Document:

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                                                                   EXHIBIT 10.46

                             1998 STOCK OPTION PLAN

                              FOR KEY EMPLOYEES OF

                     MEDCATH HOLDINGS, INC. AND SUBSIDIARIES

1.       Purpose of Plan

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

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

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

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

2.       Definitions

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

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

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

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

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

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

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

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

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

                  Amount A is the amount determined by the following formula:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3.       Administration of Plan

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

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

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

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

4.       Eligibility

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

5.       Grants

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

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

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

6.       Limitations and Conditions

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

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

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

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

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

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

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

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

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

7.       Transfers and Leaves of Absence

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

8.       Adjustments

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

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

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

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

10.      Amendment and Termination

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

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

11.      Foreign Options and Rights

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

12.      Withholding Taxes

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

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13.      Effective Date and Termination Dates

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

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                                                                   EXHIBIT 10.47

                             MEDCATH HOLDINGS, INC.

                               OUTSIDE DIRECTORS'

                                STOCK OPTION PLAN

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                             MEDCATH HOLDINGS, INC.
                               OUTSIDE DIRECTORS'
                               STOCK OPTION PLAN

         MedCath Holdings, Inc. does hereby establish the MedCath Holdings, Inc.
Outside Directors' Stock Option Plan for the benefit of certain members of the
Board of the Company subject to the following provisions:

         SECTION 1.        PURPOSE.  The purpose of the Plan is to secure for
the Company and its shareholders the benefits of the incentive inherent in
increased common stock ownership by the outside members of the Board who are not
officers or employees of the Company or any of its Subsidiaries.

         SECTION 2.         DEFINITIONS.  For the purpose of this Plan as well
as for any Option Agreement, unless the context clearly requires otherwise, the
following words shall have the meanings indicated:

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

                  (b)      "CODE" means the Internal Revenue Code of 1986, as
         amended from time to time, or any successor statute, and applicable
         regulations.

                  (c)      "COMMENCEMENT DATE" means the date, on or after the
         Effective Date, on which a resolution of the Board to authorize the
         commencement of the operation of the Plan becomes effective.

                  (d)      "COMMITTEE" means the Compensation Committee of the
         Board.

                  (e)      "COMMON STOCK" or "SHARE" means the common stock of
         the Company which may be authorized but unissued, or issued and
         reacquired.

                  (f)      "COMPANY" means MedCath Holdings, Inc., a Delaware
         corporation.

                  (g)       "DIRECTOR" means a member of the Board.

                  (h)      "DIRECTOR STOCKHOLDER'S AGREEMENT" means an agreement
         between the Company and an Optionee that sets forth the terms and
         conditions and limitations applicable to any Shares purchased pursuant
         to Options granted under this Plan.

                  (i)      "EFFECTIVE DATE" means the date, following adoption
         of the Plan by the Company, on which the shareholders of the Company
         approve and ratify the Plan pursuant to Section 12 hereunder.

                  (j)      "EXCHANGE ACT" means the Securities Exchange Act of
         1934, as amended.

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                  (k)      "FAIR MARKET VALUE" of a Share means:

                           (i)      As of any date the Shares are not listed on
                  a national securities exchange or traded on the Nasdaq
                  National Market, such value of a Share as determined at the
                  relevant time in good faith by the Board on the basis of the
                  value of the Company as a whole divided by the fully diluted
                  equity of the Company; or

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

                  (l)      "OPTION" means a non-qualified stock option described
         in Treasury Regulation section 1.83-7 to which section 422 of the Code
         does not apply, which shall be granted by the Company to Optionees
         pursuant to the terms of this Plan.

                  (m)      "OPTION AGREEMENT" means the written instrument
         executed by the Company and the Optionee that sets forth the terms,
         conditions and limitations applicable to a grant of Options pursuant to
         the Plan.

                  (n)      "OPTIONEE" means an Outside Director of the Company
         who has been granted an option pursuant to the terms of this Plan.

                  (o)      "OPTION STOCK" means shares of Common Stock issued to
         an Optionee upon the exercise of an Option granted under the Plan.

                  (p)      "OUTSIDE DIRECTOR" means any Director who is not an
         employee of the Company or any corporation which is a Subsidiary.

                  (q)      "PLAN" means the MedCath Holdings, Inc. Outside
         Directors' Stock Option Plan, as amended from time to time in
         accordance herewith.

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

         SECTION 3.         ADMINISTRATION OF PLAN.

                  (a)      The Plan shall be administered by the Committee;
         provided, however, that the members of the Committee shall qualify to
         administer the Plan for purposes of Rule 16b-3 (and any other
         applicable rule) promulgated under Section 16(b) of the Exchange Act to
         the extent that the Company is subject to such rule. The Committee may
         adopt its own rules of procedure, and action of a majority of the
         members of the Committee taken at a meeting, or action taken without a
         meeting by unanimous written consent, shall constitute action by the
         Committee. The Committee shall have the power and authority to
         administer, construe and interpret the Plan, to make rules for carrying
         it

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         out and to make changes in such rules. Any such interpretations, rules
         and administration shall be consistent with the basic purposes of the
         Plan.

