##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark one)

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

For the quarterly period ended September 30, 2010.

OR



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

For the transition period from  to

Commission file number:
001-33930





IPC THE HOSPITALIST COMPANY, INC.

(Exact name of registrant as specified in its charter)







|                                                                 |  |                                     
|---------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                         |  | 95-4562058                          
|(State or other jurisdiction of
incorporation or organization)   |  | (I.R.S. Employer Identification No.)
|                                                                 | 
|4605 Lankershim Boulevard, Suite 617
North Hollywood, California |  | 91602                               
|(Address of principal executive offices)                         |  | (Zip code)                          

Registrants telephone number, including area code: (888) 447-2362





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

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

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



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).    Yes   ̈    No  x

As of October 20, 2010, there were 16,261,697 shares of the registrants common stock, $0.001 par value, outstanding.









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IPC The Hospitalist Company, Inc.

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS



|              |  |                                                                                             |    |      |    | 
|------------- |  | ------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|              |  |                                                                                             |    | Page |   
|              |  | PART I                                                                                      |    |      |    | 
|Item 1        |  | Consolidated Financial Statements (unaudited)                                               |    |      |    | 
|              |  | Consolidated Balance Sheets  September 30, 2010 and December 31, 2009                      |    |      | 3  | 
|              |  | Consolidated Statements of Income  Three and nine months ended September 30, 2010 and 2009 |    |      | 4  | 
|              |  | Consolidated Statements of Cash Flows  Nine months ended September 30, 2010 and 2009       |    |      | 5  | 
|              |  | Notes to Consolidated Financial Statements                                                  |    |      | 6  | 
|Item 2        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations       |    |      | 13 | 
|Item 3        |  | Quantitative and Qualitative Disclosures about Market Risk                                  |    |      | 18 | 
|Item 4        |  | Controls and Procedures                                                                     |    |      | 18 | 
|              |  |                                                                                            
|              |  | PART II                                                                                     |    |      |    | 
|              |  |                                                                                            
|Item 1        |  | Legal Proceedings                                                                           |    |      | 19 | 
|Item 6        |  | Exhibits                                                                                    |    |      | 19 | 
|              | 
|Signatures    |  |                                                                                             | 20 |     
|Exhibit Index |  |                                                                                             | 21 |     

Note: Items 1A, 2, 3,
4 and 5 of Part II are omitted because they are not applicable.



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PART I  FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

IPC The Hospitalist Company, Inc.

Consolidated Balance Sheets

(dollars in thousands, except for share data)



|                                                                                                                                                                                            |  |                   |         |  |                  |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- |  | ---------------- | - | ------- | 
|                                                                                                                                                                                            |  | September 30,2010 |         |  | December 31,2009 |  
|                                                                                                                                                                                            |  | (unaudited)       |         |  |                  |  
|Assets                                                                                                                                                                                      |  |                   |         |  |                  |   |         | 
|Current assets:                                                                                                                                                                             |  |                   |         |  |                  |   |         | 
|Cash and cash equivalents                                                                                                                                                                   |  | $                 | 49,164  |  |                  | $ | 31,473  | 
|Accounts receivable, net                                                                                                                                                                    |  |                   | 48,466  |  |                  |   | 48,276  | 
|Prepaid expenses and other current assets                                                                                                                                                   |  |                   | 3,059   |  |                  |   | 8,531   | 
|                                                                                                                                                                                            |  |                   |         |  |                  |   |         | 
|Total current assets                                                                                                                                                                        |  |                   | 100,689 |  |                  |   | 88,280  | 
|Furniture and equipment, net                                                                                                                                                                |  |                   | 3,607   |  |                  |   | 3,011   | 
|Goodwill                                                                                                                                                                                    |  |                   | 104,552 |  |                  |   | 91,701  | 
|Other intangible assets, net                                                                                                                                                                |  |                   | 2,202   |  |                  |   | 2,776   | 
|Deferred tax assets, net                                                                                                                                                                    |  |                   | 2,444   |  |                  |   | 2,444   | 
|                                                                                                                                                                                            |  |                   |         |  |                  |   |         | 
|Total assets                                                                                                                                                                                |  | $                 | 213,494 |  |                  | $ | 188,212 | 
|                                                                                                                                                                                            |  |                   |         |  |                  |   |         | 
|Liabilities and Stockholders Equity                                                                                                                                                        |  |                   |         |  |                  |   |         | 
|Current liabilities:                                                                                                                                                                        |  |                   |         |  |                  |   |         | 
|Accounts payable and accrued liabilities                                                                                                                                                    |  | $                 | 4,082   |  |                  | $ | 4,083   | 
|Accrued compensation                                                                                                                                                                        |  |                   | 19,392  |  |                  |   | 15,017  | 
|Payables for practice acquisitions                                                                                                                                                          |  |                   | 10,187  |  |                  |   | 10,739  | 
|Medical malpractice and self-insurance reserves, current portion                                                                                                                            |  |                   | 391     |  |                  |   | 706     | 
|Accrued professional liability settlement                                                                                                                                                   |  |                   |        |  |                  |   | 750     | 
|Deferred tax liabilities                                                                                                                                                                    |  |                   | 134     |  |                  |   | 134     | 
|                                                                                                                                                                                            |  |                   |         |  |                  |   |         | 
|Total current liabilities                                                                                                                                                                   |  |                   | 34,186  |  |                  |   | 31,429  | 
|Medical malpractice and self-insurance reserves, less current portion                                                                                                                       |  |                   | 13,164  |  |                  |   | 11,443  | 
|Other long-term liabilities                                                                                                                                                                 |  |                   | 44      |  |                  |   | 263     | 
|                                                                                                                                                                                            |  |                   |         |  |                  |   |         | 
|Total liabilities                                                                                                                                                                           |  |                   | 47,394  |  |                  |   | 43,135  | 
|Stockholders equity:                                                                                                                                                                       |  |                   |         |  |                  |   |         | 
|Preferred stock, $0.001 par value, 15,000,000 shares authorized, none issued                                                                                                                |  |                   |        |  |                  |   |        | 
|Common stock, $0.001 par value, 50,000,000 shares authorized, 16,258,781 and 16,161,813 shares issued and outstanding at
September 30, 2010 (unaudited) and December 31, 2009, respectively |  |                   | 16      |  |                  |   | 16      | 
|Additional paid-in capital                                                                                                                                                                  |  |                   | 129,315 |  |                  |   | 125,527 | 
|Retained earnings                                                                                                                                                                           |  |                   | 36,769  |  |                  |   | 19,534  | 
|                                                                                                                                                                                            |  |                   |         |  |                  |   |         | 
|Total stockholders equity                                                                                                                                                                  |  |                   | 166,100 |  |                  |   | 145,077 | 
|                                                                                                                                                                                            |  |                   |         |  |                  |   |         | 
|Total liabilities and stockholders equity                                                                                                                                                  |  | $                 | 213,494 |  |                  | $ | 188,212 | 
|                                                                                                                                                                                            |  |                   |         |  |                  |   |         | 

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



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IPC The Hospitalist Company, Inc.

