SERVICE AGREEMENT



                                     BETWEEN



                       MEDCATH PHYSICIAN MANAGEMENT, INC.



                                       AND



                             VALLEY CARDIOLOGY, P.A.



                                December 12, 1997




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                                TABLE OF CONTENTS

                                     TO THE

                                SERVICE AGREEMENT

                                     BETWEEN

                       MEDCATH PHYSICIAN MANAGEMENT, INC.

                                       AND

                             VALLEY CARDIOLOGY, P.A.

                                December 12, 1997

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                                                                                                               Page
<S>                                                                                                              <C>
ARTICLE I  RELATIONSHIP OF THE PARTIES............................................................................1
         SECTION 1.1 Independent Relationship.....................................................................1
         SECTION 1.2 Responsibilities of the Parties..............................................................2
         SECTION 1.3 Practice's Matters...........................................................................2
         SECTION 1.4 Patient Referrals............................................................................2

ARTICLE II  DEFINITIONS...........................................................................................2

ARTICLE III  FACILITIES TO BE PROVIDED BY MANAGER.................................................................6
         SECTION 3.1 Facilities...................................................................................6
         SECTION 3.2 Independence of Practice.....................................................................7

ARTICLE IV  DUTIES OF THE POLICY BOARD............................................................................7
         SECTION 4.1 Formation and Operation of the Policy Board..................................................7
         SECTION 4.2 Duties and Responsibilities of the Policy Board..............................................7

ARTICLE V  ADMINISTRATIVE SERVICES TO BE PROVIDED BY MANAGER......................................................9
         SECTION 5.1 Performance of Management Functions..........................................................9
         SECTION 5.2 Financial Planning Goals.....................................................................9
         SECTION 5.3 Audits and Statements.......................................................................10
         SECTION 5.4 Inventory and Supplies......................................................................10
         SECTION 5.5 Management Services and Administration......................................................11
         SECTION 5.6 Executive Director..........................................................................14
         SECTION 5.7 Personnel...................................................................................15
         SECTION 5.8 Events Excusing Performance.................................................................15
         SECTION 5.9 Compliance with Applicable Laws.............................................................15
         SECTION 5.10 Quality Assurance..........................................................................15
         SECTION 5.11 Ancillary Services.........................................................................16


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ARTICLE VI  OBLIGATIONS OF PRACTICE..............................................................................16
         SECTION 6.1 Professional Services.......................................................................16
         SECTION 6.2 Medical Practice............................................................................16
         SECTION 6.3 Physician Employees.........................................................................16
         SECTION 6.4 Professional Insurance Eligibility..........................................................17
         SECTION 6.5 Fees for Professional Services..............................................................17
         SECTION 6.6 Name........................................................................................17
         SECTION 6.7 Material Decisions..........................................................................17
         SECTION 6.8 Employment of Physician Shareholders........................................................18
         SECTION 6.9 Life Insurance..............................................................................19
         SECTION 6.10 Profit Sharing Plan........................................................................19

ARTICLE VII  RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES........................................................20
         SECTION 7.1 Restrictive Covenants by Practice...........................................................21
         SECTION 7.2 Restrictive Covenants By Current Physician Shareholders and Physician Employees.............21
         SECTION 7.3 Restrictive Covenants By Future Physician Employees.........................................22
         SECTION 7.4 Physician Shareholder and Physician Employee Liquidated Damages.............................22
         SECTION 7.5 Development of Exclusive Ventures...........................................................23
         SECTION 7.6 Enforcement.................................................................................23

ARTICLE VIII  FINANCIAL ARRANGEMENTS.............................................................................24
         SECTION 8.1 Management Fees.............................................................................24
         SECTION 8.2 Collection of Management Fee................................................................25
         SECTION 8.3 Limited Guaranty Agreement..................................................................25

ARTICLE IX  RECORDS..............................................................................................26
         SECTION 9.1 Patient Records.............................................................................26
         SECTION 9.2 Records Owned by Manager....................................................................26
         SECTION 9.3 Access to Records...........................................................................26

ARTICLE X  INSURANCE AND INDEMNITY...............................................................................26
         SECTION 10.1 Insurance to be Maintained by Practice.....................................................26
         SECTION 10.2 Insurance to be Maintained by Manager......................................................26
         SECTION 10.3 Tail Insurance Coverage....................................................................27
         SECTION 10.4 Additional Insureds........................................................................27
         SECTION 10.5 Indemnification............................................................................27
         SECTION 10.6 Rules Regarding Indemnification............................................................28
         SECTION 10.7 Offset.....................................................................................28

ARTICLE XI  TERM AND TERMINATION.................................................................................29
         SECTION 11.1 Term of Agreement..........................................................................29
         SECTION 11.2 Extended Term..............................................................................29
         SECTION 11.3 Termination by Practice....................................................................29
         SECTION 11.4 Termination by Manager.....................................................................30


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         SECTION 11.5 Actions after Termination..................................................................30
         SECTION 11.6 Closing of Repurchase by Practice and Effective Date of Termination........................31

ARTICLE XII  GENERAL PROVISIONS..................................................................................31
         SECTION 12.1 Assignment.................................................................................31
         SECTION 12.2 Whole Agreement, Modification..............................................................32
         SECTION 12.3 Notices....................................................................................32
         SECTION 12.4 Binding on Successors......................................................................32
         SECTION 12.5 Waiver of Provisions.......................................................................32
         SECTION 12.6 Governing Law..............................................................................32
         SECTION 12.7 Severability...............................................................................33
         SECTION 12.8 Additional Documents.......................................................................33
         SECTION 12.9 Attorneys' Fees............................................................................33
         SECTION 12.10 Time is of the Essence....................................................................33
         SECTION 12.11 Confidentiality...........................................................................33
         SECTION 12.12 Contract Modifications for Prospective Legal Events.......................................34
         SECTION 12.13 Remedies Cumulative; Survivability........................................................34
         SECTION 12.14 Language Construction.....................................................................34
         SECTION 12.15 No Obligation to Third Parties............................................................34
         SECTION 12.16 Communications............................................................................35
         SECTION 12.17 Counterpart Executions; Facsimiles........................................................35
         SECTION 12.18 Arbitration...............................................................................35
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<PAGE>


                                SERVICE AGREEMENT



         THIS SERVICE AGREEMENT is made and entered into the 12th day of
December, 1997 by and between MEDCATH PHYSICIAN MANAGEMENT, INC., an Arizona
corporation ("Manager") and VALLEY CARDIOLOGY, P.A., a Texas professional
association ("Practice"), is binding upon execution, and is effective the 1st
day of January, 1998.

                                    RECITALS:

         WHEREAS, Practice is a group medical practice with offices in Hidalgo
County, Texas which provides medical care to the general public;

         WHEREAS, Manager is in the business of owning certain assets of and
managing and administering medical clinics, and providing support services to
and furnishing medical practices with the necessary facilities, equipment,
personnel, supplies and support staff while recognizing that each such practice,
through its physicians, must retain sole responsibility for the medical care of
its patients and thereby respecting the physician-patient relationship which
shall be maintained strictly between the physicians of such a practice and their
patients;

         WHEREAS, Practice desires to obtain the services of Manager in
performing such management functions so as to permit the physicians of Practice
to devote their efforts on a concentrated and continuous basis to the rendering
of medical services to their patients;

         NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Practice hereby agrees to purchase the management and support
services herein described and Manager agrees to provide such services on the
terms and conditions provided in this Agreement.

                                    ARTICLE I

                           RELATIONSHIP OF THE PARTIES

         SECTION 1.1       Independent Relationship.

         Practice and Manager intend to act and perform as independent
contractors, and the provisions hereof are not intended to create any
partnership, joint venture, agency or employment relationship between the
parties. Notwithstanding the authority granted to Manager herein, Manager and
Practice agree that Practice shall retain the authority to direct the medical,
professional, and ethical aspects of its medical practice. Each party shall be
solely responsible for and shall comply with all state and federal laws
pertaining to employment taxes, income withholding, unemployment compensation
contributions and other employment related statutes applicable to that party.

<PAGE>


         SECTION 1.2       Responsibilities of the Parties.

         As more specifically set forth herein, Manager shall provide Practice
with offices and facilities, equipment, supplies, support personnel, and
management and financial advisory services. As more specifically set forth
herein, Practice shall be responsible for the recruitment and hiring of
physicians. Manager shall neither exercise control over nor interfere with the
physician-patient relationship, which shall be maintained strictly between the
physicians of Practice and their patients.

         SECTION 1.3       Practice's Matters.

         Tax preparation, tax planning, and pension and investment planning (and
expenses relating solely to these internal business matters) shall remain the
sole responsibility of Practice and the individual Physician Shareholders.

         SECTION 1.4       Patient Referrals.

         The parties agree that the benefits to Practice hereunder do not
require, are not payment for, and are not in any way contingent upon the
admission, referral or any other arrangement for the provision of any item or
service offered by Manager to any of Practice's patients in any facility or
laboratory controlled, managed or operated by Manager.

                                   ARTICLE II

                                   DEFINITIONS

         Many of the capitalized words and phrases used in this Agreement are
defined below. Some defined terms used in this Agreement are not listed below,
but are defined in the Section in which they are first used because they are
better understood in that context.

                  "Adjustments" means any adjustments for uncollectible
         accounts, discounts, Medicare and Medicaid disallowances, worker's
         compensation, employee/dependent health care benefit programs,
         professional courtesies according to historical operation of Practice
         and other activities that do not generate a collectible fee.

                  "Affiliate" means, with respect to any Person, (i) any Person
         directly or indirectly controlling, controlled by or under common
         control with such Person, (ii) any Person directly or indirectly owning
         or controlling twenty five percent (25%) or more of any class of
         outstanding equity interests of such Person or of any Person which such
         Person directly or indirectly owns or controls twenty five percent
         (25%) or more of any class of equity interests, (iii) any officer,
         director, general partner or trustee of such Person, or any Person of
         which such Person is an officer, director, general partner or trustee,
         or (iv) any Person who is an officer, director, general partner,
         trustee or holder of twenty five percent (25%) or more of the equity
         interests of any Person described in clauses (i) through (iii) of this
         sentence. Practice is not an Affiliate of Manager.



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                  "Agreement" means this Service Agreement between Practice and
         Manager.

                  "Ancillary Revenues" means (a) all fees or revenues actually
         recorded each month (net of Adjustments) by or on behalf of Practice
         which are not Physician Services Revenues or Capitation Revenues,
         including medical director fees, global and technical fees from medical
         ancillary services, and fees for medical management and utilization,
         and other distributions to Practice from health care related
         investments, and including any interest, investment, rental or similar
         payments or income made or payable to Practice, plus (b) revenues from
         capitation allocated to Ancillary Revenues which are not otherwise
         included in Capitation Revenues or Physician Services Revenues;
         excluding however (a) revenue from investments made individually by
         Physician Shareholders; and (b) revenue from medical director fees of a
         Physician Shareholder if (i) such medical directorships are not in
         violation of any agreement to which the Physician Shareholder is bound,
         and (ii) such revenue was not included or reflected in financial
         information or statements of Practice which were provided to Manager in
         order to induce Manager to enter into the transactions contemplated by
         the Master Transaction Agreement.

