Overview



We were formed as a Delaware corporation on January 22, 2021 with the intention
to facilitate an initial public offering and other related transactions in order
to carry on the business of two healthcare entities, Marpai Health and Marpai
Administrators. We acquired Maestro Health on November 1, 2022 to increase the
capacity to service the heath industry. Marpai Inc.'s mission is to positively
change healthcare for the benefit of (i) our clients who are self-insured
employers that pay for their employees' healthcare benefits and engage the
Company to administer the latter's healthcare claims, to whom the Company refers
as "Clients"; (ii) employees who receive these healthcare benefits from its
clients, to whom we refer as "Members", and (iii) healthcare providers including
doctors, doctor groups, hospitals, clinics, and any other entities providing
healthcare services or products to whom we refer as "Providers". The Company's
mission is to positively change healthcare for the benefit of (i), (ii), and
(iii).

Our company is the combination of Marpai Health, Inc., Marpai Administrators,
and Maestro Health LLC. Marpai Health is our Technology focused subsidiary, with
a research and development team in Tel Aviv, Israel. Marpai Administrators and
Maestro are our healthcare payer subsidiaries that provides administration
services to self-insured employer groups across the United States. They act as a
TPA handling all administrative aspects of providing healthcare to self-insured
employer groups. We have combined these two businesses to create what we believe
to be the Payer of the Future, which has not only the licenses, processes and
know- how of a payer but also the latest technology. This combination allows us
to differentiate in the TPA market by delivering a technology-driven service
that we believe can lower the overall cost of healthcare while maintaining or
improving healthcare outcomes. Marpai Captive was founded in March 2022 as a
Delaware corporation. Marpai Captive is intended to be engaged in the captive
insurance market. Marpai Captive commenced operations in the first quarter of
2023.

Many states have enacted laws prohibiting physicians from practicing medicine in
partnership with non- physicians, such as business corporations. In some states,
including New York, these take the form of laws or regulations prohibiting
splitting of physician fees with non-physicians or others. As we do not engage
in the practice of medicine or fee-splitting with any medical professionals, we
do not believe these laws restrict our business. Our activities involve only
monitoring and analyzing historical claims data, including our Members'
interactions with licensed healthcare professionals, and recommending healthcare
providers, Value Based Care companies and/or sources of treatment. We do not
provide medical prognosis or healthcare. In accordance with various states'
corporate practice of medicine laws and states' laws and regulations which
define the practice of medicine, our call center staff are prohibited from
providing Members with any evaluation or recommendation concerning a medical
condition, diagnosis, prescription, care and/or treatment. Rather, our call
center staff can only provide Members with general and publicly available
information that is non-specific to the Members' medical conditions and
statistical information about the prevalence of medical conditions within
certain populations or under certain circumstances. Our call center staff does
not discuss Members' individual medical conditions and are prohibited from
asking Members for any additional PHI as such term is defined under the HIPAA.
Our call center staff has been trained and instructed to always inform Members
that they are not licensed medical professionals, are not providing medical
advice, and that Members should reach out to their medical provider for any
medical advice.

In the area of high-cost events, like a high-cost image or a surgery, our
customer data show large variations in cost for the same procedure, even given
the same geography. For example, the median cost of an MRI of the brain may be
approximately $1,000 in a given geography, but a significant amount of
procedures priced above the median cost 3­5 times the median. By predicting
which Members are on trajectories to have high-cost tests or surgeries, we can
help guide them to lower cost, but high-quality providers. This saves money for
employers, while ensuring Members get the best care.

After the acquisition of Maestro Health, we commenced an integration project
that combines the operation of Marpai Administrators and Maestro Health. We
expect to complete the integration of the two businesses in 2023 and they will
then operate as one business.

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Representation in the Financial Statements of Marpai, Inc.



The audited consolidated financial statements of Marpai, Inc and the discussion
of the results of its operations in this annual report, reflect the results of
the operations of Marpai Health (and its subsidiary EYME) for all periods
presented, the results of Marpai Administrators since its acquisition on April
1, 2021 and the results of Maestro Health since its acquisition on November 1,
2022.

