Document:

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                                                                    EXHIBIT 10.7

                               GUARANTY AGREEMENT

         THIS GUARANTY AGREEMENT (this "Guaranty") made as of the 18th day of
July, 1996, by MEDCATH, INCORPORATED, a North Carolina corporation (the
"Guarantor") in favor of CAPSTONE CAPITAL CORPORATION, a Maryland corporation
(the "Lender").

                                R E C I T A L S:

         Pursuant to that certain Loan Agreement of even date herewith (as the
same may hereafter be amended, the "Loan Agreement;" defined terms used herein
without definition shall have the meanings ascribed to them in the Loan
Agreement) between the Lender and MedCath of Tucson, L.L.C., a North Carolina
limited liability company (the "Borrower"), Lender has agreed to make a
construction/mini-perm loan to the Borrower in the principal mount of up to
Seventeen Million Eight Hundred Thousand and No/100 Dollars ($17,800,000) (the
"Loan"). The Loan will be used to finance the construction of the Tucson Heart
Hospital, a 60-bed acute care hospital specializing in cardiology services and
cardiovascular surgery (the "Improvements") in accordance with the Plans and
Specifications therefor prepared by Henningson, Durham & Richardson, dated March
18, 1996, as approved by the Lender (the "Plans and Specifications"). As a
condition to making the Loan, the Lender has required that the Guarantor
guarantee repayment of a portion of the Loan and further that the Guarantor
guarantee in full the performance obligations of the Borrower hereinafter set
forth.

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the foregoing Recitals, and in
order to induce the Lender to make the Loan, and as security for all agreements
and covenants of the Borrower to Lender pursuant to the Loan Documents,
including, but not limited to the payment of the principal, interest and other
charges pursuant to the Note, and the performance of all covenants, agreements
and other obligations from time to time owing to, or for the benefit of, Lender
pursuant to the Loan Documents (collectively, the "Loan Obligations"), the
Guarantor agrees and covenants with Lender and represents and warrants to Lender
as follows:

         1.       GUARANTEE OF LOAN OBLIGATIONS. The Guarantor hereby
unconditionally guarantees to the Lender the following (collectively, the
"Guaranteed Obligations"):

         (a)      The full and prompt payment of the Loan, together with all
accrued and unpaid interest owed on the Loan; plus

         (b)      The full, prompt, and timely performance of all of the
Borrower's obligations under the Loan Agreement to complete construction of the
Improvements to the reasonable satisfaction of the Lender and the Lender's
Inspecting Consultant on or before the Scheduled Completion Date of November 1,
1997, which such performance

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obligations shall include, without limitation, (i) equipping and fixturing of
the Improvements so as to enable the Improvements to be fully utilized for their
intended purposes as an acute care hospital specializing in cardiology services
and cardiovascular surgery, and (ii) obtaining all necessary licenses,
certifications, accreditations, or other required permits in order to operate
the Improvements as aforesaid as a licensed bed capacity of not less than
66-beds in accordance with applicable state and federal licensure,
certification, and accreditation laws, rules, and regulations, including,
without limitation, accreditation by the Joint Commission on Accreditation of
Hospital Organizations (the "Performance Obligations"). Furthermore, the
Guarantor covenants and agrees with Lender that it will cause the Improvements
to be kept free from all liens and encumbrances in favor of any persons or
entities supplying work or materials for the construction of the Improvements by
(i) paying promptly (or causing Borrower to pay promptly) all such persons or
entities, or (ii) within thirty (30) days of the filing of any such lien
(irrespective of any dispute which the Borrower or the General Contractor may
have with any such entity), discharging or making other arrangements acceptable
to Lender, or causing Borrower to discharge or make other arrangements
acceptable to Lender, with respect to such mechanics' or materialmens' liens
filed against the Improvements. Guarantor hereby further agrees that, in the
event it falls to comply with its Performance Obligations under this subsection
(d), Lender may, at its option (but Lender shall have no obligation to do so),
cause such Performance Obligations to be performed on behalf of the Borrower or
Guarantor and may use, without limitation, such portions of the Loan proceeds
which are budgeted for such uses in payment of such Performance Obligations.
Guarantor hereby ratifies and affirms such use of the Loan proceeds in the
circumstances set forth in this subsection (d) and Guarantor agrees immediately
to reimburse Lender, upon Lender's demand therefore, for all costs and expenses
incurred by the Lender in performing such Performance Obligations, together with
all losses or damages that the Lender may suffer as a result of the Borrower's
or Guarantor's failure to perform its Performance Obligations, even if such
costs, expenses, losses, and damages are in excess of the Loan proceeds budgeted
for such uses; plus

         (c)      the payment of all costs, reasonable attorneys' fees, and
expenses that may be incurred by the Lender as set forth in Section 12 hereof.

         Lender agrees that if Guarantor performs the Performance Obligations
with respect to the construction of the Improvements, provided that there remain
any undisbursed Loan funds, Lender will make Advances (as defined in the Loan
Agreement) to the Guarantor in order to reimburse Guarantor for its costs of
performance, however such Advances will only be made in strict accordance with
the terms governing Advances as set forth in the Loan Agreement (taking into
account, however, any extensions of deadlines as may be necessitated in order
for the Guarantor to complete such construction).

         This Guaranty is an unconditional guaranty, and the Guarantor agrees
that the Lender, upon the occurrence of any Event of Default pursuant to any of
the Loan Documents, shall not be required to assert any claim or cause of action
against the Borrower or other guarantors before asserting any claim or cause of
action against the

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Guarantor under this Guaranty. The Guarantor further agrees that the Lender
shall not be required to pursue or foreclose on any Collateral that it may
receive from the Borrower, the Guarantor, or others as security for any of the
Loan Obligations before making a claim or asserting a cause of action against
the Guarantor under this Guaranty.

         Notice of acceptance of this Guaranty and of any Default or Event of
Default is hereby waived by the Guarantor. Presentment, protest, demand, and
notice of protest and demand, and notice of receipt of any and all Collateral,
and of the exercise of possessory remedies or foreclosure on any and all
Collateral received by the Lender from the Borrower, the Guarantor, or others
are hereby waived. All settlements, compromises, compositions, accounts stated,
and agreed balances in good faith between any primary or secondary obligors on
any accounts received as Collateral shall be binding upon the Guarantor.

         This Guaranty shall not be affected, modified, or impaired by the
voluntary or involuntary liquidation, dissolution, or sale or other disposition
of all or substantially all of the assets, marshalling of assets and
liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization, arrangements, composition with creditors or
readjustment of, or other similar proceedings affecting the Borrower or the
Guarantor, or any of the assets belonging to either of them, nor shall this
Guaranty be affected, modified or impaired by the invalidity of any of the Loan
Documents executed by the Borrower, the Guarantor, or others in connection with
the Loan.

         The failure of the Lender to perfect its security interest in any of
the Collateral as set forth in any of the Loan Documents or any other collateral
now or hereafter securing all or any part of the Loan Obligations shall not
release the Guarantor from its liabilities and obligations hereunder.

         Without notice to the Guarantor, without the consent of the Guarantor,
and without affecting or limiting the Guarantor's liability hereunder, the
Lender may:

         (a)      grant the Borrower extensions of time for payment of the Loan
Obligations or any part hereof;

         (b)      renew any of the Loan Obligations;

         (c)      grant the Borrower extensions of time for performance of
agreements or other indulgences;

         (d)      at any time release any or all of the Collateral, or any
mortgage, deed of trust or security interest in any Collateral, that now or
hereafter secures any of the Loan Obligations;

         (e)      compromise, settle, release, or terminate any or all of the
obligations, covenants, or agreements of the Borrower under the Note or other
Loan Documents;

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         (f)      at any time release any other guarantor from its guaranty of
any of the Loan Obligations; and

         (g)      with the Borrower's written consent, modify or amend any
obligation, covenant, or agreement of Borrower as set forth in the Note or any
of the other Loan Documents (and such amendments shall nevertheless be binding
upon Guarantor).

         2.       REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR. To induce the
Lender to make the Loan to Borrower, the Guarantor represents and warrants to
the Lender as follows:

                  (a)      EXISTENCE, POWER AND QUALIFICATION. Guarantor is a
         corporation duly organized, validly existing and in good standing under
         the laws of the state of its formation as set forth in the heading of
         this Guaranty, has the power to own its properties and to carry on its
         business as is now being conducted, and is duly qualified to do
         business and is in good standing in every jurisdiction in which the
         character of the properties owned by it or in which the transaction of
         its business makes its qualification necessary.

                  (b)      POWER TO INCUR OBLIGATIONS. The Guarantor has full
         power and unrestricted right to enter into this Guaranty and to incur
         the obligations provided for herein, all of which have been authorized
         by all requisite corporate action of Guarantor.

                  (c)      CONFLICTS. This Guaranty does not violate, conflict
         with, or constitute any default under any decree, judgment, or any
         other agreement or instrument binding upon the Guarantor and does not
         violate or conflict with the articles of incorporation or by-laws of
         Guarantor.

                  (d)      PENDING MATTERS. Except as otherwise set forth on
         Schedule I attached hereto, no action or investigation is pending or,
         to the best of Guarantor's knowledge, threatened before or by any state
         or federal court or administrative agency which might result in any
         material adverse change in the financial condition, operations or
         prospects of the Guarantor. The Guarantor is not in violation of any
         agreement, the violation of which might reasonably be expected to have
         a materially adverse effect on its business or assets, and the
         Guarantor is not in violation of any order, judgment, or decree of any
         state or federal court.

                  (e)      FINANCIAL STATEMENTS ACCURATE. All financial
         statements heretofore or hereafter provided by the Guarantor are and
         will be true and complete in all material respects as of their
         respective dates and fairly present the financial condition of the
         Guarantor, and there are no material liabilities, direct or indirect,
         fixed or contingent, as of the respective dates of such statements
         which are not reflected therein or in the notes thereto or in a written
         certificate delivered with such statements. The financial statements of
         the Guarantor hereafter will be prepared in accordance with GAAP. There
         has been no material adverse change

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         in the financial condition, operations, or prospects of the Guarantor
         since the dates of such statements except as fully disclosed in writing
         with the delivery of such statements.

                  (f)      NO DEFAULTS OR RESTRICTIONS. There is no declared
         default under any agreement or instrument that causes or would cause a
         material adverse effect on the business, properties, or financial
         operations or condition of the Guarantor.

                  (g)      PAYMENT OF TAXES. Guarantor has filed all federal,
         state, and local tax returns which are required to be filed and has
         paid, or made adequate provision for the payment of, all taxes which
         have or may become due pursuant to said returns or to assessments
         received by the Guarantor.

                  (h)      DISCLOSURE. Neither this Guaranty nor any other
         document, financial statement, credit information, certificate or
         statement required herein to be furnished to Lender by Guarantor in
         connection with this Guaranty contains any untrue, incorrect or
         misleading statement of material fact. All representations and
         warranties made herein or in any certificate or other document
         delivered to Lender by or on behalf of Guarantor pursuant to or in
         connection with this Guaranty shall be deemed to have been relied upon
         by Lender notwithstanding any investigation heretofore or hereafter
         made by Lender or on its behalf, and shall survive the making of the
         Loan.

                  (i)      ERISA. Guarantor is compliance with all applicable
         provisions of the Employee Retirement Income Security Act of 1974, as
         amended ("ERISA").

         3.       AFFIRMATIVE COVENANTS OF THE GUARANTOR. The Guarantor
covenants and agrees that so long as the Loan Obligations are outstanding, it
shall comply with each of the following affirmative covenants:

                  (a)      PAYMENT OF LOAN/PERFORMANCE OF LOAN OBLIGATIONS. Upon
         Lender's demand thereof, duly and punctually pay or cause to be paid
         the principal and interest then due pursuant to the Note and duly and
         punctually perform or cause to be performed all the Performance
         Obligations.

                  (b)      PAYMENT OF TAXES. Pay and discharge all taxes,
         assessments, and governmental charges or levies imposed upon it,
         including, without limitation, all current tax liabilities of all
         kinds, all required withholdings of income taxes of employees, and all
         required old age and unemployment contributions.

                  (c)      REPORTING REQUIREMENTS. Provide to Lender, within one
         hundred twenty (120) days after the end of each fiscal year, copies of
         the 10-K Report of the Guarantor filed with the United States
         Securities and Exchange Commission, and, within fifty (50) days of the
         end of each fiscal quarter, copies of the 10-Q Report of the Guarantor
         filed with the United States Securities and Exchange Commission.

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                  (d)      PAYMENT OF INDEBTEDNESS. Pay duly and punctually or
         cause to be paid, all principal and interest of any material
         indebtedness of Guarantor to its creditors in accordance with its
         terms, and comply with and perform all material conditions, terms and
         obligations of the notes or other instruments evidencing such
         indebtedness and any mortgages, deeds of trust, security agreements and
         other instruments evidencing security for such indebtedness.

                  (e)      NOTICE OF LOSS. Notify Lender of any event causing a
         loss which has a material adverse effect on Guarantors net worth (for
         purposes of this Agreement, a material adverse change in the
         Guarantor's net worth shall be deemed a decrease by twenty percent
         (20%) or more during any fiscal quarter).

                  (f)      MAINTENANCE OF EXISTENCE. Maintain its corporate
         existence, and, in each jurisdiction in which the character of the
         property owned by it or in which the transaction of its business makes
         qualification necessary, maintain qualification and good standing.

                  (g)      SHAREHOLDERS' EQUITY. Maintain at all times during
         the term of the Loan, a minimum shareholders' equity of not less than
         One Hundred Million Dollars ($100,000,000).

                  (h)      MEDCATH CREDIT FACILITY. At all times during the term
         of the Loan, maintain for the Borrower's benefit an unsecured line of
         credit in the amount of not less than $6,205,000 nor more than
         $10,000,000 (the "MedCath Credit Facility"), which may be used by the
         Borrower as needed to fund costs necessary to complete construction of
         the Improvements and following completion of construction to fund
         operating deficits of the Improvements, such line of credit being
         evidenced by that certain Promissory Note of even date herewith between
         Borrower and Guarantor and is secured by that certain Security
         Agreement of even date herewith Borrower and Guarantor. Borrower,
         Guarantor, and Lender have entered into a Subordination Agreement of
         even date herewith with respect to the MedCath Credit Facility, and
         Guarantor covenants and agreements to comply with the terms and
         conditions of such Subordination Agreement.

         4.       EVENTS OF DEFAULT. Guarantor's failure to properly and timely
perform or observe any covenant or condition set forth in this Guaranty which is
not cured within any applicable cure period as set forth herein or, if no cure
period is specified therefor, is not cured within thirty (30) days of Lender's
notice to Guarantor of such default, or the falsity of any representation or
warranty herein or in any financial statement, certificate or other information
heretofore or hereafter provided by Guarantor to Lender, shall constitute an
"Event of Default" hereunder and under each of the Loan Documents. The foregoing
provision or any other provision requiring or providing for notice or demand
from Lender is deemed eliminated if Lender is prevented from giving such notice
or demand by bankruptcy or other applicable law, and the Event of Default shall
occur on

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the occurrence of such event or condition if not cured within any applicable
period measured from the occurrence of such event or condition rather than from
notice or demand.

         5.       REDUCTION IN GUARANTEED OBLIGATIONS. Notwithstanding any
provision hereof to the contrary, provided that no Event of Default shall have
occurred at any time prior to any scheduled reduction hereunder, Lender agrees
that the principal amount guaranteed hereunder shall be reduced to the following
principal amounts at such time as the following conditions precedent have been
satisfied:

                  (a)      Once the Improvements have achieved and maintained
         the minimum Cash Flow Coverage requirement specified in the Loan
         Agreement for twenty-four (24) consecutive months as evidenced by the
         certificate hereinafter described, (provided, however, that for
         purposes of this Guaranty, such Cash Flow Coverage shall be tested
         based on the operation of the Improvements on a monthly basis
         commencing with the first month in which the required Cash Flow
         Coverage has been met), the principal amount guaranteed hereunder shall
         be reduced to Twelve Million Eight Hundred Thousand Dollars
         ($12,800,000); and

                  (b)      Thereafter, provided that the Improvements continue
         to achieve and maintain the minimum Cash Flow Coverage requirement, the
         principal amount guaranteed hereunder shall be reduced annually in
         increments of Five Million Dollars ($5,000,000) each, provided however,
         that in no event will the principal amount guaranteed hereunder ever be
         less than Four Million Five Hundred Thousand Dollars ($4,500,000) and
         provided further that if, at the time the amount guaranteed hereunder
         is reduced to $4,500,000 the Cash Flow Coverage is less than 2.0,
         Guarantor must post (or cause Borrower to post) with Lender an
         irrevocable letter of credit in form and content and from an issuer
         acceptable to Lender in the face amount of $1,000,000, which such
         letter of credit shall be held by Lender as additional collateral for
         the Loan Obligations until such time as the Improvements have achieved
         and maintained a Cash Flow Coverage of not less than 2.0 for two (2)
         consecutive fiscal years. Each reduction of the amount guaranteed
         hereunder shall be conditioned upon Lender's receipt of a compliance
         certificate from the chief financial officer of the Borrower or
         Guarantor confirming compliance with the required Cash Flow Coverage
         requirement. In the event the audited financial statements of the
         Borrower reveal that the Cash Flow Coverage was not met at the time of
         any guaranty reduction hereunder, such guaranty reduction shall be null
         and void; however, future reductions of the Guaranteed Obligations
         shall not be precluded if the requirements set forth herein are
         thereafter satisfied.

