<PAGE>


                          AGREEMENT AND PLAN OF MERGER

                           Dated as of March 12, 1998
                                  by and among

                              MEDCATH INCORPORATED,
                             MCTH ACQUISITION, INC.
                                       AND
                             MEDCATH HOLDINGS, INC.


<PAGE>

     AGREEMENT AND PLAN OF MERGER (the "Agreement") dated as of March 12, 1998
by and among MEDCATH INCORPORATED, a North Carolina corporation ("MedCath"),
MCTH ACQUISITION INC., a North Carolina corporation ("Acquiror"), and MEDCATH
HOLDINGS, INC., a Delaware corporation (the "Parent"), which is the sole
shareholder of Acquiror.

                                    RECITALS

     The board of directors of MedCath and Acquiror deem it advisable for the
mutual benefit of MedCath and Acquiror and their respective shareholders,
respectively, that Acquiror be merged with and into MedCath (the "Merger") upon
the terms and subject to the conditions set forth in the Plan of Merger (the
"Plan of Merger"), which is set forth in the Articles of Merger in substantially
the form attached hereto as Exhibit A (the "Articles of Merger"), and in
accordance with the North Carolina Business Corporation Act ("North Carolina
Law").

     The boards of directors of the Parent and Acquiror have approved and
adopted this Agreement. The board of directors and Strategic Options Committee
of MedCath have adopted this Agreement and have resolved, subject to the terms
of this Agreement, to recommend to the shareholders of MedCath to vote to
approve this Agreement in conjunction with their approval of the Plan of Merger.

     In consideration of the mutual covenants, agreements, representations and
warranties contained herein, and for the purpose of setting forth certain terms
and conditions of the Merger, and the mode of carrying the same into effect,
MedCath, the Parent and Acquiror hereby agree as follows:


                                    ARTICLE 1

                             Merger and Organization

     Section 1.1 The Merger.

     Acquiror shall be merged with and into MedCath at the Effective Time (as
defined below), upon the terms and subject to the conditions hereinafter set
forth, as permitted by and in accordance with North Carolina Law. Acquiror and
MedCath are herein sometimes referred to as the "Constituent Corporations", and
MedCath, which shall be the surviving corporation following the effectiveness of
the Merger, is sometimes referred to herein as the "Surviving Corporation".


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<PAGE>


     Section 1.2 Effective Time.

     If this Agreement is not terminated pursuant to Article 8 hereof, as soon
as practicable after all conditions to the Merger set forth in Article 7 hereof
shall have been satisfied or waived, MedCath and Acquiror shall cause the
Articles of Merger to be executed, acknowledged and filed with the Secretary of
State of the State of North Carolina as provided in North Carolina Law. The
Merger shall be consummated and the closing of the transactions contemplated by
this Agreement (the "Closing") shall occur immediately upon the filing of the
Articles of Merger with the Secretary of State of the State of North Carolina
(the date and time of such filing and Closing being referred to herein as the
"Effective Time"). The Closing shall take place at Simpson Thacher & Bartlett,
425 Lexington Avenue, New York, New York 10017, or at such other place as the
parties may mutually agree.

     Section 1.3 Effect of Merger.

     The parties agree to the following provisions with respect to the Merger:

     (a) The name of the Surviving Corporation shall from and after the
Effective Time be and continue to be "MedCath Incorporated" until changed in
accordance with applicable law.

     (b) The articles of incorporation of MedCath shall be amended and restated
to conform to the articles of incorporation of Acquiror as in effect immediately
prior to the Effective Time; provided, however, that, at the Effective Time,
Article I of the articles of incorporation of the Surviving Corporation shall be
amended to read as follows: "The name of the corporation is MedCath
Incorporated" and Article II shall be amended to provide that the number of
authorized shares of common stock of the corporation shall be 100.

     (c) The bylaws of Acquiror, as in effect immediately prior to the Effective
Time, shall be the bylaws of the Surviving Corporation until thereafter amended
in accordance with law, the articles of incorporation of the Surviving
Corporation and such bylaws.

     (d) At the Effective Time, the separate corporate existence of Acquiror
shall cease, and MedCath as the surviving corporation and successor shall
succeed to Acquiror as set forth in Section 55-11-06 of the North Carolina Law.

     (e) The directors of Acquiror immediately prior to the Effective Time will
be the initial directors of the Surviving Corporation, and the officers of
MedCath immediately prior to the Effective Time will be the initial officers of
the Surviving Corporation, in each case until their successors are elected and
qualified.

     (f) If at any time after the Effective Time the Surviving Corporation shall
consider or be advised that any deeds, bills of sale, assignments or assurances
or any other acts or things are necessary, desirable or proper (i) to vest,
perfect or confirm, of record or otherwise, in the Surviving Corporation its
right, title or interest in, to or under any of the


                                      A-2
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rights, properties or assets of the Constituent Corporations acquired or to be
acquired as a result of the Merger, or (ii) otherwise to carry out the purposes
of this Agreement, the Surviving Corporation and its proper officers and
directors or their designees shall be authorized to execute and deliver, in the
name and on behalf of the Constituent Corporations, all such deeds, bills of
sale, assignments and assurances and do, in the name and on behalf of the
Constituent Corporations, all other acts and things necessary, desirable or
proper to vest, perfect or confirm its right, title or interest in, to or under
any of the rights, properties or assets of the Constituent Corporations acquired
or to be acquired as a result of the Merger and otherwise to carry out the
purposes of this Agreement.

                                    ARTICLE 2

                 Conversion of Securities at the Effective Time

          Section 2.1 Conversion of Securities of MedCath and Acquiror.

                  At the Effective Time, pursuant to this Agreement and by
virtue of the Merger and without any action on the part of MedCath, Acquiror or
the holders of any of the following securities:

     (a) Each  share of common  stock,  par value  $.01 per  share,  of  MedCath
("MedCath  Common  Stock")  (shares of MedCath  Common  Stock being  hereinafter
collectively  referred to as "MedCath  Shares"  and  individually  as a "MedCath
Share") issued and  outstanding  immediately  prior to the Effective Time (other
than any  MedCath  Shares to be  cancelled  pursuant  to Section  2.1(b) and any
Dissenting   Shares  (as  defined  in  Section   2.1(d))   shall  be  cancelled,
extinguished and shall be converted  automatically  into the right to receive an
amount   equal  to  $19.00  in  cash,   without   interest   (the  "Cash  Merger
Consideration"), payable to the holder thereof, as provided in Section 2.2, upon
surrender of the  certificate  formerly  representing  the MedCath  Shares being
converted  into the right to receive  the Cash  Merger  Consideration,  less any
required withholding taxes;

     (b) Each  MedCath  Share held in the  treasury of MedCath and each  MedCath
Share owned by Acquiror  (including  MedCath Shares contributed to the Parent by
agreement with the Parent which are in turn  contributed by Parent to Acquiror),
if any,  immediately  prior to the Effective Time shall be cancelled without any
conversion  thereof and no payment or  distribution  shall be made with  respect
thereto;

     (c) Each share of Acquiror's common stock, $.01 par value ("Acquiror Common
Stock"), that is issued and outstanding immediately prior to the Effective Time
shall be converted into one newly issued, fully paid and nonassessable share of
common stock of the Surviving Corporation;

     (d) Notwithstanding anything in this Agreement to the contrary, shares of
MedCath Common Stock issued and outstanding immediately prior to the Effective
Time held by a holder who has the right, if any, under North Carolina Law, to
demand payment for an


                                      A-3
<PAGE>


appraisal of such shares in accordance with Article 13 of the North Carolina Law
(or any successor provision) ("Dissenting Shares") shall not be converted into a
right to receive the Cash Merger Consideration (but shall have the rights set
forth in Article 13 of the North Carolina Law (or any successor provision), if
applicable) unless such holder fails to perfect or otherwise loses such holder's
right to such payment or appraisal, if any, pursuant to Article 13 of the North
Carolina Law. If, after the Effective Time, such holder fails to perfect or
loses any such right to appraisal, each such share of such holder shall be
treated as a share that had been converted as of the Effective Time into the
right to receive the Cash Merger Consideration in accordance with this Section
2.1. MedCath shall give prompt notice to Acquiror of any notices of dissent,
demands for payment of fair value or other communications or actions received by
MedCath with respect to shares of MedCath Common Stock, and Acquiror shall have
the right to participate in and approve all negotiations and proceedings with
respect thereto. MedCath shall not, except with the prior written consent of
Acquiror, make any payment with respect to, or settle or offer to settle, any
such demands.

     Section 2.2 Payment of Cash for MedCath Common Stock.

     (a) At the Effective Time, the Parent or Acquiror shall irrevocably deposit
or cause to be deposited with a bank or trust company to be designated by
Acquiror and reasonably satisfactory to MedCath which is organized and doing
business under the laws of the United States or any state thereof and has a
combined capital and surplus of at least $100,000,000 (the "Disbursing Agent"),
as agent for the holders of shares of MedCath Common Stock, cash in the
aggregate amount required to effect conversion of shares of MedCath Common Stock
into the Cash Merger Consideration at the Effective Time pursuant to Section
2.1(a) hereof. Pending distribution pursuant to Section 2.2(b) hereof of the
cash deposited with the Disbursing Agent, such cash shall be held in trust for
the benefit of the holders of MedCath Common Stock and the fund shall not be
used for any other purposes, and Acquiror and Surviving Corporation may direct
the Disbursing Agent to invest such cash, provided that such investments (i)
shall be obligations of or guaranteed by the United States of America,
commercial paper obligations receiving the highest rating from either Moody's
Investors Services, Inc. or Standard & Poor's Corporation, or certificates of
deposit, bank repurchase agreements or bankers acceptances of domestic
commercial banks with capital exceeding $250,000,000 (collectively "Permitted
Investments") or money market funds which are invested solely in Permitted
Investments and (ii) shall have maturities that will not prevent or delay
payments to be made pursuant to Section 2.2(b) hereof. Each holder of a
certificate or certificates representing shares of MedCath Common Stock
cancelled on the Effective Time pursuant to Section 2.1(a) hereof may thereafter
surrender such certificate or certificates to the Disbursing Agent, as agent for
such holder of shares of MedCath Common Stock, which shall effect the exchange
of such certificate or certificates on such holder's behalf for a period ending
six months after the Effective Time. Any interest and other income resulting
from such investments shall be paid to Acquiror.

     (b) After surrender to the Disbursing Agent of any certificate which prior
to the Effective Time shall have represented any shares of MedCath Common Stock,
the Disbursing Agent shall promptly distribute to the person in whose name such
certificate shall have been registered a check representing the amount of cash
into which such shares of


                                      A-4
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MedCath Common Stock shall have been converted at the Effective Time pursuant to
Section 2.1(a) hereof. Until so surrendered and exchanged, each such certificate
shall, after the Effective Time, be deemed to represent only the right to
receive such cash, and until such surrender and exchange, no cash shall be paid
to the holder of such outstanding certificate in respect thereof. The Surviving
Corporation shall promptly after the Effective Time cause to be distributed to
such holders appropriate materials to facilitate such surrender.

     (c) If any cash deposited with the Disbursing Agent for purposes of payment
in exchange for shares of MedCath Common Stock remains unclaimed following the
expiration of six (6) months after the Effective Time, such cash shall be
delivered to the Surviving Corporation by the Disbursing Agent, and thereafter
the Disbursing Agent shall not be liable to any persons claiming any amount of
such cash, and the surrender and exchange shall be effected directly with the
Surviving Corporation (subject to applicable abandoned property, escheat and
similar laws). No interest shall accrue or be payable with respect to any
amounts which any such holder shall be so entitled to receive. The Surviving
Corporation or the Disbursing Agent shall be authorized to pay the cash
attributable to any certificate theretofore issued which has been lost or
destroyed, upon receipt of satisfactory evidence of ownership of the shares of
MedCath Common Stock represented thereby and of appropriate indemnification.

