##### 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, 2008.

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

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

As of November 7, 2008, there were 16,057,470 shares of the registrants common stock, $0.001 par value, outstanding.









---

##### Table of Contents

IPC The Hospitalist Company, Inc.

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS



|              |  |                                                                                                           |  |     
|------------- |  | --------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                           |  | Page
|              |  | PART I                                                                                                    |  |     
|Item 1        |  | Financial Statements (unaudited)                                                                          |  |     
|              |  | Condensed Consolidated Balance Sheets  September 30, 2008 and December 31, 2007                          |  | 3   
|              |  | Condensed Consolidated Statements of Operations  Three and nine months ended September 30, 2008 and 2007 |  | 4   
|              |  | Condensed Consolidated Statements of Cash Flows  Nine months ended September 30, 2008 and
2007           |  | 5   
|              |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 6   
|Item 2        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 14  
|Item 3        |  | Quantitative and Qualitative Disclosures about Market Risk                                                |  | 19  
|Item 4        |  | Controls and Procedures                                                                                   |  | 19  
|              |  |                                                                                                          
|              |  | PART II                                                                                                   |  |     
|Item 1        |  | Legal Proceedings                                                                                         |  | 20  
|Item 6        |  | Exhibits                                                                                                  |  | 20  
|              | 
|Signatures    |  | 21                                                                                                       
|Exhibit Index |  | 22                                                                                                       

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



2



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



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

IPC The Hospitalist Company, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except for share data)



|                                                                                                                                                                                                   |  |                               |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                   |  | September 30, 2008(unaudited) |         |   | December 31,2007 |  
|Assets                                                                                                                                                                                             |  |                               |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                                    |  |                               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                          |  | $                             | 55,092  |   |                  | $ | 6,976   |  
|Accounts receivable, net                                                                                                                                                                           |  |                               | 41,329  |   |                  |   | 39,494  |  
|Prepaid expenses and other current assets                                                                                                                                                          |  |                               | 3,846   |   |                  |   | 10,203  |  
|                                                                                                                                                                                                   |  |                               |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                               |  |                               | 100,267 |   |                  |   | 56,673  |  
|Furniture and equipment, net                                                                                                                                                                       |  |                               | 2,708   |   |                  |   | 2,189   |  
|Goodwill                                                                                                                                                                                           |  |                               | 54,076  |   |                  |   | 34,754  |  
|Other intangible assets, net                                                                                                                                                                       |  |                               | 2,875   |   |                  |   | 808     |  
|Deferred tax assets, net                                                                                                                                                                           |  |                               | 2,952   |   |                  |   | 2,952   |  
|                                                                                                                                                                                                   |  |                               |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                       |  | $                             | 162,878 |   |                  | $ | 97,376  |  
|                                                                                                                                                                                                   |  |                               |         |   |                  |   |         |  
|Liabilities                                                                                                                                                                                        |  |                               |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                                               |  |                               |         |   |                  |   |         |  
|Accounts payable and accrued liabilities                                                                                                                                                           |  | $                             | 4,588   |   |                  | $ | 4,667   |  
|Accrued compensation                                                                                                                                                                               |  |                               | 12,261  |   |                  |   | 12,382  |  
|Payables for practice acquisitions                                                                                                                                                                 |  |                               | 5,936   |   |                  |   | 292     |  
|Medical malpractice and self-insurance reserves, current portion                                                                                                                                   |  |                               | 992     |   |                  |   | 951     |  
|Deferred tax liability                                                                                                                                                                             |  |                               | 45      |   |                  |   | 45      |  
|Short-term debt and current portion of capital leases                                                                                                                                              |  |                               | 3,611   |   |                  |   | 7,029   |  
|                                                                                                                                                                                                   |  |                               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                                          |  |                               | 27,433  |   |                  |   | 25,366  |  
|Long-term debt and capital leases, less current portion                                                                                                                                            |  |                               | 6,197   |   |                  |   | 19,793  |  
|Medical malpractice and self-insurance reserves, less current portion                                                                                                                              |  |                               | 11,028  |   |                  |   | 8,900   |  
|Other long-term liabilities                                                                                                                                                                        |  |                               | 300     |   |                  |   | 300     |  
|                                                                                                                                                                                                   |  |                               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                                  |  |                               | 44,958  |   |                  |   | 54,359  |  
|Stockholders equity:                                                                                                                                                                              |  |                               |         |   |                  |   |         |  
|Convertible preferred stock, Series A, B, C, and D $0.001 par value, 64,905,826 shares authorized, 57,761,235 shares issued and outstanding in
2007; liquidation preference of $43,230,532 in 2007 |  |                               |        |   |                  |   | 57      |  
|Preferred stock, $0.001 par value, 15,000,000 and 294,174 shares authorized in 2008 and 2007, respectively, none issued                                                                            |  |                               |        |   |                  |   |        |  
|Common stock, $0.001 par value, 50,000,000 and 87,300,000 shares authorized in 2008 and 2007, respectively, 16,042,013 and 1,878,382 shares
issued and outstanding in 2008 and 2007, respectively  |  |                               | 16      |   |                  |   | 2       |  
|Additional paid-in capital                                                                                                                                                                         |  |                               | 121,626 |   |                  |   | 55,605  |  
|Accumulated deficit                                                                                                                                                                                |  |                               | (3,722  | ) |                  |   | (12,647 | )
|                                                                                                                                                                                                   |  |                               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                         |  |                               | 117,920 |   |                  |   | 43,017  |  
|                                                                                                                                                                                                   |  |                               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                         |  | $                             | 162,878 |   |                  | $ | 97,376  |  
|                                                                                                                                                                                                   |  |                               |         |   |                  |   |         |  

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



3



---

##### Table of Contents

IPC The Hospitalist Company, Inc.

Condensed Consolidated Statements of Operations

(dollars in thousands, except for per share data)

(unaudited)



