FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~June~~September 30, 2010

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

For the Transition Period From ________________ to _________________

Commission File Number 000-50009

PACIFIC HEALTH CARE ORGANIZATION, INC.

(Exact name of registrant as specified in its charter)

Utah		87-0285238
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1201 Dove Street, Suite 585
Newport Beach, California		92660
(Address of principal executive offices)		(Zip Code)

(949) 721-8272

(Registrant’s telephone number, including area code)

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 any shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.	Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)	Yes o No o

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

Large accelerated filer o		Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes o No x

As of ~~August~~November 10, 2010, the registrant had 802,424 shares of common stock, par value $0.001, issued and outstanding.

PACIFIC HEALTH CARE ORGANIZATION, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
		Page

Item 1. Consolidated Financial Statements		3

	Balance Sheets as of ~~June~~September 30, 2010 (Unaudited) and December 31, 2009	3

	(Unaudited) Statements of Operations for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2010 and 2009	4

	(Unaudited) Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, ~~2009~~2010 and ~~2008~~2009	5

	Notes to Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3. Quantitative and Qualitative Disclosure about Market Risk		22

Item 4. Controls and Procedures		22

PART II — OTHER INFORMATION

Item 1.1A. Risk Factors		23

Item 6. Exhibits		2324

Signatures		2425

PART I. FINANCIAL INFORMATION

Item 1. Financial Information

Pacific Health Care Organization, Inc.

Balance Sheets

ASSETS
	June 30, 2010 (Unaudited)			December 31, 2009			September 30, 2010 (Unaudited)			December 31, 2009
Current Assets
Cash	$	419,450		$	604,022		$	342,549		$	604,022
Accounts receivable, net of allowance of $20,000		136,108			155,066			172,482			155,066
Deferred tax asset		12,469			12,469			12,469			12,469
Income tax receivable		48,023			11,523			48,023			11,523
Commission draw								12,000			-
Prepaid expenses		52,959			66,400			76,938			66,400
Total current assets		669,009			849,480			664,461			849,480

Property and equipment, net
Computer equipment		60,922			60,922			60,922			60,922
Furniture & fixtures		28,839			28,839			28,839			28,839
Office equipment under capital lease		25,543			-			25,543			-
Total property & equipment		115,304			89,761			115,304			89,761
Less: accumulated depreciation and amortization		(99,380	)		(86,318	)		(90,586	)		(86,318	)
Net property & equipment		15,924			3,443			24,718			3,443

Total assets	$	684,933		$	852,923		$	689,179		$	852,923

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	8,235		$	6,672		$	9,673		$	6,672
Accrued expenses		78,063			169,054			92,336			169,054
Income tax payable		850			100			1,475			100
Current obligation under capital lease		5,937			-			6,042			-
Unearned revenue		9,620			19,534			7,981			19,534
Total current liabilities		102,705			195,360			117,507			195,360

Long term liabilities
Noncurrent obligation under capital lease		16,789			-			15,238			-
Total liabilities		119,269			195,360			132,745			195,360

Commitments and Contingencies		-			-			-			-

Shareholders’ Equity
Preferred stock; 5,000,000 shares authorized at $0.001 par value; zero shares issued and outstanding		-			-			-			-
Common stock; 50,000,000 shares authorized at $ 0.001 par value; 802,424 shares issued and outstanding		802			802			802			802
Additional paid-in capital		623,629			623,629			623,629			623,629
Retained Earnings (deficit)		(58,992	)		33,132
Retained earnings (deficit)								(67,997	)		33,132
Total stockholders' equity		565,439			657,563			556,434			657,563
Total liabilities and stockholders’ equity	$	684,933		$	852,923		$	689,179		$	852,923

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

Pacific Health Care Organization, Inc.

Statements of Operations

(Unaudited)

	For three months ended					For nine months ended
	September 30,					September 30,
	2010			2009		2010			2009
Revenues:
HCO fees	$	136,205		$	176,861	$	428,729		$	652,122
MPN fees		149,544			145,324		452,015			446,175
Other		93,402			58,451		192,365			310,384
Total revenues		379,151			380,636		1,073,109			1,408,681

Expenses:
Depreciation and amortization		(8,794	)		145		4,268			436
Consulting fees		62,850			51,069		198,286			171,152
Salaries & wages		168,088			162,120		490,687			556,427
Professional fees		47,825			26,049		130,420			118,301
Insurance		24,994			29,982		77,103			86,768
Outsource service fees		4,355			-		5,379			-
Employment enrollment		-			-		-			30,000
Data maintenance		9,763			33,750		66,434			136,287
General & administrative		78,394			74,857		236,449			230,718
Total expenses		387,475			377,972		1,209,026			1,330,089

Income (loss) from operations		(8,324	)		2,664		(135,917	)		78,592

Other income (expense):
Interest income		333			1,000		1,405			2,404
Interest (expense)		(389	)		-		(1,242	)		-
Total other income (expense)		(56	)		1,000		163			2,404

Income (loss) before taxes		(8,380	)		3,664		(135,754	)		80,996

Income tax provision (benefit)		625			1,465		(34,625	)		32,398

Net income (loss)	$	(9,005	)	$	2,199	$	(101,129	)	$	48,598

For three months ended For six months ended
June 30, June 30,
2010 2009 2010 2009
Revenues:
  HCO fees $ 152,173 $ 230,263 $ 292,524 $ 475,261
  MPN fees 156,138 151,291 302,471 300,851
  Other 38,089 125,136 98,963 251,933
     Total revenues 346,400 506,690 693,958 1,028,045

Expenses:
  Depreciation and amortization 6,531 145 13,062 291
  Consulting fees 74,205 57,497 135,436 120,083
  Salaries & wages 149,185 181,856 322,599 394,307
  Professional fees 44,545 35,657 82,595 92,252
  Insurance 20,400 28,115 52,109 56,786
  Outsource service fees 1,024 - 1,024 -
  Employment enrollment - 15,000 - 30,000
  Data maintenance 38,050 46,905 56,671 102,537
  General & administrative 81,380 71,360 158,055 155,861
     Total expenses 415,320 436,535 821,551 952,117

Income (loss) from operations (68,920 ) 70,155 (127,593 ) 75,928

Other income (expense):
  Interest income 452 657 1,072 1,404
  Interest (expense) (414 ) - (853 ) -
     Total other income (expense) 38 657 219 1,404

Income (loss) before taxes (68,882 ) 70,812 (127,374 ) 77,332

     Income tax provision (benefit) (35,875 ) 29,465 (35,250 ) 30,933

     Net income (loss) $ (33,007 ) $ 41,347 $ (92,124 ) $ 46,399

	For three months ended					For six months ended					For three months ended					For nine months ended
	June 30,					June 30,					September 30,					September 30,
	2010			2009		2010			2009		2010			2009		2010			2009
Basic and fully diluted earnings per share:
Earnings per share amount	$	(.04	)	$	.05	$	(.12	)	$	.06	$	(.01	)	$	.00	$	(.13	)	$	.06
Weighted average common shares outstanding		804,424			804,424		804,424			804,424
Weighted average common Shares outstanding												802,424			802,424		802,424			802,424

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

Pacific Health Care Organization, Inc.

