**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-K**





x
            Annual
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934FOR
                THE FISCAL YEAR ENDED**JUNE
                30, 2008**OR ̈
            Transition
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934For
                the transition period from to





**COMMISSION
      FILE NUMBER 000-33199**





**AVENSYS
      CORPORATION**


(Exact
      name of registrant as specified in its charter)





**NEVADA**
            **88-0467845**(State
                of other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification Number)





**400
      Montpellier Blvd.**


**Montreal,
      Quebec**


**Canada
      H4N 2G7**


(Address
      of principal executive offices)





**(514)
      904-6030**


(Registrant's
      telephone number, including area code)





Copies
      to:


Darrin
      Ocasio, Esq.


Sichenzia
      Ross Friedman Ference LLP


1065
      Avenue of the Americas, 21 st Floor


New
      York,
      N.Y. 10018





**Securities
      registered pursuant to Section 12(b) of the Act:**


None


**Securities
      registered pursuant to Section 12(g) of the Act:**


**Title
        of each class**
 **Common
        Stock - $0.00001 par value**


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





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§ 229.405) 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. x





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




Large
                accelerated filer ̈
            Accelerated
                filer ̈Non-accelerated
                filer ̈
            Smaller
                reporting companyx(Do
                not check if a smaller reporting company)




Indicated
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).




Yes  ̈ No x .





The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant based on the closing price of the registrant’s common stock as
      reported on the OTC Bulletin Board on Ocotber 1,2008 was
      $6,437,350.





As
      of
      October 17, 2008, there were outstanding **99,036,152** shares
      of common stock.





**Documents
      Incorporated By Reference**




None








TABLE
      OF
      CONTENTS




**FORM****10-K**
            
            
            **1****PART****I**
            
            
            **2**ITEM 1.
            DESCRIPTION
                OF BUSINESS
            
            3ITEM 2.
            RISK
                FACTORS
            
            9ITEM 3.
            DESCRIPTION
                OF PROPERTIES
            
            18ITEM 4.
            LEGAL
                PROCEEDINGS
            
            19ITEM 5.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            20**PART****II**
            
            
            **21**ITEM 6.
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
            
            21ITEM 7.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            
            26ITEM 8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTAL DATA
            
            52ITEM 9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE
            
            53ITEM 9A.
            CONTROLS
                AND PROCEDURES
            
            54ITEM 9B.
            OTHER
                INFORMATION
            
            56**PART****III**
            
            
            **57**ITEM 10.
            DIRECTORS,
                OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH SECTION 16(a)
                OF
                THE EXCHANGE ACT
            
            57ITEM 11.
            EXECUTIVE
                COMPENSATION
            
            61ITEM 12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
            
            65ITEM 13.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS
            
            66ITEM 14.
            EXHIBITS
            
            67ITEM 15.
            PRINCIPAL
                ACCOUNTING FEES AND SERVICES
            
            69


1


**PART
      I**





We
      make
      forward-looking statements in this document. Our forward-looking statements
      are
      subject to risks and uncertainties. You should note that many factors, some
      of
      which are described in this Part I or discussed elsewhere in this document,
      could affect our company in the future and could cause our results to differ
      materially from those expressed in our forward-looking statements, including
      those matters discussed under the heading “Risk Factors” below. Forward-looking
      statements include those regarding our goals, beliefs, plans or current
      expectations and other statements regarding matters that are not historical
      facts. For example, we use the words “believe,” “expect,” “anticipate” or
      similar expressions to make forward-looking statements. Important
      factors that could cause our actual results to differ materially from those
      expressed or implied by such forward-looking statements include:





-
            Our
                ability to grow our revenue and expand acceptance of our products
                in our
                principal markets.


-
            The
                continued availability of capital to finance our activities in the
                event
                that we do not achieve
                profitability.


-
            Our
                ability to successfully integrate technologies or companies that
                we
                acquire.


-
            Our
                ability to obtain and enforce in a timely manner patent and other
                intellectual property protection for our technology and
                products.


-
            Our
                ability to avoid, either by product design, licensing arrangement
                or
                otherwise, infringement of third parties’ intellectual
                property.


-
            Our
                ability to complete and maintain corporate alliances relating to
                the
                development and commercialization of our technology and
                products.


-
            The
                competitive environment and impact of technological
                change.


-
            Other
                factors we discuss under the heading “Risk
                Factors.”





We
      are
      not required to publicly release the results of any revisions to these
      forward-looking statements we make to reflect future events or circumstances,
      except as may be required under applicable securities laws.


2


**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS**





**Overview**





Avensys
      Corporation operates two divisions, through its wholly owned subsidiary Avensys
      Inc.:





·
            Avensys
                Technologies designs, manufactures, distributes, and markets high
                reliability optical components and modules as well as FBGs for the
                telecom
                market and high power devices and sub-assemblies for the industrial
                market.





·
            Avensys
                Solutions, the other division of Avensys, is an industry leader in
                providing instrumentation and integrated solutions for the monitoring
                of
                industrial processes and environmental surveillance applications
                for air,
                water and soil in the Canadian marketplace.





**Corporate
      History**





Avensys
      Corporation (sometimes referred to as “we,” “our,” “us,” or the “Company”), was
      incorporated in the State of Nevada on June 26, 2000 as **Keystone
      Mines Limited** and
      maintains its principal executive offices at 400 Montpellier Blvd., Montreal,
      Quebec, Canada, H4N 2G7.





In
      June
      2000, the Company purchased four mineral claims, situated in the Greenwood
      Mining Division in the Province of British Columbia, Canada. At that time,
      our
      principal business plan was to acquire, explore and develop mineral properties
      and to ultimately seek earnings by exploiting the mineral claims.





In
      December 2002, we were advised that the mineral properties held were not
      economically viable. Our board of directors approved the termination of our
      exploration activity.





In
      March
      2003, we changed our company name to **C-Chip
      Technologies Corporation** in order
      to better reflect our new business activities, and began trading on the OTC
      Bulletin Board (OTC-BB) under the symbol "CCHI."





In
      July
      2005, Shareholders approved a name change for the Company to **Manaris Corporation** to
      reflect C-Chip Technologies expanded scope of business. As a result, the new
      trading symbol on the OTC Bulletin Board (OTC-BB) became "MANS."





In
      December 2007, we changed our company name to **Avensys
      Corporation** ,
      to
      accurately reflect the Company’s decision to focus its strategic efforts on
      furthering the advancement of its flagship subsidiary, Avensys Inc. As a result,
      the new trading symbol on the OTC Bulletin Board (OTC-BB) became
      "AVNY."





**Recent
      Developments**





*Acquisition
      of the Assets of Willer Engineering Limited:*





On
      March
      31, 2008, Avensys Corporation and its wholly owned subsidiary, Avensys Inc.,
      entered into an Asset Purchase Agreement (the "Purchase Agreement") to acquire
      substantially all of the operating assets of Willer Engineering Limited
      (“Willer”). The total purchase price paid, including contingent consideration,
      for the operating assets pursuant to the Purchase Agreement is CAD $705,000,
      subject to adjustments based namely on performance targets. The acquisition
      expands Avensys Solutions’ service offerings, establishing the Company as a
      strong presence with the ability to expand product lines beyond its current
      capabilities, especially in the Canadian markets, where there is strong demand.
      Willer’s services include professional instrumentation solutions as well as
      products and services to the industrial industry in the Eastern region of
      Canada.