Results of Operations - Comparison of the Years ended December 31, 2022 and 2021

                                                             Years Ended December 31,
                                              2022              2021             Change             %
Revenue
Revenue                                   $  24,341,874     $  14,226,794     $  10,115,080            42 %
Costs and Expenses
Cost of revenue (exclusive of
depreciation and
amortization shown separately below)         17,136,330        10,289,578         6,846,752            40 %
Research and development                      3,708,068         1,733,964         1,974,104            53 %
General and administrative                   12,318,529         8,055,572         4,262,957            35 %
Sales and marketing                           6,938,513         4,965,209         1,973,304            28 %
Information technology                        6,372,795         2,492,060         3,880,735            61 %
Facilities                                    1,012,827           589,926           422,901            42 %
Loss on disposal of asset                       273,430                 -           273,430           100 %
Depreciation and amortization                 3,538,237         1,961,733         1,576,504            45 %
Total Costs and Expenses                     51,298,729        30,088,042        21,210,687            41 %
Operating Loss                              (26,956,855 )     (15,861,248 )     (11,095,607 )          41 %
Other income and (expenses)
Interest expense                               (266,778 )        (427,178 )         160,400           -60 %
Other income, net                               234,472           172,513            61,959            26 %
Foreign exchange loss                              (360 )         (18,922 )          18,562         -5156 %
Total other expense                             (32,666 )        (273,587 )         240,921          -738 %
Loss before income taxes                    (26,989,521 )     (16,134,835 )     (10,854,686 )          40 %
Income tax benefit                             (521,132 )        (150,000 )        (371,132 )         n/a
Net Loss                                  $ (26,468,389 )   $ (15,984,835 )   $ (10,483,554 )          40 %
Net loss per share, basic and fully
diluted                                   $       (1.31 )   $       (1.59 )   $        0.28           -22 %

Comparison of the Years December 31, 2022 and 2021

Revenues and Cost of Revenue



During the years ended December 31, 2022 and 2021, our total revenue was
$24,341,874 and $14,226,794 respectively. The revenues for the year ended
December 31, 2021 consists exclusively of Marpai Administrators' revenues. The
revenues for the year ended December 31, 2022 consists of Marpai Administrators'
revenues and two months of Maestro Health's revenues. Marpai Administrators
results of operations have been included in our consolidated results of
operations since its acquisition on April 1, 2021. Maestro Health's results of
operations have been included in our consolidated results of operations since
its acquisition on November 1, 2022. The increase was due to the revenue of
Marpai Administrators amounting to approximately $6,218,809 which were not
included in operating results prior to its acquisition on April 1, 2021 and the
revenue of Maestro Health amounting to $3,427,334 which were not included in our
operating results prior to its acquisition on November 1, 2022.

Total revenues consist of fees that we charge our customers in consideration for
administering their self-insured healthcare plans as well as fees that we
receive for ancillary services such as care management, case management, cost
containment services, and other services provided to our customers by us or
other vendors.

During the years ended December 31, 2022 and 2021, our cost of revenue exclusive
of depreciation and amortization was $17,136,330 and $10,289,578, respectively.
The cost of revenue for the year ended December 31, 2021 consists exclusively of
Marpai Administrators' cost of revenue. The cost of revenues for the year ended
December 31, 2022 consists of Marpai Administrators' cost of revenues and two
months of Maestro Health cost of revenues. Marpai Administrators results of
operations have been included in our consolidated results of operations since
its acquisition on April 1, 2021. Maestro Health results of operations have been
included in our consolidated results of operations since its acquisition on
November 1, 2022. The increase in cost of revenue was due to cost of sales of
Marpai Administrators amounting to approximately $4,546,795 which were not
included in our operating results prior to its acquisition on April 1, 2021, and
cost of sales of Maestro Health amounting to $2,022,613 which were not included
in our operating results prior to its acquisition on November 1, 2022.

Total cost of revenues consists of (i) service fees, which primarily include
vendor fees associated with the client's benefit program selections, (ii) the
direct labor cost associated with claim management and processing services, and
(iii) direct labor costs associated with providing customer support and services
to the clients, members, and other external stakeholders as well as direct labor
costs associated with care and case management services.

Research and Development Expenses


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We incurred $3,708,068 of research and development expenses for the year ended
December 31, 2022 compared to $1,733,964 for the year ended December 31, 2021,
an increase of $1,974,104 or 53%. The increase in research and development
expenses is attributable to increased expenditures in EYME and Marpai, Inc. EYME
increases were amounting to approximately $1,147,065, and associated primarily
with a higher number of research and development personnel and consultants, and
coupled with a decrease of approximately $654,156 in the amount of research and
development costs that were capitalized during 2022 as compared to 2021. We
began to capitalize certain research and development costs when certain projects
reached the development stage in August 2020, which resulted in a substantial
portion of the software development costs being capitalized commencing at that
time. EMYE also incurred increased cloud service cost of $215,757. Our increases
amounted to approximately $1,006,618 and was associated primarily with a higher
stock compensation of $374,761. In March 2022, we added a new President of
Product and Development, whose time is being split in all aspects of the
business, which resulted in an allocation of additional compensation of $449,125
included in research and development expenses.

