UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended              June 30, 1997
                               ------------------------------------------------

                                             OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

For the transition period from                       to
                              ----------------------     ----------------------

Commission file number                      0-25176
                      ---------------------------------------------------------

                              MEDCATH INCORPORATED
             (Exact name of registrant as specified in its charter)

        North Carolina                                         56-1635096
---------------------------------                       -----------------------
  (State or other jurisdiction                              (I.R.S. Employer
of incorporation or organization)                        Identification No.)

         7621 Little Avenue, Suite 106, Charlotte, North Carolina 28226
-------------------------------------------------------------------------------
                    (Address of principal executive officers)
                                   (Zip Code)

                                 (704) 541-3228
-------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

                                 Not Applicable
-------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

   Indicate  by check mark  whether  the  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

Yes      X                  No_____


As of July 31, 1997, there were 11,152,690 Common Shares outstanding.

<PAGE>

                              MEDCATH INCORPORATED

                                    FORM 10-Q

                                  June 30, 1997

                                Table of Contents

                                                                          Page
                                                                           No.

PART I - FINANCIAL INFORMATION (UNAUDITED)

   Item 1.  Condensed consolidated financial statements

             Condensed consolidated statements of income                   3

             Condensed consolidated balance sheets                         4

             Condensed consolidated statements of cash flows               5

             Notes to condensed consolidated financial statements        6-8

   Item 2.  Management's discussion and analysis of
                   financial condition and results of operations        9-14

PART II - OTHER INFORMATION

   Item 6.  Exhibits and Reports on Form 8-K                             15
                  
            Signatures                                                   16


                                       2
<PAGE>
                              MedCath Incorporated
              Unaudited Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>

                                                                                       Nine Months Ended
                                                                                            June 30,
                                                              ---------------------------------------------------------------------
                                                                    1996             1997              1996             1997
                                                              ---------------------------------------------------------------------

<S>                                                            <C>                                                                 
Net revenue                                                    $ 18,375,810     $ 29,915,211       $ 46,868,372      $  79,479,155

Operating expenses:
    Medical supplies and other                                    7,155,778       11,606,458         18,158,849         31,016,024
    Personnel costs                                               5,585,120        8,232,826         12,709,330         21,369,816
    Depreciation                                                  1,301,140        2,344,139          3,139,930          5,617,148
    Amortization                                                    639,379        1,361,120          1,392,706          3,042,859
    Provision for doubtful accounts                                 181,021          777,640            313,696          1,715,486
    Marketing, general and administrative                         1,245,898        1,558,249          3,869,925          5,257,563
                                                              ---------------------------------------------------------------------
        Total operating expenses                                 16,108,336       25,880,432         39,584,436         68,018,896
                                                              ---------------------------------------------------------------------
Income from operations                                            2,267,474        4,034,779          7,283,936         11,460,259
Interest expense                                                   (719,281)      (1,862,104)        (1,449,236)        (3,398,509)
Interest income                                                     708,555          488,008            962,609          1,744,629
Minority interest in earnings of consolidated entities             (326,588)        (197,591)          (718,762)        (1,037,762)
Equity in net earnings of unconsolidated joint venture               23,693                -             89,644                  -
                                                              ---------------------------------------------------------------------
Income before income taxes                                        1,953,853        2,463,092          6,168,191          8,768,617

Provision for income taxes                                         (781,541)        (917,490)        (2,467,276)        (3,371,448)

                                                              =====================================================================
Net income                                                     $  1,172,312     $  1,545,602       $  3,700,915       $  5,397,169
                                                              =====================================================================


Net income per share                                           $    0.10        $     0.13         $     0.38         $    0.46
                                                              =====================================================================

Weighted average number of common and common
    equivalent shares outstanding                                11,330,391       11,661,617         9,814,686          11,665,056
<FN>

See accompanying notes.
</FN>
</TABLE>












                                        3
<PAGE>

                              MedCath Incorporated
                      Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>

                                                                              September 30,              June 30,
                                                                           ---------------------    --------------------
                                                                                  1996                     1997
                                                                           ---------------------    --------------------
                                                                                                        (Unaudited)
<S>                                                                        <C>                      <C>   
ASSETS
Current assets:
    Cash and cash equivalents                                               $         5,026,305      $        9,677,747
    Short-term investments                                                           56,667,244              26,611,488
    Accounts receivable, net of allowance                                            11,155,477              23,759,822
    Medical supplies                                                                  1,549,029               2,787,847
    Prepaid expenses and other current assets                                           610,137                 762,771
                                                                           ---------------------    --------------------
       Total current assets                                                          75,008,192              63,599,675

