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







Explanatory
          Note
 
 On
          March
          28, 2006, the Company’s Audit Committee, acting on a recommendation from the
          Company’s management and following accounting questions reviewed with the
          Securities and Exchange Commission determined that the Company’s unaudited
          condensed consolidated quarterly financial statements for the periods ended
          March 31, 2005, June 30, 2005, and September 30, 2005, should be restated
          to
          revise the accounting and related disclosures for the expense of warrants
          issued
          on January 27, 2005. In addition, the Company’s Audit Committee, acting on
          recommendation from the Company’s management has concluded that the quarterly
          provision for income taxes for the periods ended March 31, 2005, June 30,
          2005
          and September 30, 2005 should be restated to correct an error in the calculation
          of the taxable gain on the sale of assets to PCHI. The restatements impact
          each
          of the three months and the respective year to date periods ended March
          31,
          2005, June 30, 2005, and September 30, 2005 presented herein and is further
          discussed in Note 12 to the unaudited condensed consolidated financial
          statements included herein.
  This
          amendment to the Company’s Quarterly Report on Form 10-Q/A is being filed for
          the purpose of amending and restating Items 1, 2 and 4 of Part I and
          Item 6 of Part II of the Form 10-Q originally filed solely to the
          extent necessary (i) to reflect the restatement of the Company’s unaudited
          condensed consolidated financial statements as of and for the periods ended
          March 31, 2005, June 30, 2005, and September 30, 2005 as described in Note
          12 to
          the unaudited condensed consolidated financial statements and (ii) to make
          revisions to “Management’s Discussion and Analysis of Financial Condition and
          Results of Operations” as warranted by the restatement, (iii) to make
          revisions to Item 4 of Part I to reflect our evaluation of controls
          and procedures as of the date of filing this amended Quarterly Report on
          Form 10-Q/A, (iv) to include the certifications required by the
          Sarbanes-Oxley Act of 2002 and (v) to update the exhibits. This amended
          Quarterly Report on Form 10-Q/A is as of the date the Quarterly Report on
          Form 10-Q was originally filed except for material subsequent events more
          fully described in Note 13 to the unaudited condensed consolidated financial
          statements and supplemental information provided to enhance managements
          discussion of critical accounting estimates.







**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.


Unaudited
        Condensed Consolidated Balance Sheet




**ASSETS****September
                  30,****2005**
              
              **December
                    31,**
                  **2004**(Unaudited)(Restated)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
              
              
              2,326,000
              
              
              —Total
                  current liabilities
              
              
              132,471,478
              
              
              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
              
              
              17,215,000
              
              
              —Additional
                  paid in capital
              
              
              12,040,487
              
              
              1,189,621Accumulated
                  deficit
              
              
              (41,240,740
              )
              
              (2,098,358
              )Total
                  stockholders' deficiency
              
              
              (11,860,694
              )
              
              (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.**


**Unaudited
        Condensed Consolidated Statement of Operations**


**Three
                  Month Ended**
              
              **Nine
                  Months Ended****September
                  30, 2005**
              
              **September
                  30, 2004**
              
              **September
                  30, 2005**
              
              **September
                  30, 2004****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**(Restated)
              
              
              
              (Restated)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
              
              
              —
              
              
              —
              
              
              17,215,000
              
              
              —94,808,657
              
              
              491,048
              
              
              224,290,561
              
              
              1,413,788Operating
                  loss
              
              
              (3,188,654
              )
              
              (491,048
              )
              
              (27,732,992
              )
              
              (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
              )
              
              (36,771,917
              )
              
              (1,413,788
              )Provision
                  for income taxes
              
              
              1,516,000
              
              
              —
              
              
              3,726,000
              
              
              —Minority
                  interest in variable
                interest
                  entity
              
              
              (1,151,113
              )
              
              —
              
              
              (1,355,535
              )
              
              —Net
                  loss
              
              $
              (7,858,140
              )
              $
              (491,048
              )
              $
              (39,142,382
              )
              $
              (1,413,788
              )Per
                  share data:Basic
                  and fully diluted:Loss
                  per common share
              
