PACIFIC HEALTH CARE ORGANIZATION INC - Annual Report: 2010 (Form 10-K)

phco1210k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended:	December 31, 2010

OR

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

For the transition period from:	to

Commission File Number 0-50009

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 I.D. No)
	incorporation or organization)

	1201 Dove Street, Suite 300	92660
	Newport Beach, California	(Zip Code)
	(Address of principal executive offices)

Registrant's telephone number including area code: (949) 721-8272

Securities registered pursuant to Section 12 (b) of the Act: None

Securities registered pursuant to Section 12 (g) of the Act:

$.001 par value, common voting shares
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.			Yes o	No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Exchange Act			Yes o	No x

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 past 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.			Yesx	No o

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


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.				x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the 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	o	Smaller reporting company	x
(Do not check if 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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity as of June 30, 2010 was approximately $105,994.

As of March 16, 2011 the issuer had 802,424 shares of its $.001 par value common stock outstanding.

Documents incorporated by reference: None

Table of Contents

		Page
PART I

Item 1.	Business	5

Item 1A.	Risk Factors	15

Item 1B.	Unresolved Staff Comments	15

Item 2.	Properties	16

Item 3.	Legal Proceedings	16

Item 4.	Removed and Reserved	16

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16

Item 6.	Selected Financial Data	17

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	18

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 8.	Financial Statements and Supplementary Data	26

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	49

Item 9A.	Controls and Procedures	49

Item 9B.	Other Information	51

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	51

Item 11.	Executive Compensation	58

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	63

Item 13.	Certain Relationships and Related Transactions, and Director Independence	64

Item 14.	Principal Accounting Fees and Services	65

PART IV

Item 15.	Exhibits, Financial Statement Schedules	66

	SIGNATURES	68

PACIFIC HEALTH CARE ORGANIZATION, INC.

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”).

Information Concerning Forward-Looking Statements

This annual report on Form 10-K 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 annual 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” “project” 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.

PART I

ITEM 1. BUSINESS

History of the Company

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 both Health Care Organizations (“HCOs”) and Managed Provider Networks (”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. On June 30, 2010 we acquired Arissa Managed Care, Inc., a Nevada corporation organized September 1, 2009 by purchasing all of its restricted common stock. Arissa provides marketing and sales services for our subsidiaries Medex and IRC.

Industry Background

Medex Healthcare, Inc.

In July 1993, the California legislature passed Assembly Bill 110 (“AB 110” or the “bill”) and deregulated the premiums paid by employers for workers’ compensation insurance. These two events have given rise to our business.

AB 110 was a collaboration of efforts from both employers and workers’ compensation insurance carriers, in an effort to curtail employers from leaving California due to escalating workers’ compensation costs. The bill was designed to address the problem of rising medical costs and poor quality of care provided to injured workers. Two of the major problems with the system, as identified by the legislature, were fraud, (including malingering), and the lack of managed care programs that allowed control of the quality of medical care of an injured worker beyond thirty days. AB 110 created a new health care delivery body to solve the unique medical and legal issues associated with workers’ compensation. The health care delivery entities established under AB 110 are known as Health Care Organizations. HCOs are networks of health care professionals specializing in the treatment of workplace injuries and in back-to-work rehabilitation and training. An HCO does not waive the statutory obligation of companies to either possess workers’ compensation insurance or qualify as permissibly self-insured entities.

HCOs were created to appeal to employees, while providing substantial savings to employers. This is accomplished by providing high quality medical care with professional oversight and increasing the length of time the employer is involved in the medical care provided to injured workers. The increased length in control is designed to decrease the incidence of fraudulent claims and disability awards and is also based upon the notion that if there is more control over medical treatment there will be more control over costs, and subsequently, more control over getting injured workers back on the job. The intent of the increase in control was to reduce the costs of claims and thereby reduce workers’ compensation premiums.

In addition, the law requires that employers who use HCOs give employees a choice of HCOs or managed care physicians within the HCO for treatment that is designed to increase quality and give employees a fair say in their treatment.

Prior to the passing of the bill, premiums paid by employers were fixed by law at a rate that was only dependent upon the occupation of the workers covered under the policy. In passing this legislation, the California legislature deregulated the premiums paid by employers. This encouraged competition for market share in the workers’ compensation insurance business. The increased competition initially drove premiums down to levels that were not sustainable. In response, insurers raised insurance premiums in 2002-2003 to unprecedented levels. Premiums have now been reduced somewhat due to reforms which were passed in 2003. High premiums and overall costs of workers’ compensation continue to drive employers to search for alternative workers’ compensation programs such as the HCOs created by AB 110.

In 2004, the California legislature enacted new laws that created Medical Provider Networks. Like an HCO, an MPN is a network of health care professionals, but MPN networks do not require the same level of medical expertise in treating 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. Under the MPN program, however, for as long as the employee seeks treatment for his injury, he can only seek treatment from physicians 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. Because we already had qualified networks in place through our HCO program, we began offering MPN services in January 2005. As a licensed HCO and MPN, we are able to offer our clients an HCO program, an MPN program and a hybrid of the HCO and MPN programs. Under this hybrid model, an employer can enroll its employees in the HCO program, and 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. We believe that we are currently the only entity that offers both programs together in a hybrid program.

In January 2010 revisions were made to the HCO regulations to make HCOs more competitive with MPNs, providing a viable network option for workers’ compensation care. The California Division of Workers’ Compensation (“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 were $1.00 per enrollee from January 1, 2007 through December 31, 2009. In 2010, the annual assessment structure has revised to provide for a flat fee structure. Under the new structure, annual assessments are $250 for HCOs with enrollments of 0-1,000 employees, $350 for 1,001-5,000 employees, and $500 for HCOs with greater than 5,000 employees. The 2010 assessment for Medex was $500 for its network of primary care providers and $250 for its network of primary and specialized care providers. Although the revisions to the HCO regulations became effective January 1, 2010, the changes to the HCO enrollment fees was retroactively applied to 2009 assessments.

Medex maintains direct contractual agreements with the primary and specialist healthcare providers in its networks for treatment of the injured workers of employer clients of Medex who are enrollees under the HCO or covered employees under the MPN. These agreements govern the relationship between Medex and the provider, including the obligations of the provider relating to hours of accessibility, reporting requirements, referral procedures, regulatory compliance, methodology for authorizations, compensation schedules, insurance requirements, utilization review, and grievance procedures. All agreements are in compliance with the requirements of the DWC and have been approved through the HCO certification process.

The providers within our networks are paid by various payers in accordance with the appropriate California Workers’ Compensation Fee Schedule, unless such provider has entered into a discounted contract with a preferred provider organization (“PPO”), and the employer (through the payer) has contractually accessed those discounted rates for the employer client. The California Workers’ Compensation Fee Schedule, which is created by the DWC, regulates the maximum allowable fees payable under workers’ compensation for procedures performed by a variety of health treatment providers. The fee schedule also includes fees for hospital treatments. The purpose of the fee schedule is to standardize the billing process by using uniform procedure descriptions and to set maximum reimbursement levels for such covered services.

The providers within our networks are paid by the payer, either the workers’ compensation insurance carrier with whom the employer contracts, or a permissibly self-insured employer authorized by the California Department of Industrial Relations Self Insurance Plan.

Care-related decisions are dictated by the care providers within our networks. Our network providers are expected to treat within the provisions of state-approved evidence-based guidelines. Requests for authorization for services and/or procedures may be subject to utilization review pursuant to the guidelines and procedures found in the California Labor Code.

HCO/MPN Certification Process

All applications for HCO license certification are processed by the California Department of Industrial Relations (“DIR”). All applications for MPN license certification are processed by the DWC. The application process is time consuming and requires descriptions of applicant’s organization and planned methods of operation.

The applicant for HCO or MPN licensure must develop a contracted network of providers for all of the necessary medical services that injured workers may need. An HCO network must be developed to the satisfaction of the DIR, and an MPN network must meet the satisfaction of the DWC. Given the wide range of medical providers needed over a large geographical area, this is a significant undertaking. The network of providers must be under direct contract with the HCO applicant and be willing to provide the various services in their specialty. All contracts must be approved by the DIR or DWC, as applicable, so as to assure the best of care will be provided to the injured worker.

The HCO or MPN applicant must develop committees of providers that will ensure the injured worker receives the best of care. For an HCO applicant this requirement includes the development of Quality Assurance, Utilization, Work Safety, Educational and Grievance committees. For an MPN applicant this includes the geographic service areas of the provider, employee notification process, continuity of care policy, transfer of care policy and economic profiling statement.

Finally, an HCO or MPN applicant must demonstrate to the satisfaction of the DIR or the DWR, as applicable, that it has the resources necessary to manage and administer a large network of providers. To establish the HCO applicant’s ability to administer a network, it requires the applicant to furnish the details of its operating system to the DIR in writing.

Medex received its first HCO license on March 15, 1997, for its network of primary care providers. Medex later received a second HCO license on October 10, 2000, for its network of primary and specialized care providers.

We are required to renew our HCO certifications every three years. Both certification are current through 2011. Although time consuming, the renewal process is relatively straight forward. Given that we have historically always been successful in renewing our licenses, barring a change in policy or practice, we do not anticipate problems in renewing our licenses when they come up for renewal.

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.

The California legislature permits employers and employees to engage in collective bargaining over alternative systems to resolve disputes in the workers’ compensation context. These systems are called carve-outs because the employers and employees covered by such collective bargaining agreements are carved out from the state workers’ compensation system. The goals of a carve-out include:

improving safety programs and hving fewer injury and illness claims;
increasing access to quality medical providers and medical evaluators;
lowering costs of medical care;
reducing disutes;
improving collaboration between unions and employers;
increasing satisfaction of all parties; and
providing the opportunity for continuous improvement by renegotiating the terms of the carve-out on an as-needed basis.

Unions and employers are allowed to agree on the following through collective bargaining:

an alternative dispute resolution process in place of most hearings before a workers' compensation judge;
a mutually agreed upon list of medical providers and medical evaluators; and
a mutually agreed upon list of vocational rehabilitation providers.

California law mandates a number of requirements including:

that the carve-out process does not diminsh compensation to injured workers; and
that the alternative dispute resolution process retain the right to appeal to the reconsideration unit of the Workers' Compensation Appeals Board ("WCAB") and, ultimately, to the state courts of appeal.

Only unions may initiate the carve-out process by petitioning the Administrative Director of the DWC (the “AD”). The AD will review the petition according to the statutory requirements and issue a letter allowing each employer and labor representative a one-year window for negotiations. The parties may jointly request a one-year extension to negotiate the labor-management agreement. No labor-management agreement may deny the right to representation by counsel at any stages during the alternative dispute resolution process.

Many critical issues in workers’ compensation are legal questions determined by medical findings. This is referred to as the medical-legal process and is distinct from medical treatment. Medical-legal evaluations may become necessary when any question of the employee’s entitlement to benefits is not satisfactorily resolved by the reports of the treating physician. Improved communication with the treating physician may reduce the need for a separate medical-legal evaluation. The carve-out agreement may provide for a list of physicians to be used when a medical-legal exam is needed.

IRC will contractually establish an alternative dispute resolution process that is negotiated by labor and management for individual unions and joint-trust committees with whom it has negotiated agreements. IRC shall perform, administer or employ ombudsmen, mediators, and arbitrators in the dispute resolution process. In some cases, IRC will train and administer employers and/or union members acting as ombudsmen and mediators.

Generally, the process starts with an ombudsman. Carve-out agreements typically provide that the ombudsman will be a neutral person available to all parties, who can provide information to injured workers and who attempts to avert or resolve disputes at an early stage. For example, the ombudsman may provide information on whether an injury is eligible for workers’ compensation and on benefits and may resolve any problems with the delivery of medical benefits.

