Exhibit 4.1


 


IMRIS INC.


 


 


ANNUAL INFORMATION FORM


 


FOR THE YEAR ENDED


DECEMBER 31, 2009


 


 


MARCH 1, 2010


 





















 


TABLE OF CONTENTS


 


	
  TABLE OF CONTENTS

  	
  1

  
	
  FORWARD-LOOKING AND OTHER STATEMENTS

  	
  2

  
	
  GENERAL MATTERS

  	
  2

  
	
  1.

  	
  CORPORATE STRUCTURE

  	
  3

  
	
  2.

  	
  GENERAL DEVELOPMENT OF THE BUSINESS

  	
  3

  
	
  3.

  	
  NARRATIVE DESCRIPTION OF THE BUSINESS

  	
  5

  
	
  4.

  	
  DIVIDENDS

  	
  29

  
	
  5.

  	
  CAPITAL STRUCTURE

  	
  29

  
	
  6.

  	
  MARKET FOR SECURITIES

  	
  30

  
	
  7.

  	
  ESCROWED SECURITIES

  	
  30

  
	
  8.

  	
  DIRECTORS AND OFFICERS

  	
  31

  
	
  9.

  	
  LEGAL PROCEEDINGS

  	
  34

  
	
  10.

  	
  INTERESTS IN MATERIAL TRANSACTIONS

  	
  34

  
	
  11.

  	
  TRANSFER AGENT AND REGISTRAR

  	
  35

  
	
  12.

  	
  MATERIAL CONTRACTS

  	
  35

  
	
  13.

  	
  INTERESTS OF EXPERTS

  	
  35

  
	
  14.

  	
  ADDITIONAL INFORMATION

  	
  35

  
	
  APPENDIX “A”

  	
  36

  
	
  APPENDIX “B”

  	
  42

  



 


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FORWARD-LOOKING AND OTHER
STATEMENTS


 


All statements,
other than statements of historical facts, included in this Annual Information Form regarding
our strategy, future operations, financial position, future revenues, projected
costs, prospects, plans and objectives of management are forward-looking
statements.  The words “believe”, “anticipate”,
“estimate”, “plan”, “expect”, “intend”, “may”, “project”, “will”, “would” and
similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying
words.  We cannot guarantee that we
actually will achieve the plans, intentions or expectations disclosed in our
forward-looking statements and undue reliance should not be placed on our
forward-looking statements.


 


There are a
number of important factors that could cause our actual results to differ
materially from those indicated or implied by forward-looking statements or
statements of “belief”, including the factors discussed under “Risk Factors”
and in other sections of this Annual Information Form.  These factors and the other cautionary
statements made in this Annual Information Form should be read as being
applicable to all related forward-looking statements and statements of “belief”
wherever they appear in this Annual Information Form.


 


Any
forward-looking statements and statements of “belief” represent our estimates
only as of the date of this Annual Information Form and should not be
relied upon as representing our estimates as of any subsequent date.  Except as required by law, we do not assume
any obligation to update any forward looking statements or statements of “belief”.  We disclaim any intention or obligation to
update or revise any forward-looking statements or statements of “belief”,
whether as a result of new information, future events or otherwise.


 


GENERAL MATTERS


 


In this Annual
Information Form, unless otherwise indicated or the context otherwise requires,
the terms “IMRIS”, the “Company”, “we”, “us”, and “our” are, unless the context
otherwise requires, used to refer to IMRIS Inc. and its wholly owned
subsidiaries: IMRIS, Inc. (USA); IMRIS (Europe) SPRL (Belgium); IMRIS
India Private Limited (India); and IMRIS KK (Japan). Our trademarks are “IMRIS”,
“IMRISneuro” and “IMRIScardio”.  This Annual
Information Form contains company names, product names, trade names,
trademarks and service marks of other organizations, all of which are the
property of their respective owners.


 


Information
contained on our website is not part of this Annual Information Form and
is not incorporated herein by reference and may not be relied upon by
prospective purchasers for the purposes of determining whether to invest in our
common shares.


 


Unless
otherwise indicated, the market and industry data contained in this Annual
Information Form is based upon information of publicly available sources
and management’s knowledge of, and experience in, the markets in which it
operates.  Although we believe that these
sources are generally reliable, market and industry data is subject to
variation and cannot be verified with complete certainty due to limits on the
availability and reliability of raw data, the voluntary nature of the data
gathering process and other limitations and uncertainties inherent in any
survey.  Neither we nor the underwriters
have independently verified any of the data from third party sources referred
to in this Annual Information Form. 
Similarly, internal company surveys and reports, including estimates of
market size and information regarding our competitors, which we believe to be reliable,
based upon management’s knowledge of the industry, have not been verified by
any independent sources.


 


In this Annual
Information Form, unless otherwise indicated, all dollar amounts are expressed
in Canadian dollars. References to “$” and “Cdn$” are to Canadian dollars and
references to “U.S. $” and “U.S. dollars” are to United States dollars.


 


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1.             CORPORATE
STRUCTURE


 


IMRIS Inc. was
incorporated under the Canada Business
Corporations Act on May 18, 2005.  On May 20, 2005, we acquired all of the
assets and assumed all of the liabilities of Innovative Magnetic Resonance
Imaging Systems Inc., hereinafter referred to as “Innovative”.  On November 18, 2005, we acquired
control of Innovative and we amalgamated with Innovative on December 31,
2005.  We own directly or indirectly all
of the outstanding shares of our subsidiaries: IMRIS, Inc. (incorporated
under the laws of Delaware, USA); IMRIS (Europe) SPRL (incorporated in
Belgium); IMRIS India Private Limited (incorporated in India); and IMRIS KK
(incorporated in Japan).


 


On October 26,
2007, our articles of amalgamation were amended to, among other things; create
a class of preferred shares, unlimited in number and which may be issued from
time to time in one or more series. 
Consequently, we are authorized to issue an unlimited number of common
shares and an unlimited number of preferred shares.


 


Our head and
registered office is located at 100-1370 Sony Place, Winnipeg, Manitoba, R3T
1N5.


 


2.             GENERAL
DEVELOPMENT OF THE BUSINESS


 


2.1          General
Description of the Business


 


IMRIS provides
fully integrated image guided therapy solutions that deliver timely information
to clinicians during surgical or interventional procedures.  IMRIS systems incorporate multiple imaging
modalities including magnetic resonance imaging (“MRI” or “MR imaging”),
fluoroscopy and computed tomography into fully integrated imaging suites. All
IMRIS systems are designed to assist clinicians to improve outcomes for their
patients and use a variety of patented technologies that enhance patient
safety, operating room efficiency and offer enhanced financial utility for
hospitals.


 


2.2          Three-Year
History


 


Fiscal
2009


 


We substantially completed the installation of six IMRIS systems during
2009, bringing to 19 the number of units installed and in operation at December 31,
2009.


 


We received purchase orders for ten new
systems in 2009, (as well as three upgrades to existing system orders)
increasing our order backlog from $67.8 million as at December 31, 2008 to
$ 89.4 million
at the end of 2009.  As at December 31,
2009 we have sold 35 systems.  Of
these, 25 are
in the United States, five are in Canada, one is in
Europe and four
are in the Asia Pacific region.


 


We continued
our global expansion in 2009 with the sale of our first IMRISneuro system in
Europe and the establishment of regional organizations for North America,
Europe and the Middle East and China. 
Each of these organizations is responsible for sales, customer service,
program management and product sales support.


 


We completed
regulatory approvals allowing us to market and sell IMRISNV and IMRIScardio in Canada (Health Canada),
the United States (FDA) and Europe (CE). 
Following the regulatory approvals, we formally launched our new IMRISNV and IMRIScardio and sold three of these
systems during the balance of the year. We also received regulatory approvals
in Japan for the 1.5 Tesla version of IMRISneuro.


 


We
completed an equity financing with the issuance of 3,697,250 common shares for
net proceeds of $19.3 million. The proceeds of the offering are being used to
fund the Company’s working capital and general corporate purposes.


 


We entered into a renewed and
expanded OEM agreement with Siemens Healthcare for the supply of MR scanners and
angiography systems as component parts for IMRIS’s image guided therapy suites.


 


At
the end of 2009, we had 139 employees at locations around the world including
Canada, the United States, India, Japan, Europe and China.


 


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On February 4, 2010, we announced that IMRIS had
entered into a definitive agreement to acquire NeuroArm Surgical Limited (“NASL”),
a privately held company based in Calgary, Alberta, and its magnetic
resonance-compatible neurosurgical robot. 
In conjunction with the acquisition, we also entered into a memorandum
of understanding with MacDonald Dettwiler and Associates Limited to create the
next generation of the technology.  As
consideration for the acquisition of NASL including its technology, patents,
and associated intellectual property, 1.6 million IMRIS common shares were
issued from treasury.  The transaction
closed on February 5, 2010.


 


Fiscal
2008


 


We substantially completed the installation of five IMRISneuro systems
during 2008, bringing to 13 the number of units installed to December 31,
2008.


 


We received purchase orders for ten
additional systems in 2008, increasing our order backlog from $31.7 million as
at December 31, 2007 to $67.8 million at the end of 2008.  As at December 31, 2008 we had sold 25
systems, with 12 units in clinical operation. Of the 25 systems sold, 17 are in
the United States, five are in Canada and three are in the Asia Pacific region.


 


We expanded
our global operations in 2008 by opening an office in Belgium to serve the
European market, an office in Tokyo to serve the Japanese market and by
establishing a presence in Australia.  We
also substantially completed the installation of our first two systems in Asia
Pacific during the year with the delivery of systems to KDAH Hospital in
Mumbai, India and to PLA (301) Hospital in Beijing, China, and received our
first order from Australia for a system for delivery to Canberra Hospital.


 


We completed
development of the 3.0 Tesla version of IMRISneuro, which provides our
customers with an optional higher field strength solution, and which provides
for shorter scan times or enhanced image quality.  The Company released the new version in the
fourth quarter of 2008, following regulatory approval, further strengthening
our product offering and opening new market opportunities.


 


We also
substantially completed the development of our IMRIScardio system during the
2008 year, with an expectation of releasing the product for marketing in mid
2009 following regulatory approval.


 


In December 2008
we entered into a letter of intent with the University Health Network in
Toronto for the development and commercialization of MR-guided radiation
therapy and interventional procedures. The goals of the collaboration include
the development of new technologies, the establishment of clinical workflows
and the validation of the benefits of MR guided radiation therapy technology to
both the patient and the health system. Planned applications include the
integration of the IMRIS technology with external beam radiation therapy, MR
guided biopsies and brachytherapy of the prostate.  The collaboration signals the entry of IMRIS
into the field of image guided radiation therapy, expanding on its existing expertise
in neurosurgery.


 


Fiscal 2007


 


We
substantially completed the installation of 4 IMRISneuro systems during the
year, doubling the number of systems installed in the field to 8 units at the
end of the year.


 


We received
purchase orders for 7 additional systems in 2007, increasing our order backlog
from $19.6 million as at December 31, 2006 to $31.7 million at the end of
the year, and including purchase orders from our first two customers from
outside of North America during the year. 
We received an order from Reliance Group for the new Kokilaben Dhirubhai
Ambani Hospital (KDAH) in Mumbai India and an order from People Liberation Army
(PLA) Hospital in Beijing, China.


 


We opened
offices in Mumbai, India and in Beijing, China in conjunction with the receipt
of these new orders, providing us with a presence in each of these emerging
markets.


 


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We completed
the regulatory approvals for all configurations of IMRISneuro in Canada (Health
Canada), the United States (FDA), Europe (CE), Australia and other markets.


 


We launched
the development of IMRIScardio, a surgical imaging system for use in
interventional cardiac procedures.


 


In November 2007
we completed our initial public offering, with gross proceeds of $40
million.  This initial public offering
provided us with a stronger balance sheet to support our efforts to further
commercialize our products.


 


3.             NARRATIVE
DESCRIPTION OF THE BUSINESS


 


3.1          Industry
Overview


 


Surgical Imaging


 


Surgical
imaging is the ability to obtain images of patient anatomy during the course of
surgical or interventional procedures. 
In the past, surgeons relied on pre-operative images to plan procedures
and post-operative images to confirm whether the procedure achieved the desired
results.  Over the last 20 years, however,
imaging systems have emerged that provide surgeons with more current images of
patient anatomy while surgical procedures are in progress.  These images enable surgeons, among other
things, to distinguish between healthy and diseased tissue and to identify soft
tissue and anatomical structure while conducting surgery.  As a result of the information provided by
these real-time images, surgeons can make effective adjustments to a surgical
procedure while it is in progress, often leading to improved patient outcomes
and reducing the likelihood that repeat surgeries will be needed.


 


Surgical
imaging techniques used today include ultrasound, fluoroscopy, computed
tomography (CT) and MRI. Although ultrasound, fluoroscopy, and CT are
well-suited for some applications, each has certain limitations for both the
surgical team and the patient. 
Ultrasound is a well-established imaging technology with limited
deleterious effects on the patient or the surgical team, but its poor image
quality makes it of limited use for surgical procedures.  Fluoroscopy is an imaging technique that
projects real-time x-ray images onto a monitor located in the operating
room.  While fluoroscopy produces rapid,
high resolution images, a drawback of this technique is that it exposes patients
and hospital staff to potentially harmful radiation, meaning that precautions
must be used to protect against overexposure.


 


CT imaging
uses a computer to assemble a series of x-ray images in order to create a three
dimensional image of the anatomy of interest. 
Although CT achieves a high standard of spatial resolution and precision
for surgical imaging, it is not as precise as MRI for revealing soft tissue
structure.  As well, since CT scanning is
based on x-ray imaging, radiation concerns mean that CT scanning, like
fluoroscopy, requires that the surgical team be constantly protected from
overexposure to radiation.  In addition,
CT is generally used on a patient for only one series of images during each
surgical procedure due to the need to minimize radiation exposure.


 


Magnetic
Resonance Imaging


 


MR imaging
produces high resolution images of a patient’s anatomy by measuring the unique
manner in which certain molecules in the body react to radio frequency signals
in the presence of a magnetic field generated by a superconducting magnet.  While the benefits of MR imaging have long
been accepted by the medical community, intra-operative MR imaging is more
recently gaining wide acceptance.  It has
many of the benefits of ultrasound, fluoroscopy and CT but offers a number of
additional advantages.


 


A major
advantage of MR imaging is that it provides high-resolution images with
substantially better soft tissue contrast than any other imaging modality,
making it ideal for certain types of surgeries or interventional procedures.
Another advantage, when compared to CT or fluoroscopy, is that MR imaging does
not involve exposure of the patient or surgical team to any potentially harmful
radiation.


 


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MR imaging can
be used for a variety of diagnostic applications, such as revealing tissue
structure, probing tissue function and examining physiology. MRI’s ability to
provide better soft tissue contrast has allowed surgeons to better
differentiate tumors from adjacent healthy tissue and to measure the efficacy
of medical procedures.  In addition,
physiological data collected during the imaging process, such as studies of
blood flow in the brain and other organs, have enhanced the diagnostic
capabilities and medical applications of MR imaging.


 


The surgical
utility of MR imaging has been limited in the past due to practical
considerations and financial concerns associated with the use of an MR scanner
exclusively for surgical purposes. 
Notwithstanding these limitations, neurosurgery and interventional
cardiovascular procedures have emerged as two clinical applications for which
surgical MR imaging is achieving growing acceptance.


 


Magnetic
Resonance Imaging in Neurosurgical Procedures


 


MR imaging is
used as an important tool for a variety of neurosurgical procedures, such as
brain tumor resection, the implanting of neuro-modulation devices in the brain
and the repair of blood vessel malformations. 
The most prevalent use, however, is for brain tumor resection, where the
ability to identify residual tumors is of the utmost importance to the surgeon.


 


Surgery is the
primary form of treatment for brain tumors. 
Due to the invasive nature of brain tumor resections and the importance
of minimizing their impact on normal brain functions, these procedures
particularly benefit from MRI’s unique ability to distinguish between diseased
and healthy brain tissue.  This ability
allows MR imaging to be used to assist in the removal of all types of tumors,
including those that cannot be easily treated with traditional surgical
techniques because of their location, number, size, shape or proximity to vital
tissues or structures.


 


The goal of
brain tumor resection is to remove the entire tumor whenever possible since a
tumor is likely to recur if any tumor cells are left behind.  Without the detailed information available
from MR imaging during surgery, a surgical team may be forced to take an overly
conservative approach to the removal of a tumor in order to preserve healthy
surrounding tissue.  As a result, this
approach may ultimately lead to a less favorable patient outcome.  Surgical MR images assist the surgical team
in determining during the procedure whether the desired result has been
achieved.