3





*Departure
      of CFO and Corporate Secretary of Avensys Corporation’s Board of
      Directors:*





On
      April
      17, 2008, Mr. Tony Giuliano left the employment of the Company and resigned
      as
      its Chief Financial Officer and Corporate Secretary, effective as of the same
      date. Mr. Giuliano had served as Chief Financial Officer of the Company since
      October 20, 2006.





*Appointment
      of CFO and Corporate Secretary of Avensys Corporation:*





On
      April
      17, 2008, Mr. André Maréchal, Vice-President of Finance and Administration of
      Avensys Inc., a wholly owned subsidiary of the Company, was appointed Chief
      Financial Officer of the Company. On May 8, 2008, he was also appointed as
      the
      Company’s Corporate Secretary.





*Departure
      of Director of Avensys Corporation:*





On
      June
      10, 2008, John Simons retired as Chairman and a director of the Board of
      Directors of Avensys Corporation. There was no disagreement or dispute between
      Mr. Simons and the Company which led to his retirement. The Board of Directors
      accepted his retirement and appointed Jos Wintermans, a director of the Company
      since November 2005 and Chair of the Compensation Committee, to replace Mr.
      Simons as Chairman of the Board.





*Appointment
      of Director of Avensys Corporation:*





On
      June
      27, 2008, the Board of Directors appointed Mr. Jean-Marc Fortier as
      non-executive Director of the Board of Directors to fill the vacancy created
      by
      Mr. John Simons’ resignation. On July 3, 2008, Mr. Fortier accepted the terms of
      his appointment.





*Termination
      of License Agreement between C-Chip Technologies North America and iMetrik*





On
      February 6, 2008, the Technology License Agreement between our subsidiary C-Chip
      Technologies (North America) and its business partner iMetrik Inc. was
      terminated. Subsequent to December 31, 2007, no further royalties are payable
      to
      C-Chip and the outstanding balance of the C-Chip loan from iMetrik was forgiven
      as of the same date. As a result, we have recognized a gain of $351,059 during
      the third quarter, on the forgiveness of the loan. This amount represented
      the
      outstanding balance of the loan at December 31, 2007. As part of the termination
      of the Technology License Agreement, iMetrik will continue to assume
      responsibility for the manufacturing costs, sales and other incidental costs
      related to the production and marketing of the devices sold in the sub-prime
      used vehicle market. In terminating the Technology License Agreement, the
      Company ceased to operate C-Chip, and ceased to derive any cash flows from
      the
      prior C-Chip activities which, starting in the third quarter of fiscal 2008,
      were classified as discontinued operations.


4





*Amendment
      of ITF Preferred Shareholder Agreement*





As
      part
      of the acquisition of ITF Optical Technologies Inc. (Note 13 of consolidated
      financial statements), the Company entered into a shareholder agreement which
      stipulated that, between April 1, 2009 and October 1, 2009, each ITF Preferred
      Shareholder shall have an option to (i) sell their shares in ITF Labs’ ownership
      to AVI for its proportionate share of CAD $2,000,000 to be paid in cash, or
      (ii)
      exchange their shares in ITF Labs’ ownership for 3,826,531 freely tradable
      shares of Company common shares at a reference per share price of $0.342; the
      equivalent of CAD $1,500,000 (the “put option”).





On
      September 11, 2008, the Company and the ITF Preferred Shareholders amended
      the
      agreement described above as follows:





•
            The
                date permitting the exercise of the put option by the ITF Preferred
                Shareholders is postponed by 18 months from April 1, 2009 to October
                1,
                2010. The date at which the put option expires has also been postponed
                from October 1, 2009 to December 31,
                2010.


•
            AVI
                will pay interest at 10% annually from April 1, 2009 until the date
                of
                exercise of the put option on each ITF Preferred Shareholder’s
                proportional share of the consideration, should they choose to exercise
                their option.


•
            Avensys
                Inc. will also raise the total amount of the share consideration
                from CAD
                $1,500,000 to CAD $2,000,000 and will reduce the reference price
                from
                $0.342 to $0.11, should the Preferred Holders choose to exercise
                the put
                option for their proportionate amount of common shares of the
                Company.


5


**Technologies
      and Solutions**





Our
      Avensys Inc. subsidiary offers the following technologies and solutions: Optical
      Components and Modules, Environment Monitoring.





*Optical
      Components & Modules*





Optical
      components and modules, provided by the Avensys Technologies’ division of our
      Avensys subsidiary, represent the most significant source of growth within
      Avensys and generated about 60% of Avensys Inc. revenues in fiscal year
      2008.





The
      optical components that we manufacture are based on two main
      technologies:





·
            Fiber
                Bragg Grating


·
            Optical
                coupling





Avensys
      Tech is licensed by ITF Labs, its partly owned R&D facility, as well as by
      external organizations such as the CRC (Communication Research Center of Canada)
      and UTC (United Technologies Corporation) to produce optical components and
      modules. In addition to our own intellectual property, Avensys benefits from
      over 29 inventions for which ITF Labs holds patents, and will benefit from
      another 9 inventions for which patents are pending.





The
      products that we have developed are targeted towards three main
      markets:





·
            Telecommunications.
                The majority of our optical components are destined to the
                telecommunications market. After a few difficult years, this market
                sustained healthy growth in fiscal year
                2008.


·
            Fiber
                Laser. Fiber laser is a relatively new market that is rapidly growing.
                Over the next few years, we believe that a significant portion of
                conventional lasers will be replaced by fiber lasers. This technology
                is
                mainly geared towards industrial, aerospace and military
                sectors.


·
            Optical
                Sensors. Although the optical sensing market has existed for over
                ten
                years, it is still in its early stages of growth. This technology
                is
                mainly geared towards the aerospace sector, oil and gas industries,
                and
                industrial, medical and civil
                engineering.





Our
      distribution for optical components follows both a direct distribution model
      and
      partnerships with local distributors in certain areas of the world, notably
      Asia
      and Europe. Our revenue streams are split almost evenly between North America,
      Europe, and Asia.





*Environmental
      and Industrial Process Monitoring*





Avensys
      Solutions , the
      other
      division of Avensys Inc. , is
      an
      industry leader in providing instrumentation and integrated solutions for the
      monitoring of industrial processes and environmental surveillance applications
      for air, water and soil in the Canadian marketplace. It has sales offices in
      Dartmouth, Montreal, Toronto, Sarnia, Calgary, and Vancouver. Our Montreal
      and
      Toronto offices also include integration engineers and technicians involved
      in
      initial installations, customer training and ongoing maintenance and calibration
      contracts. We also have service partners allowing us to efficiently service
      other areas.


6


Avensys
      Solutions addresses the needs of specific markets and applications including
      those of:





·
            Waste
                water treatment plants in both municipal and industrial
                markets


·
            Municipal
                incinerators


·
            Industrial
                plants and processes


·
            Ambient
                air monitoring for both government organizations and
                industries


·
            Water
                quality monitoring


·
            Natural
                resources management


·
            Universities
                and laboratories research programs


·
            Industrial
                health and safety applications





With
      a
      well established base of over 1000 accounts, a solid reputation and more than
      30
      years of experience as a distributor of leading manufacturers from around the
      world, this division has evolved significantly over the last 3 years and has
      become successful at providing value-added services including engineering,
      commissioning, and maintenance & calibration services. It has developed a
      distinctive expertise in providing turn-key solutions aimed at monitoring
      environmental contaminants in air, water and soil, and in achieving growth
      rates
      beyond industry average while addressing the needs of both governments and
      Canadian industries.





