PACIFIC HEALTH CARE ORGANIZATION INC - Quarter Report: 2009 June (Form 10-Q)

phco_0609q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2009

[ ]	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 incorporation or organization)		(I.R.S. Employer 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 such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Large accelerated filer o Accelerated filer o

Non-accelerated filer o Smaller reporting company x

(Do not check if a smaller reporting company)

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 11, 2009, 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

Item 1. Consolidated Financial Statements
		Page
	Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008	3

	Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)	4

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

	Notes to Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 4T. Controls and Procedures		24

PART II — OTHER INFORMATION

Item 6. Exhibits		25

Signatures		26

PART I. FINANCIAL INFORMATION

Item 1. Financial Information

Pacific Health Care Organization, Inc.

Balance Sheets

ASSETS
	June 30, 2009			December 31, 2008
	(Unaudited)
Current Assets
Cash	$	518,661		$	624,401
Accounts receivable, net of allowance of $20,000		365,930			177,376
Deferred tax asset		15,765			15,765
Prepaid income tax		8,600			-
Prepaid expenses		59,395			50,119
Total current assets		968,351			867,661

Property and equipment, net (note 4)
Computer equipment		60,922			60,922
Furniture & fixtures		28,839			28,839
Total property & equipment		89,761			89,761

Less: accumulated depreciation		(86,027	)		(85,736	)

Net property & equipment		3,734			4,025

Total assets	$	972,085		$	871,686

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	4,644		$	1,630
Accrued expenses (note 8)		235,946			178,836
Income tax payable		33,756			34,823
Unearned revenue		25,437			30,494
Total current liabilities		299,783			245,783
Total liabilities		299,783			245,783

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
Additional paid-in capital		623,629			623,629
Retained earnings		47,871			1,472
Total stockholders’ equity		672,302			625,903

Total liabilities and stockholders’ equity	$	972,085		$	871,686

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

Pacific Health Care Organization, Inc.

Statements of Operations

(Unaudited)

	For three months ended				For six months ended
	June 30,				June 30,
	2009		2008		2009		2008
Revenues:
HCO fees	$	230,263	$	295,467	$	475,261	$	574,018
MPN fees		151,291		148,016		300,851		335,408
Other		125,136		146,319		251,933		274,043
Total revenues		506,690		589,802		1,028,045		1,183,469

Expenses:
Depreciation		145		-		291		831
Consulting fees		57,497		59,810		120,083		124,840
Salaries & wages		181,856		190,530		394,602		367,602
Professional fees		35,657		76,144		92,252		158,525
Insurance		28,115		26,339		56,786		57,067
Employment enrollment		15,000		18,000		30,000		36,000
Data maintenance		46,905		62,418		102,537		126,773
General & administrative		71,360		71,747		155,861		149,493

Total expenses		436,535		504,988		952,117		1,021,131
Income from operations		70,155		84,814		75,928		162,338

Other income:
Interest income		657		756		1,404		1,748
Total other income		657		756		1,404		1,748

Income before taxes		70,812		85,570		77,332		164,086

Income tax provision		29,465		36,472		30,933		69,580

Net income	$	41,347	$	49,098	$	46,399	$	94,506

	For three months ended				For six months ended
	June 30,				June 30,
	2009		2008		2009		2008
Basic and fully diluted earnings per share:
Earnings per share amount	$	.05	$	.06	$	.06	$	.12
Weighted average common shares outstanding		804,424		804,424		804,424		804,424

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

Pacific Health Care Organization, Inc.

Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2009			2008
Cash flows from operating activities:
Net income	$	46,399		$	94,506
Adjustments to reconcile net income to net cash:
Depreciation		291			831
Changes in operating assets & liabilities
(Increase) in accounts receivable		(188,554	)		(3,959	)
(Increase) in deferred tax asset		-			(2,087	)
( Increase) in prepaid income tax		(8,600	)		(20,620	)
(Increase) in prepaid expenses		(9,276	)		(295	)
Increase (decrease) in accounts payable		3,014			(14,019	)
Increase in accrued expenses		57,110			49,659
Increase (decrease) in income tax payable		(1,067	)		59,593
Increase (decrease) in unearned revenue		(5,057	)		(13,958	)
Net cash provided by (used in) operating activities		(105,740	)		149,651

Cash Flows from Investing Activities
Cash-out of fractional shares of common stock		-			(1,005	)
Net cash used by investing activities					(1,005	)