Statements of Cash Flows

(Unaudited)

	Six months ended June 30,						Nine months ended September 30,
	2010			2009			2010			2009
Cash flows from operating activities:
Net income (loss)	$	(92,124	)	$	46,399		$	(101,129	)	$	48,598
Adjustments to reconcile net income to net cash:
Adjustments to reconcile net income (loss) to net cash:
Depreciation and amortization		13,062			291			4,268			437
Changes in operating assets & liabilities
Decrease (increase) in accounts receivable		18,958			(188,554	)
(Increase) in accounts receivable								(17,416	)		(155,204	)
(Increase) in prepaid income tax		-			(8,600	)		-			(8,700	)
(Increase) in income tax receivable		(36,500	)		-			(36,500	)		-
Decrease (increase) in prepaid expenses		13,441			(9,276	)
(Increase) in commission draw								(12,000	)		-
(Increase) in prepaid expenses								(10,538	)		(4,999	)
Increase in accounts payable		1,563			3,014			3,001			4,019
(Decrease) increase in accrued expenses		(90,991	)		57,110			(76,718	)		22,602
Increase (decrease) in income tax payable		750			(1,067	)
Increase in income tax payable								1,375			399
(Decrease) in unearned revenue		(9,914	)		(5,057	)		(11,553	)		(11,306	)
Net cash provided by (used in) operating activities		(181,755	)		(105,740	)
Net cash used in operating activities								(257,210	)		(104,154	)

Cash Flows from Investing Activities
Purchase of office equipment under capital lease		(25,543	)		-			(25,543	)		-
Net cash used by investing activities		(25,543	)		-			(25,543	)		-

Cash Flows from Financing Activities
Increase in obligation under capital lease		25,543			-			25,543			-
Payment of obligation under capital lease		(2,817	)		-			(4,263	)		-
Net cash used by financing activities		22,726			-			21,280			-

(Decrease) in cash		(184,572	)		(105,740	)		(261,473	)		(104,154	)

Cash at beginning of period		604,022			624,401			604,022			624,401
Cash at end of period	$	419,450		$	518,661		$	342,549		$	520,247

Supplemental Cash Flow Information
Cash paid for:
Interest	$	718		$	-		$	1,116		$	-
Taxes	$	500		$	40,600		$	500		$	40,700

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

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2010

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed financial statements be read in conjunction with the Company’s au dited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2009. Operating results for the ~~six-months~~nine-months ended ~~June~~September 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Accounting

The Company uses the accrual method of accounting.

B. Revenue Recognition

The Company applies revenue recognition provisions pursuant to Accounting Standards Codification (“ASC”) 605.10, Revenue Recognition (“ASC 605”) (formerly SAB Topic 13A), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The guidance outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies.

In general, the Company recognizes revenue related to licensing fees on a monthly basis, over the life of the licensing agreement, and when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable and (iv) collectability is reasonably assured.

Health care service revenues are recognized in the period in which fees are fixed or determinable and the related services are provided to the subscriber.

The Company’s subscribers generally pay in advance for their services by check for billings made in advance, revenue is then recognized ratably over the period in which the related services are provided. Advance payments from subscribers and billings made in advance are recorded on the balance sheet as deferred revenue. An allowance for uncollectible accounts is established for any customer who is deemed as possibly uncollectible.

C. Cash Equivalents

The Company considers all short term, highly liquid investments that are readily convertible, within three months, to known amounts as cash equivalents. The Company currently has no cash equivalents.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2010

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risks consist of cash and cash equivalents. The Company places its cash and cash equivalents at well-known, quality financial institutions. At times, such cash and investments may be in excess of the FDIC insurance limit.

E. Net Earnings (Loss) Per Share of Common Stock (unaudited)

The computation of earnings (loss) per share of common stock is based on the weighted average number of shares outstanding at the date of the financial statements. There were no dilutive instruments outstanding at ~~June~~September 30, 2010 or 2009.

	For the three months ended					For the six months ended
	June 30,					June 30,					For the three months ended					For the nine months ended
	2010			2009		2010			2009		September 30,					September 30,
											2010			2009		2010			2009
Basic and fully diluted earnings per share:
Income (loss) (numerator)	$	(33,007	)	$	41,347	$	(92,124	)	$	46,399	$	(9,005	)	$	2,199	$	(101,129	)	$	48,598
Shares (denominator)		802,424			802,424		802,424			802,424		802,424			802,424		802,424			802,424
Per share amount	$	(.04	)	$	.05	$	(.12	)	$	.06	$	(.01	)	$	.00	$	(.13	)	$	.06

F. Depreciation and amortization

The cost of property and equipment is depreciated over the estimated useful lives of the related assets. The cost of leasehold improvements is amortized over the lesser of the length of the lease of the related assets for the estimated lives of the assets. Depreciation is computed on the straight line method. The ~~amount~~amortization of the equipment under capital lease iswas being amortized inover a12 month period for the ~~year the equipment was acquired~~first six month of 2010 under Internal Revenue Code Section ~~179.~~179, however in July 2010 the monthly amortization for equipment under capital lease was changed to a sixty month period. The equipment under capital lease was ~~acqui red~~acquired and placed into service in January ~~2010 and is being amortized in 12 equal installments during~~ 2010.

G. Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles, in the United States of America, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

H. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its’ wholly - owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2010

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

I. Fair Value of Financial Instruments

On January 1, 2008, the Company adopted FASB ASC 820-10-50, “Fair Value Measurements. This guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:

	•	Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	•	Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
	•	Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.

The carrying amounts reported in the balance sheets for the cash and cash equivalents, receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The carrying value of convertible notes payable approximates fair value because negotiated terms and conditions are consistent with current market rates as of ~~June~~September 30, 2010 and 2009.

J. General and Administrative Costs

General and administrative expenses include fees for office space, compensated absences, travel expenses and entertainment costs.

K. Income Taxes

The Company utilizes the liability method of accounting of income taxes. Under the liability method, deferred income tax assets and liabilities are provided based on the difference between the financial statements and tax basis of assets and liabilities measured by the currently enacted tax rates in effect for the years in which these differences are expected to reverse. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities.

L. Capital Structure

The Company has two classes of stock. Preferred stock, 5,000,000 shares authorized, zero issued. Voting rights and liquidation preferences have not been determined. The Company also has voting common stock, of 50,000,000 shares authorized, with 802,424 shares issued and outstanding. No dividends were paid in the ~~six~~nine months ended ~~June~~September 30, 2010 and 2009, nor in any prior period.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2010

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

M. Stock-Based Compensation

The Company has adopted the fair value method of accounting for stock-based employee compensation in accordance with statement of Financial Accounting Standards Board ASC Topic 718, “Stock Compensation.” This standard requires the Company to record compensation expense using the Black-Scholes pricing model.

