<PAGE>

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

--------------------------------------------------------------------------------


                                    FORM 10-Q
   (Mark One)
     | |  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

                  For the quarterly period ended

                                       OR

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

     For the transition period from January 1, 2006 to March 31, 2006

                         Commission File Number: 0-23511

--------------------------------------------------------------------------------

                      Integrated Healthcare Holdings, Inc.
        (Exact name of small business issuer as specified in its charter)

                 Nevada                                  87-0573331
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

           1301 N. Tustin Ave.                              92705
          Santa Ana, California                          (Zip Code)
(Address of principal executive offices)


                                 (714) 953-3503 (Registrant's telephone number,
              including area code)

                                   December 31

              (Former name, former address and former fiscal year,
                          if changed since last report)

--------------------------------------------------------------------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X|   No |_|

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). |_| Yes |X| No

There were 87,557,430 shares outstanding of the issuer's Common Stock as of
January 31, 2007.

--------------------------------------------------------------------------------






<PAGE>

Explanatory Note Regarding Change In Fiscal Year And Transition Period

On December 21, 2006, the Board of Directors of Integrated Healthcare Holdings,
Inc. (the "Company") determined to change the Company's fiscal year from the
period ending December 31 in each year to the period ending March 31 in each
year. This change in fiscal year was effective for the period ended March 31,
2006. As a result of this change, the Company is filing a transition report on
Form 10-Q covering the transition period from January 1, 2006 to March 31, 2006.
A quarterly report for this period was filed previously on Form 10Q. This
transition report reflects changes in estimates and values that have the benefit
of hindsight through the filing date of that Form 10Q at August 11, 2006. The
Company will file a Quarterly Report on Form 10-Q for the quarter ended December
31, 2006, and an Annual Report on Form 10-K for the year ended March 31, 2007.







<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
                                    FORM 10-Q

                                TABLE OF CONTENTS

                                                                            Page
                                                                          Number
PART I     FINANCIAL INFORMATION

Item 1.    Financial Statements:

           Condensed Consolidated Balance Sheets as of March 31, 2006
           and December 31, 2005 (restated) - (unaudited)                     2

           Condensed Consolidated Statements of Operations for the three
           months ended March 31, 2006 and 2005 (unaudited)                   3

           Condensed Consolidated Statements of Cash Flows for the three
           months ended March 31, 2006 and 2005 (unaudited)                   4

           Notes to Condensed Consolidated Financial Statements (unaudited)   5

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                         24

Item 3.    Quantitative and Qualitative Disclosures About Market Risk        35

Item 4.    Controls and Procedures                                           36

PART II    OTHER INFORMATION

Item 1.    Legal Proceedings                                                 37

Item 1A.   Risk Factors                                                      37

Item 6.    Exhibits                                                          37

SIGNATURES                                                                   38

--------------------------------------------------------------------------------


                                        1



<PAGE>
<TABLE>

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

                              INTEGRATED HEALTHCARE HOLDINGS, INC.
                              CONDENSED CONSOLIDATED BALANCE SHEETS
                                          (unaudited)

                                                                    MARCH 31,       DECEMBER 31,
                                                                      2006              2005
                                                                  -------------    -------------
                                                                                   (as restated)
                                             ASSETS
Current assets:
<S>                                                               <C>              <C>
       Cash and cash equivalents                                  $   4,969,814    $  16,005,943
       Restricted cash                                                4,971,636        4,971,636
       Accounts receivable, net of allowance for doubtful
         accounts of $2,432,084 and $3,148,276, respectively         14,127,892       15,975,486
       Security reserve funds                                        14,787,640       12,127,337
       Deferred purchase price receivables                           14,354,540        9,337,703
       Inventories of supplies, at cost                               5,786,274        5,719,717
       Due from governmental payers                                   6,587,219        3,024,772
       Prepaid expenses and other current assets                      6,369,539        6,694,045
                                                                  -------------    -------------
                                                                     71,954,554       73,856,639

Property and equipment, net of accumulated depreciation
       of $2,785,921 and $2,138,134, respectively                    58,860,857       59,431,285
Debt issuance costs, net of accumulated amortization
       of $1,033,361 and $791,735, respectively                         899,639        1,141,265

                                                                  -------------    -------------
       Total assets                                               $ 131,715,050    $ 134,429,189
                                                                  =============    =============

                            LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
       Short term debt                                            $  70,330,734    $           -
       Accounts payable                                              28,606,145       26,835,606
       Accrued compensation and benefits                             11,561,638       12,533,499
       Warrant liabilities, current                                  23,546,650       10,700,000
       Due to governmental payers                                       270,189                -
       Other current liabilities                                     17,815,951       15,725,489
                                                                  -------------    -------------
         Total current liabilities                                  152,131,307       65,794,594


Long term debt                                                                -       70,330,734
Capital lease obligations, net of current portion
       of $87,880 and $85,296, respectively                           4,938,295        4,961,257
Warrant liability                                                            -        21,064,669
Minority interest in variable interest entity                         3,041,453        3,341,549
Commitments and contingencies
                                                                  -------------    -------------
         Total Liabilites                                           160,111,055      165,492,803
                                                                  -------------    -------------
Stockholders' deficiency:
       Common stock, $0.001 par value; 250,000,000 shares
         authorized; 84,351,189 and 83,932,316 shares
         issued and outstanding, respectively                            84,351           83,932
       Additional paid in capital                                    16,257,683       16,125,970
       Accumulated deficit                                          (44,738,039)     (47,273,516)
                                                                  -------------    -------------
         Total stockholders' deficiency                             (28,396,005)     (31,063,614)
                                                                  -------------    -------------
Total liabilities and stockholders' deficiency                    $ 131,715,050    $ 134,429,189
                                                                  =============    =============



THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.


                                               2



<PAGE>

                                  INTEGRATED HEALTHCARE HOLDINGS, INC.
                            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                             (unaudited)


                                                               THREE MONTHS ENDED MARCH 31,
                                                              ------------------------------
                                                                   2006             2005
                                                              -------------    -------------


Net operating revenues                                        $  86,163,974    $  21,747,029
                                                              -------------    -------------
Operating expenses:
          Salaries and benefits                                  48,708,705       12,450,604
          Supplies                                               12,031,608        3,033,815
          Provision for doubtful accounts                         8,298,928        3,141,406
          Other operating expenses                               16,757,363        3,900,220
          Loss on sale of accounts receivable                     2,807,805                -
          Depreciation and amortization                             647,789          262,212
                                                              -------------    -------------
                                                                 89,252,198       22,788,257
                                                              -------------    -------------

Operating loss                                                   (3,088,224)      (1,041,228)
                                                              -------------    -------------
Other income (expense):
          Interest expense, net                                  (2,694,414)        (665,296)
          Common stock warrant expense                                    -      (17,215,000)
          Change in fair value of derivative                      8,218,019                -
                                                              -------------    -------------
                                                                  5,523,605      (17,880,296)
                                                              -------------    -------------
Income (loss) before minority interest
          and income tax provision                                2,435,381      (18,921,524)
Income tax benefit (provision)                                            -         (944,000)
Minority interest in variable interest entity                       100,096            8,905
                                                              -------------    -------------

Net income (loss)                                             $   2,535,477    $ (19,856,619)
                                                              =============    =============

Per Share Data:
          Earnings (loss) per common share-Basic                      $0.03           ($0.22)
          Earnings (loss) per common share-Diluted                    $0.02           ($0.22)
          Weighted average shares outstanding-Basic              84,281,377       88,493,611
          Weighted average shares-Diluted                       127,227,606           Note 8


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.


                                             3



<PAGE>

                               INTEGRATED HEALTHCARE HOLDINGS, INC.
                         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         (unaudited)


                                                                     Three months ended March 31,
                                                                     ----------------------------
                                                                         2006            2005
                                                                     ------------    ------------

Cash flows from operating activities:
Net income (loss)                                                    $  2,535,477    $(19,856,619)
Adjustments to reconcile net income (loss) to cash
         used in operating activities:
      Depreciation and amortization of property and equipment             647,789         249,363
      Amortization of debt issuance costs and intangible assets           241,626          75,203
      Common stock warrant expense                                              -      17,215,000
      Change in fair value of derivative                               (8,218,019)              -
      Minority interest in net loss of variable interest entity          (100,096)         (8,905)
Changes in operating assets and liabilities:
      Accounts receivable, net                                          1,847,594     (16,968,328)
      Security reserve funds                                           (2,660,303)              -
      Deferred purchase price receivables                              (5,016,837)              -
      Inventories of supplies                                             (66,557)         71,868
      Due from governmental payers                                     (3,562,447)              -
      Prepaids and other current assets                                   324,506      (1,375,081)
      Accounts payable                                                  1,770,539       5,933,254
      Accrued compensation and benefits                                  (971,861)      7,073,364
      Due to governmental payers                                          270,189               -
      Other current liabilities                                         2,090,462       1,439,151
                                                                     ------------    ------------
        Net cash used in operating activities                         (10,867,938)     (6,151,730)
                                                                     ------------    ------------
Cash flows from investing activities:
      Acquisition of hospital assets                                            -     (63,171,676)
      Additions to property and equipment, net                            (77,361)              -
                                                                     ------------    ------------
        Net cash used in investing activities                             (77,361)    (63,171,676)
                                                                     ------------    ------------
Cash flows from financing activities:
      Proceeds from long term debt                                              -      50,000,000
      Long term debt issuance costs                                             -      (1,933,000)
      Proceeds from minority investment in PCHI                                 -       5,000,000
      Variable interest entity distribution                              (200,000)              -
      Drawdown on line of credit                                                -      13,200,000
      Issuance of common stock                                            132,132      10,699,501
      Repayments of debt                                                        -      (1,264,013)
      Payments on capital lease obligations                               (22,962)        (34,414)
                                                                     ------------    ------------
        Net cash (used in) provided by financing activities               (90,830)     75,668,074
                                                                     ------------    ------------
Net increase (decrease) in cash and cash equivalents                  (11,036,129)      6,344,668
Cash and cash equivalents, beginning of period                         16,005,943          69,454
                                                                     ------------    ------------
Cash and cash equivalents, end of period                             $  4,969,814    $  6,414,122
                                                                     ============    ============


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>


                                                4




<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)


     NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States of America ("U.S. GAAP") for interim consolidated financial
information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X.

     In the opinion of management, the accompanying unaudited condensed
consolidated financial statements for Integrated Healthcare Holdings, Inc. and
its subsidiaries (the "Company") contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of March 31, 2006, and the Company's results of operations
and cash flows for the three months ended March 31, 2006 and 2005. The
consolidated balance sheet as of December 31, 2005 is derived from the December
31, 2005 audited consolidated financial statements. As more fully disclosed in
the Explanatory Note to the Company's Quarterly Report on Form 10Q/A for the
Quarter ended March 31, 2006, the December 31, 2005 amounts have been adjusted
for the correction of an error.

     The results of operations for the three months ended March 31, 2006 are not
necessarily indicative of the results to be expected for the full year. The
information included in this Transition Report on Form 10-Q should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 2005 and notes thereto included in the Company's Form 10-K
filed with the Securities and Exchange Commission (the "SEC") on July 28, 2006.

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. GAAP and prevailing practices for
investor-owned entities within the healthcare industry. The preparation of
financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Management regularly evaluates the
accounting policies and estimates that are used. In general, management bases
the estimates on historical experience and on assumptions that it believes to be
reasonable given the particular circumstances in which its hospitals operate.
Although management believes that adjustments considered necessary for fair
presentation have been included, actual results may materially vary from those
estimates.

     DESCRIPTION OF BUSINESS - The Company was organized under the laws of the
State of Utah on July 31, 1984 under the name of Aquachlor Marketing. Aquachlor
Marketing never engaged in business activities and was suspended for failure to
file annual reports and tax returns. In December 1988, all required reports and
tax returns were filed and Aquachlor Marketing was reinstated by the State of
Utah. In December 1988, Aquachlor Marketing merged with Aquachlor, Inc., a
Nevada corporation incorporated on December 20, 1988. The Nevada corporation
became the surviving entity and changed its name to Deltavision, Inc. In March
1997, Deltavision, Inc. received a Certificate of Revival from the State of
Nevada using the name First Deltavision, Inc. In March 2004, First Deltavision,
Inc. changed its name to Integrated Healthcare Holdings, Inc.

     On March 8, 2005, the Company completed its acquisition (the "Acquisition")
of four Orange County, California hospitals and associated real estate,
including: (i) 282-bed Western Medical Center--Santa Ana, CA; (ii) 188-bed
Western Medical Center--Anaheim, CA; (iii) 178-bed Coastal Communities Hospital
in Santa Ana, CA; and (iv) 114-bed Chapman Medical Center in Orange, CA
(collectively, the "Hospitals") from Tenet Healthcare Corporation ("Tenet"). The
Hospitals were assigned to four wholly-owned subsidiaries of the Company formed
for the purpose of completing the Acquisition. The Company also acquired the
following real estate, leases and assets associated with the Hospitals: (i) a
fee interest in the Western Medical Center at 1001 North Tustin Avenue, Santa
Ana, CA, a fee interest in the administration building at 1301 North Tustin
Avenue, Santa Ana, CA, certain rights to acquire condominium suites located in
the medical office building at 999 North Tustin Avenue, Santa Ana, CA, and the
business known as the West Coast Breast Cancer Center; (ii) a fee interest in
the Western Medical Center at 1025 South Anaheim Blvd., Anaheim, CA; (iii) a fee
interest in the Coastal Communities Hospital at 2701 South Bristol Street, Santa
Ana, CA, and a fee interest in the medical office building at 1901 North College
Avenue, Santa Ana, CA; (iv) a lease for the Chapman Medical Center at 2601 East
Chapman Avenue, Orange, CA, and a fee interest in the medical office building at
2617 East Chapman Avenue, Orange, CA; and (v) equipment and contract rights
associated with the Hospitals.

     The results of operations of the acquired assets are included in the
Company's consolidated statements of operations from the date of Acquisition
(March 8, 2005).


                                        5



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)


     BASIS OF PRESENTATION - The accompanying unaudited consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and settlement of obligations in the normal course of
business. The Company generated income of $2,535,477 (primarily attributable to
a gain from change in fair value of derivative of $8,218,019) during the three
months ended March 31, 2006 and has a working capital deficit of $80,176,753 at
March 31, 2006. For the three months ended March 31, 2006, cash used in
operations was $10,867,938.

     On or around May 9, 2005, the Company received notice that it was in
default of a credit agreement comprised of a $50 million acquisition loan (the
"Acquisition Loan") and a $30 million working capital line of credit (the "Line
of Credit"). Outstanding borrowings under the line of credit were $25,330,734 as
of March 31, 2006 and December 31, 2005. On December 12, 2005, the Company
entered into an additional credit agreement for $10,700,000, due December 12,
2006 and thereafter extended to March 2, 2007 (see Note 10), which included an
amendment that (i) declared cured the aforementioned default, (ii) required the
Company to pay $5,000,000 against its Acquisition Loan, (iii) required the
Company to obtain $10,700,000 in additional new capital contributions to pay in
full and retire all amounts due and owing under the additional credit agreement
and (iv) included certain indemnities and releases in favor of the lender.