Cash Flows from Financing Activities
Net cash used by financing activities		-			-

Increase (decrease) in cash		(105,740	)		148,646

Cash at beginning of period		624,401			419,416
Cash at end of period	$	518,661		$	568,062

Supplemental Cash Flow Information
Cash paid for:
Interest	$	-		$	-
Taxes	$	40,600		$	32,594

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

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2009

NOTE 1 - Corporate History

Pacific Health Care Organization, Inc. was incorporated under the laws of the State of Utah, on April 17, 1970 under the name Clear Air, Inc. The Company changed its name to Pacific Health Care Organization, Inc., on January 31, 2001. On February 26, 2001, we acquired Medex Healthcare, Inc., a California corporation organized March 4, 1994, in a share for share exchange. Medex is a wholly-owned subsidiary of the Company. Medex is in the business of managing and administering Health Care Organizations (“HCOs”) and Medical Provider Network (“MPNs”) in the state of California. On August 14, 2001, we formed Workers Compensation Assistance, Inc. as a wholly-owned subsidiary of PHCO. In January 2008, Workers Compensation Assistance, Inc. changed its name to Industrial Resolutions Coalition, Inc. Industrial Resolutions Coalition, Inc. is actively working towards participation in the business of creating legal agreements for the implementation of Workers’ Compensation Carve-Outs for California employers with collective bargaining units.

Medex Healthcare, Inc.

HCOs are networks of medical providers established to serve the workers’ compensation industry. In the original legislation establishing HCOs, the California legislature mandated that if an employer contracts services from an HCO, the injured workers must be given a choice between at least two HCOs. To be competitive, our wholly owned subsidiary, Medex, recognized early on that it was necessary to have two HCO certifications. Instead of aligning with a competitor, Medex elected to go through the lengthy applications process with the California Department of Industrial Relations (“DIR”) twice to obtain licensure for and to operate two separate HCOs. While there is no longer a statutory requirement to offer two HCOs to employers, Medex continues to retain its two certifications. As such, employer clients have the option of offering one or two HCOs to their employees. Medex believes its ability to offer two HCOs gives potential clients greater choice, which is favored by a number of employers, especially those with certified bargaining units.

Through the two licensed HCOs Medex offers injured workers a choice. One is to enroll in an HCO with a network managed by primary care providers requiring a referral to specialists. The second choice is to enroll in an HCO where injured workers do not need any prior authorization to be seen and treated by specialists.

The two HCO certifications that Medex currently holds cover the entire state of California, where medical and indemnity costs associated with Workers’ Compensation in the state California are in the billions of dollars annually. Our two HCOs utilize a network of over 3,200 contracted providers and clinics, as well as, hospitals, pharmacies, rehabilitation centers and other ancillary services making our HCOs capable of providing comprehensive medical services throughout this region. We are continually developing the network based upon the nominations of new clients and the approvals of their claims’ administrators. Provider credentialing is performed by Medex.

Medex, by virtue of its continued certification as an HCO, is statutorily deemed to be qualified as an approved MPN. A significant number of employer clients have availed themselves of the MPN. Others utilize the provisions of the HCO program, while others will use both in conjunction with each other. The Company maintains ongoing discussions with insurance brokers, carriers, third party administrators, managed care organizations and representatives of self-insured employers, both as partners and potential clients. Based on potential cost savings to employers and the approximately fourteen million workers eligible for our services, the Company expects that employers will continue to sign contracts with the Company to retain the Company’s services. The amounts the Company charges employers per enrollee may vary based upon factors such as employer history and exposure to risk; for instance, a construction company would likely pay more than a payroll service company. In addition, employers who have thousands of enrollees are more likely to get a discount than employers with fewer employees.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2009

NOTE 1 - Corporate History (continued)

Because the Company contracts with medical providers who own their own medical equipment, such as x-ray machines, the Company does not typically incur large capital expenditures. The Company does, however, incur fixed costs such as liability insurance and other usual costs of running a business.

Industrial Resolutions Coalition, Inc.

In 2001 we incorporated Workers Compensation Assistance, Inc., (now known as Industrial Resolutions Coalition, Inc., as a wholly-owned subsidiary, with the intent of pursuing other opportunities in the workers’ compensation field. Toward the end of 2007 we identified a business opportunity within the workers’ compensation field that we have begun to pursue. Through IRC, we will be in the business of creating legal agreements for the implementation of Workers’ Compensation Carve-Outs for California employers with collective bargaining units, and the administration of such programs within the statutory and regulatory requirements.