Consolidated Statements of Income

(dollars in thousands, except for per
share data)

(unaudited)



|                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                 |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                                 |  | 2010                             |        |   | 2009                            |   |        | 2010 |  |   | 2009    |  
|Net revenue                                                      |  | $                                | 90,897 |   |                                 | $ | 77,521 |      |  | $ | 266,240 |   |  | $ | 228,361 |  
|Operating expenses:                                              |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Cost of servicesphysician practice salaries, benefits and other |  |                                  | 66,051 |   |                                 |   | 56,768 |      |  |   | 192,763 |   |  |   | 166,716 |  
|General and administrative                                       |  |                                  | 14,724 |   |                                 |   | 12,784 |      |  |   | 43,704  |   |  |   | 37,927  |  
|Depreciation and amortization                                    |  |                                  | 678    |   |                                 |   | 536    |      |  |   | 1,983   |   |  |   | 1,699   |  
|                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                         |  |                                  | 81,453 |   |                                 |   | 70,088 |      |  |   | 238,450 |   |  |   | 206,342 |  
|                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Income from operations                                           |  |                                  | 9,444  |   |                                 |   | 7,433  |      |  |   | 27,790  |   |  |   | 22,019  |  
|Investment income                                                |  |                                  | 8      |   |                                 |   | 13     |      |  |   | 15      |   |  |   | 78      |  
|Interest expense                                                 |  |                                  | (22    | ) |                                 |   | (23    | )    |  |   | (66     | ) |  |   | (271    | )
|                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Income before income taxes                                       |  |                                  | 9,430  |   |                                 |   | 7,423  |      |  |   | 27,739  |   |  |   | 21,826  |  
|Income tax provision                                             |  |                                  | 3,364  |   |                                 |   | 2,804  |      |  |   | 10,504  |   |  |   | 8,565   |  
|                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                       |  | $                                | 6,066  |   |                                 | $ | 4,619  |      |  | $ | 17,235  |   |  | $ | 13,261  |  
|                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Net income per share:                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                            |  | $                                | 0.37   |   |                                 | $ | 0.29   |      |  | $ | 1.06    |   |  | $ | 0.82    |  
|                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                          |  | $                                | 0.37   |   |                                 | $ | 0.28   |      |  | $ | 1.04    |   |  | $ | 0.81    |  
|                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  

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



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IPC The Hospitalist Company, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)



|                                                                                  |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months Ended September 30, |        
|                                                                                  |  | 2010                            |         |   | 2009 |  
|Operating activities                                                              |  |                                 |         |   |      |   |         |  
|Net income                                                                        |  | $                               | 17,235  |   |      | $ | 13,261  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                                 | 1,983   |   |      |   | 1,699   |  
|Stock-based compensation expense                                                  |  |                                 | 2,310   |   |      |   | 1,470   |  
|Tax liability reduction for uncertain tax positions                               |  |                                 | (219    | ) |      |   | (38     | )
|Change in acquisition fair value                                                  |  |                                 | 207     |   |      |   |        |  
|Changes in assets and liabilities:                                                |  |                                 |         |   |      |   |         |  
|Accounts receivable                                                               |  |                                 | (190    | ) |      |   | (1,823  | )
|Prepaid expenses and other current assets                                         |  |                                 | 5,472   |   |      |   | 4,223   |  
|Accounts payable and accrued liabilities                                          |  |                                 | (1      | ) |      |   | 327     |  
|Accrued compensation                                                              |  |                                 | 4,375   |   |      |   | 4,929   |  
|Medical malpractice and self-insurance reserves                                   |  |                                 | 1,406   |   |      |   | 123     |  
|Accrued professional liability settlement                                         |  |                                 | (750    | ) |      |   |        |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                                 | 31,828  |   |      |   | 24,171  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Investing activities                                                              |  |                                 |         |   |      |   |         |  
|Acquisitions of physician practices                                               |  |                                 | (13,788 | ) |      |   | (14,407 | )
|Purchase of furniture and equipment                                               |  |                                 | (1,827  | ) |      |   | (1,369  | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                                 | (15,615 | ) |      |   | (15,776 | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Financing activities                                                              |  |                                 |         |   |      |   |         |  
|Repayments of long-term debt, net                                                 |  |                                 |        |   |      |   | (8,839  | )
|Net proceeds from issuance of common stock                                        |  |                                 | 1,133   |   |      |   | 599     |  
|Excess tax benefits from stock-based compensation                                 |  |                                 | 345     |   |      |   | 280     |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                               |  |                                 | 1,478   |   |      |   | (7,960  | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                         |  |                                 | 17,691  |   |      |   | 435     |  
|Cash and cash equivalents, beginning of period                                    |  |                                 | 31,473  |   |      |   | 37,394  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                               | 49,164  |   |      | $ | 37,829  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Supplemental disclosure of cash flow information                                  |  |                                 |         |   |      |   |         |  
|Cash paid for:                                                                    |  |                                 |         |   |      |   |         |  
|Interest                                                                          |  | $                               | 65      |   |      | $ | 301     |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Income taxes                                                                      |  | $                               | 9,113   |   |      | $ | 7,922   |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Acquisitions of physician practices consisted of the following:                   |  |                                 |         |   |      |   |         |  
|Acquired assets                                                                   |  | $                               | 13,029  |   |      | $ | 19,857  |  
|Net decrease (increase) in accrued considerations                                 |  |                                 | 759     |   |      |   | (5,450  | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash paid for acquisitions                                                    |  | $                               | 13,788  |   |      | $ | 14,407  |  
|                                                                                  |  |                                 |         |   |      |   |         |  

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



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IPC The Hospitalist Company, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

September 30, 2010

Note 1. Operations and Significant Accounting Policies

Business

IPC The Hospitalist Company, Inc. and its subsidiaries
(the Company, IPC, we, us, and our) is a national physician group practice company that operates and manages full-time hospitalist practices. Hospitalists are acute-care physician
specialists, who focus on a patients hospital care from time of admission to discharge and have no outpatient responsibilities. Hospitalists practice exclusively in hospitals or other inpatient facilities, including acute, sub-acute and
long-term care settings. The physicians are primarily full-time employees of our subsidiaries or consolidated professional medical corporations (the Professional Medical Corporations), although part-time and temporary physicians are also employed or
contracted on an as-needed basis.

We prepared the accompanying unaudited consolidated financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC) on the same basis as our audited annual financial statements. In our opinion, these financial statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial information set forth therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles
(GAAP) have been condensed or omitted pursuant to such rules and regulations, although we believe that the following disclosures, when read in conjunction with the audited consolidated financial statements and notes thereto as of
December 31, 2009, are adequate to make the information presented not misleading. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2009 filed with the SEC on February 22, 2010.

Principles of Consolidation

Our consolidated financial statements include the accounts of IPC The Hospitalist Company, Inc. and its wholly owned subsidiaries and the
Professional Medical Corporations managed under long-term management agreements. Some states have laws that prohibit business entities, such as IPC, from practicing medicine, employing physicians to practice medicine, exercising control over medical
decisions by physicians (collectively known as the corporate practice of medicine), or engaging in certain arrangements with physicians, such as fee-splitting. In states that have these restrictions, we operate by maintaining long-term management
contracts with the Professional Medical Corporations, which are each owned and operated by physicians, and which employ or contract with additional physicians to provide hospitalist services. Under the management agreements, we provide and perform
all non-medical management and administrative services, including financial management, information systems, marketing, risk management and administrative support. The management agreements have an initial term of 20 years and are automatically
renewable for successive 10-year periods unless terminated by either party for cause. The management agreements are not terminable by the Professional Medical Corporations, except in the case of gross negligence, fraud, or other illegal acts by us,
or bankruptcy of IPC.

Through the management agreements and our relationship with the stockholders of the Professional
Medical Corporations, we have exclusive authority over all non-medical decision making related to the ongoing business operations of the Professional Medical Corporations. Further, our rights under the management agreements are unilaterally salable
or transferable. Based on the provisions of the agreements, we have determined that the Professional Medical Corporations are variable interest entities (VIEs), and that we are the primary beneficiary because we have controls over the
operations of these VIEs. Consequently, we consolidate the revenue and expenses of the Professional Medical Corporations from the date of execution of the management agreements. All intercompany balances and transactions have been eliminated
in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses at the date and
for the periods that the financial statements are prepared. Significant estimates include the estimated net realizable value of accounts receivable, estimated liabilities for claims incurred but not reported (IBNR) related to our medical malpractice
coverage, fair value of contingent consideration related to business combinations and the analysis of goodwill for impairment.



