall pay Executive a base salary
("Base Salary") at the rate of $325,680.00 per annum for the year commencing on
the beginning of Executive's term of employment hereunder. Base Salary shall be
adjusted annually at the discretion of the Board but in no event shall Base
Salary be reduced nor be less than the median base salary for a comparable
position at corporations of similar size and character as the Company, as it
exists from time to time, and, as increased, shall constitute "Base Salary"
hereunder. Base Salary shall be payable in accordance with the ordinary payroll
practices of the Company.

                  3.2      Annual Bonus. In addition to his Base Salary, the
Company shall pay to Executive an annual cash bonus (the "Bonus") during the
term of his employment hereunder equal to a percentage of Executive's Base
Salary (the "Target Bonus"). The Bonus for each fiscal year of the Company will
be tied to either the Company's earnings per share as reported in its annual
financial statements excluding any extraordinary or nonrecurring items set forth
therein (the "EPS") and the annual EPS target for that year (the "EPS Target"),
or such other applicable performance targets as are established by the Board (or
a committee thereof). On or before the beginning of each fiscal year, the Board
(or a committee thereof) shall establish an EPS Target or other applicable
performance target (the "Target") for that year. At the end of each fiscal year,
Executive shall be paid a Target Bonus based upon the following formula:

         If the Company's actual performance results equal 80% of the Target or
         greater (e.g., actual EPS is 80% of the EPS Target or greater) (the
         comparative percentage of the actual performance results to the Target
         is referred to herein as the "Bonus Growth Percentage"), then
         Executive's Target Bonus shall be the Bonus Growth Percentage
         multiplied by 50% of Executive's Base Salary for the fiscal year then
         ended, subject to a maximum Bonus Growth Percentage of 120%. If the
         Bonus Growth Percentage is less than 80%, no Bonus will be earned or
         paid.


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                  3.3      Supplemental Payments. As soon as practicable after
the execution of this Agreement by the Company and Executive, the Company, or an
affiliate of the Company on behalf of the Company, shall pay to Executive: (a)
$378,342.00 in consideration of the termination of Executive's previously
existing employment agreement with the Company; and (b) $400,000.00 in
consideration of Executive entering into the restrictive covenants set forth in
Section 13 hereof in respect of the period during which Executive is employed
with the Company.

                  3.4      Compensation Plans and Programs. Executive shall be
eligible to participate in any compensation plan or program maintained by the
Company from time to time, which compensation plans and programs are intended to
be comparable to those currently maintained by the Company, in which other
senior executives of the Company participate on terms that are intended to be
comparable to those applicable to such other senior executives.

         4.       Employee Benefits.

                  4.1      Employee Benefit Programs, Plans and Practices. The
Company shall provide Executive during the term of his employment hereunder with
coverage under all employee pension and welfare benefit programs, plans and
practices (commensurate with his positions in the Company from time to time and
to the extent permitted under any employee benefit plan) in accordance with the
terms thereof, which the Company makes available to its senior executives and
which employee pension and welfare benefit programs, plans and practices that
are intended to be comparable to those currently maintained by the Company.

                  4.2      Vacation and Fringe Benefits. Executive shall be
entitled to no less than the number of business days paid vacation in each
calendar year to which Executive is currently entitled, which shall be taken at
such times as are consistent with Executive's responsibilities hereunder. In
addition, Executive shall be entitled to the perquisites and other fringe
benefits


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currently made available to senior executives of the Company, commensurate with
his position with the Company.

         5.       Expenses. Executive is authorized to incur reasonable expenses
in carrying out his duties and responsibilities under this Agreement, including,
without limitation, expenses for travel and similar items related to such duties
and responsibilities. The Company will reimburse Executive for all such expenses
upon presentation by Executive from time to time of appropriately itemized and
approved (consistent with the Company's policy) accounts of such expenditures.

