UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended ~~December 31, 2009~~June 30, 2010


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

Commission File Number 000-33009

MEDCATH CORPORATION

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		56-2248952 (IRS Employer Identification No.)

10720 Sikes Place, Suite 300
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)

(704) 815-7700
(Registrant’s telephone number, including area code)

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

Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

As of ~~February~~August 5, 2010, there were ~~22,436,809~~20,492,366 shares of $0.01 par value common stock outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

MEDCATH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)


	December 31,			September 30,			June 30,			September 30,
	2009			2009			2010			2009

Current assets:
Cash and cash equivalents	$	22,760		$	32,014		$	27,396		$	31,883
Accounts receivable, net		72,596			70,410
Accounts receivable, net (See Note 4)								61,230			58,913
Income tax receivable		1,037			—			1,192			—
Medical supplies		18,929			18,261			15,888			15,459
Deferred income tax assets		12,069			12,201			12,272			12,161
Prepaid expenses and other current assets		15,313			13,969			13,711			13,471
Current assets of discontinued operations		11,942			30,011			26,172			44,978

Total current assets		154,646			176,866			157,861			176,865
Property and equipment, net		383,850			385,926
Property and equipment, net (See Note 13)								289,861			341,394
Investments in affiliates		7,931			14,055			10,301			14,055
Other assets		11,658			13,601			7,460			10,785
Deferred income tax assets								603			—
Non-current assets of discontinued operations								46,741			47,349

Total assets	$	558,085		$	590,448		$	512,827		$	590,448


Current liabilities:
Accounts payable	$	39,562		$	40,979		$	27,559		$	35,920
Income tax payable		—			642			—			297
Accrued compensation and benefits		16,136			18,744			17,148			16,118
Other accrued liabilities		20,975			24,860			20,647			23,277
Current portion of long-term debt and obligations under capital leases		18,279			21,243			15,808			21,187
Current liabilities of discontinued operations		9,907			10,165			19,062			19,832

Total current liabilities		104,859			116,633			100,224			116,631
Long-term debt		99,058			101,871			56,250			66,563
Obligations under capital leases		4,861			4,647			7,459			4,596
Deferred income tax liabilities		14,069			13,874			—			13,874
Other long-term obligations		7,436			8,893			5,262			8,533
Long-term liabilities of discontinued operations								35,872			35,721

Total liabilities		230,283			245,918			205,067			245,918

Commitments and contingencies (See Note 7)

Redeemable noncontrolling interests in equity of consolidated subsidiaries		4,297			7,448
Redeemable noncontrolling interest (See Note 1)								6,095			7,448

Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none issued		—			—			—			—
Common stock, $0.01 par value, 50,000,000 shares authorized; 22,436,809 issued and 20,482,448 outstanding at December 31, 2009 22,104,917 issued and 20,150,556 outstanding at September 30, 2009		216			216
Common stock, $0.01 par value, 50,000,000 shares authorized; 22,446,727 issued and 20,492,366 outstanding at June 30, 2010 22,104,917 issued and 20,150,556 outstanding at September 30, 2009								216			216
Paid-in capital		455,273			455,259			457,058			455,259
Accumulated deficit		(94,076	)		(91,420	)		(118,102	)		(91,420	)
Accumulated other comprehensive loss		(304	)		(360	)		(395	)		(360	)
Treasury stock, at cost; 1,954,361 shares at December 31, 2009 1,945,361 shares at September 30, 2009		(44,797	)		(44,797	)
Treasury stock, at cost; 1,954,361 shares at June 30, 2010 1,954,361 shares at September 30, 2009								(44,797	)		(44,797	)

Total MedCath Corporation stockholders’ equity		316,312			318,898			293,980			318,898
Noncontrolling interests		7,193			18,184
Noncontrolling interest								7,685			18,184

Total equity		323,505			337,082			301,665			337,082

Total liabilities and equity	$	558,085		$	590,448		$	512,827		$	590,448

MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)


	Three Months Ended December 31,						Three Months Ended June 30,						Nine Months Ended June 30,
	2009			2008			2010			2009			2010			2009

Net revenue	$	147,260		$	150,245		$	131,847		$	124,588		$	390,815		$	381,410
Operating expenses:
Personnel expense		51,821			50,169			44,546			43,854			136,055			131,884
Medical supplies expense		41,859			41,642			35,706			36,472			107,453			105,829
Bad debt expense		11,925			11,429			13,642			10,406			36,241			28,798
Other operating expenses		34,452			31,902			29,935			26,537			89,292			81,039
Pre-opening expenses		866			207			—			754			866			1,340
Depreciation		9,035			7,801			7,636			6,466			23,054			19,179
Amortization		8			30			8			8			24			24
Loss on disposal of property, equipment and other assets		137			73
Impairment of property and equipment								22,813			—			42,761			—
Loss (gain) on disposal of property, equipment and other assets								20			(54	)		39			127

Total operating expenses		150,103			143,253			154,306			124,443			435,785			368,220

(Loss) Income from operations		(2,843	)		6,992
(Loss) income from operations								(22,459	)		145			(44,970	)		13,190
Other income (expenses):
Interest expense		(1,813	)		(2,857	)		(1,131	)		(396	)		(3,337	)		(3,074	)
Loss on early extinguishment of debt		—			(6,961	)		—			—			—			(6,702	)
Interest and other income		74			101			62			48			156			220
Loss on note receiveable								—			—			(1,507	)		—
Equity in net earnings of unconsolidated affiliates		1,516			2,065			2,262			2,265			6,870			7,044

Total other expense, net		(223	)		(7,652	)
Total other income (expense), net								1,193			1,917			2,182			(2,512	)

Loss from continuing operations before income taxes		(3,066	)		(660	)
Income tax benefit		(1,539	)		(1,108	)
(Loss) income from continuing operations before income taxes								(21,266	)		2,062			(42,788	)		10,678
Income tax (benefit) expense								(8,642	)		171			(17,929	)		1,287

(Loss) income from continuing operations		(1,527	)		448			(12,624	)		1,891			(24,859	)		9,391
(Loss) income from discontinued operations, net of taxes		(288	)		4,921
Income from discontinued operations, net of taxes								2,163			878			3,895			8,793

Net (loss) income		(1,815	)		5,369			(10,461	)		2,769			(20,964	)		18,184
Less: Net income attributable to noncontrolling interests		(841	)		(3,123	)
Less: Net income attributable to noncontrolling interest								(2,355	)		(2,273	)		(5,718	)		(9,860	)

Net (loss) income attributable to MedCath Corporation	$	(2,656	)	$	2,246		$	(12,816	)	$	496		$	(26,682	)	$	8,324


Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes	$	(2,511	)	$	(1,915	)
(Loss) income from discontinued operations, net of taxes		(145	)		4,161
(Loss) income from continuing operations, net of taxes							$	(14,155	)	$	23		$	(29,246	)	$	1,708
Income from discontinued operations, net of taxes								1,339			473			2,564			6,616

Net (loss) income	$	(2,656	)	$	2,246		$	(12,816	)	$	496		$	(26,682	)	$	8,324


(Loss) earnings per share, basic
Loss from continuing operations attributable to MedCath
Corporation common stockholders	$	(0.13	)	$	(0.10	)
Income from discontinued operations attributable to MedCath
Corporation common stockholders		—			0.21
(Loss) income from continuing operations attributable to MedCath Corporation common stockholders							$	(0.71	)	$	—		$	(1.48	)	$	0.09
Income from discontinued operations attributable to MedCath Corporation common stockholders								0.07			0.03			0.13			0.33

(Loss) earnings per share, basic	$	(0.13	)	$	0.11		$	(0.64	)	$	0.03		$	(1.35	)	$	0.42


(Loss) earnings per share, diluted
Loss from continuing operations attributable to MedCath
Corporation common stockholders	$	(0.13	)	$	(0.10	)
Income from discontinued operations attributable to MedCath
Corporation common stockholders		—			0.21
(Loss) income from continuing operations attributable to MedCath Corporation common stockholders							$	(0.71	)	$	—		$	(1.48	)	$	0.09
Income from discontinued operations attributable to MedCath Corporation common stockholders								0.07			0.03			0.13			0.33

(Loss) earnings per share, diluted	$	(0.13	)	$	0.11		$	(0.64	)	$	0.03		$	(1.35	)	$	0.42


Weighted average number of shares, basic		19,743			19,599			19,897			19,733			19,823			19,665
Dilutive effect of stock options and restricted stock		—			—			—			—			—			56

Weighted average number of shares, diluted		19,743			19,599			19,897			19,733			19,823			19,721

MEDCATH CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)


																										Redeemable																												Redeemable
												Accumulated														Noncontrolling														Accumulated														Noncontrolling
												Other											Total			Interests														Other											Total			Interest
	Common Stock					Paid-in			Accumulated			Comprehensive			Treasury Stock					Noncontrolling			Equity			(Temporary			Common Stock					Paid-in			Accumulated			Comprehensive			Treasury Stock					Noncontrolling			Equity			(Temporary
	Shares			Par Value		Capital			Deficit			Loss			Shares		Amount			Interests			(Permanent)			Equity)			Shares			Par Value		Capital			Deficit			Loss			Shares		Amount			Interest			(Permanent)			Equity)

Balance, September 30, 2009		22,105		$	216	$	455,259		$	(91,420	)	$	(360	)		1,954	$	(44,797	)	$	18,184		$	337,082		$	7,448			22,105		$	216	$	455,259		$	(91,420	)	$	(360	)		1,954	$	(44,797	)	$	18,184		$	337,082		$	7,448
Stock awards, including cancelations and income tax benefit		359			—		154			—			—			—		—			—			154			—			374			—		1,979			—			—			—		—			—			1,979			—
Tax withholdings for vested restricted stock awards		(27	)		—		(253	)		—			—			—		—			—			(253	)		—			(32	)		—		(293	)		—			—			—		—			—			(293	)		—
Distributions to noncontrolling interests		—			—		—			—			—			—		—			(11,595	)		(11,595	)		(3,560	)
Acquisitions and other transactions impacting noncontrolling interests		—			—		—			—			—			—		—			119			119			26
Distributions to noncontrolling interest																														—			—		—			—			—			—		—			(14,005	)		(14,005	)		(3,560	)
Acquisitions and other transactions impacting noncontrolling interest																														—			—		—			—			—			—		—			11			11			(43	)
Sale of equity interest		—			—		113			—			—			—		—			27			140			—			—			—		113			—			—			—		—			27			140			—
Comprehensive loss:
Net loss		—			—		—			(2,656	)		—			—		—			458			(2,198	)		383			—			—		—			(26,682	)		—			—		—			3,468			(23,214	)		2,250
Change in fair value of interest rate swap, net of income tax benefit (*)		—			—		—			—			56			—		—			—			56			—			—			—		—			—			(35	)		—		—			—			(35	)		—

Total comprehensive loss																								(2,142	)		383																									(23,249	)		2,250

Balance, December 31, 2009		22,437		$	216	$	455,273		$	(94,076	)	$	(304	)		1,954	$	(44,797	)	$	7,193		$	323,505		$	4,297
Balance, June 30, 2010																														22,447		$	216	$	457,058		$	(118,102	)	$	(395	)		1,954	$	(44,797	)	$	7,685		$	301,665		$	6,095

MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


	Three Months Ended December 31,						Nine Months Ended June 30,
	2009			2008			2010			2009
Net (loss) income	$	(1,815	)	$	5,369		$	(20,964	)	$	18,184
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (income) from discontinued operations, net of taxes		288			(4,921	)
Income from discontinued operations, net of taxes								(3,895	)		(8,793	)
Bad debt expense		11,925			11,429			36,241			28,798
Depreciation		9,035			7,801			23,054			19,179
Amortization		8			30			24			24
Loss on disposal of property, equipment and other assets		137			73			39			127
Share-based compensation expense		608			998			2,380			2,068
Loss on early extinguishment of debt		—			6,961			—			6,702
Amortization of loan acquisition costs		252			279			745			774
Impairment of property and equipment								42,761			—
Equity in earnings of unconsolidated affiliates, net of distributions received		6,217			4,018			3,259			1,777
Deferred income taxes		(103	)		(75	)		(14,966	)		58
Change in assets and liabilities that relate to operations:
Accounts receivable		(14,111	)		(13,498	)		(38,557	)		(22,427	)
Medical supplies		(668	)		(2,321	)		(429	)		(2,173	)
Prepaid and other assets		(3,399	)		864			(1,379	)		(2,230	)
Accounts payable and accrued liabilities		(4,496	)		1,847			(3,526	)		3,597

Net cash provided by operating activities of continuing operations		3,878			18,854			24,787			45,665
Net cash used in operating activities of discontinued operations		(343	)		(1,729	)
Net cash provided by operating activities of discontinued operations								6,394			8,163

Net cash provided by operating activities		3,535			17,125			31,181			53,828

Investing activities:
Purchases of property and equipment		(9,310	)		(30,056	)		(16,842	)		(68,038	)
Proceeds from sale of property and equipment		74			119			110			836
Sale of interest in equity method investment								436			—

Net cash used in investing activities of continuing operations		(9,236	)		(29,937	)		(16,296	)		(67,202	)
Net cash provided by investing activities of discontinued operations		—			6,909
Net cash (used in) provided by investing activities of discontinued operations								(1,044	)		2,554

Net cash used in investing activities		(9,236	)		(23,028	)		(17,340	)		(64,648	)

Financing activities:
Proceeds from issuance of long-term debt		—			83,662
Proceeds from long-term debt								—			83,479
Repayments of long-term debt		(5,800	)		(108,194	)		(16,678	)		(115,515	)
Repayments of obligations under capital leases		(506	)		(264	)		(1,381	)		(827	)
Distributions to noncontrolling interests		(8,218	)		(9,424	)
Investment by noncontrolling interests		153			—
Distributions to noncontrolling interest								(9,334	)		(10,312	)
Investment by noncontrolling interest								109			—
Sale of equity interest in subsidiary		140			—			140			—
Proceeds from the exercise of stock options								—			77
Tax withholding of vested restricted stock awards		(253	)		—			(293	)		—

Net cash used in financing activities of continuing operations		(14,484	)		(34,220	)		(27,437	)		(43,098	)
Net cash used in financing activities of discontinued operations		(6,937	)		(2,305	)		(9,063	)		(5,241	)

Net cash used in financing activities		(21,421	)		(36,525	)		(36,500	)		(48,339	)


Net decrease in cash and cash equivalents		(27,122	)		(42,428	)		(22,659	)		(59,159	)
Cash and cash equivalents:
Beginning of period		61,701			112,068			61,701			112,068

End of period	$	34,579		$	69,640		$	39,042		$	52,909


Cash and cash equivalents of continuing operations		22,760			56,912			27,396			42,725
Cash and cash equivalents of discontinued operations		11,819			12,728			11,646			10,184

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

1. Business and Basis of Presentation

MedCath Corporation (the “Company”) primarily focuses on providing high acuity services, predominantly the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in partnership with physicians, most of whom are cardiologists and cardiovascular surgeons. While each of the Company’s ~~majority-owned~~ hospitals (collectively, the “Hospital Division”) is licensed as a general acute care hospital, the Company focuses on serving the unique needs of patients suffering from cardiovascular disease. As of ~~December 31, 2009,~~June 30, 2010, the Company and its physician partners have an ownership interest in and currently operate ten hospitals in seven states, with a total of 825 licensed ~~beds.~~beds, 58 of which are related to the Heart Hospital of Austin (“HHA”), whose assets, liabilities, and operations are included within discontinued operations. See Note 3 for further discussion related to the divestiture of HHA.