                  "Asset Purchase Agreement" means that Asset Purchase Agreement
         between Practice and Parent to which this Agreement is an exhibit.

                  "Capitation Revenues" means all payments received or due from
         managed care organizations or other payors when payment is made
         periodically on a per member basis for the partial or total medical
         care needs of a patient, co-payments and all HMO incentive bonuses
         including hospital incentive bonuses.

                  "Executive Director" means that individual hired by Manager
         pursuant to Section 5.6 hereof to manage and administer all of the
         day-to-day business functions of Practice.

                  "GAAP" means generally accepted accounting principles set
         forth in the opinions and pronouncements of the Accounting Principles
         Board of the American Institute of Certified Public Accountants and
         statements and pronouncements of the Financial Accounting Standards
         Board or in such other statements by such other entity or other
         practices and procedures as may be approved by a significant segment of
         the accounting profession, which are applicable to the circumstances as
         of the date of determination. For purposes of this Agreement, GAAP
         shall be applied in a manner consistent with the historic practices
         used by Parent.

                  "Manager Account" means the bank account of Manager described
         in Section 5.5(b)(ii).

                  "Manager Expenses" means, in addition to those expenses
         identified elsewhere herein, all operating and non-operating expenses
         of Manager incurred in the operation of Practice, including, without
         limitation:

                                    (i) Salaries, benefits and other direct
                  costs of all employees of Manager at Practice (but excluding
                  all other Physician Employees);



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                                    (ii) Direct costs of all employees or
                  consultants of Manager (including Affiliates of Manager) or
                  Practice engaged by the Executive Director with Policy Board
                  approval to provide services at or in connection with Practice
                  or who actually provide services at or in connection with
                  Practice required for improved clinic performance; provided,
                  however, only that portion of such employee's or consultant's
                  costs without mark-up by Manager that is allocable to work
                  performed at or for the benefit of Practice will be a Manager
                  Expense;

                                    (iii) Obligations of Manager under leases or
                  subleases relating to the operations of Practice;

                                    (iv) Personal property and intangible taxes
                  assessed against Manager's assets utilized in the management
                  of Practice, commencing on the date of this Agreement;

                                    (v) The amount of interest on all advances
                  made pursuant to Section 5.5(b)(iii) to provide financing or
                  working capital to cover Manager Expenses, Physician Expenses,
                  Practice Surplus and the Management Fee (interest expense will
                  be charged for funds borrowed from outside sources as well as
                  from Manager; in the latter case, charges will be computed at
                  a floating rate that is equal to the prime rate of interest
                  charged by NationsBank plus one percentage point) per annum;

                                    (vi) Malpractice insurance expenses to the
                  extent provided in Article X hereof;

                                    (vii) Other expenses incurred by Manager in
                  carrying out its obligations under the Service Agreement in
                  accordance with the budget adopted by the Policy Board or
                  otherwise approved by the Policy Board;

                                    (viii) Payment of interest on indebtedness
                  incurred by Manager or its Affiliates for the use or benefit
                  of Practice; and

                                    (ix) Amortization or depreciation or
                  write-off of assets acquired by Manager for the use or benefit
                  of Practice (exclusive of amortization of the goodwill
                  acquired from Practice by Parent pursuant to the Asset
                  Purchase Agreement).

         The term "Manager Expenses" shall not include (A) any corporate
         overhead charges, other than the kind of items listed above, from
         Parent; (B) any federal or state income taxes of Manager; or (C) any
         expenses which are expressly designated herein as Physician Expenses
         which are expenses or responsibilities directly of Practice.

                  "Net Practice Revenues" means the sum of Ancillary Revenues,
         Capitation Revenues and Physician Services Revenues excluding however
         (a) revenue from investments made individually by Physician
         Shareholders; and (b) revenue from medical



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         director fees of a Physician Shareholder if (i) such medical
         directorships are not in violation of any agreement to which the
         Physician Shareholder is bound, and (ii) such revenue was not included
         or reflected in financial information or statements of Practice which
         were provided to Manager in order to induce Manager to enter into the
         transactions contemplated by the Master Transaction Agreement.

                  "Operating Account" means the bank account of Practice
         established as described in Section 5.5(b)(ii).

                  "Parent" means MedCath Incorporated, the sole shareholder of
         Manager.

                  "Person" means any natural person, partnership, trust, estate,
         association, limited liability company, corporation, custodian,
         nominee, governmental instrumentality or agency, body politic or any
         other entity in its own or any representative capacity.

                  "Physician Employees" means those individuals who are
         employees of Practice or are otherwise under contract with or under the
         control of Practice to provide professional services to Practice
         patients and are duly licensed physicians to provide professional
         medical services in the State of Texas and any other employee of the
         Practice who must continue to be employed by Practice in order for
         Practice to be reimbursed for such employee's services;

                  "Physician Expenses" means interest on debts of Practice
         approved by the Policy Board and compensation paid by Practice to any
         employee of Practice who is not a physician, exclusive in all events,
         however, of compensation, benefits, bonuses and any other expenses
         historically categorized or treated by Practice as optional expenses
         ("Optional Expenses") paid by Practice to or on behalf of any of its
         physicians including both those who are and are not Physician
         Shareholders. It is acknowledged and agreed, however, that the
         following expenses to the extent not provided otherwise in Section
         6.10(f) (collectively, "Extra Expenses") shall not constitute Physician
         Expenses and shall instead be paid out of Practice Surplus: (i) all
         contributions allocable to any participant under any pension or
         profit-sharing plan qualified under Section 401(a) of the Internal
         Revenue Code sponsored or maintained by the Practice to the extent
         provided under Section 6.10; (ii) all costs relating to sponsoring,
         maintaining, and operating any other employee benefit plan, program, or
         arrangement, such as a group health plan or other welfare benefit
         program, sponsored or maintained by the Practice to the extent provided
         in Section 6.10; (iii) all administrative expenses incurred by the
         Practice in sponsoring, maintaining, and operating any plan, program,
         or arrangement as set forth above in (i) or (ii) to the extent provided
         in Section 6.10.

                  "Physician Services Revenues" means (a) all fees actually
         recorded each month (net of Adjustments), by or on behalf of Practice
         as a result of professional medical services personally furnished to
         patients by Physician Employees and other fees or income generated in
         their capacity as professionals, whether rendered in an inpatient or
         outpatient setting, plus (b) revenues from capitation allocated to
         Physician Services


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         Revenues which are not otherwise included in Capitation Revenues or
         Ancillary Revenues.

                  "Physician Shareholders" means those physicians who are
         shareholders of Practice at the time this Agreement is executed
         (whether or not they remain shareholders) and any physicians who
         subsequently become shareholders of Practice (whether or not they
         remain shareholders).

                  "Policy Board" means the board composed of members as
         established pursuant to Section 4.1.

                  "Practice Account" means the bank account of Practice
         established as described in Section 5.5(b)(ii).

                  "Practice Surplus" means an amount equal to Net Practice
         Revenue minus accrued but unpaid Management Fee minus Physician
         Expenses minus reserves for debt repayment, for the applicable period.

                  "Professional Compensation" means compensation, bonuses,
         benefits and related expenses, including without limitation, Optional
         Expenses, and taxes, social security and unemployment insurance or
         other required withholdings with respect to certain licensed health
         care personnel of Practice. Professional Compensation due to any
         physician employed or engaged by Practice shall be paid solely from
         Practice Surplus.

                  "Related Party" means (a) with respect to any individual, such
         individual's spouse, any descendants (whether natural, adopted or in
         the process of adoption), any sibling, a spouse of any descendant or
         sibling, any ancestor, any trust twenty-five percent (25%) or more of
         the beneficial interests of which are owned by such individuals or any
         of them, and any corporation, association, partnership or limited
         liability company twenty-five (25%) or more of the equity interests of
         which are owned by those above-described individuals or trusts, (b)
         with respect to any trust, the owners of twenty-five (25%) or more of
         the beneficial interests of such trust, and (c) with respect to any
         corporation, association, partnership or limited liability company, the
         owners of twenty-five percent (25%) or more of the outstanding equity
         interests in such entity.

                  "Territory" means the area within Hidalgo and Starr Counties,
         Texas.

                                   ARTICLE III

                      FACILITIES TO BE PROVIDED BY MANAGER

         SECTION 3.1       Facilities.

         Upon the effective date of this Agreement, Practice shall provide to
Manager Practice's office and facilities in order to enable Manager to fulfill
its obligations under this Agreement. Manager shall consult with Practice
regarding the condition, use and needs for the offices,


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facilities and improvements. The Policy Board shall determine any changes to the
office and facility locations of Practice.

         SECTION 3.2       Independence of Practice.
         Manager and Practice agree that Practice, as an independent contractor,
is a separate organization that retains the authority to direct the medical,
professional, and ethical aspects of its medical practice.

                                   ARTICLE IV

                           DUTIES OF THE POLICY BOARD

         SECTION 4.1       Formation and Operation of the Policy Board.

         The parties shall establish a Policy Board which shall be responsible
for developing management and administrative policies for the overall operation
of Practice. The Policy Board shall consist of the shareholders of Practice and
Manager shall designate, in its sole discretion, two (2) members of the Policy
Board. Except as may otherwise be provided, the act of a majority of the members
of the Policy Board shall be the act of the Policy Board.

         SECTION 4.2       Duties and Responsibilities of the Policy Board.

         The Policy Board shall have the following duties and obligations:

                  (a) Capital Improvements and Expansion. Any renovation and
         expansion plans and capital equipment expenditures and the financing
         thereof with respect to Practice shall be reviewed and approved by the
         Policy Board, which for this purpose must include the approval of at
         least one member designated by Manager, and shall be based upon
         economic feasibility, physician support, productivity and then current
         market conditions.

                  (b) Annual Budgets. All annual capital and operating budgets
         prepared by Manager, as set forth in Section 5.2, shall be subject to
         the review and approval of the Policy Board, and to final approval of
         Practice.

                  (c) Advertising. All advertising and other marketing of the
         services performed at Practice, other than advertising or marketing
         programs historically implemented by Practice within the budget
         approved by the Policy Board shall be subject to the prior review and
         approval of the Policy Board and final approval of Practice.

                  (d) Patient Fees. As a part of the annual operating budget, in
         consultation with Practice and Manager, the Policy Board shall review
         and adopt the fee schedule for all physician and ancillary services
         rendered by Practice subject to final approval of Practice.

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                  (e) Ancillary Services. The Policy Board shall approve
         Practice provided ancillary services based upon the pricing, access to
         and quality of such services.