         6.       Termination of Employment.

                  6.1      Termination By the Company Without Cause or By
Executive for Good Reason. (a) The Company may terminate Executive's employment
at any time for any reason. If Executive's employment is terminated by the
Company without Cause (as defined in Section 6.4 hereof) (other than as a result
of Executive's death or Permanent Disability (as defined in Section 6.2 hereof))
or if Executive terminates his employment for Good Reason (as defined in Section
6.1 (d) hereof) prior to the Termination Date, Executive shall receive such
payments, if any, under applicable plans or program, including but not limited
to those referred to in Section 3.4 hereof, to which he is entitled pursuant to
the terms of such plans or programs. In addition, Executive shall be entitled to
receive the following: (i) an amount equal to: (A) one times the Executive's
Base Salary (for employment termination occurring on or before the first
anniversary of the Purchase Date as defined in the Management Stockholder's
Agreement attached hereto) or (B) two times the Executive's Base Salary (for
termination occurring after the first anniversary of the Purchase Date, at the
annual rate as of the date of termination under this Section 6.1(a), payable
over the twelve month period following the Termination Date in substantially
equal installment payments and in accordance with the normal payroll practices
of the Company; (ii) a cash lump sum payment in


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respect of (x) accrued but unused vacation days (the "Vacation Payment"), (y)
compensation earned but not yet paid (including any deferred Bonus payments (the
"Compensation Payment") and (z) reasonable expenses incurred under Section 5 but
not yet reimbursed (the "Expense Payment"); and (iii) continued coverage under
any employee medical, disability and life insurance plans in accordance with the
respective terms thereof for a period ending on the earlier of (A) the second
anniversary of the date of termination under this Section 6.1 (a) or (B) the
date on which the Executive becomes covered under comparable benefit plans of a
new employer.

                  (b)      The Vacation Payment, the Compensation Payment, and
the Expense Payment shall be paid by the Company to Executive within 30 days
after the termination of Executive's employment by check payable to the order of
Executive or by wire transfer to an account specified by Executive.

                  (c)      For purposes of this Agreement, "Good Reason" shall
mean any of the following (without Executive's express prior written consent):

                  (i)      A substantial reduction by the Company of Executive's
         duties or responsibilities, other than in connection with the
         termination of Executive's employment by the Company for Cause, by
         Executive without Good Reason or as a result of Permanent Disability or
         Executive's death;

                  (ii)     A reduction by the Company in Executive's Base Salary
         or an amendment to the terms of the bonus plan in effect for senior
         executives and in which Executive participates on the date hereof which
         would adversely effect the ability of Executive to receive a Bonus
         (except that the establishment of the EPS or other performance targets
         to be set by the Board annually shall be deemed not to constitute such
         an amendment);

                  (iii)    A reduction or elimination of Executive's eligibility
         to participate in any of the Company's employee benefit plans that is
         inconsistent with the eligibility of similarly situated executives of
         the Company to participate therein; or

                  (iv)     Any relocation to a primary workplace that is more
         than fifty (50) miles from the Executive's workplace in effect as of
         the date of this Agreement.


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                  (d)      With respect to (i) the payments Executive could
receive under this Section 6.1 and (ii) the provisions of the options for
capital stock of the Company granted as of the date of this Agreement (whether
as new or replacement options), the Company represents that it has received from
Welsh, Carson, Anderson & Stowe VII, L.P. and Kohlberg Kravis Roberts & Co.
(holders of more than 75% of all outstanding shares of capital stock of the
Company and its parent entities), after adequate disclosure, stockholder
approval in a separate vote to make such payments and provide for such
acceleration, both of which are made on the terms of the agreements presented to
such stockholders.

         6.2      Permanent Disability. If the Executive becomes totally and
permanently disabled (as defined in the Company's Long-Term Disability Benefit
Plan applicable to senior executive officers as in effect on the date hereof)
("Permanent Disability"), the Company or Executive may terminate Executive's
employment on written notice thereof, and Executive shall receive or commence
receiving, as soon as practicable:

                  (i)      amounts payable pursuant to the terms of a disability
         insurance policy or similar arrangement which the Company maintains
         during the term hereof;

                  (ii)     the Target Bonus in respect of the fiscal year in
         which his termination occurs, prorated by a fraction, the numerator of
         which is the number of days of the fiscal year until termination and
         the denominator of which is 365;

                  (iii)    the Vacation Payment, the Compensation Payment, and
         the Expense Payment; and

                  (iv)     such payments under applicable plans or programs,
         including but not limited to those referred to in Section 3.4 hereof,
         to which he is entitled pursuant to the terms of such plans or
         programs.

