DEF 14A

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE

SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant x

Filed by a Party other than the Registrant o

Check the appropriate box:

o Preliminary Proxy Statement

o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

x Definitive Proxy Statement

o Definitive Additional Materials

o Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

PACIFIC HEALTH CARE ORGANIZATION INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

x No fee required.

o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

1) Title of each class of securities to which transaction applies:

2) Aggregate number of securities to which transaction applies:

3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

4) Proposed maximum aggregate value of transaction:

5) Total fee paid:

o Fee paid previously with preliminary materials:

o Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

1) Amount previously paid:

2) Form, Schedule or Registration Statement No.:

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4) Date Filed:

PACIFIC HEALTH CARE ORGANIZATION, INC.

21 Toulon

Newport Beach, California 92660

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

The Annual Meeting of Stockholders of Pacific Health Care Organization, Inc., (the “Company”) will be held at the Little America Hotel, located at 500 South Main Street in Salt Lake City, Utah on November 16, 2007, at 7:00 a.m., local time, for the following purposes:

 1.To elect two directors to the Company’s Board of Directors;

 2.      To ratify the appointment of Chisholm, Bierwolf & Nilson as the independent registered public accounting firm of the Company for the 2007 fiscal year;

 3.      To transact any other business as may properly come before the meeting or at any adjournment thereof.

Our Board of Directors has fixed the close of business on October 10, 2007, as the record date for determining stockholders entitled to notice of, and to vote at, the meeting.  A list of stockholders eligible to vote at the meeting will be available for inspection at the meeting and for a period of 10 days prior to the meeting during regular business hours at the Company’s headquarters, 21 Toulon, Newport Beach, California 92660.

All Company stockholders are cordially invited to attend the meeting in person.  Whether or not you expect to attend the Annual Meeting of Stockholders, your proxy vote is important.  To assure your representation at the meeting, please sign and date the enclosed proxy card and return it promptly in the enclosed envelope, which requires no additional postage if mailed in the United States.  Should you receive more than one proxy because your shares are registered in different names or addresses, each proxy should be signed and returned to assure that all your shares will be voted.  You may revoke your proxy at any time prior to the meeting.  If you attend the meeting and vote by ballot, your proxy will be revoked automatically and only your vote at the meeting will be counted.

YOUR VOTE IS IMPORTANT

IF YOU ARE UNABLE TO BE PRESENT PERSONALLY, PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY, WHICH IS BEING SOLICITED BY THE BOARD OF DIRECTORS, AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.

	By order of the President,
October 15, 2007	Tom Kubota, President

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 PACIFIC HEALTH CARE ORGANIZATION, INC.

21 Toulon

Newport Beach, California 92660

PROXY STATEMENT

GENERAL

SOLICITATION OF PROXIES.  This proxy statement is being furnished to the stockholders of Pacific Health Care Organization, Inc., a Utah corporation, in connection with the solicitation of proxies by our President for use at the Annual Meeting of Stockholders to be held at the Little America Hotel, located at 500 South Main Street in Salt Lake City, Utah at 7:00 a.m., local time, on November 16, 2007, or at any adjournment thereof.  A copy of the notice of meeting accompanies this proxy statement.  It is anticipated that the mailing of this proxy statement will commence on or about October 20, 2007.

COST OF SOLICITATION.  The Company will bear the costs of soliciting proxies.  In addition to the use of the mails, certain directors or officers of our Company may solicit proxies by telephone, telegram, facsimile, cable or personal contact.  Upon request, the Company will reimburse brokers, dealers, banks and trustees, or their nominees, for reasonable expenses incurred by them in forwarding proxy material to beneficial owners of shares of our common stock.

OUTSTANDING VOTING SHARES.  Company stockholders of record at the close of business on October 10, 2007, the record date for the meeting, will be entitled to notice of and to vote at the meeting.  On the record date, we had 15,427,759 shares of common stock outstanding, which are our only securities entitled to vote at the meeting, each share being entitled to one vote.

VOTE REQUIRED FOR APPROVAL.  Shares of common stock will vote with respect to each proposal.  Under our Bylaws, Proposals 2 and 3 each require the affirmative vote of a majority of the votes eligible to be voted by holders of shares represented at the Annual Meeting in person or by proxy.  With respect to Proposal 1 votes may be cast by a stockholder in favor of the nominee or withheld or an alternative candidate may be written in.  With respect to Proposals 2 and 3, votes may be cast by a stockholder in favor or against the Proposals or a stockholder may elect to abstain.  Since votes withheld and abstentions will be counted for quorum purposes and are deemed to be present for purposes of the respective proposals, they will have the same effect as a vote against each matter.

Under the NASD Rules of Fair Practice, brokers who hold shares in street name have the authority, in limited circumstances, to vote on certain items when they have not received instructions from beneficial owners.  A broker will only have such authority if (i) the broker holds the shares as executor, administrator, guardian, trustee or in a similar representative or fiduciary capacity with authority to vote or (ii) the broker is acting under the rules of any national securities exchange of which the broker is also a member.  Broker abstentions or non-votes will be counted for purposes of determining the presence or absence of a quorum at the meeting.  Abstentions are counted in tabulations of the votes cast on proposals presented to stockholders, but broker non-votes are not counted for purposes of determining whether a proposal has been approved.

VOTING YOUR PROXY.  Proxies in the accompanying form, properly executed and received by our President prior to the Annual Meeting and not revoked, will be voted as directed.  In the absence of direction from the stockholder, properly executed proxies received prior to the Annual Meeting will be voted FOR the nominees of the board of directors and FOR Proposals 2 and 3.  You may revoke your proxy by giving written notice of revocation to the Corporate Secretary at any time before it is voted, by submitting a later-dated proxy or by attending the Annual Meeting and voting your shares in person.  Stockholders are urged to sign and date the enclosed proxy and return it as promptly as possible in the envelope enclosed for that purpose.

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PROPOSAL ONE

ELECTION OF DIRECTOR

Our Bylaws provide that our board of directors will consist of not less than two nor more than seven persons, the exact number to be fixed from time-to-time by the board of directors.  Currently, the board of directors has three members.  The directors have decided to fix the number of directorships at three for the upcoming year.  The board has nominated two individuals to serve as directors for a one-year term expiring on the date of our next Annual Meeting of Stockholders, and until their successors are duly elected and qualified. Mr. Tom Kubota and Mr. Thomas Iwanski, have been nominated by management to stand for election as directors, both of whom currently serve as directors of the Company.  Mr. Donald Hellwig, a current director, wishes to pursue other opportunities and will not stand for re-election to the board of directors.  The board of directors has not yet identified a suitable candidate to fill the third directorship.  Therefore, the third directorship will be left vacant until a suitable candidate is identified and willing to accept appointment to the board of directors.  We anticipate that when such a candidate is identified, the board of directors, consistent with our Bylaws, will appoint such individual to fulfill the vacant directorship.

Nominees

Set forth below is certain information as of October 2, 2007, concerning the nominees for election at the Annual Meeting and our current officers, including the business experience of each for at least the past five years:

Name	Age	Present Position With the Company	Director Since
Tom Kubota	68	Director and Iterim Secretary	September 2000
Thomas Iwanski	49	Director	November 2004

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 Corporation, 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 running the Company.  During the past five 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 in 2005 and filed for bankruptcy.  Mr. Kubota is not a director or nominee of any other SEC reporting issuer.

Thomas Iwanski.  Since September 2006, Mr. Iwanski has 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 a nominee or director of any other SEC reporting issuer.

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There are no family relationships among the current members or nominees of the board of directors.

We do not expect that any of the nominees will become unavailable for election as a director, but, if for any reason that should occur prior to the Annual Meeting, the person named in the proxy will vote for such substitute nominee, if any, as may be recommended by management.

Involvement in Certain Legal Proceedings

To our knowledge, during the past five years none of the directors or executive officers has been convicted or is currently the subject of a criminal proceeding, excluding traffic violations or similar minor offenses, or has been a party to any judicial or administrative proceeding that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement.  Except as disclosed in Mr. Kubota’s biographical information above, in the past five years none of our directors or executive officers, or any business in which they were a general partner or executive officer, have been the subject of a bankruptcy proceeding.

Vote Required

You are being asked to elect two directors, while leaving one directorship vacant until a qualified candidate can be identified.  Therefore, your proxy may be voted for no more than two directors.  Directors are elected by a plurality of votes cast at the Annual Meeting.  Unless contrary instructions are set forth in the proxies, the persons with full power of attorney to act as proxies at the Annual Meeting will vote all shares represented by such proxies for the election of the nominees named therein as director. Should any of the nominees become unable or unwilling to accept nomination or election, it is intended that the person acting under the proxy will vote for the election, in the nominee’s stead, of such other person as our board of directors may recommend.  We have no reason to believe that the nominees will be unable or unwilling to stand for election or to serve if elected.  Should you desire to elect an individual other than the nominees listed in this proxy statement, you may write in that individual in the space provided on your proxy.

OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS

VOTE "FOR" EACH OF THE NOMINEES LISTED ABOVE TO SERVE ON THE

COMPANY’S BOARD OF DIRECTORS

PROPOSAL TWO

RATIFICATION OF APPOINTMENT OF

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The firm of Chisholm, Bierwolf & Nilson served as our independent registered public accounting firm for the fiscal year ended December 31, 2006.  As we currently have no standing audit committee, the full board of directors fulfills the functions of the audit committee.  The board of directors has, in its discretion, retained Chisholm, Bierwolf & Nilson to continue in its capacity as the Company’s independent registered public accounting firm for the 2007 fiscal year.  We are submitting this matter to shareholders for their ratification.

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Audit Fees

Principal accounting fees for professional services rendered to the Company by Chisholm, Bierwolf & Nilson for the years ended December 31, 2006 and 2005, are summarized as follows:

	2006		2005
Audit	$	34,934	$	16,399
Audit related	$	-	$	-
Tax	$	11,250	$	-
All Other	$	-	$	2,537
Total	$	46,184	$	18,936

Audit Fees.  Audit fees were for professional services rendered in connection with our annual financial statement audits and quarterly reviews of financial statements for filing with the Securities and Exchange Commission.

Tax Fees.  Chisholm, Bierwolf & Nilson billed us an aggregate of $11,250 for professional services rendered for tax compliance, tax advice and tax planning within the United States for the fiscal year ended December 31, 2006.

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

Board of Directors Pre-Approval Policies and Procedures.  The board of directors has not 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, the 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 such 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 directors’ responsibilities to our management.

The board of directors has determined that the provision of services by Chisholm, Bierwolf & Nilson described above are compatible with maintaining Chisholm, Bierwolf & Nilson’s independence as our independent registered public accounting firm.

A representative of Chisholm, Bierwolf & Nilson is expected to be present at the Annual Meeting.  In the event a representative is present he or she will be given an opportunity to make a statement if he or she desires and if present, he or she is expected to be available to respond to appropriate questions.  Notwithstanding ratification by the shareholders, the board or directors shall have the right to replace the independent registered public accounting firm at any time.

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THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL TWO, RATIFYING THE APPOINTMENT OF CHISHOLM, BIERWOLF & NILSON AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL 2007.

CORPORATE GOVERNANCE

Code of Ethics

Our board of directors has adopted a code of ethics that applies 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, 21 Toulon, Newport Beach, California 92660.

Director Independence

The board of directors has determined that, Thomas Iwanski is an “independent director” as defined under the rules the NASDAQ Stock Market.  As an executive officer, Mr. Kubota would not qualify as an independent director.

Directors’ Meetings and Committees

Our business is managed under the direction of our board of directors pursuant to the Utah Revised Business Corporations Act and our Bylaws.  Our board has responsibility for establishing broad corporate policies and for the overall performance of the Company.  Our board is kept advised of our business through regular interaction with the President, our other officers and the officers of our operating subsidiary, Medex Healthcare, Inc. and through reviewing materials provided to them and by participating in board meetings.

The board of directors held 13 meetings during the 2006 fiscal year.  Each director attended all of the board meetings held during the 2006 fiscal year (held during the period for which he was a director).  The board did not take any action by written consent during fiscal 2006.

Our shares are quoted on the OTC Bulletin Board.  Since we are not listed on a securities exchange, we are not subject to various requirements of the Securities and Exchange Commission or certain self-regulatory bodies such as Nasdaq or the American Stock Exchange, which require our board of directors to establish and maintain an audit committee, compensation committee and nominating committee.  As a result, we do not have standing audit, nominating or compensation committees of our board of directors, or committees performing similar functions.

Audit Committee

As noted above, We do not currently have a standing audit committee or other committee performing similar functions, nor have we adopted an audit committee charter.  Given our size, available resources and the fact that the OTCBB does not require us to have an audit committee, the board of directors has determined that it is in our best interest to have the full board fulfill the functions that would be performed by the audit committee, including selection, review and oversight of our 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 our reporting practices and the evaluation of our internal controls and accounting procedures.  The board is also responsible for the pre-approval of all non-audit services provided by its independent auditors.  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 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.

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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 financial expert.

Audit Committee Report 

As discussed, we do not currently have a standing audit committee, therefore, our entire board of directors serves the functions that would be fulfilled by an audit committee.  The Board of Directors presents the following Report:

We have reviewed and discussed the Company’s audited consolidated financial statements for the year ended December 31, 2006 with management and have discussed with Chisholm, Bierwolf & Nilson, our independent registered public accounting firm for 2006, the matters required to be discussed by Statement of Accounting Standards 61, as amended (Codification of Statements on Auditing Standards, AU Section 380.)  We have received the written disclosures and the letter from Chisholm, Bierwolf & Nilson required by Independence Standards Board Standard No. 1 and have discussed with Chisholm, Bierwolf & Nilson its independence in connection with this audit of our most recent financial statements.  Based on this review and these discussions, we have included the financial statements in our Annual Report on Form 10-KSB for the year ended December 31, 2006.

