UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K/A





Amendment
No. 2





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





For
the fiscal year ended December 31, 2009





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





For
the transition period
from                    to





Commission
file number 0-29486





MERGE
HEALTHCARE INCORPORATED


(Exact
name of Registrant as specified in its charter)





Delaware
            
            39-1600938(State
      or other jurisdiction of incorporation or organization)
            
            (I.
      R. S. Employer Identification No.)





6737
West Washington Street, Suite 2250, Milwaukee, Wisconsin 53214-5650


(Address
of principal executive offices, including zip code)





(Registrant’s
telephone number, including area code) (414) 977-4000





Securities
registered under Section 12(b) of the Exchange Act:





Title
      of Each Class
            Name
      of Each Exchange on Which RegisteredCommon
      Stock, $0.01 par value per share
            NASDAQ
      Global Market





Securities
registered under Section 12(g) of the Exchange Act: NONE





Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes o No x





Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes o No x





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.o








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





Large
      accelerated filero
            
            Accelerated
      filerx
            
            Non-accelerated
      filero
            
            Smaller
      reporting companyo





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





The
aggregate market value for the Registrant’s voting and non-voting common equity
held by non-affiliates of the Registrant as of June 30, 2009, based upon the
closing sale price of the Common Stock on June 30, 2009, as reported on the
NASDAQ Global Market, was approximately$116,910,210.  Shares
of Common Stock held by each officer and director and by each person who owns
ten percent or more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates.  This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.





The
number of shares outstanding of the Registrant’s common stock, par value $0.01
per share, as of April 28, 2010:  82,758,904





EXPLANATORY
NOTE




This Amendment No. 2 on Form 10-K/A is
being filed by Merge Healthcare Incorporated (“Merge Healthcare,” “we,” “us,” or
“our”) to provide the disclosure required by Part III of our Annual Report on
Form 10-K for the year ended December 31, 2009, filed with the United States
Securities and Exchange Commission (“SEC”) on March 12, 2010, as amended March
17, 2010 (“Amendment No. 1”).  No other changes have been made to our
Form 10-K except for the required disclosure provided for Part
III.  This Form 10-K/A should be read in conjunction with our Form
10-K filing made with the SEC on March 12, 2010 and with our Form 10-K/A,
Amendment No. 1 filing made with the SEC on March 17, 2010.  This Form
10-K/A has not been updated to reflect events that occurred after the date of
the original Annual Report on Form 10-K and Amendment No. 1
thereto.




Updated
certifications of our principal executive and financial officer are included as
exhibits to this Amendment No. 2.







SIGNATURES




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




MERGE
      HEALTHCARE INCORPORATEDApril
      30, 2010
            
            /s/
      Justin C. DearbornBy:  Justin
      C. DearbornTitle:  Chief
      Executive Officer(principal
      executive officer)April
      30, 2010
            
            /s/
      Steven M. OreskovichBy:  Steven
      M. OreskovichTitle:  Chief
      Financial Officer(principal
      financial officer
              and
      principal accounting officer)


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.




April
      30, 2010
            
            /s/
      Michael W. Ferro, Jr.By:  Michael
      W. Ferro, Jr.Chairman
      of the BoardApril
      30, 2010
            
            /s/
      Dennis BrownBy:  Dennis
      BrownDirectorApril
      30, 2010
            
            /s/
      Justin C. DearbornBy:  Justin
      C. DearbornChief
      Executive Officer and DirectorApril
      30, 2010
            
            /s/
      Gregg G. HartemayerBy:  Gregg
      G. HartemayerDirectorApril
      30, 2010
            
            /s/
      Richard A. ReckBy:  Richard
      A. ReckDirectorApril
      30, 2010
            
            /s/
      Neele E. Stearns, Jr.By:  Neele
      E. Stearns, Jr.Director










Item
10.                                DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




BOARD
OF DIRECTORS




The
following table lists the names of the six (6) current Directors, their
respective ages and positions with us, followed by a brief biography of each
individual, including their business experience during the past five (5)
years.




Name
            Age
            PositionDennis
      Brown
            62
            DirectorJustin
      C. Dearborn
            40
            Director
      and Chief Executive OfficerMichael
      W. Ferro, Jr.
            43
            Chairman
      of BoardGregg
      G. Hartemayer
            57
            DirectorRichard
      A. Reck
            60
            DirectorNeele
      E. Stearns, Jr.
            74
            Director





Dennis
Brown presently serves as Senior Executive, Vice President and Chief
Financial Officer for Karl’s Event Rental Inc. and previously served as vice
president of finance, chief financial officer and treasurer of Apogent
Technologies Inc. (which we refer to as “Apogent”), a New York Stock Exchange
company from January 2003 to December 2004.  Fisher
Scientific International Inc. acquired Apogent in August 2004, and after
completion of a transition period, Mr. Brown retired from Apogent in
December 2004.  From December 2000 through
January 2003, Mr. Brown served as a financial consultant to
Apogent.  Mr. Brown also served as vice president of finance,
chief financial officer and treasurer of Apogent’s predecessor, Sybron
International Corporation (which we refer to as “Sybron”), a publicly traded
company formerly headquartered in Milwaukee, Wisconsin, from January 1993
through December 2000, at which time Sybron’s life sciences group was relocated
to Portsmouth, New Hampshire, and Sybron was renamed
Apogent.  Mr. Brown is a Fellow of the Chartered Institute of
Management Accountants (England).  Mr. Brown has served on our
Board since May 2003 and previously served on our Board from the date of
our initial public offering in February 1998 until
May 2000.  The Board of Directors (the “Board”) has concluded
that Mr. Brown should be a Director of Merge Healthcare because ofhis extensive industry
experience, including being vice president of finance, chief financial officer
and treasurer of Apogent.




Justin C.
Dearborn served as managing director and general counsel of Merrick
Ventures, LLC (with its operating entities and affiliates, are referred to
collectively to as “Merrick Ventures”) from January 2007 until his
appointment as Chief Executive Officer of Merge Healthcare on June 4,
2008.   Prior to joining Merrick Ventures, Mr. Dearborn worked
over nine years for Click Commerce, Inc. (which we refer to as “Click
Commerce”), a publicly traded software and services company that was acquired by
Illinois Tool Works Inc. (“ITW”) in October 2006.  From
May 2003 until May, 2005, Mr. Dearborn served as vice president of
Corporate Legal Affairs and Human Resources at Click
Commerce.  Mr. Dearborn was appointed corporate secretary of
Click Commerce on May 2, 2003.  Prior to Click Commerce,
Mr. Dearborn worked at Motorola, Inc. where he specialized in intellectual
property transactions and also held management positions in Motorola’s
Semiconductor and Corporate Groups.  Mr. Dearborn and holds a
B.A. from Illinois State University and a J.D. from DePaul
University.  He has practiced law in the state of Illinois but no
longer holds a license to practice law.  Mr. Dearborn has served on
our Board since his appointment as Chief Executive Officer of Merge Healthcare
on June 4, 2008.  The Board has concluded that Mr. Dearborn
should be a Director of Merge Healthcare because of his diverse experience in
operational, financial and legal roles.




Michael W. Ferro,
Jr. has served as a Director and Chairman of our Board since June 4,
2008.  Since May 2007, Mr. Ferro has served as chairman and
chief executive officer of Merrick Ventures, a private investment
firm.  From June 1996 until October 2006, Mr. Ferro
served as chief executive officer and chairman of the board of Click
Commerce.  Mr. Ferro is currently a member of the board of
trustees of the Chicago Museum of Science and Industry, the Field Museum, the
Joffrey Ballet, Northwestern University and the Lyric Opera of
Chicago.  He also serves on the boards of directors of the Chicago
Community Trust, Children’s Memorial Hospital, Northwestern Memorial Foundation,
Big Shoulders Foundation, and AfterSchool Matters.  Mr. Ferro
holds a B.A. from the University of Illinois.  The Board has concluded
that Mr. Ferro should be a Director of Merge Healthcare because ofhis extensive experience
in investing in and advising public and private







companies.  Additionally,
his and Merrick’s significant stock ownership in Merge Healthcare aligns his
interests with those of other stockholders.