              $
              (0.11
              )
              $
              (0.02
              )
              $
              (0.42
              )
              $
              (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.**
 **Unaudited
        Condensed Consolidated Statement of Shareholders’ Equity**


AdditionalCommon
                        Stock
                  
                  
                  Common
                      Stock Warrants
                  
                  
                  Paid-in
                  
                  
                  AccumulatedShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  Total(Restated)
                  
                  
                  
                  
                  
                  (Restated)
                  
                  
                  (Restated)Balance,
                      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
                  
                  
                  17,215,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  17,215,000Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (39,142,382
                  )
                  
                  (39,142,382
                  )Balance,
                      September 30, 2005
                  
                  
                  124,559,000
                  
                  $
                  124,559
                  
                  
                  74,700,000
                  
                  $
                  17,215,000
                  
                  $
                  12,040,487
                  
                  $
                  (41,240,740
                  )
                  $
                  (11,860,694
                  )




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




4


**INTEGRATED
      HEALTHCARE HOLDINGS, INC.**


**Unaudited
        Condensed Consolidated Statement of Cash Flows**


**Nine
                Months Ended****September
                30, 2005**
            
            **September
                30, 2004**(Restated)Cash
                flows from operating activities:Net
                loss
            
            $
            (39,142,382
            )
            $
            (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 and option expense
            
            
            17,470,144
            
            
            —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
            
            
            2,326,000
            
            
            —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 the sale of partnership interests in variable interest entity
                  used
                  for the Acquisition
            
            
            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
            
            $
            14,464Supplemental
                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 and options
            
            $
            17,470,144
            
            $
            —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 $7,858,140 and $39,142,382 (inclusive of a warrant issuance
      expense of $17,215,000 incurred in connection with the Acquisition) during
      the
      three months and nine months ended September 30, 2005, respectively and has
      negative working capital of $(64,565,550) 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 $66,246,821. 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
              )$
              66,246,821
  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 $17,215,000 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
                
                $
                (7,858,140
                )
                $
                (7,027,633
                )
                $
                (54,048,282
                )
                $
                (34,712,611
                )Per
                    share data:Basic
                    and fully diluted:Loss
                    per common share
                
                $
                (0.12
                )
                $
                (0.11
                )
                $
                (0.74
                )
                $
                (0.54
                )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.  .
          However, OC-PIN was unable to raise the additional financing in time for
          the
          closing of the Acquisition and OC-PIN indicated that it disagreed with
          the
          Company’s interpretation of OC-PIN’s obligations under the Stock Purchase
          Agreement dated January 28, 2005. In order to avoid litigation, the Company
          agreed to extend OC-PIN’s additional $20,000,000 financing commitment, and on
          June 16, 2005 the Company entered into the following new agreements with
          OC-PIN:





·
            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:




·
              OC-PIN’s
                    total stock purchase commitment under the Stock Purchase Agreement
                    was
                    reduced from $30 million to $25
                    million.


·
            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 in
                July
                2005. 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. See the financial impact of the shares placed into escrow
                at Note
                10 - loss per share.





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





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





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





3.
            5,798,831
                of the Escrowed shares of the Company’s common stock 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 recorded an expense of $17,215,000 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 estimated maximum number of shares that could be
      issued under the warrant agreement of 43,254,715.




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:




Risk-free
                  interest rate
              
              
              3.2
              %Expected
                  volatility
              
              
              33.6
              %Dividend
                  yield
              
              
              —Expected
                  life (years)
              
              
              3.5Fair
                  value of Warrants (fully diluted)
              
              
              $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. Based
        on
        the market for the Company’s stock not being reasonably efficient, the market
        not expecting the significant warrant grant, and the Company not commensurately
        benefiting from an exercise of the warrant, the Company determined that the
        dilutive effect of the warrant should be reflected in estimating its fair
        value.
        The Company calculated the dilutive effect by dividing the non-dilutive fair
        value by 1.249, based on the maximum number of shares to be issued under
        the
        warrant of 24.9% of total outstanding shares.