If resolution of a workers’ compensation problem is unsuccessful at the level of the ombudsman, the injured worker may move the matter to the next step, which typically is formal mediation by an independent, neutral mediator. If mediation is unsuccessful, the parties may turn to an outside neutral arbitrator – often a retired worker's compensation administrative law judge. In addition, injured workers may at any stage hire an attorney to advise them in the dispute resolution process, although the attorney’s role may be limited in construction industry carve-out agreements, where legislation allows labor and management to proceed up to the arbitration portion of the dispute resolution process without representation of legal counsel. This helps to significantly limit the percentage of matters that are actually litigated.

Legislative statute requires that an appeals process be maintained in a carve-out. Therefore, the arbitrator’s decision may be appealed to the reconsideration unit of the Workers’ Compensation Appeals Board and, ultimately, to the state courts of appeal. IRC is trained to appear at these WCAB hearings.

IRC has expertise in the development of legal contracts, knowledge of negotiations of labor-management committees, and professional understanding of the medical and legal aspects of California workers’ compensation.

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 because the HCO statute requires 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.

Arissa Managed Care, Inc.

In June 2010, we acquired Arissa Managed Care, Inc., as a wholly-owned subsidiary of the Company. Arissa is a stand-alone marketing and sales company, and was acquired to sell services offered by Medex, IRC or any other subsidiary of the Company.

Business of the Company

Through our two HCO licenses, we offer injured workers a choice of enrolling in an HCO with a network managed by primary care providers requiring a referral to specialists or a second HCO where injured workers do not need any prior authorization to be seen and treated by specialists.

The two HCO certifications obtained by Medex cover the entire State of California. Medical and indemnity costs associated with workers’ compensation in the State California are billions of dollars annually. Our two HCO certified programs have contracted with over 3,700 individual 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 these networks based upon the nominations of new clients and the approvals of their claims’ administrators. Provider credentialing is performed by Medex.

As discussed above, under the HCO guidelines, all HCOs are required to collect from each enrolled employer annual fees that are passed on to the DWC. These fees include an annual fee at the end of the calendar year that is based on total HCO enrollment. 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, although, given the recent restructuring of the HCO enrollment fee, we anticipate the cost difference between HCO and MPN will narrow.

Due to multiple HCO requirements, many clients opt to use the less complicated MPN even though the client ultimately may lose control over the employee’s claim. The HCO program gives the client, in most cases, 180 days of medical control in a provider network within which the client has the ability to direct the claim. The injured workers may change physicians once, but may not leave the network. Whereas the MPN program seems to allow medical control for the life of the claim, but contains provisions that allow the client’s control of only the initial treatment before the claimant can treat with anyone in the network. In addition, the MPN statute and regulations allow the injured worker to dispute treatment decisions, leading to second and third opinions, and then a review by an Independent Medical Reviewer, whose decision can end up with the client losing medical control. 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.

Unlike HCOs, MPNs are not assessed annual fees, including the annual enrollment fee that must be paid to the DWC. MPNs have 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 must be delivered to the employee at the time he suffers a workplace injury. As a result, there are fewer administrative costs associated with administering an MPN program, which allows MPNs to market their services at a lower cost fees than HCOs.

We maintain ongoing discussions with insurance brokers, carriers, third party administrators, managed care organizations and with 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, we expect that employers will continue to sign contracts with us to retain our services. The amounts we charge 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.

Because we contract with medical providers, who own their own medical equipment, we have not incurred significant capital expenditures. We do, however, incur fixed costs such as liability insurance and other usual costs of running a business.

Physicians

We strive to select physicians known for excellence and experience in providing workers’ compensation care and writing ratable and defensible medical reports. Medex has been able to recruit physicians with exceptional credentials and reputations.

We recruit physicians and allied health workers who reflect the ethnic and cultural diversity of California, thus enabling injured workers to readily find a physician who speaks their native tongue. We believe this is a benefit for injured workers and will assist in ensuring a prompt return to the workplace.

HCO Committees

In compliance with AB 110, we have seven committees to provide the best possible care to injured workers. The following briefly describes each committee:

Quality Assurance

As the name implies this committee is charged with the responsibility of monitoring the quality of care that the HCO providers are delivering to the employees. The ultimate oversight and responsibility for this committee is maintained by the Medical Director.

Utilization Review

This committee is responsible for monitoring Provider/Enrollee utilization of health care services under the plan. The activities are reflected in reports documenting examinations of procedures, provider use patterns and other matters.

Case Management

The Case Management Committee (“CMC”) is charged with working with both the injured worker and the employers to coordinate return to work issues. For example, seeking light duties for an injured worker rather than allowing a protracted period of disability. Our ability to compress the time frame between an injured worker’s first report of injury and return to work is the most critical factor in the management of workers’ compensation care. The number of work days the employee misses due to disability translates into great costs to the employer, through medical costs, loss of productivity, the need to hire temporary help and disability insurance indemnity payments. The caseworker will become an intermediary between the physician, employer and employee by coordinating the return of the worker to a position he or she is capable of carrying out while recovering.

Work Safety

We believe that the best method to reduce work-related costs is to prevent work-related injuries from occurring. This committee is a workplace safety conditions and health committee that makes suggestions for ways to improve workplace conditions and to promote healthy habits. This committee seeks to promote safety and health by providing training for workers and employers in methods of avoiding work place injuries. For instance, training may include safe methods to lift heavy objects, proper use of safety equipment and safe operation of machinery. In addition, if agreeable to employer and employee, we can provide drug and alcohol testing to attempt to mitigate injuries that may be caused by these problems. Furthermore, we may provide anonymous referral services for drug and alcohol treatment services.

Grievance

This committee is responsible to inform employees upon enrollment and annually thereafter of procedures for processing and resolving grievances. This includes the location and telephone number where grievances may be submitted and where complaint forms are available to employees. We establish procedures for continuously reviewing the quality of care, performance of medical personnel and utilization of services to prevent causes for complaint.

Provider Licensing & Performance Review

Contracting with a high quality professional staff is critical in creating a workers’ compensation health care delivery system because in workers’ compensation the physician performs additional unique tasks. A workers’ compensation physician must understand the requirements of a patient’s job to make informed return-to-work recommendations and the physician needs to know how to make impairment ratings and be willing to testify in disputed cases. In addition, the physician must be a healer and patient’s advocate. These additional demands make it necessary to use different criteria to select workers’ compensation physicians. We monitor the performance of network physicians. Physicians who produce high quality, cost effective health care are provided with more patients, while physicians who do not are eliminated from the network.

Physicians’ Continuing Education

Physicians are reviewed for the latest theories and techniques in treating workplace injuries. Protocols and treatment plan suggestions are distributed to providers on the basis of results of outcome studies as established by ACOEM, (American College of Occupational and Environmental Medicine), the State of California’s Division of Workers’ Compensation, and the Medical Disability Advisor.

Ancillary Services

We have access to a full range of ancillary services to cover all requirements of the DIR. This includes interpreter services, ambulances, physical therapy, occupational therapy, pharmacies and much more. The ancillary services are vital to ensure there is a complete network capable of independently providing all care that may be necessary.

Significant Customers

During 2010 we had two customers that accounted for more than 34% of our total sales. The following table sets forth details regarding the percentage of total sales attributable to our significant customers in the past three years:

	Year ended December 31,
Customer:	2010			2009			2008
Customer A		0	%		12	%		18	%
Customer B		22	%		20	%		15	%
Customer C		12	%		11	%		9	%
Customer D		3	%		11	%		8	%
Customer E		0	%		0	%		12	%

During our third fiscal quarter 2009, Customer A chose to terminate its third-party administrator and not to renew its contract with Medex. This contract generated revenue to us from two sources, Customer A and Customer E, who was Customer A’s third-party administrator. Customer A terminated its third-party administrator and did not renew its contract with us in favor of retaining a company owned by the Customer A’s internal insurance broker. We understand that many businesses are seeking ways to limit costs in this difficult economic environment and do not believe the non-renewal reflects on our business model or our services. Rather, this non-renewal was the decision of one customer to pursue services from a related-party.

At the end of our first fiscal quarter 2010 Customer D chose not to renew its contract with Medex. We believe this non-renewal is the result of Customer D seeking to reduce expenses and is representative of what is happening throughout the industry.

These non-renewals have and will continue to impact our revenues, profits and liquidity in upcoming periods until we are able to contract new customers to replace the revenue generated from this contract. The revenue generated from these customers was approximately $409,000 and $41,000 or 23% and 3% of revenue during the year ended December 31, 2009 and 2010, respectively.

Competition

Although we are one of the first commercial enterprises capable of offering HCO and MPN services, there are new companies that are currently setting up similar services as those we offer. Many of these competitors may have greater financial, research and marketing experience and resources than we do, and they represent substantial long-term competition. As of December 2010, in California there were nine certified health care organization licenses issued to six companies, (two of which belong to the Company.) This translates into five direct HCO competitors. By contrast, there were 1,645 approved MPNs in the State of California, 46 of which are administered by the Company.

We contract directly with a network of providers based on quality determinations rather than the provision of discounted medical services. We believe this provides us a competitive advantage because we can market a direct relationship with providers who have demonstrated expertise in treating work related injuries and writing credible medical reports, rather than relying on third party relationships or discounts alone.

Medex offers both HCO and MPN programs to potential clients, as well as an HCO/MPN hybrid model, which we believe also gives Medex a competitive advantage, because of the manner in which the network was created.

Employees

Including the employees of our two subsidiaries, we currently employ 11 people, including ten on a full-time basis. We also have a number of consultants. In addition, all officers work on a full-time basis and directors work on a part-time basis, as needed, with no commitment for full-time employment. Over the next twelve months, we anticipate hiring additional employees only if business revenues increase and our operating requirements warrant such hirings.

Reports to Security Holders

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and other filings pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and amendments to such filings with the United States Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains its internet site www.sec.gov, which contains reports, proxy and information statements and our other SEC filings. Information appearing on the Company’s website is not part of any report that it files with the SEC.

ITEM 1A. RISK FACTORS

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal executive offices are located at 1201 Dove Street, Suite 300, in Newport Beach, California, where we rent approximately 5,100 square feet. This office serves as the offices of PHCO, Medex, IRC and Arissa. We anticipate this lease will be adequate for our needs for the upcoming year. We took possession of this space on March 1, 2011 pursuant to a five year lease. Our annual base rent for this space is as follows:

Rent Period	Annual Rent Payments
Mar. 1 to Dec. 31, 2011	$	66,977
Jan. 1 to Dec. 31, 2012	$	102,977
Jan. 1 to Dec. 31, 2013	$	106,066
Jan. 1 to Dec. 31, 2014	$	109,246
Jan. 1 to Dec. 31, 2015	$	112,526
Jan. 1 to Feb. 29, 2016	$	18,847
Total	$	516,639

ITEM 3. LEGAL PROCEEDINGS

The information set forth in Note 11 “Litigation” to our Consolidated Financial Statements included in this report is incorporated by reference into this Item 3.

ITEM 4. REMOVED AND RESERVED

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock currently trades on the OTCQB under the symbol “PFHO.PK”. The following table presents the high and low bid quotations for the fiscal years ended December 31, 2010 and 2009. The published high and low bid quotations were furnished to us by Pink OTC Markets Inc. These quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

	High		Low

Fiscal year ended December 31, 2010

Fourth Quarter	$	.22	$	.22
Third Quarter	$	.22	$	.214
Second Quarter	$	.45	$	.10
First Quarter	$	.45	$	.45

Fiscal year ended December 31, 2009

Fourth Quarter	$	.45	$	.45
Third Quarter	$	.45	$	.30
Second Quarter	$	.50	$	.30
First Quarter	$	.51	$	.40

Holders

As of March 16, 2011 we had approximately 310 shareholders holding 802,424 shares of our common stock. The number of record shareholders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers and registered clearing houses.

