10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2011; or
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________

Commission File Number 0-23511

INTEGRATED HEALTHCARE HOLDINGS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA	87-0573331
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)	(I.R.S. EMPLOYER IDENTIFICATION NO.)

1301 NORTH TUSTIN AVENUE SANTA ANA, CALIFORNIA	92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)	(ZIP CODE)

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

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

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

There were 255,307,262 shares outstanding of the registrant's common stock as of November 3, 2011.

INTEGRATED HEALTHCARE HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements:	3
	Condensed Consolidated Balance Sheets as of September 30 and March 31, 2011 - (unaudited)	3
	Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2011 and 2010 - (unaudited)	4
	Condensed Consolidated Statement of Stockholders’ Deficiency for the six months ended September 30, 2011 – (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and 2010 – (unaudited)	6
	Notes to Condensed Consolidated Financial Statements - (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	36
Item 6.	Exhibits	36
	Signatures	37

2

PART I - FINANCIAL INFORMATION

Item 1.Financial statements 

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in 000's, except par value)

(unaudited)

	September 30, 2011			March 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	2,933		$	20,539
Restricted cash		11			24
Accounts receivable, net of allowance for doubtful accounts of $15,823 and $20,076, respectively		48,997			52,538
Inventories of supplies, at cost		6,195			5,945
Due from governmental payers		5,846			4,352
Prepaid insurance		1,888			3,108
Prepaid income taxes		1,223			-
Prepaid expenses - hospital quality assurance fees		15,247			-
Hospital quality assurance fees receivable		-			1,815
Other prepaid expenses and current assets		10,717			8,885
Total current assets		93,057			97,206
Property and equipment, net		52,836			54,251
Debt issuance costs, net		144			445
Total assets	$	146,037		$	151,902
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Revolving line of credit	$	20,000		$	19,081
Accounts payable		40,244			43,968
Accrued compensation and benefits		17,112			18,707
Accrued insurance retentions		15,254			16,642
Unearned revenue - hospital quality assurance fees		18,386			-
Income taxes payable		-			12,800
Other current liabilities		4,048			7,261
Total current liabilities		115,044			118,459
Debt, noncurrent		45,000			45,000
Warrant liability, noncurrent		384			167
Capital lease obligations, net of current portion of $1,116 and $1,131, respectively		6,316			6,837
Total liabilities		166,744			170,463
Commitments and contingencies
Stockholders' deficiency:
Integrated Healthcare Holdings, Inc. stockholders' deficiency:
Common stock, $0.001 par value; 800,000 shares authorized; 255,307 shares issued and outstanding		255			255
Additional paid in capital		62,911			62,911
Receivable from stockholders		-			(882	)
Accumulated deficit		(81,644	)		(79,280	)
Total Integrated Healthcare Holdings, Inc. stockholders' deficiency		(18,478	)		(16,996	)
Noncontrolling interests		(2,229	)		(1,565	)
Total stockholders' deficiency		(20,707	)		(18,561	)
Total liabilities and stockholders' deficiency	$	146,037		$	151,902

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

3

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in 000's, except per share amounts)

(unaudited)

	Three months ended September 30,						Six months ended September 30,
	2011			2010			2011			2010
Net operating revenues	$	93,702		$	91,001		$	183,364		$	184,920
Operating expenses:
Salaries and benefits		53,160			52,038			106,398			103,680
Supplies		13,230			13,716			26,213			26,661
Provision for doubtful accounts		7,119			10,359			16,816			19,267
Other operating expenses		14,699			15,260			29,176			31,400
Depreciation and amortization		1,077			1,052			2,167			2,096
		89,285			92,425			180,770			183,104
Operating income (loss)		4,417			(1,424	)		2,594			1,816
Other expense:
Interest expense, net		(2,480	)		(3,147	)		(5,322	)		(6,265	)
Gain (loss) on warrants		3,053			592			(217	)		(1,308	)
		573			(2,555	)		(5,539	)		(7,573	)
Income (loss) before income tax provision (benefit)		4,990			(3,979	)		(2,945	)		(5,757	)
Income tax provision (benefit)		4,400			-			(800	)		-
Net income (loss)		590			(3,979	)		(2,145	)		(5,757	)
Net income attributable to noncontrolling interests (Note 9)		(84	)		(1	)		(219	)		(136	)
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.	$	506		$	(3,980	)	$	(2,364	)	$	(5,893	)
Per Share Data (Note 8):
Earnings (loss) per common share attributable to Integrated Healthcare Holdings, Inc. stockholders
Basic	$	0.00		$	(0.02	)	$	(0.01	)	$	(0.02	)
Diluted	$	0.00		$	(0.02	)	$	(0.01	)	$	(0.02	)
Weighted average shares outstanding
Basic		255,307			255,307			255,307			255,307
Diluted		256,972			255,307			255,307			255,307

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

4

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

(amounts in 000's)

(unaudited)

	Integrated Healthcare Holdings, Inc. Stockholders
	Common Stock				Additional Paid-in		Receivable from			Accumulated			Noncontrolling
	Shares		Amount		Capital		Stockholders			Deficit			Interests			Total
Balance, March 31, 2011		255,307	$	255	$	62,911	$	(882	)	$	(79,280	)	$	(1,565	)	$	(18,561	)
Payment received on receivable from stockholders		-		-		-		882			-			-			882
Net income (loss)		-		-		-		-			(2,364	)		219			(2,145	)
Noncontrolling interests distributions		-		-		-		-			-			(883	)		(883	)
Balance, September 30, 2011		255,307	$	255	$	62,911	$	-		$	(81,644	)	$	(2,229	)	$	(20,707	)

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

5

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in 000's)

(unaudited)

	Six months ended September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(2,145	)	$	(5,757	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment		2,167			2,096
Provision for doubtful accounts		16,816			19,267
Amortization of debt issuance costs		449			154
Loss on warrants		217			1,308
Noncash share-based compensation expense		-			27
Changes in operating assets and liabilities:
Accounts receivable		(13,275	)		(17,698	)
Inventories of supplies		(250	)		1
Due from governmental payers		(1,494	)		(341	)
Prepaid expenses - hospital quality assurance fees		(15,247	)		-
Prepaid income taxes		(1,223	)		-
Hospital quality assurance fees receivable		1,815			-
Prepaid insurance, other prepaid expenses and current assets, and other assets		(760	)		(2,903	)
Accounts payable		(3,724	)		(1,580	)
Accrued compensation and benefits		(1,595	)		(3,674	)
Unearned revenue - hospital quality assurance fees		18,386			-
Income taxes payable		(12,800	)		-
Accrued insurance retentions and other current liabilities		(3,851	)		370
Net cash used in operating activities		(16,514	)		(8,730	)
Cash flows from investing activities:
Increase (decrease) in restricted cash		13			(8	)
Additions to property and equipment		(752	)		(853	)
Net cash used in investing activities		(739	)		(861	)
Cash flows from financing activities:
Proceeds from revolving line of credit, net		919			39,282
Debt issuance costs		-			(869	)
Repayment of debt		-			(34,968	)
Payment received - receivable from stockholders		132			-
Noncontrolling interests distributions		(883	)		(1,650	)
Payments on capital lease obligations		(521	)		(465	)
Net cash provided by (used in) financing activities		(353	)		1,330
Net decrease in cash and cash equivalents		(17,606	)		(8,261	)
Cash and cash equivalents, beginning of period		20,539			10,159
Cash and cash equivalents, end of period	$	2,933		$	1,898
Supplemental information:
Cash paid for interest	$	4,587		$	4,377
Cash paid for income taxes	$	13,095		$	-

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

6

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

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

BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated financial statements of Integrated Healthcare Holdings, Inc. and its wholly owned subsidiaries (the "Company") have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. Accordingly, the accompanying unaudited condensed consolidated statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments that are of a normal and recurring nature necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows. The results of operations for the three and six months ended September 30, 2011 are not necessarily indicative of the results for the entire 2012 fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011 filed with the SEC on June 24, 2011.

The Company has determined that Pacific Coast Holdings Investment, LLC ("PCHI") (Note 9), is a variable interest entity as defined by GAAP and, accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, all amounts included in these notes to the condensed consolidated financial statements are expressed in thousands (except per share amounts, percentages and stock option prices and values). 

LIQUIDITY - As of September 30, 2011, the Company had a total stockholders’ deficiency of $20.7 million and a working capital deficit of $22.0 million.  For the three and six months ended September 30, 2011, the Company had net income (loss) of $0.5 million and $(2.4) million, respectively. At September 30, 2011, the Company had no additional availability under its revolving credit facility (Note 3).

DESCRIPTION OF BUSINESS - Effective March 8, 2005, the Company acquired four hospitals (the "Hospitals") from subsidiaries of Tenet Healthcare Corporation (the "Acquisition"). The Company owns and operates the four community-based hospitals located in southern California, which are:

● 282-bed Western Medical Center in Santa Ana

● 188-bed Western Medical Center in Anaheim

● 178-bed Coastal Communities Hospital in Santa Ana

● 114-bed Chapman Medical Center in Orange

RECLASSIFICATION FOR PRESENTATION - Certain amounts previously reported have been reclassified to conform to the current period's presentation with no impact on the reported net income (loss) of the Company.

CONCENTRATION OF RISK - The Hospitals are subject to licensure by the State of California and accreditation by the Joint Commission. Loss of either licensure or accreditation would impact the ability to participate in various governmental and managed care programs, which provide the majority of the Company's revenues.

Substantially all net operating revenues come from external customers. The largest payers are Medicare and Medicaid, which combined accounted for 55% and 58% of the net operating revenues for the three months ended September 30, 2011 and 2010, respectively, and 55% and 57% for the six months ended September 30, 2011 and 2010, respectively. No other payers represent a significant concentration of the Company's net operating revenues.

The Company receives all of its inpatient services revenue from operations in Orange County, California. The economic conditions of this market could affect the ability of patients and third-party payers to reimburse the Company for services, through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs.

7

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

USE OF ESTIMATES - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Principal areas requiring the use of estimates include third-party cost report settlements, income taxes, accrued insurance retentions, self-insurance reserves, and net patient receivables. Management regularly evaluates the accounting policies and estimates that are used. In general, management bases the estimates on historical experience and on assumptions that it believes to be reasonable given the particular circumstances in which its Hospitals operate. Although management believes that all adjustments considered necessary for fair presentation have been included, actual results may materially vary from those estimates.

REVENUE RECOGNITION - Net operating revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less estimated discounts for contractual allowances, principally for patients covered by Medicare, Medicaid, managed care, and other health plans. Gross charges are retail charges based on the Company’s Charge Description Master. 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 accompanying unaudited condensed consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the federal government or state 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). Since Medicare requires a hospital's gross charges to be the same for all patients (regardless of payer category), gross charges are also what the Hospitals charge all other patients prior to the application of discounts and allowances.

Revenues under the traditional fee-for-service Medicare and Medicaid programs are based primarily on prospective payment systems. Discounts for retrospectively cost based revenues and certain other payments, which are based on the Hospitals' cost reports, are estimated using historical trends and current factors. Cost report settlements for retrospectively cost based revenues under these programs are subject to audit, and administrative and judicial review, which can take several years until final settlement of such matters are determined and completely resolved. Estimates of settlement receivables or payables related to a specific year are updated periodically, at year end, and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made to the estimates until the Final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be several years’ time lag between the submission of a cost report and receipt of the Final Notice of Program Reimbursement. Since the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. The Company has established settlement receivables of $534 and $456 as of September 30 and March 31, 2011, respectively, which are included as due from government payers in the accompanying unaudited condensed consolidated balance sheets.

The Hospitals receive supplemental payments from the State of California to support indigent care (Medi-Cal Disproportionate Share Hospital payments or "DSH") and from the California Medical Assistance Commission ("CMAC") under the SB 1100 and SB 1255 programs. The Hospitals received supplemental payments of $1.1 million and $0 during the three months ended September 30, 2011 and 2010, respectively, and $5.9 million and $11.1 million during the six months ended September 30, 2011 and 2010, respectively. The related revenue recorded for the three months ended September 30, 2011 and 2010, was $4.0 million and $4.8 million, respectively, and $7.4 and $11.1 million for the six months ended September 30, 2011 and 2010, respectively. As of September 30 and March 31, 2011, estimated DSH receivables were $5.3 million and $3.9 million, respectively, which are included as due from government payers in the accompanying unaudited condensed consolidated balance sheets.

The following is a summary of due from governmental payers:

	September 30,  2011		March 31,  2011
Medicare	$	534	$	456
Medicaid		5,312		3,896
	$	5,846	$	4,352

8

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

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. Management believes the estimation and review process allows for timely identification of instances where such estimates need to be revised. The Company does not believe there were any adjustments to estimates of individual patient bills that were material to its net operating revenues.

The Hospitals provide charity care to patients whose income level is below 300% of the Federal Poverty Level. Patients with income levels between 300% and 350% of the Federal Poverty Level qualify to pay a discounted rate under AB 774 based on various government program reimbursement levels. Patients without insurance 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 estimated costs (based on direct and indirect costs as a ratio of gross uncompensated charges associated with providing care to charity patients) for the three months ended September 30, 2011 and 2010 were approximately $2.5 million and $2.6 million, respectively, and $3.8 million and $4.5 million for the six months ended September 30, 2011 and 2010, respectively.

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 qualify for Medicaid, the receivables are reclassified to charity care and written off, or they are reclassified to self-pay and adjusted to their net realizable value through the provision for doubtful accounts. Reclassifications of Medicaid pending accounts to self-pay do not typically have a material impact on the results of operations as the estimated Medicaid contractual allowances initially recorded are not materially different than the estimated provision for doubtful accounts recorded when the accounts are reclassified. All accounts classified as pending Medicaid, as well as certain other governmental receivables, over the age of 90 days were reserved in contractual allowances as of September 30 and March 31, 2011 based on historical collections experience.

The Company receives payments for “eligible alien” care under Section 1011 of the Medicare Modernization Act of 2003. As of September 30 and March 31, 2011, the Company established a receivable in the amount of $1.3 million and $1.6 million, respectively, related to discharges deemed eligible to meet program criteria.

The Company 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 unaudited condensed consolidated financial statements.

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 copayments 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 copayments 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 nonemergency circumstances or for elective procedures and services, it is the Hospitals' policy, when appropriate, to verify insurance prior to a patient being treated.

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.

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. All of the non-interest bearing cash balances were fully insured at September 30, 2011 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and the Company’s non-interest bearing cash balances may again exceed federally insured limits.

9

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

INVENTORIES OF SUPPLIES - Inventories of supplies are valued at the lower of weighted average cost or market.

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 property and equipment and a corresponding lease liability is recognized. The value of the property and equipment under capital lease is recorded at 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 the lease term or their estimated useful life, where applicable.

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

LONG-LIVED ASSETS - 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 established market values of comparable assets or internal calculations of estimated undiscounted future net cash flows. The estimates of future net cash flows are based on assumptions and projections believed by the Company 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.

DEBT ISSUANCE COSTS - On August 30, 2010, the Company entered into a new revolving credit facility (Note 3) under which it incurred debt issuance costs consisting of a $450 origination fee for the Company's $40 million Revolving Line of Credit (new debt) and $469 in legal and other expenses paid to third parties. These amounts are amortized over the credit facility’s three year life using the straight-line method. Subsequently, the $40 million Revolving Line of Credit was reduced to $20 million, resulting in an acceleration of the amortization of the related debt issuance costs.  Debt issuance costs of $38 and $24 were amortized during the three months ended September 30, 2011 and 2010, respectively, and $449 (including $334 in accelerated amortization) and $154 during the six months ended September 30, 2011 and 2010, respectively.  At September 30 and March 31, 2011, prepaid expenses and other current assets in the accompanying unaudited condensed consolidated balance sheets included $153 and $300, respectively, as the current portion of debt issuance costs.

FAIR VALUE MEASUREMENTS - The Company's financial assets and liabilities recorded in the unaudited condensed consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, debt, accounts payable, and other liabilities, all of which are recorded at book value which approximates fair value.

GAAP has established a hierarchy for ranking the quality and reliability of the information used to determine fair values and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1:	Unadjusted quoted market prices in active markets for identical assets or liabilities.
Level 2:	Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3:	Unobservable inputs for the asset or liability.

The Company utilizes the best available information in measuring fair value.  Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company currently has no financial or nonfinancial assets or liabilities subject to fair value measurement on a recurring basis except for warrants issued in April 2010 (Note 4).

10

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and where they are classified within the hierarchy as of September 30, 2011:

	Total		Level 1		Level 2		Level 3
Warrant liability	$	384		-		-	$	384

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2011 - Fair value of warrants issued and vested	$	167
Change in fair value of warrant liability included in earnings		3,270
Balance at June 30, 2011		3,437
Change in fair value of warrant liability included in earnings		(3,053	)
Balance at September 30, 2011	$	384

 WARRANTS - The Company has entered into complex transactions that contain warrants (Notes 3 and 4). If an instrument (or an embedded feature) that has the characteristics of a derivative instrument is indexed to an entity’s own stock, it is still necessary to evaluate whether it is classified in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument).

INCOME (LOSS) PER COMMON SHARE – Income (loss) per share is calculated under two different methods, basic and diluted. Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period and dilutive potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock warrants or options, net of shares of common stock assumed to be repurchased by the Company from the exercise proceeds (Note 8).

INCOME TAXES - Deferred income tax assets and liabilities are determined based on the differences between the book and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws using the asset and liability method. The Company assesses the realization of deferred tax assets to determine whether an income tax valuation allowance is required. The Company has recorded a 100% valuation allowance on its deferred tax assets.

There is a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and California. Certain tax attributes carried over from prior years continue to be subject to adjustment by taxing authorities. Penalties or interest, if any, arising from federal or state taxes are recorded as a component of the Company’s income tax provision.

11

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

SEGMENT REPORTING - The Company operates in one line of business, the provision of healthcare services through the operation of general hospitals and related healthcare facilities. The Company's Hospitals generate substantially all of its net operating revenues.

The Company's four Hospitals and related healthcare facilities operate in one geographic region in Orange County, California. The region's economic characteristics, the nature of the Hospitals' operations, the regulatory environment in which they operate, and the manner in which they are managed are all similar. This region is an operating segment, as defined by GAAP. In addition, the Company's Hospitals and related healthcare facilities share certain resources and benefit from many common clinical and management practices. Accordingly, the Company aggregates the facilities into a single reportable operating segment.

SUBSEQUENT EVENTS - The Company’s accompanying unaudited condensed consolidated financial statements are considered issued when filed with the SEC.  The Company has evaluated subsequent events to the filing date of this Form 10-Q with the SEC.

NOTE 2 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	2011			2011
Buildings	$	35,376		$	34,624
Land and improvements		13,523			13,523
Equipment		13,461			13,266
Construction in progress		1,161			1,375
Assets under capital leases		11,218			11,218
		74,739			74,006
Less accumulated depreciation		(21,903	)		(19,755	)
Property and equipment, net	$	52,836		$	54,251

Accumulated depreciation on assets under capital leases as of September 30 and March 31, 2011 was $4.4 million and $3.7 million, respectively.

12

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

The Hospitals are located in an area near active and substantial earthquake faults. The Hospitals carry earthquake insurance with a policy limit of $50.0 million. A significant earthquake could result in material damage and temporary or permanent cessation of operations at one or more of the Hospitals.

The State of California has imposed new hospital seismic safety requirements. Under these new requirements, the Hospitals must meet stringent seismic safety criteria in the future. In addition, there could be other remediation costs pursuant to this seismic retrofit.

The State of California has introduced a new seismic review methodology known as HAZUS. The HAZUS methodology may preclude the need for some structural modifications. All four Hospitals requested HAZUS review and received a favorable notice pertaining to structural reclassification. All Hospital buildings, with the exception of one (an administrative building), have been deemed compliant until January 1, 2030 for both structural and nonstructural retrofit.  The Company does not have an estimate of the cost to remediate the seismic requirements for the administrative building as of September 30, 2011.

There are additional requirements that must be complied with by 2030. The costs of meeting these requirements have not yet been determined. Compliance with seismic ordinances will be costly and could have a material adverse effect on the Company's cash flow.  In addition, remediation could possibly result in certain environmental liabilities, such as asbestos abatement.

NOTE 3 - DEBT

On April 13, 2010 (the “Effective Date”), the Company entered into an Omnibus Credit Agreement Amendment (the “Omnibus Amendment”) with SPCP Group IV, LLC and SPCP Group, LLC (together, “Silver Point”), Silver Point Finance, LLC, as the Lender Agent, PCHI, Ganesha Realty LLC (“Ganesha”), Dr. Chaudhuri and KPC Resolution Company (“KPC”).  KPC and Ganesha are companies owned and controlled by Dr. Chaudhuri, who is the majority shareholder of the Company.  Ganesha owns a 49% membership interest in PCHI.

The Company entered into the Omnibus Amendment in connection with the Loan Purchase and Sale Agreement (the “Loan Purchase Agreement”), dated as of January 13, 2010, as amended, by and between KPC and the previous lender’s receiver.  Under the Loan Purchase Agreement, and as approved by the Court on April 2, 2010, KPC agreed to purchase all of the Credit Agreements from Medical Capital Corporation’s receiver for $70.0 million.  Concurrent with the closing of the Loan Purchase Agreement, KPC sold its interest in the Credit Agreements to Silver Point, and KPC purchased from Silver Point a 15% participation interest in the Credit Agreements.  On April 13, 2010, concurrent with the effectiveness of the Omnibus Amendment and the closing of the Loan Purchase Agreement, Silver Point acquired all of the Credit Agreements, including the security agreements and other ancillary documents executed by the Company in connection with the Credit Agreements, and became the “New Lender” under the Credit Agreements.

The following are material terms of the Omnibus Amendment:

● The stated maturity date under each Credit Agreement was changed to April 13, 2013.

● Affirming release of prior claims between the Company and the previous lender’s receiver, Silver Point agreed to waive any events of default that had occurred under the Credit Agreements and waived claims to accrued and unpaid interest and fees of $6.4 million under the Credit Agreements as of April 13, 2010.

● The $80.0 million Credit Agreement was amended so that the $45.0 million term note (the “$45.0 million Loan”) and $35.0 million non-revolving line of credit note (the “$35.0 million Loan”) will each bear a fixed interest rate of 14.5% per year.  These loans previously bore interest rates of 10.25% and 9.25%, respectively.  In addition, the Company agreed to make certain mandatory prepayments of the $35.0 million Loan when it received proceeds from certain new financing of its accounts receivable or provider fee funds from Medi-Cal under the Hospital Quality Assurance Fee program (“QAF”) (Note 11).  The $35.0 million Loan was refinanced on August 30, 2010 (see below).

13

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

● The $50.0 million Revolving Credit Agreement was amended so that Silver Point will, subject to the terms and conditions contained therein, make up to $10.0 million in new revolving funds available to the Company for working capital and general corporate purposes.  Each advance under the $50.0 million Revolving Credit Agreement will bear interest at an annual rate of Adjusted LIBOR (calculated as LIBOR subject to certain adjustments, with a floor of 2% and a cap of 5%) plus 12.5%, compared to an interest rate of 24.0% that was previously in effect under the $50.0 million revolving credit agreement.  In addition, the Company agreed to make mandatory prepayments of the $50.0 million Revolving Credit Agreement under the conditions described above with respect to the $80.0 million Credit Agreement.  The financial covenants under the $50.0 million Revolving Credit Agreement were also amended to increase the required levels of minimum EBITDA (as defined in the Omnibus Amendment) from the levels previously in effect under the $50.0 million Revolving Credit Agreement. This $50.0 million revolving line of credit was refinanced on August 30, 2010 (see below).

● The $10.7 million Credit Agreement was amended so that the $10.7 million convertible term note will bear a fixed interest rate of 14.5% per year, compared to the interest rate of 9.25% previously in effect and to eliminate the conversion feature of the loan.  In addition, the Company agreed to make mandatory prepayments of the $10.7 million Credit Agreement under the conditions described above with respect to the $80.0 million Credit Agreement. This $10.7 million term note was refinanced on August 30, 2010 (see below).

In connection with the sale of the Credit Agreements, all warrants and stock conversion rights issued to the previous lender were cancelled.  In connection with the Omnibus Amendment, the Company issued new warrants (Note 4).

On August 30, 2010, the Company (excluding PCHI) entered into a three year Credit and Security Agreement (the “New Credit Agreement”) with MidCap Financial, LLC, a commercial finance lender specializing in loans to middle market health care companies, and Silicon Valley Bank (collectively, the “AR Lender”).