         6.       SUBORDINATION. Guarantor subordinates its right to payments of
any indebtedness owing from Borrower to Guarantor, whether now existing or
arising at any time in the future (including, but not limited to, rights to
payment arising by virtue of any subrogation or indemnification upon payment by
Guarantor of amounts due from Borrower to Lender), to the prior right of Lender
to receive or require payment in full of

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the Loan Obligations, until such time as the Loan Obligations are fully paid
(and including interest accruing on the Note after any petition under the
Bankruptcy Code, which post-petition interest Guarantor agrees shall remain a
claim that is prior and superior to any claim of Guarantor notwithstanding any
contrary practice, custom or ruling in proceedings under the Bankruptcy Code
generally) and such payments are final and not subject to refund or recision
under bankruptcy or other applicable law. Furthermore, upon the occurrence of an
Event of Default under the Loan Documents, Guarantor agrees not to accept any
payment or satisfaction of any kind of indebtedness of Borrower to the Guarantor
or any security for such indebtedness. If Guarantor should receive any such
payment, satisfaction or security for any indebtedness of Borrower to the
Guarantor, the Guarantor agrees to deliver the same promptly to Lender in the
form received, endorsed, or assigned as may be appropriate for application on
account of, or as security for, the Loan Obligations and until so delivered,
agrees to hold the same in trust for Lender. Notwithstanding the foregoing,
Lender agrees that Borrower will be permitted to pay, and Guarantor will be
permitted to receive, payments of interest pursuant to the MedCath Credit
Facility described in Subsection 3(h) as long as there is no outstanding Default
or Event of Default pursuant to the Loan Agreement, but payments of principal
under the MedCath Credit Facility are further restricted as set forth in the
above-described Subordination Agreement.

         7.       TERMINATION. This Guaranty shall continue to be effective, or
be reinstated, as the case may be, if at any time any whole or partial payment
or performance of any Loan Obligations is or is sought to be rescinded or must
otherwise be restored or returned by the Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower or the Guarantor upon
or as a result of the appointment of a receiver, intervenor, or conservator of,
or trustee or similar officer for, the Borrower or such guarantor of or for any
substantial part of its property, or otherwise, all as though such payments and
performance had not been made. This Guaranty shall not be affected in any way by
the transfer or other disposition of any of the Collateral described in and
granted to Lender pursuant to the Loan Documents, whether by deed, operation of
law, or otherwise.

         8.       SUCCESSOR AND ASSIGNS. This Guaranty shall be binding upon,
and inure to the benefit of, the parties hereto and their respective successors
and assigns.

         9.       SEVERABILITY. In the event that any provision hereof is deemed
to be invalid by reason of the operation of any law or by reason of the
interpretation placed thereon by any court, this Guaranty shall be construed as
not containing such provisions, and the invalidity of such provisions shall not
affect other provisions hereof which are otherwise lawful and valid and shall
remain in full force and effect.

         10.      NOTICES. Any notice or other communication required or
permitted to be given pursuant to this Guaranty or by applicable law shall be in
writing and shall be deemed received (a) on the date delivered, if delivered in
person to the person or department specified below, (b) three (3) business days
after depositing the same in the U.S. Mail, certified or registered, with return
receipt requested, or (c) one (1) day

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following the date deposited with Federal Express or other national overnight
carrier, and in each case addressed as follows:

         If to Guarantor to:

         MedCath, Incorporated
         7621 Little Avenue
         Suite 106
         Charlotte, North Carolina 28226
         Attn: Steve Puckett

         with a copy to:

         Hal Levinson, Esq.
         Moore & Van Allen, PLLC
         100 North Tryon Street
         47th Floor
         Charlotte, North Carolina 28202-4003

         If to the Lender to:

         Capstone Capital Corporation
         1000 Urban Center Parkway
         Suite 630
         Birmingham, AL 35243
         Attention: William C. Harlan

Failure to provide courtesy copies shall not render invalid any notice otherwise
properly given. Any party may change its address to another single address by
notice given as herein provided, except any change of address notice must be
actually received in order to be effective.

         11.      WAIVERS. The failure by the Lender at any time or times
hereafter to require strict performance by Guarantor of any of the provisions,
warranties, terms, and conditions contained herein or in any other agreement,
document, or instrument now or hereafter executed by Guarantor and delivered to
the Lender shall not waive, affect, or diminish any right of the Lender
thereafter to demand strict compliance or performance therewith and with respect
to any other provisions, warranties, terms, and conditions contained in such
agreements, documents, and instruments, and any waiver of any Default shall not
waive or affect any other Default, whether prior or subsequent thereto and
whether of the same or a different type. None of the warranties, conditions,
provisions, and terms contained in this Guaranty or in any agreement, document,
or instrument now or hereafter executed by Guarantor and delivered to the Lender
shall be deemed to have been waived by any act or knowledge of the Lender, its
agents, officers, or employees, but only by an instrument in writing, signed by
an officer of the Lender, and directed to the Guarantor specifying such waiver.
Guarantor waives the benefits of

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any possibly applicable statutory provision or rule of court limiting the
liability of a surety or requiring that Lender bring an action against Borrower
or the collateral, including without limitation, Arizona Revised Statutes
Sections 12-1641, et seq., and Arizona Rules of Civil Procedure 17(f) and North
Carolina General Statutes Section 26-7, et seq.

         12.      EXPENSES. If, at any time or times hereafter, the Lender
employs counsel to commence, defend, or intervene, file a petition, complaint,
answer, motion, or any other pleading or to take any other action in or with
respect to any suit or proceeding relating to this Guaranty, or to represent the
Lender in any litigation with respect to the affairs of Guarantor or to enforce
any rights of the Lender or obligations of Guarantor by virtue of this Guaranty,
then in any such events, all of the reasonable attorneys' fees actually incurred
arising from such services, including fees in any appellate or bankruptcy
proceedings, and any other expenses, costs, and charges relating to this
Guaranty, shall constitute additional obligations of the Guarantor payable on
demand. As used herein, the term "reasonable attorney's fees" shall mean
attorney's fees at standard hourly rates and fees actually incurred.

         13.      SINGULAR AND PLURAL. Singular terms shall include the plural
forms, and vice versa.

         14.      ENTIRE AGREEMENT. This Guaranty constitutes the entire
agreement and supersedes all prior agreements and understandings both oral and
written, between the parties with respect to the subject matter hereof.

         15.      THE VALIDITY, INTERPRETATION, ENFORCEMENT, AND EFFECT OF THIS
GUARANTY SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAWS OF THE STATE
OF ALABAMA. THE LENDER'S PRINCIPAL PLACE OF BUSINESS IS LOCATED IN JEFFERSON
COUNTY IN THE STATE OF ALABAMA, AND GUARANTOR AGREES THAT THIS GUARANTY SHALL BE
HELD BY LENDER AT SUCH PRINCIPAL PLACE OF BUSINESS, AND THE HOLDING OF THIS
GUARANTY BY LENDER THEREAT SHALL CONSTITUTE SUFFICIENT MINIMUM CONTACTS OF
GUARANTOR WITH JEFFERSON COUNTY AND THE STATE OF ALABAMA FOR THE PURPOSE OF
CONFERRING JURISDICTION UPON THE FEDERAL AND STATE COURTS PRESIDING IN SUCH
COUNTY AND STATE. THE GUARANTOR CONSENTS THAT ANY LEGAL ACTION OR PROCEEDING
ARISING HEREUNDER MAY BE BROUGHT IN THE CIRCUIT COURT OF THE STATE OF ALABAMA,
IN JEFFERSON COUNTY, ALABAMA, OR IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ALABAMA AND ASSENTS AND SUBMITS TO THE PERSONAL
JURISDICTION OF ANY SUCH COURTS IN ANY SUCH ACTION OR PROCEEDING. NOTHING HEREIN
SHALL LIMIT THE JURISDICTION OF ANY OTHER COURT.

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         16.      GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY ON ANY
CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT
OF OR IN ANY WAY RELATED TO THIS GUARANTY OR THE LOAN, OR (B) IN ANY WAY
CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF
LENDER AND/OR BORROWER AND GUARANTOR WITH RESPECT TO THE LOAN DOCUMENTS OR IN
CONNECTION WITH THIS GUARANTY OR THE EXERCISE OF ANY PARTY'S RIGHTS AND REMEDIES
UNDER THIS GUARANTY OR OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP OF THE
PARTIES HERETO, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER
ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. GUARANTOR AGREES
THAT LENDER MAY FILE A COPY OF THIS GUARANTY WITH ANY COURT AS WRITTEN EVIDENCE
OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF GUARANTOR IRREVOCABLY TO
WAIVE ITS RIGHT TO TRIAL BY JURY AS AN INDUCEMENT OF LENDER TO MAKE THE LOAN,
AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY
WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN GUARANTOR AND LENDER SHALL
INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT
A JURY.

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         IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be
executed by its duly authorized officer as of the day and year first above
written.

WITNESS:                               MEDCATH, INCORPORATED
                                       a North Carolina corporation

                                       BY: /s/ David Crane
------------------------------------      -------------------------------------
                                       Its: Vice President
                                           ------------------------------------

STATE OF  North Carolina
         ---------------------------
COUNTY OF  Mecklenburg
          --------------------------

         I, the undersigned, a Notary Public, in and for said County in said
State, hereby certify that David Crane whose name as Vice President of MedCath
Incorporated, a North Carolina corporation, is signed to the foregoing Agreement
and who is known to me, acknowledged before me on this day that, being informed
of the contents of the Agreement, he, as such officer and with full authority,
executed the same voluntarily for and as the act of said corporation.

         Given under my hand this the 18th day of July, 1996.

                                       /s/ signature illegible
                                       ----------------------------------------
                                       Notary Public
                                       My Commission Expires: December 18, 2000
                                                              -----------------
<PAGE>   13

                                   SCHEDULE 1

                               PENDING LITIGATION

         In February 1996, the corporate owner of El Dorado Hospital, filed
civil action against MedCath and several of its affiliates alleging that they
unlawfully interfered with the hospital's contractual rights by inducing five
physicians who own the Heart Institute of Tucson, a cardiac catheterization
laboratory company which is managed by a subsidiary of MedCath Incorporated, to
breach their contract with El Dorado Hospital. The alleged breach is based upon
such physicians' investment in MedCath of Tucson, L.L.C., which El Dorado
Hospital alleges is a violation of the physicians' noncompetition covenants
with El Dorado Hospital. El Dorado has also notified the Heart Institute of
Tucson that (i) the hospital contests the hospital's obligation to pay
approximately $120,000 for certain services rendered, (ii) the hospital
believes that the execution of the management agreement between the Heart
Hospital of Tucson and a MedCath subsidiary violated the prohibition on
assignments set forth in the agreement between the hospital and the Heart
Institute of Tucson, and (iii) the investment by the physician owners of the
Heart Institute of Tucson and the Tucson Company violates their noncompetition
covenants. The Heart Institute of Tucson and MedCath believe that the Heart
Institute of Tucson is owed the funds at issue and that there is no merit to
the additional allegations made by the hospital. An arbitration proceeding has
been commenced by El Dorado Hospital against the Heart Institute of Tucson and
its owners regarding the hospital's obligation for payment of the funds at
issue. It is likely that El Dorado Hospital's claims regarding the Heart
Institute of Tucson's alleged violations of the applicable agreements will be
included in the arbitration proceeding. MedCath and its affiliates are not
parties to the arbitration proceeding.<PAGE>   1

                                                                    EXHIBIT 10.8

                               OPERATING AGREEMENT
                                       OF
                           ARIZONA HEART HOSPITAL, LLC

<PAGE>   2

                               OPERATING AGREEMENT
                                       OF
                           ARIZONA HEART HOSPITAL, LLC
                      An Arizona Limited Liability Company

         THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE ARIZONA SECURITIES ACT IN
RELIANCE UPON THE REPRESENTATION OF EACH PURCHASER OF THE SECURITIES THAT THE
SAME ARE BEING ACQUIRED FOR INVESTMENT PURPOSES. THESE SECURITIES MAY
ACCORDINGLY NOT BE RESOLD OR OTHERWISE TRANSFERRED OR CONVEYED IN THE ABSENCE OF
REGISTRATION OF THE SAME PURSUANT TO THE APPLICABLE SECURITIES LAWS UNLESS AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS FIRST OBTAINED THAT SUCH
REGISTRATION IS NOT THEN NECESSARY. ANY TRANSFER CONTRARY HERETO SHALL BE VOID.

         THIS OPERATING AGREEMENT (the "Agreement") of Arizona Heart Hospital,
LLC (the "Company"), an Arizona Limited Liability Company is made and entered
into as of the 6th day of January, 1997, by and among the Company and AHH
MANAGEMENT, INC., a North Carolina corporation ("AHH Management"), as a Member
and EACH OF THE OTHER PARTIES IDENTIFIED ON SCHEDULE A as Members (THE "INVESTOR
MEMBERS").

                                    RECITALS

         1.       The Company has been formed to develop, own and operate an
acute care hospital which hospital shall be located in or near Phoenix, Arizona
and shall specialize in all aspects of cardiology and cardiovascular care and
surgery which AHH Management and the Investor Manager may agree upon;

         2.       It is intended that the hospital will be a low-cost, high
quality provider of medical services within the Phoenix metropolitan area in a
manner which is consistent with the national health care policy of lowering the
costs of health care;

         3.       The capital contributions and active involvement of the
Investor Members are necessary to enable the Company to achieve its objectives.

                                    ARTICLE I

                                   DEFINITIONS

         As used in this Agreement, the following terms shall have the following
definitions (unless otherwise expressly provided herein).

<PAGE>   3

         1.1      "Act" shall mean the Arizona Limited Liability Company Act, as
in effect in Arizona (or any corresponding provisions of succeeding law).

         1.2      "Adjusted Capital Account" means, with respect to any Member
or Economic Interest Owner, such Person's Capital Account (as defined below) as
of the end of the relevant Fiscal Year increased by any amounts which such
Person is obligated to restore, or is deemed to be obligated to restore pursuant
to the next to last sentences of Regulations Section 1.704-2(g)(1) (share of
minimum gain) and Regulations Section 1.704-2(i)(5) (share of member nonrecourse
debt minimum gain) and decreased by the items described in Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) and (6).

         1.3      "Affiliate" with respect to a Person, (i) any relative of such
Person; (ii) any officer, director, trustee, partner, manager, employee or
holder of ten percent (10%) or more of any class of the outstanding voting
securities or of an equity interest of such Person; or (iii) any corporation,
partnership, limited liability company, trust, or any officer, director,
trustee, partner, manager, employee or holder of ten percent (10%) or more of
the outstanding voting securities or of an equity interest of any corporation,
partnership, limited liability company, trust or other equity, controlling,
controlled by, or under common control with such Person.

         1.4      "Agreed Value" shall mean with respect to any noncash asset of
the Company an amount determined and adjusted in accordance with the following
provisions:

                  (a)      The initial Agreed Value of any noncash asset
         contributed to the capital of the Company by any Member shall be its
         gross fair market value, as agreed to by the contributing Member and
         the Company.

                  (b)      The initial Agreed Value of any noncash asset
         acquired by the Company other than by contribution by a Member shall be
         its adjusted basis for federal income tax purposes.

                  (c)      The initial Agreed Values of all the Company's
         noncash assets, regardless of how those assets were acquired, shall be
         reduced by depreciation or amortization, as the case may be, determined
         in accordance with the rules set forth in Regulations Section
         1.704-1(b)(2)(iv)(f) and (g).

                  (d)      The Agreed Values, as reduced by depreciation or
         amortization, of all noncash assets of the Company, regardless of how
         those assets were acquired, shall be adjusted from time to time to
         equal their gross fair market values, as agreed to by the Members in
         writing, as of the following times:

                           (i)      the acquisition of a Membership Interest or
                  an additional Membership Interest in the Company by any new
                  or existing Member in exchange for more than a de minimis
                  Capital Contribution;

                                       2
<PAGE>   4

                           (ii)     the distribution by the Company of more than
                  a de minimis amount of money or other property as
                  consideration for all or part of a Membership Interest in the
                  Company; and

                           (iii)    the termination of the Company for federal
                  income tax purposes pursuant to Code Section 708(b)(1)(B).

         If, upon the occurrence of one of the events described in (i), (ii) or
(iii) above the Members do not agree in writing on the gross fair market values
of the Company's assets, it shall be deemed that the fair market values of all
the Company's assets equal their respective Agreed Values immediately prior to
the occurrence of the event and thus no adjustment to those values shall be made
as a result of such event.

         1.5      "Agreement" shall mean this Operating Agreement, as amended
from time to time.

         1.6      "AHI" shall mean the Arizona Heart Institute, Ltd.

         1.7      "Articles of Organization." The Articles of Organization of
the Company, as filed with the Secretary of State of Arizona as the same may be
amended from time to time.

         1.8      "Capital Account" shall mean with respect to each Member or
assignee an account maintained and adjusted in accordance with the following
provisions:

                  (a)      Each Person's Capital Account shall be increased by
         Person's Capital Contributions, such Person's distributive share of
         Profits, any items in the nature of income or gain that are allocated
         pursuant to the Regulatory Allocations and the amount of any Company
         liabilities that are assumed by such Person or that are secured by
         Company property distributed to such Person.

                  (b)      Each Person's Capital Account shall be decreased by
         the amount of cash and the Agreed Value of any Company property
         distributed to such Person pursuant to any provision of this Agreement,
         such Person's distributive share of Losses, any items in the nature of
         loss or deduction that are allocated pursuant to the Regulatory
         Allocations, and the amount of any liabilities of such Person that are
         assumed by the Company or that are secured by any property contributed
         by such Person to the Company.