General and Administrative Expenses



We incurred $12,318,529 of general and administrative expenses for the year
ended December 31, 2022 compared to $8,055,572 for the year ended December 31,
2021, an increase of $4,262,957. The increase in general and administrative
expenses was due to general and administrative expenses of Marpai Administrators
amounting to approximately $997,972 which were not included in our operating
results prior to its acquisition on April 1, 2021 and general and administrative
expenses of Maestro Health amounting to approximately $1,747,804 which were not
included in our operating results prior to its acquisition on November 1, 2022.
In addition, in 2021, we reversed a prior accrual for an IRS penalty in the
amount of $853,405 which never materialized. In March 2022, we added a new
President of Product and Development, whose time is being split in all aspects
of the business, which resulted in an allocation of additional compensation of
$654,893 included in general and administrative expenses.

Sales and Marketing Expenses



We incurred $6,938,513 of sales and marketing expenses for the year ended
December 31, 2022 compared to $4,965,209 for the year ended December 31, 2021,
an increase of $1,973,304. This increase in sales and marketing expenses was
primarily due to Marpai Administrators' sales and marketing expenses in the
amount of approximately $442,261 which were not included in our operating
results prior to its acquisition on April 1, 2021 and Maestro Health's sales and
marketing expenses in the amount of approximately $61,027 which were not
included in our operating results prior to its acquisition on November 1, 2022.
In addition, in 2022, we established the product development team and platform
cost of approximately $1,400,000. The increase expenses were partially offset by
a decrease in consulting services of approximately $368,222, a decrease in
recruitment services of $134,000, and decreases in computer and software spend
of approximately $97,277. In March 2022, we added a new President of Product and
Development, whose time is being split in all aspects of the business, which
resulted in an allocation of additional compensation of $654,893 included in
sales and marketing expenses.

Information Technology Expenses



We incurred $6,372,795 of information technology expenses for the year ended
December 31, 2022 compared to $2,492,060 for the year ended December 31, 2021.
This increase in information technology expenses was due to Marpai
Administrators' information technology expenses during the first quarter of 2022
in the amount of approximately $1,134,273 which were not included in our
operating results prior to its acquisition on April 1, 2021 and Maestro Health's
information technology expenses in the amount of approximately $1,244,680 which
were not included in our operating results prior to its acquisition on November
1, 2022. In addition, there was an increase in Marpai Administrators'
information technology staffing and technology spend in the amount of
approximately $845,000. In March 2022, we added a new President of Product and
Development, whose time is being split in all aspects of the business, which
resulted in an allocation of additional compensation of $654,893 included in
sales and marketing expenses.

Facilities expenses, depreciation and amortization



We incurred facilities expenses of $1,012,827 and depreciation and amortization
expenses of $3,538,237 for the year ended December 31, 2022 compared to
facilities expenses of $589,926 and depreciation expenses of $1,961,733 for the
year ended December 31, 2021. These increases were due to Marpai Administrators'
expenses from January 1, 2022, to the anniversary date of its acquisition on
April, 1, 2022, and amortization of software that was previously capitalized and
reached post implementation stage during the year ended December 31, 2022. In
addition, this increase was due to Maestro Health's expenses from November 1,
2022, the date of the acquisition, to December 31, 2022.

Interest Expense, net



We incurred $266,778 of interest expense for the year ended December 31, 2022
compared to $427,178 for the year ended December 31, 2021, a decrease of
160,400. The decrease in interest expense was the result of the reduction of
interest expense related to convertible notes that were repaid in cash or
converted into equity at the time of the acquisition of Marpai Health and Marpai
Administrators and after our IPO in October 2021.