With
      the
      recent acquisition of Willer Engineering in the third fiscal quarter, Avensys
      Solutions has expanded its scope, further increasing its presence by moving
      into
      the monitoring of the processes leading to the need for environmental
      monitoring. The combination of Willer Engineering's know-how in the industrial
      process industry, a more comprehensive product portfolio and the strength of
      Avensys' environmental monitoring solutions results in a stronger organization,
      one which can "wrap up" all instrumentation technologies into a complete,
      integrated solution.





We
      believe that our society's growing concern for the environment and the increased
      attention it is getting from our governments, combined with our industries’ need
      to fine-tune processes to achieve sustainable growth, will create significant
      growth opportunities. Our focus on integrated monitoring solutions which can
      address both process optimization and environmental compliance positions Avensys
      Solutions at the forefront of this trend.





**Warranties**





Avensys’
      warranty policy for manufactured products varies between three (3) months and
      five (5) years, depending on the product and the customer.





**Insurance**





Avensys
      currently maintains an insurance coverage of USD$5,000,000 for its Directors
      and
      Officers. Avensys maintains an insurance coverage of CAD$2,469,000 for its
      inventory, CAD$43,938,000 for its fixed assets, and CAD$5,000,000 for general
      liability.





**Government
      Regulation**





Manufactured
      products are subject to various industry and government certifications, all
      of
      which need to be obtained before commercial launch.


7





**Employees**





As
      of
      October 17, 2008, we have one hundred and ninety three (193) employees; 193
      (Avensys including ITF Labs), 0 (Avensys Corporation) employees. Of the 193
      employees at Avensys and ITF Labs, 160 are Avensys employees, and 33 are ITF
      Labs employees. Our employees are not unionized. We believe relationships with
      our employees and consultants are good.


8


**ITEM
      2.**  **RISK
      FACTORS******





The
      risks
      and uncertainties described below are not the only ones our Company faces.
      Additional risks not presently known or currently considered insignificant
      may
      also impair our business operations in the future. Our business, financial
      condition and plan of operations could be materially adversely affected by
      any
      of the following risks. Furthermore, the trading price of our common shares
      could decline due to any of these risks.





**RISKS
      ASSOCIATED WITH OUR BUSINESS:**





**There
      exists doubt about our ability to continue as a going
      concern**





Our
      financial statements for the year ended June 30, 2008 disclose that there exists
      substantial doubt that the company will be able to continue as a going concern.
      The inclusion of this note in the financial statements underscores the fact
      that
      the company needs to either raise additional financing or become profitable
      in
      the short-term in order to continue operations. As further discussed below,
      if
      the company is not able to achieve its objectives or raise additional capital,
      it may be forced to suspend or cease operations.





**We
      have experienced a history of losses**





Our
      losses have resulted principally from costs incurred in research and development
      activities related to our efforts to develop our technologies, and from
      associated marketing and administrative costs. On June 30, 2008 we had a working
      capital surplus of $700,504 and an accumulated deficit of $32,406,073.





Included
      in current liabilities is an amount of $40,000 due to a related party that
      carries no interest or fixed terms of repayment. Funds on hand, together with
      an
      operating loss, will not sustain operations for the next year. As a result,
      we
      will need to raise additional capital to sustain our operations. In order to
      become profitable, we will need to generate significant additional revenues
      to
      offset our cost of revenues, sales and marketing, research and development
      and
      general and administrative expenses. We may not achieve or sustain our revenue
      or profit objectives and our losses may continue or increase in the future
      in
      which case you might lose your investment. If we are not able to fund our
      operations through product sales and investments by third parties, we will
      have
      to cease operations.





**We
      may not be able to obtain additional financing when needed or on acceptable
      terms.**





We
      may
      need to raise additional capital to sustain our operations or to pursue our
      acquisition strategy. We cannot assure you that any required additional
      financing will be available or, if it is, whether it will be on acceptable
      terms. Our inability to obtain any needed financing, or the terms on which
      it
      may be available, could have a material adverse effect on our business. As
      a
      result, we could have to suspend or cease our operations and you could lose
      your
      entire investment.


9


**We
      have incurred substantial debt which could affect our ability to obtain
      additional funds and may increase our vulnerability to economic and/or business
      downturns.**





On
      February 16, 2005, we entered into a Purchase Agreement with eighteen
      institutional and accredited investors under the terms of which we agreed to
      issue units consisting of an aggregate of $4,675,000 of our Company's 9.0%
      Senior Secured Convertible Notes, Series A (the "Series A Notes"), which are
      convertible into shares of our common stock at a conversion price of $0.35
      per
      share. Under the terms of the 9.0% Senior Secured Convertible Note, Series
      A,
      the Principal on the Note was to be paid to the Holder in twenty (20) equal
      monthly installments, with each payment equal to 5% of the principal amount,
      commencing on June 16, 2005 and continuing on the same day of each month
      thereafter on the tenth date immediately preceding the principal payment date.
      All payments of principal were to be made at our option in cash or, with ten
      (10) business day prior notice, in our common stock valued at 85% of the average
      closing bid price of our stock in the most recent five trading days prior to
      a
      valuation date. As of January 2007, the outstanding debt on the principal
      payment of the 9.0% Senior Secured Convertible Note, Series A was fully repaid.





On
      August
      11, 2006, we entered into a Note and Warrant Purchase Agreement (the “Purchase
      Agreement”) providing for the sale by the Company of Series B Subordinated
      Secured Convertible Notes (the "Series B Notes") in an aggregate principal
      amount of approximately $3.6 million and Original Issue Discount Subordinated
      Secured Convertible Notes equal to fifteen percent (15%) of the aggregate
      principal amount of Series B Notes (the "OID Notes") (collectively, the "Notes")
      to certain institutional and accredited investors (the "Investors"). Pursuant
      to
      the Purchase Agreement, the Company also issued four year warrants to purchase
      shares of the Company's common stock in an amount equal to 37.5% of the number
      of common shares underlying the Series B Notes at $0.45 per share (the "Series
      Z
      Warrants") and 2.5% of the number of common shares underlying the Series B
      Notes
      at $0.65 per share (the "Series Y Warrants") (collectively, the "Warrants").





During
      the first quarter of fiscal 2008, the Company redeemed the Notes, originally
      due
      on February 11, 2009. Under an arrangement with a majority of the holders of
      the
      Notes, the Company also redeemed half of the associated Series Y and Series
      Z
      Warrants (collectively the “Warrants”) previously issued in August 2006 and
      November 2006 relating to the redeemed Notes. The total purchase price for
      the
      redemption of the Notes and half of the Warrants was $3.4 million. The remaining
      half of the Warrants that remain with the holders of the Notes will have its
      exercise prices reduced to and fixed at $0.11 per share, with no further ratchet
      or anti-dilution provisions. In connection with the redemption of the Notes,
      the
      Company received a $3.4 million secured loan facility from Imperium Master
      Fund,
      LTD (the “Investor”). The terms of the loan facility state that interest will be
      paid by the Company on the unpaid principal amount at an annual rate equal
      to
      8.5%. It was the intention of the Company and the Investor to replace the
      secured loan facility with a comprehensive refinancing to facilitate a capital
      restructuring that will provide the Company with additional working capital
      and
      credit facilities. On September 24, 2007, the Company entered into a Securities
      Purchase and Loan Agreement (“SPL Agreement”) with the Investor for the sale of
      a 6% Original Issue Discount Senior Secured Convertible Note (the “Convertible
      Note”) in the amount of $4,708,900. The principal value and the gross proceeds
      of the Convertible Note is $4,000,000. The gross proceeds will be used to repay
      the secured loan facility, with the balance of funds to be used for working
      capital purposes. The Convertible Note matures on September 24, 2012 and the
      original principal amount is convertible into common shares of the Company
      at a
      conversion price of $0.11. The principal value will accrete to the value of
      the
      Convertible Note over a two year period and will subsequently accrue interest
      at
      6%. Monthly installments of principal and interest will be payable commencing
      after the second year up to the maturity date. The SPL Agreement also provides
      the holder of the Convertible Note with a Warrant to purchase up to 20,276,190
      shares of the Company’s outstanding common stock on a fully diluted basis. On
      August 22, 2007, the Company issued to the holder of the Convertible Note a
      warrant to purchase up to five percent (5%) of the Company’s outstanding common
      stock on a fully diluted basis. In addition, the SPL Agreement provides the
      Company with a $2,500,000 Working Capital Facility


