Corporate Governance

The Directors have set out below their application of current best practice corporate governance procedures within the Group and the extent to which the Group has complied with the Listing Rules of the Financial Services Authority relating to the provisions of the Principles of Good Governance and Code of Best Practice (the “Combined Code”).

As a Company incorporated in Finland, Inion is governed by its Articles of Association and by the provisions of the Finnish Companies Act. As a UK-listed company, Inion complies with the provisions of the Combined Code to the extent appropriate for a company of its size and development.

Board of Directors

The Board is responsible for the Group’s system of Corporate Governance.

The Board of Directors comprises two Executive and five Non-Executive Directors including the Chairman.

Mr Peter Allen resigned as Non-Executive Director on 24 April 2008 and Dr Göran Ando resigned as Chairman and Non-Executive Director on 13 August 2008. Mr Paling was appointed as Non-Executive Director on 13 August 2008. He was elected Chairman by the Board on the same day.

All Directors bring strong judgement and considerable knowledge and experience to bear on issues of strategy, performance, resources and standards of conduct. All Non-Executive Directors are considered by the Board to be independent.

Mr Jim Beery is the senior independent Non-Executive Director.

The Board meets formally at least six times a year. Additional meetings are arranged as necessary to consider urgent business. In addition, the Chairman holds separate meetings with the other Non-Executive Directors. The Board periodically delegates responsibility for certain business matters to sub-committees of the Board set up in accordance with the provisions of the Company’s Articles of Association.

Information provided to the Board includes monthly Group operating reports and management accounts, specific business plans, reports and budgets. The Board meets for in-depth reviews of strategy and discussions of particular business issues and risks including annual reviews of business development plans. The Board has a formal schedule of matters reserved for its approval. These matters include acquisition and disposal of businesses, issue of shares, significant contractual commitments, effectiveness of risk management review processes and major capital expenditure.

Mr Paling is chairman and chief executive officer of CellCoTec Limited. He is also a non-executive director of Sphere Medical Limited and

Metalrax Group plc.

Principal Board committees

The Board has established a number of committees and provides sufficient resources to enable them to undertake their duties. Current membership of these committees is set out in the table below.

                                                  Audit   Nom   Rem

I Paling (Chairman)                     Y

D Anderson (Chairman)                                   Y

M Silén (Chairman)                     Y

D Anderson                                            Y

J Beery                                        Y         Y

P Jensen                                     Y                  Y

I Paling                                                             Y

M Silén                                                             Y

Dates of appointment and resignation were as follows:

Mr Allen, who was Chairman of the Audit Committee, resigned from the Audit Committee on 24 April 2008 and Dr Ando resigned from the Nomination and Remuneration Committees on 13 August 2008. Mr Beery resigned as Chairman of the Nomination Committee on 29 January 2009. Mr Jensen resigned as Chairman of the Remuneration Committee on 29 January 2009. Both Mr Beery and Mr Jensen remain as members of the Nomination and Remuneration Committees respectively.

Mr Silén was appointed Chairman of the Audit Committee on 24 April 2008. Mr Beery was appointed to the Audit Committee on 24 April 2008. Mr Paling was appointed to the Nomination and Remuneration Committees on 13 August 2008. Mr Paling was appointed as Chairman of the Nomination Committee on 29 January 2009. Mr Anderson was appointed as Chairman of the Remuneration Committee on 29 January 2009.

The roles and terms of reference of each committee are summarised below. The terms of reference for the Audit, Nomination and Remuneration Committees can be found on the Company’s website at www.inion.com.

The table below summarises the total number of Board, Audit Committee, Nomination Committee and Remuneration Committee meetings held during 2008 and the attendance by each of the Directors.

                                               Board Audit Nom Rem

Total number of meetings       11        3      1       2

Meetings attended

D Anderson                              11        –      1       2

J Beery                                     11         2     1       –

J Cotta                                      11         –     –       –

P Jensen                                  10         3     –       2

C Lee                                        11         –     –       –

I Paling¹                                      3         –     –       –

M Silén                                      11         3     –       2

¹ Attendance at the Board meetings was fewer than the total number of Board meetings in the year because Mr Paling was appointed to the Board on 13 August 2008.

Attendance at the sub-committee meetings is by invitation to non-members. Attendance by non-members is not recorded in the table.

Audit Committee

The Audit Committee reviews the financial and internal reporting process, the system of internal controls, the management of risks and the external and internal audit process. The Committee also recommends to the Board proposals for the appointment of the external auditors and is directly responsible for their remuneration, oversight of their work and monitoring of their independence. The Audit Committee meets at least twice a year.

Following Mr Allen’s resignation on 24 April 2008, the services of an independent financial consultant were provided to the Audit Committee to 4 September 2008.

The Board has determined that for the period to 24 April 2008, Mr Allen, who was Chairman of the Audit Committee had sufficient recent and relevant financial experience which gives the Committee the financial expertise necessary to discharge its responsibilities. For the period 25 April to the end of the year, although all three members of the Audit Committee have had extensive corporate experience with financial matters they are not qualified as experts within the meaning of the Combined Code.