     These factors, among others, indicate a need for the Company to take action
to resolve its financing issues and operate its business as a going concern. In
our Annual Report for the year ended December 31, 2005, our independent
accountants expressed a substantial doubt about the Company's ability to
continue as a going concern. Management is working on improvements in several
areas that the Company believes will help to mitigate its financing issues,
including (i) improved contracted reimbursements and governmental subsidies for
indigent care, (ii) reduction in operating expenses, and (iii) reduction in the
costs of borrowed capital.

     We believe that we can reduce our costs of borrowed capital by replacing
debt with new equity. We are seeking new equity investments in the Company;
however we have not yet secured alternative sources of capital or re-negotiated
our commitments with our lenders (see subsequent event Note 10). There can be no
assurance that we will be able to raise additional funds on terms acceptable to
us or at all. Such additional equity, if available, is likely to substantially
dilute the interest of our current shareholders in the Company. In addition,
changes in the level of investment are subject to the approval of the Company's
Board of Directors, which is currently comprised of three representatives of the
lead investor, two outside directors, and one officer of the Company and,
accordingly, may not be assured.

     CHANGE IN FISCAL YEAR - On December 21, 2006, the Company's Board of
Directors approved a change in the Company's fiscal year end from December 31 to
March 31. The Board of Directors believes this is in the best interest of the
Company's shareholders, because this change corresponds with the completion of
the first full twelve months of operations of the four hospitals that were
acquired by the Company as part of the Acquisition on March 8, 2005 and the
Board believes the change will likely reduce the Company's fiscal year end costs
associated with accounting and auditing procedures. With new auditors recently
engaged, the Company believes this was an appropriate time to make this
transition, which will also allow additional time to perform the annual audit
for the fiscal year ended March 31, 2007.

     As a result of this change of fiscal year, the Company is required to file
a transition report on Form 10-Q covering the transition period for three months
ended March 31, 2006 and a Form 10-Q for the three and nine months ended
December 31, 2006 and 2005. The Company's next Form 10-K will cover the period
April 1, 2006 through March 31, 2007 and will include audited statements of
Operations and Cash Flows for the three month period ended March 31, 2006.

     CONSOLIDATION - The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, the Hospitals and Mogel
Management Group, Inc. ("MMG").

     The Company's management has determined that Pacific Coast Holdings
Investment, LLC ("PCHI"), is a variable interest entity as defined in Financial
Accounting Standards Board ("FASB")Interpretation Number 46R ("FIN 46R")
"Consolidation of Variable Interest Entities (revised December 2003)--an
interpretation of ARB No. 51" and, accordingly, the financial statements of PCHI
are included in the accompanying consolidated financial statements.

     All significant intercompany accounts and transactions have been eliminated
in consolidation.

     NET OPERATING REVENUES - Net operating revenues are recognized in the
period in which services are performed and are recorded based on established
billing rates (gross charges) less estimated discounts for contractual
allowances, principally for patients covered by Medicare, Medicaid, managed care
and other health plans. Gross charges are retail charges. They are not the same

                                        6

<PAGE>

                     INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

as actual pricing, and they generally do not reflect what a hospital is
ultimately paid and therefore are not displayed in the consolidated statements
of operations. Hospitals are typically paid amounts that are negotiated with
insurance companies or are set by the government. Gross charges are used to
calculate Medicare outlier payments and to determine certain elements of payment
under managed care contracts (such as stop-loss payments). Because Medicare
requires that a hospital's gross charges be the same for all patients
(regardless of payer category), gross charges are also what hospitals charge all
other patients prior to the application of discounts and allowances.

     Revenues under the traditional fee-for-service Medicare and Medicaid
programs are based primarily on prospective payment systems. Discounts for
retrospectively cost-based revenues and certain other payments, which are based
on the Hospitals' cost reports, are estimated using historical trends and
current factors. Cost report settlements for retrospectively cost-based revenues
under these programs are subject to audit and administrative and judicial
review, which can take several years until final settlement of such matters are
determined and completely resolved. Since the laws, regulations, instructions
and rule interpretations governing Medicare and Medicaid reimbursement are
complex and change frequently, the estimates recorded by the Hospitals could
change by material amounts. The Company has established a settlement receivable
as of March 31, 2006 and December 31, 2005 of $2,620,448 and $2,273,248,
respectively. The company has identified and corrected a misclassification as of
March 31, 2006 between accounts receivable and the settlement receivable in the
amount of $774,937.

     Estimates of revenues from Medicare are recorded at the time services are
rendered. These estimates of settlement receivables or payables related to the
revenue are updated periodically and at year end and at the time the cost report
is filed with the fiscal intermediary. Typically no further updates are made to
the estimates until the final Notice of Program Reimbursement is received. At
which time the cost report for that year has been audited by the fiscal
intermediary. There could be a one to two year time lag between the submission
of a cost report and receipt of the Final Notice of Program Reimbursement.

     Outlier payments, which were established by Congress as part of the
diagnosis-related groups (DRG) prospective payment system, are additional
payments made to hospitals for treating Medicare patients who are costlier to
treat than the average patient in the same DRG. To qualify as a cost outlier, a
hospital's billed (or gross) charges, adjusted to cost, must exceed the payment
rate for the DRG by a fixed threshold established annually by the Centers for
Medicare and Medicaid Services of the United State Department of Health and
Human Services (CMS). Under Sections 1886(d) and 1886(g) of the Social Security
Act, CMS must project aggregate annual outlier payments to all prospective
payment system hospitals to be not less than 5% or more than 6% of total DRG
payments (Outlier Percentage). The Outlier Percentage is determined by dividing
total outlier payments by the sum of DRG and outlier payments. CMS annually
adjusts the fixed threshold to bring expected outlier payments within the
mandated limit. A change to the fixed threshold affects total outlier payments
by changing (1) the number of cases that qualify for outlier payments, and (2)
the dollar amount hospitals receive for those cases that still qualify. The most
recent change to the cost outlier threshold that became effective on October 1,
2005 was a decrease from $25,800 to $23,600, which CMS projects will result in
an Outlier Percentage of 5.1%. The Medicare fiscal intermediary calculates the
cost of a claim by multiplying the billed charges by the cost-to-charge ratio
from the hospital's most recent filed cost report.

     The Hospitals received new provider numbers in 2005 and, because there was
no specific history, the Hospitals were reimbursed for outliers based on
published statewide averages. If the computed cost exceeds the sum of the DRG
payment plus the fixed threshold, the hospital receives 80% of the difference as
an outlier payment. Medicare has reserved the option of adjusting outlier
payments, through the cost report, to the hospital's actual cost-to-charge
ratio. Upon receipt of the current payment cost-to-charge ratios from the fiscal
intermediary, any variance between current payments and the estimated final
outlier settlement will be reported. As of March 31, 2006 and December 31, 2005,
the Company recorded reserves for excess outlier payments due to the difference
between the Hospitals actual cost to charge rates and the statewide average in
the amount of $2,890,637 and $2,169,626, respectively. These reserves offset
against the third party settlement receivables and are included as a net payable
of $270,189 in due to governmental payers as of March 31, 2006, and as a net
receivable of $103,626 in due from governmental payers as of December 31, 2005.

     The Hospitals receive supplemental payments from the State of California to
support indigent care (MediCal Disproportionate Share Hospital payments or
"DSH"). During the three months ended March 31, 2006, the Hospitals received
payments of $575,000. The Company estimates an additional $6,587,219 is
receivable based on State correspondence, which is included in due from
governmental payers in the consolidated balance sheet as of March 31, 2006
($2,921,150 at December 31, 2005).

     Revenues under managed care plans are based primarily on payment terms
involving predetermined rates per diagnosis, per-diem rates, discounted

                                        7

<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

fee-for-service rates and/or other similar contractual arrangements. These
revenues are also subject to review and possible audit by the payers. The payers
are billed for patient services on an individual patient basis. An individual
patient's bill is subject to adjustment on a patient-by-patient basis in the
ordinary course of business by the payers following their review and
adjudication of each particular bill. The Hospitals estimate the discounts for
contractual allowances utilizing billing data on an individual patient basis. At
the end of each month, the Hospitals estimate expected reimbursement for
patients of managed care plans based on the applicable contract terms. These
estimates are continuously reviewed for accuracy by taking into consideration
known contract terms as well as payment history. Although the Hospitals do not
separately accumulate and disclose the aggregate amount of adjustments to the
estimated reimbursements for every patient bill, management believes the
estimation and review process allows for timely identification of instances
where such estimates need to be revised. Management does not believe there were
any adjustments to estimates of individual patient bills that were material to
its net operating revenues.

     Management is not aware of any material claims, disputes, or unsettled
matters with any payers that would affect revenues that have not been adequately
provided for in the accompanying consolidated financial statements.

     The Hospitals provide charity care to patients whose income level is below
200% of the Federal Poverty Level with only a co-payment charged to the patient.
The Hospitals' policy is to not pursue collection of amounts determined to
qualify as charity care; and accordingly, the Hospitals do not report the
amounts in net operating revenues or in the provision for doubtful accounts.
Patients whose income level is between 200% and 300% of the Federal Poverty
Level may also be considered under a catastrophic provision of the charity care
policy. Patients without insurance who do not meet the Federal Poverty Level
guidelines are offered assistance in applying for Medicaid and other programs
they may be eligible for, such as state disability, Victims of Crime, or county
indigent programs. Patient advocates from the Hospitals' Medical Eligibility
Program (MEP) screen patients in the hospital and determine potential linkage to
financial assistance programs. They also expedite the process of applying for
these government programs. Based on average revenue for comparable services from
all other payers, revenues foregone under the charity policy, including indigent
care accounts, for the three months ended March 31, 2006 were approximately $1.7
million.

     Receivables from patients who are potentially eligible for Medicaid are
classified as Medicaid pending under the MEP, with appropriate contractual
allowances recorded. If the patient does not quality for Medicaid, the
receivables are reclassified to charity care and written off, or they are
reclassified to self-pay and adjusted to their net realizable value through the
provision for doubtful accounts. Reclassifications of Medicaid pending accounts
to self-pay do not typically have a material impact on the results of operations
as the estimated Medicaid contractual allowances initially recorded are not
materially different than the estimated provision for doubtful accounts recorded
when the accounts are reclassified. All accounts classified as pending Medicaid
are reserved for their full value in contractual allowances when they reach 180
days old.

     PROVISION FOR DOUBTFUL ACCOUNTS - The Company sells substantially all of
its billed accounts receivable to a financing company (see Note 2). The Company
provides for accounts receivable that could become uncollectible by establishing
an allowance to reduce the carrying value of such receivables to their estimated
net realizable value. The allowance for doubtful accounts for accounts not sold
as of March 31, 2006 and December 31, 2005 was $2,432,084 and $3,148,276,
respectively. The Hospitals estimate this allowance based on the aging of their
accounts receivable, historical collections experience for each type of payer
and other relevant factors. There are various factors that can impact the
collection trends, such as changes in the economy, which in turn have an impact
on unemployment rates and the number of uninsured and underinsured patients,
volume of patients through the emergency department, the increased burden of
co-payments to be made by patients with insurance and business practices related
to collection efforts. These factors continuously change and can have an impact
on collection trends and the estimation process.
     The Company's policy is to attempt to collect amounts due from patients,
including co-payments and deductibles due from patients with insurance, at the
time of service while complying with all federal and state laws and regulations,
including, but not limited to, the Emergency Medical Treatment and Labor Act
(EMTALA). Generally, as required by EMTALA, patients may not be denied emergency
treatment due to inability to pay. Therefore, until the legally required medical
screening examination is complete and stabilization of the patient has begun,
services are performed prior to the verification of the patient's insurance, if
any. In non-emergency circumstances or for elective procedures and services, it
is the Hospitals' policy, when appropriate, to verify insurance prior to a
patient being treated. During the three months ended March 31, 2006 and 2005,
the Company recorded provisions for doubtful accounts, net of bad debt
recoveries, of $8,298,928 and $3,141,406, respectively.

     CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
investments purchased with a maturity of three months or less to be cash
equivalents.
                                       8

<PAGE>


                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     RESTRICTED CASH - Restricted cash consists of amounts deposited in short
term time deposits with a commercial bank to collateralize the Company's
obligations pursuant to certain agreements. A certificate of deposit for
$4,419,636 is pledged to a commercial bank that issued a standby letter of
credit for $4,200,000 in favor of an insurance company that is the administrator
of the Company's self-insured workers compensation plan. A certificate of
deposit for $552,000 is pledged as a reserve under the Company's capitation
agreement with CalOptima.

     Cash held in the Company's bank accounts as of March 31, 2006 collected on
behalf of the buyer of accounts receivable in the amount of $1,766,153 have been
reclassified to security reserve funds.

     The company has identified and corrected a misclassification between cash
and accounts payable in the amount of $393,726.

     PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less
accumulated depreciation and any impairment write-downs related to assets held
and used. Additions and improvements to property and equipment are capitalized
at cost. Expenditures for maintenance and repairs are charged to expense as
incurred. Capital leases are recorded at the beginning of the lease term as
assets and liabilities. The value recorded is the lower of either the present
value of the minimum lease payments or the fair value of the asset. Such assets,
including improvements, are amortized over the shorter of either the lease term
or their estimated useful life.

     The Company uses the straight-line method of depreciation for buildings and
improvements, and equipment over their estimated useful lives of 25 years and 3
to 15 years, respectively.

     The Company evaluates its long-lived assets for possible impairment
whenever circumstances indicate that the carrying amount of the asset, or
related group of assets, may not be recoverable from estimated future cash
flows. However, there is an evaluation performed at least annually. Fair value
estimates are derived from independent appraisals, established market values of
comparable assets or internal calculations of estimated future net cash flows.
The estimates of future net cash flows are based on assumptions and projections
believed by management to be reasonable and supportable. These assumptions take
into account patient volumes, changes in payer mix, revenue, and expense growth
rates and changes in legislation and other payer payment patterns. The Company
believes there has been no impairment in the carrying value of its property and
equipment at March 31, 2006.

     MEDICAL CLAIMS INCURRED BUT NOT REPORTED - The Company is contracted with
CalOptima, which is a county sponsored entity that operates similarly to an HMO,
to provide health care services to indigent patients at a fixed amount per
enrolled member per month. The Company receives payments from CalOptima based on
a fixed fee and the number of enrolled members at the Hospitals. The Company
recognizes these capitation fees as revenues on a monthly basis for providing
comprehensive health care services for the period.

     In certain circumstances, members will receive health care services from
hospitals not owned by the Company. In these cases, the Company records
estimates of patient member claims incurred but not reported (IBNR) for services
provided by other health care institutions. Claims incurred but not reported are
estimated using historical claims patterns, current enrollment trends, hospital
pre-authorizations, member utilization patterns, timeliness of claims
submissions, and other factors. There can be no assurance that the ultimate
liability will not exceed our estimates. Adjustments to the estimated IBNR
reserves are recorded in our results of operations in the periods when such
amounts are determined. Per guidance under Statement of Financial Accounting
Standards ("SFAS") No. 5, "Accounting for Contingencies," the Company accrues
for IBNR reserves when it is probable that expected future health care costs and
maintenance costs under an existing contract have been incurred and the amount
can be reasonably estimable. The Company records these IBNR claim reserves
against its net operating revenues. During the three months ended March 31,
2006, the Company recorded net revenues from CalOptima capitation of
approximately $1,401,000, net of third party claims and estimates of IBNR. IBNR
reserves at March 31, 2006 and December 31, 2005 were $5.5 million and $5.0
million respectively. The Company's direct cost of providing services to patient
members is included in the Company's normal operating expenses.