Property, plant and equipment, net of accumulated depreciation                       72,303,824             119,864,232
Other assets                                                                          1,910,092               1,874,128
Start-up and organization costs, net of accumulated amortization                      7,628,018              11,822,853
Advances to physician groups                                                          5,609,178               7,392,385
Intangible assets, net of accumulated amortization                                   19,221,414              26,475,305
                                                                           =====================    ====================
Total assets                                                                $       181,680,718     $       231,028,578
                                                                           =====================    ====================


LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                        $         2,861,343     $         2,400,993
    Distribution payable to minority interests                                          629,352                 903,246
    Accrued liabilities                                                               3,623,704               6,123,036
    Current portion of long-term debt                                                 1,931,455               2,148,283
    Current portion of obligations under capital leases                                 392,713                 391,068
                               
                                                                           ---------------------    --------------------
       Total current liabilities                                                      9,438,567              11,966,626

Deferred income taxes                                                                 2,624,535               3,646,210
Long-term debt                                                                       43,841,641              80,542,572
Obligations under capital leases                                                      2,053,797               2,344,283
                                                                           ---------------------    --------------------
Total liabilities                                                                    57,958,540              98,499,691

Minority interests in equity of consolidated entities                                 3,477,085               6,775,597

Shareholders' equity:
    Common stock, $.01 par value,  20,000,000 shares authorized,  and 11,121,326
       and 11,152,690 shares issued and outstanding
       at September 30, 1996 and June 30, 1997, respectively                            111,213                 111,526
    Paid-in capital                                                                 108,897,931             109,008,646
    Retained earnings                                                                11,235,949              16,633,118
                                                                           ---------------------    --------------------
Total shareholders' equity                                                          120,245,093             125,753,290
                                                                           ---------------------    --------------------

Total liabilities, minority interests and shareholders' equity              $       181,680,718     $       231,028,578
                                                                           =====================    ====================
<FN>

See accompanying notes.

</FN>
</TABLE>



                                        4
<PAGE>

 <TABLE>
<CAPTION>


                                                                                             Nine Months Ended
                                                                                                 June 30,
                                                                                   -------------------------------------
                                                                                         1996                1997
                                                                                   ------------------  -----------------
<S>                                                                                <C>                 <C>   
Operating activities
Net Income                                                                          $   3,700,915       $    5,397,169
Adjustments to reconcile net income to net cash provided by operating activities:
      Depreciation and amortization                                                     4,628,788            8,776,611
      Equity in net earnings of unconsolidated joint venture                              (89,644)                   -
      Minority interest                                                                  (721,396)            (767,852)
      Deferred income taxes                                                               336,200            1,021,675
      Increase in current assets:
           Accounts receivable                                                         (6,125,075)         (12,589,311)
           Medical supplies                                                              (869,912)          (1,238,818)
           Prepaid expenses and other current assets                                     (846,219)             (99,756)
      Increase (decrease) in current liabilities:
           Accounts payable                                                               893,430             (635,816)
           Distribution payable to minority interest                                      (78,692)             273,894
           Accrued liabilities                                                            836,218            2,462,308
      Other                                                                              (216,773)             (55,098)
                                                                                   ------------------  -----------------
Net cash provided by operating activities                                               1,447,840            2,545,006

Investing activities
Purchases of property, plant and equipment                                            (31,282,795)         (52,821,068)
Proceeds from sale of assets                                                              790,800                    -
Start-up and organization costs                                                        (5,292,784)          (6,546,286)
Advances to physician groups                                                           (1,801,971)          (2,465,618)
Repayments of advances to physician groups                                                315,463              682,412
Net (purchase) sale of short-term investments                                         (46,696,687)          30,055,756
                                                                                   ------------------  -----------------
Net cash used in investing activities                                                 (83,967,974)         (31,094,804)

Financing activities
Proceeds from issuance of long-term debt                                               28,558,535           33,220,841
Repayments of long-term debt                                                           (5,830,206)          (3,719,391)
Repayments of obligations under capital leases                                         (4,193,534)            (386,489)
Proceeds from issuance of common stock                                                 62,639,532              111,028
Investments by minority partners                                                          355,489            4,066,364
Payment of loan acquisition costs and deferred loan fees                                 (373,716)             (91,113)
                                                                                   ------------------  -----------------
Net cash provided by financing activities                                              81,156,100           33,201,240
                                                                                   ------------------  -----------------
Net (decrease) increase in cash and equivalents                                        (1,364,034)           4,651,442
Cash and cash equivalents, beginning of period                                          6,821,728            5,026,305
                                                                                   ------------------  -----------------
Cash and cash equivalents, end of period                                            $   5,457,694      $     9,677,747
                                                                                   ==================  =================
<FN>

See accompanying notes.