Under the New Credit Agreement, the AR Lender committed to provide up to $40.0 million in loans to the Company under a secured revolving credit facility (the “New Credit Facility”), which may be increased to up to $45.0 million upon the Company’s request, if the AR Lender consents to such increase.  Upon execution of the New Credit Agreement, the AR Lender funded approximately $39.7 million of the New Credit Facility, which funds were used primarily to repay approximately $35.0 million in loans outstanding to affiliates of Silver Point (“Term Lender”).  Upon such repayment, the remaining balances on the Company’s $35.0 million Loan, $50.0 million Revolving Credit Agreement and $10.7 million Credit Agreement with the Term Lender were fully repaid and terminated.  The only loan currently outstanding to the Term Lender consists of the $45.0 million Loan issued under the Company’s $80.0 million Credit Agreement.

The New Credit Facility is secured by a first priority security interest on substantially all of the Company’s assets, including the equity interests in all of the Company’s subsidiaries (excluding PCHI).  The availability of the AR Lender’s commitments under the New Credit Facility is limited by a borrowing base tied to the Company’s eligible accounts receivable and certain other availability restrictions.

Loans under the New Credit Facility accrue interest at LIBOR (subject to a 2.5% floor) plus 5.0% per annum, subject to a default rate of interest and other adjustments provided for in the New Credit Agreement.  For purposes of calculating interest, all payments the Company makes on the New Credit Facility are subject to a six business day clearance period. The Company also pays a collateral management fee of .0625% per month on the outstanding balance (or a minimum balance amount equal to 85% of the monthly average borrowing base (the “Minimum Balance Amount”), if such amount is greater than the outstanding balance), a monthly minimum balance fee equal to the highest interest rate applicable to the loans if the Minimum Balance Amount is greater that the outstanding balance, and an unused line fee equal to .042% per month of the average unused portion of the New Credit Facility.  The Company paid to the AR Lender a non-refundable origination fee of 1.0% of the AR Lender’s commitments under the New Credit Facility at closing.

The New Credit Agreement contains various affirmative and negative covenants and customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, and the occurrence of events which have a material adverse effect on the Company.

14

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Amendment to $80.0 million Credit Agreement – Concurrently with the execution of the New Credit Agreement, on August 30, 2010 the Company entered into an amendment to its existing $80.0 million Credit Agreement, as amended (the “Original Credit Agreement”), with the Term Lender, PCHI, and Ganesha.  Under this amendment, the Company agreed with the Term Lender to the following material changes to the Original Credit Agreement:

● In the event of a mandatory prepayment of the Company’s accounts receivable based financing facility under the Original Credit Agreement, the outstanding loans under such agreement shall not be required to be prepaid below $10.0 million.  There is also a floor of $10.0 million below which commitments under such accounts receivable based facility would not be mandatorily reduced as a result of such prepayment.

● The Original Credit Agreement was amended to add an affirmative covenant requiring the Company to deliver financial statements and other financial and non-financial information to the Term Lender on a regular basis, and a negative covenant requiring that the Company maintain a minimum fixed charge coverage ratio of 1.0 and minimum levels of earnings before interest, tax, depreciation and amortization.

● The  Company agreed to the provisions of an Intercreditor Agreement executed on August 30, 2010 by and between the AR Lender and the Term Lender with respect to shared collateral of the Company that is being pledged under both the New Credit Agreement and the Original Credit Agreement.  Under the Intercreditor Agreement, among other things, the Term Lender consented to the AR Lender having a first priority lien on substantially all of the Company’s assets while the Term Lender retained a second lien on such assets in addition to its first priority lien on the Company’s leased properties owned by PCHI.

On October 29, 2010, the Company entered into Amendment No. 1 (the “Amendment”) to the New Credit Agreement, dated as of August 30, 2010, by and among the Company and the AR Lender.

Under the Amendment, the AR Lender committed to increase the total revolving loan commitment amount under the New Credit Agreement from $40.0 million to $45.0 million, and the Company agreed to pay to the AR Lender a non-refundable origination fee of 1.0% of the AR Lender’s increased commitment under the Amendment, or $50.

Also under the Amendment, the AR Lender agreed to allow the inclusion in Eligible Accounts that are used to determine the Company’s Borrowing Base of up to $33.6 million in aggregate federal or state matching payments to the Company related to QAF (Note 11), which amount was increased from $11.8 million for the first matching payment.

In addition, the optional prepayment and permanent commitment reductionprovisions of the New Credit Agreement were amended to change the minimum Revolving Loan Commitment Amount to $20.0 million from $5.0 million.  In addition, the prepayment fee calculation under the New Credit Agreement was changed so that the prepayment fee is based on $40.0 million rather than the amount of the permanent revolving loan commitment reduction amount.

Lastly, under the Amendment, in the event the Company permanently reduces its Revolving Loan Commitment Amount to $20.0 million (and assuming there is no Event of Default at the time), the Company would be permitted to transfer funds that are swept into the AR Lender’s account from the Company’s lockbox accounts to a different bank account designated by the Company. Effective March 1, 2011, the Company reduced its Revolving Loan Commitment Amount to $20.0 million.  Beginning in April 2011, the funds that were previously swept into the AR Lender’s account were swept directly to the Company’s main account.

As of September 30, 2011, the Company had the following Credit Agreements:

● $45.0 million Loan issued under the $80.0 million Credit Agreement, bearing a fixed interest rate of 14.5% per year ($45.0 million outstanding balance at September 30, 2011). If any event of default occurs and continues, the lender can increase the interest rate to 19.5% per year.

● $20.0 million revolving line of credit under the New Credit Facility, bearing an interest rate of 5.0% plus LIBOR, with a 2.5% floor, per year (7.5% at September 30, 2011) and an unused commitment fee of 0.625% per year ($20.0 million outstanding balance at September 30, 2011).  For purposes of calculating interest, all payments the Company makes on the New Credit Facility are subject to a six business day clearance period.  As of September 30, 2011, the Company was in compliance with all financial covenants.

15

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

The Company's outstanding debt consists of the following:

	September 30, 2011		March 31, 2011
Current:
Revolving line of credit	$	20,000	$	19,081
Noncurrent:
Secured term note	$	45,000	$	45,000

NOTE 4 - COMMON STOCK WARRANTS

On April 13, 2010, the Company issued warrants (the “Omnibus Warrants”) to purchase its common stock for a period of three years at an exercise price of $0.07 per share in the following denominations: 139.0 million shares to KPC or its designees and 96.0 million shares to the Term Lender or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights. As of April 13, 2010, the Company recorded warrant expense and the related warrant liability of $2.9 million, representing fair value.  As of September 30, 2011, the fair value of the Omnibus Warrants was $223.

In addition, on April 13, 2010, the Company issued a three-year warrant (the “Release Warrant”) to acquire up to 170.0 million shares of common stock at $0.07 per share to Dr. Chaudhuri who facilitated a release enabling the Company to recover amounts due from the Company’s prior lender and a $1.0 million reduction in principal of its outstanding debt, among other benefits to the Company. As a result, the Company recorded the fair value of the Release Warrant ($2.1 million) as an offsetting cost of the recovery of amounts due from the Company’s prior lender. The Release Warrant also provides the holder with certain pre-emptive, information and registration rights. As of September 30, 2011, the fair value of the Release Warrant was $162.

The Omnibus Warrants and the Release Warrant are collectively referred to as the “April Warrants.” The net gain (loss) recorded related to the April Warrants for the three months ended September 30, 2011 and 2010 was $3.1 million and $0.6 million, respectively, and $(217) and $(1.3) million for the six months ended September 30, 2011 and 2010, respectively.

The fair value of warrants issued by the Company is estimated using the Black-Scholes valuation model, which the Company believes is the appropriate valuation method under the circumstances. Since the Company’s stock is thinly traded, the expected volatility is based on an analysis of the Company's stock and the stock of eight other publicly traded companies that own hospitals.

The risk-free interest rate is based on the average yield on U.S. Treasury notes with maturity commensurate with the terms of the warrants. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.  The assumptions used in the Black-Scholes valuation model are as follows.

	September 30, 2011		April 13, 2010
Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.2%		1.7%
Expected volatility		45.3%		68.4%
Expected term (in years)		1.5		3.0

16

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 5 - INCOME TAXES

The utilization of net operating loss (“NOL”) and credit carryforwards is limited under the provisions of the Internal Revenue Code (“IRC”) Section 382 and similar state provisions. Section 382 of the IRC of 1986 generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. In fiscal year 2009, the Company entered into the amended purchase agreement which resulted in a change in control. The Company conducted an analysis and determined that it is subject to significant IRC Section 382 limitations. For both Federal and State tax purposes, the Company's utilization of NOL and credit carryforwards is subject to significant IRC Section 382 limitations. The Company evaluates its ability to utilize the net operating losses each period with regard to the limitations imposed under IRC 382 and also considering the continuing expiration of statutes of limitation for prior years; and in the prior year determined that a portion of the federal and state net operating losses were no longer realizable, and removed from the schedule of deferreds those net operating losses in excess of the IRC 382 limitation and also considering prior years statutes now closed.

The difference between the reported income tax provision (benefit) and the amount computed by multiplying income before income tax provision (benefit) in the accompanying unaudited condensed consolidated statements of operations for the three and six months ended September 30, 2011 and 2010 by the statutory federal income tax rate primarily relates to the impact of a full valuation allowance reserving the net deferred assets, permanently nondeductible expenses, state and local income taxes, and variable interest entity.

The application of FASB Interpretation Number 18 requires the Company to compute the interim period income tax provision (benefit) by applying the estimated annual effective tax rate to the income (loss) from continuing operations for the three and six months ended September 30, 2011, which resulted in the recognition of a tax expense for the three months ended September 30, 2011 and a tax benefit for the six months ended September 30, 2011.

The Company evaluated its historical and projected sources of income to determine the extent to which the net deferred tax assets projected at September 30, 2011 could be realized, and based on this analysis the Company concluded that there was not sufficient positive evidence to support the realization of the net deferred tax assets, and therefore will continue to maintain a full valuation allowance against its net deferred assets as of September 30, 2011.

The Company’s California Enterprise Zone credits are currently under examination by the California taxing authority.  As a result of the examination, the Company recorded a liability of approximately $18.9 million for unrecognized tax benefits.  The Company's utilization of these credits is also subject to significant IRC Section 383 limitations, and these limitations have been incorporated into the tax provision calculation.

PCHI tax status – PCHI is a limited liability company. PCHI's taxable income or loss will flow through to its owners and be their separate responsibility. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include any amounts for the income tax expense or benefit, or liabilities related to PCHI's income or loss.

NOTE 6 - STOCK INCENTIVE PLAN

The Company's 2006 Stock Incentive Plan (the "Plan"), which is shareholder-approved, permits the grant of share options to its employees and board members for up to a maximum aggregate of 12.0 million shares of common stock. In addition, as of the first business day of each calendar year in the period 2007 through 2015, the maximum aggregate number of shares shall be increased by a number equal to one percent of the number of shares of common stock of the Company outstanding on December 31 of the immediately preceding calendar year. Accordingly, as of September 30, 2011, the maximum aggregate number of shares under the Plan was 21.0 million. The Company believes that such awards better align the interests of its employees with those of its shareholders. In accordance with the Plan, incentive stock options, nonqualified stock options, and performance based compensation awards may not be granted at less than 100 percent of the estimated fair market value of the common stock on the date of grant. Incentive stock options granted to a person owning more than 10 percent of the voting power of all classes of stock of the Company may not be issued at less than 110 percent of the fair market value of the stock on the date of grant. Option awards generally vest based on 3 years of continuous service (1/3 of the shares vest on the twelve month anniversary of the grant date, and an additional 1/12 of the shares vest on each subsequent fiscal quarter-end of the Company following such twelve month anniversary). Certain option awards provide for accelerated vesting if there is a change of control, as defined. The option awards have 7-year contractual terms.

When the measurement date is certain, the fair value of each option grant is estimated on the date of grant using the Black-Scholes valuation model. Since there is limited historical data with respect to both pre-vesting forfeiture and post-vesting termination, the expected life of the options was determined utilizing the simplified method, whereby the expected term is calculated by taking the sum of the vesting term plus the original contractual term and dividing that quantity by two.

17

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

The Company recorded $0 and $13 of compensation expense relative to stock options during the three months ended September 30, 2011 and 2010, respectively, and $0 and $27 during the six months ended September 30, 2011 and 2010, respectively. No options were exercised during the three and six months ended September 30, 2011 and 2010. A summary of stock option activity for the six months ended September 30, 2011 is presented as follows.

	Shares			Weighted-  average  exercise  price		Weighted-  average  grant date  fair value		Weighted-  average  remaining  contractual  term  (years)	Aggregate intrinsic value
Outstanding, March 31, 2011		8,370		$	0.18
Granted		-		$	-	$	-
Exercised		-		$	-
Forfeited or expired		(75	)	$	0.26
Outstanding, September 30, 2011		8,295		$	0.18			3.1	$	-
Exercisable at September 30, 2011		8,295		$	0.18			3.1	$	-

All outstanding options were fully vested as of September 30 and March 31, 2011.

NOTE 7 - RETIREMENT PLAN

The Company has a 401(k) plan for its employees. All employees with 90 days of service are eligible to participate, unless they are covered by a collective bargaining agreement which precludes coverage. The Company matches employee contributions up to 3% of the employee's compensation, subject to IRS limits. During the three months ended September 30, 2011 and 2010, the Company incurred expenses of $0.8 million and $0.7 million, respectively, and $1.6 million and $1.5 million during the six months ended September 30, 2011 and 2010, respectively. These costs are included in salaries and benefits in the accompanying unaudited condensed consolidated statements of operations.  At September 30 and March 31, 2011, accrued compensation and benefits in the accompanying unaudited condensed consolidated balance sheets included $2.4 million and $3.8 million, respectively, in accrued employer contributions.

NOTE 8 - INCOME (LOSS) PER SHARE

Income per share for the three months ended September 30, 2011 was computed as shown below.  Stock options and warrants aggregating approximately 412 million shares were not included in the diluted calculations since they were anti-dilutive during the three months ended September 30, 2011.

	Three months ended September 30, 2011
Numerator:
Net income attributable to Integrated Healthcare Holdings, Inc.	$	506
Denominator:
Weighted average common shares		255,307
Dilutive options		1,665
Denominator for diluted calculation		256,972
Income per share - basic	$	0.00
Income per share - diluted	$	0.00

Since the Company incurred losses for the six months ended September 30, 2011 and the three and six months ended September 30, 2010, the potential shares of common stock consisting of approximately 412 million shares issuable under warrants and stock options were not included in the diluted calculations since they were anti-dilutive for each of those periods.

18

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 9 - VARIABLE INTEREST ENTITY

Concurrent with the close of the Acquisition, PCHI simultaneously acquired title to substantially all of the real property acquired by the Company in the Acquisition. The Company received $5.0 million and PCHI guaranteed the Company's $45.0 million Loan. The Company remains primarily liable as the borrower under the $45.0 million Loan notwithstanding its guarantee by PCHI.  The $45 million Loan 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, which is a related party entity that is affiliated with the Company through common ownership and control. As of September 30, 2011, PCHI was owned 51% by various physician investors and 49% by Ganesha (Dr. Chaudhuri and Mr. Thomas). A company is required to 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 $45.0 million Loan, and cross-collateralization of the Company's non-real estate assets to secure the $45.0 million Loan. Accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

PCHI's assets, liabilities, and accumulated deficit are set forth below.

	September 30,  2011			March 31,  2011
Cash	$	182		$	330
Property, net		41,628			42,273
Other		174			70
Total assets	$	41,984		$	42,673
Debt (as guarantor)	$	45,000		$	45,000
Other		608			634
Total liabilities		45,608			45,634
Deficiency		(3,624	)		(2,961	)
Total liabilities and accumulated deficit	$	41,984		$	42,673

As noted above, PCHI is a guarantor on the $45.0 million Loan should the Company not be able to perform.  PCHI's total liabilities represent the Company's maximum exposure to loss.

PCHI rental income and the Company’s related rental expense of $1.9 million and $1.8 million were eliminated upon consolidation for the three months ended September 30, 2011 and 2010, respectively, and $3.8 million and $3.5 million for the six months ended September 30, 2011 and 2010, respectively.

The Company has a lease commitment to PCHI (Note 12). Additionally, the Company is responsible for seismic remediation under the terms of the lease agreement (Note 2).

NOTE 10 - RELATED PARTY TRANSACTIONS

The Company leases substantially all of the real property of the acquired Hospitals from PCHI which is owned by various physician investors and Ganesha, which is managed by Dr. Chaudhuri. As of September 30 and March 31, 2011, Dr. Chaudhuri and Mr. Thomas are the beneficial holders of an aggregate of 447.5 million shares of the outstanding stock of the Company. As described in Note 9, PCHI is a variable interest entity and, accordingly, the Company has consolidated the financial statements of PCHI in the accompanying unaudited condensed consolidated financial statements.

NOTE 11 - HOSPITAL QUALITY ASSURANCE FEE PROGRAM

In October 2009, the Governor of California signed legislation supported by the hospital industry to impose a provider fee on general acute care hospitals that, combined with federal matching funds, would be used to provide supplemental Medi-Cal payments to hospitals. The state submitted the plan to the Centers for Medicare and Medicaid Services (“CMS”) for a required review and approval process, and certain changes in the plan were required by CMS. Legislation amending the fee program to reflect the required changes was passed by the legislature and signed by the Governor on September 8, 2010. Among other changes, the legislation leaves distribution of “pass-through” payments received by Medi-Cal managed care plans that will be paid to hospitals under the program to the discretion of the plans.  

19

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

The hospital quality assurance fee program (“QAF”) created by this legislation initially provided payments for up to 21 months retroactive to April 2009 and expiring on December 31, 2010 (“2010 QAF”). During fiscal year 2011, the Company recognized $87.2 million in revenue from the state for the 2010 QAF of which $1.8 million was received in April 2011 and is reflected as a receivable in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2011.  All other amounts had been received during fiscal year 2011. As of March 31, 2011, $378.6 of the other expenses relating to the 2010 QAF was accrued and included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet.

In May 2011, CMS conditionally approved the extension of the QAF for the six month period from January 1 through June 30, 2011 (“2011 QAF”).

Based on the most recent modeling prepared by the California Hospital Association, the Company anticipates making payments for provider fees and other expenses relating to the 2011 QAF of approximately $15.8 million and receiving approximately $31.6 million in net revenues from the state ($18.1 million from the fee-for-service portion and $13.5 million from the managed care portion). As of September 30, 2011, the Company has received $18.4 million from the fee-for-service portion of the 2011 QAF from the state and has paid fees to the state totaling $15.2 million.  Until such time as all final approvals have been received from CMS, the amounts received and paid through September 30, 2011 are reflected as unearned revenue and a prepaid asset, respectively, in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2011.

The Company cannot provide any assurances or estimates in connection with a possible continuation of the QAF program beyond June 30, 2011.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

INFORMATION TECHNOLOGY SYSTEMS – On July 1, 2011, the Company entered into software and services agreements with McKesson Technologies Inc. (“McKesson”) to upgrade the Company’s information technology systems.

Under the agreements, McKesson will provide the Company with a variety of services, including new software implementation and education/training services for the Company’s personnel, software maintenance services and professional services related to movement and migration of data from legacy systems.  McKesson will also furnish to the Company and maintain new hardware to accommodate the upgraded software and systems.  The new hardware will include computers and servers, among other things, and will include installation, testing, and ongoing maintenance.  The Company has entered into the arrangement to enhance its clinical information systems and upgrade its billing and revenue management information systems.

The agreements will initially run for a period of five years, and the recurring services may be renewed by the Company for successive periods.  The agreements do not provide that they may be terminated by the Company prior to the initial expiration date.  The agreements provide for one-time fees and recurring fees which aggregate a total of $22.0 million.  Approximately 60% of the fees are for one-time charges, while the balance is for recurring services.

GUARANTEE – At September 30, 2011, the Company had accrued $1.8 million for a guarantee extended to a state supported teaching institution to accept the transfer of an uninsured patient for a necessary higher level of care.  The agreement and the institution’s practice are being reviewed.

LONG TERM LEASE COMMITMENT WITH VARIABLE INTEREST ENTITY – On April 13, 2010, the Company and PCHI entered into a Second Amendment to Amended and Restated Triple Net Hospital Building Lease (the “2010 Lease Amendment”).  Under the 2010 Lease Amendment, the annual base rent to be paid by the Company to PCHI was increased from $5.4 million to $7.3 million, but if PCHI refinances the $45.0 million Loan, the annual base rent will increase to $8.3 million. This lease commitment with PCHI is eliminated in consolidation.

CAPITAL LEASES - In connection with the Acquisition, the Company also assumed the leases for the Chapman facility, which include buildings and land with terms that were extended concurrently with the assignment of the leases to December 31, 2023. The Company leases equipment under capital leases expiring at various dates through December 2015. Assets under capital leases with a net book value of $6.8 million and $7.5 million are included in the accompanying unaudited condensed consolidated balance sheets as of September 30 and March 31, 2011, respectively. Interest rates used in computing the net present value of the lease payments are based on the interest rates implicit in the leases.

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INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

INSURANCE - The Company accrues for estimated general and professional liability claims, to the extent not covered by insurance, when they are probable and reasonably estimable. The Company has purchased as primary coverage a claims-made form insurance policy for general and professional liability risks. Estimated losses within general and professional liability retentions from claims incurred and reported, along with incurred but not reported (“IBNR”) claims, are accrued based upon projections and are discounted to their net present value using a weighted average risk-free discount rate of 5%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2011, the Company had accrued $12.6 million and $14.0 million, respectively, which is comprised of $5.3 million and $6.6 million, respectively, in incurred and reported claims, along with $7.3 million and $7.4 million, respectively, in estimated IBNR.  Estimated insurance recoveries of $2.9 million and $2.7 million are included in other prepaid expenses and current assets in the accompanying unaudited condensed consolidated balance sheets as of September 30 and March 31, 2011, respectively.

The Company has also purchased occurrence coverage insurance to fund its obligations under its workers compensation program. The Company has a "guaranteed cost" policy, under which the carrier pays all workers compensation claims, with no deductible or reimbursement required of the Company. The Company accrues for estimated workers compensation claims, to the extent not covered by insurance, when they are probable and reasonably estimable. The ultimate costs related to this program include expenses for deductible amounts associated with claims incurred and reported in addition to an accrual for the estimated expenses incurred in connection with IBNR claims. Claims are accrued based upon projections and are discounted to their net present value using a weighted average risk-free discount rate of 5%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2011, the Company had accrued $736 and $836, respectively, comprised of $372 and $434, respectively, in incurred and reported claims, along with $364 and $402, respectively, in estimated IBNR.

In addition, the Company has a self-insured health benefits plan for its employees. As a result, the Company has established and maintains an accrual for IBNR claims arising from self-insured health benefits provided to employees. The Company's IBNR accruals at September 30 and March 31, 2011 were based upon projections. The Company determines the adequacy of this accrual by evaluating its limited historical experience and trends related to both health insurance claims and payments, information provided by its insurance broker and third party administrator and industry experience and trends. The accrual is an estimate and is subject to change. Such change could be material to the Company's unaudited condensed consolidated financial statements. As of September 30 and March 31, 2011, the Company had accrued $2.0 million and $1.8 million, respectively, in estimated IBNR. The Company believes this is the best estimate of the amount of IBNR relating to self-insured health benefit claims at September 30 and March 31, 2011.

The Company has also purchased umbrella liability policies with aggregate limits of $25 million. The umbrella policies provide coverage in excess of the primary layer and applicable retentions for insured liability risks such as general and professional liability, auto liability, and workers compensation (employers liability).

As of September 30, 2011, the Company finances various insurance policies at an interest rate of 4.03% per annum. The Company incurred finance charges relating to such policies of $13 and $11 for the three months ended September 30, 2011 and 2010, respectively, and $25 and $27 for the six months ended September 30, 2011 and 2010, respectively. As of September 30 and March 31, 2011, the accompanying unaudited condensed consolidated balance sheets include the following balances relating to the financed insurance policies.

	September 30, 2011		March 31, 2011
Prepaid insurance	$	1,888	$	3,108
Accrued insurance premiums	$	875	$	1,951
(Included in other current liabilities)

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

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INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

The following is a summary of material developments in the matter involving Orange County Physicians Investment Network, LLC (“OC-PIN”), as well as the Avery and Ross potential class action lawsuits that were identified in our Form 10-K filed on June 24, 2011.  There have been no material developments in the other matters identified in the Form 10-K.