Because we already have established health care networks, we considered pursuing this market directly through Medex. Workers’ unions, however, have historically been opposed to HCO programs, including Medex. Medex has been largely unable to place its services into employers with union participation in both the private and public sectors. The reason for this has been the requirement in the HCO statute (LC 4600.3) that the unions authorize the use of the HCO program. Unions have been opposed to authorizing the use of HCO programs because the HCO program is selected by the employer with no input whatsoever from labor participants. The major unions, especially those involved in schools and governmental entities (municipalities, etc.), have historically refused to allow employers to implement the HCO. All the unions in the California Labor Federation have also refused to participate in HCO programs. The same objections have been raised regarding the use of the MPN, i.e., no input from labor representatives.

NOTE 2 - Significant Accounting Policies

A. Basis of Accounting

The Company uses the accrual method of accounting.

B. Revenue Recognition

The Company applies the provisions of SEC Staff Accounting Bulletin No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (“SAB 104”), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 104 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 monthly contracted amounts for services provided 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.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2009

NOTE 2 - Significant Accounting Policies (continued)

The Company’s subscribers pay for their services by check or electronic check payment, and revenue is then recognized ratably over the period in which the related services are provided. Advance billings to subscribers are recorded on the balance sheet as unearned revenue. In circumstances where payment is not received in advance, revenue is only recognized when earned. 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.

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 30, 2009 or 2008.

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2009		2008		2009		2008
Basic and Fully Diluted Earnings per share:
Income (loss) (numerator)	$	41,347	$	49,098	$	46,399	$	94,506
Shares (denominator)		802,424		802,424		802,424		802,424
Per share amount	$	.05	$	.06	$	.06	$	.12

F. Depreciation

The cost of property and equipment is depreciated over the estimated useful lives of the related assets. The cost of leasehold improvements is depreciated 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.

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.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2009

NOTE 2 - Significant Accounting Policies (continued)

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.

I. Fair Value of Financial Instruments

On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements. SFAS No. 157 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 fair value of the Company's cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate carrying value based on their effective interest rates compared to current market prices.

The Company’s financial instruments consist of cash, receivables, payables, and notes payable. The carrying amount of cash, receivables and payables approximates fair value because of the short-term nature of these items. The carrying amount of the notes payable approximates fair value as the individual borrowings bear interest at market interest rates.

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.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2009

NOTE 2 - Significant Accounting Policies (continued)

L. Capital Structure

The Company has two classes of stock. Preferred stock, par value $.001, 5,000,000 shares authorized, zero issued. Voting rights and liquidation preferences have not been determined. The Company also has voting common stock, par value $.001, of 50,000,000 shares authorized, with 802,424 shares issued and outstanding. No dividends were paid in the six months ended June 30, 2009 and 2008, nor in any prior period.

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 No. 123 (Revised 2004), “Accounting for Stock-Based Compensation” (SFS123[R]). 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 months ended June 30, 2009 and at the year ended December 31, 2008, a $20,000 general reserve for balances over 90 days past due has been established. There have not been any recognized bad debts during 2009.

The percentages of the major customers to total accounts receivable for the six months ended June 30, 2009 (unaudited) are as follows:

Customer A	22%
Customer B	16%
Customer C	14%
Customer D	13%

NOTE 3 - New Technical Pronouncements

The FASB has issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee Insurance Contracts. SFAS No. 163 clarifies how SFAS No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, and addresses the recognition and measurement of premium revenue and claim liabilities. It requires expanded disclosures about contracts, and recognition of claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires disclosure about (a) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations, and (b) the insurance enterprise’s surveillance or watch list. SFAS 163 is not currently applicable to the Company since the Company does not have any financial guarantee insurance contracts.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2009

NOTE 3 - New Technical Pronouncements (continued)

In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, the Hierarchy of Generally Accepted Accounting Principles, which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. With the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature. The Company is currently assessing the impact of SGAS No. 162 on its financial position and results of operations.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective January 1, 2009. SFAS 161 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their

effects on an entity’s financial position, financial performance, and cash flows. Among other things, SFAS 161 requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant. SFAS 161 is not currently applicable to the Company since the Company does not have derivative instruments or hedging activity.