|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                            |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                                            |  | 2008                            |        |   | 2007                           |   |        | 2008 |  |   | 2007    |  
|Net revenue                                                                 |  | $                               | 63,164 |   |                                | $ | 47,839 |      |  | $ | 182,877 |   |  | $ | 137,425 |  
|Operating expenses:                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Cost of servicesphysician practice salaries, benefits and other            |  |                                 | 45,816 |   |                                |   | 35,408 |      |  |   | 132,996 |   |  |   | 100,090 |  
|General and administrative                                                  |  |                                 | 11,368 |   |                                |   | 9,274  |      |  |   | 32,727  |   |  |   | 26,612  |  
|Depreciation and amortization                                               |  |                                 | 591    |   |                                |   | 360    |      |  |   | 1,535   |   |  |   | 1,003   |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                    |  |                                 | 57,775 |   |                                |   | 45,042 |      |  |   | 167,258 |   |  |   | 127,705 |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from operations                                                      |  |                                 | 5,389  |   |                                |   | 2,797  |      |  |   | 15,619  |   |  |   | 9,720   |  
|Investment income                                                           |  |                                 | 186    |   |                                |   | 106    |      |  |   | 493     |   |  |   | 329     |  
|Interest expense                                                            |  |                                 | (144   | ) |                                |   | (398   | )    |  |   | (724    | ) |  |   | (1,241  | )
|Loss on fair value of preferred stock warrant liabilities                   |  |                                 |       |   |                                |   | (8,695 | )    |  |   |        |   |  |   | (8,781  | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                                           |  |                                 | 5,431  |   |                                |   | (6,190 | )    |  |   | 15,388  |   |  |   | 27      |  
|Income tax provision                                                        |  |                                 | 2,281  |   |                                |   | 1,064  |      |  |   | 6,462   |   |  |   | 3,705   |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss)                                                           |  |                                 | 3,150  |   |                                |   | (7,254 | )    |  |   | 8,926   |   |  |   | (3,678  | )
|Accretion of redeemable convertible preferred stock                         |  |                                 |       |   |                                |   | (69    | )    |  |   |        |   |  |   | (206    | )
|Income allocable to preferred stockholders                                  |  |                                 |       |   |                                |   |       |      |  |   | (696    | ) |  |   |        |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss) attributable to common stockholders                       |  | $                               | 3,150  |   |                                | $ | (7,323 | )    |  | $ | 8,230   |   |  | $ | (3,884  | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Per share data:                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss) per share attributable to common stockholdershistorical: |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                       |  | $                               | 0.20   |   |                                | $ | (3.97  | )    |  | $ | 0.59    |   |  | $ | (2.35   | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                     |  | $                               | 0.20   |   |                                | $ | (3.97  | )    |  | $ | 0.58    |   |  | $ | (2.35   | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss) per share attributable to common stockholderspro forma:  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                       |  | $                               | 0.20   |   |                                | $ | (0.65  | )    |  | $ | 0.60    |   |  | $ | (0.33   | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                     |  | $                               | 0.20   |   |                                | $ | (0.65  | )    |  | $ | 0.59    |   |  | $ | (0.33   | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

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



4



---

##### Table of Contents

IPC The Hospitalist Company, Inc.

Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)



|                                                                                         |  |                                |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                         |  | Nine Months EndedSeptember 30, |        
|                                                                                         |  | 2008                           |         |   | 2007 |  
|Operating activities                                                                     |  |                                |         |   |      |   |         |  
|Net income (loss)                                                                        |  | $                              | 8,926   |   |      | $ | (3,678  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                            |  |                                | 1,535   |   |      |   | 1,003   |  
|Stock-based compensation expense                                                         |  |                                | 641     |   |      |   | 45      |  
|Deferred income taxes                                                                    |  |                                |        |   |      |   | (283    | )
|Revaluation of preferred stock warrant liabilities                                       |  |                                |        |   |      |   | 8,781   |  
|Changes in assets and liabilities:                                                       |  |                                |         |   |      |   |         |  
|Accounts receivable                                                                      |  |                                | (1,835  | ) |      |   | (3,023  | )
|Prepaid expenses and other current assets                                                |  |                                | 6,355   |   |      |   | 2,530   |  
|Accounts payable                                                                         |  |                                | (81     | ) |      |   | 779     |  
|Accrued compensation                                                                     |  |                                | (120    | ) |      |   | (127    | )
|Medical malpractice and self-insurance reserves                                          |  |                                | 2,169   |   |      |   | 2,014   |  
|Accrued litigation loss and other claims                                                 |  |                                |        |   |      |   | 35      |  
|                                                                                         |  |                                |         |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                                | 17,590  |   |      |   | 8,076   |  
|Investing activities                                                                     |  |                                |         |   |      |   |         |  
|Acquisitions of physician practices                                                      |  |                                | (16,252 | ) |      |   | (11,484 | )
|Purchase of furniture and equipment                                                      |  |                                | (1,545  | ) |      |   | (633    | )
|Cash restriction by lender                                                               |  |                                |        |   |      |   | 2,500   |  
|                                                                                         |  |                                |         |   |      |   |         |  
|Net cash used in investing activities                                                    |  |                                | (17,797 | ) |      |   | (9,617  | )
|Financing activities                                                                     |  |                                |         |   |      |   |         |  
|Proceeds from (repayments of) long-term debt and capital leases, net                     |  |                                | (17,014 | ) |      |   | 828     |  
|Net proceeds from issuance of common and preferred stock                                 |  |                                | 65,022  |   |      |   | 438     |  
|Excess tax benefits from stock-based compensation                                        |  |                                | 315     |   |      |   | 481     |  
|                                                                                         |  |                                |         |   |      |   |         |  
|Net cash provided by financing activities                                                |  |                                | 48,323  |   |      |   | 1,747   |  
|                                                                                         |  |                                |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                                |  |                                | 48,116  |   |      |   | 206     |  
|Cash and cash equivalents, beginning of period                                           |  |                                | 6,976   |   |      |   | 5,946   |  
|                                                                                         |  |                                |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                 |  | $                              | 55,092  |   |      | $ | 6,152   |  
|                                                                                         |  |                                |         |   |      |   |         |  
|Supplemental disclosure of cash flow information                                         |  |                                |         |   |      |   |         |  
|Cash paid for:                                                                           |  |                                |         |   |      |   |         |  
|Interest                                                                                 |  | $                              | 701     |   |      | $ | 1,065   |  
|                                                                                         |  |                                |         |   |      |   |         |  
|Income taxes                                                                             |  | $                              | 5,312   |   |      | $ | 3,123   |  
|                                                                                         |  |                                |         |   |      |   |         |  
|Acquisitions of physician practices consisted of the following:                          |  |                                |         |   |      |   |         |  
|Acquired assets                                                                          |  | $                              | 21,896  |   |      | $ | 9,317   |  
|Accrued consideration                                                                    |  |                                | (5,644  | ) |      |   | 2,167   |  
|                                                                                         |  |                                |         |   |      |   |         |  
|Net cash paid for acquisitions                                                           |  | $                              | 16,252  |   |      | $ | 11,484  |  
|                                                                                         |  |                                |         |   |      |   |         |  

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



5



---

##### Table of Contents

IPC The Hospitalist Company, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

September 30, 2008

Note 1. Business and Basis of Presentation

IPC The
Hospitalist Company, Inc. and its subsidiaries (the Company, IPC, we, us, and our) is a national hospitalist physician group practice company that operates and manages full-time hospitalist
practices. Hospitalists are acute-care physician specialists, nurse practitioners and physician assistants, 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 hospitalists are primarily full-time employees of Company subsidiaries or consolidated professional medical corporations,
although part-time and temporary hospitalists are also employed on an as-needed basis.

We prepared the accompanying unaudited condensed
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 and, in our opinion, 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 accounting principles
generally accepted in the United States of America ( U.S. 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, 2007, 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, 2007 filed with the SEC on March 28, 2008.

The unaudited condensed
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and consolidated professional medical corporations managed under long-term management agreements. Based on the provisions of the agreements, we
have determined that the professional medical corporations are variable interest entities, and that we are the primary beneficiary as defined in Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, and consequently we consolidate the revenue and expenses of the Professional Medical Corporations from the date of execution of the agreements. The
preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The condensed results of operations for the current
interim period are not necessarily indicative of the results for the entire year ending December 31, 2008.

Certain prior year amounts
have been reclassified to conform to the current year presentation.