In addition to its hospitals, the Company provides cardiovascular care services in diagnostic and therapeutic facilities in various locations and through mobile cardiac catheterization laboratories and also provides management services to non owned facilities (the “MedCath Partners Division”). The Company also provides consulting and management services tailored primarily to cardiologists and cardiovascular surgeons, which is included in ~~corporate~~Corporate and other.

The Company accounts for all but two of its owned and operated hospitals as consolidated subsidiaries. The Company owns a noncontrolling ~~interests~~interest in the Avera Heart Hospital of South Dakota and Harlingen Medical Center as of ~~December 31, 2009.~~June 30, 2010. Therefore, the Company is unable to consolidate these hospitals’ results of operations and financial position, but rather is required to account for its noncontrolling interests in these hospitals as equity method investments.

In March, 2010, the Company’s Board of Directors decided to begin a strategic alternatives review (the “Strategic Alternatives Review”) to consider the sale of either the Company or the sale of its individual hospitals and other assets. The Strategic Alternatives Review process is continuing. The Company cannot provide any assurance regarding the result of this process.

Basis of Presentation— Effective October 1, 2009, the Company adopted a new accounting standard which establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This new accounting standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This new accounting standard generally requires the Company to clearly identify and present ownership interests in subsidiaries held by parties other than the Company in the consolidated financial statements within the equity section but separate from the Company’s equity. However, in instances in which certain redemption features that are not solely within the control of the issuer are present, classification of noncontrolling interests outside of permanent equity is required. It also requires the amounts of consolidated net income attributable to the Company and to the noncontrolling interests to be clearly identified and presented on the face of the consolidated statements of operations; changes in ownership interests to be accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary to be measured at fair value. The implementation of this accounting standard results in the cash flow impact of certain transactions with noncontrolling interests being classified within financing activities. Such treatment is consistent with the view that under this new accounting standard, transactions between the Company and noncontrolling interests are considered to be equity transactions. The adoption of this new accounting standard has been applied retrospectively for all periods presented.

Upon the occurrence of certain fundamental regulatory changes, the Company could be obligated, under the terms of certain of its investees’ operating agreements, to purchase some or all of the noncontrolling interests related to certain of the Company’s subsidiaries. While the Company believes that the likelihood of a change in current law that would trigger such purchases was remote as of ~~December 31, 2009,~~June 30, 2010, the occurrence of such regulatory changes is outside the control of the Company. As a result, these noncontrolling interests that are subject to this redemption feature are not included as part of the Company’s equity and are carried as redeemable noncontrolling interests in equity of consolidated subsidiaries on the Company’s consolidated balance sheets.

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages and per share data)~~

~~Long-Lived Assets~~— Long-lived assets, which include finite lived intangible assets, are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in the Company’s strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. Due to a decline in operating performance at certain hospitals during 2009, the Company performed impairment tests as of September 30, 2009. The results of those tests indicated that no impairment existed as of that date. The Company will continue to monitor operating performance to determine if additional impairment tests are necessary in future periods. If impairment is determined to be present in such periods, the resulting impairment charges could be material to the Company’s consolidated financial statements.

The Company’s unaudited interim consolidated financial statements as of ~~December 31, 2009~~June 30, 2010 and for the three and nine months ended ~~December 31,~~June 30, 2010 and 2009 ~~and 2008~~ have been prepared in accordance with accounting principles generally accepted in the United States of America hereafter, (“generally accepted accounting principles”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim consolidated financial statements reflect, in the opinion of management, all material adjustments necessary to fairly state the results of operations and financial position for the periods presented. All intercompany transactions and balances have been eliminated.

Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the SEC, although the Company believes the disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009. During the ~~three~~nine months ended ~~December 31, 2009,~~June 30, 2010, the Company has not made any material changes in the selection or application of its critical accounting policies that were set forth in its Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

The Company has evaluated ~~subsequent~~the provisions of the Patient Protection and Affordable Care Act, as enacted on March 23, 2010 and the Health Care and Education Reconciliation Act of 2010 as enacted on March 30, 2010 (collectively the “Health Reform Laws”). The Company is unable to predict at this time the full impact of the Health Reform Laws on the Company and its consolidated financial statements.

Long-Lived Assets— Long-lived assets, such as property, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through ~~February 9,~~various valuation techniques including, but not limited to, discounted cash flow models, quoted market values, and third-party independent appraisals. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in the Company’s strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets.

Due to a decline in operating performance at certain hospitals during fiscal 2009, the Company performed impairment tests utilizing undiscounted cash flows as of September 30, 2009. The results of those tests indicated that no impairment existed as of that date. Due to continued declines in the operating performance of certain hospitals during the first six months of fiscal 2010, the ~~date~~Company performed impairment tests using undiscounted cash flows to determine if the carrying value of these ~~consolidated~~hospital’s long-lived assets were recoverable as of March 31, 2010. The results indicated the current carrying value of the assets at certain hospitals were not recoverable. The Company compared the fair value of those assets to their respective carrying values in order to determine the amount of impairment. The Company recognized impairment charges based on the amount each group of assets’ carrying value exceeded its fair value. The Company’s fair value estimates were derived by management using independent appraisals, established market values of comparable assets, and internal estimates of future discounted net cash flows.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

During the three months ended June 30, 2010, additional information became available relative to the fair market value of certain assets as a result of the Company’s ongoing Strategic Alternatives Review. As a result, it was determined that additional impairment may have occurred related to assets within its Hospital Division and Corporate and other. The Company performed impairment tests using undiscounted cash flows to determine if the carrying value of the long-lived assets were recoverable as of June 30, 2010. The results indicated the current carrying value of the assets were not recoverable. The Company compared the fair value of those assets to their respective carrying values in order to determine the amount of impairment. The Company recognized an impairment charge based on the amount each group of assets’ carrying value exceeded its fair value. The Company’s fair value estimates were derived by management from independent third party market offers and internal estimates of future discounted net cash flows.

These fair value estimates could change by material amounts in subsequent periods. Many factors and assumptions can impact the estimates, including the future financial ~~statements were issued,~~results of these hospitals, how the hospitals are operated in the future, changes in health care industry trends and regulations, the impact of future decisions relative to the Company’s Strategic Alternatives Review, and the impact on the nature and timing of the ultimate disposition of the assets. The impairments recognized do not include the costs of closing the hospitals or other future operating costs, which could be substantial. Accordingly, the ultimate net cash realized from the hospitals could be significantly less than their impaired value. See Note 13 for the impairment charges recorded to property and equipment and Note 15 for further discussions as ~~filed in Form 10-Q with~~to the ~~SEC.~~Company’s determination of fair value.

2. Recent Accounting Pronouncements

The following is a summary of new accounting pronouncements that have been adopted or that may apply to the Company.

Recently Adopted Accounting Pronouncements:

In December 2007, the FASB issued a new accounting standard that addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. This standard will require more assets and liabilities to be recorded at fair value and will require expense recognition (rather than capitalization) of certain pre-acquisition costs. This standard also will require any adjustments to acquired deferred tax assets and liabilities occurring after the related allocation period to be made through earnings. Furthermore, this standard requires this treatment of acquired deferred tax assets and liabilities also be applied to acquisitions occurring prior to the effective date of this standard. The Company adopted this new standard on October 1, 2009 and we expect this statement will have an impact on our consolidated financial statements for acquisitions consummated after October 1, 2009, but the nature and magnitude of the specific effects will depend upon the terms and size of the acquisitions consummated.

In December 2007, the FASB issued a new accounting standard that establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This new accounting standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The Company adopted this new standard on October 1, 2009. Upon adoption, a portion of noncontrolling ~~interest~~interests was reclassified to a separate component of total equity within our consolidated balance sheets. See Note 1Business and Basis of Presentationabove for a more detailed discussion regarding the adoption of this new ~~standard.~~standard.

In April 2008, the FASB issued a new accounting standard which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. The new accounting standard applies to intangible assets that are acquired individually or with a group of other assets and intangible assets acquired in both business combinations and asset acquisitions. The Company adopted this new standard on October 1, 2009 with no impact to its consolidated financial statements.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

Recent Accounting Pronouncements:

In June 2009, the FASB issued a new accounting standard that amends the consolidation guidance that applies to variable interest entities (“VIE”). The amendments will significantly affect the overall consolidation analysis. The provisions of this new accounting standard revise the definition and consideration of VIEs, primary beneficiary, and triggering events in which a company must re-evaluate its conclusions as to the consolidation of an entity. This new accounting standard is effective as of the beginning of the first fiscal year after November 15, 2009, fiscal 2011 for the Company. The Company is evaluating the potential impacts the adoption of this new standard will have on its consolidated financial statements.

3. Divestitures

During August 2010, the Company entered into a definitive agreement to sell substantially all of the assets, and to assign certain of the liabilities, of Arizona Heart Hospital, LLC for approximately $32.0 million. The transaction is expected to close after finalization of certain closing conditions.

During February 2010, the Company entered into an agreement to sell certain assets and liabilities of HHA for approximately $83.6 million. The sale is expected to close after all regulatory approvals are obtained. The Company has classified the results of operations of HHA within income from discontinued operations, net of taxes for the three and nine months ended June 30, 2010 and 2009. The assets and liabilities of HHA have been classified within current and non-current assets and current and long-term liabilities of discontinued operations on the consolidated balance sheets as of June 30, 2010 and September 30, 2009.

During September 2009, the MedCath Partners Division of the Company sold the assets of Sun City Cardiac Center Associates (“Sun City”). for $16.9 million, which resulted in a gain of $3.2 million, net of taxes. The Company has classified the results of operations of Sun City within ~~(loss)~~ income from discontinued operations, net of taxes for the three and nine months ended ~~December 31, 2009~~June 30, 2010 and ~~2008.~~2009. The assets and liabilities of Sun City have been classified within current assets and current liabilities of discontinued operations on the consolidated balance sheets as of June 30, 2010 and September 30, 2009.

During December 2008, the MedCath Partners Division of the Company sold its entire interest in Cape Cod Cardiology Services, LLC (“Cape Cod”) for $6.9 million, which resulted in a gain of $4.0 million, net of taxes. The Company has classified the results of operations of Cape Cod within ~~(loss)~~ income from discontinued operations, net of taxes for the three and nine months ended ~~December 31, 2009 and 2008.~~June 30, 2009.

During May 2008, the Hospital Division of the Company sold the net assets of Dayton Heart Hospital (“DHH”). The Company has classified the results of operations related to the remaining assets and liabilities associated with DHH within ~~(loss)~~ income from discontinued operations, net of taxes for the three and nine months ended ~~December 31, 2009~~June 30, 2010 and ~~2008.~~

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages~~2009. The assets and ~~per share data)~~liabilities of DHH have been classified within current assets and current liabilities of discontinued operations on the consolidated balance sheets as of June 30, 2010 and September 30, 2009.

The results of operations and the assets and liabilities of discontinued operations included in the consolidated statements of operations and consolidated balance sheets are as follows:

Three Months Ended December 31,
2009 2008

Net revenue $ (44 ) $ 4,725
Gain from sale of Cape Cod — 6,640
(Loss) income before income taxes (379 ) 7,641
Income tax (benefit) expense (91 ) 2,720

Net (loss) income (288 ) 4,921
Less: Net loss (income) attributable to noncontrolling interest 143 (760 )

Net (loss) income attributable to MedCath Corporation $ (145 ) $ 4,161

December 31, September 30,
2009 2009

Cash and cash equivalents $ 11,819 $ 29,687
Accounts receivable, net 65 324
Other current assets 58 —

Current assets of discontinued operations $ 11,942 $ 30,011

Accounts payable $ 9,762 $ 9,898
Accrued liabilities 145 267

Current liabilities of discontinued operations $ 9,907 $ 10,165

4. Accounts Receivable

Accounts receivable, net, consists of the following:

December 31, September 30,
2009 2009
Receivables, principally from patients and third-party payors $ 153,167 $ 150,476
Receivables, principally from billings to hospitals for various cardiovascular procedures 1,744 1,494
Amounts due under management contracts 225 228
Other 7,189 6,094

162,325 158,292
Less allowance for doubtful accounts (89,729 ) (87,882 )

Accounts receivable, net $ 72,596 $ 70,410


	Three Months Ended June 30,						Nine Months Ended June 30,
	2010			2009			2010			2009

Net revenue	$	23,415		$	26,797		$	71,482		$	84,634
Gain from sale of Cape Cod		—			—			—			6,640
Income before income taxes		3,070			1,182			5,567			13,071
Income tax expense		907			304			1,672			4,278

Net income before noncontrolling interest		2,163			878			3,895			8,793
Less: Net income attributable to noncontrolling interest		(824	)		(405	)		(1,331	)		(2,177	)

Net income attributable to MedCath Corporation	$	1,339		$	473		$	2,564		$	6,616

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

During November 2008, the Company amended and restated its senior secured credit facility (the “Credit Facility”). The Credit Facility provides for a three-year term loan facility in the amount of $75.0 million (the “Term Loan”) and a revolving credit facility in the amount of $85.0 million (the “Revolver”), which includes a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit and a $10.0 million sub-limit for swing-line loans. At the request of the Company and approval from its lenders, the aggregate amount available under the Credit Facility may be increased by an amount up to $50.0 million. Borrowings under the Credit Facility, excluding swing-line loans, bear interest per annum at a rate equal to the sum of LIBOR plus ~~the~~an applicable margin or the alternate base rate plus ~~the~~an applicable margin. ~~At December 31, 2009 the Term Loan bore interest at 3.23% and the Revolver bore interest at 3.24%.~~

The Credit Facility is guaranteed jointly and severally by the Company and certain of the Company’s existing and future, direct and indirect, wholly owned subsidiaries and is secured by a first priority perfected security interest in all of the capital stock or other ownership interests owned by the Company and subsidiary guarantors in each of their subsidiaries, and, subject to certain exceptions in the Credit Facility, all other present and future assets and properties of the Company and the subsidiary guarantors and all intercompany notes.