     STOCK-BASED COMPENSATION - SFAS No. 123R, "Share Based Payment
Compensation," requires companies to record compensation cost for stock-based
employee compensation plans at fair value at the grant date. The Company has
adopted SFAS 123R. As of March 31, 2006, the Company had not granted any stock
options to employees.


                                        9



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
recorded in the consolidated balance sheets include cash and cash equivalents,
restricted cash, receivables, accounts payable, and other liabilities including
warrant liability and long term debt. Management believes that the recorded
value of such financial instruments is a reasonable estimate of their fair
value. To finance the Acquisition, the Company entered into agreements that
contained warrants (see Notes 4 and 6), which are required to be accounted for
as derivative liabilities in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities."

     A derivative is an instrument whose value is derived from an underlying
instrument or index such as a future, forward, swap, or option contract, or
other financial instrument with similar characteristics, including certain
derivative instruments embedded in other contracts ("embedded derivatives") and
for hedging activities. As a matter of policy, the Company does not invest in
separable financial derivatives or engage in hedging transactions. However, the
Company may engage in complex transactions in the future that also may contain
embedded derivatives. Derivatives and embedded derivatives, if applicable, are
measured at fair value and marked to market through earnings.

     WARRANTS - In connection with its Acquisition of the Hospitals, the Company
entered into complex transactions that contain warrants that require accounting
in accordance with SFAS 133, SFAS 150 and EITF 00-19 (see Notes 4 and 6).

     NET INCOME (LOSS) PER COMMON SHARE - Net income (loss) per share is
calculated in accordance with SFAS No. 128, "Earnings per Share." Basic net loss
per share is based upon the weighted average number of common shares
outstanding. Due to the loss from operations incurred by the Company for the
three months ended March 31, 2005, the anti-dilutive effect of warrants has not
been considered in the calculations of loss per share for that period.

     GOODWILL AND INTANGIBLE ASSETS - In accordance with SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Intangible Assets," acquisitions
subsequent to June 30, 2001 must be accounted for using the purchase method of
accounting. The cost of intangible assets with indefinite lives and goodwill are
no longer amortized, but are subject to an annual impairment test based upon
fair value.

     Goodwill and intangible assets principally result from business
acquisitions. The Company accounts for business acquisitions by assigning the
purchase price to tangible and intangible assets and liabilities. Assets
acquired and liabilities assumed are recorded at their fair values; the excess
of the purchase price over the net assets acquired is recorded as goodwill. As
of March 31, 2006, no goodwill had been recorded on acquisitions.

     Debt issuance costs related to Credit agreement fees (Note 4)are amortized
over the two year life of the agreement.

     INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes," which requires the liability
approach for the effect of income taxes. Under SFAS 109, deferred income tax
assets and liabilities are determined based on the differences between the book
and tax basis of assets and liabilities and are measured using the currently
enacted tax rates and laws.

     The preparation of consolidated financial statements in conformity with
U.S. GAAP requires the Company to make estimates and assumptions that affect the
reported amount of tax-related assets and liabilities and income tax provisions.
The Company assesses the recoverability of the deferred tax assets on an ongoing
basis. In making this assessment the Company is required to consider all
available positive and negative evidence to determine whether, based on such
evidence, it is more likely than not that some portion or all of our net
deferred assets will be realized in future periods. This assessment requires
significant judgment. In addition, the Company has made significant estimates
involving current and deferred income taxes, tax attributes relating to the
interpretation of various tax laws, historical bases of tax attributes
associated with certain tangible and intangible assets and limitations
surrounding the realization of our deferred tax assets. As of March 31, 2006 and
December 31, 2005, the Company has established a 100% valuation allowance
against its deferred tax assets. The difference between the Company's statutory
rate of taxation and the effective rate for the quarters ended March 31, 2006
and 2005 is primarily due to the effect of valuation allowances and other
permanent differences.


                                       10



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     INSURANCE - The Company accrues for estimated general and professional
liability claims, to the extent not covered by insurance, when they are probable
and reasonably estimable. The Company has purchased as primary coverage a
claims-made form insurance policy for general and professional liability risks.
The policy limits are $1,000,000 per individual claim and $5,000,000 in the
aggregate. For the policy year ended March 8, 2006, retentions by the Company
were $500,000 per claim up to a maximum of $3,000,000 for claims covered during
that policy year. As of March 8, 2006, those retentions changed to $2,000,000
per claim up to a maximum of $8,000,000 for the policy year. Estimated losses
within general and professional liability retentions from claims incurred and
reported, along with incurred but not reported (IBNR) claims, are accrued based
upon actuarially determined projections and are discounted to their net present
value using a weighted average risk-free discount rate of 5%. To the extent that
subsequent claims information varies from our estimates, the liability is
adjusted in the period such information becomes available. As of March 31, 2006
and December 31, 2005, the Company had accrued approximately $2.9 million and
$2.3 million, respectively, comprised of approximately $0.6 million and $0.6
million, respectively, in incurred and reported claims, along with approximately
$2.3 million and $1.7 million, respectively, in IBNR and an allowance for
potential increases in the costs of those claims incurred and reported.

     The Company has purchased as primary coverage occurrence form insurance
policies to help fund its obligations under its workers' compensation program
for which the Company is responsible to reimburse the insurance carrier for
losses within a deductible of $500,000 per claim, to a maximum aggregate
deductible of $9,000,000. The company accrues for estimated workers'
compensation claims, to the extent not covered by insurance, when they are
probable and reasonably estimable. The ultimate costs related to this program
include expenses for deductible amounts associated with claims incurred and
reported in addition to an accrual for the estimated expenses incurred in
connection with IBNR claims. Claims are accrued based upon actuarially
determined projections and are discounted to their net present value using a
weighted average risk-free discount rate of 5%. To the extent that subsequent
claims information varies from our estimates, the liability is adjusted in the
period such information becomes available. As of March 31, 2006 and December 31,
2005, the Company had accrued approximately $1.7 million and $1.3 million,
respectively, comprised of approximately $0.4 million and $0.3 million,
respectively, in incurred and reported claims, along with $1.3 million and $1.0
million, respectively, in IBNR.

     The Company has also purchased all risk umbrella liability policies with
aggregate limits of $19,000,000. The umbrella policies provide coverage in
excess of the primary layer and applicable retentions for all of its insured
liability risks, including general and professional liability and the workers'
compensation program.

     SEGMENT REPORTING - The Company operates in one line of business, the
provision of health care services through the operation of general hospitals and
related health care facilities. Our general hospitals generated substantially
all of our net operating revenues during the three months ended March 31, 2006
and 2005.

     Our four general hospitals and our related health care facilities operate
in one geographic region in Orange County, California. This region is our
operating segment, as that term is defined by SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The regions' economic
characteristics, the nature of their operations, the regulatory environment in
which they operate, and the manner in which they are managed are all similar. In
addition, our general hospitals and related health care facilities share certain
resources and they benefit from many common clinical and management practices.
Accordingly, we aggregate the facilities into a single reportable operating
segment.

     RECENTLY ENACTED ACCOUNTING STANDARDS - In February 2006, the FASB issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an
amendment of FASB Statements No. 133 and 140." SFAS 155, among other things:
permits the fair value re-measurement of any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation and
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation.
SFAS 155 is effective for all financial instruments acquired or issued in fiscal
years beginning after September 15, 2006. The Company is currently evaluating
the effect that adopting this statement will have on the Company's financial
position and results of operations.


                                       11



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140," with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
SFAS 156 permits the choice of the amortization method or the fair value
measurement method, with changes in fair value recorded in income, for the
subsequent measurement for each class of separately recognized servicing assets
and servicing liabilities. The statement is effective for years beginning after
September 15, 2006, with earlier adoption permitted. The Company is currently
evaluating the effect that adopting this statement will have on the Company's
financial position and results of operations.

     In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109". FIN
48 clarifies the circumstances in which a tax benefit may be recorded with
respect to uncertain tax positions. The Interpretation provides guidance for
determining whether tax benefits may be recognized with respect to uncertain tax
positions and, if recognized, the amount of such tax benefits that may be
recorded. Under the provisions of FIN 48, tax benefits associated with a tax
position may be recorded only if it is more likely than not that the claimed tax
position will be sustained upon audit. The statement is effective for years
beginning after December 15, 2006. The Company is currently evaluating the
effect that adopting this statement will have on the Company's financial
position and results of operations.

     In September 2006, the FASB issued FASB Statement No. 157, "Fair Value
Measurements". This Statement establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value, and requires
additional disclosures about fair value measurements. FASB 157 applies only to
fair value measurements that are already required or permitted by other
accounting standards. The statement is effective for financial statements for
fiscal years beginning after November 15, 2007, with earlier adoption permitted.
The Company is currently evaluating the effect that adopting this statement will
have on the Company's financial position and results of operations.

     In September, 2006, the Securities and Exchange Commission released Staff
Accounting Bulletin 108. SAB 108 provides interpretative guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. SAB 108 is effective for
fiscal years ending after November 15, 2006. The Company adopted SAB 108 during
the interim quarterly period ended September 30, 2006. The effect of adopting
this statement was considered in evaluating the impact of an error that was
identified during October, 2006 in the overstatement of net operating revenues
and accounts receivable by $616,791 that existed at December 31, 2005. The error
was the result of an incorrect account reconciliation, not a matter of
estimation. The overstatement of accounts receivable, net operating revenues,
income before minority interest and provision for income taxes and net income
and understatement of accumulated deficit and stockholders' deficiency by
$616,791 was determined by management to be immaterial to the financial
statements as of and for the year ended December 31, 2005 in accordance with
Staff Accounting Bulletin No. 108 ("SAB 108"). However, in accordance with the
dual approach outlined in SAB 108 management determined that the impact of the
$616,791 error was material to the unaudited condensed consolidated financial
statements as of and for the three months ended March 31, 2006. Based on
management's evaluation of the error, SAB 108 requires the Company to correct
the December 31, 2005 financial statements for the immaterial error and make
such correction in the filing of the next annual report on Form 10-K.

     The following table sets forth the amounts as originally reported in the
consolidated balance sheet as of December 31, 2005 and statement of operations
for the year ended December 31, 2005 filed as part of Form 10-K and the effects
of the correction of the error as described above:

                                                  As of December 31, 2005
                                                ----------------------------
                                                As previously
                                                  reported      As restated
                                                ------------    ------------
Balance Sheet:
  Accounts receivable                           $ 16,592,277    $ 15,975,486
  Total assets                                   135,045,980     134,429,189
  Accumulated deficit                            (46,656,725)    (47,273,516)
  Total stockholders' deficiency                 (30,446,823)    (31,063,614)


                                       12



<PAGE>

                        INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

                                                Year ended December 31, 2005
                                                ----------------------------
                                                As previously
                                                  reported      As restated
                                                ------------    ------------
Statement of Operations:
  Net operating revenues                        $284,314,409    $283,697,618
  Operating loss                                 (15,222,366)    (15,839,157)
  Income (loss) before minority interest
    and provision for income taxes               (46,212,018)    (46,828,809)
  Net income (loss)                              (44,558,367)    (45,175,158)
  Basic and diluted earnings per share          $      (0.49)    $     (0.50)




     NOTE 2 - ACCOUNTS PURCHASE AGREEMENT

     In March 2005, the Company entered into a two year Accounts Purchase
Agreement (the "APA") with Medical Provider Financial Corporation I, an
unrelated party (the "Buyer"). The Buyer is an affiliate of the Lender (see Note
4). The APA provides for the sale of 100% of the Company's eligible accounts
receivable, as defined, without recourse. After accounts receivable are sold,
the APA requires the Company to provide billing and collection services,
maintain the individual patient accounts, and resolve any disputes that arise
between the Company and the patient or other third party payer. The Company
accounts for its sale of accounts receivable in accordance with SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities - A Replacement of FASB Statement 125."

     The accounts receivable are sold weekly based on billings for each
Hospital. The purchase price is comprised of two components, the advance rate
amount and the deferred portion amount. The advance rate amount is based on the
historical collection experience for accounts receivable similar to those
included in a respective purchase. At the time of sale, the Buyer advances 95%
of the advance rate amount (the "95% Advance"; increased from 85% at Buyer's
election effective January 1, 2006) to the Company and holds the remaining 5% as
security reserve funds on sold accounts (the "Security Reserve Funds"), which is
non-interest bearing. Except in the case of a continuing default, the Security
Reserve Funds cannot exceed 25% (the "25% Cap") of the aggregate advance rate
amount, as defined, of the open purchases. The Company is charged a "purchase
discount" (the "Transaction Fee") of 1.35% per month of the advance rate amount
of each purchase until closed, at which time the Buyer deducts the Transaction
Fee from the Security Reserve Funds. The Conpany holds cash collected in its
lockbox in a fiduciary role for the buyer and records the cash as part of
Security Reserve Funds. Collections are applied on a dollar value basis, not by
specific identification, to the respective Hospital's most aged open purchase.
The deferred portion amount represents amounts the Company expects to collect,
based on regulations, contracts, and historical collection experience, in excess
of the advance rate amount.


                                       13



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     The following table reconciles accounts receivable as of March 31, 2006 and
December 31, 2005, as reported, to the pro forma accounts receivable, as if the
Company had deferred recognition of the sales [non GAAP].

<TABLE>

                                                    March 31, 2006                  December 31, 2005
                                              ----------------------------    ----------------------------
                                               As reported      Pro forma      As reported      Pro forma
                                              ------------    ------------    ------------    ------------
                                                                              (as restated)   (as restated)
<S>                                           <C>             <C>             <C>             <C>
Accounts receivable:
  Governmental                                $  5,732,795    $ 19,362,292    $ 10,394,875    $ 23,771,977
  Non-governmental                              10,827,181      51,033,333       8,728,887      45,564,554
                                              ------------    ------------    ------------    ------------
                                                16,559,976      70,395,625      19,123,762      69,336,531
Less allowance for doubtful accounts            (2,432,084)    (15,140,247)     (3,148,276)    (17,723,163)
                                              ------------    ------------    ------------    ------------
   Net patient accounts receivable              14,127,892      55,255,378      15,975,486      51,613,368
                                              ------------    ------------    ------------    ------------
Security Reserve Funds                          14,787,640               -      12,127,337               -
Deferred purchase price receivables             14,354,540               -       9,337,703               -
                                              ------------    ------------    ------------    ------------
   Receivable from Buyer of accounts            29,142,180               -      21,465,040               -
                                              ------------    ------------    ------------    ------------
Advance rate amount, net                                -       (7,262,086)              -     (10,843,197)
Transaction Fees deducted from
  Security Reserve Funds                                -       (4,723,220)              -      (3,329,645)
                                              ------------    ------------    ------------    ------------
                                              $ 43,270,072    $ 43,270,072    $ 37,440,526    $ 37,440,526
                                              ============    ============    ============    ============
</TABLE>

     Although 100% of the Company's accounts receivable, as defined, is
purchased by the Buyer, certain payments (generally payments that cannot be
attributed to specific patient account, such as third party settlements,
capitation payments and MediCal Disproportionate Share Hospital ("DSH")
subsidies (collectively "Other Payments")) are retained by the Company and not
applied to the purchases processed by the Buyer. In the opinion of our
management, after consultation with the Buyer, DSH payments and CalOptima
capitation premium payments of $0.6 million and $5.2 million, respectively, for
the three months ended March 31, 2006, are excludable from application to the
Security Reserve Funds. However, if cash collections on purchases are not
sufficient to recover the Buyer's advance rate amount and related transaction
fees, the Buyer could be entitled to funds the Company has received in Other
Payments or require transfer of substitute accounts to cover any such shortfall.
Based on collection history under the APA to date, the Company's management
believes the likelihood of the Buyer exercising this right is remote.