                  (f) Provider and Payor Relationships. Decisions regarding the
         establishment or maintenance of relationships with institutional health
         care providers and payors and approval of managed care contracts shall
         be made by the Policy Board in consultation with Practice.

                  (g) Strategic Planning. The Policy Board shall develop
         long-term strategic planning objectives.

                  (h) Financing. All loans, leases and other financing obtained
         or proposed to be obtained for the benefit of Practice for any reason
         shall be subject to the review and approval of the Policy Board.

                  (i) Physician Hiring. The Policy Board shall determine the
         number and type of physicians required for the efficient operation of
         Practice, provided Practice shall have the final authority over
         physician hiring and termination. The approval of the Policy Board,
         which for this purpose must include the approval of at least one member
         designated by Manager, shall be required for any variations to, or any
         exceptions from, the restrictive covenants which must be included in
         any physician employment contract in conformance with Article VII
         hereof. Notwithstanding anything herein to the contrary, all decisions
         with respect to hiring and terminating the employment of physicians
         shall be subject to the final approval of Practice.

                  (j) Executive Director. The selection and retention of the
         Executive Director pursuant to Section 5.6 by Manager shall be subject
         to the reasonable approval of the Policy Board, which for this purpose
         must include the approval of at least one member designated by Manager.
         If Practice is dissatisfied with the services provided by the Executive
         Director, Practice shall refer the matter to the Policy Board. Manager
         and the Policy Board shall each in good faith determine whether the
         performance of the Executive Director could be brought to acceptable
         levels through counsel and assistance, or whether the Executive
         Director should be terminated. Manager shall have the ultimate
         authority to terminate the Executive Director. Prior to the time the
         initial Executive Director commences work in connection with the Clinic
         or during any time period for which there is no Executive Director,
         Manager shall use its other personnel (or personnel of its affiliates)
         to perform the function of the Executive Director and shall be
         compensated at the rate of two hundred dollars ($200) for each eight
         (8) hour day for doing so and such compensation shall be a Manager
         Expense.

                  (k) Grievance Referrals. The Policy Board shall consider and
         make final decisions regarding grievances pertaining to matters not
         specifically addressed in this Agreement as referred to it by
         Practice's governing body.


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                                    ARTICLE V

                ADMINISTRATIVE SERVICES TO BE PROVIDED BY MANAGER

         SECTION 5.1       Performance of Management Functions.

         Beginning with the effective date of this Agreement, Manager shall
provide or arrange for the services set forth in this Article V and otherwise as
set forth in this Agreement, the cost of all of which shall be included in
Manager Expenses. Manager is hereby expressly authorized to perform its services
hereunder in whatever manner it deems reasonably appropriate to meet the
day-to-day requirements of Practice operations in accordance with the decisions
of the Policy Board, including, without limitation, performance of some of the
business office functions at locations other than Practice. Practice will not
act in a manner which would prevent Manager from efficiently managing the
day-to-day operations of Practice in a business-like manner.

         SECTION 5.2       Financial Planning Goals.

                  (a) Preparation of Budgets. Annually and at least thirty (30)
         days prior to the commencement of each fiscal year of Practice, Manager
         shall prepare and deliver to the Policy Board for its approval an
         operational and capital budget for such fiscal year ("Annual Budget"),
         setting forth an estimate of the operating revenues and expenses
         associated with the provision of professional services by Practice
         (including, without limitation, all costs associated with the leased
         premises used by Practice, equipment, supplies, services, and personnel
         provided by Manager to Practice pursuant to this Agreement, and all
         compensation costs associated with Practice and Practice personnel) and
         sources and uses of capital expenditures. Such budget shall separately
         address Physician Expenses, Manager Expenses and Practice Surplus which
         shall be in line with historical expenses of Practice and which are
         reasonable and customary for Practice and shall include reasonable
         reserves for the repayment of principal on all borrowings of Practice.
         Any non-budgeted expenses shall be reviewed and approved by the Policy
         Board. Any such non-budgeted expense in excess of $5,000 per year
         undertaken by Practice without approval by the Policy Board, which for
         this purpose must include the approval of at least one member
         designated by Manager, shall be deducted from Practice Surplus (except
         for emergency circumstances). Manager shall use its best efforts to
         perform its duties and obligations under this Agreement such that the
         actual revenues, costs, and expenses associated with the provision of
         professional services during any applicable period of Practice's fiscal
         year shall be consistent with the Annual Budget. Manager shall prepare
         and submit to the Policy Board for its approval, and shall thereafter
         adopt, an Annual Budget for the current fiscal year as soon as
         practicable. In the event that the Policy Board does not approve any
         such Annual Budget, then the Annual Budget for the previous year shall
         be used until the Policy Board, using its best efforts, approves a new
         Annual Budget.

                  (b) Service Development. Manager realizes that Practice has
         opportunities to provide new services and utilize new technologies that
         will require capital expenditures


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         and Manager anticipates that such opportunities may include new and
         replacement equipment as may be economically justified and medically
         necessary. Development of new services will depend on, among other
         factors, physician composition, anticipated volume, reimbursement and
         number of physicians, physician support, Practice performance, and
         appropriate physician specialty mix, be subject to the requirements of
         any applicable leases and subleases, and will require Policy Board
         approval as a precondition to any capital expenditure.

                  (c) Capital Investment. Manager will use its commercially
         reasonable best efforts to obtain funds for all capital expenditures
         approved by the Policy Board. Sources of capital, including working
         capital, for such funds shall be determined by the Policy Board and may
         be (i) borrowings from Manager or its Affiliates (at the rate set forth
         in Article II at subparagraph (v) of the definition of Manager
         Expenses) or (ii) borrowings, leases or other financing methods through
         independent third-party financial institutions in accordance with
         Section 4.2(h) hereof. It is acknowledged and agreed that the payment
         of interest on any such indebtedness shall constitute Manager Expenses.
         Manager shall use its reasonable efforts to make funds available for
         borrowing by Practice but Manager only shall be obligated to make such
         loans as it determines in its sole and absolute discretion that it
         should make.

                  In the event Practice obtains a commitment for financing a
         particular project at a rate less than that obtained or charged by
         Manager hereunder, and on other terms no less favorable than those
         obtained by or available to Manager, and the Policy Board approves such
         alternate financing, the project will be financed with such alternate
         financing or the excess interest will not be charged as a Manager
         Expense.

         SECTION 5.3       Audits and Statements.

         Manager shall cause to be prepared annual financial statements for the
operations of Practice and Manager and shall cause the financial statements of
Manager to be included in the audited financial statements of Parent by a
certified public accountant selected by Manager in connection with the audit of
the financial statements of Parent. All financial statements shall be prepared
in accordance with GAAP on a consistent basis and the cost thereof shall be a
Manager Expense. Manager shall prepare monthly unaudited financial statements
containing a balance sheet and statements of income from Practice operations,
which shall be delivered to Practice within thirty (30) days after the close of
each calendar month. In addition, Practice shall be solely responsible for the
cost of the preparation and any audit of the financial statements or tax returns
of Practice.

         SECTION 5.4       Inventory and Supplies.

         Manager shall order and purchase inventory and supplies, and such other
ordinary, necessary or appropriate materials of a quality consistent with the
past customary course of conduct and manner of operating Practice, the cost of
which shall be a Manager Expense.



                                       10
<PAGE>

         SECTION 5.5       Management Services and Administration.

                  (a) Practice hereby appoints Manager as its sole and exclusive
         manager and administrator of all day-to-day business functions and
         Manager hereby accepts such appointment subject to the terms of this
         Agreement. Practice agrees that the purpose and intent of this Service
         Agreement is to relieve the Physician Employees to the maximum extent
         possible of the administrative, accounting, personnel and business
         aspects of the medical practice, the current business of Practice
         handled by employees who will become employees of Manager and
         administrative duties with respect to property leased or subleased by
         Practice to Manager, with Manager assuming responsibility and being
         given all necessary authority to perform these functions in accordance
         with the general standards approved by the Policy Board. Manager agrees
         that Practice and only Practice will perform the medical functions of
         its medical practice. Manager will have no authority, directly or
         indirectly, to perform, and will not perform, any medical function.
         Manager may, however, advise Practice as to the relationship between
         its performance of medical functions and the overall administrative and
         business functioning of its medical practice. To the extent that they
         assist Practice in performing medical functions, all clinical personnel
         performing patient care services shall be subject to the professional
         direction and supervision of Practice and, in the performance of such
         medical functions, shall not be subject to any direction or control by,
         or liability, to, Manager, except as may be specifically authorized by
         Practice.

                           (b) (i)Manager shall, on behalf of Practice, bill
                  patients and collect the professional fees for medical
                  services rendered by Practice in its medical practice, for
                  services performed outside Practice for its hospitalized
                  patients, and for all other professional and Practice
                  services. Practice hereby appoints Manager for the term hereof
                  to be its true and lawful attorney-in-fact, for the following
                  purposes: (A) to bill patients in Practice's name and on its
                  behalf; (B) to collect accounts receivable resulting from such
                  billing in Practice's name and on its behalf; (C) to receive
                  payments and prepayments from Blue Shield, insurance
                  companies, from health care plans, Medicare, Medicaid and all
                  other third party payors; (D) to take possession of and
                  endorse in the name of Practice (and/or in the name of an
                  individual physician providing services on behalf of Practice,
                  such payment intended for purpose of payment of a physician's
                  bill) any notes, checks, money orders, insurance payments and
                  other instruments received in payment of accounts receivable;
                  and (E) to initiate the institution of legal proceedings in
                  the name of Practice to collect any accounts and monies owed
                  to Practice in accordance with policies and procedures adopted
                  by the Policy Board, to enforce the rights of Practice as
                  creditors under any contract or in connection with the
                  rendering of any service, and to contest adjustments and
                  denials by governmental agencies (or their fiscal
                  intermediaries) as third-party payors. All Adjustments shall
                  be made in a reasonable manner consistent with past customary
                  course of conduct of Practice subject to any final adjustments
                  required by auditors under Section 5.3.