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages and per share data)~~

The Credit Facility requires compliance with certain financial covenants including a consolidated senior secured leverage ratio test, a consolidated fixed charge coverage ratio test and a consolidated total leverage ratio test. The Credit Facility also contains customary restrictions on, among other things, the Company and subsidiaries’ ability to incur liens; engage in mergers, consolidations and sales of assets; incur debt; declare dividends; redeem stock and repurchase, redeem and/or repay other debt; make loans, advances and investments and acquisitions; and enter into transactions with affiliates.

The Credit Facility contains events of default, including cross-defaults to certain indebtedness, change of control events, and other events of default customary for syndicated commercial credit facilities. Upon the occurrence of an event of default, the Company could be required to immediately repay all outstanding amounts under the Credit Facility.

The Company is required to make mandatory prepayments of principal in specified amounts upon the occurrence of certain events identified in the Credit Facility and is permitted to make voluntary prepayments of principal under the Credit Facility. The Term Loan is subject to amortization of principal in quarterly installments, ~~commencing on~~which began March 31, 2010. The maturity date of both the Term Loan and the Revolver is November 10, 2011.

The ~~entire $75.0~~$69.4 million outstanding under the Credit Facility at ~~December 31, 2009 relates~~June 30, 2010 related to the Term Loan. At June 30, 2010 the Term Loan bore interest at 3.35%. The maximum availability under the Revolver is $85.0 million which iswas reduced by outstanding letters of credit totaling ~~$2.4~~$1.7 million at ~~December 31, 2009.~~June 30, 2010.

During the third quarter ended June 30, 2010, the Company repaid the remaining $4.2 million note payable obligations to certain equipment lenders on behalf of its consolidated subsidiary, TexSAn Heart Hospital.

During December 2008, the Company redeemed its outstanding 9 7/8% senior notes (the “Senior Notes”) issued by MedCath Holdings Corp., a wholly owned subsidiary of the Company, for $111.2 million, which included the payment of a repurchase premium of $5.0 million and accrued interest of $4.2 million. The Senior Notes were redeemed through borrowings under the Credit Facility and available cash on hand. In addition to the aforementioned repurchase premium, the Company incurred $2.0 million in expense related to the write-off of previously incurred financing costs associated with the Senior Notes. The repurchase premium and write off of previously incurred financing costs have been included in the consolidated statements of operations as loss on early extinguishment of debt for the ~~three~~nine months ended ~~December 31, 2008.~~June 30, 2009.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

Debt Covenants—At ~~December 31, 2009 and~~ September 30, 2009, the Company was in violation of financial covenants under equipment loans at its consolidated subsidiary TexSAn Heart Hospital. Accordingly, the total outstanding balance for these loans of ~~$5.3 million and~~ $6.1 million ~~respectively, has been~~was included in the current portion of long-term debt and obligations under capital leases on the Company’s consolidated balance ~~sheets. The covenant violations did not result in any other non-compliance related to the remaining covenants governing the Company’s outstanding debt; thereby~~sheet. These loans were paid in-full as of June 30, 2010. As of June 30, 2010, the Company ~~remained~~was in compliance with all ~~other covenants.~~covenants governing its outstanding debt.

Fair Value of Financial Instruments—The Company considers the carrying amounts of significant classes of financial instruments on the consolidated balance sheets to be reasonable estimates of fair value due either to their length to maturity or the existence of variable interest rates underlying such financial instruments that approximate prevailing market rates at ~~December 31, 2009~~June 30, 2010 and September 30, 2009. The estimated fair value of long-term debt, including the current portion, at ~~December 31, 2009~~June 30, 2010 was approximately ~~$120.8~~$110.2 million ($40.8 million related to discontinued operations) as compared to a carrying value of ~~$115.6 million.~~$104.0 million ($34.6 million related to discontinued operations). At September 30, 2009, the estimated fair value of long-term debt, including the current portion, was approximately $127.6 million ($41.4 million related to discontinued operations) as compared to a carrying value of $121.4 ~~million.~~million ($35.3 million related to discontinued operations). Fair value of the Company’s fixed rate debt was estimated using discontinued cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of arrangements and market information. The fair value of the Company’s variable rate debt was determined to approximate its carrying value due to the underlying variable interest rates.

7. Contingencies and Commitments

Contingencies —The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, court decisions, executive orders, ~~and~~ freezes, and funding reductions, all of which may significantly affect the Company. In addition, reimbursement is generally subject to adjustment following audit by third party payors, including the fiscal intermediaries who administer the Medicare program, the Centers for Medicare and Medicaid Services (“CMS”).

Final determination of amounts due providers under the Medicare program often takes several years because of such audits, as well as resulting provider appeals and the application of technical reimbursement provisions. The Company believes that adequate provisions have been made for any adjustments that might result from these programs; however, due to the complexity of laws and regulations governing the Medicare and Medicaid programs, the manner in which they are interpreted and the other complexities involved in estimating net revenue, there is a possibility that recorded estimates will change by a material amount in the future.

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages and per share data)~~

In 2005, the CMS began using recovery audit contractors (“RAC”) to detect Medicare overpayments not identified through existing ~~claims~~claim review mechanisms. The RAC program relies on private auditing firms to examine Medicare claims filed by healthcare providers. Fees to the RACs are paid on a contingency basis. The RAC program began as a demonstration project in 2005 in three states (New York, California and Florida) which was expanded into the three additional states of Arizona, Massachusetts and South Carolina in July 2007. No RAC audits, however, were initiated at the Company’s Arizona or California hospitals during the demonstration project. The program was made permanent by the Tax Relief and Health Care Act of 2006 enacted in December 2006. CMS announced in March 2008 the end of the demonstration project and the commencement of the permanent program by the expansion of the RAC program to additional states beginning in the summer and fall 2008 and its plans to have RACs in place in all 50 states by 2010.

RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. The CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments will be subject to the Medicare appeals process.

The Company believes the claims for reimbursement submitted to the Medicare program by the Company’s facilities have been accurate, however the Company is unable to reasonably estimate what the potential result of future RAC audits or other reimbursement matters could be.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

The Company is involved in various claims and legal actions in the ordinary course of business, including malpractice claims arising from services provided to patients that have been asserted by various claimants and additional claims that may be asserted for known incidents through ~~December 31, 2009.~~June 30, 2010. These claims and legal actions are in various stages, and some may ultimately be brought to trial. Moreover, additional claims arising from services provided to patients in the past and other legal actions may be asserted in the future. The Company is protecting its interests in all such claims and actions and does not expect the ultimate resolution of these matters to have a material adverse impact on the Company’s consolidated financial position, results of operations or cash flows.

During the prior fiscal year, the Company refunded certain reimbursements to CMS related to carotid artery stent procedures performed during prior fiscal years at two of the Company’s consolidated subsidiary hospitals. The U.S. Department of Justice (“DOJ”) initiated an investigation related to the Company’s return of these reimbursements. As a result of the DOJ’s investigation, the Company ~~began negotiating~~negotiated a settlement agreement during the third quarter of fiscal 2009 with the DOJ whereby the Company iswas expected to pay approximately $0.8 million to settle and obtain a release from any federal civil false claims liability related to the DOJ’s investigation. The DOJ allegations do not involve patient care, and relate solely to whether the procedures were properly reimbursable by Medicare. The settlement would not include any finding of wrong-doing or any admission of liability. As part of the settlement, the Company ~~is also negotiating~~negotiated with the Department of Health and Human Services, Office of Inspector General (“OIG”), to obtain a release from any federal health care program permissive exclusion actions to be instituted by the OIG. During the quarter ended December 31, 2009 the Company paid $0.6 million of the $0.8 million initially accrued within other accrued liabilities on the consolidated balance sheet as of September 30, 2009. As of ~~December 31, 2009~~June 30, 2010, $0.2 million remained accrued within other accrued liabilities on the consolidated balance sheet.

During October 2009, a purported class action law suit was filed against the Bakersfield Heart Hospital, a consolidated subsidiary of the Company. In the complaint the plaintiff alleges that under California law, specifically under the Knox-Keene Healthcare Service Plan Act of 1975 and under the Health and Safety Code of California, California prohibits the practice of “balance billing” for patients who are provided emergency services. A class has not been certified by the court in this case. Currently the Company is unable to predict with certainty the outcome of this case or if the plaintiff prevails whether the amount due to the plaintiff could be material.

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages and per share data)~~

The Company has a one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $2.0 million of retained liability per claim. The Company additionally has insurance to reduce the retained liability per claim to $250,000 for the MedCath Partners Division. Because of the Company’s self-insured retention levels, the Company is required to recognize an estimated expense/liability for the amount of retained liability applicable to each malpractice claim. As of ~~December 31, 2009~~June 30, 2010 and September 30, 2009, the total estimated liability for the Company’s self-insured retention on medical malpractice claims, including an estimated amount for incurred but not reported claims, was ~~approximately $4.3~~$3.0 million and ~~$4.9~~$4.5 million, respectively, which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on actuarial estimates using the Company’s historical experience with claims and assumptions about future events.

In addition to reserves for medical malpractice, the Company also maintains reserves for self-insured workman’s compensation, healthcare and dental coverage. The total estimated reserve for self-insured liabilities for workman’s compensation, employee health and dental claims was ~~$4.2~~$3.4 million and $3.5 million as of ~~December 31, 2009~~June 30, 2010 and September 30, 2009, respectively, which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on historical experience with claims. The Company maintains commercial stop loss coverage for health and dental insurance program of $175,000 per plan participant.

Commitments —The Company’s consolidated subsidiary hospitals provide guarantees to certain physician groups for funds required to operate and maintain services for the benefit of the hospital’s patients including emergency care services and anesthesiology services, among other services. These guarantees extend for the duration of the underlying service agreements. As of ~~December 31, 2009,~~June 30, 2010, the maximum potential future payments that the Company could be required to make under these guarantees was ~~approximately $31.5~~approximately$31.6 million ($0.6 million related to discontinued operations) through ~~October 2012.~~June 2013. At ~~December 31, 2009~~June 30, 2010 the Company had total liabilities of ~~$13.4~~$14.0 million ($0.6 million related to discontinued operations) for the fair value of these guarantees, of which ~~$7.0~~$8.7 million is in other accrued liabilities and ~~$6.4~~$0.2 million in current liabilities of discontinued operations, and $4.7 million is in other long term ~~obligations.~~obligations and $0.4 million in long-term liabilities of discontinued operations. Additionally, the Company had assets of ~~$13.6~~$14.2 million ($0.6 million related to discontinued operations) representing the future services to be provided by the physicians, of which ~~$7.5~~$8.4 million is in prepaid expenses and other current assets and ~~$6.1~~$0.2 million in current assets of discontinued operations, and $5.2 million is in other ~~assets.~~assets and $0.4 million in non-current assets of discontinued operations.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

8. ~~Per~~Earnings per Share Data

Basic— The calculation of basic earnings per share includes 150,900 and 95,900 of restricted stock units that have vested but as of June 30, 2010 and 2009, respectively, have not been converted into common stock. See Note 9 as it relates to restricted stock units granted to directors of the Company.

Diluted— The calculation of diluted earnings per share considers the potential dilutive effect of options to purchase 1,205,587 shares of common stock at prices ranging from $4.75 to $33.05, which were outstanding at June 30, 2009, as well as 487,335 shares of restricted stock which were outstanding at June 30, 2009. Of the outstanding stock options and restricted stock 1,692,922 and 1,637,260 have not been included in the calculation of diluted earnings per share for the three and nine months ended June 30, 2009, respectively, because the stock options and restricted stock were anti-dilutive. No options or restricted stock were included in the calculation of diluted earnings per share for the three and nine months ended ~~December 31, 2009 and 2008~~June 30, 2010, as the consideration of such shares would be anti-dilutive due to the loss from continuing operations, net of ~~tax.~~taxes.

9. Stock Based Compensation

Compensation expense from the grant of equity awards made to employees and directors is recognized based on the estimated fair value of each award over each applicable awards vesting period. The Company estimates the fair value of equity awards on the date of grant using, either an option-pricing model for stock options or the closing market price of the Company’s stock for restricted stock and restricted stock units. Stock based compensation expense is recognized on a straight-line basis over the requisite service period for the awards that are ultimately expected to vest. Stock based compensation expense recorded during the three and nine months ended ~~December 31, 2009 and 2008~~June 30, 2010 was $0.6 million and ~~$1.0~~$2.4 million, respectively. The associated tax benefits related to the compensation expense recognized for the three and nine months ended ~~December 31, 2009 and 2008~~June 30, 2010 was $0.2 million and ~~$0.4~~$1.0 million, respectively. Stock based compensation expense recorded during the three and nine months ended June 30, 2009 was $0.2 million and $2.1 million, respectively. The associated tax benefits related to the compensation expense recognized for the three and nine months ended June 30, 2009 was $0.1 million and $0.8 million, respectively.