Tom Kubota

Donald Hellwig

Thomas Iwanski

Nominating Committee

As stated above, we do not currently have a standing nominating committee or other committee performing similar functions, nor have we adopted a nominating committee charter.  Given our size, available resources and the fact that the OTCBB does not require us to have a nominating committee, the board of directors has determined that it is in our best interest to have the full board of directors to participate in the consideration for 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 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 it in identifying or evaluating, potential director candidates.

Until such time as we appoint a nominating committee, the full board of directors will consider director candidates nominated by shareholders during such times as the board is actively considering appointing 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 Secretary and include: (a) 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; (b) the name and contact information for the candidate; (c) a statement of the candidate’s business and educational experience; (d) information regarding the candidate’s qualifications to be a director, including but not limited to an evaluation of the factors discussed above which the board would consider in evaluating a candidate; (e) information regarding any relationship or understanding between the proposing shareholder and the candidate; (f) information regarding potential conflicts of interest; and (g) a statement that the candidate is willing to be considered and willing to serve as director if nominated and elected.  Because of our small size and 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 board, and no undertaking to do so is implied by the willingness to consider candidates proposed by shareholders.

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Compensation Committee

We do not have a standing compensation committee or a charter; rather our President evaluates officer and employee compensation issues and presents them to the board of directors for approval of our board of directors.  Our President makes recommendations to the board of directors as to employee benefit programs and officer and employee compensation.  The compensation of the President is determined and approved directly by our board of directors.  Neither the President nor the board of directors engaged compensation consultants during the year.

Compensation Committee Interlocks and Insider Participation

As noted above, we do not have a compensation committee.  Our board of directors makes determinations with respect to compensation.  During our 2006 fiscal year, Mr. Kubota, Mr. Hellwig and Mr. Iwanski served on our board of directors.  At the same time, Mr. Kubota served, as our President and Mr. Hellwig served as our Chief Financial Officer.

Director Nominees Recommended by Stockholders

You may propose director candidates for consideration by the board of directors.  It is our policy that until such time as we establish a nominating committee, our board of directors will consider recommendations for candidates to the board of directors from stockholders holding not fewer than 50,000 shares of our common stock continuously for at least 12 months prior to the date of the submission of the recommendation.  Our board of directors will consider persons recommended by our stockholders in the same manner as a nominee recommended by other board members or management.  See “2007 Shareholder Proposals” below for additional information.

Candidates recommended by shareholders will be evaluated based on the same criteria as candidates identified by the independent members of our board of directors.  Shareholders desiring to suggest a candidate for consideration should send a letter to our Corporate Secretary and include: (a) 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; (b) the name and contact information for the candidate; (c) a statement of the candidate’s business and educational experience; (d) information regarding the candidate’s qualifications to be a director, including but not limited to an evaluation of the factors discussed above which the board would consider in evaluating a candidate; (e) information regarding any relationship or understanding between the proposing shareholder and the candidate; (f) information regarding potential conflicts of interest; and (g) a statement that the candidate is willing to be considered and willing to serve as director if nominated and elected.  Because of our 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 management or the board, and no undertaking to do so is implied by the willingness to consider candidates proposed by shareholders.

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For a shareholder recommendation to be considered by the independent directors of our board of directors as a potential candidate at an annual meeting, nominations must be received on or before the deadline for receipt of shareholder proposals.  In the event a shareholder decides to nominate a candidate for director and solicits proxies for such candidate, the shareholder will need to follow the rules set forth by the SEC.  See “2007 Shareholder Proposals” below for additional information.

Director Attendance at Annual Stockholders’ Meeting

We encourage our directors to attend the annual meeting of stockholders.  Mr. Kubota, Mr. Hellwig and Mr. Iwanski attended the annual meeting of stockholders for the 2005 fiscal year.

Communications with the Board

Stockholders and other parties interested in communicating with our board of directors may do so by writing to the Chairman of the Board of Directors, c/o Corporate Secretary, Pacific Health Care Organization, Inc., 21 Toulon, Newport Beach, California 92660.  The Corporate Secretary will review and forward to the members of the board copies of all such correspondence that, in the opinion of the Corporate Secretary, deals with the functions of the board or that he otherwise requires the attention of the board of directors.  Concerns relating to accounting, internal controls or auditing matters will be brought promptly to the attention of the board of directors.

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

The following table summarizes the total compensation paid for the 2006 and 2005 fiscal years to our president and to each other named executive officer of the Company or its wholly-owned subsidiary, Medex, whose compensation exceeded $100,000 for the year ended December 31, 2006 (the “named executive officers”).

Summary Compensation Table

Name and Principal Position	Year	Salary ($)		Bonus ($)		Option Awards(2) ($)		All Other Compensation(4) ($)		Total ($)
Tom Kubota	2006		71,400		-0-		-0-		-0-		71,400
President and Director	2005		42,000		10,000		-0-		-0-		52,000
Doug Hikawa(1)	2006		137,908		3,400		6,860		-0-		148,168
President, Medex	2005		138,846		6,400		16,979		-0-		162,225
Healthcare
Geri Plotzke(3)	2006		92,800		2,600		-0-		-0-		134,243
Vice President,
Medex Healthcare
Donald Balzano (5)	2006		125,875		-0-		-0-		38,842		164,717
Former CEO,	2005		172,341		8,600		-0-		-0-		181,475
Medex Healthcare

⁽¹⁾Doug Hikawa was promoted from Senior Vice President of Medex to President of Medex effective October 1, 2006.

⁽²⁾ Represents the dollar amount recognized for financial statement reporting purposes during 2006 in accordance with FAS 123(R) with respect stock options granted to Mr. Hikawa in October 2004.  The options are exercisable over a three year term, with the right to purchase 100,000 restricted shares for $.05 per share vesting upon the date of grant; the right to purchase an additional an additional 100,000 restricted shares for $.10 per share  vesting one year from the date of grant and the right to purchase the remaining 150,000 restricted shares for $.20 per share vesting on the two years from the date of grant.  All of Mr. Hikawa’s options have vested.  None of Mr. Hikawa’s options have been exercised to date.

⁽³⁾ Geri Plotzke was promoted to Vice President of Medex Healthcare, Inc effective October 1, 2006.

⁽⁴⁾ Represents the following amounts:  Mr. Balzano, $38,842 in consulting fees.

⁽⁵⁾Donald P. Balzano resigned as CEO of Medex Healthcare, Inc and became a consultant to Medex effective October 1, 2006.

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Employment Agreements

We do not have employment agreements with any of our employees or any of the employees of Medex.  All of our employees, including our executive officers and the executive officers or our Medex, are employed on an at will basis.  Compensation of executive officers is determined by our board of directors on an annual basis.

Employer Benefit Plans

Medex currently provides health care benefits, including medical 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.

PHCO does not provide any health care, retirement, pension, 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.

Stock Option Plan

In November 2002 our board of directors adopted the Pacific Health Care Organization, Inc. 2002 Stock Option Plan (the “2002 Plan”).  The 2002 Plan was later ratified by our stockholders at a special meeting of stockholders held in November 2004.  In November 2005 our shareholders approved the Pacific Health Care Organization, Inc. 2005 Stock Option Plan (the “2005 Plan”) at our annual meeting of stockholder held in November 2005.

The 2002 Plan reserves 1,000,000 common shares for distribution under the Plan.  The 2005 Plan also reserves 1,000,000 common share for distribution under the Plan.  The purpose of each 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 each Plan enable us to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity of our business.

Employee Stock Purchase Plan

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

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Outstanding Equity Awards at Fiscal Year End

The following table sets forth information concerning all option holdings for the fiscal year ended December 31, 2006 for each of the named executive officers.

	Option Awards
Name		Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Option Exercise Price ($)	Option Expiration Date
Tom Kubota		-0-	-0-	-0-	-
Doug Hikawa		350,000	-0-	(1)	10/11/2007

⁽¹⁾  On October 11, 2004, we granted stock options to Doug Hikawa, an officer of our subsidiary, Medex Healthcare to purchase up to 350,000 restricted common shares of the Company.  The options are exercisable as follows:  100,000 shares the first year with an exercise price of $.05 per share; 100,000 shares the second year with an exercise price of $.10 per share; and 150,000 shares the third year with an exercise price of $.20 per share.  The options expire three years from the date of grant.  To date, none of these options have been exercised.

Director Compensation

Name	Fees Earned or Paid in Cash ($)	Total ($)
Tom Iwanski	4,600	4,600
Don Hellwig	4,600	4,600
Tom Kubota	4,600	4,600

Our directors are compensated $300 for each monthly directors’ meeting attended in person, and $1,000 for the annual directors meeting, held after the annual meeting of stockholders, plus airfare and hotel expense.  No director receives a salary as a director.

Director Stock Purchase Plan

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

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SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND NOMINEES

As of October 2, 2007, we had 15,427,759 shares of our common stock issued and outstanding.  The following table sets forth the beneficial ownership of our common stock as of that date, of each current director, nominee, our President, our other executive officers, and for all directors and executive officers as a group.  The address for each of these individuals is the Company’s address.

Name	Shares of Common Stock		Percentage of Class
Tom Kubota (1)		3,212,305		20.8	%
Donald Hellwig (2)		3,000		0.0	%
Thomas Iwanski		0		0.0	%
All directors, nominees and executive officers as a group (3 persons)		3,215,305		20.8	%

⁽¹⁾  The number of shares attributed to Mr. Kubota includes 2,785,638 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.

⁽²⁾ The number of shares attributed to Mr. Hellwig are held of record by Donald C. Hellwig Trustee of the Hellwig Family Trust.  As Trustee the Trust, Mr. Hellwig may be deemed to have voting and/or investment power over the shares held by the Trust and therefore may be deemed to be the beneficial owner of those shares.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

Based upon a review of our list of shareholders provided by the Company’s transfer agent dated October 2, 2007, and a review of applicable SEC filings regarding beneficial ownership of the Company, the persons named below are the beneficial owners of more than 5% of the outstanding common stock, other than directors, nominees and executive officers whose beneficial ownership is described in the above table as of October 2, 2007.

Name	Shares of Common Stock	Percentage of Class
Amafin Trust  121 Meierhofstasse  FL 9495 Triesen  Lichtenstien	1,500,000	9.7%
Eurifa Anstalt 121 Meierhofstrasse FL 9495 Triesen Liechtenstein	955,343	6.2%
Donald P. Balzano 5422 Mitchell Drive Torrance, CA. 90503	1,083,335	7.0%
Manfred Heeb  121 Meierhofstrasse  FL 9495 Triesen  Liechtenstein	1,445982	9.4%
Auric Stifung  P.O. Box 83  Aeulestrasse 5  FL 9490 Vaduz  Liechenstein	1,500,000	9.7%
Janet Zand  1505 Rockcliff Road  Austin, Texas 78796	1,083,333	7.0%
Total	7,567,993	49.1%

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors, executive officers and beneficial owners of greater than 10% of our outstanding common stock are required to comply with Section 16(a) of the Securities Exchange Act of 1934, which requires generally that such persons file reports regarding ownership of and transactions in securities of the Company on Forms 3, 4, and 5.  Form 3 is an initial statement of ownership of securities, Form 4 is to report changes in beneficial ownership and Form 5 is an annual statement of changes in beneficial ownership.  Based solely on a review of Forms 3, 4 and 5 and amendments thereto furnished to the Company during our most recent fiscal year it appears that none of our directors, executive officers or beneficial owners failed to timely file Forms 3, 4 or 5 during the fiscal year ended December 31, 2006.

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RELATED PARTY TRANSACTIONS

Review, Approval or Ratification of Related Party Transactions

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, we consider a related party transaction to be a transaction, or a material amendment to a transaction, involving a related party and the Company involving $120,000 or more.  Our board of directors is required to review and approve related party transactions.  In reviewing and approving any related party transaction or material amendment to any such transaction, the board of directors must satisfy itself that it has 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.

Related Party Transactions

We did not engage in any significant dealings with affiliates during the year ended December 31, 2006.  If, however, there are dealings with related parties in the future, we will attempt to deal on terms competitive in the market and on the same terms that either party would deal with a third person.

2007 SHAREHOLDER PROPOSALS

If you wish to include a proposal in the Proxy Statement for the 2007 Annual Meeting of stockholders, your written proposal must be received by us no later than July 15, 2008.  The proposal should be mailed by certified mail, return receipt requested, and must comply in all respects with applicable rules and regulations of the Securities and Exchange Commission, the laws of the State of Utah and our Bylaws.  Stockholder proposals may be mailed to the Corporate Secretary, Pacific Health Care Organization, Inc., 21 Toulon, Newport Beach, California 92660.

For each matter that you wish to bring before the meeting, other than the nomination of individual for election to the board of directors, please provide the following information:

(a) a brief description of the business and the reason for bringing it to the meeting;

(b) your name and record address;

(c) the number of shares of Company stock which you own; and

(d) any material interest (such as financial or personal interest) that you have in the matter.

If the matter that you wish to propose a nominee to stand for election to the board of directors please provide the information set forth in “Director Nominees Recommended by Stockholders” on page 8 of this Proxy Statement.

WHERE STOCKHOLDERS CAN FIND MORE INFORMATION

WE FILE ANNUAL AND QUARTERLY REPORTS WITH THE SECURITIES AND EXCHANGE COMMISSION.  SHAREHOLDERS MAY OBTAIN, WITHOUT CHARGE, A COPY OF THE MOST RECENT FORM 10-KSB OR 10-QSB (WITHOUT EXHIBITS) BY REQUESTING A COPY IN WRITING FROM US AT THE FOLLOWING ADDRESS:

PACIFIC HEALTH CARE ORGANIZATION INC.

ATTN: CORPORATE SECRETARY

21 TOULON

NEWPORT BEACH, CALIFORNIA 92660

THE EXHIBITS TO THE FORM 10-KSB OR 10-QSB ARE AVAILABLE UPON PAYMENT OF CHARGES THAT APPROXIMATE REPRODUCTION COSTS.  IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY NOVEMBER 1, 2007, TO RECEIVE THEM BEFORE THE ANNUAL MEETING OF STOCKHOLDERS.