         In the event any Membership Interest is transferred in accordance with
the terms of this Agreement, the transferee shall succeed to the Capital Account
of the transferor to the extent it relates to the transferred Membership
Interest.

         In the event the Agreed Values of the Company assets are adjusted
pursuant to the definition of Agreed Value contained in this Agreement, the
Capital Accounts of all Members shall be adjusted simultaneously to reflect the
aggregate adjustments as if the Company recognized gain or loss equal to the
amount of such aggregate adjustment.

                                       3
<PAGE>   5

         The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with such regulations. In the event AHH Management shall determine
that it is prudent to modify the manner in which the Capital Accounts, or any
debits or credits thereto, are computed to comply with such Regulation, AHH
Management may make such modification, provided that it is not likely to have a
material effect on the amounts distributable to any Member pursuant to Articles
VI or VII hereof upon the dissolution of the Company. In the event AHH
Management shall determine such adjustments are necessary or appropriate to
comply with Regulations Section 1.704-1(b)(2)(iv), AHH Management shall adjust
the amounts debited or credited to Capital Accounts with respect to (i) any
property contributed by the Members or distributed to the Members and (ii) any
liabilities secured by such contributed or distributed property or assumed by
the Members. AHH Management shall also make any other appropriate modifications
in the event unanticipated events might otherwise cause this Agreement not to
comply with Regulations Section 1.704-1(b). In the event any Membership Interest
in the Company is transferred in accordance with the terms of this Agreement,
the transferee shall succeed to the Capital Account of the transferor to the
extent it relates to the transferred Membership Interest.

         1.9      "Capital Contribution" shall mean with respect to any Member,
the amount of money and the initial Agreed Value of any property (other than
money) contributed to the Company with respect to the Membership Interest of
such Member.

         1.10     "Cash Distributions" shall mean net cash distributed to
Members resulting from Cash Flow from Operations or Cash from Sales or
Refinancing, but shall not include cash distributed to AHH Management as its
Management Fee for services or any amount in repayment of loans made by the
Members to the Company.

         1.11     "Cash Flow from Operations" shall mean net cash funds provided
from operations of the Company or investment of any Company funds, without
deduction for depreciation, but after deducting cash funds used to pay or
establish a reserve for expenses, debt payments, capital improvements, and
replacements and for such other items as AHH Management reasonably determines to
be necessary or appropriate.

         1.12     "Cash from Sales or Refinancing" shall mean the net cash
proceeds received by the Company from or as a result of any Sale or Refinancing
of property after deducting (i) all expenses incurred in connection therewith,
(ii) any amounts applied by AHH Management in its sole and absolute discretion
toward the payment of any indebtedness and other obligations of the Company,
including payments of principal and interest on mortgages, (iii) the payment of
any other expenses or amounts owed by the Company to other parties, and (iv) the
establishment of any reserves reasonably deemed necessary by AHH Management. If
the proceeds of any Sale or Refinancing are paid in more than one installment,
each such installment shall be treated as a separate Sale or Refinancing for the
purposes of this definition.

         1.13     "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time. Any reference herein to a specific section(s) of the
Code shall be deemed to include a reference to any corresponding provision of
future law.

                                       4
<PAGE>   6

         1.14     "Company" shall refer to Arizona Heart Hospital, LLC, which
shall be created upon the filing of the Articles of Organization with the Office
of the Secretary of State of Arizona, to be operated under the name Arizona
Heart Hospital, an Arizona limited liability company, and to continue under this
Agreement, as amended from time to time.

         1.15     "Economic Interest" shall refer to that portion of the
Membership Interest of a Member in the economic rights and benefits of the
Company, including but not limited to all Profits, Losses and Cash
Distributions. Such an Economic Interest will be measured by an amount equal to
the percentage of the Member's percentage Membership Interest in the Company as
the same may be adjusted from time to time.

         1.16     "Economic Interest Owner" shall mean a Person who has validly
acquired a Member's Economic Interest as permitted under this Agreement but who
has not become a Member. Such Person shall be entitled to the allocations of
Profits and Losses and Cash Distributions under Article VI and VII to which the
previous owner of the Economic Interest would have been entitled had such
previous owner retained the Economic Interest. Unless and until such Economic
Interest Holder is admitted as a Substitute Member, it shall be a mere assignee
of a Member.

         1.17     "Entity" shall mean any general partnership, limited
partnership, limited liability company, corporation, joint venture, trust,
business trust, cooperative or association or any foreign trust or foreign
business organization.

         1.18     "Equipment" shall mean the appropriate equipment and supplies
required from time to time in connection with the development and operation of
the Hospital.

         1.19     "Fiscal Year" shall mean, with respect to the first year of
the Company, the period beginning upon the formation of the Company and ending
on the next September 30, with respect to subsequent years of the Company, the
twelve month period beginning October 1 and ending September 30, and, with
respect to the last year of the Company, the portion of the period beginning
October 1 and ending with the date of the final liquidating distributions.

         1.20     "Hospital" shall have the meaning provided in Section 2.3
hereof.

         1.21     "Investor Manager" shall refer to the individual elected by
Investor Members in accordance with Section 5.13 who shall serve as a Manager of
the Company.

         1.22     "Investor Members" shall mean the Members other than AHH
Management listed on Schedule A attached hereto.

         1.23     "Majority Vote of Investor Members" shall refer to the
affirmative vote, approval or consent of Investor Members holding a majority of
the Membership Interests held by the Investor Members in the aggregate.

         1.24     Intentionally omitted.

                                       5
<PAGE>   7

         1.25     "Manager" or "Managers" shall refer to one or more managers
designated pursuant to this Agreement. Pursuant to this Agreement and the
Articles of Organization, no Member shall automatically be a manager by virtue
of such Person's status as a Member. Subject to Section 11.1(g) hereof, the
Managers of the Company shall be AHH Management and the Investor Manager. The
powers, rights and duties of each Manager to manage the affairs of the Company
are specified or designated in this Agreement.

         1.26     "Management Fee" shall mean the amounts payable to AHH
Management pursuant to Article V for services rendered in managing the
operations of the Company.

         1.27     "Material Agreement" shall refer to any binding agreement
which may not be canceled upon less than ninety (90) days notice and which calls
for the expenditure of funds, or involves an obligation for financing, in excess
of One Hundred Thousand Dollars ($100,000.00) exclusive of agreements or
obligations contemplated by any budget, development plan, financing or
construction contract approved by the Managers or agreements incurred in the
ordinary course of business such as employment agreements, purchases of supplies
and routine services and the like.

         1.28     "Material Decision" shall refer to any decisions regarding
approvals of the development and operating budgets for the Hospital, the
selection of the site for the Hospital, the design of the Hospital, the
selection of the Hospital's senior administrator, strategic planning, the
execution of managed care contracts, the execution of exclusive contracts to
provide physician services to the Hospital and the selection of items of
Equipment the individual cost of which exceeds One Hundred Thousand Dollars
($100,000.00) or any other significant piece of medical Equipment which the
Investor Manager specifically designates in writing as material.

         1.29     "Member" shall refer to the organizers of the Company and each
of the members identified in the then applying Schedule A attached hereto and
incorporated herein by this reference. To the extent a Manager has purchased a
Membership Interest in the Company, such Person will have all the rights of a
Member with respect to such Membership Interest, and the term "Member" as used
herein shall include a Manager to the extent he has purchased such Membership
Interest in the Company. If a Person is already a Member immediately prior to
the purchase or other acquisition by such Person of an Economic Interest or
Membership Interest, such Person shall have all the rights of a Member with
respect to such purchased or otherwise acquired Membership Interest or Economic
Interest, as the case may be.

         1.30     "Membership Interest" shall mean all of a Member's rights in
the Company, including without limitation the Member's share of Profits, Losses,
Cash Distributions and other benefits of the Company, any right to vote, any
right to participate in the management of the business and affairs of the
Company, including the right to vote on, consent to, or otherwise participate in
any decision or action of or by the Members granted pursuant to this Operating
Agreement or the Act. The percentage Membership Interest of each Member, their
Capital Contributions and other related information shall be listed on the then
applying Schedule A. The percentage Membership Interests generally shall be
based upon the pro rata Capital Contribution of each Member.

                                       6
<PAGE>   8

         1.31     "Organization Expenses" shall mean those expenses incurred,
either by the Company or for which the Company has agreed to make reimbursement,
in connection with the formation of the Company including such expenses as: (i)
registration fees, filing fees, and taxes; and (ii) legal fees incurred in
connection with any of the foregoing.

         1.32     "Person" shall mean any individual or Entity, and the heirs,
executors, administrators, legal representatives, successors, and assigns of
such individual or Entity where the context so permits.

         1.33     "AHH Management" shall refer to AHH Management, Inc., an
Arizona corporation, who shall serve as a Manager of the Company.

         1.34     "Prime Rate" means the rate of interest as of the relevant day
or time period as announced by the First Union National Bank, N.A. or its
successor in interest from time to time as its prime or reference rate.

         1.35     "Profits and Losses" shall mean, for each Fiscal Year or other
period, an amount equal to the Company's taxable income or loss for such year or
period, determined in accordance with Code Section 703(a) (for this purpose, all
items of income, gain, loss, or deduction required to be stated separately
pursuant to Code Section 703(a)(l) shall be included in taxable income or loss),
with the following adjustments:

         (a)      Any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing Profits or Losses shall be
added to such taxable income or loss;

         (b)      Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Profits or Losses, shall be subtracted from such taxable income or
loss;

         (c)      Gain or loss resulting from dispositions of Company assets
shall be computed by reference to the Agreed Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property differs from its
Agreed Value.

         1.36     "Refinancing" means any borrowing incurred or made to
recapitalize the Company or the equity investment in, or to refinance any loan
used to finance the acquisition of property.

         1.37     "Regulations" shall mean rules, orders, and regulations issued
pursuant to or under the authority of the Code and shall include revisions to
and succeeding provisions as appropriate.

         1.38     "Regulatory Allocations" shall mean those allocations of items
of Company income, gain, loss or deduction set forth on Schedule B and designed
to enable the Company to comply with the alternate test for economic effect
prescribed in Regulations Section 1.704-1(b)(2)(ii)(d), and the safe-harbor
rules for allocations attributable to nonrecourse liabilities prescribed in
Regulations Section 1.704-2.

                                       7
<PAGE>   9

         1.39     "Sale" means the sale, exchange, involuntary conversion (other
than a casualty followed by reconstruction), condemnation, or other disposition
of property by the Company, except for dispositions of inventory items and
personal property in the ordinary course of business and in connection with the
replacement of such property.

         1.40     "Substitute Manager" shall mean a Manager who succeeds either
AHH Management or the Investor Manager with all of the specific rights and
powers of such Manager under this Agreement.

         1.41     "Substitute Member" shall mean an assignee of a Member who has
been admitted to the Company and granted all the rights of a Member in place of
his or her assignor pursuant to the provisions of this Agreement. A Substitute
Member, upon his or her admission as such, shall replace and succeed to the
rights, privileges, and liabilities of the Member from whom he or she acquired
his or her interest in the Company, to the extent of the Economic Interest
assigned.

         1.42     "Super-Majority Vote of Members" shall refer to the
affirmative vote, approval or consent of Members holding sixty-seven percent
(67%) of the Membership Interests in the aggregate.

                                   ARTICLE II

              FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY

         2.1      Company Formation. The Company will be formed upon the
execution by AHH Management and one other individual or entity on behalf of the
Company of Articles of Organization which are then filed with the Secretary of
State of Arizona in accordance with the provisions of the Act. AHH Management
shall execute or cause to be executed all other such certificates or documents,
and shall do or cause to be done all such filing, recording, or other acts, as
may be necessary or appropriate from time to time to comply with the
requirements of law for the continuation and/or operation of a limited liability
company in the State of Arizona, and other documents to reflect the admission of
additional Members to the Company. Any costs incurred by AHH Management in
connection with the foregoing shall be reimbursed promptly upon the completion
of such action.

         2.2      Name of Company. The name of the Company is Arizona Heart
Hospital, LLC, an Arizona limited liability company.

         2.3      Purposes and Investment Objectives. The principal purposes of
the Company are as follows:

                  (a)      To develop, own and operate an acute care hospital
         specializing in all aspects of cardiology and cardiovascular care and
         surgery in Phoenix, Arizona (the "Hospital") which would include, but
         not be limited to, the following:

                                       8
<PAGE>   10

                           (i)      Services and facilities to meet all
                  requirements of the State of Arizona, Medicare, JCAHO and
                  other credentialing or licensing bodies or agencies in order
                  to have the Hospital licensed as a general acute care hospital
                  and to perform cardiology and cardiovascular surgical services
                  of every type or nature and to be eligible to obtain
                  appropriate reimbursements therefore;

                           (ii)     Approximately seventy-four thousand (74,000)
                  square feet in a building to be constructed in accordance with
                  plans and specifications approved by the Company;

                           (iii)    Approximately sixty (60) medical/surgical
                  beds;

                           (iv)     Three (3) heart catheterization laboratories
                  with available space for one additional heart catheterization
                  lab;

                           (v)      One (1) electrophysiology laboratory;

                           (vi)     Three (3) heart surgical suites with space
                  for the development of one additional heart surgical suite;

                           (vii)    All appropriate support services and
                  systems; and

                           (viii)   Appropriate equipment and services with
                  respect to the facilities described above and as otherwise
                  reasonably necessary or appropriate for the diagnosis and
                  treatment of cardiovascular disease, including but not limited
                  to invasive and non-invasive cardiac testing, interventional
                  treatment including percutaneous transluminal coronary
                  angioplasty, electrophysiology and atherectomy, and cardiac
                  surgery which would include, but not be limited to, bypass
                  grafts, endovascular surgery and valve surgery;

                  The size, number and scope of facilities of the Hospital shall
         finally be determined by the Manager and the Investor Manager.

                  (b)      To lease or acquire the real property, and if
         appropriate to construct a suitable building, in which the Hospital
         shall be located;

                  (c)      Any other purpose reasonably related to (a) and (b)
         above.

         2.4      Registered Office; Agent. The registered office of the Company
is 2632 North 20th Street, Phoenix, Arizona 85006. The statutory agent of the
Company shall be MHVRB Service Corp. whose address is 3003 North Central Avenue,
Suite 1200, Phoenix, Arizona 85012-2915. AHH Management shall promptly notify
the Members of any changes in the principal place of business, the registered
office, or the registered agent of the Company.

         2.5      Commencement and Term. The Company shall commence on the
filing of the Articles of Organization in the Office of the Secretary of State
of Arizona, as required by Section

                                       9
<PAGE>   11

Section 2.1 hereof, and shall continue until December 31, 2035, unless sooner
terminated or dissolved as provided herein; provided, however, that the
termination date may be extended for up to an additional forty (40) years in
five (5) year increments upon the election of AHH Management. In the event AHH
Management does not elect to extend the term hereof, the Investor Manager may
instead elect to extend the term hereof, subject to AHH Management's consent.

                                   ARTICLE III

                        MEMBERS AND CAPITAL CONTRIBUTIONS

         3.1      Contributions of Members. The Members shall contribute capital
as follows:

                  (a)      AHH Management shall own a fifty-one percent (51%)
         Membership Interest in the Company and shall contribute to the Company
         for its Membership Interest One Million Five Hundred Thirty Thousand
         Dollars ($1,530,000.00).

                  (b)      The Investor Members shall own in the aggregate a
         forty-nine percent (49%) Membership Interest and shall contribute to
         the Company for their Membership Interests an amount, in the aggregate,
         One Million Four Hundred Seventy Thousand Dollars ($1,470,000.00). The
         Membership Interests of the Investor Members shall be owned as shown on
         Schedule A attached hereto.

         The Members may be liable to the Company for amounts distributed to
         them as a return of capital as provided by the Act. The Members shall
         not be required to contribute any additional capital to the Company
         except as provided in Section 3.5. The final percentage Membership
         Interest of each Member shall be based on his/its pro rata Capital
         Contribution to the Company.

         3.2      Liability of Members - For Capital. The liability of each
Member, as such, shall be limited to the amount of his agreed Capital
Contribution as a Member.

         3.3      Members' Accounts and Withdrawals. An individual Capital
Account shall be maintained for each Member in accordance with requirements of
the Code and the Regulations. No Member shall be entitled to withdraw from the
Company unless such right is expressly provided herein. No Member shall be
entitled to make demand for withdrawal or redemption of any part of its Capital
Account or to receive any distribution except as provided herein.

         3.4      Interest on Capital Contributions. No interest shall be paid
to any Member based solely on its Capital Contributions or Capital Account. The
preceding sentence shall not prevent the Company from earning interest on its
bank accounts and investments and distributing such earnings to the Member in
accordance with Articles VI and VII.

         3.5      Additional Funding. If from time to time, AHH Management
reasonably determines that funds in addition to that contemplated by Sections
3.1 and 3.2 are necessary or appropriate for the development or operation of the
Hospital, then:

                                       10
<PAGE>   12

                  (a)      First, AHH Management shall use commercially
         reasonable efforts to borrow such funds from a bank or other lender on
         terms and conditions reasonably acceptable to AHH Management, or AHH
         Management may, but shall not be required, to loan such funds to the
         Company at the Prime Rate plus one percent (1%) per annum which loan
         shall be secured by the Company's assets. Interest shall be paid
         monthly in arrears and principal shall be repaid as the Company has
         funds available therefor. All loans obtained hereunder shall be subject
         to the approval of the Investor Manager which approval shall not be
         unreasonably withheld or delayed;

                  (b)      Second, if loans as provided in (a) above are not
         available, AHH Management may request that the Members contribute
         additional capital to the Company pro rata according to their
         respective Membership Interests, provided however, such Capital
         Contributions shall be made only if AHH Management and the Investor
         Manager approve such Capital Contributions. If additional Capital
         Contributions are so approved, each Member may elect whether or not to
         contribute its pro rata portion thereof. The other Investor Members may
         elect to contribute capital not contributed by any Investor Member
         hereunder. AHH Management may then elect to contribute amounts which
         the Investor Members, in the aggregate, have not so contributed.
         Thereafter, AHH Management shall reasonably adjust the Membership
         Interest of each Member (taking into consideration the Capital
         Contributions made by the Members in accordance with this Section 3.5)
         in the event any Member elects not to contribute capital pursuant to a
         capital call approved in accordance with this Section 3.5;

                  (c)      If funds are not available in accordance with (a) or
         (b) above, then AHH Management may elect to dissolve the Company.

