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INTERMEDIX HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2010 (n) Cost of Revenues Cost of business services revenue primarily includes direct production costs such as labor, patient statement postage and mailings, telecommunications, facility and e- commerce costs. Cost of subscription and other revenue includes labor, hardware, and data center costs. (o) Employee Stock -Based Compensation Compensation expense for all stock -based compensation awards granted is based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718, Stock Compensation (ASC Topic 718). The Company recognizes these compensation costs on a straight -line basis over the requisite service period of the award, which is generally the option vesting term. The Company's options vest over terms of five years. As stock -based compensation expense recognized is based on awards ultimately expected to vest, such expense is generally reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. ASC Topic 718 also requires the benefits of income tax deductions in excess of recognized compensation cost to be reported as a cash flow from financing activities, rather than as a cash flow from operating activities. Income tax deductions exceeded recognized compensation costs during the Predecessor period as a result of the acceleration of Predecessor Company stock options in connection with the Merger. No tax benefit was recognized for the Management Incentive Units (MI Units) in the Predecessor period. No such benefits were recognized during the Successor period. The Company estimates the fair value of stock -based compensation awards on the date of grant using the Black - Scholes- Merton (BSM) option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and are freely transferable. The BSM option pricing model considers, among other factors, the expected life of the award and the expected volatility of the Company's stock price. (p) Income Taxes Income taxes are accounted for under the asset and liability method in accordance with ASC Topic 740, Income Taxes (ASC Topic 740). Deferred tax assets and liabilities are recognized for (i) the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and (ii) operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, tax planning strategies and recent financial operations. It was determined that a valuation allowance was not necessary as of December 31, 2010. 13 (Continued)