     Any other term of the APA notwithstanding, the parties agreed as follows:
(a) all accounts derived from any government program payer including, without
limitation, the Medicare, Medi-Cal, or CHAMPUS programs, shall be handled as set
forth in a Deposit Account Security Agreement entered into by the parties, which
provides for the segregation and control of governmental payments by the
Company, (b) the parties agreed to take such further actions and execute such
further agreements as are reasonably necessary to effectuate the purpose of the
APA and to comply with the laws, rules, and regulations of the Medicare and
other government programs regarding the reassignment of claims and payment of
claims to parties other than the provider ("Reassignment Rules"), and (c) until
such time as accounts are delivered by the Company to the Buyer controlled
lockbox, the Company shall at all times have sole dominion and control over all
payments due from any government program payer. The Company's management (i)
believes that the foregoing method of segregating and controlling payments
received from governmental program payers complies with all applicable
Reassignment Rules, and (ii) the Company intends to request an opinion from the
Federal Center for Medicare and Medicaid Services ("CMS") that such method is
compliant with the Reassignment Rules in the view of CMS. As of March 31,2006
the Company has $13,629,497 in governmental accounts receivable that have been
reported as sold subject to the foregoing limitation.

     The Company records estimated Transaction Fees and estimated servicing
costs related to the sold accounts receivable at the time of sale. For the three
months ended March 31, 2006, the Company incurred a loss on sale of accounts
receivable of $2,807,805, which is reflected in operating expenses in the
accompanying consolidated statement of operations. The related Servicing and
Transaction Fee liability at March 31, 2006 is $1,727,500.


                                       14



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

<TABLE>
<S>                                                                                        <C>
Transaction Fees deducted from Security Reserve Funds - closed purchases                   $  1,393,575
Increase in accrued Transaction Fees - open purchases                                           108,208
                                                                                           ------------
  Total Transaction Fees incurred                                                             1,501,783
                                                                                           ------------
Servicing costs for sold accounts receivable - closed purchases                               1,230,578
Increase in accrued servicing costs for sold accounts receivable - open purchases                75,444
                                                                                           ------------
  Total servicing costs incurred                                                              1,306,022
                                                                                           ------------
Loss on sale of accounts receivable for the three months ended March 31, 2006              $  2,807,805
                                                                                           ============
No accounts receivable were sold as of March 31, 2005.
</TABLE>

     Effective March 31, 2006, an amendment to the APA reduced the required
Security Reserve Funds amount as a percentage of the total advance rate amount
outstanding from 25% to 15% (the "15% Cap"). At March 31, 2006, the Security
Reserve Funds swept, prior to the inclusion of cash remaining in the lockbox,
balance of $13,021,487 (exclusive of $1,766,153 cash held in lockbox accounts)
was in excess of the 15% Cap. As a result, $6,677,916 was released to the
Company subsequent to March 31, 2006.

     NOTE 3 - PROPERTY AND EQUIPMENT
     Property and equipment consists of the following:

                                            March 31,     December 31,
                                              2006            2005
                                          ------------    ------------

       Buildings                          $ 33,696,897    $ 33,696,897
       Land and improvements                13,522,591      13,522,591
       Equipment                             9,318,403       9,241,044
       Buildings under lease                 5,108,887       5,108,887
                                          ------------    ------------
                                            61,646,778      61,569,419
       Less accumulated depreciation        (2,785,921)     (2,138,134)
                                          ------------    ------------
         Property and equipment, net      $ 58,860,857    $ 59,431,285
                                          ============    ============

     The Hospitals are affected by State of California Senate Bill 1953 (SB
1953), which requires certain seismic safety building standards for acute care
hospital facilities by 2013. The Company is currently reviewing the SB 1953
compliance requirements and developing multiple plans of action to achieve such
compliance, the estimated time frame for complying with such requirements, and
the cost of performing necessary remediation of certain of the properties. The
Company cannot currently estimate with reasonable accuracy the remediation costs
that will need to be incurred in order to make the Hospitals SB 1953-compliant,
but such remediation costs could be significant.

     NOTE 4 - DEBT
     The Company's debt consists of the following:
<TABLE>
                                                                   March 31,     December 31,
                                                                     2006            2005
                                                                 ------------    ------------
     Short term debt:
     ----------------
<S>                                                              <C>             <C>
     Secured note payable                                        $ 10,700,000    $ 10,700,000
     Less derivative - warrant liability, current (see Note 6)    (10,700,000)    (10,700,000)
     Secured acquisition loan                                      45,000,000               -
     Secured line of credit, outstanding borrowings                25,330,734               -
                                                                 ------------    ------------
          Short term debt                                        $ 70,330,734    $          -
                                                                 ============    ============

     Long term debt:
     ---------------
     Secured acquisition loan                                    $          -    $ 45,000,000
     Secured line of credit, outstanding borrowings                         -      25,330,734
                                                                 ------------    ------------
          Long term debt                                         $          -    $ 70,330,734
                                                                 ============    ============
</TABLE>

     As of March 31, 2006, the Company had approximately $4.7 million available
under its $30 million Line of Credit. The Line of Credit is to be used for the
purpose of providing (a) working capital financing for the Company and its
subsidiaries, (b) funds for other general corporate purposes of the Company and
its subsidiaries, and (c) other permitted purposes.


                                       15

<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     ACQUISITION LOAN AND LINE OF CREDIT - In connection with the Acquisition,
the Company obtained borrowings from affiliates of Medical Capital Corporation.
Effective March 3, 2005, the Company and its subsidiaries collectively entered
into a credit agreement (the "Credit Agreement") with Medical Provider Financial
Corporation II ("the Lender"), whereby the Company obtained initial financing in
the form of a loan with interest at the rate of 14% per annum in the amount of
$80,000,000 of which $30,000,000 is in the form of a non-revolving Line of
Credit and a $50,000,000 Acquisition Loan (less $5,000,000 repayment on December
12, 2005) in the form of a real estate loan (collectively, the "Obligations").

     The Company used the proceeds from the $50 million Acquisition Loan and $3
million from the Line of Credit to complete the Acquisition (see Note 1). The
Line of Credit is to be used for the purpose of providing (a) working capital
financing for the Company and its subsidiaries, (b) funds for other general
corporate purposes of the Company and its subsidiaries, and (c) other permitted
purposes. Effective January 1, 2006, the Company and the Lender agreed to an
amendment to the Obligations that changed the interest rate from 14% to prime
plus 5.75% (13.25% at March 31, 2006).

     Interest payments are due on the Obligations on the first business day of
each calendar month while any Obligation is outstanding. The Obligations mature
at the first to occur of (i) the Commitment Termination Date for the Line of
Credit; (ii) March 2, 2007; or (iii) the occurrence or existence of a continuing
Event of Default under any of the Obligations. The Commitment Termination Date
means the earliest of (a) thirty calendar days prior to March 2, 2007; (b) the
date of termination of Lender's obligations to make Advances under the Line of
Credit or permit existing Obligations to remain outstanding, (c) the date of
prepayment in full by the Company and its subsidiaries of the Obligations and
the permanent reduction of all commitments to zero dollars; or (d) March 2,
2007. Per the Credit Agreement, all future capital contributions to the Company
by Orange County Physicians Investment Network, LLC ("OC-PIN") shall be used by
the Company as mandatory prepayments of the Line of Credit.

     The Acquisition Loan and Line of Credit are secured by a lien on
substantially all of the assets of the Company and its subsidiaries, including
without limitation, a pledge of the capital stock by the Company in its wholly
owned Hospitals. In addition, (i) PCHI has agreed to guaranty the payment and
performance of the Obligations, (ii) West Coast and Ganesha have each agreed to
pledge their membership interests in PCHI as security for repayment of the
Obligations, (iii) the members of West Coast have agreed to pledge their
membership interests in PCHI as security for repayment of the Obligations, and
(iv) OC-PIN has agreed to guaranty the payment and performance of all the
Obligations.


                                       16



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     CREDIT AGREEMENT FEES - Concurrent with execution and delivery of the
Credit Agreement and as a condition to the funding of the Acquisition Loan, the
Company and its subsidiaries agreed to pay to the Lender origination fees in
amounts equal to 2% of the Credit Line,($600,000), and 2% of the Acquisition
Loan, ($1,000,000). Such fees were required to be paid out of the Company and
its subsidiaries own funds were deemed earned in full upon receipt by the
Lender. Upon the completion of the Acquisition on March 8, 2005, the Company
paid the Lender a total of $1,600,000 in origination fees and paid the Lender's
legal fees of approximately $333,000. The Company is amortizing the debt
issuance costs of $1,933,000 over the two year term of the Obligations. During
the three months ended March 31, 2006 and 2005, the Company recognized $241,626
and $62,355, respectively, of amortization expense and has unamortized debt
issuance costs of $899,639 and $1,141,265 as of March 31, 2006 and December 31,
2005, respectively.

      SECURED SHORT TERM NOTE - On December 12, 2005, the Company entered into a
credit agreement (the "December Credit Agreement") with the Credit Parties and
the Lender. Under the December Credit Agreement, the Lender loaned $10,700,000
to the Company as evidenced by a promissory note (the "December Note"). Interest
is payable monthly at the rate of 12% per annum and the December Note was due on
December 12, 2006, thereafter extended to March 2, 2007.

     The December Note is secured by substantially all of the Company's assets.
In addition, the Company issued a common stock warrant (the "December Note
Warrant") to the Lender as collateral under the December Note. The December Note
Warrant is exercisable by the Lender only in the event that a default has
occurred and is continuing on the December Note. The Company has classified the
December Note as current warrant liability in the accompanying condensed
consolidated balance sheets as of March 31, 2006 and December 31, 2005 (see
Notes 6 and 10).

     WAIVER OF DEFAULT - The Company was in default of its obligation under its
loan and security agreements to timely file financial reports with the
Securities and Exchange Commission. The lender was notified of the condition of
default and has conditionally waived its right to accelerate repayment of the
debt subject to filing of Form 10-K for the year ended December 31, 2005 (which
was filed with the SEC on July 28, 2006) and filing of the Form 10-Q for the
quarter ended March 31, 2006 (completed August 11, 2006).


                                       17



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     NOTE 5 - COMMON STOCK

     STOCK PURCHASE AGREEMENT - On January 28, 2005, the Company entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") with OC-PIN a company
founded by Dr. Anil V. Shah, the Company's previous chairman, and owned by a
number of physicians practicing at the acquired Hospitals. This agreement was
subsequently amended to include the following.

     Under the First Amendment and the related Escrow Agreement, OC-PIN
deposited a total of $12,500,000 into an escrow account. However, following
receipt of such funds, a disagreement arose between OC-PIN and the third party
which provided $11,000,000 of the $12,500,000 deposited into the escrow account.
In order to resolve this matter and to avoid potential litigation involving the
Company, the Company agreed to return $11,000,000 of these funds and provide
OC-PIN with a limited opportunity to provide alternative financing. Therefore,
effective October 31, 2005, the Company entered into a Second Amendment to the
Stock Purchase Agreement (the "Second Amendment"), pursuant to which the Company
and OC-PIN issued escrow instructions to release escrowed funds as of November
2, 2005, terminate the Escrow Agreement and distribute the assets in the escrow
account as follows:

     1.   $1,500,000 of the escrowed cash, plus a pro rata portion of the
          accrued interest, was delivered to the Company for payment of stock.

     2.   $11,000,000 of the escrowed cash, plus a pro rata portion of the
          accrued interest was delivered to OC-PIN.

     3.   5,798,831 of the escrowed shares of the Company's common stock were
          delivered to OC-PIN.


                                       18



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     4.   40,626,684 of the escrowed shares of the Company's common stock were
          delivered to the Company.

     5.   OC-PIN transferred $2,800,000 from another account to the Company for
          which OC-PIN received 10,824,485 of the escrowed shares.

     6.   The Company agreed to issue to OC-PIN 5,400,000 shares of its common
          stock multiplied by the percentage of OC-PIN's payment required to be
          made under the Stock Purchase Agreement, as amended, which had been
          made to date. As of March 31, 2006, 3,246,201 of these shares were not
          issued pending the Company's recovery of $367,868 in additional debt
          financing costs pursuant to the First Amendment. The Company resolved
          this matter with OC-PIN on July 25, 2006.

     7.   The Company granted OC-PIN the right to purchase up to $6,700,000 of
          common stock within 30 calendar days following the cure of the
          Company's default relating to the Credit Agreement at a price of
          $0.2586728 per share or a maximum of 25,901,447 shares of its common
          stock, plus interest on the purchase price at 14% per annum from
          September 12, 2005 through the date of closing on the funds from
          OC-PIN. Upon one or more closings on funds received under this section
          of the Second Amendment, the Company shall issue an additional portion
          of the 5,400,000 shares mentioned in item (6) above. As of March 31,
          2006, the Company had issued 418,873 of these shares to OC-PIN for
          cash received of $132,132.


     NOTE 6 - COMMON STOCK WARRANTS

     The Company entered into a Rescission, Restructuring and Assignment
Agreement with Dr. Kali Chaudhuri and Mr. William Thomas on January 27, 2005
(the "Restructuring Agreement"). Pursuant to the Restructuring Agreement, the
Company issued warrants to purchase up to 74,700,000 shares of the Company's
common stock (the "Warrants") to Dr. Chaudhuri and Mr. Thomas (not to exceed
24.9% of the Company's fully diluted capital stock at the time of exercise). In
addition, the Company amended the Real Estate Option to provide for Dr.
Chaudhuri's purchase of 49% interest in PCHI for $2,450,000.

     The Warrants are exercisable beginning January 27, 2007 and expire in 3.5
years from the date of issuance (July 27, 2008). The exercise price for the
first 43 million shares purchased under the Warrants is $0.003125 per share, and
the exercise or purchase price for the remaining 31.7 million shares is $0.078
per share if exercised between January 27, 2007 and July 26, 2007, $0.11 per
share if exercised between July 27, 2007 and January 26, 2008, and $0.15 per
share thereafter.

     As a result of the Company not being able to determine the maximum number
of shares that could be required to be issued under the December Note Warrant
(see Note 4), the Company has determined that share settlement of these Warrants
is no longer within its control and reclassified the Warrants as a liability in
accordance with EITF 00-19 and SFAS 133.