         3.6      Guarantees. Except as expressly provided in Section 5.9(b) of
this Agreement, the Investor Members shall not be required to provide personal
guarantees of any indebtedness incurred by the Company in connection with the
construction or operation of the Hospital or otherwise.

                                   ARTICLE IV

                     NAMES AND ADDRESSES OF INITIAL MEMBERS

         4.1      The names and addresses of the Members are as follows:

<TABLE>
<CAPTION>
                  Name                                 Address
                  ----                                 -------

         <S>                                     <C>
         -   AHH Management, Inc.                7621 Little Avenue, Suite 106
                                                 Charlotte, NC 28226
</TABLE>

         -   See the Members listed on Schedule A attached hereto.

                                       11
<PAGE>   13

                                    ARTICLE V

                            MANAGEMENT OF THE COMPANY

         5.1      General Authority and Powers of Managers. Except as set forth
in those provisions of this Agreement that specifically require the vote,
consent, approval or ratification of the Members, the Managers shall have
complete authority and exclusive control over the management of the business and
affairs of the Company. Subject to the terms and conditions of this Agreement
and except as otherwise provided herein, all Material Agreements and Material
Decisions with respect to the business and affairs of the Company shall be
approved or made by AHH Management and the Investor Manager in accordance with
Section 5.16 hereof. No Member has the actual or apparent authority to cause the
Company to become bound in any contract, agreement or obligation, and no Member
shall take any action purporting to be on behalf of the Company. No Manager
shall cause the Company to become bound to any contract, agreement or
obligation, and no Manager shall take any other action on behalf of the Company,
unless such matter has received the vote, consent, approval or ratification as
required pursuant to this Agreement with respect to such matter or except as
provided below with respect to the authority and actions of AHH Management.

         The day-to-day management of the business and affairs of the Company,
including those agreements and decisions which are not Material Agreements or
Material Decisions, shall be the responsibility of AHH Management, provided,
however, decisions relating to medical and clinical practice at the Hospital
including, without limitation, establishing standardized clinical pathways shall
be made exclusively by the qualified medical personnel of the Hospital in
accordance with the Hospital and medical staff bylaws. Subject in all cases to
the foregoing, AHH Management shall have the right and the power, if, as, and
when it, from time to time, deems necessary or appropriate on behalf of the
Company, subject only to the terms and conditions of this Agreement:

                  (a)      To negotiate and execute on behalf of the Company all
         documents, instruments and agreements reasonably necessary or
         appropriate to lease, acquire and/or construct the Hospital and/or the
         real property on which the Hospital is or will be located, and to
         borrow funds to finance such lease, acquisition and/or construction (it
         being acknowledged that the Hospital may be an existing building or may
         be a newly constructed building);

                  (b)      To prepare a budget for the development of the
         Hospital and thereafter, annual operating budgets;

                  (c)      To acquire the Equipment and enter into loans or
         other financing arrangements therefor;

                  (d)      To handle the negotiation and execution of all such
         other agreements regarding the purchase of goods or services for the
         Hospital;

                  (e)      To establish procedures for quality assurance, peer
         review and granting privileges to physicians with other specialties at
         the Hospital, subject to the terms of the

                                       12
<PAGE>   14

         Hospital and medical staff bylaws to be adopted for the Hospital. It is
         acknowledged and agreed that the establishment of an internal review
         board and of standards for physician credentialing shall be
         accomplished pursuant to the medical staff bylaws and appointment
         procedures of the Hospital in which the Investor Manager shall
         participate through his membership on the governing body of the
         Hospital and or the medical staff of the Hospital;

                  (f)      To expend all or portions of the Company's capital
         and income in furtherance of or relating to the Company's business and
         purposes, including, but not limited to, payment of all ongoing
         operational expenses, payment of commissions, organization expenses,
         professional fees, rental fees, and management fees, and to invest in
         short-term debt obligations (including, but not limited to, obligations
         of federal and state governments and their agencies, commercial paper,
         and certificates of deposit of commercial banks, or savings banks or
         savings and loan associations) such of the Company's funds as are
         temporarily not required for the development or operation of the
         Company and the payment of Company obligations;

                  (g)      To employ or retain on such terms and for such
         compensation as AHH Management may reasonably determine, such persons,
         firms, or corporations as AHH Management may deem advisable, including
         without limitation qualified medical and other employees necessary or
         appropriate to operate the Hospital, attorneys, accountants, financial
         and technical consultants, supervisory managing agents, insurance
         brokers, brokers and loan brokers, appraisers, architects and
         engineers, who may also provide such services to AHH Management,
         provided that the selection of the senior administrator of the Hospital
         shall be a Material Decision. It is further acknowledged and agreed
         that the Hospital shall include on the full-time staff a director of
         managed care/business development, two admission coordinators, two
         clinical coordinators, ACT program, two research nurses, a vice
         president-clinical services, a vice president-finance, a vice
         president-managed care, a catheterization laboratory director,
         catheterization laboratory nurses and technicians, an operating room
         director, operating room nurses and technicians, a half-time director
         of professional relations and referral coordinator and a quarter-time
         medical writer and director of marketing, the selection, retention,
         removal and compensation of which personnel shall be Material
         Decisions;

                  Either of the Managers may initiate the process to determine
         whether or not the employment of any of the above individuals shall be
         terminated by providing to the other a written report which documents
         the reasons why the individual's performance is materially deficient
         and includes a recommended course of action for the Company to take.
         With the consent of the non-initiating Manager, which consent shall not
         be unreasonably withheld, the Manager shall cause the Company to take
         such recommended action; provided, such action shall be consistent with
         the established disciplinary procedures of the Company with respect to
         employees, which include any procedures set forth in any employee
         handbooks or manuals; provided, further the actions must be consistent
         with the obligations of the Company under any contracts or agreements
         to which it is a party, including agreements with the individual in
         question and with applicable law.

                                       13
<PAGE>   15

                  (h)      To execute leases, deeds, contracts, rental
         agreements, construction contracts, sales agreements, and management
         contracts;

                  (i)      To exercise all rights, powers, and privileges of the
         Company as lessee with respect to the Hospital or rights held by the
         Company;

                  (j)      To consent to the modification, renewal, or extension
         of any obligations to the Company of any Person or of any agreement to
         which the Company is a party or of which it is a beneficiary;

                  (k)      To execute in furtherance of any or all of the
         purposes of the Company, any deed, lease, deed of trust, security
         interest, mortgage, promissory note, bill of sale, assignment,
         contract, or other instrument purporting to purchase or convey or
         encumber in whole or in part the Equipment or the Hospital or other
         real or personal property of the Company;

                  (l)      To prepay in whole or in part, refinance, recast,
         increase, modify, or extend any security interest, deed of trust, or
         mortgage affecting the Hospital and in connection therewith to execute
         any extensions or renewals thereof on the Hospital and to grant
         security interests in any of the Equipment or the Hospital;

                  (m)      To adjust, compromise, settle, or refer to
         arbitration any claim against or in favor of the Company, and to
         institute, prosecute, and defend any actions or proceedings relating to
         the Company, its business, and properties;

                  (n)      To acquire and enter into any contract of insurance
         which AHH Management deems necessary or appropriate for the protection
         of the Company and AHH Management, for the conservation of the Company
         or its assets, or for any purpose beneficial to the Company; however,
         neither AHH Management nor its Affiliates shall be compensated for
         providing insurance brokerage services relating to obtaining such
         insurance;

                  (o)      To prepare or cause to be prepared reports,
         statements, and other relevant information for distribution to the
         Members, including annual reports;

                  (p)      To open accounts and deposit and maintain funds in
         the name of the Company in banks or savings and loan associations;
         provided, however, that the Company's funds shall not be commingled
         with the funds of any other Person;

                  (q)      To cause the Company to make or revoke any of the
         elections referred to in Section 754 of the Internal Revenue Code of
         1986 as amended or any similar provisions enacted in lieu thereof;

                  (r)      To make all decisions related to generally accepted
         principles of accounting to be applied on a consistent basis and
         federal income tax elections;

                                       14
<PAGE>   16

                  (s)      To possess and exercise, subject to the restrictions
         contained in this Agreement, any and all of the rights, powers and
         privileges of a manager under the Act;

                  (t)      To execute, acknowledge, and deliver any and all
         documents or instruments in connection with any or all of the
         foregoing;

                  (u)      To modify or otherwise improve the Hospital, subject
         to the restrictions contained in this Agreement;

                  (v)      To manage, direct, and guide the operation of the
         Hospital including all necessary acts relating thereto, other than
         medical or clinical matters which shall be under the direction of the
         Investor Manager and other agreed upon qualified medical personnel;

                  (w)      To establish minimum insurance requirements for all
         physicians practicing at the Hospital;

                  (x)      To admit as Members additional investors who have
         been proposed for Member status by AHH Management and approved by the
         Investor Manager, which approval shall be given or withheld in the sole
         and absolute discretion of the Investor Manager; and

                  (y)      To sell assets of the Company, subject to the
         restrictions contained in this Agreement.

                  (z)      To propose and implement a marketing plan for the
         Hospital which for the first year of operation shall have a budget of
         not less than five hundred thousand dollars ($500,000.00) (such
         marketing plan and related budget shall be a Material Decision);
         provided, however, that if after the first year of operations the
         Hospital does not have net income before taxes calculated in accordance
         with generally accepted accounting principles during any six-month
         period, such marketing budget may be lowered in future years and in all
         events will be subject to the agreement and approval of the Managers.
         It is further acknowledged and agreed that the Investor Manager may
         elect to be actively involved in the design and implementation of the
         marketing plan, and that the marketing plan and marketing budget shall
         be a Material Decision in all years.

         In the event that substantially all of the assets of MedCath
Incorporated ("MedCath") are sold to, or fifty-one percent (51%) or more of the
capital stock of MedCath is acquired by, a third party who is not an Affiliate
of MedCath but who is, directly or indirectly, an owner or operator of a
hospital within thirty (30) miles of the Hospital, then following the closing of
such transaction, the Investor Manager shall have the right to manage the day to
day business and affairs of the Company in lieu of AHH Management (subject to
the other terms of this Agreement) unless the senior management of MedCath after
such transaction is and remains for at least one (1) year substantially the same
as the senior management of MedCath prior to such transaction.

                                       15
<PAGE>   17

         5.2      Restrictions on Authority of the Managers. The Managers shall
not do any of the following:

                  (a)      Act in contravention of this Agreement;

                  (b)      Act in any manner which would make it impossible to
         carry on the express business purposes of the Company;

                  (c)      Commingle the Company funds with those of any other
         person or entity;

                  (d)      Admit an additional Manager, except as provided in
         this Agreement;

                  (e)      Admit an additional Member, except as provided in
         this Agreement;

                  (f)      Alter the primary purposes of the Company as set
         forth in Section 2.3;

                  (g)      Possess any property or assign the rights of the
         Company in specific property for other than a Company purpose;

                  (h)      Employ, or permit the employ of, the funds or assets
         of the Company in any manner except for the exclusive benefit of the
         Company;

                  (i)      Make any payments of any type, directly or
         indirectly, to anyone for the referral of patients to the Hospital in
         order to use the Hospital or to provide other services payable by
         Medicare or Medicaid;

                  (j)      Sell all or any substantial part of the assets of the
         Company or merge the Company without the approval of a Super-Majority
         Vote of the Members.

         5.3      Duties of the Managers. Each Manager shall do the following:

                  (a)      Diligently and faithfully devote such of its time to
         the business of the Company as may be necessary to properly conduct the
         affairs of the Company and, in the case of AHH Management, to perform
         the duties for which it will receive a Management Fee as provided in
         Section 5.6(b), or otherwise, however, each Manager shall not be
         required to devote its full time to such duties;

                  (b)      Use its best efforts to cause the Company to comply
         with such conditions as may be required from time to time to permit the
         Company to be classified for Federal income tax purposes as a limited
         liability company and not as an association taxable as a corporation;

                  (c)      In the case of AHH Management file and publish all
         certificates, statements, or other instruments required by law for the
         formation and operation of the Company as a limited liability company
         in all appropriate jurisdictions;

                                       16
<PAGE>   18

                  (d)      In the case of AHH Management cause the Company to
         obtain and keep in force during the term of the Company fire and
         extended coverage and public liability and professional liability
         insurance with such issuers and in such amounts shall deem advisable,
         but in amounts not less (and deductible amounts not greater) than those
         customarily maintained with respect to the business equipment and
         property comparable to the Company's;

                  (e)      Have a fiduciary duty to conduct the affairs of the
         Company in the best interests of the Company and of the Members,
         including the safekeeping and use of all funds and assets, whether or
         not in its immediate possession and control, and it shall not employ or
         permit others besides Managers to employ such funds or assets in any
         manner except for the benefit of the Company; and

                  (f)      In the case of AHH Management deliver to the
         Secretary of State of Arizona for filing an annual report in accordance
         with the Act and deliver to the Arizona Secretary of State a
         qualification as a foreign limited liability company.

         5.4      Delegation by the Managers. Subject to restrictions otherwise
provided herein, the Managers may at any time employ any other person, including
persons and entities employed by, affiliated with, or related to the Managers to
perform services for the Company and its business, and may delegate all or part
of their authority or control to any such other persons, provided that such
employment or delegation shall not relieve the Managers of their respective
responsibilities and obligations under this Agreement or under the laws of the
State of Arizona nor will it make any such person a Member or Manager of the
Company.

         5.5      Right to Rely Upon the Authority of the Managers. Persons
dealing with the Company may rely upon the representation of the Managers that
such Managers are managers of the Company and that such Managers have the
authority to make any commitment or undertaking on behalf of the Company. No
person dealing with the Managers shall be required to determine its authority to
make any such commitment or undertaking. In addition, no purchaser from the
Company shall be required to determine the sole and exclusive authority of any
Manager to sign and deliver on behalf of the Company any instruments of transfer
with respect thereto or to see to the application or distribution of revenues or
proceeds paid or credited in connection therewith, unless such purchaser shall
have received written notice from the Company affecting the same.

         5.6      Company Expenses.

                  (a)      In general, the Company's expenses shall be billed
         directly to and paid by the Company. The Company shall reimburse the
         Managers or their Affiliates for: (i) all Organization Expenses
         incurred by the Managers or their Affiliates in connection with the
         formation of the Company; (ii) the actual costs to the Managers or
         their Affiliates of goods, services, and materials used for and by the
         Company; and (iii) all reasonable travel and other out-of-pocket
         expenses incurred by the Managers in the development and management of
         the Company and its business. The reimbursement for expenses provided
         for in this Section 5.6(a) shall be made to the Managers or their
         Affiliates regardless of whether any distributions are made to the
         Members under Article VI and Article VII.

                                       17
<PAGE>   19

                  (b)      The Company shall also pay the following expenses of
         the Company:

                           (i)      All development and operational expenses of
                  the Company, which may include, but are not limited to: the
                  salary and related expenses of employees and staff of the
                  Hospital, all costs of borrowed money, taxes, and assessments
                  on the Hospital, and other taxes applicable to the Company;
                  expenses in connection with the acquisition, maintenance,
                  leasing, refinancing, operation, and disposition of the
                  Equipment, furniture and fixtures of the Hospital (including
                  legal, accounting, audit, commissions, engineering,
                  appraisal, and the other fees); the maintenance of the
                  Hospital and its Equipment may be performed by AHH Management
                  or one of its Affiliates as long as the charges to the Company
                  for such service are no greater than the charges for such
                  service from a third party service provider;

                           (ii)     In addition to reimbursements and other
                  amounts due hereunder, a Management Fee equal to [***]
                  ($[***]) per year due to AHH Management which fees shall first
                  accrue commencing on the first to occur of (the "Completion
                  Date") (X) the substantial completion of the construction of
                  the Hospital if the Hospital is to be located in a new
                  building (whether to be leased to or owned by the Company), or
                  (Y) the closing of the purchase of the real property in which
                  the Hospital is to be located if located in an existing
                  building (either by the Company or by a third party who shall
                  in turn lease such building to the Company) which fees shall
                  be increased annually in proportion to annual increases in the
                  Consumer Price Index for all Urban Consumers (All Items)
                  published by the U.S. Department of Commerce, Bureau of Labor
                  Statistics ("CPI"), as reasonably applied by AHH Management on
                  January 1st of each year;

                           (iii)    A medical director's fee equal to Two
                  Hundred Thousand Dollars ($200,000.00) per year to be paid to
                  the medical director of the Hospital selected by the Investor
                  Manager and approved by AHH Management which fee shall first
                  accrue commencing as of the Completion Date and which fee
                  shall be increased annually by the CPI reasonably applied by
                  AHH Management on January 1st of each year;

                           (iv)     All fees and expenses paid to third parties
                  for accounting, legal, documentation, professional, and
                  reporting services to the Company, which may include, but are
                  not limited to: preparation and documentation of Company
                  bookkeeping, accounting and audits; preparation and
                  documentation of budgets, cash flow projections, and working
                  capital requirements; preparation and documentation of Company
                  state and federal tax returns; and taxes incurred in
                  connection with the issuance, distribution, transfer,
                  registration, and recordation of documents evidencing
                  ownership of a Membership Interest or Economic Interest in the
                  Company or in connection with the business of the Company;
                  expenses in connection with preparing and mailing reports
                  required to be furnished to the

                                       18

[***] These portions of this exhibit have been omitted and filed separately
      with the Commission pursuant to a request for confidential treatment.
<PAGE>   20

                  Members or Economic Interest Owners for tax reporting or other
                  purposes, including reports, if any, that may be required to
                  be filed with any federal or state regulatory agencies, or
                  expenses associated with furnishing reports to Members which
                  AHH Management deems to be in the best interest of the
                  Company; expenses of revising, amending, converting,
                  modifying, or terminating the Company or this Agreement; costs
                  incurred in connection with any litigation in which the
                  Company is involved as well as any examination, investigation,
                  or other proceedings conducted by any regulatory agency
                  involving the Company; costs of any computer equipment or
                  services used for or by the Company; the costs of preparing
                  and disseminating informational material and documentation
                  relating to potential sale, refinancing, or other disposition
                  of the Hospital or the Equipment.