     (d) None of Acquiror, the Surviving Corporation or the Disbursing Agent
shall be liable to any person in respect of any shares of retained MedCath
Common Stock (or dividends or distributions with respect thereto) or cash
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law. If any certificates representing shares of MedCath
Common Stock shall not have been surrendered prior to two years after the
Effective Time (or immediately prior to such earlier date on which any cash, if
any, in lieu of fractional shares of retained MedCath Common Stock or any
dividends or distributions with respect to retained MedCath Common Stock in
respect of such certificate would otherwise escheat to or become the property of
any governmental entity), any such cash, dividends or distributions in respect
of such certificate shall, to the extent permitted by applicable law, become the
property of the Surviving Corporation, free and clear of all claims or interest
of any person previously entitled thereto.

     (e) If payment is to be made to a person other than the person in whose
name a surrendered certificate, which prior to the Effective Time shall have
represented any shares of MedCath Common Stock, is registered, it shall be a
condition to such payment that the certificate so surrendered shall be endorsed
or shall otherwise be in proper form for transfer, and that the person
requesting such payment shall have paid any transfer and other taxes required by
reason of such payment in a name other than that of the registered holder of the
certificate surrendered or shall have established to the satisfaction of the
Surviving Corporation or the Disbursing Agent that such tax either has been paid
or is not payable.

     (f) From and after the Effective Time, the holders of shares of MedCath
Common Stock outstanding immediately prior to the Effective Time shall cease to
have any rights with respect to such shares of MedCath Common Stock except as
otherwise provided herein or by law.


                                      A-5
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     (g) After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of any shares of MedCath Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, certificates for shares of MedCath Common Stock are
presented to the Surviving Corporation, they shall be cancelled and promptly
exchanged for Cash Merger Consideration except as provided in Section 2.2(d).

     Section 2.3 Exchange of Acquiror Common Stock Certificate.

     Immediately after the Effective Time, upon surrender by the record holder
of the certificate, duly endorsed in blank, representing the shares of Acquiror
Common Stock outstanding immediately prior to the Effective Time, the Surviving
Corporation shall deliver to such record holder a share certificate, registered
in such holder's name, representing the number of shares of common stock of the
Surviving Corporation to which such record holder is so entitled by virtue of
Section 2.1(c). Such certificate will bear a legend restricting the
transferability of such shares of the Surviving Corporation except in accordance
with applicable federal and state securities laws.


                                    ARTICLE 3

               Additional Agreements in Connection With the Merger

     Section 3.1 Shareholders' Approval.

     MedCath shall take all actions reasonably necessary in accordance with
applicable law and its articles of incorporation and bylaws to convene a meeting
of its shareholders as soon as reasonably practicable for the purpose of
considering and approving this Agreement and the Merger (the "Special Meeting").
In connection with the Special Meeting, the board of directors of MedCath shall
recommend that the shareholders of MedCath vote to approve this Agreement and
the Merger unless the Strategic Options Committee of such board of directors
(the "Strategic Options Committee") has determined at any time prior to the
Special Meeting in good faith, after consultation with and based upon the
reasonably concluded written advice of counsel to the Strategic Options
Committee, that making such recommendation would violate the fiduciary duties of
the board of directors under applicable law.

     Section 3.2 Proxy Materials and Schedule 13E-3.

     (a) In connection with the Special Meeting, MedCath shall prepare and file
a preliminary proxy statement relating to the transactions contemplated by this
Agreement and the Merger (the "Preliminary Proxy Statement") with the United
States Securities and Exchange Commission (the "SEC") and shall use its
reasonable best efforts to respond to the comments of the SEC and to cause a
definitive proxy statement to be mailed to MedCath's shareholders (the
"Definitive Proxy Statement") all as soon as reasonably practicable; provided,
that prior to the filing of each of the Preliminary Proxy Statement and the

                                      A-6
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Definitive Proxy Statement, MedCath shall consult with Acquiror with respect to
such filings and shall afford Acquiror reasonable opportunity to comment
thereon. Acquiror shall provide MedCath with any information for inclusion in
the Preliminary Proxy Statement and the Definitive Proxy Statement which may be
required under applicable law and which is reasonably requested by MedCath.

     (b) MedCath and any Person that may be deemed to be an affiliate of MedCath
shall prepare and file concurrently with the filing of the Preliminary Proxy
Statement a Statement on Schedule 13E-3 ("Schedule 13E-3") with the SEC. If at
any time prior to the Special Meeting any event should occur which is required
by applicable law to be set forth in an amendment of, or supplement to, the
Schedule 13E-3, MedCath and such Person shall file such amendments or
supplements.

     Section 3.3 Termination of MedCath Stock Option Plans.

     Except as disclosed in Item 3.3 of the Disclosure Schedules, all
outstanding stock options issued by MedCath (collectively, the "Stock Options"),
including without limitation those issued under the MedCath Incorporated Omnibus
Stock Plan, the 1992 Incentive Stock Option Plan and the Outside Director's
Stock Option Plan shall terminate upon the Merger. With respect to each Stock
Option not otherwise terminated by its terms upon the effectiveness of the
Merger, MedCath shall obtain at the earliest practicable date and prior to the
Effective Time the written consent of each holder to the cancellation of such
holders' Stock Options (irrespective of their exercise price and whether or not
then currently exercisable) to take effect on the Effective Time or shall take
appropriate action to amend the relevant plans to provide for such cancellation.
At the Effective Time, the Surviving Corporation shall pay each holder of Stock
Options, to the extent such Stock Options have not been previously exercised or
cancelled, (x) cash in an amount equal to the product of (i) the difference
between $19.00 and the exercise price of such Stock Options (but in no event
less than 0), multiplied by (ii) the number of shares of MedCath Common Stock
subject to such Stock Options, less (y) the amount of all applicable withholding
taxes; provided, that those holders of Stock Options that have agreed in writing
with Acquiror to accept options to purchase common stock of the Parent shall not
receive any cash payment with respect to cancelled Stock Options.

     Section 3.4 Reasonable Best Efforts; Consents; Other Filings.

     Upon the terms and subject to the conditions herein provided, and subject
to the duties of the board of directors of MedCath under applicable law, as it
or the Strategic Options Committee may be advised in writing by counsel, each
party hereto shall use its reasonable best efforts to take, or cause to be
taken, all reasonable action and to do, or cause to be done and to assist and
cooperate with the other parties hereto in doing, all things necessary, proper
or advisable under applicable laws and regulations and their respective articles
or certificates of incorporation and bylaws to consummate and make effective, as
soon as reasonably practicable, the transactions contemplated by this Agreement,
subject, however, to the requisite vote of shareholders of MedCath. Such actions
shall include, without limitation, using its reasonable best efforts to (i)
defend any lawsuits or other legal


                                      A-7
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proceedings, whether judicial or administrative and whether brought derivatively
or on behalf of third parties (including governmental agencies or officials),
challenging this Agreement, or the consummation of the transactions contemplated
thereby or hereby and (ii) effect all necessary registrations and filings,
including but not limited to any filings required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
promulgated thereunder (the "HSR Act"), and submissions of information requested
by governmental authorities. Upon the terms and subject to the conditions
hereof, and subject to the duties of the board of directors of MedCath under
applicable law, as it, or the Strategic Options Committee, may be advised in
writing by counsel, each of the parties hereto shall use its reasonable best
efforts to take, or cause to be taken, all reasonable actions and to do, or
cause to be done, all things necessary to satisfy the other conditions of
Closing set forth herein and to cooperate with all reasonable requests made by
the other party. Without limiting the generality of the foregoing, and
notwithstanding anything in this Agreement to the contrary, MedCath shall,
except with respect to the agreements as set forth on Item 3.4 of the Disclosure
Schedules, obtain all consents, amendments to or waivers from other parties
under the terms of all leases and other agreements between MedCath and such
parties required as a result of the transactions contemplated by this Agreement
(including the agreements listed in Item 3.8 of the Disclosure Schedules) the
failure of which to obtain would have a Material Adverse Effect and obtain all
necessary consents, approvals and authorizations as are required to be obtained
under any federal or state law or regulation.

     Section 3.5 Financing.

     MedCath shall use its reasonable best efforts to cooperate and assist
Acquiror with respect to the Financing (as defined in Section 6.7).

     Section 3.6 Conduct of Business by MedCath Pending the Merger.

     MedCath covenants and agrees that, prior to the Effective Time or earlier
termination of this Agreement as provided herein, unless Acquiror shall
otherwise agree in writing and except as contemplated by this Agreement:

     (a) MedCath shall, and shall cause its subsidiaries to, act and carry on
their respective businesses in the ordinary course of business substantially
consistent with past practice and use its and their respective reasonable best
efforts to preserve substantially intact their current material business
organizations, keep available the services of their current officers and
employees (except for terminations of employees in the ordinary course of
business) and preserve their material relationships with others having
significant business dealings with them;

     (b) MedCath shall not (i) amend its articles of incorporation or bylaws, or
(ii) declare, set aside or pay any dividend or other distribution or payment in
cash, stock or property in respect of any of its shares of capital stock;

     (c) Neither MedCath nor any of its subsidiaries shall (i) except as set
forth in Item 3.6(c) of the Disclosure Schedules, issue, grant, sell, pledge or
transfer or agree or

 
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propose to issue, grant, sell, pledge or transfer any shares of capital stock,
stock options, warrants, securities or rights of any kind or rights to acquire
any such shares, securities or rights of MedCath, any of its subsidiaries or any
successor thereto, (ii) acquire directly or indirectly by redemption or
otherwise any shares of the capital stock of MedCath of any class or any
options, warrants or other rights to purchase any such shares except as
otherwise provided in this Agreement, or (iii) enter into or modify any
contract, agreement, commitment or arrangement with respect to any of the
foregoing;

     (d) Except as disclosed in Item 3.6(d) of the Disclosure Schedules, neither
MedCath nor any of its subsidiaries shall (i) incur any indebtedness for
borrowed money or guarantee any such indebtedness of another person, issue or
sell any debt securities or warrants or other rights to acquire any debt
securities of MedCath or any of its subsidiaries, guarantee any debt securities
of another person, enter into any "keep well" or other agreement to maintain any
financial statement condition of another person or enter into any arrangement
having the economic effect of any of the foregoing, except for short-term
borrowings incurred in the ordinary course of business consistent with past
practice under existing indebtedness agreements, or (ii) make any loans,
advances or capital contributions to, or investments in, any other person, other
than to MedCath or any direct or indirect wholly-owned subsidiary of MedCath;

     (e) Each of MedCath and its subsidiaries shall use its reasonable best
efforts to keep in place its current insurance policies which are material
(either individually or in the aggregate) to the conduct of their business; and
notwithstanding such efforts, if any such policy is cancelled, MedCath shall use
its reasonable best efforts to replace such policy or policies;

     (f) Neither MedCath nor any of its subsidiaries shall make any material tax
election, file any amended Tax Returns or settle or compromise any material
federal, state, local or foreign income tax liability;

     (g) Neither MedCath nor any of its subsidiaries shall make any
material change in its accounting principles or methods except insofar as may be
required by a change in generally accepted accounting principles;

     (h) Neither MedCath nor any of its subsidiaries shall split, combine or
reclassify any capital stock of MedCath or any subsidiary or issue or authorize
the issuance of any other securities in respect of, in lieu of or substitution
for shares of capital stock of MedCath or any subsidiary;

     (i) Neither MedCath nor any of its subsidiaries shall acquire or agree to
acquire by merging or consolidating with, or by purchasing a substantial portion
of the stock or assets of, or by any other manner, any business or any
corporation, partnership, joint venture, association or other business
organization or division thereof having a value in excess of $250,000;


                                      A-9
<PAGE>

     (j) Neither MedCath nor any of its subsidiaries shall agree to any
development deals, except to the extent such deals would require an investment
of less than $100,000 individually and $250,000 in the aggregate;

     (k) Except as set forth in Item 3.6(k) of the Disclosure Schedules, neither
MedCath nor any of its subsidiaries shall sell, lease, license, mortgage or
otherwise encumber or subject to any lien or otherwise dispose of any of its
properties or assets other than any such properties or assets the value of which
do not exceed $250,000 individually and $1,000,000 in the aggregate, except
sales of inventory and receivables in the ordinary course of business consistent
with past practice;

