UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

~~[X]~~x ~~Quarterly~~QUARTERLY ~~Report~~REPORT ~~Pursuant~~UNDER toSECTION ~~Section~~ 13 orOR 15(d) ofOF ~~the~~THE ~~Securities~~SECURITIES ~~Exchange~~EXCHANGE ~~Act~~ACT ofOF 1934 ~~For the quarterly period ended December 31, 2012; or~~

~~[_]~~For ~~Transition Report Pursuant to Section 13 or 15(d) of~~ the ~~Securities~~quarterly ~~Exchange Act of 1934 for the transition~~ period ~~from~~ended ~~______~~June ~~to ______~~30, 2013

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

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	(I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

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 [_]______________________________________________________________________________________________

Indicate by check mark whether the registrant (1) has ~~submitted electronically~~filed ~~and~~all ~~posted~~reports onrequired ~~its~~to ~~corporate~~be ~~Web~~filed ~~site,~~by ifSection ~~any,~~13 ~~every~~or ~~Interactive~~15(d) ~~Data~~of ~~File~~the ~~required~~Securities toExchange beAct ~~submitted and posted pursuant to Rule 405~~ of ~~Regulation~~1934 ~~S-T~~ during the preceding 12 months (or for such shorter period that the registrant was required to ~~submit~~file such reports), and ~~post~~ (2) has been subject to such ~~files)~~filing requirements for the past 90 days. Yes ~~[X]~~ T No ~~[_]~~£

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 T No £

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 ~~[_]~~£ Accelerated filer ~~[_]~~£ Non-accelerated filer ~~[_]~~£ Smaller reporting company ~~[X]~~S

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

There were 255,307,262 shares outstanding of the registrant's ~~common~~ common stock as of ~~December~~August 317, ~~2012~~2013.

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 December 31 and March 31, 2012 – (unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30 and March 31, 2013 – (unaudited)	3
	Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2012 and 2011 – (unaudited)	4
	Condensed Consolidated Statements of Operations for the three months ended June 30, 2013 and 2012 – (unaudited)	4
	Condensed Consolidated Statement of Stockholders’ Deficiency for the nine months ended December 31, 2012 – (unaudited)	5
	Condensed Consolidated Statement of Stockholders’ Equity (Deficiency) for the three months ended June 30, 2013 – (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2012 and 2011 – (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2013 and 2012 – (unaudited)	6
	Notes to Condensed Consolidated Financial Statements – (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2321
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3330
Item 4.	Controls and Procedures	3330
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	3431
Item 1A.	Risk Factors	3431
Item 6.	Exhibits	3531
	Signatures	3632

PART I - FINANCIAL INFORMATION

Item 1. Financial statements

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in 000's, except par value)

(unaudited)

	December 31,			March 31,
	June 30,			March 31,
	2012			2012
	2013			2013
ASSETS
Current assets:
Cash and cash equivalents	$	1038,~~175~~374		$	113,~~829~~545
Restricted cash		910			1013
Accounts receivable, net of allowance for doubtful accounts of $23,656 and $18,201, respectively		59,035			53,599
Accounts receivable, net of allowance for doubtful accounts of $25,671 and $21,143, respectively		61,953			62,821
Inventories of supplies, at cost		6,788			6,855
Inventories of supplies		6,751			6,738
Due from governmental payers		63,~~710~~583			5,~~183~~882
Hospital quality assurance receivable		7,722			2,436
Hospital quality assurance fees receivable		70,074			7,690
Prepaid insurance		~~741~~1,941			~~366~~115
Prepaid income taxes		2,238			892
Deferred tax assets, net		–			6,328
Other prepaid expenses and current assets		87,~~719~~460			89,~~339~~208
Total current assets		~~102~~190,~~137~~146			89102,~~509~~340
Property and equipment, net		6163,~~861~~551			5563,~~529~~988
Debt issuance costs, net		–			64
Deferred tax assets, net		–			380
Total assets	$	~~163~~253,~~998~~697		$	~~145~~166,~~102~~708
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Revolving line of credit	$	28,806		$	14,000
Revolving line of credit, net of discount	$	10,328		$	29,527
Accounts payable		6259,~~768~~620			5262,~~700~~515
Accrued compensation and benefits		2018,~~171~~225			19,~~847~~634
Accrued insurance retentions		1113,~~846~~888			1412,~~377~~938
Hospital quality assurance payable		7,225			–
Hospital quality assurance fees payable		24,358			7,226
Warrant liability, current		134			–
Due to governmental payers		463			179
Due to governmental payers		414			–
Income taxes payable		41,599			2,869
Other current liabilities		45,~~043~~884			34,~~242~~111
Total current liabilities		~~135~~174,~~407~~365			~~104~~138,~~166~~999
Debt, noncurrent		46,350			45,000
Debt, noncurrent, net of discount		45,683			45,530
Warrant liability, noncurrent		311,~~084~~922			15,~~641~~276
Capital lease obligations, net of current portion of $1,035 and $891, respectively		6,938			5,944
Capital lease obligations, net of current portion of $1,162 and $1,101, respectively		6,464			6,789
Total liabilities		~~191~~238,~~779~~434			~~156~~196,~~751~~594
Commitments, contingencies and subsequent events
Commitments and contingencies
Stockholders' deficiency:
Stockholders' equity (deficiency):
Integrated Healthcare Holdings, Inc. stockholders' deficiency:
Integrated Healthcare Holdings, Inc. stockholders' equity (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
Accumulated deficit		(8641,~~092~~962	)		(7187,~~828~~365	)
Total Integrated Healthcare Holdings, Inc. stockholders' deficiency		(22,926	)		(8,662	)
Total Integrated Healthcare Holdings, Inc. stockholders' equity (deficiency)		21,204			(24,199	)
Noncontrolling interests		(45,~~855~~941	)		(25,~~987~~687	)
Total stockholders' deficiency		(27,781	)		(11,649	)
Total stockholders' equity (deficiency)		15,263			(29,886	)
Total liabilities and stockholders' deficiency	$	163,998		$	145,102
Total liabilities and stockholders' equity (deficiency)	$	253,697		$	166,708

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

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(unaudited)

	Three months endedDecember 31,						Nine months endedDecember 31,
	Three months ended June 30,
	2012			2011			2012			2011
	2013			2012
Patient service revenues (net of contractual allowances and discounts)	$	~~101~~237,~~020~~519		$	~~123~~90,~~033~~747		$	~~331,983~~		$	~~306,398~~
Provision for bad debts		(1114,~~995~~365	)		(9,~~034~~927	)		~~(35,430~~	)		~~(25,851~~	)
Net patient service revenues		89223,~~025~~154			~~113~~80,~~999~~820			~~296,553~~			~~280,547~~
Operating expenses:
Other operating revenues		808			845
Salaries and benefits		54,391			56,101			160,669			162,499
		223,962			81,665
Supplies		13,969			14,004			41,998			40,217
Operating expenses:
Other operating expenses		28,967			32,038			97,072			61,213
Salaries and benefits		56,063			52,991
Depreciation and amortization		1,029			997			2,947			3,164
Supplies		13,949			14,051
		98,356			103,140			302,686			267,093
Other operating expenses		51,228			15,043
Operating income (loss)		(9,331	)		10,859			(6,133	)		13,454
Depreciation and amortization		2,117			959
Other expense:
		123,357			83,044
Interest expense, net		(3,389	)		(2,446	)		(8,838	)		(7,768	)
Operating income (loss)		100,605			(1,379	)
Income from electronic health records incentive program					6,802						6,802
Other income (expense):
Gain (loss) on warrants		(1,182	)		256			(1,577	)		39
Interest expense, net		(2,807	)		(2,433	)
		(4,571	)		4,612			(10,415	)		(927	)
Gain (loss) on warrants		(6,646	)		731
Income (loss) before income tax provision (benefit)		(13,902	)		15,471			(16,548	)		12,527
		(9,453	)		(1,702	)
Income tax provision (benefit)		(89	)		2,812			(1,967	)		2,012
Income (loss) before income tax provision		91,152			(3,081	)
Net income (loss)		(13,813	)		12,659			(14,581	)		10,515
Income tax provision		45,452			44
Net (income) loss attributable to noncontrolling interests (Note 9)		439			(117	)		317			(336	)
Net income (loss)		45,700			(3,125	)
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.	$	(13,374	)	$	12,542		$	(14,264	)	$	10,179
Net income attributable to noncontrolling interests (Note 9)		(297	)		(349	)
Per Share Data (Note 8):
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.	$	45,403		$	(3,474	)
Earnings (loss) per common share attributable to Integrated Healthcare Holdings, Inc. stockholders
Per Share Data (Note 8):
Basic	$	(0.05	)	$	0.05		$	(0.06	)	$	0.04
Earnings (loss) per common share attributable to Integrated Healthcare Holdings, Inc. stockholders
Diluted	$	(0.05	)	$	0.05		$	(0.06	)	$	0.04
Basic	$	0.18		$	(0.01	)
Weighted average shares outstanding
Diluted	$	0.18		$	(0.01	)
Basic		255,307			255,307			255,307			255,307
Weighted average shares outstanding
Diluted		255,307			256,839			255,307			256,848
Basic		255,307			255,307
Diluted		257,159			255,307

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

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

(amounts in 000's)

(unaudited)

	Integrated Healthcare Holdings, Inc. Stockholders
					Additional
	Common Stock				Paid-in		Accumulated			Noncontrolling
	Shares		Amount		Capital		Deficit			Interests			Total
Balance, March 31, 2012		255,307	$	255	$	62,911	$	(71,828	)	$	(2,987	)	$	(11,649	)
Balance, March 31, 2013		255,307	$	255	$	62,911	$	(87,365	)	$	(5,687	)	$	(29,886	)
Net loss		–		–		–		(14,264	)		(317	)		(14,581	)
Net income		–		–		–		45,403			297			45,700
Noncontrolling interests distributions		–		–		–		–			(1,551	)		(1,551	)
Balance, December 31, 2012		255,307	$	255	$	62,911	$	(86,092	)	$	(4,855	)	$	(27,781	)
Balance, June 30, 2013		255,307	$	255	$	62,911	$	(41,962	)	$	(5,941	)	$	15,263

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

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in 000's)

(unaudited)

	Nine months ended December 31,
	Three months ended June 30,
	2012			2011
	2013			2012
Cash flows from operating activities:
Net income (loss)	$	~~(14~~45,~~581~~700	)	$	10(3,~~515~~125	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment		2,~~947~~117			~~3,164~~959
Provision for doubtful accounts		35,430			25,851
Provision for bad debts		14,365			9,927
Amortization of debt issuance costs		1,248			487
Amortization of debt discount		193			38
Loss on warrants		1,577			(39	)
Loss (gain) on warrants		6,646			(731	)
Deferred tax assets, net		6,708			–
Changes in operating assets and liabilities:
Accounts receivable		(4013,~~866~~497	)		(238,~~523~~935	)
Inventories of supplies		67(13	)		(~~572~~116	)
Due from governmental payers		(12,~~527~~299	)		~~(302~~3,086	)
Prepaid income taxes		(1,346	)		–
Hospital quality assurance fees receivable		(62,384	)		2,436
Hospital quality assurance fees receivable		(5,286	)		(11,681	)
Prepaid income taxes		–			665
Electronic health records incentive program receivable		–			(4,191	)
Prepaid insurance, other prepaid expenses and current assets, and other assets		(78	)		(2,604	)
Prepaid insurance, other prepaid expenses and current assets, and other assets		21			348
Accounts payable		(3,790	)		(2,411	)
Accounts payable		10,068			453
Accrued compensation and benefits		(1,409	)		(1,709	)
Accrued compensation and benefits		324			301
Hospital quality assurance fees payable		17,132			–
Due to governmental payers		~~414~~284			–72
Hospital quality assurance fees payable		7,225			–
Income taxes payable		38,730			–
Income taxes payable		–			(10,776	)
Accrued insurance retentions and other current liabilities		2,173			608
Accrued insurance retentions and other current liabilities		(1,874	)		(3,822	)
Net cash provided by (used in) operating activities		55,176			(1,840	)
Net cash used in operating activities		(6,159	)		(13,787	)
Cash flows from investing activities:
Decrease in restricted cash		13			13(17	)
Additions to property and equipment		(~~7,368~~296	)		(~~1,678~~601	)
Net cash used in investing activities		(~~7,367~~293	)		(~~1,665~~618	)
Cash flows from financing activities:
Proceeds from revolving line of credit		14,806			919
Proceeds from (paydown on) revolving line of credit, net		(19,239	)		–
Debt issuance costs		(610	)		–
Noncontrolling interests distributions		(551	)		(300	)
Noncontrolling interests distributions		(1,551	)		(1,414	)
Payments on capital lease obligations		(264	)		(158	)
Payments on capital lease obligations		(773	)		(724	)
Net cash used in financing activities		(20,054	)		(458	)
Payment received - receivable from stockholders		–			132
Net increase (decrease) in cash and cash equivalents		34,829			(2,916	)
Net cash provided by (used in) financing activities		11,872			(1,087	)
Cash and cash equivalents, beginning of period		3,545			11,829
Net decrease in cash and cash equivalents		(1,654	)		(16,539	)
Cash and cash equivalents, end of period	$	38,374		$	8,913
Cash and cash equivalents, beginning of period		11,829			20,539
Cash and cash equivalents, end of period	$	10,175		$	4,000
Supplemental information:
Cash paid for interest	$	72,~~147~~417		$	62,~~641~~282
Cash paid for income taxes	$	–		$	~~13,095~~–

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

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(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~~ owned subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("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 nine~~ months ended ~~December~~June 3130, ~~2012~~ 2013 are not necessarily indicative of the results for the entire ~~2013~~2014 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, ~~2012~~2013 filed with the SEC on June 2228, ~~2012~~2013.

The Company has determined that Pacific Coast Holdings Investment, LLC ("PCHI") (Note 9), is a variable interest entity as defined by GAAP and the Company is the primary beneficiary 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 ~~December~~June 3130, ~~2012~~2013, the Company had a total stockholders’ ~~deficiency~~equity of $2815.3 million and a working capital ~~deficit~~ of $3315.8 million. For the three ~~and nine~~ months ended ~~December~~June 3130, ~~2012~~2013, the Company had net ~~loss~~income of $1345.4 million ~~and $14 million, respectively~~. At ~~December 31~~June 30, ~~2012~~2013, the Company had $124.2 million in additional availability under its revolving credit facility (Note 3). Through June 30, 2013, the Company has recorded $196.4 million in revenues and incurred $86.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, the Company anticipates recording approximately $47.1 million in revenues and incurring approximately $21.2 million in provider fees and other expenses (Notes 11 and 14). The Company is reliant on funds received under the hospital quality assurance fee program and not receiving such funding could have a material adverse effect on its liquidity and financial position and value of its common stock.

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 ~~(the "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~~ 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 patient service revenues come from external customers. The largest payers are Medicare and Medicaid (including Medicare and Medicaid managed care plans), which combined accounted for 5979% and 6454% of the patient service revenues for the three months ended ~~December~~June 3130, ~~2012~~2013 and ~~2011, respectively, and 61% and 59% for the nine months ended December 31,~~ 2012 ~~and 2011~~, respectively. No other payers represent a significant concentration of the Company's patient service revenues.

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

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(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.

PATIENT SERVICE REVENUES – Patient service revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less contractual allowances and discounts, principally for patients covered by Medicare, Medicaid, managed care, and other health plans. Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid and therefore are not displayed in the consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of payment under managed care contracts (such as stop-loss payments). Since Medicare requires that 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.

The following is a ~~summary~~ summary of sources of patient service revenues (net of contractual allowances and discounts) before provision for ~~bad~~doubtful ~~debts~~accounts:

	Three months ended				Nine months ended
	Three months ended June 30,
	December 31,				December 31,
	2013		2012
	2012		2011		2012		2011
Medicare	$	12,293	$	14,762
Medicare	$	14,654	$	14,474	$	41,246	$	45,071
Medicaid		156,401		8,784
Medicaid		20,340		42,402		82,041		66,569
Managed care		49,155		51,726
Managed care		48,453		50,081		152,883		149,321
Indemnity, self-pay and other		19,670		15,475
Indemnity, self-pay and other		16,828		15,326		53,343		43,132
	$	237,519	$	90,747
Miscellaneous		745		750		2,470		2,304
	$	101,020	$	123,033	$	331,983	$	306,398

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 and at year end and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made to the estimates until the final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be a time lag of several years 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 ( payables) ~~receivables~~ of ($~~414)~~463 and $~~190~~179 as of ~~December~~June 3130 and March 31, ~~2012~~2013, respectively.

The Hospitals receive ~~supplemental~~ 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 $5.56 million and $4.07 million during the three months ended ~~December~~June 3130, ~~2012~~2013 and ~~2011, respectively, and $9.6 million and $9.9 million during the nine months ended December 31,~~ 2012 ~~and 2011~~, respectively. The related revenue recorded for the three months ended ~~December~~June 3130, ~~2012~~2013 and ~~2011~~2012, was $~~4.4 million and $~~3.~~1 million, respectively, and $11.~~3 million and $101.~~5 million~~8 ~~for the nine months ended December 31~~million, ~~2012 and 2011,~~ respectively. As of ~~December~~June 3130 and March 31, ~~2012~~2013, estimated DSH receivables were $63.76 million and $5.09 million, respectively, which are ~~included~~reflected as due from government payers in the accompanying unaudited condensed consolidated balance sheets.

Revenues under managed care plans, including Medicare and Medicaid managed care plans (with patient service revenues of $19.8 million and $23.6 million for the three months ended June 30, 2013 and 2012, respectively), 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 patient service revenues.