</FN>
</TABLE>


                                        5
<PAGE>




                              MedCath Incorporated
         Notes to Unaudited Condensed Consolidated Financial Statements
            For the Three and Nine Month Periods Ended June 30, 1997

Note 1- General

The  accompanying  unaudited  condensed  consolidated  financial  statements  of
MedCath  Incorporated  (the  "Company")  have been prepared in  accordance  with
generally accepted accounting  principles for interim financial  information and
with  the  instructions  for  Form  10-Q  and  Article  10  of  Regulation  S-X.
Accordingly,  they do not include all of the information and footnotes  required
by generally accepted accounting  principles for complete financial  statements.
In the opinion of management,  the statements of the unaudited  interim  periods
include  all  adjustments  necessary  for fair  presentation  of results for the
periods  and  all  such  adjustments  are  of a  normal  recurring  nature.  The
accompanying  unaudited  condensed  consolidated  results of operations  for the
three and nine month periods ended June 30, 1997 are not necessarily  indicative
of the results that may be expected for the year ending  September 30, 1997. For
further information,  refer to the audited consolidated financial statements and
footnotes  thereto  included in the Company's Annual Report on Form 10-K for the
year ended September 30, 1996.  Unless otherwise  specified,  capitalized  terms
used herein are used as defined in such Annual Report on Form 10-K.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates and assumptions.

Certain prior year amounts have been reclassified to conform to the current year
presentation.

Note 2 - Net Income Per Share

The  computation of primary and fully diluted net income per share is based upon
the weighted average number of common shares and common  equivalent  shares,  if
dilutive,  outstanding  during the period.  The computation of fully diluted net
income per share also takes into  consideration  the use of market  price at the
end of the period,  when higher  than the average  market  price for the period.
Common stock  equivalents  represent the dilutive  effect of the exercise of all
outstanding  stock  options  and  the  assumed  conversion  of  all  outstanding
convertible debt. Fully diluted net income per share is not presented because it
does not differ from primary net income per share.

Note 3 - Long-Term Debt

Long term debt consisted of the following:
<TABLE>
<CAPTION>

                                                      September 30,        June 30,
                                                          1996               1997
                                                   --------------------------------------
<S>                                                  <C>                <C>           
McAllen REIT Loan                                    $   13,750,000     $   13,750,000
Arkansas REIT Loan                                       19,757,558         29,000,000
Tucson REIT Loan                                          1,062,531         13,686,401
Convertible subordinated debt                                     -          4,451,971
Notes payable to equipment lenders                       10,689,071         20,190,344
Other notes payable                                         513,936          1,612,139
                                                   --------------------------------------
                                                         45,773,096         82,690,855
Less current portion                                     (1,931,455)        (2,148,283)
                                                   ======================================
                                                      $  43,841,641     $   80,542,572
                                                   ======================================
</TABLE>

As of June 30,  1997,  approximately  $18.0  million  was  available  under  the
Company's $20 million  Revolver,  as computed in  accordance  with the borrowing
base, and there were no amounts  outstanding.  The proceeds of the Revolver have
been and are to be used to meet  ongoing  working  capital  requirements  and to
finance certain acquisitions approved by the lender.

                                       6

<PAGE>

Note 3 - Long - Term Debt (continued)

In fiscal year 1997, the Company acquired  substantially  all of the medical and
other equipment for the Arkansas Heart Hospital under  installment notes payable
to equipment lenders.  Amounts borrowed under these notes are payable in monthly
installments of principal and interest over five years. The notes are secured by
the related equipment and bear interest at rates ranging from 9.62% to 10.25%.

In October 1996, the Company issued a convertible  subordinated  promissory note
in the amount of $6.4 million in connection  with the  acquisition of a contract
to manage Heart Clinic, P.A. (See Note 4). In November 1996, $1.9 million of the
outstanding principal balance was paid in accordance with the terms of the note.
The  remaining  principal  amount of the note is due and  payable  on October 1,
1998, in cash or in shares of common stock of the Company at a conversion  price
of  $14  per  share.  Interest  is  payable  annually  at a  rate  of 4% on  the
outstanding principal. A contingent convertible subordinated promissory note was
also  issued  in  October  1996  and the  amount  of the  note  will be based on
performance levels of the Heart Clinic physicians for the 1997 calendar year.