Dividends

We have not declared a cash dividend on any class of common equity during the past two fiscal years. Our ability to pay dividends is subject to limitations imposed by Utah law. Under Utah law, dividends may not be made if, after giving effect to the dividend: a) the company would be unable to pay its debts as they become due in the usual course of business; or b) the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed to satisfy the rights of any holders of preferential rights. Our board of directors does not, however, anticipate paying any dividends in the foreseeable future; it intends to retain the earnings that could be distributed, if any, for the operations, expansion and development of our business.

Performance Graph

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.

Recent Sales of Unregistered Securities

No instruments defining the rights of the holders of any class of registered securities have been materially modified, limited or qualified.

During the quarter ended December 31, 2010, we did not sell any unregistered securities.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Neither we, nor any affiliated purchasers, purchased any of our equity securities during the year ended December 31, 2010.

ITEM 6. SELECTED FINANCIAL DATA

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our consolidated financial condition and results of operations for the years ended December 31, 2010 and 2009, and other factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read together with our Consolidated Financial Statements and related notes beginning on page 26 of this annual report on Form 10-K.

Some of the statements set forth in this section are forward-looking statements relating to our future results of operations. Our actual results may vary from the results anticipated by these statements. Please see “Information Concerning Forward-Looking Statements” on page 4.

Results of Operations

Comparison of the years ended December 31, 2010 and 2009

Revenue

Although the total number of employee enrollees increased 16% during 2010 compared to 2009, total revenues during the same period decreased 8% to $1,615,659. As of December 31, 2010, we had approximately 286,000 total enrollees. Enrollment consisted of approximately 46,000 HCO enrollees and 240,000 MPN enrollees. By comparison as of December 31, 2009 we had approximately 248,000 enrollees, including approximately 34,000 HCO enrollees and approximately 214,000 MPN enrollees.

HCO enrollees increased by approximately 13,000 enrollees or 37% primarily as a result of the addition new customers. MPN enrollees increased by 26,000 enrollees or 12%. This increase was largely the result of adding a new customer to our network access and claim re-pricing program. The continuing economic slowdown impacted our revenue during 2010 and we anticipate it will continue to impact us in 2011 as employers seek to address the effects of the current economic environment on their individual businesses.

Our business generally has a long sales cycle, typically in excess of one year. 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 who did not renew its contract with as of August 1, 2009 accounted for approximately $334,000 of our revenues in 2009. Another of our largest customers did not renew its contract with us effective March 2010. We anticipate the impact on revenue of this non-renewal will continue to adversely affect us on a going-forward basis as this customer accounted for approximately $41,000 and $196,000, of our revenue for 2010 and 2009, respectively.

In the current economic environment, we anticipate businesses will continue to seek ways to further reduce their workers’ compensation program costs. Even though the HCO and MPN programs have been shown to create a favorable return on investment for employers (as our services are a significant component of the employers’ loss prevention programs), it is always a challenge to justify our fees to our customers, especially in this economy. In order to convince employers that HCO and/or MPN fees are well-spent, we must continue to provide a framework for expeditiously returning employees back to work at the lowest cost. As a result, we may experience some client turnover in the form of existing employer clients 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 8% during 2010 to $1,615,659. Although HCO enrollees increased 37% revenues decreased 24% to $607,450 in 2010 due to the result mainly of our largest customer not renewing its contract with us effective August 1, 2009. Despite a 35% increase in MPN enrollees in 2010, MPN revenues only increased 3% as a result of two factors: i) much of the increase was within the insureds of a large insurance carrier client to whom Medex offered substantial discounts in return for future increases in volume; and ii) the HCO and MPN pricing methodologies changed somewhat to alleviate the direct access fees previously paid by the clients. Medex began to charge for managed care services such as Utilization Review (“UR”) and Medical Bill Review (“MBR”) which the client was already paying to other vendors, and these fees have been less than the historically traditional fees. Other revenue increased 9% to $402,971 primarily resulting in our providing increased UR services and offering MBR services starting the second half of 2010.

HCO Fees

HCO fee revenues for 2010 and 2009 were $607,450 and $801,571, respectively. The decrease of $194,121 was primarily the result of our largest customer not renewing its contract with us effective August 1, 2009. As mentioned earlier the economic slowdown has, and we expect will continue to impact us in 2011 as employers seek to address the effects of the current economic environment on their individual businesses.

MPN Fees

MPN Fee revenues for the year ended December 31, 2010, were $605,238 compared to $587,455 for the year ended 2009. As of December 31, 2010, although we realized a 12% increase in MPN enrollment compared to the year ended December 31, 2009 because of differing fee terms, unbundling of services, price competition and similar factors, we realized only an 3% increase in MPN revenues.

Despite the current unfavorable economic climate, we expect the number of MPN enrollees and correspondingly, revenues from MPN clients in 2011 to increase slightly.

Other Revenue

During the year ended December 31, 2010, other revenue increased approximately $34,000 or 9% to $402,971 from $369,175 in 2009. This 9% increase resulted primarily from increased UR fees and the commencement of MBR service started in the second half of 2010. Increases in these areas were partially offset by decreased nurse case management fees of approximately $46,700 during 2010 when compared to 2009. 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.

Despite the current economic conditions and impact it may have on our future revenue, we anticipate other revenues for 2011 will be moderately higher than in 2010, primarily from increased revenues from UR and MBR services.

Expenses

Total expenses during 2010 were approximately $1,697,000 compared to total expenses of approximately $1,716,000 in 2009. The decrease in total expenses of approximately 1% was mainly the result of decreased salaries and wages, insurance and data maintenance fees partially offset by higher expense levels in consulting and professional fees, outsource service fees and general and administrative expenses.

Consulting

During the year ended December 31, 2010, consulting fees increased to $273,684 from $225,201 during 2009. This increase in consulting fees of $48,483 was primarily the result of hiring two outside independent consultants during the third quarter 2010 to handle administrative duties resulting from increased utilization reviews and new MPN clients together with increased legal consulting fees. In the event we see an increase in 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 $55,177 or 7% to $692,337 during the year ended December 31, 2010. 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 fees rather than salaries and wages.

Professional Fees

For the year ended December 31, 2010, we incurred professional fees of $190,519 compared to $158,952 during the year ended December 31, 2009. This 19% increase in professional fees was primarily the result of an increase, effective April 1, 2010 in the monthly fee paid to Medex’s president who is compensated as Medex’s medical director and president and increased legal fees partially offset by lower accounting fees.

Insurance

During the year ended December 31, 2010, we incurred insurance expenses of $105,495, a $8,976 decrease over the prior year. The decrease in fiscal 2010 was due to adjustments made to health insurance premiums. We do not expect insurance expense to increase materially in 2011.

Outsource service fees

Outsource service fees consist of costs incurred by Medex and IRC in outsourcing its MBR services and certain UR services. Medex and IRC do not, at this time, have enough volume to justify creating their own MBR and UR in-house staff. We utilizes outside vendors to provide specific services for our clients, charging additional fees over and above those paid to said vendors for administration and coordination of MBR and UR services directly to the clients.

We commenced outsourcing these services during the second half of 2010 and incurred approximate $24,000 in outsource service fees during year ended December 31, 2010.

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 data reporting and document delivery 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. 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 employee enrollment fees in any given year. Employee enrollment fees are determined based on the number of HCO enrollees at the end of the calendar year and do not take into account fluctuations in HCO enrollees 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 employee enrollment fees in a given year.

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

During 2010, we experienced a 37% increase in HCO enrollees and a 12% increase in MPN enrollees, resulting in an overall enrollment increase of 15%. Data maintenance fees decreased 51% from $154,552 to $75,325 during the year ended 2010 when compared to 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 by 3% to $329,535 during the year ended December 31, 2010. This increase in general and administrative expense was primarily attributable to increases in advertising expense, expenses associated with maintaining a provider network site, and vacation expense, partially offset by decreases in dues and subscriptions, MPN printing notifications and shareholders’ meeting expense.

We do not expect a significant change in general and administrative expenses in the upcoming fiscal year.

Income (Loss) from Operations

The 8% decrease in our total revenue was only partially offset by the 1% decrease in total expense during 2010, resulting in a loss from operations of $81,229 compared to an income from operations of $42,620 during 2009.

Net Income (Loss)

We realized a net loss of $59,933 or $.08 per share for the year ended December 31, 2010, compared a net income of $31,660 or $.04 per share during the year ended December 31, 2009. Based on our current projections we believe the Company will be profitable in 2011.

Liquidity and Capital Resources

During 2010 we financed our business with revenue from operations. As of December 31, 2010 we had cash on hand of $349,552 compared to $604,022 at December 31, 2009. The $254,470 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 year ended December 31, 2010 cash was primarily used to fund operations. We had a net decrease in cash of $254,470 and of $20,379 during the years ended December 31, 2010 and 2009, respectively. See below for additional discussion and analysis of cash flow.

	December 31, 2010			December 31, 2009

Net cash provided by (used in) operating activities	$	(248,736	)	$	(20,379	)
Net cash (used in) investing activities		(25,543	)		-
Net cash provided by (used in) financing activities		19,809			-
Net decrease in cash	$	(254,470	)	$	(20,379	)

Net cash used in operating activities was $248,736 and $20,379 in 2010 and 2009, respectively. The change in cash flow from operating activities is primarily the result of decrease revenues partially offset by decreased operating expenses.

Summary of Material Contractual Commitments as of December 31, 2010

	Payments Due By Period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Equipment Leases(1)	$	31,097	$	10,086	$	21,012	$	-	$	-
Office Leases(2)		536,796		87,133		209,043		240,619		-
Total	$	567,893	$	97,219	$	230,055	$	240,619	$	-

(1)

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%.

(2)

On March 1, 2011 we commenced a new office lease agreement that runs to February 29, 2016. Unlike our previous arrangements, the new office space is sufficient for PHCO and each of our subsidiaries. Following is our annual base rent for the new office space throughout the term of the lease:

Rent Period	Annual Rent Payments
Mar. 1 to Dec. 31, 2011	$	66,977
Jan. 1 to Dec. 31, 2012	$	102,977
Jan. 1 to Dec. 31, 2013	$	106,066
Jan. 1 to Dec. 31, 2014	$	109,246
Jan. 1 to Dec. 31, 2015	$	112,526
Jan. 1 to Feb. 29, 2016	$	18,847
Total	$	516,639

Off-Balance Sheet Financing Arrangements

As of December 31, 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 assumptions.

Management suggests that our Summary of Significant Accounting Policies, as described in Note 2 of Notes to 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 used the accrual method of accounting for the period ended December 31, 2010.

Revenue Recognition — We apply 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.

In general, we recognize 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.

Our subscribers generally pay for their services by check and 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.

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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Pacific Health Care Organization, Inc.

Audited Financial Statements

(In U.S. Dollars)

December 31, 2010

and

December 31, 2009

Morrill & Associates, LLC

Certified Public Accountants

563 West 500 South, Suite 425

Bountiful, Utah 84010

801-292-8756 Phone; 801-292-3558 Fax

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Audit Committee

Pacific Health Care Organization, Inc.

Newport Beach, CA

We have audited the accompanying balance sheet of Pacific Health Care Organization, Inc. as of December 31, 2010, and the related statements of operations, stockholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pacific Health Care Organization, Inc. as of December 31, 2010, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Morrill & Associates

Morrill & Associates, LLC

Bountiful, Utah

March 29, 2011

/Letterhead/

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Pacific Health Care Organization, Inc.

We have audited the accompanying consolidated balance sheets of Pacific Health Care Organization Inc., as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the PCAOB (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company has determined that it is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Pacific Health Care Organization, Inc., as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Chisholm, Bierwolf, Nilson & Morrill, LLC

Chisholm, Bierwolf, Nilson & Morrill, LLC

Bountiful, Utah

March 29, 2010 

Pacific Health Care Organization, Inc.