         5.7      No Management by Members. Other than the Managers, the Members
shall take no part in, or at any time interfere in any manner with, the
management, conduct, or control of the Company's business and operations and
shall have no right or authority to act for or bind the Company except as set
forth in this Agreement. The rights and powers of such Members shall not extend
beyond those set forth in this Agreement and those granted under the Articles of
Organization and any attempt to participate in the control of the Company in a
manner contrary to the rights and powers granted herein and under the Articles
of Organization shall be null and void and without force and effect. Subject to
the decisions and judgement with respect to all professional medical or clinical
matters of qualified medical personnel, AHH Management, in conjunction with the
Investor Manager where applicable, shall have the right to determine when and
how the operations of the Company shall be conducted. The exercise by any other
Member of any of the rights granted him or her hereunder shall not be deemed to
be taking part in the control of the business of the Company and shall not
constitute a violation of this section.

         5.8      Consent by Members to Exercise of Certain Rights and Powers by
Managers. By its execution hereof, each Member expressly consents to the
exercise by the Managers of the rights, powers, and authority conferred on the
Managers by this Agreement.

         5.9      Other Business of Members.

                  (a)      Subject to (b) below, any Member, including any
         Manager, may engage independently or with others in other business
         ventures of every nature and description, including without limitation
         the purchase of medical equipment, the rendering of medical services
         of any kind, and the making or management of other investments and
         neither the Company nor any Member shall have any right by virtue of
         this Agreement or the relationship created hereby in or to such other
         ventures or activities or to the income or proceeds derived therefrom,
         and the pursuit of such ventures.

                  (b)      As long as any Member owns a Membership Interest in
         the Company, and for a period of three (3) years after a Member ceases
         for any reason (whether due to death, disability, retirement or
         otherwise) to own a Membership Interest in the Company, such Member and
         all of its respective Affiliates shall not hold, directly or
         indirectly, an investment, ownership or other beneficial interest in
         (i) any hospital or (ii) other Entity which provides any of the
         following services or facilities: cardiac catheterization,

                                       19

<PAGE>   21

         angioplasty, peripheral angioplasty, atherectomy, stenting and PTCA or
         other cardiac surgical or interventional procedures or services, in any
         case within a thirty (30) mile radius of the Hospital (the
         "Territory"), provided that (i) no Member who is a physician shall be
         prohibited from maintaining his or her staff privileges at any other
         hospital; (ii) nothing herein shall prohibit a Member from owning up to
         two percent (2%) of the outstanding capital stock of a company whose
         stock is publicly traded and listed on a nationally recognized
         securities exchange or from investing in a publicly traded mutual fund,
         or (iii) owning an interest in the two existing cardiac catheterization
         labs owned by AHI as long as only diagnostic catheterizations are
         performed therein, or (iv) nothing herein shall prohibit AHI or Edward
         B. Diethrich, M.D. ("EBD") from acquiring an ownership or other equity
         interest in any health care facility located north and east of the
         intersection of Doubletree Ranch Road and Tatum Boulevard, Scottsdale,
         Arizona, which acquisition would otherwise violate the provisions of
         this subsection (b), provided that AHI provides to the Company upon the
         Company's written request therefor a guaranty of payment of ten percent
         (10%) of the original principal balance (determined assuming such
         mortgage loan has been fully funded by the lender but reduced by the
         amount of any principal payments which have been made as of the date
         such guaranty is required hereunder) of the first mortgage loan upon
         the Hospital. In addition, AHH Management or its Affiliates may
         separately operate a mobile catheterization laboratory within the
         Territory, but only if either AHH Management or an Affiliate thereof is
         providing such service pursuant to a lease of six (6) months or less to
         a provider who is already providing cath lab services or if the
         Investor Manager has elected not to have such service provided by the
         Company.

                  (c)      The Members, including the Managers, have reviewed
         the term and geographical restrictions included in Section 5.9(b), and
         in light of the interests of the parties hereto, agree that such
         restrictions are fair and reasonable.

                  (d)      If there is a breach or threatened breach of the
         provisions of this Section 5.9 of this Agreement, in addition to other
         remedies at law or equity, the non-breaching party shall be entitled to
         injunctive relief. The parties desire and intend that the provisions of
         this Section 5.9 shall be enforced to the fullest extent permissible
         under the law and public policies applied, but the unenforceability or
         modification of any particular paragraph, subparagraph, sentence,
         clause, phrase, word, or figure shall not be deemed to render
         unenforceable the remainder of this Section 5.9. Should any such
         paragraph, subparagraph, sentence, clause, phrase, word, or figure be
         adjudicated to be wholly invalid or unenforceable, the balance of this
         Section 5.9 shall thereupon be modified in order to render the same
         valid and enforceable and the unenforceable portion of this Section 5.9
         shall be deemed to have been deleted from this Agreement.

                  (e)      The Company, the Managers and the Investor Members
         agree that the benefits to any Investor Member hereunder do not
         require, are not payment for, and are not in any way contingent upon
         the referral, admission or any other arrangement for the provision of
         any item or service offered by AHH Management or the Company to
         patients of such Investor Member in any facility, laboratory, cardiac
         catheterization facility or other health care operation controlled,
         managed or operated by AHH Management or the

                                       20
<PAGE>   22

         Company and nothing herein is intended to prohibit any party from
         practicing medicine at any other facility.

                  (f)      If the Investor Member is a legal entity and not an
         individual, such Investor Member shall cause each of its existing and
         future equity owners to agree in writing to be personally bound by the
         terms of this Section 5.09.

         5.10     Managers' Standard of Care. Each Manager shall act in a manner
he, she or it believes in good faith to be in the best interest of the Company
and with such care as an ordinarily prudent person in a like position would use
under similar circumstances. In discharging its duties, each Manager shall be
fully protected in relying in good faith upon the records required to be
maintained under this Agreement and upon such information, opinions, reports and
statements by any of its other Managers, Members, or agents, or by any other
person as to matters each Manager reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Company, including information, opinions,
reports or statements as to the value and amount of the assets, liabilities,
profits or losses of the Company or any other facts pertinent to the existence
and amount of assets from which distributions to members might properly be paid.

         5.11     Limitation of Liability. A Manager shall not be liable to the
Company, its Members, or other Managers for any action taken in managing the
business or affairs of the Company if he, she or it performs the duty of his,
her or its office in compliance with the standard contained in Section 5.10. No
Manager has guaranteed nor shall have any obligation with respect to the return
of a Member's Capital Contribution or profits from the operation of the Company.
Furthermore, no Manager, its Affiliates or its employees (collectively, its
"Agents") shall be liable to the Company or to any Member for any loss or damage
sustained by the Company or any Member except loss or damage resulting from
gross negligence or intentional misconduct or knowing violation of law or a
transaction for which such Manager or Agent received a personal benefit in
violation or breach of the provisions of this Agreement.

         5.12     Indemnification of the Managers.

                  (a)      The Manager and its Agents shall be indemnified by
         the Company against any losses, judgments, liabilities, expenses,
         including attorneys' fees and amounts paid in settlement of any claims
         sustained by them arising out of any action or inaction of the Member
         or its Agents in its capacity as a Manager of the Company (or, in the
         case of an Agent, within the scope of the Manager's authority) to the
         fullest extent allowed by law, provided that the same were not the
         result of gross negligence or willful misconduct on the part of the
         Manager or an Agent and provided that the Manager or an Agent, in good
         faith, reasonably determined that such course of conduct was in the
         best interest of the Company; provided, however, that such
         indemnification and agreement to hold harmless shall be recoverable
         only out of Company assets. Subject to applicable law, the Company
         shall advance expenses incurred with respect to matters for which a
         Manager may be indemnified hereunder.

                                       21
<PAGE>   23

                  (b)      If at any time, the Company has insufficient funds to
         furnish indemnification as herein provided, it shall provide such
         indemnification if and as it generates sufficient funds and prior to
         any cash distributions, pursuant to Article VI or Article VII hereof,
         to the Members.

         5.13     Election and Replacement of Investor Manager. In accordance
with the procedures outlined in Section 10.1 herein, the Investor Members shall
elect an Investor Manager to serve for one year terms or until his successor is
duly elected. At any time, in accordance with Section 10.1, the Investor Members
may replace the Investor Manager and elect a new Investor Manager.

         5.14     Role of Investor Manager. Notwithstanding anything herein to
the contrary, the Investor Manager shall take no action nor make any decision on
behalf of the Company except to the extent it is expressly authorized to do so
under this Agreement in its capacity as Investor Manager.

         5.15     Purchase of Goods and Services from AHH Management. Goods and
services purchased from AHH Management or its Affiliates shall be of
substantially the same quality and price as could be obtained from an unrelated
third party.

         5.16     Decisions by Managers. Except as provided in this Agreement,
decisions and actions to be taken by the Managers shall be deemed to have been
made only upon the affirmative approval or consent of AHH Management and the
Investor Manager. In the event a decision, approval or consent is requested of
the Investor Manager by AHH Management prior to the date which is sixty (60)
days after the opening of the Hospital, it shall be deemed to have been
affirmatively made if the Investor Manager fails to respond to any such written
request therefor within five (5) days of notice thereof by AHH Management,
provided however, if a decision, approval or consent is requested of the
Investor Manager by AHH Management after the date which is sixty (60) days after
the opening of the Hospital, such decision, approval or consent shall be deemed
to have been affirmatively made if the Investor Manager fails to respond to any
such written request therefor within ten (10) days of notice thereof by AHH
Management. Notwithstanding anything in this Agreement to the contrary, all
decisions and actions to be made by the Managers with respect to any loan, lease
or other similar financing of the development, construction or operation of the
Hospital or the Company's affairs, including without limitation the decisions
with respect to incurring any indebtedness or the refinancing thereof, shall be
made by AHH Management and shall be subject to the consent of the Investor
Manager, which consent shall not be unreasonably withheld;

         The development and annual operating budgets to be proposed by AHH
Management shall be approved by the Managers as provided above subject to the
following:

                  (a)      The Investor Manager shall be deemed to have approved
         a development budget which is substantially consistent with the
         attached Development Budget Schedule attached hereto as Schedule C to
         this Agreement;

                  (b)      The Investor Manager shall not unreasonably withhold
         its approval of budgets which are within the reasonable revenue
         expectations of the Hospital and which are

                                       22
<PAGE>   24

         in compliance (both as to terms and availability of financing) with
         agreements with the Company's lenders and other parties providing
         financing to the Company; and

                  (c)      In the event that the Managers are unable to approve
         an annual budget, AHH Management shall be authorized to operate the
         Company under the previous year's budget increased by the greater of 5%
         or the increase during the previous year in the Consumer Price Index
         for Medical Items until a new budget is approved.

                                   ARTICLE VI

                          DISTRIBUTIONS AND ALLOCATIONS

         6.1      Distributions of Cash Flow from Operations and Cash from Sales
or Refinancing. Prior to the dissolution of the Company, Cash Flow from
Operations and Cash from Sales or Refinancing, if any, remaining after repayment
of any loans made by the Members to the Company shall be distributed quarterly
by the Managers as Cash Distributions according to the relative percentage
Membership Interests of the Members and Economic Interest Owners.
Notwithstanding anything herein to the contrary, no distributions shall be made
to Members if prohibited by the Act.

         6.2      Profits. Except as provided in Schedule B, Profits shall be
allocated as follows:

                  (a)      First, to the Members who have been allocated Losses
         pursuant to Subsection 6.3(b) below until the cumulative Profits
         allocated pursuant to this Subsection 6.2(a) equal the cumulative prior
         allocations of Losses under that Subsection.

                  (b)      Next, to the Members who have been allocated Losses
         pursuant to Subsection 6.3(a) below until the cumulative Profits
         allocated pursuant to this Subsection 6.2(b) equal the cumulative prior
         allocations of Losses under that Subsection.

                  (c)      All remaining Profits shall be allocated to the
         Members in accordance with their percentage Membership Interests.

         6.3      Losses. Except as provided in Schedule B, Losses shall be
allocated as follows:

                  (a)      First, Losses shall be allocated to the Members with
         positive Adjusted Capital Account balances in proportion to those
         balances.

                  (b)      All remaining Losses shall be allocated to the
         Members in accordance with their percentage Membership Interests.

         6.4      Code Section 704(c) Tax Allocations. Income, gain, loss, and
deduction with respect to any property contributed to the capital of the Company
shall, solely for tax purposes, be allocated among the Members so as to take
account of any variation between the adjusted basis of such property to the
Company for federal income tax purposes and its initial Agreed Value pursuant to
any method allowable under Code Section 704(c) and the Regulations promulgated
thereunder.

                                       23
<PAGE>   25

         In the event the Agreed Value of any Company asset is adjusted after
its contribution to the Company, subsequent allocations of income, gain, loss
and deduction with respect to such asset shall take into account any variation
between the adjusted basis of such asset for federal income tax purposes and its
Agreed Value pursuant to any method allowable under Code Section 704(c) and the
Regulations promulgated thereunder.

         Any elections or other decisions relating to allocations under this
Section shall be determined by AHH Management. Absent a determination by AHH
Management, the remedial allocation method under Regulation Section 1.704-3(d)
shall be used. Allocations pursuant to this Section are solely for purposes of
federal, state, and local taxes and shall not be taken into account in computing
any Member's Capital Account or share of Profits, Losses, other items, or
distributions pursuant to any provision of this Agreement.

         6.5      Miscellaneous.

                  (a)      Allocations Attributable to Particular Periods. For
         purposes of determining Profits, Losses or any other items allocable to
         any period, such items shall be determined on a daily, monthly, or
         other basis, as determined by AHH Management using any permissible
         method under Code Section 706 and the Regulations thereunder.

                  (b)      Other Items. Except as otherwise provided in this
         Agreement, all items of Company income, gain, loss, deduction, credit
         and any other allocations not otherwise provided for shall be divided
         among the Members in the same proportion as they share Profits or
         Losses, as the case may be, for the year.

                  (c)      Tax Consequences; Consistent Reporting. The Members
         are aware of the income tax consequences of the allocations made by
         this Article and by the Regulatory Allocations and hereby agree to be
         bound by those allocations as reflected on the information returns of
         the Company in reporting their shares of Company income and loss for
         income tax purposes. Each Member agrees to report its distributive
         share of Company items of income, gain, loss, deduction and credit on
         its separate return in a manner consistent with the reporting of such
         items to it by the Company. Any Member failing to report consistently,
         and who notifies the Internal Revenue Service of the inconsistency as
         required by law, shall reimburse the Company for any legal and
         accounting fees incurred by the Company in connection with any
         examination of the Company by federal or state taxing authorities with
         respect to the year for which the Member failed to report consistently.

                  (d)      Economic Interest Owners. Each Economic Interest
         Owner shall be entitled to the distributions and allocations to which
         its predecessor in interest would have been entitled under this Article
         VI had it retained the Economic Interest acquired by the Economic
         Interest Owner.

                                       24
<PAGE>   26

                                   ARTICLE VII

              DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS

         7.1      No Termination by Certain Acts of Member. Neither the transfer
of interest, withdrawal from the Company, bankruptcy, insolvency, dissolution,
liquidation or other disability, nor the legal incompetency of any Member shall
result in the termination or dissolution of the Company or affect its
continuance in any manner whatsoever.

         7.2      Dissolution. The Company shall be dissolved upon the happening
of any of the following events, whichever shall first occur:

                  (a)      The election by AHH Management to dissolve the
         Company in accordance with the terms of Section 3.5(c) hereof;

                  (b)      The death, insanity, bankruptcy, retirement (other
         than due to a failure of an Investor Manager to be re-elected as an
         Investor Manager), resignation (other than due to an Investor Manager's
         resigning from serving as a Manager while still remaining a Member) or
         expulsion of any Manager who is also a Member, unless the Company is
         continued by the consent of not less than a majority in interest
         (defined in accordance with Revenue Procedure 94-46 or successor
         provisions) of the remaining Members within ninety (90) days after
         notice of such event, effective as of the date of such event. If there
         is no remaining Manager, the remaining Members owning at least 51% of
         the Membership Interests which are owned by the remaining Members
         shall, if they desire to continue the Company, elect a Substitute
         Manager who shall assume all of the rights and duties of AHH Management
         under this Agreement (which Substitute Manager accepts such election);

                  (c)      Upon the written agreement of AHH Management and the
         Investor Manager;

                  (d)      The expiration of the term of the Company as provided
         in Section 2.5 hereof;

                  (e)      The adjudication of bankruptcy of the Company;

                  (f)      Upon the written consent of a Super-Majority Vote of
         the Members;

                  (g)      In accordance with Section 12.11 hereof;

                  (h)      The entry of a decree of judicial dissolution or the
         administrative dissolution of the Company as provided in the Act; and

                  (i)      At the election of AHH Management or of the Investor
         Manager, in the event that by March 1, 1997 (unless such date is
         extended by the consent by the Manager and the Investor Manager)
         Investor Members reasonably acceptable to AHH Management and the
         Investor Manager have not been admitted as Members subscribing for at
         least ninety-three percent (93%) of the Membership Interests described
         in Section 3.1(b).