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OTHER MATTERS

The Board of Directors knows of no other matters that are to be presented for action at the Annual Meeting of Stockholders other than those set forth above.  If any other matters properly come before the Annual Meeting of Stockholders, the person named in the enclosed proxy form will vote the shares represented by proxies in accordance with their best judgment on such matters.

It is important that your shares be represented at the annual meeting, regardless of the number of shares you hold.  Therefore, you are urged to execute and return the accompanying proxy in the enclosed envelope at your earliest convenience.

	By order of the President,
October 15, 2007	Tom Kubota, President

STOCKHOLDERS ARE REQUESTED TO MARK, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED, SELF-ADDRESSED ENVELOPE.   NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. YOUR PROMPT RESPONSE WILL BE HELPFUL, AND YOUR COOPERATION WILL BE APPRECIATED.

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SELECTED INFORMATION FROM OUR ANNUAL REPORT ON FORM 10-KSB FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 2007 AND OUR QUARTERLY REPORT ON FORM 10-QSB FOR THE

QUARTER ENDED JUNE 30, 2006, FILED ON AUGUST 14, 2007

FORWARD LOOKING INFORMATION

Certain statements contained in all parts of this document contain forward-looking statements.  For this purpose any statements contained in this document that are not statements of historical fact may be deemed to be forward-looking statements.  Without limiting the foregoing, words such as “may,” “hope,” “will,” “expect,” “believe,” “anticipate,” “estimate” “projected” or “continue” or comparable terminology are intended to identify forward-looking statements.  These statements by their nature involve substantial risks and uncertainty, and actual results may differ materially depending on a variety of factors, many of which are not within our control.  These factors include but are not limited to economic conditions generally and in the industry in which we and our customers participate; competition within our industry, including competition from much larger competitors; legislative requirement 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; 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.

DESCRIPTION OF BUSINESS

History of the Company

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 Health Care Organizations in the state of California.

Industry Background

In July 1993, the California legislature passed Assembly Bill 110 (“AB 110" or the “bill”) which also deregulated the premiums paid by employers for Workers’ Compensation insurance.  These two events have given rise to the business of the Company.

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”).  The 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.

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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.  An additional measure enacted by the California legislature deregulated the premiums paid by employers.  This encouraged competition for market share of the Workers’ Compensation insurance business.  The increased competition initially drove premiums down to levels that were not sustainable.  In response, insurers initially raised insurance premiums in 2002-2003 to unprecedented levels, although now the premiums have 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 or “MPNs.”  Like an HCO, an MPN is a network of health care professionals, although MPN networks do not require the same level of medical expertise in treating employees’ work place injuries.  Under an MPN program, the employer dictates which physician the injured employee will see for the initial visit.  Thereafter, the employee can choose to treat with any physician within the MPN network.  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 are currently the only entity that offers both programs together in a hybrid program.

Certification Process

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

The applicant for the HCO license must develop a contracted network of providers for all of the necessary medical services that injured workers may need.  This network must be developed to the satisfaction of the DIR.  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 so as to assure the best of care will be provided to the injured worker.

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Next, the HCO applicant must develop committees of providers that will ensure the injured worker receives the best of care.  This requirement includes the development of Quality Assurance, Utilization, Work Safety, Educational and Grievance committees.

Finally, an HCO applicant must demonstrate to the DIR’s satisfaction 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.

Our wholly owned subsidiary 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.

All applications for MPN license certification are processed by the Division of Workers’ Compensation (“DWC’).

Applicant for an MPN license must develop a contracted network of providers for all of the necessary medical services that injured workers may need.  This network must be developed to 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 MPN applicant and be willing to provide the various services in their specialty.  All contracts must be approved by the DWC so as to assure the best of care will be provided to the injured worker.

The MPN applicant must then develop policies and procedures that will ensure the injured worker receives the best of care.  This requirement 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 MPN applicant must demonstrate to the DWC’s satisfaction that it has the resources necessary to manage and administer a large network of providers.

Our wholly owned subsidiary Medex received its first MPN certified client on December 4, 2004, for its network of primary care providers.

Business of the Company

Our sole business is that of our wholly owned subsidiary Medex. Health Care Organizations (“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 DIR twice and received certificationto 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.  We believe our ability to offer two HCOs gives potential clients greater choice, which is favored by a number of employers, especially those with certified bargaining units.

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Through the two licenses to operate HCOs, 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 networks have contracted with over 3,600 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 would be performed by Medex

Medex, by virtue of its continued certification as an HCO, is statutorily deemed to be qualified as an approved MPN.  A significant number of employer clients have availed themselves of the MPN.  Others utilize the provisions of the HCO program, while others will use both in conjunction with each other.

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 such as x-ray machines, we do not typically incur large 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.  Two of the Medex founders have been active in the Southern California medical community for many years, and as a result, we have been able to recruit physicians with superlative 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.

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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 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 trained in 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.

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Ancillary Services

We have access to a full range of ancillary services to cover all requirements of the California Department of Corporations and Department of Industrial Relations.  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.

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 being offered by the Company.  Many of these competitors may have greater financial, research and marketing experience and resources than we do, and they represent substantial long-term competition.  In California there are currently seventeen certified health care organization licenses issued to eleven companies, (two of which belong to the Company.)  This translates into ten direct HCO competitors.

We believe we have gained a competitive advantage by marketing ourselves as not only a medical company, but a legal medical organization.  The Medical Director of Medex is an attorney and member of the California State Bar.  In addition, we contract directly with a network of providers based on quality determinations rather than the provision of discounted medical services.  We believe this is advantageous 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 those based upon discounts alone.

SB 899, signed on April 19, 2004, created Medical Provider Networks, effective as of  January 1, 2005.  The statute deems the Medex network, as a certified HCO, is already approved as an MPN.  Medex offers both HCO and MPN programs to potential clients, as well as an HCO/MPN hybrid model that gives Medex a competitive advantage, because of the manner in which the network was created.

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.

Another factor that has contributed to the shift in customers from HCOs to MPNs is that unlike HCOs, MPNs are not assessed annual fees, including annual enrollee fees 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 and MPN program, which allows MPN to market their services at lower per enrollee fees than HCOs.

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Employees

Through our subsidiary, Medex, we currently have six full time employees and a number of consultants.  In addition, some officers 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 as needed and as revenues and operations warrant.

DESCRIPTION OF PROPERTY

Property & Facilities

The principal offices of our operating subsidiary, Medex are located in Long Beach, California.  Medex leases approximately 3,504 square feet of office space in Long Beach, California.  The monthly lease payment during 2006 was approximately $7,000.  The term of this lease is through February 2011.  We anticipate this facility will be suitable and adequate for our needs.  We also lease approximately 600 square feet of office space in Newport Beach, California.  We lease this space on a month-to-month basis.  During 2006 we paid $1,200 per month for this space.  We do not anticipate needing any additional office space in the next twelve months.  If the need arises, we believe we will be able to secure additional office space on acceptable terms.

MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY

AND OTHER SHAREHOLDER MATTERS

Our shares are currently traded on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol PHCO.  As of March 29, 2006, we had approximately 1,076 shareholders holding 15,427,759 common shares.

The published bid and ask quotations from January 1, 2005, through December 31, 2006, are included in the chart below.  These quotations represent prices between dealers and do not include retail markup, markdown or commissions.  In addition, these quotations do not represent actual transactions.

	BID PRICE				ASK PRICE
	HIGH		LOW		HIGH		LOW
2006
First Quarter	$	.10	$	.10	$	.19	$	.19
Second Quarter		.12		.12		.19		.19
Third Quarter		.10		.10		.40		.40
Fourth Quarter		.10		.10		.35		.35
2005
First Quarter		.16		.16		1.01		1.01
Second Quarter		.16		.16		1.01		1.01
Third Quarter		.16		.16		1.01		1.01
Fourth Quarter		.16		.16		1.01		.50

The 2006 bid and ask price information was obtained from quatos.nasdaq.com. The 2005 bid and ask price information was obtained from Pink Sheets LLC, 304 Hudson Street, 2nd Floor, New York, New York 10013.  The above quotations represent prices between dealers and do not include retail markup, markdown or commission.  In addition, these quotations may not represent any actual transactions.

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Cash Dividends

We have not declared a cash dividend on any class of common equity in the last two fiscal years.  There are no restrictions on our ability to pay cash dividends, other than state law that may be applicable; those limit the ability to pay out all earnings as dividends.  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 its business.

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 column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		66,250	$	0.05		915,000
Equity compensation plans not approved by security holders		350,000	$	0.13		-0-
Total		416,250	$	0.12		915,000

On October 11, 2004, we granted stock options to Doug Hikawa, an officer of our subsidiary, Medex Healthcare to purchase up to 350,000 restricted common shares of the Company.  The options are exercisable as follows:  100,000 shares the first year with an exercise price of $.05 per share; 100,000 shares the second year with an exercise price of $.10 per share; and 150,000 shares the third year with an exercise price of $.20 per share.  The options expire three years from the date of grant.  To date, none of these options have been exercised.

In August 2002, we granted options to purchase approximately 85,000 restricted common shares of the Company to four employees pursuant to the PHCO 2002 Stock Option Plan, the adoption of which was recently ratified by the shareholders of the Company.  50% of the options granted vested upon grant, 25% vested on the first annual anniversary of the grant date and the remaining 25% vested on the second annual anniversary of the grant date.  The exercise price of the options is $0.05.  The options expire five years from the grant date.  To date, options to purchase 18,750 restricted common shares have been exercised.

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Unregistered Sales of Equity Securities

During the quarter ended December 31, 2006 we did not sell any equity securities.

No instruments defining the rights of the holders of any class of registered securities were materially modified, limited or qualified during the quarter ended December 31, 2006.

Repurchases of Equity Securities

During the quarter ended December 31, 2006, we did not repurchase any of our equity securities.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS FOR THE YEARS DECEMBER 31, 2006 AND 2005

The following information contained in this analysis should be read in conjunction with the audited condensed consolidated financial statements and related disclosures contained in our Annual Report on Form 10-KSB.

Liquidity and Capital Resources

We do not currently possess a financial institution source of financing and we there is no guarantee that our revenues and other existing sources of cash will be adequate to meet our liquidity requirements.

Our future capital requirements will depend on our ability to continue to develop our business and revenue, including (i) our ability to maintain and expand our customer base, and (ii) the overall financial market conditions if and when we might seek potential investors.  We continue to seek potential business acquisitions based on, among other criteria, the economics of any deal and subsequent projected future cash flow.  If needed, we may seek additional funding through the sale of its common stock.

As of December 31, 2006, we had cash on hand of $273,058 compared to $345,091.  The $72,033 decrease in cash on hand is the result of decreased revenue from operations, which was compounded by a significant increase in legal fees associated with defending the Company against the lawsuit brought by Marvin Teitelbaum and Peter Alexakis..  We believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating costs over the next twelve months.  We do not anticipate needing to find other sources of capital at this time.  If, however, our revenues are less than anticipated we may need to find other sources of capital to continue operations.  Most likely we would seek additional capital in the form of debt and/or equity.  While we believe we are capable of raising additional capital, there is no assurance that we will be successful in locating other sources of capital on favorable terms or at all.

Results of Operations

For many years, workers’ compensation costs in the State of California have been high.  This has led employers to leave the state to avoid these excessive costs.  The legislature of California has been actively involved in attempting to control workers’ compensation costs.  Since 1993, the legislature in California has enacted various laws designed to introduce alternatives to the traditional model of worker’s compensation.  These laws have focused on giving the employer greater control over the medical treatment of the injured worker for a longer period of time.

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

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

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

In 2004, the California legislature enacted new laws that created Medical Provider Networks.  Like an HCO, an MPN is a network of health care professionals, although MPN networks do not require the same level of medical expertise in treating employees’ work place injuries.  Under an MPN program, the employer dictates which physician the injured employee will see for the initial visit.  Thereafter, the employee can choose to treat with any physician within the MPN network.  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, Medex 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, 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.  Medex is currently the only entity that offers both programs together in its hybrid program.

Unlike HCOs, MPNs are not assessed the annual enrollee 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.  Because there is no annual fee, and there is less administrative burden upon the employer with an MPN, the primary growth in our business during the 2006 fiscal year was in the number of enrollees in our MPN program.

Comparison of the years ended December 31, 2006 and 2005

Despite a 27% increase in the number of employee enrollees during 2006, total revenues decreased 5% to $1,970,855 as we lost some HCO clients and as increased competition for MPN services led to lower prices.

During the year ended December 31, 2006, we had approximately 157,000 total enrollees.  This was made up of approximately 49,000 HCO clients and 108,000 MPN clients.  By comparison during the year ended December 31, 2005 we had approximately 124,000 enrollees, including approximately 66,000 HCO enrollees and approximately 58,000 MPN enrollees.  The 26% decrease in HCO enrollees is the result of losing approximately 11% of our HCO customers to other workers’ compensation providers while approximately 15% of our own HCO customers converted to our MPN program.  The 86% increase in our MPN enrollees is the result of a 69% increase in enrollment of new MPN customers coupled with the aforementioned conversions of some of our own HCO clients to our MPN program.

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During the 2006 fiscal year, we experienced a 12% decrease in revenue from HCO fees.  This reduction in HCO revenue is directly attributable to the decrease in the number of HCO enrollees compared to fiscal 2005.  Barring legislative changes to reduce or eliminate government fees and otherwise reduce the costs and burdens of administering an HCO program to allow HCOs to be more price competitive with MPNs, we expect that enrollment in our HCO program will continue to decrease.  Based on a review of the expiration dates of current contracts with our existing HCO clients, and our experience over the past year, we anticipate that during fiscal 2007, we will experience a 3% decrease in total HCO enrollees.  We anticipate this will lead to a 3% decrease in HCO revenue in fiscal 2007.

Despite an 86% increase in MPN enrollees in 2006, we realized an 11% decrease in MPN fees.  The average fee we charged per MPN enrollee in during 2006 was 58% lower than in 2005 as increased competition in the MPN market required us to lower our enrollment fees to remain competitive in the market.  We expect the number of MPN enrollees and correspondingly revenue from MPN clients to increase 7% during 2007.  Based on our research, we expect that rates for MPN services will level off and we will not continue to experience the significant reductions in MPN fees per enrollee that we experienced during 2006.