Consolidated Balance Sheets


ASSETS

		December 31,			December 31,
		2010			2009

Current Assets
	Cash	$	349,552		$	604,022
	Accounts receivable, net of allowance of $20,000		239,205			155,066
	Deferred tax asset		10,582			12,469
	Income tax receivable		35,100			11,523
	Commission draw		24,000			-
	Prepaid expenses		70,112			66,400
	Total current assets		728,551			849,480

Property & Equipment, net
	Computer equipment		60,922			60,922
	Furniture & fixtures		28,839			28,839
	Office equipment under capital lease		25,543			-
	Total property & equipment		115,304			89,761
	Less: accumulated depreciation and amortization		(92,009	)		(86,318	)

	Net property & equipment		23,295			3,443

	Other assets		8,158			-

	Total assets	$	760,004		$	852,923

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
	Accounts payable	$	30,038		$	6,672
	Accrued expenses		100,392			169,054
	Income tax payable		100			100
	Current obligations under capital lease		6,148			-
	Unearned revenue		12,035			19,534
	Total current liabilities		148,713			195,360
Long term liabilities
Noncurrent obligation under capital lease			13,661			-
	Total liabilities		162,374			195,360

Commitment			-			-

Shareholder's 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 (deficit)		(26,801	)		33,132
	Total stockholders' equity		597,630			657,563

	Total liabilities and stockholders' equity	$	760,004		$	852,923

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

Pacific Health Care Organization, Inc.
Consolidated Statements of Operations

	December 31,			December 31,
	2010			2009

Revenues
HCO fees	$	607,450		$	801,571
MPN fees		605,238			587,455
Other		402,971			369,175

Total revenues		1,615,659			1,758,201

Expenses
Depreciation		5,691			582
Consulting fees		273,684			225,201
Salaries & wages		692,337			747,514
Professional fees		190,519			158,952
Insurance		105,495			114,471
Outsource service fees		24,302			-
Employee enrollment		-			(4,467	)
Data maintenance		75,325			154,552
General & administrative		329,535			318,776

Total expenses		1,696,888			1,715,581

Income from operations		(81,229	)		42,620

Other income (expense)
Interest income		1,712			3,290
Interest (expense)		(1,606	)		-
Total other income (expense)		106			3,290

Income (loss) before income tax provision		(81,123	)		45,910

Income tax provision (benefit)		(21,190	)		14,250

Net income (loss)	$	(59,933	)	$	31,660

	December 31,			December 31,
		2010			2009
Basic and fully diluted earnings per share:
Earnings per share amount	$	(0.08	)	$	0.04
Weighted average common shares outstanding		802,424			802,424

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

Pacific Health Care Organization, Inc.

Consolidated Statements of Stockholders’ Equity
From January 1, 2009 to December 31, 2010


	Preferred Stock				Common Stock				Paid in		Retained Earnings
	Shares		Amount		Shares		Amount		Capital		(Deficit)
Balance, January 1, 2009		-	$	-		802,424	$	802	$	623,629	$	1,472

Net income for the year ended December 31, 2009		-		-		-		-		-		31,660

Balance, December 31, 2009		-		-		802,424	$	802	$	623,629	$	33,132

Net (loss) for the year ended December 31, 2010		-		-		-		-		-		(59,933	)

Balance, December 31, 2010		-	$	-		802,424	$	802	$	623,629	$	(26,801	)

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

			Pacific Health Care Organization, Inc.
			Consolidated Statements of Cash Flows
			For the years ended December 31

				2010			2009
Cash Flows from Operating Activities
	Net income (loss)			$	(59,933)		$	31,660
	Adjustments to reconcile net income (loss) to net cash:
			Depreciation		5,691			582
Changes in operating assets & liabilities:
		(Increase) decrease in accounts receivable			(84,139	)		22,310
		(Increase) in income tax receivable			(23,577	)		(11,523	)
		(Increase) in commission draw			(24,000	)		-
		Decrease in deferred tax asset			1,887			3,296
		(Increase) in prepaid expenses			(3,712	)		(16,281	)
		Increase in accounts payable			23,366			5,042
		Decrease in accrued expenses			(68,662	)		(9,782	)
		(Decrease) in income tax payable			-			(34,723	)
		(Decrease) in unearned revenue			(7,499	)		(10,960	)
		(Increase) in other assets			(8,158	)		-
			Net cash provided by (used in) operating activities		(248,736	)		(20,379	)

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

Cash Flows from Financing Activities
		Increase in obligation under capital lease			25,243			-
		Payment of Obligations under capital lease			(5,734	)		-
			Net cash used by financing activities		19,809			-

		(Decrease) in cash			(254,470	)		(20,379	)

		Cash at beginning of period			604,022			624,401

		Cash at end of period		$	349,552		$	604,022

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

Pacific Health Care Organization, Inc.
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31


	2010		2009
Supplemental Cash Flow Information
Cash paid for:
Interest	$	-	$	-
Taxes	$	57,200	$	91,854

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

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 1 - CORPORATE HISTORY

Pacific Health Care Organization, Inc. (the “Company”) 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, the Company acquired Medex Healthcare, Inc. (“Medex”), a California corporation organized March 4, 1994, in a share for share exchange. Medex is now a wholly-owned subsidiary of the Company. Medex is in the business of managing and administering both Health Care Organizations (“HCOs”) and Managed Provider Networks (”MPNs”) in the state of California. On August 14, 2001 we formed Workers Compensation Assistance, Inc., a California corporation, as a wholly-owned subsidiary of PHCO. Workers Compensation Assistance changed its name to Industrial Resolutions Coalition, Inc. (“IRC”) in January 2008. The Company acquired Arissa Managed Care, Inc., a Nevada corporation organized September 1, 2009, by purchasing all of its restricted common stock. Arissa provides marketing and sales services for our subsidiaries Medex and IRC. The principal business of the Company is that of Medex.

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. Medex recognized early on that two HCO certifications were necessary to be competitive. Instead of aligning with a competitor, Medex elected to go through the lengthy application process with the California Department of Industrial Relations (“DIR”) twice and received certification 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, so that employer clients have the option of offering one or two HCOs to their employees. The Company believes its ability to offer two HCOs gives potential clients greater choices, which is favored by a number of employers, especially those with certified bargaining units.

Through the two HCO licenses the Company offers injured workers a choice of enrolling in an HCO with a network managed by primary care providers requiring referrals to specialists or a second HCO where injured workers do not need any prior authorization to be seen and treated by specialists.

The two HCO certifications obtained by Medex cover the entire State of California. Medical and indemnity costs associated with workers’ compensation in the State of California are billions of dollars annually. The two HCO networks have contracted with over 3,900 individual providers and clinics, as well as, hospitals, rehabilitation centers and other ancillary services making the Company’s HCOs capable of providing comprehensive medical services throughout California. The Company is continually developing these networks based upon the nominations of new clients and the approvals of their claims’ administrators.

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 1 – CORPORATE HISTORY (CONTINUED)

Medex maintains direct contractual agreements with the primary and specialist healthcare providers in its networks for treatment of the injured workers of employer clients of Medex who are enrollees under the HCO or covered employees under the MPN. These agreements govern the relationship between Medex and the provider, including the obligations of the provider, - including hours of accessibility, reporting requirements, referral procedures, regulatory compliance, methodology for authorizations, compensation schedules, insurance requirements, utilization review, and grievance procedures. All agreements are in compliance with the requirements of the California Division of Workers’ Compensation (“DWC”) and have been approved through the HCO certification process.

The providers within the networks are paid by various payers in accordance with the appropriate California Workers’ Compensation Fee Schedule, unless such provider has entered into a discounted contract with a preferred provider organization (“PPO”), and the employer (through the payer) has contractually accessed those discounted rates for the employer client. The California Workers’ Compensation Fee Schedule, which is created by the DWC, regulates the maximum allowable fees payable under workers’ compensation for procedures performed by a variety of health treatment providers. The fee schedule also includes fees for hospital treatments. The purpose of the fee schedule is to standardize the billing process by using uniform procedure descriptions and to set maximum reimbursement levels for such covered services.

The providers within the networks are paid by the payer, either the workers’ compensation insurance carrier with whom the employer contracts, or a permissibly self-insured employer authorized by the California Department of Industrial Relations Self Insurance Plan.

Care-related decisions are dictated by the care providers within our networks. The network providers are expected to treat within the provisions of state-approved evidence-based guidelines. Requests for authorization for services and/or procedures may be subject to utilization review pursuant to the guidelines and procedures found in the California Labor Code.

By virtue of the Company’s continued certification as an HCO, it is also statutorily deemed to be qualified as an approved MPN. The Company began offering MPN services in January 2005. As a licensed HCO and MPN, the Company is able to offer its clients an HCO program, an MPN program and a hybrid of the HCO and MPN programs. Under this hybrid model, an employer can enroll its employees in the HCO program, and 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 the best of the Company’s knowledge, it is currently the only entity that offers both programs together in a hybrid program.

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 1 – CORPORATE HISTORY (CONTINUED)

Revisions to the HCO regulations were filed with the Secretary of State on November 4, 2009 and became effective January 1, 2010. These revisions make HCOs more competitive with MPNs, providing a viable network option for workers’ compensation care.

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 were $1.50 per enrollee through calendar year 2006, and were $1.00 per enrollee from January 1, 2007 through December 31, 2009. Effective in 2010, the annual assessments are $250 for HCOs with enrollments of 0-1,000, $350 for enrollments of 1,001-5,000, and $500 for enrollments over 5,000. The 2010 assessments for Medex was $500 for Medex’s network of primary care providers and $250 for Medex’s network of primary and specialized care providers. Although the revisions to the HCO regulation became effective January 1, 2010, the changes to the HCO enrollment fees were retroactively applied to 2009 assessments.

From time to time the Company engages in continued discussions with insurance brokers, carriers, third party administrators, managed care organizations and with 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 the Company’s services, the Company expects that employers will continue to sign contracts with the Company to retain the services it provides. 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.

Because the Company contracts with medical providers, who own their own medical equipment such as x-ray machines, the Company has not historically incurred significant capital expenditures. The Company does, however, incur fixed costs such as liability insurance and other usual costs of running an office.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Accounting

The Company used the accrual method of accounting for the periods ended December 31, 2010 and 2009.

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B. 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.

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.

D. Concentrations

Financial instruments that potentially subject Pacific Health Care Organization, Inc. (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.

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

E. Net Earnings (Per Share of Common Stock)

The computation of earning per share of common stock is based on the weighted average number of shares outstanding at the date of the financial statements.

	For the Years Ended December 31,
	2010			2009
Basic Earnings per share:
Income (loss) (numerator)	$	(59,933	)	$	31,660
Shares (denominator)		802,424			802,424
Per share amount	$	(.08	)	$	.04

Fully Diluted Earnings per share:
Income (loss) (numerator)	$	(59,933	)	$	31,660
Shares (denominator)		802,424			802,424
Per share amount	$	(.08	)	$	.04

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, require 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 Consolidated Financial Statements

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 December 31, 2010 and 2009.

J. General and Administrative Expenses

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

K. Income Taxes

The Company utilizes the liability method of accounting for 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 Consolidated Financial Statements

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 either 2010 or 2009, or in any prior years.

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

2010 year end, the Company’s bad debt reserve of $20,000 is a general reserve for balances over 90 days past due and for accounts that are potentially uncollectible.

The percentages of the amounts due from major customers to total accounts receivable as of December 31, 2010 and 2009 are as follows:

	12/31/10			12/31/09
Customer A		20	%		31	%
Customer B		-			14	%
Customer C		13	%		10	%

O.	Subsequent Events

The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued. See Note 12 for a description of subsequent events.