                                       19



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     Based upon a valuation obtained by the Company from an independent
valuation firm, the Company recorded an expense of $17,215,000 for the three
months ended March 31, 2005 related to the issuance of the Warrants. For the
three months ended March 31, 2006, the Company recognized a gain of $8,218,019
in change in fair value of derivative. The related warrant liability as of March
31, 2006 and December 31, 2005 is $12,846,650 and $21,064,669, respectively. The
Company computed the expense of the Warrants based on the fair value of the
underlying shares and the estimated maximum number of shares of 43,254,715 that
could be issued under the Warrants. As of December 12, 2005, there was a
substantial reduction in the shares outstanding to 83,932,316 shares as a result
of the Company's settlement with OC-PIN. However, the requirement to repay the
December Note for $10.7 million may obligate the Company to issue new shares of
its common stock prior to the expected exercise of the Warrants and the
estimated maximum number of shares exercisable of 43,254,715 accordingly remains
unchanged.

     The Company computed the fair value of the Warrants based on the
Black-Scholes option pricing model with the following assumptions:

                                    March 31, 2006          December 31, 2005
                                    --------------          -----------------
Risk-free interest rate                       4.8%                       4.4%
Expected volatility                          27.9%                      28.6%
Dividend yield                                  --                         --
Expected life (years)                         2.32                       2.57
Fair value of Warrants                      $0.297                     $0.487
Market value per share                       $0.30                      $0.49

     In accordance with SFAS 150 and 133, the Company has included the December
Note value of $10.7 million in warrant liability, current, in the accompanying
consolidated balance sheets as of March 31, 2006 and December 31, 2005. Under
the terms of the December Credit Agreement, any proceeds from the sale of stock
received under the December Note Warrant that are in excess of the December Note
and related issuance costs are to be returned to the Company. Accordingly, the
fair value of the December Note Warrant would contractually continue to be $10.7
million (plus any issuance and exercise costs, which are considered immaterial).

     The Company computed the fair value, and related number of shares, of the
December Note Warrant based on the Black-Scholes option pricing model with the
following assumptions:

                                    March 31, 2006          December 31, 2005
                                    --------------          -----------------
Risk-free interest rate                       4.4%                       4.4%
Expected volatility                          23.8%                      23.9%
Dividend yield                                  --                         --
Expected life (years)                          .70                        .95
Fair value of Warrants                      $0.300                     $0.490
Number of shares                        35,666,667                 21,836,735

     Due to the fact that the Company emerged from the development stage in
2005, the Company computed the volatility of its stock based on an average of
the following public companies that own hospitals:

                  Amsurg Inc (AMSG)
                  Community Health Systems (CYH)
                  HCA Healthcare Company (HCA)
                  Health Management Associates Inc. (HMA)
                  Lifepoint Hospitals Inc. (LPNT)
                  Tenet Healthcare Corp. (THC)
                  Triad Hospitals Inc. (TRI)
                  Universal Health Services Inc., Class B (UHS)

     Although management believes this is the most reasonable and accurate
methodology to determine the Company's volatility, the circumstances affecting
volatility of the comparable companies selected may not be an accurate predictor
of the Company's volatility.


                                       20



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     NOTE 7 - RELATED PARTY TRANSACTIONS

     PCHI - The Company leases substantially all of the real property of the
acquired Tenet Hospitals from PCHI. PCHI is owned by two LLC's, which are owned
and co-managed by Dr. Shah, Dr. Chaudhuri, and Mr. Thomas. Dr. Shah was the
chairman of the Company until September 28, 2006 and is also the co-manager and
an investor in OC-PIN, which is the majority shareholder of the Company. Dr.
Chaudhuri and Mr. Thomas are the holders of the Warrants to purchase up to 24.9%
of the Company's fully diluted capital stock (see Note 5). The Company has
consolidated the financial statements of PCHI in the accompanying financial
statements in accordance with FIN 46R as the Company is the primary beneficiary
of a variable interest in PCHI. During the three months ended March 31, 2006 and
2005, the Company incurred rent expense paid to PCHI of $1,545,156 and $537,000,
respectively, which was eliminated upon consolidation.

     MANAGEMENT AGREEMENTS - In December 2004, February 2005, and March 2005,
the Company entered into seven employment agreements with its executive
officers. Four of these agreements were amended on August 5, 2006. Among other
terms, the three year, amended employment agreements provide for annual salaries
aggregating $2,790,000, total stock options to purchase 2,650,000 shares of the
Company's common stock at an exercise price equal to the mean average per share
for the ten days following the date of issuance with vesting at 33% per year,
and an annual bonus to be determined by the Board of Directors. As of March 31,
2006, the board of directors had not yet approved a stock option plan and
accordingly the Company has not granted any stock options pursuant to the
employment agreements.

     NOTE 8 - EARNINGS (LOSS) PER SHARE

     Earnings (loss) per share have been calculated under SFAS No. 128,
"Earnings per Share." SFAS 128 requires companies to compute earnings (loss) per
share under two different methods, basic and diluted. Basic earnings (loss) per
share is calculated by dividing the net earnings (loss) by the weighted average
shares of common stock outstanding during the period. Diluted earnings (loss)
per share is calculated by dividing the net earnings (loss) by the weighted
average shares of common stock outstanding during the period and dilutive
potential shares of common stock. Dilutive potential shares of common stock, as
determined under the treasury stock method, consist of shares of common stock
issuable upon exercise of stock warrants, net of shares of common stock assumed
to be repurchased by the Company from the exercise proceeds.

     Since the Company incurred losses for the three months ended March 31,
2005, antidilutive potential shares of common stock, consisting of approximately
40 million shares, issuable under warrants, have been excluded from the
calculation of diluted loss per share for that period in the following table.
The following table sets forth the computation of basic and diluted earnings
(loss) per share:

                                               Three months ended
                                                    March 31,
                                           ---------------------------
                                               2006           2005
                                           ------------   ------------
Numerator:
Net income (loss)                          $  2,535,477   $(19,856,619)
                                           ============   ============
Denominator:
  Weighted average common shares             84,281,377     88,493,611
  Warrants                                   42,946,229              -
                                           ------------   ------------
  Denominator for diluted calculation       127,227,606     88,493,611
                                           ============   ============
  Earnings (loss) per share - basic        $       0.03   $      (0.22)
  Earnings (loss) per share - diluted      $       0.02   $      (0.22)

     The number of shares into which the December Note warrant could convert is
not included in the calculation of diluted earnings Per share, as the related
December Note is not in default and thus the warrant is not vested. The
inclusion of the warrant would not change the amount of reported diluted
earnings per share.

     NOTE 9 - COMMITMENTS AND CONTINGENCIES

     OPERATING LEASES - Concurrent with the closing of the Acquisition as of
March 8, 2005, the Company entered into a sale leaseback type agreement with a
related party entity, PCHI. The Company leases substantially all of the real
estate of the acquired Hospitals and medical office buildings from PCHI. The
term of the lease for the Hospital is approximately 25 years, commencing March
8, 2005 and terminating on February 28, 2030. The Company has the option to
extend the term of this triple net lease for an additional term of 25 years.


                                       21



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     As noted in Note 7, PCHI is included in the Company's consolidated
financial statements. Accordingly, the Company's liability related to its lease
commitment with PCHI is eliminated in consolidation.

     Additionally, in connection with the Hospital Acquisition, the Company also
assumed the leases for the Chapman facility, which include buildings, land, and
other equipment with terms that were extended concurrently with the assignment
of the leases to December 31, 2023.

     Total rental expense was $454,724 and $130,509 for the three months ended
March 31, 2006 and 2005, respectively.

     CAPITAL LEASES - The Company has a long-term lease obligation for the
buildings at the Chapman facility. For financial reporting purposes, the lease
has been classified as a capital lease; accordingly, assets with a net book
value of $4,818,632 and $4,886,503 are included in property and equipment in the
accompanying consolidated balance sheets as of March 31, 2006 and December 31,
2005, respectively.

     AGREEMENT FOR COMPENSATION - In connection with the close of the
Acquisition, the Company entered into an Agreement for Compensation Related to
the 999 Medical Office Building (the "Compensation Agreement") with PCHI, a
related party (see Note 7). In the amended Asset Sale Agreement with Tenet,
certain medical office condominium units (the "Condo Units") were excluded from
the Company's Hospital Acquisition due to the tenants of the Condo Units having
the right of first refusal to purchase such real property. As a result, the
Company's purchase price of the Hospitals from Tenet was reduced by $5 million.
Pursuant to the amended Asset Sale Agreement, upon the expiration of the
tenants' rights of first refusal, Tenet will transfer title to the Condo Units
to the Company in exchange for consideration of $5 million, pro rated if less
than all of the Condo Units are transferred.

     Pursuant to the Compensation Agreement, the Company shall acquire title to
the Condo Units upon expiration of the tenants' rights of first refusal and then
transfer such title to the Condo Units to PCHI. In the event of the Company's
failure to obtain title to the Condo Units, the Company shall pay to PCHI a sum
to be agreed upon between the Company, PCHI, and the owners of PCHI, but not
less than the product of $2,500,000 multiplied by a fraction, the numerator of
which shall be the number of Condo Units not acquired by the Company and
transferred to PCHI, and the denominator equal to the total Condo Units of
twenty-two. The tenants are currently in litigation with Tenet related to the
purchase price of the Condo Units offered by Tenet to the tenants.

     As the financial statements of the related party entity, PCHI, a variable
interest entity, are included in the Company's accompanying consolidated
financial statements, management has determined that any future payment to PCHI
under the Compensation Agreement would reduce the Company's gain on sale of
assets to PCHI.

     CLAIMS AND LAWSUITS - The Company and the Hospitals are subject to various
legal proceedings, most of which relate to routine matters incidental to our
business. The results of these claims cannot be predicted, and it is possible
that the ultimate resolution of these matters, individually or in the aggregate,
may have a material adverse effect on the Company's business (both in the near
and long term), financial position, results of operations, or cash flows.
Although the Company defends itself vigorously against claims and lawsuits and
cooperates with investigations, these matters (1) could require payment of
substantial damages or amounts in judgments or settlements, which individually
or in the aggregate could exceed amounts, if any, that may be recovered under
insurance policies where coverage applies and is available, (2) cause
substantial expenses to be incurred, (3) require significant time and attention
from the Company's management, and (4) could cause the Company to close or sell
the Hospitals or otherwise modify the way its business is conducted. The Company
accrues for claims and lawsuits when an unfavorable outcome is probable and the
amount is reasonably estimable.

NOTE 10 - SUBSEQUENT EVENTS

     On September 23, 2006, Dr. Jaime Ludmir resigned from the Board of
Directors of Integrated Healthcare Holdings, Inc. (the "Company"), effective
immediately. On September 28, 2006, the Board of Directors elected Dr. Ajay G.
Meka to serve as a director of the Company to fill the vacancy on the Board
created by Dr. Ludmir's resignation. Dr. Meka was also elected Chairman of the
Board of the Company, replacing Dr. Anil Shah as Chairman.


                                       22



<PAGE>

                      INTEGRATED HEALTHCARE HOLDINGS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

     On December 22, 2006, Integrated Healthcare Holdings, Inc. (the "Company"),
the Company's subsidiaries (WMC-SA, Inc., WMC-A, Inc., Chapman Medical Center,
Inc., and Coastal Communities Hospital, Inc.), Pacific Coast Holdings
Investment, LLC, West Coast Holdings, LLC, Orange County Physicians Investment
Network, LLC, Ganesha Realty, LLC, and Medical Provider Financial Corporation II
(the "Lender"), executed Amendment No.1 to Credit Agreement, dated as of
December 18, 2006 (the "Amendment"), that amends that certain Credit Agreement,
dated as of December 12, 2005 (the "Credit Agreement"), pursuant to which the
Lender loaned to the Company a total of $10,700,000.

     The Amendment extended the "Stated Maturity Date", as defined in the Credit
Agreement, to March 2, 2007 from December 12, 2006. Under the Amendment, the
Company also agreed to pay to the Lender an extension fee of $107,000 plus
Lender's legal fees, costs and expenses of $2,500.

     Also on December 22, 2006, the parties to the Credit Agreement executed an
Agreement to Forbear (the "Forbearance Agreement") relating to the Credit
Agreement and that certain Common Stock Warrant, dated as of December 12, 2005,
issued in connection with the original Credit Agreement (the "Warrant").

     Under the Forbearance Agreement, the Company agreed with the Lender to
change the date by which the Company is required to file a registration
statement covering the resale of all the shares of common stock underlying the
Warrant to May 15, 2007, and requires the Company to use its reasonable best
efforts to have the registration statement declared effective by the Securities
and Exchange Commission as soon as practicable but no later than 90 days after
such date (or 120 days if the registration statement is reviewed by the SEC).



                                       23




<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

FORWARD-LOOKING INFORMATION

     This Transition Report on Form 10-Q contains forward-looking statements, as
that term is defined in the Private Securities Litigation Reform Act of 1995.
These statements relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of these
terms or other comparable terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including the
risks discussed under the caption "Risk Factors" in our Annual Report on Form
10-K filed on July 28, 2006 that may cause our Company's or our industry's
actual results, levels of activity, performance or achievements to be materially
different from those expressed or implied by these forward-looking statements.

     Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as may be required by applicable
law, we do not intend to update any of the forward-looking statements to conform
these statements to actual results.

     As used in this report, the terms "we," "us," "our," "the Company,"
"Integrated Healthcare Holdings" or "IHHI" mean Integrated Healthcare Holdings,
Inc., a Nevada corporation, unless otherwise indicated.

OVERVIEW

     ACQUISITION - Prior to March 8, 2005, we were primarily a development stage
company with no material operations and no revenues from operations. On
September 29, 2004, the Company entered into a definitive agreement to acquire
four hospitals from subsidiaries of Tenet Healthcare Corporation ("Tenet"), and
completed the transaction on March 8, 2005 (the "Acquisition"). Effective March
8, 2005, we acquired and began operating the following four hospital facilities
in Orange County, California (referred to in this report as our "Hospitals"):

     o 282-bed Western Medical Center in Santa Ana;
     o 188-bed Western Medical Center in Anaheim;
     o 178-bed Coastal Communities Hospital in Santa Ana; and
     o 114-bed Chapman Medical Center in Orange.

     We enter into agreements with third-party payers, including government
programs and managed care health plans, under which rates are based upon
established charges, the cost of providing services, predetermined rates per
diagnosis, fixed per diem rates or discounts from established charges. During
the 24 days ended March 31, 2005, substantially all of Tenet's negotiated rate
agreements were assigned to our Hospitals. Our own Medicare provider numbers
were received in April 2005. California State Medicaid Program provider numbers
were received in June 2005.

     ACQUISITION DEBT - Effective March 3, 2005, in connection with the
Acquisition, the Company and its subsidiaries collectively entered into a credit
agreement (the "Credit Agreement") with Medical Provider Financial Corporation
II ("the Lender"), whereby the Company obtained initial financing in the form of
a loan with interest at the rate of 14% per annum in the amount of $80,000,000
of which $30,000,000 is in the form of a non-revolving Line of Credit and
$50,000,000 (less $5,000,000 repayment on December 12, 2005) is in the form of
an Acquisition Loan (collectively, the "Obligations"). The Company used the
proceeds from the $50 million Acquisition Loan and $3 million from the Line of
Credit to complete the Acquisition. The Acquisition Loan and Line of Credit are
secured by a lien on substantially all of the assets of the Company and its
subsidiaries, including without limitation, a pledge of the capital stock by the
Company in its wholly owned Hospitals.