 


One
independent peer-reviewed study published in 2004 in Radiology (a journal devoted to clinical radiology)
indicated that intra-operative MR imaging resulted in the modification of
surgical strategy (i.e. led to additional tumor resection or the correction of
the placement of a biopsy needle) in 27.5% of the cases where it was used.  Where the neurosurgery specifically involved
tumor resection, MR images obtained during surgery resulted in extended tumor
removal in 39% of cases.  In the case of
pituitary tumors, the use of intra-operative MR imaging in the study was shown
to increase the rate of complete tumor removal from 56% to 87.5%.


 


Magnetic
Resonance Imaging in Cardiovascular and Neurovascular Procedures


 


In addition to
neurosurgery, other clinical applications that stand to benefit from the use of
MR imaging are interventional cardiovascular and neurovascular procedures.  According to the American Heart Association,
cardiovascular MR imaging has the potential to permit an entirely new range of
procedures otherwise attainable only with open surgery, making it a potentially
very significant innovation for coronary heart disease diagnosis and treatment.


 


“Interventional”
procedures are generally less invasive than those referred to as “surgical” and
are typically performed by clinical interventionists rather than surgeons.  For coronary artery disease, for instance,
one current treatment approach is a cardiac catheterization whereby an
interventional device is inserted into a blocked artery under guidance from
fluoroscopic images.  The device is
deployed with the intention that it will resolve the cardiac condition of the
patient by opening up the arterial blockage. 
Unfortunately, in many cases, the physiological data collected during
the procedure is insufficient to determine if the cardiac condition has
actually been resolved by the intervention, particularly where the patient has
more than one coronary blockage.


 


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Cardiovascular
interventionists are beginning to use surgical MR imaging to obtain
physiological information so that the effectiveness of the interventional
procedures can be determined immediately. 
The effectiveness of the interventional procedure can be assessed using
information that can be derived from MR images, such as the strength of heart
contractility or blood perfusion.  This
information allows the interventionist to make immediate treatment decisions,
such as the taking of further interventional measures or the determination to
proceed to surgery, which could ultimately improve outcomes for patients.


 


History of Surgical Magnetic
Resonance Imaging Technology


 


Although a
number of approaches have been developed to bring MR imaging to the
neurosurgical environment, none of them have met with significant commercial
success.  These approaches have been
limited by poor image quality, the disruption of standard surgical procedures,
a lack of financial viability and concerns over patient safety, largely due to
the requirement of most approaches to move the patient to the MR scanner during surgery.


 


The first MR
imaging system designed for use during neurosurgical procedures was introduced
in 1994.  In that system, an imaging
field was centered between two magnets and the surgeon worked in a narrow gap
between the magnets, allowing simultaneous surgery and imaging without moving
the patient.  The system had a number of
drawbacks, including low image quality, requirements for special MR-compatible
instrumentation and a cramped operating space. 
As a result of these limitations, the system received little market
acceptance and was discontinued in 2001.


 


Another system
for neurosurgical MR imaging that is currently on the market uses a small,
low-field MR scanner which is stored under the operating room table and
positioned over the patient when required for imaging.  Since the magnet is in the storage position
when not in use, the system interferes minimally with the surgical team.  The relatively low strength of the magnet
used in this system, however, results in significantly reduced image quality
and a restricted field of view of the brain, which limits the system’s surgical
utility.


 


Another
currently available approach to providing MR imaging during surgery uses a
trolley system to transport the patient from the operating room to a high-field
MR scanner located in another room and back during the procedure.   This approach was adopted due in part to a
number of complexities associated with permanently locating a high-field magnet
in an operating room and the cost associated with dedicating an MR scanner
exclusively to surgical use.  Using this
approach, the patient is moved to the MR scanner on a tabletop that detaches
from the operating room table.  This
movement of the patient during surgery, however, is complicated, due to the
need to also move the monitoring, life support and anaesthesia equipment that
is attached to the patient, and can accordingly increase risk to the patient.


 


A third system
available today minimizes patient movement by using a rotating operating room
table to move the patient when imaging is required from the surgical area of
the operating room to an MR scanner located in another area of the operating
room.  During surgery, the end of the
operating room table is positioned outside the MR scanner’s magnetic field, allowing
surgery to be performed with standard instrumentation, although particular care
must be taken not to let any metal instruments approach the MR scanner.  The primary drawback of this type of system
is that it requires an MR scanner to be permanently dedicated to the operating
room, making it unavailable for diagnostic applications when not in use for
surgery.  Similarly, the operating room
is generally not available for other types of surgical procedures due to the
permanent presence of the MR scanner in the operating room.  Both of these limitations reduce the
financial viability of this approach for hospitals.


 


All of the
foregoing approaches have various shortcomings, whether related to surgical
work flow, financial viability or patient safety.  As a result, they have not received
widespread market acceptance.  We believe
that our MR imaging system offers all of the benefits of high resolution
surgical MR imaging while overcoming the shortcomings of the other systems on
the market today.  Our system, developed
in close consultation with surgeons, adopts a unique approach to surgical MR
imaging by moving the MR scanner to the patient while the surgery is in
progress rather than moving the patient to the scanner.  This patented approach provides high resolution
surgical MR imaging designed with patient safety, surgical efficiency and
financial viability in mind.


 


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3.2          Our
Business


 


IMRIS provides
fully integrated image guided therapy solutions that deliver timely information
to clinicians during surgical or interventional procedures.  IMRIS systems incorporate multiple imaging
modalities including MR imaging, fluoroscopy and computed tomography into fully
integrated imaging suites.  Our systems
use a variety of patented technologies that enhance patient safety and
operating room efficiency.


 


IMRISneuro is
our flagship product, providing surgeons with high resolution MR images during
neurosurgical procedures.  Due to the
invasive nature of brain surgery and the importance of minimizing disturbance
to healthy brain tissue, neurosurgical procedures may benefit from MRI’s unique
ability to distinguish between diseased and healthy brain tissue.  IMRISneuro allows surgeons to make
adjustments to the procedure while the procedure is in progress, which may lead
to improved patient outcomes and reduce the likelihood that repeat surgeries
will be needed.


 


IMRISNV sequentially employs MRI and fluoroscopy
in an integrated suite that provides interventional clinicians with imaging for
the rapid assessment and post procedure evaluation of neurovascular conditions
including stroke, where speed of treatment is a major determinant in the
success of patient outcomes.  The  IMRISNV
suite features
a wide-bore 3 Tesla MR scanner and a bi-plane angiography system completely
integrated into a single suite that permits the patient to transition quickly
and seamlessly between MR imaging and intervention without transporting the
patient between modalities.


 


IMRIScardio
provides clinicians with timely and accurate images for visualizing the
cardiovascular system before, during and after an intervention. Cardiovascular
interventions demand a high level of accuracy in the diagnosis of patients and
in the assessment of treatments.  The IMRIScardio suite includes a
wide-bore 1.5 Tesla MR scanner and a single-plane or bi-plane angiography
system providing the ability to alternate between imaging modalities and
immediately assess treatment.


 


All IMRIS
products are designed to assist clinicians to improve outcomes for their
patients. Our integrated imaging solutions are based on three fundamental
principles:


 


Patient Safety
— The patient is never moved during the course of a surgical or interventional
procedure in an IMRIS integrated therapy suite. 
Unlike conventional imaging solutions where the patient is moved for
imaging, our solutions move the imaging system to the patient at the right
moment in the procedure.  This avoids any
potential risks associated with having to move the patient to the scanner, and
maintains optimum patient positioning during the procedure.


 


Clinical
Efficiency — All aspects of IMRIS systems are designed to enhance the workflow
of the clinical team.  Imaging
information is captured rapidly and presented to maximize efficiency and
effectiveness for clinicians.  In
addition, because the imaging system is moved to the patient during use, when
not in use, clinicians are afforded unrestricted access to the patient and do
not require special MR-compatible instruments for the procedures.


 


Financial Utility — IMRIS systems provide customers
with both intraoperative/interventional and diagnostic MR imaging
capabilities.  When not in use during a
surgery or interventional procedure, the MR scanner is located in an adjacent
room and is available for diagnostic imaging, thereby ensuring that the
hospital obtains maximum utility from its equipment.


 


The creation of high value intellectual property and
advancements in technology are important elements of our business. To grow the
Company and remain competitive, we are continuously engaged in new product
development and enhancement and each year we invest significantly in research
and development to drive the continuing innovation that supports our
competitive position. Underlying all of our image guided therapy solutions is
advanced proprietary technology and intellectual property that we have
developed as part of our unique solutions. The protection of these products,
processes and know-how is integral to our business. We have patents in place in
the United States, Canada and other countries where available to protect our
core patent family. In addition, we have filed a number of additional patent
applications that are directed to specific aspects of our technology. At December 31,
2009 we had 20 patents either issued or pending. As we develop our technologies
we will continue to seek patent protection to enhance our competitive position.


 


8





















 


3.3          Our
Products


 


Our products include IMRISneuro, IMRISNV and
IMRIScardio.  IMRISneuro accounted for
100% of our revenues in 2008.  In 2009,
IMRISneuro and IMRISNV represented 73%
and 27% of our revenues respectively.


 


The IMRISneuro System


 


The IMRISneuro
system is a fully integrated MR imaging system that can be used in a wide range
of neurosurgical procedures to provide timely and accurate information before,
during and after surgery.  The IMRISneuro
system combines a high-field MR scanner with a computer-controlled transport
system and MR-compatible surgical table to allow high resolution imaging of
patient anatomy during surgical procedures. 
The IMRISneuro system includes an integrated data management system that
allows surgical teams to collect, display and share patient information in real
time within the operating room or with others outside the operating room,
including students or consulting surgeons.


 


The IMRISneuro
MR scanner moves from one room to another in a matter of minutes on a set of
overhead rails.  The MR scanner is moved
into the operating room and positioned directly over the patient at the
appropriate time during a surgical procedure. 
Once the MR scanner is moved, the MRI system is recalibrated using our
proprietary technology to adjust for the new position of the magnet in the
operating room environment.  Because the
MR scanner is only present inside the operating room for a short period while
scanning, the surgical team is afforded unrestricted access to the patient and
does not require special MR-compatible instruments for the procedure.


 


The IMRISNV System


 


The IMRISNV system can be used for a number of
neurovascular procedures and, in particular, stroke.  The IMRISNV system sequentially employs MR and
fluoroscopy in an integrated suite that provides interventional clinicians with
the ability to quickly identify stroke patients who are likely to benefit from
immediate intervention.


 


The MR scanner
is moved into the interventional room and positioned directly over the patient
on our MR-compatible angiography table, permitting the clinician to visualize
the structure and condition of arteries and to quickly assess the condition of
a patient’s brain tissue before undertaking an interventional procedure.  The MR scanner is then moved out of the
interventional room and the clinician can immediately commence an
interventional procedure using the bi-plane angiography system without moving
the patient from the table.  During and
immediately after the procedure, new MR images can be taken to assess the effectiveness
of the treatment and to determine if further intervention is required.


 


The IMRIScardio System


 


The
IMRIScardio system combines the capabilities of MR and angiography in a fully
integrated image guided therapy suite which provides clinicians with the
ability to visualize anatomical structure and assess the condition of a patient’s
arteries and myocardium before, during and after cardiovascular
interventions.   IMRIScardio provides
intraprocedural MR images that can be used with real-time fluoroscopy to assist
catheter navigation during a cardiovascular intervention.  The MR scanner is moved into the
interventional room and positioned directly over the patient on our
MR-compatible angiography table, permitting the clinician to visualize the
structure and condition of arteries and myocardium before undertaking an
interventional procedure.  The MR scanner
is then moved out of the interventional room and the clinician can immediately
commence an interventional procedure using the single plane angiography system
without moving the patient from the table. 
During and immediately after the procedure, new MR images can be taken
to assess the effectiveness of the treatment and to determine if further
intervention is required.


 


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Primary Components of IMRIS systems:


 


MRI Transport System: 
IMRISneuro, IMRISNV and IMRIScardio incorporate a proprietary, computer
controlled transport system that allows for the movement of the MR scanner and
its associated equipment from one imaging location to another.  The movement of the MR scanner is achieved
using our patented approach and relies upon our substantial body of proprietary
technical knowledge relating to, among other things, the calibration of the MR
scanner at multiple scanning locations. 
At the end of the movement cycle, the IMRIS system is electronically and
magnetically stable and ready to acquire high resolution images.


 


Large Aperture Superconducting 1.5 Tesla or 3.0 Tesla Magnet:  We offer a choice of two magnet strengths for
our IMRIS systems.  We use a large
aperture superconducting Siemens Magnetom “Espree”TM 1.5-Tesla-strength magnet
that provides high resolution MR images for medical use.  The 1.5 Tesla MR scanner (Tesla is a standard
measure of magnetic strength) has been the industry standard for MR imaging for
a number of years.  During 2008 we
introduced a second version of our system using Siemens 3.0 Tesla “Verio” TM MR
scanner.  The higher field strength of
the VerioTM system provides for shorter scan times and enhanced image
quality as a result of the higher field strength.


 


Both
the 1.5 Tesla “Espree”TM and 3.0 Tesla “Verio” TM product lines are supplied with
a wide range of specialized diagnostic and surgical software used to image
specific patient anatomy and physiology. 
Both magnets have a larger opening than is typically available on the
market, which accommodates patient positioning for multiple types of surgical
procedures.  The magnets are equipped
with a digital radio frequency system that provides all of the signal
processing required for image acquisition and processing along with operating
software that integrates all of the system capabilities together.


 


IMRISneuro Operating Table:  Our
IMRISneuro operating room table is MR-compatible but is also a fully functional
operating room table that can be used for most procedures, regardless of whether
MR imaging is required or not.  The table
is designed to allow the MR scanner to pass over the patient without
interference.


 


Multi-element Surgical Coil and Head Fixation Device:  The IMRISneuro system includes our
proprietary surgical coils and head fixation device.  Our coils are a key technology component of
the imaging system and are used in conjunction with the MR scanner to capture
more detailed images of the anatomy of interest.  Our coils are designed so that the top half
can be removed during surgery while the bottom half remains fixed to the
operating table.  Our coil integrates
with a three pin head fixation device that is used to secure the cranium of the
patient during the procedure.  The head
fixation device attaches directly to the table so that the patient’s head
position is fixed and calibrated with the MR scanner.


 


IMRISNV/IMRIScardio
Patient Table:  The IMRISNV/IMRIScardio patient table is
a MR-compatible table that is also radiolucent so that it can be used for
real-time fluoroscopic procedures.  The
table can be tilted forward and reverse, rolled laterally, rotated and moved
horizontally for optimum positioning for imaging and intervention.  For MR imaging, the table is rotated 90
degrees and fully extended toward the MR scanner to allow the MR scanner to
pass over the patient without interference and without ever moving the patient
from the tabletop.


 


Angiography Systems:  IMRISNV and
IMRIScardio products utilize Siemens Artis zeeTM or ANGIO-MR MIYABITM
angiography equipment.  IMRISNV and
IMRIScardio  can be configured with
either a bi-plane or single plane system depending on the specific needs of the
customer. The systems can be ceiling mounted or floor mounted.


 


Cardiac Coil:  Our 16-channel cardiac coil is designed for
use with IMRIScardio to capture detailed images of the anatomy of
interest.  The cardiac coil includes a
posterior coil that slides into a rigid MR-compatible radiolucent housing
underneath the mattress of the patient table. The anterior coil is flexible and
is positioned on the patient’s chest.


 


10

















 


Integrated Data Management:  Our integrated image guided therapy systems
provide hospitals with the ability to fully integrate video, voice and data
from our surgical suite.  The system
allows surgical teams to collect, display and share patient information in real
time within the operating room or with others outside the operating room,
including students or consulting surgeons. 
Our integrated data management capabilities
are comprised
of both hardware and software that function together seamlessly through an
intuitive touch-screen user interface.


 


In addition to
providing these key components and technologies of IMRIS systems, we act as a
systems integrator for our customers and ensure that our imaging guided therapy
systems are fully functional with operating room hardware and software provided
by other vendors.  Our systems are compliant
with industry standards and are compatible with the leading third party image
guidance systems on the market today.


 


Multi-room
Configurations


 


IMRIS systems
are available in multiple configurations that allow customers to meet their
needs and optimize the return on their investment.  All of the configurations for our systems
have the high-field MR scanner as the center of the design.  Each configuration contains one or two
operating/interventional rooms as well as a magnet storage bay or diagnostic
room.


 


For hospitals
that also require diagnostic imaging, the IMRIS systems offer the ability to
provide a full range of diagnostic imaging services in an adjacent room.  The diagnostic imaging capability of the
system has a complete suite of examination packages and can provide both
anatomical and functional imaging in addition to spectroscopy.  The ability to utilize the IMRIS system as a
fully-functioning diagnostic MR scanner allows our customers to optimize their
return on investment.