N. Trade Receivables

The Company, in the normal course of business, extends credit to its customers on a short-term basis. Although the credit risk associated with these customers is minimal, the Company routinely reviews its accounts receivable balances and makes provisions for doubtful accounts. The Company ages its receivables by date of invoice. Management reviews bad debt reserves quarterly and reserves specific accounts as warranted or sets up a general reserve based on amounts over 90 days past due. When an account is deemed uncollectible, the Company charges off the receivable against the bad debt reserve. At the ~~six~~nine months ended ~~June~~September 30, 2010, the Company’s bad debt reserve of $20,000 is a general reserve for balances over 90 days past due and for ~~ac counts~~accounts that are ~~potentially~~potentiall y uncollectible.

The percentages of the major customers to total accounts receivable for the ~~six~~nine months ended ~~June~~September 30, 2010 are as follows:

~~Customer A~~	~~22%~~
~~Customer B~~	~~21%~~
~~Customer C~~	~~15%~~
~~Customer D~~	~~10%~~

Customer A 31%

Customer B 12%

O. Subsequent Events

In accordance with ASC 855-10 Company management reviewed all material events through the date of this report and there are no material subsequent events to report.

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This update requires new disclosures on significant transfers of assets and liabilities in and out of Level 1 and Level 2 of the fair value hierarchy (including the reasons for these transfers) and also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, this update clarifies certain existing disclosure requirements. For example, this update clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and ~~l iabilities~~liabilities rather than each major category of assets and liabilities. This update also clarifies ~~the~~th e requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2010

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

This update is effective for companies with interim and annual reporting periods after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will become effective for interim and annual reporting periods beginning after December 15, 2010. We are currently evaluating the potential impact of this new guidance on our consolidated financial statements.

In October 2009, the FASB issued guidance that establishes the accounting and reporting provisions for arrangements including multiple revenue-generating activities. This guidance provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this guidance also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant ~~judgment s~~judgments made and changes to those judgments and about how the application of the relative selling-price ~~method~~m ethod affects the timing or amount of revenue recognition. The amendments in this guidance are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the potential impact of this new guidance on our consolidated financial statements.

In May 2009, FASB issued FASB ASC 855-10 (Prior authoritative literature: SFAS No. 165, "Subsequent Events"). FASB ASC 855-10 establishes principles and requirements for the reporting of events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. FASB ASC 855-10 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ended June 30, 2009. Adoption of FASB ASC 855-10 did not have a material effect on our financial statements.

In June 2009, the FASB ASC 860-10 (Prior authoritative literature: issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140”), which eliminates the concept of a qualifying special-purpose entity (“QSPE”), clarifies and amends the de-recognition criteria for a transfer to be accounted for as a sale, amends and clarifies the unit of account eligible for sale accounting and requires that a transferor initially measure at fair value and recognize all assets obtained and liabilities incurred as a result of a transfer of an entire financial asset or group of financial assets accounted for as a sale. This standard is effective for fiscal years beginning after November 15, 2009. The adoption of FASB ASC 860-10 did not have a material effect on our financial statements.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2010

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In June 2009, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature: SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”) which amends the consolidation guidance applicable to a variable interest entity (“VIE”). This standard also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is therefore required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. Previously, the standard required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. This standard is effective for fiscal years beginning after November 15, 2009, and for interim periods within those fiscal years. Early adoption is ~~prohibited.~~prohib ited. The Company is currently evaluating the potential impact of the adoption of this standard on its financial statements, but does not expect it to have a material effect.

In June 2009, FASB issued ASC 105-10 (Prior authoritative literature: SFAS No. 168, "The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162").FASB ASC 105-10 establishes the FASB Accounting Standards Codification TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. FASB ASC 105-10 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ending September 30, 2009. ~~Adopt ion~~Adoption of FASB ASC 105-10 did not have a material ~~effect~~effe ct on the Company’s financial statements.

In September 2009, the FASB issued Accounting Standards Update 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update provides amendments to Topic 820 for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). It is effective for interim and annual periods ending after December 15, 2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been issued. The Company does not expect the provisions of ASU 2009-12 to have a material effect on the financial position, results of operations or cash flows of the Company.

In October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than a combined unit and will be separated in more circumstances that under existing US GAAP. This amendment has eliminated that residual method of allocation. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.

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

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to our management. For this purpose any statement contained in this report that is not a statement of historical fact may be deemed to be forward-looking, including statements about our revenue, spending, cash flow, products, actions, intentions, plans, strategies and objectives. Without limiting the foregoing, words such as “may,” “hope,” “ 220;will,” “expect,” “believe,” “anticipate,” “estimate” “projected” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainty, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to economic conditions generally and in the industry in which we and our customers participate; ~~competi tion~~competition within our ~~industry,~~industr y, including competition from much larger competitors; legislative requirements or changes which could render our services less competitive or obsolete; our failure to successfully develop new services and/or products or to anticipate current or prospective customers’ needs; price increases or employee limitations; and delays, reductions, or cancellations of contracts we have previously entered.

Forward-looking statements are predictions and not guarantees of future performance or events. The forward-looking statements are based on current industry, financial and economic information, which we have assessed but which, by its nature, is dynamic and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. We hereby qualify all our forward-looking statements by these cautionary statements. We undertake no obligation to amend this report or revise publicly these ~~forward looking~~forward-looking statements (other than pursuant to reporting obligations imposed on registrants pursuant to the Securities Exchange Act of ~~19 34)~~1934) to reflect ~~subsequent~~subsequ ent events or circumstances.

The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in our other filings with the Securities and Exchange ~~Commission.~~Commission, including our Annual Report on Form 10-K for the year ended December 31, 2009.

Throughout this report, unless the context indicates otherwise, the terms, “we,” “us,” “our” or “the Company” refer to Pacific Health Care Organization, Inc., (“PHCO”) and our wholly-owned subsidiaries Medex Healthcare, Inc. (“Medex”), Industrial Resolutions Coalition, Inc. (“IRC”) and Arissa Managed Care, Inc (“Arissa”).

Overview

We are in the business of managing and administering Health Care Organizations (“HCOs”) and Medical Provider Network (“MPNs”) in the state of California. For many years, workers’ compensation costs in California have been high. Since 1993, the legislature in California has enacted various laws designed to introduce alternatives to the traditional model of worker’s compensation aimed at controlling costs by giving employers greater control over the medical treatment of injured workers for a longer period of time.

Under the traditional model of workers’ compensation insurance coverage, the employer controls the selection of the medical provider for the first 30 days after the injury is reported. Thereafter the employee chooses the treating physician and the employer has no further control over the treatment of the patient.

In 1993 the California legislature passed a bill that established Health Care Organizations. An HCO is a network of health care professionals specializing in the treatment of workplace injuries and in back-to-work rehabilitation and training. The benefit of the HCO to an employer is two-fold. First, the employer is able to control the medical treatment of the injured employee for 90 to 180 days rather than just during the first 30 days. Second, the HCO provides the employer a network of trained providers to which it can refer its injured employees who specialize in treating work place injuries.

Under the HCO guidelines, all HCOs are required to pay certain annual fees to the California Division of Workers’ Compensation (“DWC”). ~~These fees, prior~~Prior to January 1, 2010, these fees included an annual fee per employee enrolled in the HCO at the end of the calendar year. Effective January 1, 2010, the annual fee was reduced to a stepped amount based on the number of employees enrolled in the HCO.