Note 2. Reverse Stock Split and Amended and Restated Certificate of Incorporation

In January 2008, we completed a 1-for-6.4 reverse stock split of our outstanding common stock. The accompanying financial statements
and notes to the financial statements give retroactive effect to the reverse stock split for all periods presented. In addition, the reverse stock split resulted in an adjustment in the number of shares of common stock issuable upon conversion of
our convertible preferred stock to a 6.4:1 ratio. In addition, we adopted an Amended and Restated Certificate of Incorporation which provides that our authorized capital stock consists of 50 million shares of common stock, $0.001 par value per
share, and 15 million shares of preferred stock, $0.001 par value per share.



6



---

##### Table of Contents

IPC The Hospitalist Company, Inc.

Notes to the Condensed Consolidated Financial Statements(continued)



Note 3. Initial Public Offering and Follow-On Public Offering

On January 30, 2008, we completed our initial public offering (IPO) for the sale of 5,905,000 shares of our common stock at a price of $16.00 per share. Of these shares 3,300,000 were newly issued shares sold by us, and 2,605,000 were
shares sold by existing stockholders. We received net proceeds of $46,164,000 after deducting underwriting discounts and commissions of $3,696,000 and other fees and expenses of $2,940,000. As discussed further in Note 13, upon completion of our
IPO, all of our preferred stock, and a majority of our warrants converted to common stock. Immediately after the offering, and including the conversion of the preferred stock and warrants, there were 14,844,934 shares of our common stock
outstanding.

On July 21, 2008, we closed a follow-on public offering for the sale of 4,025,000 shares of our common stock at a price
of $18.50 per share. Of these shares 1,135,231 shares were newly issued shares sold by us, and 2,889,769 were shares sold by certain of our existing stockholders. We received net proceeds of $19,005,000 after deducting underwriters discounts
and commissions of $1,155,000 and fees and estimated expenses of $842,000. Immediately after the offering, there were 16,017,237 shares of our common stock outstanding.

Note 4. Recently Adopted and New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS
157). SFAS 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition and disclosure purposes under generally accepted accounting principles. SFAS 157 requires the fair value of an asset
or liability to be based on a market based measure which will reflect the credit risk of the company. SFAS 157 also requires expanded disclosure requirements which will include the methods and assumptions used to measure fair value and the effect of
fair value measures on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB deferred the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal years. We adopted SFAS 157, for financial assets and liabilities on January 1, 2008. The adoption of SFAS 157 for financial assets and liabilities did not
have a material impact on our financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and
certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We adopted SFAS 159 on January 1, 2008. We did not elect to record at fair value any of our financial assets or liabilities that were not previously recorded at fair value under other accounting literature.

New Accounting Pronouncement

In December
2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)), which replaces SFAS No. 141. SFAS 141(R) introduces significant changes in the accounting for and reporting of business acquisitions. SFAS 141(R) changes
how business acquisitions are accounted for and will impact financial statements at the acquisition date and in subsequent periods. Pursuant to SFAS 141(R) an acquiring entity will be required to recognize all of the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value, with limited exceptions, and all transaction related costs will be expensed. In addition, SFAS 141(R) will have an impact on the goodwill impairment test associated with acquisitions. The
provisions of SFAS 141(R) are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact that the adoption of SFAS
141(R) will have on our consolidated financial statements will depend on the nature, terms and size of our business combinations that occur after the effective date.

Note 5. Cash and Cash Equivalents

Effective January 1, 2008, our cash equivalents are subject
to the provisions of SFAS 157. Under SFAS 157, we are required to measure the fair value of our financial assets using a three-tier fair value hierarchy. Based on this hierarchy, we determined the fair value of our cash equivalents using quoted
market prices using Level 1 inputs, under SFAS 157 as unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. As of September 30, 2008, our cash and cash equivalents consisted of bank deposits,
money market accounts and short-term securities with maturities of three months or less.



7



---

##### Table of Contents

IPC The Hospitalist Company, Inc.

Notes to the Condensed Consolidated Financial Statements(continued)



Note 6. Accounts Receivable and Concentration of Credit Risk

Accounts receivable are stated at the amounts expected to be collected, net of reserves for amounts estimated by us to be uncollectible of $2,653,000 and $2,972,000 at September 30, 2008 and December 31, 2007, respectively. Except
with respect to the Medicare and Medical 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, 2008 and 2007, approximately 51.3% and 51.4%, respectively, of our patient volume was from Medicare and Medicaid programs and receivables from these programs made up approximately 36.4% of the net accounts receivable at
September 30, 2008.

Note 7. Acquisitions

During the nine months ended September 30, 2008, we acquired the assets of four hospitalist physician practices. In connection with these acquisitions, we recorded goodwill and other identifiable intangible assets consisting of
physician, payor and hospital agreements. Amounts recorded as identifiable intangible assets are amortized over their useful lives. The results of operations of these acquisitions are included in the consolidated financial statements from the
respective dates of acquisition. In addition to the initial consideration paid at the close of each transaction, the asset purchase agreements generally provide for additional future consideration to be paid, which is generally 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 amounts of such payments, if any, will be recorded as
additional goodwill; however, such amounts cannot be determined until their respective measurement dates.

The following table is a summary
of goodwill and other intangible assets recorded during the nine months ended September 30, 2008 (dollars in thousands):



|                                                             |  |       |        |          |   |                   |  |   |      
|------------------------------------------------------------ |  | ----- | ------ | -------- | - | ----------------- |  | - | -----
|                                                             |  | Total |        | Goodwill |   | Intangible Assets
|Initial consideration paid                                   |  | $     | 14,563 |          | $ | 12,040            |  | $ | 2,523
|                                                             |  |       |        |          |   |                   |  |   |      
|Additional consideration related to prior year acquisitions: |  |       |        |          |   |                   |  |   |      
|Paid                                                         |  |       | 1,396  |          |   | 1,396             |  |   |     
|Payables                                                     |  |       | 5,936  |          |   | 5,936             |  |   |     
|                                                             |  |       |        |          |   |                   |  |   |      
|Total                                                        |  | $     | 7,332  |          | $ | 7,332             |  | $ |     
|                                                             |  |       |        |          |   |                   |  |   |      

Note 8. Medical Malpractice Liability Insurance

We maintain medical malpractice insurance coverage that indemnifies us and our employed health care professionals on a claims-made basis with a portion of
self-insurance retention. Claims-made coverage covers only those claims reported during the policy period. The current policy period is effective through December 31, 2008. We expect to be able to continue to obtain coverage in future years;
however, such coverage may not continue to be available at acceptable costs and favorable terms.

In addition, we record 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, 2008 and December 31,
2007 we accrued reserves totaling $12,020,000 and $9,851,000, respectively, for potential future uninsured claims including a provision for incurred but not reported claims not covered under our claims-made insurance policy.

Note 9. 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, plus a term loan in an original amount of $10,000,000. The Credit Facility has a maturity date of
September 15, 2011. The Credit Facility is used for working capital and to fund practice acquisitions and capital expenditures. At September 30, 2008, our outstanding principal balance on the Credit Facility was $8,500,000, all of which is
under the term loan.