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 3 – RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2009 an update was made to the FASB ASC 820, “Fair Value Measurements and Disclosures”, that provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This update is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In April 2009, an update was made to FASB ASC 825, “Financial Instruments”, which requires a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. This update is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2009, the FASB issued FASB ASC 105, “The FASB Generally Accepted Accounting Principles”, which establishes the FASB Accounting Standards Codification (the 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 generally accepted accounting principles (GAAP), aside from those issued by the Securities and exchange Commission. The Codification became effective for interim and annual periods ending after September 15, 2009. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact the Company’s financial statements.

On May 28, 2009 the FASB announced the issuance of FASB ASC 855, “Subsequent Events”, formerly referenced as SFAS No. 165, Subsequent Events. FASB ASC 855 should not result in significant changes in the subsequent events that an entity reports. Rather, FASB ASC 855 introduces the concept of financial statements being available to be issued. Financial statements are considered available to be issued when they are complete in a form and format that complies with generally accepted accounting principles (GAAP) and all approvals necessary for issuance have been obtained.

In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Measuring Liabilities at Fair Value” (ASU 2009-05). The amendments in this ASU apply to all entities that measure liabilities at fair value and provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using one or more techniques laid out in this ASU. The guidance provided in this ASU is effective for the first reporting period beginning after issuance. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 3 – RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)

In October 2009, the FASB issued ASU No. 2009-13” Revenue recognition-Multiple deliverable revenue arrangements”. The ASU provides amendments to the criteria in Revenue recognition - Multiple deliverable revenue arrangements for separating consideration in multiple revenue arrangements. The amendments in this ASU establish a selling price hierarchy for determining the selling price of a deliverable. Further, the term fair value in the revenue guidance will be replaced with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a market place participant. The amendments in this ASU will be 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 adoption of this ASU to have a material impact on its financial statements.

In January 2010, the FASB issued ASU No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements. This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers. Further, this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements. This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU 2010-06 did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued Accounting Standards Update No. 2010-09 (“ASU 2010-09”) as amendments to certain recognition and disclosure requirements. The amendments remove the requirement for an SEC filer to disclose a date in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. Those amendments remove potential conflicts with the SEC’s literature. All of the amendments in ASU 2010-09 were effective upon issuance for interim and annual periods. The adoption of ASU 2010-09 did not have a material impact on the Company’s consolidated financial statements.

In March 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-11, which is included in the Codification under ASC 815, “Derivatives and Hedging” (“ASC 815”). This update clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only an embedded credit derivative that is related to the subordination of one financial instrument to another qualifies for the exemption. This guidance is effective for interim and annual reporting periods beginning January 1, 2010. The adoption of ASU 2010-11 did not have a material impact on the Company’s consolidated financial statements.

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

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 3 and 7 years for the office equipment, and furniture and fixtures, respectively. Scheduled below are the assets, costs and accumulated depreciation at December 31, 2010 and 2009.

		Cost				Depreciation Exp. & Amort.				Accum. Depr. & Amort.
Assets		December 31, 2010		December 31, 2009		December 31, 2010		December 31, 2009		December 31, 2010		December 31, 2009
Computer equipment		$	60,922	$	60,922	$	-	$	-	$	60,922	$	60,922
Furniture & fixtures			28,839		28,839		582		582		25,978		25,396
Office equipment under capital lease			25,543		-		5,109		-		5,109		-
	Totals	$	115,304	$	89,761	$	5,691	$	582	$	92,009	$	86,318

NOTE 5 – INCOME TAXES

The Company accounts for corporate income taxes in accordance with FASB ASC 740-10 “Income Taxes”. FASB ASC 740-10 requires an asset and liability approach for financial accounting and reporting for income tax purposes.

The tax provision (benefit) for the year-ended December 31, 2010 and the year ended December 31, 2009 consisted of the following:

	2010			2009
Current:
Federal	$	(25,758	)	$	5,655
State		2,681			5,299
Deferred:
Federal		1,463			2,555
State		424			741
Total tax provision (benefit)	$	(21,190	)	$	14,250

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 December 31, 2010 and December 31, 2009 are as follows:

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 5 – INCOME TAXES (CONTINUED)

		2010			2009
Depreciation
	Federal	$	(4,054	)	$	(945	)
	State		(1,177	)		(274	)
Reserve for bad debts
	Federal		6,200			6,200
	State		1,800			1,800
Vacation accrual
	Federal		6,055			4,409
	State		1,758			1,279

Deferred tax asset		$	10,582		$	12,469

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

	2010			2009
Expense at federal statutory rate	$	(31,078	)	$	4,786
State tax effects		2,549			2,384
Non deductible exenses		5,876			4,525
Taxable temporary differences		-			3,125
Deductible temporary differences		1,463			(570	)
Deferred tax asset valuation allowance		-			-
Income tax provision (benefit)	$	(21,190	)	$	14,250

The Financial Accounting Standards Board (FASB) has issued FASB ASC 740-10 (Prior authoritative literature: Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN 48)). FASB ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with prior literature FASB Statement No. 109, Accounting for Income Taxes. This standard 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 this standard, the Company performed a review of its material tax positions in accordance with recognition and measurement standards established by FASB ASC 740-10.

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

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 5 – INCOME TAXES (CONTINUED)

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 December 31, 2010, the Company had no accrued interest or penalties.

NOTE 6 – OPERATING LEASES

Our principal executive offices were located at 1201 Dove Street, Suite 585, in Newport Beach, California, where we leased 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. We extended our lease one month until March 31, 2011 when the lease expires. Our monthly rent for this space is approximately $1,700 per month. As of December 31, 2010, the principal offices of our operating subsidiaries, Medex and IRC were located in Long Beach, California. Medex leased approximately 3,504 square feet of office space in Long Beach, California and made some space available to IRC. The monthly lease payment during 2010 was approximately $7,900. The term of this lease was through February 2011. On September 27, 2010, Medex entered into a lease agreement 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 will commence on March 1, 2011 and expires February 29, 2016. Following is our annual base rent for the new office space through out the term of the lease:

Rent Period	Annual Rent Payments
Mar. 1 to Dec. 31, 2011	$	66,977
Jan. 1 to Dec. 31, 2012	$	102,977
Jan. 1 to Dec. 31, 2013	$	106,066
Jan. 1 to Dec. 31, 2014	$	109,246
Jan. 1 to Dec. 31, 2015	$	112,526
Jan. 1 to Feb. 29, 2016	$	18,847
Total	$	516,639

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 6 – OPERATING LEASES (CONTINUED)

Total Lease Commitments as of December 31, 2010
	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	$	31,097	$	10,086	$	21,012	$	-	$	-
Office Leases		536,796		87,133		209,043		240,619		-
Total	$	567,893	$	97,219	$	230,055	$	240,619	$	-

Rent expense for the office space for the year ended December 31, 2010 and December 31, 2009 was $115,393 and $113,649, respectively. During 2010, no equipment rent expense was incurred. Equipment rent expense for the year ended December 31, 2009 was $7,316.

NOTE 7– MAJOR CUSTOMERS

The Company had two customers who accounted for 10 percent or more of the Company’s total revenues during the year ending December 31, 2010. During the year ended December 31, 2009, there were four customers who accounted for 10% or more of the Company’s revenues. The percentages of total revenues for the years ended 2010 and 2009 are as follows:

	2010			2009
Customer A		0	%		12	%
Customer B		22	%		20	%
Customer C		12	%		11	%
Customer D		3	%		11	%

NOTE 8– ACCRUED AND OTHER LIABILITIES

	2010		2009
Accured liabilities consist of the following:
Emloyee enrollment fees	$	372	$	750
Compensated absences		18,755		14,222
Legal fees		16,000		102,380
Accounting fees		46,922		37,739
Sales commissions		18,025		3,645
Licenses and permits		-		10,000
Other		318		319
Total	$	100,392	$	169,054

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 9– OPTIONS FOR PURCHASE OF COMMON STOCK

2002 Stock Option Plan

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 plan calls for a total of 50,000 shares to be held for grant. There was no activity for 2010 and 2009.

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 – STOCKHOLDERS’ EQUITY

The Company held a special meeting of stockholders on April 11, 2008 at which the Company’s stockholders voted on the proposal to amend the Company’s Article of Incorporation to effect a 1 for 50 reverse split of the Company’s common stock, with a cash-out of all resulting fractional shares followed by a 2.5 for 1 forward split of our common stock. The Company did incur significant legal, proxy notification and mailing cost in connection with the meeting. The shareholders voted 12,365,710 shares in favor, 394,516 shares against and 379 shares abstained from voting on the proposed transaction.

As permitted under Utah law and as approved by the Company’s stockholders at a special meeting of stockholders, 12,568 pre-reverse split shares of common stock were reduced to fractional shares (less than one whole share) by the reverse split and such fractional shares were not reissued. Rather, the fractional shares were cancelled and converted into the right to receive a cash payment for the value of the fractional share. The transaction has resulted in reduced shareholder record keeping and mailing expenses, as well as providing holders of fewer than the 50 pre-reverse split shares with an efficient, cost-effective way to cash-out their investments. As of December 31, 2008, the Company had paid an aggregate amount of $1,005 owed to cashed-out fractional share shareholders.

Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 10 – STOCKHOLDERS’ EQUITY (CONTINUED)

As a result of the reverse and forward splits, the Company has restated its outstanding shares on the balance sheets for December 31, 2010 and 2009 and in Note 2(e). Neither the authorized common stock of the Company, nor the par value of the common stock were affected by the splits. The outstanding shares at December 31, 2007 were 15,427,759 before the splits, following the splits; the outstanding shares of the Company were 802,424. For the year end December 31, 2008, $14,626 was reclassified from common stock to additional paid-in-capital.

NOTE 11 - LITIGATION

To the knowledge of management, there is no material litigation or governmental agency proceeding pending or threatened against the Company or any of its subsidiaries. Further, the Company is not aware of any material proceeding to which and director, officer or affiliate of the Company, any owner of record or beneficially of more than five percent of any class of voting securities of the Company, or any associate of any such director, officer or affiliate of the Company or security holder is a party adverse to the Company of any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.

NOTE 12 – SUBSEQUENT EVENTS

None.

ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On February 23, 2011, Pacific Health Care Organization, Inc. (the “Company”) dismissed Chisholm, Bierwolf, Nilson & Morrill, LLC as its independent registered public accounting firm. Chisholm, Bierwolf, Nilson & Morrill, LLC (“CBNM”) had audited our financial statements for the fiscal years ended December 31, 2009 and 2008. The reports of CBNM for the fiscal years ended December 31, 2009 and 2008 did not contain an adverse opinion, disclaimer of opinion, and they were not qualified or modified as to uncertainty, audit scope or accounting principles.

Our board of directors approved the dismissal of CBNM and there were no disagreements between the Company and CBNM on any matter regarding accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the two fiscal years ended December 31, 2009 and 2008 or any subsequent interim period preceding the date of dismissal.

There were no reportable events (as that term is used in Item 304(a)(1)(v) of Regulation S-K) between the Company and CBNM occurring during the two fiscal years ended December 31, 2009 and 2008 or any subsequent interim period preceding the date of dismissal.

On February 23, 2011, the Company engaged Morrill & Associates, LLC, Certified Public Accountants, as our independent registered public accounting firm. The decision to engage Morrill & Associates, LLC was approved by our board of directors and during the two most recent fiscal years ended December 31, 2009 and 2008, and through the date of engagement, neither we nor anyone on our behalf consulted with Morrill & Associates, LLC regarding either:

the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and neither a written report was provided to us nor oral advice was provided that Morrill & Associates, LLC concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or

·	any matter that was either the subject of a disagreement or a reportable event.

ITEM 9A. 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 December 31, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, 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 and communicated to our 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. 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 our internal control over financial reporting as of December 31, 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 the end of the period covered by this report, our internal control over financial reporting is effective based on those criteria.