     (l) Neither MedCath nor any of its subsidiaries shall acquire or agree to
acquire any assets, other than inventory in the ordinary course of business
consistent with past practice, that are material, individually or in the
aggregate, to MedCath and its subsidiaries taken as a whole, or make or agree to
make any capital expenditures except capital expenditures which, individually or
in the aggregate and taken together with any capital expenditure made between
October 1, 1997 and the date hereof (inclusive), do not exceed the amount
budgeted therefor in MedCath's annual capital expenditures budget for 1998
previously provided to Acquiror;

     (m) Neither MedCath nor any of its subsidiaries shall (x) pay, discharge or
satisfy any material claims (including claims of stockholders), liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), except for the payment, discharge or satisfaction of (i) liabilities
or obligations in the ordinary course of business consistent with past practice
or in accordance with their terms as in effect on the date hereof including
without limitation all liabilities disclosed in Item 3.6(d) of the Disclosure
Schedules or (ii) claims settled or compromised to the extent permitted by
Section 3.6(p), or (y) waive, release, grant, or transfer any rights of material
value or modify or change in any material respect any existing material license,
lease, contract or other document, other than in the ordinary course of business
consistent with past practice;

     (n) Neither MedCath nor any of its subsidiaries shall adopt a plan of
complete or partial liquidation or resolutions providing for or authorizing such
a liquidation or a dissolution, merger, consolidation, restructuring,
recapitalization or reorganization;

     (o) Neither MedCath nor any of its subsidiaries shall enter into any new
collective bargaining agreement or any successor collective bargaining agreement
to any collective bargaining agreement;

     (p) Neither MedCath nor any of its subsidiaries shall settle or compromise
any litigation (whether or not commenced prior to the date of this Agreement)
other than settlements or compromises of litigation where the settlement is
limited solely to monetary payment and the release of claims and the amount paid
(after giving effect to insurance proceeds actually received) in settlement or
compromise does not exceed $250,000, provided that the aggregate amount paid in
connection with the settlement or compromise of all such litigation matters
shall not exceed $350,000;


                                      A-10
<PAGE>
 

     (q) Neither MedCath nor any of its subsidiaries shall engage in any
transaction with, or enter into any agreement, arrangement, or understanding
with, directly or indirectly, any of MedCath's affiliates, including, without
limitation, any transactions, agreements, arrangements or understandings with
any affiliate or other Person covered under Item 404 of SEC Regulation S-K that
would be required to be disclosed under such Item 404 other than such
transactions of the same general nature, scope and magnitude as are disclosed in
documents filed by MedCath with the SEC as described in Section 4.6;

     (r) Neither MedCath nor any of its subsidiaries shall adopt or amend
(except as may be required by law) any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation, employment or other
employee benefit plan, agreement, trust, fund or other arrangement for the
benefit or welfare of any employee, director or former director or employee or,
other than increases for individuals and arrangements for new employees (other
than, in each case, officers and directors) in the ordinary course of business
consistent with past practice, increase the compensation or fringe benefits of
or loan or advance money or other property to any director, employee or former
director or employee or pay any benefit not required by any existing plan,
arrangement or agreement;

     (s) Neither MedCath nor any of its subsidiaries shall grant to employees
any new or modified severance (except for increases in severance granted to
employees other than officers in the ordinary course of business which are
immaterial individually and in the aggregate) or termination arrangement or
increase or accelerate any benefits payable under its severance or termination
pay policies in effect on the date hereof;

     (t) Neither MedCath nor any of its subsidiaries shall effectuate a "plant
closing" or "mass layoff", as those terms are defined in the Worker Adjustment
and Retraining Notification Act of 1988 ("WARN"), affecting in whole or in part
any site of employment, facility, operating unit or employee of MedCath or any
subsidiary, without notifying Acquiror or its affiliates in advance and without
complying with the notice requirements and other provisions of WARN; and

     (u) Neither MedCath nor any of its subsidiaries shall authorize any, or
commit or agree to do any of the things described in clauses (a) through (t) or
anything which would make any representation or warranty of MedCath in this
Agreement untrue or incorrect in any material respect as of the date hereof and
as of the Effective Time, as if made on such date, except to the extent such
representations and warranties expressly relate to a specific date (in which
case such representations and warranties shall be true and correct as of such
date).

     Section 3.7 MedCath's Notification of Certain Matters.

     MedCath shall, promptly upon obtaining knowledge of any of the following
occurring subsequent to the date of this Agreement and prior to the Effective
Time, notify Acquiror of: (a) any material claims, actions, proceedings, tax
audits or investigations commenced or, to its knowledge, threatened in writing,
involving or affecting MedCath or any of its subsidiaries or any of their
properties or assets, which if adversely resolved would have a Material Adverse
Effect or which could reasonably be expected to prevent, hinder or

                                      A-11
<PAGE>


materially delay the ability of MedCath to consummate the Merger or the
transactions contemplated by this Agreement, (b) any notice of, or other
communication relating to, a default or event which, with notice or lapse of
time or both, would become a default, received by MedCath or any of its
subsidiaries, under any agreement, lease, indenture or instrument to which
MedCath or any of its subsidiaries is a party or is subject where such a default
would have a Material Adverse Effect on MedCath or (c) any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement.

     Section 3.8 Access to MedCath's Books and Records.

     Upon reasonable notice, MedCath shall afford Acquiror and its
representatives and representatives of all prospective sources of Financing
reasonable access during normal business hours to the properties, books, records
and personnel of MedCath and its subsidiaries and such additional information
concerning the business and properties of MedCath and its subsidiaries as
Acquiror and its representatives may reasonably request. Unless and until
MedCath otherwise agrees, Acquiror will obtain appropriate undertakings from the
representatives of all prospective sources of Financing to hold in confidence
all confidential information and not use any confidential information except in
connection with the transactions contemplated hereby and the Financing, all in
accordance with that certain letter agreement dated October 1, 1997 by and
between Kohlberg Kravis Roberts & Co., L.P. and MedCath, the terms of which are
incorporated herein by reference (the "Confidentiality Agreement"). The parties
acknowledge that the Confidentiality Agreement shall remain in full force and
effect until the Closing.

     Section 3.9 Acquisition Proposals.

     Any offer or proposal by any corporation, partnership, person or other
entity or group concerning any tender or exchange offer, proposal for a merger,
share exchange, recapitalization, consolidation or other business combination
involving MedCath or any of its subsidiaries or divisions, or any proposal or
offer to acquire in any manner, directly or indirectly, a significant equity
interest in, or a substantial portion of the assets of, MedCath or any of its
subsidiaries, other than pursuant to the transactions contemplated by this
Agreement, is hereby defined as an "Acquisition Proposal". MedCath shall not,
nor shall it permit any of its officers, directors, affiliates, representatives
or agents to, directly or indirectly, (a) take any action to solicit, initiate
or knowingly encourage any Acquisition Proposal, or (b) participate in any
discussions or negotiations with or encourage any effort or attempt by any other
person or entity or take any other action to facilitate an Acquisition Proposal.
From and after the date hereof, MedCath, its subsidiaries and all officers,
directors, employees of, and all investment bankers, attorneys and other
advisors and representatives of, MedCath and its subsidiaries shall cease doing
any of the foregoing. Notwithstanding the foregoing, MedCath or any such persons
may, directly or indirectly, subject to a confidentiality agreement
substantially no less favorable taken as a whole to MedCath than the
Confidentiality Agreement, furnish to any party information and access in
response to a request for information or access made incident to an Acquisition
Proposal made after the date hereof and may participate in discussions and
negotiate with such party concerning any


                                      A-12
<PAGE>
    

written Acquisition Proposal made after the date hereof (provided neither
MedCath nor any such Person, after the date hereof, solicited, initiated or
encouraged such Acquisition Proposal), if the board of directors of MedCath, or
in the event of an Acquisition Proposal in which a member of such Board of
Directors or any affiliate thereof has an interest which would be adverse to
MedCath (an "Interested Party Proposal"), then the Strategic Options Committee,
shall have determined in good faith based upon the reasonably concluded written
advice of outside counsel to MedCath or counsel to the Strategic Options
Committee, as the case may be, that failing to take such action would violate
MedCath's board of directors' fiduciary duty under applicable law. During the
term of this Agreement, the board of directors of MedCath shall notify Acquiror
immediately if any Acquisition Proposal is made and shall in such notice
indicate in reasonable detail the identity of the offeror and the terms and
conditions of such Acquisition Proposal and shall keep Acquiror promptly advised
of all material developments which could reasonably be expected to culminate in
the board of directors withdrawing, modifying or amending its recommendation of
the Merger and the other transactions contemplated by this Agreement. During the
term of this Agreement, MedCath shall not waive or modify any provisions
contained in any confidentiality agreement entered into relating to a possible
acquisition (whether by merger, stock purchase, asset purchase or otherwise) or
recapitalization of MedCath.

     Section 3.10 Director and Officer Protection.

     The Surviving Corporation shall indemnify, defend and hold harmless the
present and former directors, officers, employees and agents of MedCath and its
subsidiaries (each an "Indemnified Party") against all costs and expenses
(including reasonable attorney's fees), judgments, fines, losses, claims,
damages, liabilities and settlement amounts relating to actions or omissions
arising out of the Indemnified Party's being a director, officer, fiduciary,
employee or agent of MedCath at or prior to the Effective Time (including the
transactions contemplated by this Agreement) to the fullest extent permitted
under applicable law, whether or not the Surviving Corporation is insured
against any such matter (and shall pay any expenses in advance of the final
disposition of such action or proceeding to each Indemnified Party as such
expenses are incurred to the fullest extent permitted under applicable law,
provided MedCath or the Surviving Party, as the case may be, receives from the
Indemnified Party to whom expenses are advanced an undertaking to repay such
advances required under applicable law). Without limiting the foregoing, in any
case in which approval by the Surviving Corporation is required to effectuate
any indemnification, the Surviving Corporation shall direct, at the election of
the Indemnified Party, that the determination of any such approval shall be made
by independent counsel mutually agreed to by the Surviving Corporation and the
Indemnified Party. The Surviving Corporation shall maintain in effect for a
period of six years after the Effective Time directors' and officers' liability
insurance with respect to matters occurring prior to the Effective Time which
insurance shall contain terms and conditions no less advantageous than are
contained in MedCath's current directors' and officers' liability insurance
policy; provided, the Surviving Corporation shall not be required to pay an
annual premium for such insurance in excess of two times the current annual
premium. In the event MedCath or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger


                                      A-13
<PAGE>
    

or (ii) transfers all or substantially all of its properties and assets to any
person, then, and in each case, proper provision shall be made so that the
successors and assigns of MedCath or the Surviving Corporation, as the case may
be, or, at the Parent's option, the Parent shall assume the obligations set
forth in this Section 3.10.


                                    ARTICLE 4

                    Representations and Warranties of MedCath

     MedCath represents and warrants to Acquiror and Parent as follows:

     Section 4.1 Organization and Good Standing.

