UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-Q


(Mark
                One)ý
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF 1934For
                the quarterly period ended September 30, 2005ORo
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF 1934For
                the transition period
                from                             to


Commission
      File Number: 0-23511


Integrated
      Healthcare Holdings, Inc.


(Exact
      name of small business issuer as specified in its charter)


Nevada
            
            87-0412182(State
                or other jurisdiction
                of
            
            (I.R.S.
                Employer Identification No.)incorporation
                or organization)1301
                N. Tustin Ave.
            
            92705Santa
                Ana, California
            
            (Zip
                Code)(Address
                of principal executive offices)




(714) 953-3503
              (Registrant’s
                telephone number, including area code)695
                Town Center Drive, Suite 260, Costa Mesa, California 92626
              (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 o





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act).


Yes o No x




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





There
      were 124,559,000 shares outstanding of the issuer’s Common Stock as of
      September 30, 2005









**Integrated
      Healthcare Holdings, Inc.**


**Form
      10-Q**




**Table
      of Contents**


Page
              Number**PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements:Unaudited
                Condensed Consolidated Balance Sheet as of September 30, 2005 and
                December
                31, 2004
            2Unaudited
                Condensed Consolidated Statement of Operations for the three and
                nine
                months ended September 30, 2005 and 2004
            3Unaudited
                Condensed Consolidated Statement of Stockholders’ Equity as of September
                30, 2005 and December 31, 2004
            4Unaudited
                Condensed Consolidated Statement of Cash Flows for the nine months
                ended
                September 30, 2005 and 2004
            5Condensed
                Notes to Unaudited Condensed consolidated financial
                statements
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            26Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            33Item
                4.
            Controls
                and Procedures
            33**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            34Item
                6.
            Exhibits
            34**SIGNATURES**
            35








**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**





INTEGRATED
      HEALTHCARE HOLDINGS, INC.


Consolidated
        Balance Sheet
 (Unaudited)


**ASSETS****September
                    30,****2005**
                
                **December
                      31,**
                    **2004**(Unaudited)Current
                    assets:Cash
                    and cash equivalents
                
                $
                3,070,059
                
                $
                69,454Accounts
                      receivable, net of allowance for doubtful
                    accounts
                      of $28,802,636
                
                
                45,484,769
                
                
                —Inventories
                    of supplies, at cost
                
                
                5,935,850
                
                
                —Prepaid
                    expenses and other assets
                
                
                13,415,250
                
                
                63,48967,905,928
                
                
                132,943Property
                    and equipment, net
                
                
                58,222,873
                
                
                57,423Investment
                    in hospital asset purchase
                
                
                —
                
                
                11,142,145Deferred
                    loan fees, net of accumulated amortization of $481,545
                
                
                1,451,455
                
                
                —Total
                    assets
                
                $
                127,580,256
                
                $
                11,332,511**LIABILITIES
                    AND STOCKHOLDERS' DEFICIENCY**Current
                    liabilitiesSecured
                    notes payable
                
                $
                88,351,971
                
                $
                11,264,013Accounts
                    payable
                
                
                20,489,469
                
                
                156,142Accrued
                    compensation and benefits
                
                
                12,209,156
                
                
                800,313Other
                    current liabilities
                
                
                9,094,882
                
                
                —Income
                    taxes payable
                
                
                4,149,000
                
                
                —Total
                    current liabilities
                
                
                134,294,478
                
                
                12,220,468Capital
                    lease obligations, net of current of $204,141
                
                
                3,325,007
                
                
                —Minority
                    interest in variable interest entity
                
                
                3,644,465
                
                
                —Commitments
                    and contingencies
                
                
                —
                
                
                —Stockholders'
                    deficiency:Common
                        stock, $0.001 par value; 250,000,000 shares
                      authorized;
                        124,559,000 and 20,780,000 shares issued and
                      outstanding,
                        respectively
                
                
                124,559
                
                
                20,780Common
                    stock warrants; 74,700,000 outstanding
                  (41,298,523
                    exercisable at September 30, 2005)
                
                
                27,987,100
                
                
                —Additional
                    paid in capital
                
                
                12,040,487
                
                
                1,189,621Deferred
                    warrant expense
                
                
                (11,552,927
                )
                
                —Accumulated
                    deficit
                
                
                (42,282,913
                )
                
                (2,098,358
                )Total
                    stockholders' deficiency
                
                
                (13,683,694
                )
                
                (887,957
                )Total
                    liabilities and stockholders' deficiency
                
                $
                127,580,256
                
                $
                11,332,511
 The
      accompanying condensed notes are an integral part of these unaudited condensed
      consolidated financial statements





2


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.**


**Condensed
        Consolidated Statement of Operations**
 **(Unaudited)**


**Three
                  Month Ended**
              
              **Nine
                  Months Ended****September
                  30, 2005**
              
              **September
                  30, 2004**
              
              **September
                  30, 2005**
              
              **September
                  30, 2004****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**Net
                  operating revenues
              
              $
              91,620,003
              
              $
              —
              
              $
              196,557,569
              
              $
              —Operating
                  expenses:Salaries
                  and benefits
              
              
              48,273,049
              
              
              349,054
              
              
              109,162,998
              
              
              952,200Supplies
              
              
              11,783,830
              
              
              —
              
              
              26,339,612
              
              
              —Provision
                  for doubtful accounts
              
              
              15,587,741
              
              
              —
              
              
              30,060,501
              
              
              —Other
                  operating expenses
              
              
              18,457,022
              
              
              126,401
              
              
              39,640,378
              
              
              415,218Depreciation
                  and amortization
              
              
              707,015
              
              
              15,593
              
              
              1,872,072
              
              
              46,370Common
                  stock warrant expense
              
              
              —
              
              
              —
              
              
              16,434,173
              
              
              —94,808,657
              
              
              491,048
              
              
              223,509,734
              
              
              1,413,788Operating
                  loss
              
              
              (3,188,654
              )
              
              (491,048
              )
              
              (26,952,165
              )
              
              (1,413,788
              )Interest
                  expense
              
              
              4,304,599
              
              
              —
              
              
              9,038,925
              
              
              —Loss
                  including minority interest and
                before
                  provision for income taxes
              
              
              (7,493,253
              )
              
              (491,048
              )
              
              (35,991,090
              )
              
              (1,413,788
              )Provision
                  for income taxes
              
              
              2,315,000
              
              
              —
              
              
              5,549,000
              
              
              —Minority
                  interest in variable
                interest
                  entity
              
              
              (1,151,113
              )
              
              —
              
              
              (1,355,535
              )
              
              —Net
                  loss
              
              $
              (8,657,140
              )
              $
              (491,048
              )
              $
              (40,184,555
              )
              $
              (1,413,788
              )Per
                  share data:Basic
                  and fully diluted:Loss
                  per common share
              
              $
              (0.12
              )
              $
              (0.02
              )
              $
              (0.43
              )
              $
              (0.07
              )Weighted
                  average number of
                common
                  shares outstanding
              
              
              69,853,444
              
              
              20,115,652
              
              
              94,310,167
              
              
              19,781,971


The
      accompanying condensed notes are an integral
      part of these unaudited condensed consolidated financial
      statements


3


**INTEGRATED
        HEALTHCARE HOLDINGS, INC.**
 **Condensed
        Consolidated Statement of Shareholders’ Equity**
 **(Unaudited)**


Additional
              
              DeferredCommon
                  Stock
              
              Common
                  Stock Warrants
              
              Paid-in
              
              Warrant
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Expense
              
              Deficit
              
              TotalBalance,
                  December 31, 2003
              
              
              19,380,000
              
              $
              19,380
              
              
              —
              
              $
              —
              
              $
              551,021
              
              $
              —
              
              $
              (217,781
              )
              $
              352,620Issuance
                  of debt for the
                acquisition
                  of MMG, Inc.
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (40,386
              )
              
              (40,386
              )Issuance
                  of common stock for
                cash
                  at $0.25 per share
              
              
              200,000
              
              
              200
              
              
              —
              
              
              —
              
              
              49,800
              
              
              —
              
              
              —
              
              
              50,000Issuance
                  of common stock for
                cash
                  at $0.50 per share
              
              
              1,200,000
              
              
              1,200
              
              
              —
              
              
              —
              
              
              588,800
              
              
              —
              
              
              —
              
              
              590,000Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,840,191
              )
              
              (1,840,191
              )Balance,
                  December 31, 2004
              
              
              20,780,000
              
              $
              20,780
              
              
              —
              
              $
              —
              
              $
              1,189,621
              
              $
              —
              
              $
              (2,098,358
              )
              $
              (887,957
              )Issuance
                  of common stock for
                cash
                  at $0.50 per share
              
              
              1,179,000
              
              
              1,179
              
              
              —
              
              
              —
              
              
              598,322
              
              
              —
              
              
              —
              
              
              599,501Issuance
                  of common stock for
                cash
                  to OCPIN
              
              
              102,600,000
              
              
              102,600
              
              
              —
              
              
              —
              
              
              9,997,400
              
              
              —
              
              
              —
              
              
              10,100,000Issuance
                    of common stock options
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              255,144
              
              
              —
              
              
              —
              
              
              255,144Issuance
                    of common stock warrants
              
              
              —
              
              
              —
              
              
              74,700,000
              
              
              27,987,100
              
              
              —
              
              
              (27,987,100
              )
              
              —
              
              
              —Common
                  stock warrants
                expensed
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              16,434,173
              
              
              —
              
              
              16,434,173Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (40,184,555
              )
              
              (40,184,555
              )Balance,
                  Sept 30, 2005
              
              
              124,559,000
              
              $
              124,559
              
              
              74,700,000
              
              $
              27,987,100
              
              $
              12,040,487
              
              $
              (11,552,927
              )
              $
              (42,282,913
              )
              $
              (13,683,694
              )


The
      accompanying condensed notes are an integral
      part of these unaudited condensed consolidated financial
      statements.