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 -
      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
              
              $
              3,726,000
              
              $
              —Deferred
                  income taxes:U.S.
                  Federal and State
              
              
              —
              
              
              —$
              3,726,000
              
              $
              —
 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 for the nine
        months
        ended September 30, 2005 is shown below:
 Estimated
                    tax benefit at federal and state statutory rates
                  on an annualized basis
              
              $
              (12,099,000
              )Common
                  stock warrant expense
              
              
              5,402,000Gain
                  on sale of real estate
              
              
              1,867,000Change
                  in valuation allowance
              
              
              9,009,000State
                  credits
              
              
              (1,231,000
              )Depreciation
              
              
              436,000Other
              
              
              342,000$
              3,726,000
 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
                  deferred 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 $0.12 and $0.64 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 38,651,607 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
        12 -
        RESTATEMENT OF PRIOR PERIODS
 
 In
        March
        2006, the Company restated its 2005 quarterly financial statements due to
        the
        following adjustments:
 
 ·
              The
                  Company revised its calculation of the Warrant expense incurred
                  during the
                  nine months ended September 30, 2005. The total adjustment required
                  to
                  increase the Warrant expense to its proper balance was $780,827
                  pre-tax.
                  The adjustment was a result of the Company recognizing the warrant
                  expense
                  as a nonrecurring settlement charge during the three months ended
                  March
                  31, 2005 using a probability analysis to estimate the maximum number
                  of
                  warrants exercisable at the date of issuance of 43,254,715
                  shares.
 
 ·
              The
                  Company revised its provision for income taxes due to an error
                  in the
                  calculation of the taxable gain on the sale of real property to
                  PCHI (see
                  Note 7 Variable Interest Entity.) The total adjustment required
                  to reduce
                  the provision for income taxes was $799,000 and $1,823,000 for
                  the three
                  and nine months ended September 30, 2005, respectively.
 
 The
        effects of the restatement were as follows:
  Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30, 2005
              
              September
                  30, 2005As
                  Previously
                Reported
              
              As
                Restated
              
              As
                  Previously
                Reported
              
              As
                RestatedNet
                  loss
              
              $
              (8,657,140
              )
              $
              (7,858,140
              )
              $
              (40,184,555
              )
              $
              (39,142,382
              )Basic
                  and fully diluted:
                Net
                  loss per commonshare
              
              $
              (0.12
              )
              $
              (0.11
              )
              $
              (0.43
              )
              $
              (0.42
              )
 NOTE
        13 -
        SUBSEQUENT EVENTS


On
        December 14, 2005, the Company and its subsidiaries collectively entered
        into
        Amendment No. 1 to Credit Agreement dated as of December 12, 2005 (the
“Amendment”), that amends that certain credit agreement dated as of March 3,
        2005 (the “March Credit Agreement”), with PCHI, OC-PIN, Ganesha Realty, LLC,
        West Coast Holdings, LLC (the “Credit Parties”) and Medical Provider Financial
        Corporation II (the “Lender”). The Amendment (i) declares cured those certain
        events of default set forth in the notices of default received on or about
        May
        9, 2005, from the Lender, (ii) requires the Company to pay $5,000,000 to
        the
        Lender for mandatory prepayment required under the March Credit Agreement,
        (iii)
        requires the Company to obtain $10,700,000 in additional new capital
        contributions to pay in full and retire all amounts due and owing under the
        new
        Note evidenced by the Credit Agreement (as defined below) and (iv) includes
        certain indemnities and releases in favor of the Lender.
 
 On
        December 14, 2005, the Company also entered into a credit agreement (the
“Credit
        Agreement”), dated as of December 12, 2005, with the Credit Parties and the
        Lender. Under the Credit Agreement, the Lender loaned a total of $10,700,000
        to
        the Company as evidenced by that certain promissory note in favor of the
        Lender
        (the “New Note”) with a total principal balance of $10,700,000. The Company will
        use the proceeds to operate the Hospital facilities. Interest is payable
        monthly
        at the rate of 12% per annum and the New Note is due on December 12, 2006.
        The
        Company may not prepay the New Note in whole or in part.