Gregg G.
Hartemayer has served as a Director of our Board since June 4, 2008
and is a member of our Audit, Nominating and Governance Committee and our
Compensation Committee.  Since May 2007, Mr. Hartemayer has
served as a special advisor to Merrick Ventures.  Prior to his
association with Merrick Ventures, he served in various capacities at Arthur
Anderson LLP, and its then affiliate, Accenture for
28 years.  Mr. Hartemayer retired from Accenture in
February 2004 where he was chief executive for Global Technology,
Outsourcing and Global Delivery.  Mr. Hartemayer holds an M.B.A.
and a B.A. in Mathematics from the University of Michigan.  The Board
has concluded that Mr. Hartemayer should be a Director of Merge Healthcare
because ofhis
demonstrated financial experience with Arthur Anderson LLP and
Accenture.  Mr. Hartemayer’s public accounting experience is also
beneficial to Merge Healthcare.




Richard A.
Reck is the president of Business Strategy Advisors LLC, a business
strategy consulting firm, and has served in such capacity since
August 2002.  Mr. Reck joined the certified public
accounting firm of KPMG LLP in June 1973 and remained employed there until
his retirement as a partner in July 2002.  He currently serves on
the boards of Interactive Intelligence, Inc., a publicly held software company,
and Advanced Life Sciences Holdings Inc., a publicly held biopharmaceutical
company, as well as the boards of several private and not–for–profit
entities.  Mr. Reck is a certified public accountant and holds a
B.A. in Mathematics from DePauw University and an M.B.A. in Accounting from the
University of Michigan.  Mr. Reck has served as a Director
of our Board since April 2003.  The Board has concluded that
Mr. Reck should be a Director of Merge Healthcare because ofhis financial and
executive experience with the above entities and other experience as a member of
the board of directors of other public and private entities.




Neele E. Stearns,
Jr. has served as a Director of our Board since June 4, 2008 and is
Chair of our Audit Committee.  Since February 2001,
Mr. Stearns has served as chairman of Financial Investments Corporation, a
private equity investment firm.  From July 2004 to
April 2007, he also served as the chief executive officer of Boulevard
Healthcare, LLC, an owner and operator of nursing homes, of which he is still
chairman.  From September 15, 2003 to January 15, 2004,
Mr. Stearns took a leave of absence from Financial Investments Corporation
to serve as interim chairman and chief executive officer of Footstar,
Inc.  In March 2004, Footstar filed for U.S. Chapter 11 bankruptcy, at
which time, Mr. Stearns remained as a director of Footstar, Inc. until it
emerged from bankruptcy in February 2006.  Previously,
Mr. Stearns was chairman of the Board of Wallace Computer Services, Inc.,
then a provider of printed products and print management services, from
January 2000 through November 2000 as well as serving as a director
from 1996 until its sale to Moore Corporation Limited in 2003.  Prior
to 1995, he was president and chief executive officer of CC Industries, Inc., a
diversified holding company.  Mr. Stearns served on the board of
Maytag Corporation from 1989 through its sale to Whirlpool Corporation in March
2006.  Mr. Stearns holds an M.B.A. from Harvard Business School
and a B.A. in Economics from Carleton College.  The Board has
concluded that Mr. Stearns should be a Director of Merge Healthcare because
ofhis significant
executive experience referred to above.


Role and Composition of the Board of Directors




General.  The Board,
which is elected by the shareholders, is the ultimate decision–making body of
Merge Healthcare, except with respect to those matters reserved to the
shareholders.  It selects the Chief Executive Officer and other
members of the senior management team, which senior management team is charged
with the conduct of Merge Healthcare’s business.  Having selected the
senior management team, the Board acts as an advisor and counselor to senior
management and ultimately monitors its performance.  The function of
the Board to monitor the performance of senior management is facilitated by the
presence of outside Directors of stature who have substantive knowledge of Merge
Healthcare’s business.




Our
business, property and affairs are managed under the direction of our
Board.  Members of our Board are kept informed of our business through
discussions with our Chairman and Chief Executive Officer and other officers, by
reviewing materials provided to them, by visiting our offices and by
participating in meetings of the Board and its Committees.




In 2009,
the Board met thirteen (13) times and had three (3) Committees:  the
Audit Committee, the Nominating and Governance Committee and the Compensation
Committee.  All of the Directors attended at least seventy five
percent (75%) of the meetings of the Board, and at least seventy five percent
(75%) of the meetings of all committees on which they served in
2009.




It is the
general policy of Merge Healthcare that all major decisions be considered by the
Board as a whole.  As a consequence, the Committee structure of the
Board is limited to those Committees considered to be basic to, or required for,
the operation of a publicly owned company.  Currently, these
Committees are the Audit Committee, Compensation Committee, and the Nominating
and Governance Committee.  The membership of these Committees is
rotated from time to time.




2


Selection
Criteria. Although neither the Nominating and Governance
Committee nor the Board has a diversity policy, the Board is committed to a
diversified membership, in terms of both the individuals involved and their
various experiences and areas of expertise.  The Nominating and
Governance Committee has not established specific minimum age, education, years
of business experience or specific types of skills for potential director
candidates, but, in general, expects qualified candidates will have ample
experience and a proven record of business success and
leadership.  Candidates are selected by the Nominating and Governance
Committee for, among other things, their integrity, independence, diversity of
experience, leadership and their ability to exercise sound
judgment.  Final approval of a candidate is determined by the full
Board.  The Nominating and Governance Committee considers candidates
suggested by our shareholders for election as a Director, provided that the
recommendations are made according to the procedures required under our
Bylaws.  Shareholder nominees whose nominations comply with these
procedures will be evaluated by the Nominating and Governance Committee in the
same manner as the Nominating and Governance Committee’s nominees.




Director
Compensation.  The Nominating and Governance Committee makes
recommendations to the Board regarding the compensation of
Directors.




Executive
Sessions.  Executive sessions or meetings of outside Directors
without management present are held regularly at the Board’s discretion and
consistent with NASDAQ Global Market Rules.




Merge
Healthcare's Code of Ethics




All of
our employees, including the Chief Executive Officer, Chief Financial Officer,
our Controllers, and persons performing similar functions, including all
Directors and employees, are required to abide by Merge Healthcare’s Code of
Ethics to ensure that our business is conducted in a consistently legal and
ethical manner.  This Code of Ethics along with our Whistleblower
Policy form the foundation of a comprehensive process that includes compliance
with all corporate policies and procedures, an open relationship among
colleagues that contributes to good business conduct, and the high integrity
level of our employees.  Our policies and procedures cover all areas
of professional conduct, including employment policies, conflicts of interest,
intellectual property and the protection of confidential information, as well as
strict adherence to all laws and regulations applicable to the conduct of our
business.




Employees
are required to report any conduct that they believe in good faith to be an
actual or apparent violation of Merge Healthcare’s Code of
Ethics.  The Sarbanes–Oxley Act of 2002 requires audit committees to
have procedures to receive, retain and treat complaints received regarding
accounting, internal accounting controls or auditing matters and to allow for
the confidential and anonymous submission by employees of concerns regarding
questionable accounting or auditing matters.  We have such procedures
in place as set forth in the Merge Healthcare Incorporated Whistleblower
Policyand the Code of
Ethics.




Both our
Code of Ethics and our Whistleblower Policy are available to our shareholders on
our web site at www.merge.com/about/governance.aspx
and in print.  To request copies of these documents, make such request
in writing to the General Counsel and Corporate Secretary, Merge Healthcare
Incorporated, 6737 West Washington Street, Suite 2250, Milwaukee,
Wisconsin  53214–5650.  Future material amendments relating
to the Code of Ethics and/or the Whistleblower Policy will be disclosed on our
web site.




3


Committee Membership




The table
below provides 2009 membership and meeting information for each of the Board
Committees.




Name
            
            Audit
            
            
            Compensation
            
            
            Nominating
      and GovernanceDennis
      Brown
            
            
            X
            
            
            
            X*
            
            
            
            XJustin
      C. DearbornMichael
      W. Ferro, Jr.Richard
      A. Reck
            
            
            X
            
            
            
            X
            
            
            
            X*Gregg
      G. Hartemayer
            
            
            X
            
            
            
            X
            
            
            
            XNeele
      E. Stearns, Jr.
            