     Each of MedCath and its subsidiaries is a duly organized and validly
existing corporation in good standing under the laws of the state of its
incorporation with all requisite power and authority (corporate and other) to
own, lease and operate its properties and conduct its business and is duly
qualified and in good standing as a foreign corporation authorized to do
business in each of the jurisdictions in which the character of the properties
owned or held under lease by it or the nature of the business transacted by it
makes such qualification necessary, except where the failure to be so qualified
would not have a Material Adverse Effect on MedCath and its subsidiaries, taken
as a whole. MedCath has heretofore delivered to Acquiror accurate and complete
copies of its and its subsidiaries' certificates or articles of incorporation
and bylaws, as currently in effect. For the purposes of this Agreement "Material
Adverse Change" or "Material Adverse Effect" means any change or effect that
either individually or in the aggregate is materially adverse to the business,
assets, operations, properties, financial condition or results of operations of
MedCath and its subsidiaries taken as a whole and is exclusive of any claims or
litigation involving MedCath and its subsidiaries relating to the absence of the
consents, waivers or approvals relating to the Merger with respect to the
agreements set forth in Item 3.4 of the schedules provided by MedCath to
Acquiror and Parent ("Disclosure Schedules"); provided that for the purposes of
this Agreement, "Material Adverse Effect" shall exclude the effect on the
business, assets, operations, properties, financial condition or results in
operations (i) from the delay until July 1, 1998 in the opening of the heart
hospital in Phoenix, to the extent such delay was caused by the flood that
occurred on January 18, 1998 and (ii) from the financial performance of the
heart hospital in Tucson, other than changes in financial performance from and
after the date hereof when compared to the financial performance prior to the
date hereof; provided that nothing in the immediately prior proviso shall be
interpreted to mean that delays in the opening of the heart hospital in Phoenix
beyond July 1, 1998 or further changes in the financial performance of the
Tucson heart hospital are per se Material Adverse Changes or Material Adverse
Effects.

     Section 4.2 Authorization; Binding Agreement.

     MedCath has all requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and


                                      A-14
<PAGE>
 

delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly authorized by MedCath's board of directors
and, except for the approval of this Agreement and the Merger by the
shareholders of MedCath in accordance with the North Carolina Law and the
articles of incorporation and bylaws of MedCath, no other corporate proceedings
on the part of MedCath are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by MedCath, and subject to the requisite approval of the
shareholders of MedCath, constitutes the legal, valid and binding agreement of
MedCath, enforceable against MedCath in accordance with its terms, except as
such enforceability may be limited by (a) bankruptcy, insolvency,
reorganization, moratorium or other laws, now or hereafter in effect, relating
to or limiting creditors' rights generally, and (b) general principles of equity
(whether considered in an action in equity or at law) which provide, among other
things, that the remedies of specific performance and injunctive and other forms
of equitable relief are subject to equitable defenses and to the discretion of
the court before which any proceedings therefor may be brought.

     Section 4.3 Capitalization.

     The authorized capital stock of MedCath consists of 20,000,000 shares of
MedCath Common Stock, and 2,348,167 shares of Preferred Stock, 300,000 of which
have been designated as Series A Preferred Stock, 200,000 of which have been
designated as Series A Junior Participating Preferred Stock, 20,000 of which
have been designated as Series B Preferred Shares and 28,167 of which have been
designated as Series C Preferred Shares "North Carolina Preferred Stock"). As of
March 12, 1998, 11,669,359 shares of MedCath Common Stock and no shares of North
Carolina Preferred Stock were outstanding. As of the date hereof, 1,506,569
shares of MedCath Common Stock were reserved for issuance upon exercise of
outstanding Stock Options. All of the outstanding shares of capital stock of
MedCath and the subsidiaries of MedCath have been duly authorized and validly
issued and are fully paid and nonassessable. All issued and outstanding shares
of capital stock of the subsidiaries of MedCath are owned by MedCath or a
subsidiary of MedCath free and clear of all liens, charges, encumbrances, claims
and options of any nature. Except as contemplated by this Agreement and the
Rights Agreement of MedCath dated as of October 15, 1996 (the "Rights
Agreement") and except for the Stock Options and as set forth on Item 3.6(c) of
the Disclosure Schedules, neither MedCath nor any subsidiary of MedCath has or
as of the Effective Time will have granted any outstanding security, call,
option, warrant, subscription or other right, or entered into any agreement or
commitment which either (a) obligates MedCath or any of its subsidiaries to
issue, sell or transfer or cause to be issued, delivered or sold any shares of
the capital stock of MedCath or any subsidiary of MedCath or (b) restricts the
transfer of, or otherwise encumbers, shares of MedCath Common Stock.

     Section 4.4 Financial Statements.

     All consolidated financial statements of MedCath and its subsidiaries
(including the notes to such financial statements) included in MedCath's Annual
Report on Form 10-K for the year ended September 30, 1997 (the "Year End
Financial Statements") filed pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), (a) are in


                                      A-15

<PAGE>


accordance with the books and records of MedCath and its subsidiaries in all
material respects, (b) present fairly in all material respects the consolidated
financial position, results of operations, changes in shareholders' equity and
cash flow (as applicable) of MedCath and its subsidiaries as of the respective
dates and for the respective periods indicated and (c) have been prepared in
conformity with generally accepted accounting principles applied in all material
respects on a consistent basis through all the periods involved. MedCath has no
material liabilities that are required by generally accepted accounting
principles to be disclosed on a balance sheet other than (i) those disclosed in
the Year End Financial Statements, and (ii) those arising in the ordinary course
of business since September 30, 1997 or as disclosed in Items 3.6(c) and (d) of
the Disclosure Schedules.

     Section 4.5 Absence of Certain Changes or Events.

     Since September 30, 1997, (a) there has not been any Material
Adverse Change, (b) there has not been any damage, destruction or loss, whether
covered by insurance or not, having a Material Adverse Effect, (c) there has not
been any condition, event or occurrence which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect or give rise to a
Material Adverse Change, (d) MedCath and its subsidiaries have conducted their
respective businesses only in the ordinary course, taken as a whole, (e) MedCath
has not changed its accounting principles or methods in any material respect
except insofar as may be required by a change in generally accepted accounting
principles, (f) there has been no condition, event or occurrence which could
reasonably be expected to prevent, materially hinder or materially delay the
ability of MedCath to consummate the Merger or the transactions contemplated by
this Agreement, (g) there has not been any declaration, setting aside or payment
of any dividend or other distribution (whether in cash, stock or property) with
respect to the equity interests of MedCath or any of its subsidiaries, other
than dividends paid by wholly-owned subsidiaries and (h) MedCath and its
subsidiaries have not (i) increased the compensation or fringe benefits of any
present or former director, officer or employee of MedCath or its subsidiaries
(except for increases in salary or wages in the ordinary course of business
consistent with past practice), (ii) granted any severance or termination pay to
any present or former director or officer of MedCath or its subsidiaries or,
other than in the ordinary course of business, to any other employee of MedCath
or its subsidiaries; (iii) loaned or advanced money or other property by MedCath
or its subsidiaries to any of their present or former directors, officer or
employees or (iv) established, adopted, entered into, amended or terminated any
Company Benefit Plan.

     Section 4.6 SEC Reports and other Documents.

     Since January 1, 1995, MedCath has filed all reports required to be filed
by it with the SEC and all such reports complied as to form in all material
respects with the applicable requirements of law. Each report required to be
filed by MedCath with the SEC since January 1, 1995 did not on the date of
filing of such reports and, except to the extent revised or superseded by a
subsequent filing with the SEC prior to the date hereof does not, contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.


                                      A-16
<PAGE>


     Section 4.7 Governmental and Other Consents and Approvals.

     Except as set forth in Item 4.7 of the Disclosure Schedules, subject to the
approval of this Agreement and the Merger by the shareholders of MedCath, no
consent, waiver, approval, license or authorization of or designation,
declaration or filing with any governmental agency or authority or other public
persons or entities in the United States is required in connection with the
execution or delivery by MedCath of this Agreement or the consummation by
MedCath of the transactions contemplated hereby, other than (a) filing in the
State of North Carolina articles of merger in accordance with the North Carolina
Law, (b) filings required under the HSR Act, (c) filings required under the
Exchange Act and (d) such other consents, waivers, approvals, licenses or
authorizations, the failure of which to be obtained will not have a Material
Adverse Effect or will not materially and adversely affect the ability of
MedCath to consummate the transactions contemplated hereby.

     Section 4.8 No Violation.

     Except as set forth in Item 4.8 of the Disclosure Schedules, the execution
and delivery of this Agreement, the filing by MedCath of articles of merger in
connection with the Merger in the State of North Carolina in accordance with the
North Carolina Law, the consummation by MedCath of the transactions contemplated
hereby, or compliance by MedCath with any of the provisions hereof, will not:

     (a) violate any provision of the articles of incorporation or bylaws of
MedCath or any comparable charter or organizational documents of its
subsidiaries;

     (b) cause MedCath or any of its subsidiaries to violate in any material
respect (i) any statute or law or any judgment, decree, order, regulation or
rule of any court or governmental authority applicable to MedCath or any of its
subsidiaries or any of their respective properties or (ii) the award of any
arbitrator or panel of arbitrators;

     (c) cause the acceleration of the maturity of any debt or obligation which
is material to MedCath and its subsidiaries, taken as a whole; or

     (d) with or without notice or lapse of time, or both, violate, or be in
conflict with, or constitute a material default under, or permit the termination
of, or give rise to a right of termination, cancellation or acceleration of or
"put" right with respect to any obligation or to loss of a material benefit
under, or, except as contemplated by this Agreement, require the consent of any
person under, or result in the creation of any material lien upon any property
of MedCath or any of its subsidiaries under, any agreement, indenture, lease,
instrument, permit, concession, franchise, or license applicable to MedCath or
any of its subsidiaries or to which MedCath or any of its subsidiaries is a
party or by which MedCath or any of its subsidiaries (or their respective
properties) may be bound, which individually or in the aggregate would have a
Material Adverse Effect.


                                      A-17
<PAGE>


     Section 4.9 Litigation.

     Except as set forth in Item 4.9 of the Disclosure Schedules, there is no
legal action, suit, arbitration or other legal, administrative or other
governmental investigation, inquiry or proceeding (whether federal, state, local
or foreign) pending or, to the knowledge of MedCath, threatened against or
affecting MedCath, any of its subsidiaries or any of their respective
properties, assets, business, franchises or governmental approvals before any
court or governmental department, commission, board, bureau, agency,
instrumentality or arbitrator, which, individually or in the aggregate, could
reasonably be expected (a) to have a Material Adverse Effect, or (b) to
materially and adversely affect the ability of MedCath to carry out, or prevent
or make unduly burdensome, the Merger or the transactions contemplated by this
Agreement nor is there any judgment, decree, injunction, rule or order of any
governmental entity or arbitrator outstanding against MedCath or any of its
subsidiaries having, or which in the future could have, any such effect.

     Section 4.10 Governmental Approvals; Compliance with Law.

     MedCath and its subsidiaries possess from the appropriate agency,
commission, board or governmental authority, whether federal, state or local,
all licenses, permits, authorizations, approvals, franchises and rights
("Government Approvals") that are necessary for MedCath and its subsidiaries to
engage in the business currently conducted by them, except in those instances in
which failure to possess Government Approvals, individually or in the aggregate,
would not have a Material Adverse Effect. MedCath and its subsidiaries have
been, are and as of the Effective Time will be in compliance with all applicable
federal, state and local laws, statutes, ordinances, rules and regulations
except where the failure to so comply would not constitute a material violation
of law compliance with which is material to MedCath and its subsidiaries, taken
as a whole.

     Section 4.11 Brokers and Finders.

     Except for Goldman, Sachs & Co. ("Goldman Sachs"), which has been engaged,
pursuant to an engagement letter dated August 8, 1997, a true and complete copy
of which has been delivered to Acquiror, to provide financial advisory services
to the Strategic Options Committee of MedCath and, as requested by the Strategic
Options Committee, to provide advice to the board of directors of MedCath with
respect to whether the consideration to be received by the holders of MedCath
Common Stock is fair to them, no broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Merger or in connection with any transaction involving MedCath based upon
arrangements made by or on behalf of MedCath.

     Section 4.12 Fairness Opinions and Approval by Strategic Options Committee.

     On or prior to the date hereof, the Strategic Options Committee approved
the terms of this Agreement and received an opinion from Goldman Sachs as of
such date, which opinion shall be confirmed in writing substantially to the
effect that, from a financial point of


                                      A-18
<PAGE>


view, the consideration to be received by the holders of MedCath Common Stock
pursuant to the Merger is fair to them (which opinion shall be updated in
writing to the date of the Definitive Proxy Statement), a true and complete copy
of which written opinion has been or will promptly be delivered to Acquiror
following its receipt by the Strategic Options Committee.

     Section 4.13 Taxes.