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

~~Revenues~~The ~~under~~Hospitals ~~managed~~provide charity care ~~plans,~~to ~~including~~patients ~~Medicare~~whose ~~and~~income ~~Medicaid~~level ~~managed~~is ~~care~~below ~~plans~~300% ~~(with patient service revenues~~ of ~~$24.4~~the ~~million~~Federal ~~and~~Poverty ~~$26~~Level.2 ~~million for~~Patients ~~the~~with ~~three~~income ~~months~~levels ~~ended~~between ~~December 31, 2012~~ 300% and ~~2011,~~350% ~~respectively,~~of ~~and~~the ~~$79.8~~Federal ~~million~~Poverty ~~and~~Level ~~$72.3~~qualify ~~million~~to ~~for~~pay ~~the~~a ~~nine~~discounted ~~months~~rate ~~ended December~~under ~~31,~~AB ~~2012~~774 ~~and~~based ~~2011,~~on ~~respectively),~~various ~~are~~government ~~based~~program ~~primarily~~reimbursement levels. onPatients ~~payment~~without ~~terms~~insurance ~~involving~~are ~~predetermined~~offered ~~rates~~assistance ~~per~~in ~~diagnosis,~~applying ~~per-diem rates, discounted fee-~~for~~-service~~ ~~rates~~Medicaid and~~/or~~ other ~~similar~~programs ~~contractual~~they ~~arrangements.~~may ~~These~~be ~~revenues~~eligible ~~are~~for, such ~~also~~as ~~subject~~state todisability, ~~review and~~Victims ~~possible~~of ~~audit~~Crime, byor ~~the~~county ~~payers~~indigent programs. ~~The~~Patient ~~payers~~advocates ~~are~~from ~~billed~~the ~~for~~Hospitals' ~~patient~~Medical ~~services~~Eligibility Program on("MEP") anscreen ~~individual~~patients ~~patient~~in ~~basis.~~the Anhospital ~~individual~~and ~~patient's bill~~determine ispotential ~~subject~~linkage to ~~adjustment~~financial onassistance aprograms. ~~patient-by-patient~~They also ~~basis~~expedite in the ~~ordinary~~process ~~course~~ of ~~business~~applying byfor ~~the~~these ~~payers~~government ~~following their review and adjudication of each particular bill~~programs. The ~~Hospitals~~estimated ~~estimate~~costs ~~the~~of ~~discounts~~charity ~~for~~care ~~contractual~~(based ~~allowances utilizing billing data~~ on andirect ~~individual patient basis. Management believes the estimation~~ and ~~review~~indirect costs ~~process~~as ~~allows~~a ~~for~~ratio ~~timely identification~~ of ~~instances where~~gross ~~such~~uncompensated ~~estimates~~charges ~~need~~associated towith beproviding ~~revised.~~care ~~The~~to ~~Company~~charity ~~does~~patients) ~~not~~for ~~believe~~the ~~there~~three ~~were~~months ~~any~~ended June ~~adjustments~~30, 2013 toand ~~estimates~~2012 ofwere ~~individual~~approximately ~~patient bills~~$2.3 ~~that~~million ~~were~~and ~~material~~$2.1 tomillion, ~~patient service revenues~~respectively.

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 of charity care (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 December 31, 2012 and 2011 were approximately $1.9 million and $2.5 million, respectively, and $6.5 million and $6.3 million for the nine months ended December 31, 2012 and 2011, respectively.

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 BAD DEBTS - 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.

~~Effective~~CASH ~~March 31,~~AND CASH EQUIVALENTS ~~2012,~~- ~~the~~The Company ~~adopted~~considers ~~Accounting~~all ~~Standards~~highly ~~Update~~liquid ~~(“ASU”)~~debt ~~2011-07,~~investments ~~“Health~~purchased ~~Care~~with ~~Entities~~a ~~(Topic~~maturity ~~954): Presentation and Disclosure~~ of ~~Patient~~three ~~Service~~months ~~Revenue,~~or ~~Provision~~less ~~for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” which requires health care entities~~ to ~~present~~be ~~the~~cash ~~provision for bad debts relating to patient service revenues~~equivalents. asCash aand ~~deduction~~cash ~~from~~equivalents ~~patient~~are ~~service~~maintained ~~revenues~~at infinancial ~~the~~institutions ~~statement~~and, ofat ~~operations~~times, ~~rather~~balances ~~than~~may asexceed anfederally ~~operating~~insured ~~expense~~limits. ~~All periods presented~~ ~~have~~The ~~been~~Company ~~reclassified~~has innever ~~accordance~~experienced ~~with~~any ~~the~~losses ~~provisions~~related ofto ~~ASU~~these ~~2011-07~~balances.

~~CASH~~LETTER ~~AND~~OF ~~CASH~~CREDIT ~~EQUIVALENTS~~– -At ~~The~~June 30 and March 31, 2013, the Company ~~considers~~had ~~all~~an ~~highly~~outstanding ~~liquid~~letter ~~debt~~of ~~investments~~credit ~~purchased~~totaling ~~with~~$761. aThis ~~maturity~~letter of ~~three~~credit ~~months~~correspondingly reduces orthe ~~less~~Company’s toborrowing beavailability ~~cash~~under ~~equivalents~~its revolving line of credit (Note 3).

~~Cash~~RECEIVABLES ~~and~~AND ~~cash equivalents~~ALLOWANCE ~~are~~FOR ~~maintained~~DOUBTFUL atACCOUNTS ~~financial~~– ~~institutions and, at times, balances may exceed federally insured limits.~~ The ~~Company~~following ~~has~~is ~~never~~a ~~experienced any~~summary ~~losses related to these balances. All~~ of the ~~non-interest~~principal ~~bearing~~components ~~cash~~of ~~balances~~accounts ~~were~~receivable ~~fully~~and ~~insured at December 31, 2012~~ due to ~~a temporary federal program in effect~~ from/to ~~December 31, 2010 through December 31, 2012. Under the program, there is no limit~~government topayers ~~the~~as ~~amount~~ of ~~insurance~~June ~~for~~30 ~~eligible~~and ~~accounts.~~March ~~Beginning 2013~~31, ~~insurance coverage will revert to $250 per depositor at each financial institution, and the Company’s non-interest bearing cash balances may again exceed federally insured limits.~~2013:

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS – The following is a summary of the principal components of accounts receivable and due from government payers as of December 31 and March 31, 2012:

	June 30,			March 31,
	2013			2013
Accounts receivable:
Patient accounts receivable	$	87,624		$	83,964
Allowance for doubtful accounts		(25,671	)		(21,143	)
Accounts receivable, net	$	61,953		$	62,821

Due from government payers:
DSH	$	3,583		$	5,882
	$	3,583		$	5,882

Due to government payers:
Settlement payables	$	463		$	179
	$	463		$	179

	December 31,			March 31,
	2012			2012
Accounts receivable:
Patient accounts receivable	$	82,691		$	71,800
Allowance for doubtful accounts		(23,656	)		(18,201	)
Accounts receivable, net	$	59,035		$	53,599
Due from government payers:
Settlement receivables	$	–		$	190
DSH		6,710			4,993
	$	6,710		$	5,183
Due to government payers:
Settlement payables	$	414		$	–
	$	414		$	–

The Company’s self-pay collection rate, which is the blended collection rate for uninsured and balance after insurance accounts receivable, was approximately 6.5% and 6.5% as of June 30 and March 31, 2013, respectively. These self-pay collection rates include payments made by patients, including co-payments and deductibles paid by patients with insurance. As of June 30 and March 31, 2013, the allowance for doubtful accounts for self-pay uninsured was 95.2% and 95.2%, respectively, of self-pay uninsured patient accounts receivable. As of June 30 and March 31, 2013, the allowance for doubtful accounts for self-pay balance after insurance was 76.4% and 78.0%, respectively, of self-pay balance after insurance patient accounts receivable, consisting primarily of co-pays and deductibles owed by patients with insurance. As of June 30 and March 31, 2013, the allowance for doubtful accounts for managed care was 15.4% and 20.3%, respectively, of managed care patient accounts receivable.

~~The~~Receivables ~~Company’s~~from ~~self-pay~~patients ~~collection~~who ~~rate,~~are ~~which~~potentially iseligible ~~the~~for ~~blended~~Medicaid ~~collection~~are ~~rate~~classified ~~for~~as ~~uninsured~~Medicaid ~~and~~pending ~~balance~~under ~~after~~the ~~insurance~~MEP, ~~accounts~~with ~~receivable,~~appropriate ~~was~~contractual ~~approximately~~allowances 4recorded.9% ~~and~~If ~~11.3%~~the aspatient ofdoes ~~December~~not 31qualify ~~and~~for ~~March 31~~Medicaid, ~~2012,~~the ~~respectively.~~receivables ~~These~~are ~~self-pay~~reclassified ~~collection~~to ~~rates~~charity ~~include~~care ~~payments~~and ~~made~~written ~~by patients~~off, ~~including~~or cothey are reclassified to self-~~payments~~pay and ~~deductibles~~adjusted ~~paid~~to bytheir ~~patients~~net ~~with~~realizable ~~insurance.~~value Asthrough ofthe ~~December~~provision 31for ~~and~~bad ~~March 31, 2012,~~debts. Reclassifications ~~the~~of ~~allowance~~pending ~~for~~Medicaid ~~doubtful~~ accounts ~~for~~to self-pay ~~uninsured~~do ~~was~~not ~~96.1%~~typically ~~and~~have ~~90.3%,~~a ~~respectively,~~material ofimpact ~~self-pay~~on ~~uninsured~~the ~~patient~~results ~~accounts receivable. As~~ of ~~December~~operations 31as ~~and March 31, 2012,~~ the ~~allowance~~estimated Medicaid ~~for~~contractual ~~doubtful~~allowances ~~accounts~~initially ~~for~~recorded ~~self-pay~~are ~~balance~~not ~~after~~materially ~~insurance was~~different ~~75.4%~~than ~~and~~the ~~77.4%,~~estimated ~~respectively,~~provision offor ~~self-pay~~bad ~~balance~~debts ~~after~~recorded when ~~insurance~~the ~~patient~~ accounts ~~receivable,~~are ~~consisting~~reclassified. ~~primarily~~All ofaccounts ~~co-pays and~~classified ~~deductibles~~as ~~owed~~pending byMedicaid, ~~patients~~as ~~with~~well ~~insurance.~~as Ascertain ofother ~~December~~governmental 31receivables, over ~~and~~the ~~March~~age ~~31,~~of ~~2012,~~90 ~~the~~days ~~allowance~~were ~~for~~reserved ~~doubtful~~in ~~accounts~~contractual ~~for managed~~allowances ~~care~~as ~~was~~of ~~15.9%~~June 30 and ~~16.1%,~~March ~~respectively~~31, of2013 ~~managed~~based ~~care~~on ~~patient~~historical ~~accounts receivable~~collections experience.

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 bad debts. Reclassifications of pending Medicaid 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 bad debts 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 December 31 and March 31, 2012 based on historical collections experience.

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. 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.

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.

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

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 undiscounted future cash flows. Fair value estimates are derived from established market values of comparable assets or internal calculations of estimated future net cash flows. The estimates of future net cash flows are based on assumptions and projections believed by 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 - Debt issuance costs are amortized over the related credit facility’s life using the straight-line method. On August 1, 2012, the Company amended its debt and incurred an aggregate of $1.96 million in origination, consent, and amendment fees which are being amortized over the remaining lives of the respective credit facilities (Note 3). Debt issuance costs of $718 and $38 were amortized during the three months ended December 31, 2012 and 2011, respectively, and $1,248 and $487 during the nine months ended December 31, 2012 and 2011, respectively. At December 31 and March 31, 2012, prepaid expenses and other current assets in the accompanying unaudited condensed consolidated balance sheets included $929 and $153, respectively, as the current portion of debt issuance costs.

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~~ 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 and February 2013 (Note 4).

The following table ~~sets~~ sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and where they are ~~classified~~ classified within the hierarchy as of June 30 and March 31, 2013:

		Total		~~Total~~		Level 1		~~Level 1~~		Level 2		~~Level 2~~		Level 3		~~Level 3~~
	Warrant liability at December 31, 2012			$	3,218				–				–			$	3,218
Warrant liability at June 30, 2013		$	11,922				–				–			$	11,922
	Warrant liability at March 31, 2012			$	1,641				–				–			$	1,641
Warrant liability at March 31, 2013		$	5,276				–				–			$	5,276

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2012	$	1,641
Balance at March 31, 2013		$	5,276
Change in fair value of warrant liability included in earnings		~~(730)~~	6,646
Balance at June 30, 2012		911
Balance at June 30, 2013		$	11,922
Change in fair value of warrant liability included in earnings		1,125
Balance at September 30, 2012		2,036
Change in fair value of warrant liability included in earnings		1,182
Balance at December 31, 2012	$	3,218

~~WARRANTS~~Additional -quantitative ~~The~~information about ~~Company~~Level ~~has entered into complex transactions that contain warrants (Notes~~ 3 ~~and~~fair ~~4).~~value Ifmeasurements ~~an instrument (or an embedded feature) that has the characteristics of a derivative instrument~~ is ~~indexed~~discussed ~~to an entity’s own stock, it is still necessary to evaluate whether it is classified~~ in ~~stockholders’~~Note ~~equity (or would be classified in stockholders’ equity if it were a freestanding instrument)~~4. ~~The Company has concluded that the warrants should be classified as liabilities as the settlement of the warrants are not deemed to be in the control of the Company.~~

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). The Company has concluded that the warrants should be classified as liabilities as the exercise price is subject to a weighted average ratchet down provision if the Company subsequently sells shares at a price lower than the then exercise price.

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 net deferred tax since they did not meet the more-likely-than-not threshold.

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

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. Any penalties or interest 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 patient service revenues.

The Company's four Hospitals and related healthcare facilities operate in one geographic region in Orange County, California. There are similarities in the region's economic characteristics and the nature of the Hospitals' operations, the regulatory environment in which they operate and the manner in which they are managed. 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.

NOTE 2 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	December 31,			March 31,
	June 30,			March 31,
	2012			2012
	2013			2013
Buildings	$	36,536		$	3536,~~376~~536
Land and improvements		13,523			13,523
Equipment		2530,~~588~~204			1828,~~268~~534
Construction in progress		–			1,160
Assets under capital leases		13,264			13,267
Assets under capital leases		13,129			11,218
		93,527			91,860
		88,776			79,545
Less accumulated depreciation		(29,976	)		(27,872	)
Less accumulated depreciation		(26,915	)		(24,016	)
Property and equipment, net	$	63,551		$	63,988
Property and equipment, net	$	61,861		$	55,529

~~Equipment~~Accumulated atdepreciation on ~~December~~assets 31 under capital leases as of June 30 and March 31, ~~2012~~2013 ~~includes~~was $116.75 million and $4.6.2 million, respectively~~, relating to the Company’s ongoing development of its new electronic health record technology, which has not been fully placed into service (Note 12)~~.

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 hospital seismic safety requirements. Under these 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 a 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 June 30, 2013.

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.

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

NOTE 3 - DEBT

OnAs August 1, 2012, the Company entered into Amendment No. 4 to Credit Agreement and Consent (the “Credit Agreement Amendment”), which amends the Term Loan Credit Agreement. Under the Credit Agreement Amendment, Silver Point consented to and waived certain provisions under the Term Loan Credit Agreement in connection with the Company’s execution of ~~the~~June ~~Revolving Loan Amendment. In addition~~30, ~~the~~ ~~provisions in the Term Loan Credit Agreement that provide for mandatory prepayment of the Company’s outstanding “A/R Financing~~2013,~~” as defined, upon receipt of certain federal matching funds under the QAF program were amended to replace 65%~~ ~~with 80%. In connection with~~ the ~~Credit Agreement Amendment, the~~ Company ~~agreed~~had ~~to pay Silver Point a one-time consent and amendment fee in an aggregate amount equal to $1.8 million, of which $450 was paid upon execution of~~ the ~~Credit~~following ~~Agreement Amendment and the balance was added to the principal amount under the Term Loan~~ Credit ~~Agreement.~~Agreements:

~~Also~~— onA ~~August~~$47.277 1,million ~~2012, the~~Term ~~Company~~Loan ~~entered~~issued ~~into~~under ~~Amendment~~the No$80.0 3million toRestated Credit ~~and~~Agreement ~~Security~~by ~~Agreement~~and (among the ~~“Revolving~~Company, ~~Loan~~Silver ~~Amendment”)~~Point Finance, ~~which~~LLC ~~amends the~~and ~~Revolving~~its ~~Loan~~affiliate, ~~Agreement.~~SPCP ~~Under~~Group, ~~the~~LLC ~~Revolving~~(together ~~Loan~~with ~~Amendment~~Silver Point Finance, ~~the~~LLC, ~~minimum~~“Silver ~~Revolving~~Point”), ~~Loan~~and ~~Commitment~~PCHI ~~Amount~~and ~~under~~Ganesha ~~the~~Realty, ~~Revolving Loan~~LLC, ~~Agreement~~as ~~was~~Credit ~~increased~~Parties, ~~from~~bearing ~~$14.0~~an ~~million~~interest torate ~~$30.0~~of ~~million~~LIBOR plus 10%, ~~and~~with the ~~Company~~LIBOR ~~agreed~~floor toset ~~pay~~at to2% ~~MidCap~~(12% ~~Funding~~at ~~IV,~~June ~~LLC~~30, as2013). ~~assigned to~~If itany ~~from~~event ~~MidCap~~of ~~Financial,~~default ~~LLC~~occurs and continues, as ~~administrative~~the ~~agent~~lender ~~and~~can aincrease ~~lender,~~the ~~and~~interest ~~Silicon~~rate ~~Valley~~by ~~Bank,~~5% asper ayear. ~~lender (collectively~~As of June 30, 2013, the ~~“Lenders”)~~Company anwas ~~origination~~in ~~fee~~compliance ofwith 1all financial covenants.0% ofThe ~~the~~stated ~~Lenders’~~maturity ~~increased~~date ~~commitment~~for ~~under~~this ~~the~~Restated ~~Revolving~~Credit ~~Loan~~Agreement ~~Amendment~~is April 13, or ~~$160~~2016.