                                       25
<PAGE>   27

         7.3      Dissolution and Final Liquidation.

                  (a)      Upon any dissolution of the Company, the Company
         shall not terminate, but shall cease to engage in further business
         except to the extent necessary to perform existing contracts and
         preserve the value of its assets. Its assets shall be liquidated and
         its affairs shall be wound up as soon as practical thereafter by the
         Managers, or if for any reason there is no Manager, by another Person
         designated by a Super-Majority Vote of the Members. In winding up the
         Company and liquidating assets, the Managers, or other Person so
         designated for such purpose, may arrange, either directly or through
         others, for the collection and disbursement to the Members of any
         future receipts from the Hospital or other sums to which the Company
         may be entitled, and shall sell the Company's interest in the Hospital
         and the Equipment to any Person, including AHH Management or any
         Affiliate thereof, on such terms and for such consideration as shall be
         consistent with obtaining the fair market value thereof, as such fair
         market value is approved by a Super-Majority Vote of the Members.

                  (b)      Upon any such dissolution and liquidation of the
         Company, the net assets, if any, of the Company available for
         distribution, including any cash proceeds from the liquidation of
         Company assets, shall be applied and distributed in the following
         manner or order, to the extent available:

                           (i)      To the payment of or creation of reserves
                  for all debts, liabilities, and obligations to all creditors
                  of the Company (other than the Members or their Affiliates)
                  and the expenses of liquidation;

                           (ii)     To the payment of all debts and liabilities
                  (including interest) owed to the Members or their Affiliates
                  as creditors; and

                           (iii)    The balance to the Members with positive
                  Capital Account balances after taking into account all other
                  adjustments during the Fiscal Year in which liquidation
                  occurs.

                  (c)      The Members shall look solely to the assets, if any,
         of the Company for any return of their Capital Contributions and, if
         the assets of the Company remaining after payment or discharge of the
         Company's debts and liabilities, or provision therefor, are
         insufficient to return all or any part of the Capital Contributions, no
         Member shall have any right of recourse against the Managers or other
         Members or to charge the Managers or other Members for any amounts
         except as provided herein and except to the extent otherwise provided
         by the Act and/or Arizona law.

                  (d)      Upon such dissolution, reasonable time shall be
         allowed for the orderly liquidation of the assets of the Company and
         the discharge of liabilities to creditors so as to minimize the losses
         normally attendant to a liquidation.

                                       26
<PAGE>   28

                  (e)      The Capital Accounts of the Members, as adjusted,
         shall be utilized by the Company for the purpose of making
         distributions to those Members with positive balances in their
         respective Capital Accounts pursuant to Section 7.3(b). In making such
         distributions, the Managers or the Person winding up the affairs of the
         Company shall distribute all funds available for distribution to the
         Members and Economic Interest Owners (after establishing any reserves
         that the Managers deem or the Person winding up the affairs of the
         Company deems reasonably necessary pursuant to Section 7.3(b)) prior to
         the later of (a) the end of the taxable year in which the event occurs
         which caused the termination and dissolution of the Company, or (b)
         ninety (90) days after the occurrence of such event. The Managers in
         their sole discretion, or the Person winding up the affairs of the
         Company, in its discretion, may elect to have the Company retain any
         installment obligations owed to the Company until collected in full so
         long as any portion of the reserves which are later determined to be
         unnecessary, and all collections on such installment obligations which
         are not deemed to be reasonably necessary by the Managers or the Person
         winding up the affairs of the Company to add to such reserves are
         distributed as soon as practicable in accordance with the provisions of
         Section 7.3(b) as modified by this Section.

                  (f)      Each Economic Interest Owner shall be entitled to the
         distributions to which its predecessor in interest would have been
         entitled pursuant to this Article VII had it retained the Economic
         Interest acquired by the Economic Interest Owner.

         7.4      Termination. Upon completion of the dissolution, winding up,
distribution of the liquidation proceeds and any other Company assets, the
Company shall terminate.

         7.5      Payment in Cash. Any payments made to any Member pursuant to
this Article VII shall be made only in cash.

         7.6      Goodwill and Trade Name. Upon the dissolution of the Company,
the firm or trade name of the Company and any goodwill associated therewith
shall become the sole property of AHH Management, provided that distributions
and allocations otherwise due to AHH Management shall not be reduced as a result
of AHH Management becoming entitled to such assets.

         7.7      Termination of Noncompetition Covenants. Upon the later of the
dissolution of the Company and the completion of the liquidation process, the
Members shall have no continuing liability, or obligation under Section 5.9(b)
except that Section 5.9(b) shall continue to be binding upon a Member whose
breach of this Agreement caused a dissolution of the Company and any actions for
a breach of this Agreement, including a breach of Section 5.9(b), shall not be
impaired by the dissolution or completed liquidation.

                                       27
<PAGE>   29

                                  ARTICLE VIII

                REMOVAL OR WITHDRAWAL OF MANAGERS AND MEMBERS AND
            TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS

         8.1      Manager - Transfers.

                  (a)      Except as provided in this Section 8.1, without the
         consent of a Majority Vote of Investor Members, AHH Management shall
         not voluntarily withdraw from the Company as a Member at any time prior
         to its termination, or transfer or assign any of its rights and duties
         as a Manager, provided that AHH Management may assign its Membership
         Interest in the Company and its rights to be a Manager either to any
         party who directly or indirectly purchases all or substantially all of
         MedCath Incorporated's assets or more than fifty percent (50%) of its
         capital stock (in either event, a "MedCath Sale") if such purchaser
         assumes in writing the obligations of AHH Management hereunder or to a
         party under control of, common control, or which controls, AHH
         Management. AHH Management may also assign its Membership Interest in
         the Company and its rights to be a Manager to a financial institution
         as collateral security for repayment of indebtedness for borrowed funds
         by AHH Management or its Affiliates. In the event that AHH Management
         desires to sell any of its Membership Interest, or in the event of a
         sale of more than fifty percent (50%) of the capital stock with AHH
         Management, and in both such cases such sale is not in connection with
         a MedCath Sale, then the other Members shall first have an option to
         purchase such Membership Interest in accordance with the Right of First
         Refusal provided in Section 8.4.

                  (b)      The Investor Manager may not assign his rights to be
         a Manager herein. Upon the withdrawal or resignation of the Investor
         Manager, a substitute therefore who must be an Investor Member may be
         elected by a Majority Vote of Investor Members.

                  (c)      Any resignation or withdrawal by a Manager as a
         manager shall not constitute such Manager's withdrawal as a Member.

         8.2      Members' Right to Continue. If at any time there is no
remaining Manager, a meeting of the Members shall be held at the principal place
of business of the Company within forty-five (45) days after the happening of
such event to consider whether to continue the Company on the same terms and
conditions as are contained in this Agreement (except that the Managers may be
different) and to select a Manager for the Company, or whether to wind up the
affairs of the Company, liquidate its assets and distribute the proceeds
therefrom in accordance with Article VII hereof. The Company may be continued
and a new Manager (who accept such appointment) selected by the Members within
ninety (90) days of the occurrence of the event described in Section 7.2(a). The
new Manager shall execute, acknowledge, file or record (as appropriate) Articles
of Organization and an Operating Agreement and such other documents as may be
required by the Act. The continuance of the Company pursuant to the terms of
this Section 8.2 is conditioned upon (i) the amendment of the Articles of
Organization to reflect the foregoing change and, if applicable, compliance by
the Company with any notice provisions of the Act and (ii) delivery to the
withdrawing Manager of an indemnification agreement by the Company, in form and
substance

                                       28
<PAGE>   30

reasonably satisfactory to the withdrawing Manager, indemnifying and holding AHH
Management harmless against all future liabilities of the Company.

         8.3      Relationship with Substitute Manager. The relationship of the
Members to any person or entity that has acquired the Membership Interest of
either AHH Management or the Investor Manager shall be governed by this
Agreement. If the acquiring party was not theretofore a Manager, then such
Substitute Manager shall have all the rights and powers of such Manager under
this Agreement; provided, it assumes in writing the obligations of such Manager
under this Agreement and any arising thereafter, and accepts and adopts all the
terms and provisions of this Agreement in writing. The withdrawing Manager shall
be liable for all of its covenants and obligations under this Agreement for all
periods prior to its withdrawal until such liability is assumed by a Substitute
Manager.

         8.4      Members Who Are Not Managers - Restriction on Transfer. Except
as otherwise set forth in this Section or in this Agreement, no Economic
Interest and/or Membership Interest of an Investor Member or any portion
thereof, shall be validly sold or assigned whether voluntarily, involuntarily or
by operation of law, and no purported assignee shall be recognized by the
Company for any purpose, unless such Economic Interest and/or Membership
Interest shall have been transferred in accordance with the provisions of this
Agreement and in compliance with such additional restrictions as may be imposed
by AHH Management to comply with requirements imposed by any Federal or state
securities regulatory authority and unless AHH Management' consent is obtained.
In no event, however, shall an Investor Member transfer or sell all or any of
its Economic Interest and/or Membership Interest to any party which, if a
Member, would be in violation of Section 5.9(b) hereof. Except as otherwise set
forth in this Section or in this Agreement, an Investor Member may transfer,
sell or assign his or her entire Economic Interest and/or Membership Interest if
it has received the approval of AHH Management, not to be unreasonably withheld,
provided however: (a) the Company first for a period of fifteen (15) days, and
thereafter the other Members for a period of fifteen (15) days shall have the
right, but not the obligation, to purchase all, but not less than all, of the
Economic Interest and/or Membership Interest proposed to be transferred, which
right shall be exercisable on the terms and for the purchase price set forth in
writing in a bona fide offer made for the Interests by a third-party (the "Right
of First Refusal"), and (b) there shall have been filed with the Company a duly
executed and acknowledged counterpart of the instrument making such assignment
signed by both the assignor and assignee and such instrument evidences the
written acceptance by the assignee of all of the terms and provisions of the
Agreement, represents that such assignment was made in accordance with all
applicable laws and regulations and the assignee shall have represented to the
Company in writing that he, she or it meets the investor suitability standards
established by his, her or its state of residence, or, in the absence thereof,
the investor suitability standards established by the Company. AHH Management
shall use reasonable care to determine that transfers are in accordance with
applicable laws and regulations, including obtaining an opinion of counsel to
that effect. Any Member who is not a Manager who shall assign all its Membership
Interest shall cease to be a Member of the Company, except that unless and until
a Substitute Member is admitted in his or her stead, such assigning Member shall
retain the statutory rights of an assignor of a Membership Interest under the
Act. Any Membership Interests acquired by the Company pursuant to Section 8.4
shall, subject to applicable law, be re-offered by the Company to suitable
investors.

                                       29
<PAGE>   31

         In the event that an Investor Member who is an Entity (x) sells or
attempts to sell fifty percent (50%) or more of its assets, determined using
such assets' then current value, (y) if the owners of such Entity as of the date
hereof cease to own in the aggregate fifty-one percent (51%) or more of such
Entity, or (z) if the Entity is a medical practice, it enters into a Transaction
(as defined in the Supplemental Agreement between AHH Management, EBD, AHI and
ACS), then unless such sale, transfer or Transaction was to other Members of the
Company or to individuals who are owners of an Investor Member as of the date
hereof, such transfer by the Entity shall constitute a transfer of such Entity's
Membership Interest for purposes of this Section 8.4 giving rise to the Right of
First Refusal of the other Members and the Company set forth above, except that
the purchase price for the Membership Interest acquired pursuant to this
sentence shall be determined using the Fair Market Appraisal Procedure described
in Section 8.11 which shall be paid pursuant to the payment method also
described in Section 8.11.

         8.5      Condition Precedent to Transfer of Economic Interest and/or
Membership Interest. Notwithstanding anything herein to the contrary, no
transfer of an Economic Interest and/or Membership Interest may be made if such
transfer (a) constitutes a violation of the registration provisions of the
Securities Act of 1933, as amended, or the registration provisions of any
applicable state securities laws; (b) if after such transfer the Company will
not be classified as a limited liability company for Federal income tax
purposes; and (c) if when taken together with other prior transfers, results in
a "termination" of the Company for Federal income tax purposes. The Company may
require, as a condition precedent to transfer of an Economic Interest and/or
Membership Interest, delivery to the Company, at the proposed transferor's
expense, of an opinion of counsel satisfactory (both as to the counsel and
substance of the opinion) to AHH Management that the transfer will not violate
any of the foregoing restrictions.

         8.6      Substitute Member - Conditions to Fulfill. No assignee of a
Member's Membership Interest in the Company shall have the right to become a
Substitute Member in place of his or her assignor unless, in addition to any
other requirement herein, all of the following conditions are satisfied:

                  (a)      The Company has waived its right pursuant to Section
         8.4 to purchase the Membership Interest held by the assignee;

                  (b)      The duly executed and acknowledged written instrument
         of assignment which has been filed with the Company sets forth that the
         assignee becomes a Substitute Member in place of the assignor;

                  (c)      The assignor and assignee execute and acknowledge
         such other instruments as AHH Management may deem reasonably necessary
         or desirable to effect such admission, including, but not limited to,
         the written acceptance and adoption by the assignee of the provisions
         of this Agreement;

                  (d)      The written consent of AHH Management to such
         substitution is obtained, which consent may be withheld in AHH
         Management' sole and absolute discretion;

                                       30
<PAGE>   32

                  (e)      The payment by the Member of all costs to the Company
         associated with the transaction, including but not limited to legal
         fees, transfer fees, and filing fees.

         8.7      Allocations Between Transferor and Transferee. Upon the
transfer of a Member's Economic Interest or Membership Interest, all items of
income, gain, loss, deduction and credit attributable to the Economic Interest
or Membership Interest so transferred shall be allocated between the transferor
and the transferee in such manner as the transferor and transferee agree at the
time of transfer; provided such allocation does not violate federal or state
income tax law. If AHH Management, in its sole discretion, deems such laws
violated, then such allocation shall be made pro rata for the Fiscal Year based
upon the number of days during the applicable Fiscal Year of the Company that
the Economic Interest or Membership Interest so transferred was held by the
transferor and transferee, without regard to the results of Company activities
during the period in which each was the holder, or in such other manner as AHH
Management deems necessary to comply with Federal or state income tax laws.
Distributions as called for by this Agreement shall be made to the holder of
record of the Economic Interest or Membership Interest on the date of
distribution. Notwithstanding anything contained in this Agreement to the
contrary, both the Company and AHH Management shall be entitled to treat the
assignor of any assigned Economic Interest or Membership Interest as the
absolute owner thereof in all respects, and shall incur no liability for
distributions of cash or other property made in good faith to such assignor in
reliance on the Company records as they exist until such time as the written
assignment has been received by, and recorded on the books of the Company. For
purposes of this Article VIII, the effective date of an assignment of any
Economic Interest or Membership Interest shall be the last day of the month
specified in the written instrument of assignment.

         8.8      Rights, Liabilities of, and Restrictions on Assignee. No
assignee of a Member's Economic Interest or Membership Interest shall have the
right to participate in the Company, inspect the books of account of the Company
or exercise any other right of a Member unless and until admitted as a
Substitute Member. Notwithstanding AHH Management' failure or refusal to admit
an assignee as a Substitute Member, such assignee shall be entitled to receive
the share of income, credit, gain, expense, loss and deduction and cash
distributions provided hereunder that is assigned to it, and, upon demand, may
receive copies of all reports thereafter delivered pursuant to the requirements
of this Agreement; provided, the Company shall have first received notice of
such assignment and all required consents thereto shall have been obtained and
other conditions precedent to transfer thereof shall have been satisfied. The
Company's tax returns shall be prepared to reflect the interest of assignees as
well as Members.

         8.9      Death of a Member. Heirs of Members shall be entitled to
inherit the Membership interests of a deceased Member, provided that upon a
Member's death such interests shall be automatically converted to an Economic
Interest only in the Company until such heir agrees in writing to all of the
terms and conditions of this Agreement and such other reasonable terms as may be
established by AHH Management as a condition to such heir becoming a Member, in
which event such interest shall again become a Membership Interest in the
Company. Notwithstanding the previous sentence, within one hundred twenty (120)
days of the Company first learning of the death of a Member, the Company shall
have the option to purchase the Membership Interest of the deceased Member, and
the estate of the deceased Member shall be obligated to sell such Membership
Interest to the Company, in accordance with the terms of this Section 8.9. The

                                       31
<PAGE>   33

Company may exercise its option by giving written notice thereof to the estate
of the deceased Member, or the appropriate representative thereof, within such
one hundred twenty (120) day period. The purchase price for such Membership
Interest shall equal five (5) multiplied by the pretax net income (as reasonably
determined by the Company's accountants) of the Company for the twelve (12)
month period ending as of the calendar quarter most recently ended prior to the
death of such Member multiplied by the percentage interest of such Member in the
Company (the "Formula Purchase Price"). The purchase price shall be paid (the
"Payment Method") in three (3) equal annual installments, the first third of
which shall be paid upon the determination of the purchase price and the
remaining two (2) installments of which shall be paid on the first and second
anniversary of such date. The outstanding amounts due from the Company to the
estate of the deceased Member shall bear interest at Prime Rate as of the date
of such Member's death. Accrued interest shall be paid as of the dates payments
of principal are due as provided above.