4


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.**


**Condensed
        Consolidated Statement of Cash Flows**
 **(Unaudited)**


**Nine
                Months Ended****September
                30, 2005**
            
            **September
                30, 2004**Cash
                flows from operating activities:Net
                loss
            
            $
            (40,184,555
            )
            $
            (1,413,788
            )Adjustments
                to reconcile net loss to cash used in operating
                activities:Depreciation
                and amortization expense
            
            
            1,835,145
            
            
            46,370Common
                stock warrant expense
            
            
            16,689,317
            
            
            —Minority
                interest in variable interest entity
            
            
            (1,355,535
            )Increase
                in prepaid expense and other assets
            
            
            (11,038,604
            )
            
            —Increase
                in net accounts receivable
            
            
            (45,484,769
            )
            
            —Increase
                in income taxes payable
            
            
            4,149,000
            
            
            —Increase
                (decrease) in accounts payable
            
            
            20,333,327
            
            
            45,070Increase
                in accrued compensation and benefits
            
            
            11,530,863
            
            
            739,540Increase
                in other accrued liabilities
            
            
            8,890,741
            
            
            —Decrease
                in inventories of supplies
            
            
            83,145
            
            
            —Net
                cash used in operating activities
            
            
            (34,551,925
            )
            
            (582,808
            )Cash
                flows from investing activities:Acquisition
                of hospital assets
            
            
            (63,171,676
            )
            
            —Purchase
                of property and equipment
            
            
            —
            
            
            (19,549
            )Acquisition
                of MMG, Inc., net of cash acquired
            
            
            —
            
            
            8,536Net
                cash used in investing activities
            
            
            (63,171,676
            )
            
            (11,013
            )Cash
                flows from financing activities:Issuance
                of secured promissory note, net of costs
            
            
            48,067,000
            
            
            —Proceeds
                from line of credit
            
            
            25,330,734
            
            
            —Advances
                from accounts receivable purchase agreement
            
            
            13,021,237
            
            
            —Proceeds
                from issuance of common stock
            
            
            10,699,501
            
            
            370,000Repayment
                of secured notes
            
            
            (1,394,266
            )
            
            (100,000
            )Proceeds
                from minority interest in variable interest entity
            
            
            5,000,000
            
            
            —Advances
                from shareholders
            
            
            —
            
            
            73,285Net
                cash provided by financing activities
            
            
            100,724,206
            
            
            343,285Net
                increase (decrease) in cash
            
            
            3,000,605
            
            
            (250,536
            )Cash
                and cash equivalents, beginning of period
            
            
            69,454
            
            
            265,000Cash
                and cash equivalents, end of period
            
            $
            3,070,059
            
            $
            14,464Supplemmental
                disclosure of noncash transactions:Issuance
                of promissory notes for Hospital Acquisition
            
            $
            53,000,000
            
            $
            60,000Consolidation
                of variable interest entity
            
            $
            54,758,312
            
            $
            —Expense
                of common stock warrants
            
            $
            16,689,317
            
            $
            —Rescinded
                  secured promissory note for the
                return
                  of initial deposit on hospital assets
            
            $
            10,000,000
            
            $
            —Interest
                paid
            
            $
            7,939,508
            
            $
            —Income
                taxes paid
            
            $
            1,400,000
            
            $
            —




The
      accompanying condensed notes are an integral
      part of these unaudited condensed consolidated financial
      statements.




5


**INTEGRATED
        HEALTHCARE HOLDINGS, INC.**
 **Condensed
        Notes to Unaudited Condensed Consolidated Financial
        Statements**
 **September
        30, 2005**




NOTE
      1 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





*Acquisition* - 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 (the “Subsidiaries”)
      formed for the purpose of completing the Hospital 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 92705, a fee interest in the administration building
      at
      1301 North Tustin Avenue, Santa Ana, CA 92705, 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 92805; (iii) a fee interest in the Coastal Communities
      Hospital at 2701 South Bristol Street, Santa Ana, CA 92704, 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
      92869, and a fee interest in the medical office building at 2617 East Chapman
      Avenue, Orange, CA; and (v) the furniture, fixtures and contract rights
      associated with the Hospitals.





The
      results of operations of the acquired assets from the acquisition date (March
      8,
      2005) have been included in the Company’s consolidated statement of operations
      for the three and nine months ended September 30, 2005.As a result of the
      Acquisition, the Company has commenced its planned principal operations and
      accordingly is no longer considered a development stage enterprise.





As
      discussed further in Note 7, concurrent with the close of the Acquisition,
      the
      Company entered into a sale-leaseback transaction with a Pacific Coast Holdings
      Investment, LLC (“PCHI”), a then wholly owned subsidiary, involving all the real
      property acquired in the Acquisition, except for the fee interest in the medical
      office building at 2617 East Chapman Avenue. PCHI was then immediately sold
      to
      certain major equity holders in the Company. In this transaction the Company
      received consideration of $5 million in cash plus PCHI’s guarantee of $50
      million in debt issued by the Company in the Acquisition. Because, among other
      reasons, the Company remains primarily liable under the $50 million debt, this
      transaction does not qualify for sale-leaseback accounting and the $50 million
      in debt has not been removed from the Company’s consolidated balance sheet at
      September 30, 2005. However, because PCHI now holds title to the real property,
      the Company’s interest in the real estate was converted to a lease interest
      pursuant to the lease entered into between PCHI, as lessor, and the Company,
      as
      lessee as part of the sale-leaseback transaction. Additionally, as further
      discussed under *Consolidation* below,
      Company management has determined that generally accepted accounting principles
      require that the financial statements of PCHI must be included in the condensed
      consolidated financial statements of the Company under generally accepted
      accounting principles.





*Consolidation
      -* The
      condensed consolidated financial statements include the accounts of Integrated
      Healthcare Holdings, Inc. (“the Company”) and its wholly owned subsidiaries,
      Mogel Management Group, Inc. (“MMG”) and its four hospital subsidiaries located
      in Orange County, California (collectively, the “Hospitals”):


Western
                  Medical Center - Anaheim
              Anaheim,
                  CA 188 bedsWestern
                  Medical Center - Santa Ana
              Santa
                  Ana, CA 282 bedsCoastal
                  Communities Hospital
              Santa
                  Ana, CA 178 bedsChapman
                  Medical Center
              Orange,
                  CA 114 beds
  6
 **INTEGRATED
        HEALTHCARE HOLDINGS, INC.** **Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 2005**


Additionally,
      generally accepted accounting principles require that a company consolidate
      the
      financial statements of any entity that cannot finance its activities without
      additional subordinated financial support, and for which one company provides
      the majority of that support through means other than ownership. As discussed
      further in Note 9, the Company has determined that it provides to the entity
      that purchased the Hospitals’ real estate, PCHI, the majority of its financial
      support through various sources including lease payments, remaining primarily
      liable under the $50 million debt, and cross-collateralization of the Company’s
      non real property assets to secure the $50 million debt. Accordingly, the
      accompanying condensed consolidated financial statements include the accounts
      of
      PCHI from the date of the real estate sale, March 8, 2005.





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





*Company
      Operations* - The
      Company, through the Hospitals, operates in a single industry segment, the
      operation of general hospitals and related healthcare facilities. The
      accompanying 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 losses from continuing
      operations of $8,657,140 and $40,184,555 (inclusive of a warrant issuance
      expense incurred in connection with the Hospital acquisitions of $16,434,173)
      during the three months and nine months ended September 30, 2005, respectively
      and has negative working capital of $(66,388,550) at September 30, 2005. In
      addition, on or around May 9, 2005, the Company received a notice of default
      from Medical Provider Financial Corporation II (“Medical Provider”), which is
      the lender under the $50 million acquisition loan and under a working capital
      line of credit that has an outstanding balance of $25.3 million as of September
      30, 2005. The default has caused the acquisition loan to be classified as a
      current liability as of September 30, 2005. These factors, among others,
      indicate a need for the Company to take action to resolve its financing issues
      and operate its business on a profitable basis.





Management
      is working to restructure the debt with Medical Provider and believes that
      the
      Company’s existing cash flow from operations and the Company’s ability to raise
      additional capital will be sufficient to meet its continuing obligations for
      the
      foreseeable future. The Company has requested and PCHI has agreed to permit
      the
      Company to use the Hospitals’ real property as collateral for the purposes of
      joint financing of Company’s business operation for an initial period of
      time.





*Condensed
      Consolidated Financial Statements* - The
      accompanying financial statements have been prepared by the Company without
      audit. In the opinion of management, all adjustments (which include only normal
      recurring adjustments) necessary to present fairly its consolidated financial
      position at September 30, 2005, and its consolidated results of operations
      for
      the three months and nine months ended September 30, 2005 and 2004, respectively
      and the statement of changes in cash flows for the nine months ended September
      30, 2005 and 2004 have been made. Financial information at December 31, 2004
      and
      for the year then ended included in these condensed consolidated financial
      statements has been taken from the Company’s audited financial statements for
      the year ended December 31, 2004.





Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with generally accepted accounting principles in the
      United States of America have been condensed or omitted. It is suggested that
      these condensed financial statements be read in conjunction with the financial
      statements and notes thereto included in the Company’s December 31, 2004 audited
      condensed consolidated financial statements. The results of operations for
      the
      periods ended September 30, 2005 and 2004 are not necessarily indicative of
      the
      operating results for the full year.




7


**INTEGRATED
        HEALTHCARE HOLDINGS, INC.**
 **Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 2005**





*Organization* -
      Integrated Healthcare Holdings, Inc., (“the Company”) was organized under the
      laws of the State of Utah on July 31, 1984 under the name of Aquachlor
      Marketing. The Company 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 the Company was reinstated
      by
      the State of Utah. In December 1988, the Company 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, the Company received a Certificate of Revival from the State of Nevada
      using the name First Deltavision, Inc. In March 2004, the Company changed its
      name to Integrated Healthcare Holdings, Inc.




*Use
      of Estimates* -
      The
      accounting and reporting policies of the Company conform to accounting
      principles generally accepted in the United State of American and prevailing
      practices for investor-owned entities within the healthcare industry. The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of American requires management to
      make
      estimates and assumptions that affect the amounts reported in the 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 the Hospitals operate. Although
      management believes that adjustments considered necessary for fair presentation
      have been included, actual results may vary from those estimates.