The revolving line is limited by a formula based on a certain multiple times the trailing twelve months of earnings
before interest, depreciation, taxes, 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 our 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. We make equal monthly installment payments, which increase annually, against our
term loan through the maturity date. Outstanding amounts advanced to us under the revolving line of credit are repayable on or before the maturity date.



8



---

##### Table of Contents

IPC The Hospitalist Company, Inc.

Notes to the Condensed Consolidated Financial Statements(continued)



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, 2008, we were in compliance with
such financial covenants and restrictions.

Note 10. Income Taxes

We recorded a provision for income taxes of $2,281,000 and $1,064,000 for the three months ended September 30, 2008 and 2007, respectively, and $6,462,000 and $3,705,000 for the nine months ended
September 30, 2008 and 2007, respectively. Excluding the non-deductible loss on fair value of preferred stock warrant liabilities in 2007, our effective tax rate was 42.0% and 42.5% for the three months ended September 30, 2008 and 2007,
respectively, and 42.0% and 42.1% for the nine months ended September 30, 2008 and 2007, respectively. The effective tax rates differ from the statutory U.S. federal income tax rate of 35.0% due to state income taxes and the non-deductible loss
on fair value of preferred stock warrant liabilities in 2007.

We regularly review our deferred tax assets for recoverability and the need
for a valuation allowance. We analyze both negative and positive evidence, and the strength of such evidence. This analysis includes assessment of forecasted and historic financial performance and taxable income. As of September 30, 2008, we
recorded a valuation allowance of $347,000 against certain deferred tax assets of entities not consolidated for income tax purposes. The valuation allowance will continue to be evaluated over future quarters.

Our accounting policy is to include interest and penalties related to income tax liabilities in income tax expense. As of September 30, 2008,
we had accrued a total of $70,000 for interest and penalties related to uncertain tax positions.

The tax years 1997 to 2007 remain open to
examination by the United States and various state taxing jurisdictions to which we are subject, except for 1997, 2003 and 2004 for which the federal statute is closed. Our 2005 and 2006 tax years are currently under examination by the Internal
Revenue Service (IRS). We are in the process of producing documents and other information to the IRS, but have not yet begun discussions with the IRS with respect to any issues that may arise from these audits. The outcome of such examination 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 are not aware of any other notices of examination by any taxing
authorities.

In accordance with FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods, 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 an interim period.

Note 11. Stock-Based Compensation

At September 30, 2008, we had three stock-based employee compensation plans: the
1997 Equity Participation Plan (1997 Plan), the 2002 Equity Participation Plan (2002 Plan) and the 2007 Equity Participation Plan (2007 Plan). The shares reserved for issuance pursuant to these three plans have been adjusted to reflect the 1-for-6.4
reverse stock split which was completed in January 2008. We reserved 1,054,688 common shares for issuance pursuant to the 1997 Plan, and 531,250 common shares for issuance pursuant to the 2002 Plan. Pursuant to the 2007 Plan, which was adopted in
June 2007, 234,375 shares of our common stock were authorized for initial issuance, which amount was increased by 371,123 upon the consummation of our initial public offering in January 2008, and, each calendar year thereafter until 2013, the number
of shares authorized for issuance under the plan will increase in an amount equal to 2.5% of the total number of shares of our common stock outstanding. The number of shares available for issuance under the 2007 Plan will also be increased by any
shares granted pursuant to the 2002 or 1997 equity participation plans that are subsequently forfeited by the participants. As of September 30, 2008, 184,394 shares of our common stock were available for issuance under the 2007 Plan.

The options under the three plans generally vest over a four-year period from the date of the grant, and unrestricted options terminate on
the 10th anniversary of the agreement date. We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment(SFAS 123(R)).

All options granted during the nine months ended September 30, 2007 and all options granted in January 2008 prior to our IPO on January 25, 2008 were issued with exercise prices equal to the fair value of
shares at the date of the grant, as determined contemporaneously with the grants. Subsequent to our IPO, all options have been issued with exercise prices equal to the closing price of our common stock on the dates of the grant.



9



---

##### Table of Contents

IPC The Hospitalist Company, Inc.

Notes to the Condensed Consolidated Financial Statements(continued)



Stock-based compensation expense was $307,000 and $27,000, respectively, for the three months ended September 30, 2008 and 2007 and $641,000 and
$45,000, respectively, for the nine months ended September 30, 2008 and 2007. Stock based compensation expense for the three and nine months ended September 30, 2008 includes $44,760 of stock compensation expense related to the
Nonqualified Employee Stock Purchase Plan described in Note 12. Stock-based compensation expense is included in general and administrative expenses. As of September 30, 2008, there was $2,545,000 of total unrecognized compensation cost related
to non-vested share-based compensation arrangements granted under the plans, which is expected to be recognized over a weighted-average period of 3.1 years.

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:



|                                |  |                                |   |  |       |  
|------------------------------- |  | ------------------------------ | - |  | ----- | -
|                                |  | Nine months endedSeptember 30, |  
|                                |  | 2008                           |   |  | 2007  |  
|Risk-free interest rate         |  | 2.32                           | % |  | 4.58  | %
|Expected volatility             |  | 37.00                          | % |  | 37.00 | %
|Expected option life (in years) |  | 6.22                           |   |  | 6.25  |  
|Expected dividend yield         |  | 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 primarily based on historical volatility levels of our public company peer group. The expected option life of each award granted was calculated using the simplified method
in accordance with SEC Staff Accounting Bulletin (SAB) No. 107, as amended by SAB 110.

The following table summarizes activity in the
1997 Plan, the 2002 Plan and the 2007 Plan, during the nine months ended September 30, 2008 (dollars in thousands, except for per share data).



|                                             |  |         |   |  |                               |       |                                                     |      |                         |   |                          |  |   |     
|-------------------------------------------- |  | ------- | - |  | ----------------------------- | ----- | --------------------------------------------------- | ---- | ----------------------- | - | ------------------------ |  | - | ----
|                                             |  | Shares  |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractual Term(in years) |      | AggregateIntrinsicValue |   | WeightedAverageFairValue
|Options outstanding as of January 1, 2008    |  | 446,175 |   |  | $                             | 3.07  |                                                     |      |                         |   |                          |  | $ | 1.81
|Changes during period:                       |  |         |   |  |                               |       |                                                     |      |                         |   |                          |  |   |     
|Granted                                      |  | 351,202 |   |  |                               | 18.25 |                                                     |      |                         |   |                          |  |   | 7.45
|Exercised                                    |  | (50,106 | ) |  |                               | 2.08  |                                                     |      |                         |   |                          |  |   | 0.63
|Forfeited                                    |  | (46,348 | ) |  |                               | 7.62  |                                                     |      |                         |   |                          |  |   | 4.79
|                                             |  |         |   |  |                               |       |                                                     |      |                         |   |                          |  |   |     
|Options outstanding as of September 30, 2008 |  | 700,923 |   |  | $                             | 10.45 |                                                     | 8.53 |                         | $ | 10,690                   |  | $ | 4.53
|                                             |  |         |   |  |                               |       |                                                     |      |                         |   |                          |  |   |     
|Options exercisable as of September 30, 2008 |  | 196,022 |   |  | $                             | 3.94  |                                                     | 7.13 |                         | $ | 4,265                    |  | $ | 1.53
|                                             |  |         |   |  |                               |       |                                                     |      |                         |   |                          |  |   |     