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Net Loss



Net loss for the year ended December 31, 2022 amounted to $26,468,389 as
compared to a loss of $15,984,835 for the year ended December 31, 2021. The
increase in the net loss was due to increases in general and administrative
expenses, sales and marketing expenses, information technology expenses, and
research and development expenses, for the reasons mentioned above, partially
offset by Marpai Administrators' revenue net of cost of revenues from January 1,
2022, to March 31, 2022, and Maestro Health's revenue net of cost of revenues
from November 1, 2022, the date of the acquisition, to December 31, 2022.

Loss per share for the year ended December 31, 2022 was $1.31, as compared to
$1.59 loss per share for the year ended December 31, 2021. The loss per share
for the year decreased mainly as a result of an increase in our weighted average
number of shares due to the issuance of additional shares during the year ended
December 31, 2022, partially offset by an increase in net loss for the year. The
increase in weighted average common shares outstanding reflects primarily the
issuances of our common shares outstanding for an entire year of 2022 compared
to two months of shares outstanding in 2021.

Liquidity and Capital Resources



As shown in the accompanying consolidated financial statements as of December
31, 2022, we had an accumulated deficit of approximately $48.0 million, debt of
$20.2 million, unrestricted cash of approximately $13.8 million and working
capital of approximately $9.2 million. In addition, for the years ended December
31, 2022 and 2021, we reported operating losses and negative cash flows from
operations.

We have spent most of our cash resources on funding our operating activities.
Through December 31, 2022, we have financed our operations primarily with the
proceeds from the sale and issuance of our Common Stock as well as convertible
promissory notes.

On November 1, 2022, we announced the closing of the Acquisition of Maestro
Health. Under the terms of the purchase agreement, there is no cash payment to
be made until April 1, 2024 and the sellers have agreed that at the closing of
the transaction, Maestro Health's free cash reserves will be $15.79 million.
This cash is available to be used by us to fund our operations after the
closing. While Maestro Health is currently generating operating losses and
negative cash flows from operations, management believes that the integration of
the Maestro Health business into our legacy business will lead to substantial
improvement in our operating results over the next year.

Management continues to evaluate additional funding alternatives and currently
seeks to raise additional funds through the issuance of equity or debt
securities, through arrangements with strategic partners or through obtaining
credit from financial institutions. As we seek additional sources of financing,
there can be no assurance that such financing would be available to us on
favorable terms or at all. The Company is also considering disposing of what it
considers, non-strategic assets.

If we are unable to raise additional capital moving forward, our ability to operate in the normal course and continue to invest in its product portfolio may be materially and adversely impacted and we may be forced to scale back operations or divest some or all of our assets.



As a result of the above, in connection with our assessment of going concern
considerations in accordance with FASB Accounting Standards Update ("ASU")
2014-15, "Disclosures of Uncertainties about an Entity's Ability to Continue as
a Going Concern," management has determined that our liquidity condition raises
substantial doubt about our ability to continue as a going concern through
twelve months from the date these consolidated financial statements are
available to be issued. These consolidated financial statements do not include
any adjustments relating to the recovery of the recorded assets or the
classification of the liabilities that might be necessary should we be unable to
continue as a going concern.

Cash Flows

The following table summarizes selected information about our sources and uses
of cash, cash equivalents and restricted cash for the years ended December 31,
2022 and 2021:

            Comparison of the Years Ended December 31, 2022 and 2021

                                                            Year Ended

December 31,


                                                            2022

2021


Net cash used in operating activities                   $ (35,239,299 )   $ (10,795,252 )
Net cash provided by investing activities                  32,422,576

9,643,740


Net cash provided by financing activities                         196

25,267,223

Net (decrease) increase in cash and cash equivalents and restricted cash

$  (2,816,527 )   $

24,115,711

Net Cash Used in Operating Activities



Net cash used in operating activities totaled $35,239,299 for the year ended
December 31, 2022 and increased by $24,444,047 as compared to $10,795,252 for
the year ended December 31, 2021. Net cash used in operating activities for the
year ended December 31, 2021 was primarily driven by our net loss for the year
of $26,468,390 partially offset by non-cash items totaling approximately
$7,292,254 as well as decrease in net working capital items amounting to
approximately $9,178,005.

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Net Cash Provided by Investing Activities



A total of $32,422,576 was provided by investing activities in the year ended
December 31, 2022 and increased by $22,778,836 as compared to $9,643,740used for
the year ended December 31, 2021. The increase in net cash provided by investing
activities was mainly due to the cash and restricted cash acquired as part of
the Maestro Acquisition, partially offset by an amount of approximately $600,000
for capitalization of software during the year ended December 31, 2022.