 


IMRISneuro
configurations contain one or two operating rooms together with a magnet
storage bay or diagnostic room.  The MR
scanner typically remains in the magnet bay or diagnostic room and is moved
into an operating room only when imaging is required.


 


IMRISNV and IMRIScardio configurations contain one
or two interventional rooms together with a magnet storage bay or diagnostic
room. The interventional rooms contain a single plane or bi-plane angiography
system.


 


Multiple
product configurations are also available including one IMRISneuro operating
room together with an IMRISNV or IMRIScardio interventional suite on either side of
a magnet storage bay or diagnostic room. 
Another multiple product configuration is an IMRISNV interventional suite together with an
IMRIScardio interventional suite as well as a magnet storage bay or diagnostic
room.


 


The doors
between the rooms in these various suite configurations provide air, acoustic,
and physical barriers between the rooms. 
Where required, the doors are airtight to prevent contamination and
allow the air in each room to be exchanged, a procedure which is required in
order to maintain sterility in the operating room.


 


3.4         Competition


 


MRI competes
with other surgical imaging technologies such as CT, fluoroscopy and ultrasound
for market share in the overall surgical imaging market. MR imaging, however,
has been widely recognized as the imaging modality of choice for neurosurgery,
and therefore we consider our main competitors to be other providers of
neurosurgical MR imaging.


 


The market for
neurosurgical MR imaging is highly competitive, with a number of companies
providing competing surgical MRI systems. 
Our competitors tend to be large medical systems suppliers, such as
General Electric, Siemens, Philips and Medtronic.  Some of our suppliers and partners compete
with IMRIS by offering their own competing MR imaging systems alone or in
conjunction with other partners. 
Medtronic offers its own low-field surgical MR scanner in competition
with IMRIS.


 


11

















 


We compete for
surgical MRI integration services.  Our
main competitor for integration services is BrainLab AG, which markets a
surgical MR image guidance system and also offers an integrated operating room
incorporating its proprietary information management system.


 


Notwithstanding
that many of our competitors are larger than IMRIS; we believe that IMRIS is
well positioned to compete due to our proprietary know-how and patent-protected
ability to move a high-field MR scanner to the patient.


 


The initial
competitor for IMRIScardio and IMRISNV is Philips, which has offered a combined
MRI/fluoroscopy system for several years. 
The Philips system involves moving the patient from an operating room on
a detachable table top into an MR scanner in an adjacent MRI diagnostic
room.  We believe the same product
advantages offered by IMRISneuro, particularly the focus on patient safety by
moving the scanner to the patient rather than moving the patient to the
scanner, apply to IMRIScardio and IMRISNV and will provide IRMIScardio and IMRISNV with a competitive advantage over other
systems.  Given the size of the market
for cardiovascular procedures, we expect that other competitors will emerge as
the application of MR imaging to cardiovascular and neurovascular applications
becomes more widely accepted by clinicians.


 


3.5          Intellectual
Property


 


The protection
of our products, product components, processes and know-how is integral to our
business.  We seek patent protection for
our products, components and other technologies in Canada, the United States
and other countries where available and appropriate.  We also rely on trade secrets, know-how and
continuing innovation to develop and maintain our competitive position.  All of our employees and contractors are
required to sign agreements committing them to hold our intellectual property
in confidence and assigning to IMRIS all rights in the technology that they
help us to develop.


 


Our core
patent family covers an apparatus which includes an MR scanner that is moved
along its axis over an operating room table to perform patient imaging while a
medical procedure is in progress and, after imaging is completed, is moved away
from the table to allow the procedure to continue without interference from the
MR scanner.  We have obtained patents for
this apparatus in the United States, Canada, Germany, The Netherlands, France,
the United Kingdom and Japan.  This
patent was granted in the United States in 1998 to the National Research
Council (NRC) of Canada and was irrevocably assigned by NRC to IMRIS in
2005.  The United States patent expires
in March 2016.  The Canadian,
German, Dutch, French, British and Japanese patents will expire in March 2017.


 


We
continuously seek other areas for patent protection for new developments in
order to maintain our competitive advantage. 
In addition to our core patent family, we have eighteen additional
patent families that are directed to specific aspects of our technology.  Seven of these already include Canadian,
United States and International Patent Cooperation Treaty (PCT) patent
applications, three are filed only in Canada and USA and the other eight
include United States patent applications which remain pending and may form the
basis of additional patent families.


 


We cannot be
assured that any of these pending patent applications will issue with
commercially useful claims or that the inventions when built will perform as
required or that the patents granted to us will be useful commercially.  We have an additional number of inventions
currently in development, which may lead to the filing of further patent
applications during 2010.


 


To date we
have registered or applied for registrations to the following trademarks in
Canada and the United States: “IMRIS” with its logo, “IMRISneuro” and “IMRIScardio”.
 We also claim common law trademarks over
the foregoing names.


 


12

















 


3.6          Research
and Development


 


In order to
remain competitive and to grow our business, we are continuously engaged in new
product development and enhancement.  Our
current research and development efforts are focused on leveraging our core MRI
system platform to provide image guided therapy solutions for different medical
applications.


 


To date, the
primary application for our surgical imaging system has been
neurosurgical.  Accordingly our
development efforts include maintaining our leading position in neurosurgical
imaging through product enhancements, the addition of new components (such as
our proprietary surgical coils) and new features to our IMRISneuro system.  Our research and development strategy also
includes the investigation of new neurosurgical applications for our surgical
MRI system, including neuro-modulation, an emerging technique for treating
neurological disorders such as Parkinson’s disease through the application of
electrical impulses to affected areas in the brain.


 


In addition to
developing new applications and products for neurosurgical procedures, we have
leveraged the IMRISneuro technology platform to target other application areas
including neurovascular and cardiovascular disorders with the introduction of
our IMRISNV and IMRIScardio systems in
2009.


 


We continue to
develop innovative imaging products and technologies that are designed to
increase the accuracy of critical information obtained from MR images, decrease
the time required to obtain it and improve its usefulness to clinicians.  For instance, we introduced a high-quality
imaging coil used for neurosurgery that provides what we believe are among the
highest resolution intra-operative MR images available on the market today.
This coil offers high image quality, compatibility with standard surgical
procedures and ease of use.  We continue
to work collaboratively with clinicians and researchers and to collect feedback
regarding patient outcomes to guide our innovation efforts and to seek patent
protection for our new developments as appropriate.


 


In December 2008
we entered into a letter of intent with the University Health Network in
Toronto for the development and commercialization of MR-guided radiation
therapy and interventional procedures. 
The goals of the collaboration include the development of new
technologies, the establishment of clinical workflows and the validation of the
benefits of MR guided radiation therapy technology and interventional therapies
to both the patient and the health system. 
Planned applications include the integration of the IMRIS technology
with external beam radiation therapy, MR guided biopsies and brachytherapy of
the prostate.  The collaboration signals
the entry of IMRIS into the field of image guided radiation therapy, expanding
on its existing expertise.


 


On
February 4, 2010, we announced that IMRIS had entered into a definitive
agreement to acquire NeuroArm Surgical Limited (“NASL”), a privately held
company based in Calgary, Alberta, and its magnetic resonance-compatible
neurosurgical robot.   This technology combines the
detailed imaging of MR with the precision of surgical robotics and has the
potential to deepen our portfolio of image guided therapy solutions and add to
our overall value proposition to customers. 
In conjunction with the acquisition of NASL, we have entered into a
memorandum of understanding with MacDonald, Dettwiler and Associates Limited, a
world leader in the development of robotics, to work with us to develop and
commercialize robotic surgery systems. As consideration for the
acquisition of NASL, including its technology, patents, and associated
intellectual property, 1.6 million IMRIS common shares were issued from
treasury to the vendors of all of the NASL shares.  The transaction closed on February 5,
2010.


 


3.6          Employees
and Facilities


 


As at December 31,
2009 we had 139 employees with 23 in sales and marketing, 59 in customer
support and operations, 37 in research and development and 20 in
administration.  We require employees
with specialized knowledge in areas such as the surgical environment, image
guidance, MR imaging, manufacturing and telecommunications technology.


 


We have never
experienced a work stoppage or other labour disturbance.  None of our employees belong to or are
represented by a labour union.  Voluntary
turnover has been low, and recently conducted employee focus group sessions
confirm management’s relationship with employees and employee morale to be
good.


 


13

















 


3.7          Manufacturing
and Assembly, Facilities and Suppliers


 


Manufacturing and Assembly


 


Each IMRIS
system is customized in order to meet specific customer preferences and
requirements.  Our customer engineering
group works closely with hospitals and clinicians to develop integrated designs
to meet their specialized requirements. 
The customized elements of each system can range from the inclusion of
selected brands of operating room equipment to the implementation of structural
and MRI system modifications which are required to permit the system to operate
properly at the customer location.  The
delivery cycle and installation process typically ranges from five months to
twelve months or more depending in part on the configuration of our system, but
also dependent on the amount of additional construction work that may be
required to be completed by the customer. 
In certain cases, the purchase and installation of our system may be
part of a larger hospital construction project and our delivery cycle may be
considerably longer.  Our delivery cycle
includes a phase for initial design and obtaining of building and similar
permits, structural site construction activities carried out by the hospital
and our subcontractors, installation of our overhead rail system, the delivery
and installation of the MR scanner and the remaining system components and
final testing and integration of the system. 
The delivery cycle involves the following steps:


 


	
  Step

  	
   

  	
  Responsibility

  
	
   

  	
   

  	
   

  
	
  Site preparation and installation of structural steel

  	
   

  	
  Customer

  
	
  Installation of overhead rail system

  	
   

  	
  IMRIS

  
	
  Installation of RF shield

  	
   

  	
  IMRIS sub-contractor

  
	
  Room finishes and mechanical systems

  	
   

  	
  Customer

  
	
  Delivery, installation and integration of
  magnet, MRI-transport system, table, and, if applicable, angio system

  	
   

  	
  IMRIS

  
	
  Final test and acceptance procedures, customer training

  	
   

  	
  IMRIS/Customer

  



 


Certain
components of an IMRIS system are manufactured and assembled at our Winnipeg
facility, while other components are purchased from outside vendors and
integrated and installed either at our Winnipeg facility or at the customer
site.  Our manufacturing and assembly
process also involves initial assembly, integration and testing of certain
components with proprietary software prior to shipment to customer sites.


 


Approximately
22,400 square feet of our Winnipeg facility is presently dedicated to
manufacturing of the mechanical, electronic and electrical subsystems of the
IMRIS systems, including the integrated magnet transport system, operating room
table with associated controls and specialized surgical imaging coils.


 


Suppliers


 


We purchase
certain components of our system from outside vendors, including the MR scanner (with its associated software,
diagnostic coils and controls), the angiography system, radio-frequency
shielding systems (which are required to protect the MR scanner from radio
interference), certain hardware components for our integrated data management
system, operating room booms and surgical lighting.


 


We attempt to
establish dual sourcing for most components of our system, although we
currently purchase our MR scanners and angiography systems only from Siemens
under a non-exclusive OEM re-sale agreement. 
The agreement sets out the general terms of supply by Siemens of the MRI
system.  The agreement was entered into
as of November 2009 for a five-year term with automatic renewal thereafter
for further two-year periods, subject to six months’ advance written notice of
termination by either party prior to the end of the initial term or any
two-year renewal term.  The agreement may
be terminated earlier in the event of default or in the event of a change of
control or similar sale transaction affecting IMRIS where the buyer or
controlling shareholder is a direct competitor to Siemens.


 


14

















 


For the
majority of our system components, we do not have long-term supply contracts
with suppliers.  We believe that we would
be able to establish alternative sources for these components, subject to any
regulatory approvals that may be required. 
It is possible that a disruption of the supply of key components could
result in increased costs and delays in deliveries of IMRIS systems, which
could adversely affect our reputation and results of operations.


 


Facilities


 


Our head
office and production and assembly facility is located in Winnipeg, Manitoba,
where we lease a 75,000 square foot building. 
Approximately 22,400 square feet of our main facility is devoted to
manufacturing, with the balance of the space dedicated to research and
development, sales and marketing, and administration.  The available manufacturing space can be
significantly increased with minimal capital investment.  The lease for our main facility has a
five-year term expiring in 2011 with a possibility of renewal at our option for
a period of two, three or five years. Our annual rent obligation is
approximately $402,000 per year.


 


In addition we
lease office space for certain regional employees in one location in each of
the United States, China, India and Japan.


 


3.8          Marketing
and Distribution


 


The purchase
and installation of an IMRIS system represents a significant capital project
for our customers.  The cost of an integrated
IMRIS system to a hospital can range from approximately $4 million to $12
million depending on the product selected, the room configuration and the level
of integration services requested.  The
installation generally involves further additional capital expenditures by the
customer for room construction and ancillary operating room equipment.  We currently do not provide leasing, deferred
payment, profit sharing or other financing arrangements to our customers in
connection with the purchase of our systems.


 


Our sales
process requires that we engage with a number of different stakeholders within
and outside the hospital to assist in making a strong clinical and business
case for the IMRIS system.  While
clinicians are generally the lead stakeholders of the hospital responsible for
supporting an IMRIS system acquisition, the sales process requires the
involvement of radiologists, facilities managers, hospital administrators and
other hospital staff at various stages. 
In certain cases, we also engage as needed with hospital funding
sources, including private donors, government entities and financial
institutions.  As a result, the sales
cycle associated with the marketing of our systems is both complex and lengthy,
with a typical sales cycle of more than 12 months from initial customer
engagement to our receipt of a purchase order.


 


We market
IMRIS systems directly to hospitals in our established markets through our own
sales force. We currently have sales staff located in Canada, the United
States; Beijing, China; Mumbai, India; Tokyo, Japan; Brussels and Belgium.


 


In support of
the sales staff, we currently have regional market managers who are responsible
for the development and delivery of territory-specific marketing programs to
create awareness and generate sales interest. 
Also supporting sales are specialists in program management, customer
engineering, customer support and training who serve all of the sales
regions.  Our product managers are
responsible for working with the sales staff, regional market managers and
customers to identify potential new products and upgrades to be developed in
conjunction with our research and development group.


 


15

















 


Strategic Partners


 


We work with a
number of our customers and suppliers in designing, developing and marketing
our systems.  Our most important
strategic relationship is with Siemens, with whom we have a long-term original
equipment manufacturer (“OEM”) agreement. 
The OEM agreement provides for the supply of the Magnetom Espree 1.5
TeslaTM and the VerioTM 3.0 Tesla superconducting magnets which are at the core
of our systems as well as the Siemens single plane and bi-plane angiography
systems for our IMRISNV and IMRIScardio systems.  The OEM agreement deals principally with the
terms and conditions relating to the supply of the magnet and angiography
systems. We also work closely with Siemens’ sales, marketing and customer
service departments in addressing customer sales opportunities, and Siemens
provides 24/7/365 first line of customer support to our customers.


 


We work with a
number of other suppliers who contribute products or services to the integrated
solutions we provide to our customers. 
Most of these relationships are based on mutually beneficial goals and
not contractual relationships.


 


We also work
with a number of customers who provide input in the product development cycle
and who act as demonstration sites for our customer visits.


 


3.9          Regulatory
Matters


 


IMRISneuro,
IMRISNV and IMRIScardio are classified
as medical devices and are subject to governmental regulations in various
jurisdictions.  These regulations
typically govern the research, testing, development, manufacture, promotion and
marketing of the system.  Once approved,
medical devices are usually subject to continuing regulation, which typically
includes record-keeping requirements, adverse event reporting, good
manufacturing requirements and post-market surveillance and, in certain
jurisdictions, the requirement to maintain certain ISO certifications and to
undergo periodic inspections. 
Non-compliance with the applicable regulatory requirements will
jeopardize our ability to market our products as such non-compliance can result
in the failure to grant the regulatory approval for the device, withdrawal or
suspension of the regulatory approval, fines, injunctions, civil penalties,
recalls or seizures of the device and, in certain jurisdictions, criminal
prosecution.


 


We have
received approval in the United States, Canada, Europe, China, Australia, South
Korea, Japan and Singapore to market and sell all five room configurations of
our IMRISneuro 1.5 Tesla system product line into these jurisdictions.  We have also received approval for our 3.0
Tesla system in the United States, Canada, Europe, Australia, South Korea and
Japan.  We have applied for regulatory
approval to market and sell our IMRISneuro 3.0 Tesla system in China.  No regulatory approval is required for the
marketing and sale of our systems in India.


 


As of December 31,
2009, we have received approval in the United States, Canada and Europe to
market and sell our IMRISNV and IMRIScardio systems.  In February 2010, we received approval
to market and sell these systems in Australia.