NOTE 4 - Fixed Assets

The Company capitalizes the purchase of equipment and fixtures for major purchases in excess of $1,000 per item. Capitalized amounts are depreciated over the useful life of the assets using the straight line method of depreciation which is three and seven years for office equipment, and furniture and fixtures, respectively. Scheduled below are the assets, costs and accumulated depreciation at June 30, 2009 (unaudited) and December 31, 2008.

	Cost				Depreciation Expense				Accumulated Depreciation
	For the Six Months Ended		For the Year Ended		For the Six Months Ended		For the Year Ended		For the Six Months Ended		For the Year Ended
	June 30, 2009		December 31, 2008		June 30, 2009		December 31, 2008		June 30, 2009		December 31, 2008
Assets:
Computer Equipment	$	60,922	$	60,922	$	-	$	-	$	60,922	$	60,922
Furniture & Fixtures		28,839		28,839		291		831		25,105		24,814
Totals	$	89,761	$	89,761	$	291	$	831	$	86,027	$	85,736

NOTE 5 - Income Taxes

The Company accounts for corporate income taxes in accordance with Statement of Accounting Standards Number 109 (“SFAS No. 109”) “Accounting for Income Taxes.” SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income tax purposes.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2009

NOTE 5 - Income Taxes (continued)

The tax provision (benefit) for the six months ended June 30, 2009 and the year ended December 31, 2008 consisted of the following:

	2009		2008
	(unaudited)
Current:
Federal	$	23,200	$	81,703
State		7,733		35,323
Deferred:
Federal		-		(996	)
State		-		(259	)
Total tax	$	30,933	$	115,771

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s total deferred tax liabilities, deferred tax assets, and deferred tax asset valuation allowances at June 30, 2009 and December 31, 2008 are as follows:

	2009			2008

Net operating loss	$	-		$	-
Depreciation
Federal		(888	)		(888	)
State		(330	)		(330	)
Reserve for bad debts
Federal		6,770			6,770
State		1,030			1,030
Vacation accrual
Federal		7,734			7,734
State		1,449			1,449
Charitable contribution		-			-

Deferred tax asset	$	15,767		$	15,767

The reconciliation of income tax computed at statutory rates of income tax benefits is as follows:

	2009		2008

Expense at federal statutory rate	$	23,200	$	70,085
State tax effects		7,733		35,064
Non deductible expenses		-		10,622
Taxable temporary differences		-		2,764
Deductible temporary differences		-		(1,768	)
Deferred tax asset valuation increase		-		(996	)
Income tax (benefit)	$	30,933	$	115,771

The Financial Accounting Standards Board (FASB) has issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of FIN 48, the Company performed a review of its material tax positions in accordance with recognition and measurement standards established by FIN 48.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2009

NOTE 5 - Income Taxes (continued)

At the adoption date of January 1, 2007, the Company had no unrecognized tax benefit which would affect the effective tax rate if recognized.

The Company includes interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations in the provision for income taxes. As of June 30, 2009 and December 31, 2008, the Company had no accrued interest or penalties.

NOTE 6 - Operating Leases

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 March 2009 under a one-year lease. Our monthly rent for this space is approximately $2,000 per month. The principal offices of our operating subsidiaries, Medex and IRC are located in Long Beach, California. Medex leases approximately 3,504 square feet of office space in Long Beach, California. The monthly lease payment during the quarter ended June 30, 2009 was approximately $7,700. The term of this lease is through February 2011. Medex currently makes some office space available to IRC. Medex also has an equipment lease for an office copier with monthly payments of $436 expiring in May 2011. We anticipate the facilities we currently lease will be suitable and adequate for our needs.

Total Lease Commitments:	Year	Office Lease Amount		Equipment Lease Amount		Total Amount
	2009	$	57,984	$	2,616	$	60,600
	2010		98,208		5,232		103,440
	Thereafter		15,776		2,180		17,956
	Total	$	171,968	$	10,028	$	181,996

Rent expense for the office space for the six months ended June 30, 2009 and June 30, 2008 was $55,666 and $51,479, respectively. Equipment rent expense for the six months ended June 30, 2009 was $2,616.