In March 1997, the Company obtained a financing commitment for up to $32 million
for the purpose of financing the land acquisition, construction and a portion of
the working capital costs of the Arizona Heart Hospital.  The interest rate will
be at a premium above LIBOR and the  outstanding  principal  balance will be due
and payable in full three years from the closing of the note,  if the  Company's
optional  extension of one year is not exercised.  The Company  expects to close
the transaction during the fourth fiscal quarter of 1997.

In April 1997,  the Company  obtained a commitment  for a $20 million  revolving
credit facility to replace the Company's existing Revolver.  The proceeds of the
new revolving credit facility are to be used for working capital,  acquisitions,
and for general corporate  purposes.  The interest rate is variable at a premium
above the LIBOR rate. In July 1997,  the  transaction  was  completed  under the
terms set forth above.

In July 1997, the Company obtained a financing  commitment for up to $35 million
for the purpose of financing the land acquisition and construction  costs of the
Heart  Hospital of Austin.  The interest  rate is based on a fixed premium above
the seven-year treasury note rate and the principal and interest is payable over
a seven year term.  The  Company  expects  to close the  transaction  during the
fourth fiscal quarter of 1997.

Note 4 - Business Combinations and New Operations

In September 1996, the Company formed PMMI. In October 1996, PMMI entered into a
40-year contract to manage Heart Clinic,  P.A., a  multi-physician  cardiologist
group located in McAllen,  Texas. Total  consideration  given in connection with
the  acquisition  of the  management  contract  was  approximately  $6.3 million
(subject to increase if certain base performance  levels are exceeded in 1997 by
the physicians) and consisted of fixed and contingent  promissory notes that are
partially convertible into the Company's common stock (see Note 3).

In January 1997,  the Company  announced it had formed a venture for the purpose
of  constructing  and  operating  the  Arizona  Heart  Hospital to be located in
Phoenix,  Arizona.  The Arizona  Heart  Hospital will be owned and operated by a
limited  liability  company in which the Company  owns a majority  interest  and
serves as  manager.  The  Company  expects  the total cost of  constructing  and
equipping the Arizona Heart Hospital to be  approximately  $47 million and plans
to open the hospital in fiscal year 1998.

                                       7

<PAGE>

Note 4 - Business Combinations and New Operations (continued)

On March 3, 1997, the Arkansas Heart Hospital  received  Medicare  certification
from the  Arkansas  Department  of  Health  and  opened  slightly  earlier  than
anticipated.  The Company  serves as the managing  member with a 51% interest in
the limited liability company that operates the Arkansas Heart Hospital.


Note 5 - Newly Issued Accounting Standards

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128,  Earnings per Share,  which is required to be adopted on December 31, 1997.
At that time,  the Company will be required to change the method  currently used
to compute  earnings per share and to restate all prior  periods.  Under the new
requirements for calculating  primary earnings per share, the dilutive effect of
stock options will be excluded.  The impact is expected to result in an increase
in primary earnings per share, for the quarters ended June 30, 1996 and June 30,
1997,  of $.01 per share,  respectively.  The impact is expected to result in an
increase in primary  earnings per share, for the nine months ended June 30, 1996
and June 30,  1997,  of $.01 per share  and $.02 per  share,  respectively.  The
impact of Statement 128 on the  calculation of fully diluted  earnings per share
for these periods is not expected to be material.

                                       8
<PAGE>


                              MedCath Incorporated
   Management's Discussion and Analysis of Financial Condition and Results of
       Operations For the Three and Nine Month Periods Ended June 30, 1997

The following  discussion and analysis is provided to increase the understanding
of, and should be read in conjunction with, the Unaudited Condensed Consolidated
Financial  Statements and notes  thereto.  All References to a "Note" are to the
"Notes to  Unaudited  Condensed  Consolidated  Financial  Statements"  contained
herein.  Unless otherwise  specified,  capitalized terms used herein are used as
defined in the Company's Annual Report on Form 10-K for the year ended September
30, 1996.

Acquisitions and New Operations

In September 1996, the Company formed PMMI. In October 1996, PMMI entered into a
40-year contract to manage Heart Clinic,  P.A., a  multi-physician  cardiologist
group located in McAllen, Texas (See Notes 3 and 4).

In January 1997,  the Company  announced it had formed a venture for the purpose
of  constructing  and  operating  the  Arizona  Heart  Hospital to be located in
Phoenix,  Arizona.  The Arizona  Heart  Hospital will be owned and operated by a
limited  liability  company in which the Company  owns a majority  interest  and
serves as manager (See Notes 3 and 4).

On March 3, 1997, the Arkansas Heart Hospital  received  Medicare  certification
from the  Arkansas  Department  of  Health  and  opened  slightly  earlier  than
anticipated.  The Company  serves as the managing  member with a 51% interest in
the limited liability company that operates the Arkansas Heart Hospital.