         8.10     Repurchase of Interests in Certain Event.

                  (a)      In the discretion of AHH Management, the Company may,
         but is not obligated to, repurchase a Member's Economic Interest or
         Membership Interest upon such Member's breach of the Member's
         obligations contained in Article III, Sections 5.09, 8.1(b), 8.4, 8.9,
         8.11, 12.1 and 12.11 of this Agreement.

                  (b)      Each Member agrees to sell its Membership Interest to
         the Company in the event AHH Management elects to exercise the right of
         repurchase granted under Section 8.10(a) and the purchase price shall
         the lower of (x) the Capital Contribution of the Member less all
         amounts distributed to such Member by the Company, and (y) the fair
         market value of such Member's Membership Interest determined by an
         appraiser reasonably selected by AHH Management.

         8.11     Option to Sell Membership Interest. Notwithstanding anything
in this Agreement to the contrary, at any time after the fifth (5th) anniversary
and before the twentieth (20th) anniversary of the Completion Date, AHI shall
have the option to cause AHH Management to purchase up to an aggregate of fifty
percent (50%) of AHI's Membership Interest; provided that:

                  (a)      Prior the tenth (10th) anniversary of the Completion
         Date, AHH Management shall not be required to purchase more than five
         percent (5%) of AHI's Membership Interest during each twelve (12) month
         period which follows the fifth (fifth) anniversary of the Completion
         Date (determined on a cumulative basis);

                  (b)      Prior to the death or retirement of EBD from the
         practice of medicine in the Phoenix, Arizona area, EBD directly, or
         through AHI, shall continue to own at least twenty-five percent (25%)
         of AHI's Membership Interest which AHI acquired as of the date hereof;

                  (c)      AHH Management's obligation to purchase AHI's
         Membership Interest from time to time hereunder shall be conditioned
         upon the simultaneous purchase (at the same purchase price, on a pro
         rata basis, as will be paid by AHH Management and on such other terms
         and conditions to be negotiated by AHI at the time), on each occasion,
         of an equal percentage of AHI's Membership Interest by physicians who
         constitute a majority of

                                       32
<PAGE>   34

         the physicians of AHI and of AHI Cardiovascular Surgeons, Ltd. ("ACS")
         then practicing full-time with AHI and ACS at their main or primary
         offices and who must agree to be bound by the terms and conditions of
         this Agreement; and

                  (d)      The purchase price of such Membership Interest then
         being sold by AHI to AHH Management and the physicians of AHI and ACS
         hereunder shall be its fair market value determined using the appraisal
         procedure ("Fair Market Appraisal Procedure") set forth in paragraph 3
         of the Supplemental Agreement entered into as of the date hereof
         between AHI, ACS and AHH Management (the costs of which shall be paid
         in accordance with the terms of the Supplemental Agreement procedures).
         The purchase price may at the election of AHH Management be paid in
         cash or by a twenty percent (20%) cash down payment with a deferred
         balance of such a purchase price bearing interest at eight percent (8%)
         per annum and amortized in equal monthly installments over a five year
         period. The note evidencing any deferred balance shall be guaranteed by
         AHH Management and shall be secured by a pledge of the Membership
         Interest which has been sold by AHI to AHH Management pursuant to this
         Section 8.11. The closing of any purchase by AHH Management hereunder
         shall occur within ninety (90) days of the date of AHI's request to AHH
         Management to purchase its Membership Interest pursuant to this Section
         8.11 or if later, within thirty (30) days of the determination of the
         fair market value hereunder.

                                   ARTICLE IX

                        RECORDS, ACCOUNTINGS AND REPORTS

         9.1      Books of Account. At all times during the continuance of the
Company, AHH Management shall maintain or cause to be maintained true and full
financial records and books of account showing all receipts and expenditures,
assets and liabilities, profits and losses, and all other records necessary for
recording the Company's business and affairs including those sufficient to
record the allocations and distributions required by the provisions of this
Agreement.

         9.2      Access to Records. The books of account and all documents and
other writings of the Company, including the Articles of Organization and any
amendments thereto, shall at all times be kept and maintained at the registered
office of the Company. Each Member or his or her designated representatives
shall, upon reasonable notice to AHH Management, have access to such financial
books, records and documents during reasonable business hours and may inspect
and make copies of any of them. Each Member may receive by mail, upon written
request to the Company and at his or her cost, a list of the names and addresses
of the Members and the percentage of Economic Interest held by each of them or
such other information which may be obtained pursuant to requirements of the
Act.

         9.3      Bank Accounts and Investment of Funds.

                  (a)      AHH Management shall open and maintain, on behalf of
         the Company, a bank account or accounts in a federally insured bank or
         savings institution as it shall determine, in which all monies received
         by or on behalf of the Company shall be deposited.

                                       33
<PAGE>   35

         All withdrawals from such accounts shall be made upon the signature of
         such person or persons as AHH Management may from time to time
         designate.

                  (b)      Any funds of the Company which AHH Management may
         determine are not currently required for the conduct of the Company's
         business may be deposited with a federally insured bank or savings
         institution or invested in short-term debt obligations (including
         obligations of federal or state governments and their agencies,
         commercial paper, certificates of deposit of commercial banks, savings
         banks or savings and loan associations) as shall be determined by AHH
         Management in its sole discretion.

         9.4      Fiscal Year. The Fiscal Year and accounting period of the
Company shall end on September 30 of each year.

         9.5      Accounting Reports. As soon as reasonably practicable after
the end of each Fiscal Year but in no event later than 120 days after the end
thereof, each Member shall be furnished an annual accounting showing the
financial condition of the Company at the end of such Fiscal Year and the result
of its operations for the Fiscal Year then ended, which annual accounting shall
be prepared on an accrual basis in accordance with generally accepted accounting
principles applied on a consistent basis and shall be delivered to each of the
Members promptly after it has been prepared. It shall include a balance sheet as
of the end of such Fiscal Year and statements of income and expense, each
Member's equity, and cash flow for such Fiscal Year. At AHH Management' election
the Company shall either be audited or such annual accountings shall be either
reviewed or compiled by a firm of independent certified public accountants
engaged by AHH Management on behalf of the Company. The report shall set forth
the distributions to the Members for such Fiscal Year and shall separately
identify distributions from (i) operating revenue during such Fiscal Year, (ii)
operating revenue from a prior period which had been held as reserves, (iii)
proceeds from the sale or refinancing of the Equipment, and (iv) unexpended
proceeds received from the sale of Membership Interests. AHH Management shall
also cause to be prepared and distributed to the Members monthly financial
statements in a form and containing such information as reasonably determined by
AHH Management.

         9.6 Tax Returns. AHH Management shall cause income tax returns for the
Company to be prepared, at Company expense, and timely filed with the
appropriate authorities. As soon as is reasonably practicable, and in any event
on or before the expiration of 75 days following the end of each Fiscal Year,
each Member shall be furnished with a statement to be used in the preparation of
the Member's tax returns, showing the amounts of any Profits or Losses allocated
to the Member, and the amount of any distributions made to the Member, pursuant
to this Agreement, along with a reconciliation of the annual report with
information furnished to investors for income tax purposes.

                                       34
<PAGE>   36

                                    ARTICLE X

                      MEETINGS AND VOTING RIGHTS OF MEMBERS

         10.1     Meetings.

                  (a)      Meetings of the Members of the Company for any
         purpose may be called by AHH Management, the Investor Manager or by
         Investor Members holding in the aggregate ten percent (10%) of the
         Membership Interests. Such request shall state the purpose of the
         proposed meeting and the matters proposed to be acted upon thereat.
         Such meetings shall be held in the Phoenix area.

                  (b)      A notice of any such meeting shall be given by mail,
         not less than fifteen (15) days nor more than sixty (60) days before
         the date of the meeting, to each Member at his address as specified in
         Section 12.7. Such notice shall be in writing, and shall state the
         place, date and hour of the meeting, and shall indicate that it is
         being issued at or by the direction of AHH Management or by the
         Investor Members, as the case may be. The notice shall state the
         purpose or purposes of the meeting. If a meeting is adjourned to
         another time or place, and if any announcement of the adjournment of
         time or place is made at the meeting, it shall not be necessary to give
         notice of the adjourned meeting.

                  (c)      Each Member may authorize any person or persons to
         act for him or her by proxy in all matters in which a Member is
         entitled to participate, whether by waiving notice of any meeting, or
         voting or participating at a meeting. Every proxy must be signed by the
         Member or his or her attorney-in-fact. No proxy shall be valid after
         the expiration of eleven months from the date thereof unless otherwise
         provided in the proxy. Every proxy shall be revocable at the pleasure
         of the Member executing it.

         10.2     Voting Rights of Members.

                  (a)      Each Member shall take no part in or interfere in any
         manner with the control, conduct or operation of the Company, and shall
         have no right or authority to act for or bind the Company except as
         provided herein. Votes, to the extent taken, of the Members may be cast
         at any duly called meeting of the Company. Each Member shall be
         entitled to the number of votes determined by multiplying one thousand
         (1,000) by the percentage Membership Interest of such Member.

                  (b)      No Member shall have the right or power to vote to:
         (i) withdraw or reduce his or her contributions to the capital of the
         Company except as a result of the dissolution of the Company or as
         otherwise provided by law or this Agreement; (ii) bring an action for
         partition against the Company; (iii) cause the termination and
         dissolution of the Company by court decree or otherwise, except as set
         forth in this Agreement; or (iv) demand or receive property other than
         cash in return for his or her contribution.

                                       35
<PAGE>   37

                                   ARTICLE XI

                                   AMENDMENTS

         11.1     Authority to Amend by Managers. Except as otherwise provided
by Section 11.2, this Agreement and the Articles of Organization of the Company
may be amended by AHH Management with the approval of the Investor Manager:

                  (a)      To admit additional Members or Substitute Members but
         only in accordance with and if permitted by the other terms of this
         Agreement;

                  (b)      To preserve the legal status of the Company as a
         limited liability company under the Act or other applicable state or
         federal laws if such does not change the substance hereof, and the
         Company has obtained the written opinion of its counsel to that effect;

                  (c)      To cure any ambiguity, to correct or supplement any
         provision herein which may be inconsistent with any other provision
         herein, to clarify any provision of this Agreement, or to make any
         other provisions with respect to matters or questions arising under
         this Agreement which will not be inconsistent with the provisions of
         this Agreement;

                  (d)      To satisfy the requirements of the Code and
         Regulations with respect to limited liability companies or of any
         Federal or state securities laws or regulations, provided such
         amendment does not adversely affect the Membership Interests of Members
         and is necessary or appropriate in the written opinion of counsel. Any
         amendment under this subsection (e) shall be effective as of the date
         of this Agreement;

                  (e)      To the extent that it can do so without materially
         reducing the economic return to any Member on his or her investment in
         the Company, to satisfy any requirements of federal or state
         legislation or regulations, court order, or action of any governmental
         administrative agency with respect the operation or ownership of the
         Hospital;

                  (f)      Subject to the terms of Section 2.5, to extend the
         term of the Company; and

                  (g)      Upon written notice to all Members, AHH Management
         may elect to expand the number of Managers up to nine (9) so that the
         Managers can serve as the governing body of the Hospital. In such
         event, the Managers shall include, in addition to AHH Management or its
         designee, the president or chief executive officer of the Hospital who
         shall be designated by AHH Management and three (3) additional Managers
         elected from time to time by the Investor Members one of whom must be
         the medical director of the hospital. The remaining Managers shall be
         elected from time to time by AHH Management. AHH Management may
         delegate to such governing body such duties and responsibilities of AHH
         Management as AHH Management deems necessary or appropriate.
         Notwithstanding the foregoing, in the event the number of Managers is
         expanded, the Investor Members shall continue to have the right to
         elect an Investor Manager who shall be designated to make decisions
         which are specifically authorized to be made by the Investor Manager
         under this Agreement and AHH Management shall continue to have the
         right to make decisions with

                                       36
<PAGE>   38

         respect to matters which are reserved for AHH Management at the time
         the number of Managers is so expanded.

         11.2     Restrictions on Managers' Amendments: Amendments by Investor
Members. Except as provided in Section 11.1, amendments to this Agreement shall
be made only upon the consent of AHH Management and a Majority Vote of Investor
Members. Except as set forth in this Section 11.2, no amendment shall be made
pursuant to Section 11.1 which would materially adversely affect the federal
income tax treatment to be afforded each Member, materially adversely affect the
interests and liabilities of each Member as provided herein, materially change
the purposes of the Company, extend or otherwise modify the term of the Company,
or materially change the method of allocations and distributions as provided in
Article VI.

         11.3     Amendments to Certificates. In making any amendments to this
Agreement, there shall be prepared, executed and filed for recording by AHH
Management such documents amending the Articles of Organization as required
under the Act.

                                   ARTICLE XII

                                  MISCELLANEOUS

         12.1     Limited Power of Attorney. Upon the execution hereof, each
Member hereby irrevocably constitutes and appoints AHH Management his or her
true and lawful attorney in his or her name and on his or her behalf to take at
any time all such action which AHH Management is expressly authorized to
perform, or which a Member is expressly required to perform, under this
Agreement.

         12.2     Waiver of Provisions. The waiver of compliance at any time
with respect to any of the provisions, terms or conditions of this Agreement
shall not be considered a waiver of such provision, term or condition itself or
of any of the other provisions, terms or conditions hereof.

         12.3     Interpretation and Construction. This Agreement contains the
entire agreement among the Members and any modification or amendment hereto must
be accomplished in accordance with the provisions of Article XI and Article XII.
Where the context so requires, the masculine shall include the feminine and the
neuter, and the singular shall include the plural. The headings and captions in
this Agreement are inserted for convenience and identification only and are in
no way intended to define, limit or expand the scope and intent of this
Agreement or any provision thereof. The references to Section and Article in
this Agreement are to the Sections and Articles of this Agreement.

         12.4     Arbitration. The parties hereto agree that any dispute between
them other than an action or proceeding for injunctive or other equitable
relief, shall be resolved by binding arbitration. Such arbitration shall be
conducted by the American Arbitration Association in accordance with its then
existing commercial rules applicable to such disputes. Such arbitration shall be
conducted in Phoenix, Arizona. The decision of such arbitrators shall be final
and binding upon the parties hereto and may be enforced by a court with
applicable authority.

                                       37
<PAGE>   39

         12.5     Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Arizona, exclusive of its
conflict of law rules.

         12.6     Partial Invalidity. In the event that any part or provision of
this Agreement shall be determined to be invalid or unenforceable, the remaining
parts and provisions of said Agreement which can be separated from the invalid
or unenforceable provision and shall continue in full force and effect.

         12.7     Binding on Successors. The terms, conditions and provisions of
this Agreement shall inure to the benefit of, and be binding upon the parties
hereto and their respective heirs, successors, distributees, legal
representatives, and assigns. However, none of the provisions of this Agreement
shall be for the benefit of or enforceable by any creditors of the Company.

         12.8     Notices and Delivery.

                  (a)      To Members. Any notice to be given hereunder at any
         time to any Member or any document reports or returns required by this
         Agreement to be delivered to any Member, may be delivered personally or
         mailed to such Member, postage prepaid, addressed to him or her at such
         times as (s)he shall by notice to the Company have designated as his or
         her address for the mailing of all notices hereunder or, in the absence
         of such notice, to the address set forth in Article IV hereof. Any
         notice, or any document, report or return so delivered or mailed shall
         be deemed to have been given or delivered to such Member at the time it
         is mailed, as the case may be.

                  (b)      To the Company. Any notice to be given to the Company
         hereunder shall be delivered personally or mailed to the Company, by
         certified mail, postage prepaid, addressed to the Company at its
         registered office. Any notice so delivered or mailed shall be deemed to
         have been given to the Company at the time it is delivered or mailed,
         as the case may be.

         12.9     Counterpart Execution; Facsimile Execution. This Agreement may
be executed in any number of counterparts with the same effect as if all of the
Members had signed the same document. Such executions may be transmitted to the
Company and/or the other Members by facsimile and such facsimile execution shall
have the full force and effect of an original signature. All fully executed
counterparts, whether original executions or facsimile executions or a
combination, shall be construed together and constitute one and the same
agreement.

         12.10    Statutory Provisions. Any statutory reference in this
Agreement shall include a reference to any successor to such statute and/or
revision thereof.

         12.11    Waiver of Partition. Each party does hereby waive any right to
partition or the right to take any other action which might otherwise be
available to such party for the purpose of severing its relationship with the
Company or such party's interest in the Equipment held by the Company from the
interests of other Members until the end of the term of both this Company and
any successor company formed pursuant to the terms hereof.