During the year ended December 31, 2006, other revenue increased 156% to $204,423.  The primary component of other revenue is nurse case management.  We retain nurses on our staff who, at the request of our customers, will review the medical portion of a claim on behalf of our employer clients, claims managers and injured workers.  We offer nurse case management services to our customers on an optional basis.  We charge an additional fee for nurse case management services.  We anticipate that demand for and revenue from nurse case management will increase 18% in 2007 as a result of more customers availing themselves of this service.

We expect the aforementioned 3% decrease in HCO fees to more than offset the expected 7% increase in MPN fees and the anticipated 18% increase in other revenue and will result in an overall decrease in total revenue of approximately 3% in 2007.

Total expenses remained flat during the year ended December 31, 2006 compared to 2005, decreasing less than 1%.  We expect total expenses to be approximately 17% lower during the 2007 fiscal year, primarily as a result of settling the aforementioned lawsuit during 2006.

During the year ended December 31, 2006, consulting fees increased to $134,303 from $104,110 during the year ended December 31, 2005.  This increase in consulting fees was primarily due to a former executive officer of Medex leaving his position during 2006 and becoming a consultant.  During 2006 we also realized a 29% increase in consulting fees as a result of a 274% increase in the use of outside temporary help.  We anticipate that consulting fees will increase approximately 37% in 2007 as we continue to retain the consulting services of the former Medex executive officer.

Salaries and wages decreased $53,770 or 7% during the year ended December 31, 2006.  The decrease in salaries & wages is attributable to the aforementioned resignation of the former Medex executive officer.  We expect salaries and wages to be approximately 13% lower in 2007 as a result of the reduction in overall salaries and wages from the resignation of the former Medex executive officer.  As discussed above, however, we expect this decrease in salaries and wages in 2007 will be largely offset by the corresponding increase in consulting fees.

For the year ended December 31, 2006, we incurred professional fees of $435,909 compared to $342,028 during the year ended December 31, 2005.  The increase in professional fees in 2006 is largely attributable to increased legal fees incurred in defending the Company in the legal proceeding brought by Marvin Teitelbaum and Peter Alexakis.  We also realized increase professional fees during fiscal 2006 in connection with compliance with the reporting obligations of the Company under the Exchange Act of 1934.  We expect professional fees to be about 66% lower in 2007 as a result of the settlement of the lawsuit against the Company during 2006.

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During the year ended December 31, 2006, we incurred insurance expenses of $123,909, a $39,568 increase over the prior year.  The increase in 2006 is related to an increase in professional liability insurance premiums and acquiring directors and officers liability insurance coverage.  We do not expect insurance expense to increase materially in 2007.

Employee enrollment decreased $61,084 to $55,456 during the year ended December 31, 2006, compared to the year ended December 31, 2005.  As an HCO, we are required to pay a fee to the State of California Division of Workers’ Compensation for each person enrolled at the end of the calendar year in our HCO program.  The decrease in employee enrollment expenses in the year ended December 31, 2006 reflects the decreased number of persons enrolled in our HCO program as compared to the same period ended 2005.  Part of the decrease in enrollment expense in 2006 was also the result of our over estimating employee enrollment fees during 2005.  We anticipate employee enrollment expenses to decrease 3% in 2007 consistent with the anticipated decrease in HCO enrollment for the same period.

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.  As a result, after the first year, data maintenance fees for MPN enrollees are consistently about 50% lower than data maintenance costs per HCO enrollee.  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.  Employee enrollment fees do not take into account fluctuations in HCO enrollees during the year.  By comparison, data maintenance fees are billed as services are provided.  Therefore, as we experienced in 2006, 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 2006 we experienced a 26% decrease in HCO enrollees and an 86% increase in MPN enrollees, resulting in an overall enrollment increase of 27%.  Data maintenance fees increased 12% during the 2006 fiscal year.  The increase in data maintenance fees is attributable to the increase in total enrollment offset by the somewhat lower data maintenance costs associated with the renewal of MPN enrollees from 2005.  During 2007 we expect ­­­data maintenance fees will decrease approximately 5% as a result of negotiation of lower printing costs with a vendor and fewer HCO enrollees.

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Bad debt expense was $0 for the year ended December 31, 2006 as compare to $38,000 for year ended December 31, 2005.  A reserve was established during 2005 for several past due accounts.  We incurred no bad debt expense in fiscal 2006.  We do not expect to incur any bad debt in 2007.

General and administrative expenses decreased nearly 15% to 261,912 during the year ended December 31, 2006.  This decrease in general & administrative expense was attributable to lower advertising cost and shareholders’ meeting expense.  We do not expect a significant change in general and administrative expenses in the upcoming fiscal year.

The 5% decrease in our total revenue more than offset the less than 1% decrease in total expenses during 2006, resulting in a loss from operations $90,912 compared to income from operations of $13,456 during 2005.

Because we realized a loss from operations in 2006, we realized a net operating loss carryforward, or income tax benefit, of $11,243.  By comparison, during fiscal 2005 we realized income tax expense of $45,235 related to taxes for 2002 – 2005.  Since inception we have realized net losses for book purposes.  We did not file tax returns until 2006 for the fiscal year ended 2005.  At that point, all prior year Federal and state tax returns were filed.  For Federal purposes, due to the net operating loss carryforwards, no income tax was due.  For California state purposes, however, taxes were due because California suspended net operation loss carryforwards during 2002 and 2003.  As a result of the suspension of net loss carryforwards in the state of California, we owed state income taxes in the aggregate amount of $23,750 for the 2002, 2003 and 2004 fiscal years.  For the year ended December 31, 2005, there were taxes due in the amount of $21,485.  Since the amount of the tax in any of these years was not significant, the Company decided to expense the amount in the 2005 year. 

As a result of decreasing revenue that was only partially offset by a decrease in total expenses, we realized a net loss of $77,451 for the year ended December 31, 2006, compared to net loss of $29,323 during the year ended December 31, 2005.  In 2007, we anticipate that a projected 37% increase in consulting fees will be more than offset by a 13% decrease in salaries and wages, and a 66% decrease in professional fees to result in a 15% decrease in total expenses in 2007.  We expect this 15% decrease in total expenses will more than offset the projected 3% decrease in total revenue in 2007, resulting in a net profit in 2007.

Cash Flow

During the fiscal year ended December 31, 2006 cash was primarily used to fund operations.   We had a net decrease in cash of $72,033 during the 2006 fiscal year.  See below for additional discussion and analysis of cash flow.

	Fiscal 2006			Fiscal 2005
Net cash provided by (used in) operating activities	$	(72,033	)	$	(161,584	)
Net cash used in investing activities		-			-
Net cash provided by (used in) financing activities		-			-
Net Change in Cash	$	(72,033	)	$	(161,584	)

In fiscal 2006, net cash used in operating activities was $72,033, compared to net cash used by operating activities of $161,584 in fiscal 2005.  This change in cash flow from operating activities is the result of lower operating income due to increased legal fees and insurance.

The Company did not engage in investing or financing activities in fiscal 2006 or fiscal 2005.

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Summary of Material Contractual Commitments
(Stated in thousands)
	Payment Period
Contractual Commitments	Total		1 Year		2-3 Years		4-5 Years
Operating Leases	$	376,004	$	86,196	$	180,236	$	109,572
Total	$	376,004	$	86,196	$	180,236	$	109,572

Off-Balance Sheet Financing Arrangements

As of December 31, 2006 the Company had no off-balance sheet financing arrangements.

New Accounting Standards

In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS. This Statement replaces APB No. 20, ACCOUNTING CHANGES and FASB No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies it all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement includes specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The adoption of SFAS No. 154 did not have an impact on the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS   AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140.This Statement amends FASB Statements No. 133, accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues addressed in Statement 133 Implementation Issued No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." The adoption of SFAS No. 155 did not have an impact on the Company's consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS AN AMENDMENT OF FASB STATEMENT No. 140.  This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.  The adoption of SFAS No. 156 did not have an impact on the Company's consolidated financial statements.

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           In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements.  This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS 157 did not have an impact on the Company's consolidated financial statements. The Company presently comments on significant accounting policies (including fair value of financial instruments) in Note 2 to the financial statements.

           In September 2006, the FASB issued SFAS No. 158, EMPLOYERS' ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS AN AMENDMENT OF FASB STATEMENTS NO. 87, 88, 106 AND 132(R). This statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other that a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. The adoption of SFAS No. 158 did not have an impact on the Company's consolidated financial statements.

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. The company’s estimates and assumptions affect its recognition of deferred expenses, bad debts, income taxes, the carrying value of its long-lived assets and its provision for certain contingencies. The company evaluates 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 the Company’s Summary of Significant Accounting Policies, as described in Note 2 of Notes to Consolidated Financial Statements, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company believes the critical accounting policies that most impact the Company’s consolidated financial statements are described below.

Basis of Accounting — The Company uses the accrual method of accounting.

Revenue Recognition— The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB") No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 104"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC.  The SAB 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies.  In general, the Company recognizes revenue related to monthly contracted amounts for services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable and (iv) collectibility is reasonably assured.

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

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The Company's subscribers generally pay in advance for their services by check or electronic check payment, and revenue is then recognized ratably over the period in which the related services are provided.  Advance payments from subscribers are recorded on the balance sheet as deferred revenue.  In circumstance where payment is not received in advance, revenue is only recognized if collectibility is reasonably assured.

Principles of Consolidation— The accompanying consolidated financial statements include the accounts of the company and it's wholly - owned subsidiary.  Intercompany transactions and balances have been eliminated in consolidation.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2007 AND 2006

The following information contained in this analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related disclosures contained in the Company’s Quarterly Report on Form 10-QSB for the three and six months ended June 30, 2007.

Liquidity and Capital Resources

           We do not currently possess a financial institution source of financing and there is no guarantee that our revenues and other existing sources of cash will be adequate to meet our liquidity requirements.

Our future capital requirements will depend on our ability to continue to develop our business and revenue, including (i) our ability to maintain and expand our customer base, and (ii) the overall financial market conditions if and when we might seek potential investors.  We continue to seek potential business acquisitions based on, among other criteria, the economics of any deal and subsequent projected future cash flow.  If needed, we may seek additional funding through the sale of its common stock.

As of June 30, 2007, we had cash on hand of $357,290 compared to $273,058 at December 31, 2006.  The $84,232 increase in cash on hand is the result of increased revenue from operations.  We believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating costs over the next twelve months.  We do not anticipate needing to find other sources of capital at this time.  If, however, our revenues are less than anticipated we may need to find other sources of capital to continue operations.  Most likely we would seek additional capital in the form of debt and/or equity.  While we believe we are capable of raising additional capital, there is no assurance that we will be successful in locating other sources of capital on favorable terms or at all.

Results of Operations

Comparison of the six months ended June 30, 2007 and 2006

Despite an 18% increase in the total number of employee enrollees during six months ended June 30, 2007 total revenues decreased 6% to $920,688. As a result of goodwill gesture, in February 2007, we entered into an agreement with a major customer to absorb the cost of re-enrolling their employees into the HCO program with no additional revenue being generated.  Another contributing factor to decreasing revenue is the increasing popularity of our a la carte option.  This option allows an employer to enter either our HCO or MPN program at a lower rate and pay a separate cost for other services as needed in the future.  We expect that our goodwill gesture in February 2007 was a one-time event.  We also anticipate that our a la carte option will continue to be a popular option in the future which could contribute to reductions in revenue in future quarters.

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During the six months ended June 30, 2007, we had approximately 207,000 total enrollees.  This was made up of approximately 66,000 HCO clients and 141,000 MPN clients.  By comparison during the six months ended June 30, 2006 we had approximately 128,000 enrollees, including approximately 48,000 HCO enrollees and approximately 80,000 MPN enrollees.  The 38% increase in HCO enrollees is the result of increasing customers and existing customers increasing their number of enrollees. The 76% increase in our MPN enrollees is the result of increasing customers and existing customers increasing their number of enrollees.

Despite a 38% increase in HCO enrollment, during the six months ended June 30, 2007 we experienced a 24% decrease in revenue from HCO fees.  As discussed above, this decrease was primarily the result of the goodwill gesture we made to one of our clients in February 2007.  Due to increased competition and barring legislative changes to reduce or eliminate government fees and otherwise reduce the costs and burdens of administering an HCO program to allow HCOs to be more price competitive with MPNs, we expect that enrollment in our HCO program will continue to be challenging and could continue to negatively impact revenues from HCO enrollment.  Based on a review of the expiration dates of current contracts with our existing HCO clients and our experience over the past year, we anticipate that during fiscal 2007 we will experience a 3% increase in total HCO enrollment. As a result of our goodwill gesture, we anticipate we will experience a 3% decrease in HCO revenue in fiscal 2007.

With a 76% increase in MPN enrollment during the six months ended June 30, 2007, we realized only an 8% increase in MPN fees.  The average fee we charged per MPN enrollee during the six months ended June 30, 2007 was 58% lower than in six months ended June 30, 2006. In the second and third quarters of 2006, we lowered our rates to be more competitive.  The six months ended June 30, 2007 reflect that significant rate reduction.  While revenue increased slightly from MPN enrollment during the first six months, we expect MPN rates for services to be relatively stable throughout the balance of fiscal 2007. We continue to anticipate that MPN revenue for the 2007 fiscal year will be approximately 7% higher compared to fiscal 2006.

During the six months ended June 30, 2007, other revenue increased 75% to $137,314 from $78,123 for the six months ended June 30, 2006.  The primary component of other revenue is nurse case management.  We retain nurses on our staff who, at the request of our customers, will review the medical portion of a claim on behalf of our employer clients, claims managers and injured workers.  We offer nurse case management services to our customers on an optional basis.  We charge an additional fee for nurse case management services.  We anticipate approximately 18% growth in other revenue by the end of fiscal 2007.