26
 
 **INTEGRATED
        HEALTHCARE HOLDINGS, INC.** **Condensed
          Notes to Unaudited Condensed Consolidated Financial
          Statements**
 **September
          30, 2005**
  The
                New
                Note is secured by substantially all of the Company’s assets. In addition, the
                Company issued a common stock warrant to the Lender as collateral
                under the New
                Note. The warrant is exercisable by the Lender only in the event
                of that a
                default has occurred and is continuing on the New Note. The warrant
                provides the
                Lender to purchase the number of shares of the Company’s common stock equal in
                value to the amount of the New Note not repaid at maturity, plus
                accrued
                interest and lender fees for an aggregate exercise price of $1.00,
                regardless of
                the amount of shares acquired. The Warrant is exercisable from and
                after
                December 12, 2005 until the occurrence of either a termination of
                the Credit
                Agreement by the Lender or the Company’s payment in full of all obligations
                under the Credit Agreement. The Company is obligated to register
                the estimated
                number of shares of common stock issuable upon exercise of the warrant
                by filing
                a registration statement under the Securities Act of 1933, as amended
                (the
“Securities Act”), no later than ninety days prior to the maturity date of the
                New Note. If the Company proposes to file a registration statement
                under the
                Securities Act on or before the expiration date of the warrant, then
                the Company
                must offer to the holder of the warrant the opportunity to include
                the number of
                shares of common stock as the holder may request.
 
 The
                Company has determined it appropriate to classify the warrant as
                a liability at
                the date of issuance in accordance with EITF No. 00-19 “Accounting for
                Derivative Financial Instruments Indexed to, and Potentially Settled
                in, a
                Company’s Own Stock,” FAS 133 “Accounting for Derivative Instruments and Hedging
                Activities,” and FAS 150 “Accounting for Certain Financial Instruments with
                Characteristics of both Liabilities and Equity.” In addition, the Company will
                re-measure the warrants subsequent to the initial measurement date
                at fair value
                with changes in fair value recognized in earnings.
 
 As
                a
                result of the Company not being able to determine the maximum number
                of shares
                that could be required to be issued under the warrants issued on
                December 12,
                2005, the Company has also determined that share settlement of the
                Warrants
                issued on January 27, 2005 is not within its control and will reclassify
                the
                Warrants as a liability as of December 12, 2005.
  PCHI
              and
              OC-PIN have each agreed to guaranty payment of the New Note. In addition,
              West
              Coast Holdings, LLC and Ganesha Realty, LLC have each agreed to pledge
              their
              membership interests in PCHI as security for payment of the New
              Note.
 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**
 
 Accounts
            receivable primarily consist of amounts due from third-party payors and
            patients. Our ability to collect outstanding receivables is critical
            to our
            results of operations and cash flows. 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. Our allowance is based on the aging of certain of our
            accounts
            receivables by hospital, the historical collection experience by hospital
            and
            for each type of payer and other relevant factors. The percentages applied
            in
            the calculation of the allowance are consistent with those used by Tenet.
 
 The
            primary uncertainty lies with uninsured patient receivables and deductibles,
            co-payments or other amounts due from individual patients, which collectively
            represent the largest component of bad debts. 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. We 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.
 
 Generally,
            uncollected balances are expected to be assigned to a collection agency
            between
            90 to 120 days past due, once patient responsibility has been identified.
            As we
            did not acquire Tenet’s accounts receivable in our Acquisition on March 8, 2005,
            our accounts have been current up to the third quarter. Accordingly,
            in
            September 2005 we engaged a collection agency and bad debt assignments
            commenced. 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.
 