In 2004 the California legislature enacted ~~new~~ laws that created MPNs. Like an HCO, an MPN is a network of health care professionals, but MPN networks are not required to have the same level of medical expertise in treating ~~employees’~~employee work place injuries. Under an MPN program, the employer dictates which physician the injured employee will see for the initial visit. Thereafter, the employee can choose to treat with any physician within the MPN network.

By virtue of our continued certification as an HCO, we were statutorily deemed to be qualified as an approved MPN on January 1, 2005. As a licensed HCO and MPN, we are able to offer our clients an HCO program, an MPN program and a combination of the HCO and MPN programs. Under this combination model, an employer can enroll its employees in the HCO program then, prior to the expiration of the 90 or 180 day treatment period under the HCO program, the employer can enroll the employee into the MPN program. This allows employers to take advantage of both programs. To our knowledge, we are currently the only entity that offers both programs together.

Because of the annual fee per enrollee, historically HCO programs have been more expensive than MPN programs. Revisions to the HCO regulations ~~were filed with the Secretary of State on November 4, 2009 and became effective~~in January 1, ~~2010. These revisions make~~2010 have helped HCOs become more competitive with ~~medical provider networks,~~MPNs, providing a viable network option for workers’ compensation care. The DWC has reported that studies have shown that network care is associated with lower costs for employers and better return to work outcomes for injured workers.

The revised regulations reduce HCO fees and eliminate duplicative HCO reporting requirements. Annual HCO enrollment fees ~~have been $1.50~~ per enrollee through calendar year 2006 were $1.50 per enrollee, and were $1.00 per enrollee from January 1, 2007 through December 31, 2009. Effective in 2010, the annual assessments ~~are~~were reduced to $250 for HCOs with enrollments of ~~0-1000,~~0-1,000, $350 for ~~1001-5000,~~HCO’s with enrollments of 1,001-5,000, and $500 for ~~5001 and above.~~ HCO’s with enrollment above 5,000. The 2010 assessments for Medex Healthcare will be $500 for ~~Medex’s~~MedexR 17;s network of primary care providers and $250 for Medex’s network of primary and specialized care providers. The HCO enrollment fees were retroactively applied to 2009 assessments.

~~In June 2010, PHCO made an equity investment of $1,000 to acquire 1,000,000 shares of~~ During the quarter Arissa ~~common stock from Arissa, which represents all of the issued~~began providing marketing and outstanding common stock of Arissa. Tom Kubota, a PHCO officer and director was the incorporator and is a director of Arissa. Fred Odaka, a PHCO officer is the secretary and treasurer of Arissa. Neither Mr. Kubota nor Mr. Odaka were shareholders of Arissa and neither received any funds from the PHCO equity investment into Arissa. We anticipate Arissa will provide marketingsales services tofor our subsidiaries Medex and IRC.

~~Liquidity and Capital Resources~~

~~As of June 30, 2010 we had cash on hand of $419,450 compared to $604,022 at December 31, 2009. The $184,572 decrease in cash on hand is the result of decreases in revenue from operations,~~

unearned revenue, and accrued expenses, partially offset by decreases in accounts receivables and prepaid expenses and an increase in accumulated depreciation. We believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating costs over the next twelve months. We do not anticipate the need to find other sources of capital at this time.

We do not currently have planned any significant capital expenditures during the next twelve months that we anticipate will require us to seek outside sources of funding. We do, however, from time to time, investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses. We have not identified any suitable opportunity at the current time. An expansion or acquisition of this sort may require greater capital resources than we possess. Should we need additional capital resources, we most likely would seek to obtain such through debt and/or equity financing. We do not currently possess a financial institution source of financing. Given current c redit conditions, there is no assurance that we could be successful in obtaining additional debt financing on favorable terms, or at all. Similarly, given current market and economic conditions there is no guarantee that we could negotiate appropriate equity financing.

Results of Operations

Comparison of the three months ended ~~June~~September 30, 2010 and 2009

Revenue

The total number of employee enrollees ~~increased 13%~~decreased 2% during three months ended ~~June~~September 30, 2010 compared to ~~June~~September 30, 2009. ~~Even though we realized an increase in employee enrollees, total~~Total revenues ~~decreased 32%~~remained almost unchanged decreasing 0.4% to ~~$346,400.~~$379,151. As of ~~June~~September 30, 2010, we had approximately ~~245,000~~254,000 total enrollees. Enrollment consisted of approximately ~~35,000~~37,000 HCO enrollees and ~~210,000~~217,000 MPN enrollees. By comparison as of ~~June~~September 30, 2009 we had approximately ~~216,000~~260,000 enrollees, including approximately ~~57,000~~31,000 HCO enrollees and approximately ~~159,000~~229,000 MPN enrollees.

The net ~~increase~~decrease in MPN enrollees of approximately ~~51,000~~12,000 was mainly the result of ~~adding one~~a non-renewal by a major customer ~~with approximately 73,000 enrollees offset against an approximate reduction of 22,000 enrollees from other customers.~~in March 2010. The new customer with 73,000 enrollees generates revenues for the Company based upon a percentage of savings it realizes from its enrollment into Medex’s program by its employees. During the three months ended June 30, 2010 revenues generated from this new customer on a percentage of savings basis were significantly lower per enrollee when compared to those revenues generated on a monthly or annual service fee per number of enrollees basis. The decreaseincrease in HCO enrollment of approximately ~~22,000~~6,000 enrollees was primarily the result of ~~a non-renewal by one of our major~~adding four new HCO customers in ~~August 2009.~~the third fiscal quarter 2010. The economic slowdown has, and we expect will continue to impact us, as employers seek to address the effects of the current economic environment on their individual businesses. As a result of the economic slowdown, employers are reducing their workforce. ~~However, this may lead to an increase in workers’ compensation claims.~~

In the current economic environment, we anticipate businesses will continue to seek ways to reduce their workers’ compensation program costs. As a result, we expect to experience client turnover, in the form of existing employer clients seeking to terminate or renegotiate the scope and terms of existing ~~services.~~services or seek services from another service provider. We also anticipate our market may shrink as some employers seek to reduce their costs by managing their workers’ compensation care services in-house. As a result, the market is currently subject to restructuring in the type and pricing of services provided in our industry. In January 2010 we received notice from a significant customer that it would not ~~be renewing its~~renew i ts contract with Medex when it terminated at the end of March 2010. This customer accounted for 11% of Medex’s revenues in 2009 and 1% during the three months ended ~~June~~September 30, 2010. We believe this non-renewal is the result of the ~~company~~customer seeking to reduce expenses wherever possible and is representative of what is happening throughout the industry. We expect these factors may continue to erode HCO Fees, MPN Fees and Other Revenue until economic conditions improve.

HCO Fees

During the three months ended September 30, 2010 and 2009, HCO fee revenues were $136,205 and $176,861 respectively. Although we had a 19% increase in HCO enrollment during the three months ended September 30, 2010, HCO revenues decreased by 23%. This decrease in revenues was mainly the result of converting some customers from the historic HCO monthly and/or annual fees based upon number of employees to fees generated by bill review, PPO savings, utilization review, and case rates during the quarter ended September 30, 2010. This new billing methodology results in fees being paid later in the life of claims.