We expect the aforementioned 3% decrease in HCO fees to more than offset the expected 7% increase in MPN fees and the anticipated 18% increase in other revenue and will result in an overall decrease in total revenue of approximately 3% in 2007.

Total expenses decreased 15% during the six months ended June 30, 2007 compared to 2006. We expect total expenses to be approximately 17% lower during the 2007 fiscal year, primarily as a result of settling the aforementioned lawsuit during 2006.

During the six months ended June 30, 2007, consulting fees increased to $97,967 from $44,708 during the six months ended June 30, 2006.  This increase in consulting fees was primarily due to a former executive officer of Medex leaving his position during 2006 and becoming a consultant.  We anticipate that consulting fees will increase approximately 37% in 2007 as we continue to retain the consulting services of the former Medex executive officer.

Salaries and wages decreased $57,384 or 16% during the six months ended June 30, 2007.  The decrease in salaries & wages is attributable to the aforementioned resignation of the former Medex executive officer.  We expect salaries and wages to be approximately 7% lower in 2007 as a result of the reduction in overall salaries and wages from the resignation of the former Medex executive officer, which was partially offset by the hiring of a new sales executive.  As discussed above, however, we expect this decrease in salaries and wages in 2007 will be largely offset by the corresponding increase in consulting fees.

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For the six months ended June 30, 2007, we incurred professional fees of $86,163 compared to $186,533 during the six months ended June 30, 2006.  We expect professional fees to be about 66% lower in 2007, as compared to 2006, as a result of settling the lawsuit against the Company during 2006.

During the six months ended June 30, 2007, we incurred insurance expenses of $51,712, an $18,588 decrease over the prior year six months.  The decrease in 2007 is primarily due to a reduction in health insurance premiums resulting from the former Medex executive officer becoming an independent consultant.  We expect insurance expenses to remain lower during the rest of 2007.

Employee enrollment decreased $2,733 to $34,800 during the six months ended June 30, 2007, compared to the six months ended June 30, 2006.  As an HCO, we are required to pay a fee to the DWC for each person enrolled at the end of the calendar year in our HCO program.  Because employee enrollment expenses are not determined until year-end, we accrue expenses during the year based on our estimation of what enrollment will be at year-end.  We anticipate that employee enrollment will be lower at December 31, 2007 than it was at December 31, 2006.  Therefore, we are accruing less for employee enrollment expense in 2007 than we did in 2006.

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.  As a result, after the first year, data maintenance fees for MPN enrollees are consistently about 50% lower than data maintenance fees per HCO enrollee.  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.  Employee enrollment fees do not take into account fluctuations in HCO enrollment during the year.  By comparison, data maintenance fees are billed as services are provided.  Therefore, we may have years when HCO enrollment is higher during the year than it is at the end of the calendar year, resulting in variances in data maintenance fees and 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 the six months ended June 30, 2007 we experienced a 38% increase in HCO enrollment and a 76% increase in MPN enrollment, resulting in an overall enrollment increase of 62%.  Data maintenance fees decreased 11% during the six months ended June 30, 2007.  The decrease in data maintenance fees is primarily attributable to lower data maintenance costs associated with the renewal of MPN enrollees.  We expect ­­­data maintenance fees will be approximately 5% lower by the end of 2007 as a result of the negotiation of lower printing costs with a vendor.

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General and administrative expenses decreased 7% to $123,726 during the six months ended June 30, 2007.  This decrease in general & administrative expense was attributable to decreases in travel expenses and lower vacation accruals as a result of resignation of a former Medex executive officer.  We do not expect a significant change in general and administrative expenses in upcoming quarters.

During the six months ended June 30, 2007, total revenues was $920,688.  This 6% decrease in total revenues was partially offset by the 18% decrease in total expenses resulting in a profit from operations of $61,149 compared to loss from operations of $30,985 during six months ended June 30, 2006.  Correspondingly, we realized a net profit of $34,049 for the six months ended June 30, 2007, compared to net loss of $24,403 during the six months ended June 30, 2006.  In 2007, we anticipate that a projected 37% increase in consulting fees will be more than offset by a 7% decrease in salaries and wages, and a 66% decrease in professional fees to result in a 15% decrease in total expenses in 2007.  We expect this 15% decrease in total expenses will more than offset the projected 3% decrease in total revenue in 2007, resulting in a net profit in 2007.

Comparison of the three months ended June 30, 2007 and 2006

Total revenues increased 26% to $516,369 in the second quarter 2007 over the second quarter 2006. HCO revenues remained constant. MPN revenues increased 74% as a result of increasing customers and existing customers increasing their number of enrollees. Other revenue increased 95% as a result of our providing increased nurse case management services to our customers.

Total expenses during the three months ended June 30, 2007 compared to 2006, decreased 27% to $401,054, primarily as a result of settling the aforementioned lawsuit during 2006.

During the three months ended June 30, 2007, consulting fees increased to $52,075 from $26,501 during the three months ended June 30, 2006.  This increase in consulting fees was primarily due to a former executive officer of Medex leaving his position during 2006 and becoming a consultant.

Salaries and wages decreased $42,396 or 22% during the three months ended June 30, 2007.  The decrease in salaries & wages is attributable to the aforementioned resignation of the former Medex executive officer.

For the three months ended June 30, 2007, we incurred professional fees of $29,639 compared to $132,071 during the three months ended June 30, 2006.  Professional fees are lower as a result of the settlement of the lawsuit.

During the three months ended June 30, 2007, we incurred insurance expenses of $26,999, a $6,722 decrease over the prior year quarter.  The decrease in 2007 is primarily due to a former Medex executive officer becoming an independent consultant thus lowering the health insurance premium.

Employee enrollment costs increased $8,067 to $17,400 during the three months ended June 30, 2007, compared to the three months ended June 30, 2006.  As an HCO, we are required to pay a fee to the DWC for each person enrolled at the end of the calendar year in our HCO program.  The 2006 second quarter employee enrollment fees were lower due to over accruing employee enrollment fees in 2005.

Data maintenance fees decreased $15,037 to $64,706 during the three months ended June 30, 2007. This 19% decrease is due to renegotiation with outside service vendors resulting in lower fees.

33

General and administrative expenses decreased 21% to $58,500 during the three months ended June 30, 2007.  This decrease in general & administrative expense was attributable to decreases in travel expenses and lower vacation accruals as a result of resignation of a former Medex executive officer.

The 26% increase in our total revenue and 27 % decrease in total expenses during the three months ended June 30, 2007, resulted in a profit from operations of $115,315 compared to loss from operations of $141,320 during three months ended June 30, 2006.

As a result of increasing revenues and decreasing expenses, we realized a net profit of $78,411 for the three months ended June 30, 2007, compared to net loss of $95,022 during the three months ended June 30, 2006.

Cash Flow

During the six months ended June 30, 2007 cash was primarily used to fund operations. We had a net increase in cash of $84,232 during the six months ended June 30, 2007 as compared to June 30, 2006. See below for additional discussion and analysis of cash flow.

	For the six months ended June 30,
	2007 (unaudited)		2006 (unaudited)
Net cash provided by operating activities	$	84,232	$	115,330
Net cash used in investing activities		-		-
Net cash provided by (used in) financing activities		-		-
Net Change in Cash	$	84,232	$	115,330

During the six months ended June 30, 2007, net cash provided by operating activities was $84,232, compared to net cash provided by operating activities of $115,330 during the six months ended June 30, 2006.  Although we realized net income from operations of $34,049 during the six months ended June 30, 2007, compared to a net loss of $24,403 during the six months ended June 30, 2006, this significant increase in cash provided from operating activities was more than offset by a $97,151 decrease in accounts receivable, a $30,117 decrease in accounts payable and a $64,611 decrease in unearned revenue.  The factors contributed to a $31,098 decrease in cash on hand at June 30, 2007.

We did not engage in investing or financing activities during the six months ended June 30, 2007 or 2006.

Summary of Material Contractual Commitments

	Payment Period
	Total		Less than 1 year		2-3 years		4-5 years		After 5 Years
Operating Leases	$	333,514	$	43,308	$	180,234	$	109,972	$	-
Total	$	333,514	$	43,308	$	180,234	$	109,972	$	-

34

Balance Sheet Financing Arrangements

As of June 30, 2007 the Company had no off-balance sheet financing arrangements.

Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS – AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140.This Statement amends FASB Statements No. 133, accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues addressed in Statement 133 Implementation Issued No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” The adoption of SFAS No. 155 did not have an impact on the Company's consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS – AN AMEDNMENT OF FASB STATEMENT No. 140. This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The adoption of SFAS No. 156 did not have an impact on the Company's consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS 157 did not have an impact on the Company’s consolidated financial statements. The Company presently comments on significant accounting policies (including fair value of financial instruments) in Note 2 to the financial statements.

In September 2006, the FASB issued SFAS No. 158,  EMPLOYERS’ ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS –AN AMENDMENT OF FASB STATEMENTS NO. 87, 88, 106 AND 132(R). This statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other that a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. The adoption of SFAS No. 158 did not have an impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES – INCLUDING AN AMMENDMENT OF FASB STATEMENT NO.115. This statements objective is to improve financial reporting by providing the Company with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objective for accounting for financial instruments. The adoption of SFAS 159 did not have an impact on the Company’s financial statements. The Company presently comments on significant accounting policies (including fair value of financial instruments) in Note 2 to the financial statements.

35

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. The Company’s estimates and assumptions affect its recognition of deferred expenses, bad debts, income taxes, the carrying value of its long-lived assets and its provision for certain contingencies. The Company evaluates 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 the Company’s Summary of Significant Accounting Policies, as described in Note 2 of Notes to Consolidated Financial Statements, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company believes the critical accounting policies that most impact the Company’s consolidated financial statements are described below.

Basis of Accounting — The Company uses the accrual method of accounting.

Revenue Recognition— The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB") No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 104"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue related to monthly contracted amounts for services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable and (iv) collectibility is reasonably assured.

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

The Company's subscribers generally pay in advance for their services by check or electronic check payment, and revenue is then recognized ratably over the period in which the related services are provided. Advance payments from subscribers are recorded on the balance sheet as deferred revenue. In circumstance where payment is not received in advance, revenue is only recognized if collectibility is reasonably assured.

Principles of Consolidation— The accompanying consolidated financial statements include the accounts of the company and it's wholly-owned subsidiary. Intercompany transactions and balances have been eliminated in consolidation.

FINANCIAL STATEMENTS

See Consolidated Financial Statement listed in the accompanying index to the

Consolidated Financial Statements on Page F-1 herein.

LEGAL PROCEEDINGS

None.

36

INDEX TO FINANCIAL STATEMENTS
	Page
Report of Chisholm, Bierwolf & Nilson, Independent Registered Public Accounting Firm	F-1
Balance Sheets as of December 31, 2006 and 2005	F-2
Statements of Operations for the year ended December 31, 2006 and 2005	F-3
Statements of Stockholders’ Equity from January 1, 2005 to December 31, 2006	F-4
Statements of Cash Flows for the Years Ended December 31, 2006 and 2005	F-5
Notes to Consolidated Financial Statements for the years ended December 31, 2006 and 2005	F-6
Balance Sheets as of June 30, 2007 and December 31, 2006 (audited)	F-20
Unaudited Statements of Operations for the three and six months ended June 30, 2007 and 2006	F-21
Unaudited Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006	F-22
Notes to Unaudited Consolidated Financial Statements for the six months ended June 30, 2007F	F-23

37

/Letterhead/

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Pacific Health Care Organization, Inc.

We have audited the accompanying balance sheets of Pacific Health Care Organization Inc., as of December 31, 2006 and 2005, and the related statements of operations, stockholders’ equity and comprehensive income 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, 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 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 financial statements present fairly, in all material respects, the financial position of Pacific Health Care Organization, Inc., as of December 31, 2006 and 2005, 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, LLC

Chisholm, Bierwolf & Nilson, LLC

Bountiful, Utah

February 2, 2007

F-1

Pacific Health Care Organization, Inc.
Balance Sheets
ASSETS
	December 31,			December 31,
	2006			2005
Current Assets
Cash	$	273,058		$	345,091
Accounts receivable, net of allowance of $20,000		213,738			351,311
Income tax receivable		27,355			-
Deferred tax asset		14,615			19,620
Prepaid state income tax		1,600
Prepaid expenses		49,548			42,871
Total current assets		579,914			758,893
Property & Equipment, net (Note 4)
Computer equipment		60,922			60,922
Furniture & fixtures		24,766			24,766
Total property & equipment		85,688			85,688
Less: accumulated depreciation		(75,317	)		(65,777	)
Net property & equipment		10,371			19,911
Total assets	$	590,285		$	778,804
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	9,910		$	41,083
Accrued expenses (note 8)		142,065			236,176
Income tax payable		-			40,812
Unearned revenue		83,521			35,352
Total current liabilities		235,496			353,423
Total liabilities		235,496			353,423
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;
15,427,759 shares issued and outstanding		15,428			15,428
Additional paid-in capital		610,007			603,148
Accumulated (deficit)		(270,646	)		(193,195	)
Total stockholders' equity		354,789			425,381
Total liabilities and stockholders' equity	$	590,285		$	778,804

F-2

Pacific Health Care Organization, Inc.
Statements of Operations
	December 31,			December 31,
	2006			2005
				(Restated)
Revenues
HCO fees	$	1,229,816		$	1,399,012
MPN fee		536,616			597,404
Other		204,423			79,975
Total revenues		1,970,855			2,076,391
Expenses
Depreciation		9,540			11,341
Consulting fees		134,303			104,110
Salaries & wages		696,746			750,516
Professional fees		435,909			342,028
Insurance		123,909			84,341
Employee enrollment		55,456			116,540
Data maintenance		343,992			309,017
Bad debt expense		-			38,000
General & administrative		261,912			307,042
Total expenses		2,061,767			2,062,935
Income (loss) from operations		(90,912	)		13,456
Other income
Interest income		2,218			2,456
Total other income		2,218			2,456
Income (loss) before income tax provision (benefit)		(88,694	)		15,912
Income taxprovision (benefit)		(11,243	)		45,235
Net income (loss)	$	(77,451	)	$	(29,323	)
	December 31,			December 31,
	2006			2005
Basic and fully diluted earnings per share:
Earnings per share amount	$	0.00		$	0.00
Weighted average common shares outstanding		15,427,759			15,427,759