On April 24, 2009, a conglomeration of several OC-PIN members led by Ajay G. Meka, M.D. filed a lawsuit against Dr. Shah, other OC-PIN members, and various attorneys, alleging breach of fiduciary duty and seeking damages as well as declaratory and injunctive relief relating to the control of OC-PIN.  After a number of demurrers were filed by the defendants, Plaintiffs filed a Sixth Amended Complaint on May 5, 2011, to which the Company is not a party.  On May 19, 2011, Judge Nancy Wieben-Stock appointed Dr. Anil Shah and Dr. John Glavinovich as interim managers of OC-PIN and signed a formal order to this effect on June 27, 2011.  On July 20, 2011, OC-PIN’s attorney placed a demand on the Company to seat two directors – Mr. Brahmbhatt himself and one Amer Zarka, M.D. – on the Board of Directors.  The Company declined this request based on its non-compliance with the Global Settlement Agreement and asked for additional information.  On August 3, 2011, the Company filed a lawsuit in the Orange County Superior Court asking for declaratory relief as to how it must respond to this request.  On August 4, 2011, OC-PIN filed a “Motion for Clarification” asking Judge Wieben-Stock to modify her prior order appointing Drs. Shah and Glavinovich as OC-PIN interim managers to include a finding that they are empowered to appoint one member to the Company’s Board of Directors pursuant to Judge Lewis’ March 23, 2011 judgment in the Company v. Shah matter.  On August 12, 2011, Judge Wieben-Stock denied this motion.  On August 22, 2011, OC-PIN filed another motion for “Further and Additional Orders” essentially repeating the request in its August 4, 2011 motion.  This motion was likewise denied.  Shortly thereafter, the Company offered to dismiss its declaratory relief action without prejudice if OC-PIN made no further attempts to appoint a Company Director until the Meka/OC-PIN matter is resolved.  OC-PIN agreed, and on October 5, 2011, the Company dismissed its declaratory relief action without prejudice.

On June 5, 2009, a potential class action lawsuit was filed against the Company by Alexandra Avery.  Ms. Avery purports to represent all 12-hourly employees and the complaint alleges causes of action for restitution of unpaid wages as a result of unfair business practices, injunctive relief for unfair business practices, failure to pay overtime wages, and penalties associated therewith. On December 23, 2009, the Company filed an answer to the complaint, generally denying all of the plaintiff’s allegations.  On January 25, 2010, a potential class action lawsuit was filed against the Company by Julie Ross.  Ms. Ross purports to represent all similarly-situated employees and the complaint alleges causes of action for violation of the California Labor Code and unfair competition law.  On September 3, 2010 the plaintiffs in both the Avery and Ross actions filed a consolidated complaint (the “Consolidated Complaint”) that alleges the causes of action found in the initial Ross complaint.  On October 12, 2010, the Company filed an answer to the Consolidated Complaint, which generally denied all allegations.  On July 18, 2011, the Company filed a motion to compel arbitration of the matter, which was denied on October 21, 2011.  The Company intends to appeal the denial of its motion to arbitrate and will vigorously defend itself in connection with the claims in the Consolidated Complaint.   The parties are currently exchanging discovery in the action.   At this early stage in the proceedings, the Company is unable to determine the cost of defending this lawsuit or the impact, if any, this action may have on its results of operations.

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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,” “continue,” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K filed on June 24, 2011 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.

Unless otherwise indicated, all amounts included in this Item 2 are expressed in thousands (except percentages and per share amounts).

OVERVIEW

On March 8, 2005, we completed our 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. The Hospitals were assigned to our four wholly owned subsidiaries formed for the purpose of completing the Acquisition. We also acquired the following real estate, leases and assets associated with the Hospitals: (i) a fee interest in the Western Medical Center at 1001 North Tustin Avenue, Santa Ana, CA, a fee interest in the administration building at 1301 North Tustin Avenue, Santa Ana, CA, certain rights to acquire condominium suites located in the medical office building at 999 North Tustin Avenue, Santa Ana, CA, and the business known as the West Coast Breast Cancer Center; (ii) a fee interest in the Western Medical Center at 1025 South Anaheim Blvd., Anaheim, CA; (iii) a fee interest in the Coastal Communities Hospital at 2701 South Bristol Street, Santa Ana, CA, and a fee interest in the medical office building at 1901 North College Avenue, Santa Ana, CA; (iv) a lease for the Chapman Medical Center at 2601 East Chapman Avenue, Orange, CA, and a fee interest in the medical office building at 2617 East Chapman Avenue, Orange, CA; and (v) equipment and contract rights. At the closing of the Acquisition, we transferred all of the fee interests in the acquired real estate to Pacific Coast Holdings Investment, LLC ("PCHI"), a company owned indirectly by two of our largest shareholders.

SIGNIFICANT CHALLENGES

COMPANY - Our Acquisition involved significant cash expenditures, debt incurrence and integration expenses that has seriously strained our consolidated financial condition. If we are required to issue equity securities to raise additional capital or for any other reasons, existing stockholders will likely be substantially diluted, which could affect the market price of our stock. In April 2010 we issued equity securities to existing shareholders and a new lender (see "WARRANTS”).

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

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

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of obligations in the normal course of business. We had a total stockholders’ deficiency of $20.7 million and a working capital deficit of $22.0 million at September 30, 2011.  For the three and six months ended September 30, 2011, we had net income (loss) of $0.5 and $(2.4) million, respectively.

Key items for the six months ended September 30, 2011 included:

1.	Net collectible revenues (net operating revenues less provision for doubtful accounts) for the six months ended September 30, 2011 and 2010 were $166.5 million and $165.7 million, respectively, representing an increase of 0.5%. The Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from Medicaid, Medicaid DSH, and Orange County, CA (CalOptima). Governmental net revenues decreased $5.1 million for the six months ended September 30, 2011 compared to the six months ended September 30, 2010.
	Inpatient admissions decreased by 10.2% to 10.6 for the six months ended September 30, 2011 compared to 11.8 for the six months ended September 30, 2010. The decline in admissions is primarily related to reductions in managed care and obstetrics admissions.  Adjusting for the shift to outpatient, adjusted admissions decreased by 6.7% for the six months ended September 30, 2011 compared to the same period in fiscal year 2011. Uninsured patients, as a percentage of gross charges, were 5.3% for the six months ended September 30, 2011 compared to 5.7% for the six months ended September 30, 2010.
2.	Operating expenses: Management is working aggressively to reduce costs without reduction in service levels. These efforts have in large part been offset by inflationary pressures. Operating expenses before interest for the six months ended September 30, 2011 were $180.8 million, or 1.3%, lower than during the six months ended September 30, 2010.

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DEBT – On April 13, 2010 (the “Effective Date”), we entered into an Omnibus Credit Agreement Amendment (the “Omnibus Amendment”) with SPCP Group IV, LLC and SPCP Group, LLC (together, “Silver Point”), Silver Point Finance, LLC, as the Lender Agent, PCHI, Ganesha Realty LLC (“Ganesha”), Dr. Chaudhuri and KPC Resolution Company (“KPC”).  KPC and Ganesha are companies owned and controlled by Dr. Chaudhuri, who is our majority shareholder.  Ganesha owns a 49% membership interest in PCHI.

We entered into the Omnibus Amendment in connection with the Loan Purchase and Sale Agreement (the “Loan Purchase Agreement”), dated as of January 13, 2010, as amended, by and between KPC and the previous lender’s receiver.  Under the Loan Purchase Agreement, and as approved by the Court on April 2, 2010, KPC agreed to purchase all of the Credit Agreements from Medical Capital Corporation’s receiver for $70.0 million.  Concurrent with the closing of the Loan Purchase Agreement, KPC sold its interest in the Credit Agreements to Silver Point, and KPC purchased from Silver Point a 15% participation interest in the Credit Agreements.  On April 13, 2010, concurrent with the effectiveness of the Omnibus Amendment and the closing of the Loan Purchase Agreement, Silver Point acquired all of the Credit Agreements, including the security agreements and other ancillary documents executed by us in connection with the Credit Agreements, and became the “New Lender” under the Credit Agreements.

The following are material terms of the Omnibus Amendment:

● The stated maturity date under each Credit Agreement was changed to April 13, 2013.  

● Affirming release of prior claims between us and the previous lender’s receiver, Silver Point agreed to waive any events of default that had occurred under the Credit Agreements and waived claims to accrued and unpaid interest and fees of $6.4 million under the Credit Agreements as of April 13, 2010.

● The $80.0 million Credit Agreement was amended so that the $45.0 million term note (the “$45.0 million Loan”) and $35.0 million non-revolving line of credit note (the “$35.0 million Loan”) will each bear a fixed interest rate of 14.5% per year.  These loans previously bore interest rates of 10.25% and 9.25%, respectively.  In addition, we agreed to make certain mandatory prepayments of the $35.0 million Loan when it received proceeds from certain new financing of its accounts receivable or provider fee funds from Medi-Cal under the Hospital Quality Assurance Fee program (“QAF”) (Note 11).  The $35.0 million non-revolving line of credit was refinanced on August 30, 2010 (see below).

● The $50.0 million Revolving Credit Agreement was amended so that Silver Point will, subject to the terms and conditions contained therein, make up to $10.0 million in new revolving funds available to us for working capital and general corporate purposes.  Each advance under the $50.0 million Revolving Credit Agreement will bear interest at an annual rate of Adjusted LIBOR (calculated as LIBOR subject to certain adjustments, with a floor of 2% and a cap of 5%) plus 12.5%, compared to an interest rate of 24.0% that was previously in effect under the $50.0 million revolving credit agreement.  In addition, we agreed to make mandatory prepayments of the $50.0 million Revolving Credit Agreement under the conditions described above with respect to the $80.0 million Credit Agreement.  The financial covenants under the $50.0 million Revolving Credit Agreement were also amended to increase the required levels of minimum EBITDA (as defined in the Omnibus Amendment) from the levels previously in effect under the $50.0 million Revolving Credit Agreement. This $50.0 million revolving line of credit was refinanced on August 30, 2010 (see below).

● The $10.7 million Credit Agreement was amended so that the $10.7 million convertible term note will bear a fixed interest rate of 14.5% per year, compared to the interest rate of 9.25% previously in effect and to eliminate the conversion feature of the loan.  In addition, we agreed to make mandatory prepayments of the $10.7 million Credit Agreement under the conditions described above with respect to the $80.0 million Credit Agreement. This $10.7 million term note was refinanced on August 30, 2010 (see below).

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In connection with the sale of the Credit Agreements, all warrants and stock conversion rights issued to the previous lender were cancelled.  In connection with the Omnibus Amendment, we issued new warrants.

On August 30, 2010, we (excluding PCHI) entered into a Credit and Security Agreement (the “New Credit Agreement”) with MidCap Financial, LLC, a commercial finance lender specializing in loans to middle market health care companies, and Silicon Valley Bank (collectively, the “AR Lender”).

Under the New Credit Agreement, the AR Lender committed to provide up to $40.0 million in loans to us under a secured revolving credit facility (the “New Credit Facility”), which may be increased to up to $45.0 million upon our request, if the AR Lender consents to such increase.  Upon execution of the New Credit Agreement, the AR Lender funded approximately $39.7 million of the New Credit Facility, which funds were used primarily to repay approximately $35.0 million in loans outstanding to affiliates of Silver Point (“Term Lender”).  Upon such repayment, the remaining balances on our $35.0 million non-revolving line of credit loan, $50.0 million revolving credit agreement and $10.7 million credit agreement with the Term Lender were fully repaid and terminated.  The only loan currently outstanding to the Term Lender consists of a $45.0 million Loan issued under our $80.0 million Credit Agreement.

The New Credit Facility is secured by a first priority security interest on substantially all of our assets, including the equity interests in all of our subsidiaries (excluding PCHI).  The availability of the AR Lender’s commitments under the New Credit Facility is limited by a borrowing base tied to our eligible accounts receivable and certain other availability restrictions.

Loans under the New Credit Facility accrue interest at LIBOR (subject to a 2.5% floor) plus 5.0% per annum, subject to a default rate of interest and other adjustments provided for in the New Credit Agreement.  For purposes of calculating interest, all payments we make on the New Credit Facility are subject to a six business day clearance period. We also pay a collateral management fee of .0625% per month on the outstanding balance (or a minimum balance amount equal to 85% of the monthly average borrowing base (the “Minimum Balance Amount”), if such amount is greater than the outstanding balance), a monthly minimum balance fee equal to the highest interest rate applicable to the loans if the Minimum Balance Amount is greater that the outstanding balance, and an unused line fee equal to .042% per month of the average unused portion of the New Credit Facility.  We paid to the AR Lender a non-refundable origination fee of 1.0% of the AR Lender’s commitments under the New Credit Facility at closing.

The New Credit Agreement contains various affirmative and negative covenants and customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, and the occurrence of events which have a material adverse effect on us.

Amendment to $80.0 million Credit Agreement – Concurrently with the execution of the New Credit Agreement, on August 30, 2010 we entered into an amendment to its existing $80.0 million Credit Agreement, as amended (the “Original Credit Agreement”), with the Term Lender, PCHI, and Ganesha.  Under this amendment, we agreed with the Term Lender to the following material changes to the Original Credit Agreement:

● In the event of a mandatory prepayment of our accounts receivable based financing facility under the Original Credit Agreement, the outstanding loans under such agreement shall not be required to be prepaid below $10.0 million.  There is also a floor of $10.0 million below which commitments under such accounts receivable based facility would not be mandatorily reduced as a result of such prepayment.

● The Original Credit Agreement was amended to add an affirmative covenant requiring us to deliver financial statements and other financial and non-financial information to the Term Lender on a regular basis, and a negative covenant requiring that we maintain a minimum fixed charge coverage ratio of 1.0 and minimum levels of earnings before interest, tax, depreciation and amortization.

● We agreed to the provisions of an Intercreditor Agreement executed on August 30, 2010 by and between the AR Lender and the Term Lender with respect to shared collateral of ours that is being pledged under both the New Credit Agreement and the Original Credit Agreement.  Under the Intercreditor Agreement, among other things the Term Lender consented to the AR Lender having a first priority lien on substantially all of our assets while the Term Lender retained a second lien on such assets, in addition to the Term Lender’s first priority lien on our leased properties owned by PCHI.

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On October 29, 2010, we entered into Amendment No. 1 (the “Amendment”) to the New Credit Agreement, dated as of August 30, 2010, by and among us and the AR Lender.

Under the Amendment, the AR Lender committed to increase the total revolving loan commitment amount under the New Credit Agreement from $40.0 million to $45.0 million, and we agreed to pay to the AR Lender a non-refundable origination fee of 1.0% of the AR Lender’s increased commitment under the Amendment, or $50.

Also under the Amendment, the AR Lender agreed to allow the inclusion in Eligible Accounts that are used to determine our Borrowing Base of up to $33.6 million in aggregate federal or state matching payments to us related to QAF (Note 11), which amount was increased from $11.8 million for the first matching payment.

In addition, the optional prepayment and permanent commitment reductionprovisions of the New Credit Agreement were amended to change the minimum Revolving Loan Commitment Amount to $20.0 million from $5.0 million.  In addition, the prepayment fee calculation under the New Credit Agreement was changed so that the prepayment fee is based on $40.0 million rather than the amount of the permanent revolving loan commitment reduction amount.

Lastly, under the Amendment, in the event we permanently reduce our Revolving Loan Commitment Amount to $20.0 million (and assuming there is no Event of Default at the time), we would be permitted to transfer funds that are swept into the Lender’s account from our lockbox accounts to a different bank account designated by us. Effective March 1, 2011, we reduced our Revolving Loan Commitment Amount to $20.0 million.  Beginning in April 2011, the funds that were previously swept into the Lender’s account were swept directly to our main account.

As of September 30, 2011, we had the following Credit Agreements:

● A $45.0 million Loan issued under the $80.0 million Credit Agreement, bearing a fixed interest rate of 14.5% per year ($45.0 million outstanding balance at September 30, 2011). If any event of default occurs and continues, the lender can increase the interest rate to 19.5% per year.

● A $20.0 million Revolving Credit Agreement, bearing an interest rate of 5.0% plus LIBOR, with a 2.5% floor, per year (7.5% at September 30, 2011) and an unused commitment fee of 0.625% per year ($20.0 million outstanding balance at September 30, 2011).  For purposes of calculating interest, all payments we make on the New Credit Facility are subject to a six business day clearance period.  As of September 30, 2011, we were in compliance with all financial covenants.

WARRANTS – On April 13, 2010, we issued warrants (the “Omnibus Warrants”) to purchase our common stock for a period of three years at an exercise price of $0.07 per share in the following denominations: 139.0 million shares to KPC or its designees and 96.0 million shares to the Term Lender or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights. As of April 13, 2010, we recorded warrant expense and the related warrant liability of $2.9 million, representing fair value.  As of September 30, 2011, the fair value of the Omnibus Warrants was $223.

In addition, on April 13, 2010, we issued a three-year warrant (the “Release Warrant”) to acquire up to 170.0 million shares of common stock at $0.07 per share to Dr. Chaudhuri who facilitated a release enabling us to recover amounts due from our prior lender and a $1.0 million reduction in principal of our outstanding debt, among other benefits. As a result, we recorded the fair value of the Release Warrant ($2.1 million) as an offsetting cost of the recovery of amounts due from our prior lender. The Release Warrant also provides the holder with certain pre-emptive, information and registration rights. As of September 30, 2011, the fair value of the Release Warrant was $162.

The Omnibus Warrants and the Release Warrant are collectively referred to as the “April Warrants.” The net loss related to the April Warrants for the six months ended September 30, 2011 and 2010 was $217 and $1.3 million, respectively.

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HOSPITAL QUALITY ASSURANCE FEES PROGRAM - In October 2009, the Governor of California signed legislation supported by the hospital industry to impose a provider fee on general acute care hospitals that, combined with federal matching funds, would be used to provide supplemental Medi-Cal payments to hospitals. The state submitted the plan to the Centers for Medicare and Medicaid Services (“CMS”) for a required review and approval process, and certain changes in the plan were required by CMS. Legislation amending the fee program to reflect the required changes was passed by the legislature and signed by the Governor on September 8, 2010. Among other changes, the legislation leaves distribution of “pass-through” payments received by Medi-Cal managed care plans that will be paid to hospitals under the program to the discretion of the plans.  

The hospital quality assurance fee program (“QAF”) created by this legislation initially provided payments for up to 21 months retroactive to April 2009 and expiring on December 31, 2010 (“2010 QAF”). During fiscal year 2011, we recognized $87.2 million in revenue from the state for the 2010 QAF of which $1.8 million was received in April 2011 and is reflected as a receivable in our unaudited condensed consolidated balance sheet as of March 31, 2011.  All other amounts had been received during fiscal year 2011. As of March 31, 2011, $378.6 of the other expenses relating to the 2010 QAF was accrued and included in other current liabilities in our unaudited condensed consolidated balance sheet.

In May 2011, CMS conditionally approved the extension of the QAF for the six month period from January 1 through June 30, 2011 (“2011 QAF”).

Based on the most recent modeling prepared by the California Hospital Association, we anticipate making payments for provider fees and other expenses relating to the 2011 QAF of approximately $15.8 million and receiving approximately $31.6 million in net revenues from the state ($18.1 million from the fee-for-service portion and $13.5 million from the managed care portion). As of September 30, 2010, we have received $18.4 million from the fee-for-service portion of the 2011 QAF from the state and have paid fees to the state totaling $15.2 million.  Until such time as all final approvals have been received from CMS, the amounts received and paid through September 30, 2011 are reflected as unearned revenue and a prepaid asset, respectively, in our unaudited condensed consolidated balance sheet as of September 30, 2011.

We cannot provide any assurances or estimates in connection with a possible continuation of the QAF program beyond June 30, 2011.

LONG TERM LEASE COMMITMENT WITH VARIABLE INTEREST ENTITY – On April 13, 2010, we and PCHI entered into a Second Amendment to Amended and Restated Triple Net Hospital Building Lease (the “2010 Lease Amendment”).  Under the 2010 Lease Amendment, the annual base rent to be paid to PCHI was increased from $5.4 million to $7.3 million, but if PCHI refinances the $45.0 million Loan, the annual base rent may increase to $8.3 million.  This lease commitment with PCHI is eliminated in consolidation.

COMMITMENTS AND CONTINGENCIES – The State of California has imposed new hospital seismic safety requirements. Under these new requirements, the Hospitals must meet stringent seismic safety criteria in the future. In addition, there could be other remediation costs pursuant to this seismic retrofit.

The State of California has introduced a new seismic review methodology known as HAZUS. The HAZUS methodology may preclude the need for some structural modifications. All four Hospitals requested HAZUS review and received a favorable notice pertaining to structural reclassification. All Hospital buildings, with the exception of one (an administrative building), have been deemed compliant until January 1, 2030 for both structural and nonstructural retrofit. We do not have an estimate of the cost to remediate the seismic requirements for the administrative building as of September 30, 2011.

There are additional requirements that must be complied with by 2030. The costs of meeting these requirements have not yet been determined. Compliance with seismic ordinances will be costly and could have a material adverse effect on our cash flow.  In addition, remediation could possible result in certain environmental liabilities, such as asbestos abatement.

CASH FLOW - Net cash used in operating activities for the six months ended September 30, 2011 and 2010 was $16.5 million and $8.7 million, respectively. Net income (loss), adjusted for depreciation and other non-cash items, excluding the provision for doubtful accounts and net income from noncontrolling interests (not a measurement under accounting principles generally accepted in the United States of America (“GAAP”)), totaled $0.7 million and $(2.2) million for the six months ended September 30, 2011 and 2010, respectively. We used $20.3 million (including $12.8 million for income taxes) and $6.6 million in working capital for the six months ended September 30, 2011 and 2010, respectively. Net cash used in payment of accounts payable, accrued compensation and benefits and other current liabilities was $9.2 million and $4.9 million for the six months ended September 30, 2011 and 2010, respectively. Cash provided by accounts receivable, net of provision for doubtful accounts, was $3.5 million and $1.6 million for the six months ended September 30, 2011 and 2010, respectively.

Net cash used in investing activities during the six months ended September 30, 2011 and 2010 was $0.7 million and $0.9 million, respectively. During the six months ended September 30, 2011 and 2010, we invested $0.8 million and $0.9 million in cash, respectively, in new equipment.

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Net cash provided by financing activities for the six months ended September 30, 2011 and 2010 was $0.4 million and $1.3 million, respectively.  

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following table sets forth, for the three and six months ended September 30, 2011 and 2010, our unaudited condensed consolidated statements of operations expressed as a percentage of net operating revenues.

	Three months ended September 30,				Six months ended September 30,
	2011		2010		2011		2010
Net operating revenues		100.0%		100.0%		100.0%		100.0%
Operating expenses:
Salaries and benefits		56.7%		57.2%		58.0%		56.1%
Supplies		14.1%		15.1%		14.3%		14.4%
Provision for doubtful accounts		7.6%		11.4%		9.2%		10.4%
Other operating expenses		15.7%		16.8%		15.9%		17.0%
Depreciation and amortization		1.2%		1.1%		1.2%		1.1%
		95.3%		101.6%		98.6%		99.0%
Operating income (loss)		4.7%		(1.6%)		1.4%		1.0%
Other expense:
Interest expense, net		(2.6%)		(3.5%)		(2.9%)		(3.4%)
Income (loss) on warrants		3.2%		0.7%		(0.1%)		(0.7%)
		0.6%		(2.8%)		(3.0%)		(4.1%)
Income (loss) before income tax provision (benefit)		5.3%		(4.4%)		(1.6%)		(3.1%)
Income tax provision (benefit)		4.7%		0.0%		(0.4%)		0.0%
Net income (loss)		0.6%		(4.4%)		(1.2%)		(3.1%)
Net income attributable to noncontrolling interests		(0.1%)		0.0%		(0.1%)		(0.1%)
Net income (loss) attributable to
Integrated Healthcare Holdings, Inc.		0.5%		(4.4%)		(1.3%)		(3.2%)

THREE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2010

NET OPERATING REVENUES - Net operating revenues for the three months ended September 30, 2011 increased 3.0% compared to the same period in fiscal year 2011, from $91.0 million to $93.7 million. Admissions for the three months ended September 30, 2011 decreased 12.4% compared to the same period in fiscal year 2011. A significant factor in the decline in admissions is the result of lower obstetrical deliveries. Net operating revenues per admission improved by 17.6% during the three months ended September 30, 2011 as a result of improved trauma case reimbursement, a decrease in self-pay admissions and visits, and negotiated managed care and governmental payment rate increases. Adjusting for the shift to outpatient, adjusted admissions decreased by 8.9% for the three months ended September 30, 2011 compared to the same period in fiscal year 2011.

Essentially all net operating revenues come from external customers. The largest payers are the Medicare and Medicaid programs accounting for 55% and 58% of the net operating revenues for the three months ended September 30, 2011 and 2010, respectively.