*Net
      Patient Service Revenue* -
      Net
      patient service revenue is recognized in the period in which services are
      performed and is recorded based on established billing rates (gross charges)
      less estimated discounts for contractual allowances, principally for patients
      covered by Medicate, 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 condensed 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.





Percentages
      of net patient service revenue, by payer type, for the Hospitals for the nine
      months ended September 30, 2005 were as follows:





**Nine
                months ended**
              **September
                30, 2005**Medicare
            21%Medicaid
            16%Managed
                care
            42%Indemnity,
                self-pay and other
            21%





Revenues
      under the traditional fee-for-service Medicare and Medicaid programs are based
      primarily on prospective payment systems. Discounts for retrospectively
      cost-based revenues, which were more prevalent in earlier periods, 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. 
      Because
      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.




8


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.** **Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 2005**


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). 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. 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.





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%.





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 the month,
      the Hospitals estimate expected reimbursement for patient of manage d 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 patient service
      revenue.





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 combined 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
      patient service revenue 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. The amount of gross charges foregone under the
      charity policy, including indigent care accounts, for the three months and
      nine
      months ended September 30, 2005 were approximately $4,995,605 and $9,642,417
      respectively.




9


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.** **Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 2005**




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 of
      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 fully reserved when they reach 180 days old.





*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 and nine months ended September 30, 2005, the Company recorded
      provisions for doubtful accounts of $15,587,741 and $30,060,501
      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.





*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.




10


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.** **Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 2005**




The
      Company uses the straight-line method of depreciation for buildings, building
      improvements, and equipment over their estimated useful lives as
      follows:




Buildings
                  and improvements
              4
                  to 25 yearsEquipment
              3
                  to 15 years


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 September 30, 2005.





*Medical
      Claims Incurred but not Reported -* The
      Company is contracted with CalOptima, which is a county sponsored entity that
      operates similar 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 to the
      Company’s specific hospitals. The Company recognizes these capitation fees as
      revenues on a monthly basis for providing comprehensive health care services
      for
      the period. The Company does not have contractual obligations with
      HMO’s.





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. The 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 SFAS No. 5, 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 nine months ended September 30, 2005, the Company recorded
      net revenues from CalOptima of approximately $2,410,000, net of IBNR reserves
      of
      $2,728,000. The Company’s direct cost of providing services to patient members
      in IHHI facilities is recorded as an operating expense.




*Stock-Based
      Compensation* -
      Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
      Compensation, encourages, but does not require, companies to record compensation
      cost for stock-based employee compensation plans at fair value. The Company
      has
      chosen to account for stock-based compensation using the intrinsic value method
      prescribed in previously issued standards.




11


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.** **Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 2005**




Accordingly,
      compensation cost for stock options issued to employees is measured as the
      excess, if any, of the fair market value of the Company’s stock at the date of
      grant over the amount an employee must pay to acquire the stock. Compensation
      is
      charged to expense over the shorter of the service or vesting period. Stock
      options issued to non-employees are recorded at the fair value of the services
      received or the fair value of the options issued, whichever is more reliably
      measurable, and charged to expense over the service period.




*Fair
      Value of*  *Financial
      Instruments -* The
      Company considers all liquid interest-earning investments with a maturity of
      three months or less at the date of purchase to be cash equivalents. Short-term
      investments generally mature between three months and nine months from the
      purchase date. All cash and short-term investments are classified as available
      for sale and are recorded at market using the specific identification method;
      unrealized gains and losses are reflected in other comprehensive income. Cost
      approximates market for all classifications of cash and short-term
      investments.





*Net
      Loss per Common Share* - Net
      loss per share is calculated in accordance with Statement of Financial
      Accounting Standards No. 128, Earnings Per Share. Basic net loss per share
      is
      based upon the weighted average number of common shares outstanding. Diluted
      net
      loss per share is based on the assumption that options and warrants are included
      in the calculation of diluted earnings per share, except when their effect
      would
      be anti-dilutive. Dilution is computed by applying the treasury stock method.
      Under this method, options and warrants are assumed to be exercised at the
      beginning of the period (or at the time of issuance, if later), and as if funds
      obtained thereby were used to purchase common stock at the average market price
      during the period.





*Impairment
      of Long-Lived Assets* -
      The Company continually monitors events or changes in circumstances that could
      indicate that the carrying amount of long-lived assets to be held and used,
      including intangible assets, may not be recoverable. The determination of
      recoverability is based on an estimate of undiscounted future cash flows
      resulting from the use of the asset and its eventual disposition. When
      impairment is indicated for a long-lived asset, the amount of impairment loss
      is
      the excess of net book value over fair value. Long-lived assets to be disposed
      of are reported at the lower of carrying amount or fair value less costs to
      sell. As of September 30, 2005, the Company has determined that no impairment
      of
      its long-lived assets exists.





*Goodwill
      and Intangible Assets* -
      On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
      Statement of Financial Accounting Standards (“SFAS”) 141, Business Combinations,
      and SFAS 142, Goodwill and Intangible Assets. Under these new standards, all
      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 its 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 September 30, 2005 no goodwill
      had been recorded on acquisitions.




*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 nine months ended September 30, 2005.




12


**INTEGRATED
      HEALTHCARE HOLDINGS,
      INC.** **Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 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 Statement of Financial Accounting Standards
      No. 131. 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 hospitals share certain
      resources and they benefit from many common clinical and management practices.
      Accordingly, we aggregate the region into a single reportable operating
      segment.




*Recently
      Enacted Accounting Standards* - On
      October 13, 2004, the Financial Accounting Standards Board issued Statement
      123R, Share-Based Payment, which requires all companies to measure compensation
      cost for all share-based payments, including employee stock options, at fair
      value. The statement is effective for the Company as of the fiscal year
      commencing January 1, 2006. The statement generally requires that such
      transactions be accounted for using a fair-value-based method and recognized
      as
      expenses in the consolidated statements of operations. This standard also
      requires that the modified prospective transition method be used, under which
      the Company will recognize compensation cost for (1) the fair value of new
      awards granted, modified or settled after the effective date of the
      SFAS 123R; and (2) a portion of the fair value of each option and stock
      grant made to employees or directors prior to the implementation date that
      represents the unvested portion of these share-based awards as of such date.
      The
      measurement of compensation cost for awards that are not fully vested as of
      the
      effective date of the SFAS 123R would be based on the same estimate
      that
      the Company used to previously value its grants under SFAS 123.





As
      a
      result of SFAS 123R, the Company will be required to expense the fair
      value
      of its stock option grants rather than disclose the impact on its consolidated
      statement of operations within the Company’s footnotes, as is current practice.
      Additionally, if it chooses to do so, SFAS 123(R) permits the Company to adopt
      the new share-based award accounting by retrospectively restating results for
      all periods presented to facilitate period-to-period comparison.





In
      January 2003, the Financial Accounting Standards Board issued FIN 46,
“Consolidation of Variable Interest Entities,” which requires consolidation of
      certain entities in which equity investors do not have the characteristics
      of a
      controlling financial interest or do not have sufficient equity at risk for
      the
      entity to finance its activities without additional subordinated financial
      support from other parties. Paragraph 1 of ARB 51 states that condensed
      consolidated financial statements are usually necessary for a fair presentation
      when one of the companies in the group directly or indirectly has a controlling
      financial interest in the other companies. Paragraph 2 states that “the usual
      condition for a controlling financial interest is ownership of a majority voting
      interest...” However, application of the majority voting interest requirement in
      ARB 51 to certain types of entities may not identify the party with a
      controlling financial interest because the controlling financial interest may
      be
      achieved through arrangements that do not involve voting interests. Application
      of Interpretation 46 or Interpretation 46(R) is required in financial statements
      of public entities that have interests in variable interest entities or
      potential variable interest entities commonly referred to as special-purpose
      entities for periods ending after December 15, 2003. See Note 7 regarding the
      Company’s implementation of FIN 46 (R).




13


**INTEGRATED
      HEALTHCARE HOLDINGS,
      INC.** **Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 2005**
  NOTE
          2 -
          ACQUISITION





The
      purchase price, after all purchase price adjustments, of the Acquisition
      amounted to $66,164,700. The fair value of the tangible assets acquired and
      liabilities assumed consisted of the following:


Property
                  and equipment
              
              $
              59,493,353Inventories
                  of supplies
              
              
              6,018,995Prepaid
                  expenses and other current assets
              
              
              2,460,874Debt
                  issuance costs
              
              
              1,933,000Capital
                  lease obligations
              
              
              (3,659,401
              )Other
                  assumed liabilities
              
              
              (82,121
              )$
              66,164,700


The
      Company financed the asset purchase and related financing costs (Note 6) by
      obtaining a $50 million acquisition debt, drawing $3 million on a working
      capital line of credit, the sale of the Company’s common stock for $10.1
      Million, and $5 million in proceeds from the sale of the real property of the
      acquired Hospitals.





The
      Company recorded its initial deposit of $10 million on the Acquisition and
      direct acquisition costs of $1,142,145, consisting primarily of legal fees,
      as
      an Investment in hospital asset purchase in the accompanying consolidated
      balance sheet as of December 31, 2004.




The
      following unaudited supplemental pro forma information represents the Company’s
      consolidated results of operations as if the Acquisition had occurred on
      January 1, 2004 and after giving effect to certain adjustments including
      interest expense, depreciation expense, and related tax effects. In addition,
      the following unaudited pro forma information includes the nonrecurring items
      related to the issuance of 74,700,000 common stock warrants (Note 5), which
      resulted in an expense of $16,434,173 that the Company recorded during the
      three
      months ended March 31, 2005 and restructuring charges of $3,147,000 incurred
      by
      Tenet during the three months ended March 31, 2005. Such pro forma information
      does not purport to be indicative of operating results that would have been
      reported had the Acquisition occurred on January 1, 2004 or future
      operating results.