Results of Operations

The following table sets forth, for the periods presented, the percentage of the
Company's  net revenue  represented  by the net revenue of each of the Company's
three  divisions  and by certain  items  reflected  in the  Unaudited  Condensed
Consolidated Statements of Income:
<TABLE>
<CAPTION>

                                                             Three Months Ended            Nine Months Ended
                                                                  June 30,                     June 30,
                                                        -------------------------------------------------------------
                                                             1996           1997           1996           1997
                                                        -------------------------------------------------------------
<S>                                                          <C>             <C>           <C>            <C>     
Net revenue:
   Diagnostics Division                                        47.1%          30.6%         56.0%          35.6%
   Practice Management Division                                22.4           15.4          23.1           18.1
   Hospital Division                                           30.5           54.0          20.9           46.3
                                                        -------------------------------------------------------------
         Total net revenue                                    100.0%         100.0%        100.0%         100.0%

Operating expenses:
   Medical supplies, personnel & other                         69.3           66.3          65.8           65.9
   Depreciation and amortization                               10.6           12.3           9.7           10.9
   Provision for doubtful accounts                              1.0            2.6            .7            2.2
   Marketing, general and administrative                        6.8            5.2           8.3            6.6
                                                        -------------------------------------------------------------
         Total operating expenses                              87.7           86.4          84.5           85.6

                                                        -------------------------------------------------------------
Income from operations                                         12.3           13.6          15.5           14.4

Interest expense                                               (3.9)          (6.2)         (3.1)          (4.3)
Interest income                                                 3.9            1.6           2.1            2.2
Minority interest in earnings of consolidated entities         (1.8)          (0.7)         (1.5)          (1.3)
Equity in earnings of unconsolidated subsidiaries                .1             -             .2             -
                                                        -------------------------------------------------------------
Income before income taxes                                     10.6            8.3           13.2           11.0
Provision for income taxes                                     (4.2)          (3.1)          (5.3)          (4.2)
                                                        -------------------------------------------------------------
Net income                                                      6.4%           5.2%           7.9%           6.8%
                                                        =============================================================
</TABLE>

                                       9
<PAGE>

Results of Operations (continued)

Net revenue

Consolidated  net revenue for the third  quarter and nine months  ended June 30,
1997 increased $11.5 million or 62.8% and $32.6 million or 69.6%,  respectively,
over the comparable  prior year periods.  These increases are primarily a result
of net revenue  generated  at the  McAllen and  Arkansas  Heart  Hospitals.  The
remainder of the  increases in net revenue are the result of new  operations  in
both the Practice Management Division and the Diagnostics Division.

Net revenue in the  Diagnostics  Division for the third  quarter and nine months
ended  June 30,  1997  increased  $507,000  or 5.9% and  $2.1  million  or 8.0%,
respectively,  over the  comparable  prior year  periods.  The  increase  in net
revenue during both the three and nine month periods was  attributable  to three
new  Fixed-Site  Facilities  which  opened  within the last year.  The number of
Fixed-Site  Facilities  and Mobile  Cath Labs  either  owned or  operated by the
Company  increased  from a total of 28 in  fiscal  year 1996 to a total of 31 in
fiscal year 1997.

Net revenue in the Practice  Management  Division for the third quarter and nine
months ended June 30, 1997 increased $292,000 or 7.1% and $3.3 million or 30.8%,
respectively,  over the  comparable  prior year  periods.  The  increase  in net
revenue  during the three and nine month periods was primarily  attributable  to
the acquisition of a contract to manage Heart Clinic, P.A. ("Heart Clinic"),  in
October  1996.  Also  contributing  to the  increase in net revenue  during both
periods  is the  increase  in net  revenue  from  the  two  existing  management
contracts,  one of which was  acquired in  February  1996.  The total  number of
physicians under management in the Practice  Management Division at this quarter
end is 79 compared with 66 at the same time last year.

Net revenue in the Hospital Division for the third quarter and nine months ended
June 30, 1997  increased  $10.6  million or 188.3% and $27.0  million or 275.1%,
respectively,  over the comparable prior year periods. The increase in the third
quarter of this year is primarily  due to net revenue  generated at the Arkansas
Heart Hospital located in Little Rock,  Arkansas,  which opened in March of this
year and to an increase in net revenue at the McAllen  Heart  Hospital  over the
comparable  prior year  period of 1996.  The  increase  over the prior year nine
month period is attributable to net revenue at the McAllen Heart Hospital, which
opened in January 1996,  and four months of net revenue from the Arkansas  Heart
Hospital this year.