         6.3      Death. In the event of Executive's death during the term of
his employment hereunder, Executive's estate or designated beneficiaries shall
receive or commence receiving, as soon as practicable:


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                  (i)      the Target Bonus in respect of the fiscal year in
         which his death occurs, prorated by a fraction, the numerator of which
         is the number of days of the fiscal year until his death and the
         denominator of which is 365;

                  (ii) any death benefits provided under the employee benefit
         programs, plans and practices referred to in Section 4.1 hereof, in
         accordance with their terms;

                  (iii) the Vacation Payment, the Compensation Payment, and the
         Expense Payment; and

                  (iv) such payments under applicable plans or programs,
         including but not limited to those referred to in Section 3.4
         hereof, to which Executive's estate or designated beneficiaries are
         entitled pursuant to the terms of such plans or programs.

                  6.4      Termination By the Company for Cause or By Executive
without Good Reason. (a) The Company shall have the right to terminate the
employment of Executive for Cause. In the event that Executive's employment is
terminated by the Company for Cause, as hereinafter defined, or by Executive
without Good Reason (other than as a result of the Executive's Permanent
Disability or death), prior to the Termination Date, notwithstanding any other
provision in this Agreement, the Executive shall be entitled only to the
Compensation Payment, the Vacation Payment, and the Expense Payment, and shall
not be entitled to any further compensation or benefits hereunder including,
without limitation, the payment of any Bonus in respect of all or any portion of
the fiscal year in which such termination occurs.

                  (b)      As used herein, the term "Cause" shall be limited to
(i) willful misconduct by Executive involving dishonesty or breach of trust in
connection with his employment which results in a demonstrable injury (which is
other than de minimis or insignificant) to the Company, (ii) willful and
continued failure by Executive to perform his material duties with respect to
the Company or its subsidiaries, which failure continues beyond 10 days after a
written demand for substantial performance of such duties was given to Executive
by the Company, or (iii) the Executive's conviction of, or plea of nolo
contendere to, a felony. Termination of Executive pursuant to this Section 6.4
shall be made by delivery to Executive of written notice that, in the


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reasonable judgment of the Board, Executive was guilty of conduct set forth in
any of clauses (i) through (iii) above and specifying the particulars thereof.

         [7.      Mitigation of Damages. Executive shall not be required to
mitigate damages or the amount of any payment provided for under this Agreement
by seeking other employment or otherwise after the termination of his employment
hereunder.

         8.       Notices. All notices or communications hereunder shall be in
writing, addressed as follows:

                  To the Company:

                  MedCath Holdings, Inc.
                  7621 Little Avenue
                  Suite 106
                  Charlotte, North Carolina 28226
                  Attention: General Counsel

                  with a copy to:

                  MedCath, Inc.
                  c/o Kohlberg Kravis
                      Roberts & Co.
                  2800 Sand Hill Road
                  Suite 200
                  Menlo Park, California 94025
                  (Attn: Edward A. Gilhuly)

                  with a copy to:

                  Alvin H.  Brown, Esq.
                  Simpson Thacher & Bartlett
                  425 Lexington Avenue
                  New York, New York 10017

                  To Executive:

                  Stephen R. Puckett
                  2324 Kingsmill Terrace
                  Charlotte, North Carolina 28226


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                  with a Copy to:

                  [EXECUTIVE'S ATTORNEY]
                  [ADDRESS]

Any such notice or communication shall be delivered by hand, by telecopy (with
machine confirmation) or by courier or sent certified or registered mail, return
receipt requested, postage prepaid, addressed as above (or to such other address
as such party may designate in a notice duly delivered as described above), and
the third business day after the actual date of mailing shall constitute the
time at which notice was given.

         9.       Separability; Legal Fees. If any provision of this Agreement
shall be declared to be invalid or unenforceable, in whole or in part, such
invalidity or unenforceability shall not affect the remaining provisions hereof
which shall remain in full force and effect. Each party shall bear the costs of
any legal fees and other fees and expenses which may be incurred in respect of
enforcing its respective rights under this Agreement.

         10.      Assignment. This contract shall be binding upon and inure to
the benefit of the heirs and representatives of Executive and the assigns and
successors of the Company, but neither this Agreement nor any rights or
obligations hereunder shall be assignable or otherwise subject to hypothecation
by Executive (except by will or by operation of the laws of intestate
succession) or by the Company, except that the Company may assign this Agreement
to any successor (whether by merger, purchase or otherwise) to all or
substantially all of the stock, assets or businesses of the Company, if such
successor expressly agrees to assume the obligations of the Company hereunder.