 


In addition,
some of our products must conform to standards set by the International
Electotechnical Commission (“IEC”), Underwriters Laboratories Inc. (“UL”), a
privately owned and operated product safety testing and certification
organization and TÜV SÜD,  a globally
recognized testing, inspection and certification organization.  In the United States, we obtain UL or TÜV SÜD  certification for each system
on site during the installation process.


 


We intend to
seek regulatory approval for IMRISNV and IMRIScardio in other jurisdictions in which we
currently have, or have sought, approval for our IMRISneuro system.  While we expect that the approval process in
each jurisdiction will be similar to that used to obtain approval of
IMRISneuro, there can be no assurance that we will receive market clearance for
IMRISNV and IMRIScardio in these
other jurisdictions.


 


16

















 


United States


 


In the United
States, medical devices are regulated primarily by the U.S. Food and Drug
Administration (the “FDA”).  The FDA
classifies medical devices into one of three regulatory classes, referred to as
Class I, Class II or Class III, depending on the level of
control and review necessary to assure the safety and effectiveness of the
device, which in turn is based on the level of risk to the patient.  As the risk level increases, additional data
is required to demonstrate the safety and effectiveness of the device.  The products we currently market are Class I
and Class II medical devices.


 


There are two
review procedures by which medical devices can receive FDA clearance or
approval for marketing in the United States: (i) a pre-market notification
(or a 510(k) notification), or (ii) submission and approval of a
pre-market approval application.  Most Class I
devices and a few Class II devices are exempt from the 510(k) notification
requirements subject to the limitations on exemptions. A 510(k) notification,
must be submitted for certain Class I devices as well as for the majority
of Class II and certain Class III devices.  The 510(k) application must establish
that the medical device, in comparison with an existing legally marketed
product (a “predicate device”):  (i) is
substantially equivalent, and (ii) is as safe and effective and does not
raise different questions of safety or effectiveness.  A pre-market approval application must be
filed if a proposed device is not substantially equivalent to a predicate
device.


 


Marketing a
medical device that is subject to a 510(k) notification may begin upon the
FDA issuing a clearance letter finding substantial equivalence to the predicate
device.  The FDA issued a clearance
letter with respect to certain room configurations for IMRISneuro 1.5 Tesla
system in August 2006 and the IMRISneuro 3.0 Tesla system in December 2008.  The FDA issued a clearance letter with
respect to our IMRISNV and IMRIScardio systems in September 2009.  We expect the products currently under
development will be subject to 510(k) clearance or special 510(k) clearance.  We obtain the advice of FDA regulatory
consultants in order to confirm which type of submission is required for a
given product.  Generally, a 510(k) clearance
submission requires three months for approval and a special 510(k) clearance
requires one month for approval, although delays are common.  The FDA, however, may determine that our
future products are not substantially equivalent and therefore not subject to
510(k) notification or may require further information, including clinical
data, to make a determination regarding substantial equivalence.  Such determination or request for additional
information will delay market introduction of the product that is the subject
of the 510(k) notification. If FDA requires a pre-market approval
application, the period for review and additional expense can be substantial, as
a pre-market approval application may involve creating additional clinical data
and typically takes 180 days to be approved by the FDA.


 


Canada


 


In Canada,
medical devices are regulated by Health Canada and are divided into one of four
regulatory classes, Class I to Class IV, depending upon the risk the
medical device presents to the patient. 
Except for Class I devices, all medical devices are required to
have a device license before they can be sold in Canada.  As the risk level increases, additional data
is required to demonstrate the safety and effectiveness of the medical device
before a device license is issued by Health Canada.  Manufacturers of Class II, III and
IV medical devices are also required to submit to Health Canada valid ISO 13485
quality management systems certificate issued to the manufacturer by a third
party organization recognized and accredited by Health Canada.  We have obtained a Class II device
license for our IMRISneuro 1.5 Tesla system in 2006, our IMRISneuro 3.0 Tesla
system in 2008 and a Class III device license for our IMRISNV and IMRIScardio systems in 2009.


 


17

















 


International
Regulations


 


International
sales of medical devices are subject to foreign governmental relations which
vary substantially from country to country. 
The primary regulatory environment in Europe is that of the European
Union.  As in the United States, medical
devices are classified depending upon the risk the medical device presents to
the patient, although otherwise the current regulatory requirements in the
European Union differ significantly from those in the United States.  Medical devices in Europe are required to
carry a CE Mark, which represents compliance with the applicable Medical Device
Directives.  Typically, in order to
achieve the CE Mark, Class IIa, Class IIb and Class III medical
devices in Europe require quality systems certification by a third party
assessment agency known as a Notified Body. 
The IMRISneuro system is a European Class IIa medical device and
IMRISNV and IMRIScardio systems are Class IIb
medical devices and fall under the Medical Devices Directive (93/42/EEC)
(MDD).  SGS (UK) Limited Systems and
Services is our Notified Body for Europe. 
We are required to prepare a technical file with evidence of compliance
with the MDD and applicable standards. 
We received the appropriate CE Mark for our IMRISneuro 1.5 Tesla system
in 2006 and our IMRISneuro 3.0 Tesla system and IMRISNV and IMRIScardio systems in 2009.


 


3.11        Risks
Related to Our Business


 


Long sales cycle, high unit price and
limited quarterly installations


 


The high unit
price of the IMRISneuro, IMRIScardio and IMRISNV systems, as well as other
factors, may contribute to substantial fluctuations in our quarterly operating
results and share price.  The purchase
and installation of an IMRIS system represents a significant capital project
for our customers.  Due to the relative
size and complexity of these projects, our sales process requires that we
engage with a number of different stakeholders within and outside the hospital
to assist in making a strong clinical and business case for the IMRIS system,
including neurosurgeons, radiologists, facilities managers, hospital
administrators and other hospital staff. 
As a result, the sales cycle associated with the marketing of our
systems is both complex and lengthy, with an average sales cycle of more than
12 months from initial customer engagement to our receipt of a purchase order.


 


Because of the
high unit price of the IMRIS system and the relatively limited number of units
installed each quarter, each installation currently represents a significant
component of our revenue for a particular quarter.  If we lose a single customer order or if customers
defer installation of an IMRIS system for even a short period of time,
recognition of a significant amount of revenue may be lost or deferred to a
subsequent period.


 


Because our
operating costs are relatively fixed, our inability to recognize revenue in a
particular quarter may adversely affect our profitability in that quarter.  In addition, while we believe that our order
backlog provides a better measure at any particular point in time of the
long-term performance prospects of our business than our quarterly operating
results, investors may attribute significant weight to our quarterly operating
results, which may result in substantial fluctuations in our share price.


 


We expect that
revenues from a limited number of new customers will account for a large
percentage of total revenues in future quarters.  Our ability to attract new customers will
depend on a variety of factors, including the capability, safety, efficacy,
ease of use, price, quality and reliability of our products and effective sales,
support, training and service.  The loss
or delay of individual orders could have a significant impact on revenues and
operating results.  Our failure to add
new customers that make significant purchases of our products would reduce our
future revenues.


 


18

















 


If we are
unable to fulfill our current purchase orders and other commitments on a timely
basis or at all, our ability to generate revenue could be impaired, market
acceptance of our products could be adversely affected and hospitals may instead
purchase our competitors’ products.  As
at December 31, 2009 we had 16 outstanding purchase orders and other
commitments for our IMRIS systems.  These
orders and commitments may be revised, modified or cancelled, either by their
express terms, as a result of negotiations or by project changes or
delays.  The installation process for an
IMRIS system is long and involves multiple stages, the completion of many of
which is outside of our control.  If we
experience any failures or delays in completing the installation of these
systems, our reputation would suffer and we may not be able to sell additional
systems.  Substantial delays in the
installation process also increase the risk that a customer would attempt to cancel
a purchase order.  This would have a
negative effect on our revenues and results of operations.


 


Limited operating history and accumulated
deficit


 


We acquired
all of the assets and assumed all of the liabilities of Innovative in
2005.  Accordingly, we have a limited
operating history.  We have a large
accumulated deficit and we may not maintain profitability.  We have incurred substantial losses since
inception and we may incur additional operating losses.  If the time required to generate significant
revenues and profitability is longer than anticipated, we may not be able to
continue our operations without additional capital.  Our prospects must be considered in light of
the risks and uncertainties encountered by an early-stage company in the
continuously-evolving market for image guided therapy solutions, including the
risks described throughout this annual information form.  If we cannot successfully address these
risks, our business and financial condition would suffer.


 


Lack of product diversity


 


Currently,
our commercially available products are the IMRISneuro, IMRIScardio and IMRISNV systems.  Although we expect sales of our new
IMRIScardio and IMRISNV systems to increase with
market acceptance of these systems, we currently generate substantially all of
our revenue from sales of the IMRISneuro system and multiyear service plans for
the IMRISneuro system.  If we are unable
to sustain or grow sales of the IMRISneuro system or grow sales of IMRIScardio
and IMRISNV, we may not generate sufficient revenue to support
our business.  Accordingly, we are
currently largely dependent on our ability to market and sell the IMRISneuro
system.  Any factor materially and/or
adversely affecting our ability to market and sell the IMRISneuro system or
pricing and demand for the IMRISneuro system may have a material and adverse
effect on our financial condition and results of operations.


 


Dependence on suppliers


 


We depend on
Siemens to supply the MR scanner and angiography systems for our IMRIS systems.  Our current agreement with Siemens was
entered into as of November 2009 for a five-year term with automatic
renewal annually thereafter, subject to six months’ advance written notice of
termination by either party.  The
agreement may be terminated earlier in the event of default or in the event of
insolvency or equivalent proceedings against either party or in the event of a
change of control or similar sale transaction affecting IMRIS where the buyer
or controlling shareholder is a direct competitor to Siemens.  If for any reason we could not obtain MR
scanners and angiography systems from Siemens, there is no certainty that we
could find another vendor willing to supply this equipment for the IMRIS
systems and a change would require a redesign of the IMRIS systems, which could
take a year or more to implement.  We are
dependant on Siemens to provide support and maintenance services to our
customers under contract to IMRIS.  If
Siemens’ services became unavailable, any resulting service issues could
disrupt our customer relationships and cause damage to our reputation.


 


19














 


We purchase
certain other critical components of our system from outside vendors, including
radio-frequency shielding systems (which are required to protect the MR scanner
from radio interference), certain hardware components for our integrated data
management system, and operating room booms and lights.  For the majority of our other critical system
components, we do not have long-term supply contracts with the suppliers.  However, we have established dual sourcing
for some of these other components of our system and we believe that we would
be able to establish additional alternative sources for these components,
subject to any regulatory qualifications, as may be required.  It is possible that a disruption of the supply
of key components could result in increased costs and delays in deliveries of
IMRIS systems, which could adversely affect our reputation and results of
operations.  Additionally, any transition
to alternate manufacturers or suppliers would likely result in operational
problems and increased expenses and could delay the shipment of, or limit our
ability to provide, our products.  We
cannot assure you that we would be able to enter into agreements with new
manufacturers or suppliers on commercially reasonable terms or at all.  As a result, we may be unable to meet the
demand for the IMRIS systems, or face increased costs and delays in deliveries
of IMRIS systems, either of which could harm our ability to generate revenue
and damage our reputation.  In addition,
any delay in receiving components might cause us to have insufficient spare
parts to service existing installed systems, which could lead to customer
dissatisfaction.


 


We believe it
may be necessary to find alternative manufacturers for key components of the
IMRIS systems over time as our quantity and quality demands evolve, but we may
not be able to identify an alternative manufacturer in a timely fashion.  Any transition to alternate manufacturers or
suppliers would likely result in operational problems and increased expenses
and could delay the shipment of, or limit our ability to provide, our
products.  Furthermore, we will need to
verify that any new manufacturer meets our technical specifications and
maintains facilities, procedures and operations that comply with our quality
requirements.  We will also have to
assess any new manufacturer’s compliance with all applicable regulations and
guidelines, which could further impede our ability to manufacture our products
in a timely manner.  If the change in
manufacturer results in a significant change to the product, a new 510(k) clearance
from the U.S. Food and Drug Administration, or FDA, or similar foreign
clearance may be necessary, which would likely cause substantial delays.  The occurrence of any of these events could
harm our ability to meet the demand for the IMRIS systems in a timely manner or
within budget.


 


Development of new products


 


To date, the
primary application for our surgical MR imaging system has been neurosurgical
procedures.  In addition to developing
new neurological applications and products, we have leveraged the IMRISneuro
technology platform to create our IMRIScardio and IMRISNV systems for interventional
cardiovascular and neurovascular procedures. 
In addition, we believe our products and related technologies can be
applied in different medical practices and we will continue to assess other
applications for our MRI system platform. 
We have limited financial and managerial resources and therefore may be
required to focus on selected products and applications and to forego efforts
with regard to other products and applications. 
We may fail to focus on the most profitable areas or our decisions may
not produce viable commercial products and may divert our resources from more profitable
market opportunities.  Moreover, we may
devote resources to developing products in these additional areas but may be
unable to justify the value proposition or otherwise develop a commercial
market for such products.  In that case,
the return on investment in these additional areas may be limited, which could
negatively affect our results of operations.


 


20

















 


Reliance on key personnel


 


We are
dependent on certain of our key employees. 
In particular, we are highly dependent on the members of our senior
management, operations and research and development staff.  The loss of one or more of these individuals
could adversely affect our business. 
Recruiting and retaining key personnel in the future will be critical to
our success.  Although we have done so in
the past and expect to be able to do so in the future, we cannot assure you
that we will be able to attract and retain skilled and experienced
personnel.  Competition for qualified
personnel in the medical device industry is intense and finding and retaining
qualified personnel with experience in our industry is very difficult.  We believe there are only a limited number of
individuals with the requisite skills to serve in many of our key positions and
we compete for key personnel with other medical equipment and software
manufacturers and technology companies, as well as universities and research
institutions.  It can be difficult to
hire and retain these persons, and we may be unable to replace key persons if
they leave or fill new positions requiring key persons with appropriate
experience.  A significant portion of our
compensation to our key employees is in the form of stock option grants.  A prolonged depression in our share price
could make it difficult for us to retain our employees and recruit additional
qualified personnel.  We do not maintain,
and do not intend to obtain, key employee life insurance on any of our
personnel.  If we fail to hire and retain
personnel in key positions, we may be unable to grow our business successfully.


 


Lack of supporting clinical data


 


The
effectiveness of procedures performed using IMRIS systems are not yet supported
by long-term clinical data and the medical community has not yet developed a
large body of peer-reviewed literature that supports the safety and efficacy of
IMRIS systems.  Although we believe that
IMRIS systems have advantages over competing products and technologies, because
they are relatively new, we do not have sufficient clinical data demonstrating
these advantages for all applications. 
If future studies call into question the safety or efficacy of our
products, our business, financial condition or results of operations could be
adversely affected.


 


Market competition and technological
advances


 


The medical
device industry in general, and the field of surgical imaging in particular, is
subject to intense and increasing competition and rapidly evolving
technologies.  Radiation therapy,
chemotherapy and other drugs offer existing means of treating the diseases that
are dealt with using surgical imaging. 
In addition, many government, academic and business entities are
investing substantial resources in research and development of treatments and
new products that may render surgical imaging obsolete, including radiation
treatment, new drug treatments and gene therapy.  Successful developments that result in new
approaches for treatments could reduce the attractiveness of our products or
render them obsolete.  MRI competes with
other surgical imaging technologies such as CT, fluoroscopy and ultrasound for
market share in the overall surgical imaging market.


 


Because our
products often have long development and government approval cycles, we must
anticipate changes in the marketplace and the direction of technological
innovation and customer demands.  To
compete successfully, we will need to continue to demonstrate the advantages of
our products and technologies over well-established alternative procedures,
products and technologies, and convince neurosurgeons, cardiovascular
interventionists, radiologists, facilities managers, hospital administrators
and other hospital staff at various stages and other healthcare decision makers
of the advantages of our products and technologies.


 


Our current
competitors or other companies may at any time develop new imaging
solutions.  If we are unable to develop
products that compete effectively against the products of existing or future
competitors, our net revenue could decline. 
Some of our competitors may compete by changing their pricing model or
by lowering the price of their imaging solutions or ancillary supplies.  If these competitors’ pricing techniques are
effective, it could result in downward pressure on the price of our
products.  If we are unable to maintain
or increase our selling prices in the face of competition, we may not improve
our gross margins.


 


21

















 


Moreover, many
of our competitors are large medical systems suppliers and have considerably
greater resources at their disposal than we do in terms of technology,
manufacturing, product development, marketing, distribution, sales,
commercialization, capital resources and human resources and have established
relationships with hospitals.  Many
competitors have more experience in obtaining domestic and foreign regulatory
approvals.  Therefore, we cannot assure
you that we can successfully compete with present or potential competitors or
that such intense competition will not have a materially adverse effect on our
business, financial condition or results of operations.