Income from Operations

Consolidated  income from operations for the third quarter and nine months ended
June 30,  1997  increased  $1.8  million  or 77.9%  and $4.2  million  or 57.3%,
respectively,  over the  comparable  prior year  periods.  These  increases  are
attributable  to increased  operating  income at the McAllen Heart Hospital over
the prior year and operating  income at the Arkansas Heart Hospital which opened
in March of this year.  Operating  margins increased for the third quarter ended
June 30,  1997 to 13.5% from  12.3% in 1996 and  decreased  for the nine  months
ended June 30, 1997 to 14.4% from 15.5% in 1996.  The  improvement  in the third
quarter  operating margin over the comparable prior year period is the result of
substantial margin  improvements in the Hospital  Division.  The decrease in the
year to date  operating  margin is the result of the increased contribution to 
revenue by the Hospital Division, which operates at slightly lower margins than 
the Company's other operating divisions, and to a slight decline in margins in 
the Diagnostics Division due to lower patient volumes at several facilities.  
EBITDA margins for the third quarter and nine months ended June 30, 1997 
increased to 25.9% from 22.9% and to 25.3% from 25.2%,  respectively,  over the
comparable  prior year periods.  The three and nine month improvements in EBITDA
margin can be  attributed  to the substantial margin improvements in the 
Hospital Division

                                       10

<PAGE>

Results of Operations (continued)

Income from operations in the Diagnostics  Division  decreased  $348,000 or 9.4%
for the third quarter  ended June 30, 1997 and increased  $80,000 or .8% for the
nine months  ended June 30,  1997,  over the  comparable  respective  prior year
periods.  The decrease in the third  quarter  compared  with the record  results
achieved in the prior year is the result of slightly  lower  patient  volumes at
several of the Company's facilities.  The increase in the nine month period over
the comparable  prior year period is due to the income from  operations at three
new Fixed Site  Facilities,  which have opened within the last year. The year to
date  increases at these new  facilities  are offset by slightly  lower  patient
volumes  at  several  other  of  the  Company's  facilities.  Operating  margins
decreased  for the third  quarter and nine  months  ended June 30, 1997 over the
comparable  periods  in 1996 to  36.5%  from  42.6%  and to  36.3%  from  38.9%,
respectively.  EBITDA  margins for the third  quarter and nine months ended June
30, 1997 decreased in the Diagnostics  Division to 48.5% from 52.3% and to 47.6%
from  48.8%,  respectively.  These  decreases  are  primarily  the result of the
slightly lower patient volumes at several of the Company's facilities.

Income from operations in the Practice Management Division for the third quarter
and nine months ended June 30, 1997  increased  $79,000 or 14.5% and $529,000 or
41.7%, respectively, over the comparable prior year periods. These increases are
the result of income from operations generated from the contract to manage Heart
Clinic,  which was acquired in October 1996.  Operating  margins in the Practice
Management  Division  for the third  quarter and nine months ended June 30, 1997
increased  to 14.1% from 13.2% and to 12.7% from 11.7%,  respectively,  over the
comparable  prior  year  periods.  EBITDA  margins  in the  Practice  Management
Division  for the  third  quarter  and nine  months  ended  June 30,  1997  also
increased  to 16.8% from 14.8% and to 15.1% from 13.3%,  respectively,  over the
comparable  prior year periods.  These increases are  attributable to the higher
margins  produced from the contract to manage Heart  Clinic,  due to a different
management fee structure than the Company's existing management contracts.

 Income from operations in the Hospital  Division for the third quarter and nine
months ended June 30, 1997  increased $2.0 million or 193.6% and $4.3 million or
289.3%, respectively,  over the comparable prior year periods. Operating margins
in the Hospital  Division  for the third  quarter and nine months ended June 30,
1997 increased to 5.9% from (18.1)% and to 7.6% from (15.1)%, respectively, over
the comparable prior year periods.  EBITDA margins in the Hospital  Division for
the third  quarter and nine months  ended June 30, 1997  increased to 20.9% from
 .1% and to 21.3% from 2.6%,  respectively,  over the same comparable  prior year
periods.  The increases in the three month and nine month periods in income from
operations,  operating  margins  and  EBITDA  margins  are  attributable  to the
substantial  improvement  in the  results of  operations  at the  McAllen  Heart
Hospital, which was in the initial six months of operations in fiscal year 1996,
and due to the results of  operations  at the  Arkansas  Heart  Hospital,  which
opened in March 1997.  The results of operations  achieved at the Arkansas Heart
Hospital  during its initial months of operation are  substantially  better than
those achieved by the McAllen  Hospital  during its initial months of operations
in the prior year.