In— ~~addition,~~A ~~pursuant~~$35.0 ~~to the~~million Revolving ~~Loan~~Credit ~~Amendment,~~Agreement ~~the~~by ~~lockbox~~and ~~requirements~~among ~~under~~ the ~~Revolving~~Company ~~Loan~~and ~~Agreement~~MidCap ~~were~~Funding ~~amended~~IV, LLC, as assigned to ~~provide~~it ~~that~~from inMidCap ~~the~~Financial, ~~event the~~LLC, ~~Revolving~~as ~~Loan~~agent ~~Commitment~~and ~~Amounts~~a ~~are~~lender, ~~$30~~bearing an interest rate of 4.025% ~~million~~plus orLIBOR, ~~less~~with ~~during~~a ~~any~~2.5% ~~period~~floor, ~~prior~~per toyear ~~March~~(6.75% 31at June 30, 2013,) orand an unused commitment fee of 0.5% per year ($2010.08 million ~~or less~~outstanding ~~thereafter~~balance ~~(and~~at ~~assuming~~June ~~there~~30, is2013). noFor ~~Event~~purposes of ~~Default~~calculating atinterest, ~~the~~all ~~time),~~payments the Company ~~would~~makes beon ~~permitted~~the toRevolving ~~transfer~~Credit ~~funds~~Agreement ~~that~~ are ~~deposited~~subject ~~into~~to ~~any~~a ~~Lockbox~~five ~~Account,~~business asday ~~defined,~~clearance toperiod. aAs ~~different~~of ~~bank~~June ~~account~~30, ~~designated~~2013, by the Company was in compliance with all financial covenants. The stated maturity date for this Revolving Credit Agreement is March 25, ~~subject~~2016. toAt June 30, 2013, the ~~other terms~~Company ~~and~~had ~~conditions~~$24.2 ~~contained~~million in ~~the~~additional ~~Revolving~~availability ~~Loan~~under ~~Agreement~~this facility.

AsThe ofCompany's ~~December 31, 2012,~~outstanding ~~the~~debt ~~Company~~consists ~~had~~of the following ~~credit facilities~~:

	●	$46.35 million term loan under the Credit Agreement, dated as of October 9, 2007, as amended (the “Term Loan Credit Agreement”), by and among the Company, Silver Point, and PCHI and Ganesha Realty LLC (“Ganesha”), as Credit Parties, bearing a fixed interest rate of 14.5% per year ($46.35 million outstanding balance at December 31, 2012). If any event of default occurs and continues, the lender can increase the interest rate to 19.5% per year.
		June 30, 2013			March 31, 2013
	●	$30.0 million revolving line of credit under the Credit and Security Agreement, dated as of August 30, 2010, as amended (the “Revolving Loan Agreement”), by and among the Company, MidCap Funding IV, LLC, as assigned to it from the Lenders, bearing an interest rate of 5.0% plus LIBOR, with a 2.5% floor, per year (7.5% at December 31, 2012) and an unused commitment fee of 0.625% per year ($28.8 million outstanding balance at December 31, 2012). For purposes of calculating interest, all payments the Company makes on the revolving line of credit are subject to a six business day clearance period. The stated maturity date for this Revolving Loan Agreement is August 30, 2013. At December 31, 2012, the Company had $1.2 million in additional availability under its revolving credit facility.
Current:
Revolving line of credit		$	10,761		$	30,000
Discount			(433	)		(473	)
		$	10,328		$	29,527
Noncurrent:
Term loan		$	47,277		$	47,277
Discount			(1,594	)		(1,747	)
		$	45,683		$	45,530

NOTE 4 - COMMON STOCK WARRANTS

A summary of the warrants outstanding at June 30 and March 31, 2013 is presented as follows.

Shares issuable under warrants

Weighted- average exercise price

Expiration date

Outstanding, June 30 and March 31, 2013

405,000

0.07

April 13, 2016

On April 13, 2010 the Company issued three-year warrants (the “Omnibus Warrants”) to purchase its common stock 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 its Term Loan lender, Silver Point (SPCP Group, LLC and SPCP Group IV, LLC) or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights.

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 its prior lender and a $1.0 million reduction in principal of its outstanding debt, among other benefits to the Company. The Release Warrant also provides the holder with certain pre-emptive, information and registration rights.

On February 7, 2013, in connection with the Restated Credit Agreement, the Company entered into the following transactions involving warrants:

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

The Company’s entered ~~credit~~into ~~facilities~~a ~~contain~~Warrant ~~various~~Repurchase ~~affirmative~~Agreement ~~and~~with ~~negative~~SPCP ~~covenants~~Group ~~and~~IV, ~~customary~~LLC ~~events~~pursuant ofto ~~default,~~which ~~including~~it ~~payment~~repurchased ~~defaults,~~the outstanding common stock warrant ~~breaches~~issued ofto ~~representations~~SPCP ~~and~~Group ~~warranties~~IV, ~~covenant~~LLC ~~defaults~~on or about April 13, ~~cross-defaults~~2010 (the “Cancelled Warrant”). The Cancelled Warrant (part of the Omnibus Warrants) entitled the holder to ~~similar~~purchase ~~obligations,~~an ~~events~~aggregate of ~~bankruptcy~~16.8 ~~and insolvency,~~million ~~judgment~~shares ~~defaults,~~of the ~~invalidity~~Company’s common stock at an exercise price of ~~liens~~$0.07 onper ~~collateral,~~share. ~~and~~The Company repurchased the ~~occurrence~~Cancelled Warrant for a purchase price of ~~events~~$0.12 ~~which~~per ~~have~~share minus the exercise price of $0.07 per share resulting in a ~~material~~net ~~adverse~~purchase price of $0.05 per share multiplied by 16.8 million shares for ~~effect~~an onaggregate ~~the~~purchase ~~Company~~price of $840.9.

AsImmediately following ~~described~~the inwarrant ~~Note 14~~repurchase, the Company ~~entered~~issued ~~into~~a annew ~~Amendment~~common onstock ~~February~~warrant 7,(the ~~2013,~~“New ~~which~~Warrant”) ~~changed~~to ~~the~~SPCP ~~measurement~~Group, ~~period~~LLC for ~~the~~a ~~term~~price ~~loan~~of ~~facility~~$0.05 ~~The~~per ~~next~~share ~~assessment~~(an ~~date~~aggregate ~~for~~price ~~which~~of $840.9) on the ~~Company~~same isterms ~~required~~as tothe ~~comply~~Cancelled ~~with~~Warrant entitling the ~~term~~holder ~~loan~~to ~~financial covenants~~purchase ~~will~~an beaggregate ~~for~~of 16.8 million shares of common stock at an exercise price of $0.07 per share, except that the ~~period~~New ~~ended~~Warrant ~~June~~expires on 30April 13, ~~2013~~2016.

~~The~~Also simultaneous with ~~Company~~the ~~did~~transactions ~~not~~described ~~meet~~above, the ~~financial~~Company ~~covenants~~extended ~~for~~the ~~its~~expiration ~~revolving~~date ~~line~~from ofApril ~~credit~~13, 2013 to April 13, 2016 for the ~~period~~Omnibus Warrants ~~ended~~issued ~~December~~to ~~31,~~KPC ~~2012. Although~~and the ~~Company~~remaining isheld ~~not~~by ~~required~~Silver Point (to ~~report~~purchase ~~compliance~~79.2 ~~with~~million shares) and the ~~financial~~Release ~~covenant~~Warrant ~~for~~issued to ~~its~~Dr. ~~revolving~~Chaudhuri. ~~line~~The extension of ~~credit until~~the 50warrant ~~days~~expiration ~~after~~date ~~the~~was ~~fiscal~~intended ~~quarter~~to ~~end,~~conform the ~~Company~~terms isof ~~seeking~~ the ~~lenders’~~warrants ~~consent~~ to athat ~~potential~~of ~~non-compliance with~~the ~~this~~Restated ~~financial~~Credit ~~covenant~~Agreement.

The Company's ~~outstanding~~assessed the amended credit agreement entered into in August 2012 and February 2013 under the provisions of ASC 470-50 and determined that the debt ~~consists~~amendments should be accounted for as a debt modification. Accordingly, the recorded change in fair value as of February 7, 2013, totaling $534, of the ~~following:~~New Warrant and the Omnibus Warrant held by SPCP Group, LLC was recognized as a component of the debt discount on the Term Loan (Note 3) and will be amortized to interest expense over the term of the debt agreement using the effective interest method.

	December 31,		March 31,
	2012		2012
Current:
Revolving line of credit	$	28,806	$	14,000
Noncurrent:
Term loan	$	46,350	$	45,000

The Omnibus Warrants, the Release Warrant, and the New Warrant are collectively referred to as the “IHHI Warrants.” As of June 30, 2013, the fair value of the IHHI Warrants was $11.9 million.

OnThe ~~February~~gain 7,(loss) ~~2013,~~related to the change in fair value of the Company’s ~~amended~~outstanding ~~its~~ warrants for the three months ended June 30, 2013 and 2012 was $46(6.35 6) million ~~term~~and ~~loan~~$.07 ~~(Note~~million, ~~14)~~respectively.

~~NOTE~~The 4fair value of warrants issued by the Company is estimated using the Black-Scholes ~~COMMON~~valuation ~~STOCK~~model, ~~WARRANTS~~which it 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 its stock and the stock of eight other publicly traded companies that own hospitals.

OnThe ~~April~~risk-free ~~13, 2010, the~~interest ~~Company~~rate ~~issued~~is ~~warrants~~based (on the ~~“Omnibus~~average ~~Warrants”)~~yield toon ~~purchase~~U.S. ~~its~~Treasury ~~common~~notes ~~stock~~with ~~for~~maturity acommensurate ~~period~~with ofthe ~~three~~terms ~~years at an exercise price~~ of ~~$0.07 per share in~~ the ~~following denominations: 139~~warrants.0 ~~million~~The ~~shares to KPC Resolution Company (a company owned and controlled~~dividend byyield ~~Kali~~reflects P.that ~~Chaudhuri, M.D.,~~ the Company’s ~~majority~~has ~~shareholder)~~not orpaid ~~its~~any ~~designees~~cash ~~and~~dividends ~~96.0~~since ~~million~~inception ~~shares~~and todoes ~~the~~not ~~$46.35~~anticipate ~~million term~~paying ~~loan~~cash ~~lender~~dividends ~~or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration~~in ~~rights. On April 13, 2010,~~ the ~~Company~~foreseeable ~~recorded warrant expense and the related warrant liability of $2~~future.~~9 million, representing fair value.~~ AsThe ofassumptions ~~December~~used ~~31,~~in ~~2012,~~ the ~~fair~~Black-Scholes ~~value~~valuation ofmodel ~~the~~are ~~Omnibus~~as ~~Warrants was $1.9 million.~~follows:

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 its 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 December 31, 2012, the fair value of the Release Warrant was $1.3 million.

	June 30, 2013		March 31, 2013

Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.6%		0.4%
Expected volatility		39.8%		39.9%
Expected term (in years)		2.80		3.05

~~The~~NOTE ~~Omnibus~~5 ~~Warrants~~- ~~and the~~INCOME 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 December 31, 2012 and 2011 was $(1,182) and $256, respectively, and $(1,577) and $39 for the nine months ended December 31, 2012 and 2011, respectively.TAXES

The ~~fair~~utilization ~~value~~of net operating loss (“NOL”) and credit carryforwards is limited under the provisions of ~~warrants~~the Internal Revenue Code (“IRC”) ~~issued~~Section by382 and similar state provisions. Section 382 of the ~~Company~~IRC isof ~~estimated~~1986 ~~using~~generally imposes an annual limitation on the ~~Black-Scholes~~amount ~~valuation~~of NOL ~~model,~~carryforwards ~~which~~that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. In fiscal year 2009, the Company ~~believes~~entered isinto the ~~appropriate~~amended ~~valuation~~purchase agreement which resulted in a change in control. The Company ~~method~~conducted ~~under~~an ~~the~~analysis ~~circumstances~~and determined that it is subject to significant IRC Section 382 limitations. ~~Since~~For both Federal and State tax purposes, the Company’'s ~~stock~~utilization of NOL and credit carryforwards is ~~thinly~~subject ~~traded,~~to significant IRC Section 382 limitations. The Company evaluates its ability to utilize the ~~expected~~net ~~volatility~~operating islosses ~~based~~each onperiod anwith ~~analysis~~regard to the limitations imposed under IRC 382 and also considering the continuing expiration of statutes of limitation for prior years; and in the ~~Company's~~prior ~~stock~~year determined that a portion of the federal and state net operating losses were no longer realizable, and removed from the ~~stock~~schedule of ~~eight~~ ~~other~~deferreds those ~~publicly~~net ~~traded~~operating ~~companies~~losses ~~that~~in ~~own~~excess ~~hospitals~~of the IRC 382 limitation and also considering prior years statutes now closed.

The difference between the reported income tax provision and the amount computed by multiplying income (loss) before income tax provision in the accompanying unaudited condensed consolidated statements of operations for the three months ended June 30, 2013 and 2012 by the statutory federal income tax rate primarily relates to the impact of the valuation allowance reserving certain net deferred assets, permanently nondeductible expenses, state and local income taxes, and variable interest entity.

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

The ~~risk-free interest~~ ~~rate~~application isof ~~based~~FASB onInterpretation ~~the~~Number ~~average~~18 ~~yield~~requires onthe ~~U.S.~~Company ~~Treasury~~to ~~notes~~compute ~~with~~the ~~maturity~~interim ~~commensurate~~period income ~~with~~tax ~~the~~provision ~~terms~~(benefit) ofby applying the ~~warrants.~~estimated ~~The~~annual ~~dividend yield~~effective ~~reflects~~tax ~~that~~rate to the ~~Company~~loss ~~has~~from ~~not~~continuing ~~paid~~operations ~~any~~for ~~cash~~the three ~~dividends~~months ~~since~~ended ~~inception~~June ~~and~~30, ~~does~~2013, ~~not~~which ~~anticipate~~resulted ~~paying cash dividends~~ in the ~~foreseeable~~recognition ~~future. The~~of ~~assumptions~~a ~~used~~tax inexpense for the ~~Black-Scholes~~three ~~valuation~~months ~~model~~ended ~~are~~June as30, ~~follows~~2013.

	December 31, 2012		March 31, 2012
Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.1%		0.2%
Expected volatility		32.5%		57.3%
Expected term (in years)		0.28		1.04

The Company evaluated its historical and projected sources of income to determine the extent to which the net deferred tax assets projected at June 30, 2013 could be realized and, based on this analysis, the Company concluded that there was not sufficient positive evidence to support further realization of its net deferred tax assets, and therefore, as of June 30, 2013, will maintain a 100% valuation allowance against its net deferred assets.

OnPCHI ~~February~~TAX 7,STATUS ~~2013,~~– PCHI ~~the~~is ~~Company~~a ~~amended~~limited ~~its~~liability ~~$46~~company.35 ~~million term~~PCHI's ~~loan~~taxable income or loss will flow through to its owners and inbe ~~connection~~their ~~therewith~~separate ~~extended~~responsibility. Accordingly, the ~~term~~accompanying ofunaudited condensed consolidated financial statements do not include any amounts for the income tax expense or benefit, or liabilities related ~~warrants~~to ~~(Note~~PCHI's ~~14)~~income or loss.

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 nine months ended December 31, 2012 and 2011 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 nine months ended December 31, 2012 which resulted in the recognition of a tax benefit for the nine months ended December 31, 2012.

The Company evaluated its historical and projected sources of income to determine the extent to which the net deferred tax assets projected at December 31, 2012 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 December 31, 2012.

The Company’s California Enterprise Zone credits were recently examined by the California taxing authority, which issued a Notice of Proposed Adjusted Carryover Amount. The Company has filed a Protest requesting an oral hearing with the taxing authority. The Protest is currently pending review by the taxing authority. As a result of the examination, during the year ended March 31, 2011, 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~~ 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 ~~December~~June 3130, ~~2012~~2013, the maximum aggregate number of shares under the Plan was 2326.51 million. The Company ~~believes~~ believes that such awards better align the interests of its employees with those of its shareholders. In accordance with the Plan, ~~incentive~~ 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~~ 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.

No options were granted or exercised during the three months ended June 30, 2013 and 2012. All outstanding options were fully vested as of June 30 and March 31, 2013.

A summary of stock option activity for the three months ended June 30, 2013 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, 2013	7,595		$	0.18
Granted	–		$	–	$	–
Exercised	–		$	–
Forfeited or expired	(10	)	$	0.26
Outstanding, June 30, 2013	7,585		$	0.18			1.4	$	–
Exercisable at June 30, 2013	7,585		$	0.18			1.4	$	–

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

No options were granted or exercised during the three and nine months ended December 31, 2012 and 2011. All outstanding options were fully vested as of December 31 and March 31, 2012.

A summary of stock option activity for the nine months ended December 31, 2012 is presented as follows.

	Shares		Weighted- averageexerciseprice		Weighted-averagegrant datefair value		Weighted- average remaining contractual term (years)		Aggregate intrinsic value
Outstanding, March 31, 2012		8,235	$	0.18
Granted		–	$	–	$	–
Exercised		–	$	–
Forfeited or expired		(620)	$	0.27
Outstanding, December 31, 2012		7,615	$	0.18			1.9	$	–
Exercisable at December 31, 2012		7,615	$	0.18			1.9	$	–

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 ~~December~~June 3130, ~~2012~~2013 and ~~2011~~2012, the Company incurred expenses of $~~0.8~~750 and $~~0.8 million~~804, respectively~~, and $2~~.~~4 million and $2.4 million for the nine months ended December 31, 2012 and 2011, respectively. These~~ These costs are included in salaries and benefits in the accompanying unaudited condensed consolidated statements of operations. At ~~December~~June 3130 and March 31, ~~2012~~2013, accrued compensation and benefits in the accompanying unaudited condensed consolidated balance ~~sheets~~ sheets included $31.27 million and $34.91 million, respectively, in accrued employer contributions.

NOTE 8 - INCOME (LOSS) PER 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.