NOTE 7 - Major Customers

The Company had four and three customers, respectively, who accounted for 10 percent or more of the Company’s total revenues during the six months ended June 30, 2009 and year ended December 31, 2008. The percentages of total revenues for the six months ended June 30, 2009 and the year ended December 31, 2008 are as follows:

	June 30, 2009			December 31, 2008
	(unaudited)
Customer A		13	%		18	%
Customer B		16	%		15	%
Customer C		0	%		12	%
Customer D		21	%		0	%
Customer E		13	%		0	%

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2009

NOTE 8 - Accrued and Other Liabilities

	June 30, 2009		December 31, 2008
	(unaudited)
Accrued liabilities consist of the following;
Employment Enrollment Fees	$	104,250	$	75,000
Compensated Absences		22,888		22,735
Legal Fees		94,000		79,000
Accounting Fees		14,490		1,783
Other		318		318
Total	$	235,946	$	178,836

NOTE 9 - Options for Purchase of Common Stock

In August 2002, the Company adopted a stock option plan. The Company adopted a plan which provides for the grant of options to officers, consultants and employees to acquire shares of the Company’s common stock at a purchase price equal to or greater than fair market value as of the date of the grant. Options are exercisable six months after the grant date and expire five years from the grant date. The exercise price of the options is $1.00. The fair market value of the options at the date of grant was determined to be $.70 due to earlier issuances for cash of this stock. The plan calls for a total of 50,000 shares to be held for grant. No securities were issued under the plan during the six months period ending June 30, 2009 or during the 2008 fiscal year.

2005 Stock Option Plan

On November 18, 2005, at the annual meeting of Stockholders of the Company, the Company and its shareholders adopted the Pacific Health Care Organization, Inc., 2005 Stock Option Plan. The plan provides for the grant of Company securities, including options, warrants and restricted stock to officers, consultants and employees to acquire shares of the Company’s common stock at a purchase price equal to or greater than fair market value as of the date of the grant. Options are exercisable six months after the grant date and expire five years from the grant date. The plan permits the granting of up to 50,000 common shares of the Company. To date, no securities have been granted under this plan.

NOTE 10 - Unaudited Information

The financial statement for the six months ended June 30, 2009 and 2008 were taken from the books and records of the Company without audit. However, such information reflects all adjustments, which are in the opinion of management, necessary to properly reflect the results of the six months ended June 30, 2009 and 2008, and are of a normal, recurring nature. The information presented is not necessarily indicative of the results from operations expected for the full fiscal year.

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 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,” “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; competition within our industry, 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 statements (other than pursuant to reporting obligations imposed on registrants pursuant to the Securities Exchange Act of 1934) to reflect subsequent 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.

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”) and Industrial Resolutions Coalition, Inc. (“IRC”).

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 include an annual fee per employee enrolled in the HCO at the end of the calendar year. The HCO guidelines also impose certain data reporting requirements on the HCO and annual enrollment notice delivery requirements. These requirements increase the administrative costs of an 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’ 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.

Unlike HCOs, MPNs are not assessed the annual enrollee fee that must be paid to the DWC. MPNs have far fewer data reporting obligations and no annual enrollment notice delivery requirements. MPN’s are only required to provide an enrollment notice at the time the employee first joins the MPN and a second notice at the time the employee suffers a work place injury.

Liquidity and Capital Resources

As of June 30, 2009, we had cash on hand of $518,661 compared to $624,401 at December 31, 2008. The $105,740 decrease in cash on hand is the result of decreases in revenue from operations and unearned revenue, increase in accounts receivables and prepaid income taxes offset by increases in accrued expenses and accounts payables. 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 credit 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 30, 2009 and 2008

Revenue

The total number of employee enrollees decreased 6% during three months ended June 30, 2009 compared to June 30, 2008. Total revenues decreased 14% to $506,690. As of June 30, 2009, we had approximately 216,000 total enrollees. Enrollment consisted of approximately 57,000 HCO enrollees and 159,000 MPN enrollees. By comparison as of June 30, 2008 we had approximately 228,000 enrollees, including approximately 75,000 HCO enrollees and approximately 153,000 MPN enrollees.

We believe the decrease in employee enrollees and revenue is indicative of the current economy. 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.

Our business generally has a long sales cycle, typically in excess of one year. However, once we have established a customer relationship, our revenue adjusts with the growth or retraction of our customers’ managed headcount volume. New customers are added throughout the year and other customers terminate from the program for a variety of reasons. Our single largest customer will terminated its contract with us effective August 1, 2009. We anticipate the impact on revenue of this termination will be significant on a go forward basis as this customer accounted for approximately $158,000 and $161,000, of revenue for the quarters ending September 30, 2008 and December 31, 2008, respectively. The total 2008 revenue generated from this customer was approximately $681,000.