14


**INTEGRATED
      HEALTHCARE HOLDINGS,
      INC.**


**Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 2005**


**Pro
                      Foma (Unaudited)****Three
                      Months Ended September 30,**
                
                
                **Nine
                      Months Ended September 30,****2005**
                
                
                **2004**
                
                
                **2005**
                
                
                **2004**Net
                    operating revenues
                
                $
                91,620,003
                
                $
                87,251,731
                
                $
                251,237,312
                
                $
                251,053,793Net
                    loss
                
                $
                (6,342,140
                )
                $
                (7,027,633
                )
                $
                (55,090,455
                )
                $
                (33,931,784
                )Per
                    share data:Basic
                    and fully diluted:Loss
                    per common share
                
                $
                (0.09
                )
                $
                (0.11
                )
                $
                (0.75
                )
                $
                (0.52
                )Weighted
                    average number of
                  common
                    shares outstanding
                
                
                67,308,778
                
                
                64,980,000
                
                
                73,092,315
                
                
                64,730,000


NOTE
      3 -
      PROPERTY AND EQUIPMENT





Property
      and equipment consist of the following as of September 30, 2005:




Buildings
                  and improvements
              
              $
              34,344,247Land
              
              
              12,581,309Equipment
              
              
              9,335,615Leasehold
              
              
              3,659,39959,920,570Less
                  accumulated depreciation
              
              
              (1,697,697
              )Property
                  and equipment, net
              
              $
              58,222,873


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. The Hospitals are 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 Hospitals
      cannot currently estimate with reasonable accuracy the remediation costs that
      will need to be incurred in order to make the facilities SB 1953-compliant,
      but
      such remediation costs could be significant.





NOTE
      4 -
      COMMON STOCK





*Stock
      Purchase Agreement with OC-PIN -* On
      January 28, 2005, the Company entered into a Stock Purchase Agreement (the
      “Stock Purchase Agreement”) with Orange County Physicians Investment Network,
      LLC (“OC-PIN”), a company founded by Dr. Anil V. Shah and owned by a number of
      physicians practicing at the acquired hospitals, pursuant to which OC-PIN
      committed to invest $30,000,000 in the Company for an aggregate of 108,000,000
      shares of the Company’s common stock. In addition, a prior Purchase Option
      Agreement, dated November 16, 2004, between the Company and Dr. Anil V. Shah,
      was terminated. During the nine months ended September 30, 2005, the Company
      issued a total of 102,600,000 shares of its common stock in consideration of
      $10.1 million from OC-PIN under the Stock Purchase Agreement. The Company used
      the proceeds from this stock sale as part of the consideration paid to Tenet
      for
      the acquisition of the Hospitals.





15


**INTEGRATED
        HEALTHCARE HOLDINGS,
        INC.**
 **Condensed
            Notes to Unaudited Condensed Consolidated Financial
            Statements**
 **September
            30, 2005**




Under
      the
      Stock Purchase Agreement, no later than nine calendar days before the closing
      of
      Acquisition, OC-PIN was to deliver to the Company additional financing totaling
      $20,000,000. Upon receipt of the $20,000,000, the Company was to issue an
      additional 5.4 million shares of its common stock to OC-PIN. The Company
      extended OC-PIN’s additional financing commitment to June 16, 2005, when the
      Company entered into the following new agreements:





·
            First
                Amendment to the Stock Purchase Agreement, dated as of June 1, 2005
                (the
                “First Amendment”); and





·
            Escrow
                Agreement, dated as of June 1, 2005, by and among IHHI, OC-PIN and
                City
                National Bank (the “Escrow Agreement”).





The
      following material terms were contained in a First Amendment to the Stock
      Purchase Agreement (“First Amendment”) and an Escrow Agreement, each dated June
      3, 2005:





·
            A
                total of 57,250,000 shares of Company common stock previously issued
                to
                OC-PIN were placed in an escrow account with City National Bank.
                OC-PIN
                had until September 1, 2005 to make aggregate payments of up to
                approximately $15,000,000 in monthly installments into the escrow
                account.
                Such portion of the escrowed shares which were fully paid were to
                be
                returned to OC-PIN and the balance was to be transferred back to
                the
                Company.





·
            OC-PIN
                agreed to reimburse the Company for certain of its additional debt
                financing costs incurred since March 8,
                2005;





·
            The
                Company would work to complete a new borrowing transaction with Capital
                Source Finance LLC; and





·
            Upon
                receipt of at least $5,000,000 of new capital under the First Amendment,
                the Company would call a shareholders meeting to re-elect directors.





Under
      the
      First Amendment and the Escrow Agreement, OC-PIN deposited $12,500,000 into
      an
      escrow account. 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 was delivered to
                OC-PIN.




16


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.** **Condensed
            Notes to Unaudited Condensed Consolidated Financial
            Statements**
 **September
            30, 2005**






4.
            40,626,684
                of the Escrowed shares of the Company’s common stock was delivered to the
                Company.





5.
            OC-PIN
                transferred $2,800,000 from another account to the Company and 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 to date, which has been
                made to
                date.





7.
            The
                Company granted OC-PIN the right to purchase up to $6,700,000 of
                common
                stock within 30 calendar days following the termination of the Company’s
                Default with Medical Provider 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.








NOTE
      5 -
      COMMON STOCK WARRANTS





The
      Company entered into a Rescission, Restructuring and Assignment Agreement with
      Dr. Chaudhuri and William Thomas on January 27, 2005 (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 Tenet
      Hospital 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 (but not to exceed 24.9% of the Company’s
      fully diluted capital stock) (the “Warrants”) to Dr. Chaudhuri and Mr. Thomas.
      In addition, the Company amended the Real Estate Option to provide that Dr.
      Chaudhuri’s option shall be to purchase 49% of substantially all of the real
      property in the Acquisition for $2,450,000. 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 in 3.5 years
      from
      the date of the 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 thereafter.





Based
      upon a valuation obtained by the Company from an independent valuation firm,
      the
      Company has assigned a value to the 74,700,000 warrants of $27,987,100 at the
      date of grant. The Company recorded an expense of $16,434,173 related to the
      issuance of the common stock warrants during the three months ended March 31,
      2005. The Company computed the expense of the warrants based on the fair value
      of the warrants at the date of grant and the maximum number of shares that
      could
      be issued under the warrant agreement as of March 31, 2005 of 41,298,523 (which
      constitutes 24.9% of the fully diluted stock that would have been outstanding
      as
      of March 31, 2005 assuming maximum possible exercise of the Warrants). The
      remaining warrants of 33,401,477 that are not issuable as of March 31, 2005
      and
      September 30, 2005 have been recorded as a deferred warrant expense of
      $11,552,927 based on the fair value determined at the date of issuance. Upon
      an
      increase in the Company’s outstanding fully diluted stock, the Company will
      recognize additional warrant expense up to the amount of the deferred warrant
      expense of $11,552,927.





17


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.** **Condensed
            Notes to Unaudited Condensed Consolidated Financial
            Statements**
 **September
            30, 2005**




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


Low,
                  HighRisk-free
                  interest rate
              
              
              3.2%,
                  3.33
              %Expected
                  volatility
              
              
              33.6%,
                  35.7
              %Dividend
                  yield
              
              
              —Expected
                  life (years)
              
              
              2,
                  2.5Fair
                  value of Warrants (fully diluted)
              
              $
              0.343,
                  $0.398


Due
      to
      the Company emerging from the development stage during the nine months ended
      September 30, 2005, the Company computed the volatility of its stock based
      on an
      average of comparable public companies that own hospitals.








NOTE
      6 -
      DEBT





The
      current portion of the Company’s debt consists of the following notes as of
      September 30, 2005:


Secured
                  acquisition note payable
              
              $
              50,000,000Secured
                  line of credit note payable
              
              
              25,330,734Advances
                    from accounts receivablepurchase
                    agreement
              
              
              13,021,237$
              88,351,971





*Acquisition
      Loan and Line of Credit* - In
      connection with the Tenet Hospital Acquisition, the Company obtained borrowings
      to complete the Hospital Acquisition from affiliates of Medical Capital
      Corporation of Anaheim, CA. 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 has 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 will be in the form of a non-revolving Line of Credit (the “Line of
      Credit”) and $50,000,000 will be in the form of a real estate loan (the
“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 (See Notes 1 and 3). 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.





18


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.** **Condensed
            Notes to Unaudited Condensed Consolidated Financial
            Statements**
 **September
            30, 2005**




Interest
      payments are due on the Obligations on the first business day of each calendar
      month to occur while any Obligation is outstanding at the interest rate of
      14%
      per annum. The Obligations mature at the first to occur of (i) the Commitment
      Termination Date for the Line of Credit Loan, (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 Note 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; (d) March 2, 2007. Per the Credit Agreement,
      all future capital contributions to the Company by 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 subsidiary
      Hospitals. In addition, (i) PCHI (see Note 1) has agreed to guaranty the payment
      and performance of the Obligations, (ii) West Coast and Ganesha (see Note 7)
      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 (see Note 5) has agreed to guaranty the payment
      and
      performance of all the Obligations.





*Credit
      Agreement Fees* -
      Concurrently with the execution and delivery of the Credit Agreement and as
      a
      condition to the funding of the Acquisition Loan, Company and its Subsidiaries
      agreed to pay to the Lender an origination fee in an amount equal to 2% of
      the
      Credit Line Commitment or $600,000, and 2% of the Acquisition Loan or
      $1,000,000, to be payable out of Company and its Subsidiaries own funds, which
      fee shall be deemed earned in full upon receipt by 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 deferred loan fees of $1,933,000 over
      the two year term of the Obligations. During the nine months ended September
      30,
      2005, the Company recognized $481,545 of amortization expense and has
      unamortized deferred loan fees of $1,451,455 as of September 30,
      2005.





*Accounts
      Receivable Purchase Agreement*  -
      In
      March 2005, the Hospitals entered into a two year Accounts Purchase Agreement
      that allows the sale of their accounts receivable to Medical Provider Financial
      Corp., an affiliate of the Lender, as they become billable to third parties.
      The
      Company will continue to provide billing and collection services and the
      proceeds collected from the accounts receivable are applied to reduce amounts
      advanced under this agreement. As of September 30, 2005, advances made under
      this agreement were $13,021,237.





*Default
      Notice* - On or
      about May 9, 2005, the Company received a notice of default from the Lender.
      In
      addition, each of OC-PIN, PCHI, Ganesha Realty, LLC, and West Coast Holdings,
      LLC, which are parties to the Credit Agreement, has received a notice of default
      under the Credit Agreement. The Company has recorded the acquisition note of
      $50
      million and outstanding draws on the line of credit of $25.3 million as current
      liabilities in the accompanying condensed consolidated financial
      statements.