Stock Options

The following table summarizes the Company’s stock option activity:


	For the Three Months Ended										For the Three Months Ended
	December 31, 2009					December 31, 2008					June 30, 2010					June 30, 2009
				Weighted-					Weighted-					Weighted-					Weighted-
	Number of			Average		Number of			Average		Number of			Average		Number of			Average
	Stock Options			Exercise Price		Stock Options			Exercise Price		Stock Options			Exercise Price		Stock Options			Exercise Price
Outstanding stock options, beginning of period		1,027,387		$	22.25		1,776,837		$	22.15		975,637		$	22.14		1,302,587		$	21.60

Granted		—			—		82,000			17.46
Exercised												—			—		(7,000	)		10.95
Cancelled		(40,750	)		22.94		(33,000	)		19.77		(4,000	)		16.91		(90,000	)		21.60


Outstanding stock options, end of period		986,637		$	22.23		1,825,837		$	21.98		971,637		$	22.17		1,205,587		$	21.66

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)


	For the Nine Months Ended
	June 30, 2010					June 30, 2009
				Weighted-					Weighted-
	Number of			Average		Number of			Average
	Stock Options			Exercise Price		Stock Options			Exercise Price
Outstanding stock options, beginning of period		1,027,387		$	22.25		1,776,837		$	22.15

Granted		—			—		82,000			17.46
Exercised		—			—		(7,000	)		10.95
Cancelled		(55,750	)		23.80		(646,250	)		22.59


Outstanding stock options, end of period		971,637		$	22.17		1,205,587		$	21.66

Restricted Stock Awards

During the nine months ended June 30, 2010, the Company granted to employees 401,399 shares of restricted stock. No shares of restricted stock were granted during the three months ended ~~December 31,~~June 30, 2010. During the three and nine months ended June 30, 2009, the Company granted to employees ~~369,164~~96,725 and 520,878 shares of restricted ~~stock.~~stock, respectively. Restricted stock granted to employees, excluding executives of the Company, vest annually on December 31 over a three year period. Executives of the Company ~~defined~~(defined by the Company as vice president or ~~higher,~~higher) received two equal grants of restricted stock. The first grant vests annually in equal installments on December 31 over a three year period. The second grant vests annually on December 31 over a three year period if certain performance conditions are met. ~~At December 31,~~During the nine months ended June 30, 2010, the Company granted 89,600 shares of restricted stock units to directors. During the nine months ended June 30, 2009, the Company granted 95,900 shares of restricted stock units to directors. No restricted stock units were granted during the three months ended June 30, 2010 and 2009. Restricted stock units granted to directors are fully vested at the date of grant and are paid in shares of common stock upon each applicable director’s termination of service on the board. At June 30, 2010, the Company had ~~$4.0~~$3.8 million of unrecognized compensation expense associated with restricted stock awards.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

12. Comprehensive Income


	Three Months Ended June 30,						Nine Months Ended June 30,
	2010			2009			2010			2009
Net (loss) income	$	(10,461	)	$	2,769		$	(20,964	)	$	18,184
Changes in fair value of interest rate swap, net of tax benefit		(67	)		126			(35	)		(147	)

Comprehensive (loss) income		(10,528	)		2,895			(20,999	)		18,037
Less: Net income attributable to noncontrolling interest		(2,355	)		(2,273	)		(5,718	)		(9,860	)

Comprehensive (loss) income attributable to MedCath Corporation common stockholders	$	(12,883	)	$	622		$	(26,717	)	$	8,177

13. Property and Equipment


	June 30,			September 30,
	2010			2009

Land	$	30,558		$	32,629
Buildings		234,194			263,796
Equipment		225,385			217,362
Construction in progress		1,077			17,434

Total, at cost		491,214			531,221
Less accumulated depreciation		(201,353	)		(189,827	)

Property and equipment, net	$	289,861		$	341,394

During the three and nine months ended June 30, 2010 the Company recorded $22.8 million and $42.8 million of impairment charges to the consolidated statement of operations, respectively. See Note 1 for further discussion related to these impairment charges.

14. Other Assets

The Company’s Corporate and other division entered into a note receivable agreement with a third party during 2008. During the second quarter ended March 31, 2010, the Company deemed the note receivable to be uncollectable due to the third party’s inability to repay the note and the insufficiency of the value of the collateral securing the note. As a result a loss of $1.5 million was recorded on the consolidated statement of operations during the nine months ended June 30, 2010.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

~~11. Intangible Assets~~15. Fair Value Measurements

As described in Note 2Recent Accounting Pronouncementsthe Company adopted the accounting standard issued by the FASB that defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements. The FASB delayed the effective date of this new standard for all nonfinancial assets and liabilities whose fair values are measured on a nonrecurring basis, typically relate to long-lived assets. The Company is now required to provide additional disclosures about fair value measurements for each major category of assets and liabilities measured at fair value on a non-recurring basis. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to non-financial assets and liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as independent third party market offers. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of discounted future cash flows or third party appraisals.

As of March 31, 2010 the fair values of certain longed lived assets within the Hospital Division were $78.9 million, $32.0 million was derived from Level 2 inputs and $46.9 million was derived from Level 3 inputs, resulting in an impairment of $19.9 million for the three and six month period ended March 31, 2010.

As of June 30, 2010 the fair values of certain long lived assets within the Hospital Division and Corporate and other were $54.3 million, all of which was derived from Level 2 inputs, resulting in an impairment of $22.8 million for the three month period ended June 30, 2010 and $42.8 million for the nine months ended June 30, 2010. See Notes 1 and 13 for further disclosure regarding these impairments.

16. Income Taxes

As of ~~December 31, 2009~~June 30, 2010 the Company had a net deferred tax asset of $12.9 million, $12.3 million were current deferred tax assets and $0.6 million were long term deferred tax assets. As of September 30, 2009 the ~~Company’s intangible~~Company had a net deferred tax liability of $1.7 million, $12.2 million were current deferred tax assets ~~which are included in other assets on the consolidated balance sheets, are detailed~~and $13.9 million were long term deferred tax liabilities. The change in the ~~following table:~~

December 31, 2009 September 30, 2009
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization

Intangible Assets 555 (228 ) 730 (352 )

~~The estimated aggregate amortization expense for each~~Company’s net deferred tax position was primarily due to the recording of $8.8 million and $16.4 million in deferred tax assets in connection with the ~~next five year~~Company’s impairments of property and equipment during the three and nine month periods ~~ending December 31 are $57 for fiscal~~ended June 30, 2010, ~~and 2011, and $32 for fiscal 2012, 2013, and 2014.~~

~~12. Comprehensive Income~~

Three Months Ended December 31,
2009 2008
Net (loss) income $ (1,815 ) $ 5,369
Changes in fair value of interest rate swap, net of tax benefit 56 (448 )

Comprehensive (loss) income (1,759 ) 4,921
Less: Net income attributable to noncontrolling interests (841 ) (3,123 )

Comprehensive (loss) income attributable to
MedCath Corporation common stockholders $ (2,600 ) $ 1,798

respectively.

1419

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the interim unaudited consolidated financial statements and related notes included elsewhere in this report, as well as the audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report onForm 10-K for the fiscal year ended September 30, 2009.

Overview

General. We are a healthcare provider focused primarily on providing high acuity services, predominantly the diagnosis and treatment of cardiovascular disease. We own and operate hospitals in partnership with physicians whom we believe have established reputations for clinical excellence. We have ownership interests in and operate ten hospitals, with a total of 825 licensed beds, 58 of which ~~735~~are related to HHA, whose assets, liabilities, and operations are included within discontinued operations. Our nine hospitals that currently comprise our continuing operations have 767 licensed beds, of which 678 are staffed and available, and are located ~~predominately in high growth markets~~ in seven states: Arizona, Arkansas, California, Louisiana, New Mexico, South Dakota, and Texas.During May 2009, we completed our 79 licensed bed expansion at Louisiana Medical Center and Heart Hospital (“LMCHH”) and built space for an additional 40 beds at that hospital. During October 2009, we opened a new acute care hospital, Hualapai Mountain Medical Center (“HMMC”), in Kingman, Arizona. This hospital is designed to accommodate a total of 106 licensed beds, with an initial opening of 70 of its licensed beds.

In addition to our hospitals, we currently own and/or manage 1612 cardiac diagnostic and therapeutic facilities. ~~Ten~~Nine of these facilities are located at hospitals operated by other parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining ~~six~~three facilities are not located at hospitals and offer only diagnostic procedures.

In March, 2010, the Company’s Board of Directors began the Strategic Alternatives Review to consider the sale of either the Company or the sale of its individual hospitals and other assets. The Strategic Alternatives Review process is continuing. The Company cannot provide any assurance regarding the result of this process. As a result, the Company’s Strategic Alternatives Review process may collect information relative to the fair market value of our assets which could result in additional impairments. However, generally accepted accounting principles do not allow us to recognize a gain if the fair value of our assets exceeds their carrying value until the disposition of those assets occurs.

Same Facility Hospitals.Our policy is to include, on a same facility basis, only those facilities that were open and operational during the full current and prior fiscal year comparable periods. For example, on a same facility basis for our consolidated ~~hospital division~~Hospital Division for the three and nine months ended ~~December 31, 2009,~~June 30, 2010, we exclude the results of operations of Hualapai Mountain Medical Center, which opened in October 2009.

Revenue Sources by Division.The largest percentage of our net revenue is attributable to our ~~hospital division.~~Hospital Division. The following table sets forth the percentage contribution of each of our consolidating divisions to consolidated net revenue in the periods indicated below.


	Three Months Ended December 31,						Three Months Ended June 30,						Nine Months Ended June 30,
Division	2009			2008			2010			2009			2010			2009
Hospital		97.3	%		96.7	%		97.5	%		96.2	%		97.3	%		96.2	%
MedCath Partners		2.6	%		3.2	%		2.4	%		3.7	%		2.6	%		3.7	%
Corporate and other		0.1	%		0.1	%		0.1	%		0.1	%		0.1	%		0.1	%

Net Revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Results of Operations

Three Months Ended ~~December 31, 2009~~June 30, 2010 Compared to Three Months Ended ~~December 31, 2008~~June 30, 2009

Statement of Operations Data.The following table presents our results of operations in dollars and as a percentage of net revenue for the periods indicated:


	Three Months Ended December 31,																		Three Months Ended June 30,
	(in thousands except percentages)																		(in thousands except percentages)
							Increase/(Decrease)						% of Net Revenue												Increase/(Decrease)						% of Net Revenue
	2009			2008			$			%			2009			2008			2010			2009			$			%			2010			2009
Net revenue	$	147,260		$	150,245		$	(2,985	)		(2.0	)%		100.0	%		100.0	%	$	131,847		$	124,588		$	7,259			5.8	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		51,821			50,169			1,652			3.3	%		35.2	%		33.4	%		44,546			43,854			692			1.6	%		33.8	%		35.2	%
Medical supplies expense		41,859			41,642			217			0.5	%		28.4	%		27.7	%		35,706			36,472			(766	)		(2.1	)%		27.1	%		29.3	%
Bad debt expense		11,925			11,429			496			4.3	%		8.1	%		7.6	%		13,642			10,406			3,236			31.1	%		10.3	%		8.3	%
Other operating expenses		34,452			31,902			2,550			8.0	%		23.4	%		21.2	%		29,935			26,537			3,398			12.8	%		22.7	%		21.3	%
Pre-opening expenses		866			207			659			318.4	%		0.6	%		0.1	%		—			754			(754	)		(100.0	)%		—			0.6	%
Depreciation		9,035			7,801			1,234			15.8	%		6.1	%		5.2	%		7,636			6,466			1,170			18.1	%		5.8	%		5.2	%
Amortization		8			30			(22	)		(73.3	)%		0.0	%		0.0	%		8			8			—			—			—			—
Loss on disposal of property, equipment and other assets		137			73			64			87.7	%		0.1	%		0.1	%
Impairment of property and equipment																				22,813			—			22,813			100.0	%		17.3	%		—
Loss (gain) on disposal of property, equipment and other assets																				20			(54	)		74			137.0	%		—			—

(Loss) income from operations		(2,843	)		6,992			(9,835	)		(140.7	)%		(1.9	)%		4.7	%		(22,459	)		145			(22,604	)		N/M			(17.0	)%		0.1	%
Other income (expenses):
Interest expense		(1,813	)		(2,857	)		1,044			36.5	%		(1.2	)%		(1.9	)%		(1,131	)		(396	)		(735	)		185.6	%		(0.8	)%		(0.3	)%
Loss on early extinguishment of debt		—			(6,961	)		6,961			100.0	%		—			(4.6	)%
Interest and other income, net		74			101			(27	)		(26.7	)%		0.1	%		0.1	%
Interest and other income																				62			48			14			29.2	%		—			—
Equity in net earnings of unconsolidated affiliates		1,516			2,065			(549	)		(26.6	)%		1.0	%		1.3	%		2,262			2,265			(3	)		(0.1	)%		1.7	%		1.8	%

Loss from continuing operations before
income taxes		(3,066	)		(660	)		(2,406	)		364.5	%		(2.0	)%		(0.4	)%
Income tax benefit		(1,539	)		(1,108	)		(431	)		38.9	%		(1.0	)%		(0.7	)%
(Loss) income from continuing operations before income taxes																				(21,266	)		2,062			(23,328	)		N/M			(16.1	)%		1.6	%
Income tax (benefit) expense																				(8,642	)		171			(8,813	)		N/M			(6.6	)%		0.1	%

(Loss) income from continuing operations		(1,527	)		448			(1,975	)		(440.8	)%		(1.0	)%		0.3	%		(12,624	)		1,891			(14,515	)		(767.6	)%		(9.5	)%		1.5	%
(Loss) income from discontinued operations, net of taxes		(288	)		4,921			(5,209	)		(105.9	)%		(0.2	)%		3.3	%
Income from discontinued operations, net of taxes																				2,163			878			1,285			146.4	%		1.6	%		0.7	%

Net (loss) income		(1,815	)		5,369			(7,184	)		(133.8	)%		(1.2	)%		3.6	%		(10,461	)		2,769			(13,230	)		(477.8	)%		(7.9	)%		2.2	%
Less: Net income attributable to noncontrolling interest		(841	)		(3,123	)		2,282			(73.1	)%		(0.6	)%		(2.1	)%		(2,355	)		(2,273	)		(82	)		3.6	%		(1.8	)%		(1.8	)%

Net (loss) income attributable to MedCath Corporation	$	(2,656	)	$	2,246		$	(4,902	)		(218.3	)%		(1.8	)%		1.5	%	$	(12,816	)	$	496		$	(13,312	)		N/M			(9.7	)%		0.4	%


Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes	$	(2,511	)	$	(1,915	)	$	(596	)		31.1	%		(1.7	)%		(1.3	)%
(Loss) income from discontinued operations, net of taxes		(145	)		4,161			(4,306	)		(103.5	)%		(0.1	)%		2.8	%
(Loss) income from continuing operations, net of taxes																			$	(14,155	)	$	23		$	(14,178	)		N/M			(10.7	)%		—
Income from discontinued operations, net of taxes																				1,339			473			866			183.1	%		1.0	%		0.4	%

Net (loss) income	$	(2,656	)	$	2,246		$	(4,902	)		(218.3	)%		(1.8	)%		1.5	%	$	(12,816	)	$	496		$	(13,312	)		N/M			(9.7	)%		0.4	%

Three Months Ended December 31,
2009 Same
2009 2008 % Change Facility % Change
Selected Operating Data (a):

Number of hospitals 8 7 7
Licensed beds (b) 658 509 588
Staffed and available beds (c) 572 463 502
Admissions (d) 7,163 6,801 5.3 % 6,938 2.0 %
Adjusted admissions (e) 10,497 9,874 6.3 % 10,043 1.7 %
Patient days (f) 26,352 25,181 4.7 % 25,423 1.0 %
Adjusted patient days (g) 39,336 37,044 6.2 % 37,526 1.3 %
Average length of stay (days) (h) 3.68 3.70 (0.5 )% 3.66 (1.1 )%
Occupancy (i) 50.1 % 59.1 % 55.0 %
Inpatient catheterization procedures (j) 3,307 3,552 (6.9 )% 3,265 (8.1 )%
Inpatient surgical procedures (k) 1,949 2,001 (2.6 )% 1,909 (4.6 )%
Hospital net revenue (in thousands except percentages) $ 142,346 $ 144,225 (1.3 )% $ 137,753 (4.5 )%


(a)		Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in our consolidated financial statements.