Marketing,  general and  administrative  expenses for the third quarter and nine
months  ended June 30,  1997  increased  $312,000  or 25.1% and $1.4  million or
35.9%,  respectively,  over the comparable  prior periods.  These increases were
primarily  a  result  of  the  Company's   continued   investment  in  corporate
infrastructure to facilitate growth. The Company has continued to add additional
development and finance  personnel,  as well as personnel for new operations and
acquisitions.  The  remainder  of the  increase  was  attributable  to increased
professional fees associated with pursuing business  development  opportunities,
the addition of  administrative  and accounting  personnel to support growth and
increases in salaries.

                                       11

<PAGE>

Results of Operations (continued)

Interest Expense and Interest Income

Interest  expense  for the third  quarter  and nine  months  ended June 30, 1997
increased $1.1 million or 158.9% and $1.9 million or 134.5%, respectively,  over
the comparable  prior year periods.  These increases are primarily the result of
interest  incurred on borrowings  used to finance the McAllen and Arkansas Heart
Hospitals.  Substantially  all of  the  property,  plant  and  equipment  at the
hospitals was financed using borrowings that bear interest at rates ranging from
8.54% to 11.54%.  Interest  expense  incurred prior to the opening of each Heart
Hospital is capitalized as a cost of the building. Interest income for the third
quarter ended June 30, 1997 decreased  $221,000 or 31.1% and for the nine months
ended  June  30,  1997  increased  $782,000  or  81.2%,  respectively,  over the
comparable  prior year  periods.  The  increase in interest  income for the nine
month  period  over the  comparable  prior year period is the result of interest
earned on investments  from the proceeds of a public  offering in April of 1996.
The decrease in interest  income for the quarter over the comparable  prior year
period is the result of utilizing a portion of the public  offering  proceeds to
fund the Company's Heart Hospital projects.

 Liquidity and Capital Resources

Operating Cash Flows

Net cash provided by operating  activities  was $2.5 million for the nine months
ended June 30, 1997.  Accounts  receivable  increased  $12.6 million and accrued
liabilities increased $2.5 million during the nine month period. The increase in
receivables  is the result of  additional  receivables  from the  opening of the
Arkansas  Heart  Hospital,   additional  receivables  from  new  operations  and
increased  revenues in each of the  Company's  three  operating  divisions.  The
increase in accrued  liabilities is also a result of the opening of the Arkansas
Heart  Hospital.  At June 30,  1997,  the Company  had working  capital of $51.6
million,  including  $36.3 million of cash and short-term  investments and $23.8
million in accounts receivable.

Investing Cash Flows

During the nine months ended June 30, 1997, the Company  utilized a net of $31.1
million in investing  activities.  A total of $54.3  million was utilized in the
Hospital Division and consisted of land acquisition, construction, equipment and
start-up costs incurred in developing the Company's  Heart  Hospitals.  A net of
$6.9 million was utilized in the Company's other  operations.  Offsetting  these
outflows  was $30.1  million  provided  from the sale of short term  investments
which were used to fund a portion of the aforementioned investing activities.

Financing Cash Flows

Financing  activities  provided  a net of $33.2  million  during  the nine month
period  ended June 30,  1997.  A total of $32.8  million  was  provided  through
borrowings to finance the  construction  and equipment costs at the Arkansas and
Tucson  Heart  Hospitals  and $4.1  million  was  provided by  investments  from
minority  partners in the  Company's  Heart  Hospitals  during the nine  months.
Offsetting  these  proceeds was the  repayment  of a portion of the  convertible
subordinated debt, long term debt and capital leases.

In September 1996, the Company formed PMMI, which in October 1996,  entered into
a 40-year contract to manage Heart Clinic, P.A., a multi-physician  cardiologist
group located in McAllen,  Texas. Total  consideration  given in connection with
the  acquisition  of the  management  contract  was  approximately  $6.3 million
(subject to increase if certain base performance  levels are exceeded in 1997 by
the physicians) and consisted of fixed and contingent  promissory notes that are
partially  convertible into the Company's common stock (see Note 3). In November
1996, $1.9 million of the outstanding  principal  balance was paid in accordance
with the terms of the note.

                                       12
<PAGE>

Liquidity and Capital Resources (continued)

In January 1997,  the Company  announced it had formed a venture for the purpose
of  constructing  and  operating  the  Arizona  Heart  Hospital to be located in
Phoenix,  Arizona.  The Arizona  Heart  Hospital will be owned and operated by a
limited  liability  company in which the Company  owns a majority  interest  and
serves as  manager.  The  Company  expects  the total cost of  constructing  and
equipping the Arizona Heart Hospital to be  approximately  $47 million and plans
to open the hospital in fiscal year 1998.