10





As
      a
      result, we are subject to the risks associated with substantial indebtedness,
      including:





-
            we
                are required to dedicate a portion of our cash flows from operations
                to
                pay debt service costs;





-
            it
                may be more difficult and expensive to obtain additional funds through
                financing, if available at all;





-
            we
                are more vulnerable to economic downturns and fluctuations in interest
                rates, less able to withstand competitive pressures and less flexible
                in
                reacting to changes in our industry and general economic conditions;
                and





-
            if
                we default under any of our existing indebtedness or if our creditors
                demand payment of a portion or all of our indebtedness, we may not
                have
                sufficient funds to make such payments.





**If
      we default under our financing agreements, we may have to forfeit our rights
      to
      our assets.**





We
      have
      pledged all of our assets, including the assets of our subsidiaries, as security
      to holders of our convertible debentures. A default under the financing
      agreement concluded with holders of our convertible debentures, if not waived
      or
      cured, would permit the holders of the convertible debentures to foreclose
      on
      the collateral and we could lose all our rights in the collateral, which would
      have a materially adverse effect on our business. As a result, we could have
      to
      suspend or cease our operations and you could lose your entire investment.


11


**We
      may seek to make acquisitions that prove unsuccessful or strain or divert our
      resources.**





We
      may
      seek to grow our business through acquisitions of similar businesses. Such
      acquisitions present risks that could materially adversely affect our business
      and financial performance, including:





-
            the
                diversion of our management's attention from our everyday business
                activities;





-
            the
                assimilation of the operations and personnel of the acquired business;





-
            the
                contingent and latent risks associated with the past operations of,
                and
                other unanticipated problem arising in, the acquired business; and





-
            the
                need to expand management, administration, and operational
                systems.





If
      we
      make such acquisitions we cannot predict whether:





-
            we
                will be able to successfully integrate the operations of any new
                businesses into our business;





-
            we
                will realize any anticipated benefits of completed acquisitions;
                or





-
            there
                will be substantial unanticipated costs associated with acquisitions.





In
      addition, future acquisitions by us may result in:





-
            potentially
                dilutive issuances of our equity securities;





-
            the
                incurrence of additional debt; and





-
            the
                recognition of significant charges for depreciation and amortization
                related to goodwill and other intangible assets.





Although
      we have no present plans or intentions, we continuously evaluate potential
      acquisitions of similar businesses. However, we have not reached any agreement
      or arrangement with respect to any particular acquisition and we may not be
      able
      to complete any acquisitions on favorable terms or at all.





**There
      may be undisclosed liabilities associated with our
      acquisitions.**





In
      connection with any acquisition made by us, there may be liabilities that we
      fail to discover or are unable to discover including liabilities arising from
      non-compliance with laws and regulations by prior owners and for which we,
      as
      successor owners, may be responsible. Similarly, we may incur expenses to
      investigate the merits of future acquisitions that may never materialize,
      resulting in a potential charge.


12


**We
      may not be able to develop or manage our internal growth.**





Our
      growing existing businesses may strain our management, human resources and
      information systems. To manage our growth successfully, we will have to add
      managers and employees and update our operating, financial and other systems,
      procedures and controls. In addition, issues relating to new acquisitions may
      divert current management's attention from existing operations.





**We
      are highly dependent on our executive management and other key employees.**





We
      rely
      heavily on our executive management and key employees for providing services
      and
      for continued business development. We have employment agreements which contain
      non-competition and non-solicitation provisions with most of our executive
      managers and other key employees. Our business could be materially adversely
      affected if a number of our executive managers and other key employees were
      to
      leave us and if we were unable to enforce the non-competition and
      non-solicitation agreements or to attract and retain qualified replacements.





**Some
      of our products and services are in the development stage, and may not be
      effective at a level sufficient to support a profitable business venture.**





If
      our
      products or services are not effective at a level sufficient to support a
      profitable venture, we will be unable to create other marketable products and
      services, and we will have to cease some of our operations. About 60% of Avensys
      Inc.’s revenues depend on volume production of products sold by the Avensys
      Technologies division to a few large customers. These products are subject
      to
      competitive pressures and continuous improvement challenges. Variations in
      demand volume and specifications may lead to losses in economies of scale and/or
      decreased yields. ITF Labs revenues, which account for less than $2 million,
      are
      directly associated with prototypes and R&D products and are therefore
      subject to low yields and risky, potentially low market demand.





We
      can
      offer you no assurance that all of our products and services will be effective
      at a level sufficient to support a profitable business venture. If they are
      not,
      we will be unable to create marketable products, we will not generate sufficient
      revenues from our key operations, and we will have to reduce, suspend or cease
      key operations and you could lose your entire investment.





**If
      we cannot deliver the features and functionality our customers demand, we will
      be unable to attract customers, and that will result in a loss of income and
      eventually a termination of our operations.**





As
      a
      provider of fiber components and modules, our future success depends largely
      upon our ability to determine the features, and functionality our customers
      demand and to design and implement products that meet their needs in a cost
      efficient manner. Although we have often been a leader in introducing new
      products and technologies, maintaining that leadership while responding to
      downward pressures on price is an ongoing challenge. We cannot assure that
      we
      will be able to successfully determine customer requirements or that our current
      or future products and services will adequately satisfy customer demands. If
      we
      cannot meet our customers' demands, we will not generate revenues from this
      business and we may have to cease or suspend key operations.


13


**Our
      business depends on the protection of its intellectual property and proprietary
      information.**





We
      rely
      on a combination of trade secret and trademark laws, confidentiality procedures,
      contractual provisions and patent and copyright laws to protect our proprietary
      rights in our products and technology. These measures may not be adequate to
      protect our trade secrets and proprietary technology. As a result, unauthorized
      third parties may copy or otherwise obtain and use our products or technology.
      To enforce and defend our intellectual property rights and our proprietary
      rights, we may have to engage in litigation, either domestically or in other
      countries, and we could face substantial costs and diversion of resources,
      including management’s attention, regardless of the outcome of that litigation.
      Our attempts to enforce our intellectual property rights may not be successful,
      may result in royalties that are less than the cost of such enforcement efforts
      or may result in the loss of the intellectual property altogether. Furthermore,
      we may not have adequate funds available to prosecute actions to protect or
      defend our proprietary rights, in which case those using our proprietary rights
      may continue to do so in the future. Even if we succeeded in protecting our
      intellectual property, others may independently develop similar technologies
      or
      products that do not infringe on our intellectual property.