MPN Fees

During the third fiscal quarter we realized a 5% decrease in MPN enrollment when compared to the same period 2009. However, MPN fee revenue for the three months ended September 30, 2010 was $149,544 compared to $145,324 for the three months ended September 30, 2009. Although MPN enrollment decreased 5%, because of increased MPN program administration fees charged to our new customers during the third fiscal quarter of 2010, we realized a 3% increase in MPN fee revenue.

~~HCO Fees~~Other Revenue

During the three months ended June 30, 2010 and 2009, HCO fee revenues were $152,173 and $230,263 respectively. A 39% decrease in HCO enrollment during the three months ended June 30, 2010, resulted in this 34% decrease in revenue from HCO fees. This was attributable to decreased employee enrollment, primarily due to non-renewal by one of our major customers in August 2009.

~~MPN Fees~~

MPN fee revenue for the three months ended June 30, 2010 was $156,138 compared to $151,291 for the three months ended June 30, 2010. During the second fiscal quarter we realized a 32% increase in MPN enrollment when compared the same period 2009. Although MPN enrollment increased 32%, because of differing fee terms, unbundling of services, price competition and similar factors, we realized only a 3% increase in MPN revenue during the three months ended June 30, 2010.

~~Other Revenue~~

~~During the three months ended June~~September 30, 2010 other revenue ~~decreased 70%~~increased 60% to ~~$38,089~~$93,402 from ~~$125,136~~$58,451 in the same period a year earlier. The primary ~~component~~components of other revenue ~~is nurse case management. We retain nurses on our staff who, at the request of our customers, will~~are medical bill review, ~~the medical portion of a claim on behalf of our employer clients, claims managers and injured workers. We offer~~ nurse case management ~~services to our customers on an optional basis. We charge an additional fee for nurse case management services.~~and utilization review. The ~~decrease~~increase in other revenue of ~~$87,047~~$34,951 was mainly the result of ~~lower~~increased revenues realized from medical bill review and utilization review offset by decreased nurse case management ~~service fees resulting from a non-renewal by a major customer in August 2009 coupled with other clients being less willing to uti lize nurse case management services in an effort to cut costs.~~revenue.

Expenses

Total expenses for the three months ended ~~June~~September 30, 2010 and 2009 were ~~$415,320~~$387,475 and ~~$436,535~~$377,972 respectively. The ~~decrease~~increase of ~~$21,215~~$9,503 was the result of ~~decreases~~increases in salaries and wages, ~~insurance, employment enrollment expense and data maintenance, offset by increases in depreciation, consulting fees,~~ professional fees, outsource service fees and general and administration ~~expense.~~expense, offset by decreases in depreciation, insurance and data maintenance.

Consulting Fees

During the three months ended ~~June~~September 30, 2010 consulting fees increased to ~~$74,205~~$62,850 from ~~$57,497~~$51,069 during the three months ended ~~June~~September 30, 2009. This increase in consulting fees of ~~$16,708~~$11,781 was primarily the result of hiring two outside independent consultants to during the third fiscal quarter of 2010 to handle administrative duties resulting from increased utilization reviews and new MPN clients together with an increased legal consulting fees.

Salaries and Wages

Salaries and wages increased $5,968, or 4% to $168,088 from $162,120 during the three months ended September 30, 2010 compared with the three months ended September 30, 2009. The increase in salaries and wages was primarily due to the hiring a manager of bill review and electronic data interchange (“EDI”) operations in June 2010 and the addition of a ~~corporate development consultant in March 2010. Additionally, in the event we see an increased level of services requested from our customers, especially for~~ nurse case ~~management services which would require us to engage additional nurse case managers, we could experience higher consulting fees.~~

~~Salaries and Wages~~

~~Salaries and wages decreased $32,671 or 18% to $149,185 from $181,856 during the three months ended June 30,~~manager in September 2010, ~~compared with the three months ended June 30, 2009. The decrease in salaries and wages was primarily due to~~partially offset by the termination of Medex’s former president onduring August ~~3, 2009 and a 10% reduction in wages for all salaried employees that went into effect in May~~ 2009. Medex also hired a new President in December 2009 who is also Medex’s medical director. He is compensated as a professional consultant and his monthly fees are recorded as professional fees rather than salaries and wages.

Professional Fees

For the three months ended ~~June~~September 30, 2010 we incurred professional fees of ~~$44,545~~$47,825 compared to ~~$35,657~~$26,049 during the three months ended ~~June~~September 30, 2009. This ~~25%~~84% increase in professional fees was primarily the result of an increase, effective April 1, 2010 in the monthly ~~retainer~~ fee paid to Medex’s president who is compensated as Medex’s medical director and president and an increased legal fees partially offset by lower accounting fees.

Insurance

During the three months ended ~~June~~September 30, 2010 we incurred insurance expenses of ~~$20,400~~$24,994 a ~~$7,715~~$4,988 decrease over the prior year three months of 2009. The decrease in insurance expense realized during the three months ended ~~June~~September 30, 2010 was the result of lower workers’ compensation insurance ~~premiums together with an adjustment transferring previously expensed insurance premiums in the first quarter of 2010 to prepaid insurance.~~premiums. We do not expect insurance expense to increase materially ~~in 2009.~~throughout the remainder of 2010.

~~Employment Enrollment~~

As an HCO, we were required to pay a fee to the DWC for each person enrolled at the end of the calendar year in our HCO program. Because employee enrollment expenses are not determined until year end, we had been accruing expenses during the year based on our estimation of what enrollment will be at year end. Effective January 1, 2010 the annual HCO assessment moved to a flat fee basis. Effective in 2010 the annual assessments became $250 for HCOs with enrollments of 0-1,000, $350 for enrollments of 1,001-5,000, and $500 for enrollments above 5,000. The revisions to the HCO regulations became effective on January 1, 2010 and the change to the HCO enrollmentOutsource service fees ~~was retroactively applied to 2009 assessments. As a result of this change, empl oyee enrollment decreased by $15,000 during~~

For the three months ended ~~June~~September 30, 2010 ~~when compared~~we incurred outsource service fee expense totaling $4,355. During the second quarter of 2010 we commenced outsourcing our medical bill review and certain utilization review services to independent third parties and we incur a per-review fee for each medical bill submitted for review and a monthly fee for certain utilization reviews conducted by our independent outsource service companies. During the ~~previous year’s period. The changes~~same period in ~~the HCO enrollment fee structure represents a significant decrease compared to the employee enrollment expenses~~2009 we ~~have historically paid.~~did not incur any outsource service fees.

Data Maintenance

Under regulations applicable to HCOs and MPNs we are required to comply with certain data reporting and document delivery obligations. We currently contract out much of these data reporting and document delivery obligations to third parties. The costs we incur to meet these requirements are reflected in our financial statements as “data maintenance.”

Data maintenance costs are impacted by several factors, including the overall mix of enrollees in our HCO and MPN programs and the number of new enrollees during the year. HCOs are required to deliver enrollment notices annually to each HCO enrollee. By comparison, MPNs are required to deliver an enrollment notice only at the time of initial enrollment and at the time an enrollee is injured. As a result, after the first year, data maintenance fees for MPN enrollees are consistently about 50% lower than data maintenance fees for HCO enrollees. Therefore, depending on the mix of HCO and MPN enrollees and the number of new MPN enrollees versus ongoing MPN enrollees, our data maintenance costs may vary significantly from year to year even in years when our overall enrollment does not change materially.