 


In addition to
the competition that we face from technologies performing similar functions to
our IMRIS systems, competition also exists for the limited capital expenditure
budgets of our customers.  A potential
purchaser may be forced to choose between two items of capital equipment.  Our ability to compete may also be adversely
affected when purchase decisions are based largely upon price, since the IMRIS
systems are premium-priced systems due to their greater functionality compared
to traditional systems.  If we are unable
to market the IMRIS systems more effectively than competing products, which
could be purchased as an alternative to our systems using the same budget at
comparable or lower prices, we may be unable to maintain our current growth
rate.


 


Patent protection and trade secrets


 


Our success
depends, in part, on our ability to maintain or obtain and enforce patent and
other intellectual property protections for our processes and technologies, to
preserve our trade secrets and to operate without infringing upon the
proprietary rights of third parties or having third parties circumvent the
rights that we own or license.  We have
obtained patents and filed applications in the United States, Canada, and
internationally and may, in the future, seek additional patents or file patent
applications.  Significant aspects of our
technology are currently protected as trade secrets, for which we may or may
not file patent applications when appropriate. 
There can be no assurance that patents owned or licensed by IMRIS will
be valid and we may not be able to successfully obtain and enforce patents and
maintain trade secret protection for our technology.  We cannot assure you that any of our pending patent
applications will issue with commercially useful claims or that the inventions
when built will perform as required, or that the patents granted to us will be
commercially useful.  Setbacks in these
areas could negatively affect our ability to compete and materially and
adversely affect our business, financial condition and results of operations.


 


Patents may
provide some degree of protection for our intellectual property; however,
patent protection involves complex legal and factual determinations and is
therefore uncertain.  We cannot assure
you that our patents or patent applications will be valid or will issue over
prior art, or that patents will issue from the patent applications we have
filed or will file.  Additionally, we
cannot assure you that the scope of any claims granted in any patent will
provide us with adequate protection for the processes used by us currently or
in the future.  We cannot be certain that
the creators of our technology were the first inventors of inventions and
processes covered by our patents and patent applications or that they were the
first to file.  Accordingly, we cannot
assure you that our patents will be valid or will afford us with protection
against competitors with similar technology or processes.  Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our proprietary information. 
Monitoring unauthorized use of our confidential information is difficult
and we cannot be certain that the steps we take to prevent unauthorized use of
our confidential information will be effective. 
In addition, the laws governing patent protection continue to evolve and
are different from one country to the next, all of which causes further
uncertainty in the usefulness of a patent. 
In addition, our issued patents or patents licensed to us may be
successfully challenged, invalidated, circumvented or unenforceable so that our
patent rights would not create an effective competitive barrier. Moreover, the
laws of some countries may not protect our proprietary rights to the same
extent as do the laws of the United States and Canada.  Although we have attempted to obtain patent
coverage for our technology where available and appropriate, there are aspects
of the technology for which patent coverage was never sought or never
received.  There are also countries in
which we sell or intend to sell our products, but have no patents or pending
patent applications.  Our ability to
prevent others from making or selling duplicate or similar technologies will be
impaired in those countries in which we have no patent protection.  If we are not able to adequately protect our
intellectual property and proprietary technology, our competitive position,
future business prospects and financial performance will be adversely affected.


 


22

















 


Unpatented
trade secrets, technological innovation and confidential know-how are also
important to our success.  Although we
seek to protect our proprietary information through confidentiality agreements
and other appropriate means, these measures may not effectively prevent
disclosure of our proprietary information, and, in any event, we cannot assure
you that others will not independently develop the same or similar information
or gain access to the same or similar information.  In view of these factors, our intellectual
property positions have a degree of uncertainty.


 


Intellectual property litigation


 


Patents issued
or licensed to us may be infringed by the products or processes of others.  The cost of enforcing patent rights against
infringers, if such enforcement is required, could be significant, and the time
demands could interfere with our normal operations.  We may also be subject to litigation alleging
that we have violated the intellectual property rights of third parties, which
litigation would be equally costly and time consuming to defend against. There
has been substantial litigation and other proceedings regarding patent and
other intellectual property rights in the medical technology industry.  We may become a party to patent litigation
and other proceedings.  The cost to us of
any patent litigation, even if resolved in our favour, could be substantial.  Some of our competitors may be able to
sustain the costs of such litigation more effectively than we can because of
their substantially greater financial resources.  Litigation may also absorb significant time
and could divert our management’s attention from our core business.  Litigation also puts our patents at risk of
being invalidated or interpreted narrowly and our patent applications at risk
of not issuing.  Additionally, we may
provoke third parties to assert claims against us.


 


Furthermore,
it is possible that patents issued or licensed to us may be challenged
successfully by third parties in patent litigation.  Patent applications which relate to or affect
our business may have been filed by others and may conflict with our
technologies or patent applications. 
This could reduce the scope of patent protection which we could otherwise
obtain or even lead to refusal of our patent applications.  It is also possible for others to develop
products which have the same effect as our products on an independent basis or
to design around the technology protected by our patents.  In any event, if we are unable to secure or
to continue to maintain a preferred position, our products could become subject
to competition from the sale of similar or equivalent products.  We could also become involved in interference
proceedings in connection with one or more of our patents or patent
applications to determine priority of invention.


 


We cannot be
certain that we are the creator of inventions covered by pending patent
applications or that we were the first to file patent applications for any such
inventions.  We cannot assure you that
our patents, once issued, would be declared by a court to be valid or
enforceable, or that a competitor’s technology or product would be found to
infringe our products.  In the event that
a court was to find that we were infringing upon a valid patent of a third
party, we could be required to pay a substantial damage award, develop
non-infringing technology, enter into royalty-bearing licensing agreements or
stop selling our products.  We cannot
assure you that we could enter into licensing arrangements at a reasonable
cost, or at all, or develop or obtain alternative technology in respect of
patents issued to third parties that incidentally cover our products.  Any inability to secure licenses or
alternative technology could result in delays in the introduction of some of
our products or even lead to prohibition of the development, manufacture or
sale of certain of our products.


 


We may be
subject to claims that our employees have wrongfully used or disclosed alleged
trade secrets of their former employers. 
As is common in the medical device industry, we employ individuals who
were previously employed at other medical equipment companies, including our
competitors or potential competitors. 
Although no claims against us are currently pending, we may be subject
to claims that these employees or we have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of their former
employers.  Litigation may be necessary
to defend against these claims.  Even if
we are successful in defending against these claims, litigation could result in
substantial costs and be a distraction to management.


 


23

















 


Ability to manage growth


 


Our future
financial performance, our ability to commercialize the IMRIS systems and to
compete effectively will depend, in part, on our ability to manage future
growth effectively.  In 2009, we reported
a 94% growth in sales over the prior year comparative period and a 32%
year-over-year growth in our order backlog. 
Our ability to manage growth will require us to continue to implement
and improve our administrative, accounting and management systems and to
recruit, integrate and train new employees, including additional management,
administrative, distribution, sales and marketing personnel.  Our manufacturing, assembly and installation
process is complex and we must effectively scale this entire process to satisfy
customer expectations and changes in demand. 
We cannot be certain that our personnel, systems, procedures and
internal controls will be adequate to support our future operations.  Any failure to effectively manage our growth
could impede our ability to successfully develop, market and sell our products
and harm our business.


 


Foreign exchange fluctuations


 


As a global
provider of integrated imaging solutions, most of our sales are denominated in
currencies other than the Canadian dollar. 
We currently generate a significant portion of our sales in U.S. dollars
but many of our expenses are denominated in Canadian dollars.  To date, we have not used forward exchange
contracts to hedge exposures denominated in U.S. dollars or any other
derivative instrument for trading, hedging or speculative purposes.  As such, we are exposed to fluctuations in
the exchange rate between the U.S. dollar and the Canadian dollar as a result
of the translation into Canadian dollars of our balance sheet and income
statement items denominated in U.S. dollars. 
In addition, we are also exposed to fluctuations in the exchange rate
between the Canadian dollar and any other foreign currencies in which our sales
may be denominated.


 


Additional financing requirements


 


We believe
that our cash reserves and cash from operations will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for the
foreseeable future.  If our estimates of
revenue, expenses, or capital or liquidity requirements change or are
inaccurate, or if cash generated from operations is insufficient to satisfy our
liquidity requirements, we may arrange additional financings.  In the future, we may also arrange financings
to give us financial flexibility to pursue attractive acquisition or investment
opportunities that may arise, although we currently do not have any
acquisitions or investments planned.  We
may pursue future financings through various means, including equity
investments, issuance of debt, joint venture projects, licensing arrangements
or other means.  We cannot be certain
that we will be able to obtain additional financing on commercially reasonable
terms or at all.  Our ability to obtain
additional financing may be impaired by such factors as the capital markets,
both generally and specifically in the medical device industry and the fact
that we are a new enterprise without a proven operating history.  If the amount of capital we are able to raise
from financing activities, together with our revenues from operations, is not
sufficient to satisfy our capital needs, we may not be able to develop or
enhance our products, execute our business and growth plans, take advantage of
future opportunities, or respond to competitive pressures or unanticipated
customer requirements.  If any of these
events occurs, it could adversely affect our business, financial condition and
results of operations.


 


24

















 


Regulatory matters


 


Products
intended for diagnostic and therapeutic use for humans are governed by a wide
array of regulatory authorities in various jurisdictions.  For most of these products in most
jurisdictions, applicable statutes and regulations require testing and
government review and approval prior to marketing the product.  This procedure can take a number of years and
involves the expenditure of substantial resources.  Any failure or delay by us to obtain
regulatory approvals or clearances could adversely affect the marketing of any
products developed by us and our ability to receive product revenue.  We cannot assure you that any of our planned
products will be approved by any regulatory authority on a timely basis, or at
all.  Also, in the event that a
regulatory authority revokes any approvals granted in respect of our products,
our business, financial condition and results of operations could be adversely
affected.  In addition, regulatory
authorities in countries in which we market and sell our products have the
authority to require the recall of our products in the event of material
deficiencies or defects in design or manufacture or in some cases, for safety
or efficacy concerns.  A government
mandated recall, or a voluntary recall by us, could occur as a result of
component failures, manufacturing errors or design defects, including defects
in labelling and user manuals.  Any
recall could divert management’s attention, cause us to incur significant
expenses, harm our reputation with customers, negatively affect our future
sales and business, require redesign of an IMRIS system, harm our operating
results, and result in a decline in our share price.  In these circumstances, we may also be
subject to significant enforcement action. 
If any of these events were to occur, our business, financial condition
and results of operations could be adversely affected.


 


Numerous
statutes and regulations govern the manufacture and sale of medical devices in
the United States, Canada and other countries where we intend to market our
products.  In addition to the approval of
products, such laws and regulations govern, among other things, the approval of
manufacturing facilities, testing procedures and controlled research,
manufacturing practices, marketing, advertising and labelling of products,
record keeping, post-market surveillance and the reporting of adverse
events.  In addition, we must comply with
U.S. federal and state healthcare anti-kickback laws and other healthcare fraud
and abuse laws that affect the marketing of medical devices.  Failure to comply with statutes and
regulations administered could result in warning letters, fines and other civil
penalties, unanticipated expenditures, withdrawal of regulatory approval,
delays in approving or refusing to approve a product, product recall or
seizure, interruption of production, operating restrictions, injunctions,
criminal sanctions and exclusion from certain public healthcare programs.  We and our suppliers are also subject to
numerous federal, state, provincial and local laws relating to such matters as
safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances.  In addition, advertising and
promotional materials relating to medical devices are, in certain instances,
subject to regulation by the Federal Trade Commission in the United States,
Health Canada and the Competition Bureau in Canada and equivalent regulators in
other jurisdictions.  We and our
manufacturers and suppliers may be required to incur significant costs to
comply with such laws and regulations in the future, and such laws and
regulations may have an adverse effect on our business.  Our failure or the failure of our
manufacturers and suppliers to comply with current or future regulatory
requirements may have a material adverse effect on our business, financial condition
or results of operations.


 


Manufacturing and development concerns


 


Our in-house
manufacturing operations are conducted at a single location in Winnipeg,
Manitoba and any disruption at our facility could increase our expenses.  We do not maintain a backup manufacturing
facility and we therefore depend on our current facility for the continued
operation of our business.  We take
precautions to safeguard our facility, including insurance, health and safety
protocols, and off-site storage of computer data.  However, a natural disaster could cause
substantial delays in our manufacturing operations, damage or destroy our
manufacturing equipment or inventory, and cause us to incur additional
expenses.  The insurance we maintain
against natural disasters may not be adequate to cover our losses in any
particular case.  With or without
insurance, damage to our manufacturing facility or our other property, or to
any of our suppliers, due to a natural disaster or casualty event may have a
material adverse effect on our business, financial condition and results of
operations.


 


25

















 


IMRIS systems
are complex, and require the integration of a number of components from several
sources of supply.  We must manufacture
and assemble these complex systems in commercial quantities in compliance with
regulatory requirements and at an acceptable cost.  We believe that our manufacturing facility is
adequate for our expected growth for the foreseeable future.  In order to meet our anticipated long term
market demand we will need to increase our manufacturing capacity.  Increasing the manufacturing capacity of our
facilities will require the investment of additional funds and the hiring and
retaining of additional management and technical personnel who have the
necessary manufacturing experience.  We
may not successfully complete any required increase in manufacturing capacity
on a timely basis or at all.  If our
manufacturing capacity does not keep pace with product demand, we will not be
able to fulfill orders in a timely manner which in turn may have a negative
effect on our financial results and overall business.  Conversely, if demand for our products
decreases, the fixed costs associated with excess manufacturing capacity may adversely
affect our financial results.


 


Reliance on partners


 


We work with a
number of our customers and suppliers in designing, developing and marketing
our systems.  Currently, our most
important strategic relationship is with Siemens, who supplies the
superconducting magnet at the core of our systems, the angiography equipment
for our IMRISNV and IMRIScardio systems, and
with whom we work closely in connection with the sales and marketing of our
IMRIS systems.  Siemens and certain of
our other strategic partners are large, global organizations with diverse
product lines and interests that may diverge from our interests in
commercializing our products. 
Accordingly, our strategic partners may not devote adequate resources to
our product development, or may experience financial difficulties, change their
business strategy or undergo a business combination that may affect their
willingness or ability to fulfill their obligations to us.  The failure of one or more of our key
strategic partners could have a material adverse effect on our financial condition,
results of operations and cash flow. 
Furthermore, if we are unable to enter into additional partnerships in
the future, or if our current or future partnerships fail, our ability to
develop and commercialize products could be impacted negatively and our
revenues could be adversely affected. 
There can be no assurances that we will be able to establish these
strategic relationships, or, if established, that the relationships will be
maintained, particularly if members of our management team leave our company.


 


Status of healthcare reimbursement


 


Medical
institutions will typically bill the services performed with our products to
various third-party payers, such as government health administration
authorities, private health coverage insurers and other organizations.  Our ability to commercialize products
successfully may depend in part on the extent to which reimbursement for the
cost of such products and related treatments will be available.  Third-party payers are increasingly
challenging the price of medical products and services and instituting cost
containment measures to control or significantly influence the purchase of
medical products and services. 
Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products and we cannot assure you that adequate third-party
coverage will be available to establish price levels sufficient for us to
realize an appropriate return on our investment in product development.  In the event that our customers are unable to
obtain adequate reimbursement for the use of IMRIS systems or other products we
may develop, market acceptance of our products would be adversely affected.


 


Future
legislative or regulatory changes to the healthcare system may affect our
business.  Even if third-party payers
provide adequate coverage and reimbursement for procedures using our products,
adverse changes in third-party payers’ general policies toward reimbursement
could preclude market acceptance for our products and materially harm our sales
and revenue growth, which could cause our share price to decline.  Future legislative or policy initiatives
directed at reducing costs could be introduced in the United States, Canada and
other countries where we intend to market our products.  We cannot predict the impact on our business
of any legislation or regulations related to the healthcare system that may be
enacted or adopted in the future.


 


26

















 


In addition,
reimbursement and healthcare payment systems in international markets vary
significantly by country and, within some countries, by region.  In many international markets, payment
systems may control reimbursement for procedures performed using new products
as well as procurement of these products. 
As economies of emerging markets develop, these countries may implement
changes in their healthcare delivery and payment systems.  Furthermore, healthcare cost containment
efforts similar to those underway in the United States are prevalent in many of
the other countries in which we intend to sell our products and these efforts
are expected to continue.  Market
acceptance of our products in a particular country may depend on the
availability and level of reimbursement in that country.


 


Research and development risk


 


A principal
component of our business strategy is to expand our product offering to fully
exploit the core technologies that we have developed for our IMRIS
systems.  As such, our organic growth and
long-term success is partially dependent on our ability to successfully develop
and market new products and we will likely incur significant research and
development expenditures.  We cannot be
certain, however, that any investment in research and development will yield
technically feasible or commercially viable products.  Product development is subject to regulatory
overview and approval at significant costs. 
Failure to introduce new products, or failure or delays in obtaining regulatory
approval could materially and adversely affect our operations and financial
condition.