            
            X*





(*)
            Represents
      Committee Chairperson.





The Audit Committee




The Audit
Committee is comprised of entirely independent Directors in accordance with the
listing standards of the NASDAQ Global Market and applicable rules of the United
States Securities and Exchange Commission (“Commission”).  Under its
Charter, the Audit Committee is responsible for reviewing with the independent
registered public accounting firm and management the adequacy and effectiveness
of internal controls over financial reporting.  The Audit Committee
reviews and consults with management and the independent registered public
accounting firm on matters related to the annual audit, the published financial
statements, earnings releases and the accounting principles
applied.  The Audit Committee is also responsible for appointing,
retaining and evaluating Merge Healthcare’s independent public accounting
firm.  The Committee is directly responsible for the compensation,
retention and oversight of Merge Healthcare’s independent public accounting firm
and evaluates the independent public accounting firm’s qualifications,
performance and independence.  The Committee reviews reports from
management relating to the status of compliance with laws, regulations and
internal procedures.  The Audit Committee is also responsible for
reviewing and discussing with management Merge Healthcare’s policies with
respect to risk assessment and risk management.




The Audit Committee Charter is available on our website at
www.merge.com/about/governance.aspx
and in print upon request.   The Audit Committee met thirteen (13)
times in 2009.




The Board
has determined that each of the members of the Audit Committee is an “audit
committee financial expert” for purposes of the Commission’s rules.




The
Compensation Committee




The Compensation
Committeeis
comprised entirely of independent Directors in accordance with the listing
standards of the NASDAQ Global Market and each Committee member is a
“non–employee director” as defined in Rule 16b–3 under the Securities Exchange
Act of 1934, as amended (“Exchange Act”) and is an “outside director” as defined
in Section 162(m) of the Internal Revenue Code.  The Committee
determines Merge Healthcare’s compensation philosophy and oversees and
administers Merge Healthcare’s executive compensation programs.  Its
responsibilities also include overseeing Merge Healthcare’s compensation and
benefit plans and policies, administering its stock plans (including reviewing
and approving equity grants) and reviewing and approving annually all
compensation programs for Merge Healthcare’s executive officers.




The
Compensation Committee Charter is available on our website at www.merge.com/about/governance.aspx
and in print upon request.   The Compensation Committee met five (5)
times in 2009.




4


The
Nominating and Governance Committee




The
Nominating and Governance Committee is comprised entirely of independent
Directors.  Under the terms of its Charter, the Nominating and
Governance Committee is responsible for matters of corporate governance and
matters relating to the practices, policies and procedures of the
Board.  This includes identifying, recruiting and recommending
director candidates as well as considering nominees recommended by
shareholders.  The Committee is responsible for recommending corporate
governance guidelines and otherwise taking a leadership role in shaping the
corporate governance of Merge Healthcare.




The
Committee advises on the structure of Board meetings and recommends matters for
consideration by the Board.  The Committee also advises on and
recommends director compensation, which is ultimately approved by the full
Board.




The
Nominating and Governance Committee Charter is available on our website at www.merge.com/about/governance.aspxand in print upon request.   The Nominating and
Governance Committee did not convene in 2009.




During
the last year, there have not been any material changes to the procedures by
which shareholders may recommend nominees to Merge Healthcare's
Board.




Compensation
Committee Interlocks and Insider Participation




During
fiscal 2009 and as of the date hereof, none of the members of the Compensation
Committee was or is an officer or employee of Merge Healthcare, and no executive
officer of Merge Healthcare served or serves on the Compensation Committee or
Board of any company that employed or employs any member of Merge Healthcare’s
Compensation Committee or Board.




MANAGEMENT




Executive
Officers




The names
of our current executive officers, and their respective ages and positions are
as follows:




Name
            
            Age
            
            PositionJustin
      C. Dearborn
            
            
            40
            
            Chief
      Executive Officer, DirectorNancy
      J. Koenig
            
            
            45
            
            President
      Merge FusionAnn
      Mayberry–French
            
            
            49
            
            General
      Counsel and Corporate SecretarySteven
      M. Oreskovich
            
            
            38
            
            Chief
      Financial OfficerAntonia
      A. Wells
            
            
            51
            
            President
      Merge OEM





Mr. Dearborn’s
biography appears above under the heading “Board of Directors.”




Nancy J.
Koenig was appointed President of Merge Fusion in June of
2008.  Ms. Koenig comes to Merge Healthcare from Merrick
Healthcare Solutions (a Merrick Ventures portfolio company), where she served as
its chief executive officer.  Prior to joining Merrick Ventures in the
fall of 2007, Ms. Koenig was the president of Click Commerce during its
integration as a subsidiary of ITW.  Ms. Koenig joined Click
Commerce in 1999 as the director of business consulting and held various
positions, including serving as the head of Click Commerce’s European
Operations, its vice president of Product Operations and Marketing and its
executive vice president – Operations.  Ms. Koenig became Click
Commerce’s president in 2006.




Ann G.
Mayberry–French was appointed General Counsel and Corporate Secretary in
August of 2008.  Ms. Mayberry–French comes to Merge Healthcare
from Modine Manufacturing Company where she served as senior
counsel.  Prior to joining Modine Manufacturing Company,
Ms. Mayberry–French was the general counsel and secretary of Assurant
Health for seven years.  Ms. Mayberry–French has over 27 years of
experience in the healthcare and health insurance industry, including business
management of managed care services and federal government
contracting.  Ms. Mayberry–French is a Registered Nurse and has
been licensed to practice law in Kentucky, Ohio and Wisconsin.  She
currently maintains a license to practice only in Wisconsin, but is also
admitted in Ohio and Kentucky.




5


Steven M.
Oreskovich was appointed Chief Financial Officer in
June 2008.  Prior to his appointment as Chief Financial Officer,
Mr. Oreskovich served as our Vice President of Internal Audit since
January 2007, as our Chief Accounting Officer and interim Treasurer and
interim Secretary from July 2006 to January 2007 and as our Vice
President and Corporate Controller from April 2004 to
July 2006.  Prior to joining our Company, Mr. Oreskovich
served as vice president of finance and operations at Truis, Inc., a company
that provided customer intelligence solutions for business–to–business
enterprises, from April 2000 to January 2003.  Prior to that,
Mr. Oreskovich worked as an auditor at PriceWaterhouseCoopers LLP from
September 1994 to April 2000.  Mr. Oreskovich holds a
B.S. degree in Accounting from Marquette University and is a C.P.A.




Antonia A.
Wells was appointed President of Merge OEM in
June 2008.  Prior to her appointment as President Merge OEM,
Ms. Wells served as Merge OEM Vice President of Customer Operations since
June 2005.  Since joining us in 1999, Ms. Wells has been
responsible for Merge OEM’s contract management, quality/regulatory affairs,
manufacturing, order management, professional services and internal
infrastructure.  Ms. Wells has over 25 years of business
management experience, including leadership roles in IT, enterprise system
implementation, process re–engineering, and human resources.




SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE




Section 16(a)
of the Exchange Act requires our executive officers, members of our Board, and
persons who own more than ten percent (10%) of a registered class of our equity
securities, to file initial statements of beneficial ownership (Form 3),
and statements of changes in beneficial ownership (Forms 4 or 5).  The
Commission requires executive officers, directors and greater than ten percent
(10%) shareholders to furnish us with copies of all these forms filed with the
Commission.




To our
knowledge, based solely upon our review of the copies of these forms received by
us, or written representations from certain reporting persons that no additional
forms were required for those persons, we believe that all of our executive
officers and Directors complied with their reporting obligations during 2009,
with the exception that one late Form 4, which was filed on February 26, 2009 on
behalf of Merrick RIS, LLC and Michael W. Ferro, Jr., jointly, with respect to a
purchase made on February 23, 2009.




Item
11.                                Executive
Compensation




COMPENSATION
DISCUSSION AND ANALYSIS




INTRODUCTION




This item
describes our executive compensation program for 2009 and certain elements of
the 2010 program.  We use this program to attract, motivate, and
retain colleagues whom the Board has selected to lead our business.