Note 12. Employee Stock Purchase Plan

In March 2008, our board of directors adopted the amended and restated IPC The Hospitalist Company, Inc. Nonqualified Employee Stock Purchase Plan (ESPP)
which we implemented on July 1, 2008. The plan authorizes the issuance of up to an aggregate of 156,250 shares of our common stock to eligible employees who meet the service requirements. At the end of each annual offering period under the
plan, an automatic purchase of our common stock will be made on behalf of the plans participants. Eligible employees may purchase common stock through payroll deductions in amounts from $500 to $10,000 per year. Employees may reduce or suspend
deductions during the year or withdraw from the plan during the year and receive a refund of their deductions. For 2008, the offering period will be for six months and the annual deductions reduced by 50%. Stock purchases will be made at a price
equal to 85% of the fair market value (i.e., closing price of our common stock on the Nasdaq Global Market) of a share of our common stock on the first or last day of the offering period, whichever is less. If the fair market value is less on the
last day of the offering period, the difference in the per share price will be refunded to the participant. We will account for the plan in accordance with SFAS 123(R).Share based expense relating to the ESPP was $44,760 for the three and
nine months ended September 30, 2008, and is included in general and administrative expenses.



10



---

##### Table of Contents

IPC The Hospitalist Company, Inc.

Notes to the Condensed Consolidated Financial Statements(continued)



Note 13. Redeemable Convertible Preferred Stock Warrant Liabilities

During 2007 we had four series of authorized and outstanding redeemable convertible preferred stock (Preferred Stock Series): Series A, Series B, Series C and Series D; and warrants to purchase shares of preferred
stock. Upon our IPO in January 2008, all Preferred Stock Series shares converted to 9,025,195 shares of common stock and the majority of warrants were exercised on a cashless basis for 641,340 common shares. As of September 30, 2008, warrants
to purchase 10,938 shares of common stock remain outstanding. All remaining warrants were exercised in October 2008.

Note 14. Earnings Per Share

We follow EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement 128 (EITF 03-6), which
established standards regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company. EITF 03-6 requires
earnings attributable to common stockholders for the period, after deduction of preferred stock dividends, to be allocated between the common and preferred shareholders based on their respective rights to receive dividends. Basic net income per
share is then calculated by dividing income attributable to common stockholders (including the reduction for any undeclared, preferred stock dividends assuming current income for the period had been distributed) by the weighted-average number of
common shares outstanding, net of shares subject to repurchase by us, during the period. EITF 03-6 does not require the presentation of basic and diluted net income per share for securities other than common stock; therefore, the following net
income per share amounts only pertain to our common stock. We calculate diluted net income per share under the if-converted method unless the conversion of the preferred stock is anti-dilutive to basic net income per share. To the extent preferred
stock is anti-dilutive, we calculate diluted net income per share under the two-class method.



11



---

##### Table of Contents

IPC The Hospitalist Company, Inc.

Notes to the Condensed Consolidated Financial Statements(continued)



The calculations of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2008 and 2007 are as follows
(dollars in thousands, except for per share data):



|                                                                                                                          |  |                                 |            |      |                                |           |      |  |      |            |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | ---- | ------------------------------ | --------- | ---- |  | ---- | ---------- |  | - | --------- | -
|                                                                                                                          |  | Three months endedSeptember 30, |            |      | Nine months endedSeptember 30, |          
|                                                                                                                          |  | 2008                            |            | 2007 |                                |           | 2008 |  | 2007 |           
|Basic:                                                                                                                    |  |                                 |            |      |                                |           |      |  |      |            |  |   |           |  
|Net income (loss) attributable to common stockholders                                                                     |  | $                               | 3,150      |      | $                              | (7,323    | )    |  | $    | 8,230      |  | $ | (3,884    | )
|                                                                                                                          |  |                                 |            |      |                                |           |      |  |      |            |  |   |           |  
|Weighted average number of common shares outstanding                                                                      |  |                                 | 15,784,261 |      |                                | 1,845,909 |      |  |      | 14,037,183 |  |   | 1,653,574 |  
|                                                                                                                          |  |                                 |            |      |                                |           |      |  |      |            |  |   |           |  
|Basic net income (loss) per share attributable to common stockholders                                                     |  | $                               | 0.20       |      | $                              | (3.97     | )    |  | $    | 0.59       |  | $ | (2.35     | )
|                                                                                                                          |  |                                 |            |      |                                |           |      |  |      |            |  |   |           |  
|Diluted:                                                                                                                  |  |                                 |            |      |                                |           |      |  |      |            |  |   |           |  
|Net income (loss) attributable to common stockholders                                                                     |  | $                               | 3,150      |      | $                              | (7,323    | )    |  | $    | 8,230      |  | $ | (3,884    | )
|                                                                                                                          |  |                                 |            |      |                                |           |      |  |      |            |  |   |           |  
|Weighted average number of common shares outstanding                                                                      |  |                                 | 15,784,261 |      |                                | 1,845,909 |      |  |      | 14,037,183 |  |   | 1,653,574 |  
|Weighted average number of dilutive common equivalents from options to purchase common stock and preferred stock warrants |  |                                 | 203,082    |      |                                |          |      |  |      | 270,842    |  |   |          |  
|                                                                                                                          |  |                                 |            |      |                                |           |      |  |      |            |  |   |           |  
|Weighted average number of common and common equivalents                                                                  |  |                                 | 15,987,343 |      |                                | 1,845,909 |      |  |      | 14,308,025 |  |   | 1,653,574 |  
|                                                                                                                          |  |                                 |            |      |                                |           |      |  |      |            |  |   |           |  
|Diluted net income (loss) per share attributable to common stockholders                                                   |  | $                               | 0.20       |      | $                              | (3.97     | )    |  | $    | 0.58       |  | $ | (2.35     | )
|                                                                                                                          |  |                                 |            |      |                                |           |      |  |      |            |  |   |           |  

The following pro forma of basic and diluted earnings per share assumes the conversion of
preferred shares to common stock at a ratio of 6.4:1 as well as a cashless exchange of warrants at the beginning of each period using the treasury stock method for the three and nine months ended September 30, 2008 and 2007 (dollars in
thousands, except per share data):



|                                                                                |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | ---- | ------------------------------ | ---------- | ---- |  | ---- | ---------- |  | - | ---------- | -
|                                                                                |  | Three months endedSeptember 30, |            |      | Nine months endedSeptember 30, |           
|                                                                                |  | 2008                            |            | 2007 |                                |            | 2008 |  | 2007 |           
|Basic:                                                                          |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|Net income (loss) attributable to common stockholdershistorical                |  | $                               | 3,150      |      | $                              | (7,323     | )    |  | $    | 8,230      |  | $ | (3,884     | )
|Accretion of redeemable convertible preferred stockholders                      |  |                                 |           |      |                                | 69         |      |  |      |           |  |   | 206        |  
|Income allocable to preferred stockholders                                      |  |                                 |           |      |                                |           |      |  |      | 696        |  |   |           |  
|                                                                                |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|Net income (loss) attributable to common stockholderspro forma                 |  | $                               | 3,150      |      | $                              | (7,254     | )    |  | $    | 8,926      |  | $ | (3,678     | )
|                                                                                |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|Weighted average number of common shares outstandinghistorical                 |  |                                 | 15,784,261 |      |                                | 1,845,909  |      |  |      | 14,037,183 |  |   | 1,653,574  |  
|Add number of preferred shares converted to common shares and related warrants  |  |                                 |           |      |                                | 9,361,595  |      |  |      | 843,888    |  |   | 9,341,610  |  
|                                                                                |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|Common shares outstandingpro forma                                             |  |                                 | 15,784,261 |      |                                | 11,207,504 |      |  |      | 14,881,071 |  |   | 10,995,184 |  
|                                                                                |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|Basic net income (loss) per share attributable to common stockholderspro forma |  | $                               | 0.20       |      | $                              | (0.65      | )    |  | $    | 0.60       |  | $ | (0.33      | )
|                                                                                |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  



12



---

##### Table of Contents

IPC The Hospitalist Company, Inc.