 


Certain
companies have claimed exclusive patent, copyright and other intellectual
property rights to technologies in the diagnostics industry.  If these technologies relate to our planned
products, we would be obliged to either seek licenses to use this technology or
obtain opinions of invalidity or non-infringement, or appropriately redesign
products. In the event that these alternatives are not possible, we may be
precluded from marketing such products, which could adversely impact our revenues
and financial condition.


 


Potential product liability


 


Medical
products involve an inherent risk of product liability claims and associated
adverse publicity.  We currently maintain
liability insurance coverage in the aggregate amount of $10 million.  While we believe such insurance coverage to
be adequate, there is no guarantee that future claims based on product
liability will not exceed such amounts. 
In addition, should it prove impossible to obtain this type of insurance
at reasonable rates or to otherwise protect us against potential liability
proceedings, we could be required to cease the commercialization of products
that we have developed or even be prevented from beginning the
commercialization of new products.  Our
obligation to pay indemnities or to withdraw a product following complaints
could materially and adversely affect our financial condition, results of
operations and cash flow.


 


Warranty claims


 


Our costs
could substantially increase if we receive a significant number of warranty
claims.  We typically provide our
customers with a one-year material and workmanship warranty on their purchase
of an IMRIS system.  We have only a
limited history of commercial placements from which to judge our rate of
warranty claims.  If product returns or
warranty claims increase, we could incur unanticipated additional expenditures
for parts and service.  In addition, our
reputation and goodwill in the medical imaging market could be damaged.  While we have established reserves for
liability associated with product warranties, unforeseen warranty exposure in
excess of those reserves could materially and adversely affect our financial
condition, results of operations and cash flow.


 


27

















 


International operations


 


We are
currently expanding our sales and marketing efforts to markets outside of North
America.  In the future, we expect
international sales of our products to account for a significant portion of our
revenue, which exposes us to risks inherent in international operations.  To accommodate our international sales, we
have and will need to further invest financial and management resources to
develop an international infrastructure that will meet the needs of our
customers.  Accordingly, we will face additional
risks resulting from our international operations including:


 


·      difficulties in enforcing agreements and
collecting receivables in a timely manner through the legal systems of many
countries outside North America;


 


·      the failure to fulfill foreign regulatory
requirements to market our products on a timely basis or at all;


 


·      availability of, and changes in,
reimbursement within prevailing foreign healthcare payment systems;


 


·      difficulties in managing foreign
relationships and operations, including any relationships that we establish
with foreign sales or marketing employees and agents;


 


·      limited protection for intellectual
property rights in some countries;


 


·      fluctuations in currency exchange rates;


 


·      the possibility that foreign countries may
impose additional withholding taxes or otherwise tax our foreign income, impose
tariffs or adopt other restrictions on foreign trade;


 


·      the possibility of any material shipping
delays;


 


·      significant changes in the political,
regulatory, safety or economic conditions in a country or region;


 


·      protectionist laws and business practices
that favour local competitors; and


 


·      trade restrictions, including U.S.
prohibitions and restrictions on exports of certain products and technologies
to certain nations as well as the imposition of, or significant changes to, the
level of tariffs, customs duties and export quotas.


 


If we fail to
overcome the challenges we encounter in our international operations, our
business may be materially adversely affected.


 


Volatility of share price


 


The market
price of our common shares has been volatile. 
Factors that could have a significant effect on the share price of our
common shares include, but are not limited to, regulatory developments
regarding our products or processes, developments regarding potential or future
third-party strategic partners, announcements of technological innovations, new
commercial products, patents, the development of proprietary rights by us or by
others or any litigation relating to these rights, regulatory actions, general
conditions in the medical device industry, our failure to meet analysts’
expectations, our financial results, general economic conditions in the United
States, Canada or abroad and terrorism. 
In recent years and particularly in 2008 and 2009, our common shares and
the shares of other companies in the medical device and diagnostic industries
and stock markets in Canada and the United States have experienced extreme
price fluctuations that have been both related and unrelated to the operating
performance of IMRIS or the affected companies. 
We cannot assure you that the market price of the common shares will not
experience significant fluctuations in the future.


 


28

















 


Influence of significant shareholders


 


Our executive
officers, directors and holders of 10% or more of our common shares, as of December 31,
2009, beneficially owned approximately 50.1% of our common shares.  Consequently,
these shareholders are able to influence the composition of our board of
directors and retain the voting power to approve some matters requiring
shareholder approval.  The interests of
these shareholders may be different than the interests of other shareholders on
these matters.  For example, these
shareholders may decide not to enter into a transaction in which our
shareholders would receive consideration for their common shares that is much
higher than the cost of their investment in our common shares or the then
market price of our common shares.  This
concentration of ownership could also have the effect of delaying or preventing
a change in our control or otherwise discouraging a potential acquirer from
attempting to obtain control of us, which in turn could reduce the price of our
common shares.


 


Dividends


 


We have
not to date paid dividends on our common shares.  Our current intention is to retain earnings
to fund the development and growth of our business, and therefore we do not
anticipate declaring or paying any cash dividends in the near to medium term.  Our board of directors will determine if and
when dividends should be paid in the future based on all relevant
circumstances, including the desirability of financing, our further growth and
our financial position at the relevant time. 
Until we pay dividends, which we may never do, you will not be able to
receive a return on your common shares unless you sell them, which you may only
be able to do at less than the price you paid for them.


 


Future issuances of Common Shares


 


The
market price of our common shares could decline as a result of the future
issuances of additional common shares, or sales by our shareholders of common
shares, or the perception that these sales could occur.  Sales by our shareholders might also make it
more difficult for us to sell equity securities at a time and price that it
deems appropriate.


 


4.             DIVIDENDS


 


Except as
noted in the next paragraph, we have not to date paid dividends on our common
shares.  Our current intention is to
retain earnings to fund the development and growth of our business, and
therefore we do not anticipate declaring or paying any cash dividends in the
near to medium term.  Our board of
directors will determine if and when dividends should be paid in the future
based on all relevant considerations, including the desirability of financing
our further growth and our financial position at the relevant time.


 


On September 20,
2007, the directors of IMRIS resolved to increase the paid up capital of the
common shares of IMRIS in an amount of $3,220,000 immediately prior to and
conditional on closing of the initial public offering (the “Offering”), which
resulted in a deemed dividend to our shareholders for tax purposes.


 


5.             CAPITAL
STRUCTURE


 


5.1          General
Description


 


We are
currently authorized to issue an unlimited number of common shares and an
unlimited number of preferred shares, issuable in series. As at December 31,
2009 there were a total of 31,082,377 common shares and no preferred shares
issued and outstanding on a non-fully diluted basis.  In addition to the outstanding shares, as at December 31,
2009, our current and former directors, executive officers, employees and certain
consultants held options to acquire an aggregate of 4,007,915 common shares
under the terms of our employee stock option plan.


 


29














 


Common Shares


 


The holders of
the common shares are entitled to receive notice of and to attend all annual
and special meetings of our shareholders and to one vote in respect of each
common share held at all such meetings. 
The holders of the common shares will be entitled, at the discretion of
our board of directors, to receive out of any or all profits or surplus of
IMRIS properly available for the payment of dividends, any dividend declared by
the board and payable by IMRIS on the common shares.  The holders of the common shares will
participate rateably in any distribution of the assets of IMRIS upon its
liquidation, dissolution or winding-up or other distribution of its assets
among its shareholders for the purpose of winding up its affairs.


 


Preferred Shares


 


We are
authorized to issue an unlimited number of preferred shares, which may be
issued from time to time in one or more series. 
Our board of directors is authorized to fix the dividend rights and
terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences and any other rights, preferences, privileges and
restrictions applicable to each series of preferred shares.


 


6.                                    MARKET FOR SECURITIES


 


6.1                             Trading Price and Volume


 


Our common shares are listed on the Toronto Stock
Exchange (“TSX”) under the symbol “IM”. 
The volume and price range of our common shares for 2009 are set forth
in the following table:


 


	
  Month

  	
   

  	
  Volume

  (#)

  	
   

  	
  High Trading Price

  ($)

  	
   

  	
  Low Trading Price

  ($)

  	
   

  
	
  January

  	
   

  	
  118,618

  	
   

  	
  2.30

  	
   

  	
  1.75

  	
   

  
	
  February

  	
   

  	
  60,309

  	
   

  	
  2.39

  	
   

  	
  1.64

  	
   

  
	
  March

  	
   

  	
  102,488

  	
   

  	
  3.01

  	
   

  	
  2.01

  	
   

  
	
  April

  	
   

  	
  383,220

  	
   

  	
  3.86

  	
   

  	
  3.00

  	
   

  
	
  May

  	
   

  	
  1,793,311

  	
   

  	
  4.25

  	
   

  	
  3.37

  	
   

  
	
  June

  	
   

  	
  240,402

  	
   

  	
  5.65

  	
   

  	
  3.80

  	
   

  
	
  July

  	
   

  	
  63,313

  	
   

  	
  5.41

  	
   

  	
  4.71

  	
   

  
	
  August

  	
   

  	
  57,471

  	
   

  	
  5.98

  	
   

  	
  4.51

  	
   

  
	
  September

  	
   

  	
  99,980

  	
   

  	
  6.00

  	
   

  	
  4.99

  	
   

  
	
  October

  	
   

  	
  583,009

  	
   

  	
  5.89

  	
   

  	
  5.09

  	
   

  
	
  November

  	
   

  	
  453,316

  	
   

  	
  5.41

  	
   

  	
  4.30

  	
   

  
	
  December

  	
   

  	
  768,347

  	
   

  	
  5.70

  	
   

  	
  5.00

  	
   

  



 


7.                                    ESCROWED SECURITIES


 


There were no
escrowed securities of the Company as at December 31, 2009.


 


30

















 


8.                                    DIRECTORS AND OFFICERS


 


8.1                             Directors and Officers


 


The following
table sets forth the names, municipalities of residence, positions held with us
and principal occupations of our directors and executive officers and, if a
director, the month and year in which the person became a director.  Our directors will hold office until the next
annual meeting of our shareholders.


 


	
  Name, Province/State and Country

  of Residence

  	
   

  	
  Position with IMRIS

  	
   

  	
  Principal Occupation

  	
   

  	
  Director Since

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  H. David Graves  

  Manitoba, Canada

  	
   

  	
  Chairman, Chief Executive Officer and Director

  	
   

  	
  Chairman and Chief Executive Officer

  	
   

  	
  May 2005

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Pablo Batista,  

  Manitoba, Canada

  	
   

  	
  Executive Vice President Operations

  	
   

  	
  Executive Vice President Operations

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Meir Dahan  

  Manitoba, Canada

  	
   

  	
  Executive Vice President Research and Development

  	
   

  	
  Executive Vice President Research and Development

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ram Liebenthal, (3)  

  Manitoba, Canada

  	
   

  	
  Executive Vice President of Marketing

  	
   

  	
  Executive Vice President of Marketing

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Kelly McNeill  

  Manitoba, Canada

  	
   

  	
  Executive Vice President Finance & Administration, Chief
  Financial Officer and Secretary

  	
   

  	
  Executive Vice President Finance & Administration, Chief
  Financial Officer and Secretary

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Edward Richmond,(3)  

  Manitoba, Canada

  	
   

  	
  President and Chief Operating Officer

  	
   

  	
  President and Chief Operating Officer

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Denis Sutton  

  Manitoba, Canada

  	
   

  	
  Executive Vice President Human Resources

  	
   

  	
  Executive Vice President Human Resources

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Robert Courteau,(2)  

  Ontario, Canada

  	
   

  	
  Director

  	
   

  	
  Chief Operating Officer, SAP Global Field Operations

  	
   

  	
  July 2006

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Carey Diamond(1)(2)  

  Ontario, Canada

  	
   

  	
  Director and Chairman of the Compensation Committee

  	
   

  	
  President and Chief Executive Officer, Whitecastle Investments Limited

  	
   

  	
  March 2006

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  William Fraser(1)  

  Manitoba, Canada

  	
   

  	
  Director

  	
   

  	
  Corporate Director

  	
   

  	
  August 2007

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Blaine Hobson(2)  

  Ontario, Canada

  	
   

  	
  Director

  	
   

  	
  Managing Partner, Whitecap Venture Partners

  	
   

  	
  March 2006

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  David Leslie(1)  

  Ontario, Canada

  	
   

  	
  Director and Chairman of the Audit and Governance Committee

  	
   

  	
  Corporate Director

  	
   

  	
  August 2007

  



 






(1)                                  Member
of the Audit and Governance Committee.


(2)                                  Member
of the Compensation Committee


(3)                                  Appointment
effective January 1, 2010.


(4)                                  Appointment
effective September 21, 2009.


 


31

















 


At December 31,
2009 as a group, our directors and executive officers beneficially owned,
directly or indirectly, or exercised control over 15,579,387 common shares
which represented 50.1% of the
outstanding common shares.  Additionally,
at December 31, 2009 as a group, our directors and executive officers
beneficially owned, directly or indirectly, or exercised control over options
to purchase up to 2,219,741 common
shares.


 


Except as
disclosed below, each of our directors and executive officers has been engaged
for 5 years in his present principal occupation or in other capacities with the
company or organization (or predecessor thereof) in which he currently holds
his principal occupation.  The information
provided below has been provided to us by the individuals themselves and has
not been independently verified by us.


 


·                  H. David Graves; prior to
joining IMRIS in May 2005, Mr. Graves was the President and Chief
Executive Officer of Centara Corporation from 1998 to 2005.


 


·                  Pablo Batista; prior to
joining IMRIS in February, 2007, Mr Batista worked at New Flyer Industries from
2004 to 2007 as a Senior Program Manager.


 


·                  Meir Dahan; prior to joining
IMRIS in January 2008, Mr. Dahan held a number of positions with
Baxter Healthcare from 2001 to 2008, and most recently was their Program Leader
within the Renal division.


 


·                  Ram Liebenthal; prior to
joining IMRIS in October 2007, Mr. Liebenthal held a number of
positions with GE Healthcare from 1997 to 2007, and most recently was their
General Manager, Growth Markets.


 


·                  Kelly McNeill; prior to
joining IMRIS in September 2009, Mr. McNeill was Chief Financial
Officer of Resverlogix Corporation from May 2006 to September 2009
and General Manager of Haworth Limited from July 2004 to May 2006.


 


·                  Ed Richmond; prior to joining
IMRIS in October 2006, Mr. Richmond held senior roles, including
President of Corporate Strategy of Standard Aero Limited from 2000 to 2006.


 


·                  Denis Sutton; prior to joining
IMRIS in March 2007, Mr. Sutton was the Senior Vice President Human
Resources of MTS Allstream from March 2005 to March 2007 and was the
Chief Human resources Officer for Saint Boniface Hospital from January 2002
to March 2005.


 


·                  Robert Courteau; Mr. Courteau
is the Chief Operating Officer for SAP’s Global Field Operations and was
previously the Chief Operating Officer SAP North America.  He was the President and Managing director of
SAP Canada from 2004 to 2008.


 


·                  William Fraser; Mr. Fraser
was the President and Chief Executive Officer and a Director of Manitoba
Telecom Services Inc. from 1994 to 2006.


 


8.2                             Committees of the Board of Directors


 


Our board of
directors has two committees: an Audit and Governance Committee comprised
entirely of independent directors, and a Compensation Committee, comprised of a
majority of independent directors.


 


Audit and
Governance Committee


 


The directors
have appointed an Audit and Governance Committee consisting of three directors;
Carey Diamond, William Fraser and David Leslie, all of whom are independent and
financially literate within the meaning of Multilateral Instrument 52-110
(Audit Committees).  Mr. Leslie and Mr. Fraser
are Chartered Accountants and each has been named a Fellow of the Institute of
Chartered Accountants.  Mr. Diamond
holds a B.A. in Economics degree from the University of Western Ontario and an
LLB from Osgoode Hall Law School.  Each
of these directors has held various director positions with private and public
companies and/or community organizations.


 


32

















 


The
responsibilities and mandate of the Audit and Governance Committee are set out
in an Audit and Governance Committee Charter, a full copy of which is included
as appendix A hereto.  The primary
purposes of the Audit and Corporate Governance Committee are to (i) manage,
on behalf of IMRIS’s shareholders, the relationship between IMRIS and its
external auditor and enhance the independence of the external auditor, (ii) assist
the board in meeting its financial oversight responsibilities, oversee the
audit and financial reporting process and increase the credibility and
objectivity of financial reporting, (iii) oversee the design,
implementation and ongoing effectiveness of a system of internal controls, and (iv) oversee
the process by which IMRIS assesses and manages risk.