This
section of the Annual Report explains how the Compensation Committee made its
compensation decisions for our officers who also comprise our named executive
officers.  Those Named Executive Officers are our Chief Executive
Officer, Justin C. Dearborn; our President, Merge Fusion, Nancy J. Koenig; our
Vice President, General Counsel and Corporate Secretary, Ann Mayberry–French;
our Chief Financial Officer, Steven M. Oreskovich; and our President, Merge OEM,
Antonia A. Wells.




MARKET AND BUSINESS CONDITIONS




Although
the global economy rebounded somewhat toward the end of 2009, our business
remained affected by the downturn that started in 2008.  Healthcare in
particular showed country-by-country challenges and opportunities as a direct
result of the local government investment.  In 2009 our major market,
the U.S., passed dramatic healthcare legislation intended to spark new
investment in health IT.  While it originally served to freeze the
market as elements of the legislation were further defined, market conditions
improved toward the end of 2009 and major market segments are forecasted for
growth in 2010 onward.  At the same time, legislation aimed at
reducing reimbursement to our customers hindered their ability to invest in our
solutions.  Merge Healthcare improved its financial position during
the second half of 2008 and continued to grow top line revenue throughout
2009.  Management successfully limited overhead while growing revenue
in order to improve our financial strength and sustain future
performance.  In 2009 we continued to operate two operational
units:  Indirect (selling customized software solutions to original
equipment manufacturers in the healthcare information technology industry,
CAD




6


solutions
and Merge solutions internationally) and Direct (selling software solutions to
end–users such as radiologists, diagnostic imaging centers and hospitals, as
well as clinical trials solutions to pharmaceutical companies and
CROs).  These business units are focused on providing software
solutions in the health care market space.  Our business structure is
designed to provide each global business unit with the authority and
accountability to make decisions as part of the overall Merge Healthcare global
business – quickly and with agility – in the best interest of its stakeholders,
including our customers.  We believe this business model has
contributed to improved performance and increased shareholder
value.




PHILOSOPHY AND GOALS OF OUR EXECUTIVE COMPENSATION
PROGRAM




Compensation
Philosophy




The
primary objectives of our executive compensation policies are as
follows:




·
            to
      attract and retain talented executives by providing compensation that is
      in alignment with the compensation provided to executives at companies of
      comparable size and growth trajectory in the health care information
      technology industry, while maintaining compensation within levels that are
      consistent with our annual budget, financial objectives and operating
      performance; and




·
            to
      provide appropriate incentives for executives to work toward the
      achievement of our annual financial performance and business goals, based
      primarily on diluted earnings per
share.




Our
incentive compensation programs are designed to reward executive and other
employee contributions based on the success of our
organization.  Specifically, they are designed to reward achievement
of our annual financial performance and business goals and creation of
shareholder value.




Compensation
Mix




Historically,
we have used a mix of short–term compensation (base salaries and annual cash
incentive bonuses) and long–term compensation (stock option grants and
restricted stock awards) to meet the objectives of our compensation
programs.  We do not have a fixed policy for allocating between
long–term and short–term compensation or between cash and non–cash
compensation.  Because we believe that it is important to align the
interests of our executives with those of our shareholders, equity incentive
compensation has made up a portion of each current executive’s overall
compensation package.  In the near term, we plan to continue to use
primarily short–term compensation (base salaries and annual cash incentive
bonuses) as well as long–term compensation, as appropriate.




The
compensation that we pay our Named Executive Officers consists of base salary,
cash incentive compensation and stock option awards.  The following
discussion explains the reason we pay each element of compensation, how the
amount of each element is determined, and how each element fits into our overall
compensation philosophy and affects decisions regarding other
elements.




We seek
to pay executives a base salary in alignment with salaries of executives at
companies of comparable position in the healthcare information technology
industry and at a rate that fits within our annual budget, financial objectives
and operating performance.  We have not historically attempted to make
base salary a certain percentage of total compensation.




In light
of the Company’s 2009 annual performance and the public sentiment regarding
corporate bonus payouts for substandard, annual corporate performance, the
Compensation Committee determined that Merge Healthcare’s performance did not
warrant cash incentive payments for 2009.




In early
2010, the Compensation Committee established targets for bonuses for Merge
Healthcare’s Named Executive Officers.  However, due to the Company’s
acquisition of AMICAS, Inc., such targets are no longer in
effect.


7


Role
of the Compensation Committee




The
Compensation Committee of our Board is responsible for administering our
compensation practices and ensuring they are designed to drive corporate
performance.  Our Compensation Committee reviews compensation policies
affecting our executive officers annually, taking into consideration our
financial performance, our position within the health care information
technology industry, the executive compensation policies of similar companies in
similar industries and, when reviewing individual compensation levels, certain
individual factors, including the executive’s level of experience and
responsibility and the personal contribution that the individual has made to our
success.  Further, our Compensation Committee also considers the
global economic trends and the macroeconomic environment.




Annually,
our Compensation Committee reviews the base salaries of all executive officers
and based on these reviews, may adjust these salaries to ensure external
competitiveness and to reflect the executive’s individual position and
performance, as well as the performance of our Company.  In addition
to these factors, our Compensation Committee considers the recommendations of
our Chief Executive Officer when adjusting base salaries of our Named Executive
Officers other than himself.  We may also make base salary adjustments
during the year if the scope of an executive officer’s responsibility changes
relative to the other executives.




Modifications
To Our Executive Compensation Program




The
Committee continues to focus its efforts to refine the executive compensation
structure and process consistent with evolving good governance
practices.




Beginning
in June 2008, in connection with the investment by Merrick RIS, LLC (“Merrick”)
in our Company, several changes occurred in the makeup of our senior management
team.  Specifically, effective on the closing of the Merrick
investment, Mr. Dearborn became our Chief Executive Officer,
Mr. Oreskovich became our Chief Financial Officer, Ms. Koenig became
our President of Merge Fusion and Ms. Wells became our President of Merge
OEM.  In connection with these changes, the Compensation Committee
proposed and the Board accepted several modifications to our executive officer
and director compensation programs to ensure that we offer competitive
compensation that will help us to retain our executive officers and to reflect
the views of the current members of our Board and the Compensation Committee on
appropriate compensation structures.




During
2008, we also implemented a different director compensation program than
previously utilized for our Directors as set forth in the Director compensation
discussion.




We have
entered into employment agreements with four (4) Named Executive
Officers:  Mr. Dearborn, Ms. Koenig, Mr. Oreskovich and
Ms. Wells.  The agreements formalize and confirm the base
compensation, target annual bonus amounts and the stock option grants that we
agreed to in connection with the hiring of Mr. Dearborn and
Ms. Koenig, and Mr. Oreskovich’s and Ms. Wells’
promotions.  The agreements provide for twelve (12) months’ base
salary as severance upon a termination other than for cause or other than due to
the executive officer’s death or disability, conditioned on the executive
officer’s execution of a release agreement.  The agreements do not
include a definition of “cause.” In addition, upon a change of control of Merge
Healthcare, all of the executive officers’ stock options will
vest.  We proposed the amounts of these severance benefits and the
triggering events based on the subjective judgments and experiences of the
members of the Compensation Committee indicating that these amounts are
consistent with market practice and that the triggering events are likely to
involve circumstances in which it is customary and appropriate to offer the
protections embodied in the employment agreements.




We
established the terms of the compensation arrangements with four (4) of our
Named Executive Officers at the time of the closing of the Merrick investment,
as noted above.  Under the employment agreements, Mr. Dearborn
receives an annual base salary of $250,000 and has a target annual bonus equal
to his base salary.  Ms. Koenig receives an annual base salary of
$200,000 and has a target annual bonus equal to her base
salary.   Ms. Wells receives an annual base salary of
CAD$200,000 and has a target annual bonus equal to her annual base
salary.  Mr. Oreskovich receives an annual base salary of
$200,000 and has a target annual bonus equal to 50% of his annual base
salary.  The compensation arrangement for Ms. Mayberry–French was
determined upon her date of hire.  Those arrangements are as
follows:  Ms. Mayberry–French was hired at an annual salary of
$150,000 and received a salary increase effective on January 1, 2009, due to
additional responsibility for the Human Resources function of Merge
Healthcare  Ms. Mayberry–French now receives an annual salary of
$160,000 and has a target annual bonus of thirty five percent (35%) of her base
salary.  Achievement of bonus for each of the current
executive




8


officers
is tied to factors defined by the Compensation Committee for the 2009 annual
bonus program and could result in a bonus amount that is more or less than the
targeted bonus.