Notes to the Condensed Consolidated Financial Statements(continued)



|                                                                                  |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | ---- | ------------------------------ | ---------- | ---- |  | ---- | ---------- |  | - | ---------- | -
|                                                                                  |  | Three months endedSeptember 30, |            |      | Nine months endedSeptember 30, |           
|                                                                                  |  | 2008                            |            | 2007 |                                |            | 2008 |  | 2007 |           
|Diluted:                                                                          |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|Net income (loss) attributable to common stockholdershistorical                  |  | $                               | 3,150      |      | $                              | (7,323     | )    |  | $    | 8,230      |  | $ | (3,884     | )
|Accretion of redeemable convertible preferred stockholders                        |  |                                 |           |      |                                | 69         |      |  |      |           |  |   | 206        |  
|Income allocable to preferred stockholders                                        |  |                                 |           |      |                                |           |      |  |      | 696        |  |   |           |  
|                                                                                  |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|Net income (loss) attributable to common stockholderspro forma                   |  | $                               | 3,150      |      |                                | (7,254     | )    |  | $    | 8,926      |  |   | (3,678     | )
|                                                                                  |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|Weighted average number of common shares outstandinghistorical                   |  |                                 | 15,784,261 |      |                                | 1,845,909  |      |  |      | 14,037,183 |  |   | 1,653,574  |  
|Add number of preferred shares converted to common shares and related warrants    |  |                                 |           |      |                                | 9,361,595  |      |  |      | 843,888    |  |   | 9,341,610  |  
|Add weighted average number of dilutive common equivalent shares                  |  |                                 | 203,082    |      |                                |           |      |  |      | 217,482    |  |   |           |  
|                                                                                  |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|Common shares outstandingpro forma                                               |  |                                 | 15,987,343 |      |                                | 11,207,504 |      |  |      | 15,098,553 |  |   | 10,995,184 |  
|                                                                                  |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  
|Diluted net income (loss) per share attributable to common stockholderspro forma |  | $                               | 0.20       |      | $                              | (0.65      | )    |  | $    | 0.59       |  | $ | (0.33      | )
|                                                                                  |  |                                 |            |      |                                |            |      |  |      |            |  |   |            |  

Note 15. 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 physicians. 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.



13



---

##### Table of Contents

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

The following managements discussion and analysis should be read in conjunction with the unaudited condensed 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, 2007 filed with the Securities and Exchange Commission ( SEC) on March 28, 2008.

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 (affiliated
professional organizations). Our affiliated professional organizations 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 by either our wholly-owned subsidiaries or our affiliated
professional organizations. References to practice groups refer to our affiliated professional organizations 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.

Follow-On Public Offering

On July 21, 2008, we closed a follow-on public offering for the sale of 4,025,000 shares of our common stock at a price of $18.50 per share. Of these shares 1,135,231 shares were newly issued shares sold by us,
and 2,889,769 were shares sold by certain of our existing stockholders. We received net proceeds of $19,005,000 after deducting underwriters discounts and commissions of $1,155,000 and fees and estimated expenses of $842,000. Immediately after
the offering, there were 16,017,237 shares of our common stock outstanding.

Acquisitions

During the nine months ended September 30, 2008, we acquired the assets of four hospitalist physician practices for a total initial consideration of
$14,563,000. In connection with these acquisitions, we recorded goodwill of $12,040,000 and other identifiable intangible assets of $2,523,000 consisting of physician, payor and hospital agreements.



14



---

##### Table of Contents

Rate Changes by Government Sponsored Programs

The Medicare program reimburses for our services based upon the rates in its Physician Fee Schedule, and each year the Medicare program updates the
Physician Fee Schedule 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. On October 30, 2008, CMS
announced that there would be a 1.1% overall increase in the Medicare Physician Fee Schedule for 2009, but the regional fee schedules have not yet been published. A 1.0% change in Medicare reimbursement would result in an approximately 0.5% change
in our net revenue per encounter.

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 caused by the end of the academic year for
graduating resident physicians and 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 such illnesses as flu and pneumonia in patient populations in the first quarter.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Results of Operations and
Operating Data

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



|                                                                 |  |                                 |    |  |                                |    |  |           |    |  |           |   
|---------------------------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------ | -- |  | --------- | -- |  | --------- | --
|                                                                 |  | Three months endedSeptember 30, |    |  | Nine months endedSeptember 30, |   
|                                                                 |  | 2008                            |    |  | 2007                           |    |  | 2008      |    |  | 2007      |   
|                                                                 |  |                                 |    | 
|Operating data  patient encounters                              |  | 692,000                         |    |  | 544,000                        |    |  | 2,037,000 |    |  | 1,559,000 |   
|                                                                 |  |                                 |    |  |                                |    |  |           |    |  |           |   
|                                                                 |  |                                 |    | 
|Net revenue                                                      |  | 100.0                           | %  |  | 100.0                          | %  |  | 100.0     | %  |  | 100.0     | % 
|Operating expenses:                                              |  |                                 |    |  |                                |    |  |           |    |  |           |   
|Cost of servicesphysician practice salaries, benefits and other |  | 72.5                            | %  |  | 74.0                           | %  |  | 72.7      | %  |  | 72.8      | % 
|General and administrative                                       |  | 18.0                            | %  |  | 19.4                           | %  |  | 17.9      | %  |  | 19.4      | % 
|Depreciation and amortization                                    |  | 1.0                             | %  |  | 0.8                            | %  |  | 0.9       | %  |  | 0.7       | % 
|                                                                 |  |                                 |    |  |                                |    |  |           |    |  |           |   
|Total operating expenses                                         |  | 91.5                            | %  |  | 94.2                           | %  |  | 91.5      | %  |  | 92.9      | % 
|                                                                 |  |                                 |    |  |                                |    |  |           |    |  |           |   
|Income from operations                                           |  | 8.5                             | %  |  | 5.8                            | %  |  | 8.5       | %  |  | 7.1       | % 
|Investment income                                                |  | 0.3                             | %  |  | 0.2                            | %  |  | 0.3       | %  |  | 0.2       | % 
|Interest expense                                                 |  | (0.2                            | )% |  | (0.8                           | )% |  | (0.4      | )% |  | (0.9      | )%
|Loss on fair value of preferred stock warrant liabilities        |  |                                | %  |  | (18.1                          | )% |  |          | %  |  | (6.4      | )%
|                                                                 |  |                                 |    |  |                                |    |  |           |    |  |           |   
|Income (loss) before income taxes                                |  | 8.6                             | %  |  | (12.9                          | )% |  | 8.4       | %  |  |          | % 
|Income tax provision                                             |  | 3.6                             | %  |  | 2.2                            | %  |  | 3.5       | %  |  | 2.7       | % 
|                                                                 |  |                                 |    |  |                                |    |  |           |    |  |           |   
|Net income (loss)                                                |  | 5.0                             | %  |  | (15.1                          | )% |  | 4.9       | %  |  | (2.7      | )%
|                                                                 |  |                                 |    |  |                                |    |  |           |    |  |           |   

Three months ended September 30, 2008 compared to three months ended September 30,
2007.