F-3

Pacific Health Care Organization, Inc.
Statements of Stockholders’ Equity
From January 1, 2005 to December 31, 2006
	Preferred Stock				Common Stock				Paid in		Accumulated
	Shares		Amount		Shares		Amount		Capital		Deficit
Balance, January 1, 2005		-	$	-		15,427,759	$	15,428	$	586,169	$	(163,872	)
Valuation Stock Options		-		-		-		-		16,979		-
Net Income for the Year Ended December 31, 2005		-		-		-		-		-		(29,323	)
Balance, December 31, 2005		-	$	-		15,427,759	$	15,428	$	603,148	$	(193,195	)
Valuation of Stock Options		-		-		-		-		6,859		-
Net Income for the Year Ended December 31, 2006		-		-		-		-		-		(77,451	)
Balance, December 31, 2006		-	$	-		15,427,759	$	15,428	$	610,007	$	(270,646	)

F-4

Pacific Health Care Organization, Inc.
Statements of Cash Flows
For the Years Ended December 31
	2006			2005
Cash Flows from Operating Activities				(Restated)
Net income (loss)	$	(77,451	)	$	(29,323	)
Adjustments to reconcile net income to net cash:
Depreciation		9,540			11,341
Stock options issued for services		6,859			16,979
Changes in operating assets & liabilities:
(Increase) decrease in accounts receivable		137,573			(171,920	)
Increase in income tax receivable		(27,355	)		-
(Increase) decrease in deferred tax asset		5,005			(19,620	)
Increase in prepaid state income tax		(1,600	)
(Increase) decrease in prepaid expenses		(6,677	)		(2,156	)
Increase (decrease) in accounts payable		(31,173	)		19,270
Increase (decrease) in accrued expenses		(94,111	)		57,289
Increase (decrease) in income tax payable		(40,812	)		40,812
Increase (decrease) in unearned revenue		48,169			(84,256	)
Net cash provided by operating activities		(72,033	)		(161,584	)
Cash Flows from Investing Activities
Net cash used by investing activities		-			-
Cash Flows from Financing Activities
Net cash provided by financing activities		-			-
Increase (decrease) in cash		(72,033	)		(161,584	)
Cash at beginning of period		345,091			506,675
Cash at End of Period	$	273,058		$	345,091
Supplemental Cash Flow Information
Interest	$	-		$	-
Taxes		1,600			24,043

F-5

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006

NOTE 1 - CORPORATE HISTORY

Pacific Health Care Organization, Inc., was incorporated under the laws of the state of Utah on April 17, 1970 under the name Clear Air, Inc.  On September 25, 2000, the Company changed its name to Pacific Health Care Organization, Inc. On February 26, 2001, the Company acquired Medex Healthcare, Inc. ("Medex"), a California corporation organized March 4, 1994, in a share for share exchange in which the Company acquired all of the outstanding shares of Medex in exchange for 6,500,000 shares of the Company.  The acquisition of Medex by the Company was accounted for as a reverse acquisition, and therefore Medex was considered the accounting acquirer.  The financial statements, contained herein, are those of Medex Healthcare, Inc., for all periods presented.

The principle business of the Company is that of its wholly owned subsidiary Medex.  Medex is in the business of managing and administering Health Care Organizations (“HCOs”).   HCOs are networks of medical providers established to serve the Workers' Compensation industry.  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.  The Company recognized early on that two HCO certifications were necessary to be competitive.  Instead of aligning with the competitor, the Company elected to go through the lengthy application process with the Department of Industrial Relations twice and subsequently received certification to operate two separate HCOs.

Through the two licenses to operate HCOs, the Company offers the injured worker 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 the Company cover the entire state of California.  The geographical area has a multi-billion dollar annual medical and indemnity Worker's Compensation cost.  The two HCO networks have contracted with over 3,800 provider locations making the Company's HCOs capable of providing comprehensive medical services throughout this region.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

A.   Basis of Accounting

The Company uses the accrual method of accounting.

B.   Revenue Recognition

The Company applies the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (“SAB 104”), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC.  SAB 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies.  In general, the Company recognizes revenue related to monthly contracted amounts for services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable and (iv) collectibility is reasonably assured.

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

The Company's subscribers generally pay in advance for their services by check or electronic check payment, and revenue is then recognized ratably over the period in which the related services are provided.  Advance payments from subscribers are recorded on the balance sheet as deferred revenue.  In circumstance where payment is not received in advance, revenue is only recognized if collectibility is reasonably assured.

F-6

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

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

The computation of earning (loss) per share of common stock is based on the weighted average number of shares outstanding at the date of the financial statements.  Potentially issuable common shares totaling 817,964 related to warrants and 416,500 related to options were excluded from the calculation of fully diluted loss per share during 2005 because their inclusion would have been anti-dilutive.

	For the Years Ended December 31,
	2006			2005
Basic Earnings per share:				(Restated)
Income (loss) (numerator)	$	(77,451	)	$	(29,323	)
Shares (demoninator)		15,427,759			15,427,759
Per share amount	$	.00		$	.00
Fully Diluted Earnings per share:
Income (loss) (numerator)	$	(77,451	)	$	(29,323	)
Shares (demoninator)		15,427,759			15,427,759
Per share amount	$	.00		$	.00

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.

F-7

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 it's wholly - owned subsidiary.  Intercompany transactions and balances have been eliminated in consolidation.

I.   Fair Value of Financial Instruments

The fair value of the Company's cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate carrying value based on their effective interest rates compared to current market prices.

J.   General and Administrative Costs

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

L.   Capital Structure

The Company has two classes of stock.  Preferred stock, 5,000,000 shares authorized, zero issued.  Voting rights and liquidation preferences have not been determined.  The Company also has voting common stock of 50,000,000 shares authorized, with 15,427,759 shares issued and outstanding.  No dividends were paid in the 2006 and 2005 years.

M.   Share - Based Payment

The Company has adopted the fair value method of accounting for stock-based employee compensation in accordance with statement of Financial Accounting Standards No. 123 (Revised 2004), “Accounting for Stock-Based Compensation” (SFS123[R]). This standard requires the company to record compensation expense using the Black-Scholes pricing model.

F-8

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 2006 year end, the Company’s bad debt reserve of $20,000 is a general reserve for balances over 90 days past due.

The percentages of the major customers to total accounts receivable for the year ended 2006 are as follows:

       Customer A          13%

       Customer B          12%

NOTE 3 - NEW TECHNICAL PRONOUNCEMENTS

In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS. This Statement replaces APB No. 20, ACCOUNTING CHANGES and FASB No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies it all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The adoption of SFAS No. 154 did not have an impact on the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140.This Statement amends FASB Statements No. 133, accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues addressed in Statement 133 Implementation Issued No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." The adoption of SFAS No. 155 did not have an impact on the Company's consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS   AN AMENDMENT OF FASB STATEMENT No. 140. This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The adoption of SFAS No. 156 did not have an impact on the Company's consolidated financial statements.

F-9

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

NOTE 3 - NEW TECHNICAL PRONOUNCEMENTS (CONTINUED)

In September 2006, the FASB issued SFAS No. 157, FAIR VALUE  MEASUREMENTS. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS 157 did not have an impact on the Company's consolidated financial statements. The Company presently comments on significant accounting policies (including fair value of financial instruments) in Note 2 to the financial statements.

In September 2006, the FASB issued SFAS No. 158,  EMPLOYERS' ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS AN AMENDMENT OF FASB STATEMENTS NO. 87, 88, 106 AND 132(R). This statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other that a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. The adoption of SFAS No. 158 did not have an impact on the Company's 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, 2006 and 2005.

	Cost				Depreciation Expense				Accumulated Depreciation
	December 31, 2006		December 31, 2005		December 31, 2006		December 31, 2005		December 31, 2006		December 31, 2005
Assets
Computer equipment	$	60,922	$	60,922	$	6,386	$	7,801	$	60,922	$	54,536
Furniture & fixtures		24,766		24,766		3,154		3,540		14,395		11,241
Totals	$	85,688	$	85,688	$	9,540	$	11,341	$	75,317	$	65,777

NOTE 5 – INCOME TAXES

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

The tax provision (benefit) for the year-ended December 31, 2006 and the year ended December 31, 2005 consisted of the following:

	2006			2005 (Restated)
Current:
Federal	$	(17,948	)	$	23,216
State		1,700			17,596
Deferred
Federal		4,240			(17,070	)
State		765		$	(2,550	)
Total tax provision (benefit)	$	(11,243	)	$	21,192

F-10

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

NOTE 5 – INCOME TAXES (CONTINUED)

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, 2006 and December 31, 2005 are as follows:

Depreciation
Federal	$	(1,060	)	$	(2,175	)
State		(160	)		(325	)
Reserve for bad debts
Federal		6,770			12,890
State		1,030			1,930
Vacation accrual
Federal		6,135			6,355
State		915			945
Charitable contribution		985			-
Deferred tax asset	$	14,615		$	19,620

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

Expense at federal statutory rate	$	(26,043	)	$	5,410
State tax effects		1,700			23,575
Non deductible expenses		12,335			18,800
Taxable temporary differences		2,100			17,505
Deductible temporary differences		(6,340	)		(435	)
Change in deferred tax asset valuation		5,005			(19,620	)
Income tax provision (benefit)	$	(11,243	)	$	45,235

NOTE 5 – INCOME TAXES

The Company recognized a total of $45,235 in income tax expense for the year ended December 31, 2005.  This amount was comprised of $21,485 for the year ended December 31, 2005 and a total of $23,750 for the prior years of 2002, 2003 and 2004.  The Company failed to file tax returns for the prior years and was unaware that the state of California had suspended NOL carryforwards for those years.  There was no federal income tax recognized for those years.  The Company deemed this appropriate treatment since the state tax expense was not material for the years the tax was incurred.

NOTE 6 – OPERATING LEASES

The Company’s lease on its 3,504 square feet of office space at 5150 East Pacific Coast Highway, Long Beach, California 90804 expired on February 28, 2006.  Prior to expiration of the lease, the Company was leasing the space for $6,482 per month.  Subsequent to the year end, the Company negotiated a five year extension of its lease agreement.  The monthly lease payments increased to $7,008 per month for the first year with 3% annual increased in the following years, resulting in monthly lease payment of $7,887 at the expiration of the lease.  The space the Company is leasing is sufficiently large enough to accommodate all of its administrative needs. Also the Company approximately 600 square feet of office space in Newport Beach, California on a month to month basis.

F-11

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

NOTE 6 – OPERATING LEASES (CONTINUED)

Total Lease Commitments:	Year	Amount
	2007		86,198
	2008		88,784
	2009		91,450
	2010		94,196
Thereafter			15,776
	Total	$	376,404

Rent expense for the year ended December 31, 2006 and December 31, 2005 was $89,673 and $81,240, respectively.

NOTE 7– MAJOR CUSTOMERS

The Company had two customers who, accounted for 10 percent, or more, of the Company’s total revenues during the years ending December 31, 2006, and December 31, 2005.  The percentages of total revenues for the years ended 2006 and 2005 are as follows:

	2006			2005
Customer A		10	%		21	%
Customer B		10	%		10	%

NOTE 8– ACCRUED AND OTHER LIABILITIES

Accrued liabilities consist of the following:	2006		2005
Employee enrollment fees	$	100,000	$	144,000
Compensated absences		18,065		18,719
Legal fees		12,000		48,000
Other		12,000		25,457
Total	$	142,065	$	236,176

F-12

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

NOTE 9– OPTIONS FOR PURCHASE OF COMMON STOCK

In August 2002, the Company adopted a stock option plan.  The Company adopted a plan which provides for the grant of options to officers, consultants and employees to acquire shares of the Company’s common stock at a purchase price equal to or greater than fair market value as of the date of the grant.   Options are exercisable six months after the grant date and expire five years from the grant date.  The exercise price of the options is $.05.  The fair market value of the options at the date of grant was determined to be $.035 due to earlier issuances for cash of thisstock.  The plan calls for a total of 1,000,000 shares to be held for grant.  A summary of activity follows:

2002 Stock Option Plan	Number of Shares		Weighted Average Exercise Price
Outstanding, January 1, 2005		66,250	$	.05
Granted		-		-
Exercised		-		-
Canceled		-		-
Outstanding, December 31, 2005		66,250	$	.05
Exercisable, December 31, 2005		66,250	$	.05
Outstanding, January 1, 2006		66,250	$	.05
Granted		-		-
Exercised		-		-
Canceled		-		-
Outstanding, December 31, 2006		66,250	$	.05
Exercisable, December 31, 2006		66,250	$	.05

In accordance with SFAS 123, Accounting for Stock-Based Compensation, $0 and $1,858 has been charged to compensation expense for the years ended December 31, 2006 and December 31, 2005, respectively.