Board
Leadership Structure and Risk Oversight




We
separate the roles of Chief Executive Officer and Chairman of the Board of
Directors in recognition of the differences between the two
roles.  The Chief Executive Officer is responsible for setting the
strategic direction for the Company and the day to day leadership and
performance of the Company, while the Chairman of the Board of Directors
provides guidance to the Chief Executive Officer and sets the agenda for Board
meetings and presides over meetings of the full Board.  We also believe
that separation of the positions reinforces the independence of the Board in its
oversight of the business and affairs of the Company, and creates an environment
that is more conducive to objective evaluation and oversight of management’s
performance, increasing management accountability and improving the ability of
the Board to monitor whether management’s actions are in the best interests of
the Company and its stockholders.  We do not have a lead independent
director.




The
Board’s role in the Company’s risk oversight process includes receiving regular
reports from members of senior management on areas of material risk to the
Company, including operational, financial, legal and regulatory, and strategic
and reputational risks.  The full Board (or the appropriate committee
in the case of risks that are under the purview of a particular committee)
receives these reports to enable it to understand our risk identification, risk
management and risk mitigation strategies.  The Company’s Compensation
Committee is responsible for overseeing the management of risks relating to the
Company’s executive compensation plans and arrangements.  The Audit
Committee oversees management of financial risks.  The Nominating and
Governance Committee manages risks associated with the independence of the Board
and potential conflicts of interest.  While each committee is
responsible for evaluating certain risks and overseeing the management of such
risks, the entire Board is regularly informed of such risks through committee
reports at the Board meeting following a given committee meeting.  This
enables the Board and its committees to coordinate the risk oversight role,
particularly with respect to risk interrelationships.




In
addition to the Company’s formal compliance program, the Board encourages
management to promote a corporate culture that understands risk management and
incorporates it into the overall corporate strategy and day-to-day business
operations.  The Company’s risk management structure also includes an
ongoing effort to assess and analyze the most likely areas of future risk for
the Company.  As a result, the Board (and its committees) periodically
asks the Company’s executives to discuss the most likely sources of material
future risks and how the Company is addressing any significant potential
vulnerability. The Company has reviewed its compensation policies and practices
for its employees and does not believe such policies and practices are
reasonably likely to have a material adverse effect on the Company.




COMPENSATION
COMMITTEE REPORT




The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) of Regulation S–K set forth above with
management and, based on such review and discussions, the Compensation
Committee recommended to our Board that the Compensation Discussion and Analysis
be included in this Proxy Statement.




The
Compensation Committee




Dennis
Brown, Chairperson


Gregg G.
Hartemayer


Richard
A. Reck




9


COMPENSATION
OF EXECUTIVE OFFICERS AND DIRECTORS




Summary
Compensation Tables




The
following table relates to the compensation earned by our current Named
Executive Officers for the fiscal years ended December 31,  2007, 2008
and 2009.




Name
      and Principal Position
            
            Year
            
            
            Salary
      ($)
            
            
            Bonus(1)
      ($)
            
            
            Stock
      Awards(2)
      ($)
            
            
            Option
      Awards(2)
              ($)
            
            
            Non
      Equity Incentive Plan Compensation(3)
      ($)
            
            
            All
      Other Compensation ($)
            
            
            Total
              ($)Justin
      C. Dearborn(4)
              Chief
      Executive Officer
            
            
            2009
              2008
            
            
            
            250,000
              143,109
            
            
            
            ––
              ––
            
            
            
            ––
              ––
            
            
            
            ––
              340,000
            
            
            
            ––
              ––
            
            
            
            17,453
              7,018
            (5)
              (5)
            
            
            267,453
              490,127Steven
      M. Oreskovich(6)
              Chief
      Financial Officer and Treasurer
            
            
            2009
              2008
              2007
            
            
            
            200,000
              189,583
              175,000
            
            
            
            ––
              ––
              130,000
            
            
            
            ––
              ––
              80,000
            
            
            
            ––82,000
              150,000
            
            
            
            ––
              ––
              5,469
            
            
            
            14,475
              10,222
              9,514
            (5)
              (5)
              (5)
            
            
            214,475
              281,805
              549,983Nancy
      J. Koenig(4)
              President,
      Merge Fusion
            
            
            2009
              2008
            
            
            
            200,000
              114,487
            
            
            
            ––
              ––
            
            
            
            ––
              ––
            
            
            
            ––
              82,000
            
            
            
            ––
              ––
            
            
            
            4,687
              2,236
            (5)
              (5)
            
            
            204,687
              198,723Antonia
      A. Wells(7)
              President,
      Merge OEM
            
            
            2009
              2008
            
            
            
            199,123
              160,474
            
            
            
            ––
              ––
            
            
            
            ––
              ––
            
            
            
            ––
              82,000
            
            
            
            ––
              ––
            
            
            
            11,223
              5,975
            (8)
              (8)
            
            
            211,223
              248,449Ann
      G. Mayberry–French(9)
              Vice
      President, General Counsel & Corporate Secretary
            
            
            2009
              2008
            
            
            
            160,000
              60,288
            
            
            
            ––
              ––
            
            
            
            ––
              ––
            
            
            
            ––
              88,000
            
            
            
            ––
              ––
            
            
            
            15,535
              4,882
            (5)
              (5)
            
            
            175,535
              153.170


___________________




(1)
            For
      2007, reflects a retention bonus of $105,000 for Mr. Oreskovich, and
      a discretionary bonus of $25,000 for
  Mr. Oreskovich.




(2)
            Our
      Named Executive Officers were not granted any stock or option awards in
      the fiscal year ended December 31, 2009.  The dollar amounts for
      the awards represent the grant-date value calculated in accordance with
      Financial Accounting Standards Board (FASB) Accounting Standards
      Codification (ASC) Topic 718 (“FASB ASC 718”) for each Named Executive
      Officer.  Assumptions used in the calculation of these amounts
      are included in Note 8 to our audited financial statements for the fiscal
      year ended December 31, 2009 included in our Annual Report on Form 10–K
      filed with the Commission on March 12, 2010, as amended March 17,
      2010.




(3)
            Represents
      the cash incentive award earned under our 2007 performance–based cash
      bonus plan.




(4)
            Mr. Dearborn
      and Ms. Koenig each began employment with us at the consummation of
      the Merrick transaction, effective June 4,
2008.




(5)
            For
      2009, represents our matching contribution under our 401(k) employee
      retirement savings plan ($6,510 for Mr. Dearborn, $6,000 for
      Mr. Oreskovich, and $4,800 for Ms. Mayberry–French) and medical,
      dental, optical, long term disability and life insurance benefits ($10,943
      for Mr. Dearborn, $8,475 for Mr. Oreskovich, $4,687 for
      Ms. Koenig, and $10,735 for Ms. Mayberry–French).  For
      2008, represents our matching contribution under our 401(k) employee
      retirement savings plan ($1,875 for Mr. Dearborn, $5,688 for
      Mr. Oreskovich, and $1,125 for Ms. Mayberry–French) and medical,
      dental, optical and life insurance benefits ($5,143 for Mr. Dearborn,
      $4,534 for Mr. Oreskovich, $2,236 for Ms. Koenig, and $3,757 for
      Ms. Mayberry–French).  For 2007, represents our matching
      contribution under our 401(k) employee retirement savings plan ($5,250 for
      Mr. Oreskovich) and medical, dental, optical and life insurance
      benefits ($4,264 for
Mr. Oreskovich).




(6)
            At
      the consummation of the Merrick transaction effective June 4, 2008,
      Mr. Oreskovich was promoted to the position of Chief Financial
      Officer and Treasurer.  Prior to that time, Mr. Oreskovich
      held the position of Vice President of Internal
  Audit.