         11.      Amendment. This Agreement may only be amended by written
agreement of the parties hereto.

         12.      Nondisclosure of Confidential Information; NonCompetition. (a)
At any time during or after Executive's employment with the Company, Executive
shall not, without the prior


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written consent of the Company, use, divulge, disclose or make accessible to any
other person, firm, partnership, corporation or other entity any Confidential
Information (as hereinafter defined) pertaining to the business of the Company
or any of its subsidiaries, except (i) while employed by the Company, in the
business of and for the benefit of the Company, or (ii) when required to do so
by a court of competent jurisdiction, by any governmental agency having
supervisory authority over the business of the Company, or by any administrative
body or legislative body (including a committee thereof) with jurisdiction to
order Executive to divulge, disclose or make accessible such information. For
purposes of this Section 13(a), "Confidential Information" shall mean nonpublic
information concerning the financial data, strategic business plans, and other
non-public, proprietary and confidential information of the Company, its
subsidiaries, Kohlberg Kravis Roberts & Co., Welsh, Carson, Anderson & Stowe
VII, L.P., or their respective affiliates as in existence as of the date of
Executive's termination of employment (collectively, the "Restricted Group")
that, in any case, is not otherwise available to the public (other than by
Executive's breach of the terms hereof).

                  (b)      During the period of his employment hereunder and for
one year thereafter, Executive agrees that, without the prior written consent of
the Company, (A) he will not, directly or indirectly, either as principal,
manager, agent, consultant, officer, stockholder, partner, investor, lender or
employee or in any other capacity, carry on, be engaged in or have any financial
interest in (other than an ownership position of less than 5 percent in any
company whose shares are publicly traded), any business, which is in Competition
(as hereinafter defined) with the existing business of the Company or its
subsidiaries or any such business in which the Company or any of its
subsidiaries has taken concrete steps toward engaging and (B) he shall not, on
his own behalf or on behalf of any person, firm or company, directly or
indirectly, solicit or offer employment to any


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person who has been employed by the Company or its subsidiaries at any time
during the 12 months immediately preceding such solicitation.

                  (c)      For purposes of this Section 13, a business shall be
deemed to be in Competition with the Company or its subsidiaries if it is
engaged in or has taken concrete steps toward engaging in the business of owning
or managing cardiac care hospitals, centers or clinics in the United States.

                  (d)      Executive and the Company agree that this covenant
not to compete is a reasonable covenant under the circumstances, and further
agree that if in the opinion of any court of competent jurisdiction such
restraint is not reasonable in any respect, such court shall have the right,
power and authority to excise or modify such provision or provisions of this
covenant as to the court shall appear not reasonable and to enforce the
remainder of the covenant as so amended. Executive agrees that any breach of the
covenants contained in this Section 13 would irreparably injure the Company.
Accordingly, Executive agrees that the Company may, in addition to pursuing any
other remedies it may have in law or in equity, cease making any payments
otherwise required by this Agreement and obtain an injunction against Executive
from any court having jurisdiction over the matter restraining any further
violation of this Agreement by Executive.

         13.      Beneficiaries; References. Executive shall be entitled to
select (and change, to the extent permitted under any applicable law) a
beneficiary or beneficiaries to receive any compensation or benefit payable
hereunder following Executive's death, and may change such election, in either
case by giving the Company written notice thereof. In the event of Executive's
death or a judicial determination of his incompetence, reference in this
Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.


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Any reference to the masculine gender in this Agreement shall include, where
appropriate, the feminine.

         14.      Survivorship. The respective rights and obligations of the
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations, including
the provisions of Section 13 herein. The provisions of this Section 15 are in
addition to the survivorship provisions of any other section of this Agreement.

         15.      Governing Law. This Agreement shall be construed, interpreted
and governed in accordance with the laws of the State of North Carolina without
reference to rules relating to conflicts of law.

         16.      Effect on Prior Agreements. This Agreement contains the entire
understanding between the parties hereto and supersedes in all respects any
prior or other agreement or understanding between the Company or any affiliate
of the Company and Executive other than the agreements referred to in Section 7
hereof.

         17.      Withholding. The Company shall be entitled to withhold from
payment any amount of withholding required by law.


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         18.      Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original.

                                       MEDCATH INCORPORATED



                                       By: /s/ Richard Post
                                          -------------------------------------
                                          Name:
                                          Title:



                                          /s/ Stephen R. Puckett
                                          -------------------------------------
                                          Stephen R. Puckett


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