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IPC The Hospitalist Company, Inc.

Notes to the Consolidated Financial Statements(Continued)

(Unaudited)

September 30, 2010





The process of
estimating the net realizable value of accounts receivable, the IBNR liabilities, the fair value of contingent consideration related to business combinations and the analysis of goodwill for impairment involves judgment decisions, which are subject
to an inherent degree of uncertainty. Actual results could differ from those estimates. The results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2010.

Fair Value of Financial Instruments

We disclose fair value information about financial instruments for which it is practical to estimate that value. Our consolidated balance sheets as of September 30, 2010 included the following
financial instruments: cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities. We consider the carrying amounts of current assets and liabilities to approximate their fair value because of the relatively short
period of time between the origination of these instruments and their expected realization.

Accounts Receivable and
Concentration of Credit Risk

Accounts receivable are stated at the amounts expected to be collected. Except with
respect to the Medicare and Medicaid programs, concentration of credit risk, which consists primarily of accounts receivable, is limited due to the large number of payors comprising our diverse payor mix and patient base. During the nine months
ended September 30, 2010 and 2009, approximately 50.7% and 49.1 %, respectively, of our patient volume was from Medicare and Medicaid programs. Receivables from these programs made up approximately 33.8% and 31.8% of the net accounts
receivable at September 30, 2010 and December 31, 2009, respectively.

Note 2. Recently Adopted and New Accounting Principles

Recently Adopted Accounting Principles

In June 2009, the Financial Accounting Standards Board (FASB) issued revised GAAP which amends the existing GAAP on VIEs and changes
the consolidation guidance applicable to a VIE. The revised GAAP requires the use of a qualitative analysis rather than a quantitative analysis to determine whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to
consolidate the VIE. The revised GAAP also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE, while the existing GAAP only requires reconsideration of the primary beneficiary of a VIE when specific events
occur. Enhanced disclosures about an enterprises involvement with a VIE is also required. We adopted this revised GAAP on January 1, 2010. The adoption of this revised GAAP did not have a material impact on our financial position,
results of operations or cash flows.

In January 2010, the FASB issued revised GAAP that requires additional fair value
disclosures. The revised GAAP requires disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers in and out of fair value hierarchy levels. Additionally, the revised GAAP requires
presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3). Our adoption of this revised GAAP in January 2010 did not have an impact on our financial position, results
of operations or cash flows.

New Accounting Principles

In August 2010, the FASB issued revised GAAP on the presentation of insurance claims and related insurance recoveries. The revised GAAP
clarifies that a healthcare entity shall present medical malpractice claims and similar liabilities without consideration of insurance recoveries. Related insurance recoveries shall be presented as a receivable net of a valuation allowance for
uncollectible amounts. The revised GAAP is effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this revised GAAP will not impact our results of operations or cash flows. We are currently
evaluating the impact of this revised GAAP on our financial position.

Note 3. Acquisitions

In connection with the acquisition of hospitalist physician practices, we generally record goodwill and other identifiable intangible
assets consisting of physician and hospital agreements. The results of operations of the acquired practices are included in the consolidated financial statements from the date of acquisition. In addition to the initial consideration paid at the
close of these transactions, the asset purchase agreements generally provide for future consideration to be paid based upon the achievement of certain operating results of the acquired practices as of certain measurement dates. These additional
payments are not contingent upon the future employment of the sellers. The estimated fair value of additional future consideration is recognized at the acquisition-date. Subsequent changes, if any, to the acquisition-date fair value of additional
future consideration are recognized as part of on-going operations.



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IPC The Hospitalist Company, Inc.

Notes to the Consolidated Financial Statements(Continued)

(Unaudited)

September 30, 2010





During the nine
months ended September 30, 2010, we completed the acquisition of assets of seven hospitalist physician practices. In addition to the initial consideration paid at the close of these transactions, the asset purchase agreements provide for future
consideration to be paid, based upon the achievement of certain operating results of the acquired practices as of certain measurement dates.

The following table summarizes the total amounts recorded during the nine months ended September 30, 2010, related to the acquisition of hospitalist practices (dollars in thousands):



|                                                        |  |          |        |  |            |   |     |                       |  |   |       |  |  |   |         |  
|------------------------------------------------------- |  | -------- | ------ |  | ---------- | - | --- | --------------------- |  | - | ----- |  |  | - | ------- | -
|                                                        |  | Goodwill |        |  | Intangible |   |     | FurnitureandEquipment |  |   | Total | 
|Acquired assets:                                        |  |          |        |  |            |   |     |                       |  |   |       |  |  |   |         |  
|2010 transactions                                       |  | $        | 12,735 |  |            | $ | 168 |                       |  | $ | 10    |  |  | $ | 12,913  |  
|Addition to prior year transactions                     |  |          | 116    |  |            |   |    |                       |  |   |      |  |  |   | 116     |  
|                                                        |  |          |        |  |            |   |     |                       |  |   |       |  |  |   |         |  
|Total acquired assets                                   |  |          | 12,851 |  |            |   | 168 |                       |  |   | 10    |  |  |   | 13,029  |  
|                                                        |  |          |        |  |            |   |     |                       |  |   |       |  |  |   |         |  
|Cash paid for acquisitions:                             |  |          |        |  |            |   |     |                       |  |   |       |  |  |   |         |  
|2010 transactions                                       |  |          |        |  |            |   |     |                       |  |   |       |  |  |   | (8,173  | )
|Prior year transactions                                 |  |          |        |  |            |   |     |                       |  |   |       |  |  |   | (5,615  | )
|                                                        |  |          |        |  |            |   |     |                       |  |   |       |  |  |   |         |  
|Total cash paid for acquisitions                        |  |          |        |  |            |   |     |                       |  |   |       |  |  |   | (13,788 | )
|                                                        |  |          |        |  |            |   |     |                       |  |   |       |  |  |   |         |  
|Accrued consideration - reduction                       |  |          |        |  |            |   |     |                       |  |   |       |  |  |   | (759    | )
|Change in fair value of additional future consideration |  |          |        |  |            |   |     |                       |  |   |       |  |  |   | 207     |  
|                                                        |  |          |        |  |            |   |     |                       |  |   |       |  |  |   |         |  
|Net change in payable for practice acquisitions         |  |          |        |  |            |   |     |                       |  |   |       |  |  |   | (552    | )
|Payable for practice acquisitions, beginning of period  |  |          |        |  |            |   |     |                       |  |   |       |  |  |   | 10,739  |  
|                                                        |  |          |        |  |            |   |     |                       |  |   |       |  |  |   |         |  
|Payable for practice acquisitions, end of period        |  |          |        |  |            |   |     |                       |  |   |       |  |  | $ | 10,187  |  
|                                                        |  |          |        |  |            |   |     |                       |  |   |       |  |  |   |         |  

Note 4. Medical Malpractice Liability Insurance

We maintain a medical malpractice liability insurance policy, which expires on December 31, 2010, that indemnifies us and our
employed health care professionals on a claims-made basis. Our claims-made policy covers only those claims reported during the policy period. Our current claims-made professional liability insurance policy provides first dollar coverage up to our
policy limits. We expect to be able to continue to obtain coverage in future years; however, there can be no assurance that we will obtain substantially similar coverage as is provided under the 2010 policy at acceptable costs and on favorable terms
upon expiration.

We recorded reserves for self-insurance retention and an estimate of our liabilities, on an undiscounted
basis, for claims incurred but not reported based upon actuarial loss projections using our historical loss experience. At September 30, 2010 and December 31, 2009, our accrual for potential unreported claims and self-insurance
retention was $13,555,000 and $12,149,000, respectively.