~~Income~~Since ~~per~~the ~~share~~Company incurred a loss for the three ~~and nine~~ months ended ~~December~~June 3130, ~~2011~~2012, ~~was~~the ~~computed~~potential asshares ~~shown~~of ~~below.~~common ~~Stock~~stock ~~options~~consisting ~~and~~of ~~warrants~~approximately ~~aggregating~~413 ~~approximately~~million shares ~~411~~issuable ~~and~~under ~~412~~warrants ~~million~~and ~~shares~~stock options were not included in the diluted calculations since they were anti-dilutive.

Income per share for the three months ended June 30, 2013 was computed as shown below. Stock options and warrants aggregating approximately 411 million shares were not included in the diluted calculation since they were anti-dilutive.

	Three months ended June 30,
	2013		2012
Numerator:
Net income attributable to
Integrated Healthcare Holdings, Inc.	$	45,403	$	(3,474	)

Denominator:
Weighted average common shares		255,307		255,307
Dilutive options		1,852		–
Denominator for diluted calculation		257,159		255,307

Income per share - basic	$	0.18	$	(0.01	)
Income per share - diluted	$	0.18	$	(0.01	)

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 $47.277 million term loan. The Company remains primarily liable as the borrower under the $47.277 million term loan notwithstanding its guarantee by PCHI. The $47.277 million term 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 June 30, 2013, PCHI was owned 51% by various physician investors and 49% by Ganesha, which is managed by Dr. Chaudhuri (majority stockholder in the Company).

The Company entered into a lease agreement dated March 7, 2005 (amended and restated as of April 13, 2010) under which it leased back from PCHI all of the real estate that it transferred to PCHI (Note 13). The amended lease terminates on the 25-year anniversary of the original lease (March 7, 2005), grants the Company the right to renew for one additional 25-year period, and requires combined annual base rental payments of $8.3 million for all the properties. However, until PCHI refinances the related $47.277 million term loan, the annual base rental payments are reduced to $7.3 million. In addition, the Company offsets, against its rental payments owed to PCHI, interest payments that it makes on the related $47.277 million term loan. Lease payments to PCHI and offsetting interest payments are eliminated in consolidation.

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

	Three months ended		Nine months ended
	December 31, 2011		December 31, 2011
Numerator:
Net income attributable to Integrated Healthcare Holdings, Inc.	$	12,542	$	10,179
Denominator:
Weighted average common shares		255,307		255,307
Dilutive options		1,532		1,541
Denominator for diluted calculation		256,839		256,848
Income per share - basic	$	0.05	$	0.04
Income per share - diluted	$	0.05	$	0.04

Since the Company incurred a loss for the three and nine months ended December 31, 2012, the potential shares of common stock consisting of approximately 411 and 413 million shares, respectively, issuable under warrants and stock options were not included in the diluted calculations since they were anti-dilutive.

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 $46.35 million term loan. The Company remains primarily liable as the borrower under the $46.35 million term loan notwithstanding its guarantee by PCHI. The $46.35 million term 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 December 31, 2012, PCHI was owned 51% by various physician investors and 49% by Ganesha, which is managed by Dr. Chaudhuri.

The Company entered into a lease agreement dated March 7, 2005 (amended and restated as of April 13, 2010) under which it leased back from PCHI all of the real estate that it transferred to PCHI (Note 13). The amended lease terminates on the 25-year anniversary of the original lease (March 7, 2005), grants the Company the right to renew for one additional 25-year period, and requires combined annual base rental payments of $8.3 million for all the properties. However, until PCHI refinances the related $46.35 million term loan, the annual base rental payments are reduced to $7.3 million. In addition, the Company offsets, against its rental payments owed to PCHI, interest payments that it makes on the related $46.35 million term loan. Lease payments to PCHI and offsetting interest payments are eliminated in consolidation.

GAAP defines variable interest entities (“VIE”) as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. Then, for entities identified as a VIE, the guidance sets forth a model to a primary beneficiary based on an assessment of which party to a VIE, if any, bears a majority of the exposure to expected losses, or stands to gain from a majority of its expected returns and has the power to direct activities of the VIE that impacts economic performance. The primary beneficiary of a VIE should consolidate the VIE.

The Company determined that it provides the majority of financial support to PCHI through various sources including lease payments, remaining primarily liable under the $4647.35277 million term loan, and cross-collateralization of the Company's non-real estate assets to secure the $4647.35277 million term loan. The Company concluded that PCHI is a VIE and it is the primary beneficiary. Accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(UNAUDITED)

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

	December 31, 2012			March 31, 2012
	June 30, 2013			March 31, 2013
Cash	$	64252		$	68147
Property, net		4039,~~018~~374			4039,~~984~~696
Other		~~1,009~~119			~~207~~49
Total assets	$	4139,~~091~~745		$	4139,~~259~~892
Debt (as guarantor)	$	46,350		$	45,000
Debt ($47,277, net of discount) (as guarantor)	$	45,683		$	45,530
Other		~~541~~442			~~641~~488
Total liabilities		46,~~891~~125			4546,~~641~~018
Deficiency		(56,~~800~~380	)		(46,~~382~~126	)
Total liabilities and accumulated deficit	$	4139,~~091~~745		$	4139,~~259~~892

As noted above, PCHI is is a guarantor on the $4647.35277 million term loan should the Company not be able to perform. PCHI's total liabilities ~~represent~~ represent the Company's maximum exposure to loss. Additionally, the Company is responsible for seismic remediation under the terms of the lease agreement (Notes 2 and 13).

PCHI rental income ~~and~~ and the Company’s related rental expense of $12.90 million and $12.90 million were eliminated upon consolidation for the three ~~months~~ ~~ended December 31, 2012 and 2011, respectively, and $5.8 and $5.6 million for the nine~~ months ended ~~December~~June 3130, ~~2012~~2013 and ~~2011~~2012, respectively.

NOTE 10 - RELATED PARTY TRANSACTIONS

The Company leases ~~substantially~~ 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 ~~December~~June 3130 and March 31, ~~2012~~2013, Dr. Chaudhuri and Mr. ~~William E.~~ Thomas are the beneficial holders of 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 the Company is the primary beneficiary, accordingly, the Company has consolidated the financial statements of PCHI in the accompanying unaudited condensed consolidated financial statements.

NOTE 11 - HOSPITAL QUALITY ASSURANCE FEES (“QAF”)

In October 2009, the ~~Governor~~ 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~~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”). In February 2011, CMS gave final approval for the 2010 QAF. During fiscal year 2011, the Company recognized $87.2 million in revenue and recorded expenses of $47.8 million relating to the 2010 QAF.

In December 2011, CMS gave final approval for the extension of the QAF for the period from January 1 through June 30, 2011 (“2011 QAF”). Accordingly, for the three and nine months ended December 31, 2011 the Company recognized $31.9 million in revenue and recorded expenses of $15.9 million relating to the 2011 QAF. 17

In June 2012, CMS conditionally approved the extension of the QAF for the thirty month period from July 1, 2011 through December 31, 2013 (“2013 QAF”). In June 2012, the California State Legislature amended the hospital fee statute to recognize separate CMS approval of the fee-for-service portion and managed care portion of the 2013 QAF, which was further clarified in legislation approved by the governor of California in September 2012. As a result, during the three and nine months ended December 31, 2012, the Company recognized revenue of $7.8 million and $46.5 million and expenses of $6.9 million and $45.3 million relating to the fee-for-service portion of the 2013 QAF for the periods from October 1, 2012 through December 31, 2012 and July 1, 2011 through December 31, 2012, respectively.

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

~~Based on~~In ~~the~~December ~~most~~2011, ~~recent~~CMS gave ~~modeling~~final ~~prepared~~approval byfor the ~~California~~extension ~~Hospital~~of ~~Association,~~ the ~~Company~~QAF ~~anticipates making payments~~ for ~~provider fees~~the ~~and~~nine ~~other~~month ~~expenses~~period ~~relating~~from toJanuary ~~the~~1 ~~2013~~through ~~QAF~~June of30, ~~approximately~~2011 ~~$105~~(“2011 QAF”).8 Accordingly, ~~million~~for ~~and~~the ~~receiving~~year ~~approximately~~ended ~~$235.5~~March ~~million~~31, ~~in revenues~~2012 ~~from~~ the ~~State~~Company (recognized $7931.49 million ~~from~~in ~~the~~revenue ~~fee-for-service portion~~ and recorded expenses of $~~156~~15.19 million relating ~~from~~to the ~~managed~~2011 ~~care portion)~~QAF.

~~The~~In ~~Company~~June ~~cannot~~2012, ~~provide~~CMS conditionally ~~any~~approved ~~assurances~~the orextension ~~estimates~~of inthe ~~connection~~QAF ~~with~~for ~~CMS’s~~the ~~final~~thirty month period from July 1, 2011 through December 31, 2013 (“2013 QAF”). In June 2012, the California State Legislature amended the hospital fee statute to recognize separate CMS approval of the fee-for-service portion and managed care portion of the 2013 QAF, orwhich was further clarified in legislation approved by the governor of California in September 2012. As a ~~possible~~result, ~~continuation~~during the year ended March 31, 2013, the Company recognized revenue of $54.2 million and expenses of $52.5 million relating to the 2013 QAF ~~program~~ ~~beyond~~for ~~December~~the periods from July 1, 2011 through March 31, 2013.

In May 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2011 through June 30, 2012. On June 26, 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2012 through June 30, 2013. As a result, during the three months ended June 30, 2013, the Company recognized revenue of $142.2 million and expenses of $33.5 million relating to the 2013 QAF for the periods from July 1, 2011 through June 30, 2013.

Through June 30, 2013, the Company has recorded $196.4 million in revenues and incurred $86.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, the Company anticipates recording approximately $47.1 million in revenues and incurring approximately $21.2 million in provider fees and other expenses.

The Company cannot provide any assurances or estimates in connection with CMS’s final managed care approval of the 2013 QAF (for the period from July 1, 2013 to December 31, 2013) or a possible continuation of the QAF program beyond December 31, 2013.

NOTE 12 – ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM

Provisions of the American Recovery and Reinvestment Act of 2009 provide incentive payments for the adoption and meaningful use of certified electronic health record (EHR) technology. The Medicare EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) that are meaningful users of certified EHRs. The Medicaid EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) for efforts to adopt, implement, upgrade, or ~~meaningfully~~meaningful use of certified EHR technology.

CMS has established the final rule which requires eligible providers in their first year of participation in the Medicaid incentive payment program to demonstrate that they have adopted (acquired, purchased, or secured access to), or implemented, or upgraded to certified EHR technology in order to qualify for an incentive payment. During the second and subsequent years of the program, eligible providers are required to meet other criteria, including meaningful use, to receive additional funds. The Company has been awarded a total amount of $13.6 million under the Medicaid EHR incentive program, which will be earned and received over a four year period. The Company adopted certified EHR technology and it recognized other income of $6.8 million relative to the first year under the Medicaid EHR incentive program during fiscal year 2012.

NOTE 13 - 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. During the three months ended December 31, 2012 the Company commenced conversion of one of its facilities to the McKesson system and is concurrently completing testing and developing system applications where necessary.18

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. The base rent is subject to an annual Consumer Price Index increase on January 1 of each year; such increase shall not be less than 2% or more than 6% per year. As a result, the annual base rent as of January 1, 2012 is $7.7 million. If PCHI refinances the $46.35 million term 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 $7.2 million and $6.2 million are included in the accompanying unaudited condensed consolidated balance sheets as of December 31 and March 31, 2012, respectively. Interest rates used in computing the net present value of the lease payments are based on the interest rates implicit in the leases.

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

~~INSURANCE -~~ The agreements will ~~Company~~initially ~~accrues~~run for ~~estimated~~a ~~general~~period ~~and~~of ~~professional~~five ~~liability claims~~years, toand the ~~extent~~recurring ~~not~~services ~~covered~~may bybe ~~insurance,~~renewed ~~when~~by ~~they are~~the ~~probable~~Company ~~and~~for ~~reasonably~~successive ~~estimable~~periods. The agreements ~~Company~~do ~~has~~not ~~purchased~~provide asthat ~~primary~~they ~~coverage~~may abe ~~claims-made~~terminated ~~form~~by ~~insurance~~the ~~policy~~Company ~~for general~~prior ~~and~~to ~~professional~~the ~~liability~~initial ~~risks~~expiration date. The ~~Estimated losses within general and professional liability retentions from claims~~agreements ~~incurred~~provide ~~and~~for ~~reported,~~one-time ~~along~~fees ~~with incurred but not reported (“IBNR”) claims, are accrued based upon projections~~ and ~~are~~recurring ~~discounted~~fees towhich ~~their~~aggregate ~~net present value using~~ a ~~weighted~~total ~~average~~of ~~risk-free~~$22.0 ~~discount~~million. Approximately ~~rate~~60% of ~~5%. To~~ the ~~extent that~~fees ~~subsequent~~are ~~claims~~for ~~information~~one-time ~~varies from estimates~~charges, while the ~~liability~~balance is ~~adjusted~~for inrecurring ~~the period such information becomes available~~services. As of ~~December~~June ~~31 and March 31~~30, ~~2012,~~2013 the Company ~~had~~completed ~~accrued~~conversion ~~$9.3 million and $11.5 million, respectively, which~~of isall ~~comprised~~ of ~~$4.2~~its ~~million~~facilities ~~and~~to ~~$4.5~~the ~~million,~~McKesson ~~respectively, in incurred and reported claims, along with $5~~system.1 ~~million~~The ~~and $7.0~~Company ~~million,~~is ~~respectively,~~also incontinuing ~~estimated~~to ~~IBNR.~~test ~~Estimated insurance recoveries of $2.7 million~~ and ~~$3.0~~develop ~~million~~system ~~are~~applications ~~included in~~where ~~other prepaid expenses and current assets as of December 31 and March 31, 2012, respectively~~necessary.

~~The~~OPERATING ~~Company~~LEASES ~~has also purchased~~AND ~~occurrence~~LONG ~~coverage~~TERM ~~insurance~~LEASE toCOMMITMENT ~~fund~~WITH ~~its~~VARIABLE ~~obligations~~INTEREST ~~under~~ENTITY ~~its~~– ~~workers~~On ~~compensation~~April ~~program.~~13, ~~The~~2010, the Company ~~has~~and aPCHI ~~"paid~~entered ~~loss plan"~~into ~~policy,~~a ~~under~~Second Amendment ~~which~~to ~~the~~Amended ~~carrier~~and ~~pays~~Restated ~~all~~Triple ~~workers~~Net ~~compensation~~Hospital ~~claims,~~Building ~~with~~Lease no(the ~~deductible~~“2010 orLease ~~reimbursement required of~~Amendment”). Under the ~~Company.~~2010 ~~The~~Lease ~~Company~~Amendment, ~~accrues~~the ~~for~~annual ~~estimated~~base ~~workers~~rent ~~compensation claims,~~ to ~~the~~be ~~extent~~paid ~~not covered~~ by ~~insurance,~~the ~~when~~Company ~~they~~to ~~are probable~~PCHI ~~and~~was ~~reasonably~~increased ~~estimable~~from $5.4 ~~The~~million ~~ultimate costs related~~ to ~~this~~$7.3 ~~program include expenses for deductible amounts associated~~million. ~~with~~The ~~claims~~base ~~incurred~~rent ~~and~~is ~~reported~~subject ~~in addition~~ to an ~~accrual~~annual ~~for~~Consumer ~~the~~Price ~~estimated~~Index ~~expenses~~increase ~~incurred~~on inJanuary ~~connection~~1 ~~with~~of ~~IBNR~~each ~~claims. Claims~~year; ~~are~~such ~~accrued~~increase ~~based~~shall ~~upon~~not ~~projections~~be ~~and are discounted to their net present value using a weighted average risk-free discount~~less ~~rate~~than ~~of 5~~2%. Toor ~~the~~more ~~extent~~than ~~that~~6% ~~subsequent~~per ~~claims~~year. ~~information~~The ~~varies~~annual ~~from~~base ~~estimates,~~rent ~~the liability~~ is ~~adjusted~~currently in$7.8 ~~the period such information becomes available~~million. AsIf ofPCHI ~~December~~refinances ~~31 and March 31, 2012,~~ the ~~Company had accrued~~ $~~593~~47.277 ~~and~~million ~~$673,~~term ~~respectively~~loan, ~~comprised~~ ofthe ~~$282~~annual ~~and~~base ~~$338,~~rent ~~respectively,~~will inincrease ~~incurred~~to ~~and~~$8.3 ~~reported~~million. ~~claims,~~This ~~along~~lease commitment with ~~$311~~PCHI ~~and~~is ~~$335,~~eliminated ~~respectively,~~ in ~~estimated IBNR~~consolidation.