The
      notice of default asserts that (i) the Company failed to provide satisfactory
      evidence that the Company has received capital contributions of not less than
      $15,000,000, as required under the Credit Agreement, (ii) the Company failed
      to
      prepay $5,000,000 by the Mandatory Prepay Date as required under the Credit
      Agreement, and (iii) a Material Adverse Effect has occurred under the Credit
      Agreement for reasons relating primarily to OC-PIN’s failure to fully fund its
      obligations under its Stock Purchase Agreement with the Company dated January
      28, 2005.





19


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.** **Condensed
            Notes to Unaudited Condensed Consolidated Financial
            Statements**
 **September
            30, 2005**


*Forbearance
      Agreement* - In
      connection with the Company’s First Amendment (see Note 4), the Company entered
      into an Agreement to Forbear as of June 1, 2005 by and among the Company,
      OC-PIN, West Coast Holdings, LLC and the Lender (the “Forbearance Agreement”).
      Without another default, the Lender agrees for 100 days to forbear from (i)
      recording Notices of Default, (ii) filing a judicial foreclosure lawsuit against
      the Company, OC-PIN and West Coast Holdings, LLC, and (iii) filing lawsuits
      against the Company, OC-PIN and West Coast Holdings, LLC. The interest rate
      on
      the notes will be increased to the Default Rate of 19%, as defined in the Credit
      Agreement, and all Obligations (as defined in the Credit Agreement), will be
      forthwith due and payable, as long as the events of default remain uncured.
      The
      Company’s Line of Credit facility is suspended to additional advances. During
      the forbearance period of 100 days, OC-PIN and other investors will invest
      not
      less than $15 million in new equity capital in the Company.




NOTE
      7 -
      SALE OF REAL ESTATE AND VARIABLE INTEREST ENTITY




Concurrent
      with the close on the acquisition of the Hospitals, Dr. Chaudhuri and Dr. Shah
      exercised their option to purchase all of the real property of the Hospitals
      pursuant to an Option agreement dated September 28, 2004, as amended and
      restated on November 16, 2004 (“LLC Option Agreement”). The option was exercised
      by the option holders purchasing from the Company all of the equity interests
      in
      PCHI, which holds title to the real property. The Company received $5 million
      and PCHI guaranteed the Company’s acquisition debt of $50 million.





The
      Company remains primarily liable under the $50 million acquisition note
      notwithstanding 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, it appears that
      the Company has indirectly guaranteed the indebtedness of PCHI. The Company
      is
      standing ready to perform on the acquisition debt should PCHI not be able to
      perform and has undertaken a contingent obligation to make future payments
      if
      those triggering events or conditions occur.





In
      connection with the sale of all of the real property of the Hospitals, the
      Company entered into a triple net lease with PCHI to leaseback this real
      property for an initial term of 25 years. Per the triple net lease, PCHI will
      receive rent that covers the cost of the underlying debt, plus a guaranteed
      spread up to 2.5%. Additionally, the Company has a right to renew the leases
      for
      periods up to an additional 25 years.





PCHI
      is a
      related party entity that is affiliated with the Company through common
      ownership and control. It is owned 51% by West Coast Holdings, LLC (Dr. Shah
      and
      investors) and 49% by Ganesha Realty, LLC (Dr. Chaudhuri and William Thomas).
      Generally accepted accounting principles require that a company consolidate
      the
      financial statements of any entity that cannot finance its activities without
      additional subordinated financial support, and for which one company provides
      the majority of that support through means other than ownership. Effective
      March
      8, 2005, the Company determined that it provided the majority of financial
      support to PCHI through various sources including lease payments, remaining
      primarily liable under the $50 million debt, and cross-collateralization of
      the
      Company’s non-real estate assets to secure the $50 million debt. Accordingly,
      during the nine months ended September 30, 2005, the Company included in its
      condensed consolidated financial statements, the net assets of PCHI, net of
      consolidation adjustments. Selected information of PCHI’s balance sheet as of
      September 30, 2005, and its results of operations for the period March 8, 2005
      to September 30, 2005 are as follows:




20


**INTEGRATED
      HEALTHCARE HOLDINGS,
      INC.** **Condensed
            Notes to Unaudited Condensed Consolidated Financial
            Statements**
 **September
            30, 2005**


Total
                  assets
              
              $
              54,621,717Total
                  liabilities
              
              
              50,481,720Member’s
                  equity
              
              
              3,644,465Net
                  revenues
              
              
              5,357,273Net
                  loss
              
              
              1,355,535





Consolidation
      adjustments to reflect the effects of the following matters are included in
      the
      accompanying condensed consolidated financial statements:





§
            The
                Company’s lease interest in the hospitals has been eliminated leaving
                PCHI’s ownership of the land and buildings being presented in the
                accompanying condensed consolidated financial statements. Additionally,
                a
                gain of $12,157,808 arising from the Company’s sale of the real property
                of the Hospitals to PCHI has been eliminated to state the land and
                buildings at the Company’s cost. The gain is offset by a $5,000,000
                contingent liability by IHHI to acquire and transfer title to medical
                office building condominiums from Tenet, also eliminated in
                consolidation.





§
            Because
                the Company remains primarily liable under the $50 million debt
                notwithstanding its guarantee by PCHI, generally accepted accounting
                principles do not allow the Company to remove this liability from
                its
                balance sheet. Therefore, it is necessary to eliminate the same item
                from
                PCHI’s balance sheet in
                consolidation.





§
            PCHI’s
                equity accounts have been classified as minority interest variable
                interest entity in the accompanying consolidated balance
                sheet.





§
            The
                Company’s rent expense has been eliminated against PCHI’s rental income.
                Additionally, amounts assigned to buildings are being depreciated
                over
                their estimated useful lives of 25
                years.




NOTE
      8 -
      INCOME TAXES





The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No. 109 "Accounting for Income Taxes" which requires the
      liability approach for the effect of income taxes. The provision for income
      taxes consists of provisions for federal and state income taxes.





The
      preparation of condensed consolidated financial statements in conformity with
      generally accepted accounting principles requires us 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 realizability of our deferred tax assets. The
      Company does not recognize current and future tax benefits until it is deemed
      probable that certain tax positions will be sustained.





21


**INTEGRATED
        HEALTHCARE HOLDINGS, INC.**
 **Condensed
        Notes to Unaudited Condensed Consolidated Financial
        Statements**
 **September
        30, 2005**
 
 The
        provision for income taxes consisted of the following for the nine months
        ended
        September 30, :
 
 **2005**
              
              **2004**Current
                  income tax expense:U.S.
                  Federal and State
              
              $
              5,549,000
              
              $
              —Deferred
                  income taxes:U.S.
                  Federal and State
              
              
              —
              
              
              —$
              5,549,000
              
              $
              —
 A
        reconciliation between the amount of reported income tax expense (benefit)
        and
        the amount computed by multiplying income (loss) from continuing operations
        before income taxes by the statutory federal income tax rate is shown below:
 Estimated
                    tax benefit at federal and state statutory rates
                  on an annualized basis
              
              $
              (11,701,000
              )Common
                  stock warrant expense
              
              
              5,157,000Gain
                  on sale of real estate
              
              
              3,815,000Change
                  in valuation allowance
              
              
              9,009,000State
                  credits
              
              
              (1,210,000
              )Other
              
              
              479,000$
              5,549,000
 Deferred
        income taxes reflect the tax effects of temporary differences between the
        carrying amount of assets and liabilities for financial reporting purposes
        and
        the amount used for income tax purposes. The following table discloses those
        significant components of our deferred tax assets and liabilities, including
        any
        valuation allowance:
 
 **September
                  30,****2005**
              
              **2004**Current
                  deferred tax assets:Allowance
                  for doubtful accounts
              
              $
              10,233,000
              
              $
              —Accrued
                  vacation
              
              
              1,875,000
              
              
              —Net
                  operating losses
              
              
              692,000
              
              
              1,414,000Deferred
                  tax assets
              
              
              12,800,000
              
              
              1,414,000Valuation
                  allowance
              
              
              (12,800,000
              )
              
              (1,414,000
              )Net
                  deffered tax assets
              
              $
              —
              
              $
              —
  22
 **INTEGRATED
          HEALTHCARE HOLDINGS, INC.**
 **Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 2005**
  A
          valuation allowance of $12.8 million was recorded as of September 30, 2005
          based
          on an assessment of the realization of our deferred tax assets as described
          below. We assess the realization of our deferred tax assets to determine
          whether
          an income tax valuation allowance is required. The Company recorded a 100%
          valuation allowance on its deferred tax assets at September 30, 2005, based
          primarily on the following factors:




•
              cumulative
                  losses in recent years;•
              income/losses
                  expected in future years;•
              unsettled
                  circumstances that, if unfavorably resolved, would adversely affect
                  future
                  operations and profit levels;•
              the
                  availability, or lack thereof, of taxable income in prior carryback
                  periods that would limit realization of tax benefits;•
              the
                  carryforward period associated with the deferred tax assets and
                  liabilities; and•
              prudent
                  and feasible tax-planning
                  strategies.




*Tenet
      Hospital Acquisition* - The
      Acquisition was an asset purchase transaction and the Company will not benefit
      from the net operating losses of the acquired Hospitals. In connection with
      the
      Company’s completion of the Tenet Hospital Acquisition in March 2005, the
      Company sold all of the real estate of the acquired hospitals to its majority
      shareholders. For income tax purposes, the sale of the real estate of the
      acquired hospitals could require the Company to report dividend and/or interest
      income. If the Company is required to report dividend and/or interest income
      in
      connection with this transaction, the Company would be required to withhold
      28%
      on any deemed dividend or interest income. The Company’s sale of its 100%
      membership interest in PCHI on March 8, 2005 to West Coast Holdings LLC and
      Ganesha Realty LLC in consideration of $5 million plus the assumption of the
      $50
      million Acquisition note is a taxable event to the Company.