Uninsured patients, as a percentage of gross charges, decreased to 5.8% from 6.2% for the three months ended September 30, 2011 compared to the three months ended September 30, 2010.

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Although not a GAAP measure, we define "Net Collectible Revenues" as net operating revenues less provision for doubtful accounts. This eliminates the distortion caused by the changes in patient account classification. Net collectible revenues (net operating revenues less provision for doubtful accounts) for the three months ended September 30, 2011 and 2010 were $86.6 million and $80.6 million, respectively, representing an increase of 7.4%. Net Collectible Revenues increased due to the reasons discussed above. The Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from Medicaid, Medicaid DSH, and Orange County, CA (CalOptima). Governmental net revenues decreased $1.3 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010.  

OPERATING EXPENSES - Operating expenses for the three months ended September 30, 2011 decreased to $89.3 million from $92.4 million, a decrease of $3.1 million, or 3.4%, compared to the same period in fiscal year 2011. Operating expenses expressed as a percentage of net operating revenues for the three months ended September 30, 2011 and 2010 were 95.3% and 101.6%, respectively. On a per admission basis, operating expenses increased 10.3%.

Salaries and benefits increased $1.1 million (2.2%) for the three months ended September 30, 2011 compared to the same period in fiscal year 2011. The increase is primarily due to increases in contract labor utilization and cost of employee health insurance of $0.6 million and $0.5 million, respectively.

Other operating expenses during the three months ended September 30, 2011 decreased to $14.7 million from $15.3 million, a decrease of $0.6 million, or 3.9%, compared to the same period in fiscal 2011, primarily due to an additional accrual of $0.3 million during the three months ended September 30, 2010 for a guarantee extended to a state supported teaching institution to accept the transfer of an uninsured patient for a necessary higher level of care (the agreement and the institution’s practice are being reviewed).

The provision for doubtful accounts for the three months ended September 30, 2011 was $7.1 million compared to $10.4 million for the three months ended September 30, 2010, representing a 31.7% decrease.  The primary reasons for the decrease were due to a $1.0 decrease in self-pay revenues combined with the collection of a single large dollar account that had been fully reserved.

OPERATING INCOME - The operating income (loss) for the three months ended September 30, 2011 and 2010 was $4.4 million and $(1.4) million, respectively.

OTHER EXPENSE - Interest expense for the three months ended September 30, 2011 was $2.5 million compared to $3.1 million for the same period in fiscal year 2011.

On April 13, 2010, we issued warrants which had a fair value at the date of issuance of $5.0 million.  Of the fair value on April 13, 2010, $2.1 million was related to the warrants issued to Dr. Chaudhuri and were a component of the recovery of overswept funds by our previous lender that was recorded during fiscal year 2010.  The remaining $2.9 million was recorded as warrant expense during fiscal year 2011.   As of September 30, 2011, the fair value of the warrants aggregated $384.  The gain related to the change in the fair value of the April Warrants for the three months ended September 30, 2011 and 2010 was $3.1 million and $0.6 million, respectively. See “DEBT.”

NET INCOME (LOSS) - Net income (loss) for the three months ended September 30, 2011 and 2010 was $0.5 million and $(4.0) million, respectively.

SIX MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 2010

NET OPERATING REVENUES - Net operating revenues for the six months ended September 30, 2011 decreased 0.8% compared to the same period in fiscal year 2011, from $184.9 million to $183.4 million. Admissions for the six months ended September 30, 2011 decreased 10.2% compared to the same period in fiscal year 2011. The decline in admissions is the combined result of lower obstetrical deliveries and psychiatric admissions. Net operating revenues per admission improved by 10.9% during the six months ended September 30, 2011 as a result of improved trauma case reimbursement, and negotiated managed care and governmental payment rate increases. Adjusting for the shift to outpatient, adjusted admissions decreased by 6.7% for the six months ended September 30, 2011 compared to the same period in fiscal year 2011.

Essentially all net operating revenues come from external customers. The largest payers are the Medicare and Medicaid programs accounting for 55% and 57% of the net operating revenues for the six months ended September 30, 2011 and 2010, respectively.

Uninsured patients, as a percentage of gross charges, decreased to 5.3% from 5.7% for the six months ended September 30, 2011 compared to the six months ended September 30, 2010.

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Although not a GAAP measure, we define "Net Collectible Revenues" as net operating revenues less provision for doubtful accounts. This eliminates the distortion caused by the changes in patient account classification. Net collectible revenues (net operating revenues less provision for doubtful accounts) for the six months ended September 30, 2011 and 2010 were $166.5 million and $165.7 million, respectively, representing an increase of 0.5%. The Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from Medicaid, Medicaid DSH, and Orange County, CA (CalOptima). Governmental net revenues decreased $5.1 million ($3.0 million in Medicaid DSH) for the six months ended September 30, 2011 compared to the six months ended September 30, 2010.  

OPERATING EXPENSES - Operating expenses for the six months ended September 30, 2011 decreased to $180.8 million from $183.1 million, a decrease of $2.3 million, or 1.3%, compared to the same period in fiscal year 2011. Operating expenses expressed as a percentage of net operating revenues for the six months ended September 30, 2011 and 2010 were 98.6% and 99.0%, respectively. On a per admission basis, operating expenses increased 10.4%.

Salaries and benefits increased $2.7 million (2.6%) for the six months ended September 30, 2011 compared to the same period in fiscal year 2011. The increase is primarily due to increases in contract labor utilization and cost of employee health insurance of $0.7 million and $2.1 million, respectively.

Other operating expenses during the six months ended September 30, 2011 decreased to $29.2 million from $31.4 million, a decrease of $2.2 million, or 7.0%, compared to the same period in fiscal 2011, primarily due to an accrual of $1.8 million during the six months ended September 30, 2010 for a guarantee extended to a state supported teaching institution to accept the transfer of an uninsured patient for a necessary higher level of care (the agreement and the institution’s practice are being reviewed).

The provision for doubtful accounts for the six months ended September 30, 2011 was $16.8 million compared to $19.3 million for the six months ended September 30, 2010, representing a 13.0% decrease.  The primary reason for the decrease was due to the collection of a single large dollar account that had been fully reserved.

OPERATING INCOME - The operating income for the six months ended September 30, 2011 and 2010 was $2.6 million and $1.8 million, respectively.

OTHER EXPENSE - Interest expense for the six months ended September 30, 2011 was $5.3 million compared to $6.3 million for the same period in fiscal year 2011. The decrease primarily related to lower outstanding borrowings under our revolving line of credit, which was partially offset by accelerated amortization of debt issuance costs of $334 as a result of the reduction in our $40 million Revolving Line of Credit to $20 million.

On April 13, 2010, we issued warrants which had a fair value at the date of issuance of $5.0 million.  Of the fair value on April 13, 2010, $2.1 million was related to the warrants issued to Dr. Chaudhuri and were a component of the recovery of overswept funds by our previous lender that was recorded during fiscal year 2010.  The remaining $2.9 million was recorded as warrant expense during fiscal year 2011.   As of September 30, 2011, the fair value of the warrants aggregated $384.  The loss related to the change in the fair value of the April Warrants for the six months ended September 30, 2011 and 2010 was $217 and $1.3 million, respectively. See “DEBT.”

NET LOSS – Net loss for the six months ended September 30, 2011 and 2010 was $2.4 million and $5.9 million, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

REVENUE RECOGNITION - Net operating revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less estimated discounts for contractual allowances, principally for patients covered by Medicare, Medicaid, managed care, and other health plans. Gross charges are retail charges based on our Charge Description Master. 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 our consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the federal government or the state 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). Since Medicare requires a hospital's gross charges be the same for all patients (regardless of payer category), gross charges are also what the Hospitals charge all other patients prior to the application of discounts and allowances.

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Revenues under the traditional fee-for-service Medicare and Medicaid programs are based primarily on prospective payment systems. Discounts for retrospectively cost based revenues and certain other payments, which are based on the Hospitals' cost reports, are estimated using historical trends and current factors. Cost report settlements for retrospectively cost-based revenues under these programs are subject to audit, and administrative and judicial review, which can take several years until final settlement of such matters are determined and completely resolved. Estimates of settlement receivables or payables related to a specific year are updated periodically, at year end, and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made to the estimates until the final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be several years’ time lag between the submission of a cost report and receipt of the Final Notice of Program Reimbursement. Since the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. We have established settlement receivables of $534 and $456 as of September 30 and March 31, 2011, respectively.

Our Hospitals receive supplemental payments from the State of California to support indigent care (Medi-Cal Disproportionate Share Hospital payments or "DSH") and from the California Medical Assistance Commission ("CMAC") under the SB 1100 and SB 1255 programs. The Hospitals received supplemental payments of $1.1 million and $0 during the three months ended September 30, 2011 and 2010, respectively, and $5.9 million and $11.1 million during the six months ended September 30, 2011 and 2010, respectively. The related revenue recorded for the three months ended September 30, 2011 and 2010, was $4.0 million and $4.8 million, respectively, and $7.4 million and $11.1 million during the six months ended September 30, 2011 and 2010, respectively. As of September 30 and March 31, 2011, estimated DSH receivables were $5.3 million and $3.9 million, respectively.

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. We believe the estimation and review process allows for timely identification of instances where such estimates need to be revised. We do not believe there were any adjustments to estimates of individual patient bills that were material to our net operating revenues.

Our Hospitals provide charity care to patients whose income level is below 300% of the Federal Poverty Level. Patients with income levels between 300% and 350% of the Federal Poverty Level qualify to pay a discounted rate under AB 774 based on various government program reimbursement levels. Patients without insurance 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 our 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 estimated costs (based on direct and indirect costs as a ratio of gross uncompensated charges associated with providing care to charity patients) for the three months ended September 30, 2011 and 2010 were approximately $2.5 million and $2.6 million, respectively, and $3.8 million and $4.5 million for the six months ended September 30, 2011 and 2010, respectively.

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 qualify for Medicaid, the receivables are reclassified to charity care and written off, or they are reclassified to self-pay and adjusted to their net realizable value through the provision for doubtful accounts. Reclassifications of Medicaid pending accounts to self-pay do not typically have a material impact on the results of operations as the estimated Medicaid contractual allowances initially recorded are not materially different than the estimated provision for doubtful accounts recorded when the accounts are reclassified. All accounts classified as pending Medicaid, as well as certain other governmental receivables, over the age of 90 days were reserved in contractual allowances as of September 30 and March 31, 2011 based on historical collections experience.

We receive payments for “eligible alien” care under Section 1011 of the Medicare Modernization Act of 2003. As of September 30 and March 31, 2011, we established a receivable in the amount of $1.3 million and $1.6 million, respectively, related to discharges deemed eligible to meet program criteria.

We are 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 our unaudited condensed consolidated financial statements.

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PROVISION FOR DOUBTFUL ACCOUNTS - We provide 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. Our 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 copayments 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.

Our policy is to attempt to collect amounts due from patients, including copayments 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 nonemergency circumstances or for elective procedures and services, it is our Hospitals' policy, when appropriate, to verify insurance prior to a patient being treated.

INCOME TAXES - Deferred income tax assets and liabilities are determined based on the differences between the book and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws using the asset and liability method. We assess the realization of deferred tax assets to determine whether an income tax valuation allowance is required. We have recorded a 100% valuation allowance on its deferred tax assets.

There is a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and California. Certain tax attributes carried over from prior years continue to be subject to adjustment by taxing authorities. Penalties or interest, if any, arising from federal or state taxes are recorded as a component of our income tax provision.

INSURANCE - We accrue for estimated general and professional liability claims, to the extent not covered by insurance, when they are probable and reasonably estimable. We have purchased as primary coverage a claims-made form insurance policy for general and professional liability risks. Estimated losses within general and professional liability retentions from claims incurred and reported, along with incurred but not reported (“IBNR”) claims, are accrued based upon projections and are discounted to their net present value using a weighted average risk-free discount rate of 5%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2011, we had accrued $12.6 million and $14.0 million, respectively, which is comprised of $5.3 million and $6.6 million, respectively, in incurred and reported claims, along with $7.3 million and $7.4 million, respectively, in estimated IBNR.  Estimated insurance recoveries of $2.9 million and $2.7 million are included in other prepaid expenses and current assets as of September 30 and March 31, 2011, respectively.

We have also purchased occurrence coverage insurance to fund our obligations under our workers compensation program. We have a "guaranteed cost" policy, under which the carrier pays all workers compensation claims, with no deductible or reimbursement required of us. We accrue for estimated workers compensation claims, to the extent not covered by insurance, when they are probable and reasonably estimable. The ultimate costs related to this program include expenses for deductible amounts associated with claims incurred and reported in addition to an accrual for the estimated expenses incurred in connection with IBNR claims. Claims are accrued based upon projections and are discounted to their net present value using a weighted average risk-free discount rate of 5%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2011, we had accrued $736 and $836, respectively, comprised of $372 and $434, respectively, in incurred and reported claims, along with $364 and $402, respectively, in estimated IBNR.

In addition, we have a self-insured health benefits plan for our employees. As a result, we have established and maintain an accrual for IBNR claims arising from self-insured health benefits provided to employees. Our IBNR accruals at September 30 and March 31, 2011 were based upon projections. We determine the adequacy of this accrual by evaluating our limited historical experience and trends related to both health insurance claims and payments, information provided by our insurance broker and third party administrator and industry experience and trends. The accrual is an estimate and is subject to change. Such change could be material to our consolidated financial statements. As of September 30 and March 31, 2011, we had accrued $2.0 million and $1.8 million, respectively, in estimated IBNR. We believe this is the best estimate of the amount of IBNR relating to self-insured health benefit claims at September 30 and March 31, 2011.

We have also purchased umbrella liability policies with aggregate limits of $25 million. The umbrella policies provide coverage in excess of the primary layer and applicable retentions for insured liability risks such as general and professional liability, auto liability, and workers compensation (employers liability).

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As of September 30, 2011, the Company did not have any investment in, or outstanding liabilities under, market rate sensitive instruments. The Company does not enter into hedging instrument 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 reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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) under the Exchange Act. 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.

As of September 30, 2011, the end of the period of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2011 the Company's disclosure controls and procedures were effective to ensure that the information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

During the three months ended September 30, 2011, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

The following is a summary of material developments in the matter involving Orange County Physicians Investment Network, LLC (“OC-PIN”), as well as the Avery and Ross potential class action lawsuits that were identified in our Form 10-K filed on June 24, 2011.  There have been no material developments in the other matters identified in the Form 10-K.

On April 24, 2009, a conglomeration of several OC-PIN members led by Ajay G. Meka, M.D. filed a lawsuit against Dr. Shah, other OC-PIN members, and various attorneys, alleging breach of fiduciary duty and seeking damages as well as declaratory and injunctive relief relating to the control of OC-PIN.  After a number of demurrers were filed by the defendants, Plaintiffs filed a Sixth Amended Complaint on May 5, 2011, to which the Company is not a party.  On May 19, 2011, Judge Nancy Wieben-Stock appointed Dr. Anil Shah and Dr. John Glavinovich as interim managers of OC-PIN and signed a formal order to this effect on June 27, 2011.  On July 20, 2011, OC-PIN’s attorney placed a demand on the Company to seat two directors – Mr. Brahmbhatt himself and one Amer Zarka, M.D. – on the Board of Directors.  The Company declined this request based on its non-compliance with the Global Settlement Agreement and asked for additional information.  On August 3, 2011, the Company filed a lawsuit in the Orange County Superior Court asking for declaratory relief as to how it must respond to this request.  On August 4, 2011, OC-PIN filed a “Motion for Clarification” asking Judge Wieben-Stock to modify her prior order appointing Drs. Shah and Glavinovich as OC-PIN interim managers to include a finding that they are empowered to appoint one member to the Company’s Board of Directors pursuant to Judge Lewis’ March 23, 2011 judgment in the Company v. Shah matter.  On August 12, 2011, Judge Wieben-Stock denied this motion.  On August 22, 2011, OC-PIN filed another motion for “Further and Additional Orders” essentially repeating the request in its August 4, 2011 motion.  This motion was likewise denied.  Shortly thereafter, the Company offered to dismiss its declaratory relief action without prejudice if OC-PIN made no further attempts to appoint a Company Director until the Meka/OC-PIN matter is resolved.  OC-PIN agreed, and on October 5, 2011, the Company dismissed its declaratory relief action without prejudice.

On June 5, 2009, a potential class action lawsuit was filed against the Company by Alexandra Avery.  Ms. Avery purports to represent all 12-hourly employees and the complaint alleges causes of action for restitution of unpaid wages as a result of unfair business practices, injunctive relief for unfair business practices, failure to pay overtime wages, and penalties associated therewith. On December 23, 2009, the Company filed an answer to the complaint, generally denying all of the plaintiff’s allegations.  On January 25, 2010, a potential class action lawsuit was filed against the Company by Julie Ross.  Ms. Ross purports to represent all similarly-situated employees and the complaint alleges causes of action for violation of the California Labor Code and unfair competition law.  On September 3, 2010 the plaintiffs in both the Avery and Ross actions filed a consolidated complaint (the “Consolidated Complaint”) that alleges the causes of action found in the initial Ross complaint.  On October 12, 2010, the Company filed an answer to the Consolidated Complaint, which generally denied all allegations.  On July 18, 2011, the Company filed a motion to compel arbitration of the matter, which was denied on October 21, 2011.  The Company intends to appeal the denial of its motion to arbitrate and will vigorously defend itself in connection with the claims in the Consolidated Complaint.   The parties are currently exchanging discovery in the action.   At this early stage in the proceedings, the Company is unable to determine the cost of defending this lawsuit or the impact, if any, this action may have on its results of operations.

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ITEM 1A. RISK FACTORS

CONCENTRATION OF BUSINESS – Since the Company’s business is currently limited to the southern California area, any reduction in its revenues and profitability from a local economic downturn would not be offset by operations in other geographic areas.

To date, the Company has developed its business within only one geographic area to take advantage of economies of scale. Due to this concentration of business in a single geographic area, the Company is exposed to potential losses resulting from the risk of an economic downturn in southern California. If economic conditions deteriorate in southern California, the Company’s patient volumes and revenues may decline, which could significantly reduce its profitability.

There are no other material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

ITEM 6.EXHIBITS

Exhibit Number	Description
10.9	Master Information System Agreement, dated March 31, 2008, between McKesson Information Solutions LLC and the Registrant.
10.9.1	Contract Supplement, dated July 1, 2011, to Master Information System Agreement, dated March 31, 2008, between McKesson Information Solutions LLC and the Registrant.*
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.

101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document

__________________

* Confidential treatment has been requested with respect to certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, which confidential portions have been omitted from the exhibit and filed separately with the Securities and Exchange Commission.

36

SIGNATURES

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

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: November 9, 2011	By:	/s/ Steven R. Blake
		Steven R. Blake
		Chief Financial Officer (Principal Financial Officer)

37

EX-10.9

EXHIBIT 10.9

PROPRIETARY and CONFIDENTIAL TO MCKESSON INFORMATION SOLUTIONS LLC Integrated Healthcare Holdings, Inc. Customer No. TBD Contract No. C0810294 March 7, 2008

MASTER INFORMATION SYSTEM AGREEMENT

This Master Information System Agreement (the "Agreement") is made effective as of this 31st day of March, 2008 (the "Effective Date"), by and between McKesson Information Solutions LLC, having its principal place of business at 5995 Windward Parkway, Alpharetta, Georgia 30005 ("McKesson"), and Integrated Healthcare Holdings, Inc., having its principal place of business at 1301 North Tustin Avenue, Santa Ana, California 92705 ("Customer").

This Agreement governs all software, services, and equipment supplied by McKesson to Customer during the term of this Agreement, whether or not provided pursuant to a Contract Supplement. The provisions of this Agreement, including exhibits and attachments, apply to each Contract Supplement referencing this Agreement, and the provisions of each Contract Supplement will control in the event of any inconsistency between the provisions of such Contract Supplement and the provisions of this Agreement.

SECTION 1: DEFINITIONS

Except as otherwise stated, capitalized terms in this Agree­ment have the meanings set forth in Exhibit A.

SECTION 2: SOFTWARE

2.1License Grant.Subject to the terms of this Agreement and each applicable Contract Supplement, McKesson hereby grants to Customer a limited, nonexclusive, nontransferable, non-sublicensable, perpetual license to use the Software for Customer's internal purposes related to operating the Facilities, expressly subject to the following conditions:(a) the Software may be installed only on equipment located at the Facilities, (b) the Software may be accessed or used only by Permitted Users, and (c) use of the Software may be limited by any usage-based variable(s) specified in an applicable Contract Supplement. Customer may copy the Software as reasonably necessary to exercise its license rights under this Section 2.1, including a reasonable number of copies for testing and backup purposes.

2.2           License Restrictions.

2.2.1Copying and Modification. Customer will not copy or modify the Software except as expressly authorized in this Agreement. Customer will not alter any trademark, copyright notice, or other proprietary notice on the Software, and will duplicate each such mark or notice on each copy of the Software.

2.2.2Facility Limitation. Customer will only install the Software at the applicable Facility, except that Customer may install the Software on a temporary basis at an alternate location in the U.S. or Canada if Customer is unable to use the Software at such Facility due to equipment malfunction or other cause beyond Customer's reasonable control. Customer will promptly notify McKesson of such alternate location if such temporary use continues for longer than 30 days.

2.2.3Services Limitation. Customer will not use the Software to provide service bureau or other services to any third party.

2.2.4Outsourced Services. Customer will not permit use of the Software by any outsourcing or facility management service provider without McKesson's prior written consent, which will not be unreasonably withheld. McKesson's consent will be deemed reasonably withheld, among other possible reasons, if such service provider participates in the development, distribution, or marketing of software products that compete with any McKesson products.

2.2.5Retained Rights. Customer's rights in the Software will be limited to those expressly granted in this Section 2. McKesson reserves all Intellectual Property Rights and any other rights and licenses in and to the Software not expressly granted to Customer hereunder. All changes, modifications, or improvements made or developed with regard to the Software, whether or not made or developed at Customer's request, will be the property of McKesson. Customer acknowledges that the Software contains trade secrets of McKesson, and Customer agrees not to take any step to derive a source code equivalent of the Software (e.g., disassemble, decompile, or reverse engineer the Software) or to permit any third party to do so. Customer will not disclose, distribute, license, rent, loan, lease, sub-license, or otherwise transfer or distribute the Software to any third party except as expressly permitted in a Contract Supplement or amendment.

2.3Third-Party Software.McKesson may substitute different software for any Third-Party Software licensed to Customer, if McKesson reasonably demonstrates the need to do so. In such event, the parties will negotiate in good faith the terms under which McKesson will make available reasonably comparable software to replace such Third-Party Software.

2.4 Audit.Upon reasonable prior written notice, McKesson may audit Customer's use of the Software to ensure that Customer is in compliance with this Agreement. Any such audit will be conducted during regular business hours, and Customer will provide McKesson with reasonable access to all relevant equipment and records.

2.5Source Code Escrow. Customer will be entitled, at its sole expense, to have the source code for any Generally Available McKesson Software licensed by Customer under this Agreement escrowed with McKesson's nationally recognized escrow agent, as specified in the applicable Contract Supplement.

SECTION 3: SERVICES; EQUIPMENT

3.1Software Maintenance Services.

3.1.1Performance of Software Maintenance Services. Subject to payment of the Software Maintenance Services fees set forth in the applicable Contract Supplement, McKesson will provide the Software Maintenance Services to Customer for the two most current releases of the Software. McKesson and Customer will comply with McKesson's written Software Maintenance Services procedures as contained in the McKesson Support Manual incorporated herein by reference, as may be reasonably modified from time to time.

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PROPRIETARY and CONFIDENTIAL TO MCKESSON INFORMATION SOLUTIONS LLC Integrated Healthcare Holdings, Inc. Customer No. TBD Contract No. C0810294 March 7, 2008

3.1.2Software Maintenance Term. McKesson will provide Software Maintenance Services for an initial term that will begin on the effective date of the applicable Contract Supplement and end three years thereafter (the “Initial Software Maintenance Term”). Following the expiration of the Initial Software Maintenance Term, McKesson will continue to provide Customer with Software Maintenance Services for successive, automatically renewable one year periods (“Renewal Software Maintenance Terms”), unless either party provides the other party with written notice of termination of Software Maintenance Services no less than six months prior to the end of the Initial Software Maintenance Term or three months prior to the end of the applicable Renewal Software Maintenance Term.

3.2Implementation Services

3.2.1Performance of Implementation Services. Subject to the terms and conditions of this Agreement and each applicable Contract Supplement, McKesson will provide to Customer the Implementation Services described on an applicable Contract Supplement.