Note 5. Debt

Our amended and restated loan agreement (Credit Facility) provides a revolving line of credit of $30,000,000, with a sublimit of
$5,000,000 for the issuance of letters of credit. The Credit Facility has a maturity date of September 15, 2011. The Credit Facility is available for working capital, practice acquisitions and capital expenditures. As of
September 30, 2010, we had a letter of credit of $100,000 outstanding and $29,900,000 available under the revolving line of credit.

The revolving line of credit is limited by a formula based on a certain multiple times the trailing twelve months of earnings before interest, taxes, depreciation, amortization and certain non-cash items.
Borrowings under the Credit Facility bear interest at a rate, based on either LIBOR plus 1.5% to 2.0%, or the lenders prime rate, as selected by us for each advance. We pay an unused commitment fee equal to 0.25% per annum on the
difference between the revolving line capacity and the average balance outstanding during the year. Outstanding amounts advanced to us under the revolving line of credit are repayable on or before the maturity date.



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IPC The Hospitalist Company, Inc.

Notes to the Consolidated Financial Statements(Continued)

(Unaudited)

September 30, 2010





The Credit
Facility is secured by all of our current and future personal and intellectual property assets, except those held subject to purchase money loans and capital leases. The Credit Facility includes various customary financial covenants and
restrictions, as well as customary remedies for our lenders following an event of default. As of September 30, 2010, we were in compliance with such financial covenants and restrictions.

Note 6. Income Taxes

We recorded a provision for income taxes of
$3,364,000 and $2,804,000 for the three months ended September 30, 2010 and 2009, and $10,504,000 and $8,586,000 for the nine months ended September 30, 2010 and 2009, respectively. Our effective tax rate was 35.7% and 37.8% for the three
months ended September 30, 2010 and 2009, and 37.9% and 39.2% for nine months ended September 30, 2010 and 2009, respectively. The effective tax rates differ from the statutory U.S. federal income tax rate of 35.0% due primarily to state
income taxes.

Our accounting policy is to include interest and penalties related to income tax liabilities in income tax
expense. As of September 30, 2010, we had accrued a total of $28,000 for estimated interest and penalties related to uncertain tax positions.

The tax years 2005 to 2008 remain open to examination by the major taxing jurisdictions to which we are subject. The statute of limitations for tax years 1997 to 2004 has expired, except that the tax
years 1997 to 2002 are subject to adjustment of net operating losses by the Internal Revenue Service. We are subject to taxation in the United States and various state jurisdictions. Federal and state tax return examinations are underway for some of
our subsidiaries and affiliated Professional Medical Corporations. The outcome of such examinations cannot be predicted with certainty; however, we believe that the ultimate resolution will not have a material effect on our financial position,
results of operations or cash flows.

We make our best estimate of the tax rate expected to be applicable for the full fiscal
year. The rate so determined is used to provide for income taxes for interim periods.

Note 7. Stock-Based Compensation

At September 30, 2010, we had a stock-based employee compensation program, for which we reserved a total of 2,998,858 common shares
for issuance. In accordance with our Equity Participation Plan (Equity Plan), for each calendar year until 2013, the number of shares authorized for issuance under the Equity Plan will increase in an amount equal to 2.5% of the total number of
shares of our common stock outstanding at the close of the first trading day of each year. Pursuant to the Equity Plan, the available shares of our common stock for issuance were increased by 405,247 on January 4, 2010. As of September 30,
2010, there were 205,596 shares of our common stock available for issuance under our Equity Plan.

The options under the
Equity Program generally vest over a four-year period from date of grant, and unrestricted options terminate on the 10th anniversary of the agreement date.

All options granted during the nine months ended September 30, 2010 were issued with exercise prices equal to the closing price of our common stock on the NASDAQ Global Market on the dates of the
grant.

Stock-based compensation expense was $803,000 and $516,000 for the three months ended September 30, 2010 and
2009, and $2,310,000 and $1,470,000 for the nine months ended September 30, 2010 and 2009, respectively. Stock-based compensation expense is included in general and administrative expenses. As of September 30, 2010, there was $6,085,000 of
total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the plans, which is expected to be recognized over a weighted-average period of 2.83 years.



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IPC The Hospitalist Company, Inc.

Notes to the Consolidated Financial Statements(Continued)

(Unaudited)

September 30, 2010





The fair value of
each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions:



|                                |  |                                  |       |   |                                 |  |       |      |  |  |       |   |  |  |       |  
|------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- |  | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                |  | Three months ended September 30, |       |   | Nine months ended September 30, | 
|                                |  | 2010                             |       |   | 2009                            |  |       | 2010 |  |  | 2009  |  
|Risk-free interest rate         |  |                                  | 1.31  | % |                                 |  | 2.23  | %    |  |  | 1.24  | % |  |  | 2.20  | %
|Expected volatility             |  |                                  | 40.00 | % |                                 |  | 40.00 | %    |  |  | 40.00 | % |  |  | 40.00 | %
|Expected option life (in years) |  |                                  | 5.89  |   |                                 |  | 6.03  |      |  |  | 5.83  |   |  |  | 5.99  |  
|Expected dividend yield         |  |                                  | 0.00  | % |                                 |  | 0.00  | %    |  |  | 0.00  | % |  |  | 0.00  | %

The risk-free interest
rate is based on the implied yield currently available on U.S. Treasury zero coupon issues. The expected volatility is based on historical volatility levels of our public company peer group and the volatility of our stock price since our
initial public offering in January 2008. The expected option life of each award granted was calculated using the simplified method in accordance with GAAP.

The following table summarizes the activity in our three stock-based compensation plans during the nine months ended September 30, 2010 (dollars in thousands, except for per share data).



|                                             |  |        |           |   |                               |   |       |                                                  |  |  |                         |  |  |                           |        |  |  |   |       | 
|-------------------------------------------- |  | ------ | --------- | - | ----------------------------- | - | ----- | ------------------------------------------------ |  |  | ----------------------- |  |  | ------------------------- | ------ |  |  | - | ----- | 
|                                             |  | Shares |           |   | Weighted-AverageExercisePrice |   |       | Weighted-AverageRemainingContractualTerm (Years) |  |  | AggregateIntrinsicValue |  |  | WeightedAverage FairValue |       
|Options outstanding as of December 31, 2009  |  |        | 1,041,834 |   |                               | $ | 13.24 |                                                  |  |  |                         |  |  |                           |        |  |  | $ | 5.75  | 
|Changes during period:                       |  |        |           |   |                               |   |       |                                                  |  |  |                         |  |  |                           |        |  |  |   |       | 
|Granted                                      |  |        | 359,003   |   |                               |   | 33.11 |                                                  |  |  |                         |  |  |                           |        |  |  |   | 13.71 | 
|Exercised                                    |  |        | (48,895   | ) |                               |   | 10.05 |                                                  |  |  |                         |  |  |                           |        |  |  |   | 4.42  | 
|Canceled, forfeited or expired               |  |        | (6,700    | ) |                               |   | 14.30 |                                                  |  |  |                         |  |  |                           |        |  |  |   | 7.83  | 
|                                             |  |        |           |   |                               |   |       |                                                  |  |  |                         |  |  |                           |        |  |  |   |       | 
|Options outstanding as of September 30, 2010 |  |        | 1,345,242 |   |                               | $ | 18.66 |                                                  |  |  | 7.95                    |  |  | $                         | 13,737 |  |  |   | 7.92  | 
|                                             |  |        |           |   |                               |   |       |                                                  |  |  |                         |  |  |                           |        |  |  |   |       | 
|Options exercisable as of September 30, 2010 |  |        | 624,472   |   |                               | $ | 13.38 |                                                  |  |  | 7.23                    |  |  | $                         | 8,907  |  |  |   | 5.53  | 
|                                             |  |        |           |   |                               |   |       |                                                  |  |  |                         |  |  |                           |        |  |  |   |       | 

Note 8. Earnings Per Share

Basic net income per share is calculated by dividing net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by
dividing net income for the period by the weighted average number of shares outstanding during the period plus the dilutive effect of our outstanding stock awards and shares issuable under our employee stock purchase plan using the treasury stock
method.