**Our
      registered trademarks may not provide us with adequate protection.**





Third
      parties may appropriate our trademarks, and that may reduce our competitive
      edge
      and cause our revenues to decrease. Even though we have trademarks, there is
      no
      assurance that third parties may not infringe on our trademarks. In order to
      protect our trademark rights, we may have to file lawsuits and obtain
      injunctions, which would likely be expensive and divert our resources. If we
      do
      that, we will have to spend large sums of money for legal fees in order to
      obtain the injunctions. Even if we obtain the injunctions, there is no assurance
      that those infringing on our trademarks will comply with the injunctions.
      Furthermore, we may not have adequate funds available to prosecute actions
      to
      protect or to defend our trademarks, in which case those infringing on our
      trademarks could continue to do so in the future.





**Third
      parties may claim that our current or future products or services infringe
      their
      proprietary rights or assert other claims against us.**





Any
      claims filed against us alleging that we infringe third-party proprietary rights
      could result in significant expenses or restrictions on our ability to provide
      our products and services. As the number of entrants into our market increases,
      the possibility of an intellectual property or other claim against us grows.
      Any
      intellectual property or other claim, with or without merit, would be
      time-consuming and expensive to litigate or settle and could divert management’s
      attention from focusing on our core business. As a result of such a dispute,
      we
      may have to pay damages, incur substantial legal fees, develop costly
      non-infringing technology, if possible, or enter into license agreements, which
      may not be available on terms acceptable to us, if at all. As a result, our
      business and operating results could be materially adversely affected. No such
      claims have been filed against us at this time.


14


**Competitive
      conditions could materially adversely affect our businesses.**





The
      markets in which we do, and intend to do business are highly competitive. Our
      ability to execute our business strategy depends, in part, upon our ability
      to
      develop and commercialize efficient and effective products based on our
      technologies. We compete against established companies as well as numerous
      independently owned small businesses. Many of our competitors are capable of
      developing products based on similar technology, have developed and are capable
      of continuing to develop products based on other technologies, which are or
      may
      be competitive with our products and technologies. In all market segments in
      which we operate, there are many competitors, some of which are significantly
      larger, and some of which have access to much more important resources or
      capital than us, or have better reputations among potential customers in the
      delivery of particular services or products. Our competitors may succeed in
      developing competing products and technologies that are more effective than
      our
      products and technologies, which may render our existing and new products or
      technology uncompetitive, uneconomical or obsolete.





**We
      may be exposed to liability claims if products based on our technologies are
      marketed and sold.**





We
      have
      general liability insurance coverage for CAD$5,000,000. However, if a judgment
      is rendered against us in excess of the amount of our coverage, we may have
      to
      cease operations. If we are sued for any reason, we will have to rely on our
      liability insurance to pay any judgment rendered against us. Although we
      maintain a general liability insurance of CAD$5,000,000, we cannot provide
      any
      assurance that:





-
      our
      insurance will provide adequate coverage against potential liabilities if a
      product or a service that we provide causes harm or fails to perform as
      promised;





-
      adequate liability insurance will continue to be available in the future; or





-
      our
      insurance can be maintained on acceptable terms.





The
      obligation to pay any liability claim in excess of whatever insurance we are
      able to obtain would increase our expenses and could greatly reduce our assets
      or cause us to cease operations. If a judgment is rendered against us for any
      amount over our coverage of CAD$5,000,000, we may have to cease operations.





**Fluctuations
      in the value of foreign currencies could result in increased product costs
      and
      operating expenses.**





We
      have
      suppliers that are located outside Canada and the U.S. The functional currency
      of our operating subsidiary is the Canadian dollar and we report our results
      in
      U.S. dollars. Fluctuations in the value of Canadian and U.S. dollars are
      difficult to predict and can cause us to incur currency exchange costs.
      Although, we cannot predict the effect of exchange rate fluctuations on our
      future operating results any material changes could cause our operating results
      to be materially adversely affected.


15




**RISKS
      ASSOCIATED WITH OUR COMMON STOCK:**




**The
      market of our common stock is limited.**





The
      market for our common stock being limited, you may not be able to resell your
      shares of common stock. There is currently only a limited trading market for
      our
      common stock. Our common stock trades on the Bulletin Board operated by the
      National Association of Securities Dealers, Inc. under the symbol "AVNY."
      Trading volume of OTC Bulletin Board stocks has been historically lower and
      more
      volatile than stocks traded on an exchange. As a result, you may not be able
      to
      resell your securities in open market transactions.





**Sales
      of substantial amounts of our common stock could cause our stock price to fall.**





As
      of
      October 17, 2008, 99,086,152 shares of our common stock were outstanding,
      91,864,886 of which were freely tradable and 7,221,266 of which were restricted
      as a result of securities laws. Sales of a substantial number of shares of
      our
      common stock could cause the price of our securities to fall and could impair
      our ability to raise capital by selling additional securities. The terms on
      which we could obtain additional capital during the life of the options and
      warrants may be adversely affected, and it should be expected that the holders
      of the options and warrants would exercise or convert them at a time when we
      would be able to obtain equity capital on terms more favorable than those
      provided for by such convertible securities. As a result, any issuance of
      additional shares of common stock may cause our current shareholders to suffer
      significant dilution which may adversely affect the market price of our common
      stock.





**Our
      common stock being subject to penny stock rules, the liquidity of your
      investment may be restricted.**





Our
      common stock is now and may continue to be in the future subject to the penny
      stock rules under the Securities Exchange Act of 1934, as amended. These rules
      regulate broker/dealer practices for transactions in "penny stocks." Penny
      stocks are generally equity securities with a price of less than $5.00. The
      penny stock rules require broker/dealers to deliver a standardized risk
      disclosure document that provides information about penny stocks and the nature
      and level of risks in the penny stock market. The broker/dealer must also
      provide the customer with current bid and offer quotations for the penny stock,
      the compensation of the broker/dealer and its salesperson and monthly account
      statements showing the market value of each penny stock held in the customer's
      account. The bid and offer quotations and the broker/dealer and salesperson
      compensation information must be given to the customer orally or in writing
      prior to completing the transaction and must be given to the customer in writing
      before or with the customer's confirmation. In addition, the penny stock rules
      require that prior to a transaction, the broker and/or dealer must make a
      special written determination that the penny stock is a suitable investment
      for
      the purchaser and receive the purchaser's written agreement to the transaction.
      These additional penny stock disclosure requirements are burdensome and may
      reduce the trading activity in the market for our common stock. As long as
      the
      common stock is subject to the penny stock rules, holders of our common stock
      may find it more difficult to sell their securities.


16


**There
      are a large number of outstanding warrants issued that if exercised may be
      available for future sale and the sale of these shares may depress the market
      price of our common stock.**





As
      of
      October 17, 2008 we had 99,086,152  shares
      of
      common stock issued and outstanding. There exist warrants to purchase 44,125,399
      shares of common stock at an exercise price ranging between $0.00001 and $0.70.
      The sale of these shares may adversely affect the market price of our common
      stock.