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

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

         SECTION 4.        AMOUNT OF STOCK. The stock which may be issued and
sold under the Plan will be the Common Stock of the Company, of a total number
not exceeding one hundred thousand (100,000) shares, subject to adjustment as
provided in Section 7. The stock to be issued may be either authorized and
unissued shares or issued shares acquired by the Company or its subsidiaries. In
the event that Options granted under the Plan shall terminate or expire without
being exercised in whole or in part, new Options may be granted covering the
shares not purchased under such lapsed Options.

         SECTION 5.        ELIGIBILITY.  Each Outside Director shall receive an
Option or Options in accordance with Section 6.

         SECTION 6.        TERMS AND CONDITIONS OF OPTIONS. On or after the
Commencement Date of the Plan, the Committee shall commence to grant Options
hereunder. Each Option granted under the Plan shall be evidenced by an Option
Agreement in such form as the Committee shall prescribe from time to time in
accordance with the Plan and shall comply with and be subject to the following
terms and conditions:

                  (a)      Each Outside Director who is a Director on the
         Commencement Date shall, as of the Commencement Date of the Plan,
         automatically receive an initial Option for two thousand (2,000) shares
         of Common Stock. Each Outside Director who is first elected or
         appointed a Director after the Commencement Date shall, as of the date
         of his first election or appointment as a Director after the
         Commencement Date, automatically receive an initial Option for three
         thousand five hundred (3,500) shares of Common Stock.

                  (b)      Each year, as of the last day of the fiscal year of
         the Company, each Outside Director described in (a) who has been
         re-elected as a Director or who is continuing as a Director as of the
         adjournment of the immediately preceding Annual Meeting of shareholders
         of the Company (other than an Annual Meeting at which the

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         Director is first elected or appointed as a Director), shall
         automatically receive an additional Option for three thousand five
         hundred (3,500) shares of Common Stock.

                  (c)      The Option exercise price shall be the Fair Market
         Value of the Common Stock shares subject to such Option on the date the
         Option is granted.

                  (d)      Each Option shall not be transferable by the Optionee
         otherwise than by will or the laws of descent and distribution, and
         shall be exercisable during his lifetime only by him.

                  (e)      Each Option shall expire ten years from the date of
         the grant of the Option.

                  (f)      To exercise an Option the Optionee must deliver
         written notice of the exercise to the Company specifying the number of
         whole Shares to be purchased accompanied by payment in full for the
         Shares being acquired thereunder. Such payment shall be made

                           (i)      in United States dollars by registered check
                  or bank draft, or

                           (ii)     by tendering to the Company Common Stock
                  shares owned for at least six months by the person exercising
                  the Option and having a Fair Market Value as of the date of
                  exercise equal to the cash exercise price applicable to such
                  Option, or

                           (iii)    by a combination of United States dollars
                  and Common Stock shares as aforesaid.

                  (g)      Except as provided in the Director Stockholder's
         Agreement, during the Optionee's lifetime, only the Optionee may
         exercise an Option or any portion thereof. After the death of the
         Optionee, any exercisable portion of an Option may, prior to the time
         when an Option becomes unexercisable pursuant to the terms of the
         Option Agreement, be exercised by the Optionee's executors,
         administrators, heirs, or distributees, as the case may be.

                  (h)      If any Option is exercised by the executor,
         administrator, heirs, or distributees of the estate of a deceased
         Optionee, the Company shall be under no obligation to issue stock
         thereunder unless and until the Company is satisfied that the person or
         persons exercising the Option are the duly appointed legal
         representatives of the deceased Optionee's estate or the proper heirs
         or distributees thereof.

         SECTION 7.        EFFECT OF CERTAIN TRANSACTIONS. The number of Shares
reserved for the Plan, the maximum number of Shares an Optionee may purchase
pursuant to an outstanding Option, and the determination of the exercise price
of an outstanding Option shall be appropriately adjusted by the Committee, whose
determination shall be conclusive, to reflect any increase or decrease in the
number of issued Shares resulting from a stock split, a consolidation of Shares,
the payment of a stock dividend, or any other capital adjustment affecting the
number of issued Shares. In the event that the outstanding Shares shall be
changed into or exchanged for

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a different number or kind of shares of stock or other securities of the Company
or another corporation, whether through reorganization, recapitalization,
merger, consolidation, or otherwise, there shall be substituted for each share
of Common Stock reserved for issuance under the Plan, but not yet purchased by
Optionees, the number and kind of shares of stock or other securities into which
each outstanding Share shall be so changed or for which each such share shall be
exchanged.