(7)
            At
      the consummation of the Merrick transaction effective June 4, 2008,
      Ms. Wells was promoted to the position of President, Merge
      OEM.  Prior to that time, Ms. Wells held the position of
      Vice President, Customer Operations of our Cedara business
      division.




(8)
            For
      2009, represents our contribution of $5,931 under our Deferred Profit
      Sharing Plan (“DPSP”) for Canadian employees and the payment of $5,292 in
      medical, dental, optical and life insurance and related costs for the
      benefit of Ms. Wells.  For 2008, represents our
      contribution of $2,207 under our Deferred Profit Sharing Plan (“DPSP”) for
      Canadian employees and the payment of $3,768 in medical, dental, optical
      and life insurance and related costs for the benefit of
      Ms. Wells.




(9)
            Ms. Mayberry–French
      began her employment with us effective August 4,
  2008.




10


Grants
Of Plan–Based Awards For Fiscal Year 2009




Merge
Healthcare did not grant any plan-based equity or non-equity awards to its Named
Executed Officers in fiscal 2009.




Outstanding
Equity Awards At 2009 Fiscal Year–End




The
following table contains information concerning equity awards held by our
current Named Executive Officers that were outstanding as of December 31,
2009.




OPTION
      AWARDS
            
            STOCK
      AWARDSName
            
            Number
      of
              Securities
              Underlying
              Unexercised
              Options
      (#)
              Exercisable
            
            
            Number
      of Securities Underlying
              Unexercised
      Options (#) Unexercisable
            
            
            Option
              Exercise
              Price
              ($)
            
            Option
      Expiration
              Date
            
            Number
      of Shares or
              Units
      of Stock That Have Not Vested (#)(1)
            
            
            Market
      Value of Shares or Units of Stock That Have Not Vested ($)(2)Justin
      C. Dearborn
            
            
            100,000
              50,000
            
            
            
            300,000
              150,000
            
            
            
            0.68
              1.47
            
            06/03/2014
              08/18/2014Steven
      M. Oreskovich
            
            
            20,000
              5,000
              35,000
              100,000
              30,000
              50,000
            
            
            
            ––
              ––
              ––
              ––
              15,000
              150,000
            
            
            
            15.00
              12.96
              17.50
              8.05
              4.99
              0.68
            
            04/01/2010
              07/16/2010
              05/31/2011
              09/05/2012
              04/02/2013
              06/03/2014
            
            
            53,333
            
            
            
            179,199Nancy
      J. Koenig
            
            
            50,000
            
            
            
            150,000
            
            
            
            0.68
            
            06/03/2014Antonia
      A. Wells
            
            
            25,000
              10,000
              18,750
              11,500
              50,000
            
            
            
            ––
              ––
              6,250
              17,500
              150,000
            
            
            
            17.50
              17.82
              6.34
              4.99
              0.68
            
            05/31/2011
              10/19/2011
              11/16/2012
              04/02/2013
              06/03/2014
            
            
            53,333
            
            
            
            179,199Ann
      G. Mayberry–French
            
            
            25,000
            
            
            
            75,000
            
            
            
            1.47
            
            08/18/2014


___________________


(1)
            One
      hundred percent (100%) of the restricted stock will vest on November 24,
      2010.




(2)
            Reflects
      the value as calculated using the closing market price of our Common Stock
      as of the last trading day in fiscal year 2009, December 31, 2009
      ($3.36).




In 2009,
none of our Named Executive Officers exercised any of their vested
options.




POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL




Description
of Agreements Providing for Potential Payments




Prior to
the closing of the investment by Merrick in our Company, we had in place
agreements that required us to provide compensation to certain of our executive
officers in the event of a termination of employment.  These
agreements generally called for increased payments if the termination of
employment occurred in connection with a change of control.




With
respect to the restricted stock award agreements of Mr. Oreskovich and
Ms. Wells, the restrictions lapse and the restricted stock becomes fully
vested upon resignation for good reason (as defined in the
agreement).  The agreements also




11


provide
for the lapse of the restrictions and full vesting upon: (a) the executive
officer’s termination of employment due to disability; (b) the executive
officer’s termination of employment by us without cause; (c) the executive
officer’s involuntary termination of employment within 365 days after a
change in control; (d) the executive officer’s resignation for good reason
within 365 days of a change in control; or (e) the sale by us of the
business unit with respect to which the Named Executive Officer primarily
performs services.




A number
of former officers of Merge Healthcare had employment agreements with the
potential for payment of certain amounts upon termination or a change in
control.  However, concurrent with the Merrick transaction described
below, such former officers entered into severance agreements with us, which
resulted in us paying a lower amount to them upon their separation from Merge
Healthcare.  For descriptions of the Named Executive Officer’s
employment agreements, see “Modifications To Our Executive Compensation Program”
above.




COMPENSATION
OF NON–EMPLOYEE DIRECTORS




Following
the Merrick transaction discussed below, our non–employee Directors no longer
receive cash compensation.  Instead, the Directors received stock
options, which options vest over sixteen equal quarterly increments and have an
exercise price equal to the closing price of Merge Healthcare’s shares on the
date of grant.  For 2008, our current Chairman of the Board was
awarded an option grant to purchase 400,000 shares of our Common Stock, our
current Chairman of the Audit Committee was awarded an option grant to purchase
300,000 shares of our Common Stock, and each of our other current non-employee
Directors were awarded an option grant to purchase 225,000 shares of our Common
Stock.  Our Directors were not granted any option awards in
2009.




Director
Compensation For Fiscal Year 2009




Our
Directors did not receive any cash or equity compensation for their service on
the Board in fiscal 2009.




12


OUTSTANDING
EQUITY AWARDS OF DIRECTORS AT FISCAL YEAR END




The
following table contains information concerning equity awards held by our
Directors that were outstanding as of December 31, 2009.




Option Awards(1)Name
            
            Number
      of Securities Underlying Options
              (#)
            
            
            Exercise
      Price of Option Awards
              ($
      / Share)
            
            Expiration
      Date
            
            Aggregate
      Number of Securities Underlying Options
              (#)Dennis
      Brown
            
            
            5,000
            
            
            
            9.78
            
            05/21/2013
            
            
            295,00010,000
            
            
            
            16.19
            
            05/20/201415,000
            
            
            
            17.50
            
            06/01/201515,000
            
            
            
            6.59
            
            12/27/201610,000
            
            
            
            5.52
            
            01/30/201715,000
            
            
            
            6.01
            
            05/10/2017225,000
            (2)
            
            
            1.47
            
            08/18/2018Michael
      W. Ferro, Jr.
            
            
            400,000
            (3)
            
            
            0.57
            
            11/19/2018
            
            
            400,000Gregg
      G. Hartemayer
            
            
            225,000
            (2)
            
            
            1.47
            
            08/18/2018
            
            
            225,000Richard
      A. Reck
            
            
            411
            
            
            
            7.46
            
            04/23/2013
            
            
            285,4115,000
            
            
            
            9.78
            
            05/21/201310,000
            
            
            
            16.19
            
            05/20/201415,000
            
            
            
            17.50
            
            06/01/201515,000
            
            
            
            6.59
            
            12/27/201615,000
            
            
            
            6.01
            
            05/10/2017225,000
            (2)
            
            
            1.47
            
            08/18/2018Neele
      E. Stearns, Jr.
            
            
            300,000
            (4)
            
            
            1.47
            
            08/18/2018
            
            
            300,000


___________________




(1)
            All
      options are fully vested and exercisable, with the exception of the
      options granted on August 19, 2008 with an August 18, 2018 expiration
      date, and the options granted on November 20, 2008 with a November 19,
      2018 expiration date, which options vest and are exercisable as noted
      below.




(2)
            Options
      vest in sixteen (16) equal quarterly increments of 14,062.5 shares, with
      the first increment vesting on the date of grant, August 19, 2008, with
      subsequent increments vesting on November 30, February 28, May 31 and
      August 31 thereafter.