**Our
      operating results in future periods may vary from quarter to quarter, and as
      a
      result, we may fail to meet the expectations of our investors and analysts,
      which may cause our stock price to fluctuate or decline.**





As
      a
      manufacturer of fiber-optic components and modules, our contract flow is
      sometimes unpredictable, and to the extent that we do not generate new business
      upon completion of existing contracts, our revenue will decline. Also, our
      facilities may become under utilized, thus increasing our overhead cost burden.
      Due to these factors, our revenue and operating results may fluctuate from
      quarter to quarter. Due to these risks, you should not rely on period-to-period
      comparisons of our results of operations as an indication of future
      performance.





**Failure
      to achieve and maintain effective internal controls in accordance with Section
      404 of the Sarbanes-Oxley Act could have a material adverse effect on our
      business and operating results and stockholders could lose confidence in our
      financial reporting.**





Effective
      internal controls are necessary for us to provide reliable financial reports
      and
      effectively prevent fraud. If we cannot provide reliable financial reports
      or
      prevent fraud, our operating results could be harmed. We are required to
      document and test our internal control procedures in order to satisfy the
      requirements of Section 404 of the Sarbanes-Oxley Act, which requires increased
      control over financial reporting requirements, including annual management
      assessments of the effectiveness of such internal controls and we will be
      required to provide a report by our independent certified public accounting
      firm
      addressing these assessments. Failure to achieve and maintain an effective
      internal control environment, regardless of whether we are required to maintain
      such controls, could also cause investors to lose confidence in our reported
      financial information, which could have a material adverse effect on our stock
      price.


17


**ITEM
      3.**  **DESCRIPTION
      OF PROPERTIES**





The
      main
      office of Avensys Corporation and our wholly owned subsidiary, Avensys Inc.,
      is
      located at 400 Montpellier, Montreal, Quebec, Canada. The base monthly rent
      for the current premises is approximately CAD $27,368. This lease expires on
      January 31, 2010 with an option to renew for an additional 5 years until January
      31, 2015. Avensys Inc. also maintains warehousing facilities located at 247
      Boulevard Thibeau, Cap-de-la-Madeleine, Quebec, Canada. They currently lease
      approximately 6,500 square feet and the base rent for the current premises
      is
      approximately CAD $3,346 per month inclusive of taxes, and is subject to annual
      increases equivalent to the increase in the CPI.





Avensys
      Solutions also has four field offices in Canada. They currently lease
      approximately 3,615 square feet at 422 Consumers Road Toronto, Ontario, Canada.
      The office is used for sales personnel, service technicians, and administrative
      staff as well as warehousing and shipping. The base rent for the current
      premises is approximately CAD $3,809 per month and is subject to annual
      increases equivalent to the increase in the Consumer Price Index ("CPI"). This
      lease expires on December 31, 2009. They also currently lease approximately
      400
      square feet for a sales office at 5810-2nd Street S.W., Calgary, Alberta,
      Canada. The base rent for the current premises is approximately CAD $1,232
      per
      month inclusive of taxes, and is subject to annual increases equivalent to
      the
      increase in the CPI. This lease expires on March 31, 2011. Avensys Solutions
      rents two additional small field offices. They currently lease 900 square feet
      in Sarnia, Ontario, Canada for a base monthly rent of approximately CAD $993.
      They also lease 522 square feet in Dartmouth, Nova Scotia, Canada for a base
      monthly rent of CAD $688. The Dartmouth, Nova Scotia field office lease expires
      on September 30, 2011.


18


**ITEM
      4.**  **LEGAL
      PROCEEDINGS** ****





In
      the
      course of normal business, the Company may be subject to the threat of
      litigation, claims and assessments. Management believes that unfavorable
      decisions in any pending procedures or threat of procedures or any amount it
      might be required to pay might have a material adverse impact on our financial
      condition.





*1.
      Labor Law Litigation*


On
      February 7, 2007, a lawsuit was filed by a former employee under Quebec Law
      in
      the Superior Court of Quebec for a total amount of $268,027 (CAD $273,307),
      with
      regards to alleged breach of employment contract and wrongful dismissal. The
      Company has filed its response, and is in the process of contesting the case
      vigorously. Furthermore, a court date for the hearing has been
      scheduled.





Avensys
      is not a party to any other pending legal proceeding, nor is its property the
      subject of a pending legal proceeding, that is not in the ordinary course of
      business or otherwise material to the financial condition of Avensys’
business.


19


**ITEM
      5.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





Not
      applicable.


20


**PART
      II**





**ITEM
      6.**  **MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS**





Our
      common shares are traded on the OTC Bulletin Board operated by the National
      Association of Securities Dealers, Inc. under the symbol "AVNY." Our shares
      began trading on July 2, 2001. The following table sets forth the closing high
      and low prices of the common stock. The quotations reflect inter-dealer prices
      and do not represent retail mark-ups, markdowns, commissions, and may not
      reflect actual transactions.





**Fiscal Quarter**
            
            **Highest**
              **Closing Price**
            
            **Lowest**
              **ClosingPrice****2009****7-01-08
                – 9-30-08***
            
            
            0.08
            
            
            0.05**2008**04-01-08
                - 06-30-08
            
            
            0.09
            
            
            0.0701-01-08
                - 03-31-08
            
            
            0.09
            
            
            0.0710-01-07
                - 12-31-07
            
            
            0.10
            
            
            0.0707-01-07
                - 09-30-07
            
            
            0.12
            
            
            0.08**2007**04-01-07
                - 06-30-07
            
            
            0.10
            
            
            0.0601-01-07
                - 03-31-07
            
            
            0.22
            
            
            0.1110-01-06
                - 12-31-06
            
            
            0.26
            
            
            0.1907-01-06
                - 09-30-06
            
            
            0.35
            
            
            0.23





*
      through
      September 30, 2008





The
      market price of our common shares may be the object of significant fluctuations
      related to a number of events and reasons, such as variations in our operating
      results, publication of technological developments or new products or services
      by us or our competitors, recommendations of securities analysts on us or our
      competitors, the operating and stock performance of other companies that the
      market may view as related to our business, and news reports relating to trends
      in our activities.





In
      addition, the stock market in recent years has experienced significant price
      and
      volume fluctuations that have particularly affected the market prices of many
      high technology companies that often may have been unrelated or inconsistent
      to
      the operating performance of those companies. These fluctuations, as well as
      general political, economic and market conditions and other factors, may
      adversely affect the market price for our common stock.


21


**Dividend
      Policy**





We
      have
      never paid cash dividends on our common shares and at present we do not intend
      to pay any cash dividends in the foreseeable future. Our plan is to retain
      earnings, if any, to fund our future growth.





On
      January 3, 2003, we declared a stock dividend of nineteen (19) shares of common
      stock for each share outstanding. The record date for the stock dividend was
      January 20, 2003 and our common shares began trading on a post-dividend basis
      on
      January 23, 2003.





**Issuance
      and Cancellation of Common Shares**





At
      June
      30, 2008, the Company had authority to issue 500,000,000 shares of common stock.
      The Company had 99,036,152 and 93,437,654 of common shares outstanding at June
      30, 2008 and 2007, respectively.





For
      the
      year ended June 30, 2008:





a)
            In
                February 2008, the Company issued 462,035 common shares upon the
                resolution of a contingency in connection with the acquisition of
                the
                manufacturing assets of ITF Optical Technologies Inc. in April
                2006.