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IPC The Hospitalist Company, Inc.

Notes to the Consolidated Financial Statements(Continued)

(Unaudited)

September 30, 2010





The calculations
of basic and diluted net income per share for the three and nine months ended September 30, 2010 and 2009 are as follows (dollars in thousands, except for per share data):



|                                                                                 |  |                                  |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|-------------------------------------------------------------------------------- |  | -------------------------------- | ---------- |  | ------------------------------- | - | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                                                                                 |  | Three Months Ended September 30, |            |  | Nine Months Ended September 30, |  
|                                                                                 |  | 2010                             |            |  | 2009                            |   |            | 2010 |  |   | 2009       | 
|Basic:                                                                           |  |                                  |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|Net income                                                                       |  | $                                | 6,066      |  |                                 | $ | 4,619      |      |  | $ | 17,235     |  |  | $ | 13,261     | 
|                                                                                 |  |                                  |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|Weighted average number of common shares outstanding                             |  |                                  | 16,256,757 |  |                                 |   | 16,122,506 |      |  |   | 16,239,672 |  |  |   | 16,104,732 | 
|                                                                                 |  |                                  |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|Basic net income per share                                                       |  | $                                | 0.37       |  |                                 | $ | 0.29       |      |  | $ | 1.06       |  |  | $ | 0.82       | 
|                                                                                 |  |                                  |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|Diluted:                                                                         |  |                                  |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|Net income                                                                       |  | $                                | 6,066      |  |                                 | $ | 4,619      |      |  | $ | 17,235     |  |  | $ | 13,261     | 
|                                                                                 |  |                                  |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|Weighted average number of common shares outstanding                             |  |                                  | 16,256,757 |  |                                 |   | 16,122,506 |      |  |   | 16,239,672 |  |  |   | 16,104,732 | 
|Weighted average number of dilutive common shares equivalents from stock options |  |                                  | 284,275    |  |                                 |   | 333,234    |      |  |   | 331,196    |  |  |   | 204,203    | 
|                                                                                 |  |                                  |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|Common shares and common share equivalents                                       |  |                                  | 16,541,032 |  |                                 |   | 16,455,740 |      |  |   | 16,570,868 |  |  |   | 16,308,935 | 
|                                                                                 |  |                                  |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|Diluted net income per share                                                     |  | $                                | 0.37       |  |                                 | $ | 0.28       |      |  | $ | 1.04       |  |  | $ | 0.81       | 
|                                                                                 |  |                                  |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 

Outstanding stock options with an exercise price above market are excluded from our diluted computation as
their effect would be anti-dilutive. At September 30, 2010, there were approximately 358,000 and 288,000 outstanding stock options with an exercise price above the average market price for the three and nine months ended September 30,
2010.

Note 9. Commitments and Contingencies

Legal

In the ordinary course of our business, we become involved in
pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by our affiliated hospitalists. We may also become subject to other lawsuits which could involve
significant claims and/or significant defense costs.

We believe, based upon our review of pending actions and proceedings,
that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition, results of operations, or cash flows. The outcome of such actions and proceedings, however, cannot be predicted with
certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition, results of operations, or cash flows in a future period.

Government Inquiry

On June 7, 2010, we received a civil investigative demand (CID) issued by the Department of Justice, U.S. Attorneys Office for the Northern District of Illinois. The CID requests
information concerning claims that we have submitted to Medicare and Medicaid. The CID covers the period from January 1, 2003, through June 4, 2010, and seeks production of a wide range of documents relating to our Medicare and Medicaid
participation, physician arrangements, operations and compliance programs. We believe we have a strong compliance focus, and that we operate with appropriate billing policies, procedures, provider training and compliance programs. We have met and
continue to meet with representatives of the government to discuss the scope of the CID and the production of responsive documents. To our knowledge, no proceedings have been initiated against us at this time, although it is not possible to predict
whether or when proceedings might be initiated, when this matter may be resolved or what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations, or cash flows.



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IPC The Hospitalist Company, Inc.

Notes to the Consolidated Financial Statements(Continued)

(Unaudited)

September 30, 2010





Note 10. Fair Value Measurement

Some of our assets and liabilities are measured and recorded at fair value, which is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The established fair value hierarchy distinguishes between market participant assumptions based
on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entitys own assumptions about market participant assumptions (Level 3). This hierarchy is used to measure fair value as follows:



| |  |  | Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities.
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Level 2 inputs include quoted prices for similar assets and liabilities in active markets; quoted prices in markets that are not active; and other
inputs that are observable or can be corroborated by observable market data for the asset or liability.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 inputs are unobservable inputs for the asset or liability that are supported by little or no market activity.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

The following table presents our liabilities measured at fair value on a recurring basis as of September 30, 2010 (dollars in
thousands):



|                                   |  |           |   |  |           |   |   |           |  |   |               |  |  |   |        | 
|---------------------------------- |  | --------- | - |  | --------- | - | - | --------- |  | - | ------------- |  |  | - | ------ | 
|                                   |  | (Level 1) |   |  | (Level 2) |   |   | (Level 3) |  |   | Total Balance | 
|Payables for practice acquisitions |  | $         |  |  |           | $ |  |           |  | $ | 10,168        |  |  | $ | 10,168 | 
|                                   |  |           |   |  |           |   |   |           |  |   |               |  |  |   |        | 

The following table presents a reconciliation for our liabilities measured at fair value on a recurring
basis using significant unobservable inputs (level 3) for the three and nine months ended September 30, 2010 (dollars in thousands):



|                                               |  |                                      |        |  |                                     |   |        |  
|---------------------------------------------- |  | ------------------------------------ | ------ |  | ----------------------------------- | - | ------ | -
|Payables for Practice Acquisitions             |  | Three Months EndedSeptember 30, 2010 |        |  | Nine Months EndedSeptember 30, 2010 |  
|Beginning balance                              |  | $                                    | 8,457  |  |                                     | $ | 9,407  |  
|Addition through acquisition2010 transactions |  |                                      | 1,596  |  |                                     |   | 4,741  |  
|Change in fair value realized, net             |  |                                      | 115    |  |                                     |   | 207    |  
|Payments                                       |  |                                      |       |  |                                     |   | (4,187 | )
|                                               |  |                                      |        |  |                                     |   |        |  
|Ending balance                                 |  | $                                    | 10,168 |  |                                     | $ | 10,168 |  
|                                               |  |                                      |        |  |                                     |   |        |  

The net change in fair value realized of $115,000 and $207,000 for the three and nine months ended
September 30, 2010 is included in general and administration expenses.

The fair value of our payable for practice
acquisitions is determined using widely accepted valuation techniques, which include the estimation of future consideration to be paid based on projected earnings of the acquired practices as of certain measurement dates. The earnings projections
and the related fair value of our payable for practice acquisitions are reassessed on a quarterly basis.

Note 11. Subsequent Events

Subsequent to September 30, 2010, we acquired the assets of three hospitalist physician practices.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following managements discussion and analysis should be read in conjunction with the unaudited consolidated financial
statements and the notes thereto included in this Quarterly Report. In addition, reference is made to our audited consolidated financial statements and notes thereto and related Managements Discussion and Analysis of Financial Condition and
Results of Operations included in our most recent Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC) on February 22, 2010.