In March 1997, the Company obtained a financing commitment for up to $32 million
for the purpose of financing the land acquisition, construction and a portion of
the working capital costs of the Arizona Heart Hospital.  The interest rate will
be at a fixed premium above LIBOR and the outstanding  principal balance will be
due and payable in full three years from closing of the note,  if the  Company's
optional  extension of one year is not exercised.  The Company  expects to close
the transaction during the fourth fiscal quarter of 1997.

As of June 30,  1997,  approximately  $18.0  million  was  available  under  the
Company's $20 million  Revolver,  as computed in  accordance  with the borrowing
base, and there were no amounts  outstanding.  The proceeds of the Revolver have
been and are to be used to meet  ongoing  working  capital  requirements  and to
finance certain acquisitions approved by the lender.

In April 1997,  the Company  obtained a commitment  for a $20 million  revolving
credit facility to replace the Company's existing Revolver.  The proceeds of the
new revolving credit facility are to be used for working  capital,  acquisitions
and for general corporate  purposes.  The interest rate is variable at a premium
above the LIBOR rate. In July 1997,  the  transaction  was  completed  under the
terms set forth above.

In July 1997, the Company obtained a financing  commitment for up to $35 million
for the purpose of financing the land acquisition and construction  costs of the
Heart  Hospital of Austin.  The interest  rate is based on a fixed premium above
the seven-year treasury note rate and the principal and interest is payable over
a seven year term.  The  Company  expects  to close the  transaction  during the
fourth fiscal quarter of 1997.

The  Company  expects  that each of its Heart  Hospitals  will  require  working
capital  advances  to fund a portion  of the  pre-opening  costs and to fund the
operations  subsequent to opening in the initial start-up phase of the hospital.
Substantial  investments  will be required  during the  development  phase,  and
operating  losses and  negative  cash flow will be  incurred  during the initial
operation of each Heart Hospital.

The Company anticipates financing its future operations through a combination of
amounts  available under the Revolver,  financing  through other real estate and
equipment lenders,  capital  contributions by minority partners,  cash reserves,
short-term  investments  and  operating  cash flows.  The Company  believes  the
combination of these sources will be sufficient to meet the Company's  currently
anticipated  Heart Hospital  development,  acquisition and working capital needs
through fiscal year 1997. In addition,  in order to provide funds  necessary for
the continued  pursuit of its business  strategy,  the Company expects to incur,
from  time to  time,  additional  indebtedness  to  banks  and  other  financial
institutions  and to issue, in public or private  transactions,  equity and debt
securities.  The  availability  and terms of any such financing will depend upon
market and other  conditions.  There can be no  assurance  that such  additional
financing will be available on terms acceptable to the Company.

                                       13
<PAGE>

Statements  contained  herein which are not  historical  facts may be considered
forward-looking  statements  as that term is defined in the  Private  Securities
Litigation  Reform Act of 1995. Such  forward-looking  statements are subject to
risks and  uncertainties  which could cause actual results to differ  materially
from those  projected.  Such risks and  uncertainties  include  construction and
development risks associated with heart hospitals; operating losses and negative
cash flows  during the  initial  operation  of heart  hospitals;  dependence  on
physician   relationships;   dependence  on  long-term   management   contracts;
fluctuations in quarterly operating results from seasonality, population shifts,
third-party  payor mix,  patient  volumes,  operating  costs and other  factors;
dependence on key  management;  as well as other risks detailed in the Company's
filings with the Securities and Exchange Commission.

                                       14
<PAGE>
                                    
PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

             (a)    Exhibits

                    10.1 Standard Form of Agreement between Owner and Contractor
                         dated as of May 5, 1997, by and between Arizona Heart
                         Hospital, LLC and Chanen Construction Company.  (In 
                         accordance with Rule 202 of Regulation S-T, this 
                         exhibit is being filed in paper pursuant to a 
                         continuing hardship exemption.)
                    27   Financial Data Schedule  (EDGAR version only)

             (b)    Reports on Form 8-K filed during the three months ended June
                    30, 1997 are as follows:

                          Date of Report          Items Reported

                          May 16, 1997            Item 5. OTHER EVENTS
                          April 22, 1997          Item 5. OTHER EVENTS



                                       15
<PAGE>





                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                              MEDCATH INCORPORATED


      Date                                            Signature and Title


  July 31, 1997                                     /s/  Richard J. Post
                                                    -------------------------
                                                         Richard J. Post
                                                     Chief Financial Officer,
                                                     Secretary and Treasurer





  
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