On
      April
      18, 2006, Avensys Corporation, AVI and Avensys Laboratories Inc (“ALI”), entered
      into an Asset Purchase Agreement (the “ITF Agreement”) to acquire the
      manufacturing assets and research and development assets of ITF Optical
      Technologies Inc. The purchase price paid for the manufacturing assets acquired
      by Avensys, pursuant to the ITF Agreement, was $1,526,651 (CAD $1,750,000),
      comprised of $654,279 (CAD $750,000) in cash and $872,372 (CAD$1,000,000) of
      Avensys Corporation common stock (2,550,795 common shares). The 2,550,795 common
      shares were originally issued as restricted stock and became freely tradable
      on
      November 9, 2006 (“Free Date”). The holders of these shares were permitted to
      sell, in every three month period following the Free Date, the lesser of (i)
      25%
      of the shares and (ii) the average weekly reported volume of trading in the
      common shares of Avensys Corporation on the OTCBB in the previous three month
      period. Notwithstanding the foregoing, the holders of such shares were permitted
      to sell any number of the common shares in any three month period if the closing
      price of the common shares of Avensys Corporation on the date of the sale of
      the
      common shares was higher than a specified reference price, which was $0.342.
      The
      holders of the common shares were also permitted to transfer all or any of
      the
      common shares at any time and at any price by private sale to a bona fide third
      party purchaser. In addition, if within the period ending one year after the
      Free Date (“Period”), the holders of the common shares sold their common shares
      through the facilities of the OTCBB at a price which was less than the specified
      reference price, Avensys Corporation would, at the option of the holders of
      the
      common shares, within five days of the end of the Period, either pay in cash
      the
      cumulative shortfall between the specified reference price and the actual sale
      price of the common shares or issue that number of free trading shares of common
      stock of Avensys Corporation equal to the cumulative shortfall. On November
      9,
      2007, the shortfall based on actual common shares sold was $34,653 and the
      holders elected to be paid in common shares using the November 9, 2007 closing
      share price of $0.075, with such amount totaling 462,035 common
      shares.


22


b)
            In
                February 2008, the Company issued 1,477,273 registered common shares,
                representing $162,500 in placement agent fees, in connection with
                the
                Senior Secured Original Issue Discount Convertible Debenture described
                in
                Note 15(b)





c)
            In
                the quarter ended September 30, 2007, the Company issued 649,955
                common
                shares representing scheduled principal payments on the Series B
                Notes and
                the OID Notes.





d)
            In
                August 2007, pursuant to the cashless exercise of warrants described
                in
                Note 13(b) and other warrants exercised on a cashless basis, the
                Company
                issued 2,759,235 common shares.





e)
            In
                August 2007, the Company issued 250,000 registered common shares
                as
                compensation for legal services.





For
      the
      fiscal year ended June 30, 2007:





a)
            In
                April, May and June 2007, the Company issued 10,191,394 common shares
                representing scheduled principal payments on the Series B Notes and
                the
                OID Notes.





b)
            In
                April 2007, pursuant to the conversion of the unsecured convertible
                debentures, the Company issued 1,654,394 common
                shares.





c)
            In
                February and March 2007, the Company issued 2,258,959 common shares
                representing scheduled principal payments on the Series B Notes and
                the
                OID Notes.





d)
            In
                February 2007, the Company issued 40,000 restricted common shares
                as
                compensation for legal services.





e)
            In
                November 2006, the Company issued 6,055 common shares in connection
                with
                the Series A Notes as an adjustment to a previous issuance for interest
                paid. During the first quarter, the Company issued 1,277,558 common
                shares
                in connection with the Series A Notes. Of that amount, 1,094,949
                common
                shares with a fair value of $341,458, were issued for scheduled principal
                payments. Since the Company had been accreting the debt on the basis
                that
                the principal payments would be settled in shares, no gain or loss
                was
                recorded and $341,458 was removed from the carrying value of the
                convertible debentures and credited to capital stock and additional
                paid
                in capital. Also, a total of 182,609 common shares, with a fair value
                of
                $58,410, were issued for interest payments. Since the Company had
                been
                accruing interest on the basis that the interest would be settled
                in
                shares, no gain or loss was recorded. In September 2006, pursuant
                to the
                ITF transaction and in connection with the Company’s failure to file the
                required registration statement within the time period required by
                the
                Asset Purchase Agreement, the Company issued 255,079 restricted common
                stock shares to the ITF preferred shareholders. The fair value of
                the
                shares at the issue date that was expensed in the financial statements
                was
                $73,463. In August 2006, the Company issued 82,934 common shares
                to settle
                outstanding payables in the amount of
                $25,709.


23


**Section
      15(g) of the Securities Exchange Act of 1934**





Our
      Company's shares are covered by Section 15(g) of the Securities Exchange Act
      of
      1934, as amended, that imposes additional sales practice requirements on
      broker/dealers who sell such securities to persons other than established
      customers and accredited investors (generally institutions with assets in excess
      of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual
      income exceeding $200,000 or $300,000 jointly with their spouses). For
      transactions covered by the Rule, the broker/dealer must make a special
      suitability determination for the purchase and have received the purchaser's
      written agreement to the transaction prior to the sale. Consequently, the Rule
      may affect the ability of broker/dealers to sell our securities and also may
      affect your ability to sell your shares in the secondary market.





Section
      15(g) also imposes additional sales practice requirements on broker/dealers
      who
      sell penny securities. These rules require a one-page summary of certain
      essential items. The items include the risk of investing in penny stocks in
      both
      public offerings and secondary marketing; terms important in understanding
      the
      function of the penny stock market, such as "bid" and "offer" quotes, a dealers
      "spread" and broker/dealer compensation; the broker/dealer compensation, the
      broker/dealers duties to its customers, including the disclosures required
      by
      any other penny stock disclosure rules; the customers rights and remedies in
      causes of fraud in penny stock transactions; and, the NASD's toll free telephone
      number and the central number of the North American Administrators Association,
      for information on the disciplinary history of broker/dealers and their
      associated persons.


24


**Securities
      authorized for issuance under equity compensation plans**





We
      have
      four equity compensation plans: our 2003 Nonqualified Stock Option Plan, our
      2004 Nonqualified Stock Option Plan, our Amended and Restated 2006 Nonqualified
      Stock Option Plan, and our 2007 Employee Compensation Plan (the "Plans"). The
      Plans provide for the issuance of stock options and common stock for services
      rendered. The Board of Directors is vested with the power to determine the
      terms
      and conditions of the stock options and common stock rewards. The Plans include
      20,000,000 stock options included in the Stock Option Plans and 4,000,000 common
      shares included in the 2007 Employee Compensation Plan. The 2006 Non Qualified
      Stock Option Plan was amended and restated to augment the Plan by 5,000,000
      stock options on September 5, 2007. The 2007 Employee Compensation Plan came
      into effect on August 21, 2007.





As
      of
      October 17, 2008, stock options to purchase 18,953,489 shares had been granted
      of which 5,973,686 options had been exercised, 2,590,530 had been forfeited
      and
      10,286,773 are outstanding. As at October 17, 2008, we have 3,739,541 stock
      options available for issuance.





**Plan category**
            
            **Number of**
              **securities to be**
              **issued upon**
              **exercise of**
              **outstanding**
              **options, warrants**
              **and rights (a)**
            
            **Weighted-average**
              **exercise price of**
              **outstanding options,**
              **warrants and rights**
              **(b)**
            
            **Number of securities**
              **remaining available**
              **for future issuance**
              **under equity**
              **compensation plans**
              **(excluding securities**
              **reflected in column**
              **(a)) (c)**Equity
                compensation plans approved by security holders
            
            
            -
            
            $
            0.00
            
            
            -Equity
                compensation plans not approved by securities holders
            
            
            10,286,773
            
            $
            0.35
            
            
            3,739,541Total
            
            
            10,286,773
            
            $
            0.35
            
            
            3,739,541


25


**ITEM
      7.**  **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





This
      management's discussion and analysis of financial condition and results of
      operations of Avensys Corporation should be read in conjunction with the
      financial statements and notes thereto of the Company for the years ended June
      30, 2008 and 2007 as included in this Form 10-K.