 The
            process of determining the allowance requires us to estimate uncollectible
            patient accounts that are highly uncertain and requires a high degree
            of
            judgment. It is impacted by changes in regional economic conditions,
            business
            office operations, payor mix and trends in federal or state governmental
            healthcare coverage. Due to our limited historical information as a result
            of
            our Acquisition occurring on March 8, 2005, the following represents
            our
            significant categories of gross patient accounts receivable as of December
            31,
            2005 (in thousands and unaudited):
  Governmental
                                  
                                  $
                                  16,809Insured
                                      Patient Accounts, net of discounts
                                  
                                  
                                  33,222Uninsured
                                      and Self Pay Accounts
                                  
                                  
                                  16,927$
                                  66,958


Also
              as
              of December 31, 2005, $20 million in accounts had been written off
              and assigned
              for collection. Of the combined uninsured and self pay balances (both
              active
              accounts and bad debt write-offs) 4.4% had been collected as of December
              31,
              2005. The uninsured accounts category represented 78% of the allowance
              for
              uncollectible accounts and net of this portion of the allowance represented
              an
              estimated receivable of $1.4 million. Uninsured accounts are reserved
              at 93.2%
              of the balance for all aging categories. Based on collection experience
              through
              December 31, 2005, we expect to collect 65% or $0.9 million of this
              prior to
              assignment. The remainder represents the expected recovery by the outside
              collection agency after the active balances are assigned. Until we
              obtain
              additional historical experience, this recovery is not assured.
 
 Approximately
              $17 million of our accounts at December 31, 2005 are governmental accounts
              reserved at 100% for potential denials after 180 days.
 
 Insured
              patient accounts represent 22% of the allowance for doubtful accounts
              as of
              December 31, 2005 calculated on a scale based on the age of the accounts
              from
              date of service starting at 3.3% for current accounts and progressing
              to 63% for
              accounts over 180 days. Our commercial insured accounts of $22 million
              have an
              allowance of $4 million as of December 31, 2005. The average age of
              these
              accounts from date of service to collection is 52 days. In management’s opinion
              this is reasonable as long as the accounts continue to be current.
 
 A
              significant increase in our provision for doubtful accounts (as a percentage
              of
              revenues) would have a significant increase to our operating losses.
              This would
              adversely affect our results of operations, financial condition, liquidity
              and
              future access to capital.


**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 number of Warrants exercisable are limited to
      not exceed 24.9% of the Company’s Fully-Diluted capital stock.






The
      Company computed the Warrant expense
      of $17,215,000 based on the fair value of the Warrants at the date
      of the grant and the estimated maximum number of shares exercisable of
      43,254,715.






29


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




Risk-free
                  interest rate
              
              
              3.2
              %Expected
                  volatility
              
              
              33.6
              %Dividend
                  yield
              
              
              —Expected
                  life (years)
              
              
              3.5Fair
                  value of Warrants (fully diluted)
              
              
              $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.





**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)(Restated)
              
              (Restated)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
              
              
              1,516,000
              
              
              1,266,000Minority
                  interest in variable interest entity
              
              
              (1,151,113
              )
              
              (195,517
              )Net
                  loss
              
              $
              (7,858,140
              )
              $
              (11,427,621
              )




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 $1.5 million for the three months ended September
      30,
      2005 and $1.3 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 $17.2 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 $2.3 million. Other current liabilities increased by $2.4 million
      and consist primarily of accrued interest, workers’ compensation insurance, and
      other miscellaneous accruals.





We
      used
      $63.2 million in investing activities to complete the Hospital acquisition.





33


Cash
      provided by financing activities was $100.7 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.





34


**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 instrument
      arrangements. On December 12, 2005 we entered into a derivative financial
      instrument solely for the purpose of securing a related loan. This is discussed
      more fully in the notes to the financial statements regarding subsequent
      events. 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
          periodic reports is recorded, processed, summarized and reported within
          the time
          periods specified in the SEC’s rules and forms, and that such information is
          accumulated and communicated to the Company’s management, including its Chief
          Executive Officer and Chief Financial Officer, as appropriate, to allow
          timely
          decisions regarding required disclosure based closely on the definition
          of
“disclosure controls and procedures” in Rule 15d-15(e). The Company’s disclosure
          controls and procedures are
          designed to provide a reasonable level of assurance of reaching the Company’s
          desired disclosure control objectives. In designing and evaluating the disclosure
          controls and procedures ,
          management recognized that any controls and procedures, no matter how well
          designed and operated, can provide only reasonable assurance of achieving
          the
          desired control objectives and management necessarily was required to apply
          its
          judgment in evaluating the cost-benefit relationship of possible controls
          and
          procedures.
 