                                       11
<PAGE>

                           (ii) Practice shall establish and control a bank
                  account at a bank (the "Bank") acceptable to Manager (the
                  "Practice Account"). In connection herewith and throughout the
                  term of this Agreement, Practice hereby appoints Manager as
                  Practice's true and lawful agent and attorney-in-fact, and
                  grants Manager a special power of attorney and Manager hereby
                  accepts such special power of attorney and appointment, to
                  deposit in the Practice Account all funds, fees, and revenues
                  generated by Practice and collected by Manager. Practice shall
                  execute any and all additional documents required by the Bank
                  where the Practice Account is held to effectuate the power of
                  attorney granted herein. Practice shall not draw checks on the
                  Practice Account. Practice also agrees to establish this
                  account with the Bank under terms which provide that the
                  balance of the Practice Account at the close of each working
                  day is transferred to a bank account of Manager (the "Manager
                  Account") by means to be designated by Manager. Practice shall
                  not revoke such daily transfer to the Manager's Account.
                  Manager shall pay from funds in the Manager Account all
                  Manager Expenses and the Management Fee as required under the
                  terms of this Agreement. Practice shall establish a second
                  account (the "Operating Account") to which Manager shall be a
                  signatory and to which Manager shall deposit from time to time
                  out of the Practice Account (to the extent available) amounts
                  sufficient to enable Manager to pay from that account, on
                  behalf of Practice, Physician Expenses and Practice Surplus to
                  be paid by Practice as Professional Compensation as provided
                  under the terms of this Agreement and principal payment on
                  debts of Practice which were approved by the Policy Board,
                  when such repayments are due.

                                    If the balance in the Practice Account after
                  subtraction of reserves for repayment of debts (to the extent
                  the debts are not then being repaid) is insufficient to
                  satisfy the obligations and liabilities of Practice at a
                  particular point in time, disbursements from the Practice
                  Account shall be made in the following priority:

                           (A) Payments of interest and principal on debts of
                  Practice that were approved by the Policy Board to the extent
                  then due;

                           (B) Payments of Management Fee attributable to
                  collections by Practice from physicians pursuant to Section
                  7.4;

                           (C) Payments of Manager Expenses;

                           (D) Payments of Physician Expenses; and

                           (E) Pro Rata between the Management Fee (to the
                  extent not paid pursuant to B above) and Practice Surplus.

                           (iii) The Accounts Receivable of Practice as of the
                  Closing Date and thereafter, and the proceeds thereof, shall
                  be provided by Practice to Manager as working capital to
                  enable Manager to pay Manager Expenses, Physician


                                       12
<PAGE>


                  Expenses, Management Fee and Professional Compensation. If
                  reasonably necessary, Manager will use its reasonable efforts
                  to arrange for a third party commercial lender to provide a
                  working capital line of credit to Practice in excess of that
                  amount, to enable Manager or Practice as provided herein, to
                  pay Manager Expenses, Physician Expenses, Management Fee and
                  Practice Surplus when due (subject however to the obligation
                  to repay agreed upon working capital advances or other third
                  party financing) and in accordance with the Annual Budget. In
                  the event any such advances are provided by Manager or any of
                  its Affiliates, such advances shall bear interest at the rate
                  set forth in Article II at subparagraph (v) of the definition
                  of Manager Expenses except as otherwise provided herein. The
                  obligation of Practice to repay any such advances to Manager
                  or its Affiliates shall be evidenced by one or more promissory
                  notes and shall be secured in accordance with the terms of a
                  Security Agreement entered into as of December 12, 1997
                  granting a security interest in the accounts receivable of
                  Practice to Manager. Interest on such advances shall be paid
                  monthly. Prior to making advances hereunder, the Policy Board
                  and Manager shall agree upon the term over which such
                  principal amounts shall be repaid to Manager, including the
                  priority of the utilization of Net Practice Revenues for the
                  repayment of such loans. In addition, Practice shall cooperate
                  with Manager and execute all necessary documents in connection
                  with the pledge of such accounts receivable either to Manager,
                  Manager's lenders or any other lender providing such financing
                  to Practice.

                  (c) Manager shall supervise and, to the extent necessary,
         maintain custody of all files and records relating to the operation of
         Practice, including but not limited to accounting, billing, patient
         medical records, and collection records. Patient medical records shall
         at all times be and remain the property of Practice and shall be
         located at Practice facilities so that they are readily accessible for
         patient care. The management of all files and records shall comply with
         applicable state and federal statutes. Manager shall use its reasonable
         efforts consistent with the past operation of Practice to preserve the
         confidentiality of patient medical records and use information
         contained in such records only for the limited purpose necessary to
         perform the services set forth herein; provided, however, in no event
         shall a breach of said confidentiality be deemed a default under this
         Agreement.

                  (d) Manager shall supply to Practice necessary clerical,
         accounting, bookkeeping and computer services, printing, postage and
         duplication services, medical transcribing services and any other
         ordinary, necessary or appropriate service for the operation of
         Practice.

                  (e) Manager shall provide the data necessary for Practice to
         prepare its annual income tax returns and financial statements. Manager
         personnel shall continue to provide the preparatory work currently
         provided by Practice personnel. Except as provided above, Manager shall
         have no responsibility for the preparation of Practice's federal or



                                       13
<PAGE>


         state income tax returns or the payment of such income taxes and such
         costs shall not be Manager Expenses or Physician Expenses, and shall be
         borne solely by Practice.

                  (f) Manager shall assist Practice in recruiting additional
         physicians, carrying out such administrative functions as may be
         appropriate such as advertising for and identifying potential
         candidates, checking credentials, and arranging interviews; provided,
         however, Practice shall interview and make the ultimate decision as to
         the suitability of any physician to become associated with Practice.
         Candidate screening and interviewing procedures shall be consistent
         with the past operation of Practice or as otherwise adopted by the
         Policy Board. All physicians recruited by Manager and accepted by
         Practice shall be the sole employees of Practice, to the extent such
         physicians are hired as employees. Any expenses incurred in the
         recruitment of physicians, including, but not limited to, employment
         agency fees, relocation and interviewing expenses shall be budgeted
         Manager Expenses. Such expenses shall be pre-approved by the Executive
         Director.

                  (g) Subject to Policy Board approval, Manager shall negotiate
         and administer all managed care contracts on behalf of Practice and
         shall consult with Practice on all professional or clinical matters
         relating thereto.

                  (h) Subject to the provisions of Sections 5.3 and Section
         5.5(e), Manager shall arrange for legal and accounting services related
         to Practice operations, the expense for which has been incurred
         traditionally in the ordinary course of business, including the cost of
         enforcing any physician contract containing restrictive covenants, but
         any cost and all other aspects of malpractice suits against Practice
         shall be governed by Article X hereof.

                  (i) Manager shall provide for the proper cleanliness of the
         premises in compliance with applicable federal and state regulations,
         and maintenance and cleanliness of the equipment, furniture and
         furnishings located upon such premises.

                  (j) Manager shall make payment for the cost of professional
         licensure fees, board certification fees, medical staff dues, and
         national organization fees required to maintain professional licenses,
         all as historically paid by Practice in accordance with its past
         operation.

         SECTION 5.6       Executive Director.

         Subject to the provisions of Section 4.2(j), Manager shall hire and
appoint an Executive Director to manage and administer all of the day-to-day
business functions of Practice. Manager shall determine the salary and fringe
benefits, of the Executive Director consistent with the budget adopted by the
Policy Board. At the direction, supervision and control of Manager, the
Executive Director, subject to the terms of this Agreement, shall implement the
policies established by the Policy Board and shall generally perform the duties
and have the responsibilities of an administrator. The Executive Director shall
be responsible for organizing



                                       14
<PAGE>


the agenda for the meetings of the Policy Board referred to in Article IV. As of
the date hereof, Manager shall hire the Practice's current office manager as the
Executive Director at his/her current rate of compensation. Any replacement for
such employee shall be subject to the reasonable consent of Practice.

         SECTION 5.7       Personnel.

         Manager shall hire as of the date hereof all employees of Practice
other than Physician Employees and shall hereafter provide such personnel as are
reasonably necessary for the conduct of Practice operations. Manager shall
determine and cause to be paid the salaries and fringe benefits of all such
personnel. Such personnel shall be under the direction, supervision and control
of Manager, with those personnel performing patient care services subject to the
professional supervision of Practice. Practice shall consult with Manager if
Practice is dissatisfied with the services of any person. Manager shall in good
faith determine whether the performance of that employee could be brought to
acceptable levels through counsel and assistance or whether such employee should
be terminated. All of Manager's obligations regarding staff shall be governed by
the overriding principle and goal of providing high quality medical care
consistent with past practice of Practice. Employee assignments shall be made to
assure consistent and continued rendering of high quality medical support
services and to ensure prompt availability and accessibility of individual
medical support personnel to physicians in order to develop constant, familiar
and routine working relationships between individual physicians and individual
members of the medical support personnel. Manager shall maintain established
working relationships wherever possible and Manager shall make every effort
consistent with sound business practices to honor the specific requests of
Practice with regard to the assignment of its employees.

         SECTION 5.8       Events Excusing Performance.

         So long as Manager uses its commercially reasonable best efforts,
Manager shall not be liable to Practice for failure to perform any of the
services required herein in the event of strikes, lockouts, calamities, acts of
God, unavailability of supplies or other events over which Manager has no
control for so long as such events continue, and for a reasonable period of time
thereafter.

         SECTION 5.9       Compliance with Applicable Laws.

         Manager shall comply in all material respects with all applicable
federal, state and local laws, regulations and restrictions in the conduct under
this Agreement of its obligations under this Agreement.

         SECTION 5.10      Quality Assurance.

         Manager shall assist Practice in fulfilling its obligations to its
patients to maintain a high quality of medical and professional services.



                                       15
<PAGE>

         SECTION 5.11      Ancillary Services.

         Manager shall provide its services hereunder in the operation of such
ancillary services as approved by the Policy Board.



                                   ARTICLE VI

                             OBLIGATIONS OF PRACTICE

         SECTION 6.1       Professional Services.

         Practice shall provide professional services to patients in compliance
at all times with ethical standards, laws and regulations applying to the
medical profession. Practice shall ensure that each of its physicians providing
medical care to patients in the State of Texas are licensed by the State of
Texas. In the event that any disciplinary actions or medical malpractice actions
are initiated against any such physician, Practice shall immediately inform
Manager of such action and the underlying facts and circumstances. Practice
shall carry out a program to monitor the quality of medical care which it
provides.

         SECTION 6.2       Medical Practice.

         Manager shall not interfere with the physician-patient relationship
between Practice's physicians and their patients. Practice shall use and occupy
the facilities provided by Manager exclusively for the practice of medicine, and
shall comply with all applicable local rules, ordinances and all standards of
medical care. It is expressly acknowledged by the parties that the medical
practice or practices conducted at Practice shall be conducted solely by
physicians associated with Practice, and no other physician or medical
practitioner shall be permitted to use or occupy Practice without the prior
written consent of the Policy Board.

         SECTION 6.3       Physician Employees.