     (a) All Returns (as hereinafter defined) required to be filed by or with
respect to MedCath and Tax Affiliates (as hereinafter defined) have been filed
on a timely basis, except where the failure to file such Returns would not have
a Material Adverse Effect. All such Returns were correct and complete in all
material respects. There are no deficiencies for Taxes that have been proposed,
asserted or assessed against MedCath or Tax Affiliates that remain unpaid.
MedCath and its Tax Affiliates have paid or made adequate provision in all
material respects in the Financial Statements (other than reserves for deferred
income Taxes established to reflect differences between book basis and Tax basis
of assets and liabilities) for the payment of all Taxes, whether or not shown on
any Return. As used in this Section 4.13, the term "Tax" or "Taxes" means all
federal, state, local, foreign and other net income, gross income, gross
receipts, franchise, sales, use, withholding, employment, property alternative
or add-on minimum, environmental (including Taxes under Section 59A of the
Internal Revenue Code of 1986, as amended (the "Code")) or other taxes, fees,
assessments or charges of any kind whatsoever, together with any interest and
any penalties, additions to tax or additional amounts with respect thereto; the
term "Returns" means all returns, declarations, reports, statements and other
documents required to be filed in respect of Taxes, including any schedule or
attachment thereto, and including any amendment thereof; and the term "Tax
Affiliate" means any subsidiaries of MedCath and any individual or entity for
whose Taxes MedCath or any of its subsidiaries is or could be held liable,
whether by reason of being a member of an affiliated, consolidated, combined,
unitary, or other similar group for Tax purposes, by reason of being a
successor, member or general partner, by agreement, or otherwise (but only with
respect to the Taxes and taxable periods(s) or portions thereof with respect to
which MedCath or such subsidiaries is or could be held liable for such Taxes).

     (b) Item 4.13 of the Disclosure Schedules lists all Returns that have been
audited, and indicates all Returns that are currently the subject of audit.
Neither MedCath nor any Tax Affiliate has granted any extension or waiver of the
statute of limitations period on the assessment of any material Taxes, which
period (after giving effect to such extension or waiver) has not expired.
Neither MedCath nor any Tax Affiliate has granted a power of attorney with
respect to any matter relating to any material Tax. No claim has been made by an
authority in a jurisdiction where MedCath or any Tax Affiliate does not file
Returns that it is or may be subject to Tax in that jurisdiction.

     (c) MedCath and each Tax Affiliate has withheld and paid all Taxes required
to have been paid in connection with amounts paid or owing to any employee,
independent contractor, stockholder, partner, or other third party.


                                      A-19
<PAGE>


     (d) Neither MedCath nor any Tax Affiliate is a party to any Tax allocation,
sharing, or similar agreement. Neither MedCath nor any Tax Affiliate has been a
member of an affiliated group filing a consolidated federal income tax Return
(other than a group the common parent of which was MedCath).

     (e) Except as disclosed to Acquiror prior to the date of this Agreement,
neither MedCath nor any Tax Affiliate has made any payments, is obligated to
make any payments, or is a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be deductible
under Code Section 280G or would constitute compensation in excess of the
limitation set forth in Section 162(m) of the Code.

     (f) No consent under Section 341(f) of the Code has been filed with respect
to MedCath or any Tax Affiliates.

     (g) Neither MedCath nor any Tax Affiliate has been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the Code
during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

     (h) No material claim for unpaid Taxes has become a lien or encumbrance of
any kind against the property of MedCath or any Tax Affiliates.

     Section 4.14 Employee Benefits.

     (a) A list of all employee benefit plans, programs, arrangements, funds,
policies, practices, or contracts and samples of representative employment
agreements with respect to which, through which, or under which the MedCath or
any of MedCath's subsidiaries has any liability to provide benefits or
compensation to or on behalf of employees, former employees, or independent
contractors of MedCath or any of MedCath's subsidiaries, whether formal or
informal, whether or not written, including but not limited to any employee
benefit plan (within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), any multiemployer plan (as
defined in Section 3(37) and Section 4001(a)(3) of ERISA), stock purchase, stock
option, severance, employment, change in control, fringe benefit, collective
bargaining, bonus, incentive, and deferred compensation arrangement
(collectively, the "Company Benefit Plans"), have been disclosed in writing to
Acquiror. MedCath has made available to Acquiror a true and complete copy of the
following documents, if applicable, with respect to each Company Benefit Plan:
(i) all documents setting forth the terms of the Company Benefit Plan, or if
there are no such documents evidencing the Company Benefit Plan, a full
description of the Company Benefit Plan, (ii) the ERISA summary plan description
and any other written summary of plan provisions provided to participants or
beneficiaries for each such Company Benefit Plan, (iii) the annual report (Form
5500 series), required under ERISA or the Code, filed for the most recent plan
year and most recent financial statements or periodic accounting of related plan
assets with respect to each Company Benefit Plan, and (iv) the most recent
favorable determination letter, opinion, or ruling from the Internal Revenue
Service for each Company Benefit Plan, the assets of which are held in trust, to
the effect that such trust is exempt from federal income tax.


                                      A-20
<PAGE>


     (b) Each Company Benefit Plan has at all times been maintained, by its
terms and in operation, in accordance with the Code, ERISA, and other applicable
laws, except where the failure to so comply is not reasonably likely to have a
Material Adverse Effect. Each Company Benefit Plan that is intended to be
qualified under Section 401(a) of the Code, and related trust that is intended
to be tax-exempt under Section 501(a) of the Code, has received a favorable
determination letter from the Internal Revenue Service to the effect that such
plan is qualified under the Code and such trust is tax-exempt, and any such
determination letter remains in effect and has not been revoked. All
contributions required to be made prior Closing under the terms of each Company
Benefit Plan, the Code, ERISA, or other applicable law have been or will be
timely made, and adequate reserves have been provided for by MedCath with
respect to all accrued benefits attributable to service on or prior to the
Closing. No Company Benefit Plan provides for an increase in benefits on or
after the Closing.

     (c) Each Company Benefit Plan may be amended or terminated at any time
without any obligation or liability other than for benefits accrued prior to
such amendment or termination, or as required to be vested pursuant to
applicable law as a result of such amendment or termination. There are no
actions, audits, suits, or claims which are pending or threatened, to the
knowledge of MedCath against any Company Benefit Plan, except claims for
benefits made in the ordinary course of the operation of such plans. MedCath
will promptly notify Acquiror in writing of any such actions, audits, suits, or
claims arising between the date hereof and the Closing. Neither MedCath nor any
of its subsidiaries is subject to any material liability, tax, or penalty
whatsoever to any person whomsoever as a result of MedCath or any of its
subsidiaries engaging in a prohibited transaction under ERISA or the Code. To
the knowledge of MedCath, no event has occurred and no condition exists that
would subject MedCath, either directly or by reason of its affiliation with any
trade or business (whether or not incorporated) which together with the Company
is treated as a single employer under Section 414(b), (c), (m), or (o) of the
Code ("Company ERISA Affiliate"), to any material liability, tax, or penalty
imposed by ERISA, the Code, or other applicable law.

     (d) Neither MedCath nor any Company ERISA Affiliate maintains, nor has at
any time established or maintained, nor has at any time been obligated to make,
or made, contributions to or under any plan subject to Title IV of ERISA.

     Section 4.15 Environmental Matters.

     Except for such items of non-compliance that could not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect:

          (i) MedCath and its subsidiaries, taken as a whole, hold and formerly
     held, and, to the knowledge of MedCath, are and have been in compliance
     with, all Environmental Permits, and MedCath and its subsidiaries are and
     have been, otherwise in compliance with all applicable Environmental Laws
     and there are no circumstances that might prevent or interfere with such
     compliance in the future;


                                      A-21
<PAGE>


          (ii) None of MedCath or its subsidiaries has received any
     Environmental Claim, and none of MedCath or its subsidiaries is aware after
     reasonably inquiry of any threatened material Environmental Claim or of any
     circumstances, conditions or events that could reasonably be expected to
     give rise to an Environmental Claim that could result in a Material Adverse
     Effect;

          (iii) None of MedCath or its subsidiaries has entered into or agreed
     to any consent decree, order or agreement under any Environmental Law, and
     none of MedCath or its subsidiaries is subject to any material judgment,
     decree, order or other material requirement relating to compliance with any
     Environmental Law or to investigation, cleanup, remediation or removal of
     regulated substances under any Environmental Law;

          (iv) To the knowledge of MedCath, there are no (a) underground storage
     tanks, (B) polychlorinated biphenyls, (C) asbestos or asbestos-containing
     materials, (D) urea-formaldehyde insulation, (E) sumps, (F) surface
     impoundments, (G) landfills, (H) sewers or septic systems or (I) Hazardous
     Materials present at any facility currently or formerly owned, leased,
     operated or otherwise used by MedCath or any of its subsidiaries that could
     reasonably be expected to give rise to a Material Adverse Effect;

          (v) There are no past (including, without limitation, with respect to
     assets or businesses formerly owned, leased or operated by MedCath or any
     of its subsidiaries) or present actions, activities, events, conditions or
     circumstances, with respect to or against MedCath or its subsidiaries
     including without limitation the release, threatened release, emission,
     discharge, generation, treatment, storage or disposal of Hazardous
     Materials, that could reasonably be expected to give rise to a Material
     Adverse Effect under any Environmental Laws or any contract or agreement;

          (vi) No modifications, revocation, reissuance, alteration, transfer,
     or amendment of the Environmental permits, or any review by, or approval
     of, any third party of the Environmental Permits is required in connection
     with the execution or delivery of this Agreement or the consummation of the
     transactions contemplated hereby or the continuation of the business of
     MedCath or its subsidiaries following such consummation;

          (vii) Hazardous Materials have not been generated, transported,
     treated, stored, disposed of, released or threatened to be released at, on,
     from or under any of the properties or facilities currently or formerly
     owned, leased or otherwise used by MedCath or any of its subsidiaries, in
     violation of, or in a manner or to a location that could give rise to a
     Material Adverse Effect, under any Environmental Laws;

          (viii) For purposes of this Agreement, the following terms shall have
     the following meanings:


                                      A-22
<PAGE>


               "Environmental Claim" means any written or oral notice, claim,
          demand, action, suit, complaint, proceeding or other communication by
          any person alleging liability or potential liability (including
          without limitation liability or potential liability for investigatory
          costs, cleanup costs, governmental response costs, natural resource
          damages, property damage, personal injury, fines or penalties) arising
          out of, relating to, based on or resulting from (i) the presence,
          discharge, emission, release or threatened release of any Hazardous
          Materials at any location, either owned, leased or operated by MedCath
          or any of its subsidiaries or (ii) circumstances forming the basis of
          any violation or alleged violation of any Environmental Law or
          Environmental Permit or (iii) otherwise relating to obligations or
          liabilities under any Environmental Laws.

               "Environmental Permits" means all permits, licenses,
          registrations and other governmental authorizations required for
          MedCath and the operations of MedCath's and its subsidiaries'
          facilities and otherwise to conduct its business under Environmental
          Laws.

               "Environmental Laws" means all applicable federal, state and
          local statutes, rules, regulations, ordinances, orders, decrees and
          common law in effect as of the date hereof relating in any manner to
          contamination, pollution or protection of human health or the
          environment, including without limitation the Comprehensive
          Environmental Response, Compensation and Liability Act, the Solid
          Waste Disposal Act, the Clean Air Act, the Toxic Substances Control
          Act, the Occupational Safety and Health Act, the Emergency Planning
          and Community-Right-to-Know Act, the Safe Drinking Water Act, all as
          amended, and similar state laws.

               "Hazardous Materials" means all hazardous or toxic substances,
          wastes, materials or chemicals, petroleum (including crude oil or any
          fraction thereof) and petroleum products, asbestos and
          asbestos-containing materials, pollutants, contaminants and all other
          materials, substances and forces, including but not limited to
          electromagnetic fields, regulated pursuant to, or that could form the
          basis of liability under, any Environmental Law.

     Section 4.16 Board Recommendation.