(b)		Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use.

(c)		Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period.

(d)		Admissions represent the number of patients admitted for inpatient treatment.

(e)		Adjusted admissions isare a general measure of combined inpatient and outpatient volume. We compute adjusted admissions by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions.

(f)		Patient days represent the total number of days of care provided to inpatients.

(g)		Adjusted patient days isare a general measure of combined inpatient and outpatient volume. We compute adjusted patient days by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days.

(h)		Average length of stay (days) represents the average number of days inpatients stay in our hospitals.

(i)		We compute occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the number of staffed and available beds.

(j)		Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals’ catheterization labs during the period.

(k)		Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period.

Same facility inpatient net revenue was ~~70%~~69.5% of the Hospital Division’s total same facility net patient revenue for the ~~first~~third quarter of fiscal 2010 compared to ~~approximately 72%~~65.9% for the ~~first~~third quarter of fiscal 2009. ~~While~~Inpatient cases for the third quarter of fiscal 2010 increased 6.9% compared to the third quarter of the prior year, however our total ~~same facility~~ inpatient ~~cases increased by 2%, total same facility hospital~~ net ~~patient~~ revenue ~~was down 4.7%, or $6.7 million, from $142.7 to $136.0. This~~remained relatively flat as a result of a decline ~~is due primarily to an 8.3% reduction~~ in ~~inpatient~~procedures with higher net revenue per case such as open heart ~~cases resulting in a $6.9 million reduction in total same facility~~and AICD procedures. Inpatient open heart and AICD net ~~patient revenue offset by an increase in drug-eluting stents~~revenues were down 12.9% and ~~other catheter procedures.~~18.2%, respectively, during the third quarter of fiscal 2010 as compared to the comparable period of fiscal 2009. We believe ~~this~~the decline is indicative that less invasive cardiac procedures, such as stents, and pharmaceutical treatments have been increasingly successful ~~for our~~in treating patients ~~at our hospitals. This decline was~~suffering from cardiovascular disease. These decreases were offset by a ~~35%, or $6.1 million,~~10.3% increase in ~~our~~ inpatient ~~non-cardiovascular cases. This~~bare metal and drug eluting stent procedures and a 48.1% increase in non-core procedure related net revenue. Inpatient stent revenues have increased as a result of the utilization of an independent third party to assist with the determination of patient clinical setting. The increase in non-cardiac related net revenue is ~~directly attributable~~due to the ~~expansion at~~Hospital Division’s focus on diversifying the business from a dependence on cardiac cases and increasing cases in emergency department visits due to several of our ~~hospitals~~hospital expansions.

Outpatient cases, excluding emergency department cases, and net revenue decreased 2.3% and 3.2%, respectively for the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009. As noted above, the decrease in outpatient cases and net revenue was primarily due to the use of an independent third party to assist with the proper classification of patients as ~~well as seasonal illnesses.~~inpatient or outpatient. Emergency department visits and net revenue increased 5.9% and 8.1%, respectively for the third quarter of fiscal 2010 compared to the same period of fiscal 2009 due to the mix of the procedures performed.

~~Net~~Same facility net revenue for the ~~first~~third quarter of fiscal 2010 included charity care deductions of ~~$2.6~~$1.9 million compared to charity care deductions of ~~$0.8~~$0.6 million for the ~~first~~third quarter of fiscal 2009. The increase is the result of more uninsured patients applying and qualifying for charity care.

Personnel expense.~~Personnel~~Our consolidated personnel expense increased ~~3.3%~~1.6% to ~~$51.8~~$44.5 million for the ~~first~~third quarter of fiscal 2010 from ~~$50.2~~$43.9 million for the ~~first~~third quarter of fiscal 2009. Personnel expense on a same facility basis was as follows:

Three Months Ended December 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2009 2008 $ % 2009 2008
Personnel expense $ 48,360 $ 50,169 $ (1,809 ) (3.6 )% 33.9 % 33.4 %


	Three Months Ended June 30,
	(in thousands except percentages)
					Increase/(Decrease)						% of Net Revenue
	2010		2009		$			%			2010			2009
Personnel expense	$	41,208	$	43,854	$	(2,646	)		(6.0	)%		33.1	%		35.2	%

The ~~$1.8~~$2.6 million reduction in same facility personnel expense was primarily due to ~~a $1.5 million~~an overall reduction in temporary contract labor, a $0.6 million reduction in bonus expense, a $0.4 million reduction in salaries and wages and a $0.4 million reduction in stock based compensation expense offset by increases in accrued paid time off expense and workers compensation expense. Temporary contract labor and salaries and wage expense were reduced by our effortsthe majority of all personnel related expenses to better align our expenses with the level of care required for our ~~revenue as well as several positions being vacant during the first quarter of fiscal 2010 compared~~patients. We also incurred a $0.6 million reduction in other salaries and wages expense attributable to ~~the same period of the prior year. Bonus expense is incurred as bonuses are accrued. Some of~~ our facilities accrued less bonus expense during the first quarter of fiscal 2010 compared to the same period of the prior year due to the number of employees that qualified for bonuses. Stock based compensation is recognized based on the number of equity awards granted. There was a grant of restricted stock to employees during the first quarter of fiscal 2010 as well as the acceleration of expense upon the acceleration of vesting for grants issued during fiscal 2009. Paid time off expense is directly related to the hours earned and not taken by our employees. This expense will increase during any fiscal quarter in which wage increases were given to employees, which only applied to a few of our facilities. Workers compensation expense increased at one of our facilitiesMedCath Partners Division due to a ~~new claim incurred~~decrease in the staff related to fewer ventures. These decreases were partially offset by an increase of $0.4 million in stock based compensation. Certain employees and directors were granted restricted stock during fiscal 2010 and 2009, thus incrementally increasing our quarterly expense. We recognize employee restricted stock based compensation expense over the ~~first quarter of fiscal 2010.~~periods in which they are expected to vest.

Medical supplies expense.~~Medical~~Our consolidated medical supplies expense ~~increased 0.5%~~decreased 2.1% to ~~$41.9~~$35.7 million for the ~~first~~third quarter of fiscal 2010 from ~~$41.6~~$36.5 million for the ~~first~~third quarter of fiscal 2009. Medical supplies expense on a same facility basis was as follows:

Three Months Ended December 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2009 2008 $ % 2009 2008
Medical supplies expense $ 41,063 $ 41,642 $ (579 ) (1.4 )% 28.8 % 27.7 %


	Three Months Ended June 30,
	(in thousands except percentages)
					Increase/(Decrease)						% of Net Revenue
	2010		2009		$			%			2010			2009
Medical supplies expense	$	34,363	$	36,472	$	(2,109	)		(5.8	)%		27.6	%		29.3	%

The ~~$0.6~~majority of the $2.1 million decrease in medical supplies ~~expense is a result of a 5.0% decrease in net revenue on a same facility basis. Medical supplies expense as a percentage of net revenue increased 1.1% in~~for the ~~first fiscal~~third quarter of fiscal 2010 compared to the same period inof the prior ~~year. The increase in medical supplies expense as a percentage of net revenue~~year is ~~due~~attributable to the ~~mix of procedures performed during the first quarter of fiscal 2010. We had an 8.3% reduction~~decline in open heart ~~surgeries, which have high net revenue per case. With less~~and AICD cases. Cardiac related cases such as open heart ~~net revenue,~~and AICD procedures have higher supply related costs compared to the ~~percentage~~supply costs of ~~medical supplies will increase as~~our non-cardiac related cases. In addition, we have negotiated a ~~percentage~~decline in the unit cost of ~~net revenue.~~our drug-eluting stents and our utilization of stents per case has declined.

1824

Bad debt expense.~~Bad~~Our consolidated bad debt expense increased ~~4.3%~~31.1% to ~~$11.9~~$13.6 million for the ~~first~~third quarter of fiscal 2010 from ~~$11.4~~$10.4 million for the ~~first~~third quarter of fiscal 2009. As a percentage of net revenue, bad debt expense increased to ~~8.1%~~10.3% for the ~~first~~third quarter of fiscal 2010 as compared to ~~7.6%~~8.3% for the comparable period of fiscal 2009. Bad debt expense on a same facility basis was as follows:

Three Months Ended December 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2009 2008 $ % 2009 2008
Bad debt expense $ 10,905 $ 11,429 $ (524 ) (4.6 )% 7.6 % 7.6 %


	Three Months Ended June 30,
	(in thousands except percentages)
					Increase/(Decrease)					% of Net Revenue
	2010		2009		$		%			2010			2009
Bad debt expense	$	12,506	$	10,406	$	2,100		20.2	%		10.1	%		8.3	%

Our total same facility uncompensated care including charity care and bad debt expense was ~~9.6%~~11.8% of total same facility net patient hospital revenue for the ~~first~~third quarter of fiscal 2010 compared to ~~8.5%~~9.2% of total same facility net patient revenue for the ~~first~~third quarter of fiscal 2009. The total number of patients ~~which~~that applied and qualified for charity care increased during ~~first~~the third quarter of fiscal 2010 compared to the ~~first~~third quarter of fiscal 2009. We reported ~~$1.8~~$1.3 million more charity care deductions to net revenue during the ~~first~~third quarter of fiscal 2010 when compared to the ~~first~~third quarter of fiscal 2009. Bad debt expense alone (not including charity care) ~~decreased $0.5~~increased $2.1 million for the ~~first~~third quarter of fiscal 2010 compared to the same period of ~~the prior year. This~~fiscal 2009. The increase in bad debt expense is directly attributable to ~~our improved collection experience over~~an increase in the ~~past several quarters as well a reduction in~~patient account receivable balance after insurance plan payments. Our self-pay ~~net revenue~~accounts receivable after insurance balance prior to bad debt reductions has increased approximately 15.3% for ~~certain of our facilities during~~ the ~~first~~third quarter of fiscal 2010 compared to the ~~first~~balance for the third quarter of fiscal 2009.

Other operating expenses.~~Other~~Our consolidated other operating expenses increased ~~8.0%~~12.8% to ~~$34.5~~$29.9 million for the ~~first~~third quarter of fiscal 2010 from ~~$31.9~~$26.5 million for the ~~first~~third quarter of fiscal 2009. Other operating expense on a same facility basis was as follows:

Three Months Ended December 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2009 2008 $ % 2009 2008
Other operating expense $ 31,911 $ 31,902 $ 9 — 22.4 % 21.2 %


	Three Months Ended June 30,
	(in thousands except percentages)
					Increase/(Decrease)					% of Net Revenue
	2010		2009		$		%			2010			2009
Other operating expense	$	27,673	$	26,537	$	1,136		4.3	%		22.2	%		21.3	%

~~While our~~Our total same facility other operating expense ~~remained flat~~increased $1.1 million for the ~~first~~third quarter of fiscal 2010 compared to fiscal ~~2009, we did experience some fluctuations~~2009. The material and notable increases in ~~certain of our~~ operating expenses ~~that offset each other~~were as reflected below (in millions):


Salaries, wages and bonus expense of corporate division	$	0.7
Primary care practice expenses	$	0.6
Property tax	$	0.3
Purchased services	$	0.4
Repairs and maintenance	$	0.3
Professional fees	$	(0.4	)
Fees and penalties	$	(0.8	)

Corporate salaries and wages have declined $1.0 million due to natural attrition related to our Strategic Alternatives Review and a reduction in ~~comparison to the prior year. Our purchased service expense for clinical and non-clinical contractors increased approximately $0.9~~hiring of new employees as we explore these alternatives. In addition, we incurred $0.4 million in severance during the ~~first~~third quarter of fiscal 2009 compared to no severance during the third quarter of fiscal 2010. The decrease in salaries and wages was offset by a $1.7 million increase in bonus expense. Bonuses are accrued based on the expected attainment of operating performance and/or individual goals. During the third quarter of fiscal 2009 it was management’s estimate that the attainment of goals required for bonus payout was unlikely and a reduction in bonus expense was recorded at that time. A similar reduction was taken during the second quarter of fiscal 2010 ~~compared~~versus the third quarter of fiscal 2010 based on management’s current estimate of the attainment of these goals for fiscal 2010.

We have a primary care practice at one of our hospitals, which was first organized during fiscal 2009. The $0.6 million increase in expense is a result of the addition of physicians to the ~~same period~~practice during the third quarter of ~~the prior year to accommodate the slight~~fiscal 2010 and 2009.

The $0.3 million increase in ~~volume~~property taxes is directly attributable to the recent expansions at ~~certain~~several of our hospitals, which has increased the tax value of our property at these locations.

Purchased services have increased $0.4 million as a result of an increase in the use of outside clinical and non-clinical providers for services such as anesthesiologist, hospitalist and emergency department personnel. The increases are the result of entering into new contracts with these vendors to ensure 24 hour coverage at our hospitals. ~~In addition,~~

Repair and maintenance expense for our Hospital Division increased ~~$0.4~~$0.3 million for the ~~first~~third quarter of fiscal 2010 when compared to the same period of ~~the prior year due~~fiscal 2009 to the fact that our hospitals are aging and in need of higher maintenance. ~~These increases were offset by a $0.6 reduction~~

Professional fees for the third quarter of fiscal 2010 include charges of approximately $1.7 million related to legal, audit, consulting and board of director expenses in ~~medical malpractice expense and a $0.9~~connection with the review of our Strategic Alternatives Review. Conversely, we incurred $1.1 million ~~reduction~~ in ~~advertising expense. Medical malpractice expense was higher~~professional fees during the ~~first~~third quarter of fiscal 2009 ~~due~~associated with an internal assessment of certain controls and procedures, resulting in a $0.6 million year over year increase in professional fees related to ~~a claim incurred during that quarter, which has since been paid. Advertising expense has decreased due~~special projects. Offsetting this increase is a decline in ~~specific marketing campaigns~~professional fees related to recurring professional fees as a direct result of the reduction in ~~certain~~new corporate initiatives and an overall reduction in outstanding legal matters (see fees and licenses reduction discussion below).