In this Quarterly Report, unless otherwise expressly stated or the context otherwise requires, IPC, we,
us and our refer to IPC The Hospitalist Company, Inc., a Delaware corporation, and its wholly-owned subsidiaries, together with IPCs consolidated affiliated professional corporations and limited liability companies
(Professional Medical Corporations). Our Professional Medical Corporations are separate legal entities that provide physician services in certain states and with which we have management agreements. For financial reporting purposes we
consolidate the revenues and expenses of all our practice groups that we own or manage because we have a controlling financial interest in these practices based on applicable accounting rules and as described in our accompanying financial
statements. Also, unless otherwise expressly stated or the context otherwise requires, our affiliated hospitalists refer to physicians, nurse practitioners and physician assistants employed or contracted by either our wholly-owned
subsidiaries or our Professional Medical Corporations. References to practices or practice groups refer to our Professional Medical Corporations and the wholly-owned subsidiaries of IPC that provide medical services, unless
otherwise expressly stated or the context otherwise requires.

The following discussion contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of IPC that are based on managements current expectations, estimates, projections, and assumptions about our
business. Words such as may, will, could, should, target, potential, project, expects, anticipates, intends, plans,
believes, sees, estimates and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to,
those discussed in our most recent Annual Report on Form 10-K, including the section entitled Risk Factors, as well as those discussed from time to time in the Companys other SEC filings and reports. In addition, such statements
could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Quarterly Report or, in the case of any document incorporated by reference, the date of that document, and we do not
undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or Internet service providers. If we update or correct one or
more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

Overview and Recent Developments

We are a leading provider of hospitalist services in the United States. Hospitalist medicine is organized around inpatient care, primarily delivered in hospitals, and is focused on providing, managing and
coordinating the care of hospitalized patients. We believe we are the largest dedicated hospitalist company in the United States based on revenues, patient encounters and number of affiliated hospitalists. Our early entry into the emerging
hospitalist industry has permitted us to establish a reputation and leadership position that we believe is closely identified with hospitalist medicine.

Acquisitions

During the nine months ended September 30, 2010, we
acquired the assets of seven hospitalist physician practices for a total estimated purchase price of $12,913,000. In connection with these acquisitions, we recorded goodwill of $12,735,000 other identifiable intangible assets of $168,000 consisting
of physician, payor and hospital agreements, and fixed assets of $10,000.

Subsequent to September 30, 2010, we acquired
the assets of three hospitalist physician practices.

Rate Changes by Government Sponsored Programs

The Medicare program reimburses for our services based upon the rates in the Medicare Physician Fee Schedule (MPFS), and each year the
Medicare program updates the MPFS reimbursement rates based on a formula approved by Congress in the Balanced Budget Act of 1997. Many private payors use the Medicare fee schedule to determine their own reimbursement rates.



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The Medicare law
requires the Centers for Medicare and Medicaid Services (CMS) to adjust the MPFS payment rates annually based on an update formula which includes application of the Sustainable Growth Rate (SGR) that was adopted in the Balanced Budget Act of 1997.
This formula has yielded negative updates every year beginning in 2002, although CMS was able to take administrative steps to avoid a reduction in 2003, and Congress has taken a series of legislative actions to prevent reductions each year from 2004
to 2009. In December 2009, March 2010, April 2010, and June 2010, Congress passed stays of the negative update to the SGR from January 1 to November 30, 2010. CMS has projected a rate reduction of approximately 21% for the period
beginning December 1, 2010, provided Congress does not take further legislative action as they have done in prior years.

In November 2009, CMS finalized several changes to refine Medicare payments to physicians effective January 1, 2010, which increased
payment rates for primary care services. This includes an update to the practice expense component of physician fees, which will be implemented over a four-year transition period. CMS also ceased making payments for consultation codes, which are
typically billed by specialists, including our physicians, and were paid at a higher rate than equivalent evaluation and management (E/M) services. Practitioners will now use existing E/M service codes when providing these services
instead. Resulting savings were redistributed to increase payments for the existing E/M services. In addition, CMS refined how Medicare recognizes the cost of professional liability insurance in its payment system. Also, effective
January 1, 2010, the Geographic Practice Cost Indices (GPCI) floor of 1.0 for localities other than Alaska expired, which resulted in a decrease in payments to any geographic area with an index of less than 1.0. In May 2010, the GPCI floor was
reinstated retroactively to January 1, 2010 and the MPFS payment rates were increased by 2.2% effective June 1, 2010. These changes, taken together with the stay in the negative update to the SGR, resulted in an overall estimated increase
of 2% to 3% in Medicare reimbursement rates for the codes applicable to the services performed by our affiliated hospitalists and an overall estimated increase of 1% to 1.5% in our net patient revenue per encounter starting July 1, 2010,
assuming Congress further extends the stay of the negative update to the SGR from December 1, 2010 and makes no other changes to the rates paid through the remainder of 2010.

While Congress has intervened in the past several years to mitigate projected CMS rate reductions, there is no guarantee that Congress
will continue to do so in the future.

Healthcare Reform

President Obama signed into law the Patient Protection and Affordable Care Act (PPACA) (H.R. 3590; Public Law 111-148) on March 23,
2010, followed by the Health Care and Education Reconciliation Act of 2010 (H.R. 4872; Public Law 111-152) on March 30, 2010, which contains amendments to PPACA (referred to collectively as the Health Reform Laws). The Health Reform
Laws include a number of provisions that may affect our Company, although the impact of many of the changes will be unknown until they are implemented, which in some cases will not occur for several years. The impact of some of these provisions may
be positive, such as the expansion in the number of individuals with health insurance, the 10% Medicare bonus payment for certain outpatient and nursing home visits from 2011 through 2015 for primary care practitioners for whom primary care services
represented a minimum of 60% of Medicare allowed charges in a prior period, and the increase in certain Medicaid primary care rates in 2013 and 2014. The impact of other provisions is unknown at this time, such as the establishment of an Independent
Medicare Advisory Board that could recommend changes in payment for physicians under certain circumstances not earlier than January 15, 2014, which the Secretary of Health and Human Services generally would be required to implement unless
Congress enacts superseding legislation. Fraud and abuse penalty increases and the expansion in the scope of the reach of the Federal Civil False Claims Act and government enforcement tools may adversely impact entities in the healthcare industry,
including our Company.

The impact of certain provisions will depend upon the ultimate method of implementation. For example,
PPACA requires the Secretary of Health and Human Services to develop a budget neutral value-based payment modifier that provides for differential payment under the physician fee schedule for physicians or groups of physicians that is linked to
quality of care furnished. The Secretary of Health and Human Services must begin implementing the modifier through the physician fee schedule rulemaking in 2013, with an initial performance period for certain physicians and groups of physicians in
2015 and all physicians and groups of physicians starting not later than January 1, 2017. The impact of this payment modifier cannot be determined at this time.

In addition, certain provisions of PPACA authorize voluntary demonstration projects beginning not later than 2013 around development of bundling payments for acute, inpatient hospital services, physician
services, and post acute services for episodes of hospital care. In addition, beginning no later than January 1, 2012, PPACA allows providers organized as accountable care organizations that voluntarily meet quality thresholds to share in the
cost savings they achieve for the Medicare program. The impact of these projects on our Company cannot be determined at this time.



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Seasonality and
Quarterly Fluctuations

We have historically experienced and expect to continue to experience quarterly fluctuations in net
revenue and income from operations. Absent the impact and timing of acquisitions, our net revenue has historically been higher in the first and fourth quarters of the year primarily due to the following factors:



| |  |  | the number of physicians we have on staff during the quarter, which may fluctuate based upon the timing of hires due to the end of the academic year
for graduating resident physicians, the schedule of the Internal Medicine Board exams and terminations in our existing practices; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | fluctuations in patient encounters, which are impacted by hospital census, which can be volatile, and physician productivity and often reflect
seasonality due to the higher occurrence of illnesses such as flu and pneumonia in patient populations in the first quarter.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have significant fixed operating costs, including physician practice salaries and benefits and, as a result, are highly dependent on patient encounters and the productivity of our affiliated
hospitalists to sustain profitability. Additionally, quarterly results may be affected by the timing of practice acquisitions and the hiring and termination of our affiliated hospitalists.