The fair value of the option grant was established at the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	2006
Risk-free interest rate		4.0	%
Dividend yield		0	%
Volatility		119	%
Average expected term (years to exercise date)		½

Employee stock options outstanding and exercisable under this plan as of December 31, 2006 are:

Range of Exercise Price		Outstanding Options Price		Weighted Average of Exercise		Weighted Average Remaining Contractual Life (years)		Outstanding Options		Weighted Average of Exercise Price
$	.05		66250	$	.05		1.67		66,250	$	.05

NOTE 10- STOCK OPTION AGREEMENT

On April 20, 2004, the board of directors agreed to a stock option agreement with an officer of the Company, effective as of October 11, 2004.  The agreement calls for the grant of 350,000 options that rest and are exercisable as follows: 100,000 the first year, with an exercise price of $.05; 100,000 the second year, with an exercise price of $.10; and 150,000 the third year, with an exercise price of $.20.  The options expire three years from the date of grant

F-13

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

NOTE 10- STOCK OPTION AGREEMENT (CONTINUED)

2004 Stock Option Agreement	Number of Shares		Weighted Average Exercise Price
Outstanding, January 1, 2005		-	$	-
Granted		350,000		.68
Exercised		-		-
Canceled		-		-
Outstanding, December 31, 2005		350,000	$	.68
Exercisable, December 31, 2005		200,000	$	.05
Outstanding, January 1, 2006		350,000	$	.68
Granted		-		-
Exercised		-		-
Canceled		-		-
Outstanding, December 31, 2006		350,000	$	.68
Exercisable, December 31, 2006		350,000	$	.23

In accordance with SFAS 123, Accounting for Stock-Based Compensation, $15,121 and $13,511 has been charged to compensation expense for the years ended December 31, 2006 and 2005, respectively.  The fair value of the option grant was established at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	2006
Risk-free interest rate		4.0	%
Dividend yield		0	%
Volatility		119
Average expected term (years to exercise date)		1/2

Employee stock options outstanding and exercisable under this agreement as of December 31, 2006 are:

Range of Exercise Price		Outstanding Options Price		Weighted Average of Exercise		Weighted Average Remaining Contractual Life (years)		Outstanding Options		Weighted Average of Exercise Price
$	.05 - .20		350,000	$	.68		.34		350,000	$	.23

NOTE 11 - LITIGATION

A complaint was filed in Orange County, California Superior Court, Case No. 04cc04645, by plaintiffs Marvin Teitelbaum, a shareholder of the Company, and Peter Alezakis, a shareholder and former director of the Company (collectively "Plaintiffs") on or about April 7, 2004 against the Company's president Tom Kubota, former secretary and director, now deceased, Rudy LaRusso and the Company (collectively "Defendants").

On September 22, 2006, a settlement agreement was reached between the Company, Medex and Tom Kubota and Marvin Teitelbaum and Peter Alexakis dismissing the complaint and cross complaint in the matter.

Each party to the action agreed to dismiss with prejudice their complaint and/or cross complaint in the above mentioned action. No party received any money, stock or other compensation as a result of the mutual release and settlement and each party agreed to be responsible for its own attorneys’ fee.

F-14

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

NOTE 12 – SUBSEQUENT EVENT

As result of a goodwill gesture, in February 2007, Medex entered into an agreement with a major customer to absorb cost of re-enrolling their employees into the HCO program. Medex will incur costs for printing and postage. The net impact on the Company’s Financial Statements will not exceed $38,000 for the year end December 31, 2007.

NOTE 13 -   RESTATEMENT AND RECLASSIFICATION

The Company has restated our financial statements for the year ended December 31, 2005 on May 17, 2006, to reflect certain issues identified during a regulatory review of our financial statements associated with the SEC form 10KSB filing on April 3, 2006. The Company’s management and our board of directors have concluded this additional restatement of December 31, 2005 is necessary to reflect the changes described below. There was no effect on cash provided by operating activities or cash used by investing and financing activities as a result of these corrections.

Revisions affecting our statement of operations:

The Company’s Amended 2005 10KSB filed on May 17, 2006 only showed only one revenue line for year-ended 2005. The Company divided the revenue line into three subcategories which reflect the program revenue sources.  The Total revenues amount did not change for 2005.

The Company added a new expense line item “Data maintenance” to provide more transparent disclosure of data maintenance costs.  This did not result in an increase in total expenses in 2006 and 2005.

The Company reclassified the $89,664 of data maintenance fees from a particular third party provider, which had incorrectly been classified in Employment enrollment to Data maintenance.  The Company also reclassified the balance of the data maintenance costs incurred in 2005, which was $219,353, from General and administrative to Data maintenance.  This resulted in total Data maintenance costs of $309,017 for the year ended December 31, 2005.

Also for the year-ended December 31, 2005, the Company reclassified the $23,750 income tax expense for the years 2002, 2003, and 2004 from General & administrative to the Tax expense line.  Total expenses decrease by $23,750 due to the tax reclassification. The net income (loss) amount did not change.

     A summary of the effects of these changes is as follows:

F-15

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

NOTE 13 -   RESTATEMENT AND RECLASSIFICATION – (CONTINUED)

Pacific Health Care Organization, Inc.
Balance Sheets
For the year ended December 31, 2005
	As Reported in Amended 10KSB May 17, 2006			As Restated			Change
ASSETS
Current Assets
Cash	$	345,091		$	345,091		$	-
Accounts receivable, net of allowance of $38,000		351,311			351,311			-
Deferred tax asset		19,620			19,620			-
Prepaid expenses		42,871			42,871			-
Total current assets		758,893			758,893			-
Property & Equipment, net
Computer equipment		60,922			60,922			-
Furniture & fixtures		24,766			24,766			-
Total property & equipment		85,688			85,688			-
Less: accumulated depreciation		(65,777	)		(65,777	)		-
Net property & equipment		19,911			19,911			-
Total assets	$	778,804		$	778,804		$	-
LIABILITIES AND STOCK HOLDERS' EQUITY
Current Liabilities
Accounts payable	$	41,083		$	41,083		$	-
Accrued expenses		236,176			236,176			-
Income tax payable		40,812			40,812			-
Unearned revenue		35,352			35,352			-
Total current liabilities		353,423			353,423			-
Total liabilities		353,423			353,423			-
Commitment		-			-			-

F-16

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

 

NOTE 13 -   RESTATEMENT AND RECLASSIFICATION – (CONTINUED)

Shareholders' Equity
Perferred 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; 15,427,759 shares issued and
Outstanding			15,428			15,428			-
Additional paid-in-capital			603,148			603,148			-
Accumulated (deficit)			(193,195	)		(193,195	)		-
	Total stockholders' equity		425,381			425,381			-
	Total liabilities and stockholders' equity	$	778,804		$	778,804		$	-
(a)	Reclassification of revenue line into subcategories
(b)	Reclassification of tax expense
(c)	Reclassification of fees for data maintenance from Employee enrollment and General & administrative to Data maintenance

F-17

Pacific Health Care Organization, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

NOTE 13 -   RESTATEMENT AND RECLASSIFICATION – (CONTINUED)

Pacific Health Care Organization, Inc.
Statements of Operations
For the year ended December 31, 2005
			As Reported in Amended 10KSB May 17, 2006			As Restated			Change
Revenues			$	2,076,391		$	-		$	(2,076,391	)	(a)
	HCO fees			-			1,399,012			1,399,012		(a)
	MPN fees			-			597,404			597,404		(a)
	Other			-			79,975			79,975		(a)
	Total revenues			2,076,391			2,076,391			-
Expenses
	Depreciation			11,341			11,341			-
	Consulting fees			104,110			104,110			-
	Salaries & wages			750,516			750,516			-
	Professional fees			342,028			342,028			-
	Insurance			84,341			84,341			-
	Employee enrollment			206,204			116,540			(89,664	)	(c)
	Data maintenance			-			309,017			309,017		(c)
	Bad debt expense			38,000			38,000			-
	General & administrative			550,145			307,042			(243,103	)	(c)
	Total expenses			2,086,685			2,062,935			(23,750	)	(b)
Income (loss) from operations				(10,294	)		13,456			23,750		(b)
Other income
	Interest income			2,456			2,456			-
	Total other income			2,456			2,456			-
Income (loss) before income
Tax provision (benefit)				(7,838	)		15,912			23,750		(b)
	Income tax
	provisions (benefit)			21,485			45,235			23,750		(b)
	Net income (loss)		$	(29,323	)	$	(29,323	)	$	-
Basic earnings per share:
	Earnings per share amount		$	-		$	-		$	-
	Weighted average common
	shares outstanding			15,427,759			15,427,759			-
Fully diluted earnings per share:
	Earnings per share amount		$	-		$	-		$	-
	Weighted average common
	shares outstanding			15,427,759			15,427,759			-
	(a)	Reclassification of revenue line into subcategories
	(b)	Reclassification of tax expense
	(c)	Reclassification of fees for data maintenance from Employee enrollment and General & administrative to Data maintenance

F-18

Pacific Health Care Organization, Inc.
Balance Sheets
ASSETS
	June 30, 2007 (Unaudited)			December 31, 2006
Current Assets
Cash	$	357,290		$	273,058
Accounts receivable, net of allowance of $20,000		202,482			213,738
Income tax receivable		32,623			27,355
Deferred tax asset		15,577			14,615
Prepaid state income tax		0			1,600
Prepaid expenses		53,237			49,548
Total current assets		661,209			579,914
Property and equipment, (note 4)
Computer equipment		60,922			60,922
Furniture & fixtures		24,766			24,766
Total property & equipment		85,688			85,688
Less: accumulated depreciation		(80,087	)		(75,317	)
Net property & equipment		5,601			10,371
Total assets	$	666,810		$	590,285
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	7,197		$	9,910
Accrued expenses (note 8)		149,351			142,065
Tax payable		28,340			-
Unearned revenue		93,084			83,521
Total current liabilities		277,972			235,496
Total liabilities		277,972			235,496
Commitments and Contingencies		-			-
Shareholders’ Equity
Preferred stock; 5,000,000 shares  authorized at $0.001 par value;  zero shares issued and outstanding		-			-
Common stock; 50,000,000 shares authorized at $ 0.001 par value; 15,427,759 shares issued and outstanding		15,428			15,428
Additional paid-in capital		610,007			610,007
Accumulated (deficit)		(236,597	)		(270,646	)
Total stockholders' equity		338,838			354,789
Total liabilities and stockholders’ equity	$	666,810		$	590,285

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

F-19

Pacific Health Care Organization, Inc.
Statements of Operations
(Unaudited)
	For three months ended June 30,					For six months ended June 30,
	2007		2006			2007		2006
Revenues:
HCO fees	$	273,811	$	273,947		$	460,034	$	605,256
MPN fees		166,674		95,385			323,340		298,036
Other		75,884		38,837			137,314		78,123
Total revenues		516,369		408,169			920,688		981,415
Expenses:
Depreciation		2,385		2,385			4,770		4,770
Consulting fees		52,075		26,501			97,967		44,708
Salaries & wages		149,350		191,746			303,637		361,021
Professional fees		29,639		132,071			86,163		186,533
Insurance		26,999		33,721			51,712		70,300
Employee enrollment		17,400		9,333			34,800		37,533
Data maintenance		64,706		79,743			154,002		173,914
General & administrative		61,261		73,989			126,488		133,621
Total expenses		403,815		549,489			859,539		1,012,400
Income (loss) from operations		112,554		(141,320	)		61,149		(30,985	)
Other income:
Interest income		329		698			610		1,582
Total other income		329		698			610		1,582
Income (loss) before taxes		112,883		(140,622	)		61,759		(29,403	)
Income tax provision (benefit)		34,472		(45,600	)		27,710		(5,000	)
Net income (loss)	$	78,411	$	(95,022	)	$	34,049	$	(24,403	)

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

F-20

Pacific Health Care Organization, Inc.
Statements of Cash Flows
(Unaudited)
	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net Income (Loss)	$	34,049		$	(24,403	)
Adjustments to reconcile net income (loss) to net cash:
Depreciation		4,770			4,770
Stock options issued for services		-			6,569
Changes in operating assets & liabilities
Decrease in accounts receivable		11,256			108,407
Increase in income tax receivable		(5,268	)		-
Increase in deferred tax asset		(962	)		(6,300	)
Decrease in prepaid state income tax		1,600			-
Increase in prepaid expenses		(3,689	)		(6,689	)
Decrease in accounts payable		(2,713	)		(32,830	)
Increase in accrued expenses		7,286			30,011
Increase (decrease) in income tax payable		28,340			(38,379	)
Increase in unearned revenue		9,563			74,174
Net cash provided by operating activities		84,232			115,330
Cash Flows from Investing Activities
Net cash used by investing activities		-			-
Cash Flows from Financing Activities
Net cash used by financing activities		-			-
Increase in cash		84,232			115,330
Cash at beginning of period		273,058			345,091
Cash at end of period	$	357,290		$	460,421
Supplemental Cash Flow Information
Cash paid for:
Interest	$	-		$	-
Taxes		27,710			1,857

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

F-21

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2007

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 Health Care Organizations and Medical Provider Networks in the state of California.

The principle business of the Company is that of its wholly owned subsidiary Medex. Medex is in the business of managing and administering Health Care Organizations (“HCOs”).  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 choice, which is favored by a number of employers, especially those with certified bargaining units.

Through the two licenses to operate HCOs, the Company offers 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. The two HCO networks have contracted with over 3,300 individual providers and clinics, as well as, hospitals, pharmacies, rehabilitation centers and other ancillary services making the Company's HCOs capable of providing comprehensive medical services throughout this region. The Company is continually developing these networks based upon the nominations of new clients and the approvals of their claims' administrators.

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.  To the best of our knowledge, we are currently the only entity that offers both programs together in a hybrid program.

F-22

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2007

NOTE 1 - Corporate History (continued)

The Company is currently 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 services of the Company, 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 does not typically incur large 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 uses the accrual method of accounting.

B.   Revenue Recognition

The Company applies the provisions of SEC Staff Accounting Bulletin No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (“SAB 104”), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue related to monthly contracted amounts for services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable and (iv) collectibility is reasonably assured.

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

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

F-23

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2007

NOTE 2 - Significant Accounting Policies (continued)

C.   Cash Equivalents

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

D.   Concentrations

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

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

The computation of earning (loss) per share of common stock is based on the weighted average number of shares outstanding at the date of the financial statements. Potentially issuable common shares totaling 416,250 related to options were considered but excluded from the calculation of fully diluted loss per share during 2007 and 2006 because their inclusion would have been anti-dilutive.

	For the Six Months Ended June 30,
	2007		2006
Basic Earnings per share:
Income (Loss) (numerator)	$	34,049	$	(24,403	)
Shares (denominator)		15,427,759		15,427,759
Per Share Amount	$	.00	$	(.00	)
Fully Diluted Earnings per share:
Income (Loss) (numerator)	$	34,049	$	(24,403	)
Shares (denominator)		15,427,759		15,427,759
Per Share Amount	$	.00	$	(.00	)

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.