During the third quarter of fiscal 2009 we incurred $0.8 million related to the anticipated settlement of regulatory claims at two of our ~~markets.~~hospitals related to the identification, return, and self-reporting of $0.7 million in reimbursement for certain procedures performed at those hospitals in prior fiscal years. We did not incur any fees or penalties during the third quarter of fiscal 2010.

Interest expense.Interest expense ~~decreased $1.0~~increased $0.7 million ~~or 36.5%~~ to ~~$1.8~~$1.1 million for the ~~first~~third quarter of fiscal 2010 from ~~$2.8~~$0.4 million for the ~~first~~third quarter of fiscal 2009. The ~~$1.0~~$0.7 million ~~decrease~~increase in interest expense is primarily attributable to the fact that no interest expense was capitalized during the third quarter of fiscal 2010, whereas $0.8 million of interest expense was capitalized during the comparable period of fiscal 2009 due to our expansion projects and construction of HMMC. The increase in interest expense due to the cessation of capitalized interest was offset by the overall reduction in our outstanding debt ~~and~~resulting in lower interest ~~rates on our outstanding debt.~~payments during the third quarter of fiscal 2010.

Equity in net earnings of unconsolidated affiliates.The net earnings of unconsolidated affiliates are comprised of our share of earnings in two unconsolidated hospitals, a hospital realty investment and several ventures within our MedCath Partners Division.

~~Total combined net~~Net earnings of unconsolidated affiliates in which we have a noncontrolling interest ~~decreased during~~remained flat from the ~~first~~third quarter of fiscal ~~2010~~2009 to ~~$5.8 million from $13.0 million for~~ the same period of the prior year. Approximately $6.2 million of the reduction in total combined net earnings of unconsolidated affiliates was from unconsolidated affiliates within our MedCath Partners Division, $0.6 million of the reduction in total combined net earnings of unconsolidated affiliates was from unconsolidated affiliates within our Hospital Division and the remaining $0.4 million reduction was due to a medical office venture within corporate and other. As a result of these total combined decreases from our equity investments in unconsolidated affiliates, our equity in net earnings of unconsolidated affiliates decreased $0.5 million for the firstthird quarter of fiscal ~~2010 as compared to the comparable period of fiscal 2009.~~2010.

Net income attributable to noncontrolling interest.Noncontrolling interest share of earnings of consolidated subsidiaries ~~decreased~~increased to ~~$0.8~~$2.4 million for the ~~first~~third quarter of fiscal 2010 from ~~$3.1~~$2.3 million for the ~~comparable period~~third quarter of fiscal 2009. Net income attributable to noncontrolling ~~interest~~interests on a same facility basis was as follows:

Three Months Ended December 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2009 2008 $ % 2009 2008
Net income attributable to noncontrolling interest $ (1,827 ) $ (3,123 ) $ (1,296 ) (41.5 )% (1.3 )% (2.1 )%


	Three Months Ended June 30,
	(in thousands except percentages)
					Increase/(Decrease)					% of Net Revenue
	2010		2009		$		%			2010			2009
Net income attributable to noncontrolling interest	$	2,886	$	2,273	$	613		27.0	%		2.3	%		1.8	%

On a same facility basis, net income attributable to noncontrolling interest ~~decreased $1.3~~increased $0.6 million due to a reduction in net income and an increase in our disproportionate share of losses from certain of our facilities.

We expect earnings attributable to noncontrolling interests to fluctuate in future periods as we either recognize disproportionate losses and/or recoveries thereof through disproportionate profit recognition. For a more complete discussion of our accounting for noncontrolling interests, including the basis for disproportionate allocation accounting, seeCritical Accounting Policiesin our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

Income tax ~~benefit.~~(benefit) expense.Income tax benefit was ~~$1.5~~$8.6 million for the third quarter of fiscal 2010 compared to income tax expense of $0.2 million for the comparable period of fiscal 2009, which represents an effective tax rate of approximately 37.9% and 87.7% for the respective periods. The higher income tax rate for the three months of fiscal 2009 was the result of nondeductible permanent differences related to Medicare settlements as discussed in Note 7 of this report.

Income from discontinued operations, net of taxes.Income from discontinued operations primarily includes HHA for the third quarter of fiscal 2010 and 2009. Income generated by HHA has increased as a result of not recording depreciation since the asset was classified as held for sale during the second quarter of fiscal 2010.

Results of Operations

Nine Months Ended June 30, 2010 Compared to Nine Months Ended June 30, 2009

Statement of Operations Data.The following table presents our results of operations in dollars and as a percentage of net revenue for the periods indicated:


	Nine Months Ended June 30,
	(in thousands except percentages)
							Increase/(Decrease)						% of Net Revenue
	2010			2009			$			%			2010			2009
Net revenue	$	390,815		$	381,410		$	9,405			2.5	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		136,055			131,884			4,171			3.2	%		34.8	%		34.6	%
Medical supplies expense		107,453			105,829			1,624			1.5	%		27.5	%		27.7	%
Bad debt expense		36,241			28,798			7,443			25.8	%		9.3	%		7.6	%
Other operating expenses		89,292			81,039			8,253			10.2	%		22.9	%		21.2	%
Pre-opening expenses		866			1,340			(474	)		(35.4	)%		0.2	%		0.4	%
Depreciation		23,054			19,179			3,875			20.2	%		5.9	%		5.0	%
Amortization		24			24			—			—			—			—
Impairment of property and equipment		42,761			—			42,761			100.0	%		10.9	%		—
Loss on disposal of property, equipment and other assets		39			127			(88	)		(69.3	)%		—			—

(Loss) income from operations		(44,970	)		13,190			(58,160	)		(440.9	)%		(11.5	)%		3.5	%
Other income (expenses):
Interest expense		(3,337	)		(3,074	)		(263	)		8.6	%		(0.9	)%		(0.8	)%
Loss on early extinguishment of debt		—			(6,702	)		6,702			100.0	%		—			(1.8	)%
Interest and other income		156			220			(64	)		(29.1	)%		—			0.1	%
Loss on note receivable		(1,507	)		—			(1,507	)		100.0	%		(0.4	)%		—
Equity in net earnings of unconsolidated affiliates		6,870			7,044			(174	)		(2.5	)%		1.8	%		1.8	%

(Loss) income from continuing operations before income taxes		(42,788	)		10,678			(53,466	)		(500.7	)%		(11.0	)%		2.8	%
Income tax (benefit) expense		(17,929	)		1,287			(19,216	)		N/M			(4.6	)%		0.3	%

(Loss) income from continuing operations		(24,859	)		9,391			(34,250	)		(364.7	)%		(6.4	)%		2.5	%
Income from discontinued operations, net of taxes		3,895			8,793			(4,898	)		(55.7	)%		1.0	%		2.3	%

Net (loss) income		(20,964	)		18,184			(39,148	)		(215.3	)%		(5.4	)%		4.8	%
Less: Net income attributable to noncontrolling interest		(5,718	)		(9,860	)		4,142			(42.0	)%		(1.4	)%		(2.6	)%

Net (loss) income attributable to MedCath Corporation	$	(26,682	)	$	8,324		$	(35,006	)		(420.5	)%		(6.8	)%		2.2	%


Amounts attributable to MedCath Corporation common stockholders:
(Loss) income from continuing operations, net of taxes	$	(29,246	)	$	1,708		$	(30,954	)		N/M			(7.5	)%		0.4	%
Income from discontinued operations, net of taxes		2,564			6,616			(4,052	)		(61.2	)%		0.7	%		1.8	%

Net (loss) income	$	(26,682	)	$	8,324		$	(35,006	)		(420.5	)%		(6.8	)%		2.2	%


N/M		Not meaningful

For comparison purposes, the selected operating data below are presented on an actual basis and on a same facility basis. Same facility basis excludes HMMC from operations for the nine months ended June 30, 2010. The following table presents selected operating data on a consolidated basis and a same facility basis for the periods indicated:


	Nine Months Ended June 30,
										2010 Same
	2010			2009			% Change			Facility			% Change

Selected Operating Data (a):
Number of hospitals		7			6						6
Licensed beds ( b )		600			530						530
Staffed and available beds ( c )		514			484						444
Admissions ( d )		19,347			17,883			8.2	%		18,176			1.6	%
Adjusted admissions ( e )		28,436			25,621			11.0	%		26,252			2.5	%
Patient days ( f )		72,536			69,841			3.9	%		68,073			(2.5	)%
Adjusted patient days ( g )		107,012			100,167			6.8	%		98,809			(1.4	)%
Average length of stay (days) ( h )		3.75			3.91			(4.1	)%		3.75			(4.1	)%
Occupancy ( i )		51.7	%		52.9	%					56.2	%
Inpatients with a catheterization procedure (j)		8,824			8,993			(1.9	)%		8,624			(4.1	)%
Inpatient surgical procedures (k)		5,463			5,394			1.3	%		5,237			(2.9	)%
Hospital net revenue (in thousands except percentages)	$	377,402		$	363,790			3.7	%	$	358,086			(1.6	)%

(a)		Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in our consolidated financial statements.

(b)		Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use.

(c)		Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period.

(d)		Admissions represent the number of patients admitted for inpatient treatment.

(e)		Adjusted admissions are a general measure of combined inpatient and outpatient volume. We compute adjusted admissions by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions.

(f)		Patient days represent the total number of days of care provided to inpatients.

(g)		Adjusted patient days are a general measure of combined inpatient and outpatient volume. We compute adjusted patient days by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days.

(h)		Average length of stay (days) represents the average number of days inpatients stay in our hospitals.

(i)		We compute occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the number of staffed and available beds.

(j)		Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals’ catheterization labs during the period.

(k)		Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period.

Net Revenue.Our consolidated net revenue increased 2.5% or $9.4 million to $390.8 million for the nine months ended June 30, 2010 from $381.4 million for the nine months ended June 30, 2009. Hospital Division net revenue increased 3.7% or $13.4 million, for the first nine months of fiscal 2010 compared to the same period of fiscal 2009. Beginning in our first quarter of fiscal 2010, our MedCath Partners Division renegotiated certain management contracts and several joint ventures. Consequently, certain management agreements within our MedCath Partners Division were terminated. As a result, our MedCath Partners Division net revenue declined $4.0 million during the nine months of fiscal 2010 compared to the same period of fiscal 2009. Net revenue on a same facility basis was as follows:


	Nine Months Ended June 30,
	(in thousands except percentages)
					Increase/(Decrease)						% of Net Revenue
	2010		2009		$			%			2010			2009
Net revenue	$	371,499	$	381,410	$	(9,911	)		(2.6	)%		100.0	%		100.0	%

Same facility inpatient net revenue was 73.6% of the Hospital Division’s same facility net patient revenue for the nine months of fiscal 2010 compared to approximately 73.0% for the same period of fiscal 2009. Our total same facility inpatient cases increased 1.6% and inpatient net revenue was down 3.6% for the nine months of fiscal 2010 compared to the comparable period of fiscal 2009. This decline in net revenue was due primarily to a 1.8% reduction in our core cardiovascular related cases, resulting in a $14.7 million reduction in total same facility core cardiovascular net patient revenue offset by a 26.5% increase in our inpatient non-core procedure related net revenue. Total outpatient net revenue, excluding emergency department net revenue, increased 6.1% due to a 22.2% increase in outpatient AICD implants, pacer implants and EP studies/ablations net revenue. These procedures have increased due to the addition of physicians performing these procedures at certain of our hospitals. Emergency department net revenue increased 8.4% due to the mix of the procedures performed and the recent expansions at certain of our hospitals.

Net revenue for the nine months of fiscal 2010 included charity care deductions of $6.1 million compared to charity care deductions of $2.7 million for the comparable period of fiscal 2009. The $3.4 million increase is the result of more uninsured patients applying and qualifying for charity care.

Personnel expense.Our consolidated personnel expense increased 3.2% to $136.1 million for the nine months ended June 30, 2010 from $131.9 million for the comparable period of fiscal 2009. Personnel expense on a same facility basis was as follows:


	Nine Months Ended June 30,
	(in thousands except percentages)
					Increase/(Decrease)						% of Net Revenue
	2010		2009		$			%			2010			2009
Personnel expense	$	125,590	$	131,884	$	(6,294	)		(4.8	)%		(33.8	)%		34.6	%

The $6.3 million reduction in same facility personnel expense was primarily due to a $7.2 million reduction in salaries and wages, including temporary labor and bonuses, offset by a $0.9 million increase in employee benefits expense. We continue to experience reduction in salaries and wages as we focus on aligning our expenses with the level of care required for our patients. The total percentage of personnel expense is approximately the same for the nine months of fiscal 2010 and fiscal 2009. Our benefits expense increased as the result of an increase in the number of medical claims for the nine months of fiscal 2010 compared to the comparable period of fiscal 2009.

Medical supplies expense.Our consolidated medical supplies expense increased 1.5% to $107.5 million for the nine months of fiscal 2010 from $105.8 million for the comparable period of fiscal 2009. Medical supplies expense on a same facility basis was as follows:


	Nine Months Ended June 30,
	(in thousands except percentages)
					Increase/(Decrease)						% of Net Revenue
	2010		2009		$			%			2010			2009
Medical supplies expense	$	103,866	$	105,829	$	(1,963	)		(1.9	)%		(28.0	)%		27.7	%

The $2.0 million decrease to medical supplies expense for the nine months of fiscal 2010 was due to lower volumes on procedures that have high net revenue per case, such as open heart procedures. We had an 11.6% reduction in open heart surgeries for the nine months of fiscal 2010 compared to the comparable period of fiscal 2009. With less open heart net revenue, the percentage of medical supplies increases as a percentage of net revenue. In addition, we have negotiated a decline in the unit cost of our drug-eluting stents and our utilization of stents per case has declined.