3.2.2Scope Change. All changes in the scope of Implementation Services are subject to, and shall be made only in accordance with, the Change Control Process.

3.3Equipment Delivery and Installation. Title and all risk of loss or damage to Equipment will pass to Customer upon shipment to Customer. Unless Customer notifies McKesson to the contrary in writing, McKesson may make partial shipments of Equipment, to be separately invoiced and paid for when due. Delay in delivery of any installment caused solely by Customer will not relieve Customer of its obligation to accept any subsequent installments. McKesson will provide installation and configuration services for the Equipment (excluding peripherals) at the Facility. Customer will be responsible, at Customer’s sole expense, for preparing the Facility for installation of the Equipment (including any required cabling), and will provide all assistance reasonably required by McKesson to install and configure the Equipment.

SECTION 4: WARRANTIES

4.1Software Quality Warranties; Testing Period.

4.1.1Performance. McKesson warrants that the McKesson Software will perform in all material respects in accordance with all functional specifications set forth in the Documentation, except that this warranty will not apply: (a) if Customer operates the Software on equipment other than Equipment or equipment that McKesson certifies; (b) if anyone other than McKesson or its authorized third-party supplier modifies the Software; (c) if Customer uses a version of the Software other than one of the two most current releases; or (d) during any period of time in which Customer has discontinued Software Maintenance Services or is past due on Software Maintenance Services or Implementation Services fees.

4.1.2Obstructions. McKesson warrants that the Software, as delivered, does not contain any virus, worm, trap door, or other malicious code designed to disrupt use of the Software in accordance with the Documentation.

4.1.3Software Testing Period. Customer may test any Software delivered by McKesson to ensure that it performs in all material respects in accordance with the warranties set forth in this Section 4.1. Such testing will begin on the Software delivery date and end 45 days after the Live Date (the “Software Testing Period”) unless, prior to the expiration of the Software Testing Period, Customer provides McKesson with a reasonably detailed written report identifying any material nonconformities in the performance of the Software. In such event, the Software Testing Period will continue until McKesson corrects all such nonconformities identified in the error report to the extent necessary for the Software to perform in all material respects in accordance with the warranties set forth in this Section 4.1.

4.2Services Warranty. McKesson warrants that the Implementation Services will be performed in a professional manner consistent with industry standards by trained and skilled personnel. Upon Customer’s reasonable, written request, McKesson will use commercially reasonable efforts to replace any McKesson service personnel having direct contact with Customer.

4.3Disclaimer; Exclusive Remedy. THE WARRANTIES EXPRESSLY PROVIDED IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WHICH WARRANTIES ARE HEREBY SPECIFICALLY DISCLAIMED. CUSTOMER’S SOLE AND EXCLUSIVE REMEDY FOR MCKESSON’S BREACH OF ANY WARRANTY IN THIS AGREEMENT WILL BE THE REPAIR, REPLACEMENT, OR RE-PERFORMANCE BY MCKESSON OF THE NONCONFORMING SOFTWARE, EQUIPMENT, OR SERVICE; EXCEPT, THAT IF MCKESSON FAILS TO DELIVER THIS REMEDY, THEN CUSTOMER MAY PURSUE ANY OTHER REMEDY THAT IS OTHERWISE PERMITTED UNDER THIS AGREEMENT.

SECTION 5: PAYMENT

5.1Payment Terms. Customer will pay all fees and other charges due under each Contract Supplement to McKesson in U.S. dollars within 35 days after date of invoice. Disputes as to the accuracy of an invoice must be presented in writing to McKesson within 65 days after the invoice date.

5.2Expenses. Prices do not include, and Customer will be invoiced for, packing, delivery, and insurance charges. In addition, Customer will reimburse McKesson for all reasonable out-of-pocket expenses incurred in the course of providing Services, including travel, accommodations, and living expenses in accordance with McKesson’s travel policies.

5.3Taxes. All amounts payable under this Agreement  are exclusive of sales, use, value-added, withholding, and other taxes and duties. Customer will promptly pay, and indemnify McKesson against, all taxes and duties assessed in connection with this Agreement and its performance, except for taxes payable on McKesson’s net income.

5.4Late Payments. McKesson may charge Customer interest on any overdue fees, charges, or expenses at a rate equal to the lesser of 1.5% per month or the highest rate permitted by law. Customer will reimburse McKesson for all reasonable costs and expenses incurred (including reasonable attorneys’ fees) in collecting any overdue amounts. In addition, if Customer does not pay fees, charges, or expenses when due, then McKesson may require reasonable advance payments as a condition to providing Software, Equipment, or Services, notwithstanding any other express obligation to provide them.

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PROPRIETARY and CONFIDENTIAL TO MCKESSON INFORMATION SOLUTIONS LLC Integrated Healthcare Holdings, Inc. Customer No. TBD Contract No. C0810294 March 7, 2008

5.5Price Changes. McKesson may change its prices at any time, but such changes will not affect orders accepted by McKesson prior to the effective date of the change. In addition, McKesson will have the right to increase its Software Maintenance Services fees upon 60 days notice to Customer, but the amount of any such increase will not exceed (a) during the Initial Software Maintenance Term, the lower of five percent or the annual percentage increase in the ECI or (b) during any Renewal Software Maintenance Term, the annual percentage increase in the ECI. Any such increase will not be effective until the next annual Software Maintenance Services fee is due.

SECTION 6: GENERAL TERMS

6.1Confidentiality and Proprietary Rights.

6.1.1Confidential Information. Each party may disclose to the other party non-public information, including technical, marketing, financial, personnel, planning, medical records, and other information that is marked confidential or which the receiving party should reasonably know to be confidential (“Confidential Information”). Confidential Information of each party will also include the terms of this Agreement and each Contract Supplement, but not the existence and general nature of this Agreement and each Contract Supplement. Confidential Information will not include any information: (a) lawfully obtained or created by the receiving party independently of the disclosing party’s Confidential Information without breach of any obligation of confidence; or (b) that enters the public domain without breach of any obligation of confidence.

6.1.2Use and Disclosure of Confidential Information. Except as expressly permitted by this Agreement, neither party will: (a) disclose the other party’s Confidential Information except (i) to its employees or contractors who are bound by confidentiality terms no less restrictive than those contained in this Section 6.1 (to the extent that they need to know such Confidential Information in order to perform under this Agreement); or (ii) to the extent required by law (with prompt notice of such obligation to the other party); or (b) use the other party’s Confidential Information for any purpose other than performing its obligations under this Agreement. Each party will use all reasonable care in handling and securing the other party’s Confidential Information and will employ all security measures ordinarily used for its own proprietary information of similar nature. Following the expiration or termination of this Agreement, each party will, upon written request, return or destroy all of the other party’s tangible Confidential Information in its possession and will promptly certify in writing to the other party that it has done so.

6.1.3Injunctive Relief. The parties agree that the breach, or threatened breach, by a party of any provision of this Section 6.1 may cause the other party irreparable harm without adequate remedy at law. Therefore, the parties agree that upon such breach or threatened breach, a party will be entitled to injunctive relief to prevent the other party from commencing or continuing any action constituting such breach, without having to post a bond or other security and without having to prove the inadequacy of other available remedies. Nothing in this paragraph will limit any other remedy available to either party.

6.1.4Proprietary Rights. Except for license rights expressly granted by McKesson under this Agreement, each party will retain all rights, title, and interest in its Intellectual Property Rights.

6.2Intellectual Property Infringement.

6.2.1Duty to Defend. At its expense, McKesson will defend, indemnify, and hold Customer harmless from any action or other proceeding brought against Customer to the extent that it is based on a claim that (a) the use of the McKesson Software delivered under this Agreement infringes any U.S. copyright or (b) the McKesson Software incorporates any misappropriated trade secrets, and McKesson will pay costs and damages finally awarded as a result thereof; provided, that Customer (i) notifies McKesson of the claim within ten business days, (ii) provides McKesson with all reasonably requested cooperation, information and assistance, and (iii) gives McKesson sole authority to defend and settle the claim.

6.2.2Exclusions.McKesson will have no obligations under Section 6.2.1 above with respect to claims arising from: (a) McKesson Software modifications that were not performed by McKesson or authorized by McKesson in writing; (b) compliance with Customer’s designs, specifications or instructions; or (c) use of McKesson Software in combination with products not provided by McKesson, if the claim would not have arisen but for the particular combination.

6.2.3Injunctions. If a claim of infringement or misappropriation for which Customer is entitled to be indemnified under Section 6.2.1 above arises, McKesson may, at its sole option and expense: (a) obtain for Customer the right to continue using such McKesson Software; (b) replace or modify such McKesson Software to avoid such a claim, provided that the replaced or modified McKesson Software is substantially equivalent in function to the affected McKesson Software; or (c) if options (a) and (b) above are not practical in McKesson’s reasonable opinion, take possession of the affected McKesson Software and terminate Customer’s rights and McKesson’s obligations under this Agreement with respect to such McKesson Software, and upon any such termination, refund to Customer a portion of the fees paid for that McKesson Software based upon a five year straight-line depreciation, with depreciation deemed to have commenced on the corresponding Live Date, if any, or the corresponding date of delivery.

6.2.4Exclusive Remedy. THE FOREGOING ARE MCKESSON’S SOLE AND EXCLUSIVE OBLIGATIONS, AND CUSTOMER’S SOLE AND EXCLUSIVE REMEDIES, WITH RESPECT TO THE INFRINGEMENT OR MISAPPROPRIATION OF THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS.

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PROPRIETARY and CONFIDENTIAL TO MCKESSON INFORMATION SOLUTIONS LLC Integrated Healthcare Holdings, Inc. Customer No. TBD Contract No. C0810294 March 7, 2008

6.3Limitations of Liability.

6.3.1Total Damages.

(a)EXCEPT FOR ANY LIABILITY UNDER SECTION 6.2, MCKESSON’S TOTAL CUMULATIVE LIABILITY UNDER, IN CONNECTION WITH, OR RELATED TO THIS AGREEMENT WILL BE LIMITED TO THE TOTAL FEES PAID (LESS ANY REFUNDS OR CREDITS) BY CUSTOMER TO MCKESSON UNDER THE APPLICABLE CONTRACT SUPPLEMENT FOR THE AFFECTED PRODUCT OR SERVICE, WHETHER BASED ON BREACH OF CONTRACT, WARRANTY, TORT, PRODUCT LIABILITY, OR OTHERWISE.

(b)EXCEPT FOR (i) CUSTOMER’S PAYMENT OBLIGATIONS OR (ii) LIABILITY ARISING FROM INTELLECTUAL PROPERTY INFRINGEMENT OR VIOLATION OF THE SCOPE OF A LICENSE, CUSTOMER’S TOTAL LIABILITY TO MCKESSON UNDER, IN CONNECTION WITH OR RELATED TO THIS AGREEMENT WILL BE LIMITED TO THE TOTAL FEES PAID AND PAYABLE BY CUSTOMER TO MCKESSON UNDER THE APPLICABLE CONTRACT SUPPLEMENT FOR THE AFFECTED PRODUCT OR SERVICE, WHETHER BASED ON BREACH OF CONTRACT, WARRANTY, TORT, PRODUCT LIABILITY OR OTHERWISE.

6.3.2Exclusion of Damages.

(a)EXCEPT FOR ANY LIABILITY UNDER SECTION 6.2, IN NO EVENT WILL MCKESSON BE LIABLE TO CUSTOMER UNDER, IN CONNECTION WITH, OR RELATED TO THIS AGREEMENT FOR ANY SPECIAL, INCIDENTAL, INDIRECT, OR CONSEQUENTIAL DAMAGES, INCLUDING, BUT NOT LIMITED TO, LOST PROFITS OR LOSS OF GOODWILL, WHETHER BASED ON BREACH OF CONTRACT, WARRANTY, TORT, PRODUCT LIABILITY, OR OTHERWISE, AND WHETHER OR NOT MCKESSON HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.

(b)EXCEPT FOR ANY LIABILITY ARISING OUT OF OR RELATED TO INTELLECTUAL PROPERTY INFRINGEMENT OR VIOLATION OF THE SCOPE OF A LICENSE, IN NO EVENT WILL CUSTOMER BE LIABLE TO MCKESSON UNDER, IN CONNECTION WITH, OR RELATED TO, THIS AGREEMENT FOR ANY SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING, BUT NOT LIMITED TO, LOST PROFITS OR LOSS OF GOODWILL, WHETHER BASED ON BREACH OF CONTRACT, WARRANTY, TORT, PRODUCT LIABILITY, OR OTHERWISE, AND WHETHER OR NOT CUSTOMER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.

6.3.3Material Consideration. THE PARTIES ACKNOWLEDGE THAT THE FOREGOING LIMITATIONS ARE A MATERIAL CONDITION FOR THEIR ENTRY INTO THIS AGREEMENT.

6.4Term and Termination.

6.4.1 Term. This Agreement will commence on the Effective Date and will continue until termination of each and every Contract Supplement, unless this Agreement is terminated earlier in accordance with its terms.

6.4.2Termination. A party may terminate this Agreement or any Contract Supplement immediately upon notice to the other party if the other party: (a) materially breaches this Agreement or the applicable Contract Supplement and fails to remedy, or fails to commence reasonable efforts to remedy, that breach within 60 days after receiving notice of the breach from the terminating party; (b) infringes the terminating party’s Intellectual Property Rights and fails to remedy, or fails to commence reasonable efforts to remedy, that breach within 10 days after receiving notice of the breach from the terminating party; (c) materially breaches this Agreement or the applicable Contract Supplement in a manner that cannot be remedied; or (d) commences dissolution proceedings or ceases to operate in the ordinary course of business. Termination of a particular Contract Supplement on the grounds of material breach will not automatically terminate this Agreement or any other Contract Supplement.

6.4.3Orderly Transition. Except in the event of termination relating to Customer’s material breach or infringement of McKesson’s Intellectual Property Rights, for a period of up to six months following termination or expiration of this Agreement or a Contract Supplement: (a) each Software license will continue, together with Customer’s obligation to pay fees; (b) McKesson will cooperate with Customer in an orderly transition; and (c) Customer will pay McKesson fees for any services that McKesson performs for Customer during such period at McKesson’s then-current rates.

6.4.4Return of Software. At the end of any transition period under Section 6.4.3, or the termination or expiration of this Agreement or a Contract Supplement if no transition period applies, Customer will promptly (a) cease using the Software, (b) purge all Software from all computer systems (including servers and personal computers), (c) return to McKesson all copies (including partial copies) of the Software, and (d) certify in writing to McKesson that Customer has complied with its obligations under this Section 6.4.4.

6.4.5Survival of Provisions. Those provisions of this Agreement or any Contract Supplement that, by their nature, are intended to survive termination or expiration of this Agreement or any Contract Supplement will remain in full force and effect, including, without limitation, the following Sections of this Agreement: 5 (Payment), 6.1 (Confidentiality and Proprietary Rights), 6.2 (Intellectual Property Infringement), 6.3 (Limitations of Liability), 6.4.3 (Orderly Transition), 6.4.4 (Return of Software), 6.5 (Books and Records), and 6.7 (Miscellaneous).

6.5Books and Records. The parties agree to make available, upon the written request of the Secretary of Health and Human Services, the Comptroller General, or their representatives, this Agreement and such books, documents, and records as may be necessary to verify the nature and extent of the costs of services rendered hereunder to the full extent required by the Centers for Medicare and Medicaid Services implementing Section 952 of the Omnibus Reconciliation Act of 1980, 42 U.S.C. Section 1395x(v)(1)(l).

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PROPRIETARY and CONFIDENTIAL TO MCKESSON INFORMATION SOLUTIONS LLC Integrated Healthcare Holdings, Inc. Customer No. TBD Contract No. C0810294 March 7, 2008

6.6Business Associate.The parties agree to the obligations set forth on Exhibit B attached hereto.

6.7Miscellaneous.

6.7.1Governing Law.This Agreement is governed by and will be construed in accordance with the laws of the state in which Customer’s principal place of business is located, exclusive of its rules governing choice of law and conflict of laws, any version of the Uniform Computer Transactions Act, and any version of the Uniform Commercial Code. Any action relating to this Agreement, other than collection of outstanding payments, must be commenced within four years of the date upon which the cause of action accrued.

6.7.2Assignment. Except as otherwise expressly set forth below, Customer will not assign this Agreement without the written consent of McKesson, which will not be unreasonably withheld. Customer may, upon notice to McKesson, assign this Agreement, together with any license granted hereunder, to any affiliate or any entity resulting from the sale, combination or transfer of all or substantially all of the assets or capital stock, or from any other corporate form of reorganization, provided the assignment is not to a competitor of McKesson.Upon any permitted assignment of this Agreement, Customer shall not incur any transfer fees other than such fees as may be required for any expanded or additional licenses, equipment, or services necessary as a result of such assignment. McKesson may, upon notice to Customer, assign this Agreement to any affiliate or to any entity resulting from the transfer of all or substantially all of McKesson’s assets or capital stock or from any other corporate reorganization. McKesson may subcontract its obligations under this Agreement.

6.7.3Severability. If any part of a provision of this Agreement is found illegal or unenforceable, it will be enforced to the maximum extent permissible, and the legality and enforceability of the remainder of that provision and all other provisions of this Agreement will not be affected.

6.7.4Notices. All notices relating to the parties’ legal rights and remedies under this Agreement will be provided in writing and will reference this Agreement. Such notices will be deemed given if sent by: (a) postage prepaid registered or certified U.S. Post mail, then five working days after sending; or (b) commercial courier, then at the time of receipt confirmed by the recipient to the courier on delivery. All notices to a party will be sent to its address below, or to such other address as may be designated by that party by notice to the sending party:

To Customer:	To McKesson:
Integrated Healthcare Holdings, Inc.	McKesson Information Solutions LLC
1301 North Tustin Avenue	5995 Windward Parkway
Santa Ana, California 92705	Alpharetta, Georgia 30005
	Attn: General Counsel

6.7.5Waiver. Failure to exercise or enforce any right under this Agreement will not act as a waiver of such right.

6.7.6Force Majeure. Except for the obligation to pay money, a party will not be liable to the other party for any failure or delay caused by matters beyond such party’s reasonable control, whether or not such matters were foreseeable, and such failure or delay will not constitute a material breach of this Agreement.

6.7.7Amendment.This Agreement may be modified, or any rights under it waived, only by a written document executed by both parties.
     

6.7.8No Third-Party Beneficiaries. Nothing in this Agreement will confer any right, remedy, or obligation upon anyone other than Customer and McKesson.

6.7.9Construction of Agreement. This Agreement will not be presumptively construed for or against either party. Section titles are for convenience only and will not affect this Agreement’s interpretation. As used in this Agreement, “will” means “shall,” and “include” means “include without limitation.” The parties may execute this Agreement and each Contract Supplement in one or more counterparts, each of which will be deemed an original and one and the same instrument.

6.7.10Entire Agreement.This Agreement, including exhibits, attachments, written terms incorporated by reference, and Contract Supplements, is the complete and exclusive agreement between the parties with respect to the subject matter hereof, superseding and replacing all prior agreements, communications, and understandings (written and oral) regarding its subject matter. Pre-printed terms and conditions on or attached to Customer purchase orders will be of no force or effect, even if acknowledged or accepted by McKesson.

Each party executes this Agreement by its duly authorized representative.

INTEGRATED HEALTHCARE HOLDINGS, INC.	MCKESSON INFORMATION SOLUTIONS LLC
By: /s/ Steve Blake	By: /s/  Ted Arneson
Name: Steve Blake	Name: Ted Arneson
Title: CFO	Title: Product Specialist
Date: 3/31/08	Date: 3/31/08

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PROPRIETARY and CONFIDENTIAL TO MCKESSON INFORMATION SOLUTIONS LLC Integrated Healthcare Holdings, Inc. Customer No. TBD Contract No. C0810294 March 7, 2008

EXHIBIT A

DEFINITIONS

“Agreement” (see introduction)

“Change Control Process” is as follows: Upon Customer’s request, McKesson will prepare a written proposal for change(s) to the scope of any Implementation Services. If Customer agrees to such proposal, then the parties will execute a written amendment documenting such change(s). If Customer does not agree to such proposal, or the parties otherwise fail to amend the applicable Contract Supplement, then such change(s) will not take effect, except that McKesson may change the Implementation Services and associated fees to reflect any additional costs to McKesson resulting from either delay by Customer in complying with its implementation obligations or an incorrect implementation assumption set forth in the applicable Contract Supplement.

“Confidential Information” (see Section 6.1.1)

“Contract Supplement” means McKesson’s form addendum to this Agreement, duly executed by both parties, under which Customer may order specific Software, Equipment, and Services.

“Customer” (see introduction)

“Documentation” means user guides, operating manuals, and specifications for the McKesson Software that McKesson provides to Customer.

“ECI” means Employment Cost Index for Private Industry, Compensation, Information Industry, Not Seasonally Adjusted (December 2005 = 100), as published by the US Department of Labor, Bureau of Labor Statistics.

“Effective Date” (see introduction)

“Equipment” means computer equipment identified in a Contract Supplement that Customer purchases from McKesson.

“Facility” means a healthcare facility located in the U.S. or Canada and operated by Customer that is identified in a Contract Supplement.

“Generally Available” means available as a non-development product, licensed by McKesson in the general commercial marketplace.

“Implementation Services” means the implementation services, training and education specified in a Contract Supplement to be performed by McKesson for Customer, which may include, but are not limited to, software loading, data conversion, software interface services, software testing assistance and Equipment installation.

“Initial Software Maintenance Term” (see Section 3.1.2)

“Intellectual Property Rights” means copyright, patent, and trade secret rights, and any other current or future proprietary rights in intangible property in any jurisdiction in the world, whether or not registered.

“Live Date” means the earlier of: (a) the date when the Software is first available for Productive Use; or (b) the date specified in the applicable implementation plan when the Software is intended to be available for Productive Use, except that the date determined under this subsection (b) will be extended for each day that the Software is not available for Productive Use due to direct fault of McKesson.

“McKesson” (see introduction)

“McKesson Software” means any McKesson-owned Software licensed to Customer under this Agreement.

“Permitted User” means (a) any Customer employee; (b) any physician with admitting privileges at an applicable Facility; (c) any employee of such physician; and (d) any medical professional authorized to perform services at an applicable Facility.

“Productive Use” means use of Software to process live data for purposes other than Software testing.

“Renewal Software Maintenance Term” (see Section 3.1.2)

“Services” means, Implementation Services, professional services, Software Maintenance Services, and any other services that McKesson provides to Customer pursuant to this Agreement.

“Software” means software in object code form only (and related Documentation) identified in a Contract Supplement or otherwise provided by McKesson to Customer, including any corrections and enhancements thereto that McKesson provides to Customer.

“Software Maintenance Services” means corrections of Software or Documentation due to defects in the Software or Documentation, as applicable, and improvements to existing functionality provided by McKesson after the Software delivery date but not otherwise separately priced or marketed by McKesson. McKesson and Customer will comply with McKesson’s written Software Maintenance Services procedures as contained in the McKesson Support Manual incorporated herein by reference, as may be reasonably modified from time to time.

“Software Testing Period” (see Section 4.1.3)

“Third-Party Software” means any third-party Software licensed to Customer under this Agreement.

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PROPRIETARY and CONFIDENTIAL TO MCKESSON INFORMATION SOLUTIONS LLC Integrated Healthcare Holdings, Inc. Customer No. TBD Contract No. C0810294 March 7, 2008

EXHIBIT B

BUSINESS ASSOCIATE AGREEMENT

SECTION 1: DEFINITIONS

1.1“Designated Record Set” means a group of records maintained by or for Customer that are the medical records and/or billing records of individual patients or are otherwise used by Customer to make decisions about individual patients.

1.2“HIPAA” means the Health Insurance Portability and Accountability Act of 1996 and the federal HIPAA privacy regulations at 45 C.F.R. parts 160 and 164.

1.3“Individually Identifiable Health Information” means individually identifiable health information as defined at 45 C.F.R. § 164.501.

1.4“Protected Health Information” or “PHI” means Individually Identifiable Health Information (transmitted or maintained in any form or medium) concerning Customer patients or the patients of any of Customer’s health care provider customers.

1.5 All capitalized terms used herein that are not otherwise defined have the meanings ascribed in HIPAA.

SECTION 2: RESPONSIBILITIES OF THE PARTIES WITH RESPECT TO PROTECTED HEALTH INFORMATION

2.1Responsibilities of McKesson. Beginning upon the compliance date established by HIPAA, with regard to PHI obtained from Customer, McKesson agrees as follows:

(a)McKesson will use and/or disclose the PHI only as permitted or required by the Agreement or as required by law.