                                       38
<PAGE>   40

         12.12    Change In Law. If due to any new law, rule or regulation, or
due to an interpretation or enforcement of any existing law, rule or regulation,
health care counsel reasonably selected by AHH Management determines in writing
that it is reasonably likely that the relationships established between any of
the parties to this Agreement including any of their Affiliates and/or
successors or assigns will not comply with any law, rule, regulation or
interpretation thereof ("Applicable Law"), then the parties hereto hereby agree
first, to negotiate in good faith to restructure the relationships established
under this Agreement so as to bring them into compliance with such applicable
laws while at the same time preserving the material benefits of each of the
parties hereto. In the event that a specific proposal for the restructuring of
this Agreement is approved by AHH Management and a Majority Vote of Investor
Members, such restructured agreement shall become binding upon all Members of
the Company. Second, in the event that within forty-five (45) days following the
Company's receipt of legal advice in writing from such health care counsel
regarding Applicable Law the parties hereto are unable to negotiate an
acceptable restructuring of their relationship, then AHH Management shall have
the option, within the following forty-five (45) day period, to purchase the
Membership Interests of some or all of the Investor Members whose ownership is
involved with such noncompliance with Applicable Law for a purchase price equal
to the greater of: (a) the Formula Purchase Price or (b) the amount of the
Capital Contribution made by each Member to the Company together with interest
thereon computed at the Prime Rate as of the date of this Agreement from the
date of such contribution through the date upon which AHH Management pays all
amounts due under the terms of this Section 12.11. Such purchase price shall be
paid in accordance with the Payment Method. Third, in the event that AHH
Management does not exercise its option to purchase Membership Interests of a
Member whose ownership causes the Company not to be in compliance with
Applicable Law, such Members may elect in writing within the following
forty-five (45) day period, to require that the Company be dissolved, in which
event the Company shall be dissolved in accordance with the terms of this
Agreement.

         12.13    Investment Representations of the Members.

                  (a)      Each Member or individual executing this Agreement on
         behalf of an entity which is a Member hereby represents and warrants to
         the Company and to the Members that such Member has acquired such
         Member's Membership Interest in the Company for investment solely for
         such Company's own account with the intention of holding such
         Membership Interest for investment, without any intention of
         participating directly or indirectly in any distribution of any portion
         of such Membership Interest, including an Economic Interest, and
         without the financial participation of any other Person in acquiring
         such Membership Interest in the Company.

                  (b)      Each Member or individual executing this Agreement on
         behalf of an entity which is a Member hereby acknowledges that such
         Member is aware that such Member's Membership Interest in the Company
         has not been registered (i) under the Securities Act of 1933, as
         amended (the "Federal Act"), (ii) under the Uniform Securities Act of
         the State of Arizona, as amended (the "Uniform Securities Act") in
         reliance upon an exemption contained in the Uniform Securities Act, or
         (iii) under any other State securities laws. Each Member or individual
         executing this Agreement on behalf of an entity which is a Member
         further understands and acknowledges that his representations and
         warranties contained in

                                       39
<PAGE>   41

         this Section are being relied upon by the Company and by the Members as
         the basis for the exemption of the Members' Membership Interest in the
         Company from the registration requirements of the Federal Act and from
         the registration requirements of the Uniform Securities Act and all
         other State securities laws. Each Member or individual executing this
         Agreement on behalf of an entity which is a Member further acknowledges
         that the Company will not and has no obligation to recognize any sale,
         transfer, or assignment of all or any part of such Member's Membership
         Interest, including an Economic Interest in the Company to any Person
         unless and until the provisions of this Agreement hereof have been
         fully satisfied.

                  (c)      Each Member or individual executing this Agreement on
         behalf of an entity which is a Member hereby acknowledges that prior to
         his execution of this Agreement, such Member received a copy of this
         Agreement and that such Member has examined this Agreement or caused
         this Agreement to be examined by such Member's representative or
         attorney. Each Member or individual executing this Agreement on behalf
         of an entity which is a Member hereby further acknowledges that such
         Member or such Member's representative or attorney is familiar with
         this Agreement and with the Company's business plans. Each Member or
         individual executing this Agreement on behalf of an entity which is a
         Member acknowledges that such Member or such Member's representative or
         attorney has made such inquiries and requested, received, and reviewed
         any additional documents necessary for such Member to make an informed
         investment decision and that such Member does not desire any further
         information or data relating to the Company or to the Members. Each
         Member or individual executing this Agreement on behalf of an entity
         which is a Member hereby acknowledges that such Member understands that
         the purchase of such Member's Membership Interest in the Company is a
         speculative investment involving a high degree of risk and hereby
         represents that such Member has a net worth sufficient to bear the
         economic risk of such Member's investment in the Company and to justify
         such Member's investing in a highly speculative venture of this type.

         12.14    Decisions by Investor Manager. Each of the Investor Members
hereby authorize the Investor Manager to make the decisions to be made by the
Investor Manager hereunder and hereby release and hold harmless the Investor
Manager from any and all claims, liabilities, losses or damages which any of
them may have now or in the future resulting from any decision made by the
Investor Manager hereunder unless due to the gross negligence or willful
misconduct of the Investor Manager.

         12.15    Ownership of Shares of MedCath. Each Investor Member agrees
that either he shall not refer patients to the Hospital or that he shall not
acquire, nor continue to own any of the common shares of MedCath to the extent
that in the reasonable opinion of health care counsel of MedCath, that such
ownership, together with referrals of patients to the Hospital, by such Investor
Member, would cause or constitute a violation of any federal or state law, rule
or regulation.

         12.16    Consents or Approvals. Whenever this Agreement requires that
the consent or approval of any Manager or Member be given or obtained, then
unless specifically provided otherwise herein, the decision to give or withhold
such approval or consent shall be made reasonably and without unreasonable
delay.

                                       40
<PAGE>   42

         12.17    Subscriptions by Entities. In the event an Investor Member is
an Entity which was formed by individuals for the purpose of becoming an
Investor Member of the Company, the agreements relating to the ownership of such
Entity and amendments thereto shall be subject to the reasonable approval of AHH
Management.

                                       41
<PAGE>   43

                                 EXECUTION PAGE
                                       OF
                               OPERATING AGREEMENT

         IN WITNESS WHEREOF, the parties hereto have hereunto set their
respective hands and seals as of the day and year first above written.

[***]

For the purpose of acknowledging and agreeing to be bound by the terms of
Section 5.9 of this Agreement, the undersigned Affiliates of the Members other
than AHH Management hereby execute this Operating Agreement.

[***]

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

                                       42
<PAGE>   44

                                                                      SCHEDULE A
                            Membership Interest Table

<TABLE>
<CAPTION>
                                                                 Percentage of Company Interests
Members                             Capital Contributions            if all Units are Sold
-------                             ---------------------            ---------------------
<S>                                 <C>                          <C>
AHH Management, Inc.                     $1,530,000                      51%

Arizona Heart Institute, Ltd.               900,000                      30%

Purchasers of Units                         570,000                      19% (0.33% per Unit)
                                         ----------              ----------------------------
Total Capital Contributions              $3,000,000                     100%
</TABLE>

<PAGE>   45

                                   SCHEDULE B
                                     TO THE
                               OPERATING AGREEMENT
                                       OF
                           ARIZONA HEART HOSPITAL, LLC
                      AN ARIZONA LIMITED LIABILITY COMPANY

                             REGULATORY ALLOCATIONS

         This Schedule contains special rules for the allocation of items of
Company income, gain, loss and deduction that override the basic allocations of
Profits and Losses in the Agreement to the extent necessary to cause the overall
allocations of items of Company income, gain, loss and deduction to have
substantial economic effect pursuant to Regulations Section 1.704-1(b) and shall
be interpreted in light of that purpose. Subsection (a) below contains special
technical definitions. Subsections (b) through (h) contain the Regulatory
Allocations themselves. Subsections (i), (j) and (k) are special rules
applicable in applying the Regulatory Allocations.

         (a)      Definitions Applicable to Regulatory Allocations. For purposes
of the Agreement, the following terms shall have the meanings indicated:

                  (i)      "Company Minimum Gain" has the meaning of
                           "partnership minimum gain" set forth in Regulations
                           Section 1.704-2(d), and is generally the aggregate
                           gain the Company would realize if it disposed of its
                           property subject to Nonrecourse Liabilities in full
                           satisfaction of each such liability, with such other
                           modifications as provided in Regulations Section
                           1.704-2(d). In the case of Nonrecourse Liabilities
                           for which the creditor's recourse is not limited to
                           particular assets of the Company, until such time as
                           there is regulatory guidance on the determination of
                           minimum gain with respect to such liabilities, all
                           such liabilities of the Company shall be treated as a
                           single liability and allocated to the Company's
                           assets using any reasonable basis selected by AHH
                           Management.

                  (ii)     "Member Nonrecourse Deductions" shall mean losses,
                           deductions or Code Section 705(a)(2)(B) expenditures
                           attributable to Member Nonrecourse Debt under the
                           general principles applicable to "partner nonrecourse
                           deductions" set forth in Regulations Section
                           1.704-2(i)(2).

                  (iii)    "Member Nonrecourse Debt" means any Company liability
                           with respect to which one or more but not all of the
                           Members or related Persons to one or more but not all
                           of the Members bears the economic risk of loss within
                           the meaning of Regulations Section 1.752-2 as a
                           guarantor, lender or otherwise.

                  (iv)     "Member Nonrecourse Debt Minimum Gain" shall mean the
                           minimum gain attributable to Member Nonrecourse Debt
                           as determined pursuant to Regulations Section
                           1.704-2(i)(3). In the case of Member Nonrecourse Debt
                           for which the creditor's recourse against the Company
                           is not limited to

<PAGE>   46

                           particular assets of the Company, until such time as
                           there is regulatory guidance on the determination of
                           minimum gain with respect to such liabilities, all
                           such liabilities of the Company shall be treated as a
                           single liability and allocated to the Company's
                           assets using any reasonable basis selected by AHH
                           Management.

                  (v)      "Nonrecourse Deductions" shall mean losses,
                           deductions, or Code Section 705(a)(2)(B) expenditures
                           attributable to Nonrecourse Liabilities (see
                           Regulations Section 1.704-2(b)(1)). The amount of
                           Nonrecourse Deductions for a Fiscal Year shall be
                           determined pursuant to Regulations Section
                           1.704-2(c), and shall generally equal the net
                           increase, if any, in the amount of Company Minimum
                           Gain for that taxable year, determined generally
                           according to the provisions of Regulations Section
                           1.704-2(d), reduced (but not below zero) by the
                           aggregate distributions during the year of proceeds
                           of Nonrecourse Liabilities that are allocable to an
                           increase in Company Minimum Gain, with such other
                           modifications as provided in Regulations Section
                           1.704-2(c).

                  (vi)     "Nonrecourse Liability" means any Company liability
                           (or portion thereof) for which no Member bears the
                           economic risk of loss under Regulations Section
                           1.752-2.

                  (vii)    "Regulatory Allocations" shall mean allocations of
                           Nonrecourse Deductions provided in Paragraph (b)
                           below, allocations of Member Nonrecourse Deductions
                           provided in Paragraph (c) below, the minimum gain
                           chargeback provided in Paragraph (d) below, the
                           member nonrecourse debt minimum gain chargeback
                           provided in Paragraph (e) below, the qualified income
                           offset provided in Paragraph (f) below, the gross
                           income allocation provided in Paragraph (g) below,
                           and the curative allocations provided in Paragraph
                           (h) below.

         (b)      Nonrecourse Deductions. All Nonrecourse Deductions for any
Fiscal Year shall be allocated to the Members in accordance with their
percentage Membership Interests.

         (c)      Member Nonrecourse Deductions. All Member Nonrecourse
Deductions for any Fiscal Year shall be allocated to the Member who bears the
economic risk of loss under Regulations Section 1.752-2 with respect to the
Member Nonrecourse Debt to which such Member Nonrecourse Deductions are
attributable.

         (d)      Minimum Gain Chargeback. If there is a net decrease in Company
Minimum Gain for a Fiscal Year, each Member shall be allocated items of Company
income and gain for such year (and, if necessary, subsequent years) in an amount
equal to such Member's share of such net decrease in Company Minimum Gain,
determined in accordance with Regulations Section 1.704-2(g)(2) and the
definition of Company Minimum Gain set forth above. This provision is intended
to comply with the minimum gain chargeback requirement in Regulations Section
1.704-2(f) and shall be interpreted consistently therewith.

<PAGE>   47

         (e)      Member Nonrecourse Debt Minimum Gain Chargeback. If there is a
net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member
Nonrecourse Debt for any Fiscal Year, each Member who has a share of the Member
Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt as of
the beginning of the Fiscal Year, determined in accordance with Regulations
Section 1.704-2(i)(5), shall be allocated items of Company income and gain for
such year (and, if necessary, subsequent years) in an amount equal to such
Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Regulations Sections 1.704-2(i)(4) and (5) and the definition of Member
Nonrecourse Debt Minimum Gain set forth above. This Paragraph is intended to
comply with the member nonrecourse debt minimum gain chargeback requirement in
Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.

         (f)      Qualified Income Offset. In the event any Member unexpectedly
receives any adjustments, allocations, or distributions described in Regulations
Sections 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Company income and gain
(consisting of a pro rata portion of each item of Company income, including
gross income, and gain for such year) shall be allocated to such Member in an
amount and manner sufficient to eliminate, to the extent required by the
Regulations, any deficit in such Member's Adjusted Capital Account created by
such adjustments, allocations or distributions as quickly as possible.

         (g)      Gross Income Allocation. In the event any Member has a deficit
in its Adjusted Capital Account at the end of any Fiscal Year, each such Member
shall be allocated items of Company gross income and gain, in the amount of such
Adjusted Capital Account deficit, as quickly as possible.

         (h)      Curative Allocations. When allocating Profits and Losses under
Article VI, such allocations shall be made so as to offset any prior allocations
of gross income under Paragraph (g) above to the greatest extent possible so
that overall allocations of Profits and Losses shall be made as if no such
allocations of gross income occurred.

         (i)      Ordering. The allocations in this Schedule to the extent they
apply shall be made before the allocations of Profits and Losses under Article
VI and in the order in which they appear above.

         (j)      Waiver of Minimum Gain Chargeback Provisions. If AHH
Management determines that (i) either of the two minimum gain chargeback
provisions contained in this Schedule would cause a distortion in the economic
arrangement among the Members, (ii) it is not expected that the Company will
have sufficient other items of income and gain to correct that distortion, and
(iii) the Members have made Capital Contributions or received net income
allocations that have restored any previous Nonrecourse Deductions or Member
Nonrecourse Deductions, then AHH Management shall have the authority, but not
the obligation, after giving notice to the Members, to request on behalf of the
Company the Internal Revenue Service to waive the minimum gain chargeback or
member nonrecourse debt minimum gain chargeback requirements pursuant to
Regulations Sections 1.704-2(f)(4) and 1.704-2(i)(4). The Company shall pay the
expenses (including attorneys' fees) incurred to apply for the waiver. AHH
Management shall promptly copy all Members on all correspondence to and from the
Internal Revenue Service concerning the requested waiver.

<PAGE>   48

         (k)      Code Section 754 Adjustments. To the extent an adjustment to
the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or
Code Section 743(b) is required, pursuant to Regulations Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts,
the amount of such adjustment to the Capital Accounts shall be treated as an
item of gain (if the adjustment increases the basis of the asset) or loss (if
the adjustment decreases such basis), and such gain or loss shall be specially
allocated to the Members in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of the
Regulations.

[THE REMAINDER OF THIS PAGE INTENTIONALLY HAS BEEN LEFT BLANK.]

<PAGE>   49

                                   SCHEDULE C

                           DEVELOPMENT BUDGET SCHEDULE

                            (SEE ATTACHMENTS HERETO)

<PAGE>   50

                                                                      Schedule C

         Arizona Heart Hospital
              Capital Expenses

<TABLE>
<CAPTION>
Facility Size
      Total Beds           55 occ. beds     = [***]% of capacity       60 beds
      Total Square Feet    [***] sqft/bed   + [***] add'l sqft         [***]

CAPITAL EXPENSES                                   Total           Depreciation &           Interest              Medicare Capital
                                                   Amount           Amortization             Expense                Reimbursement
                                                                --------------------      ---------------       -------------------
                                                                  Term       Amount        Rate    Amount       Mix/Rate     Amount
<S>                       <C>           <C>             <C>      <C>         <C>           <C>      <C>         <C>          <C>

Property:
     Building Construction               $[***]/sqft     $[***]   40 years      $[***]                            [***]%     $[***]

     Land                   13.00 acres      @           $[***]    0 years      $[***]                            [***]%     $[***]
                                         $[***]/sqft
     Architectural Fees      [***]% of                   $[***]   40 years      $[***]                            [***]%     $[***]
                              constr
     Interest During Constr  9 months     @ [***]%       $[***]   40 years      $[***]                            [***]%     $[***]

                                                       ------
          Total Property                               $[***]                              [***]%     $[***]                 $[***]

Equipment:                 Capacity
                          ------------
    Cath Labs             [***]/lab/yr  3 lab(s)       $[***]
    Operating Rooms       [***]/OR/yr   3 OR(s)        $[***]
     Angiography Suite                                 $[***]
     CVRU/Recovery                                     $[***]
     Radiology &                                       $[***]
            Laboratory
     Patient Care                                      $[***]
     Other Departments                                 $[***]
                                                       ------
         Total Equipment                               $[***]   7 years       $[***]       [***]%     $[***]      [***]%     $[***]

Startup Costs:
     Loan Acquisition
          Costs:
        Loan Commitment                [***]% of       $[***]   7 years       $[***]       [***]%     $[***]
                                        loan amt
        Legal Fees                                     $[***]   5 years       $[***]       [***]%     $[***]
                                                       ------
                                                       $[***]

Pre-Opening Costs:                                     $[***]   2 years       $[***]       [***]%     $[***]

                                                       ------                 ------                  ------                 -----
TOTAL                                                  $[***]                 $[***]                  $[***]                 $[***]
</TABLE>

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

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00026-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00026-of-00352.parquet"}]]