Bad debt expense.Our consolidated bad debt expense increased 25.8% to $36.2 million for the nine months of fiscal 2010 from $28.8 million for the comparable period of fiscal 2009. As a percentage of net revenue, bad debt expense increased to 9.3% for the nine months of fiscal 2010 as compared to 7.6% for the comparable period of fiscal 2009. Bad debt expense on a same facility basis was as follows:


	Nine Months Ended June 30,
	(in thousands except percentages)
					Increase/(Decrease)					% of Net Revenue
	2010		2009		$		%			2010			2009
Bad debt expense	$	33,288	$	28,798	$	4,490		15.6	%		9.0	%		7.6	%

Our total same facility Hospital Division uncompensated care including charity care and bad debt expense was 10.9% of total same facility net patient hospital revenue for the nine months of fiscal 2010 compared to 8.6% of total same facility net patient revenue for the comparable period of fiscal 2009. The total number of patients which applied and qualified for charity care increased during first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. We reported $3.4 million more charity deductions to net revenue during the nine months of fiscal 2010 when compared to the comparable period of fiscal 2009. Bad debt expense alone (not including charity care) increased $4.5 million for the nine months of fiscal 2010 compared to the comparable period of fiscal 2009. This is attributable to an increase in the self-pay portion of accounts balance after insurance plans and a corresponding increase in the percent of these accounts we believe are uncollectible for the nine months of fiscal 2010 compared to the same period of fiscal 2009.

Other operating expenses.Our consolidated other operating expenses increased 10.2% to $89.3 million for the nine months of fiscal 2010 from $81.0 million for the comparable period of fiscal 2009. Other operating expense on a same facility basis was as follows:


	Nine Months Ended June 30,
	(in thousands except percentages)
					Increase/(Decrease)					% of Net Revenue
	2010		2009		$		%			2010			2009
Other operating expense	$	82,112	$	81,039	$	1,073		1.3	%		22.1	%		21.2	%

Our same facility other operating expense increased $1.1 million for the ~~first quarter~~nine months of fiscal 2010 compared to the comparable period of fiscal 2009. The material and notable increases in operating expenses were as reflected below (in millions):


Employee benefits	$	1.4
Purchased contract services	$	1.2
Professional fees	$	0.8
Repairs and maintenance	$	0.7
Travel	$	(0.5	)
Fees and penalties	$	(0.8	)
Corporate salaries, wages, bonus, recruitment and temporary labor	$	(0.9	)
Advertising expense	$	(1.2	)
Professional liability expense	$	(1.6	)

Our corporate benefits expense was approximately $1.4 million higher due to an increase in employee medical claims during the nine months of fiscal 2010 compared to the same period of fiscal 2009.

Purchased contract services have increased $1.2 million as a result of an increase in the use of outside clinical and non-clinical providers for services such as anesthesiologist, hospitalist and emergency department personnel. The increases are the result of entering into new contracts with these vendors to ensure 24 hour coverage at our hospitals.

Our professional fees were $0.8 million higher for the nine months of fiscal 2010 compared to the comparable period of fiscal 2009 due to fees incurred related to the pending sale of HHA and fees related to our Strategic Alternatives Review.

We incurred an additional $0.7 million of repairs and maintenance expense during the nine months of fiscal 2010 compared to the comparable period of fiscal 2009 as our newer facilities begin to age.

Travel expense has declined during the nine months of fiscal 2010 compared to the comparable period of fiscal 2009 due to the reduction in the number of managed ventures in our MedCath Partners Division, which required travel to these facilities during fiscal 2009, and a reduction in corporate travel as we have ceased any travel related to new initiatives.

During the nine months of fiscal 2009 we incurred $0.8 million related to penalty expense for the anticipated settlement of regulatory claims at two of our hospitals related to the identification, return and self-reporting of $0.7 million in reimbursement for certain procedures performed at those hospitals in prior fiscal years. We did not incur any fees or penalties during the nine months of fiscal 2010.

Our corporate salary related expenses including bonuses, recruitment and temporary labor has declined $0.9 million for the nine months of fiscal 2010 compared to the comparable period for fiscal 2009. The decline is primarily due to the attrition we have experienced as a result of Strategic Alternatives Review as well as a reduction in temporary labor and recruiting expense as new initiatives have declined.

Advertising expense was $1.2 million lower during the nine months of fiscal 2010 compared to the same period of fiscal 2009. We ran several advertising campaigns during the nine months of fiscal 2009 to promote our expanded facilities and to increase volumes in our emergency departments.

Our medical malpractice expense was $1.6 million lower for the nine months of fiscal 2010 compared to the same period of fiscal 2009 due to specific high dollar claims incurred in fiscal 2009.

Interest expense.Interest expense increased $0.2 million or 8.6% to $3.3 million for the nine months of fiscal 2010 from $3.1 million for the comparable period of fiscal 2009. The $0.2 million increase in interest expense is primarily attributable to the fact that no interest was capitalized during the nine months of fiscal 2010, whereas $2.3 million of interest was capitalized during the comparable period of fiscal 2009. This increase was offset by our overall reduction in our outstanding debt and interest rates on our outstanding debt.

Loss on note receivable.Our corporate and other division entered into a note receivable agreement with a third party during 2008. The note receivable was deemed uncollectable and a loss of $1.5 million was recorded during the three month period ended March 31, 2010, due to our determination of the third party’s inability to repay the note and the insufficiency of the value of the collateral securing the note.

Net earnings of unconsolidated affiliates in which we have a noncontrolling interest decreased during the nine months of fiscal 2010 to $6.9 million from $7.0 million for the same period of the prior year. The $0.1 million decrease was primarily due to hospitals in our Hospital Division in which we hold a noncontrolling interest.

Net income attributable to noncontrolling interest.Noncontrolling interest share of earnings of consolidated subsidiaries decreased to $5.7 million for the nine months of fiscal 2010 from $9.9 million for the comparable period of fiscal 2009. Net income attributable to noncontrolling interest on a same facility basis was as follows:


	Nine Months Ended June 30,
	(in thousands except percentages)
					Increase/(Decrease)						% of Net Revenue
	2010		2009		$			%			2010			2009
Net income attributable to noncontrolling interest	$	8,004	$	9,860	$	(1,856	)		(18.8	)%		2.2	%		2.6	%

On a same facility basis, net income attributable to noncontrolling interest decreased $1.9 million due to a reduction in net income and an increase in our disproportionate share of losses from certain of our facilities.

Income tax (benefit) expense.Income tax benefit was $17.9 million for the nine months of fiscal 2010 compared to income tax expense of $1.3 million for the comparable period of fiscal 2009, which represents an effective tax rate of approximately 38.0% and ~~36.6%~~43.0% for the respective periods. The ~~lower~~higher income tax rate for the ~~first quarter~~nine months of fiscal 2009 was the result of ~~the impact of~~ nondeductible permanent differences ~~from incentive stock option grants. The expense for incentive stock options is not tax deductible.~~related to Medicare settlements as discussed in Note 7 of this report.

(~~Loss) income~~Income from discontinued operations, net of taxes.(Loss) income from discontinued operations, net of taxes, reflects the results of Dayton Heart Hospital, Cape Cod Cardiology, and Sun City Cardiac Center Associates for the first quarter of fiscal 2010 and fiscal 2009. Discontinued operations decreased to ~~a loss~~income of ~~$0.1~~$2.6 million, net of taxes for the ~~first quarter~~nine months of fiscal 2010 from income of ~~$4.2~~$6.6 million, net of taxes, for the comparable period of fiscal 2009. ~~Losses~~Income from discontinued operations during the ~~first quarter~~nine months of fiscal 2010 reflected the operations of HHA and the related to continued activities associated with ~~the divested facilities,~~DHH, which primarily related to ~~insurance liabilities, whereas the income~~accounts receivable and medical malpractice reserves. Income from discontinued operations from the same ~~quarter~~period of fiscal 2009 reflected the operating income from HHA, Sun City, Cape Cod, and the gain from the divestiture of Cape Cod, which was sold during the first quarter of fiscal 2009, offset by losses at ~~Dayton Heart Hospital.~~DHH.

Liquidity and Capital Resources

Working Capital and Cash Flow Activities. Our consolidated working capital from continuing operations was ~~$47.8~~$50.5 million at ~~December 31, 2009~~June 30, 2010 and ~~$40.4~~$35.1 million at September 30, 2009. Consolidated working capital from continuing operations increased ~~$2.2~~$15.4 million due to an $8.4 million reduction in accounts payable due to a decrease in overall operating expenses, a $2.6 million decrease in other accrued liabilities primarily due to the final payments of our development costs associated with HMMC and LMCHH, and a decrease in the current portion of long-term debt of $6.1 million due to the ~~increase in patient accounts receivable and $1.7 million as a result~~payment of ~~being in an income tax receivable position due~~notes payable related to our net loss for the quarter versus an income tax payable position of $0.7 million as of September 30, 2009. We also received a $2.0 million distribution from one of our minority owned affiliates due to the release of restrictions on collateralized cash.consolidated subsidiary, TexSAn Heart Hospital.

At ~~December 31, 2009,~~June 30, 2010, we continue to carry a reserve of ~~$9.7~~$9.8 million for outlier payments received in 2004, which is recorded in current liabilities of discontinued operations.

~~The cash~~Cash provided by continuing operations from operating activities was ~~$3.9~~$24.8 million for the ~~first three~~nine months of fiscal 2010 compared to ~~$18.9~~$45.7 million for the comparable period of fiscal 2009. The decrease of $20.9 million in cash provided by continuing operations ~~is primarily the result of $5.2 million~~from operating activities was due to an overall increase in ~~accounts receivable~~bad debt reserves and final payments of $2.3 million and $0.6 million related to our development costs associated with HMMC and LMCHH, respectively, during the ~~opening~~nine months of ~~HMMC, a $1.7 million increase in our income tax receivable due to our net loss for the quarter versus an income tax payable position as of September 30, 2009 with the remaining reduction due~~fiscal 2010 compared to the timing of payments for accounts payable and prepaid expenses. We also received a $2.0 million distribution from one of our minority owned affiliates due to the release of restrictions on collateralized cash during the first quartercomparable period of fiscal ~~2010.~~2009.

Our investing activities from continuing operations used net cash of ~~$9.2~~$16.3 million for the ~~first three~~nine months of fiscal 2010 compared to ~~$29.9~~$67.2 million for the comparable period of fiscal 2009. The total cash used for capital expenditures decreased by ~~$21.0~~$50.9 million during the ~~first three~~nine months of fiscal 2010 as compared to the comparable period of fiscal 2009, as a direct result of the completion of the expansion of our hospital facilities and the ~~construction~~opening of ~~our new acute care hospital in Kingman, Arizona.~~HMMC.

Our financing activities from continuing operations used net cash of ~~$14.5~~$27.4 million for the ~~first three~~nine months of fiscal 2010 compared to ~~$34.2~~$43.1 million for the comparable period of fiscal 2009. Cash used in financing activities decreased ~~$19.7~~$15.7 million for the ~~first three~~nine months of fiscal 2010 as compared to the comparable period of fiscal 2009. The decrease was due to the repayment of our 9 7/8% Senior Notes during December 2008 offset by a ~~$5.0~~$10.6 million payment on our ~~senior secured credit facility~~Credit Facility during the ~~first quarter~~nine months of fiscal 2010.

Capital Expenditures.Cash paid for property and equipment was ~~$9.3~~$16.8 million and ~~$30.1~~$68.0 million for the ~~first three~~nine months of fiscal years 2010 and 2009, respectively. Of the ~~$9.3~~$16.8 million of cash paid for property and equipment during the ~~first three~~nine months of fiscal 2010, ~~$4.5~~$8.8 million related to maintenance capital expenditures. The ~~$30.1~~$68.0 million cash paid for property and equipment during the ~~first three~~nine months of fiscal 2009 primarily related to the development of HMMC and the expansion projects ofat two of our existing ~~hospitals, which began during fiscal 2007.~~hospitals. All expansion projects were substantially complete during fiscal 2009, and ~~our hospital in Kingman, Arizona~~HMMC opened in October 2009.

Obligations and Availability of Financing.At ~~December 31, 2009,~~June 30, 2010, we had ~~$122.2~~$79.5 million of outstanding long-term debt and obligations under capital leases, of which ~~$18.3~~$15.8 million was classified as current. Our Term Loan under our Credit Facility had an outstanding amount of ~~$75.0 million.~~$69.4 million as of June 30, 2010. The remaining outstanding long-term debt and obligations under capital leases of ~~$47.2~~$10.1 million was due to various lenders to our ~~hospitals.~~Hospital Division and MedCath Partners Division. No amounts were outstanding under our Revolver. The maximum availability under our Revolver is $85.0 million which iswas reduced by outstanding letters of credit totaling ~~$2.4~~$1.7 million as of ~~December 31, 2009.~~June 30, 2010.

Covenants related to our long-term debt restrict the payment of dividends and require the maintenance of specific financial ratios and amounts and periodic financial reporting. At ~~December 31, 2009 and~~ September 30, 2009, TexSAn Heart Hospital was in violation of financial covenants which govern its equipment loans outstanding. Accordingly, the total outstanding balance for these loans of ~~$5.3 million and~~ $6.1 million ~~respectively,~~ has been included in the current portion of long-term debt and obligations under capital leases in our consolidated balance ~~sheets.~~sheet. These loans were fully repaid as of June 30, 2010. The covenant violations did not result in any other non-compliance related to the covenants governing our other outstanding debt arrangements. As of June 30, 2010 we were in compliance with all of our covenants.

At ~~December 31, 2009,~~June 30, 2010, we guaranteed either all or a portion of the obligations of certain of our subsidiary hospitals for equipment and other notes payable. We provide these guarantees in accordance with the related hospital operating agreements, and we receive a fee for providing these guarantees from either the hospitals or the physician investors. Access to available borrowings under our Credit ~~Faculty~~Facility is dependent on the Company’s ability to maintain compliance with the financial covenants contained in the Credit Facility. Deterioration in the Company’s operating results could result in failure to maintain compliance with these covenants, which would restrict or eliminate access to available funds.

We believe that internally generated cash flows and available borrowings under our Credit Facility will be sufficient to finance our business plan, capital expenditures and our working capital requirements for the next 12 to 18 months.

~~Intercompany Financing Arrangements~~.We provide secured real estate, equipment and working capital financings to our majority-owned hospitals. The aggregate amount of the intercompany real estate, equipment and working capital and other loans outstanding as of December 31, 2009 was $316.3 million.