     The board of directors of MedCath, at a meeting duly called and held, has
by unanimous vote of those directors present (who constituted 100% of the
directors then in office exclusive of directors who recused themselves from such
vote because of their interest in the Parent or Acquiror) (i) determined that
this Agreement and the transactions contemplated hereby are fair to and in the
best interests of the shareholders of MedCath and (ii) resolved to recommend
that the holders of the shares of MedCath Common Stock approve this Agreement
and the transactions contemplated herein, including the Merger.


                                      A-23
<PAGE>


     Section 4.17 Required Company Vote.

     The affirmative vote of a majority of the shares of MedCath Common Stock is
the only vote of the holders of any class or series of MedCath's securities
necessary to approve this Agreement and the Merger under the North Carolina Law.

     Section 4.18 State Takeover Statutes.

     No state takeover statute or similar statute or regulation of the State of
North Carolina (and, to the knowledge of MedCath after due inquiry, of any other
state or jurisdiction) applies or purports to apply to this Agreement, the
Merger, or any of the other transactions contemplated hereby. No provision of
the articles of organization, by-laws or other governing instruments of MedCath
or any of its subsidiaries would, directly or indirectly, restrict or impair the
ability of Acquiror or its affiliates to vote, or otherwise to exercise the
rights of a shareholder with respect to, securities of MedCath and its
subsidiaries that may be acquired or controlled by Acquiror or its affiliates or
permit any shareholder to acquire securities of MedCath on a basis not available
to Acquiror in the event that Acquiror were to acquire securities of MedCath,
and neither MedCath nor any of its subsidiaries has any rights plan (except the
Rights Agreement), preferred stock or similar arrangement which have any of the
aforementioned consequences. The board of directors of MedCath has duly and
validly approved and taken all corporate action required to be taken by the
board of directors for the consummation of the transactions contemplated by this
Agreement.

     Section 4.19 Material Contract Defaults.

     Neither MedCath nor any of its subsidiaries is, or has received any notice
or has any knowledge that any other party is, in default in any respect under
any material contract, agreement, commitment, arrangement, lease, policy or
other instrument to which it or any of its subsidiaries is a party or by which
it or any such subsidiary is bound ("Material Contracts"), except for those
defaults which could not reasonably be expected, either individually or in the
aggregate, to have a Material Adverse Effect; and there has not occurred any
event that with the lapse of time or the giving of notice or both would
constitute such a material default.

     Section 4.20 Information in Proxy Statement.

     The Definitive Proxy Statement (or any amendment thereof or supplement
thereto), at the date mailed to MedCath shareholders and at the time of the
Special Meeting, will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading, provided, however, that no representation is made
by MedCath with respect to statements made therein based on information supplied
by the Parent or Acquiror for inclusion in the Definitive Proxy Statement. The
Definitive Proxy Statement will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.


                                      A-24
<PAGE>


     Section 4.21 Rights Agreement.

     The Rights Agreement has been amended so as to provide that neither the
Parent nor Acquiror will become an "Acquiring Person" or an "Adverse Person" and
that no "Triggering Event", "Stock Acquisition Date" or "Distribution Date" (as
such terms are defined in the Rights Agreement) will occur as a result of the
approval, execution or delivery of this Agreement or the consummation of the
Merger.

     Section 4.22 Properties.

     (a) Except with respect to liens securing indebtedness evidenced by the
agreements listed on Item 3.6(d) of the Disclosure Schedules or reflected in the
Year End Financial Statements of MedCath, each of MedCath and its subsidiaries
have good and sufficient, valid and marketable title to its owned real property
free and clear of all liens and other encumbrances that, individually or in the
aggregate, would have a Material Adverse Effect. Except as set forth in Item
4.22 of the Disclosure Schedules, there are no outstanding contracts for the
purchase of any real property.

     (b) MedCath and its subsidiaries hold good and valid leasehold title to
leased real property they occupy, free of all liens except for liens which,
individually or in the aggregate, would not have a Material Adverse Effect or
liens securing indebtedness evidenced by the agreements listed on Item 3.6(d) of
the Disclosure Schedules or reflected in the Year End Financial Statements of
Medcath. Other than such exceptions which as would not have a Material Adverse
Effect, all real property leases are in full force and effect and grant in all
respects the leasehold estates or rights of occupancy or use they purport to
grant. There are no existing defaults (either on the part of MedCath or any of
its subsidiaries or, to the knowledge of MedCath, any other party thereto) under
any real property lease and no event has occurred which, with notice or the
lapse of time, or both, would constitute a default (either on the part of
MedCath or any of its subsidiaries or, to the knowledge of MedCath, any other
party thereto) under any of the real property leases, except for any of the
foregoing which, individually or in the aggregate, would not have a Material
Adverse Effect. The consummation of the Merger will not result in the occurrence
of a default under any of the real property leases (whether pursuant to a
"change in control" provision in the real property leases or otherwise).

     Section 4.23 Billing and Coding.

     MedCath and its subsidiaries have, whether directly or indirectly through
contractual arrangements with others, billed third party payers (including, but
not limited to, Medicare, Medicaid, CHAMPUS, and private payers) for health care
services rendered by MedCath, its subsidiaries, or any of its or their
employees, professional staff, or other persons or entities on behalf of whom or
for which MedCath or any of its subsidiaries is authorized to bill for health
care services, in accordance in all material respects with all federal, state,
and local laws, rules, and regulations, and all agreements, applicable with
respect thereto. Without limiting the generality of the foregoing, for said
purposes all such services have been


                                      A-25
<PAGE>


properly documented and coded all except to the extent the failure to so comply
or to do so would not be material individually or in the aggregate.

     Section 4.24 Other Confidentiality Agreements.

     MedCath has entered into a confidentiality agreement not substantially less
favorable taken as a whole to it than the Confidentiality Agreement with each
Person (as defined in Section 8.6) that, since January 1, 1997, has been
provided confidential information with respect to MedCath and its subsidiaries
with a view to a possible acquisition (whether by merger, stock purchase, asset
purchase or otherwise) or recapitalization of MedCath. Each such agreement is in
full force and effect, MedCath has not modified or waived or agreed to modify or
waive any provisions of any such agreement and, to the knowledge of MedCath none
of the other parties thereto is in default thereunder.


                                    ARTICLE 5

                             [Intentionally Omitted]


                                    ARTICLE 6

              Representations and Warranties of Acquiror and Parent

     Acquiror and Parent hereby represent and warrant to MedCath as follows:

     Section 6.1 Organization and Good Standing.

     Each of Acquiror and Parent is a duly organized and validly existing
corporation in good standing under the laws of the state of its incorporation.
Each of Acquiror and Parent has heretofore delivered to MedCath accurate and
complete copies of its articles or certificate of incorporation and bylaws as
currently in effect. Neither Acquiror nor Parent has any subsidiary (other than
Acquiror, in the case of Parent) or owns or holds any capital stock, security or
investment in any other Person other than bank accounts, certificates of
deposit, money market or similar short-term investments.

     Section 6.2 Authorization; Binding Agreement.

     Parent and Acquiror have all requisite corporate power and authority to
execute and deliver this Agreement and to consummate the Merger and the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the Merger and the transactions contemplated hereby have
been duly and validly authorized by its respective board of directors, and this
Agreement has been adopted by the shareholders of Acquiror in accordance with
North Carolina Law and its articles or certificate of incorporation and bylaws.
No other corporate proceedings on the part of Acquiror or Parent are necessary
to authorize this Agreement, the Merger and the transactions contemplated
hereby. This


                                      A-26
<PAGE>


Agreement has been duly and validly executed and delivered by Parent and
Acquiror and constitutes a legal, valid and binding agreement of Acquiror and
Parent, enforceable against Parent and Acquiror in accordance with its terms
except as such enforceability may be limited by (a) bankruptcy, insolvency,
reorganization, moratorium or other similar laws, now or hereafter in effect,
relating to or limiting creditors, rights generally, and (b) general principles
of equity (whether considered in an action in equity or at law) which provide,
among other things, that the remedies of specific performance and injunctive and
other forms of equitable relief are subject to equitable defenses and to the
discretion of the court before which any proceedings therefor may be brought.

     Section 6.3 Capitalization.

     The authorized capital stock of Acquiror consists of a single class of
20,000,000 shares of common stock, par value $.01 per share, (which class of
stock is herein called "Acquiror Common Stock"), of which 100 are issued and
outstanding on the date hereof and are beneficially owned by the Parent. All of
the shares of Acquiror Common Stock outstanding at the Effective Time (i) will
have been duly authorized, validly issued, fully paid and nonassessable and free
of preemptive rights, and (ii) will be beneficially owned by Parent. Acquiror
has not granted any outstanding option, warrant, subscription or other right, or
entered into any agreement or commitment which either (a) obligates Acquiror to
issue, sell, repurchase or transfer any shares of the capital stock of Acquiror
or (b) restricts the transfer of, or otherwise encumbers, shares of Acquiror
Common Stock. Acquiror has no treasury stock.

     Section 6.4 No Violation.

     Neither the execution and delivery of this Agreement, the filing of the
Articles of Merger nor the consummation by Acquiror and Parent of the
transactions contemplated hereby, nor compliance by Acquiror with any of the
provisions hereof, will:

          (a) violate any provision of the charter documents or bylaws of
     Acquiror or Parent;

          (b) violate any statute or law or any judgment, decree, order,
     regulation or rule of any court or governmental authority applicable to
     Acquiror or Parent or any of their properties;

          (c) cause the acceleration of the maturity of any debt or obligation
     of Acquiror or Parent; or

          (d) with or without notice or lapse of time, or both, violate, or be
     in conflict with, or constitute a default under, or permit the termination
     of, or give rise to a right of termination, cancellation or acceleration of
     or "put" right with respect to any obligation or to loss of a material
     benefit under, or except as contemplated by this Agreement, require the
     consent of any person under, or result in the creation of any lien upon any
     property of Acquiror or the Parent under, any agreement, indenture,


                                      A-27
<PAGE>


     lease or instrument, permit, concession, franchise, or license applicable
     to Acquiror or Parent to which Acquiror or Parent is a party or by which
     Acquiror or the Parent (or its properties) may be bound, which in the
     aggregate would have a material adverse effect on Acquiror or Parent.

     Section 6.5 Governmental and Other Consents and Approvals.

     Except as provided in Item 4.7 in the Disclosure Schedules, no consent,
waiver, approval, license or authorization of or designation, declaration or
filing with any governmental agency or authority or other public persons or
entities in the United States is required in connection with the execution or
delivery by Acquiror of this Agreement or the consummation by Parent or Acquiror
of the Merger or the transactions contemplated hereby, other than (a) filings in
the State of North Carolina in accordance with the North Carolina Law, (b)
filings required under the HSR Act, (c) filings required under the Exchange Act
and (d) such other consents, waivers, approvals, licenses or authorizations, the
failure of which to be obtained will not have a material adverse effect on
Parent or Acquiror or on the ability of Parent or Acquiror to consummate the
transactions contemplated hereby.

     Section 6.6 Proxy and Schedule 13E-3 Information.

     The information furnished to MedCath by Acquiror and Parent specifically
for inclusion in the Definitive Proxy Statement and the Schedule 13E-3, or any
amendment or supplement thereto, or specifically for inclusion in any other
documents filed with the SEC by MedCath in connection with the Merger, shall,
with respect to the Definitive Proxy Statement at the time the Definitive Proxy
Statement is mailed and at the time of the Special Meeting, and, with respect to
the Schedule 13E-3 and such other documents, at the time of filing with the SEC
and at the time of such Special Meeting, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.

     Section 6.7 Financing.

     Acquiror has obtained commitments for equity and debt financing necessary
or appropriate to consummate the Merger in an amount no less than the Cash
Merger Consideration plus the expenses related to the Merger and obtaining the
financing therefor (the "Financing"). A true and correct copy of the letters or
other documents evidencing such commitments (the "Financing Letters") have been
delivered to the Strategic Options Committee.

     Section 6.8 Brokers and Finders.