Data maintenance fees may also vary significantly from employment enrollment fees in any given year. Employment enrollment fees are determined based on the number of HCO enrollees at the end of the calendar year. Employment enrollment fees do not take into account fluctuations in HCO enrollment during the year. By comparison, data maintenance fees are billed as services are provided. Therefore, we may have years when HCO enrollment is higher during the year than it is at the end of the calendar year, resulting in variances in data maintenance fees and employment enrollment fees in a given year.

Data maintenance fees are also impacted by the prices we can negotiate with our third party service providers.

During the three months ended ~~June~~September 30, 2010 we experienced ~~a 39% decrease~~19% increase in HCO enrollees and a ~~32% increase~~5% decrease in MPN enrollees when compared the same period a year earlier, resulting in an overall enrollment ~~increase~~decrease of ~~13%~~2%. Data maintenance fees decreased ~~19%~~71% from ~~$46,905~~$33,750 to ~~$38,050~~$9,763 during the three months ended ~~June~~September 30, 2010 when compared to the same period in 2009. The decrease in data maintenance fees is primarily attributable to changing our primary service provider in August 2009. Under an agreement with our new primary service provider, we agreed to pay a flat fee of $5,000 per month for the use of their associate development system until a cumulative amount of approximately $53,000 is paid, at which time the monthly $5,000 fee will cease and under the terms of the ~~agreement~~agre ement we will own the system without further payments. The last payment to reach the cumulative amount of $53,000 was paid in July 2010. Any additional software improvements or updates costs, if any, will be negotiated with the provider.

~~General and Administrative~~

General and Administrative

General and administrative expenses increased ~~14%~~4% to ~~$81,380~~$78,394 during the three months ended ~~March 31,~~September 30, 2010. The increase in general and administrative expense of ~~$10,020~~$3,537 was primarily attributable to increases in ~~advertising expenses, internet expense,~~equipment and repairs, office supplies, travel and entertainment and vacation ~~expense and miscellaneous general and administrative expenses,~~ partially offset ~~a decrease~~by decreases in ~~printing and reproduction costs.~~dues & subscriptions. We expect current levels of general and administrative expenses to remain constant unless we realize a significant increase in new revenues.

Net Income (Loss)

During the three months ended ~~June~~September 30, 2010 total revenues of ~~$346,400,~~$379,151, were lower by ~~$160,290~~$1,485 when compared to the same period in 2009. ~~This~~Total expenses for the third quarter of 2010 increased to $387,475 from $377,972 in the same quarter in 2009. The decrease in total revenues ~~was partially offset by $21,215 decrease~~together with an increase in total expenses ~~resulting~~of $9,503 resulted in a loss from operations of ~~$68,920~~$8,324 compared to an income from operations of ~~$70,155~~$2,664 during three months ended ~~June~~September 30, 2009. Correspondingly, we realized a net loss of ~~$33,007~~$9,005 for the three months ended ~~June~~September 30, 2010 compared to a net income of ~~$41,347,~~$2,199 during the three months ended ~~June~~September 30, 2009. While the current ~~recession has~~economic environment had an adverse impact on our gross revenues during the three month period ending ~~June~~September 30, 2010 we expect modest increases in revenues beginning in the ~~third~~forth quarter of 2010, (compared to the ~~second~~third quarter of 2010), to be generated from new services offered by the Company to existing and new customers in the areas of ~~managed~~medical bill review and clinical and non-clinical utilization reviews. There are no assurances that the new services will materialize to a level that will allow us to become profitable.

Comparison of the ~~six~~nine months ended ~~June~~September 30, 2010 and 2009

Revenue

The total number of employee enrollees ~~increased 13%~~decreased 2% during ~~six~~nine months ended ~~June~~September 30, 2010 compared to ~~June~~September 30, 2009. Although we realized ~~an increase~~a decrease in employee enrollees of 2%, total revenues decreased ~~33%~~24% to ~~$693,958.~~$1,073,109. As of ~~June~~September 30, 2010 we had approximately ~~245,000~~254,000 total enrollees. ~~Enrollment~~As noted above, enrollment consisted of approximately ~~35,000~~37,000 HCO enrollees and ~~210,000~~217,000 MPN enrollees. By comparison as of ~~June~~September 30, 2009 we had approximately ~~216,000~~260,000 enrollees, including approximately ~~57,000~~31,000 HCO enrollees and approximately ~~159,000~~229,000 MPN enrollees.

HCO Fees

During the ~~six~~nine months ended ~~June~~September 30, 2010 and 2009 HCO fee revenues were ~~$292,524~~$428,729 and ~~$475,261~~$652,122 respectively. ~~The 39% decrease~~Although we had a 19% increase in HCO enrollment during the ~~six~~nine months ended ~~June~~September 30, 2010 ~~resulted in a 38% decrease in~~, revenue from HCO ~~fees.~~fess decreased by 34%. This decrease in revenues was ~~attributable~~mainly the result of converting some of our customers from the historic HCO monthly and/or annual fees based upon number of employees to ~~decreased employee enrollment~~fees generated by bill review, PPO savings, utilization review, and ~~decreased re-notification~~case rates during the quarter ended September 30, 2010. This new billing methodology results in fees being paid later in the life of ~~existing clients.~~claims.

MPN Fees

MPN ~~Fee~~fee revenues for the ~~six~~nine months ended ~~June~~September 30, 2010 were ~~$302,471~~$452,015 compared to ~~$300,851~~$446,175 for the ~~six~~nine months ended ~~June~~September 30, 2009. As of ~~June~~September 30, 2010 we realized a ~~32% increase~~5% decrease in MPN enrollment when compared the same period 2009. ~~Although we had an increase~~Despite this decrease in MPN enrollment during the ~~six~~nine months ended ~~June~~September 30, 2010, ~~factors such~~ as ~~differing fee terms, unbundling~~a result of ~~services, price competition and other similar factors as compared~~increased monthly MPN administration fees charged to ~~2009, resulted in only~~our new MPN customers, we realized a 1% increase in MPN revenues compared to ~~the same period~~ 2009.

Other Revenue

During the ~~six~~nine months ended ~~June~~September 30, 2010 other revenue decreased ~~61%~~38% to ~~$98,963~~$192,365 from ~~$251,933~~$310,384 in the same period a year earlier. ~~As noted above,~~One of the primary ~~component~~components of other revenue is nurse case management. Other revenue decreased by ~~$152,970~~$118,019 during the ~~six~~nine months ended ~~June~~September 30, 2010 primarily resulting from a non-renewal by a major customer in August 2009 and an overall decline in demand for nurse case management services, which we believe is related to efforts by employers to reduce costs.