The
      March
      8, 2005 contribution of the real estate acquired in the Tenant Hospital
      Acquisition to Pacific Coast Holdings Investment LLC (“PCHI”), a 100% owned
      subsidiary of the Company, was intended to be a non-taxable event. The Company’s
      sale of 100% of the membership interest in PCHI on March 8, 2005, to West Coast
      Holdings LLC and Ganesha Realty LLC in consideration of $5 million plus the
      assumption of the $50 million Acquisition Loan on the real property debt is
      a
      taxable event to the Company. The Company is currently assessing the potential
      impact of this taxable event in 2005.





*PCHI
      Tax Status* -- PCHI
      is a limited liability corporation. PCHI’s owners plan to make tax elections for
      it to be treated as a disregarded entity for tax reporting whereby similar
      to a
      partnership PCHI’s taxable income or loss will flow through to its owners and be
      their separate responsibility. Accordingly, the accompanying condensed
      consolidated financial statements do not include any amounts for the income
      tax
      expense or benefit of PCHI’s income or loss.




23


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.**


**Condensed
      Notes to Unaudited Condensed Consolidated Financial
      Statements**


**September
      30, 2005**




NOTE
      9 -
      RELATED PARTY TRANSACTIONS





*PCHI* - The
      Company leases 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. William Thomas. Dr. Shah is the chairman of the Company
      and is also the co-manager 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.
      The Company has consolidated the financial statements of PCHI for the period
      March 8, 2005 through September 30, 2005 in accordance with FIN 46(R) (see
      Note
      7). During the nine month period ended September 30, 2005, the Company incurred
      a liability for rent expense payable to PCHI of $5,357,273, which was eliminated
      upon consolidation at September 30, 2005.





*Management
      Agreements* - In December 2004, February 2005, and March 2005, the Company
      entered into seven employment agreements with its executive officers. Among
      other terms, the three year employment agreements in aggregate provide for
      annual salaries totaling $2,290,000, total stock option grants to purchase
      6,650,000 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 September 30, 2005, the Company has not issued any stock
      options pursuant to the employment agreements.








NOTE
      10 -
      LOSS PER SHARE





The
      weighted average number of common shares used to compute basic and fully diluted
      loss per share for the three and nine months ended September 30, 2005 exclude
      57,250,000 contingently issuable shares of common stock which were placed into
      an escrow account on July 4, 2005, pursuant to the First Amendment to the Stock
      Purchase Agreement dated as of June 1, 2005 and the Escrow Agreement dated
      as of
      June 1, 2005. As of September 30, 2005, all necessary conditions required to
      issue these shares (see Note 4) have not been met. The Company’s fully diluted
      loss per share for the three and nine months ended September 30, 2005 exclude
      the 57,250,000 contingently issuable shares due to their anti-dilutive effect
      on
      loss per share.





If
      the
      First Amendment to the Stock Purchase Agreement and the Escrow Agreement were
      entered into as of the date of the original Stock Purchase Agreement dated
      January 28, 2005, the Company’s future loss per share would be greater than
      reported and the Company’s loss per share would have been $0.13 and $0.66 for
      the three and nine months ended September 30, 2005, respectively.





The
      Company’s weighted average common stock equivalents related to the Warrants
      (Note 6) were 41,291,892 for the nine months ended September 30, 2005. These
      common stock equivalents have been excluded from the Company’s weighted average
      number of common shares outstanding due to their anti-dilutive effect for the
      three and nine months ended September 30, 2005.








NOTE
      11 -
      COMMITMENTS AND CONTINGENCIES





*Operating
      Leases -* Concurrent
      with the closing of the Tenet Hospital Acquisition as of March 7, 2005, the
      Company entered into a sale leaseback type agreement with a related party
      entity, PCHI (the “Related Party Lease”). The Company leases all of the real
      estate of the acquired Hospitals properties (the “Hospital Properties”) and
      medical office buildings and a long term acute care facility (collectively
      the
      "MOB Properties") from PCHI. The term of the Lease for the Hospital Properties
      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 twenty-five years.




24


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.** **Condensed
        Notes to Unaudited Condensed Consolidated Financial
        Statements**
 **September
        30, 2005**
  Additionally,
        in connection with the acquisition of the Hospitals, the Company also assumed
        the operating leases for the Chapman facility, which include buildings, land,
        and other equipment. The Related Party Lease has been eliminated with the
        consolidation of PCHI in the accompanying consolidated financial statements.
        The
        following is a schedule of the Company’s future minimum operating lease payments
        that have initial or remaining noncancelable lease terms in excess of one
        year
        as of December 31, 2004:


Year
                  Ended December 31,
              
              Unrelated
                    ThirdParties
              
              RelatedParty
                  (PCHI)
              
              Total2005
              
              $
              2,038,365
              
              $
              10,642,672
              
              
              12,681,0372006
              
              
              2,008,102
              
              
              13,153,611
              
              
              15,161,7132007
              
              
              1,660,807
              
              
              13,233,219
              
              
              14,894,0262008
              
              
              1,162,675
              
              
              13,315,216
              
              
              14,477,8912009
              
              
              844,267
              
              
              13,315,216
              
              
              14,159,483Thereafter
              
              
              8,569,793
              
              
              278,706,133
              
              
              287,275,926$
              16,284,009
              
              $
              342,366,067
              
              $
              358,650,076


*Capital
      Leases* -
      The
      Company has long-term lease obligations for the real property at the Chapman
      Medical Center. For financial reporting purposes, the leases have been
      classified as capital leases: accordingly, assets with a book value of
      $3,659,401 are included in property and equipment in the accompanying
      consolidated balance sheet. The following is a schedule of future minimum lease
      payments under capitalized equipment leases together with the present value
      of
      the net minimum lease payments as of September 30, 2005:


Year
                  ending September 30,2006
              
              $
              686,2922007
              
              
              686,2922008
              
              
              686,2922009
              
              
              686,2922010
              
              
              686,292Thereafter
              
              
              2,573,595Total
                  minimum lease payments
              
              $
              6,005,055Less
                  amount representing interest
              
              
              2,475,907Present
                  value of net minimum lease payments
              
              
              3,529,148Less
                  current portion
              
              
              204,141Long-term
                  portion
              
              $
              3,325,007


25


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.** **Condensed
        Notes to Unaudited Condensed Consolidated Financial
        Statements**
 **September
        30, 2005**


*Agreement
      for Compensation* - In
      connection with the close of the Hospital 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 a first right of refusal to
      purchase such real property. 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 tenant’s right 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 tenant’s right of first refusal and then transfer
      such title to the Condo Units to PCHI. If some of the Condo Units are acquired
      by the tenants, the Company shall provided compensation to PCHI and the Company
      shall pay down its Acquisition Note (see Note 6) by $5 million or such pro
      rata
      portion. 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 (see Note 7), 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 (see Note
      7.) Although the gain on sale of assets is eliminated upon the consolidation
      of
      the financial statements of PCHI, the Company’s income tax provision related to
      such gain would be reduced.




*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 cooperate 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 management and (4) could cause
      the
      Company to close or sell the Hospitals or otherwise modify the way its business
      is conducted. Reserves for claims and lawsuits are recorded when they are
      probable and reasonably estimable.








NOTE
      11 -
      SUBSEQUENT EVENTS





The
      Company entered into a term sheet dated October 20, 2005 with Medical Provider,
      OC-PIN, PCHI, and owners of PCHI (the “Term Sheet”). Pursuant to the non-binding
      Term Sheet, Medical Provider would provide the Company with a new loan in the
      amount of $10,700,000 for working capital purposes (the “New Loan.”) The New
      Loan would be due in one year with an interest rate of 12% per annum, interest
      payable monthly. In addition, the Term Sheet included the following items:




26
 
 **INTEGRATED
        HEALTHCARE HOLDINGS, INC.** **Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 2005**


·
            OC-PIN
                will contribute new capital of $4,300,000 to the Company. This new
                capital
                would constitute a credit against the continuing obligation of the
                Company
                to raise $15 million in new capital


·
            The
                existing default on the Company’s debt would be waived by Medical
                Provider.


·
            The
                Company would pay $5 million to Medical Provider on the Acquisition
                Note
                of $50 million as required by the Credit
                Agreement.


·
            The
                Company would agree to obtain additional new capital contributions
                equal
                to the amount of the New Loan of $10,700,000 by the one year maturity
                date
                of the new loan, with proceeds used to pay the new loan in
                full.


·
            The
                Forbearance Agreement would be
                terminated.


·
            As
                collateral, the Company would issue Medical Provider a warrant or
                other
                contingent right to purchase the Company’s common stock equal in value to
                the amount of the New Loan plus accrued interest not repaid at maturity.
                This warrant or contingent right would be exercisable for an aggregate
                amount of $1.00, regardless of how many shares are acquired.





The
      Company is proceeding to complete the documentation and execute the transaction
      outlined in the Term Sheet.





On
      or
      about October 31, 2005, the Company and OC-PIN entered into the Second Amendment
      to Stock Purchase Agreement (see Note 4).




The
      Company is a defendant in a claim brought by Andrew Weiss, a former consultant
      to the Company, filed with Judicial Arbitration and Mediation Service in Orange
      County, California, alleging breach of contract, wrongful discharge, failure
      to
      pay wages, fraud, and other related claims relating to his services to the
      Company in 2004 and 2005. Mr. Weiss alleges that he was an employee of the
      Company and was covered by a purported written employment agreement dated March
      3, 2005. Mr. Weiss is seeking unspecified damages, including lost earnings
      and
      benefits, loss of future earnings, penalties, punitive damages and attorneys
      fees and costs. The Company intends to defend itself vigorously against these
      claims. Although the Company does not believe it is probable that it will lose
      this case, it is possible that resolution of this case could result in a loss.
      Management is not able to estimate the amount of such loss as of September
      30,
      2005.




27


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




**Forward-Looking
      Information**





This
      Quarterly 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-KSB filed on March 31,
      2005 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**





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. 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.





Our
      results of operations discussed in this report reflect Hospital operations
      for
      the full quarter ended September 30, 2005 compared to the quarter ended June
      30,
      2005.





We
      entered 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.