                  (a) Practice shall employ physicians and other licensed health
         care personnel who must be employed by Practice in order for Practice
         to be reimbursed for such employee's services, as Practice deems
         reasonably necessary and appropriate, subject to the Annual Budget, for
         Practice's operation of its medical practice and provision of
         professional services each of whom shall be subject to the applicable
         provisions of this Agreement, all of whom shall be Physician Employees.
         Practice shall have the sole responsibility for paying for its
         personnel all Professional Compensation provided that Manager shall
         arrange for and supervise the administration of such responsibilities
         from funds available and due to Practice from Manager as set forth in
         Section 8.1. Manager shall, in the name of and on behalf of Practice,
         establish and administer and pay when due the compensation with respect
         to such professional personnel and, on behalf of Practice and out of
         funds available in the Operating Account, ensure that proper tax
         withholdings from such compensation are made and timely remitted to the
         appropriate governmental


                                       16
<PAGE>


         entities. Each physician retained by Practice shall at all times hold
         and maintain a valid and unlimited license to practice in the State of
         Texas. Practice shall enter into and maintain with each such physician
         a written agreement which shall include, without limitation, the
         provisions of Section 7.2 hereof. Practice shall ensure that each of
         its Physician Employees participates in such continuing medical
         education as is consistent with past practice.

                  (b) Practice, through its Physician Employees, shall
         continuously and uninterruptedly, during the term hereof, during all
         business hours and on such days as businesses of like nature in the
         area are open for business, provide services in a manner calculated to
         produce the maximum volume of revenue which is consistent with the
         professional obligation of Practice and in the best interest of
         Practice's patients. Practice shall cause the work load, patient load
         and criteria for its Physician Employees, taken as a whole, to remain
         substantially the same as their historical practice during the
         immediate past three (3) years; provided that in no event shall it be a
         breach of this Agreement if Practice's revenues decrease after the date
         for reasons beyond the Practice's and the Physician Employee's control.

                  (c) Practice and the Physician Shareholders shall take all
         actions necessary, including without limitation adjusting Professional
         Compensation on at least a quarterly basis, to ensure from time to time
         that the Professional Compensation paid, distributed or provided to all
         physicians employed or engaged by Practice under their employment
         agreements or otherwise, in the aggregate, never exceeds Practice
         Surplus.

         SECTION 6.4       Professional Insurance Eligibility.

         Practice shall cooperate in the obtaining and retaining of professional
liability insurance by assuring that its Physician Employees are insurable, and
by participating in an on-going risk management program.

         SECTION 6.5       Fees for Professional Services.

         Practice shall be solely responsible for legal, accounting and other
professional services fees incurred and retained by Practice, and not approved
by the Policy Board, except as set forth in Article V herein.

         SECTION 6.6       Name.

         Manager shall be entitled to use the name "Valley Cardiology, P.A." in
connection with the operation of Practice.

         SECTION 6.7       Material Decisions.

         In addition to any other rights of Manager in this Agreement, the
following actions or decisions shall be made or taken, directly or indirectly,
by Practice or the Physician Shareholders only with the consent of Manager:



                                       17
<PAGE>

                  (a) Entering into any merger unless Practice is the surviving
         entity and after which the Physician Shareholders immediately prior to
         the date of the closing of such merger own at least seventy-five
         percent (75%) of the capital stock of Practice after the closing;

                  (b) Entering into any sale or series of related sales by
         Practice or by the Physician Shareholders of the capital stock of
         Practice during the term of this Agreement to any party who is not a
         Physician Shareholder as of the date hereof, provided such sales may be
         made to individual physicians who become full-time employees of
         Practice in the ordinary course of Practice's operations and business
         but only if the Physician Shareholders as of the date hereof continue
         to own in the aggregate at least seventy-five percent (75%) of the
         Capital Stock of Practice thereafter;

                  (c) Entering into any agreement or consummating any
         transaction for the sale of any of the material assets of Practice;

                  (d) Paying money or other property by Practice for a majority
         of the capital stock or all or substantially all of the assets
         constituting a business of any person or entity;

                  (e) Entering into a managed care agreement or arrangement or
         entering into a capitation arrangement or agreement;

                  (f) Opening any new location or the relocation of the primary
         office of Practice or failure to maintain offices in McAllen, Texas
         comparable in size to that maintained by Practice as of the date
         hereof;

                  (g) Paying compensation, benefits or distributions, directly
         or indirectly, of any type or nature to any Physician Shareholder until
         all amounts due as Physician Expenses, Manager Expenses and Management
         Fee currently due and payable have been paid in full;

                  (h) Deviating from the collection policies generally followed
         by Practice prior to the date hereof with respect to any patient
         account or other amount due for Practice's services; or

                  (i) Entering into any new relationship or agreement with a
         Physician Shareholder or an Affiliate of or a Related Party to a
         Physician Shareholder or continuing any existing relationship or
         agreement with any such Person to the extent such relationship or
         agreement is not fully reflected in a written contract that has been
         provided to Manager as of the date hereof.

         SECTION 6.8       Employment of Physician Shareholders.

         Practice and each of the Physician Shareholders agree that each of the
Physician Shareholders shall be employed by Practice in accordance with the
terms of his employment


                                       18
<PAGE>


agreement with Practice dated as of the date hereof or entered into to be
effective as of the effective date of this Agreement, the term of which
employment shall not be less than five (5) years from the effective date hereof
(whether or not he remains an owner of Practice), unless attributable to the
termination of an employment agreement upon the death or disability of the
Physician Shareholder.

         SECTION 6.9       Life Insurance.

         Practice shall cause each of its physician employees to and the
Physician Shareholders shall cooperate fully with any efforts by Manager to
obtain insurance policies on the life of any such physicians under which Manager
would be the owner and beneficiary. Manager will be responsible for the costs of
any such insurance and such costs shall not be Manager Expenses.

         SECTION 6.10      Profit Sharing Plan.

                  (a) Practice may sponsor or maintain a profit-sharing plan
         that is intended to be qualified under Section 401(a) of the Internal
         Revenue Code of 1986, as amended (the "Code"), which contains (i) a
         salary reduction, elective contribution feature which qualified as a
         cash or deferred arrangement within the meaning of Section 401(k) of
         the Code and (ii) an employer matching contribution provision within
         the meaning of Section 401(m) of the Code ("Practice Qualified Plan").
         The employer matching contribution provision in the Practice Qualified
         Plan shall match elective contributions at a rate, and in the aggregate
         amount, that is at least equivalent to the employer matching
         contribution provision contained in the MedCath Incorporated 401(k)
         Profit-Sharing Plan and Trust ("MedCath Plan").

                  (b) All contributions to the Practice Qualified Plan made on
         behalf of, or with respect to, any participant thereunder (including,
         without limitation, Physician Shareholders, Physician Employees who are
         not Physician Shareholders, and Manager employees who are treated as
         Practice employees because they are "leased employees" within the
         meaning of Section 414(n) of the Code with respect to the Practice),
         shall be paid solely by the Physician Shareholders from Practice
         Surplus; provided, however, that any elective contributions to the
         Practice Qualified Plan by Physician Employees that are not Physician
         Shareholders shall be considered Professional Compensation and any
         elective contributions to the Practice Qualified Plan by Physician
         Employees that are not Physician Shareholder shall be considered
         Professional Compensation and any elective contributions to the
         Practice Qualified Plan by any Manager employees who are treated as
         Practice employees because they are "leased employees" within the
         meaning of Section 414(n) of the Code with respect to the Practice
         shall be considered a Manager Expense.

                  (c) In addition to the Practice Qualified Plan, Practice shall
         be solely responsible for any other employee benefit plan, program, or
         arrangement, such as a group health plan or other welfare benefit
         program, it chooses to sponsor or maintain for the benefit of Practice
         employees (including, without limitation, Physician Shareholders,
         Physician Employees who are not Physician Shareholders, and any Manager
         employees


                                       19
<PAGE>


         who are treated as Practice employees because they are "leased
         employees" within the meaning of Section 414(n) of the Code). The costs
         relating to sponsoring and maintaining any such plans, programs, or
         arrangements shall be paid solely by the Physician Shareholders from
         Practice Surplus.

                  (d) Unless such expenses are, pursuant to its terms and
         applicable law, expenses of such plans or of individual participants,
         the compensation of counsel, accountants, corporate trustees,
         investment managers, and other agents and service providers necessary
         in the administration of the Practice Qualified Plan and any other
         employee benefit plan, program, or arrangement adopted and maintained
         by Practice shall be an Extra Expense, and shall not be a Physician
         Expense, a Manager Expense, or an expense of or borne by Manager.
         Similarly, unless such expenses are, pursuant to its terms and
         applicable law, expenses of such plans or of individual participants,
         all such expenses necessary in the administration of the MedCath Plan
         and any other employee benefit plan, program, or arrangement adopted
         and maintained by Manager shall be a Manager Expense to the extent such
         expenses are allocable to Manager employees who are providing services
         to Practice on a substantially full-time basis.

                  (e) From and after the Closing, employees of the Manager who
         were employed by Practice (or its predecessors) shall be credited under
         all of Manager's employee benefit plans, programs, or arrangements with
         service, for eligibility and vesting purposes, equal to the service
         credited to them for such purposes under the terms of the corresponding
         employee benefit plan, program, or arrangement of the Practice (or its
         predecessors).

                  (f) Notwithstanding anything else in this Agreement to the
         contrary, all contributions (i.e., employee elective contributions,
         employer matching contributions, and discretionary nonelective employer
         contributions) to the MedCath Plan made on behalf of, or with respect
         to, any participant thereunder who is a Manager employee providing
         services to Practice on a substantially full-time basis shall be
         considered a Manager Expense.



                                   ARTICLE VII

                  RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES

         The parties recognize that Parent paid a substantial amount in
connection with this Agreement and Manager will incur substantial costs in
providing the premises, personnel, management, equipment, supplies and other
goods and services being provided hereunder and that the services to be provided
by Manager shall be feasible only if Practice operates an active medical
practice to which the physicians associated with Practice devote their full time
and attention. To that end:



                                       20
<PAGE>

         SECTION 7.1       Restrictive Covenants by Practice.

         During the term of this Agreement, Practice and the Physician
Shareholders shall not, directly or indirectly, either as a shareholder,
partner, member, consultant, independent contractor, manager or otherwise
establish, operate or provide physician, medical or other professional services
at any medical office, clinic or other health care facility providing services,
including but not limited to ancillary services, substantially similar to those
provided by Practice pursuant to this Agreement anywhere within the Territory
other than as contemplated by the terms of this Agreement. Additionally, during
the term of this Agreement and for a period of twenty-four (24) months following
the termination hereof prior to the 40th anniversary of the date hereof for any
reason other than due to a default by Manager, Practice and the Physician
Shareholders shall not, directly or indirectly, enter into any agreement or
arrangement similar to this Agreement with any other person or party (whether in
a single transaction or series of related transactions) or sell substantially
all the assets of Practice or sell or issue ownership interests (whether through
a sale, merger or otherwise) in Practice except to individual physicians who
become full-time employees of Practice in the ordinary course of Practice's
operations and business.

         SECTION 7.2       Restrictive Covenants By Current Physician
Shareholders and Physician Employees.