This annual report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to an exemption for non-accelerated filers set forth in Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth, as of March 16, 2011 our directors, executive officers, certain significant employees and consultants of the Company, their ages, and all offices and positions held with the Company. Directors are elected for a period of one year and thereafter serve until their successor is duly elected by the stockholders and qualified. Officers and other employees serve at the will of the board of directors.

Name of Director, Executive Officer, Significant Employee or Consultant	Age	Positions with the Company	Director Since	Executive Officer Since

Tom Kubota	71	Chief Executive Officer, President and Chairman of the Board of Directors	Sept. 2000	Sept. 2000

Fred Odaka	74	Chief Financial Officer and Secretary		Aug. 2008

David Wang	47	Independent Director	Nov. 2007

Thomas Iwanski	53	Independent Director	Nov. 2004

Lester L. Sacks	79	President, Medex Healthcare, Inc

Geri Plotzke	68	Vice President, Managed Care Services, Medex Healthcare, Inc.

Donald P. Balzano	65	President, Industrial Resolutions Coalition, Inc.

Kathy Torres	61	President, Arissa Managed Care, Inc.

The following sets forth certain biographical information relating to the Company’s executive officers, directors, certain significant employees and consultants:

Tom Kubota. Mr. Kubota has thirty years of experience in the investment banking, securities and corporate finance field. He held the position of Vice President at Drexel Burnham Lambert; at Stem, Frank, Meyer and Fox; and at Cantor Fitzgerald. Mr. Kubota is the president of Nanko Investments, Inc., which specializes in capital formation services for high technology and natural resources companies. He has expertise in counseling emerging public companies and has previously served as a director of both private and public companies. For the last five years, Mr. Kubota has been primarily engaged in the operations of PHCO and running his consulting firm Nanko Investments, Inc. During the past ten years, Mr. Kubota also served as CEO of Fabrics International, Ltd., a privately held corporation. Fabrics International, and each of its three wholly-owned subsidiaries, terminated operations and filed for bankruptcy in 2005. Mr. Kubota is not currently, nor has he in the past five years been, a nominee or director of any other SEC registrant. In concluding that Mr. Kubota was an appropriate candidate to serve on the Company’s board of directors, the board considered his experience as the Company’s president and chief executive officer, his many years of investment banking and corporate finance experience and his prior management experience.

Fred Odaka. Mr. Odaka joined PHCO as CFO in August 2008. He has held senior level management positions in corporate finance for over 30 years and served as CFO for private and public companies. Most recently, from 1998 to May 2008, Mr. Odaka was CFO of Rx for Africa, Inc. (“RXAF”), f/k/a Diamond Entertainment Corporation (“DMEC”) – OTCBB. In May 2007, DMEC merged with RXAF and changed its name to Rx for Africa, Inc. RXAF owns and operates a large pharmaceutical plant in Addis Ababa, Ethiopia. Prior to the merger, DMEC marketed and sold DVD titles to the home video market primarily through mass merchandisers and department stores. For four years, Mr. Odaka was a Financial Consultant and Analyst for Kibel, Green Inc., a leading West Coast business advisory and financial service firm specializing in corporate re-structure and crisis intervention. Mr. Odaka was also a co-founder of Rexon Inc., a manufacturer of computers and computer peripheral equipment and from 1978 to 1984 held the position of Vice President/CFO and was instrumental in taking the company public. Mr. Odaka also served as Controller of the computer division of Perkin-Elmer, a NYSE traded company. Mr. Odaka received his Bachelor of Science degree in Finance from Fresno State College, Fresno, California.

David Wang. Mr. Wang co-founded and has served as the President of Aces Fuel Technology in Santa Monica, California. Aces Fuel Technology specialized in marketing and selling a fuel and oil catalyst. Mr. Wang is responsible for overseeing the day-to-day operations of the Aces Fuel Technology. From 2001 through 2003, Mr. Wang worked as a Proprietary Trader for Schonfeld Securities in Santa Monica, California where he was responsible for trading U.S. equities. Mr. Wang earned a BS in computer Science/Mathematics from the University of California, Los Angeles (UCLA) in 1985. He earned an MBA degree in Financial and Entrepreneurial Studies from the Anderson School at UCLA in 2000. Mr. Wang is not currently, nor has he in the past five years been, a nominee or director of any other SEC registrant. In concluding that Mr. Wang was an appropriate candidate to serve on the Company’s board of directors, the board considered his education background, his experience in entrepreneurial business enterprises and his favorable history of attracting venture capital funds through his established contacts in the investment banking community.

Thomas Iwanski. Since May 2007, Mr. Iwanski has served as Director and Chief Executive Officer of Live-Vu Communications, Inc, a company that specializes in turnkey telemedicine and telehealth solutions for hospitals, clinics, long-term care facilities and homes incorporating proprietary video technology. From September 2006 through May 2007, Mr. Iwanski served as Chief Financial Officer of SyncVoice Communications, Inc. From April 2005 through July 2006, Mr. Iwanski served as Senior Vice President, Corporate Secretary and Chief Financial Officer of IP3 Networks, Inc. From February 2003 through April 2005 Mr. Iwanski served as a Special Advisor to the CEO of Procom Technology, Inc., where he played a prominent role in the development and implementation of business and financial strategies. Mr. Iwanski has also served in various positions including, Vice President Finance, Chief Financial Officer, Director and Secretary for a number of companies, including Cognet, Inc., NetVantage, Inc., Kimalink, Inc., Xponent Photonics, Inc., Prolong, Inc., and Memlink, Inc. Mr. Iwanski also has approximately ten years of public accounting experience having worked for KPMG, LLP, as a Senior Audit Manager and a Certified Public Accountant. Mr. Iwanski received a Bachelor of Business Administration from the University of Wisconsin-Madison in 1980. Mr. Iwanski is not, nor has he in the past five years been, a nominee or director of any other SEC registrant. In concluding that Mr. Iwanski was an appropriate candidate to serve on the Company’s board of directors, the board considered his years of experience in management and as a director of various start-up ventures. The board also considered his experience in financial and strategic planning and his strong accounting background.

Significant Employees

Geri Plotzke. Executive Vice President of Medex Healthcare, Inc. Ms. Plotzke has served as the Executive Vice President of Medex since October 1, 2006. Prior to that she served as the Director of Managed Care Services of Medex since 2003 and has over 17 years experience in the workers’ compensation and healthcare industries. Ms. Plotzke’s prior work experience includes various managerial positions including Medical Management Director, Workers; Compensation Program Director, and Disability Case Management Program Director for various insurance and medical management companies. Mrs. Plotzke received an AA in Nursing in 1970 at Los Angeles City College, as well as, a BA in 1981 and a MBA in 1989 in Business Administration from the University of Redlands.

Significant Consultants

Dr. Lester L. Sacks. President and Medical Director of Medex Healthcare, Inc. As a Board Certified Physician, educator, and physician executive, Dr. Sacks has cross-disciplinary experience as the President/Medical Director for MEDEX. Dr. Sacks a native of New York City, completed his undergraduate training at both George Washington University and Long Island University. He then moved to California to complete his medical training at the University of California, School of Medicine at Irvine. Following his initial residency training, he pursued Family Practice, developed a chain of medical clinics specializing in work related injuries. He is Board Certified in Occupational Medicine, as well as several other specialties. After selling his clinics, he moved into the arena of managed care. First as Senior Vice President of Beech Street, Inc. and then after five years he moved to the insurance industry as President of Travelers Medical Management Service. Having then decided to move back to California, he became the President of EOS/Reviewco, the managed care division of HealthNet, Inc. and ultimately moving to Total HealthCare Management, Inc as a working partner from 2004 through 2009. He then sold his interest in that company and in January 2009 became Medical Director of Medex Healthcare, Inc. In December 2009, Dr. Sacks began serving as President of Medex Healthcare, Inc. He brings the experience of private practice, managed care and the insurance industry to this post. He has served as President and Chairman of the Western Occupational Medical Association and on the Board of Directors of the American College of Occupational and Environmental Medicine. He is currently a Voluntary Clinical Professor of Medicine at the University of California. He has served as consulting Medical Director for Levi Strauss, and Steelcase, as well as, several other national companies during his career.

Donald P. Balzano. President of Industrial Resolutions Coalition, Inc. Mr. Balzano is a graduate of the UCLA School of Law and is a member of the State Bar of California. From 1979 through 1990 he was the president of Western Medical Review and Care Resources, Inc. From 1990 through 1995 he founded Balzano & Associates which focused on medical and legal delivery systems for workers’ compensation programs and he held the position of vice president and general counsel for Keenan & Associates where he was responsible for corporate legal activity and for creation of a workers' compensation defense attorney and managed medical care program. From 1996-2001 Mr. Balzano served as the president and CEO of Priority CompNet, a California workers’ compensation health care organization. Mr. Balzano has been with the Industrial Resolution Coalition, Inc. since 2007 and was appointed to the position of President in November 2007. Mr. Balzano also serves as a consultant with Medex and was formerly the Chief Executive Officer of Medex.

Kathy Torres. President of Arissa Managed Care, Inc. Ms. Torres started her career in Group Health and Benefits in 1990 selling group health insurance to large employers. Currently, Ms. Torres serves as President of Arissa Managed Care, Inc. Prior to joining Arissa in July 2010, Ms. Torres was the owner of Total HealthCare Management, a company she founded in 2000, that was engaged in the workers’ compensation industry. In January 2010 Ms. Torres became a consultant at Total HealthCare Management and ended this relationship in June 2010. As a business owner, Ms. Torres was responsible for servicing her clients and developing solutions for reducing workers’ compensation costs. Ms. Torres focused on strategic solutions to implement advanced technologies, streamlined processes, and solutions to develop successful cost savings programs.

Board Leadership Structure and Risk Oversight

The board of directors has chosen to combine the principal executive officer and board chairman positions and has not appointed a separate lead director. Mr. Kubota has served as the principal executive officer and board chairman since February 2001. At the present time, the independent directors believe that Mr. Kubota’s in-depth knowledge of our operations and vision for its development make him the best-qualified director to serve as Chairman.

The board of directors is responsible for consideration and oversight of risks facing the Company, and is responsible for ensuring that material risks are identified and managed appropriately. The board of directors administers its oversight functions by reviewing the operations of the Company, by overseeing the executive officers’ management of the Company, and also oversees related party transactions, requiring pre-approval of any such transactions with the Company.

Family Relationships

There are no family relations among any of our executive officers, directors or significant employees or consultants.

Involvement in Certain Legal Proceedings

Except as disclosed in Mr. Kubota’s biographical information above, during the past ten years none of our executive officers, directors, promoters or control persons has been involved in any of the following events that could be material to an evaluation of his ability or integrity, including:

(1) Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.

(2) Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

(3) Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting the following activities:

	(i) Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity poll operator, floor broker, leverage transaction merchant, and other person regulated by the Commodity Futures Trading Commission (“CFTC”), or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliate person, director or employee of any investment company, bank savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
	(ii) Engaging in any type of business practice; or
	(iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws.

(4) Being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the rights of such person to engage in any activity described in (3)(i) above, or to be associated with persons engaged in any such activity.

(5) Being found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not be subsequently reversed, suspended or vacated.

(6) Being found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated.