CAPITAL LEASES - In connection ~~addition~~with the Acquisition, the Company ~~has~~ aalso ~~self-insured~~assumed ~~health~~the ~~benefits~~leases ~~plan~~ for ~~its~~the ~~employees.~~Chapman ~~As a result~~facility, ~~the~~which ~~Company~~include ~~has~~buildings ~~established~~ and ~~maintains an accrual for~~land ~~IBNR~~with ~~claims~~terms ~~arising~~that ~~from~~were ~~self-insured~~extended ~~health~~concurrently ~~benefits~~with ~~provided~~the toassignment ~~employees.~~of ~~The~~the ~~Company's~~leases ~~IBNR~~to ~~accruals at~~ December 31 ~~and March 31~~, ~~2012 were based upon projections~~2023. The Company ~~determines~~leases ~~the adequacy of this accrual by evaluating its limited historical~~equipment ~~experience~~under ~~and~~capital ~~trends~~leases ~~related~~expiring toat ~~both~~various ~~health~~dates ~~insurance~~through ~~claims~~2017. ~~and~~Assets ~~payments,~~under ~~information~~capital ~~provided~~leases bywith ~~its~~a ~~insurance~~net ~~broker~~book ~~and~~value ~~third party~~of ~~administrator, and industry experience and trends~~$6.7 ~~The accrual is an estimate~~ million and ~~is subject to change~~$7.1 ~~Such~~million ~~change~~are ~~could be~~included ~~material~~in to the ~~Company's~~accompanying unaudited condensed consolidated ~~financial~~balance ~~statements.~~sheets Asas of ~~December~~June 3130 and March 31, ~~2012~~2013, respectively. Interest rates used in computing the ~~Company had~~net ~~accrued~~present ~~$2.0~~value ~~million~~of ~~and~~the ~~$2.2~~lease ~~million,~~payments ~~respectively,~~are based on the interest rates implicit in ~~estimated~~the ~~IBNR~~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 ~~also~~ purchased as primary coverage a claims-made form insurance policy for general ~~umbrella~~and professional liability ~~policies~~risks. Estimated losses within general and professional liability retentions from claims incurred and reported, along with ~~aggregate~~incurred ~~limits~~but ofnot ~~$25~~reported ~~million~~(“IBNR”) claims, are accrued based upon projections and are discounted to their net present value using an interest rate of 5.0%. ~~The~~To ~~umbrella~~the ~~policies~~extent ~~provide~~that ~~coverage~~subsequent claims information varies from estimates, the liability is adjusted in ~~excess~~the period such information becomes available. As of June 30 and March 31, 2013, the ~~primary~~Company had accrued ~~layer~~$11.5 million and ~~applicable~~$10.6 ~~retentions~~million, ~~for~~respectively, ~~insured~~which ~~liability~~is ~~risks~~comprised ~~such~~of as$5.8 ~~general~~million and ~~professional~~$5.5 ~~liability~~million, ~~auto~~respectively, ~~liability~~in incurred and reported claims, along with $5.7 million and ~~workers~~$5.1 million, respectively, in estimated IBNR. Estimated insurance recoveries of $2.3 ~~compensation~~million ~~(employers~~and ~~liability)~~$2.1 million are included in other prepaid expenses and current assets as of June 30 and March 31, 2013, respectively.

AsThe ofCompany ~~December~~has 31purchased statutory coverage insurance to fund its obligations under its workers compensation program. The Company has a large deductible rating plan program. The workers compensation program is a prefunded program, ~~2012~~subject to a $250 deductible, per occurrence/loss ~~the~~limit. ~~Company~~The ~~finances~~prefunded ~~various~~program ~~insurance~~is ~~policies~~subject atto an ~~interest~~annual ~~rate~~adjustment ofuntil ~~4.39%~~all ~~per~~losses ~~annum~~are closed. The Company ~~incurred~~accrues ~~finance~~for ~~charges~~estimated workers ~~relating~~compensation claims, to the extent not covered by insurance, when they are probable and reasonably estimable. The ultimate costs related to ~~such~~this ~~policies~~program ofinclude $7expenses for deductible amounts associated with claims incurred and $7reported in addition to an accrual for the ~~three~~estimated ~~months~~expenses ~~ended~~incurred ~~December~~in ~~31,~~connection ~~2012~~with ~~and~~IBNR ~~2011,~~claims. ~~respectively,~~Claims ~~and~~are ~~$32~~accrued based upon projections and are ~~$32~~discounted ~~for~~to their net present value using an interest rate of 5.0%. To the ~~nine months~~extent ~~ended~~that ~~December~~subsequent ~~31,~~claims ~~2012~~information ~~and~~varies from ~~2011~~estimates, ~~respectively~~the liability is adjusted in the period such information becomes available. As of ~~December~~June 3130 and March 31, ~~2012~~2013, the Company ~~accompanying~~had ~~unaudited~~accrued ~~condensed consolidated~~$470 ~~balance~~and ~~sheets~~$500, ~~include~~respectively, ~~the~~comprised ~~following~~of ~~balances~~$195 ~~relating~~and to$200, ~~the~~respectively, ~~financed~~in ~~insurance~~incurred ~~policies~~and reported claims, along with $275 and $300, respectively, in estimated IBNR.

	December 31, 2012		March 31, 2012
Prepaid insurance	$	741	$	366
Accrued insurance premiums	$	197	$	–
(Included in other current liabilities)

In addition, the Company has a self-insured health benefits plan for its employees. As a result, the Company has established and maintained an accrual for IBNR claims arising from self-insured health benefits provided to employees. The Company’s IBNR accruals at June 30 and March 31, 2013 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 June 30 and March 31, 2013, the Company had accrued $1.9 million and $1.9 million, respectively, in estimated IBNR.

~~CLAIMS~~The ~~AND~~Company ~~LAWSUITS~~has ~~– The~~also ~~Company~~purchased ~~and~~excess ~~the~~liability ~~Hospitals~~policies ~~are~~with ~~subject~~aggregate tolimits ~~various legal proceedings, most~~ of ~~which~~$25 ~~relate to routine matters incidental to operations~~million. The ~~results~~excess ofliability ~~these~~policies ~~claims~~provide ~~cannot~~coverage ~~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,~~excess ~~results~~ of ~~operations, or cash flows. Although~~ the ~~Company~~primary ~~defends~~layer ~~itself vigorously against claims~~ and ~~lawsuits~~applicable ~~and~~retentions ~~cooperates with~~for ~~investigations,~~insured ~~these~~liability ~~matters~~risks ~~(1)~~such ~~could~~as ~~require~~general ~~payment~~and ofprofessional ~~substantial damages or amounts in judgments or settlements~~liability, ~~which individually~~auto ~~or in the aggregate could exceed amounts~~liability, ~~if any, that may be recovered under insurance policies where coverage applies~~ and isworkers ~~available,~~compensation (2)employers ~~cause substantial expenses to be incurred, (3~~liability) ~~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.~~

20As of June 30, 2013, the Company finances various insurance policies at an interest rate of 4.1% per annum. The Company incurred finance charges relating to such policies of $11.2 and $12.1 for the three months ended June 30, 2013 and 2012, respectively. As of June 30 and March 31, 2013, the accompanying unaudited condensed consolidated balance sheets include the following balances relating to the financed insurance policies.

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2012~~2013

(UNAUDITED)

Fitzgibbons v. IHHI

	June 30, 2013		March 31, 2013

Prepaid insurance	$	1,941	$	115

Accrued insurance premiums	$	–	$	69
(Included in other current liabilities)

~~The~~CLAIMS AND LAWSUITS ~~second~~– The ~~phase~~Company ofand ~~trial~~the ~~before~~Hospitals aare ~~jury~~subject ~~commenced~~to onvarious ~~January~~legal 22proceedings, ~~2013.~~most ~~When~~of ~~submitted~~which relate to ~~the~~routine ~~jury,~~matters ~~three~~incidental to ~~of Dr~~operations. ~~Fitzgibbons’~~ ~~four~~The ~~original~~results ~~causes~~ of ~~action~~these ~~had~~claims ~~been~~cannot ~~dismissed~~be predicted, ~~leaving~~and ~~the~~it ~~jury~~is topossible ~~decide~~that ~~Dr.~~the ~~Fitzgibbons’~~ultimate ~~claim~~resolution of these matters, ~~for~~individually ~~intentional~~or ~~infliction~~in ofthe ~~emotional~~aggregate, ~~distress.~~may Onhave ~~February~~a 8,material ~~2013~~adverse ~~the~~effect ~~jury~~on ~~returned~~the aCompany's ~~verdict~~business (both in ~~Dr.~~the ~~Fitzgibbons’ favor~~near ~~for~~and ~~$5.2~~long ~~million.~~term), financial ~~The~~position, ~~jury~~results isof ~~scheduled~~operations, toor ~~consider~~cash ~~whether~~flows. toAlthough ~~award~~the ~~any~~Company ~~additional~~defends ~~sum~~itself asvigorously ~~punitive~~against ~~damages~~claims onand ~~February~~lawsuits ~~13,~~and ~~2013.~~cooperates ~~The~~with ~~Company~~investigations, ~~has~~these ~~reserved~~matters ~~the~~(1) ~~contingent~~could ~~loss~~require aspayment of ~~December~~substantial ~~31,~~damages ~~2012.~~or ~~Management~~amounts ~~currently~~in isjudgments ~~unable~~or ~~to estimate~~settlements, ~~unfavorable~~which ~~outcomes~~individually ofor in the ~~punitive~~aggregate ~~damages~~could ~~hearing~~exceed ~~beyond~~amounts, ~~the~~if ~~amount~~any, ~~accrued.~~that ~~Accordingly,~~may ~~management~~be ~~cannot~~recovered ~~express~~under ~~an opinion~~insurance aspolicies towhere ~~the~~coverage applies ~~ultimate~~and ~~amount~~is available, if(2) ~~any~~cause substantial expenses to be incurred, of(3) require significant time and attention from the Company’'s ~~liability~~ management, ~~nor~~and is(4) itcould ~~possible~~cause the Company to ~~estimate~~close ~~what~~or sell the Hospitals or otherwise modify the way its business is conducted. ~~litigation-related~~The ~~costs~~Company ~~will~~accrues befor inclaims ~~future~~and ~~periods~~lawsuits when an unfavorable outcome is probable and the amount is reasonably estimable.

There have been no ~~other~~ material developments in the matters identified in the Company’s Form 10-K filed with the SEC on June 2228, ~~2012~~2013.

~~NOTE 14 – SUBSEQUENT EVENTS~~20

Amendment to Credit Agreement with Silver Point

On February 7, 2013, Integrated Healthcare Holdings, Inc. (“IHHI”) and its subsidiaries WMC-A, Inc., WMC-SA, Inc., Chapman Medical Center, Inc. and Coastal Communities Hospital, Inc. (together with IHHI, the “Company”), entered into an “Amendment and Restatement to the Credit Agreement” (the “Amendment”) with SPCP Group IV, LLC, SPCP Group, LLC, and Silver Point Finance, LLC, as the Lender Agent (collectively, the “Silver Point Entities”), Pacific Coast Holdings Investment, LLC (“PCHI”) and Ganesha Realty, llc (“Ganesha”).

Under the Amendment, the $80,000,000 Credit Agreement, dated as of October 9, 2007, as amended, to which IHHI and the Silver Point Entities are parties (the “Credit Agreement”) was amended and restated in its entirety in the form of the “Amended and Restated Credit Agreement ($47,277,000 Term Loan)” attached as Exhibit A to the Amendment (the “Restated Credit Agreement”). The Restated Credit Agreement reflects changes to the terms of the Credit Agreement that were previously made under various amendments entered into by the Company since inception of the Credit Agreement in October 2007.

In addition, the following new amendments were made to the Credit Agreement and reflected in the Restated Credit Agreement:

· The Stated Maturity Date was extended to April 13, 2016. The Credit Agreement was previously due to mature on April 13, 2013.

· The annual interest rate applicable to the loans under the Credit Agreement was modified from the previous fixed rate of 14.5% to LIBOR plus 10%, with the LIBOR floor set at 2% (the effective interest rate is currently 12%), except upon an Event of Default. The Company may elect from one, two or three months LIBOR interest periods, except in an Event of Default when the interest period may not exceed one month.

· The principal balance under the Credit Agreement was increased from $46,350,000 to $47,277,000 to reflect new borrowings by the Company under the Restated Credit Agreement.

· The Company repaid all amounts owing to SPCP Group IV, LLC under the Credit Agreement, consisting of a principal balance of $8,119,634 plus accrued interest of $19,622, and increased the principal amount owing to SPCP Group, LLC under the Credit Agreement by $9,046,634 to reflect the repayment to SPCP Group IV, LLC and other new borrowings.

· The financial covenants applicable to the Company under the Credit Agreement were amended, including the covenants requiring the Company to maintain minimum levels of EBITDA (as defined in the Restated Credit Agreement).

· Upon receipt by the Company of enhanced federal matching funds from Medi-Cal under the Quality Assurance Fee Program (defined as “Net QAF Funds” under the Restated Credit Agreement), the Company is required to make certain prepayments of principal under its Revolving Loan Agreement with MidCap Financial, LLC.

· A prepayment fee was established for voluntary prepayments under the Credit Agreement equal to 5% for prepayments made on or prior to December 31, 2013, and 2% for prepayments made after January 1, 2014 and before December 31, 2014.

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(UNAUDITED)

Warrant Transactions

In connection with the Amendment, on February 7, 2013, IHHI entered into the following transactions involving warrants:

IHHI entered into a Warrant Repurchase Agreement with SPCP Group IV, LLC pursuant to which IHHI repurchased the outstanding Common Stock Warrant issued to SPCP Group IV, LLC on or about April 13, 2010 (the “Cancelled Warrant”). The Cancelled Warrant entitled the holder to purchase an aggregate of 16,817,365 shares of IHHI Common Stock at an exercise price of $0.07 per share. The Cancelled Warrant was repurchased by IHHI for a purchase price of $0.12 per share minus the exercise price of $0.07 per share, or a net purchase price of $0.05 per share, multiplied by 16,817,365 shares exercisable under the Warrant, or an aggregate purchase price of $840,868.25.

Immediately following the warrant repurchase, IHHI issued a new Common Stock Warrant to SPCP Group, LLC for a price of $0.05 per share, on the same terms as the Cancelled Warrant entitling the holder to purchase an aggregate of 16,817,365 shares of Common Stock at an exercise price of $0.07 per share, except that the new warrant expires on April 13, 2016.

Also simultaneous with the transactions described above, IHHI extended the expiration date from April 13, 2013 to April 13, 2016 for (i) the warrant held by SPCP Group, LLC to purchase 79,182,635 shares at an exercise price of $0.07 per share, (ii) the warrant held by Dr. Kali P. Chaudhuri, M.D. to purchase 170,000,000 shares at an exercise price of $0.07 per share, and (iii) the warrant held by KPC Resolution Company, LLC to purchase 139,000,000 shares at an exercise price of $0.07 per share. The extension of the warrant expiration date was intended to conform the term of the warrants to that of the Restated Credit.

Amendment to Revolving Loan Facility with MidCap

On February 7, 2013, the Company entered into “Amendment No. 4 to Credit and Security Agreement and Limited Consent” (the “Revolving Loan Amendment”) with MidCap Funding IV, LLC and Silicon Valley Bank, as lenders (the “Lenders”), and MidCap Financial, LLC, as agent (the “Agent”).

The Revolving Loan Amendment amends the Credit and Security Agreement, dated as of August 30, 2010, as amended, to which the Company, the Lenders and the Agent are parties (the “ Revolving Loan Agreement”), to reflect the following changes:

· The maximum face amount of the Letter of Credit Liabilities permitted under the Revolving Loan Agreement was increased to $760,755.39, and the Lenders consented to the issuance of a Letter of Credit in the same amount by Wells Fargo Bank, National Association.

· The Commitment Expiry Date under the Revolving Loan Agreement was amended to allow for an extension from August 30, 2013 to January 31, 2014 at Agent’s and Lenders’ sole option, which option can be exercised at any time prior to March 31, 2013.

· The period during which the Prepayment Fee of 1% is applicable was extended from three years from the original closing date to the Commitment Expiry Date (if it is extended by the Agent and Lenders).

· The Agent and Lenders consented to the Company’s entry into the Amendment with the Silver Point Entities and the Restated Credit Agreement thereunder.

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

FORWARD-LOOKING INFORMATION

This Quarterly Report on 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 2228, ~~2012~~2013 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~~ 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~~ from Tenet Healthcare Corporation. The Hospitals were assigned to four of our 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; (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~~ the medical office building at 1901 North College Avenue, Santa Ana, CA; (iv) a lease for the Chapman Medical Center at 2601 East ~~Chapman~~ Chapman Avenue, Orange, CA, and a fee interest in the medical office building at 2617 East Chapman Avenue, Orange, CA; and (v) ~~equipment~~ equipment and contract rights. At the closing of the Acquisition, we transferred all of the fee interests in the acquired real estate (the "Hospital Properties") to Pacific Coast Holdings Investment, LLC ("PCHI"), a company owned 51% by various physician investors and 49% by our largest shareholder.

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~~warrants ~~securities~~ to an existing shareholders ~~shareholder~~ and a lender. In February 2013 we repurchased certain warrants, issued new warrants, and extended the expiration dates of the remaining warrants. (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~~ scope of covered services and negotiate reduced payment schedules with providers. These cost containment measures generally have ~~resulted~~ 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.

2321

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 ~~and the like~~. Compliance with these regulatory requirements, as interpreted and amended from time to time, can increase ~~operating~~ 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.

We receive all of our ~~inpatient~~ ~~service~~inpatient ~~revenues~~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~~ 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. As of ~~December~~June 3130, ~~2012~~2013, ~~the~~we ~~Company~~ had a total stockholders’ ~~deficiency~~equity of $2815.3 million and a working capital ~~deficit~~ of $3315.8 million. For the three ~~and nine~~ months ended ~~December 31~~June 30, ~~2012~~2013, ~~the~~we ~~Company~~ had net income ~~loss~~ of $1345.4 million. At June 30, 2013, we had $24.2 million in additional availability under our revolving credit facility (see “DEBT”). Through June 30, 2013, we have recorded $196.4 million in revenues and incurred $1486.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, ~~respectively~~we anticipate recording approximately $47.1 million in revenues and incurring approximately $21.2 million in provider fees and other expenses (See “HOSPITAL QUALITY ASSURANCE FEES”). We are reliant on funds received under the hospital quality assurance fee program and not receiving such funding could have a material adverse effect on our liquidity and financial position and value of our common stock.

Key items for the ~~nine~~three months ended ~~December~~June 3130, ~~2012~~2013 included:

1. Net patient service revenues (patient service revenues, net of contractual allowances and discounts, less provision for ~~bad~~doubtful ~~debts~~accounts) for the ~~nine~~three months ended ~~December~~June 3130, ~~2012~~2013 and ~~2011~~2012 were $~~296~~223.52 million and $~~280~~80.58 million, respectively, representing an increase of $16142.04 million, or 5176.72%. 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 increased $19141.27 million for the ~~nine~~three months ended ~~December~~June 3130, ~~2012~~2013 compared to the ~~nine~~three months ended ~~December~~June 3130, ~~2011~~2012. The increase was primarily related to Hospital Quality Assurance Fee (“QAF”) revenues received from the State of ~~$46~~California.5 ~~million~~For ~~recognized during~~ the ~~nine~~three months ended ~~December~~June 3130, ~~2012~~2013, ~~compared~~we torecorded $31142.92 million in QAF revenues compared to $0 during the ~~same~~three ~~period~~months inended ~~fiscal~~June 30, 2012 (see “HOSPITAL QUALITY ASSURANCE FEES”).