     LONG TERM LEASE COMMITMENT WITH VARIABLE INTEREST ENTITY - Concurrent with
the close on the Acquisition, the Company sold substantially all of the real
property acquired in the Acquisition to Pacific Coast Holdings Investment, LLC
("PCHI"). The Company sold $5 million in limited partnership interests to
finance the Acquisition and PCHI guaranteed the Company's Acquisition Loan. PCHI
is a related party entity that is affiliated with the Company through common
ownership and control. Upon such sale, the Company entered into a 25 year lease
agreement with PCHI involving substantially all of the real property acquired in
the Acquisition. In accordance with Financial Accounting Standards Board
Interpretation Number 46R, "Consolidation of Variable Interest Entities (revised
December 2003)--an interpretation of ARB No. 51," PCHI is a variable interest
entity and has been included in the accompanying consolidated financial
statements as of March 31, 2006 and December 31, 2005, and for the three months
ended March 31, 2006 and 2005.


                                       24



<PAGE>

     The Company remains primarily liable under the Acquisition Loan note, not
withstanding its guarantee by PCHI, and this note is cross-collateralized by
substantially all of the Company's assets and all of the real property of the
Hospitals. All of the Company's operating activities are directly affected by
the real property that was sold to PCHI. Given these factors, the Company has
indirectly guaranteed the indebtedness of PCHI. The Company is standing ready to
perform on the Acquisition Loan should PCHI not be able to perform and has
undertaken a contingent obligation to make future payments if those triggering
events or conditions occur.

     ACCOUNTS PURCHASE AGREEMENT - In March 2005, the Company entered into a two
year Accounts Purchase Agreement (the "APA") with Medical Provider Financial
Corporation I, an unrelated party (the "Buyer"). The Buyer is an affiliate of
the Lender (see Note 4). The APA provides for the sale of 100% of the Company's
eligible accounts receivable, as defined, without recourse. After accounts
receivable are sold, the APA requires the Company to provide billing and
collection services, maintain the individual patient accounts, and resolve any
disputes that arise between the Company and the patient or other third party
payer. The Company accounts for its sale of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities - A Replacement of FASB Statement 125."

     The accounts receivable are sold weekly based on billings for each
Hospital. The purchase price is comprised of two components, the advance rate
amount and the deferred portion amount. The advance rate amount is based on the
historical collection experience for accounts receivable similar to those
included in a respective purchase. At the time of sale, the Buyer advances 95%
of the advance rate amount (the "95% Advance"-note; increased from 85% effective
January 1, 2006) to the Company and holds the remaining 5% as security reserve
funds on sold accounts (the "Security Reserve Funds"), which is non-interest
bearing. Except in the case of a continuing default, the Security Reserve Funds
can not exceed 25% (the "25% Cap") of the aggregate advance rate amount, as
defined, of the open purchases. The Company is charged a "purchase discount"
(the "Transaction Fee") of 1.35% per month of the advance rate amount of each
purchase until closed, at which time the Buyer deducts the Transaction Fee from
the Security Reserve Funds. Collections are applied on a dollar value basis, not
by specific identification, to the respective Hospital's most aged open
purchase. The deferred portion amount represents amounts the Company expects to
collect, based on regulations, contracts, and historical collection experience,
in excess of the advance rate amount.

     The following table reflects the components of accounts receivable and
receivable from Buyer of accounts as of March 31, 2006 and December 31, 2005.


                                                March 31,     December 31,
                                                  2006           2005
                                               ------------   ------------
                                               (unaudited) (as restated)
     Accounts receivable:

       Governmental                            $  5,732,795    $10,394,875
       Non-governmental                          10,827,181      8,728,887
                                               ------------   ------------
                                                 16,559,976     19,123,762
     Less allowance for doubtful accounts        (2,432,084)    (3,148,276)
                                               ------------   ------------
        Net patient accounts receivable          14,127,892     15,975,486
                                               ------------   ------------
     Security Reserve Funds                      14,787,640     12,127,337
     Deferred purchase price receivables         14,354,540      9,337,703
                                               ------------    -----------
        Receivable from Buyer of accounts        29,142,180     21,465,040
                                               ------------   ------------
                                               $ 43,270,072   $ 37,440,526
                                               ============   ============

     Although 100% of the Company's accounts receivable, as defined, is
purchased by the Buyer, certain payments (generally payments that cannot be
attributed to specific patient account, such as third party settlements,
capitation payments and MediCal Disproportionate Share Hospital ("DSH")
subsidies (collectively "Other Payments") are retained by the Company and not
applied to the purchases processed by the Buyer. In the opinion of our
management, after consultation with the Buyer, DSH payments and CalOptima
capitation premium payments of $0.6 million and $5.2 million, respectively, for
the three months ended March 31, 2006, are excludable from application to the
Security Reserve Funds. However, if cash collections on purchases are not
sufficient to recover the Buyer's advance rate amount and related transaction
fees, the Buyer could be entitled to funds the Company has received in Other
Payments or require transfer of substitute accounts to cover any such shortfall.
Based on collection history under the APA to date, the Company's management
believes the likelihood of the Buyer exercising this right is remote.


                                       25



<PAGE>

     Any other term of the APA notwithstanding, the parties agreed as follows:
(a) all accounts derived from any government program payer including, without
limitation, the Medicare, Medi-Cal, or CHAMPUS programs, shall be handled as set
forth in a Deposit Account Security Agreement entered into by the parties, which
provides for the segregation and control of governmental payments by the
Company, (b) the parties agreed to take such further actions and execute such
further agreements as are reasonably necessary to effectuate the purpose of the
APA and to comply with the laws, rules, and regulations of the Medicare and
other government programs regarding the reassignment of claims and payment of
claims to parties other than the provider ("Reassignment Rules"), and (c) until
such time as accounts are delivered by the Company to the Buyer controlled
lockbox, the Company shall at all times have sole dominion and control over all
payments due from any government program payer. The Company's management (i)
believes that the foregoing method of segregating and controlling payments
received from governmental program payers complies with all applicable
Reassignment Rules, and (ii) the Company intends to request an opinion from the
Federal Center for Medicare and Medicaid Services ("CMS") that such method is
compliant with the Reassignment Rules in the view of CMS. As of March 31,2006
the Company has $13,629,497 in governmental accounts receivable that have been
reported as sold subject to the foregoing limitation.

     The Company records estimated Transaction Fees and estimated servicing
costs related to the sold accounts receivable at the time of sale. For the three
months ended March 31, 2006, the Company incurred a loss on sale of accounts
receivable of $2,807,805. No accounts receivable were sold as of March 31, 2005.

     Effective March 31, 2006, an amendment to the APA reduced the required
Security Reserve Funds amount as a percentage of the total advance rate amount
outstanding from 25% to 15% (the "15% Cap"). At March 31, 2006, the Security
Reserve Funds balance of $14,787,640was in excess of the 15% Cap. As a result,
$6,677,916 was released to the Company subsequent to March 31, 2006.

     COMMON STOCK WARRANTS - On January 27, 2005, the Company entered into a
Rescission, Restructuring and Assignment Agreement with Dr. Kali Chaudhuri and
Mr. William Thomas, both of whom have ownership interests in PCHI (the
"Restructuring Agreement"). Previously, the Company had obtained financing from
Dr. Chaudhuri and Mr. Thomas and had issued to them a $500,000 secured
convertible promissory note that was convertible into approximately 88.8% of the
Company's issued and outstanding common stock on a fully-diluted basis, a $10
million secured promissory note, and a Real Estate Purchase Option agreement
originally dated September 28, 2004 to purchase 100% of substantially all of the
real property in the Acquisition for $5 million (the "Real Estate Option"), all
of which together with related accrued interest payable pursuant to the terms of
the notes were rescinded and cancelled. Pursuant to the Restructuring Agreement,
the company released its initial deposit of $10 million plus accrued interest on
the Acquisition back to Dr. Chaudhuri and issued non-convertible secured
promissory notes totaling $1,264,014 and warrants to purchase up to 74,700,000
shares of the Company's common stock (the "Warrants") to Dr. Chaudhuri and Mr.
Thomas (not to exceed 24.9% of the Company's fully diluted capital stock at the
time of exercise). Concurrent with the close of the Acquisition, the Company
repaid the non-convertible secured promissory notes of $1,264,014 to Dr.
Chaudhuri and Mr. Thomas.

     The Warrants are exercisable beginning January 27, 2007 and expire 3.5
years from the date of issuance. The exercise price for the first 43 million
shares purchased under the Warrants is $0.003125 per share, and the exercise or
purchase price for the remaining 31.7 million shares is $0.078 per share if
exercised between January 27, 2007 and July 26, 2007, $0.11 per share if
exercised between July 27, 2007 and January 26, 2008, and $0.15 per share
thereafter until expiration of the warrants.

     Effective December 12, 2005, the Company entered into a credit agreement
(the "December Credit Agreement") with the Credit Parties and the Lender. Under
the December Credit Agreement, the Lender loaned $10,700,000 to the Company as
evidenced by a promissory note (the "December Note"), of which $5 million was
used to pay down the Acquisition Loan. Interest is payable monthly at the rate
of 12% per annum and the December Note is due on December 12, 2006.

     The December Note is secured by substantially all of the Company's assets.
In addition, the Company issued a common stock warrant (the "December Note
Warrant") to the Lender as collateral under the December Note. The December Note
Warrant is exercisable by the Lender only in the event that a default has
occurred and is continuing on the December Note. The December Note Warrant
entitles the Lender to purchase the number of shares of the Company's common
stock equal in value to the amount of the December Note not repaid at maturity,
plus accrued interest and lender fees for an aggregate exercise price of $1.00,
regardless of the number of shares acquired. The December Note Warrant is
exercisable from and after December 12, 2005 until the occurrence of either a


                                       26



<PAGE>

termination of the December Credit Agreement by the Lender or the Company's
payment in full of all obligations under the December Credit Agreement. The
Company is obligated to register the estimated number of shares of common stock
issuable upon exercise of the December Note Warrant by filing a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
no later than ninety days prior to the maturity date of the December Note. If
the Company proposes to file a registration statement under the Securities Act
on or before the expiration date of the December Note Warrant, then the Company
must offer to the holder of the December Note Warrant the opportunity to include
the number of shares of common stock as the holder may request.

     Based upon a valuation obtained by the Company from an independent
valuation firm, the Company recorded a warrant expense of $17,215,000 for the
three months ended March 31, 2005 related to the issuance of the Warrants. The
Company computed the expense of the Warrants based on the fair value of the
underlying shares at the date of grant and the estimated maximum number of
shares of 43,254,715 that could be issued under the Warrants. The Company
recognized a gain of $8,218,019 in change in fair value of derivative in the
accompanying consolidated statement of operations for the three months ended
March 31, 2006.

     As a result of the Company not being able to determine the maximum number
of shares that could be required to be issued under the December Note Warrant
issued on December 12, 2005, the Company has determined that share settlement of
the Warrants issued on January 27, 2005 is no longer within its control and
reclassified the Warrants as a liability on December 12, 2005 in accordance with
EITF No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" and SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities." As of December 12, 2005, there
was a substantial reduction in the shares outstanding to 83,932,316 shares as a
result of the Company's settlement with OC-PIN. However, the requirement to
repay the December Note for $10.7 million may obligate the Company to issue new
shares of its common stock prior to the expected exercise of the Warrants and
the estimated maximum number of shares exercisable of 43,254,715 accordingly
remains unchanged.

     In accordance with SFAS 150 and 133, the Company has included the December
Note value of $10.7 million in warrant liability, current, in the accompanying
consolidated balance sheets as of March 31, 2006 and December 31, 2005. Under
the terms of the December Credit Agreement, any proceeds from the sale of stock
received under the December Note Warrant that are in excess of the December Note
and related issuance costs are to be returned to the Company. Accordingly, the
fair value of the December Note Warrant would contractually continue to be $10.7
million (plus any issuance and exercise costs, which are considered immaterial).

     The Company computed the fair value of the Warrants, and the fair value of
the December Note Warrant and related number of shares, based on the
Black-Scholes option pricing model. Due to the fact that the Company emerged
from the development stage during 2005, the Company computed the volatility of
its stock based on an average of public companies that own hospitals. Although
management believes this is the most reasonable and accurate methodology to
determine the Company's volatility, the circumstances affecting volatility of
the comparable companies selected may not be an accurate predictor of the
Company's volatility.

SIGNIFICANT CHALLENGES

     COMPANY - Our acquisition of the Hospitals involves numerous potential
risks, including:

     o    potential loss of key employees and management of acquired companies;
     o    difficulties integrating acquired personnel and distinct cultures;
     o    difficulties integrating acquired companies into our proposed
          operating, financial planning and financial reporting systems;
     o    diversion of management attention; and
     o    assumption of liabilities and potentially unforeseen liabilities,
          including liabilities for past failure to comply with healthcare
          regulations.

     Our acquisition also involved significant cash expenditures, debt
incurrence and integration expenses that could seriously strain our financial
condition. If we are required to issue equity securities to raise additional
capital, existing stockholders will likely be substantially diluted, which could
affect the market price of our stock.


                                       27



<PAGE>

     INDUSTRY - Our Hospitals receive a substantial portion of their revenues
from Medicare and Medicaid. The healthcare industry is experiencing a strong
trend toward cost containment, as the government seeks to impose lower
reimbursement and resource utilization group rates, limit the scope of covered
services and negotiate reduced payment schedules with providers. These cost
containment measures generally have resulted in a reduced rate of growth in the
reimbursement for the services that we provide relative to the increase in our
cost to provide such services.

     Changes to Medicare and Medicaid reimbursement programs have limited, and
are expected to continue to limit, payment increases under these programs. Also,
the timing of payments made under the Medicare and Medicaid programs is subject
to regulatory action and governmental budgetary constraints resulting in a risk
that the time period between submission of claims and payment could increase.
Further, within the statutory framework of the Medicare and Medicaid programs, a
substantial number of areas are subject to administrative rulings and
interpretations which may further affect payments.

     Our business is subject to extensive federal, state and, in some cases,
local regulation with respect to, among other things, participation in the
Medicare and Medicaid programs, licensure and certification of facilities, and
reimbursement. These regulations relate, among other things, to the adequacy of
physical property and equipment, qualifications of personnel, standards of care,
government reimbursement and operational requirements. Compliance with these
regulatory requirements, as interpreted and amended from time to time, can
increase operating costs and thereby adversely affect the financial viability of
our business. Because these regulations are amended from time to time and are
subject to interpretation, we cannot predict when and to what extent liability
may arise. Failure to comply with current or future regulatory requirements
could also result in the imposition of various remedies including (with respect
to inpatient care) fines, restrictions on admission, denial of payment for all
or new admissions, the revocation of licensure, decertification, imposition of
temporary management or the closure of a facility or site of service.

     We are subject to periodic audits by the Medicare and Medicaid programs,
which have various rights and remedies against us if they assert that we have
overcharged the programs or failed to comply with program requirements. Rights
and remedies available to these programs include repayment of any amounts
alleged to be overpayments or in violation of program requirements, or making
deductions from future amounts due to us. These programs may also impose fines,
criminal penalties or program exclusions. Other third-party payer sources also
reserve rights to conduct audits and make monetary adjustments in connection
with or exclusive of audit activities.