                  (a) Practice shall obtain and enforce formal written
         agreements from its current Physician Shareholders and Physician
         Employees, other than Technical Employees and Physician Extender
         Employees pursuant to which the Physician Shareholders and Physician
         Employees agree not to within the Territory, directly or indirectly,
         whether as a shareholder, partner, employee, director, independent
         contractor, consultant, agent or otherwise (i) establish, operate or
         provide physician, medical or other professional services at any
         medical office, hospital, clinic or outpatient and/or ambulatory
         treatment or diagnostic facility providing services, including but not
         limited to ancillary services, substantially similar to those provided
         by Practice except as an employee of Practice, or (ii) accept any
         direct or indirect compensation or benefit (income or expense
         guarantees, etc.) from any medical office, hospital, clinic or
         outpatient and/or ambulatory treatment or diagnostic facility other
         than as an employee of Practice and which compensation or benefit is
         paid directly to Practice, or (iii) solicit or employ any employee or
         consultant of Practice or of Manager, in all cases during the term of
         their employment and for a period of twenty-four (24) months after any
         termination of employment with Practice for any reason (unless this
         Agreement has been terminated as of such date as a result of a default
         hereunder by Manager).

                  (b) In addition to the other restrictions in this Article VII,
         the Physician Shareholders hereby agree with Manager (and all future
         Physician Shareholders of Practice shall be required to agree in
         writing) and shall enter into a similar covenant with Practice, which
         Practice agrees to fully enforce, that they shall (unless this
         Agreement has been terminated as of such date as a result of a default
         hereunder by Manager) neither accept employment to practice medicine or
         become a consultant for the purpose of


                                       21
<PAGE>


         providing such medical services from or with any other party or entity,
         or group of affiliated parties or entities (a "New Employer") if at
         least fifty-one percent (51%) of the then current Physician
         Shareholders of Practice within any twelve (12) month period accept
         employment or enter into any consulting or other similar arrangement
         with such New Employer at the same time or in a series of related
         circumstances, nor engage in any other transaction which is
         substantially similar to that described in this sentence (a "Group
         Departure") unless such New Employer or the Physician Shareholders
         personally assume all liabilities and obligations of Practice to
         Manager under Article VIII with respect to such Physician Shareholders
         and under other provisions herein related to such obligations and
         liabilities plus any amount due from Practice to Manager under Section
         5.5(b)(iii).

         SECTION 7.3       Restrictive Covenants By Future Physician Employees.

         Practice shall obtain and enforce formal agreements from each of its
future Physician Employees (and future Physician Shareholders who are not
currently Physician Employees), other than Technical Employees and Physician
Extender Employees which contain the restrictions and covenants set forth in
Section 7.2.

         SECTION 7.4       Physician Shareholder and Physician Employee
Liquidated Damages.

         The Restrictive Covenants described above may provide that the
Physician Shareholders and Physician Employees (existing or future) with the
written consent of Manager may be released from their Restrictive Covenants by
paying liquidated damages under this Agreement in an amount as follows:

         For Physician Shareholders and Physician Employees who are physicians
employed by Practice on the date of this Agreement and for future Physician
Shareholders or Physician Employees who are employed by Practice after the date
of this Agreement, "Liquidated Damages" means an amount with respect to the
physician equal to the greater of (a) such physician's Form W-2 taxable
compensation paid by Practice to him for the most recently ended calendar year,
and (b) the average of such physician's Form W-2 taxable compensation paid by
Practice to him for the three most recently ended calendar years.

         Such payment of Liquidated Damages or any recovery for breach shall be
made to Manager by Practice simultaneously with the physician being released
from the restrictive covenants (if consented to by Manager) or any collection of
a judgment. Such payment shall be first applied to all costs incurred by Manager
in the enforcement of the restrictive covenants for that departing physician and
in recruiting a replacement physician for that departing physician. The
remainder, if any, shall become an additional Management Fee to be paid to
Manager pursuant to Article VIII hereof.

         Manager shall be entitled to designate which remedies shall be sought
by Practice for breaches of restrictive covenants or such employment agreements
and Practice shall diligently pursue those remedies.



                                       22
<PAGE>

         SECTION 7.5       Development of Exclusive Ventures.

                  (a) During the term of this Agreement (the "Exclusive Period")
         subject to applicable law, Manager, Practice and the Physician
         Shareholders, including any future shareholders of Practice may discuss
         and explore the feasibility of acquiring or developing in the Territory
         a managed care plan or organization (e.g., an HMO, etc.) (the
         "Exclusive Ventures"). Subject to applicable law, each such Exclusive
         Venture shall be owned by a joint venture to include Manager or its
         designee, the Physician Shareholders and other Shareholders. Each
         Exclusive Venture would be managed by Manager or its designee for a
         management fee which would not exceed reasonable management fees which
         are paid to other parties for managing similar facilities or activities
         in bona fide transactions involving unrelated persons or entities.
         Capital shall be contributed to the joint venture on a pro rata basis
         by Manager or its designee, on the one hand, and Practice and/or the
         Physician Shareholders on the other hand, in accordance with their
         ownership percentages. No additional payment would be due to Manager,
         Practice or the Physician Shareholders in connection with the
         development or ownership of any Exclusive Venture other than pro rata
         distributions to them from the joint venture. Manager, Practice and the
         Physician Shareholders agree to cooperate and negotiate with one
         another in good faith with respect to the development or acquisition of
         the Exclusive Venture and to enter into all such additional agreements
         and to take all such additional actions as are reasonably necessary or
         appropriate to fulfill the purpose and intent of this Section 7.5.

                  In the event that health care counsel of Manager, which is
         reasonably acceptable to Practice, advises that the legal entity owning
         any such health care facility or service should be owned only by
         Practice, the Physician Shareholders or Affiliates thereof, then the
         parties hereto shall instead enter into a management and service
         agreement which will provide Manager with substantially all of the
         benefits which it would have received had it been legally entitled to
         be an owner of such facility or service.

                  (b) During the Exclusive Period, Practice agrees that it will
         not, directly or indirectly, develop or acquire an interest in any
         Exclusive Venture, and each Physician Shareholder agrees that he will
         not develop or acquire an interest in any venture, entity or investment
         whose business is similar to that which would be conducted by the
         Exclusive Ventures as long as such Physician Shareholder is a
         shareholder or employee of Practice and for a period of two (2) years
         thereafter, other than through a joint venture between Manager or its
         designee, on the one hand, and Practice and/or the Physician
         Shareholders on the other hand, as provided in (a) above.

         SECTION 7.6       Enforcement.

         Manager, Practice and the Physician Shareholders acknowledge and agree
that since a remedy at law for any breach or attempted breach of the provisions
of this Article VII shall be inadequate, either party shall be entitled to
specific performance and injunctive or other equitable relief in case of any
such breach or attempted breach, in addition to whatever other remedies may
exist by law. All parties hereto also waive any requirement for the securing or
posting of any


                                       23
<PAGE>


bond in connection with the obtaining of any such injunctive or other equitable
relief. If any provision of Article VII relating to the restrictive period,
scope of activity restricted and/or the territory described therein shall be
declared by a court of competent jurisdiction to exceed the maximum time period,
scope of activity restricted or geographical area such court deems reasonable
and enforceable under applicable law, the time period, scope of activity
restricted and/or area of restriction held reasonable and enforceable by the
court shall thereafter be the restrictive period, scope of activity restricted
and/or the territory applicable to the restrictive covenant provisions in this
Article VII. The invalidity or non-enforceability of this Article VII in any
respect shall not affect the validity or enforceability of the remainder of this
Article VII or of any other provisions of this Agreement.



                                  ARTICLE VIII

                             FINANCIAL ARRANGEMENTS

         SECTION 8.1       Management Fees.

         Practice and Manager agree that the compensation set forth in this
Article VIII is being paid to Manager in consideration of the substantial
commitment made by Manager hereunder and that such fees are fair and reasonable.

                  (a) Manager shall be paid as its management fee (the
         "Management Fee") the following amounts:

                           (i)      An amount equal to all Manager Expenses;

                           (ii) [                                  ] ($[      ])
                  per annum (the "Base Fee"), to be earned and accrued in
                  equal monthly installments;

                           (iii) The Performance Bonus (as defined below); and

                           (iv) Amounts due to Manager pursuant to Section 7.4.

                  (b) Practice has retained Manager to provide services
         hereunder due to Manager's unique expertise and Practice desires to
         provide an additional incentive to Manager with respect to Manager's
         performance of its obligations under this Agreement. Practice has
         established the following goals for Manager: providing efficient and
         uniform management services to Practice in a manner which enables
         Practice's physicians to focus on patient care and to avoid
         administrative responsibilities, provide updated management systems
         which Practice would not otherwise be aware from time to time, assist
         the practice in providing its services in a more efficient and cost
         effective manner, assist Practice in analyzing the provision of
         additional services and facilities, obtaining additional financing
         sources for the expansion of Practice and its facilities, developing
         relationships and agreements with managed care providers and other
         health

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


                                       24
<PAGE>


         care providers and developing and administering positive and uniform
         employment policies. Practice acknowledges that these goals will have
         been met if Manager earns the Performance Bonus as set forth below.

                  In the event that the Net Practice Revenues minus Physician
         Expenses, Manager Expenses and the Base Fee, ("Net Income") exceeds
         [                                   ] ($[       ]) for the then current
         year (pro rated on a monthly basis), then Manager shall be entitled to
         a performance bonus (the "Performance Bonus") for such year equal to
         [             ] ([  ]%) of Net Income in excess of [
                        ] ($[      ]). The Performance Bonus shall be earned and
         accrued on a monthly basis.

                  (c) Notwithstanding anything herein to the contrary, in no
         event shall Manager's Management Fee due under Section 8.1(a)(ii) and
         (iii) exceed [             ] ([  ]%) of Net Income.

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


         SECTION 8.2       Collection of Management Fee.

                  (a) Manager shall be paid any portion of the Management Fee
         resulting from Manager Expenses upon Manager's presentation to Practice
         of reasonable documentation of such Manager Expenses and resulting from
         Section 7.4 immediately upon the receipt of such amounts by Practice.

                  (b) The remaining amounts to be paid to Manager under this
         Article VIII shall be payable monthly. The amounts shall be estimated
         based upon the previous month's operating results of Practice (subject
         however to the obligations to repay agreed upon working capital
         advances or other third-party financing). Adjustments to the estimated
         payments shall be made to reconcile actual amounts due under this
         Article VIII, by the end of the following month during each calendar
         quarter. Upon preparation of quarterly financial statements, final
         adjustments to the service fee for the quarter shall be made and any
         additional payments owing to Manager or Practice shall then be made.
         Any audit adjustments shall be reflected in the calculation for the
         fourth quarter. Operating results shall be prepared on a consistent
         basis in accordance with GAAP.

         SECTION 8.3       Limited Guaranty Agreement.

         Each existing and any future Physician Shareholder shall execute the
Limited Guaranty Agreement dated as of the date hereof.