Net Cash Provided by Financing Activities



Financing activities provided net cash of $196 and $25,267,223 during the years
ended December 31, 2022 and 2021, respectively. In 2021 the cash provided from
financing activities was primarily from our IPO compared to 2022 when it was
related to proceeds from the exercise of options.

Critical Accounting Estimates



Our consolidated financial statements are prepared in accordance with U.S. GAAP.
The preparation of these consolidated financial statements requires management
to make estimates, assumptions and judgments that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenue and expenses during the applicable periods. We evaluate our estimates,
assumptions and judgments on an ongoing basis. Our estimates, assumptions and
judgments are based on historical experience and various other factors that we
believe to be reasonable under the circumstances. Different assumptions and
judgments would change the estimates used in the preparation of our consolidated
financial statements, which, in turn, could change the results from those
reported.

See Note 3 to our consolidated financial statements included in this Annual Report for a description of the significant accounting policies that we use to prepare our consolidated financial statements.



Critical accounting policies that were impacted by the estimates, judgments and
assumptions used in the preparation of our consolidated financial statements are
discussed below.

Capitalized Software

We comply with the guidance of ASC Topic 350-40, "Intangibles - Goodwill and
Other - Internal Use Software", in accounting for the Company's internally
developed system projects that it utilizes to provide its services to customers.
These system projects generally relate to the Company's software that is not
intended for sale or otherwise marketed. Internal and external costs incurred
during the preliminary project stage are expensed as they are incurred. Once a
project has reached the development stage, we capitalize direct internal and
external costs until the software is substantially complete and ready for its
intended use. Costs for upgrades and enhancements are capitalized, whereas costs
incurred for maintenance are expensed as incurred. These capitalized software
costs are amortized on a project by- project basis over the expected economic
life of the underlying software on a straight-line basis, which is generally
three to five years. Amortization commences when the software is available for
its intended use.

Goodwill

Goodwill is recognized and initially measured as any excess of the
acquisition-date consideration transferred in a business combination over the
acquisition-date amounts recognized for the net identifiable assets acquired.
Goodwill is not amortized but is tested for impairment annually, or more
frequently if an event occurs or circumstances change that would more likely
than not result in an impairment of goodwill. We operate in one reporting
segment and reporting unit; therefore, goodwill is tested for impairment at the
consolidated level. First, we assess qualitative factors to determine whether it
is more likely than not that the fair value of a reporting unit is less than
it's carrying amount. If we conclude that it is more likely than not that the
fair value of a reporting unit is less than its carrying amount, we conduct a
quantitative goodwill impairment test comparing the fair value of the applicable
reporting unit with its carrying value. If the carrying amount of the reporting
unit exceeds the fair value of the reporting unit, we recognize an impairment
loss in the consolidated statement of operations for the amount by which the
carrying amount exceeds the fair value of the reporting unit. We perform the
annual goodwill impairment test on December 31. There was no goodwill impairment
for the years ended December 31, 2022 and 2021.

Income Taxes



We account for income taxes using an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax basis, net
operating losses, tax credit and other carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates when the assets and liabilities
are expected to be realized or settled. We regularly review deferred tax assets
for realizability and establishes valuation allowances based on available
evidence including historical operating losses, projected future taxable income,
expected timing of the reversals of existing temporary differences, and
appropriate tax planning strategies. If our assessment of the realizability of a
deferred tax asset changes, an increase to a valuation allowance will result in
a reduction of net earnings at that time, while the reduction of a valuation
allowance will result in an increase of net earnings at that time.

We follow ASC Topic 740-10-65-1 in accounting for uncertainty in income taxes by
prescribing rules for recognition, measurement, and classification in financial
statements of tax positions taken or expected to be in a tax return. This
prescribes a two-step process for the financial statement measurement and
recognition of a tax position. The first step involves the determination of
whether it is more likely than

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not (greater than 50 percent likelihood) that a tax position will be sustained
upon examination, based on the technical merits of the position. The second step
requires that any tax position that meets the more likely than not recognition
threshold be measured and recognized in the financial statements at the largest
amount of benefit that is a greater than 50 percent likelihood of being realized
upon ultimate settlement. This topic also provides guidance on the accounting
for related interest and penalties, financial statement classification and
disclosure. Our policy is that any interest or penalties related to uncertain
tax positions are recognized in income tax expense when incurred. We have no
uncertain tax positions or related interest or penalties requiring accrual on
December 31, 2022 and December 31, 2021.