(b)McKesson will use appropriate safeguards to maintain the security of the PHI and to prevent unauthorized use or disclosure of PHI, which will in no event be any less than the means which McKesson uses to protect its own confidential information.

(c)McKesson will promptly report to Customer any use or disclosure of PHI of which McKesson becomes aware that is not permitted by this Exhibit.

(d)If McKesson is permitted to utilize an agent or subcontractor to perform any of its obligations under the Agreement, McKesson will require all such subcontractors and agents that receive or use, or have access to, PHI under the Agreement to agree, in writing, to the same restrictions and conditions on the use and/or disclosure of PHI that apply to McKesson pursuant to this Exhibit.

(e)McKesson will make available its internal practices, books and records relating to the use and disclosure of PHI to the Secretary of HHS for purposes of determining Customer’s compliance with HIPAA.

(f)McKesson will provide to Customer such information in McKesson’s possession as is reasonably requested by Customer and necessary to enable Customer to respond to a request by an individual for an accounting of the disclosures of the individual's PHI in accordance with HIPAA.

(g)Unless otherwise explicitly stated in the applicable Contract Supplement, the parties do not intend for McKesson to maintain any PHI in a Designated Record Set for Customer. If McKesson maintains any PHI in a Designated Record Set, then McKesson agrees to (1) provide to Covered Entity such PHI in a timely fashion upon written request, and (2) to make amendments to such PHI in accordance with HIPAA.

(h)If McKesson believes it has a legal obligation to disclose any PHI, it will notify Customer as soon as reasonably practical after it learns of such obligation, and in any event within a time sufficiently in advance of the proposed release date such that Customer’s rights would not be prejudiced, as to the legal requirement pursuant to which it believes the PHI must be released. If Customer objects to the release of such PHI, McKesson will allow Customer to exercise any legal rights or remedies McKesson might have to object to the release of the PHI, and McKesson agrees to provide such assistance to Customer, at Customer’s expense, as Customer may reasonably request in connection therewith.

(i)As of the final compliance date established by the applicable regulation:

i.McKesson willimplement administrative, physical, and technical safeguards that reasonably and appropriately protect the confidentiality, integrity, and availability of the electronic protected health information that it creates, receives, maintains, or transmits on behalf of Customer as required by HIPAA.

ii.McKesson will ensure that any agent, including a subcontractor, to whom it provides such information, agrees to implement reasonable and appropriate safeguards to protect it;

iii.McKesson will report to Customer any security incident of which it becomes aware.

2.2Responsibilities of Customer. Customer agrees to obtain any consent or authorization that may be required by HIPAA, or applicable state law, prior to furnishing McKesson with PHI. Customer agrees to timely notify McKesson, in writing, of any arrangements between Customer and the individual that is the subject of PHI that may impact in any manner the use and/or disclosure of that PHI by McKesson under this Exhibit.

2.3Effect of Changes of HIPAA Privacy Regulation on Responsibilities of the Parties. To the extent that any relevant provision of HIPAA is materially amended in a manner that changes the obligations of Business Associates or Covered Entities that are embodied in term(s) of this Exhibit, the Parties agree to negotiate in good faith appropriate non-financial terms or amendment(s) to this Exhibit to give effect to such revised obligations. In addition, the terms of this Exhibit should be construed in light of any interpretation and/or guidance on HIPAA issued by HHS from time to time.

SECTION 3: PERMITTED USES AND DISCLOSURES OF PROTECTED HEALTH INFORMATION

3.1Permitted Uses and Disclosures of PHI by McKesson. Except as specified below, McKesson may only access, duplicate or otherwise use or disclose PHI as necessary to perform its obligations under the Agreement, provided that such use or disclosure would not violate HIPAA if done by Customer. Unless otherwise permitted by this Agreement, McKesson will not permit the disclosure of any PHI to any person or entity other than such of its employees, agents or subcontractors who must have access to the PHI in order for McKesson to perform its obligations under the Agreement and who agree to keep such PHI confidential as required by this Exhibit. Unless otherwise limited herein, McKesson may:

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PROPRIETARY and CONFIDENTIAL TO MCKESSON INFORMATION SOLUTIONS LLC Integrated Healthcare Holdings, Inc. Customer No. TBD Contract No. C0810294 March 7, 2008

(a)use the PHI in its possession for its proper management and administration and to fulfill any legal responsibilities of McKesson.

(b)disclose the PHI in its possession to a third party for the purpose of McKesson's proper management and administration or to fulfill any legal responsibilities of McKesson, provided that (i) the disclosures are required by law, or (ii) McKesson has received from the third party reasonable assurances regarding the confidential handling of such PHI as required under HIPAA.

(c)aggregate the PHI obtained by McKesson as a business associate.

SECTION 4: TERMINATION OF AGREEMENT

4.1Termination by Customer. Customer may terminate this Agreement or any other agreement that requires the use of PHI if McKesson has violated a material term of this Exhibit and has failed to cure such breach within thirty (30) days after Customer has provided McKesson with prompt written notice of such material breach.

4.2Return of PHI. Upon the expiration or termination, for any reason, of this Agreement that requires the use of PHI by McKesson, McKesson will promptly return to Customer, or at Customer’s sole option destroy, any PHI in its possession or control and will retain no copies of such PHI, and, unless otherwise expressly agreed to in writing, any right or license which McKesson has to use the PHI will terminate immediately upon such expiration or termination of this Agreement. If the destruction or return of the PHI is not reasonably feasible, the protections contained in this Agreement will continue to apply to any retained PHI, and any further use or disclosure of the PHI by McKesson is limited solely to those purposes that made the return or destruction of such PHI infeasible.

SECTION 5: RIGHT TO INJUNCTIVE RELIEF

McKesson expressly acknowledges and agrees that the breach, or threatened breach, by it of any provision of this Exhibit may cause Customer to be irreparably harmed and that Customer may not have an adequate remedy at law. Therefore, McKesson agrees that upon such breach, or threatened breach, Customer will be entitled to seek injunctive relief to prevent McKesson from commencing or continuing any action constituting such breach without having to post a bond or other security and without having to prove the inadequacy of any other available remedies. Nothing in this paragraph will be deemed to limit or abridge any other remedy available to Customer at law or in equity.

SECTION 6: MISCELLANEOUS

6.1Survival. Sections 3.1(a) and 4 will survive the termination or expiration of the Agreement.

6.2No Third Party Beneficiaries. Nothing in this Exhibit shall confer upon any person other than the Parties and their respective successors or assigns, any rights, remedies, obligations, or liabilities whatsoever.

8

EX-10.9(1)

EXHIBIT 10.9.1

Integrated Healthcare Holdings Inc. - 1048628

Contract No. 1-15XA0R

June 30, 2011

Contract Supplement

Contract Supplement to Master Information System Agreement No. C0810294, dated March 31, 2008.

THIS CONTRACT SUPPLEMENT, including all Exhibits, Schedules, and Attachments hereto and incorporated herein (this “Contract Supplement”) amends the agreement identified above including all Exhibits, Schedules, and Attachments thereto, and as amended (the “Agreement”), and is made effective as of this 1st day of July, 2011 (the “CS Effective Date”). Unless otherwise expressly set forth in this Contract Supplement, the terms and conditions set forth in this Contract Supplement apply only to the Facilities, Software, and/or Services listed herein. To the extent that this Contract Supplement conflicts with the Agreement, the terms and conditions of this Contract Supplement shall control. Where not in conflict, all applicable terms and conditions set forth in the Agreement are incorporated herein.

	EXHIBITS
A	Facilities, Fees Summary, Payment Schedule and Administration
A-1	Software & Software Maintenance Fee Schedule
A-2	Additional Terms
A-3	Statement of Load and Leave Delivery of Software
B-1	Implementation Services and Education Services Fee Schedule
B-2	Implementation Services Terms
B-3	Reserved
B-4	Subscription Services Fee Schedule
B-4-1	Benchmarks Collaborative Terms
C-1	Equipment and Technology Services Fee Schedule
C-2	Equipment Configuration
C-3	Equipment and Technology Services Terms
C-3-1	Systemcare Additional Terms

The pricing in this Contract Supplement and McKesson’s corresponding offer to Customer expires unless McKesson receives this Contract Supplement signed by Customer on or before July 1, 2011.

McKesson will include Customer’s purchase order (“PO”) number on Customer invoices if provided by Customer on or before the CS Effective Date. If this Contract Supplement includes an amount equal to or greater than $10,000, a copy of Customer's purchase order(s) must be attached. Failure to provide McKesson with a PO number or copy does not suspend or negate any Customer duty, including payment, under this Contract Supplement. Pre-printed terms and conditions on or attached to Customer's PO shall be of no force or effect.

By signing this Contract Supplement, Customer acknowledges and agrees that (a) McKesson has made no warranty or commitment with regard to any functionality not Generally Available as of the CS Effective Date, whether or not included as part of Software Maintenance Services, for any of the Software licensed in this Contract Supplement and (b) Customer has not relied on the availability of any future version of the purchased Product or any other future Product in executing this Contract Supplement.

In the event the parties fail to execute the Contract Supplement No. 1-U90NM with or before this Contract Supplement, then this Contract Supplement will be deemed void.

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Integrated Healthcare Holdings Inc. - 1048628

Contract No. 1-15XA0R

June 30, 2011

Each signatory hereto represents and warrants that it is duly authorized to sign, execute, and deliver this Contract Supplement on behalf of the party it represents.

INTEGRATED HEALTHCARE HOLDINGS, INC.	MCKESSON TECHNOLOGIES INC.
By: /s/ Kenneth K. Westbrook	By: /s/ Ted Arneson
Name: Kenneth K. Westbrook	Name: Ted Arneson
Title: CEO	Title: Enterprise Sales Executive
Date: 7/1/11	Date: 7/1/11
Customer PO No: _________________________

FOR MCKESSON INTERNAL USE ONLY

  Submit fully executed contract and copy of purchase order to:

McKesson

  Attn:           Contract Operations

  5995 Windward Parkway

  Mailstop: ATHQ-0111

  Alpharetta, GA 30005

  Fax: 404.338.5161

  Email: Contract.Operations@McKesson.com

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Integrated Healthcare Holdings Inc. - 1048628

Contract No. 1-15XA0R

June 30, 2011

EXHIBIT A

FACILITIES, FEES SUMMARY, PAYMENT SCHEDULE AND ADMINISTRATION

FACILITIES:

Customer No.	Data Center Facility	Full Address
1048628	Integrated Healthcare Holdings Inc	1301 North Tustin Avenue Santa Ana, CA 92705

Customer No.	Facility	Full Address
1010114	Chapman Medical Center a/k/a Chapman Medical Center, Inc.	2601 East Chapman Avenue Orange, CA 92869
1029738	Coastal Communities Hospital a/k/a Coastal Communities Hospital, Inc.	2701 South Bristol Santa Ana, CA 92704
1010478	Western Medical Center Santa Ana a/k/a WMC-SA, Inc.	1001 North Tustin Avenue Santa Ana, CA 92705
1009285	Western Medical Center Anaheim a/k/a WMC-A, Inc.	1025 South Anaheim Boulevard Anaheim, CA 92805
(NOTE: It is not necessary to list offices of physicians or other caregivers with privileges at a Facility.)

FEES SUMMARY:

Products and Services	Initial Term	One-Time Fees	Recurring Fees	Estimated / T&M Fees
Software (Perpetual):		[***]	[***]
Software (Term):	5 years		[***]
[***] Third Party Software:	5 years		[***]
Implementation Services:		[***]		[***]
Benchmarks Collaborative Subscription Services:	5 years	[***]	[***]
Equipment:		[***]
Technology Services:		[***]	[***]
GRAND TOTALS:		$10,895,487	$1,730,602	$203,454

[***] Confidential Treatment has been requested for certain redacted provisions of this exhibit. The redacted provisions are identified by asterisks and enclosed by brackets. The confidential portions have been filed separately with the Securities and Exchange Commission.

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Integrated Healthcare Holdings Inc. - 1048628

Contract No. 1-15XA0R

June 30, 2011

PAYMENT SCHEDULE:

Aggregate Payment Amount: The total payment amount pursuant to Contract Supplement No. 1-15XA0R for Software (Perpetual), Implementation Services (Fixed Fee), Quality Benchmarks Collaborative Subscription Services (One-Time Fees), Equipment (Equipment and Warranty Uplift) and Technology Services (Professional Services), and Contract Supplement No. 1-U90NM for System Software (One-Time Fees), System Implementation & Education Services (One-Time Fees), System Equipment (One-Time Fees), Third Party Pass Through Equipment (One-Time Fees) and Professional Services (Data Move & Domain Migration) (One-Time Fees) is $13,159,996 (the “Aggregate Payment Amount”). The Aggregate Payment Amount shall be paid as follows: ● [***] is due [***] after the CS Effective Date; ● [***] is due [***] after the CS Effective Date; ● [***] is due [***] after the CS Effective Date; and, ● [***] is due [***] after the CS Effective Date (each of the foregoing four [***] payment milestones shall be referred to herein as a “Payment Milestone”). The foregoing Aggregate Payment Amount will be applied in McKesson’s sole discretion.Further, Customer acknowledges and agrees that Contract Supplement No. 1-U90NM contains fees that are not included in the Aggregate Payment Amount and such fees will be paid in accordance with the payment schedule set forth in that Contract Supplement. Payment Milestones: (a)At least [***] days prior to each Payment Milestone due date, Customer may certify to McKesson in writing (the “Certification”) that [***] pursuant to The Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) for making “meaningful use” of qualified electronic health records technology that is certified under the Stage 1 certification standards as set forth in the effective final rules of the HITECH Act published on July 28, 2010 (“Stage 1 Standards”) due to a [***] generally and not specific to the Customer. If Customer provides McKesson the Certification in accordance with the prior sentence and subject to Customer continuing to provide McKesson with written re-certifications consistent with the Certification [***] McKesson agrees that [***]. Notwithstanding the foregoing, McKesson will continue to invoice Customer pursuant to the payment schedule detailed in this Contract Supplement. (b)Following [***] and contingent upon Customer continuing to provide McKesson with written re-certifications consistent with the Certification every [***] McKesson agrees that [***]. (c)The foregoing subsections (a) and (b) shall no longer apply once the [***]. Further, except as set forth in the foregoing subsections (a) and (b), McKesson may pursue all remedies under this Contract Supplement or available by law in connection with late payments or non-payments by Customer.    (d)McKesson makes no commitment of any kind with respect to Customer’s ability to (1) demonstrate “meaningful use” as such term may be defined pursuant to the HITECH Act, or (2) receive Incentive Payments.

[***] Confidential Treatment has been requested for certain redacted provisions of this exhibit. The redacted provisions are identified by asterisks and enclosed by brackets. The confidential portions have been filed separately with the Securities and Exchange Commission.

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Integrated Healthcare Holdings Inc. - 1048628

Contract No. 1-15XA0R

June 30, 2011

Software Maintenance Services:	The first annual Software Maintenance Services fee is due [***] months after the CS Effective Date. Subsequent annual Software Maintenance Services fees will be due [***] in advance.
Software (Term):	For Term Software: Unless other payment terms for specific Term Software are stated in this Contract Supplement, the first annual fee is due, in advance, on the CS Effective Date. Subsequent annual fees are due, in advance, on each anniversary of the CS Effective Date.
[***] Third Party Software:	For Horizon Performance Manager: The first annual fee is due, in advance, onthe earlier of (a) [***] after CS Effective Date or (b) the delivery of the [***] Third Party Software license key (“[***] Payment Date”).Subsequent annual fees are due, in advance, on each anniversary of the [***] Payment Date.
Implementation Services:	Time & Materials: 100% is due monthly as incurred, billed in arrears.
Quality Benchmarks Collaborative Subscription Services:	Annual Fees: For the first year, 100% is due the earlier of [***] from CSEffective Date or the Live Date. Setup fees, if any, are due in advance on the CS Effective Date. For subsequent years, 100% is due in advance each year on the CS Effective Date anniversary.
Equipment:	Shipping and Handling: Shipping and handling charges will be listed separately on the invoice for the corresponding Equipment and are due upon Equipment Delivery. Shipping and handling charges are not included in the amounts listed on Exhibit C-1.
Technology Services:	SystemCare Services (Recurring Fees): First year fees are due on the SystemCare Start Date as defined in Exhibit C-3; remaining annual installments are due on each anniversary of the SystemCare Start Date.

[***] Confidential Treatment has been requested for certain redacted provisions of this exhibit. The redacted provisions are identified by asterisks and enclosed by brackets. The confidential portions have been filed separately with the Securities and Exchange Commission.

5

Integrated Healthcare Holdings Inc. - 1048628

Contract No. 1-15XA0R

June 30, 2011

The transaction covered by this Contract Supplement may involve a discount, rebate or other price reduction on the items covered by this Contract Supplement. Customer may have an obligation to report such price reduction or the net cost in its cost reports or in another appropriate manner in order to meet the requirements of applicable federal and state anti-kickback laws, including 42 U.S.C. Sec. 1320a­7b(b)(3)(A) and the regulations found at 42 C.F.R. Sec. 1001.952(g) and (h). Customer will be responsible for reporting, disclosing, and maintaining appropriate records with respect to such price reduction or net cost and making those records available under Medicare, Medicaid, or other applicable government health care programs.

Unless Customer provides McKesson prior to the CS Effective Date satisfactory evidence of exemption (including evidence of renewal if applicable) from applicable sales, use, value-added, or other similar taxes or duties, McKesson will invoice Customer for all such taxes applicable to the transactions under this Contract Supplement.

GENERAL COMMENTS:

SECTION 1: INVOICING TERMS

1.1 Customer will pay all fees and other charges in U.S. dollars within 35 days after invoice date. Invoices may be issued by McKesson Technologies Inc. or any of the McKesson Affiliates.

SECTION 2:

2.1 In the event Customer fails to pay the Aggregate Payment Amount in accordance with the payment schedule detailed in this Contract Supplement, McKesson (i) reserves the right to cease implementation of the Software until such time as outstanding payments are rendered, and (ii) reserves the right to require advance payments as a condition before restarting and/or continuing the implementation of the Software.

SECTION 3:

3.1 Customer acknowledges and agrees that McKesson will not order any Equipment purchased pursuant to this Contract Supplement prior to receipt of the [***] of the Aggregate Payment Amount from Customer.

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Integrated Healthcare Holdings Inc. - 1048628

Contract No. 1-15XA0R

June 30, 2011

ADMINISTRATION:

Sold To:	Ship To (SOFTWARE):
Integrated Healthcare Holdings Inc.	[***]
1301 North Tustin Avenue	[***]
Santa Ana, CA 92705	Carlsbad, CA 92009
Attention:	Attention: 1053302
Telephone:	Telephone: (760) 845-7612
Facsimile:	Facsimile:
Bill To:	Ship To (HARDWARE):
Integrated Healthcare Holdings Inc.	Integrated Healthcare Holdings Inc.
1301 North Tustin Avenue	1301 North Tustin Avenue
Santa Ana, CA 92705	Santa Ana, CA 92705
Attention: Nova Stewart	Attention: Nova Stewart
Telephone: (714) 953-2370	Telephone: (714) 953-2370
Facsimile:	Facsimile:
Paid By:
Integrated Healthcare Holdings Inc.
1301 North Tustin Avenue
Santa Ana, CA 92705
Attention:
Telephone:
Facsimile:

[***] Confidential Treatment has been requested for certain redacted provisions of this exhibit. The redacted provisions are identified by asterisks and enclosed by brackets. The confidential portions have been filed separately with the Securities and Exchange Commission.

 7

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Kenneth K. Westbrook, Chief Executive Officer of Integrated Healthcare Holdings, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated, or caused such disclosure controls and procedures to be designed under our supervision, subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: November 9, 2011	By:	/s/ Kenneth K. Westbrook
		Kenneth K. Westbrook
		Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Steven R. Blake, Chief Financial Officer of Integrated Healthcare Holdings, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated, or caused such disclosure controls and procedures to be  designed under our supervision, subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: November 9, 2011	By:	/s/ Steven R. Blake
		Steven R. Blake
		Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc. (the "Company") for the quarter ended September 30, 2011, as filed with the Securities and Exchange Commission (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the period indicated

This Certificate has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: November 9, 2011	By:	/s/ Kenneth K. Westbrook
		Kenneth K. Westbrook
		Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc. (the "Company") for the quarter ended September 30, 2011, as filed with the Securities and Exchange Commission (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the period indicated

This Certificate has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: November 9, 2011	By:	/s/ Steven R. Blake
		Steven R. Blake
		Chief Financial Officer

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CONDENSED CONSOLIDATED BALANCE SHEET (Parentheticals) (USD $) In Thousands, except Per Share data	Sep. 30, 2011	Mar. 31, 2011
Allowance for doubtful accounts (in Dollars)	$ 15,823	$ 20,076
Current portion of Capial Lease Obligation (in Dollars)	$ 1,116	$ 1,131
Common stock par value (in Dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	800,000	800,000
Common stock, shares issued	255,307	255,307
Common stock, shares outstanding	255,307	255,307

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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (USD $) In Thousands, except Per Share data	3 Months Ended		6 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Net operating revenues	$ 93,702	$ 91,001	$ 183,364	$ 184,920
Operating expenses:
Salaries and benefits	53,160	52,038	106,398	103,680
Supplies	13,230	13,716	26,213	26,661
Provision for doubtful accounts	7,119	10,359	16,816	19,267
Other operating expenses	14,699	15,260	29,176	31,400
Depreciation and amortization	1,077	1,052	2,167	2,096
[OperatingExpenses]	89,285	92,425	180,770	183,104
Operating income (loss)	4,417	(1,424)	2,594	1,816
Other expense:
Interest expense, net	(2,480)	(3,147)	(5,322)	(6,265)
Gain (loss) on warrants	3,053	592	(217)	(1,308)
[OtherExpenses]	573	(2,555)	(5,539)	(7,573)
Income (loss) before income tax provision (benefit)	4,990	(3,979)	(2,945)	(5,757)
Income tax provision (benefit)	4,400		(800)
Net income (loss)	590	(3,979)	(2,145)	(5,757)
Net income attributable to noncontrolling interests (Note 9)	(84)	(1)	(219)	(136)
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.	$ 506	$ (3,980)	$ (2,364)	$ (5,893)
Earnings (loss) per common share attributable to Integrated Healthcare Holdings, Inc. stockholders
Basic (in Dollars per share)	$ 0.00	$ (0.02)	$ (0.01)	$ (0.02)
Diluted (in Dollars per share)	$ 0.00	$ (0.02)	$ (0.01)	$ (0.02)
Weighted average shares outstanding
Basic (in Shares)	255,307	255,307	255,307	255,307
Diluted (in Shares)	256,972	255,307	255,307	255,307

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Document And Entity Information (USD $)	6 Months Ended
	Sep. 30, 2011	Nov. 03, 2011	Jun. 30, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	Integrated Healthcare Holdings Inc
Document Type	10-Q
Current Fiscal Year End Date	--03-31
Entity Common Stock, Shares Outstanding		255,307,262
Entity Public Float			$ 1,867,760
Amendment Flag	false
Entity Central Index Key	0001051488
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2

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NOTE 6 - STOCK INCENTIVE PLAN

6 Months Ended

Sep. 30, 2011

Shareholders' Equity and Share-based Payments [Text Block]

NOTE 6 - STOCK INCENTIVE PLAN

The Company's 2006 Stock Incentive Plan (the "Plan"), which is shareholder-approved, permits the grant of share options to its employees and board members for up to a maximum aggregate of 12.0 million shares of common stock. In addition, as of the first business day of each calendar year in the period 2007 through 2015, the maximum aggregate number of shares shall be increased by a number equal to one percent of the number of shares of common stock of the Company outstanding on December 31 of the immediately preceding calendar year. Accordingly, as of September 30, 2011, the maximum aggregate number of shares under the Plan was 21.0 million. The Company believes that such awards better align the interests of its employees with those of its shareholders. In accordance with the Plan, incentive stock options, nonqualified stock options, and performance based compensation awards may not be granted at less than 100 percent of the estimated fair market value of the common stock on the date of grant. Incentive stock options granted to a person owning more than 10 percent of the voting power of all classes of stock of the Company may not be issued at less than 110 percent of the fair market value of the stock on the date of grant. Option awards generally vest based on 3 years of continuous service (1/3 of the shares vest on the twelve month anniversary of the grant date, and an additional 1/12 of the shares vest on each subsequent fiscal quarter-end of the Company following such twelve month anniversary). Certain option awards provide for accelerated vesting if there is a change of control, as defined. The option awards have 7-year contractual terms.