Inpatient admissions decreased by 3 7.58% to 154.37 for the ~~nine~~three months ended ~~December~~June 3130, ~~2012~~2013 compared to 155.91 for the ~~nine~~three months ended ~~December~~June 3130, ~~2011~~2012. The ~~decline~~ decline in admissions is primarily related to reductions in managed care, shifts from inpatient to outpatient observation, and lower obstetrics admissions.

Uninsured patients, as a percentage of gross charges (retail charges), were 57.86% for the ~~nine~~three months ended ~~December~~June 3130, ~~2012~~2013 compared to 5.34% for the three ~~nine~~ months ended ~~December~~ 31June 30, ~~2011~~2012.

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 and warrant loss for the nine months ended December 31, 2012 were $302.7 million, representing an increase of $35.6 million, or 13.3%, compared to the nine months ended December 31, 2011. The increase is primarily related to QAF expenses of $45.3 million incurred during the nine months ended December 31, 2012 compared to $15.9 million during the same period in fiscal year 2012.22

242. 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 for the three months ended June 30, 2013 were $123.4 million, representing an increase of $40.4 million, or 48.7%, compared to the three months ended June 30, 2012. The increase is primarily related to QAF expenses of $33.5 million incurred during the three months ended June 30, 2013 compared to $0 incurred during the three months ended June 30, 2012.

DEBT -– OnAs August 1, 2012, we entered into Amendment No. 4 to Credit Agreement and Consent (the “Credit Agreement Amendment”), which amends the Term Loan Credit Agreement. Under the Credit Agreement Amendment, Silver Point consented to and waived certain provisions under the Term Loan Credit Agreement in connection with our execution of ~~the~~June ~~Revolving Loan Amendment. In addition~~30, ~~the provisions in the Term Loan Credit Agreement that provide for mandatory prepayment of our outstanding “A/R Financing~~2013,” ~~as defined, upon receipt of certain federal matching funds under the QAF program were amended to replace 65% with 80%. In connection with the Credit Agreement Amendment,~~ we ~~agreed~~had ~~to pay Silver Point a one-time consent and amendment fee in an aggregate amount equal to $1.8 million, of which $450 was paid upon execution of~~ the ~~Credit~~following ~~Agreement Amendment and the balance was added to the principal amount of the Term Loan~~ Credit ~~Agreement.~~Agreements:

~~Also~~— onA ~~August~~$47.277 1,million ~~2012, we~~Term ~~entered~~Loan ~~into~~issued ~~Amendment~~under Nothe $80.0 3million toRestated Credit Agreement by and ~~Security~~among ~~Agreement~~us, Silver Point Finance, LLC and its affiliate, SPCP Group, LLC (~~the~~together ~~“Revolving~~with ~~Loan~~Silver ~~Amendment~~Point Finance, LLC, “Silver Point”), ~~which~~and ~~amends~~PCHI ~~the Revolving~~and ~~Loan~~Ganesha ~~Agreement.~~Realty, ~~Under~~LLC, ~~the~~as ~~Revolving~~Credit ~~Loan Amendment~~Parties, ~~the~~bearing ~~minimum~~an ~~Revolving~~interest ~~Loan~~rate ~~Commitment~~of ~~Amount~~LIBOR ~~under~~plus 10%, with the ~~Revolving Loan~~LIBOR ~~Agreement~~floor ~~was~~set ~~increased~~at ~~from~~2% ~~$14.0~~(12% ~~million~~at toJune $30~~.0 million~~, ~~and~~2013). weIf ~~agreed~~any toevent ~~pay~~of todefault ~~MidCap~~occurs ~~Funding~~and IVcontinues, ~~LLC,~~the aslender ~~assigned~~can ~~to it~~increase ~~from~~the ~~MidCap~~interest ~~Financial,~~rate ~~LLC, as~~by ~~administrative~~5% ~~agent~~per ~~and~~year. aAs ~~lender,~~of ~~and~~June ~~Silicon~~30, ~~Valley Bank~~2013, aswe awere ~~lender (collectively, the~~in ~~“Lenders”)~~compliance anwith ~~origination~~all ~~fee~~financial ~~of 1~~covenants.0% ofThe ~~the~~stated ~~Lenders’~~maturity ~~increased~~date ~~commitment~~for ~~under~~this ~~the~~Restated ~~Revolving~~Credit ~~Loan~~Agreement ~~Amendment~~is April 13, or ~~$160~~2016.

In— ~~addition,~~A ~~pursuant~~$35.0 ~~to the~~million Revolving ~~Loan~~Credit ~~Amendment,~~Agreement ~~the~~by ~~lockbox~~and ~~requirements~~among ~~under~~us ~~the~~and ~~Revolving~~MidCap ~~Loan~~Funding ~~Agreement~~IV, ~~were~~LLC, ~~amended~~as assigned to ~~provide~~it ~~that~~from inMidCap ~~the~~Financial, ~~event the~~LLC, ~~Revolving~~as ~~Loan~~agent ~~Commitment~~and ~~Amounts~~a ~~are~~lender, ~~$30~~bearing an interest rate of 4.025% ~~million~~plus orLIBOR, ~~less~~with ~~during~~a ~~any~~2.5% ~~period~~floor, ~~prior~~per toyear ~~March~~(6.75% 31at June 30, 2013,) orand an unused commitment fee of 0.5% per year ($2010.08 million ~~or less~~outstanding ~~thereafter~~balance ~~(and~~at ~~assuming~~June ~~there~~30, is2013). noFor ~~Event~~purposes of ~~Default~~calculating atinterest, ~~the~~all ~~time),~~payments we ~~would~~make beon ~~permitted~~the Revolving Credit Agreement are subject to ~~transfer~~a ~~funds~~five ~~that~~business ~~are~~day ~~deposited into~~clearance ~~any~~period. ~~Lockbox~~As ~~Account,~~of asJune ~~defined~~30, to2013, awe ~~different~~were ~~bank~~in ~~account~~compliance ~~designated~~with byall usfinancial covenants. The stated maturity date for this Revolving Credit Agreement is March 25, ~~subject~~2016. toAt ~~the~~June ~~other~~30, ~~terms~~2013, ~~and~~we ~~conditions~~had ~~contained~~ $24.2 million in ~~the~~additional ~~Revolving~~availability ~~Loan~~under ~~Agreement~~this facility.

As of December 31, 2012, we had the following credit facilities:

	●	$46.35 million term loan under the Credit Agreement, dated as of October 9, 2007, as amended (the “Term Loan Credit Agreement”), by and among us, Silver Point, and PCHI and Ganesha Realty LLC (“Ganesha”), as Credit Parties, bearing a fixed interest rate of 14.5% per year ($46.35 million outstanding balance at December 31, 2012).
	●	$30.0 million revolving line of credit under the Credit and Security Agreement, dated as of August 30, 2010, as amended (the “Revolving Loan Agreement”), by and among us, and the Lenders, bearing an interest rate of 5.0% plus LIBOR, with a 2.5% floor, per year (7.5% at December 31, 2012) and an unused commitment fee of 0.625% per year ($28.8 million outstanding balance at December 31, 2012). For purposes of calculating interest, all payments we make on the revolving line of credit are subject to a six business day clearance period. At December 31, 2012, we had $1.2 million in additional availability under our revolving credit facility.

The Company’s credit facilities contain 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.

The Company entered into an Amendment on February 7, 2013, which changed the measurement period for the term loan facility. The next assessment date for which the Company is required to comply with the term loan financial covenants will be for the period ended June 30, 2013.

The Company did not meet the financial covenants for its revolving line of credit for the period ended December 31, 2012. Although the Company is not required to report compliance with the financial covenant for its revolving line of credit until 50 days after the fiscal quarter end, the Company is seeking the lenders’ consent to a potential non-compliance with this financial covenant.

Our outstanding debt consists of the following:

	December 31,			March 31,
	June 30, 2013			March 31, 2013
	2012			2012
Current:
Revolving line of credit	$	2810,~~806~~761		$	1430,000
Discount		(433	)		(473	)
	$	10,328		$	29,527
Noncurrent:
Term loan	$	4647,~~350~~277		$	4547,~~000~~277
Discount		(1,594	)		(1,747	)
	$	45,683		$	45,530

WARRANTS – On ~~February~~April 713, ~~2013,~~2010 we issued three-year warrants (the ~~Company~~“Omnibus ~~amended~~Warrants”) ~~its~~to purchase our common stock at an exercise price of $460.3507 per share in the following denominations: 139.0 million ~~term~~shares ~~loan~~to ~~which~~KPC ~~included~~or its designees and 96.0 million shares to its Term Loan lender, ~~among~~Silver ~~other~~Point ~~changes~~(SPCP Group, anLLC ~~extension~~and ofSPCP ~~the~~Group ~~maturity~~IV, ~~date~~LLC) toor ~~April~~its 16designees. The Omnibus Warrants also provide the holders with certain pre-emptive, ~~2016~~information and registration rights.

~~WARRANTS -~~In ~~On April~~addition, on April 13, 2010, ~~the~~we ~~Company~~ issued ~~warrants~~a three-year warrant (the “~~Omnibus~~Release ~~Warrants~~Warrant”) to ~~purchase~~acquire ~~its~~up ~~common~~to ~~stock~~170.0 ~~for~~million ashares ~~period~~ of ~~three~~ ~~years~~common stock at ~~an exercise price of~~ $0.07 per share into ~~the following denominations: 139~~Dr.0 ~~million~~Chaudhuri ~~shares~~who tofacilitated ~~KPC Resolution Company (~~a ~~company~~release ~~owned~~enabling ~~and~~us ~~controlled~~to byrecover ~~Kali~~amounts P.due ~~Chaudhuri,~~from ~~M.D.,~~our ~~the~~prior ~~Company’s~~lender ~~majority shareholder) or its designees~~ and 96a $1.0 million ~~shares~~reduction toin ~~the~~principal ~~$46.35~~of ~~million~~our ~~term~~outstanding ~~loan~~debt, ~~lender~~among orother ~~its~~benefits ~~designees.~~to us. The ~~Omnibus~~Release ~~Warrants~~Warrant also ~~provide~~provides the ~~holders~~holder with certain pre-emptive, information and registration rights. On April 13, 2010, the Company recorded warrant expense and the related warrant liability of $2.9 million, representing fair value. As of December 31, 2012, the fair value of the Omnibus Warrants was $1.9 million.

InOn ~~addition~~February 7, ~~on April 13~~2013, 2010, the Company issued a three-year warrant (the “Release Warrant”) to acquire up to 170.0 million shares of its 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~~connection ofwith ~~its outstanding debt, among other benefits to~~ the ~~Company. As a~~Restated ~~result,~~Credit 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-emptiveAgreement, ~~information~~we ~~and registration~~entered ~~rights.~~into ~~As of December 31, 2012,~~ the ~~fair~~following ~~value~~transactions ofinvolving ~~the Release Warrant was $1.3 million.~~warrants:

~~The~~We ~~Omnibus~~entered ~~Warrants~~into ~~and~~a Warrant Repurchase Agreement with SPCP Group IV, LLC pursuant to which it repurchased the ~~Release~~outstanding ~~Warrant~~common ~~are~~stock ~~collectively~~warrant ~~referred~~issued to asSPCP Group IV, LLC on or about April 13, 2010 (the “~~April~~Cancelled ~~Warrants.~~Warrant”). The ~~net~~Cancelled ~~gain~~Warrant (~~loss~~part of the Omnibus Warrants) entitled ~~recorded~~the ~~related~~holder to ~~the April~~purchase ~~Warrants~~an ~~for~~aggregate ~~the~~of ~~three~~16.8 ~~months~~million ~~ended~~shares ~~December~~of ~~31,~~our ~~2012~~common ~~and~~stock ~~2011~~at ~~was~~an ~~$(1,182)~~exercise ~~and~~price of $~~256,~~0.07 ~~respectively,~~per ~~and~~share. We repurchased the Cancelled Warrant for a purchase price of $~~(1,577)~~0.12 ~~and~~per share minus the exercise price of $390.07 per share resulting ~~for~~in ~~the~~a ~~nine~~net ~~months~~purchase ~~ended~~price ~~December~~of ~~31,~~$0.05 ~~2012~~per ~~and~~share ~~2011,~~multiplied ~~respectively~~by 16.8 million shares for an aggregate purchase price of $840.9.

InImmediately ~~connection~~following the ~~with~~warrant repurchase, we issued a new common stock warrant (the “New Warrant”) to SPCP Group, LLC for a price of ~~change~~$0.05 inper ~~maturity~~share (an aggregate price of $840.9) on the ~~term~~same ~~loan~~terms ~~discussed~~as ~~above,~~the Cancelled Warrant entitling the ~~April~~holder ~~Warrants~~to ~~maturity~~purchase ~~date~~an ~~was~~aggregate of ~~revised~~16.8 tomillion shares of common stock at an exercise price of $0.07 per share, except that the New Warrant expires on April 13, 2016.

Also simultaneous with the transactions described above, we extended the expiration date from April 13, 2013 to April 13, 2016 for the Omnibus Warrants issued to KPC and the remaining held by Silver Point (to purchase 79.2 million shares) and the Release Warrant issued to Dr. Chaudhuri. The extension of the warrant expiration date was intended to conform the terms of the warrants to that of the Restated Credit Agreement.

We assessed the amended credit agreement entered into in August 2012 and February 2013 under the provisions of ASC 470-50 and determined that the debt amendments should be accounted for as a debt modification. Accordingly, the recorded change in fair value as of February 7, 2013, totaling $534, of the New Warrant and the Omnibus Warrant held by SPCP Group, LLC was recognized as a component of the debt discount on the Term Loan and will be amortized to interest expense over the term of the debt agreement using the effective interest method.

The Omnibus Warrants, the Release Warrant, and the New Warrant are collectively referred to as the “IHHI Warrants.” As of June 30, 2013, the fair value of the IHHI Warrants was $11.9 million.

The gain (loss) related to the change in fair value of the Company’s outstanding warrants for the three months ended June 30, 2013 and 2012 was $(6.6) million and $.07 million, respectively.

HOSPITAL QUALITY ASSURANCE FEES - 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”). In February 2011, CMS gave final approval for the 2010 QAF. During fiscal year 2011, we recognized $87.2 million in revenue and recorded expenses of $47.8 million relating to the 2010 QAF.

In December 2011, CMS gave final approval for the extension of the QAF for the nine month period from January 1 through June 30, 2011 (“2011 QAF”). Accordingly, for the ~~three~~year ~~and nine months~~ ended ~~December~~March 31, ~~2011~~2012 ~~the~~we ~~Company~~ recognized $31.9 million in revenue and recorded expenses of $15.9 million relating to the 2011 QAF.

In June 2012, CMS conditionally approved the extension of the QAF for the thirty month period from July 1, 2011 through December 31, 2013 (“2013 QAF”). In June 2012, the California State Legislature amended the hospital fee statute to recognize separate CMS approval of the fee-for-service portion and managed care portion of the 2013 QAF, which was further clarified in legislation approved by the governor of California in September 2012. As a result, during the ~~three~~year ~~and nine months~~ ended ~~December~~March 31, ~~2012~~2013, ~~the~~we ~~Company~~ recognized revenue of $754.82 million and ~~$46.5 million and~~ expenses of $652.95 million ~~and $45.3 million~~ relating to the ~~fee-for-service portion of the~~ 2013 QAF for the periods from ~~October 1, 2012 through December 31, 2012 and~~ July 1, 2011 through ~~December~~March 31, ~~2012, respectively~~2013.

~~Based~~Through onJune ~~the~~30, ~~most~~2013, ~~recent~~we ~~modeling~~have ~~prepared~~recorded by$196.4 ~~the~~million ~~California~~in ~~Hospital~~revenues ~~Association,~~and weincurred ~~anticipate~~$86.0 ~~making~~million ~~payments~~in ~~for~~ provider fees and other expenses relating to the 2013 ~~QAF~~hospital ofquality ~~approximately~~assurance ~~$105~~fee program.8 ~~million~~For ~~and~~the ~~receiving~~remaining ~~approximately~~term ~~$235.5~~of ~~million~~the in2013 ~~revenues~~hospital quality assurance fee program, ~~from~~we ~~the~~anticipate ~~State~~recording (approximately $7947.41 million ~~from~~in ~~the~~revenues ~~fee-for-service portion~~ and incurring approximately $~~156~~21.12 million ~~from~~in ~~the~~provider ~~managed~~fees ~~care~~and other ~~portion)~~expenses.

26We cannot provide any assurances or estimates in connection with CMS’s final managed care approval of the 2013 QAF (for the period from July 1, 2013 to December 31, 2013) or a possible continuation of the QAF program beyond December 31, 2013.

WeELECTRONIC HEALTH ~~cannot~~RECORDS ~~provide~~INCENTIVE ~~any~~PROGRAM ~~assurances or~~– ~~estimates~~Provisions inof ~~connection~~the ~~with~~American ~~CMS’s~~Recovery ~~final~~and ~~approval~~Reinvestment Act of 2009 provide incentive payments for the ~~2013~~adoption ~~QAF~~and ormeaningful ause ~~possible~~of ~~continuation~~certified electronic health record (EHR) technology. The Medicare EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) that are meaningful users of ~~the~~certified EHRs. ~~QAF~~The Medicaid EHR incentive program ~~beyond~~provides incentive payments to eligible hospitals (and certain other providers) for efforts ~~December~~to 31adopt, ~~2013~~implement, upgrade, or meaningful use of certified EHR technology.