 We
          conducted an evaluation under the supervision and with the participation
          of our
          management, including our Chief Executive Officer and Chief Financial Officer,
          of the effectiveness of the design and operation of our disclosure
          controls and procedures as of
          December 31, 2005. During previous quarters we conducted evaluations of
          the
          effectiveness of our disclosure
          controls and procedures as of
          March 31, June 30 and September 30, 2005 and found them to be effective
          as of
          such dates. However, we have subsequently conducted a re-evaluation of
          the
          effectiveness of our disclosure
          controls and procedures as of
          March 31, June 30 and September 30, 2005, and identified certain material
          weaknesses, discussed further below.
 
 With
          the
          participation of the Company’s Chief Executive Officer and Chief Financial
          Officer, management conducted an evaluation of the effectiveness of our
          system
          of internal
          control over financial reporting as of
          December 31, 2005, based on the framework in Internal Control-Integrated
          Framework published by the Committee of Sponsoring Organizations of the
          Treadway
          Commission.
 
 Based
          on
          these evaluations and re-evaluations, management determined that the Company’s
          system of disclosure
          controls and procedures was not
          effective as of March 31, June 30, September 30 and December 31, 2005,
          and the
          Company’s systems of internal
          control over financial reporting was not
          effective as of December 31, 2005, due to the presence of certain material
          weaknesses. These weaknesses contributed to the need for restatements of
          our
          financial statements for the quarterly periods ending March 31, June 30
          and
          September 30, 2005 as follows.
 
 1.  As
          described in the notes to the accompanying restated financial statements,
          the
          Company revised its calculation of Warrant expense incurred during the
          three
          months ended March 31, 2005 after review of its accounting treatment following
          receipt of comments from the Staff of the Securities and Exchange Commission.
          The total adjustment required to increase the Warrant expense to its proper
          balance was $780,827 pre-tax for such period. This adjustment was necessary
          because the Company recognized the Warrant expense as a nonrecurring settlement
          charge during the three months ended March 31, 2005 using a probability
          analysis
          to estimate the maximum number of warrants exercisable at the date of issuance
          of 43,254,715 shares.
 
 2.  As
          described in the notes to the accompanying restated financial statements,
          the
          Company revised its provision for income taxes due to an error in the
          calculation of the taxable gain on the sale of real property to PCHI (see
          Note 7
          Variable Interest Entity). The total adjustment required to reduce the
          provision
          for income taxes was $528,000 for the three months ended March 31, 2005,
          $496,000 for the three months ended June 30, 2005, $799,000 for the three
          months
          ended September 30, 2005 and $1,823,000 for the nine months ended September
          30,
          2005.
 
 Management
          has identified, as a material weakness contributing to these restatements,
          that
          the Company’s research and analysis of complex accounting issues was inadequate.
          Although the type of complex transactions giving rise to the restatements
          are
          expected to occur very infrequently, management believes that its process
          of
          analyzing and accounting for complex financial transactions requires
          improvement. In addition to inadequate expertise, due to business exigencies
          there was a lack of complete accounting analysis of these transactions
          until
          after they were completed, which contributed to an incomplete accounting
          analysis. Under the direction of the Audit Committee, management intends
          in the
          future to engage experts with sufficient expertise to advise on accounting
          and
          financial reporting of complex financial transactions, and to do so prior
          to or
          concurrently with the Company’s commitment to these
          transactions.


35




**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.


*
      Previously filed.






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:
                April 11, 2006
              By:
              /s/ Steven
                R. BlakeSteven
                  R. Blake
                Chief
                  Financial Officer
                (Principal
                    Financial Officer)