Results of Operations and Operating Data

The following table sets forth operating data and selected consolidated statements of income information stated as a percentage of net revenue:



|                                                                 |  |                                 |         |   |                                |  |         |      |  |  |           |   |  |  |           |  
|---------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ |  | ------- | ---- |  |  | --------- | - |  |  | --------- | -
|                                                                 |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, | 
|                                                                 |  | 2010                            |         |   | 2009                           |  |         | 2010 |  |  | 2009      |  
|Operating datapatient encounters                                |  |                                 | 957,000 |   |                                |  | 823,000 |      |  |  | 2,804,000 |   |  |  | 2,429,000 |  
|                                                                 |  |                                 |         |   |                                |  |         |      |  |  |           |   |  |  |           |  
|                                                                 |  |                                 |         |  
|Net revenue                                                      |  |                                 | 100.0   | % |                                |  | 100.0   | %    |  |  | 100.0     | % |  |  | 100.0     | %
|Operating expenses:                                              |  |                                 |         |   |                                |  |         |      |  |  |           |   |  |  |           |  
|Cost of servicesphysician practice salaries, benefits and other |  |                                 | 72.7    | % |                                |  | 73.2    | %    |  |  | 72.4      | % |  |  | 73.0      | %
|General and administrative                                       |  |                                 | 16.2    | % |                                |  | 16.5    | %    |  |  | 16.4      | % |  |  | 16.6      | %
|Depreciation and amortization                                    |  |                                 | 0.7     | % |                                |  | 0.7     | %    |  |  | 0.8       | % |  |  | 0.8       | %
|                                                                 |  |                                 |         |   |                                |  |         |      |  |  |           |   |  |  |           |  
|Total operating expenses                                         |  |                                 | 89.6    | % |                                |  | 90.4    | %    |  |  | 89.6      | % |  |  | 90.4      | %
|                                                                 |  |                                 |         |   |                                |  |         |      |  |  |           |   |  |  |           |  
|Income from operations                                           |  |                                 | 10.4    | % |                                |  | 9.6     | %    |  |  | 10.4      | % |  |  | 9.6       | %
|Investment income                                                |  |                                 |        | % |                                |  |        | %    |  |  |          | % |  |  |          | %
|Interest expense                                                 |  |                                 |        | % |                                |  |        | %    |  |  |          | % |  |  |          | %
|                                                                 |  |                                 |         |   |                                |  |         |      |  |  |           |   |  |  |           |  
|Income before income taxes                                       |  |                                 | 10.4    | % |                                |  | 9.6     | %    |  |  | 10.4      | % |  |  | 9.6       | %
|Income tax provision                                             |  |                                 | 3.7     | % |                                |  | 3.6     | %    |  |  | 3.9       | % |  |  | 3.8       | %
|                                                                 |  |                                 |         |   |                                |  |         |      |  |  |           |   |  |  |           |  
|Net income                                                       |  |                                 | 6.7     | % |                                |  | 6.0     | %    |  |  | 6.5       | % |  |  | 5.8       | %
|                                                                 |  |                                 |         |   |                                |  |         |      |  |  |           |   |  |  |           |  

Three months ended September 30, 2010 compared to three months ended September 30, 2009

Our patient encounters for the three months ended September 30, 2010 increased 16.3% to 957,000, compared to 823,000
for the same period in the prior year. Patient revenue per encounter increased 2.2% primarily as the result of an increase in Medicare reimbursement rates. Net revenue for the three months ended September 30, 2010 increased 17.3% to $90.9
million, an increase of $13.4 million from $77.5 million for the three months ended September 30, 2009. Of this $13.4 million increase, $9.7 million or 72.4% was attributable to same-market area growth and $3.7 million, or 27.6%, was
attributable to revenue generated from three new markets, two of which were entered through acquisition in 2009 and one in 2010. Same-market encounters increased 13.0% and patient revenue per encounter increased 1.7% resulting in an increase in
same-market patient revenue of 14.9%. Same-market hospital contract and other revenue decreased on net basis, primarily from less locum cost reimbursement, resulting in an overall 12.8% increase in same market net revenue. Same-market areas are
those geographic areas in which we have had operations for the entire current period and the entire comparable prior period. Because in-market area acquisitions are often small practice groups which become subsumed within our existing practice
groups and are managed by our existing regional management staff, we consider these as part of our same-market area growth.



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Physician practice
salaries, benefits and other expenses for the three months ended September 30, 2010 were $66.1 million or 72.7% of net revenue compared to $56.8 million or 73.2% of net revenue for the three months ended September 30, 2009. These costs
increased by $9.3 million or 16.4%. Same-market area physician costs increased a total of $6.7 million, of which $4.7 million was primarily the result of increased costs related to our new hires or acquired physician practices and $2.0 million was
due to increase in existing physician costs. In addition, $2.6 million of the $9.3 million overall cost increase is attributable to physician costs associated with our three new markets.

General and administrative expenses include all salaries, benefits, supplies and operating expenses not specifically related to the
day-to-day operations of our physician group practices, including billing and collections functions, our regional and market-area administrative offices and our corporate management and overhead. General and administrative expenses increased $1.9
million, or 15.2%, to $14.7 million, or 16.2% of net revenue, for the three months ended September 30, 2010, as compared to $12.8 million, or 16.5% of net revenue for the three months ended September 30, 2009. The increase in expense is
primarily the result of increased costs to support the continuing growth of our operations, including new regional office costs and increases in corporate development and other expenses to support our acquisitions. In addition, our stock based
compensation expense increased as a result of the increase in our stock price at the date of various grants. General and administrative expenses decreased as a percentage of net revenue as we continue to leverage these costs over a larger revenue
base.

Income from operations increased $2.0 million, or 27.1%, to $9.4 million, as compared to $7.4 million for the same
period in the prior year. Our operating margin increased to 10.4% for the three months ended September 30, 2010 from 9.6% for the three months ended September 30, 2009. The increase in operating margin percentage is attributable to lower
practice costs and a reduction in general and administrative expenses, both as a percentage of net revenue.

Our effective tax
rate for the three months ended September 30, 2010 was 35.7% compared to 37.8% for the three months ended September 30, 2009. The decrease in the effective tax rate reflects a reduction in our tax liability for uncertain tax positions
resulting from the lapse of statute of limitations and a reduction in our effective state rate. The effective tax rate differs from the statutory U.S. federal rate of 35.0% due primarily to state income taxes.

Net income increased to $6.1 million for the three months ended September 30, 2010, as compared to $4.6 million for the three months
ended September 30, 2009, and our net income margin increased to 6.7% from 6.0% for the same period in the prior year.

Nine months ended September 30, 2010 compared to nine months ended September 30, 2009

Our patient encounters for the nine months ended September 30, 2010 increased 15.4% to 2,804,000, compared to 2,429,000 for the same
period last year. Patient revenue per encounter increased 2.0% primarily as the result of an increase in Medicare reimbursement rates. Net revenue for the nine months ended September 30, 2010 increased 16.6% to $266.2 million, an increase of
$37.8 million from $228.4 million for the nine months ended September 30, 2009. Of this $37.8 million increase, $26.2 million or 69.3% was attributable to same-market area growth and $11.6 million was attributable to revenue generated from
three new markets, two of which were entered through acquisition in 2009 and one in 2010. Same-market encounters increased 11.3% and patient revenue per encounter increased 1.6% resulting in an increase in same-market patient revenue of 13.1%.
Same-market hospital contract and other revenue decreased on a net basis, primarily from less locum cost reimbursement, resulting in an overall 11.5% increase in same-market net revenue.