     Except for Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson, Anderson
& Stowe VII, L.P., the fees and expenses of which shall be paid by Acquiror,
Acquiror has not engaged any broker, finder or investment banker which
engagement would require the


                                      A-28
<PAGE>


payment of any brokerage, finder's or other fees by MedCath in connection with
the transaction contemplated hereby.

     Section 6.9 No Prior Activities.

     Acquiror and Parent have not incurred, and will not incur, directly or
through any subsidiary, any liabilities or obligations, except those incurred in
connection with its organization or with the negotiation of this Agreement and
the Financing. Except as contemplated by this Agreement and the Financing
Letters, Acquiror and Parent have not engaged in any business activities of any
type or kind whatsoever, or entered into any agreements or arrangements with any
person or entity, or become subject to or bound by any obligation or
undertaking.

     Section 6.10 Litigation.

     There is no legal action, suit, arbitration or other legal, administrative
or other governmental investigation, inquiry or proceeding (whether federal,
state, local or foreign) pending or, to the knowledge of Acquiror or Parent,
threatened against or affecting Acquiror or Parent or any of its properties,
assets, business, franchises or governmental approvals before any court or
governmental department, commission, board, bureau, agency, instrumentality or
arbitrator, which, individually or in the aggregate, could reasonably be
expected (a) to have a material adverse effect upon Acquiror or Parent or (b) to
materially and adversely affect the ability of Acquiror or Parent to carry out,
or prevent or make unduly burdensome, the Merger or the transactions
contemplated by this Agreement.


                                    ARTICLE 7

                                   Conditions

     Section 7.1 Conditions to Each Party's Obligation to Effect the Merger.

     The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions unless waived in accordance with Section 8.4:

          (a) This Agreement and the Merger shall have been approved at or prior
     to the Effective Time by the holders of a majority of the outstanding
     shares of MedCath Common Stock entitled to vote thereon;

          (b) No action, suit or proceeding shall be pending before any court or
     governmental body in which an unfavorable judgment or decree would prevent
     or substantially delay the consummation of the Merger, cause the Merger to
     be rescinded or, with respect to any litigation in connection with the
     Merger, result in an award of damages that would have a Material Adverse
     Effect; and


                                      A-29
<PAGE>


          (c) Any applicable waiting period under the HSR Act shall have expired
     or early termination shall have been granted.

     Section 7.2 Conditions to Obligation of MedCath to Effect the Merger.

     The obligations of MedCath to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following additional
conditions, unless waived by MedCath:

          (a) The representations and warranties of Acquiror and the Parent set
     forth in Article 6 hereof shall be true and correct in all material
     respects (except that any such representation and warranty that is
     qualified as to materiality by reference to "Material Adverse Effect" or
     any similar term shall be true and correct) as of the date of this
     Agreement and as of the Effective Time as though made on and as of the
     Effective Time, and MedCath shall have received a certificate from each of
     Acquiror and Parent signed by its President and a Vice President,
     respectively, to that effect, provided that such signatories shall not have
     any personal liability in connection therewith; and

          (b) Acquiror and Parent shall have performed in all material respects
     all obligations required to be performed by them under this Agreement prior
     to the Effective Time, and MedCath shall have received a certificate from
     each of Acquiror and the Parent signed by its President and a Vice
     President, respectively, to that effect, provided that such signatories
     shall not have any personal liability in connection therewith.

     Section 7.3 Conditions to Obligations of Acquiror to Effect the Merger.

     The obligations of Acquiror and the Parent to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
additional conditions, unless waived by Acquiror or the Parent:

          (a) The representations and warranties of MedCath set forth in Article
     4 hereof shall be true and correct in all material respects (except that
     any such representation and warranty that is qualified as to materiality by
     reference to "Material Adverse Effect" or any similar term shall be true
     and correct) as of the date of this Agreement and as of the Effective Time
     as though all of such representations were made on and as of the Effective
     Time by MedCath, and Acquiror shall have received a certificate of MedCath
     signed by the President, the Chief Financial Officer or a Vice President of
     MedCath to that effect, provided that such signatories shall not have any
     personal liability in connection therewith;

          (b) MedCath shall have performed in all material respects all
     obligations required to be performed by it under this Agreement prior to
     the Effective Time and Acquiror shall have received a certificate of
     MedCath signed by the President, the Chief Financial Officer or a Vice
     President of MedCath to that effect, provided that such signatories shall
     not have any personal liability in connection therewith;

                                      A-30
<PAGE>


          (c) Acquiror shall have obtained financing necessary to satisfy its
     obligations to pay the Cash Merger Consideration pursuant to Section 2.1
     hereof on terms and conditions satisfactory to Acquiror in its sole
     discretion. Acquiror acknowledges that its obtaining financing from parties
     satisfactory to it and on substantially the same terms and conditions as
     set forth in the Financing Letters shall satisfy this condition.

          (d) MedCath and Acquiror shall have been furnished with evidence
     satisfactory to them of the timely consent or approval of, or notice to,
     each governmental authority or other person or entity whose consent or
     approval, or to whom notice, is required in connection with the execution
     or delivery by MedCath or Acquiror of this Agreement or consummation of the
     transactions contemplated hereby or the absence of which would result in a
     default or acceleration under or right to terminate any contract or
     agreement, except with respect to consents, waivers or approvals relating
     to the Merger with respect to agreements set forth in Item 3.4 of the
     Disclosure Schedules;

          (e) The persons named in Item 7.3 of the Disclosure Schedules will
     have invested in Parent an amount equal to at least 50% of the value of the
     MedCath Common Stock and the spread on the Stock Options (assuming a value
     of $19.00 per share) held by such persons, which investment will be made
     substantially on the terms of the letter agreement of even date herewith
     between Acquiror and such persons;

          (f) The directors of MedCath shall have, other than those who are also
     directors of Acquiror, tendered to MedCath their resignations effective as
     of the Effective Time; and

          (g) To MedCath's knowledge, neither it nor any of its subsidiaries
     shall be under investigation for any violation of the "Stark" laws,
     anti-kickback laws or the laws relating to Medicare, Medicaid, Champus or
     any rules or regulations related thereto.


                                    ARTICLE 8

            Termination; Non-Survival of Representations, Warranties
                       and Covenants; Waiver and Amendment

     Section 8.1 Termination.

     This Agreement may be terminated, and the Merger abandoned, at any time
prior to the Effective Time, by:

          (a) mutual written consent of the boards of directors of the
     Constituent Corporations;


                                      A-31
<PAGE>


          (b) Acquiror may terminate this Agreement by giving written notice to
     MedCath at any time prior to the Effective Time (i) in the event MedCath
     has breached any representation, warranty, or covenant contained in this
     Agreement in any material respect, Acquiror has notified MedCath of the
     breach, and the breach has continued without cure for a period of thirty
     (30) days after the notice of breach or (ii) if the Closing shall not have
     occurred on or before August 31, 1998, by reason of the failure of any
     condition precedent under Section 7.1 or 7.3 hereof (unless the failure
     results primarily from Acquiror breaching any representation, warranty, or
     covenant contained in this Agreement);

          (c) MedCath may terminate this Agreement by giving written notice to
     Acquiror at any time prior to the Effective Time (i) in the event Acquiror
     has breached any representation, warranty, or covenant contained in this
     Agreement in any material respect, MedCath has notified Acquiror of the
     breach, and the breach has continued without cure for a period of thirty
     (30) days after the notice of breach or (ii) if the Closing shall not have
     occurred on or before August 31, 1998, by reason of the failure of any
     condition precedent under Sections 7.1 or 7.2 hereof (unless the failure
     results primarily from MedCath breaching any representation, warranty, or
     covenant contained in this Agreement);

          (d) MedCath, by written notice to Acquiror, if (i) the board of
     directors of MedCath or the Strategic Options Committee has withdrawn or
     modified its approval or recommendation of this Agreement or the Merger in
     accordance with Section 3.1; (ii) the board of directors of MedCath or the
     Strategic Options Committee has determined that MedCath has entered into a
     definitive agreement with a Person with respect to a transaction the
     proposal of which qualifies as an Acquisition Proposal; provided that the
     board of directors of MedCath or the Strategic Options Committee, as the
     case may be, has first determined in good faith based upon the reasonably
     concluded written advice of outside counsel to MedCath or counsel to the
     Strategic Options Committee, as the case may be, that failing to take such
     action would violate MedCath's board of directors' fiduciary duty under
     applicable law; or (iii) (A) a third party commences a tender offer or
     exchange offer for 25% or more of the outstanding shares of MedCath Common
     Stock and that tender offer or exchange offer is not solicited, initiated
     or encouraged after the date hereof by MedCath and (B) the board of
     directors of MedCath has recommended that the shareholders of MedCath
     tender their shares in such tender of exchange offer; provided that the
     board of directors of MedCath or the Strategic Options Committee has first
     determined in good faith upon the reasonably concluded written advice of
     outside counsel to MedCath or counsel to the Strategic Options Committee,
     as the case may be, that failing to take such action would violate
     MedCath's board of directors' fiduciary duty under applicable law; and
     provided further, that termination under this Section 8.1(d) shall be of no
     effect unless and until MedCath pays the fees and expenses referred to in
     Section 8.6(a);

          (e) Acquiror, by written notice to MedCath, if (i) the board of
     directors of MedCath has withdrawn or modified its approval or
     recommendation of this Agreement or the Merger, (ii) MedCath enters into a
     definitive agreement with a


                                      A-32
<PAGE>


     Person with respect to a transaction the proposal of which qualifies as an
     Acquisition Proposal or (iii) (A) a third party commences a tender offer or
     exchange offer for 25% or more of the outstanding shares of MedCath Common
     Stock and (B) the board of directors of MedCath has recommended that the
     shareholders of MedCath tender their shares in such tender or exchange
     offer;

          (f) MedCath or Acquiror, by written notice to the other, if upon a
     vote at the Special Meeting, any approval of the shareholders of MedCath
     necessary to consummate the Merger and the transactions contemplated hereby
     shall not have been obtained; or

          (g) any of the parties, by written notice, if any court of competent
     jurisdiction or other governmental entity shall have issued an order,
     decree or ruling or taken any other action permanently enjoining,
     restraining or otherwise prohibiting the Merger and such order, decree,
     ruling or other action shall have become final and nonappealable.

     Any action to be taken to terminate this Agreement under this Section shall
be taken by, or pursuant to authority granted by, the boards of directors of
MedCath or Acquiror, as applicable. Any such action by MedCath shall be
authorized by the Strategic Options Committee, provided a termination by MedCath
pursuant to Section 8.1(d) as a result of an Acquisition Proposal that is not an
Interested Party Proposal may be authorized by the board of directors of MedCath
without the action of the Strategic Options Committee.

     Section 8.2 Non-Survival of Representations, Warranties and Covenants.

     The respective representations and warranties of MedCath and Acquiror
contained herein or in any certificate delivered pursuant hereto shall expire
with, and be terminated and extinguished upon, consummation of the Merger, and
thereafter neither Surviving Corporation nor MedCath or Acquiror or any officer,
director or principal thereof shall be under any liability whatsoever with
respect to any such representation or warranty. This Section 8.2 shall have no
effect upon any other covenant or agreement of the parties hereto, whether to be
performed before or after the consummation of the Merger.

     Section 8.3 Amendment.

     This Agreement may not be amended except by an instrument in writing signed
on behalf of each of the parties hereto; provided, however, that after approval
of this Agreement by the shareholders of MedCath, no amendment may be made which
reduces the amount or changes the form of consideration to be received in the
Merger or otherwise changes or effects any change which would adversely affect
the holders of MedCath Common Stock without the further approval of the
shareholders of MedCath in accordance with Section 7.1(a).


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<PAGE>


     Section 8.4 Waiver.

     At any time prior to the Effective Time, whether before or after the
Special Meeting, any party hereto, by action taken by its board of directors,
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto or (ii) subject to the proviso contained in
Section 8.3, waive compliance with any of the agreements of any other party or
with any conditions (other than those appearing in Section 7.1(a) and (c)) to
its own obligations. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party by a duly authorized officer, and, in the case of
MedCath, authorized by the Strategic Options Committee.