When the measurement date is certain, the fair value of each option grant is estimated on the date of grant using the Black-Scholes valuation model. Since there is limited historical data with respect to both pre-vesting forfeiture and post-vesting termination, the expected life of the options was determined utilizing the simplified method, whereby the expected term is calculated by taking the sum of the vesting term plus the original contractual term and dividing that quantity by two.

The Company recorded $0 and $13 of compensation expense relative to stock options during the three months ended September 30, 2011 and 2010, respectively, and $0 and $27 during the six months ended September 30, 2011 and 2010, respectively. No options were exercised during the three and six months ended September 30, 2011 and 2010. A summary of stock option activity for the six months ended September 30, 2011 is presented as follows.

	Shares			Weighted-  average  exercise  price		Weighted-  average  grant date  fair value		Weighted-  average  remaining  contractual  term  (years)	Aggregate intrinsic value
Outstanding, March 31, 2011		8,370		$	0.18
Granted		-		$	-	$	-
Exercised		-		$	-
Forfeited or expired		(75	)	$	0.26
Outstanding, September 30, 2011		8,295		$	0.18			3.1	$	-
Exercisable at September 30, 2011		8,295		$	0.18			3.1	$	-

All outstanding options were fully vested as of September 30 and March 31, 2011.

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NOTE 11 - HOSPITAL QUALITY ASSURANCE FEE PROGRAM

6 Months Ended

Sep. 30, 2011

Other Parent Company Disclosures

NOTE 11 - HOSPITAL QUALITY ASSURANCE FEE PROGRAM

In October 2009, the Governor of California signed legislation supported by the hospital industry to impose a provider fee on general acute care hospitals that, combined with federal matching funds, would be used to provide supplemental Medi-Cal payments to hospitals. The state submitted the plan to the Centers for Medicare and Medicaid Services (“CMS”) for a required review and approval process, and certain changes in the plan were required by CMS. Legislation amending the fee program to reflect the required changes was passed by the legislature and signed by the Governor on September 8, 2010. Among other changes, the legislation leaves distribution of “pass-through” payments received by Medi-Cal managed care plans that will be paid to hospitals under the program to the discretion of the plans.  

The hospital quality assurance fee program (“QAF”) created by this legislation initially provided payments for up to 21 months retroactive to April 2009 and expiring on December 31, 2010 (“2010 QAF”). During fiscal year 2011, the Company recognized $87.2 million in revenue from the state for the 2010 QAF of which $1.8 million was received in April 2011 and is reflected as a receivable in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2011.  All other amounts had been received during fiscal year 2011. As of March 31, 2011, $378.6 of the other expenses relating to the 2010 QAF was accrued and included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet.

In May 2011, CMS conditionally approved the extension of the QAF for the six month period from January 1 through June 30, 2011 (“2011 QAF”).

Based on the most recent modeling prepared by the California Hospital Association, the Company anticipates making payments for provider fees and other expenses relating to the 2011 QAF of approximately $15.8 million and receiving approximately $31.6 million in net revenues from the state ($18.1 million from the fee-for-service portion and $13.5 million from the managed care portion). As of September 30, 2011, the Company has received $18.4 million from the fee-for-service portion of the 2011 QAF from the state and has paid fees to the state totaling $15.2 million.  Until such time as all final approvals have been received from CMS, the amounts received and paid through September 30, 2011 are reflected as unearned revenue and a prepaid asset, respectively, in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2011.

The Company cannot provide any assurances or estimates in connection with a possible continuation of the QAF program beyond June 30, 2011.

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NOTE 2 - PROPERTY AND EQUIPMENT

6 Months Ended

Sep. 30, 2011

Property, Plant and Equipment Disclosure [Text Block]

NOTE 2 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	2011			2011
Buildings	$	35,376		$	34,624
Land and improvements		13,523			13,523
Equipment		13,461			13,266
Construction in progress		1,161			1,375
Assets under capital leases		11,218			11,218
		74,739			74,006
Less accumulated depreciation		(21,903	)		(19,755	)
Property and equipment, net	$	52,836		$	54,251

Accumulated depreciation on assets under capital leases as of September 30 and March 31, 2011 was $4.4 million and $3.7 million, respectively.

The Hospitals are located in an area near active and substantial earthquake faults. The Hospitals carry earthquake insurance with a policy limit of $50.0 million. A significant earthquake could result in material damage and temporary or permanent cessation of operations at one or more of the Hospitals.

The State of California has imposed new hospital seismic safety requirements. Under these new requirements, the Hospitals must meet stringent seismic safety criteria in the future. In addition, there could be other remediation costs pursuant to this seismic retrofit.

The State of California has introduced a new seismic review methodology known as HAZUS. The HAZUS methodology may preclude the need for some structural modifications. All four Hospitals requested HAZUS review and received a favorable notice pertaining to structural reclassification. All Hospital buildings, with the exception of one (an administrative building), have been deemed compliant until January 1, 2030 for both structural and nonstructural retrofit.  The Company does not have an estimate of the cost to remediate the seismic requirements for the administrative building as of September 30, 2011.

There are additional requirements that must be complied with by 2030. The costs of meeting these requirements have not yet been determined. Compliance with seismic ordinances will be costly and could have a material adverse effect on the Company's cash flow.  In addition, remediation could possibly result in certain environmental liabilities, such as asbestos abatement.

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NOTE 8 - INCOME (LOSS) PER SHARE

6 Months Ended

Sep. 30, 2011

Earnings Per Share [Text Block]

NOTE 8 - INCOME (LOSS) PER SHARE

Income per share for the three months ended September 30, 2011 was computed as shown below.  Stock options and warrants aggregating approximately 412 million shares were not included in the diluted calculations since they were anti-dilutive during the three months ended September 30, 2011.

	Three months ended September 30, 2011
Numerator:
Net income attributable to Integrated Healthcare Holdings, Inc.	$	506
Denominator:
Weighted average common shares		255,307
Dilutive options		1,665
Denominator for diluted calculation		256,972
Income per share - basic	$	0.00
Income per share - diluted	$	0.00

Since the Company incurred losses for the six months ended September 30, 2011 and the three and six months ended September 30, 2010, the potential shares of common stock consisting of approximately 412 million shares issuable under warrants and stock options were not included in the diluted calculations since they were anti-dilutive for each of those periods.

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NOTE 9 - VARIABLE INTEREST ENTITY

6 Months Ended

Sep. 30, 2011

Business Combination Disclosure [Text Block]

NOTE 9 - VARIABLE INTEREST ENTITY

Concurrent with the close of the Acquisition, PCHI simultaneously acquired title to substantially all of the real property acquired by the Company in the Acquisition. The Company received $5.0 million and PCHI guaranteed the Company's $45.0 million Loan. The Company remains primarily liable as the borrower under the $45.0 million Loan notwithstanding its guarantee by PCHI.  The $45 million Loan 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, which is a related party entity that is affiliated with the Company through common ownership and control. As of September 30, 2011, PCHI was owned 51% by various physician investors and 49% by Ganesha (Dr. Chaudhuri and Mr. Thomas). A company is required to 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 $45.0 million Loan, and cross-collateralization of the Company's non-real estate assets to secure the $45.0 million Loan. Accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

PCHI's assets, liabilities, and accumulated deficit are set forth below.

	September 30,  2011			March 31,  2011
Cash	$	182		$	330
Property, net		41,628			42,273
Other		174			70
Total assets	$	41,984		$	42,673
Debt (as guarantor)	$	45,000		$	45,000
Other		608			634
Total liabilities		45,608			45,634
Deficiency		(3,624	)		(2,961	)
Total liabilities and accumulated deficit	$	41,984		$	42,673

As noted above, PCHI is a guarantor on the $45.0 million Loan should the Company not be able to perform.  PCHI's total liabilities represent the Company's maximum exposure to loss.

PCHI rental income and the Company’s related rental expense of $1.9 million and $1.8 million were eliminated upon consolidation for the three months ended September 30, 2011 and 2010, respectively, and $3.8 million and $3.5 million for the six months ended September 30, 2011 and 2010, respectively.

The Company has a lease commitment to PCHI (Note 12). Additionally, the Company is responsible for seismic remediation under the terms of the lease agreement (Note 2).

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NOTE 7 - RETIREMENT PLAN

6 Months Ended

Sep. 30, 2011

Pension and Other Postretirement Benefits Disclosure [Text Block]

NOTE 7 - RETIREMENT PLAN

The Company has a 401(k) plan for its employees. All employees with 90 days of service are eligible to participate, unless they are covered by a collective bargaining agreement which precludes coverage. The Company matches employee contributions up to 3% of the employee's compensation, subject to IRS limits. During the three months ended September 30, 2011 and 2010, the Company incurred expenses of $0.8 million and $0.7 million, respectively, and $1.6 million and $1.5 million during the six months ended September 30, 2011 and 2010, respectively. These costs are included in salaries and benefits in the accompanying unaudited condensed consolidated statements of operations.  At September 30 and March 31, 2011, accrued compensation and benefits in the accompanying unaudited condensed consolidated balance sheets included $2.4 million and $3.8 million, respectively, in accrued employer contributions.

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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (USD $) In Thousands	6 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Net loss	$ (2,145)	$ (5,757)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment	2,167	2,096
Provision for doubtful accounts	16,816	19,267
Amortization of debt issuance costs	449	154
Loss on warrants	217	1,308
Noncash share-based compensation expense		27
Changes in operating assets and liabilities:
Accounts receivable	(13,275)	(17,698)
Inventories of supplies	(250)	1
Due from governmental payers	(1,494)	(341)
Prepaid expenses - hospital quality assurance fees	(15,247)
Prepaid income taxes	(1,223)
Hospital quality assurance fees receivable	1,815
Prepaid insurance, other prepaid expenses and current assets, and other assets	(760)	(2,903)
Accounts payable	(3,724)	(1,580)
Accrued compensation and benefits	(1,595)	(3,674)
Unearned revenue - hospital quality assurance fees	18,386
Income taxes payable	(12,800)
Accrued insurance retentions and other current liabilities	(3,851)	370
Net cash used in operating activities	(16,514)	(8,730)
Cash flows from investing activities:
Increase (decrease) in restricted cash	13	(8)
Additions to property and equipment	(752)	(853)
Net cash used in investing activities	(739)	(861)
Cash flows from financing activities:
Proceeds from revolving line of credit, net	919	39,282
Debt issuance costs		(869)
Repayment of debt		(34,968)
Payment received - receivable from stockholders	132
Noncontrolling interests distributions	(883)	(1,650)
Payments on capital lease obligations	(521)	(465)
Net cash provided by (used in) financing activities	(353)	1,330
Net decrease in cash and cash equivalents	(17,606)	(8,261)
Cash and cash equivalents, beginning of period	20,539	10,159
Cash and cash equivalents, end of period	2,933	1,898
Supplemental information:
Cash paid for interest	4,587	4,377
Cash paid for income taxes	$ 13,095

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NOTE 3 - DEBT

6 Months Ended

Sep. 30, 2011

Debt Disclosure [Text Block]

NOTE 3 - DEBT

On April 13, 2010 (the “Effective Date”), the Company entered into an Omnibus Credit Agreement Amendment (the “Omnibus Amendment”) with SPCP Group IV, LLC and SPCP Group, LLC (together, “Silver Point”), Silver Point Finance, LLC, as the Lender Agent, PCHI, Ganesha Realty LLC (“Ganesha”), Dr. Chaudhuri and KPC Resolution Company (“KPC”).  KPC and Ganesha are companies owned and controlled by Dr. Chaudhuri, who is the majority shareholder of the Company.  Ganesha owns a 49% membership interest in PCHI.

The Company entered into the Omnibus Amendment in connection with the Loan Purchase and Sale Agreement (the “Loan Purchase Agreement”), dated as of January 13, 2010, as amended, by and between KPC and the previous lender’s receiver.  Under the Loan Purchase Agreement, and as approved by the Court on April 2, 2010, KPC agreed to purchase all of the Credit Agreements from Medical Capital Corporation’s receiver for $70.0 million.  Concurrent with the closing of the Loan Purchase Agreement, KPC sold its interest in the Credit Agreements to Silver Point, and KPC purchased from Silver Point a 15% participation interest in the Credit Agreements.  On April 13, 2010, concurrent with the effectiveness of the Omnibus Amendment and the closing of the Loan Purchase Agreement, Silver Point acquired all of the Credit Agreements, including the security agreements and other ancillary documents executed by the Company in connection with the Credit Agreements, and became the “New Lender” under the Credit Agreements.

The following are material terms of the Omnibus Amendment:

● The stated maturity date under each Credit Agreement was changed to April 13, 2013.

● Affirming release of prior claims between the Company and the previous lender’s receiver, Silver Point agreed to waive any events of default that had occurred under the Credit Agreements and waived claims to accrued and unpaid interest and fees of $6.4 million under the Credit Agreements as of April 13, 2010.

● The $80.0 million Credit Agreement was amended so that the $45.0 million term note (the “$45.0 million Loan”) and $35.0 million non-revolving line of credit note (the “$35.0 million Loan”) will each bear a fixed interest rate of 14.5% per year.  These loans previously bore interest rates of 10.25% and 9.25%, respectively.  In addition, the Company agreed to make certain mandatory prepayments of the $35.0 million Loan when it received proceeds from certain new financing of its accounts receivable or provider fee funds from Medi-Cal under the Hospital Quality Assurance Fee program (“QAF”) (Note 11).  The $35.0 million Loan was refinanced on August 30, 2010 (see below).

● The $50.0 million Revolving Credit Agreement was amended so that Silver Point will, subject to the terms and conditions contained therein, make up to $10.0 million in new revolving funds available to the Company for working capital and general corporate purposes.  Each advance under the $50.0 million Revolving Credit Agreement will bear interest at an annual rate of Adjusted LIBOR (calculated as LIBOR subject to certain adjustments, with a floor of 2% and a cap of 5%) plus 12.5%, compared to an interest rate of 24.0% that was previously in effect under the $50.0 million revolving credit agreement.  In addition, the Company agreed to make mandatory prepayments of the $50.0 million Revolving Credit Agreement under the conditions described above with respect to the $80.0 million Credit Agreement.  The financial covenants under the $50.0 million Revolving Credit Agreement were also amended to increase the required levels of minimum EBITDA (as defined in the Omnibus Amendment) from the levels previously in effect under the $50.0 million Revolving Credit Agreement. This $50.0 million revolving line of credit was refinanced on August 30, 2010 (see below).

● The $10.7 million Credit Agreement was amended so that the $10.7 million convertible term note will bear a fixed interest rate of 14.5% per year, compared to the interest rate of 9.25% previously in effect and to eliminate the conversion feature of the loan.  In addition, the Company agreed to make mandatory prepayments of the $10.7 million Credit Agreement under the conditions described above with respect to the $80.0 million Credit Agreement. This $10.7 million term note was refinanced on August 30, 2010 (see below).

In connection with the sale of the Credit Agreements, all warrants and stock conversion rights issued to the previous lender were cancelled.  In connection with the Omnibus Amendment, the Company issued new warrants (Note 4).

On August 30, 2010, the Company (excluding PCHI) entered into a three year Credit and Security Agreement (the “New Credit Agreement”) with MidCap Financial, LLC, a commercial finance lender specializing in loans to middle market health care companies, and Silicon Valley Bank (collectively, the “AR Lender”).

Under the New Credit Agreement, the AR Lender committed to provide up to $40.0 million in loans to the Company under a secured revolving credit facility (the “New Credit Facility”), which may be increased to up to $45.0 million upon the Company’s request, if the AR Lender consents to such increase.  Upon execution of the New Credit Agreement, the AR Lender funded approximately $39.7 million of the New Credit Facility, which funds were used primarily to repay approximately $35.0 million in loans outstanding to affiliates of Silver Point (“Term Lender”).  Upon such repayment, the remaining balances on the Company’s $35.0 million Loan, $50.0 million Revolving Credit Agreement and $10.7 million Credit Agreement with the Term Lender were fully repaid and terminated.  The only loan currently outstanding to the Term Lender consists of the $45.0 million Loan issued under the Company’s $80.0 million Credit Agreement.

The New Credit Facility is secured by a first priority security interest on substantially all of the Company’s assets, including the equity interests in all of the Company’s subsidiaries (excluding PCHI).  The availability of the AR Lender’s commitments under the New Credit Facility is limited by a borrowing base tied to the Company’s eligible accounts receivable and certain other availability restrictions.

Loans under the New Credit Facility accrue interest at LIBOR (subject to a 2.5% floor) plus 5.0% per annum, subject to a default rate of interest and other adjustments provided for in the New Credit Agreement.  For purposes of calculating interest, all payments the Company makes on the New Credit Facility are subject to a six business day clearance period. The Company also pays a collateral management fee of .0625% per month on the outstanding balance (or a minimum balance amount equal to 85% of the monthly average borrowing base (the “Minimum Balance Amount”), if such amount is greater than the outstanding balance), a monthly minimum balance fee equal to the highest interest rate applicable to the loans if the Minimum Balance Amount is greater that the outstanding balance, and an unused line fee equal to .042% per month of the average unused portion of the New Credit Facility.  The Company paid to the AR Lender a non-refundable origination fee of 1.0% of the AR Lender’s commitments under the New Credit Facility at closing.

The New Credit Agreement contains various affirmative and negative covenants and customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, and the occurrence of events which have a material adverse effect on the Company.

Amendment to $80.0 million Credit Agreement – Concurrently with the execution of the New Credit Agreement, on August 30, 2010 the Company entered into an amendment to its existing $80.0 million Credit Agreement, as amended (the “Original Credit Agreement”), with the Term Lender, PCHI, and Ganesha.  Under this amendment, the Company agreed with the Term Lender to the following material changes to the Original Credit Agreement:

● In the event of a mandatory prepayment of the Company’s accounts receivable based financing facility under the Original Credit Agreement, the outstanding loans under such agreement shall not be required to be prepaid below $10.0 million.  There is also a floor of $10.0 million below which commitments under such accounts receivable based facility would not be mandatorily reduced as a result of such prepayment.

● The Original Credit Agreement was amended to add an affirmative covenant requiring the Company to deliver financial statements and other financial and non-financial information to the Term Lender on a regular basis, and a negative covenant requiring that the Company maintain a minimum fixed charge coverage ratio of 1.0 and minimum levels of earnings before interest, tax, depreciation and amortization.

● The  Company agreed to the provisions of an Intercreditor Agreement executed on August 30, 2010 by and between the AR Lender and the Term Lender with respect to shared collateral of the Company that is being pledged under both the New Credit Agreement and the Original Credit Agreement.  Under the Intercreditor Agreement, among other things, the Term Lender consented to the AR Lender having a first priority lien on substantially all of the Company’s assets while the Term Lender retained a second lien on such assets in addition to its first priority lien on the Company’s leased properties owned by PCHI.

On October 29, 2010, the Company entered into Amendment No. 1 (the “Amendment”) to the New Credit Agreement, dated as of August 30, 2010, by and among the Company and the AR Lender.

Under the Amendment, the AR Lender committed to increase the total revolving loan commitment amount under the New Credit Agreement from $40.0 million to $45.0 million, and the Company agreed to pay to the AR Lender a non-refundable origination fee of 1.0% of the AR Lender’s increased commitment under the Amendment, or $50.

Also under the Amendment, the AR Lender agreed to allow the inclusion in Eligible Accounts that are used to determine the Company’s Borrowing Base of up to $33.6 million in aggregate federal or state matching payments to the Company related to QAF (Note 11), which amount was increased from $11.8 million for the first matching payment.

In addition, the optional prepayment and permanent commitment reductionprovisions of the New Credit Agreement were amended to change the minimum Revolving Loan Commitment Amount to $20.0 million from $5.0 million.  In addition, the prepayment fee calculation under the New Credit Agreement was changed so that the prepayment fee is based on $40.0 million rather than the amount of the permanent revolving loan commitment reduction amount.

Lastly, under the Amendment, in the event the Company permanently reduces its Revolving Loan Commitment Amount to $20.0 million (and assuming there is no Event of Default at the time), the Company would be permitted to transfer funds that are swept into the AR Lender’s account from the Company’s lockbox accounts to a different bank account designated by the Company. Effective March 1, 2011, the Company reduced its Revolving Loan Commitment Amount to $20.0 million.  Beginning in April 2011, the funds that were previously swept into the AR Lender’s account were swept directly to the Company’s main account.

As of September 30, 2011, the Company had the following Credit Agreements:

● $45.0 million Loan issued under the $80.0 million Credit Agreement, bearing a fixed interest rate of 14.5% per year ($45.0 million outstanding balance at September 30, 2011). If any event of default occurs and continues, the lender can increase the interest rate to 19.5% per year.

● $20.0 million revolving line of credit under the New Credit Facility, bearing an interest rate of 5.0% plus LIBOR, with a 2.5% floor, per year (7.5% at September 30, 2011) and an unused commitment fee of 0.625% per year ($20.0 million outstanding balance at September 30, 2011).  For purposes of calculating interest, all payments the Company makes on the New Credit Facility are subject to a six business day clearance period.  As of September 30, 2011, the Company was in compliance with all financial covenants.

The Company's outstanding debt consists of the following:

	September 30, 2011		March 31, 2011
Current:
Revolving line of credit	$	20,000	$	19,081
Noncurrent:
Secured term note	$	45,000	$	45,000

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NOTE 4 - COMMON STOCK WARRANTS

6 Months Ended

Sep. 30, 2011

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 4 - COMMON STOCK WARRANTS

On April 13, 2010, the Company issued warrants (the “Omnibus Warrants”) to purchase its common stock for a period of three years at an exercise price of $0.07 per share in the following denominations: 139.0 million shares to KPC or its designees and 96.0 million shares to the Term Lender or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights. As of April 13, 2010, the Company recorded warrant expense and the related warrant liability of $2.9 million, representing fair value.  As of September 30, 2011, the fair value of the Omnibus Warrants was $223.

In addition, on April 13, 2010, the Company issued a three-year warrant (the “Release Warrant”) to acquire up to 170.0 million shares of common stock at $0.07 per share to Dr. Chaudhuri who facilitated a release enabling the Company to recover amounts due from the Company’s prior lender and a $1.0 million reduction in principal of its outstanding debt, among other benefits to the Company. As a result, the Company recorded the fair value of the Release Warrant ($2.1 million) as an offsetting cost of the recovery of amounts due from the Company’s prior lender. The Release Warrant also provides the holder with certain pre-emptive, information and registration rights. As of September 30, 2011, the fair value of the Release Warrant was $162.

The Omnibus Warrants and the Release Warrant are collectively referred to as the “April Warrants.” The net gain (loss) recorded related to the April Warrants for the three months ended September 30, 2011 and 2010 was $3.1 million and $0.6 million, respectively, and $(217) and $(1.3) million for the six months ended September 30, 2011 and 2010, respectively.

The fair value of warrants issued by the Company is estimated using the Black-Scholes valuation model, which the Company believes is the appropriate valuation method under the circumstances. Since the Company’s stock is thinly traded, the expected volatility is based on an analysis of the Company's stock and the stock of eight other publicly traded companies that own hospitals.

The risk-free interest rate is based on the average yield on U.S. Treasury notes with maturity commensurate with the terms of the warrants. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.  The assumptions used in the Black-Scholes valuation model are as follows.

	September 30, 2011		April 13, 2010
Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.2%		1.7%
Expected volatility		45.3%		68.4%
Expected term (in years)		1.5		3.0

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NOTE 12 - COMMITMENTS AND CONTINGENCIES

6 Months Ended

Sep. 30, 2011

Commitments and Contingencies Disclosure [Text Block]

NOTE 12 - COMMITMENTS AND CONTINGENCIES

INFORMATION TECHNOLOGY SYSTEMS – On July 1, 2011, the Company entered into software and services agreements with McKesson Technologies Inc. (“McKesson”) to upgrade the Company’s information technology systems.

Under the agreements, McKesson will provide the Company with a variety of services, including new software implementation and education/training services for the Company’s personnel, software maintenance services and professional services related to movement and migration of data from legacy systems.  McKesson will also furnish to the Company and maintain new hardware to accommodate the upgraded software and systems.  The new hardware will include computers and servers, among other things, and will include installation, testing, and ongoing maintenance.  The Company has entered into the arrangement to enhance its clinical information systems and upgrade its billing and revenue management information systems.

The agreements will initially run for a period of five years, and the recurring services may be renewed by the Company for successive periods.  The agreements do not provide that they may be terminated by the Company prior to the initial expiration date.  The agreements provide for one-time fees and recurring fees which aggregate a total of $22.0 million.  Approximately 60% of the fees are for one-time charges, while the balance is for recurring services.

GUARANTEE – At September 30, 2011, the Company had accrued $1.8 million for a guarantee extended to a state supported teaching institution to accept the transfer of an uninsured patient for a necessary higher level of care.  The agreement and the institution’s practice are being reviewed.