28


**Critical
      Accounting Policies and Estimates**




**Provision
      For Doubtful Accounts**




Our
      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
      our
      policy, when appropriate, to verify insurance prior to a patient being treated.




We
      provide for an allowance against accounts receivable that could become
      uncollectible by establishing an allowance to reduce the carrying value of
      such
      receivables to their estimated net realizable value. We estimate this allowance
      based on the aging of certain of our accounts receivables by hospital, our
      historical collection experience by hospital and for each type of payer and
      other relevant factors. Our practice is to write-down self-pay accounts
      receivable, including accounts related to the co-payments and deductibles due
      from patients with insurance, to their estimated net realizable value at the
      time of billing. Generally, uncollected balances are assigned to collection
      agency between 90 to 120 days, once patient responsibility has been
      identified. When accounts are assigned for collections by the Hospitals, the
      accounts are completely written off through provision for doubtful accounts.
      Any
      recoveries from collection agencies thereafter are credited to the provision
      as
      received.




**Common
      Stock Warrants**




As
      indicated in the notes to the financial statements, the Company entered into
      a
      Rescission, Restructuring and Assignment Agreement with Dr. Chaudhuri and
      William Thomas on January 27, 2005 (the “Restructuring Agreement”). Pursuant to
      the Restructuring Agreement, the company released its initial deposit of $10
      million plus accrued interest on the Tenet Hospital 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”). The Warrants were limited not to exceed 24.9% of
      the Company’s Fully-Diluted capital stock.





Due
      to
      this limitation, the Company recognized an expense of $16.4 million related
      to
      the issuance of the warrants during the three months ended March 31, 2005.
      No
      additional expense was recognized during the nine months ended September 30,
      2005 due to no change in the fully diluted outstanding common stock during
      this
      period.





The
      Company computed the expense of the Warrants based on the fair value of the
      Warrants at the date of the grant and the maximum number of shares exercisable
      as of September 30, 2005 of 41,298,523 (24.9% of the fully diluted stock
      outstanding of September 30, 2005). The Company recorded the fair value of
      the
      outstanding unexercisable Warrants as of September 30, 2005 of $11.6 million
      as
      deferred Warrant expense in the accompanying consolidated balance sheet. With
      any future increase in the Company’s outstanding fully diluted common stock, the
      Company will recognize additional Warrant expense up to $11.6
      million.




29


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





Low,
                  HighRisk-free
                  interest rate
              
              
              3.2%,
                  3.33%Expected
                  volatility
              
              
              33.6%,
                  35.7%Dividend
                  yield
              
              
              —Expected
                  life (years)
              
              
              2,
                  2.5Fair
                  value of Warrants (fully diluted)
              
              
              $0.343,
                    $0.398





Due
      to
      the fact that the Company emerged from the development stage during the nine
      months ended September 30, 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)
              Healthcare
                Company (HCA)
              Health
                Management Associates Inc (HMA)
              Lifepoint
                (LPNT)
              Tenet
                Healthcare Corp (THC)
              Triad
                Hospitals Corp (TRI)
              Universal
                (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.





**Sale
      of Real Estate and Variable Interest Entity**





Concurrent
      with the close of the Company’s acquisition of the Hospitals, Dr. Chaudhuri and
      Dr. Anil Shah exercised their options to purchase the Company’s interest in a
      limited liability company holding the real property underlying the Hospitals
      pursuant to an option agreement dated September 28, 2004, as amended and
      restated on November 16, 2004 (the “LLC Option Agreement”). The option holders
      purchased all of the Company’s interests in Pacific Coast Holdings Investment
      LLC (“PCHI”), which acquired title to the real property. The Company received $5
      million and PCHI guaranteed the Company’s acquisition debt of $50 million.





The
      Company remains primarily liable under the $50 million acquisition note
      notwithstanding 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, it appears that
      the Company has indirectly guaranteed the indebtedness of PCHI. The Company
      is
      standing ready to perform on the acquisition debt should PCHI not be able to
      perform and has undertaken a contingent obligation to make future payments
      if
      those triggering events or conditions occur.





In
      connection with the sale of all of the real property of the Hospitals, the
      Company entered into a triple net lease with PCHI to leaseback this real
      property for an initial term of 25 years. Per the triple net lease, PCHI will
      receive rent that covers the cost of the underlying debt, plus a guaranteed
      spread up to 2.5%. Additionally, the Company has a right to renew the leases
      for
      periods up to an additional 25 years.





30


PCHI
      is a
      related party entity that is affiliated with the Company through common
      ownership and control. It is owned 51% by West Coast Holdings, LLC (Dr. Shah
      and
      investors) and 49% by Ganesha Realty, LLC (Dr. Chaudhuri and William Thomas).
      Generally accepted accounting principles require that a company consolidate
      the
      financial statements of any entity that cannot finance its activities without
      additional subordinated financial support, and for which one company provides
      the majority of that support through means other than ownership. Effective
      March
      8, 2005, the Company determined that it provided the majority of financial
      support to PCHI through various sources including lease payments, remaining
      primarily liable under the $50 million debt, and cross-collateralization of
      the
      Company’s non-real estate assets to secure the $50 million debt. Accordingly,
      during the three and nine months ended September 30, 2005, the Company included
      in its consolidated financial statements the net assets of PCHI, net of
      consolidation adjustments.





**Results
      of Operations**





The
      following table summarizes our results of operations from continuing operations
      for the three months ended September 30, 2005 compared to the three months
      ended
      June 30, 2005. Comparisons to the related periods in 2004 were not considered
      useful as we had not acquired the Hospitals and our results of operations
      consisted solely of administrative expenses of $491,048 for the three months
      ended September 30, 2004.




**Three
                  Months Ended****September
                  30,**
              
              **June
                  30,****2005**
              
              **2005******(Unaudited)
              
              (Unaudited)Net
                  operating revenues
              
              $
              91,620,003
              
              $
              83,190,537Provision
                  for doubtful accounts
              
              
              (15,587,741
              )
              
              (11,331,354
              )Collectable
                  Revenues
              
              
              76,032,262
              
              
              71,859,183Operating
                  expenses:Salaries
                  and benefits
              
              
              48,273,049
              
              
              48,439,345Supplies
              
              
              11,783,830
              
              
              11,521,967Other
                  operating expenses
              
              
              18,457,022
              
              
              17,283,135Depreciation
                  and amortization
              
              
              707,015
              
              
              902,84579,220,916
              
              
              78,147,292Operating
                  loss
              
              
              (3,188,654
              )
              
              (6,288,109
              )Interest
                  expense
              
              
              4,304,599
              
              
              4,069,029Loss
                  including minority interest andbefore
                  provision for income taxes
              
              
              (7,493,253
              )
              
              (10,357,138
              )Provision
                  for income taxes
              
              
              2,315,000
              
              
              1,762,000Minority
                  interest in variable interest entity
              
              
              (1,151,113
              )
              
              (195,517
              )Net
                  loss
              
              $
              (8,657,140
              )
              $
              (11,923,621
              )




31


**Three
      Months Ended September 30, 2005 and Three Months Ended June 30, 2005**




Losses
      from continuing operations, before interest and taxes, decreased to $3.2 million
      for the three months ended September 30, 2005 from $6.3 million for the three
      months ended June 30, 2005. Substantially all of the losses from continuing
      operations during the periods then ended reflect the operational losses from
      our
      Hospitals, which were acquired on March 8, 2005.




On
      a same-hospital basis, admissions were up during the three months ended
      September 30, 2005 compared to the three months ended June 30, 2005 by 3.9%.
      As
      a result of reduction in the length of stay from 6.28 to 5.95 days, patient
      days
      were down 1.6%. For the fixed payment (Diagnosis Related Groups or DRG as well
      as prepaid contract with Cal Optima) based admissions, this has a slight
      beneficial impact on the costs in relation to revenues. Outpatient visits were
      down slightly by 1.1% which is not unusual during the summer
      months.




The
      income tax provision was $2.3 million for the three months ended September
      30,
      2005 and $1.8 million for the three months ended June 30, 2005, and consisted
      primarily of a taxable gain on the sale of the real property of the Hospitals
      to
      PCHI, the non-deductible Warrant expense of $16.4 million and non-deductible
      provision for doubtful accounts, offset against losses from operations. As
      of
      September 30, 2005, we had net deferred tax assets of approximately
      $10.7 million for which a full valuation allowance has been
      provided.





**Managed
      care contracting**





The
      prior
      owners of the Hospitals adopted a state wide managed care contracting strategy
      that was designed to improve consolidated results with less regard for the
      individual facilities financial needs. Those contracts have been substantially
      all assigned to IHHI preserving the existing revenue base. Management is
      committed to negotiating terms more closely aligned with the services provided
      and the financial resources required to achieve that level of service. Although
      management believes that substantial opportunity exists for improving contracted
      reimbursement, there can be no assurance that this will be achieved and failure
      to do so could have a material adverse impact on future
      performance.





**Provision
      for doubtful accounts**





When
      accounts are assigned for collections by the Hospitals, the accounts are
      completely written off through the provision for doubtful accounts. Any
      recoveries from collection agencies thereafter are credited to the provision
      as
      received. Because IHHI did not acquire accounts receivable from Tenet, estimates
      of recoveries from collection efforts are made based on Tenet’s experience
      applied to new accounts. Management believes this is reasonable because the
      systems and personnel are substantially the same.





During
      the three months ended September 30, 2005 and June 30, 2005, we recorded
      provisions for doubtful accounts of $15.6 million and $11.3 million,
      respectively.





The
      breakdown of our billed hospital receivables (which is a component of total
      receivables) at September 30, 2005 and June 30, 2005 is summarized in the table
      below.