(3)
            Options
      vest in sixteen (16) equal quarterly increments of 25,000 shares, with the
      first increment vesting on the date of grant, November 20, 2008, with
      subsequent increments vesting on February 28, May 31, August 31 and
      November 30 thereafter.




(4)
            Options
      vest in sixteen (16) equal quarterly increments of 18,750 shares, with the
      first increment vesting on the date of grant, August 19, 2008, with
      subsequent increments vesting on November 30, February 28, May 31 and
      August 31 thereafter.




Item
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS




The
following table shows, as of April 28, 2010, the beneficial ownership of shares
of our Common Stock, by:  (i) each person that is known to us to
beneficially own or exercise the voting or dispositive control of five percent
(5%) or more of our outstanding Common Stock; (ii) each of our Directors and
Named Executive Officers; and (iii) all of our Directors and




13


Named
Executive Officers as a group.  Except pursuant to marital property
laws or as otherwise indicated in the footnotes to the table, each of the
shareholders named below has sole voting and investment power with respect to
the shares shown as beneficially owned by such shareholder.  In
general, a person is deemed to be a “beneficial owner” of a security if that
person has or shares the power to vote or direct the voting of such security, or
the power to dispose of or to direct the disposition of such
security.  A person is also deemed to be a beneficial owner of any
securities of which the person has the right to acquire the beneficial ownership
within sixty (60) days.




Name and Address of Beneficial
      Owner(1)
            
            Shares BeneficiallyOwned(2)
            
            Percentage
      of TotalOutstandingMerrick
      RIS, LLC / Michael W. Ferro, Jr.(3)
            
            30,090,137
            
            36.4%NorthPointe
      Capital, LLC(4)
            
            5,625,779
            
            6.8%Dennis
      Brown
            
            594,427
            
            (*)Justin
      C.
      Dearborn
            
            290,022
            
            (*)Gregg
      G.
      Hartemayer
            
            201,140
            
            (*)Nancy
      J.
      Koenig
            
            122,160
            
            (*)Ann
      G.
      Mayberry–French
            
            53,462
            
            (*)Steven
      M. Oreskovich(5)
            
            363,092
            
            (*)Richard
      A.
      Reck
            
            422,549
            
            (*)Neele
      E. Stearns,
      Jr.
            
            371,610
            
            (*)Antonia
      A.
      Wells
            
            244,680
            
            (*)All
      Directors and Named Executive Officers as a Group (10
    persons)
            
            32,753,279
            
            39.6%(*)Less
      than 1% of outstanding Common Stock.





(1)
            The
      business address of each beneficial owner who is also a Director or Named
      Executive Officer of Merge Healthcare is c/o Merge Healthcare
      Incorporated, 6737 West Washington Street, Suite 2250, Milwaukee,
      Wisconsin 53214–5650.  The business address for Merrick RIS, LLC
      is 233 North Michigan Avenue, Suite 2330, Chicago, Illinois
      60601.  The business address of NorthPointe Capital, LLC is 101
      West Big Beaver, Suite 745, Troy, Michigan
  48084.


(2)
            Share
      amounts include the following numbers of shares of Common Stock which may
      be acquired upon the exercise of stock options which are currently
      exercisable or exercisable within sixty (60) days of April 28,
      2010:  175,000 for Mr. Ferro; 182,500 for Mr. Brown;
      250,000 for Mr. Dearborn; 112,500 for Mr. Hartemayer; 100,000
      for Ms. Koenig, 25,000 for Ms. Mayberry–French; 285,000 for
      Mr. Oreskovich; 172,911 for Mr. Reck; 150,000 for
      Mr. Stearns; 180,000 for Ms. Wells; and 1,632,911 for all
      Directors and Named Executive Officers as a
  group.


(3)
            Merrick
      RIS, LLC also holds 10,000 shares of Series A Preferred Stock of Merge
      Healthcare, representing 24% of the shares of Series A Preferred Stock
      issued by Merge Healthcare in connection with its acquisition of AMICAS,
      Inc.


(4)
            As
      reported on a Schedule 13G/A filed with the Commission on April 7, 2010,
      by NorthPointe Capital, LLC, a registered investment advisor, of which
      NorthPointe Capital, LLC has sole voting power with respect to 4,508,056
      of the number of shares beneficially owned and sole dispositive power with
      respect to 5,625,779 of the number of shares beneficially
      owned.


(5)
            Includes
      53,333 shares of Restricted Common Stock granted on November 24, 2007,
      which shares shall become 100% vested and non–forfeitable on the third
      anniversary of the grant date.





EQUITY
COMPENSATION PLAN SUMMARY




The
following table provides information about the Company’s equity compensation
plans as of December 31, 2009.




Number of securities
              to
      be issued upon
              exercise
      of
              outstanding
      options
            
            
            Weighted-average
              exercise
      price of
              outstanding options
            
            
            Number of securities
              remaining
              available
      for future
              issuance
      under
              equity
      compensation
              plans
              (excluding
      securities
              reflected
      in the first
              column)Equity
      compensation plans approved by shareholders
            
            
            5,021,995
            (1)
            
            $
            3.57
            
            
            
            2.593.506
            (2)Equity
      compensation plans not approved by shareholders
            
            
            ––
            
            
            
            ––
            
            
            
            ––Total
            
            
            5,021,995
            
            
            $
            ––
            
            
            
            2,593,506


______________


(1)
            Represents
      outstanding options to purchase the Company’s common
  stock.


(2)
            Represents
      options available to purchase the Company’s common stock under the 2005
      Equity Incentive Plan.




14


Item
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE




REVIEW
OF RELATED PERSON TRANSACTIONS




The
Company adopted written policies and procedures regarding related person
transactions.  For purposes of these policies and
procedures:




·
            A
      “related person” means any of our Directors, executive officers, nominees
      for director, holder of five percent (5%) or more of our Common Stock or
      any of their immediate family members;
and




·
            A
      “related person transaction” generally is a transaction (including any
      indebtedness or a guarantee of indebtedness) in which we were or are to be
      a participant and the amount involved exceeds $50,000, and in which a
      related person had or will have a direct or indirect material
      interest.




Each of
our executive officers, Directors or nominees for director is required to
disclose certain information relating to related persons transactions for
review, approval or ratification by our Audit Committee.  Disclosure
to our Audit Committee should occur before, if possible, or as soon as
practicable after the related person transaction is effected, but in any event
as soon as practicable after the executive officer, Director or nominee for
director becomes aware of the related person transaction.  Our Audit
Committee’s decision whether or not to approve or ratify a related person
transaction is to be made in light of its determination that consummation of the
transaction is not or was not contrary to the best interests of Merge
Healthcare.  Any related person transaction must be disclosed to our
full Board.




TRANSACTIONS
WITH RELATED PERSONS




Software
      License Agreement with Merrick Healthcare
  Solutions




Effective
March 31, 2009, we entered into a software license agreement with Merrick
Healthcare Solutions, an entity doing business as Olivia
Greets.  Olivia Greets is wholly owned by Merrick.  This
transaction was approved by the Audit Committee in accordance with its written
policies and procedures regarding related person transactions.  The
revenue generated by this agreement is estimated to be $400,000, exclusive of
optional services, which may be purchased by Olivia Greets, over its
term.




Repayment
      of Merrick Term Note




On
November 18, 2009, the Company used $18.1 million of the net proceeds from its
registered direct public offering of 9,084,032 shares of its common stock to
prepay in full the term note that was held by Merrick RIS, LLC (“Merrick”)
pursuant to the securities purchase agreement that the Company entered into with
Merrick in May of 2008.  As a result of the prepayment, the Company
was required to pay 118% of the outstanding $15.0 million principal of the term
note and accrued and unpaid interest of $395,000.  Prior to its
repayment, the term note had an interest rate of 13.0% per annum, and was to
become payable in a single installment in June 2010.  In connection
with the prepayment of the term note, Merrick waived certain piggyback
registration rights and Michael W. Ferro, Jr. agreed not to offer or sell
any of the Company’s common stock held by him (or any securities convertible
into, exercisable for or exchangeable or exercisable for shares of common stock)
prior to 90 days following November 13, 2009, subject to certain
exceptions.