F-24

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2007

NOTE 2 - Significant Accounting Policies (continued)

G.   Use of Estimates

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

H.   Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and it's wholly - owned subsidiary. Intercompany transactions and balances have been eliminated in consolidation.

I.   Fair Value of Financial Instruments

The fair value of the Company's cash, receivables, accounts payable and accrued liabilities approximate carrying value based on their effective interest rates compared to current market prices.

J.   General and Administrative Costs

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

K.   Income Taxes

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

L.   Capital Structure

The Company has two classes of stock.  Preferred stock, 5,000,000 shares authorized, zero issued and outstanding. Voting rights and liquidation preferences have not been determined. The Company also has voting common stock of 50,000,000 shares authorized, with 15,427,759 shares issued and outstanding.  No dividends were paid in the six months ended 2007 and 2006.

F-25

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2007

NOTE 2 - Significant Accounting Policies (continued)

M.   Stock-Based Compensation

The Company has adopted the fair value method of accounting for stock-based employee compensation in accordance with statement of Financial Accounting Standards No. 123 (Revised 2004), “Accounting for Stock-Based Compensation” (SFS123[R]). This standard requires the company to record compensation expense using the Black-Scholes pricing model.

N.   Trade Receivables

The Company, in the normal course of business, extends credit to its customers on a short-term basis. Although the credit risk associated with these customers is minimal, the Company routinely

reviews its accounts receivable balances and makes provisions for doubtful accounts. The Company ages its receivables by date of invoice. Management reviews bad debt reserves quarterly and reserves specific accounts as warranted or sets up a general reserve based on amounts over 90 days past due. When an account is deemed uncollectible, the Company charges off the receivable against the bad debt reserve.  At the six months ended June 30, 2007, a $20,000 general reserve for balances over 90 days past due has been established.

The percentages of the major customers to total accounts receivable for the six months ended June 30, 2007 (unaudited) are as follows:

            Customer A          25%

            Customer B          15%

NOTE 3 - New Technical Pronouncements

In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS – AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140. This Statement amends FASB Statements No. 133, accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues addressed in Statement 133 Implementation Issued No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” The adoption of SFAS No. 155 did not have an impact on the Company's consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS – AN AMENDMENT OF FASB STATEMENT No. 140. This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The adoption of SFAS No. 156 did not have an impact on the Company's consolidated financial statements.

F-26

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2007

NOTE 3 - New Technical Pronouncements (continued)

In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS 157 did not have an impact on the Company’s consolidated financial statements. The Company presently comments on significant accounting policies (including fair value of financial instruments) in Note 2 to the financial statements.

In September 2006, the FASB issued SFAS No. 158,  EMPLOYERS’ ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS –AN AMENDMENT OF FASB STATEMENTS NO. 87, 88, 106 AND 132(R). This statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other that a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. The adoption of SFAS No. 158 did not have an impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES – INCLUDING AN AMENDMENT OF FASB STATEMENT NO.115. This statements objective is to improve financial reporting by providing the Company with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objective for accounting for financial instruments. The adoption of SFAS 159 did not have an impact on the Company’s financial statements. The Company presently comments on significant accounting policies (including fair value of financial instruments) in Note 2 to the financial statements.

F-27

Pacific Health Care Organization, Inc.

Notes to the Financial Statements

For the Six Months Ended June 30, 2007

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 computer equipment, and furniture and fixtures, respectively. Scheduled below are the assets, costs and accumulated depreciation at June 30, 2007 (unaudited) and December 31, 2006.

	Cost				Depreciation Expense				Accumulated Depreciation
	For the Six Months Ended June 30, 2007		For the Year Ended December 31, 2006		For the Six Months Ended June 30, 2007		For the Year Ended December 31, 2006		For the Six Months Ended June 30, 2007		For the Year Ended December 31, 2006
Assets
Computer Equipment	$	60,922	$	60,922	$	-	$	6,386	$	60,922	$	60,922
Furniture & Fixtures		24,766		24,766		4,770		3,154		19,165		14,395
Totals	$	85,688	$	85,688	$	4,770	$	9,540	$	80,087	$	75,317

 NOTE 5 - Income Taxes

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

The tax provision (benefit) for the six months ended June 30, 2007 and the year ended December 31, 2006 consisted of the following:

	2007			2006
	(unaudited)
Current:
Federal	$	24,870		$	(17,948	)
State		3,802			1,700
Deferred
Federal		(710	)		4,240
State		(252	)	$	765
Total tax (benefit)	$	(27,710	)	$	(11,243	)

F-28

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2007

 NOTE 5 - Income Taxes (continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  The Company’s total deferred tax liabilities, deferred tax assets, and deferred tax asset valuation allowances at June 30, 2007 and December 31, 2006 are as follows:

	2007			2006
Net operating loss	$	-		$	-
Depreciation
Federal		(788	)		(1,060	)
State		(120	)		(160	)
Reserve for bad debts
Federal		6,770			6,770
State		1,030			1,030
Vacation accrual
Federal		7,561			6,135
State		1,124			915
Charitable contribution		-			985
Deferred tax asset	$	15,577		$	14,615

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

	2007			2006
Expense at federal statutory rate	$	19,145		$	(26,043	)
State tax effects		3,799			1,700
Non deductible expenses		5,015			12,335
Taxable temporary differences		1,698			2,100
Deductible temporary differences		(985	)		(6,340	)
Deferred tax asset valuation increase		(962	)		5,005
Income tax (benefit)	$	27,710		$	(11,243	)

NOTE 6 - Operating Leases (unaudited)

The Company leases 3,504 square feet of office space at 5150 East Pacific Coast Highway, Long Beach, California 90804 that terminates in February 2011.  The current monthly lease payment on this office space is $7,218  per month with 3% annual increases in each subsequent year, resulting in monthly lease payment of $7,887 at the expiration of the lease.  The space the Company is leasing is sufficiently large enough to accommodate all of its administrative needs. Also the Company leases approximately 600 square feet of office space in Newport Beach, California on a month to month basis for $1,200 per month.

Total Lease Commitments:
	Year	Amount
	2007	$	43,308
	2008		88,784
	2009		91,450
	2010		94,196
	Thereafter		15,776
	Total	$	333,514

Rent expense for the six months ended June 30, 2007 and June 30, 2006 was $50,089 and $45,548, respectively.

F-29

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2007

NOTE 7 - Major Customers

The Company had three customers who, accounted for 10 percent, or more of the Company’s total revenues during the six months ended June 30, 2007 and two customers in the year ended December 31, 2006.  The percentages of total revenues for the six months ended June 30, 2007 and the year ended December 31, 2006 are as follows:

	June 30, 2007			December 31, 2006
	(unaudited)
Customer A		17	%		10	%
Customer B		13	%		10	%
Customer C		11	%		-	%

NOTE 8 - Accrued and Other Liabilities

	June 30, 2007		December 31, 2006
	(unaudited)
Accrued liabilities consist of the following:
Employment Enrollment Fees	$	70,237	$	100,000
Compensated Absences		18,114		18,065
Legal Fees		44,000		12,000
Other		17,000		12,000
Total	$	149,351	$	142,065

NOTE 9 - Options for Purchase of Common Stock

In August 2002, the Company adopted a stock option plan.  The Company adopted a plan which provides for the grant of options to officers, consultants and employees to acquire shares of the Company’s common stock at a purchase price equal to or greater than fair market value as of the date of the grant.   Options are exercisable six months after the grant date and expire five years from the grant date.  Under the Plan, the exercise price of any options granted is determined at the time of grant.  Currently there are options outstanding under the Plan to purchase up to a total of 66,250 shares.   The exercise price of these outstanding options is $.05.  The fair market value of these options at the date of grant was determined to be $.035 due to earlier issuances for cash of this stock.  The plan calls for a total of 1,000,000 shares to be held for grant.  A summary of activity follows:

2002 Stock Option Plan	Number of Shares		Weighted Average Exercise Price
Outstanding, January 1, 2006		66,250	$	.05
Granted		-		-
Exercised		-		-
Canceled		-		-
Outstanding, December 31, 2006		66,250	$	.05
Exercisable, December 31, 2006		66,250	$	.05
Outstanding, January 1, 2007		66,250	$	.05
Granted		-		-
Exercised		-		-
Canceled		-		-
Outstanding, June 30, 2007		66,250	$	.05
Exercisable, June 30, 2007		66,250	$	.05

F-30

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2007

NOTE 9 - Options for Purchase of Common Stock (continued)

In accordance with SFAS 123, Accounting for Stock-Based Compensation, $0 has been charged to compensation expense for the six months ended June 30, 2007 and December 31, 2006, respectively, as no new options were granted.

The fair value of the option grant was established at the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

Risk-free interest rate	4.0	%
Dividend yield	0	%
Volatility	-50	%
Average expected term (years to exercise date)	¼

Employee stock options outstanding and exercisable under this plan as of June 30, 2007 are:

Range of Exercise Priace		Outstanding Options		Weighted Average of Exercise Price		Weighted Average Remaining Contractual Life (years)		Outstanding Options		Weighted Average of Exercise Price
$	.05		66,250	$	.05		.25		66,250	$	.05

NOTE 10- Stock Option Agreement

On April 20, 2004, the board of directors agreed to a stock option agreement with an officer of the Company, effective as of October 11, 2004.  The agreement calls for the grant of 350,000 options that rest and are exercisable as follows: 100,000 the first year, with an exercise price of $.05; 100,000 the second year, with an exercise price of $.10; and 150,000 the third year, with an exercise price of $.20.  The options expire three years from the date of grant.

2004 Stock Option Agreement	Number of Shares		Weighted Average Exercise Price
Outstanding, January 1, 2006		-	$	-
Granted		350,000		.68
Exercised		-		-
Canceled		-		-
Outstanding, December 31, 2006		350,000		.68
Exercisable, December 31, 2006		200,000		.05
Outstanding, January 1, 2007		350,000	$	.68
Granted		-		-
Exercised		-		-
Canceled		-		-
Outstanding, June 30 2007		350,000		.68
Exercisable, June 30, 2007		350,000		.23

F-31

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Six Months Ended June 30, 2007

NOTE 10- STOCK OPTION AGREEMENT (continued)

In accordance with SFAS 123, Accounting for Stock-Based Compensation, $0 and $15,121 has been charged to compensation expense for the six months ended June 30, 2007 and year ended December 31, 2006, respectively.  The fair value of the option grant was established at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

Risk-free interest rate	4.0	%
Dividend yield	0	%
Volatility	-50	%
Average expected term (years to exercise date)	1 ¾

Employee stock options outstanding and exercisable under this agreement as of June 30, 2007 are:

Range of Exercise Price		Outstanding Options		Weighted Average of Exercise Price		Weighted Average Remaining Contractual Life (years)		Outstanding Options		Weighted Average of Exereise Price
$	.05 - .20		350,000	$	.68		1.75		350,000	$	.23

NOTE 11 - Litigation

A complaint was filed in Orange County, California Superior Court, Case No. 04cc04645, by plaintiffs Marvin Teitelbaum, a shareholder of the Company, and Peter Alezakis, a shareholder and former director of the Company (collectively "Plaintiffs") on or about April 7, 2004 against the Company's president Tom Kubota, former secretary and director, now deceased, Rudy LaRusso and the Company (collectively "Defendants").

On September 22, 2006, a settlement agreement was reached between the Company, Medex and Tom Kubota and Marvin Teitelbaum and Peter Alexakis dismissing the complaint and cross complaint in the matter.

Each party to the action agreed to dismiss with prejudice their complaint and/or cross complaint in the above mentioned action. No party received any money, stock or other compensation as a result of the mutual release and settlement and each party agreed to be responsible for its own attorneys’ fee.

NOTE 12 - Unaudited Information

The financial statement for the six months ended June 30, 2007 and 2006 were taken from the books and records of the Company without audit.  However, such information reflects all adjustments, which are in the opinion of management, necessary to properly reflect the results of the six months ended June 30, 2007 and 2006, and are of a normal, recurring nature.  The information presented is not necessarily indicative of the results from operations expected for the full fiscal year.

EX-99.1

Proxy – Pacific Health Care Organization, Inc.

Annual Meeting of Stockholders – November 16, 2007

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Tom Kubota and Thomas Iwanski, severally, as Proxies, each with the power to appoint his substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side, all of the shares of Common Stock of PACIFIC HEALTH CARE ORGANIZATION, INC., of record in the name of the undersigned at the close of business on October 10, 2007, which the undersigned is entitled to vote at the Annual Meeting of Stockholders of the Company and at any and all adjournments thereof, with respect to the matters set forth on the reverse side and described in the Notice of Annual Meeting and Proxy Statement dated October 15, 2007, receipt of which is acknowledged.

This Proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder(s). IF NO INDICATION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 and 3.

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.

(Please See Reverse Side)

Proxy – Pacific Health Care Organization, Inc.

Annual Meeting of Stockholders – November 16, 2007

[Name and address of shareholder]

o Mark this box with an X if you have made changes to your name or address details above.

[A]	Proposal for the Election of Director
1.	The Board of Directors recommends a vote FOR the listed nominees.  If you wish to nominate and vote for someone other than the nominee listed below, please do so in the blank space below.

	For	Withheld		For	Withheld
Tom Kubota	o	o	_______________________	o	o
Thomas Iwanski	o	o

[B] Other Proposals  

The Board of Directors recommends a vote FOR the following proposals.

		For	Against	Abstain
2.	APPOINT CHISHOLM, BIERWOLF & NILSON AS THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE 2007 FISCAL YEAR.	o	o	o
3.	IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY AND ALL ADJOURNMENTS THEREOF.	o	o	o

  [C]   Authorized Signatures - Sign Here - This section must be completed for your instructions to be executed.

Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as an attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person.

Signature 1 - Please keep signature within the box	Signature 2 - Please keep signature within the box	Date (mm/dd/yyyy)
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