 


The Audit and
Governance Committee is also responsible for (i) establishing procedures
for the receipt, retention and treatment of complaints received by IMRIS
regarding accounting practices, financial reporting, internal accounting controls
or auditing matters, (ii) establishing procedures for the confidential,
anonymous submission by IMRIS employees of concerns regarding questionable
accounting or auditing matters, and (iii) monitoring compliance with IMRIS’s
Whistleblower Protection Policy on Financial Matters.


 


The Audit and
Governance Committee also takes a leadership role in shaping IMRIS’s corporate
governance practices by overseeing and assessing the functioning of the board
and the committees of the board and developing, implementing and assessing
effective corporate governance processes and practices.  It is also responsible for reviewing and
recommending the adoption of IMRIS’s strategic corporate policies, including
its Disclosure and Confidentiality Policy, Insider Trading Policy, Code of
Business Conduct and Ethics, and other relevant policies associated with
ensuring an effective system of corporate governance and for overseeing the
investigation of any alleged breach of any of these policies.


 


Compensation
Committee


 


The board has
appointed a Compensation Committee consisting of three Directors, Carey
Diamond, Blaine Hobson and Robert Courteau. 
All of these directors are considered independent within the meaning of
Multilateral Instrument 52-110 (Audit Committees) except for Mr. Hobson.  Mr. Hobson is not considered independent
as he has provided certain consulting services to the Corporation.  The Compensation Committee ensures the
independence of its actions by requiring the presence of a majority of independent
directors to convene any meeting of the Compensation Committee.  The responsibilities and mandate of the
Compensation Committee are set out in a Compensation Committee Charter. The
primary purposes of the Compensation Committee are to (i) assist the board
in discharging the board’s oversight responsibilities relating to the
compensation, development, succession and retention of the President and Chief
Executive Officer and senior management, (ii) establish fair and
competitive compensation and performance incentive plans, and (iii) identify
candidates for director positions.


 


33

















 


Pre-Approval of Non-Audit
Services


 


The Committee has implemented a policy restricting the
services that may be provided by our auditors and the fees paid to our auditors
(see Appendix “B”).  Prior to the
engagement of our auditors to perform both audit and non-audit services, the
Committee pre-approves the provision of the services.  In making their determination regarding
non-audit services, the Committee considers the compliance with the policy and
the provision of non-audit services in the context of avoiding impact on
auditor independence.  All audit and
non-audit fees paid to Deloitte & Touche LLP have been approved by the
Committee.  For the years ended December 31,
2009 and 2008, the Corporation incurred the following fees:


 


	
   

  	
   

  	
  Fiscal 2009

  	
   

  	
  Fiscal 2008

  	
   

  
	
  Audit Fees (1)

  	
   

  	
  $

  	
  89,709

  	
   

  	
  $

  	
  63,264

  	
   

  
	
  Audit Related
  Fees (2)

  	
   

  	
  $

  	
  76,653

  	
   

  	
  $

  	
  74,667

  	
   

  
	
  Tax Fees (3)

  	
   

  	
  $

  	
  144,829

  	
   

  	
  $

  	
  59,929

  	
   

  
	
  All Other Fees
  (4)

  	
   

  	
  $

  	
  115,760

  	
   

  	
  $

  	
  129,401

  	
   

  



 






(1)                                  “Audit Fees” consist of the aggregate fees billed by
Deloitte and Touche LLP, our independent
auditors, for professional services rendered by it for the audit of our annual
financial statements or services that are normally provided by Deloitte and
Touche LLP in connection with statutory and regulatory filings or engagements.


(2)                                  “Audit Related Fees” consist of the aggregate fees billed by Deloitte
and Touche LLP for assurance and related services rendered by them that are
reasonably related to the performance of the audit or review of our financial
statements and are not reported as Audit Fees. Professional services provided
include review of quarterly financial statements and accounting advice on
certain matters.


(3)                                  “Tax Fees” consist of the aggregate fees billed by Deloitte and Touche
LLP for professional services rendered by them for tax compliance, tax advice
and tax planning.  Tax services included
advisory services and review and filing of our annual income tax returns.


(4)                                  “All Other Fees” consist of fees billed by Deloitte and Touche LLP for
products and services other than Audit Fees, Audit Related Fees and Tax Fees.


 


8.3                             Conflicts of Interest


 


IMRIS leases air travel time from 5343381 Manitoba Ltd., a Corporation
controlled by H. David Graves, the Chief Executive Officer and Chairman of the
board of directors of IMRIS as disclosed in Section 11 — Interest in
Material Transactions.  Mr. Graves
has declared his interest and abstains from any board decisions related to this
matter.


 


The Corporation contracts consulting services from Hobson Equities Inc.
which is controlled by Blaine Hobson, a director of IMRIS Inc., as disclosed in
Section 11 — Interest in Material Transactions.  Mr. Hobson has declared his interest and
abstains from any board decisions related to this matter.


 


9.                                    LEGAL PROCEEDINGS


 


There were no legal proceedings involving IMRIS during the 2009 year
nor are any such proceedings known by us to be contemplated.


 


10.                             INTERESTS IN MATERIAL TRANSACTIONS


 


H. David Graves,
the President, Chief Executive Officer and Chairman of the board of directors
of IMRIS, exercises control over Norpine Holdings Inc (“Norpine”),
a significant shareholder of IMRIS. 
IMRIS was incorporated by Mr. Graves in May 2005 to acquire
the assets of Innovative Magnetic Resonance Imaging Systems Inc.  Other than Mr. Graves, no director,
executive officer or shareholder who beneficially owns, directly or indirectly,
or exercises control or direction over more than 10% of the outstanding common
shares of IMRIS or known associate or affiliate of any such person, has or had
any material interest, direct or indirect, in any transaction within the last
three years or in any proposed transaction, that has materially affected or
will materially affect IMRIS.


 


34

















 


IMRIS leases
air travel time from 5343381 Manitoba Ltd., a company which is wholly owned by Mr. Graves.  The amount charged to travel expenses during
the year ended December 31, 2009 with respect to transactions with this
related party totalled $740,940 with respect to transactions with this related
party ($382,832 was charged to travel expenses for the year ended December 31,
2008).  The transactions were priced
using an estimated third party comparable cost and were recorded at the
exchange amount.  The payable balance
owing to 5343381 Manitoba Ltd. as at December 31, 2009 was $Nil (2008 -
$41,580).  Management has compared the
amounts paid by IMRIS for these services against the amounts charged by third
parties for similar services and has concluded that the rates charged by
5343381 Manitoba Ltd. are competitive with market rates.  Management monitors the competitiveness of
these rates and may obtain similar services from a third party should they become
available at lower rates.


 


The
Corporation has contracted consulting services from Hobson Equities Inc. which
is controlled by Blaine Hobson, a director of IMRIS Inc.  The amount charged to professional fees
during the year ended December 31, 2009 was $Nil (2008 — $96,000).


 


Except as
disclosed elsewhere in this Annual Information Form, no material transactions
with the directors, senior officers, promoters or principal holders of our
securities have occurred in our last three completed fiscal years or our
current financial year.


 


11.                             TRANSFER AGENT AND REGISTRAR


 


The transfer
agent and registrar for the common shares is Computershare Investor Services
Inc. at its principal offices in Toronto, Ontario.


 


12.                             MATERIAL CONTRACTS


 


During the
2009 fiscal year, we entered into two material contracts as follows:


 


·                  An underwriting agreement dated October 19,
2009 with a syndicate of underwriters led by RBC Dominion Securities Inc., in
connection with the Corporation’s $19.3 underwritten public financing which closed
on November 2, 2009; and


 


·                  A renewed Master OEM Agreement dated November 2009
with Siemens AG, Healthcare Sector, for the supply to IMRIS of MR scanners and
angiography systems.


 


Copies of
these agreements are available at www.sedar.com.


 


13.                             INTERESTS OF EXPERTS


 


Deloitte &
Touche LLP are our auditors and are independent within the meaning of the Rules of
Professional Conduct of the Institute of Chartered Accountants of
Manitoba.  Deloitte & Touche LLP
has no registered or beneficial interests, direct or indirect, in any
securities or other property of IMRIS Inc. or any of its associates or
affiliates.


 


14.                             ADDITIONAL INFORMATION


 


Additional
financial information with respect to IMRIS, including remuneration and
indebtedness of directors and officers, principal holders of our securities and
options to purchase securities is contained in our information circular in
respect of our annual meeting of shareholders that involves the election of
directors.  Additional financial
information is contained in our audited comparative consolidated financial
statements and our management discussion and analysis for our most recently
completed fiscal year.  Additional
information relating to IMRIS may be found on the SEDAR website at
www.sedar.com.


 


35

















 


APPENDIX “A”


 


IMRIS INC.


 


AUDIT AND GOVERNANCE COMMITTEE


CHARTER


 


Establishment and Purpose


 


The
Board of Directors (the “Board”) of
IMRIS Inc. (“IMRIS”) has established the Audit
and Governance Committee (the “Committee”) for
the purposes of managing the relationship between IMRIS and its external
auditors, overseeing the audit and financial reporting process, ensuring the
adequacy and effectiveness of IMRIS’s internal controls and procedures for
financial reporting and ensuring the adequacy and effectiveness of IMRIS’s risk
management program.  In addition, the
Committee is responsible for identifying candidates for director and for taking
a leadership role in shaping IMRIS’s corporate governance practices by
overseeing and assessing the functioning of the Board and the committees of the
Board and developing, implementing and assessing effective corporate governance
processes and practices.


 


Appointment
and Removal


 


The
Committee shall consist of at least three directors (the “Members”)
appointed annually by the Board.  Any
Member may be removed or replaced at any time by the Board.  A Member shall cease to be a Member upon
ceasing to be a member of the Board.


 


The
Committee and each Member must meet the independence and audit committee
composition requirements promulgated by all governmental and regulatory bodies
exercising control over IMRIS as may be in effect from time to time, including
those of any stock exchange upon which IMRIS’s shares are listed.  To that end, each member of the Committee
shall be both an “unrelated” director and “independent” director (as such terms
are defined under the requirements or guidelines for compensation committee
service in applicable securities laws and the rules of any stock exchange
on which IMRIS’s securities are listed for trading).  In general, this means that no director who
is an officer or employee of IMRIS (or any related entity of IMRIS) may be a
Member and each Member must be free of any relationship with IMRIS that could
or could be reasonably expected to, in the opinion of the Board, interfere with
the exercise of that director’s independent judgment as a Member.


 


All
Members of the Committee must also be “financially literate” (as that term is
defined from time to time in Multilateral Instrument 52-110 (Audit Committees)
or any replacement or supplementary instrument or rule or, if it is not
defined, as that term is interpreted by the Board), which generally means that
they must be able to read and understand fundamental financial statements
including IMRIS’s balance sheet, income statement and cash flow statement.  At least one Member must have a professional
accounting certification (or equivalent) or comparable experience and
background that results in that Member’s financial sophistication.


 


36

















 


Structure
and Reporting


 


The Committee
meets as required, but at least quarterly, typically on the day of the full
Board to allow ample time for discussion. 
A majority of the Committee shall constitute quorum.  The Executive Vice President and Chief
Financial Officer is expected to attend all Committee meetings and attendance
by the President and Chief Executive Officer is desirable.  The audit partner from the external auditor
will be invited to meet with the Committee at least twice a year and may
request a meeting with the Committee at any time.


 


The Committee
shall report to the Board on all proceedings, deliberations, decisions and
recommendations of the Committee at the first subsequent meeting of the Board,
and at such other times and in such manner as the Board may require or as the
Committee may, in its discretion, consider advisable.


 


Authority


 


The Committee
shall have unrestricted direct access to IMRIS’s external auditors as well as
full access to all IMRIS books, records, facilities, and personnel.  The Committee may require such IMRIS
officers, directors and employees as it may see fit from time to time to
provide any information about IMRIS as it may deem appropriate and to attend
and assist at meetings of the Committee. 
The Committee may adopt policies and procedures for carrying out its
responsibilities.  The Committee may, in
its sole discretion and at IMRIS’s expense, retain, and agree to compensate,
outside advisors to assist with the performance of its duties.  The Committee may delegate from time to time
to any person, including any individual member of the Committee, or
subcommittee, any of the Committee’s responsibilities that lawfully may be
delegated.


 


Responsibilities


 


In
general, the Committee performs a number of roles including (i) managing,
on behalf of IMRIS’s shareholders, the relationship between IMRIS and its
external auditor and enhancing the independence of the external auditor, (ii) assisting
directors in meeting their financial oversight responsibilities, overseeing the
audit and financial reporting process and increasing the credibility and
objectivity of financial reporting, (iii) overseeing the design,
implementation and on-going effectiveness of a system of internal controls and (iv) overseeing
the process by which IMRIS assesses and manages risk.  The Committee will have the specific duties
and responsibilities set out below, as well as other such duties that are, in
the opinion of the Board, in line with the purpose of the Committee as stated
above.


 


Relationship
with Auditors


 


The Committee is responsible for managing,
on behalf of IMRIS’s shareholders, the relationship between IMRIS and its
external auditors.  In furtherance of
this responsibility, as delegated by the Board, the Committee shall:


 


(a)                                 be directly responsible for
recommending the selection and determining the compensation of the external
auditor;


 


(b)                                oversee the work of the
external auditor engaged for the purpose of preparing or issuing an auditor’s
report or performing other audit, review or attest services for IMRIS,
including the resolution of disagreements between management and the external
auditor regarding financial reporting;


 


(c)                                 establish procedures to
monitor the independence of the external auditor and take necessary actions to
eliminate all factors that might impair or be perceived to impair the
independence of the external auditor;


 


(d)                                annually require the external
auditors to identify the relationships that may affect its independence;


 


(e)                                 establish procedures for
review and approval of all audit and permitted non-audit services provided by
external auditors;


 


37

















 


(f)                                   pre-approve all non-audit
services to be provided to IMRIS or its subsidiaries by the external auditor,
which pre-approval may be delegated to any Member; and


 


(g)                                provide the external auditor
with the opportunity to meet with the Committee or the Board without management
present at each regularly scheduled meeting of the Committee or the Board.


 


Audit
and Financial Reporting


 


The Committee
is responsible for overseeing the audit and financial reporting process.  In furtherance of this responsibility, as
delegated by the Board, the Committee shall:


 


(a)                                 review, establish and monitor
each annual audit of the external auditor with a written audit plan, including
scope, fees and schedule;


 


(b)                                review with both management
and the external auditor the appropriateness and acceptability of IMRIS’s
critical accounting policies and any proposed changes thereto;


 


(c)                                 review with management and the
external auditor the presentation and impact of significant risks and
uncertainties associated with IMRIS’s business, all alternative treatments of
financial information with GAAP that have been discussed with management, the
material assumptions made by management relating to them and their effect on
IMRIS’s financial statements;


 


(d)                                question management and the
external auditor regarding financial reporting issues discussed during the
fiscal period;


 


(e)                                 review any problems
experienced by the external auditors in performing audits;


 


(f)                                   review and discuss the audited
annual financial statements in conjunction with the external auditor and review
with management all significant variances between comparative reporting
periods;


 


(g)                                review and discuss the
external auditor’s report with the external auditor and management;


 


(h)                                review all material written
communications between the external auditor and management, including post audit
or management letters containing recommendations of the external auditors,
management’s response and follow up with respect to the identified weaknesses;


 


(i)                                    review with management and
with the external auditors, as appropriate, IMRIS’s annual and interim
financial statements, MD&A and earnings press releases prior to their
public dissemination;


 


(j)                                    satisfy itself that adequate
procedures are in place for the review of IMRIS’s public disclosure of
financial information extracted or derived from IMRIS’s financial statements,
other than the public dissemination referred to in (i) above, and
periodically assess the adequacy of those procedures;


 


(k)                                 review with management IMRIS’s
relationship with the regulators and the quality of its filings with the regulators;
and


 


(l)                                    review with the Executive Vice
President and external legal counsel any current or anticipated litigation or
legal activity that could have a material effect on IMRIS’s financial position.