Net revenue for the three months ended September 30, 2008 was $63.2 million, an increase of $15.4 million,
or 32.2%, from $47.8 million for the three months ended September 30, 2007. Of this $15.4 million increase, $8.7 million or 56.5% was attributable to same-market area growth and $6.7 million was attributable to revenue generated from
completed acquisitions and new geographical areas opened during 2007 and 2008. 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. The change in same-market
area net revenue was primarily the result of a 14.4% increase in patient encounters. Overall net revenue per encounter increased by 1.9%, primarily as a result of improvements in our billing processes and collections.



15



---

##### Table of Contents

Physician practice salaries, benefits and other expenses for the three months ended September 30,
2008 were $45.8 million or 72.5% of net revenue compared to $35.4 million or 74.0% of net revenue for the three months ended September 30, 2007. These costs increased by $10.4 million or 29.4%. Same-market area physician costs increased a
total of $5.7 million, of which $0.5 million was primarily the result of increased practice bonuses and other costs related to an increase in existing hospitalists productivity and $5.2 million from costs of net new hires or acquired
physicians in the same-market area practices. The remaining increased cost of $4.7 million is attributable to physician costs associated with new market openings and new market acquisitions. The decrease in physician costs as a percentage of net
revenue is primarily attributable to higher average productivity per physician and the closure of several practices which were unprofitable in the third quarter of 2007.

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 $2.1 million, or 22.6%, to $11.4 million, or 18.0% of net revenue, for the three
months ended September 30, 2008, as compared to $9.3 million, or 19.4% of net revenue for the three months ended September 30, 2007. The increase is the result of a combination of increased costs as a public company, increased stock
compensation expense and increased costs to support the continuing growth of our operations and our acquisitions, including the addition of new regional offices to support our geographical expansion. General and administrative expenses decreased as
a percentage of net revenue as we continue to leverage these costs over a larger revenue base.

Depreciation and amortization expense
increased by $0.2 million to $0.6 million for the three months ended September 30, 2008, as compared to $0.4 million for the three months ended September 30, 2007. This increase is attributable to depreciation related to added computer
hardware and software and to amortization of identifiable intangible assets related to our acquisitions.

Income from operations increased
$2.6 million, or 92.9%, to $5.4 million, as compared to $2.8 million for the same period in the prior year. Our operating margin increased to 8.5% for the three months ended September 30, 2008 from 5.8% for the three months ended
September 30, 2007. The increase in operating margin percentage is directly attributable to the reduction in physician costs and general and administrative expenses as a percentage of net revenue.

We recorded interest expense of $0.1 million for the three months ended September 30, 2008, as compared to interest expense of $0.4 million for the
three months ended September 30, 2007. The decrease in interest expense is primarily attributable to the pay-off of balances outstanding on our revolving credit agreement with proceeds from our initial public offering in January, 2008.

Our effective tax rate for the three months ended September 30, 2008 was 42.0% compared to 42.5% for the three months ended
September 30, 2007, excluding the nondeductible loss of $8.7 million we incurred related to the change in the fair value preferred stock warrant liabilities in 2007. 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 $3.2 million for the three months ended September 30, 2008, as compared
to a $7.3 million net loss for the three months ended September 30, 2007, and our net income margin increased to 5.0% from a negative 15.1% for the same period in the prior year. In the three months ended September 30, 2007, we
recorded a loss of $8.7 million related to the change in the fair value of preferred stock warrant liabilities. Excluding such loss in 2007, our net income margin was 3.0%. The net income margin increase to 5.0% is primarily the result of the
reduction in physician costs as a percentage of net revenue and leveraging our general and administrative expenses over a larger revenue base as we grow our practices and acquire new practices.

Nine months ended September 30, 2008 compared to nine months ended September 30, 2007.

Net revenue for the nine months ended September 30, 2008 was $182.9 million, an increase of $45.5 million, or 33.1%, from $137.4 million for the
nine months ended September 30, 2007. Of this $45.5 million increase, $27.2 million, or 59.8% was attributable to same-market area growth and $18.3 million was attributable to revenue generated from completed acquisitions and new geographical
areas opened during 2007 and 2008. The change in same-market area net revenue was primarily the result of a 17.4% increase in patient encounters. Overall net revenue per encounter increased by 0.7%, primarily as a result of improvements in our
billing processes and collections.



16



---

##### Table of Contents

Physician practice salaries, benefits and other expenses for the nine months ended September 30,
2008 were $133.0 million or 72.7% of net revenue compared to $100.1 million or 72.8% of net revenue for the nine months ended September 30, 2007. These costs increased by $32.9 million or 32.9%. Same-market area physician costs increased a
total of $19.4 million of which $4.7 million was primarily the result of increased practice bonuses and other costs related to an increase in existing hospitalists productivity and $14.7 million from costs of net new hires or acquired
physicians in the same-market area practices. The remaining increased cost of $13.5 million is attributable to physician costs associated with new market openings and new market acquisitions. Physician costs as a percentage of net revenue remained
stable during the periods.

General and administrative expenses increased $6.1 million, or 22.9%, to $32.7 million, or 17.9% of net
revenue, for the nine months ended September 30, 2008, as compared to $26.6 million, or 19.4% of net revenue for the nine months ended September 30, 2007. The increase is the result of a combination of increased costs as a public company,
increased stock compensation expense and increased costs to support the continuing growth of our operations and our acquisitions, including the addition of new regional offices to support our geographical expansion. General and administrative
expenses decreased as a percentage of net revenue as we continue to leverage these costs over a larger revenue base.

Depreciation and
amortization expense increased by $0.5 million to $1.5 million for the nine months ended September 30, 2008, as compared to $1.0 million for the nine months ended September 30, 2007. This increase is attributable to depreciation related to
added computer hardware and software and to amortization of identifiable intangible assets related to our acquisitions.

Income from
operations increased $5.9 million, or 60.8% to $15.6 million, as compared to $9.7 million for the same period in the prior year. Our operating margin increased to 8.5% for the nine months ended September 30, 2008 from 7.1% for the nine months
ended September 30, 2007. The increase in operating margin percentage is directly attributable to the reduction in general and administrative expenses as a percentage of net revenue.