     The healthcare industry is highly competitive. We compete with a variety of
other organizations in providing medical services, many of which have greater
financial and other resources and may be more established in their respective
communities than we are. Competing companies may offer newer or different
centers or services than we do and may thereby attract patients or customers who
are presently patients, customers or are otherwise receiving our services.

     An increasing trend in malpractice litigation claims, rising costs of
malpractice litigation, losses associated with these malpractice lawsuits and a
constriction of insurers have caused many insurance carriers to raise the cost
of insurance premiums or refuse to write insurance policies for hospital
facilities. Also, a tightening of the reinsurance market has affected property,
auto and excess liability insurance carriers. Accordingly, the costs of all
insurance premiums have increased.

     We receive all of our inpatient services revenue from operations in Orange
County, California. The economic condition of this market could affect the
ability of our patients and third-party payers to reimburse us for our services,
through its effect on disposable household income and the tax base used to
generate state funding for Medicaid programs. An economic downturn, or changes
in the laws affecting our business in our market and in surrounding markets,
could have a material adverse effect on our financial position, results of
operations and cash flows.

LIQUIDITY AND CAPITAL RESOURCES


     The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and settlement
of obligations in the normal course of business. The Company generated income of
$2,535,477 (primarily attributable to a non-cash gain from change in fair value
of derivative of $8,218,019) during the three months ended March 31, 2006 and
has a working capital deficit of $80,176,753 at March 31, 2006. For the three
months ended March 31, 2006, cash used in operations was $10,867,938.


                                       28



<PAGE>

     On or around May 9, 2005, the Company received notice that it was in
default of its Acquisition Loan and Line of Credit. Effective December 12, 2005,
the Company entered into a one year credit agreement for $10,700,000, which
included an amendment that (i) declared cured the aforementioned default, (ii)
required the Company to pay $5,000,000 against its Acquisition Loan, (iii)
required the Company to obtain $10,700,000 in additional new capital
contributions to pay in full and retire all amounts due and owing under the one
year credit agreement and (iv) included certain indemnities and releases in
favor of the Lender. Accordingly, on December 12, 2005, the Company paid
$5,000,000 against the Acquisition Loan reducing its outstanding balance to $45
million. As of March 31, 2006, the Company had outstanding short term debt
aggregating $81,030,734, of which $10,700,000 (included within Warrant Liability
- Current) was classified as warrant liability, current. See "Overview - Common
Stock Warrants" above in this Item 2.

     Effective January 1, 2006, the Company and the Lender agreed to an
amendment to the Acquisition Loan and Line of Credit that changed the interest
rate from 14% to prime plus 5.75% (13.25% at March 31,2006). As a result, future
increases in the prime rate would increase the Company's interest expense.
     Our working capital deficit as of March 31, 2006 was $80.2 million and, for
the three months then ended, cash used by operations was $10.9 million.
Management is working on improvements in several areas that the Company believes
will mitigate these deficits:

     1.   Net operating revenues: The Hospitals serve a disproportionate number
          of indigent patients and receive governmental revenues and subsidies
          in support of care for these patients. We have received increases in
          Medicaid, Medicaid DSH, and Orange County, CA (CalOptima) payments.
          Increased reimbursement and support in these areas represent $0.7
          million per month in committed improvement and an additional $0.1 to
          $0.2 million per month still under discussion. Commercial managed care
          rate improvements are approximately $0.2 million per month in 2006 in
          comparison with 2005. Adjusting for calendar days, revenues for the
          three months ended March 31, 2006 were $4.6 million higher than for
          the same period in the preceding year.

     2.   Operating expenses: Management is working aggressively to reduce cost
          without reduction in service levels. These efforts have in large part
          been offset by inflationary pressures. However, a net improvement of
          $0.2 to $0.3 million per month is a reasonable expectation for 2006.
          Adjusting for calendar days, operating expenses for the three months
          ended March 31, 2006 were $3.7 million higher than for the same period
          in the preceding year.

     3.   Financing costs: The Company completed the Acquisition of the
          Hospitals with a high level of debt financing. Additionally, the
          Company entered into an Accounts Purchase Agreement, and is incurring
          significant discounts on the sale of accounts receivable. As described
          in the notes to the consolidated financial statements, the largest
          investor was unable to meet all the commitments under the stock
          purchase agreement. As a result, the Company incurred additional
          interest costs from default rates and higher than planned borrowings.
          We are seeking new equity investments in the Company; however we have
          not yet secured alternative sources of capital or re-negotiated our
          commitments with our lenders. The Company intends to work with
          interested parties to place an additional $20 million in equity, of
          which $10.7 million will be applied toward the payment of the December
          Note and the remainder will reduce the level required when the term
          notes are refinanced. Management believes the reduction in leverage
          and refinancing, if successful, will yield reductions in the discount
          on sales of accounts receivable. The combined impact of these changes
          is expected to yield from $0.4 to $0.5 million in reduced capital
          costs per month. There can be no assurance that we will be able raise
          additional funds on terms acceptable to us or at all. Such additional
          equity, if available, is likely to substantially dilute the interest
          of our current shareholders in the Company. These steps are also
          subject to the approval of the Company's Board of Directors which
          currently is comprised of three representatives of the lead investor,
          two outside directors, and one officer of the Company and,
          accordingly, may not be assured.

     The foregoing analysis presumes that capital expenditures to replace
equipment can be kept to an immaterial amount in the short term. It is the
intent of management to fund future capital expenditures from operations.
     On December 22, 2006, Integrated Healthcare Holdings, Inc. executed
Amendment No.1 to the Credit Agreement, dated as of December 18, 2006 (the
"Amendment"), that amends that certain Credit Agreement, dated as of December
12, 2005 (the "Credit Agreement"), pursuant to which the Lender loaned to the
Company a total of $10,700,000.
     The Amendment extended the "Stated Maturity Date", as defined in the Credit
Agreement, to March 2, 2007 from December 12, 2006. Under the Amendment, the
Company also agreed to pay to the Lender an extension fee of $107,000 plus
Lender's legal fees, costs and expenses of $2,500.
     Also on December 22, 2006, the parties to the Credit Agreement executed an
Agreement to Forbear (the "Forbearance Agreement") relating to the Credit
Agreement and that certain Common Stock Warrant, dated as of December 12, 2005,
issued in connection with the original Credit Agreement (the "Warrant").

                                       29



<PAGE>

     Under the Forbearance Agreement, the Company agreed with the Lender to
change the date by which the Company is required to file a registration
statement covering the resale of all the shares of common stock underlying the
Warrant to May 15, 2007, and requires the Company to use its reasonable best
efforts to have the registration statement declared effective by the Securities
and Exchange Commission as soon as practicable but no later than 90 days after
such date (or 120 days if the registration statement is reviewed by the SEC).

     As of March 31, 2006, the Company had approximately $4.7 million available
under its $30 million Line of Credit. The Line of Credit is to be used for the
purpose of providing (a) working capital financing for the Company and its
subsidiaries, (b) funds for other general corporate purposes of the Company and
its subsidiaries, and (c) other permitted purposes.

     Effective March 31, 2006, an amendment to the APA will accelerate the
Company's cash receipts in connection with its sales of accounts receivable. The
amendment reduced the required accumulated Security Reserve Funds amount as a
percentage of the total advance rate amount outstanding from 25% to 15%. At
March 31, 2006, the Security Reserve Funds balance of $14,787,640 was in excess
of the 15% Cap. As result, $6,677,916 was released to the Company subsequent to
March 31, 2006.

     On February 5, 2007, Dr. Chaudhuri and Mr. Thomas notified the company that
they were exercising their warrants for 24.9% of the Company's common stock
subject to regulatory approval. The Company will issue the stock when approval
is received from the appropriate regulatory agencies.


RESULTS OF OPERATIONS

     The following table sets forth, for the three months ended March 31, 2006
and 2005, our unaudited consolidated statements of operations expressed as a
percentage of net operating revenues. The three months ended March 31, 2005
reflects only 24 days of operations from the Acquisition date.

                                                        Three months ended
                                                             March 31,
                                                       ---------------------
                                                         2006         2005
                                                       --------     --------

     Net operating revenues                               100.0%       100.0%
     Operating expenses                                   103.6        104.8
                                                       --------     --------
     Operating loss                                        (3.6)        (4.8)
                                                       --------     --------
     Other income (expense):
     Interest expense, net                                 (3.1)        (3.0)
     Common stock warrant expense                             -        (79.2)
     Change in fair value of derivative                     9.5            -
                                                       --------     --------
     Other income (expense), net                            6.4        (82.2)
                                                       --------     --------
     Income (loss) before provision for income taxes
       and minority interest                                2.8        (87.0)
     Provision for income taxes                               -         (4.3)
     Minority interest in variable interest entity          0.1            -
                                                       --------     --------

     Net income (loss)                                      2.9%       (91.3)%
                                                       ========     ========

CONSOLIDATED RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 2006 AND MARCH
31, 2005

NET OPERATING REVENUES
     Our consolidated net operating revenues, on a calendar day basis (using 24
days for the three months ended March 31, 2005- "Acquisition" days), increased
5.7% during the three months ended March 31, 2006 as a result of contract rate
increases. Average daily census remained unchanged.

OPERATING EXPENSES
     Operating expenses decreased as a percent of revenues by 1.2% during the
three months ended March 31, 2006 which equates to inflationary increases (net
of efficiencies) of 4.8%.

     The provision for doubtful accounts as a percentage of revenue decreased to
9.6% for the three months ended March 31, 2006 from 14.4% in the comparable
period in 2005, more than offsetting the $2.8 million loss on sale of accounts
receivable incurred during the three months ended March 31, 2006.

     Salaries and benefits (adjusted for Acquisition days) increased $2.0
million or 4.3% during the three months ended March 31, 2006, slightly under the
average wage increase which ranged from 5-6%.

     Supplies increased $0.6 million or 5.8% during the three months ended March
31, 2006 primarily due to inflationary pressures.


                                       30


<PAGE>

     Remaining operating expenses (adjusted for Acquisition days) increased
approximately $4.6 million during the three months ended March 31, 2006. The
most significant increases in other operating expenses related to medical fees
for emergency coverage, data processing fees for system conversions and medical
equipment repairs.


OPERATING LOSS

     Loss from operations as a percent of revenue improved by 1.2% during the
three months ended March 31, 2006 due to rate improvements in excess of cost
increases.

OTHER INCOME (EXPENSE), NET

     Other income (expense), net, changed primarily as a result of the changes
in fair value of warrants. The initial valuation of warrants issued in the first
quarter of 2005 was $17,215,000. As described more fully in our Annual Report on
Form 10-K for the year ended December 31, 2005, this was revalued to $17,604,292
on December 12, 2005 and subsequently increased to $21,064,669 as of December
31, 2005. As of March 31, 2006, the fair value of these warrants had decreased
to $12,846,650, resulting in a gain of $8,218,019 during the three months ended
March 31, 2006.

     Interest costs of 3.1% of revenue during the three months ended March 31,
2006 and 3.0% of revenue during the three months ended March 31, 2005 were
relatively consistent between the periods as a percentage of revenue.

PROVISION FOR INCOME TAXES
     The provision for income taxes for the three months ended March 31, 2006
was $0 compared to $0.9 million for the comparable period in 2005. The provision
for income taxes during the three months ended March 31, 2005 was reversed in
the subsequent quarter as a result of the impact of the implementation of the
Accounts Purchase Agreement.

NET INCOME (LOSS)
     Net income for the three months ended March 31, 2006 was $2.5 million
compared to a net loss of $19.9 million for the three months ended March 31,
2005. The decrease in the loss in 2006 was primarily due to the decrease in
Common stock expense of $17.2 million and the increase in the fair value of
derivative of $8.2 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     REVENUE RECOGNITION - Net operating revenues are recognized in the period
in which services are performed and are recorded based on established billing
rates (gross charges) less estimated discounts for contractual allowances,
principally for patients covered by Medicare, Medicaid, managed care and other
health plans. Gross charges are retail charges. They are not the same as actual
pricing, and they generally do not reflect what a hospital is ultimately paid
and therefore are not displayed in the consolidated statements of operations.
Hospitals are typically paid amounts that are negotiated with insurance
companies or are set by the government. Gross charges are used to calculate
Medicare outlier payments and to determine certain elements of payment under
managed care contracts (such as stop-loss payments). Because Medicare requires
that a hospital's gross charges be the same for all patients (regardless of
payer category), gross charges are also what hospitals charge all other patients
prior to the application of discounts and allowances.

     Revenues under the traditional fee-for-service Medicare and Medicaid
programs are based primarily on prospective payment systems. Discounts for
retrospectively cost-based revenues and certain other payments, which are based
on the Hospitals' cost reports, are estimated using historical trends and
current factors. Cost report settlements for retrospectively cost-based revenues
under these programs are subject to audit and administrative and judicial
review, which can take several years until final settlement of such matters are
determined and completely resolved. Since the laws, regulations, instructions
and rule interpretations governing Medicare and Medicaid reimbursement are
complex and change frequently, the estimates recorded by the Hospitals could
change by material amounts. The Company has established settlement receivables
as of March 31, 2006 and December 31, 2005 of $2,620,448 and $2,273,248,
respectively.

     Estimates of revenues from Medicare are recorded at the time services are
rendered. These estimates of settlement receivables or payables related to the
revenue are updated periodically and at year end and at the time the cost report
is filed with the fiscal intermediary. Typically no further updates are made to
the estimates until the final Notice of Program Reimbursement is received. At
which time the cost report for that year has been audited by the fiscal
intermediary. There could be a one to two year time lag between the submission
of a cost report and receipt of the Final Notice of Program Reimbursement.

     Outlier payments, which were established by Congress as part of the
diagnosis-related groups (DRG) prospective payment system, are additional
payments made to hospitals for treating Medicare patients who are costlier to
treat than the average patient in the same DRG. To qualify as a cost outlier, a
hospital's billed (or gross) charges, adjusted to cost, must exceed the payment
rate for the DRG by a fixed threshold established annually by the Centers for
Medicare and Medicaid Services of the United State Department of Health and
Human Services (CMS). Under Sections 1886(d) and 1886(g) of the Social Security

                                         31
<PAGE>

Act, CMS must project aggregate annual outlier payments to all prospective
payment system hospitals to be not less than 5% or more than 6% of total DRG
payments (Outlier Percentage). The Outlier Percentage is determined by dividing
total outlier payments by the sum of DRG and outlier payments. CMS annually
adjusts the fixed threshold to bring expected outlier payments within the
mandated limit. A change to the fixed threshold affects total outlier payments
by changing (1) the number of cases that qualify for outlier payments, and (2)
the dollar amount hospitals receive for those cases that still qualify. The most
recent change to the cost outlier threshold that became effective on October 1,
2005 was a decrease from $25,800 to $23,600, which CMS projects will result in
an Outlier Percentage of 5.1%. The Medicare fiscal intermediary calculates the
cost of a claim by multiplying the billed charges by the cost-to-charge ratio
from the hospital's most recent filed cost report.