Physician practice salaries, benefits and other expenses for the nine months ended September 30, 2010 were $192.8 million or 72.4%
of net revenue compared to $166.7 million or 73.0% of net revenue for the nine months ended September 30, 2009. These costs increased by $26.1 million or 15.6%. Same-market area physician costs increased a total of $17.7 million, of which $17.4
million was primarily the result of increased costs related to our new hires or acquired physician practices and $0.3 million was due to an increase in existing physician costs. In addition, $8.4 million of the $26.1 million overall cost increase is
attributable to physician costs associated with our three new markets.



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General and
administrative expenses increased $5.8 million, or 15.2%, to $43.7 million, or 16.4% of net revenue, for the nine months ended September 30, 2010, as compared to $37.9 million, or 16.6% of net revenue for the nine months ended
September 30, 2009. The increase in expense is primarily the result of increased costs to support the continuing growth of our operations, including new regional office costs and increases in corporate development and other expenses to support
our acquisitions. In addition, our stock based compensation expense increased primarily as a result of the increase in our stock price at the date of various grants. General and administrative expenses decreased as a percentage of net revenue as we
continue to leverage these costs over a larger revenue base.

Income from operations increased $5.8 million, or 26.2%, to
$27.8 million, as compared to $22.0 million for the same period in the prior year. Our operating margin increased to 10.4% for the nine months ended September 30, 2010 from 9.6% for the nine months ended September 30, 2009. The increase in
operating margin percentage is attributable to lower practice costs and a reduction in general and administrative expenses, both as a percentage of net revenue.

Our effective tax rate for the nine months ended September 30, 2010 was 37.9% compared to 39.2% for the nine months ended September 30, 2009. The decrease in the effective tax rate reflects a
reduction in our tax liability for uncertain tax positions resulting from the lapse of statute of limitations and a reduction in our effective state rate. The effective tax rate differs from the statutory U.S. federal rate of 35.0% due primarily to
state income taxes. Without regard to tax legislation that may be passed in 2010, we expect our 2010 annual effective tax rate to be 38.1%.

Net income increased to $17.2 million for the nine months ended September 30, 2010, as compared to $13.3 million for the nine months ended September 30, 2009, and our net income margin increased
to 6.5% from 5.8% for the same period in the prior year.

Liquidity and Capital Resources

As of September 30, 2010 we had approximately $79.1 million in liquidity, comprised of $49.2 million in cash and cash equivalents, no
debt outstanding and an available line of credit of $29.9 million.

Net cash provided by operating activities for the nine
months ended September 30, 2010 was $31.8 million compared to $24.2 million for the same period of 2009. The primary changes in working capital during the nine months ended September 30, 2010 consisted of (i) a decrease in prepaid
expenses of $5.5 million as a result of expensing prepaid medical malpractice premiums, (ii) a net increase in medical malpractice and self-insurance reserves of $1.4 million , (iii) an increase in accrued compensation related to timing of
payrolls and physician bonus payments, and (iv) payment of $0.8 million for a professional liability settlement that was accrued at December 31, 2009.

Our days sales outstanding (DSO), which we use to measure the effectiveness of our collections, decreased to 49.1 DSO as of September 30, 2010, compared to 54.1 DSO as of December 31, 2009. We
calculate our DSO using a three-month rolling average of net revenues.

Net cash used in investing activities was $15.6
million for the nine months ended September 30, 2010, compared to $15.8 million for the same period in 2009. Cash of $13.8 million was used in 2010 for physician practice acquisitions and earn-out payments on prior acquisitions compared to
$14.4 million in the same period of the prior year. The remainder of cash used in investing activities was for purchases of computer hardware and software, and office furnishings.

Credit Facility and Liquidity

Our Credit Facility provides a revolving line of credit of $30.0 million, with a sublimit of $5.0 million for the issuance of letters of credit. The Credit Facility has a maturity date of
September 15, 2011. We use the Credit Facility for working capital, practice acquisitions and capital expenditures. At September 30, 2010, we had no borrowings under the term loan portion of the Credit Facility, and a letter of credit of
$100,000 outstanding and $29.9 million available under the revolving line of credit.

The revolving line of credit is limited
by a formula based on a certain multiple times the trailing twelve months of earnings before interest, taxes, depreciation, amortization, and certain non-cash items. Borrowings under the Credit Facility bear interest at a rate based on either LIBOR
plus 1.5% to 2.0%, or the lenders prime rate, as selected by us for each advance. We pay an unused commitment fee equal to 0.25% per annum on the difference between the revolving line capacity and the average balance outstanding for each
quarter. Outstanding amounts advanced to us under the revolving line of credit are repayable on or before the maturity date. The Credit Facility is secured by all of our current and future personal and intellectual property assets, except those held
subject to purchase money loans and capital leases. The Credit Facility includes various customary financial covenants and restrictions, as well as customary remedies for our lenders following an event of default. As of September 30, 2010, we
were in compliance with such financial covenants and restrictions.



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We anticipate that
funds generated from operations, together with our current cash on hand and funds available under our revolving credit agreement will be sufficient to finance our working capital requirements and fund anticipated acquisitions, contingent acquisition
consideration and capital expenditures.

Off Balance Sheet Arrangements

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

Recently Adopted Accounting Principles

See Note 2 to the Consolidated Financial Statements for information regarding recently adopted and new accounting principles.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We had no outstanding borrowings under our Credit Facility at September 30, 2010.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise
in interest rates, while floating rate securities with shorter maturities may produce less income if interest rates fall. As of September 30, 2010, all of our short-term investments were invested in money market funds with less than 90-day
maturities and are classified as cash equivalents.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and Procedures

We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the Securities and Exchange Commission (SEC), and
to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the
design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that
our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms.

Changes in Internal
Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the
nine months ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



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PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

Legal

In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided
by our affiliated hospitalists. We may also become subject to other lawsuits which could involve significant claims and/or significant defense costs.

We believe, based upon our review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition,
results of operations, or cash flows. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial
condition, results of operations, or cash flows in a future period.

Government Inquiry

On June 7, 2010, we received a civil investigative demand (CID) issued by the Department of Justice, U.S. Attorneys
Office for the Northern District of Illinois. The CID requests information concerning claims that we have submitted to Medicare and Medicaid. The CID covers the period from January 1, 2003, through June 4, 2010, and seeks production of a
wide range of documents relating to our Medicare and Medicaid participation, physician arrangements, operations and compliance programs. We believe we have a strong compliance focus, and that we operate with appropriate billing policies, procedures,
provider training and compliance programs. We have met and continue to meet with representatives of the government to discuss the scope of the CID and the production of responsive documents. To our knowledge, no proceedings have been initiated
against us at this time, although it is not possible to predict whether or when proceedings might be initiated, when this matter may be resolved or what impact, if any, the outcome of this matter might have on its consolidated financial position,
results of operations, or cash flows.

ITEMS 1A, 2, 3, 4 AND 5 ARE NOT APPLICABLE



|ITEM 6. | EXHIBITS
|------- | --------

(a) Exhibits

Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index on page 21 of this report.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 27th day of
October, 2010.



IPC THE HOSPITALIST COMPANY, INC.By:

/s/    ADAM D. SINGER,
M.D.Adam D. Singer, M.D. Chief Executive OfficerBy:

/s/    DEVRA G.
SHAPIRODevra G. Shapiro Chief Financial Officer




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EXHIBIT INDEX



|               |  |                                                                                                                                                                                               
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description of Document                                                                                                                                                                       
|               | 
|31.1           |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act.
|               | 
|31.2           |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act.
|               | 
|32.1           |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.                                                 
|               | 
|32.2           |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.                                                 



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