                                       25
<PAGE>

                                   ARTICLE IX

                                     RECORDS

         SECTION 9.1       Patient Records.

         Upon termination of this Agreement, Practice shall retain all patient
medical records maintained by Practice or Manager in the name of Practice.
Practice shall, at its option, be entitled to retain copies of financial and
accounting records relating to all services performed by Practice.

         SECTION 9.2       Records Owned by Manager.

         All records relating in any way to the operation of Practice which are
not the property of Practice under the provisions of Section 9.1 above, shall at
all times be the property of Manager.

         SECTION 9.3       Access to Records.

         During the term of this Agreement, and thereafter, Practice or its
designee shall have reasonable access during normal business hours to Practice's
and Manager's financial records which relate to Practice, including, but not
limited to, records of collections, expenses and disbursements as kept by
Manager in performing Manager's obligations under this Agreement, and Practice
may copy any or all such records.



                                    ARTICLE X

                             INSURANCE AND INDEMNITY

         SECTION 10.1      Insurance to be Maintained by Practice.

         Throughout the term of this Agreement, Practice shall maintain
comprehensive professional liability insurance with limits of not less than
$200,000.00 per claim and with aggregate policy limits of not less than
$600,000.00 for Practice with such carrier as is approved by the Policy Board.
Malpractice premiums, deductibles and such accruals shall be a Manager Expense.
Practice shall be responsible for all liabilities in excess of the limits of
such policies. Manager shall have the option, with Policy Board approval, of
providing such professional liability insurance through an alternative program,
provided such program meets the requirements of the Insurance Commissioner of
the State of Texas.

         SECTION 10.2      Insurance to be Maintained by Manager.

         Throughout the term of this Agreement, Manager will provide and
maintain, as a Manager Expense, comprehensive professional liability insurance
for all professional employees of Manager, if any, with limits and with such
carrier as provided above and comprehensive


                                       26
<PAGE>


general liability and property insurance covering Practice premises and
operations with limits and with such carrier as determined reasonable by Manager
in its national program.

         SECTION 10.3      Tail Insurance Coverage.

         Practice will cause each individual physician who becomes associated
with Practice after the date hereof to enter into an agreement with Practice
that upon termination of such physician's relationship with Practice, for any
reason, and in the event tail insurance is not provided for such physician under
Practice's insurance policies, tail insurance coverage will be purchased by the
individual physician; provided however, in the event that such physician's
relationship with Practice is terminated due to death or disability or due to an
uncured event of default by Practice under its agreement for the services of
such physician, then Practice, rather than such physician, shall pay the costs
of such tail insurance. Such provisions may be contained in employment
agreements, restrictive covenant agreements or other agreements entered into by
Practice and the individual physicians, and Practice hereby covenants with
Manager to enforce such provisions relating to the tail insurance coverage or to
provide such coverage at the expense of Practice. The Policy Board may determine
to provide coverage for such a physician as a Manager Expense on a physician by
physician basis. The Policy Board may also decide to require other categories of
physicians currently employed by Practice to provide tail coverage upon
termination of employment with Practice.

         SECTION 10.4      Additional Insureds.

         Practice and Manager agree to use their reasonable efforts to have each
other named as an additional insured on the other's respective professional
liability insurance programs.

         SECTION 10.5      Indemnification.

         Practice shall indemnify, hold harmless and defend Manager, its
officers, directors, shareholders and employees, from and against any and all
liability, loss, damage, claim, causes of action, and expenses (including
reasonable attorneys' fees), whether or not covered by insurance, caused or
asserted to have been caused, directly or indirectly, by or as a result of the
performance of medical services or the performance of any intentional acts,
negligent acts or omissions by Practice and/or its shareholders, agents,
employees and/or subcontractors (other than Manager, Parent or their agents)
during the term hereof. Manager shall indemnify, hold harmless and defend
Practice, its officers, shareholders, directors and employees, from and against
any and all liability, loss, damage, claim causes of action, and expenses
(including reasonable attorneys' fees), whether or not covered by insurance,
caused or asserted to have been caused, directly or indirectly, by or as a
result of the performance of any intentional acts, negligent acts or omissions
by Manager and/or its shareholders, agents, employees and/or subcontractors
(other than Practice) during the term of this Agreement.



                                       27
<PAGE>

         SECTION 10.6      Rules Regarding Indemnification.

         The obligations and liabilities of each indemnifying party hereunder
with respect to claims resulting from the assertion of liability by the other
party or third parties shall be subject to the following terms and conditions:

                  (a) The indemnified party shall give prompt written notice to
         the indemnifying party of any claim which might give rise to a claim by
         the indemnified party against the indemnifying party based on the
         indemnity agreement contained in Section 10.5 hereof, stating the
         nature and basis of said claims and the amounts thereof, to the extent
         known. If written notice is not given to the indemnifying party within
         thirty (30) days from receipt of notice of the claim to be indemnified,
         in sufficient detail to apprise the indemnifying party of the nature of
         the claim (in each instance taking into account the facts and
         circumstances known by the indemnified party with respect to such
         claim), the indemnifying party shall not be liable to the party seeking
         indemnification to the extent that the indemnifying party can
         demonstrate that its rights were irreparably prejudiced thereby. The
         indemnifying party shall have the right, at its option, to compromise
         or defend, at its own expense and by its own counsel, any claim
         involving the asserted liability of the party seeking indemnification.
         If any indemnifying party shall undertake to compromise or defend any
         such asserted liability, it shall promptly notify the party seeking
         indemnification of its intention to do so, and the party seeking
         indemnification agrees to cooperate fully with the indemnifying party
         and its counsel in the compromise of, or defense against, any such
         asserted liability. All costs and expenses incurred in connection with
         such cooperation shall become by the indemnifying party. In any event,
         the indemnified party shall have the right, at its own expense and by
         its own counsel to participate in the defense of such asserted
         liability.

                  (b) The indemnified party shall not make any settlement of any
         claims without the written consent of the indemnifying party, which
         consent shall not be unreasonably withheld or delayed.

         SECTION 10.7      Offset.

         Manager is hereby authorized upon written notice to Practice to offset
or apply any funds or Common Stock of MedCath of Practice or the Physician
Shareholders which Manager holds from time to time or which Manager owes to
Practice or to the Physician Shareholders against or to any amounts owed by
Practice or the Physician Shareholders to Manager under this Agreement or the
Master Transaction Agreement; provided however, if within ten (10) days of such
written notice Practice objects thereto, such funds or Common Stock of MedCath
shall be placed with an escrow agent pursuant to a mutually acceptable escrow
agreement until any dispute with respect thereto is finally resolved through
binding arbitration.



                                       28
<PAGE>

                                   ARTICLE XI

                              TERM AND TERMINATION

         SECTION 11.1      Term of Agreement.

         This Agreement shall commence on the date hereof and shall expire on
the 40th anniversary hereof unless earlier terminated pursuant to the terms
hereof.

         SECTION 11.2      Extended Term.

         Unless earlier terminated as provided for in this Agreement, the term
of this Agreement shall be automatically extended for additional terms of five
(5) years each, unless Manager delivers to Practice, not less than six (6)
months nor earlier than twelve (12) months prior to the expiration of the
preceding term, written notice of Manager's intention not to extend the term of
this Agreement. If the preceding sentence would result in this Agreement being
in violation of any applicable law or would render this Agreement void or
unenforceable, such sentence shall be void and of no further force or effect.

         SECTION 11.3      Termination by Practice.

         Practice may elect to terminate this Agreement as follows:

                  (a) In the event or the filing of a petition in voluntary
         bankruptcy or an assignment for the benefit of creditors by Manager, or
         upon other action taken or suffered, voluntarily or involuntarily,
         under any federal or state law for the benefit of debtors by Manager,
         except for the filing of a petition in involuntary bankruptcy against
         Manager which is dismissed within ninety (90) days thereafter, Practice
         may give notice of the immediate termination of this Agreement; or

                  (b) In the event Manager shall materially default in the
         performance of any material duty or obligation imposed upon it by this
         Agreement and such default shall continue for a period of forty-five
         (45) days after written notice thereof has been given to Manager by
         Practice or Manager shall fail to remit any material payments due as
         provided in Article VIII hereof and such failure to remit shall
         continue for a period of fifteen (15) days after written notice
         thereof, Practice may terminate this Agreement. Termination of this
         Agreement pursuant to this subsection (b) by Practice shall require the
         affirmative vote of Physician Shareholders holding at least
         seventy-five (75%) of the ownership of Practice.



                                       29
<PAGE>

         SECTION 11.4      Termination by Manager.

         Manager may elect to terminate this Agreement as follows:

                  (a) In the event of the filing of a petition in voluntary
         bankruptcy or an assignment for the benefit of creditors by Practice,
         or upon other action taken or suffered, voluntary or involuntarily,
         under any federal or state law for the benefit of debtors by Practice,
         except for the filing of a petition in involuntary bankruptcy against
         Practice which is dismissed within ninety (90) days thereafter, Manager
         may give notice of the immediate termination of this Agreement;

                  (b) In the event Practice shall materially default in the
         performance of any material duty or obligation imposed upon it by this
         Agreement, and such default shall continue for a period of forty-five
         (45) days after written notice thereof has been given to Practice by
         Manager, Manager may give notice of the immediate termination of this
         Agreement;

                  (c) In the event that prior to the fifth (5th) anniversary of
         the effective date of this Agreement, two (2) or more of the physicians
         employed by Practice during the prior twelve (12) months are no longer
         employed by Practice for any reason (other than due to death or
         disability), Manager may give notice of the immediate termination of
         this Agreement, provided this provision shall not apply for so long as
         at least three of Paul Manoharan, Benjamin Robolino, Ofsman Quintana
         and Tawhid Shuaib are still employed by Practice on a full-time basis;
         or

                  (d) In the event at any time prior to the fifth (5th)
         anniversary of the date of this Agreement, two (2) or more of the
         physicians employed by Practice during the prior twelve (12) months
         shall fail by omission or co-omission in any substantial matter to
         provide professional services in a competent manner or such physicians'
         licenses to practice medicine are revoked, suspended, canceled or
         limited in any manner or such physicians fail to comply with the terms
         of their employment agreements with Practice, Manager may give notice
         of the immediate termination of this Agreement, provided this provision
         shall not apply for so long as at least three of Paul Manoharan,
         Benjamin Robolino, Ofsman Quintana and Tawhid Shuaib shall not have had
         any such failure or have had such a revocation or suspension.

         SECTION 11.5      Actions after Termination.

         (a) Upon termination of this Agreement by either party for any reason
or upon expiration of this Agreement, Practice agrees to:

                                    (i) Purchase from Manager at book value all
                  intangible assets set forth on the balance sheet of Manager
                  and relating to Practice or this Service Agreement, all as
                  adjusted through the last day of the month most recently ended
                  prior to the date of such termination in accordance with GAAP
                  to reflect amortization or depreciation of intangibles; and



                                       30
<PAGE>

                                    (ii) Assume all debt and all contracts,
                  payables and leases which are obligations of Manager and which
                  relate principally to the performance of its obligations under
                  this Agreement or the properties leased or subleased by
                  Manager.