     The Hospitals received new provider numbers during the year ended December
31, 2005 and, because there was no specific history, the Hospitals were
reimbursed for outliers based on published statewide averages. If the computed
cost exceeds the sum of the DRG payment plus the fixed threshold, the hospital
receives 80% of the difference as an outlier payment. Medicare has reserved the
option of adjusting outlier payments, through the cost report, to the hospital's
actual cost-to-charge ratio. Upon receipt of the current payment cost-to-charge
ratios from the fiscal intermediary, any variance between current payments and
the estimated final outlier settlement will be reported. As of March 31, 2006,
the Company has recorded reserves for excess outlier payments due to the
difference between the Hospitals' actual cost to charge rates and the statewide
average in the amount of $2,890,637. These reserves offset against the third
party settlement receivables and are included as a net payable of $270,189 in
due to governmental payers in the Company's consolidated balance sheet as of
March 31, 2006.

     The Hospitals receive supplemental payments from the State of California to
support indigent care (MediCal Disproportionate Share Hospital payments or
"DSH"). During the three months ended March 31, 2006, the Hospitals received
payments of $575,000. The Company estimates an additional $6,587,219 is
receivable based on State correspondence, which is included in due from
governmental payers in the consolidated balance sheet as of March 31, 2006.

     Revenues under managed care plans are based primarily on payment terms
involving predetermined rates per diagnosis, per-diem rates, discounted
fee-for-service rates and/or other similar contractual arrangements. These
revenues are also subject to review and possible audit by the payers. The payers
are billed for patient services on an individual patient basis. An individual
patient's bill is subject to adjustment on a patient-by-patient basis in the
ordinary course of business by the payers following their review and
adjudication of each particular bill. The Hospitals estimate the discounts for
contractual allowances utilizing billing data on an individual patient basis. At
the end of each month, the Hospitals estimate expected reimbursement for patient
of managed care plans based on the applicable contract terms. These estimates
are continuously reviewed for accuracy by taking into consideration known
contract terms as well as payment history. Although the Hospitals do not
separately accumulate and disclose the aggregate amount of adjustments to the
estimated reimbursements for every patient bill, management believes the
estimation and review process allows for timely identification of instances
where such estimates need to be revised. Management does not believe there were
any adjustments to estimates of individual patient bills that were material to
its net operating revenues. Management is not aware of any material claims,
disputes, or unsettled matters with any payers that would affect revenues that
have not been adequately provided for in the Company's consolidated financial
statements as of and for the three months ended March 31, 2006.

     The Hospitals provide charity care to patients whose income level is below
200% of the Federal Poverty Level with only a co-payment charged to the patient.
The Hospitals' policy is to not pursue collection of amounts determined to
qualify as charity care; and accordingly, the Hospitals do not report the
amounts in net operating revenues or in the provision for doubtful accounts.
Patients whose income level is between 200% and 300% of the Federal Poverty
Level may also be considered under a catastrophic provision of the charity care
policy. Patients without insurance who do not meet the Federal Poverty Level
guidelines are offered assistance in applying for Medicaid and other programs
they may be eligible for, such as state disability, Victims of Crime, or county
indigent programs. Patient advocates from the Hospitals' Medical Eligibility
Program (MEP) screen patients in the hospital and determine potential linkage to
financial assistance programs. They also expedite the process of applying for
these government programs. Based on average revenue for comparable services from
all other payers, revenues foregone under the charity policy, including indigent
care accounts, for the three months ended March 31, 2006 were approximately $1.6
million.

     Receivables from patients who are potentially eligible for Medicaid are
classified as Medicaid pending under the MEP, with appropriate contractual
allowances recorded. If the patient does not quality for Medicaid, the
receivables are reclassified to charity care and written off, or they are
reclassified to self-pay and adjusted to their net realizable value through the
provision for doubtful accounts. Reclassifications of Medicaid pending accounts
to self-pay do not typically have a material impact on the results of operations
as the estimated Medicaid contractual allowances initially recorded are not
materially different than the estimated provision for doubtful accounts recorded
when the accounts are reclassified. All accounts classified as pending Medicaid
are reserved for their full value in contractual allowances when they reach 180
days old.


                                       32

<PAGE>

     SALE OF ACCOUNTS RECEIVABLE - During the three months ended March 31, 2006,
the Company incurred $2,807,805 in loss on sale of accounts receivable. See
"Overview - Accounts Purchase Agreement" above in this Item 2.

     PROVISION FOR DOUBTFUL ACCOUNTS - The Company provides for accounts
receivable that could become uncollectible by establishing an allowance to
reduce the carrying value of such receivables to their estimated net realizable
value. The Hospitals estimate this allowance based on the aging of their
accounts receivable, historical collections experience for each type of payer
and other relevant factors. There are various factors that can impact the
collection trends, such as changes in the economy, which in turn have an impact
on unemployment rates and the number of uninsured and underinsured patients,
volume of patients through the emergency department, the increased burden of
co-payments to be made by patients with insurance and business practices related
to collection efforts. These factors continuously change and can have an impact
on collection trends and the estimation process.

     The Company's policy is to attempt to collect amounts due from patients,
including co-payments and deductibles due from patients with insurance, at the
time of service while complying with all federal and state laws and regulations,
including, but not limited to, the Emergency Medical Treatment and Labor Act
(EMTALA). Generally, as required by EMTALA, patients may not be denied emergency
treatment due to inability to pay. Therefore, until the legally required medical
screening examination is complete and stabilization of the patient has begun,
services are performed prior to the verification of the patient's insurance, if
any. In non-emergency circumstances or for elective procedures and services, it
is the Hospitals' policy, when appropriate, to verify insurance prior to a
patient being treated.

     During the three months ended March 31, 2006, the Company recorded a
provision for doubtful accounts of $8,298,928.

     INSURANCE - The Company accrues for estimated general and professional
liability claims, to the extent not covered by insurance, when they are probable
and reasonably estimable. The Company has purchased as primary coverage a
claims-made form insurance policy for general and professional liability risks.
The policy limits are $1,000,000 per individual claim and $5,000,000 in the
aggregate. For the policy year ended March 8, 2006, retentions by the Company
were $500,000 per claim up to a maximum of $3,000,000 for claims covered during
that policy year. As of March 8, 2006, those retentions changed to $2,000,000
per claim up to a maximum of $8,000,000 for the policy year. Estimated losses
within general and professional liability retentions from claims incurred and
reported, along with incurred but not reported (IBNR) claims, are accrued based
upon actuarially determined projections and are discounted to their net present
value using a weighted average risk-free discount rate of 5%. To the extent that
subsequent claims information varies from our estimates, the liability is
adjusted in the period such information becomes available

     The Company has purchased as primary coverage occurrence form insurance
policies to help fund its obligations under its workers' compensation program
for which the Company is responsible to reimburse the insurance carrier for
losses within a deductible of $500,000 per claim, to a maximum aggregate
deductible of $9,000,000. The company accrues for estimated workers'
compensation claims, to the extent not covered by insurance, when they are
probable and reasonably estimable. The ultimate costs related to this program
include expenses for deductible amounts associated with claims incurred and
reported in addition to an accrual for the estimated expenses incurred in
connection with IBNR claims. Claims are accrued based upon actuarially
determined projections and are discounted to their net present value using a
weighted average risk-free discount rate of 5%. To the extent that subsequent
claims information varies from our estimates, the liability is adjusted in the
period such information becomes available

     COMMON STOCK WARRANTS - During the three months ended March 31, 2006 and
2005, the Company recorded a gain of $8,218,019 and a warrant expense of
$17,215,000, respectively, related to warrants. See "Overview - Common Stock
Warrants" above in this Item 2.

RECENT ACCOUNTING STANDARDS

     In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140."
SFAS 155, among other things: permits the fair value re-measurement of any
hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation and establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation. SFAS 155 is effective for all financial
instruments acquired or issued in fiscal years beginning after September 15,
2006. The Company is currently evaluating the effect that adopting this
statement will have on the Company's financial position and results of
operations.


                                       33



<PAGE>

     In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140," with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
SFAS 156 permits the choice of the amortization method or the fair value
measurement method, with changes in fair value recorded in income, for the
subsequent measurement for each class of separately recognized servicing assets
and servicing liabilities. The statement is effective for years beginning after
September 15, 2006, with earlier adoption permitted. The Company is currently
evaluating the effect that adopting this statement will have on the Company's
financial position and results of operations.

     In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109". FIN
48 clarifies the circumstances in which a tax benefit may be recorded with
respect to uncertain tax positions. The Interpretation provides guidance for
determining whether tax benefits may be recognized with respect to uncertain tax
positions and, if recognized, the amount of such tax benefits that may be
recorded. Under the provisions of FIN 48, tax benefits associated with a tax
position may be recorded only if it is more likely than not that the claimed tax
position will be sustained upon audit. The statement is effective for years
beginning after December 15, 2006. The Company is currently evaluating the
effect that adopting this statement will have on the Company's financial
position and results of operations.

     In September 2006, the FASB issued FASB Statement No. 157, "Fair Value
Measurements". This Statement establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value, and requires
additional disclosures about fair value measurements. FASB 157 applies only to
fair value measurements that are already required or permitted by other
accounting standards. The statement is effective for financial statements for
fiscal years beginning after November 15, 2007, with earlier adoption permitted.
The Company is currently evaluating the effect that adopting this statement will
have on the Company's financial position and results of operations.

                                       34



<PAGE>

     In September, 2006, the Securities and Exchange Commission released Staff
Accounting Bulletin 108. SAB 108 provides interpretative guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. SAB 108 is effective for
fiscal years ending after November 15, 2006. The Company adopted SAB 108 during
the interim quarterly period ended September 30, 2006. The effect of adopting
this statement was considered in evaluating the impact of an error that was
identified during October, 2006 in the overstatement of net operating revenues
and accounts receivable by $616,791 that existed at December 31, 2005. The
Company's management determined that the error was material to the its Financial
statements for year ended December 31, 2005 was necessary to write-off patient
accounts receivable for services provided under capitated CalOptima managed care
contracts. The overstatement of accounts receivable, net operating revenues,
income before minority interest and provision for income taxes and net income
and understatement of accumulated deficit and stockholders' deficiency by
$616,791 was determined by management to be immaterial to the financial
statements as of and for the year ended December 31, 2005 in accordance with
Staff Accounting Bulletin No. 108 ("SAB 108"). However, in accordance with the
dual approach outlined in SAB 108 management determined that the impact of the
$616,791 error was material to the unaudited condensed consolidated financial
statements as of and for the three months ended March 31, 2006. Based on
management's evaluation of the error, SAB 108 requires the Company to correct
the December 31, 2005 financial statements for the immaterial error and make
such correction in the filing of the next annual report on Form 10-K.

     The following table sets forth the amounts as originally reported in the
consolidated balance sheet as of December 31, 2005 and statement of operations
for the year ended December 31, 2005 filed as part of Form 10-K and the effects
of the correction of the error as described above:

                                                  As of December 31, 2005
                                                ----------------------------
                                                As previously
                                                  reported      As restated
                                                ------------    ------------
Balance Sheet:
  Accounts receivable                           $ 16,592,277    $ 15,975,486
  Total assets                                   135,045,980     134,429,189
  Accumulated deficit                            (46,656,725)    (47,273,516)
  Total stockholders' deficiency                 (30,446,823)    (31,063,614)

                                               Year ended December 31, 2005
                                                ----------------------------
                                                As previously
                                                  reported      As restated
                                                ------------    ------------
Statement of Operations:
  Net operating revenues                        $284,314,409    $283,697,618
  Operating loss                                 (15,222,366)    (15,839,157)
  Income (loss) before minority interest
    and provision for income taxes               (46,212,018)    (46,828,809)
  Net income (loss)                              (44,558,367)    (45,175,158)
  Basic and fully diluted earnings per share    $      (0.49)    $     (0.50)


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     At March 31, 2006, we did not have any investment in or outstanding
liabilities under market rate sensitive instruments. We do not enter into
hedging instrument arrangements. On December 12, 2005 we entered into a
derivative financial instrument solely for the purpose of securing a related
loan. This is discussed more fully in the Notes 4 and 6 to the consolidated
financial statements. We have no off-balance sheet arrangements.


                                       35



<PAGE>

ITEM 4. CONTROLS AND PROCEDURES.

     The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based closely on the definition of
"disclosure controls and procedures" in Rule 15d-15(e). The Company's disclosure
controls and procedures are designed to provide a reasonable level of assurance
of reaching the Company's desired disclosure control objectives. In designing
and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

     We previously conducted an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2006 and June 30, 2006 and
found them to be effective as of such dates. However, we subsequently conducted
a re-evaluation of the effectiveness of our disclosure controls and procedures
as of March 31, 2006 and June 30, 2006 and identified certain material
weaknesses, discussed further below. With the participation of the Company's
Chief Executive Officer and Chief Financial Officer, management re-evaluated the
Effectiveness of our system of internal control over financial reporting as a
result of the restatement of the financial statements for the quarterly periods
ended March 31, 2006 and June 30, 2006, based on the framework in Internal
Control-Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission.

     Based on these evaluations and re-evaluations, management determined that
the Company's system of disclosure controls and procedures was not effective as
of March 31, 2006 and June 30, 2006, and the Company's systems of internal
control over financial reporting was not effective as of March 31, 2006 and June
30, 2006, due to the presence of certain material weaknesses. These weaknesses
contributed to the need for restatements of our financial statements for the
quarterly period ended March 31, 2006 on Form 10-Q/A as filed on November 3,
2006 and the quarterly period ended June 30, 2006 on Form 10-QA as filed on
November 7, 2006.

     The Company's management determined that the Company's unaudited condensed
consolidated financial statements for the periods ended March 31, 2006 and June
30, 2006, should be restated due to the an error in the overstatement of net
revenues and accounts receivable. The Company determined that the restatements
were necessary to write-off patient accounts receivable for services provided
under capitated contracts. The correction of errors resulted in a decrease in
net operating revenues, income before minority interest and provision for income
taxes and net income of $322,887 for the three months ended March 31, 2006 and a
decrease in accounts receivable and an increase in accumulated deficit and
stockholders' deficiency of $939,678 as of March 31, 2006.

     Management has identified, as a material weakness contributing to these
restatements, that the Company's controls over the timely preparation and review
of account reconciliations were inadequate. Management has implemented new
procedures to monitor the timely preparation and review of account
reconciliations. In addition, management has implemented new procedures to
ensure that material errors are prevented or detected on a timely basis.

                                       36



<PAGE>

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     We and our subsidiaries are involved in various legal proceedings most of
which relate to routine matters incidental to our business. We do not believe
that the outcome of these matters is likely to have a material adverse effect on
the Company.

ITEM 1A. RISK FACTORS

     There are no material changes from the risk factors previously disclosed in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

 ITEM 6. EXHIBITS.

     Exhibits required to be filed are listed below and except where
incorporated by reference, immediately follow. References to the "Commission"
mean the U.S. Securities and Exchange Commission.

Exhibit   Description
Number
-----------------------------------------------------------------------

10.1      Employment Severance Agreement and General Release of Claims and
          Waiver of the Right to Cancel or Revoke Employment Severance Agreement
          and General Release of Claims (incorporated herein by reference from
          Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with
          the Commission on January 26, 2006). *

31.1      Certification of Chief Executive Officer Pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002.

31.2      Certification of Chief 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.

* Previously filed.


                                       37



<PAGE>

                                    SIGNATURE

     In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


                                         INTEGRATED HEALTHCARE HOLDINGS, INC.


Dated: February 8, 2007                  By: /s/ Steven R. Blake
                                             -----------------------------------
                                             Steven R. Blake
                                             Chief Financial Officer
                                             (Principal Financial Officer)



                                       38