Expenses

Total expenses for the ~~six~~nine months ended ~~June~~September 30, 2010 and 2009 were ~~$821,551~~$1,209,026 and ~~$952,117.~~$1,330,089, respectively. The decrease of ~~$130,566~~$121,063, was primarily the result in decreases in salary and wages, ~~professional fees,~~ insurance, employment enrollment fees, and data maintenance expense partially offset by increases in ~~depreciation,~~ consulting fees, professional fees, outsource service fees and general and administrative expenses.

Consulting Fees

During the ~~six~~nine months ended ~~June~~September 30, 2010, consulting fees increased to ~~$135,436~~$198,286 from ~~$120,083~~$171,152 during the ~~six~~nine months ended ~~June~~September 30, 2009. This increase in consulting fees of ~~$15,353~~$27,134 was ~~primarily~~mainly the result of hiring ~~a manager of bill review~~two outside independent consultants during the third quarter 2010 to handle administrative duties resulting from increased utilization reviews and ~~EDI operations and the addition of a corporate development consultant in March 2010.~~new MPN clients together with an increased legal consulting fees. Additionally, in the event we see an increased level of services requested from our customers, especially for nurse case management services which would require us to engage additional nurse case managers, we could experience higher consulting fees.

Salaries and Wages

Salaries and wages decreased ~~$71,708~~$65,740 or ~~18%~~45% to ~~$322,599~~$490,687 from ~~$394,307~~$556,427 during the ~~six~~nine months ended ~~June~~September 30, 2010 compared with the ~~six~~nine months ended ~~June~~September 30, 2009. The decrease in salaries and wages was primarily due to the termination of Medex’s former president in August 2009 and a 10% reduction in wages for all salaried employees that went into effect in May 2009. The decrease was partially offset by the hiring of a manager of bill review and electronic data interchange (“EDI”) operations in June 2010 and the addition of a nurse case manager in September 2010. Medex also hired a new president in December 2009 who is also Medex’s medical director. He is compensated as a professional consultant and his monthly fees are recorded as ~~professional~~profe ssional fees rather than salaries and wages.

Professional Fees

~~Professional Fees~~

For the ~~six~~nine months ended ~~June~~September 30, 2010, we incurred professional fees of ~~$82,595~~$130,420 compared to ~~$92,252~~$118,301 during the ~~six~~nine months ended ~~June~~September 30, 2009. This ~~11% decrease~~10% increase in professional fees was primarily the result of ~~decrease~~an increase, effective April 1, 2010 in ~~accounting fees~~the monthly fee paid to Medex’s president who is compensated as Medex’s medical director and ~~NCM~~president and increased legal fees partially offset by ~~increases in legal fees, and the medical consulting fees paid to the president of Medex.~~lower accounting fees.

Insurance

During the ~~six~~nine months ended ~~June~~September 30, 2010, we incurred insurance expenses of ~~$52,109~~$77,100 a ~~$4,677~~$9,665 decrease over the same ~~six-month~~nine-month period of 2009. The decrease in insurance expense realized during the ~~six~~nine months ended ~~June~~September 30, 2010 was the result of lower workers’ compensation insurance premiums together with modest premium reductions in Medex’s other insurance policies. We do not expect insurance expense to increase materially inthroughout the remainder of 2010.

Employment Enrollment

As discussed ~~earlier~~ above, effective January 1, 2010 the annual HCO assessment moved to a flat fee basis. ~~Effective in 2010 the annual assessments became $250 for HCOs with enrollments of 0-1,000, $350 for enrollments of 1,001-5,000, and $500 for enrollments above 5,000.~~ The ~~revisions to the HCO regulations became effective on January 1, 2010 and the~~ change to the HCO enrollment fees was retroactively applied to 2009 assessments. As a result of this change, employee enrollment fees decreased by $30,000 during the ~~six~~nine months ended ~~June~~September 30, 2010 when compared to the previous year’s period. The changes in the HCO enrollment fee structure ~~represents~~represent a significant decrease compared to the employee enrollment expenses we have historically paid.

Data Maintenance

During ~~six~~nine months ended ~~June~~September 30, 2010 we experienced a ~~39% decrease~~19% increase in HCO enrollment and a ~~32% increase~~5% decrease in MPN enrollment, resulting in an overall enrollment ~~increase~~decrease of ~~13%~~2%. Despite the ~~increase~~decrease in overall employee enrollment of only 2%, data maintenance fees decreased ~~45%~~51% to ~~$102,537~~$66,634 during the ~~six~~nine months ended ~~June~~September 30, 2010. The decrease in data maintenance fees is primarily attributable to lower data maintenance costs associated with the renewal of MPN enrollees and lower prices negotiated with third party service providers.

~~General and Administrative~~

General and Administrative

General and administrative ~~was largely unchanged increasing 1%~~expense increased by 3% to ~~$158,055~~$236,449 during the ~~six~~nine months ended ~~June~~September 30, 2010. This increase in general and administrative expense was primarily attributable to

increases in advertising expense, expenses associated with maintaining a provider network site, vacation expense ~~rent expense~~ and ~~miscellaneous expenses,~~outsource service fees, partially offset by decreases in dues and subscriptions, MPN printing ~~and reproduction expenses, travel and entertainment expense~~notifications and shareholders’ meeting expense. We expect current levels of general and administrative ~~expenses~~expense to remain relatively constant unless we realize a significant increase in new revenues.

Net Income (Loss)

~~Net Income~~

During the ~~six~~nine months ended ~~June~~September 30, 2010 total revenues of ~~$693,958~~$1,073,109 were lower by ~~$334,087~~$335,572, when compared to the same period in 2009. This decrease in total revenues was only partially offset by the ~~$130,566~~$121,063 decrease in total expenses resulting in a loss from operations of ~~$127,593~~$135,917 compared to an income from operations of ~~$75,928~~$78,592 during ~~six~~nine months ended ~~June~~September 30, 2009. Correspondingly, we realized a net loss of ~~$92,124~~$101,129 for the ~~six~~nine months ~~June~~September 30, 2010, compared to a net income of ~~$46,399,~~$48,598, during the ~~six~~nine months ended ~~June~~September 30, 2009. We expect modest increases in revenues beginning in the ~~third~~fourth quarter of 2010, (compared to the ~~second~~third quarter of 2010), to be generated from new services offered by the Company to existing and new customers in the areas ~~of ma naged~~o f medical bill review and clinical and non-clinical utilization reviews. There are no assurances that the new services will materialize to a level that will allow us to become profitable.

Liquidity and Capital Resources

As of September 30, 2010 we had cash on hand of $342,549 compared to $604,022 at December 31, 2009. The $261,473 decrease in cash on hand is the result of decreases in revenue from operations, unearned revenue and accrued expenses and increases in accounts receivable, income tax receivable, commission draw and prepaid expenses. These changes were partially offset by decreased accumulated depreciation and increased accounts payable. Barring a significant downturn in the economy, we believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating costs over the next twelve months and we do not anticipate the need to find other sources of capital at this time.

We do not currently have planned any significant capital expenditures during the next twelve months that we anticipate will require us to seek outside sources of funding. We do, however, from time to time, investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses. We have not identified any suitable opportunity at the current time. An expansion or acquisition of this sort may require greater capital resources than we possess. Should we need additional capital resources, we most likely would seek to obtain such through equity and/or debt financing. We do not currently possess a financial institution source of financing. Given current credit market conditions, there is no assurance that we could be successful in obtaining debt financing on favorable terms, or at all. Similarly, given current market and economic conditions there is no guarantee that we could negotiate appropriate equity financing.