(7) Being the subject of, or a party to any Federal or State judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

	(i) Any Federal or State securities or commodities law or regulations; or
	(ii) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

(8) Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26)))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Committees of the Board of Directors

The OTCBB does not require the Company to have an audit committee, a compensation committee or a corporate governance and nominating committee and the board does not currently have standing audit, compensation or corporate governance and nominating committees. Our board of directors has determined that it is in the Company’s best interest to have the full board fulfill the functions that would be performed by these committees. The full board of directors selection, review and oversight of the Company’s independent registered public accounting firm, the approval of all audit, review and attest services provided by the independent registered public accounting firm, the integrity of the Company’s reporting practices and the evaluation of the Company’s internal controls and accounting procedures. The board is also responsible for the pre-approval of all non-audit services provided by its independent registered public accounting firm. Non-audit services are only provided by our independent registered public accounting firm to the extent permitted by law. Pre-approval is required unless a “de minimus” exception is met. To qualify for the “de minimus” exception, the aggregate amount of all such non-audit services provided to the Company must constitute not more than 5% of the total amount of revenues paid by us to our independent registered public accounting firm during the fiscal year in which the non-audit services are provided; such services were not recognized by us at the time of the engagement to be non-audit services; and the non-audit services are promptly brought to the attention of the board and approved prior to the completion of the audit by the board or by one or more members of the board to whom authority to grant such approval has been delegated.

As we do not currently have a standing audit committee, we do not, at this time have an “audit committee financial expert” as defined under the rules of the Securities and Exchange Commission. The board does believe, however, that should the Company form a standing audit committee in the future, Mr. Thomas Iwanski, an independent director, could qualify as an audit committee expert.

Our full board of directors also participates in the consideration of director nominees. In general, when the board determines that expansion of the board or replacement of a director is necessary or appropriate, the board will review through candidate interviews with members of management, consult with the candidate’s associates and through other means determine a candidate’s honesty, integrity, reputation in and commitment to the community, judgment, personality and thinking style, residence, willingness to devote the necessary time, potential conflicts of interest, independence, understanding of financial statements and issues, and the willingness and ability to engage in meaningful and constructive discussion regarding Company issues. The board will review any special expertise, for example, that qualifies a person as an audit committee financial expert, membership or influence in a particular geographic or business target market, or other relevant business experience. To date we have not paid any fee to any third party to identify or evaluate, or to assist in identifying or evaluating, potential director candidates.

Board Diversity

While we do not have a formal policy regarding the consideration of diversity in identifying and evaluating potential director candidates, the board considers the interplay of a candidate's knowledge, expertise, skills and experience with that of the other members of the board of directors in order to build a board of directors that is effective, collegial and responsive to the needs of the Company. We believe this analysis results in a board of directors that is diverse in knowledge, expertise, skills, experience and viewpoint.

Procedures for Security Holders to Nominate Candidates to the Board of Directors

During the fiscal year, there were no changes made to the procedures by which shareholders may nominate candidates to our board of directors. The full board of directors will consider all director candidates nominated by shareholders during such times as the Company is actively considering appointment of new directors. Candidates recommended by shareholders will be evaluated based on the same criteria described above. Shareholders desiring to suggest a candidate for consideration should send a letter to the Company’s Corporate Secretary and include:

·	a statement that the writer is a shareholder (providing evidence if the person's shares are held in street name) and is proposing a candidate for consideration;

·	the name and contact information for the candidate;

·	a statement of the candidate’s business and educational experience;

·	information regarding the candidate’s qualifications to be director, including but not limited to an evaluation of the factors discussed above which the board would consider in evaluating a candidate;

·	information regarding any relationship or understanding between the proposing shareholder and the candidate;

·	information regarding potential conflicts of interest; and

·	a statement that the candidate is willing to be considered and willing to serve as director if nominated and elected.

Because of the small size of the Company and the limited need to seek additional directors, there is no assurance that all shareholder proposed candidates will be fully considered, that all candidates will be considered equally, or that the proponent of any candidate or the proposed candidate will be contacted by the Company or the board, and no undertaking to do so is implied by the willingness to consider candidates proposed by shareholders.

From time to time our board may establish committees as it deems appropriate to facilitate our management.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and any persons who own more than 10% of the common stock of the Company to file with the Securities and Exchange Commission reports of beneficial ownership and changes in beneficial ownership of common stock. Officers and directors are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of such reports furnished to us or written representations that no other reports were required, we believe that, during 2010, all filing requirements applicable to our officers and directors were met on a timely basis.

Code of Ethics

Our board of directors has adopted a code of ethics that will apply to its principal executive officer, principal financial officer and principal accounting officer or controller and to persons performing similar functions. The code of ethics is designed to deter wrongdoing and to promote honest and ethical conduct, full, fair, accurate, timely and understandable disclosure, compliance with applicable laws, rules and regulations, prompt internal reporting of violations of the code and accountability for adherence to the code. We will provide a copy of our code of ethics, without charge, to any person upon receipt of written request for such delivered to our corporate headquarters. All such requests should be sent care of Pacific Health Care Organization, Inc., Attn: Corporate Secretary, 1201 Dove Street, Suite 300, Newport Beach, California 92660.

ITEM 11. EXECUTIVE COMPENSATION

During the fiscal year ended December 31, 2010 only Tom Kubota, our CEO, President and the chairman of our board of directors and Donald Balzano, the President of our wholly-owned subsidiary IRC were the only individuals whose total compensation package during the 2010 fiscal year exceeded $100,000. The following table summarizes the total compensation paid during the 2010 and 2009 fiscal years to Mr. Kubota and Mr. Balzano and they are referred to in this Item 11 as the “named executive officers.”

SUMMARY COMPENSATION TABLE

Name and Principal Position	Year	Salary ($)		Bonus ($)		All Other Compensation ($)			Total ($)
Tom Kubota	2010	$	111,150	$	-0-	$	-0-		$	111,150
Chief Executive Officer,	2009		117,000		10,000		-0-			127,600
President and Director

Donald Balzano	2010	$	-0-	$	-0-	$	153,664	(1)	$	153,664
President, IRC	2009		-0-		-0-		128,784	(1)		128,784

(1) Mr. Balzano provides services to Medex and IRC as a consultant, not as an employee. This compensation represents consulting fees paid to Mr. Balzano. Fees paid to Mr. Balzano increased during fiscal 2010 as a result of commissions earned on a new customer.

We do not have a standing compensation committee, rather our Chief Executive Officer (“CEO”) evaluates officer and employee compensation issues subject to the approval of our board of directors. Our CEO makes recommendations to the board of directors as to employee benefit programs and officer and employee compensation. Historically, our CEO has not made recommendations to the board of directors regarding his own compensation, although we have no policy prohibiting the CEO from doing so. Our board of directors may seek input from the CEO as to his compensation, but CEO compensation must be approved by a majority of our board of directors. Currently our CEO is a member of our board of directors.

Salary

Salary is used to recognize the experience, skills, knowledge and responsibilities required of all our employees, including our named executive officers. The salary for each named executive officer is typically set at the time the individual is hired based on the factors discussed in the preceding sentence and the negotiation process between the Company and the named executive officer. Thereafter, changes to annual salary, if any, are determined based on several factors, including evaluation of performance, anticipated financial performance, economic condition and local market and labor conditions. In February 2011, the board awarded Mr. Kubota a salary increase from $10,000 per month to $12,000 per month effective March 1, 2011. The board of directors did not extend salary or other benefit increases to any of the named executive officers during the 2010 fiscal year. In an effort to help reduce operating costs to combat the economic conditions facing the Company, in May 2009 many Company employees, including Mr. Kubota, agreed to a 10% reduction in salary. Mr. Kubota’s new salary of $12,000 per month includes the re-instatement of the 10% salary reduction mentioned above.

Nonequity incentive compensation

From time to time we may make cash awards to our employees, including the named executive officers. Such awards may be designed to incentivize employees over a specified period of time pursuant to pre-established, performance-based criteria, the accomplishment of which is substantially uncertain at the time the criteria are established. In the event this type of cash award were made, it would be reflected in the “Summary Compensation Table” under a separate column entitled “Nonequity Incentive Plan Compensation.” We may use non-equity incentive compensation to incentivize our employees. The criteria for earning such non-equity incentive bonuses may be based on corporate financial performance measures that would be developed by our board of directors at the time such non-equity incentive plan is established. Our board has discretion to determine the applicable performance measures and the appropriate weighting of such measures at the time it establishes any non-equity incentive plan. Our board of directors did not establish a non-equity incentive compensation plan during the fiscal years ended December 31, 2010 and no non-equity incentive compensation was awarded during the year.

Bonuses

We may also make cash awards to employees that are not part of any pre-established, performance-based criteria. Awards of this type are completely discretionary and subjectively determined by our board of directors at the time they are awarded. Such awards are reported in the “Summary Compensation Table” in the column entitled “Bonus.” None of our named executive officers were awarded a bonus during the fiscal year ended December 31, 2010.

Equity Incentive Compensation

Our equity incentive award program is the primary vehicle for offering long-term incentives to our employees. From time to time, we may also make equity incentive awards to our named executive officers in the form of stock options, restricted stock grants or some other form of equity award. Equity incentive awards would be reflected in the “Summary Compensation Table” under the columns entitled “Stock Awards” or “Option Awards” as appropriate. Our board of directors did not award equity incentive compensation to any of our named executive officers in 2010, and is under no contractual obligation to award equity incentive compensation in the future.

While our board of directors has not awarded equity incentive compensation in either of the past two fiscal years and is under no obligation to make any such awards in the future, that does not mean the board of directors may not, as it deems appropriate, award equity incentive compensation in the future.

Benefit and Other Compensation

Medex currently provides health care benefits, including medical, vision and dental insurance, subject to certain deductibles and co-payments to its full time employees.

Medex also maintains a 401(k) profit sharing plan for Medex employees who meet the eligibility requirements set forth in the plan. Pursuant to the plan, Medex may make discretionary matching contributions and/or discretionary profit sharing contributions to the plan. All such contributions must comply with federal pension laws, non-discrimination requirements and the terms of the plan. In determining whether to make a discretionary contribution, the board of directors evaluates Medex’s current and future prospects and management’s desire to reward and retain employees and attract new employees. To date, Medex has never made any matching contributions and/or discretionary profit sharing contributions to the plan.

Other than the foregoing, Medex does not offer any retirement or other benefit plans to its employees, including the named executive officers, at the present time; however, the board of directors may adopt plans as it deems to be reasonable under the circumstances.

PHCO does not provide any health care, retirement or other benefit plans to its employees at the present time; however, the board of directors may adopt plans as it deems to be reasonable under the circumstances. The executive officers of PHCO do not participate in the employer benefit plans offered by Medex.

Pension Benefits

We offer no pension or other specified retirement payments or benefits, including but not limited to tax-qualified deferred benefit plans and supplemental executive retirement plans to its named executive officers.

Nonqualified Deferred Compensation

We offer no defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified to any of our employees including the named executive officers.

Employment Agreements

We have consulting agreements with Don Balzano and Kathy Torres. All other of our employees, including our named executive officers are employed on an at will basis.

Termination and Change in Control

We do not have agreements, plans or arrangements, written or unwritten, with any of our named executive officers that would provide for payments or other benefits to any of our named executive officers following, or in connection with, the resignation, retirement or other termination of a named executive officer or change in control of the Company or a change in the responsibilities of any named executive officer following a change in control of the Company.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

None of the named executive officers held an outstanding equity award at our fiscal year end.

Stock Option Plans

2002 Stock Option Plan

In August 2002 our board of directors adopted the Pacific Health Care Organization, Inc. 2002 Stock Option Plan (the “2002 Plan”). The Plan was later ratified by our shareholders at a special meeting of shareholders held in November 2004. The Plan reserves 50,000 common shares for distribution under the Plan. The purpose of the Plan is to allow us to offer key employees, officers, directors, consultants and sales representatives an opportunity to acquire a proprietary interest in the Company. The various types of incentive awards which may be provided under the 2002 Plan enable us to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity of our business. In August 2002 we granted to four employees options to purchase approximately 4,250 shares of our common stock. Options to acquire 938 shares were exercised, the balance expired unexercised. Currently there are no options or other grants outstanding under the 2002 Plan.