~~ELECTRONIC HEALTH~~CMS ~~RECORDS~~has ~~INCENTIVE~~established the ~~PROGRAM~~final -rule ~~Provisions~~which ofrequires ~~the~~eligible ~~American~~providers ~~Recovery~~in ~~and~~their ~~Reinvestment~~first ~~Act~~year of ~~2009~~participation ~~provide~~in the Medicaid incentive ~~payments~~ ~~for~~payment ~~the~~program to ~~adoption~~demonstrate ~~and~~that ~~meaningful~~they ~~use~~have ofadopted ~~certified~~(acquired, ~~electronic~~purchased, ~~health~~or ~~record~~secured ~~(EHR~~access to), ~~technology.~~or ~~The~~implemented, ~~Medicare~~or ~~EHR~~upgraded ~~incentive~~to certified EHR ~~program~~technology ~~provides~~in order to qualify for an incentive ~~payments~~payment. toDuring ~~eligible~~the ~~hospitals~~second (and ~~certain~~subsequent ~~other~~years ~~providers)~~of ~~that~~the program, eligible providers are required to meet other criteria, including meaningful ~~users~~use, ofto ~~certified~~receive additional funds. We have been awarded a total amount ~~EHRs~~of $13.6 ~~The~~million under the Medicaid EHR incentive program, ~~provides~~which ~~incentive~~will ~~payments~~be toearned ~~eligible~~and ~~hospitals~~received ~~(and~~over ~~certain~~a ~~other~~four ~~providers)~~year ~~for~~period. ~~efforts~~We adopted tocertified ~~adopt,~~EHR ~~implement,~~technology ~~upgrade,~~and orwe ~~meaningfully~~recognized ~~use~~other income of ~~certified~~$6.8 million relative to the first year under the Medicaid EHR ~~technology~~incentive program during fiscal year 2012.

CMS has established the final rule which requires eligible providers in their first year of participation in the Medicaid incentive payment program to demonstrate that they have adopted (acquired, purchased, or secured access to), or implemented, or upgraded to certified EHR technology in order to qualify for an incentive payment. During the second and subsequent years of the program, eligible providers are required to meet other criteria, including meaningful use, to receive additional funds. We have been awarded a total amount of $13.6 million under the Medicaid EHR incentive program, which will be earned and received over a four year period. We adopted certified EHR technology and recognized other income of $6.8 million relative to the first year under the Medicaid EHR incentive program during fiscal year 2012.24

LONG TERM LEASE ~~COMMITMENT~~ 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 by us to PCHI was increased from $5.4 million to $7.3 million. The base rent is subject to an annual Consumer Price Index increase on January 1 of each year; such increase shall not be less than 2% or more than 6% per year. AsThe ~~a result, the~~ annual base rent ~~as of January 1, 2012~~ is currently $7.78 million. If PCHI refinances the $4647.35 277 million term loan, the annual base rent will increase to $8.3 million. This lease commitment with PCHI is eliminated in consolidation.

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

The State of California has a 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 ~~December~~June 3130, ~~2012~~2013.

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 possibly result in certain environmental liabilities, such as asbestos abatement.

On July 1, 2011, we entered into software and services agreements with McKesson Technologies Inc. (“McKesson”) to upgrade our information technology systems.

Under the agreements, McKesson will provide us with a variety of services, including new software implementation and education/training services for our personnel, software maintenance services and professional services related to movement and migration of data from legacy systems. McKesson will also furnish to us 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. We have entered into the arrangement to enhance our clinical information systems and upgrade our billing and revenue management information systems.

The agreements will ~~initially~~ initially run for a period of five years, and the recurring services may be renewed by us for successive periods. The ~~agreements~~ agreements do not provide that they may be terminated by us 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. ~~During~~As ~~the~~of ~~three~~June ~~months ended December 31~~30, ~~2012~~2013 ~~the~~we ~~Company~~completed ~~commenced~~ conversion of ~~one~~ all of ~~its~~our facilities to the McKesson system. ~~and~~We isare ~~concurrently~~also ~~completing~~continuing ~~testing~~to test and ~~developing~~develop system applications where necessary.

27CASH FLOW – Net cash provided by (used in) operating activities for the three months ended June 30, 2013 and 2012 was $55.2 million and $(1.8) million, respectively. Net income (loss), adjusted for depreciation and other non-cash items, excluding the provision for bad debts and net income (loss) from non-controlling interests (not a measurement under accounting principles generally accepted in the United States of America (“GAAP”), totaled $61.4 million and $(2.9) million for the three months ended June 30, 2013 and 2012, respectively. We provided $0.8 million and $1.4 million in working capital for the three months ended June 30, 2013 and 2012, respectively. Net cash used in payment of accounts payable, accrued compensation and benefits and other current liabilities was $3.0 million and $3.5 million for the three months ended June 30, 2013 and 2012, respectively. Cash provided by accounts receivable, net of provision for bad debts, was $0.9 million and $1.0 million for the three months ended June 30, 2013 and 2012, respectively.

~~CASH FLOW -~~ Net cash used byin ~~operating~~ investing activities ~~for~~during the ~~nine~~three months ended ~~December~~June 3130, ~~2012~~2013 and ~~2011~~2012 was $60.23 million and $130.86 million, respectively. ~~Net~~In ~~income (loss), adjusted for depreciation and other non-cash items, excluding~~ the ~~provision~~three ~~for bad debts~~months ~~and~~ended ~~net~~June ~~income from non-controlling interests (not a measurement under accounting principles generally accepted in the United States of America (“GAAP”))~~30, ~~totaled~~2013 ~~($8.8) million~~ and ~~$14.1 million for the nine months ended December 31,~~ 2012 ~~and 2011~~, ~~respectively.~~we ~~Cash~~invested ~~provided (used) was~~ $20.~~7million~~3 million and ($270.6) million ~~(including $10.8 million for income taxes)~~ in ~~working capital for the nine months ended December 31, 2012 and 2011, respectively. Net~~ cash ~~provided (used) in payment of accounts payable~~, ~~accrued compensation and benefits and other current liabilities was $8.5 million and ($3.1) million for the nine months ended December 31, 2012 and 2011,~~ respectively~~. Cash provided (used) by accounts receivable~~, ~~net~~in ofnew ~~provision~~property ~~for bad debts, was ($5.4) million~~ and $2equipment.~~3 million for the nine months ended December 31, 2012 and 2011, respectively.~~

Net cash used in ~~investing~~financing activities ~~during~~for the ~~nine~~three months ended ~~December~~June 3130, ~~2012~~2013 and ~~2011~~2012 was $720.41 million and $10.75 million, respectively. ~~were~~The increase in net cash used in financing activities for ~~new~~the three months ended June 30, 2013 was primarily related to a paydown on our revolving ~~property~~line ~~and~~of ~~equipment~~credit of $19.2 million.

Net cash provided (used) in financing activities for the nine months ended December 31, 2012 and 2011 was $11.9 million and ($1.1) million, respectively. The increase was incurred primarily to fund payment of the QAF fees to the State of California.25

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following table sets forth, for the three ~~and nine~~ months ended ~~December~~June 3130, ~~2012~~2013 and ~~2011~~2012 our unaudited condensed consolidated statements of operations expressed as a percentage of net patient service revenues.

	Three months ended December 31,						Nine months ended December 31,
	Three months ended June 30,
	2012			2011			2012		2011
	2013			2012
Net patient service revenues		100.0%			100.0%			100.0%		100.0%
Revenues		100.0	%		100.0	%
Operating expenses:
Salaries and benefits		6125.1%0	%		4964.2%9	%		~~54.2%~~		~~57.9%~~
Supplies		156.7%2	%		1217.3%2	%		~~14.2%~~		~~14.3%~~
Other operating expenses		3222.5%9	%		2818.1%4	%		~~32.7%~~		~~21.8%~~
Depreciation and amortization		1.2%0	%		01.9%2	%		~~1.0%~~		~~1.1%~~
		110.5%			90.5%			102.1%		95.2%
		55.1	%		101.7	%
Operating income (loss)		~~(10~~44.~~5%)~~9	%		9(1.5%7	)%		~~(2.1%)~~		~~4.8%~~
Other expense:
Interest expense, net		(31.~~8%)~~2	)%		(23.~~1%)~~0	)%		~~(3.0%)~~		~~(2.8%)~~
Income from electronic health records incentive program		0.0%			6.0%			0.0%		2.4%
Income (loss) on warrants		(3.0	)%		0.9	%
Income (loss) on warrants		(1.3%)			0.2%			(0.5%)		0.0%
		(4.2	)%		(2.1	)%
		(5.1%)			4.0%			(3.5%)		(0.3%)
Income (loss) before income tax provision		40.7	%		(3.8	)%
Income (loss) before income tax provision (benefit)		(15.6%)			13.6%			(5.6%)		4.5%
Income tax provision		20.3	%		0.1	%
Income tax provision (benefit)		(0.1%)			2.5%			(0.7%)		0.7%
Net income (loss)		20.4	%		(3.9	)%
Net income (loss)		(15.5%)			11.1%			(4.9%)		3.7%
Net income attributable to noncontrolling interests		(0.1	)%		(0.4	)%
Net (income) loss attributable to noncontrolling interests		0.5%			(0.1%)	)		0.1%		(0.1%)
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.		20.3	%		(4.3	)%
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.		(15.0%)			11.0%			(4.8%)		3.6%

THREE MONTHS ENDED ~~DECEMBER~~JUNE 3130, ~~2012~~2013 COMPARED TO THREE MONTHS ENDED ~~DECEMBER~~JUNE 3130, ~~2011~~ 2012

NET PATIENT SERVICE REVENUES – Net patient service revenues (patient service revenues, net of contractual allowances and discounts, less provision for doubtful accounts) for the three months ended ~~December~~June 3130, 2013 and 2012 ~~decreased~~were 21$223.9%2 ~~compared~~million toand ~~fiscal~~$80.8 ~~year 2012~~million, ~~from~~respectively, ~~$114.0~~representing ~~million~~an toincrease of $89142.04 million, or 176.2%. The ~~decrease~~increase in net patient service revenues was primarily related to QAF revenues. ofIf the QAF payments noted above are excluded, net patient service revenues for the three months ended June 30, 2013 were $70.81 million, ~~recognized~~or ~~during~~0.2%, higher than the comparable period in fiscal year 2013. For the three months ended ~~December~~June 30, 312013, ~~2012~~we ~~compared~~recorded to $31142.92 million in QAF payments compared to $0 during the ~~same~~three ~~period~~months inended ~~fiscal~~June 30, 2012. The provision for bad debts for the three months ended ~~December~~June 3130, ~~2012~~2013 was $1214.04 million compared to $9.09 million for the three months ended ~~December~~June 3130, ~~2011~~ 2012, representing a 3245.85% increase. The primary reason for the increase in the provision for bad debts ~~relates to the~~was ~~termination~~a of$7.2 ~~Section~~million ~~1011~~(39.0%) ofincrease ~~the Medicare Modernization Act of 2003 program~~ in ~~January~~gross ~~2012.~~charges ~~Section~~related ~~1011~~to ~~provided~~uninsured ~~federal~~patients ~~funding of emergency health services~~ for ~~“eligible aliens.” During~~ the three months ended ~~December~~June 3130, ~~2011,~~2013 ~~patient service~~compared ~~revenues~~to ~~recorded~~the ~~under~~same ~~Section~~period ~~1011~~in ~~were~~fiscal ~~reduced~~2013. Uninsured bypatients, ~~contractual~~as ~~allowances~~a ~~and~~percentage ~~discounts~~of ~~whereas~~gross ~~patient~~charges, ~~service~~increased ~~revenues related~~ to ~~the~~7.6% ~~same~~from ~~type~~5.4% for ~~of services provided after~~ the ~~termination~~three ofmonths ~~Section~~ended ~~1011~~June ~~are~~30, ~~adjusted~~2013 compared to ~~net~~the ~~patient~~three ~~service~~months ~~revenues~~ended ~~through the~~June ~~provision~~30, ~~for bad debts~~2012.

Admissions for the three months ended ~~December~~June 3130, ~~2012~~2013 decreased 67.48% compared to ~~the same period in~~ fiscal year ~~2012~~2013. The decline in admissions is the combined result of lower obstetrical deliveries, and psychiatric admissions. Net patient service revenues per admission ~~decreased 16~~increased 200.6% during the three months ended ~~December~~June 3130, ~~2012~~2013. This ~~decrease~~increase was primarily due to the ~~decrease~~QAF inrevenues. Excluding QAF revenues, ~~recognized~~the increase in net patient service revenues per admission increased 9.1% during the three months ended ~~December~~June 3130, ~~2012~~2013 compared to ~~the same period in~~ fiscal ~~2012~~year 2013.

28Substantially all patient service revenues come from external customers. The largest payers are Medicare and Medicaid (including Medicare and Medicaid managed care plans), which combined accounted for 79% and 54% of patient service revenues for the three months ended June 30, 2013 and 2012, respectively.

~~Essentially~~The ~~all~~Hospitals ~~patient~~serve a disproportionate ~~service~~number of indigent patients and receive governmental revenues ~~come~~and ~~from~~subsidies ~~external~~in ~~customers.~~support ~~The~~of ~~largest~~care ~~payers~~for ~~are~~these ~~the~~patients. ~~Medicare~~Governmental revenues ~~and~~include payments from Medicaid, ~~(including~~Medicaid ~~Medicare~~DSH, and ~~Medicaid managed~~Orange ~~care~~County, ~~plans~~CA (CalOptima). ~~programs~~Governmental ~~accounting~~revenues ~~for~~(net ~~59%~~of contractual allowances and ~~64%~~discounts), ofincluding ~~the~~QAF ~~patient~~funds, ~~service~~increased ~~revenues~~$141.7 million for the three months ended ~~December~~June 3130, 2013 compared to the ~~2012~~three ~~and~~months ~~2011~~ended June 30, ~~respectively~~2012.

~~Uninsured~~Other ~~patients,~~operating asrevenues ~~a percentage~~ of ~~gross~~$808 ~~charges,~~and ~~decreased~~$845 ~~to 5.2% from 5.3%~~ for the three months ended ~~December~~June 3130, 2013 and 2012, ~~compared~~respectively, toconsist ~~the~~primarily ~~three~~of ~~months ended~~rental ~~December~~income ~~31,~~and ~~2011~~cafeteria sales.

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, including QAF funds, decreased $23.6 million for the three months ended December 31, 2012 compared to the three months ended December 31, 2011. $24.1 million of the decline in governmental revenue is the decrease in QAF revenues from the three months ended December 31, 2011.26

OPERATING EXPENSES -– Operating expenses for the three months ended ~~December~~June 3130, ~~2012~~2013 ~~decreased~~increased to $98123.4 million from $~~103~~83.20 million, aan ~~decrease~~increase of $440.8 4 million, or 448.67%, compared to ~~the same period in~~ fiscal year ~~2012~~2013. Operating expenses expressed as a percentage of ~~net patient services~~ revenues for the three months ended ~~December~~June 3130, ~~2012~~2013 and ~~2011~~2012 were ~~110~~54.58% and 90101.57%, respectively. On a per admission basis, operating expenses increased 161.97%. The increase is ~~the~~primarily ~~net~~related ~~result~~to of QAF expenses of $633.95 million incurred during the three months ended ~~December~~June 3130, ~~2012~~2013 compared to $150 in fiscal year 2013.9 ~~million~~Also, ~~during~~for the ~~same~~three ~~period~~months ended June 30, 2013, depreciation and amortization relating to the conversion of all of our facilities to the McKesson computer system was $1.3 million compared to $0 in fiscal year ~~2012~~2013 ~~offset~~(see “ELECTRONIC byHEALTH ~~loss~~RECORDS ~~reserves~~INCENTIVE ~~for~~PROGRAM” ~~potential~~and ~~legal~~“COMMITMENTS ~~settlements~~AND CONTINGENCIES”).

Salaries and benefits ~~decreased~~ increased $13.71 million (35.19%) for the three months ended ~~December~~June 3130, ~~2012~~2013 compared to fiscal year 2013, the ~~same~~increase ~~period~~is inprimarily related ~~fiscal~~to ~~year~~increased ~~2012~~labor ~~due~~needs during the conversion of all of our facilities to ~~lower~~the ~~admissions~~McKesson computer system (see “ELECTRONIC ~~partially~~HEALTH ~~offset~~RECORDS byINCENTIVE ~~wage~~PROGRAM” ~~increases~~and “COMMITMENTS AND CONTINGENCIES”).

Supplies ~~decreased $35 (0.3%)~~ for the three months ended ~~December~~June 3130, ~~2012~~2013 ~~compared~~were comparable to the ~~same~~amounts ~~period~~incurred in fiscal ~~year 2012~~2013. ~~The decrease primarily related to the decline in admissions.~~

Other operating expenses during the three months ended ~~December~~June 3130, ~~2012~~2013 ~~decreased~~increased to $2951.02 million from $3215.0 million, aan ~~decrease~~increase of $336.02 million, or 9241.63%, compared to ~~the same period in~~ fiscal year ~~2012~~2013. The ~~decrease~~increase is primarily related to QAF expenses of $633.95 million incurred during the three months ended ~~December~~June 3130, ~~2012~~2013 compared to $~~15.9~~0 ~~million~~ during the ~~same~~three ~~period~~months inended ~~fiscal~~June ~~year~~30, 2012 ~~offset by loss reserves for potential legal settlements~~.

OPERATING INCOME - (LOSS) – The operating income (loss) for the three months ended ~~December~~June 3130, ~~2012~~2013 and ~~2011~~2012 was ($9100.3)6 million and $10(1.9 4) million, respectively.

OTHER INCOME (EXPENSE) – -Interest Weexpense ~~adopted~~for ~~certified~~the ~~EHR~~three ~~technology~~months ~~and~~ended ~~recognized~~June ~~other~~30, ~~income~~2013 ofwas $02.8 ~~and~~million compared to $62.84 million ~~under~~for ~~the~~fiscal ~~Medicaid~~year 2013. ~~EHR~~The ~~incentive~~increase ~~program~~primarily related to higher outstanding debt during the three months ended ~~December~~June 3130, ~~2012~~2013 ~~and~~prior ~~2011~~to the paydown of $19.2 million on our revolving line of credit in late June 2013.