**September
                  30,2005**
              
              **June
                  30,2005**Insured
                  receivables
              
              
              65.5
              %
              
              78.3
              %Uninsured
                  receivables
              
              
              34.5
              %
              
              21.7
              %Total
              
              
              100.0
              %
              
              100.0
              %


Our
      allowance for doubtful accounts and the approximate percentages of allowance
      for
      doubtful accounts to accounts receivable at September 30, 2005 and June 30,
      2005
      are summarized as follows (dollars in thousands):




**September
                  30,2005**
              
              **June
                  30,2005**Allowance
                  for doubtful accounts
              
              $
              28,802
              
              $
              14,445Percentage
                  of accounts receivables
              
              
              38.8
              %
              
              26.3
              %


32


Our
      reported accounts receivable as of June 30, 2005 were all under 115 days
      outstanding, due to the fact that our acquisition of the Hospitals from Tenet
      on
      March 8, 2005 did not include patient accounts. Net days in outstanding accounts
      receivable as of September 30, 2005 and June 30, 2005 were 55.0 and 51.2 days,
      respectively.





**Collectable
      Revenues**





Management
      reviews Collectable Revenues (Patient Revenue less Bad Debt Expense) as one
      measure of operational performance because it eliminates the distortion caused
      when the study of individual patient accounts result in reclassifications
      between accounts that meet charity criteria (see notes to the financial
      statements) and bad debts. The $4.2 million increase in collectable revenues
      from the quarter ended June 30, 2005 to the quarter ended September 30, 2005
      was
      a significant factor in the improved results from operations. This was due
      primarily to a 4% increase in patient admissions and better realization from
      managed care contracts.





**Salaries
      and Benefits**





We
      have
      experienced and expect to continue to experience significant wage and benefit
      pressures created by the nursing shortages throughout the region. In addition,
      approximately 24% of our employees were represented by labor unions as of
      September 30, 2005. If union activity increases at our Hospitals, our salaries
      and benefits expense may increase more rapidly than our net operating revenues.
      Labor costs remain a significant cost pressure facing us as well as the health
      care industry in general.  The nursing shortage continues and remains
      more
      serious in key specialties.  This has increased labor costs for nursing
      personnel. In addition, state-mandated nurse-staffing ratios in California
      have
      not only increased our labor costs, but may also adversely affect net operating
      revenues due to volume limitations if the required number of nurses are
      unavailable.  In March 2005, increases to California’s state-mandated
      nurse-staffing ratios went into effect as provided by the original
      statute.  The vast majority of hospitals in California, including our
      Hospitals, are not at all times meeting these ratios.  We have, however,
      gradually improved our monthly compliance and expect that our compliance levels
      will continue to improve throughout our Hospitals in 2005.





**Other
      Operating Expenses**




Other
      operating expenses increased $1.2 million over the previous quarter. This
      increase was primarily the result of an increase in computer services purchased
      from Tenet and other vendors of approximately $0.8 million. Utilities rose
      approximately $0.3 million in the summer months due to increased power
      consumption to run air conditioning.





**Liquidity
      and Capital Resources**





Cash
      used
      by operating activities was $34.6 million in the nine months ended September
      30,
      2005. Prepaids increased from the quarter ended June 30, 2005 by $6.5 million
      primarily as a result of a workman’s compensation reserve deposit of
      approximately $4.4 million. Net accounts receivable increased by $5.1 million
      to
      $45.5 million from the preceding quarter due to an increase in net revenues
      of
      $8.4 million. Accounts payable increased by $8.8 million due to improved
      management of payables compared to the preceding quarter and taxes payable
      increased by $2.4 million. Other current liabilities increased by $2.4 million
      and consist primarily of accrued interest, workers’ compensation insurance, and
      other miscellaneous accruals.





We
      used
      $63 million in investing activities to complete the Hospital acquisition.





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Cash
      provided by financing activities was $100.3 million during the nine months
      ended
      September 30, 2005. At September 30, 2005, our indebtedness consisted of a
      $50
      million term loan for the purchase of our Hospitals, a $25.3 million in advances
      from the $30 million line of credit. We received $5 million in net proceeds
      from
      the sale of the real property of the Hospitals to PCHI a related party entity.
      In addition, in March 2005, our Hospitals entered into a 2-year Accounts
      Purchase Agreement to sell Accounts Receivable to a lending institution as
      they
      become billable to third parties.  We continue to provide billing and
      collection services and the proceeds collected thereby are applied to reduce
      amounts advanced under this agreement. As of September 30, 2005, $13.1 million
      had been advanced under this agreement.





On
      or
      about May 9, 2005, the Company received a notice of default from its lender,
      Medical Provider Financial Corporation II (“Medical Provider”). Medical Provider
      is the lender for the secured acquisition note of $50 million, and the Company’s
      secured line of credit note of up to $30 million. The Company has recorded
      the
      acquisition note of $50 million and outstanding draws on the line of credit
      of
      $13.2 million as current liabilities in the accompanying consolidated financial
      statements. The notice of default asserts that (i) the Company failed to provide
      satisfactory evidence that the Company has received capital contributions of
      not
      less than $15,000,000, as required under the Credit Agreement, (ii) the Company
      failed to prepay $5,000,000 by the Mandatory Prepay Date as required under
      the
      Credit Agreement, and (iii) a Material Adverse Effect has occurred under the
      Credit Agreement for reasons relating primarily to OC-PIN’s failure to fully
      fund its obligations under its Stock Purchase Agreement with the Company dated
      January 28, 2005.





As
      of
      June 1, 2005, the Company entered into an Agreement to Forbear with Medical
      Provider. Without another default, Medical Provider agrees for 100 days to
      forbear from (i) recording Notices of Default, (ii) filing a judicial
      foreclosure lawsuit against the Company, OC-PIN and West Coast Holdings, LLC,
      and (iii) filing lawsuits against the Company, OC-PIN and West Coast Holdings,
      LLC. The interest rate on the notes will be increased from 14% to the Default
      Rate of 19%, as defined in the Credit Agreement, and all Obligations (as defined
      in the Credit Agreement) will be forthwith due and payable, as long as the
      events of default remain uncured. The Company’s Line of Credit facility is
      suspended to additional advances. During the forbearance period of 100 days,
      OC-PIN and other investors will invest not less than $15 million in new equity
      capital in the Company.





In
      June
      2005, in connection with the First Amendment to Stock Purchase Agreement, dated
      as of June 1, 2005 by and among the Company, OC-PIN, PCHI, West Coast Holdings,
      LLC, and Ganesha Realty LLC, OC-PIN placed into an escrow account 57,250,000
      shares of the Company’s common stock. As of September 30, 2005, an aggregate of
      $12.5 million in cash has been deposited in the escrow account. See Note 4
      for a
      discussion of events after such date.





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**Recent
      Accounting Pronouncements**





On
      October 13, 2004, the Financial Accounting Standards Board issued Statement
      123R, Share-Based Payment, which requires all companies to measure compensation
      cost for all share-based payments, including employee stock options, at fair
      value. The statement is effective for all public companies for interim or annual
      periods after June 15, 2005. The statement eliminates the ability to
      account for share-based compensation transactions using APB No. 25,
      and
      generally requires that such transactions be accounted for using a
      fair-value-based method and recognized as expenses in our consolidated
      statements of operations. The standard also requires that the modified
      prospective transition method be used, which would necessitate the Company
      to
      recognize compensation cost for the fair value of new awards granted, modified
      or settled after the effective date of the SFAS 123R. In addition, the
      measurement of compensation cost for awards that are not fully vested as of
      the
      effective date of the SFAS 123R would be based on the same estimate
      that
      the Company used to previously value its grants under SFAS 123.





As
      a
      result of SFAS 123R, the Company will be required to expense the fair
      value
      of any stock option grants that it may make in the future, rather than disclose
      the impact on its consolidated statement of operations within the Company’s
      footnotes.





In
      January 2003, the Financial Accounting Standards Board issued FIN 46,
“Consolidation of Variable Interest Entities,” which requires consolidation of
      certain entities in which equity investors do not have the characteristics
      of a
      controlling financial interest or do not have sufficient equity at risk for
      the
      entity to finance its activities without additional subordinated financial
      support from other parties. Paragraph 1 of ARB 51 states that consolidated
      financial statements are usually necessary for a fair presentation when one
      of
      the companies in the group directly or indirectly has a controlling financial
      interest in the other companies. Paragraph 2 states that “the usual condition
      for a controlling financial interest is ownership of a majority voting
      interest...” However, application of the majority voting interest requirement in
      ARB 51 to certain types of entities may not identify the party with a
      controlling financial interest because the controlling financial interest may
      be
      achieved through arrangements that do not involve voting interests. Application
      of Interpretation 46 or Interpretation 46(R) is required in financial statements
      of public entities that have interests in variable interest entities or
      potential variable interest entities commonly referred to as special-purpose
      entities for periods ending after December 15, 2003. See Note to the financial
      statements regarding the Company’s implementation of FIN 46 (R).




**Item
      3. Quantitative and Qualitative Disclosures About Market Risk.**





At
      September 30, 2005, we did not have any investment in or outstanding liabilities
      under market rate sensitive instruments. We do not enter into hedging or
      derivative instrument arrangements. We have no off-balance sheet arrangements.




**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. The Company’s
      certifying officers have concluded that the Company’s disclosure controls and
      procedures are effective in reaching that level of assurance.





35


As
      of the
      end of the period of this report, the Company carried out an evaluation, under
      the supervision and with the participation of the Company’s management,
      including the Company’s Chief Executive Officer and the Company’s Chief
      Financial Officer, of the effectiveness of the design and operation of the
      Company’s disclosure controls and procedures. Based on the foregoing, the
      Company’s Chief Executive Officer and Chief Financial Officer concluded that the
      Company’s disclosure controls and procedures were effective.





There
      have been no significant changes in the Company’s internal controls or in other
      factors that could significantly affect the internal controls subsequent to
      the
      date the Company completed its evaluation.




**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 are likely to have a material adverse effect on the
      Company.




**Item
      6. Exhibits.**




Exhibit
                Number
            Description10.1
            Second
                Amendment to Stock Purchase Agreement, dated as of October 31, 2005,
                by
                and between the Registrant and Orange County Physicians Investment
                Network, LLC (incorporated herein by reference from Exhibit 99.1
                to the
                Registrant’s Current Report on Form 8-K filed with the Commission on
                November 4, 2005).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.




36


**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:
              November 21, 2005
            By:
            /s/ Steven
              R. BlakeSteven
                R. Blake
              Chief
                Financial Officer
              (Principal
                  Financial Officer)




37