 


38

















 


Internal
Controls and Procedures


 


The Committee is responsible for overseeing
the design, implementation and on-going effectiveness of a system of internal
controls.  In furtherance of this
responsibility, as delegated by the Board, the Committee shall:


 


(a)                                 establish, monitor and review
policies and procedures for internal accounting, financial control and
management information (“Internal  Controls”);


 


(b)                                establish procedures for: (i) the
receipt, retention and treatment of complaints received by IMRIS regarding
accounting, internal accounting controls or auditing matters; and (ii) the
confidential, anonymous submission by IMRIS employees of concerns regarding
questionable accounting or auditing matters, and monitor compliance with IMRIS’s
Whistleblower Protection Policy on Financial Matters and coordinate and review
all investigations undertaken thereunder;


 


(c)                                 consult with the external
auditor regarding the adequacy of the Internal Controls and review with the
external auditor its report on the Internal Controls;


 


(d)                                address, on a regular basis,
any perceived shortcomings in the Internal Controls;


 


(e)                                 review the involvement of
officers and directors in any matter related to business ethics or potential
conflict of interest and advise the Board on the appropriate course of action;


 


(f)                                   ensure that no individual who
is, or in the past 3 years has been, affiliated with or employed by a present
or former auditor of the Company or an affiliate, is hired by the Company as a
senior officer until at least 3 years after the end of either the affiliation
or the auditing relationship,


 


(g)                                prior to IMRIS entering into
any Related Transaction, review the Related Transaction and recommend its
approval or rejection by the Board. For the purposes of this Mandate, a “Related
Transaction” means a business transaction or contract between IMRIS and a party
in which an IMRIS director or officer has a direct or indirect interest.  This direct or indirect interest could exist
by virtue of the following: (i) the party is the director or officer; (ii) the
director or officer, or their relative or spouse, is on the board of directors
or is an officer of the party entering into such a business transaction with
IMRIS; or (iii) the director or officer, or their relative or spouse, has
a financial interest in the party entering into such a business transaction
with IMRIS;


 


(h)                                annually, review any ongoing
Related Transactions and report to the Board; and


 


(i)                                    obtain from management
adequate assurances that all statutory payments and withholdings have been
made.


 


39






 










 


Risk Management


 


The Committee is responsible for overseeing the
process by which IMRIS assesses and manages risk.  In furtherance of this responsibility, as
delegated by the Board, the Committee shall:


 


(a)                                 identify risks inherent in
IMRIS’s business (“Risks”);


 


(b)                                maintain policies and
procedures that address the Risks on a reasonable, cost-effective basis;


 


(c)                                 in conjunction with
management, review, on an annual basis, all aspects of IMRIS’s risk management
program, including all significant policies and procedures relating to
insurance coverage, foreign exchange exposures and investments (including IMRIS’s
use of financial risk management instruments);


 


(d)                                monitor compliance with
environmental codes of conduct and legislation; and


 


(e)                                 monitor compliance with safety
codes of conduct and legislation.


 


Other


 


In furtherance
of its duties, the Committee shall:


 


(a)                                 meet regularly with management
to discuss any areas of concern to the Committee or management;


 


(b)                                consider whether the quality
of employees involved in the audit and financial reporting process and the
processes described herein meets an acceptable standard;


 


(c)                                 recommend to the Board a
system of corporate governance policies and practices, monitor its
implementation and co-ordinate an annual corporate governance review by the
Board;


 


(d)                                make recommendations to the
Board on an ongoing basis concerning corporate governance in general and
regarding the Board’s stewardship role in the management of IMRIS including the
roles and responsibilities of directors and the recommendation of appropriate
policies and procedures to ensure directors carry out their duties with due
diligence and in compliance with all legal requirements;


 


(e)                                 at least annually formally
review and make recommendations on the composition of the Board and its
committees, including a review of what competencies and skills the Board, as a
whole, should possess and currently possesses and a review of the appropriate
size of the Board in order to facilitate effective decision-making;


 


(f)                                   monitor outside corporate
governance regulations and developments, keep the Board sufficiently informed
and recommend actions as appropriate;


 


(g)                                ensure that any required
corporate governance disclosures are duly reported on, and approve the information
to be disclosed;


 


(h)                                identify individuals and make
recommendations of appropriate nominees qualified to become new Board and/or
committee members, taking into consideration the competencies and skills that
each such nominee will bring to the Board or committee and whether or not each
new nominee can devote sufficient time and resources to his or her duties as a
Board member;


 


(i)                                    ensure that newly elected
directors and committee members receive an effective and comprehensive
orientation and that all directors are provided continuing education
opportunities, both to maintain and enhance their skills and abilities as
directors and, as applicable, committee members and to ensure their knowledge
and understanding of IMRIS business remains current;


 


(j)                                    ensure that a majority of the
directors are independent according to applicable rules and regulations;


 


40

















 


(k)                                 develop a review process (the “Process”) for periodic assessment of the effectiveness of
each director, the Board and each of its committees and co-ordinate, supervise
and assess the Process;


 


(l)                                    establish procedures for
effective Board meetings and otherwise ensure that processes, procedures and
structures are in place to ensure that the Board functions independently of
management and without conflicts of interest;


 


(m)                              ensure that appropriate
processes are established by the Board to fulfill its responsibility for (i) oversight
of strategic direction and development and review of ongoing results of
operations and (ii) oversight of investor relations and public relations
activities and procedures for the effective monitoring of its shareholder base,
receipt of shareholder feedback and responses to shareholder concern;


 


(n)                                review and recommend the adoption
of IMRIS’s strategic corporate policies, including its Disclosure and
Confidentiality Policy, Insider Trading Policy, Code of Business Conduct and
Ethics, and other relevant policies associated with ensuring an effective
system of corporate governance (the “Policies”);


 


(o)                                review with legal counsel
compliance with applicable laws and regulations and inquiries received from
regulators and governmental agencies;


 


(p)                                authorize and oversee the
investigation of any alleged breach of any Policies;


 


(q)                                review the mandates of the
Board’s committees and any recommendations received from such committees and
recommend appropriate changes;


 


(r)                                   annually evaluate the
Committee’s performance as compared to the requirements of this Charter; and


 


(s)                                 annually review the Committee’s
Charter and any other documents used by the Committee in fulfilling its
responsibilities.


 


Chairman


 


The Chairman’s primary role is to ensure
that the Committee functions properly, meets its obligations and
responsibilities, fulfills its purpose and that its organization and mechanisms
are in place and are working effectively. 
More specifically, the Chairman shall:


 


(a)                                  chair meetings of the
Committee;


 


(b)                                 in consultation with the
Chairman of the Board, the Members, the Executive Vice President and Chief
Financial Officer and Corporate Secretary, set the agendas for the meetings of
the Committee;


 


(c)                                  in collaboration with the
Chairman of the Board, the President and Chief Executive Officer, the Executive
Vice President and Chief Financial Officer and the Corporate Secretary, ensure
that agenda items for all Committee meetings are ready for presentation and
that adequate information is distributed to Members in advance of such meetings
in order that Members may properly inform themselves on matters to be acted
upon;


 


(d)                                 assign work to Members;


 


(e)                                  act as liaison and maintain
communication with the Chairman of the Board and the Board to optimize and
co-ordinate input from directors, and to optimize the effectiveness of the
Committee; and


 


(f)                                    provide leadership to the
Committee with respect to its functions as described in this Mandate and as
otherwise may be appropriate.


 


41

















 


APPENDIX “B”


 


IMRIS INC.


 


AUDIT AND GOVERNANCE COMMITTEE


AUDITOR SERVICES PRE-APPROVAL
POLICY


 


1.                          Purpose of Auditor Services Pre-approval Policy


 


The Audit and Governance Committee of the Board of
Trustees (the “Board”) of IMRIS Inc. (the “Corporation”) has adopted this
Auditor Services Pre-approval Policy (the “Policy”) as part of the Corporation’s
comprehensive Corporate Governance Policy in order to provide to its personnel
the policies and procedures followed by the Audit and Governance Committee in
reviewing and pre-approving services to be provided to the Corporation and its
subsidiaries (collectively the “Corporation”) by the Corporation’s independent
external auditor (the “External Auditor”), and to disclose those policies and
procedures to the Corporation’s shareholders.


 


The policies and procedures in this policy are set
forth as guidelines. They do not constitute requirements or create legal
obligations. The Audit and Governance Committee may supplement or modify the
policies and procedures as appropriate in its discretion, or it may choose to
pre-approve External Auditor services in other ways that it deems advisable in
its business judgment.


 


2.                          Statement of Principle


 


The Audit and Governance Committee should evaluate all
services that are proposed to be performed by the External Auditor of the
Corporation, before those services are commenced, in order to ensure that the
provision of the services will not impair the External Auditor’s independent
status. Services should not be commenced by the External Auditor of the
Corporation unless and until the specific service has been approved by the
Audit and Governance Committee or its designee.


 


3.                          Delegation of Authority


 


The Audit and Governance Committee elects to delegate
pre-approval authority to the Chair of the Audit and Governance Committee, and
delegates the responsibility for coordinating the External Auditor services to
the Chief Financial Officer, within the parameters of this Policy. The Chair of
the Audit and Governance Committee shall report any pre-approval decisions to
the Audit and Governance Committee at its next scheduled meeting. The Audit and
Governance Committee will not delegate to management the Audit and Governance
Committee’s responsibilities for pre-approving audit and non-audit services
performed by the External Auditor.


 


4.                          Policy and Procedures


 


The Corporation will not engage the External Auditor
to carry out any non-audit services prohibited by applicable law, regulation, rule or
accounting or auditing standard. A list of prohibited services is provided in
Appendix B1, and may be amended from time to time to add any other services
prohibited by applicable regulators.


 


The Audit and Governance Committee will consider the
pre-approval of permitted services to be performed by the External Auditor. A
list of permitted services is provided in Appendix B2, and may be amended from
time to time to add any other services permitted by applicable regulators.


 


42

















 


For permitted services the following pre-approval
policies will apply:


 


(a) Audit Services


 


Annually, the
Audit and Governance Committee will pre-approve all audit services provided by
the External Auditor, as submitted jointly by the Chief Financial Officer and
the External Auditor. Any additional requests for pre-approval of audit
services should be addressed as described in (c) below.


 


(b) Pre-Approval of Audit Related, Tax and Other Non-audit Services


 


Annually, the
Audit and Governance Committee will pre-approve the audit related, tax and
other non-audit services provided by the External Auditor that are recurring or
otherwise reasonably expected to be provided, as submitted jointly by the Chief
Financial Officer and the External Auditor. 
The Audit and Governance Committee will be subsequently informed, at
least quarterly, of the services for which the External Auditor has been
actually engaged. Any additional requests for pre-approval will be addressed on
a case-by-case specific engagement basis as described in (c) below.


 


(c) Approval of Additional Services


 


The
Corporation employee making the request will submit the request for service to
the Corporation’s Chief Financial Officer. The request for service should
include a description of the service, the estimated fee, a statement that the
service is not a Prohibited Service and the reason the External Auditor is
being engaged.


 


(i) Services where the aggregate fees are estimated to be
less than or equal to $7,500 (in either U.S. or Canadian dollars).


 


Recommendations,
in respect of each engagement, will be submitted by the Corporation’s Chief
Financial Officer for consideration and approval. The full Audit and Governance
Committee will subsequently be informed of the service, at its next meeting.
The engagement may commence upon approval of the Chief Financial Officer.


 


(ii) Services where the aggregate fees are estimated to be
greater than $7,500 and less than or equal to $50,000 (in either U.S. or
Canadian dollars).


 


Recommendations,
in respect of each engagement, will be submitted by the Corporation’s Chief
Financial Officer to the Chair of the Audit and Governance Committee for
consideration and approval. The full Audit and Governance Committee will
subsequently be informed of the service, at its next meeting. The engagement
may commence upon approval of the Chair of the Audit and Governance Committee.


 


(iii) Services where the aggregate fees are estimated to be
greater than $50,000 (in either U.S. or Canadian dollars).


 


Recommendations,
in respect of each engagement, will be submitted by the Corporation’s Chief
Financial Officer to the full Audit and Governance Committee for consideration
and approval, generally at its next meeting or at a special meeting called for
the purpose of approving such services. The engagement may commence upon
approval of the full Audit and Governance Committee.


 


43

















 


5.
De Minimis Exception


 


The Audit and Governance Committee recognizes that
applicable laws provides for an exception to the pre-approval requirements for
permitted non-audit services, provided all such services were not recognized at
the time of the engagement to be non-audit services and, once recognized, are
promptly brought to the attention of the Audit and Governance Committee and
approved prior to the completion of the audit. The aggregate amount of all
services approved in this manner may not constitute more than five percent of
the total fees paid to the External Auditor during the fiscal year in which the
services are provided.


 


6.
Disclosure of Pre-Approval Policies and Procedures


 


Annually, the Corporation shall publicly disclose the
Audit and Governance Committee’s pre-approval policies and procedures and the
fees paid to the External Auditors, in accordance with regulatory requirements.


 


44

















 


Appendix B1


 


Background and Prohibited Services


 


Background


 


On January 1, 2004, the Canadian Institute of
Chartered Accountants’ (CICA) revised Rules of Professional Conduct on
auditor independence became effective. As they relate to public companies these
new rules are very similar to the revised independence rules of the
Securities and Exchange Commission (SEC) that became effective on May 6,
2003. They include prohibitions or restrictions on services that may be
provided by auditors to their audit clients and require that all services
provided to a listed entity audit client, including its subsidiaries, be
pre-approved by the client’s audit committee.


 


In addition, under Canadian Securities Administrators
(CSA) rules, a public company’s Audit and Governance Committee will be
responsible for pre-approving all non-audit services to be provided to the
company or its subsidiaries by the company’s external auditors or the external
auditors of the company’s subsidiaries.


 


Under both the CICA and CSA rules, pre-approval of
services by the Audit and Governance Committee may be accomplished either by
specific approval of each engagement or by adopting pre-approval policies and
procedures.


 


Prohibited Services


 


The rules identify the following ten types of
non-audit services that are deemed inconsistent with an auditors’ independence
(“Prohibited Services”):


 


1.               Bookkeeping or other services
related to the audit client’s accounting records or financial statements.


2.               Financial information systems
design and implementation


3.               Appraisal or valuation
services for financial reporting purposes.


4.               Actuarial services for items
recorded in the financial statements.


5.               Internal audit outsourcing
services.


6.               Management functions.


7.               Human resources.


8.               Certain corporate finance and other
services.


9.               Legal services.


10.         Certain expert services
unrelated to the audit.


 


The rules provide further details as to the
specific nature of services within these categories that are prohibited.


 


45

















 


Appendix B2


 


Permitted Services


 


Permitted Services


 


The Audit and Governance Committee will consider the
pre-approval of permitted services to be performed by the External Auditor in
each of the following broad categories:


 


(a) Audit Services:


 


Include services that are normally provided by the
external auditor in connection with statutory and regulatory filings or
engagements. Such services may include:


 


(i)                                     Annual audit of consolidated
financial statements.


(ii)                                  Quarterly intermediate review
of interim consolidated financial statements.


(iii)                               Other audit and special
reports which include among others:


·                  accounting consultations and tax services required to
perform an audit


·                  periodic reports and other documents filed with
securities regulatory bodies or other documents


·                  issued in connection with securities offerings


(iv)                              Attestation engagement
relative to Canadian securities rules.


 


(b) Audit Related
Services:


 


Include services by an external auditor that are
reasonably related to the performance of the audit of the issuer’s financial
statements and are not reported as Audit Services. Such services may include:


 


(i)                                     Audit of pension and other
benefit plans.


(ii)                                  Consultations concerning
accounting and financial reporting standards, such as discussion, research
consultations and auditing procedures relating to new pronouncements, usual or
non-recurring transactions and other technical topics which are generally
non-recurring.


(iii)                               Assistance with statutory
financial reporting, such as providing technical advice and compliance
(preparation) services in connection with required statutory filings.


(iv)                              Assistance with financial due
diligence (non-tax) performed on potential acquisition targets.


(v)                                 Auditing procedures and
special reports (as periodically requested).


(vi)                              Internal
control reviews and assistance with internal control reporting requirements


(vii)                           Consultations
by the Company’s management as to the accounting or disclosure treatment of
transactions or events and/or the actual or potential impact of final or
proposed rules, standards or interpretations by securities regulators, or other
regulatory or standard-setting bodies (Note: Under securities rules, some
consultations may be “audit” services rather than “audit-related” services)


 


(c) Tax Services:


 


Include professional services rendered by an external
auditor for tax compliance, tax advice, and tax planning. Such services may
include:


 


(i)                                     Advice and assistance with
regard to tax compliance, tax planning and audit defense.


(ii)                                  Tax-related due diligence
performed on potential acquisition targets.


(iii)                               Review tax returns on a
pre-filing basis.


(iv)                              Consultation on tax technical
matters, such as tax basis and earnings and profits computations; evaluating
the deductibility of certain expenses and creditability of certain expenses and
income items; advice on accounting methods, timing issues, compliance matters
and characterization issues.


(v)                                 Technical and procedural
advice in connection with examination by various tax jurisdictions.


 


46

















 


(d) Other Services


 


Include products and services provided by the external
auditor not included in the previous three categories. Such services may relate
to: valuations; information technology advisory and risk management; actuarial;
forensic and related services; corporate recovery; transactions; corporate
finance; project risk management; operational advisory and risk management;
regulatory and compliance.


 


47