     Section 8.5 Effect of Termination.

     In the event of the termination of this Agreement under Section 8.1, this
Agreement shall thereafter become void and have no effect and no party hereto
shall have any liability to any other party hereto or its shareholders or
directors or officers in respect thereof, except that the provisions of Section
3.8 and the Confidentiality Agreement, and Section 8.6 and Article 9 shall
survive any such termination if such obligations arose at or before the time of
such termination.

     Section 8.6 Certain Payments.

     (a) In the event that:

          (i) this Agreement is terminated pursuant to Section 8.1(d) or (e);

          (ii) an Acquisition Proposal is commenced, publicly proposed, publicly
     disclosed or communicated to MedCath at any time after the date of this
     Agreement and MedCath, either on or prior to the date which is five (5)
     months after the termination of this Agreement pursuant to Section 8.1(f)
     or one year after the termination of this Agreement for any other reason
     other than by MedCath under 8.1(c), consummates with any individual,
     corporation, partnership, joint venture, association, joint stock company,
     trust, fund, unincorporated association or organization (a "Person") a
     transaction the proposal of which would otherwise qualify as an Acquisition
     Proposal or enters into a definitive agreement with a Person with respect
     to a transaction the proposal of which would otherwise qualify as an
     Acquisition Proposal; or

          (iii) the board of directors of MedCath, withdraws or modifies its
     approval or recommendation of this Agreement or the Merger;

then in any such event, MedCath shall pay Acquiror Six Million Seven Hundred
Seventy Four Thousand Six Hundred and Forty Dollars ($6,774,640), plus an amount
equal to Acquiror's actual and reasonably documented out-of-pocket fees and
expenses incurred by Acquiror, Parent or shareholders of Parent in connection
with this Agreement and the proposed


                                      A-34
<PAGE>


consummation of the transactions contemplated hereby, exclusive in all events of
any fee due to Parent or any of its stockholders or affiliates, which amounts
shall be payable in immediately available funds and within three business days
after such event has occurred (or in the case of fees and expenses, within three
business days after MedCath's receipt of reasonable documentation thereof).

     (b) (i) In the event that this Agreement is terminated by Acquiror or
MedCath pursuant to Section 8.1(b)(i) or 8.1(c)(i) the breaching party shall pay
the non-breaching party, in immediately available funds within three business
days after the breaching party's receipt of reasonable documentation thereof, an
amount equal to the actual and documented fees and expenses incurred by such
non-breaching party in connection with this Agreement and the proposed
consummation of the transactions contemplated hereby (exclusive of any fees due
to the Parent or any of its stockholders or affiliates in the event Acquiror is
the non-breaching party).

     (ii) In the event that any approval of the shareholders of MedCath
necessary to consummate the Merger and the transactions contemplated thereby
shall not have been obtained, MedCath shall pay Acquiror in immediately
available funds an amount equal to the actual and documented fees and expenses
incurred by Acquiror, Parent and shareholders of Parent in connection with this
Agreement and the proposed consummation of the transactions contemplated hereby
(exclusive of any fees due to the Parent or any of its stockholders or
affiliates).

     (c) The payments made by Acquiror to MedCath, or by MedCath to Acquiror, as
set forth above shall represent the sole and exclusive remedy at law or in
equity to which either party and its officers, directors, representatives and
affiliates shall be entitled in the event this Agreement shall be terminated in
the circumstances contemplated by subsection (a) or (b) above. Such payments
shall be made without duplication. Accordingly, Acquiror shall not be entitled
to payments under Section 8.6(a) in more than one instance, and if Acquiror is
entitled to payments under Section 8.6(a) it shall not be entitled to payments
under Section 8.6(b); provided, however, that if Acquiror is entitled to
payments under Section 8.6(b) it shall be entitled to payments under Section
8.6(a) to the extent applicable and not duplicative.


                                    ARTICLE 9

                               General Agreements

     Section 9.1 Notice.

     All notices, requests and other communications to any party shall be in
writing (including telecopy or similar writing) and shall be given,


                                      A-35
<PAGE>


     (a) If to Acquiror:

                                    c/o Kohlberg Kravis Roberts & Co.
                                    2800 Sand Hill Road, Suite 200
                                    Menlo Park, California 94025
                                    Attention:  Edward A. Gilhuly
                                    Facsimile No.:  (415) 233-6561

                                    and

                                    c/o Welsh, Carson, Anderson & Stowe VII,L.P.
                                    320 Park Avenue
                                    Suite 2500
                                    New York, New York 10022-6815
                                    Attention:  Paul B. Queally
                                    Facsimile No.:   (212) 893-9575

                                    with copies to:

                                    Simpson Thacher & Bartlett
                                    425 Lexington Avenue
                                    New York, New York 10017
                                    Attention:  Gary I. Horowitz
                                    Facsimile No.:  (212) 455-2502

                                    and

                                    Reboul, MacMurray, Hewitt, Maynard & Kristol
                                    45 Rockefeller Plaza
                                    New York, N.Y. 10111
                                    Attention:  Karen C. Wiedemann
                                    Facsimile No.:  (212) 841-5725

     (b)  If to MedCath, to:

                                    MedCath Incorporated
                                    7621 Little Avenue, Suite 106
                                    Charlotte, North Carolina 28226
                                    Attention: Stephen R. Puckett
                                    Facsimile No.: (704) 541-2615


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<PAGE>


                 with copies to:

                                    Moore & Van Allen, PLLC
                                    100 N. Tryon Street, Floor 47
                                    Charlotte, North Carolina 28202
                                    Attention: Hal A. Levinson
                                    Facsimile No. (704) 331-1159

                                    and to:

                                    Strategic Options Committee
                                    c/o John B. McKinnon
                                    2020 Virginia Road
                                    Winston-Salem, North Carolina 27104
                                    Facsimile No.: (910) 777-8510

                                    and to:

                                    Womble Carlyle Sandridge & Rice, PLLC
                                    3300 One First Union Center
                                    Charlotte, North Carolina 28202
                                    Attention:  Garza Baldwin, III
                                    Facsimile No.:  (704) 338-7816

or to such other address or telecopier number as such party may hereafter
specify for the purpose of notice to the other parties. Any such notice, request
or other communication shall be deemed to have been given and received on the
day on which it is delivered or telecopied (or, if such day is not a business
day in North Carolina or if the notice or other communication is not telecopied
during business hours, at the place of receipt, on the next following business
day); provided that if notice or other communication is given by telecopy, such
notice or communication shall also be given by certified mail or by overnight
courier.

     Section 9.2 Entire Agreement.

     This Agreement (including the documents and instruments referred to herein)
and the Confidentiality Agreement constitute the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.

     Section 9.3 Parties in Interest.

     This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and, except as provided in Section 3.10 with respect to the
obligations of Parent thereunder, nothing in this Agreement, express or implied,
is intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.


                                      A-37
<PAGE>


     Section 9.4 Publicity.

     The written release to the public by any party of any information relating
to the Merger shall be approved in advance by the other parties, which approval
shall not be unreasonably withheld or delayed.

     Section 9.5 Headings.

     The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.

     Section 9.6 Interpretation.

     As used herein, "knowledge" (or words to such effect) of MedCath shall mean
actual knowledge of the officers of MedCath, as the case may be, and "knowledge"
(or words to such effect) of Acquiror shall mean the actual knowledge of its
officers or actual knowledge of any partner, managing director or employee of
Acquiror.

     Section 9.7 Subsidiaries.

     When a reference is made in this Agreement to subsidiaries of MedCath, the
word "subsidiaries", means any corporation all of whose outstanding voting
securities are directly or indirectly owned by MedCath.

     Section 9.8 Successors and Assigns.

     This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto.

     Section 9.9 Governing Law.

     This Agreement shall be governed in all respects, including validity,
interpretation and effect, by the internal laws of the State of North Carolina,
without giving effect to the principles of conflict of laws thereof, except the
laws of the state of incorporation of a party shall govern its internal
corporate affairs.

     Section 9.10 Costs and Expenses.

     Except as provided in Section 8.6, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such expenses.

     Section 9.11 Counterparts.

     This Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall constitute one and the
same agreement.


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<PAGE>


     Section 9.12 Specific Performance.

     The parties hereto agree that irreparable damage would occur in the event
any provision of this Agreement was not performed in accordance with the terms
hereof and that the parties shall be entitled to the remedy of specific
performance of the terms hereof, in addition to any other remedy at law or
equity.

     Section 9.13 Conciliation and Arbitration. (a) If any dispute, claim or
difference arises out of or relates to this Agreement (a "Dispute"), such
Dispute shall be finally settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association ("AAA")
effective as of the commencement of the arbitration (the "Rules"), except as
such Rules may be modified as provided herein. The arbitration shall be held in
Charlotte, North Carolina, unless the parties mutually agree to have the
arbitration held elsewhere, and judgment upon the award made therein may be
entered by any court having jurisdiction thereof. The arbitral tribunal shall be
composed of three arbitrators, who shall be experienced commercial litigators
admitted to practice law in the State of New York or the State of North
Carolina. Parent and the Company shall each appoint one arbitrator. If such
parties fail to nominate an arbitrator in accordance with the preceding sentence
within thirty days from the date when the notice of intention to arbitrate
referred to in Rule 6 of the Rules (the "Commencement Notice") has been received
by the Respondent (as defined in the Rules) such appointment shall, upon written
request by either party to the AAA, be made in accordance with Rule 14 of the
Rules. The two arbitrators thus appointed shall attempt to agree upon the third
arbitrator to act as chairperson of the arbitration tribunal. If said two
arbitrators fail to appoint the chairperson within thirty days from the date of
appointment of the second arbitrator, upon written request of either party to
the AAA, such appointment shall be made in accordance with Rule 15 of the Rules.
The arbitrators shall have no power to waive, alter, amend, revoke or suspend
any of the provisions of this Agreement, provided, however, that the arbitrators
shall have the power to decide all questions with respect to the interpretation
and validity of this Section 9.13. The arbitration shall be conducted, and the
award shall be rendered, in the English language. An arbitrator may not act as
an advocate for the party nominating him, and all three arbitrators shall be
impartial and unbiased. A majority vote by the three arbitrators shall be
required on any decision made by them. The arbitrators shall permit such
discovery as they shall determine is appropriate in the circumstances, taking
into account the needs of the parties and the desirability of making discovery
expeditious and cost-effective. Any such discovery shall be limited to
information directly relevant to the controversy or claim in arbitration and
shall be concluded within thirty days after the appointment of the arbitration
panel. This agreement to arbitrate shall be binding upon the heirs, successors
and assigns and any trustee, receiver or executor of any party hereto. Except to
the extent required by law or court or administrative order, no party,
arbitrator, representative, counsel or witness shall disclose or confirm to any
person not present at the arbitration hearings any information about the
arbitration proceeding or hearings, including the names of the parties and
arbitrators, the nature and amount of the claims, the financial condition of any
party, the expected date of hearing or the award made.

                                      A-39
<PAGE>


     (b) Subject to and not in any way limiting the preceding Section 9.13(a),
each of the parties hereto irrevocably consents and submits to the jurisdiction
in any action brought in connection with this Agreement in the United States
District Court for the Southern District of New York or for the District of
North Carolina, including, but not limited to, any action to enforce an award
rendered pursuant to the preceding Section 9.13(a). Parent hereby appoints CT
Corporation System as their agent for service of process in New York.

                             SIGNATURE PAGE FOLLOWS


                                      A-40
<PAGE>


     IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized officers as of the date first above written.


                                    MEDCATH INCORPORATED,
                                    a North Carolina corporation


                                    By:
                                    Name:
                                    Title:



                                    MCTH ACQUISITION INC.,
                                    a North Carolina corporation


                                    By:
                                    Name:
                                    Title:


                                    MEDCATH HOLDINGS, INC.
                                    a Delaware corporation

                                    By:
                                    Name:
                                    Date:





                                      A-41