In the current economic environment, we anticipate businesses will seek ways to further reduce their workers’ compensation program costs. Even though the HCO and MPN programs create a favorable return on investment for employers as our services are a significant part of the employers’ loss prevention programs to avoid significant workers’ compensation claims and provide a framework for expeditiously returning their employees back to work at the lowest cost, it is always a challenge to justify our fees to our customers. As a result, we may experience some client turnover, in the form of existing employer clients short-sightedly seeking to terminate or renegotiate the scope and terms of existing services. We also anticipate our market may shrink as some employers seek to reduce their costs by managing their workers’ compensation care services in-house. The market is currently subject to restructuring in the type and pricing of services provided in our industry. We expect these factors may continue to erode HCO Fees, MPN Fees and Other Revenue until economic conditions improve.

Total revenues decreased 14% to $506,690, in the second quarter 2009 over the second quarter 2008. HCO revenues decreased 22% due to decreased HCO enrollees. MPN revenues increased 2% due to increases in MPN enrollees in the second quarter 2009. Other revenue decreased 14% as a result of providing decreased nurse case management services to our customers.

HCO Fees

During the three months ended June 30, 2009 and 2008, HCO fee revenues were $230,263 and $295,467 respectively. A 24% decrease in HCO enrollment during the three months ended June 30, 2009, resulted in this 22% decrease in revenue from HCO fees. This was attributable to decreased employee enrollment and renotification of existing clients.

MPN Fees

MPN fee revenue for the three months ended June 30, 2009 was $151,291 compared to $148,016 for the three months ended June 30, 2008. During the second fiscal quarter we realized a 4% increase in MPN enrollment when compared the same period 2008. Although MPN enrollment increased 4%, because of differing fee terms, unbundling of services, price competition and similar factors, we realized only a 2% increase in MPN revenue during the three months ended June 30, 2009.

Other Revenue

During the three months ended June 30, 2009, other revenue decreased 14% to $125,136 from $146,319 in the same period a year earlier. The primary component of other revenue is nurse case management. We retain nurses on our staff who, at the request of our customers, will 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.

Expenses

Total expenses during the three months ended June 30, 2009 compared to 2008, decreased 14% to $436,535 primarily as a result of decreased professional fees caused by higher legal fees incurred in the 2008 quarter related to the reverse and forward stock splits. Additionally, during the three months ended June 30, 2009, salaries and wages and data maintenance expense were lower by 5% and 25%, respectively, when compared to the same period a year earlier.

Consulting Fees

During the three months ended June 30, 2009, consulting fees decreased to $57,497 from $59,810 during the three months ended June 30, 2008. This decrease in consulting fees of $2,313 was primarily due to lower lobbyist consulting fees. We do not anticipate that consulting fees will increase during fiscal 2009 unless 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.

Salaries and Wages

Salaries and wages decreased $8,674 or 5% during the three months ended June 30, 2009 from the same period a year earlier. The decrease in salaries & wages was due primarily to the termination of a nurse case manager and a 10% reduction in wages for salaried employees that went into effect in May 2009.

Professional Fees

For the three months ended June 30, 2009, we incurred professional fees of $35,657 compared to $76,144 during the three months ended June 30, 2009. This 53% decrease in professional fees was the primarily the result of decreased legal fees during the three months ended June 30, 2009 when compared to the previous year quarter which included legal fees associated with our the reverse and forward splits of our common stock. Should potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses arise, legal expenses may be considerably higher in future quarters.

Insurance

During the three months ended June 30, 2009, we incurred insurance expenses of $28,115 a $1,776 increase over the prior year three months of 2008. We do not expect insurance expense to increase materially in 2009.

Employment Enrollment

Employment enrollment decreased $3,000 to $15,000 during the three months ended June 30, 2009, compared to the three months ended June 30, 2008. As an HCO, we are 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 accrue expenses during the year based on our estimation of what enrollment will be at year end. We anticipate that employee enrollment will be lower at December 31, 2009 than it was at December 31, 2008 due to fewer HCO enrolled employees.

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.

Data maintenance fees decreased 25% during the three months ended June 30, 2009. The decrease in data maintenance fees was primarily attributable to the decreased level of HCO enrollees, lower data maintenance costs associated with the renewal of MPN enrollees and lower prices negotiated with third party service providers. We expect data maintenance fees will be lower throughout 2009 as compared to 2008.

General and Administrative

General and administrative expenses for the three months ended June 30, 2009 and 2008 were $71,360 and $71,747, respectively. We expect current general and administrative expenses to be lower in the remaining months of 2009, as compared to the comparable period of 2008, as a result of cutting operating costs in proportion to the anticipated decline in revenues.