~~Interest~~As ~~expense~~of ~~for~~June ~~the~~30, 2013, ~~three~~the ~~months~~aggregate ~~ended~~fair ~~December~~value ~~31,~~of ~~2012~~the IHHI Warrants was $311.49 million. A ~~compared~~gain (loss) relating to ~~$2.4~~the ~~million~~change ~~for~~in ~~the~~fair ~~same~~value of ~~period~~the inoutstanding ~~fiscal~~warrants ~~year~~of ~~2012~~$(6.6) ~~The~~million ~~increase primarily~~and ~~related~~$731 towas ~~increased~~recorded ~~drawdowns~~during onthe ~~our~~three ~~revolving~~months ~~line~~ended ofJune ~~credit~~30, 2013 and 2012, respectively. See “WARRANTS.”

~~As of December 31, 2012,~~NET ~~the~~INCOME ~~fair~~(LOSS) ~~value~~- ofNet ~~our~~income ~~April Warrants aggregated $3.2 million. A gain~~ (loss) ~~relating~~for to the ~~change~~three inmonths ~~fair~~ended ~~value~~June ~~of the~~30, ~~April~~2013 ~~Warrants~~and of2012 (was $145.2)4 million and $0.(3.5) million ~~was recorded during the three months ended December 31~~, ~~2012 and 2011,~~ respectively. ~~See “WARRANTS.”~~

NET INCOME - Net income (loss) for the three months ended December 31, 2012 and 2011 was ($13.4) million and $12.5 million, respectively.

NINE MONTHS ENDED DECEMBER 31, 2012 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 2011

NET PATIENT SERVICE REVENUES - Net patient service revenues for the nine months ended December 31, 2012 increased 5.7% compared to fiscal year 2012, from $280.5 million to $296.6 million. The increase was primarily related to QAF revenues of $46.5 million recognized during the nine months ended December 31, 2012 compared to $31.9 million during the same period in fiscal 2012. The provision for bad debts for the nine months ended December 31, 2012 was $35.4 million compared to $25.9 million for the nine months ended December 31, 2011, representing a 37.1% increase. The primary reason for the increase in the provision for bad debts relates to the termination of Section 1011 of the Medicare Modernization Act of 2003 program in January 2012. Section 1011 provided federal funding of emergency health services for “eligible aliens.” During the nine months ended December 31, 2011, patient service revenues recorded under Section 1011 were reduced by contractual allowances and discounts whereas patient service revenues related to the same type of services provided after the termination of Section 1011 are adjusted to net patient service revenues through the provision for bad debts.

Admissions for the nine months ended December 31, 2012 decreased 3.5% compared to the same period in fiscal year 2012. The decline in admissions is the combined result of lower obstetrical deliveries, and psychiatric admissions. Net patient service revenues per admission increased 9.5% during the nine months ended December 31, 2012. This increase was primarily due to an increase orthopedic surgeries and an increase in QAF revenue.

Uninsured patients, as a percentage of gross charges, increased to 5.8% from 5.3% for the nine months ended December 31, 2012 compared to the nine months ended December 31, 2011.

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, including QAF funds, increased $19.2 million for the nine months ended December 31, 2012 compared to the nine months ended December 31, 2011.

OPERATING EXPENSES - Operating expenses for the nine months ended December 31, 2012 increased to $302.7 million from $267.1 million, an increase of $35.6 million, or 13.3%, compared to the same period in fiscal year 2012. Operating expenses expressed as a percentage of net patient services revenues for the nine months ended December 31, 2012 and 2011 were 102.1% and 95.2%, respectively. On a per admission basis, operating expenses increased 17.4%. The increase is primarily related to QAF expenses of $45.3 million incurred during the nine months ended December 31, 2012 compared to $15.9 million during the same period in fiscal year 2012.

Salaries and benefits decreased $1.8 million (1.1%) for the nine months ended December 31, 2012 compared to the same period in fiscal year 2012 due to lower admissions partially offset by wage increases.

Supplies increased $1.8 million (4.4%) for the nine months ended December 31, 2012 compared to the same period in fiscal year 2012. The increase primarily related to increases in orthopedic supplies and pacemakers.

Other operating expenses during the nine months ended December 31, 2012 increased to $97.1 million from $61.2 million, an increase of $35.9 million, or 58.6%, compared to the same period in fiscal year 2012. The increase is primarily related to QAF expenses of $45.3 million incurred during the nine months ended December 31, 2012 compared to $15.9 million during the same period in fiscal year 2012 and loss reserves for potential legal settlements.

OPERATING INCOME - The operating income (loss) for the nine months ended December 31, 2012 and 2011 was ($6.1) million and $13.5 million, respectively.

OTHER INCOME (EXPENSE) - We adopted certified EHR technology and recognized other income of $0 and $6.8 million under the Medicaid EHR incentive program during the nine months ended December 31, 2012 and 2011.

Interest expense for the nine months ended December 31, 2012 was $8.8 million compared to $7.8 million for the same period in fiscal year 2012. The increase primarily related to increased drawdowns on our revolving line of credit.

As of December 31, 2012, the fair value of our April Warrants aggregated $3.2 million. A gain (loss) relating to the change in fair value of the April Warrants of ($1,577) and $39 was recorded during the nine months ended December 31, 2012 and 2011, respectively. See “WARRANTS.”

NET INCOME (LOSS) - Net income (loss) for the nine months ended December 31, 2012 and 2011 was ($14.3) million and $10.2 million, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 and at year end and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made to the estimates until the final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be a time lag of several years 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 established settlement payables of $463 and $179 as of June 30 and March 31, 2013, respectively.

~~Revenues~~The ~~under~~Hospitals ~~the~~receive ~~traditional~~supplemental ~~fee-for-service~~payments ~~Medicare~~from ~~and~~the ~~Medicaid~~State ~~programs~~of ~~are~~California ~~based~~to ~~primarily~~support onindigent ~~prospective~~care ~~payment~~(Medi-Cal ~~systems.~~Disproportionate ~~Discounts~~Share ~~for~~Hospital ~~retrospectively~~payments ~~cost~~or ~~based~~"DSH") ~~revenues~~ and ~~certain~~from ~~other~~the ~~payments,~~California ~~which~~Medical ~~are~~Assistance ~~based~~Commission on("CMAC") under the ~~Hospitals'~~SB ~~cost~~1100 ~~reports, are estimated using historical trends~~ and ~~current~~SB ~~factors.~~1255 ~~Cost report settlements for retrospectively cost-based revenues under these~~ programs ~~are subject to~~. ~~audit~~The ~~and~~Hospitals ~~administrative~~received ~~and~~supplemental ~~judicial~~payments ~~review, which can take several years until final settlement~~ of ~~such~~$5.6 ~~matters~~million ~~are determined~~ and ~~completely resolved~~$4.7 ~~Estimates~~million ofduring ~~settlement~~the ~~receivables~~three ormonths ~~payables~~ended ~~related~~June to30, a2013 ~~specific year are updated periodically~~ and at ~~year end and at the time the cost report is filed with the fiscal intermediary~~2012, respectively. ~~Typically~~The norelated ~~further~~revenue ~~updates~~recorded ~~are~~for ~~made to~~ the ~~estimates~~ ~~until~~three ~~the~~months ~~final~~ended ~~Notice~~June of30, ~~Program~~2013 ~~Reimbursement~~and ~~is received~~2012, atwas ~~which~~$3.3 ~~time~~million ~~the~~and ~~cost~~$1.8 ~~report for that year has been audited~~million, ~~by the fiscal intermediary~~respectively. ~~There~~As ~~could be a time lag~~ of ~~several~~June ~~years~~30 ~~between the submission of a cost report~~ and ~~receipt~~March ~~of the Final Notice of Program Reimbursement. Since the laws~~31, ~~regulations~~2013, ~~instructions~~estimated ~~and~~DSH rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. The Company has established settlement (payables) receivables ofwere ($~~414)~~3.6 million and $~~190~~5.9 ~~as of December 31 and March 31~~million, ~~2012,~~ respectively.

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 $5.5 million and $4.0 million during the three months ended December 31, 2012 and 2011, respectively, and $9.6 million and $9.9 million during the nine months ended December 31, 2012 and 2011, respectively. The related revenue recorded for the three months ended December 31, 2012 and 2011, was $4.4 million and $3.1 million, respectively, and $11.3 million and $10.5 million for the nine months ended December 31, 2012 and 2011, respectively. As of December 31 and March 31, 2012, estimated DSH receivables were $6.7 million and $5.0 million, respectively, which are included as due from government payers in the accompanying unaudited condensed consolidated balance sheets.27

Revenues under managed care plans, including Medicare and Medicaid managed care plans (with patient service revenues of $2419.48 million and $2623.26 million for the three months ended ~~December~~June 3130, ~~2012~~2013 and ~~2011, respectively, and $79.8 million and $72.3 million for the nine months ended December 31,~~ 2012 ~~and 2011~~, respectively), 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~~We ~~Company~~do ~~does~~ not believe there were any adjustments to estimates of individual patient bills that were material to patient service revenues.

The Hospitals provide ~~charity~~ 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~~ 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 of charity care (based on direct and indirect ~~costs~~ costs as a ratio of gross uncompensated charges associated with providing care to charity patients) for the three months ended ~~December~~ 31June 30, ~~2012~~2013 and ~~2011~~2012 were approximately $12.93 million and $2.51 million, respectively~~, and $6~~.~~5 million and $6.3 million for the nine months ended December 31, 2012 and 2011, respectively.~~

~~The~~We ~~Company~~are is not aware of of any material claims, disputes, or unsettled matters with any payers that would affect revenues that have not been adequately ~~provided~~ provided for in the accompanying unaudited condensed consolidated financial statements.

PROVISION FOR BAD DEBTS - ~~The~~We ~~Company~~provide ~~provides~~ for accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying ~~value~~ value of such receivables to their estimated net realizable value. The Hospitals estimate this allowance based on the aging of ~~their~~ their accounts receivable, historical collections experience for each type of payer and other relevant factors. There are various ~~factors~~ 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~~Our ~~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~~ 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.

31INCOME 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 our net deferred tax since they did not meet the more-likely-than-not threshold.

Effective March 31, 2012, the Company adopted Accounting Standards Update (“ASU”) 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” which requires health care entities to present the provision for bad debts relating to patient service revenues as a deduction from patient service revenues in the statement of operations rather than as an operating expense. All periods presented have been reclassified in accordance with the provisions of ASU 2011-07.

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.

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. Any penalties or interest arising from federal or state taxes are recorded as a component of our income tax provision.

INSURANCE - ~~The~~– We ~~Company~~accrue ~~accrues~~ for estimated general and professional liability claims, to the extent not covered by insurance, when they are probable and reasonably estimable. ~~The~~We ~~Company~~have ~~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 aan ~~weighted~~interest ~~average risk-free discount~~ rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of June 30 and March 31, 2013, we had accrued $11.5 million and $10.6 million, respectively, which is comprised of $5.8 million and $5.5 million, respectively, in incurred and reported claims, along with $5.7 million and $5.1 million, respectively, in estimated IBNR. Estimated insurance recoveries were $2.3 million and $2.1 million as of June 30 and March 31, 2013, respectively.

As of December 31 and March 31, 2012, the Company had accrued $9.3 million and $11.5 million, respectively, which is comprised of $4.2 million and $4.5 million, respectively, in incurred and reported claims, along with $5.1 million and $7.0 million, respectively, in estimated IBNR. Estimated insurance recoveries of $2.7 million and $3.0 million are included in other prepaid expenses and current assets as of December 31 and March 31, 2012, respectively.28

~~The~~We ~~Company~~have ~~has also~~ purchased ~~occurrence~~ statutory coverage insurance to fund ~~its~~our obligations under ~~its~~our workers compensation program. ~~The~~We ~~Company~~have ~~has~~ a ~~"paid~~large ~~loss plan"~~deductible ~~policy,~~rating ~~under~~plan ~~which~~program. The ~~the~~workers ~~carrier~~compensation ~~pays~~program ~~all~~is ~~workers~~a ~~compensation~~prefunded ~~claims~~program, ~~with~~subject noto ~~deductible~~a or$250 ~~reimbursement~~deductible, ~~required~~per ~~of the~~occurrence/loss ~~Company~~limit. The ~~Company~~prefunded program ~~accrues~~is subject to an annual adjustment until all losses are closed. 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 aan ~~weighted~~interest ~~average risk-free discount~~ rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of ~~December~~June 3130 and March 31, ~~2012~~2013, ~~the~~we ~~Company~~ had accrued $~~593~~470 and $~~673~~500, respectively, ~~comprised~~ comprised of $~~282~~195 and $~~338~~200, respectively, in incurred and reported claims, along with $~~311~~275 and $~~335~~300, respectively, in estimated IBNR.

In addition, ~~the~~we ~~Company~~have ~~has~~ a self-insured health benefits plan for ~~its~~our employees. As a result, ~~the~~we ~~Company~~have ~~has~~ established and ~~maintains~~maintained an accrual for IBNR claims arising from self-insured health benefits provided to employees. ~~The~~Our ~~Company's~~ IBNR accruals at ~~December~~June 3130 and March 31, ~~2012~~2013 were based upon projections. ~~The~~We ~~Company~~determine ~~determines~~ the adequacy of this accrual by evaluating ~~its~~our limited historical experience and trends related to both health insurance claims and payments, information provided by ~~its~~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 ~~the~~our ~~Company's~~ unaudited condensed consolidated financial statements. As of ~~December~~June 3130 and March 31, ~~2012~~2013, the ~~Company~~ we had accrued $21.09 million and $21.29 million, respectively, in estimated IBNR.

~~The~~We ~~Company~~have ~~has~~ also purchased ~~umbrella~~excess liability policies with aggregate limits of $25 million. The ~~umbrella~~excess liability policies provide coverage in excess of the ~~primary~~ 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 ~~December~~June 3130, ~~2012~~2013, 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 ~~December~~June 3130, ~~2012~~2013, the end of the period of this report, the Company carried out an evaluation, under the supervision and with ~~the~~ 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 ~~December~~June 3130, ~~2012~~2013 the Company's disclosure ~~controls~~ 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 ~~December~~June 3130, ~~2012~~2013, there were no changes in the Company's internal control over financial reporting that ~~have~~ 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.

~~Fitzgibbons~~There v.have ~~IHHI~~been no material developments in the matters identified in the Company’s Form 10-K filed with the SEC on June 28, 2013.

The second phase of trial before a jury commenced on January 22, 2013. When submitted to the jury, three of Dr. Fitzgibbons’ four original causes of action had been dismissed, leaving the jury to decide Dr. Fitzgibbons’ claim for intentional infliction of emotional distress. On February 8, 2013 the jury returned a verdict in Dr. Fitzgibbons’ favor for $5.2 million. The jury is scheduled to consider whether to award any additional sum as punitive damages on February 13, 2013. The Company has reserved the contingent loss as of December 31, 2012. Management currently is unable to estimate unfavorable outcomes of the punitive damages hearing beyond the amount accrued. Accordingly, management cannot express an opinion as to the ultimate amount, if any, of the Company’s liability, nor is it possible to estimate what litigation-related costs will be in future periods.

There have been no other material developments in the matters identified in the Company’s Form 10-K filed with the SEC on June 22, 2012.

ITEM 1A. RISK FACTORS

There are no no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal ~~year~~ year ended March 31, ~~2012~~2013.

ITEM 6. EXHIBITS

Exhibit Number		Description
10.10		Amendment No. 3 to Credit and Security Agreement, dated August 1, 2012, by and among the Company, MidCap Funding IV, LLC, as Agent and lender, and Silicon Valley Bank, as lender (incorporated by reference to Exhibit 99.1 to the Registrant's Report on Form 8-K filed on August 6, 2012).
10.11		Amendment No. 4 to Credit Agreement and Consent, dated August 1, 2012, by and among the Company, Pacific Coast Holdings Investment, LLC, Ganesha Realty, LLC, SPCP Group IV, LLC, SPCP Group, LLC and Silver Point Finance, LLC (incorporated by reference to Exhibit 99.2 to the Registrant's Report on Form 8-K filed on August 6, 2012).
10.12		Amendment and Restatement to the Credit Agreement, dated February 7, 2013, by and among the Company, the Silver Point Entities, PCHI and Ganesha * **
10.13		Warrant Repurchase Agreement, dated February 7, 2013, by and between IHHI and SPCP Group IV, LLC * **
10.14		Warrant to purchase 16,817,365 shares of common stock, dated February 7, 2013, issued to SPCP Group, LLC **
10.15		Amendment No. 1 to Common Stock Warrant (139,000,000 shares), dated February 7, 2013, by and between IHHI and KPC Resolution Company, LLC **
10.16		Amendment No. 1 to Common Stock Warrant (170,000,000 shares), dated February 7, 2013, by and between IHHI and Dr. Kali P. Chaudhuri, M.D. **
10.17		Amendment No. 1 to Common Stock Warrant (79,182,635 shares), dated February 7, 2013, by and between IHHI and SPCP Group, LLC **
10.18		Amendment No. 4 to Credit and Security Agreement and Limited Consent, by and among the Company, MidCap Funding IV, LLC and Silicon Valley Bank, as lenders, and MidCap Financial, LLC, as agent * **
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 ~~Taxonomy Extension~~ Schema Document
101.CAL		XBRL ~~Taxonomy Extension~~ Calculation Linkbase Document
101.DEF		XBRL ~~Taxonomy Extension~~ Definition Linkbase Document
101.LAB		XBRL ~~Taxonomy~~Label ~~Extension Labels~~ Linkbase Document
101.PRE		XBRL ~~Taxonomy Extension~~ Presentation Linkbase Document

* Certain exhibits, schedules and/or annexes have been omitted. A copy of any omitted exhibit, schedule or annex will be furnished supplementally to the Securities and Exchange Commission upon request.31

** Each document filed with this report is marked with two asterisks (**).

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: February 12, 2013	By:	/s/ Steven R. Blake
Dated: August 14, 2013	By:	/s/ Steven R. Blake
		Steven R. Blake
		Chief Financial Officer (Principal Financial Officer)

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