Nomination Committee

The Nomination Committee meets as required to review the structure, size and composition of the Board and the appointment of the members of the Board and makes recommendations to the Board as appropriate. The Committee appoints search consultants as appropriate for the recruitment of new Board members.

Remuneration Committee

The Remuneration Committee meets as required to determine the terms of service and remuneration of the Executive Directors and senior executives and the remuneration policy for Non-Executive Directors. The Remuneration Committee report appears on pages 23 to 28.

Evaluation of the Board

The Board has evaluated its own performance and that of its Audit, Nomination and Remuneration Committees on a broad range of issues including functionality, meeting of objectives, conduct of meetings, structure, corporate governance and relationships with shareholders. The Non-Executive Directors, led by the Senior Independent Director, are responsible for performance evaluation of the Chairman taking into account the views of the Executive Directors.

The performance of the Executive Directors is reviewed by the Chairman and discussed with the Remuneration Committee by reference to achievement of individual and corporate objectives.

Relationships with investors

The Company reports formally to shareholders twice a year when its half year and full year results are announced. The full year results are included in the Company’s annual results and the half year results are included in the Interim report.

In addition, there are presentations of the interim announcement and preliminary announcement of the Annual Report to institutional investors, analysts and the media in which Non-Executive Directors are involved as appropriate. This provides an opportunity for the Non-Executive Directors to develop an understanding of the views of the major shareholders.

Press releases and other financial and business information are available on the Company’s website at www.inion.com.

The Annual General Meeting (AGM) takes place in Tampere and formal notification is sent to shareholders. All Board members usually attend and are available to respond to questions both formally in the meeting and informally afterwards. All resolutions at the AGM are decided on by a majority of votes of those shareholders registered on the Finnish shareholders’ register. In order to vote at the AGM, holders of Crest Depository Interests (CDIs) must seek temporary registration on the Finnish shareholders’ register. The results are announced at the AGM.

The Combined Code

The Combined Code incorporates recommendations of best practice in respect of the control and reporting functions of the Board. It sets out principles under the headings of:

>> Directors

>> Directors’ remuneration

>> Relations with shareholders

>> Accountability and audit

Detailed provisions in respect of each principle are provided within the Code. These require Directors to report in the Annual Report on:

>> Directors’ remuneration

>> Directors’ responsibility for the accounts

>> Going concern

>> Internal control

Directors’ remuneration is addressed in the Report of the Remuneration Committee on pages 23 to 28. The other provisions are addressed below.

Directors’ responsibility for the accounts

Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing the financial statements, the Directors are required to:

>> Select suitable accounting policies and then apply them consistently

>> Make judgements and estimates that are reasonable and prudent

>> State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements

>> Prepare the financial statements on the going concern basis unless it is appropriate to presume that the Company and the Group will not continue in business

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Acts. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The financial statements included with the Annual Report for the year ended 31 December 2008 are published in hard-copy printed form and on the Company’s website. The Directors are responsible for the maintenance and integrity of the website in

accordance with Finnish legislation governing the preparation and dissemination of financial statements. Access to the website is available from outside Finland, where comparable legislation may be different.

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

Going concern

In its Pre-Close Trading Statement on 12 January 2009, the Company announced that it continued to seek additional funding to support its strategy. The Company has been holding discussions with shareholders and other potential investors with the aim of raising additional equity capital. However, whilst it has been able to obtain indicative commitments from a number of investors, in light of prevailing equity market conditions, the Company has not been able to secure a sufficient level of funding to enable it to continue with its current strategy.

On 19 March 2009, the Company made a further announcement that it is continuing with the implementation of measures to reduce its overhead expenditure and headcount levels to conserve its current cash resource. Despite these measures, the Company continues to require additional funding to finance its working capital requirements in the short term.

With an equity fundraising now highly unlikely, the Company has initiated discussions with a number of parties in relation to other strategic transactions or divestment of certain assets to raise additional funding. There is no certainty that these discussions will result in an injection of funds into the Company and the Company will continue to keep the market updated, as appropriate.

The updated cash position of the Group as at 29 April 2009 was €1.0 million. As a consequence of the actions taken to reduce overhead expenditure and headcount levels, future cash expenditure has been considerably reduced.

The Directors have concluded that the combination of these circumstances represents a material uncertainty that casts significant doubt upon the Group’s and the Company’s ability to continue as a going concern and as the Company has recently announced, the Directors will continue: (i) to approach potential investors and/or buyers of the Company’s assets, or (ii) failing such additional investments/disposals, to facilitate an orderly liquidation of the Company.

Nevertheless, following the discussions referred to above, and after considering the uncertainties described, the Directors believe that they have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. However, until the outcomes of discussions with potential investors/buyers are known, there is considerable uncertainty over this basis of presentation.

The financial information does not reflect any adjustments which would be required if the going concern assumption was not appropriate. Given the uncertainty described above it is not currently possible to determine the extent and quantification of such adjustments but these may include the reclassification of liabilities due more than one year to less than one year and the disclosure of, or provision for, additional liabilities.