         (b) To secure Practice's obligations to Manager and to MedCath
Incorporated under this Agreement and under the Master Transaction Agreement,
Practice hereby agrees to grant a security interest in all of the accounts
receivable of Practice and to execute a Security Agreement and related financing
statements as of the date hereof.

         SECTION 11.6 Closing of Repurchase by Practice and Effective Date of
Termination.

         Practice shall pay cash for the repurchased assets (exclusive of fixed
assets). The amount of the purchase price shall be reduced by the amount of debt
and liabilities of Manager assumed by Practice. Practice and any physician
associated with Practice shall execute such documents as may be required to
assume the liabilities set forth in Section 11.5 and to remove Manager from any
liability with respect to such repurchased assets and with respect to any
property leased or subleased by Manager, Manager will execute and deliver such
documents as are customary in asset sales with general warranties of title, and
such assets shall be in no worse condition than when delivered to Manager by
Practice, normal wear and tear excepted, and such documents to be executed and
delivered by Manager shall be similar to the documents executed by Practice in
connection with the asset sale to Parent. The closing date for the repurchase
shall be determined by Practice, but shall in no event occur later than 120 days
from the date of the notice of termination. The termination of this Agreement
shall become effective upon the closing of the sale of the assets. Manager shall
have the right, in its sole and absolute discretion, to waive the repurchase
requirements herein, in which event, the termination of this Agreement shall
become effective upon the execution and delivery of such waiver notice. From and
after any termination, each party shall provide the other party with reasonable
access to books and records then owned by it to permit such requesting party to
satisfy reporting and contractual obligations which may be required of it.



                                   ARTICLE XII

                               GENERAL PROVISIONS

         SECTION 12.1      Assignment.

         Manager shall have the right to assign its rights hereunder to any
Person that is an Affiliate of or Related Party to Manager and to any lending
institution, for security purposes or as collateral, from which Parent or
Manager obtains financing, or to any purchaser of substantially all of the
assets of Parent. Except as set forth above, neither Manager nor Practice shall
have the right to assign their respective rights and obligations hereunder
without the written consent of the other party.



                                       31
<PAGE>

         SECTION 12.2      Whole Agreement, Modification.

         This Agreement constitutes the entire agreement between the parties.
There are no other agreements or understandings, written or oral between the
parties regarding this Agreement, the Exhibits and the Schedules, other than as
set forth herein. This Agreement shall not be modified or amended except by a
written document executed by both parties to this Agreement, and such written
modification(s) shall be attached hereto.

         SECTION 12.3      Notices.

         All notices required or permitted by this Agreement shall be in writing
and shall be addressed as follows:

                  To Manager:          MedCath Physician Management, Inc.
                                       7621 Little Avenue, Suite 106
                                       Charlotte, North Carolina 28226
                                       Attn: President

                  With a copy to:      Moore & Van Allen, PLLC
                                       NationsBank Corporate Center
                                       100 N. Tryon Street, Floor 47
                                       Charlotte, North Carolina 28202-4003
                                       Attn:  Hal A. Levinson

                  To Practice:         Valley Cardiology, P.A.
                                       500 East Ridge Road, Suite 101
                                       McAllen, Texas  78503
                                       Attn:  President

         or to such other address as either party shall notify the other.

         SECTION 12.4      Binding on Successors.

         Subject to Section 12.1, this Agreement shall be binding upon the
parties hereto, and their successors, assigns, heirs and beneficiaries.

         SECTION 12.5      Waiver of Provisions.

         Any waiver of any terms and conditions hereof must be in writing, and
signed by the parties hereto. The waiver of any of the terms and conditions of
this Agreement shall not be construed as a waiver of any other terms and
conditions hereof.

         SECTION 12.6      Governing Law.

         The validity, interpretation and performance of this Agreement shall be
governed by and construed in accordance with the laws of the State of Texas. The
parties acknowledge that Manager is not authorized or qualified to engage in any
activity which may be construed or


                                       32
<PAGE>

deemed to constitute the practice of medicine. To the extent any act or service
required of Manager in this Agreement should be construed or deemed, by any
governmental authority, agency or court to constitute the practice of medicine,
the performance of said act or service by Manager shall be deemed waived and
forever unenforceable and the provisions of Section 12.12 shall be applicable.

         SECTION 12.7      Severability.

         The provisions of this Agreement shall be deemed severable and if any
portion shall be held invalid, illegal or unenforceable for any reason, the
remainder of this Agreement shall be effective and binding upon the parties.

         SECTION 12.8      Additional Documents.

         Each of the parties hereto agrees to execute any document or documents
that may be requested from time to time by the other party to implement or
complete such party's obligations pursuant to this Agreement.

         SECTION 12.9      Attorneys' Fees.

         If legal action is commenced by either party to enforce or defend its
rights under this Agreement, the prevailing party in such action shall be
entitled to recover its costs and reasonable attorneys' fees in addition to any
other relief granted.

         SECTION 12.10     Time is of the Essence.

         Time is hereby expressly declared to be of the essence in this
Agreement.

         SECTION 12.11     Confidentiality.

         Except for disclosure to its attorneys, accountants, bankers,
underwriters or lenders, or as necessary or desirable for conduct of business,
including negotiations with other acquisition candidates, neither party hereto
shall disseminate or release to any third party any information regarding any
provision of this Agreement, or any financial information regarding the other
(past, present or future) that was obtained by the other in the course of the
negotiation of this Agreement or in the course of the performance of this
Agreement, without the other party's written approval; provided, however, the
foregoing shall not apply to information which (i) is generally available to the
public other than as a result of a breach of confidentiality provisions, (ii)
becomes available on a non-confidential basis from a source other than the other
party, or its affiliates or agents, which source was not itself bound by a
confidentiality agreement, or (iii) which is required to be disclosed by law,
including securities laws or pursuant to court order. Notwithstanding the
foregoing, Practice may disclose information it deems advisable to its physician
employees provided such physician employees are advised of the confidential
nature of such information and agree to keep such information confidential as
provided herein. Manager shall be a third party beneficiary of such agreements.



                                       33
<PAGE>

         SECTION 12.12     Contract Modifications for Prospective Legal Events.

         In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision or regulatory agency or legal counsel in such a
manner as to indicate that the structure of this Agreement may be in violation
of such laws or regulations, Practice and Manager shall amend this Agreement as
necessary to eliminate such violation. To the maximum extent possible, any such
amendment shall preserve the underlying economic and financial arrangements
between Practice and Manager. To the extent the parties cannot agree on any such
amendment or changes, the matter shall be submitted to binding arbitration upon
the request of either party and through the arbitration process an equitable
modification shall be implemented based on all of the facts and circumstances or
the Agreement will terminate.

         SECTION 12.13     Remedies Cumulative; Survivability.

         No remedy set forth in this Agreement or otherwise conferred upon or
reserved to any party shall be considered exclusive of any other remedy
available to any party, but the same shall be distinct separate and cumulative
and may be exercised from time to time as often as occasion may arise or as may
be deemed expedient. Pursuit of any remedy set forth in this Agreement shall not
preclude pursuit of any other remedy provided in this Agreement or any other
remedy provided for in this Agreement constitute a waiver of any amount due from
a defaulting party under this Agreement or of any damages accruing by reason of
the violation of any of its terms, provisions and covenants. No waiver of any
violation shall be deemed or construed to constitute a waiver of any other
violation or breach of any of the terms, provisions and covenants contained in
this Agreement, and forbearance to enforce one or more of the remedies provided
on an event of default shall not be deemed or construed to constitute a waiver
of such default or of any other remedy provided for in this Agreement. The
termination of this Agreement shall not affect the remedies and rights of a
party hereunder with respect to a breach of this Agreement occurring on or
before such termination.

         SECTION 12.14     Language Construction.

         The language in all parts of this Agreement shall be construed, in all
cases, according to its fair meaning, and not for or against either party
hereto. The parties acknowledge that each party and its counsel have reviewed
and revised this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement.

         SECTION 12.15     No Obligation to Third Parties.

         None of the obligations and duties of Manager or Practice under this
Agreement shall in any way or in any manner be deemed to create any obligation
of Manager or of Practice to, or any rights in, any person or entity not a party
to this Agreement.



                                       34
<PAGE>

         SECTION 12.16     Communications.

         Practice and Manager agree that good communication between the parties
is essential to the successful performance of this Agreement, and each pledges
to communicate fully and clearly with the other on matters relating to the
successful operation of Practice.

         SECTION 12.17     Counterpart Executions; Facsimiles.

         This Agreement may be executed in any number of counterparts with the
same effect as if all of the parties had signed the same document. Such
executions may be transmitted to the parties 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 shall constitute one and the
same agreement.

         SECTION 12.18     Arbitration.

         Other than with respect to any claim or action for equitable or
injunctive relief, any controversy, dispute or disagreement arising out of or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration, which shall be conducted in Corpus Christi, Texas in accordance
with the National Health Lawyers Association Alternative Dispute Resolution
Service Rules of Procedure for Arbitration, and judgment on the award rendered
by the arbitrator may be entered into any court having jurisdiction thereof.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the following execution page(s) effective as of the day and year first above
written.


                                       35
<PAGE>

                                 EXECUTION PAGE

                                     TO THE

                                SERVICE AGREEMENT

                                     BETWEEN

                       MEDCATH PHYSICIAN MANAGEMENT, INC.

                                       AND

                             VALLEY CARDIOLOGY, P.A.

                                December 12, 1997





                                        PRACTICE:

                                        VALLEY CARDIOLOGY, P.A.


                                        By:      /s/ P. Manoharan
                                            ----------------------------------

                                        Title:     President
                                               -------------------------------


                                        MANAGER:

                                        MEDCATH PHYSICIAN MANAGEMENT, INC.


                                        By:     /s/   Ken Petronis
                                            ----------------------------------

                                        Title:     President, PPM Division
                                               -------------------------------
 


                                       36
<PAGE>

         The Physician Shareholders of Practice hereby execute this Agreement
for purposes of acknowledging and agreeing to be bound by the terms of Sections
5.5, 6.3, 6.8, 6.9, 6.10, Article VII, Sections 8.3 and 10.7 hereof.

/s/ Paul Manoharan                       /s/ Benjamin Robolino
---------------------------------        -------------------------------------
Paul Manoharan, M.D.                     Benjamin Robolino, M.D.


/s/ Ofsman Quintana, M.D.                /s/ Tawhid Shuaib, M.D.
---------------------------------        -------------------------------------
Ofsman Quintana, M.D.                    Tawhid Shuaib, M.D.


                                       37