Net Income

While we realized a 14% decrease in our total revenue during the quarter, this decrease was partially offset by a 13% decrease in total expenses during the three months ended June 30, 2009, which led to a $14,659 decrease in income from operations during three months ended June 30, 2009.

As a result of lower revenues and lower expenses, we realized a net income of $41,347 compared to $49,098 during three months ended June 30, 2009 and 2008, respectively.

Comparison of the six months ended June 30, 2009 and 2008

Revenue

The total number of employee enrollees decreased 6% during six months ended June 30, 2009 compared to June 30, 2008. As a result, total revenues decreased 13% to $1,028,045. As of June 30, 2009, we had approximately 216,000 total enrollees. Enrollment consisted of approximately 57,000 HCO enrollees and 159,000 MPN enrollees. By comparison as of June 30, 2008 we had approximately 228,000 enrollees, including approximately 75,000 HCO enrollees and approximately 153,000 MPN enrollees.

HCO Fees

During the six months ended June 30, 2009 and 2008, HCO fee revenues were $475,261 and $574,018 respectively. The 24% decrease in HCO enrollment during the six months ended June 30, 2009, resulted in a 17% decrease in revenue from HCO fees. This was attributable to decreased employee enrollment and decreased re-notification of existing clients.

MPN Fees

MPN Fee revenues for the six months ended June 30, 2009 were $300,851 compared to $335,408 for the six months ended June 30, 2008. As of June 30, 2009 we realized a 4% increase in MPN enrollment when compared the same period 2008. Although we had an increase in MPN enrollment during the six months ended June 30, 2009, factors such as differing fee terms, unbundling of services, price competition and other similar factors as compared to 2008, resulted in a 10% decrease in MPN revenues compared to the same period 2008.

Other Revenue

During the six months ended June 30, 2009, other revenue decreased 8% to $251,933 from $274,043 in the same period a year earlier. As noted above, the primary component of other revenue is nurse case management. Other revenue decreased during the six months ended June 30, 2009 because of the decline in demand for nurse case management services.

Expenses

Total expenses for the six months ended June 30, 2009 and 2008 were $952,117 and $1,021,131. The decrease of $69,014 was the result in decreases in consulting fees, professional fees, insurance, employment enrollment and data maintenance, partially offset by increases in salaries and wages and general and administrative expenses.

Consulting Fees

During the six months ended June 30, 2009, consulting fees decreased to $120,083 from $124,840 during the six months ended June 30, 2008. This decrease of $4,757 in consulting fees was primarily due to reduced level of lobbyist fees. We do not anticipate that consulting fees will increase during fiscal 2009 unless 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.

Salaries and Wages

Salaries and wages increased $26,705 or 7% during the six months ended June 30, 2009. The increase in salaries & wages is primarily, due to the hiring of an additional administrative staff member, a bonus paid to our CEO and merit increases to certain administrative staff members, offset by a 10% wage reduction implemented in May 2009 for our salaried employees and the termination of a nurse case manager.

Professional Fees

For the six months ended June 30, 2009, we incurred professional fees of $92,252 compared to $158,525 during the six months ended June 30, 2008. This 42% decrease in fees is the result of decreased accounting and legal fees, partially offset by increases in medical consulting fees and NCM fees. The decrease in accounting fee was the result of terminating the outside accounting consultant in December 2008. The lower legal expenses during the six months ended June 30, 2009, resulted from the higher expense level in 2008 associated with the reverse and forward splits of our common stock.

Insurance

During the six months ended June 30, 2009, we incurred insurance expenses of $56,786, a $281 decrease over the prior year six months. The decrease in 2009 was primarily due to minor adjustments made to the health insurance premiums.

Employment Enrollment

Employment enrollment expenses decreased $6,000 to $30,000 during the six months ended June 30, 2009, compared to the six months ended June 30, 2008. As an HCO, we are 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 accrue expense during the year based on our estimation of what enrollment will be at year end.

Data Maintenance

During six months ended June 30, 2009 we experienced a 32% decrease in HCO enrollment and a 4% increase in MPN enrollment, resulting in an overall enrollment decrease of 6%. Data maintenance fees decreased 19% to $102,537 during the six months ended June 30, 2009. 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 expenses increased 4% to $155,861 during the six months ended June 30, 2009. This increase in general and administrative expense was attributable to increases in expenses associated with maintaining a provider network site, printing and reproduction and miscellaneous expense partially offset by decreases in advertising expense, equipment repairs, travel and entertainment expense and shareholders’ meeting expense. We expect current general and administrative expenses to be lower in the remaining months of 2009 as a result of cutting operating costs in proportion to the anticipated decline in revenues.