2005 Stock Option Plan

In November 2005 our shareholders adopted the Pacific Health Care Organization, Inc., 2005 Stock Option Plan (the “2005 Plan”). The 2005 Plan provides for the grant of Company securities, including options, warrants and restricted stock to officers, consultants and employees to acquire shares of our 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 2005 Plan permits the granting of up to 50,000 common shares. To date, no securities have been granted under the 2005 Plan.

Employee Stock Purchase Plan

We do not currently have an employee stock purchase plan in place.

DIRECTOR COMPENSATION

We offer cash compensation to attract and retain candidates to serve on our board of directors. We do not compensate directors who are also our employees for their service on our board of directors.

Meeting Fees

Our non-employee directors receive a fee of $450 per meeting for each meeting attended in person. Additionally, all non-employee directors are paid $1,000 for attendance at the annual meeting of stockholders, plus airfare and hotel expense.

Equity Compensation

We do not currently have a fixed plan for the award of equity compensation to our non-employee directors.

Director Compensation Table

The following table sets forth a summary of the compensation we paid to our directors for services on our board during our 2010 fiscal year.

Name	Fees Earned or Paid in Cash ($)			All Other Compensation($)			Total ($)
Thomas Iwanski	$	2,700	(1)	$	0		$	2,700
Tom Kubota	$	0		$	111,150	(2)	$	111,150
David Wang	$	2,250	(3)	$	0		$	2,250

(1) Includes six directors’ meetings attended in person at $450 per meeting during 2010.

(2) In addition to being a director Mr. Kubota is the CEO and President of the Company, and therefore does not qualify for compensation paid to our non-employee directors. For details regarding compensation paid to

Mr. Kubota in his capacity as CEO and President of the Company please see the Summary Compensation Table above.

(3) Includes five directors’ meeting attended at $450 per meeting during 2010.

Director Stock Purchase Plan

We do not currently have a director stock purchase plan in place.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth as of March 16, 2011, the name and the number of shares of our common stock, par value $0.001 per share, held of record or beneficially by each person who held of record, or was known by us to own beneficially, more than 5% of the 802,424 issued and outstanding shares of our common stock, and the name and shareholdings of each director and of all executive officers and directors as a group.

Type of Securities	Name and Address	Amount & Nature of Beneficial Ownership		% of Class

Common	Tom Kubota(1)(2) 1201 Dove Street, Suite 300 Newport Beach, CA 92660		455,456		56.8	%

Common	Fred Odaka(1) 1201 Dove Street, Suite 300 Newport Beach, CA 92660		-0-		*

Common	Thomas Iwanski(1) 1541 Amberwood Drive Santa Ana, CA 92705		-0-		*

Common	David Wang(1) 138 Ocean Way Santa Monica, CA 90402		-0-		*

Common	Nanko Investments, Inc.(2) 1280 Bison Street, Suite B9-596 Newport Beach, CA 92660		432,626		53.9	%

Common	Donald P. Balzano(3) 5422 Michelle Drive Torrance, CA 90503		54,165		6.8	%

Common	Janet Zand 1505 Rockcliff Road Austin, TX 78796		54,165		6.8	%

All executive officers and directors as a group (5 persons)			509,621		63.5

TOTAL			563,786		70.3	%

* Less than 1%.

(1) Mr. Kubota, Mr. Iwanski and Mr. Wang are directors of the Company. Mr. Kubota and Mr. Odaka are executive officers of the Company.

(2) The number of shares attributed to Mr. Kubota includes 22,830 shares held of record by Mr. Kubota and 432,626 shares held of record by Nanko Investments, Inc. Mr. Kubota is the President of Nanko Investments, Inc. As such, Mr. Kubota may be deemed to have voting and/or investment power over the shares held by Nanko Investments and therefore may be deemed to be the beneficial owner of those shares.

(3) Mr. Balzano is the President of our wholly-owned subsidiary Industrial Resolutions Coalition, Inc.

Change in Control

To the knowledge of the management, there are no present arrangements or pledges of our securities, the operation of which may at a subsequent date result in a change in control of the Company.

Securities for Issuance Under Equity Compensation Plans

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in colum (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		0	$	0.00		95,750
Equity compensation plans not approved by security holders		0	$	0.00		-0-
Total		0	$	0.00		95,750

On August 13, 2002 we adopted the PHCO 2002 Stock Option Plan which calls for a total of 50,000 shares to be held for grant. Unless terminated by the Board, this plan shall continue to remain effective until such time no further awards may be granted and all awards granted under the plan are no longer outstanding. Notwithstanding the foregoing, grants of incentive stock options may only be made during the ten-year period following August 13, 2002. In August 2002, we granted options to purchase approximately 4,250 restricted common shares to four employees pursuant to the PHCO 2002 Stock Option Plan, the adoption of which was subsequently ratified by our shareholders. Options to acquire 938 restricted common shares were exercised, the balance expired unexercised in August 2007.

On November 18, 2005 our 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 the 2005 Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

As disclosed in Item 10. Executive Compensation during the years ended December 31, 2010 and 2009 we paid Donald Balzano $153,664 and $128,784, respectively, in consulting fees for services provided to Medex and IRC. Mr. Balzano is the President of IRC. It is anticipated that consulting fees to be paid to Mr. Balzano for services anticipated to be rendered in 2011 will exceed the lesser of $120,000 or 1% of the average of our total assets at year end for the 2011 and 2010 fiscal years. He also owns more than 5% of our outstanding common stock.

During the years ended December 31, 2010 and 2009 we paid Fred Odaka $67,500 and $67,550, respectively, in total aggregate compensation in connection with his employment as the Chief Financial Officer of the Company. It is anticipated that Mr. Odaka's total aggregate compensation for 2011 will exceed the lesser of $120,000 or 1% of the average of our total assets at year end for 2011 and 2010 fiscal years.

In accordance with our written policies and procedures our board of directors is charged with monitoring and reviewing issues involving potential conflicts of interests and reviewing and approving all related party transactions. In general, for purposes of our policy, a related party transaction is a transaction, or a material amendment to any such transaction, involving a related party and the Company involving any amount that exceeds the lesser of $120,000 or 1% of the average of our total assets at year end for the last two completed fiscal years. Our policy requires our management and our board of directors to review and approve related party transactions. In reviewing and approving any related party transaction or material amendment to any such transaction, management and the board of directors must satisfy themselves that they have been fully informed as to the related party’s relationship to the Company and interest in the transaction and as to the material facts of the transaction, and must determine that the related party transaction is fair to the Company.

Director Independence

The board has determined that Mr. Iwanski and Mr. Wang would each qualify as an independent director as that term is defined in the listing standards of the NYSE Amex. Such independence definition includes as series of objective tests, including that the director is not an employee of the company and has not engaged in various types of business dealings with the company. In addition, as further required by the NYSE Amex listing standards, the board of directors has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Chisholm Bierwolf, Nilson & Morrill, CPA served as our independent registered public accounting firm for the years ended December 31, 2010 and 2009. Principal accounting fees for professional services rendered for the Company by Chisholm, Bierwolf, Nilson & Morrill for the years ended December 31, 2010 and 2009, are summarized as follows:

	2010		2009
Audit	$	41,271	$	46,832
Audit related		-0-		-0-
Tax		-0-		-0-
All other		900		893
Total	$	42,171	$	47,725

Audit Fees. Audit fees were for professional services rendered in connection with the audit of the financial statements included in our annual report on Form 10-K and review of the financial statements included in our quarterly reports on Form 10-Q and for services normally provided by our independent registered public accounting firm in connection with statutory and regulatory filings or engagements.

As discussed in more detail in Item 9. Disagreements with and Changes in Accountants on Accounting and Financial Disclosure above, Chisholm, Bierwolf, Nilson & Morrill, CPA served as our independent registered public accounting firm for the year ended December 31, 2009 and through the nine months ended September 30, 2010. Audit fees for professional services rendered by Chisholm, Bierwolf, Nilson & Morrill to the Company for those periods were $46,832 and $13,271. Audit fees for professional services rendered by Morrill & Associates, LLC for the year ended December 31, 2010 were $28,000.

Tax Fees. Tax fees related to services for tax compliance and consulting. During the fiscal years ended December 31, 2010 and 2009 the Company retained Stayner Bates & Jensen P.C. to advise us on tax compliance, consulting and the preparation of our tax returns.

All Other Fees. Other fees were for EDGAR filing services provided to the Company.

Board of Directors Pre-Approval Policies and Procedures. At its regularly scheduled and special meetings, our board of directors, in lieu of an established audit committee, considers and pre-approves any audit and non-audit services to be performed by our independent registered public accounting firm. The board of directors has the authority to grant pre-approvals of non-audit services.

The board of directors has not, as of the time of filing this annual report on Form 10-K with the Securities and Exchange Commission, adopted policies and procedures for pre-approving audit or permissible non-audit services performed by our independent auditors. Instead, the board of directors as a whole has pre-approved all such services. In the future, our board of directors may approve the services of our independent registered public accounting firm pursuant to pre-approval policies and procedures adopted by the board of directors, provided the policies and procedures are detailed as to the particular service, the board of directors is informed of each service, and such policies and procedures do not include delegation of the board of director’s responsibilities to our management.

The board of directors has determined that the provision of services by Morrill & Associates, LLC and prior to retaining Morrill & Associates, LLC, Chisholm, Bierwolf, Nilson and Morrill, CPA, described above are compatible with maintaining their independence as our independent registered public accounting firm.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as a part of this report:

(1) Financial Statements

The following financial statements of the Registrant are included in response to Item 8 of this annual report:

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets as of December 31, 2010 and 2009.

Consolidated Statements of Operations for the years ended December 31, 2010 and 2009.

Consolidated Statements of Stockholders’ Equity From January 1, 2009 to December 31, 2010.

Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009.

Notes to Consolidated Financial Statements.

(2) Financial Statement Schedules

Schedules are omitted because the required information is either inapplicable or presented in the consolidated financial statements or related notes.

(b) Exhibits

Exhibit No.		Exhibit Description

3.1		Articles of Incorporation and Amendments Thereto(1)
3.2		Bylaws(1)
3.3		Bylaws(2)
3.4		Articles of Amendment to Articles of Incorporation to effect 1 share for 50 shares reverse split(3)
3.5		Articles of Amendment to Articles of Incorporation to effect 2.5 shares for 1 share forward split(3)
4.1		Pacific Health Care Organization, Inc., 2002 Stock Option Plan(1)
4.2		Pacific Health Care Organization, Inc., 2005 Stock Option Plan(4)
14.1		Code of Ethics(5)
21.1		List of Subsidiaries*
31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2		Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

(1)		Incorporated by reference to Registrant's Registration Statement on Form 10-SB as filed with the Commission on September 19, 2002.
(2)		Incorporated by reference to Registrant's Registration Statement on Form 10-SB/A-2 as filed with the Commission on July 13, 2004.
(3)		Incorporated by reference to Registrant's Proxy Statement on Schedule 14A as filed with the Commission on May 15, 2008.
(4)		Incorporated by reference to Registrant's Proxy Statement on Schedule 14A as filed with the Commission on October 21, 2005.
(5)		Incorporated by reference to Registant's Annual Report on Form 10-KSB as filed with the COmmission on April 17, 2007.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized.

	PACIFIC HEALTH CARE ORGANIZATION, INC.

Date: March 31, 2011	By:	/s/ Tom Kubota
		Tom Kubota
		Chief Executive Officer and President
		(Duly Authorized Representative

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dated indicated.

Signatures	Title	Date


/s/ Tom Kubota	Chief Executive Officer, President	March 31, 2011
Tom Kubota	and Director
	(Principal Executive Officer)

/s/ Fred Odaka	Chief Financial Officer	March 31, 2011
Fred Odaka	(Principal Financial Officer)


/s/ Thomas Iwanski	Director	March 31, 2011
Thomas Iwanski


/s/ David Wang	Director	March 31, 2011
David Wang