Cash Flow

During the ~~six~~nine months ended ~~June~~September 30, 2010 cash was primarily used to fund operations. We had a net decrease in cash of ~~$184,572~~$261,473 during the ~~six~~nine months ended ~~June~~September 30, 2010 as compared a decrease in cash of ~~$105,740~~$104,154 at ~~June~~September 30, 2009. See below for additional discussion and analysis of cash flow.

	For the six months ended June 30,						For the nine months ended September 30,
	2010			2009			2010			2009
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Net cash provided by (used in) operating activities	$	(181,755	)	$	(105,740	)
Net cash used in operating activities							$	(257,210	)	$	(104,154	)
Net cash used in investing activities		(25,543	)		-			(25,543	)		-
Net cash provided by financing activities		22,726			-			21,280			-

Net Change in Cash	$	(184,572	)	$	(105,740	)	$	(261,473	)	$	(104,154	)

During the ~~six~~nine months ended ~~June~~September 30, 2010, net cash used in operating activities was ~~$181,755~~$257,210 compared to net cash used by operating activities of ~~$105,740~~$104,154 during the ~~six~~nine months ended ~~June~~September 30, 2009. As discussed herein we realized a net loss from operations of ~~$127,593~~$135,917 during the ~~six~~nine months ended ~~June~~September 30, 2010, compared to a net income from operations of ~~$75,928~~$78,592 during the ~~six~~nine months ended ~~June~~September 30, 2009.

In January 2010 we entered into a capital lease arrangement whereby we leased an office copy machine for $25,543. The asset was recorded on our balance sheet under office equipment under capital lease and our liability incurred under the lease was recorded as current and noncurrent obligations under capital lease. The lease arrangement is for a term of 48 months at level operating rents with capital interest rate at 7%.

Currently our principal executive offices are located at 1201 Dove Street, Suite 585, in Newport Beach, California, where we currently lease approximately 950 square feet of office space. We moved to this location in February 2009 and renewed our lease in March 2010 for one year. Our monthly rent for this space is approximately $1,700 per month. The principal offices of our operating subsidiaries, Medex and IRC are currently located in Long Beach, California. Medex leases approximately 3,504 square feet of office space in Long Beach, California and makes some space available to IRC. The monthly lease payment during 2010 was approximately $7,900. The term of this lease is through February 2011. On September 27, 2010, Medex entered into a lease agree ment for new office space. The new space is located at 1201 Dove Street, Suite 300, in Newport Beach, California. This new office space, which is approximately 5,074 square feet, will serve as our principal executive offices, as well as, the principal offices of our operating subsidiaries, Medex, IRC and Arissa. We anticipate the facilities under the new lease will be suitable and adequate for our needs. The lease on this new office space commences on March 1, 2011 and expires February 29, 2016. Our annual and monthly base rent for this space is as follows:

Months of Lease Term		Annual Base Rent		Monthly Base Rent
	1* – 12	$	100,465.20	$	8,372.10
	13 – 24	$	103,479.12	$	8,623.26
	25 – 36	$	106,583.52	$	8,881.96
	37 – 48	$	109,781.04	$	9,148.42
	49 – 60	$	113,074.44	$	9,422.87
*Base Rent for the first two full months of the term of the lease shall be abated.

Summary of Material Contractual Commitments

The following is a summary of our material contractual commitments as of ~~March 31,~~September, 2010:

	Payments Due By Period										Payments Due By Period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years		Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating leases:
Office leases	$	76,856	$	76,856	$	-	$	-	$	-	$	564,667	$	89,895	$	251,920	$	222,852	$	-
Total operating leases	$	76,856	$	76,856	$	-	$	-	$	-	$	564,667	$	89,895	$	251,920	$	222,852	$	-

Capital lease:
Office equipment	$	36,140	$	10,086	$	26,055	$	-	$	-	$	33,619	$	10,086	$	23,533	$	-	$	-
Total capital lease	$	36,140	$	10,086	$	26,055	$	-	$	-	$	33,619	$	10,086	$	23,533	$	-	$	-

Off-Balance Sheet Financing Arrangements

As of ~~June~~September 30, 2010 we had no off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect both the recorded values of assets and liabilities at the date of the financial statements and the revenues recognized and expenses incurred during the reporting period. Our estimates and assumptions affect our recognition of deferred expenses, bad debts, income taxes, the carrying value of its long-lived assets and its provision for certain contingencies. We evaluate the reasonableness of these estimates and assumptions continually based on a combination of historical information and other information that comes to its attention that may vary its outlook for the future. Actual results may differ from these estimates under ~~different~~differen t assumptions.

We believe the critical accounting policies that most impact our consolidated financial statements are described below.

Basis of Accounting — We use the accrual method of accounting.

Revenue Recognition — The Company applies the revenue recognition provisions pursuant to Accounting Standards Codification (“ASC”) 605.10, Revenue Recognition (“ASC 605”) (formerly SAB Topic 13A), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The guidance outlines the basic criteria that must be met to recognize the revenue and provides guidance for disclosure related to revenue recognition policies.

Health care service revenues are recognized in the period in which fees are fixed or determinable and the related services are provided to the subscriber.

Our subscribers generally pay in advance for their services by check payment, and revenue is then recognized ratably over the period in which the related services are provided. Advance payments from subscribers are recorded on the balance sheet as deferred revenue. In circumstance where payment is not received in advance, revenue is only recognized if collectability is reasonably assured. An allowance for uncollectible accounts is established for any customer who is deemed as possibly uncollectible.

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Item 3.3. Quantitative and Qualitative Disclosure about Market Risk

We are a smaller reporting company, as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, and accordingly we are not required to provide the information required by this Item.

Item 4.4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of ~~June~~September 30, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of ~~June~~September 30, 2010, our disclosure controls and procedures were effective in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and (2) ensuring that information disclosed by us in such reports is ~~accumulated~~accumul ated and communicated to our ~~manag ement,~~management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive officer and principal financial officer and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of ~~June~~September 30, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based on this assessment, our management concluded that as of ~~June~~September 30, 2010, our internal control over financial reporting is effective based on those criteria.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the ~~six~~nine months ended ~~June~~September 30, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. 1A. Risk Factors

Item 6. Exhibits ~~Exhibits~~

Exhibits. The following exhibits are included as part of this Quarterly Report:

	Exhibit Number		Title of Document

	Exhibit 31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

	Exhibit 31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the ~~Sarbanes-Oxley~~Sarbanes Oxley Act of 2002

	Exhibit 32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	Exhibit 32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

2324

SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf, thereunto duly authorized.

	PACIFIC HEALTH CARE ORGANIZATION, INC.

Date: ~~August 13,~~November 15, 2010	By:	/s/ Tom Kubota
		Tom Kubota,
		Chief Executive Officer



Date: ~~August 13,~~November 15, 2010	By:	/s/ Fred Odaka
		Fred Odaka,
		Chief Financial Officer