Internal control

Internal control is defined in the Combined Code as “all controls,including financial, operational and compliance controls and risk management”.

In accordance with the provisions of the Combined Code, the Directors are responsible for the Group’s system of internal control and for reviewing its effectiveness. In response to the requirements of the Combined Code in respect of internal control, the Board has reviewed and updated its assessment of the risks affecting both short-term and long-term value of the business and the policies and procedures by which these risks are managed.

The Board has reviewed the Group’s system of internal controls. The review process, which has been in place throughout the period covered by the Annual Report, comprises appropriate consideration and discussion of business and financial reports, strategic plans, capital expenditure projects, product development projects, tax and treasury issues, risk management and legal issues.

Such a system can provide only reasonable and not absolute assurance against material misstatement or loss.

The Group’s system of internal controls is communicated through policy and procedure manuals. The Group uses the corporate intranet as a communication channel to ensure that all employees have easy access to the procedures.

The key features of the Group’s internal control system are:

>>Identification of Group goals, strategy and business objectives

>> Appropriate organisation structure which is subject to periodic review to ensure changing business needs are continuously served and which identifies responsibilities and reporting structures

>> Financial approval and reporting procedures which enable progress of the business to be monitored and performance against plan to be compared each month

>> Framework of operating policies and procedures which help ensure that manufacturing and other operating activities are carried out to the best possible recognised standards

>> Policies in respect of business conduct and ethical values are clearly communicated to employees

>> A risk review process inherent in the system of Board approval and consideration of matters for the management of risk

Throughout 2008, the Audit Committee has worked to a clear programme of activities with standing items that the Committee is required to consider at each meeting together with other items which are addressed at specific times in the year:

>> The external auditors reported to the Committee on areas including all critical accounting policies and judgements used by the Company, draft interim and annual financial statements, taxation, audit strategy and approach and internal financial controls

>> The CFO reported on financial and accounting matters

>> The CFO reported on Corporate Governance matters including a summary of risk control issues considered by the Board during the year following the review of internal financial and non financial controls

>> The Committee has monitored the objectivity, effectiveness and independence of the external auditors, including the nature and extent of the non-audit services provided; in addition, the external auditors have processes in place to ensure that their independence is maintained, including safeguards to ensure that where they do provide non-audit services, their independence is not compromised; they have confirmed to the Audit Committee that in their opinion they are independent

>> The Committee has reviewed arrangements by which employees may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters and by which the Company investigates such matters and implements appropriate actions.

The Group has implemented a policy for reporting fraud or malpractice. This enables employees to report matters to the Company Secretary, any human resources manager or any senior manager of the Group. Where the report is made to a human resources manager or senior manager of the Group, the Company Secretary is to be notified immediately. Where an employee considers that it is not appropriate to report the concern to an Officer of the Company or having reported the concern, an adequate response has not been provided, the employee may, where available, report the concern to a staff representative body or an external agency.

Managing business risk

Commercial risk

Inion’s products, along with the Group’s products under development, are targeted at medical conditions for which a number of marketed products already exist and where other companies also have new products in development. Inion’s products may also experience competition from the products of other companies which have greater research, development, marketing, financial and personnel resources than the Group.

Market acceptance of Inion’s products will largely depend on the Group’s ability to demonstrate their relative safety, efficacy, cost-effectiveness and ease of use and the level of customer service provided by the Group and its partners.

This risk is being actively managed in a number of ways. These include:

>> Commission of post-marketing studies to support efficacy and safety claims with clinical data

>> Establishment of key opinion leaders among surgeons in particular in the USA

>> Implementation of a well-resourced comprehensive training plan for sales managers, agents and surgeons

Operational risk

This relates to the risk of financial loss resulting from inadequate or failed internal systems and from the actions of people or external events. The Group manages this risk through appropriate controls. Key examples include:

>>Ensuring an appropriate level of insurance cover is in place to cover risks such as business interruption

>> Maintaining appropriate data back-up procedures

>> Constant review and monitoring of international regulatory requirements

Credit risk

The Group assesses the creditworthiness of new customers before commencing trade with them and authorised limits of credit are set. Trade receivables are monitored each month and a pro-active approach to the identification and control of bad and doubtful debts is maintained.

Internal audit

There is presently no internal audit function as the Group is not sufficiently large to justify the function. However, the need for the function is kept under review.

Statement of compliance with the Combined Code

Throughout the year ended 31 December 2008 the Company has been in compliance with the Code provisions set out in Section 1 of the Combined Code with the exception of the following:

Section C.3.1 requires that the Board should satisfy itself that at least one member of the Audit Committee should have recent and relevant financial experience. Following the resignation of Mr Allen on 24 April, although all three members of the Audit Committee have had extensive corporate experience with financial matters they are not qualified as experts within the meaning of the Combined Code.

By order of the Board

Julien Cotta

CFO and Company Secretary

30 April 2009