Each intercompany real estate loan is separately documented and secured with a lien on the borrowing hospital’s real estate, building and equipment and certain other assets. Each intercompany real estate loan typically matures in 2 to 10 years and accrues interest at variable rates based on LIBOR plus an applicable margin or a fixed rate similar to terms commercially available.

Each intercompany equipment loan is separately documented and secured with a lien on the borrowing hospital’s equipment and certain other assets. Amounts borrowed under the intercompany equipment loans are payable in monthly installments of principal and interest over terms that range from 5 to 7 years. The intercompany equipment loans accrue interest at fixed rates ranging from 3.50% to 8.58%. The weighted average interest rate for the intercompany equipment loans at December 31, 2009 was 6.41%.

~~We typically receive a fee from the minority partners in the subsidiary hospitals as further consideration for providing these intercompany real estate and equipment loans.~~

We also use intercompany financing arrangements to provide cash support to individual hospitals for their working capital and other corporate needs. We provide these working capital loans pursuant to the terms of the operating agreements between our physician and hospital investor partners and us at each of our hospitals. These intercompany loans are evidenced by promissory notes that establish borrowing limits and provide for a market rate of interest to be paid to us on outstanding balances. These intercompany loans are subordinate to each hospital’s mortgage and equipment debt outstanding, but are senior to our equity interests and our partners’ equity interests in the hospital venture and are secured, subject to the prior rights of the senior lenders, in each instance by a pledge of certain of the borrowing hospital’s assets. Also as part of our intercompany financing and cash management structure, we sweep cash from certain individual hospitals as amounts are available in excess of the individual hospital’s working capital needs. These funds are advanced pursuant to cash management agreements with the individual hospital that establish the terms of the advances and provide for a rate of interest to be paid consistent with the market rate earned by us on the investment of its funds. These cash advances are due back to the individual hospital on demand and are subordinate to our equity investment in the hospital venture. As of December 31, 2009 and September 30, 2009, we held $36.3 million and $25.7 million, respectively, of intercompany working capital and other notes receivable and related accrued interest, net of advances from our hospitals.

Disclosure About Critical Accounting Policies

Our accounting policies are disclosed in our Annual Report on Form 10-K for the year ended September 30, 2009. During the ~~first three~~nine months of fiscal 2010 we adopted new accounting policies as discussed in Note 2 —Recent Accounting Pronouncementsto our consolidated financial ~~statements.~~statements included herein. The adoption of these new accounting policies did not have a material impact on our consolidated financial statements.

2132

Forward-Looking Statements

Some of the statements and matters discussed in this report and in exhibits to this report constitute forward-looking ~~statements.~~statements, including statements relating to the impact of statutory and regulatory changes, including reimbursement rates, our payor mix, earnings attributable to noncontrolling interests in hospitals, the consummation of asset dispositions, and our boards consideration of strategic alternatives to maximize stockholders’ value. Words such as “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “intends” and “hopes” and variations of such words and similar expressions are intended to identify such forward-looking statements. We have based these statements on our current expectations and projections about future events. These ~~forward-looking~~forward- looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that we will achieve our goals. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report and its exhibits might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We urge you to review carefully all of the information in this report and our other filings with the SEC, including the discussion of risk factors inItem 1A. Risk Factorsin this report and our Annual Report on Form 10-K for the year ended September 30, 2009 ~~before making an investment decision~~as may be updated by our subsequent filings with ~~respect to our equity securities.~~the SEC. A copy of this report, including exhibits, is available on the internet site of the SEC athttp://www.sec.govor through our website athttp://www.medcath.com.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We maintain a policy for managing risk related to exposure to variability in interest rates, commodity prices, and other relevant market rates and prices which includes considering entering into derivative instruments (freestanding derivatives), or contracts or instruments containing features or terms that behave in a manner similar to derivative instruments (embedded derivatives) in order to mitigate our risks. In addition, we may be required to hedge some or all of our market risk exposure, especially to interest rates, by creditors who provide debt funding to us. There was no material change in our policy for managing risk related to variability in interest rates, commodity prices, other relevant market rates and prices during the first ~~three~~nine months of 2010. See Item 7A in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009 for further discussions about market risk.

Interest Rate Risk

Our Credit Facility borrowings expose us to risks caused by fluctuations in the underlying interest rates. The total outstanding balance of our Credit Facility was ~~$75.0~~$69.4 million at ~~December 31, 2009.~~June 30, 2010. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately ~~$0.2~~$0.5 million during the ~~three~~nine month period ended ~~December 31, 2009.~~June 30, 2010.

Item 4. Controls and Procedures

The President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation of the Company’s disclosure controls and procedures as of ~~December 31, 2009,~~June 30, 2010, that the Company’s disclosure controls and procedures were effective as of ~~December 31, 2009~~June 30, 2010 to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported in a timely manner, and includes controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes during the fiscal quarter to the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

During the period covered by this report, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended September 30, 2009 or filings subsequently made with the Securities and Exchange Commission, except for the addition of the following risk ~~factor:~~factors:

Impairment of ~~Long-Lived Assets~~long-lived assets could have a material adverse effect on our consolidated financial statements

Long-lived assets, which include finite lived intangible assets, are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in our strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. If impairment is determined to be present, the resulting non-cash impairment charges could be material to our consolidated financial statements.

Health Reform Laws may have a material adverse impact on our financial condition and results of operations

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, followed by the Health Care and Education Reconciliation Act of 2010 on March 30, 2010 (collectively referred to as the “Health Reform Laws”). The Health Reform Laws include many provisions that will affect our Company, although given the complexity of the laws, the full impact on the Company and its operations is not known at this time. In addition, implementing regulations have not been issued which will also have a bearing on how these changes impact the Company. Some of the provisions in the Health Reform Laws are effective immediately while others will not become effective for several years.

Significantly, the Health Reform Laws revised the “whole hospital” exception to the Stark Law by adding additional requirements for hospitals to qualify for the exception. Because all of our hospitals have physician ownership and therefore must comply with the “whole hospital” exception, these additional requirements will apply to all of our hospitals. These requirements include: additional reporting and disclosure obligations; prohibitions on the increase in the percentage of physician ownership over that in place on the date of enactment; prohibitions on expanding the number of beds, operating rooms, or procedure rooms over the number in place as of the date of enactment, specifications for physician investment; and patient safety measures. The limitations on expansion and additional investment by physician owners or investors were effective as to our hospitals as of March 23, 2010.

The Health Reforms Laws also established a new Independent Payment Advisory Board (the “IPAB”) to develop and submit proposals to Congress to reduce Medicare spending. The IPAB could have a significant impact on Medicare spending, which in turn would affect Medicare payments to our hospitals and other health care facilities.

Some of the other provisions contained in the Health Reform Laws may have a positive impact on the Company, such as the expansion in the number of individuals with health insurance and the expansion of Medicaid eligibility. The Health Reform Laws also tie payment to quality measures by establishing a value-based purchasing system and adjusting hospital payment rates based on hospital-acquired conditions and hospital readmissions. Beginning in 2013, hospitals that satisfy certain performance standards will receive increased payments for discharges during the following fiscal year. We believe that if we continue to make quality of care improvements, this may have the effect of reducing costs, increasing payments from Medicare for our services, and increasing physician and patient satisfaction.

The Health Reform Laws also include enhanced government enforcement tools to identify and impose remedies for fraud, which may adversely impact entities in the healthcare industry, including our Company.

In addition, certain provisions of the Health Reform Laws authorize voluntary demonstration projects beginning not later than 2013 for bundling payments for acute, inpatient hospital services, physician services, and post acute services for episodes of hospital care. In addition, beginning no later than January 1, 2012, the Health Reform Laws allows providers organized as accountable care organizations that voluntarily meet quality thresholds to share in the cost savings they achieve for the Medicare program.

The Company is unable to predict at this time the full impact of the Health Reform Laws on the Company and its operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On July 27, 2001, we completed an initial public offering of our common stock pursuant to our Registration Statement on Form S-1 (File No. 333-60278) that was declared effective by the SEC on July 23, 2001. We expect to use the remaining proceeds of approximately $13.8 million from the offering to fund development activities, working capital requirements and other corporate purposes. Although we have identified these intended uses of the remaining proceeds, we have broad discretion in the allocation of the net proceeds from the offering. Pending this application, we will continue to invest the net proceeds of the offering in cash and cash-equivalents, such as money market funds or short-term interest bearing, investment-grade securities.

The Board of Directors approved a stock repurchase program of up to $59.0 million in August 2007, which was announced November 2007. Stock purchases can be made from time to time in the open market or in privately negotiated transactions in accordance with applicable federal and state securities laws and regulations. The repurchase program may be discontinued at any time. Subsequent to the approval of the stock repurchase program, the Company has purchased 1,885,461 shares of common stock at a total cost of $44.4 million, with a remaining $14.6 million available to be repurchased per the approved stock repurchase program. No shares were repurchased during the ~~three~~nine month period ended ~~December 31, 2009.~~June 30, 2010.

See Note 6 to our annual financial statements in our Annual Report on Form 10-K for the year ended September 30, 2009 for a description of restrictions on payments of ~~dividends.~~dividends and stock repurchases.


	Page
PART I. FINANCIAL INFORMATION		1
Item 1. Unaudited Consolidated Financial Statements		1
Consolidated Balance Sheets as of ~~December 31, 2009~~June 30, 2010 and September 30, 2009		1
Consolidated Statements of Operations for the Three and Nine Months Ended ~~December 31,~~June 30, 2010 and 2009 ~~and 2008~~		2
Consolidated Statement of Stockholders’ Equity for the ~~Three~~Nine Months Ended ~~December 31, 2009~~June 30, 2010		3
Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~December 31,~~June 30, 2010 and 2009 ~~and 2008~~		4
Notes to Unaudited Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1520
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2233
Item 4. Controls and Procedures		2233
PART II. OTHER INFORMATION		2234
Item 1. Legal Proceedings		2234
Item 1A. Risk Factors		2234
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		2335
Item 6. Exhibits		2336
SIGNATURES		2436
~~EX-10.1~~
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	Three Months Ended December 31,				Three Months Ended June 30,				Nine Months Ended June 30,
	2009		2008		2010		2009		2010		2009

Net revenue	$	53,326	$	68,162	$	56,368	$	56,196	$	167,199	$	171,405
Income from operations	$	8,073	$	15,028	$	11,161	$	12,070	$	34,102	$	37,118
Net income	$	5,777	$	12,907	$	8,871	$	9,750	$	27,280	$	30,326


	December 31,		September 30,		June 30,		September 30,
	2009		2009		2010		2009

Current assets	$	50,309	$	68,675	$	56,270	$	68,174
Long-term assets	$	148,433	$	149,194	$	146,207	$	148,993
Current liabilities	$	23,866	$	25,967	$	23,547	$	25,770
Long-term liabilities	$	122,786	$	122,685	$	122,869	$	122,629


	December 31,			September 30,			June 30,			September 30,
	2009			2009			2010			2009

Credit Facility	$	75,000		$	80,000		$	69,375		$	80,000
REIT Loan		35,308			35,308
Notes payable to various lenders		5,254			6,054			—			6,054

		115,562			121,362			69,375			86,054
Less current portion		(16,504	)		(19,491	)		(13,125	)		(19,491	)

Long-term debt	$	99,058		$	101,871		$	56,250		$	66,563


	For the Three Months Ended										For the Three Months Ended
	December 31, 2009					December 31, 2008					June 30, 2010					June 30, 2009
	Number of					Number of					Number of					Number of
	Restricted			Weighted-		Restricted			Weighted-		Restricted			Weighted-		Restricted			Weighted-
	Stock Awards			Average		Stock Awards			Average		Stock Awards			Average		Stock Awards			Average
	and Units			Grant Price		and Units			Grant Price		and Units			Grant Price		and Units			Grant Price
Outstanding restricted stock awards and units, beginning of period		654,327		$	9.64		123,982		$	19.28		1,025,700		$	8.49		559,116		$	9.74

Granted		369,164			6.99		—			—		—			—		96,725			9.42
Vested		(90,195	)		9.30		(52,106	)		20.50		(37,800	)		7.56		—			—
Cancelled		(10,026	)		9.03		(32,813	)		15.88		(52,870	)		8.04		(72,606	)		9.40


Outstanding restricted stock awards and units, end of period		923,270		$	8.54		39,063		$	20.50		935,030		$	8.63		583,235		$	9.73


(*)		Tax benefits were ~~$38~~$23 for the ~~quarter~~nine months ended ~~December 31, 2009.~~June 30, 2010.


	June 30, 2010					September 30, 2009
	Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Intangible Assets	$	555	$	(256	)	$	555	$	(213	)


	Three Months Ended December 31,
										2009 Same
	2009			2008			% Change			Facility			% Change
Selected Operating Data (a):
Number of hospitals		8			7						7
Licensed beds (b)		658			509						588
Staffed and available beds (c)		572			463						502
Admissions (d)		7,163			6,801			5.3	%		6,938			2.0	%
Adjusted admissions (e)		10,497			9,874			6.3	%		10,043			1.7	%
Patient days (f)		26,352			25,181			4.7	%		25,423			1.0	%
Adjusted patient days (g)		39,336			37,044			6.2	%		37,526			1.3	%
Average length of stay (days) (h)		3.68			3.70			(0.5	)%		3.66			(1.1	)%
Occupancy (i)		50.1	%		59.1	%					55.0	%
Inpatient catheterization procedures (j)		3,307			3,552			(6.9	)%		3,265			(8.1	)%
Inpatient surgical procedures (k)		1,949			2,001			(2.6	)%		1,909			(4.6	)%
Hospital net revenue (in thousands except percentages)	$	142,346		$	144,225			(1.3	)%	$	137,753			(4.5	)%


Exhibit No.		Description

	~~10.1~~		~~Employment agreement dated December 21, 2006 by and between MedCath Corporation and Blair W. Todt~~

	31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


	MEDCATH CORPORATION
Dated: ~~February~~August 9, 2010	By:	/s/ O. EDWIN FRENCH
		O. Edwin French
		President and Chief Executive Officer (principal executive officer)


	By:	/s/ JAMES A. PARKER
		James A. Parker
		Executive Vice President and Chief Financial Officer ~~(principal~~ (principal financial officer)


	By:	/s/ LORA RAMSEY
		Lora Ramsey
		Vice President and Controller (principal accounting officer)