We recorded interest expense of $0.7 million for the nine months ended September 30, 2008, as compared to interest expense of $1.2 million for the
nine months ended September 30, 2007. The decrease in interest expense is primarily attributable to the pay-off of balances outstanding on our revolving credit agreement with proceeds from our initial public offering in January 2008.

Our effective tax rate for the nine months ended September 30, 2008 was 42.0% compared to 42.1% for the nine months ended
September 30, 2007, excluding the nondeductible loss of $8.8 million we incurred related to the change in the fair value preferred stock warrant liabilities in 2007. 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 $8.9 million for the nine months ended September 30, 2008, as compared
to a loss of $3.7 million for the nine months ended September 30, 2007 and our net income margin increased to 4.9% from a negative 2.7% for the same period in the prior year. During 2007, we recorded a loss of $8.8 million related to the
change in the fair value of preferred stock warrant liabilities. Excluding such loss in 2007, our net income margin was 3.7%. The net income margin increase to 4.9% is primarily the result of leveraging our general and administrative expenses over a
larger revenue base as we grow our practices and acquire new practices.

Liquidity and Capital Resources

In January 2008, we completed our initial public offering which resulted in net proceeds of $46.2 million to us after payment of underwriting discounts
and commissions and offering expenses. We used part of the proceeds to pay off the outstanding balance of $14.1 million under the revolving portion of our Credit Facility. At September 30, 2008, we had outstanding borrowings of $9.8 million on
our term loan and other financings with no borrowings under our $30.0 million revolving credit agreement and $55.1 million in cash and cash equivalents.

On July 21, 2008, we closed a follow-on public offering for the sale of 4,025,000 shares of our common stock at a price of $18.50 per share. Of these shares 1,135,231 shares were newly issued shares sold by us,
and 2,889,769 were shares sold by existing stockholders. We received net proceeds of $19,005,000 after deducting underwriters discounts and commissions of $1,155,000 and fees and estimated expenses of $842,000. Immediately after the offering,
there were 16,017,237 shares of our common stock outstanding.

Net cash provided by operating activities for the nine months ended
September 30, 2008 was $17.6 million compared to $8.1 million provided by operations for the same period of 2007. Operating cash flow from changes in working capital for the nine months ended September 30, 2008 increased by $4.3 million.
Accounts receivable increased by $1.8 million during the nine months. However, on a days sales outstanding (DSO) basis, which we use to measure the effectiveness of our collections, DSO has decreased to 60 DSO as of September 30, 2008 compared
to 69 DSO as of December 31, 2007. We calculate our DSO using a three-month rolling average of net revenues. Prepaid expenses decreased by $6.4 million for the 2008 period compared to a decrease of $2.5 million for the 2007 period. The decrease
was primarily the result of amortization of prepaid malpractice premiums, funding of $1.8 million in prepaid IPO costs from our public stock offering in January 2008, and application of $2.0 million of taxes overpaid in 2007 against our
$6.5 million current period tax liability.



17



---

##### Table of Contents

Net cash used in investing activities was $17.8 million for the nine months ended September 30,
2008, compared to net cash used in investing activities of $9.6 million for the same period in 2007. Cash of $16.3 million was used in 2008 for acquisitions of physician practices or earn-out payments on prior acquisitions compared to $11.5 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.

For the nine months ended September 30, 2008, net cash provided by financing activities was $48.3 million, compared to $1.7 million for the nine months ended September 30, 2007. During 2008, we completed our
initial public offering and a follow-on offering which resulted in aggregate net proceeds of $65.2 million to us after payment of underwriting discounts and commissions and offering expenses. We used part of the proceeds of our initial public
offering to pay off the outstanding balance of $14.1 million under the revolving portion of our Credit Facility.

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, plus a term loan in an original amount of $10.0 million. The Credit Facility has a maturity date of September 15, 2011. The Credit Facility is to be used for working capital and to fund practice acquisitions and
capital expenditures. Our outstanding principal balance under the term loan portion of the Credit Facility as of September 30, 2008 was $8.5 million and we had $30.0 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,
depreciation, amortization, taxes 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 three months. We make equal monthly installment payments, which increase annually, against our term
loan through the maturity date. 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, 2008, we were in compliance with such financial covenants and restrictions.

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, 2008, we had no off-balance sheet arrangements.

Recently Adopted and New Accounting Pronouncements

Recently
Adopted Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements (SFAS 157). SFAS 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition and disclosure purposes under generally accepted accounting
principles. SFAS 157 requires the fair value of an asset or liability to be based on a market based measure which will reflect the credit risk of the company. SFAS 157 also requires expanded disclosure requirements which will include the methods and
assumptions used to measure fair value and the effect of fair value measures on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB deferred the effective date of SFAS 157 for certain
nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We adopted SFAS 157, for financial assets and liabilities on January 1, 2008. The adoption
of SFAS 157 for financial assets and liabilities did not have a material impact on our financial position, results of operations or cash flows.



18



---

##### Table of Contents

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on
items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 on January 1, 2008. We
did not elect to record at fair value any of our financial assets or liabilities that were not previously recorded at fair value under other accounting literature.

New Accounting Pronouncement

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations
(SFAS 141(R)), which replaces FASB SFAS No. 141. SFAS 141(R) introduces significant changes in the accounting for and reporting of business acquisitions. SFAS 141(R) changes how business acquisitions are accounted for and will impact financial
statements at the acquisition date and in subsequent periods. Pursuant to SFAS 141(R) an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited
exceptions and all transaction related costs will be expensed. In addition, SFAS 141(R) will have an impact the goodwill impairment test associated with acquisitions. The provisions of SFAS 141(R) are effective for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact that the adoption of SFAS 141(R) will have on our consolidated financial statements will depend on the
nature, terms and size of our business combinations that occur after the effective date.



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

We are exposed to changes in interest rate as a result of our Credit Facility agreement. At our option, the interest rate on outstanding borrowings under our Credit Facility is either LIBOR plus 1.5% to 2.0% or the base rate plus the
applicable margin as defined in the agreements. The base rate is a daily floating rate based on most recently announced by our lender, as its prime rate, whether or not such announced rate is the lowest rate available from our lender.
LIBOR is either the 30, 60, 90 or 180 day LIBOR. Historically, we have chosen not to use interest rate derivatives to manage our exposure to changes in interest rates.

We had outstanding borrowings under the term loan portion of our Credit Facility of $8.5 million at September 30, 2008. The impact of a 1.0% increase on short-term interest rates would result in an increase in
interest expense of approximately $0.1 million annually and a decrease in net income of approximately $0.05 million.

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, 2008, all of our short-term investments were invested in money market funds with less than 90-day maturities.



|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

Not applicable.



19



---

##### Table of Contents

PART II  OTHER INFORMATION



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

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.

In late 2007, the Internal Revenue Service (IRS) began
auditing our tax returns for the 2005 fiscal year. In April, 2008, we received a notice from the IRS indicating that the IRS would be auditing our tax returns for the 2006 fiscal year. We are in the process of producing documents and other
information to the IRS, but have not yet begun discussions with the IRS with respect to any issues that may arise from these audits.

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.

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 hereto and include the following:



|               |  |                                                                                                                                                                                               
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                 



20



---

##### Table of Contents

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 11th day of November 2008.



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




21



---

##### Table of Contents

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.                                                 



22