Revenue Recognition



We recognize revenue when control of the promised services is transferred to our
customers in an amount that reflects the consideration expected to be entitled
to in exchange for those services. As we complete our performance obligations,
which are identified below, we have an unconditional right to consideration, as
outlined in our contracts.

All of our contracts with customers obligate us to perform services. Services
provided include health and welfare administration, dependent eligibility
verification, COBRA administration, benefit billing, clinical care, and cost
containment. Revenue is recognized over time as services are provided as the
performance obligations are satisfied through the effort expended to research,
investigate, evaluate, document, and report claims, and control of these
services is transferred to the customer. We have the right to receive payment
for all services rendered.

The transaction price of a contract is the amount of consideration to which we
expect to be entitled in exchange for transferring promised goods or services to
a customer.

To determine the transaction price of a contract, we consider our customary business practices and the terms of the contract. For the purpose of determining transaction prices, we assume that the services will be transferred to the customer as promised in accordance with existing contracts and that the contracts will not be canceled, renewed, or modified.



Our contracts with customers have fixed fee prices that are denominated per
employee per month. We include amounts of variable consideration in a contract's
transaction price only to the extent that it is probable that the amounts will
not be subject to significant reversals (that is, downward adjustments to
revenue recognized for satisfied performance obligations). In determining
amounts of variable consideration to include in a contract's transaction price,
we rely on our experience and other evidence that supports our qualitative
assessment of whether revenue would be subject to a significant reversal. We
consider all the facts and circumstances associated with both the risk of a
revenue reversal arising from an uncertain future event and the magnitude of the
reversal if that uncertain event were to occur.

Share-Based Compensation



We account for share-based awards issued to employees in accordance with ASC
Topic 718, "Compensation-Stock Compensation". In addition, we issue stock
options to non-employees in exchange for consulting services and accounts for
these in accordance with the provisions of Accounting Standards Update ("ASU")
2018-07, "Improvements to Nonemployee Share-Based Payment Accounting" ("ASU
2018-07"). Compensation expense is measured at the grant date, based on the
calculated fair value of the award, and recognized as an expense over the
requisite service period, which is generally the vesting period of the grant.
For modification of share-based payment awards, we record the incremental fair
value of the modified award as share-based compensation on the date of
modification for vested awards or over the remaining vesting period for unvested
awards. The incremental compensation is the excess of the fair value of the
modified award on the date of modification over the fair value of the original
award immediately before the modification. The sum of the incremental
compensation cost and the remaining unrecognized compensation cost for the
original award on the modification date is recognized over the requisite service
period.

We estimate the expected term of our stock options granted to employees using
the simplified method, whereby the expected term equals the average of the
vesting term and the original contractual term of the option. We utilize this
method as we do not have sufficient historical exercise data to provide a
reasonable basis upon which to estimate the expected term. For stock options
granted to non-employees, we utilize the contractual term of the option as the
basis for the expected term assumption. All other assumptions used to calculate
the grant date fair value are generally consistent with the assumptions used for
options granted to employees. For purposes of calculating share-based
compensation, we estimate the fair value of stock options using a Black-Scholes
option-pricing model. The determination of the fair value of share-based payment
awards utilizing the Black-Scholes model is affected by our stock price and a
number of assumptions, including expected volatility, expected life, risk-free
interest rate and expected dividends. The expected volatility is primarily based
on the historical volatility of peer company data while the expected life of the
stock options is based on historical and other economic data trended into the
future. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant for periods corresponding to the expected option
term. The dividend yield assumption is based on our history and expectation of
no dividend payouts.

If factors change and we employ different assumptions, share-based compensation
expense may differ significantly from what has been recorded in the past. If
there is a difference between the assumptions used in determining share-based
compensation expense and the actual factors which become known over time,
specifically with respect to anticipated forfeitures, we may change the input
factors used in determining share-based compensation costs for future grants.
These changes, if any, may materially impact our results of operations in the
period such changes are made. Incremental compensation costs arising from
subsequent modifications of awards after the grant date are recognized when
incurred. In addition, we account for forfeitures of awards as they occur. For
share-based awards that vest based on performance conditions, expense is
recognized when it is probable that the conditions will be met.

Recently Issued and Adopted Accounting Pronouncements


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A discussion of recent accounting pronouncements is included in Note 3 to our consolidated financial statements in this annual report.

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