         SECTION 8.        MERGER, CONSOLIDATION, EXCHANGE, ACQUISITION,
LIQUIDATION OR DISSOLUTION. In its absolute discretion, and on such terms and
conditions as it deems appropriate, coincident with or after the grant of any
Option, the Committee may provide that such Option cannot be exercised after (i)
the merger or consolidation of either the Company, MedCath Intermediate
Holdings, Inc., or MedCath Incorporated into another corporation, (ii) the
exchange of all or substantially all of the assets of either the Company,
MedCath Intermediate Holdings, Inc., or MedCath Incorporated for the securities
of another corporation, (iii) the acquisition by another corporation of 80% or
more of the Company's, MedCath Intermediate Holdings, Inc.'s, or MedCath
Incorporated's then outstanding shares of voting stock, or (iv) the
recapitalization, reclassification, liquidation or dissolution of the Company,
MedCath Intermediate Holdings, Inc., or MedCath Incorporated, (a "Transaction"),
and if the Committee so provides that such Option cannot be exercised, it shall,
on such terms and conditions as it deems appropriate, also provide, either by
the terms of such Option or by a resolution adopted prior to the occurrence of
such Transaction, that, for some reasonable period of time prior to such
Transaction, such Option shall be exercisable as to all shares subject thereto,
notwithstanding anything to the contrary herein (but subject to the provisions
of Paragraph 6(e)) and that, upon the occurrence of such Transaction, such
Option shall terminate and be of no further force or effect; provided, however,
in lieu of so providing that an Option cannot be exercised after a Transaction,
the Committee may provide, in its absolute discretion, that the Option shall
remain exercisable after a Transaction in accordance with its original terms,
except upon exercise of such Option, the holder thereof shall receive the kind
and amount of securities and/or other property, or the cash equivalent thereof,
receivable as a result of such Transaction by the holder of a number of shares
of stock for which such Option could have been exercised immediately prior to
such Transaction.

         SECTION 9.        AMENDMENT OR DISCONTINUANCE. The Plan may be amended
at any time and from time to time by the Board as the Board shall deem advisable
including, but not limited to, amendments necessary to qualify for any exemption
or to comply with applicable law or regulations; provided, however, that except
as provided in Section 7, the Board may not, without further approval by the
shareholders of the Company, increase the maximum number of Shares as to which
Options may be granted under the Plan, increase the number of Shares subject to
an Option, reduce the Option exercise price described in Section 6(c), extend
the period during which Options may be granted or exercised under the Plan, or
change the class of persons eligible to receive Options under the Plan. No
amendment of the Plan shall materially and adversely affect any right of any
Optionee with respect to any Option theretofore granted without such Optionee's
written consent. Any such action to amend or discontinue the Plan shall be
adopted by formal action of the Board and executed by an officer or person
authorized to act on behalf of the Company.

         SECTION 10.       TERMINATION. Unless otherwise terminated by the Board
in accordance with Section 9, this Plan shall terminate upon the tenth
anniversary of the date the Plan is initially approved and adopted by the Board
of the Company.

                                       5
<PAGE>   7

         SECTION 11.        MISCELLANEOUS PROVISIONS.

                  (a)      Except as expressly provided for in the Plan, no
         Outside Director or other person shall have any claim or right to be
         granted an Option under the Plan. Neither the Plan nor any action taken
         hereunder shall be construed as giving any Outside Director any right
         to be retained in the service of the Company.

                  (b)      Except as otherwise permitted under the Director
         Stockholder's Agreement, an Optionee's right and interest under the
         Plan may not be assigned or transferred in whole or in part either
         directly or by operation of law or otherwise (except in the event of an
         Optionee's death, by will or the laws of descent and distribution),
         including, but not by way of limitation, execution, levy, garnishment,
         attachment, pledge, bankruptcy, or in any other manner, and no such
         right or interest of any participant in the Plan shall be subject to
         any obligation or liability of such participant.

                  (c)      No Common Stock shares shall be issued hereunder
         unless counsel for the Company shall be satisfied that such issuance
         will be in compliance with applicable federal, state, and other
         securities laws and regulations.

                  (d)      The expenses of the Plan shall be borne by the
         Company.

                  (e)      By accepting any Option or other benefit under the
         Plan, each Optionee and each person claiming under or through such
         person shall be conclusively deemed to have indicated his acceptance
         and ratification of, and consent to, any action taken under the Plan by
         the Company or the Board.

                  (f)      All section references herein refer to sections of
         this Plan unless specifically noted otherwise.

                  (g)      Any notice or other communication provided for herein
         shall be given in writing by registered or certified mail, return
         receipt requested, or by facsimile, telecopy, or other means of
         electronic communication, reasonably calculated in any instance to be
         received by the receiving party or his or its authorized agent at the
         receiving party's last-known address. The notice or communication shall
         be deemed as delivered when it arrives at such address.

         SECTION 12.        APPROVAL OF PLAN. The  effectiveness of this Plan
is subject to its approval and ratification by the shareholders of the Company
within one year from the date of adoption hereof by the Board.

                                       6

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