Merrick
beneficially owns, as of April 28, 2010, 36.1% of the Company’s outstanding
common stock (excluding 175,000 shares of common stock which may be acquired
upon the exercise of stock options which are currently exercisable or
exercisable within sixty (60) days by Michael W. Ferro, Jr.).  Michael
W. Ferro, Jr., the Company’s Chairman of the Board, and trusts for the benefit
of Mr. Ferro’s family members beneficially own a majority of the equity interest
in Merrick.  Mr. Ferro also serves as the chairman and chief executive
officer of Merrick.  Accordingly, Mr. Ferro indirectly owned and
controlled the term note and indirectly owns all of the shares of common stock
owned by Merrick.  In addition, Justin C. Dearborn, the Chief
Executive Officer and Director of the Company, served as Managing Director and
General Counsel of Merrick Ventures, LLC, an affiliate of Merrick, from January
2007 until his appointment as Chief Executive Officer on June 4,
2008.




15


Amendment
      of Merrick Consulting Agreement




In
January of 2009, the Company entered into a Consulting Agreement with Merrick
which was effective as of January 1, 2009, had a one year term and which allowed
the Company to take advantage of certain consulting services offered by Merrick
to the Company.  These services included, but were not limited to,
investor relations, financial analysis and strategic
planning.  Effective on January 1, 2010, the Company and Merrick
entered into an amendment to extend the term of this Consulting Agreement
through December 31, 2011, and modified the payment terms from a flat fee
arrangement per quarter to a per transaction or success based
arrangement.  The Audit Committee of the Company considered the
amendment to the Consulting Agreement prior to its execution and approved its
terms. The fees under the Consulting Agreement in 2009 were approximately
$400,000.




Merrick’s
      Debt and Equity Investment in Connection with our Acquisition of AMICAS,
      Inc.




On April
28, 2010, Merrick purchased an aggregate principal amount of $5.0 million of the
$200 million of 11.75% senior secured notes due 2015 that we offered in a
private placement pursuant to Rule 144A and Regulation S under the Securities
Act of 1933, as amended.  The notes purchased by Merrick were
purchased at the same purchase price per note as the other investors in the
offering. Merrick has agreed for a period of 180 days from the closing of the
offering not to, without the prior written consent of Morgan Stanley & Co.
Incorporated, offer, sell or contract to sell, or otherwise dispose of, directly
or indirectly, or announce the offering of, the notes purchased by it in the
offering.




In
addition, Merrick subscribed for and purchased 1.8 million shares of our common
stock at the purchase price of $2.07 per share and 10,000 shares of our Series A
Preferred Stock at the same purchase price as the of $627.40 per share in a
private placement to fund a portion of our acquisition of AMICAS,
Inc.  The shares of common stock and Series A Preferred Stock
purchased by Merrick were purchased at the same purchase price per share as the
other investors in the private placement.




DIRECTOR
      INDEPENDENCE




Our Board
follows the NASDAQ Global Market Rules regarding the independence of
directors.  The Board recognizes that independent directors play an
important role in assuring investor confidence.  As such, the Board
has determined that each of Messrs. Brown, Hartemayer, Reck, and Stearns is
independent under the listing standards of the NASDAQ Global
Market.




Item
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES




AUDIT
      AND NON-AUDIT FEES




The
following table presents fees for professional services rendered by BDO Seidman,
LLP for the audit of Merge Healthcare’s annual financial statements for the
years ended December 31, 2008 and December 31, 2009.




2009
            
            
            2008Audit
      fees(1)
            
            $
            767,814
            
            
            $
            337,000Audit–related
      fees
            
            
            ––
            
            
            
            ––Tax
            
            
            ––
            
            
            
            ––All
      other fees
            
            
            ––
            
            
            
            ––Total
      fees
            
            $
            767,814
            
            
            $
            337,000





(1)
            Audit
      fees include fees for the annual financial statement audit, quarterly
      reviews, comfort letters, consents and review of, and assistance with,
      Current Reports on Form 8–K.  In 2008, management’s report
      on internal control over financial reporting was not subject to
      attestation by BDO Seidman, LLP pursuant to temporary rules of the
      Commission that permitted us to provide only a report from
      management.




16


POLICY
ON AUDIT COMMITTEE PRE–APPROVAL OF AUDIT AND PERMISSIBLE NON–AUDIT SERVICES OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Consistent
with the Commission and the Public Company Accounting Oversight Board (“PCAOB”)
requirements regarding auditor independence, the Audit Committee has
responsibility for appointing, setting compensation and overseeing the work of
the independent registered public accounting firm.  In recognition of
this responsibility, the Audit Committee has established a policy to pre–approve
all audit and permissible non–audit services provided by the independent
registered public accounting firm.




Prior to
engagement of the independent registered public accounting firm for each year’s
audit, management will submit a list to the Audit Committee for its approval of
services and related fees expected to be rendered and fees expected to be
incurred during that year within each of four (4) categories of services to the
Audit Committee for approval.




·
            Audit
      services include audit work performed on the financial statements and
      internal control over financial reporting, as well as work that generally
      only the independent registered public accounting firm can reasonably be
      expected to provide, including quarterly reviews, comfort letters,
      statutory audits, and discussions surrounding the proper application of
      financial accounting and/or reporting
standards.




·
            Audit–Related
      services are for assurance and related services that are traditionally
      performed by the independent registered public accounting firm, including
      due diligence related to mergers and acquisitions, employee benefit plan
      audits, and special procedures required to meet certain regulatory
      requirements.




·
            Tax
      services include all services, except those services specifically related
      to the audit of the financial statements, performed by the independent
      registered public accounting firm’s tax personnel, including tax analysis;
      assisting with coordination of execution of tax–related activities,
      primarily in the area of corporate development; supporting other
      tax–related regulatory requirements; and tax compliance and
      reporting.  The Company generally does not request such services
      from the independent registered public accounting
  firm.




·
            All
      Other services are those services not captured in the audit,
      audit–related or tax categories.  The Company generally does not
      request such services from the independent registered public accounting
      firm.




The Audit
Committee requires the independent registered public accounting firm and
management to report actual fees versus the budget periodically throughout the
year by category of service.  During the year, circumstances may arise
when it may become necessary to engage the independent registered public
accounting firm for additional services not contemplated in the original
pre–approval categories.  In those instances, the Audit Committee
requires specific pre–approval before engaging the independent registered public
accounting firm.  The Audit Committee may delegate pre–approval
authority to one or more of its members.  The member to whom such
authority is delegated must report any pre–approval decisions to the Audit
Committee at its next scheduled meeting.




AUDIT
COMMITTEE REPORT




The
information contained in this report shall not be deemed to be “soliciting
material” or “filed” or incorporated by reference in future filings with the
Commission, or subject to the liabilities of Section 18 of the Exchange
Act, except to the extent that we specifically incorporate it by reference into
a document filed under the Securities Act of 1933, as amended, or the Exchange
Act.




We, the
members of the Audit Committee, represent the following:




1.
            The
      Audit Committee has reviewed and discussed Merge Healthcare’s audited
      financial statements with
management;




2.
            The
      Audit Committee has discussed with BDO Seidman, LLP, Merge Healthcare’s
      independent registered public accounting firm for fiscal year 2009, the
      matters required to be discussed by Statement of Auditing Standards
      No. 61 (Codification of Statements on Auditing Standards), as may be
      modified or supplemented;




17


3.
            The
      Audit Committee has received the written disclosures and the letter from
      BDO Seidman, LLP required by the Public Company Accounting Oversight Board
      rule that relates to independence (Rule 3526), as may be modified or
      supplemented, and has discussed with BDO Seidman, LLP, its independence as
      Merge Healthcare’s independent registered public accounting firm;
      and




4.
            Based
      on the review and discussions referred to above, the Audit Committee
      recommended to our Board that the audited financial statements be included
      in Merge Healthcare’s Annual Report on Form 10–K for the year ended
      December 31, 2008, for filing with the
  Commission.




The
Audit Committee




Neele E.
Stearns, Jr., Chairperson


Dennis
Brown


Richard
A. Reck


Neele E.
Stearns, Jr.




18