LONG TERM LEASE COMMITMENT WITH VARIABLE INTEREST ENTITY – On April 13, 2010, the Company and PCHI entered into a Second Amendment to Amended and Restated Triple Net Hospital Building Lease (the “2010 Lease Amendment”).  Under the 2010 Lease Amendment, the annual base rent to be paid by the Company to PCHI was increased from $5.4 million to $7.3 million, but if PCHI refinances the $45.0 million Loan, the annual base rent will increase to $8.3 million. This lease commitment with PCHI is eliminated in consolidation.

CAPITAL LEASES - In connection with the Acquisition, the Company also assumed the leases for the Chapman facility, which include buildings and land with terms that were extended concurrently with the assignment of the leases to December 31, 2023. The Company leases equipment under capital leases expiring at various dates through December 2015. Assets under capital leases with a net book value of $6.8 million and $7.5 million are included in the accompanying unaudited condensed consolidated balance sheets as of September 30 and March 31, 2011, respectively. Interest rates used in computing the net present value of the lease payments are based on the interest rates implicit in the leases.

INSURANCE - The Company accrues for estimated general and professional liability claims, to the extent not covered by insurance, when they are probable and reasonably estimable. The Company has purchased as primary coverage a claims-made form insurance policy for general and professional liability risks. Estimated losses within general and professional liability retentions from claims incurred and reported, along with incurred but not reported (“IBNR”) claims, are accrued based upon projections and are discounted to their net present value using a weighted average risk-free discount rate of 5%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2011, the Company had accrued $12.6 million and $14.0 million, respectively, which is comprised of $5.3 million and $6.6 million, respectively, in incurred and reported claims, along with $7.3 million and $7.4 million, respectively, in estimated IBNR.  Estimated insurance recoveries of $2.9 million and $2.7 million are included in other prepaid expenses and current assets in the accompanying unaudited condensed consolidated balance sheets as of September 30 and March 31, 2011, respectively.

The Company has also purchased occurrence coverage insurance to fund its obligations under its workers compensation program. The Company has a "guaranteed cost" policy, under which the carrier pays all workers compensation claims, with no deductible or reimbursement required of the Company. The Company accrues for estimated workers compensation claims, to the extent not covered by insurance, when they are probable and reasonably estimable. The ultimate costs related to this program include expenses for deductible amounts associated with claims incurred and reported in addition to an accrual for the estimated expenses incurred in connection with IBNR claims. Claims are accrued based upon projections and are discounted to their net present value using a weighted average risk-free discount rate of 5%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2011, the Company had accrued $736 and $836, respectively, comprised of $372 and $434, respectively, in incurred and reported claims, along with $364 and $402, respectively, in estimated IBNR.

In addition, the Company has a self-insured health benefits plan for its employees. As a result, the Company has established and maintains an accrual for IBNR claims arising from self-insured health benefits provided to employees. The Company's IBNR accruals at September 30 and March 31, 2011 were based upon projections. The Company determines the adequacy of this accrual by evaluating its limited historical experience and trends related to both health insurance claims and payments, information provided by its insurance broker and third party administrator and industry experience and trends. The accrual is an estimate and is subject to change. Such change could be material to the Company's unaudited condensed consolidated financial statements. As of September 30 and March 31, 2011, the Company had accrued $2.0 million and $1.8 million, respectively, in estimated IBNR. The Company believes this is the best estimate of the amount of IBNR relating to self-insured health benefit claims at September 30 and March 31, 2011.

The Company has also purchased umbrella liability policies with aggregate limits of $25 million. The umbrella policies provide coverage in excess of the primary layer and applicable retentions for insured liability risks such as general and professional liability, auto liability, and workers compensation (employers liability).

As of September 30, 2011, the Company finances various insurance policies at an interest rate of 4.03% per annum. The Company incurred finance charges relating to such policies of $13 and $11 for the three months ended September 30, 2011 and 2010, respectively, and $25 and $27 for the six months ended September 30, 2011 and 2010, respectively. As of September 30 and March 31, 2011, the accompanying unaudited condensed consolidated balance sheets include the following balances relating to the financed insurance policies.

	September 30, 2011		March 31, 2011
Prepaid insurance	$	1,888	$	3,108
Accrued insurance premiums	$	875	$	1,951
(Included in other current liabilities)

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

The following is a summary of material developments in the matter involving Orange County Physicians Investment Network, LLC (“OC-PIN”), as well as the Avery and Ross potential class action lawsuits that were identified in our Form 10-K filed on June 24, 2011.  There have been no material developments in the other matters identified in the Form 10-K.

On April 24, 2009, a conglomeration of several OC-PIN members led by Ajay G. Meka, M.D. filed a lawsuit against Dr. Shah, other OC-PIN members, and various attorneys, alleging breach of fiduciary duty and seeking damages as well as declaratory and injunctive relief relating to the control of OC-PIN.  After a number of demurrers were filed by the defendants, Plaintiffs filed a Sixth Amended Complaint on May 5, 2011, to which the Company is not a party.  On May 19, 2011, Judge Nancy Wieben-Stock appointed Dr. Anil Shah and Dr. John Glavinovich as interim managers of OC-PIN and signed a formal order to this effect on June 27, 2011.  On July 20, 2011, OC-PIN’s attorney placed a demand on the Company to seat two directors – Mr. Brahmbhatt himself and one Amer Zarka, M.D. – on the Board of Directors.  The Company declined this request based on its non-compliance with the Global Settlement Agreement and asked for additional information.  On August 3, 2011, the Company filed a lawsuit in the Orange County Superior Court asking for declaratory relief as to how it must respond to this request.  On August 4, 2011, OC-PIN filed a “Motion for Clarification” asking Judge Wieben-Stock to modify her prior order appointing Drs. Shah and Glavinovich as OC-PIN interim managers to include a finding that they are empowered to appoint one member to the Company’s Board of Directors pursuant to Judge Lewis’ March 23, 2011 judgment in the Company v. Shah matter.  On August 12, 2011, Judge Wieben-Stock denied this motion.  On August 22, 2011, OC-PIN filed another motion for “Further and Additional Orders” essentially repeating the request in its August 4, 2011 motion.  This motion was likewise denied.  Shortly thereafter, the Company offered to dismiss its declaratory relief action without prejudice if OC-PIN made no further attempts to appoint a Company Director until the Meka/OC-PIN matter is resolved.  OC-PIN agreed, and on October 5, 2011, the Company dismissed its declaratory relief action without prejudice.

On June 5, 2009, a potential class action lawsuit was filed against the Company by Alexandra Avery.  Ms. Avery purports to represent all 12-hourly employees and the complaint alleges causes of action for restitution of unpaid wages as a result of unfair business practices, injunctive relief for unfair business practices, failure to pay overtime wages, and penalties associated therewith. On December 23, 2009, the Company filed an answer to the complaint, generally denying all of the plaintiff’s allegations.  On January 25, 2010, a potential class action lawsuit was filed against the Company by Julie Ross.  Ms. Ross purports to represent all similarly-situated employees and the complaint alleges causes of action for violation of the California Labor Code and unfair competition law.  On September 3, 2010 the plaintiffs in both the Avery and Ross actions filed a consolidated complaint (the “Consolidated Complaint”) that alleges the causes of action found in the initial Ross complaint.  On October 12, 2010, the Company filed an answer to the Consolidated Complaint, which generally denied all allegations.  On July 18, 2011, the Company filed a motion to compel arbitration of the matter, which was denied on October 21, 2011.  The Company intends to appeal the denial of its motion to arbitrate and will vigorously defend itself in connection with the claims in the Consolidated Complaint.   The parties are currently exchanging discovery in the action.   At this early stage in the proceedings, the Company is unable to determine the cost of defending this lawsuit or the impact, if any, this action may have on its results of operations.

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NOTE 5 - INCOME TAXES

6 Months Ended

Sep. 30, 2011

Income Tax Disclosure [Text Block]

NOTE 5 - INCOME TAXES

The utilization of net operating loss (“NOL”) and credit carryforwards is limited under the provisions of the Internal Revenue Code (“IRC”) Section 382 and similar state provisions. Section 382 of the IRC of 1986 generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. In fiscal year 2009, the Company entered into the amended purchase agreement which resulted in a change in control. The Company conducted an analysis and determined that it is subject to significant IRC Section 382 limitations. For both Federal and State tax purposes, the Company's utilization of NOL and credit carryforwards is subject to significant IRC Section 382 limitations. The Company evaluates its ability to utilize the net operating losses each period with regard to the limitations imposed under IRC 382 and also considering the continuing expiration of statutes of limitation for prior years; and in the prior year determined that a portion of the federal and state net operating losses were no longer realizable, and removed from the schedule of deferreds those net operating losses in excess of the IRC 382 limitation and also considering prior years statutes now closed.

The difference between the reported income tax provision (benefit) and the amount computed by multiplying income before income tax provision (benefit) in the accompanying unaudited condensed consolidated statements of operations for the three and six months ended September 30, 2011 and 2010 by the statutory federal income tax rate primarily relates to the impact of a full valuation allowance reserving the net deferred assets, permanently nondeductible expenses, state and local income taxes, and variable interest entity.

The application of FASB Interpretation Number 18 requires the Company to compute the interim period income tax provision (benefit) by applying the estimated annual effective tax rate to the income (loss) from continuing operations for the three and six months ended September 30, 2011, which resulted in the recognition of a tax expense for the three months ended September 30, 2011 and a tax benefit for the six months ended September 30, 2011.

The Company evaluated its historical and projected sources of income to determine the extent to which the net deferred tax assets projected at September 30, 2011 could be realized, and based on this analysis the Company concluded that there was not sufficient positive evidence to support the realization of the net deferred tax assets, and therefore will continue to maintain a full valuation allowance against its net deferred assets as of September 30, 2011.

The Company’s California Enterprise Zone credits are currently under examination by the California taxing authority.  As a result of the examination, the Company recorded a liability of approximately $18.9 million for unrecognized tax benefits.  The Company's utilization of these credits is also subject to significant IRC Section 383 limitations, and these limitations have been incorporated into the tax provision calculation.

PCHI tax status – PCHI is a limited liability company. PCHI's taxable income or loss will flow through to its owners and be their separate responsibility. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include any amounts for the income tax expense or benefit, or liabilities related to PCHI's income or loss.

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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (USD $) In Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Other Additional Capital [Member]	Retained Earnings [Member]	Noncontrolling Interest [Member]	Total
Balance at Mar. 31, 2011	$ 255	$ 62,911	$ (882)	$ (79,280)	$ (1,565)	$ (18,561)
Balance (in Shares) at Mar. 31, 2011	255,307
Payment received on receivable from stockholders			882			882
Net income (loss)				(2,364)	219	(2,145)
Noncontrolling interests distributions					(883)	(883)
Balance at Sep. 30, 2011	$ 255	$ 62,911		$ (81,644)	$ (2,229)	$ (20,707)
Balance (in Shares) at Sep. 30, 2011	255,307

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

6 Months Ended

Sep. 30, 2011

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

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

BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated financial statements of Integrated Healthcare Holdings, Inc. and its wholly owned subsidiaries (the "Company") have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. Accordingly, the accompanying unaudited condensed consolidated statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments that are of a normal and recurring nature necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows. The results of operations for the three and six months ended September 30, 2011 are not necessarily indicative of the results for the entire 2012 fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011 filed with the SEC on June 24, 2011.

The Company has determined that Pacific Coast Holdings Investment, LLC ("PCHI") (Note 9), is a variable interest entity as defined by GAAP and, accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, all amounts included in these notes to the condensed consolidated financial statements are expressed in thousands (except per share amounts, percentages and stock option prices and values). 

LIQUIDITY - As of September 30, 2011, the Company had a total stockholders’ deficiency of $20.7 million and a working capital deficit of $22.0 million.  For the three and six months ended September 30, 2011, the Company had net income (loss) of $0.5 million and $(2.4) million, respectively. At September 30, 2011, the Company had no additional availability under its revolving credit facility (Note 3).

DESCRIPTION OF BUSINESS - Effective March 8, 2005, the Company acquired four hospitals (the "Hospitals") from subsidiaries of Tenet Healthcare Corporation (the "Acquisition"). The Company owns and operates the four community-based hospitals located in southern California, which are:

● 282-bed Western Medical Center in Santa Ana

● 188-bed Western Medical Center in Anaheim

● 178-bed Coastal Communities Hospital in Santa Ana

● 114-bed Chapman Medical Center in Orange

RECLASSIFICATION FOR PRESENTATION - Certain amounts previously reported have been reclassified to conform to the current period's presentation with no impact on the reported net income (loss) of the Company.

CONCENTRATION OF RISK - The Hospitals are subject to licensure by the State of California and accreditation by the Joint Commission. Loss of either licensure or accreditation would impact the ability to participate in various governmental and managed care programs, which provide the majority of the Company's revenues.

Substantially all net operating revenues come from external customers. The largest payers are Medicare and Medicaid, which combined accounted for 55% and 58% of the net operating revenues for the three months ended September 30, 2011 and 2010, respectively, and 55% and 57% for the six months ended September 30, 2011 and 2010, respectively. No other payers represent a significant concentration of the Company's net operating revenues.

The Company receives all of its inpatient services revenue from operations in Orange County, California. The economic conditions of this market could affect the ability of patients and third-party payers to reimburse the Company for services, through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs.

USE OF ESTIMATES - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Principal areas requiring the use of estimates include third-party cost report settlements, income taxes, accrued insurance retentions, self-insurance reserves, and net patient receivables. Management regularly evaluates the accounting policies and estimates that are used. In general, management bases the estimates on historical experience and on assumptions that it believes to be reasonable given the particular circumstances in which its Hospitals operate. Although management believes that all adjustments considered necessary for fair presentation have been included, actual results may materially vary from those estimates.

REVENUE RECOGNITION - Net operating revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less estimated discounts for contractual allowances, principally for patients covered by Medicare, Medicaid, managed care, and other health plans. Gross charges are retail charges based on the Company’s Charge Description Master. 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 accompanying unaudited condensed consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the federal government or state 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). Since Medicare requires a hospital's gross charges to be the same for all patients (regardless of payer category), gross charges are also what the Hospitals charge all other patients prior to the application of discounts and allowances.

Revenues under the traditional fee-for-service Medicare and Medicaid programs are based primarily on prospective payment systems. Discounts for retrospectively cost based revenues and certain other payments, which are based on the Hospitals' cost reports, are estimated using historical trends and current factors. Cost report settlements for retrospectively cost based revenues under these programs are subject to audit, and administrative and judicial review, which can take several years until final settlement of such matters are determined and completely resolved. Estimates of settlement receivables or payables related to a specific year are updated periodically, at year end, and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made to the estimates until the Final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be several years’ time lag between the submission of a cost report and receipt of the Final Notice of Program Reimbursement. Since the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. The Company has established settlement receivables of $534 and $456 as of September 30 and March 31, 2011, respectively, which are included as due from government payers in the accompanying unaudited condensed consolidated balance sheets.

The Hospitals receive supplemental payments from the State of California to support indigent care (Medi-Cal Disproportionate Share Hospital payments or "DSH") and from the California Medical Assistance Commission ("CMAC") under the SB 1100 and SB 1255 programs. The Hospitals received supplemental payments of $1.1 million and $0 during the three months ended September 30, 2011 and 2010, respectively, and $5.9 million and $11.1 million during the six months ended September 30, 2011 and 2010, respectively. The related revenue recorded for the three months ended September 30, 2011 and 2010, was $4.0 million and $4.8 million, respectively, and $7.4 and $11.1 million for the six months ended September 30, 2011 and 2010, respectively. As of September 30 and March 31, 2011, estimated DSH receivables were $5.3 million and $3.9 million, respectively, which are included as due from government payers in the accompanying unaudited condensed consolidated balance sheets.

The following is a summary of due from governmental payers:

	September 30,  2011		March 31,  2011
Medicare	$	534	$	456
Medicaid		5,312		3,896
	$	5,846	$	4,352

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. Management believes the estimation and review process allows for timely identification of instances where such estimates need to be revised. The Company does not believe there were any adjustments to estimates of individual patient bills that were material to its net operating revenues.

The Hospitals provide charity care to patients whose income level is below 300% of the Federal Poverty Level. Patients with income levels between 300% and 350% of the Federal Poverty Level qualify to pay a discounted rate under AB 774 based on various government program reimbursement levels. Patients without insurance 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 estimated costs (based on direct and indirect costs as a ratio of gross uncompensated charges associated with providing care to charity patients) for the three months ended September 30, 2011 and 2010 were approximately $2.5 million and $2.6 million, respectively, and $3.8 million and $4.5 million for the six months ended September 30, 2011 and 2010, respectively.

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 qualify for Medicaid, the receivables are reclassified to charity care and written off, or they are reclassified to self-pay and adjusted to their net realizable value through the provision for doubtful accounts. Reclassifications of Medicaid pending accounts to self-pay do not typically have a material impact on the results of operations as the estimated Medicaid contractual allowances initially recorded are not materially different than the estimated provision for doubtful accounts recorded when the accounts are reclassified. All accounts classified as pending Medicaid, as well as certain other governmental receivables, over the age of 90 days were reserved in contractual allowances as of September 30 and March 31, 2011 based on historical collections experience.

The Company receives payments for “eligible alien” care under Section 1011 of the Medicare Modernization Act of 2003. As of September 30 and March 31, 2011, the Company established a receivable in the amount of $1.3 million and $1.6 million, respectively, related to discharges deemed eligible to meet program criteria.

The Company 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 unaudited condensed consolidated financial statements.

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 copayments 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 copayments 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 nonemergency circumstances or for elective procedures and services, it is the Hospitals' policy, when appropriate, to verify insurance prior to a patient being treated.

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.

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. All of the non-interest bearing cash balances were fully insured at September 30, 2011 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and the Company’s non-interest bearing cash balances may again exceed federally insured limits.

INVENTORIES OF SUPPLIES - Inventories of supplies are valued at the lower of weighted average cost or market.

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 property and equipment and a corresponding lease liability is recognized. The value of the property and equipment under capital lease is recorded at 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 the lease term or their estimated useful life, where applicable.

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

LONG-LIVED ASSETS - 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 established market values of comparable assets or internal calculations of estimated undiscounted future net cash flows. The estimates of future net cash flows are based on assumptions and projections believed by the Company 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.

DEBT ISSUANCE COSTS - On August 30, 2010, the Company entered into a new revolving credit facility (Note 3) under which it incurred debt issuance costs consisting of a $450 origination fee for the Company's $40 million Revolving Line of Credit (new debt) and $469 in legal and other expenses paid to third parties. These amounts are amortized over the credit facility’s three year life using the straight-line method. Subsequently, the $40 million Revolving Line of Credit was reduced to $20 million, resulting in an acceleration of the amortization of the related debt issuance costs.  Debt issuance costs of $38 and $24 were amortized during the three months ended September 30, 2011 and 2010, respectively, and $449 (including $334 in accelerated amortization) and $154 during the six months ended September 30, 2011 and 2010, respectively.  At September 30 and March 31, 2011, prepaid expenses and other current assets in the accompanying unaudited condensed consolidated balance sheets included $153 and $300, respectively, as the current portion of debt issuance costs.

FAIR VALUE MEASUREMENTS - The Company's financial assets and liabilities recorded in the unaudited condensed consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, debt, accounts payable, and other liabilities, all of which are recorded at book value which approximates fair value.

GAAP has established a hierarchy for ranking the quality and reliability of the information used to determine fair values and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1:	Unadjusted quoted market prices in active markets for identical assets or liabilities.
Level 2:	Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3:	Unobservable inputs for the asset or liability.

The Company utilizes the best available information in measuring fair value.  Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company currently has no financial or nonfinancial assets or liabilities subject to fair value measurement on a recurring basis except for warrants issued in April 2010 (Note 4).

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and where they are classified within the hierarchy as of September 30, 2011:

	Total		Level 1		Level 2		Level 3
Warrant liability	$	384		-		-	$	384

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2011 - Fair value of warrants issued and vested	$	167
Change in fair value of warrant liability included in earnings		3,270
Balance at June 30, 2011		3,437
Change in fair value of warrant liability included in earnings		(3,053	)
Balance at September 30, 2011	$	384

 WARRANTS - The Company has entered into complex transactions that contain warrants (Notes 3 and 4). If an instrument (or an embedded feature) that has the characteristics of a derivative instrument is indexed to an entity’s own stock, it is still necessary to evaluate whether it is classified in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument).

INCOME (LOSS) PER COMMON SHARE – Income (loss) per share is calculated under two different methods, basic and diluted. Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period and dilutive potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock warrants or options, net of shares of common stock assumed to be repurchased by the Company from the exercise proceeds (Note 8).

INCOME TAXES - Deferred income tax assets and liabilities are determined based on the differences between the book and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws using the asset and liability method. The Company assesses the realization of deferred tax assets to determine whether an income tax valuation allowance is required. The Company has recorded a 100% valuation allowance on its deferred tax assets.

There is a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and California. Certain tax attributes carried over from prior years continue to be subject to adjustment by taxing authorities. Penalties or interest, if any, arising from federal or state taxes are recorded as a component of the Company’s income tax provision.

SEGMENT REPORTING - The Company operates in one line of business, the provision of healthcare services through the operation of general hospitals and related healthcare facilities. The Company's Hospitals generate substantially all of its net operating revenues.

The Company's four Hospitals and related healthcare facilities operate in one geographic region in Orange County, California. The region's economic characteristics, the nature of the Hospitals' operations, the regulatory environment in which they operate, and the manner in which they are managed are all similar. This region is an operating segment, as defined by GAAP. In addition, the Company's Hospitals and related healthcare facilities share certain resources and benefit from many common clinical and management practices. Accordingly, the Company aggregates the facilities into a single reportable operating segment.

SUBSEQUENT EVENTS - The Company’s accompanying unaudited condensed consolidated financial statements are considered issued when filed with the SEC.  The Company has evaluated subsequent events to the filing date of this Form 10-Q with the SEC.

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NOTE 10 - RELATED PARTY TRANSACTIONS

6 Months Ended

Sep. 30, 2011

Related Party Transactions Disclosure [Text Block]

NOTE 10 - RELATED PARTY TRANSACTIONS

The Company leases substantially all of the real property of the acquired Hospitals from PCHI which is owned by various physician investors and Ganesha, which is managed by Dr. Chaudhuri. As of September 30 and March 31, 2011, Dr. Chaudhuri and Mr. Thomas are the beneficial holders of an aggregate of 447.5 million shares of the outstanding stock of the Company. As described in Note 9, PCHI is a variable interest entity and, accordingly, the Company has consolidated the financial statements of PCHI in the accompanying unaudited condensed consolidated financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEET (USD $) In Thousands	Sep. 30, 2011	Mar. 31, 2011
Current assets:
Cash and cash equivalents	$ 2,933	$ 20,539
Restricted cash	11	24
Accounts receivable, net of allowance for doubtful accounts of $15,823 and $20,076, respectively	48,997	52,538
Inventories of supplies, at cost	6,195	5,945
Due from governmental payers	5,846	4,352
Prepaid insurance	1,888	3,108
Prepaid income taxes	1,223
Prepaid expenses - hospital quality assurance fees	15,247
Hospital quality assurance fees receivable		1,815
Other prepaid expenses and current assets	10,717	8,885
Total current assets	93,057	97,206
Property and equipment, net	52,836	54,251
Debt issuance costs, net	144	445
Total assets	146,037	151,902
Current liabilities:
Revolving line of credit	20,000	19,081
Accounts payable	40,244	43,968
Accrued compensation and benefits	17,112	18,707
Accrued insurance retentions	15,254	16,642
Unearned revenue - hospital quality assurance fees	18,386
Income taxes payable		12,800
Other current liabilities	4,048	7,261
Total current liabilities	115,044	118,459
Debt, noncurrent	45,000	45,000
Warrant liability, noncurrent	384	167
Capital lease obligations, net of current portion of $1,116 and $1,131, respectively	6,316	6,837
Total liabilities	166,744	170,463
Commitments and contingencies
Integrated Healthcare Holdings, Inc. stockholders' deficiency:
Common stock, $0.001 par value; 800,000 shares authorized; 255,307 shares issued and outstanding	255	255
Additional paid in capital	62,911	62,911
Receivable from stockholders		(882)
Accumulated deficit	(81,644)	(79,280)
Total Integrated Healthcare Holdings, Inc. stockholders' deficiency	(18,478)	(16,996)
Noncontrolling interests	(2,229)	(1,565)
Total stockholders' deficiency	(20,707)	(18,561)
Total liabilities and stockholders' deficiency	$ 146,037	$ 151,902