Net Income

During the six months ended June 30, 2009, total revenues of $1,028,045 were lower by $155,424 when compared to the same period in 2008. This decrease in total revenues was offset by the $69,014 decrease in total expenses resulting in an income from operations of $75,928 compared to an income from operations of $162,338 during six months ended June 30, 2008. Correspondingly, we realized a net profit of $46,399 for the six months June 30, 2009, compared to a net income of $94,506, during the six months ended June 30, 2008. As the current recession has had an adverse impact on our gross revenues and net income during the three and six month periods ending June 30, 2009, we expect this trend will continue throughout 2009.

Cash Flow

During the six months ended June 30, 2009 cash was primarily used to fund operations. We had a net decrease in cash of $105,740 during the six months ended June 30, 2009 as compared an increase in cash of $148,646 at June 30, 2008. See below for additional discussion and analysis of cash flow.

	For the six months ended June 30,
	2009			2008
	(unaudited)			(unaudited)

Net cash provided by (used in) operating activities	$	(105,740	)	$	149,651
Net cash used in investing activities		-			(1,005	)
Net cash provided by financing activities		-			-

Net Change in Cash	$	(105,740	)	$	148,646

During the six months ended June 30, 2009, net cash used in operating activities was $105,740 compared to net cash provided by operating activities of $149,651 during the six months ended June 30, 2008. As discussed herein we realized net income from operations of $46,399 during the six months ended June 30, 2009, compared to $94,506 during the six months ended June 30, 2008.

We did not engage in investing activities during the six months ended June 30, 2009 and used only $1,005 in investing activities during the six months ended June 30, 2008 for the cash-out of fractional shares of common stock resulting from the reverse split of our common stock in May 2008. We did not engage in any financing activities in six months ended June 30, 2009 or 2008.

Summary of Material Contractual Commitments

	Payments Due By Period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating Leases:
Equipment Leases	$	10,028	$	5,232	$	4,796	$	-	$	-
Office Leases		171,968		108,864		63,104		-		-

Total	$	181,996	$	114,096	$	67,900	$	-	$	-

Off-Balance Sheet Financing Arrangements

As of June 30, 2009 we had no off-balance sheet financing arrangements.

Recent Accounting Pronouncements

The FASB has issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee Insurance Contracts. SFAS No. 163 clarifies how SFAS No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, and addresses the recognition and measurement of premium revenue and claim liabilities. It requires expanded disclosures about contracts, and recognition of claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires disclosure about (a) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations, and (b) the insurance enterprise’s surveillance or watch list. We are currently evaluating the impact of SFAS No. 163.

In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, the Hierarchy of Generally Accepted Accounting Principles, which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. With the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature. We are currently assessing the impact of SGAS No. 162 on our financial position and results of operations.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective January 1, 2009. SFAS 161 requires enhanced

disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, SFAS 161 requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant. SFAS 161 is not currently applicable to the Company since we do not have derivative instruments or engage in hedging activity.

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 assumptions.

Management suggests that our Summary of Significant Accounting Policies, as described in Note 2 of our Consolidated Financial Statements, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 — We apply the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (“SAB 104”), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, we recognize revenue related to monthly contracted amounts for services provided 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) collectibility 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.

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 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures. Because of inherent limitations, our disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of such disclosure controls and procedures are met.

As of the end of the period covered by this Report we conducted an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2009.

Changes in Internal Control

There was no change in our internal control over financial reporting during the six months ended June 30, 2009, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. 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 Sarbannes Oxley Act of 2002.
Exhibit 31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbannes Oxley Act of 2002.
Exhibit 32.1		Certification Pursuant to Section 906 of the Sarbannes-Oxley Act of 2002.
Exhibit 32.2		Certification Pursuant to Section 906 of the Sarbannes-Oxley Act of 2002.

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 ORGNIZATION, INC.

Date: August 14, 2009	By:	/s/ Tom Kubota
		Tom Kubota, Chief Executive Officer


Date: August 14, 2009	By:	/S/ Fred Odaka
		Fred Odaka, Chief Financial Officer