With
      respect to forward-looking statements made in this Management’s Discussion and
      Analysis of Financial Condition and Results of Operations see Part I initial
      paragraph concerning “ *forward-looking
      statements* ”.





**CORPORATE
      OVERVIEW**





Avensys
      Corporation operates two divisions, through its wholly owned subsidiary Avensys
      Inc.:





Avensys
      Technologies designs, manufactures, distributes, and markets high reliability
      optical components and modules as well as FBGs for the telecom market and high
      power devices and sub-assemblies for the industrial market.





Avensys
      Solutions, the other division of Avensys, is an industry leader in providing
      instrumentation and integrated solutions for the monitoring of industrial
      processes and environmental surveillance applications for air, water and soil
      in
      the Canadian marketplace.





For
      the
      twelve month period ended June 30, 2008, Avensys revenues were a record $21.6
      million, compared to $16.6 million for the same period in the previous year
– an
      increase of 30.3% year on year. The loss from operations for the twelve month
      period ended June 30, 2008 was $2.8 million compared to $2.4 million for the
      previous year.





Our
      gross
      margin for the year ended June 30, 2008 of 36.6% remained substantially the
      same
      as it was for the previous 12 month period – 36.8%.





Net
      cash
      used in operating activities during the year totaled $635,000, as compared
      with
      net cash used of $2.5 million in the previous year.





Net
      loss
      for the year ended June 30, 2008 was $3.1 million compared with $2.4 million
      for
      last year. The increase in net loss can be primarily attributed to the cost
      of
      severance paid to departed executives and by the very high cost of compliance
      with Sarbanes Oxley during the year. Compliance with SOX 404 in particular
      cost
      the Company dearly, both in terms of external consulting fees and in terms
      of
      the amount of staff time required, and time not spent on operations.





The
      Avensys Technologies division generated revenues of $14.5 million for the twelve
      months, an increase of 32.4% over the same period a year ago. The main drivers
      of growth were our undersea telecom products, our DPSK demodulators, Fiber
      Bragg
      Gratings and fiber laser combiners. Gross margins were steady year on year
      showing 36.2% in fiscal 2008 and 36.3% in fiscal 2007.





Revenues
      at Avensys Solutions division of $7.1 million showed a growth of 26.3% for
      the
      twelve month period. Of the $7.1 million in revenues, $1.4 million was generated
      in the fourth quarter by Willer Engineering, whose assets we purchased at the
      end of March 2008. Gross margins in fiscal 2008 were 37.3% and in fiscal 2007
      37.8%.


26


For
      the
      three month period ended June 30, 2008, Avensys’ revenues increased to $6.9
      million, as compared to $5.4 million for the same period last year, an increase
      of 28.9%. Avensys’ operating loss for the three month period was $$774,339,
      compared to an operating loss of $561,203 for the three month period ended
      June
      30, 2007.





The
      gross
      margin of $2.6 million for the three month period ended June 30, 2008 was 37.2%
      of our consolidated revenues compared to $2.3 million and 43.3%, respectively,
      for the same period the previous year. The reduction in the gross margin over
      the previous year occurred because of substantial increases in sales of lower
      margin products at the Avensys Tech division.





Net
      cash
      generated by operating activities during the three month period ended June
      30,
      2008 totaled $528,000, as compared with net cash generated of approximately
      $243,000 for the same period last year.





Net
      loss
      for the three month period ended June 30, 2008 has decreased to approximately
      $285,000 compared with $712,000 for the same period last year.





On
      March
      31, 2008, Avensys entered into an Asset Purchase Agreement (the "Purchase
      Agreement") to acquire the operating assets of Willer Engineering Limited
      (“Willer”). The purchase price to be paid for the operating assets pursuant to
      the Purchase Agreement is CAD $705,000, subject to adjustments. The purchase
      price includes two CAD $200,000 payments to be made in 2009 and 2010 which
      are
      subject to adjustment contingent upon the performance of the Company.
      Accordingly, the Company did not record these contingent payments until their
      values will be established after the release of the fiscal year 2009 and 2010
      financial results. The acquisition expands Avensys Solutions’ service offerings,
      establishing the division as a strong presence with the ability to expand
      product lines beyond its current capabilities, especially in the Canadian
      markets, where there is strong demand. Willer’s services include professional
      instrumentation solutions as well as products and services to the industrial
      industry in the Eastern region of Canada. Revenues and results for Willer are
      included in the Avensys Solutions results effective April 1, 2008.





On
      February 6, 2008, the Technology License Agreement between our subsidiary C-Chip
      Technologies (North America) and its business partner iMetrik Inc. was
      terminated. Subsequent to December 31, 2007, no further royalties are payable
      to
      C-Chip and the outstanding balance of the C-Chip loan from iMetrik was forgiven
      as of the same date. As a result, we recognized a gain of $351,059 during the
      third quarter, on the forgiveness of the loan. This amount represented the
      outstanding balance of the loan at December 31, 2007. As part of the termination
      of the Technology License Agreement, iMetrik will continue to assume
      responsibility for the manufacturing costs, sales and other incidental costs
      related to the production and marketing of the devices sold in the sub-prime
      used vehicle market. In terminating the Technology License Agreement, the
      Company ceased to operate C-Chip, and ceased to derive any cash flows from
      C-Chip activities which, starting in the third quarter of fiscal 2008, were
      classified as discontinued operations.





For
      fiscal year 2009, our primary objective is to continue to grow revenues, and
      to
      generate positive cash flow. We will be seeking complementary product lines,
      which will provide us with access to new markets and/or economies of scales.
      We
      are also continuously seeking to improve our manufacturing process, decrease
      costs and improve our margins.


27




**OVERVIEW
      OF AVENSYS SUBSIDIARY**





Avensys
      Corporation acquired Avensys Inc. in February 2005. Avensys Inc. operates two
      divisions, Avensys Tech and Avensys Solutions. Avensys Tech produces optical
      components and modules for the telecom, fiber laser and optical sensor markets.
      Avensys Solutions distributes and integrates environmental monitoring solutions
      and instrumentation in the Canadian marketplace.





Our
      Avensys Inc. revenues for the three months ended June 30, 2008 were $6.9
      million, as compared to $5.4 million for the same period last year. Revenues
      for
      the three month period were 28.8% ahead of the same period last year. Our
      Avensys Inc. revenues for the year ended June 30, 2008 were $21.6 million,
      as
      compared to $16.6 million in the previous year. Revenues for the year were
      30.3%
      ahead of the previous year.





*Avensys
      Tech Division of Avensys*





Avensys
      Tech sells its optical products and services primarily in North America, Asia,
      and Europe to the telecommunications, fiber laser, and sensors industries.
      It
      currently operates in three vertical markets within the photonics industry:
      the
      telecommunications market, the growing fiber laser market, and, the fiber sensor
      market.





The
      acquisition of the assets of ITF Optical Technologies has contributed to
      solidifying our position in the optical component market. We occupy a dominant
      position for some of the components that we are offering and intend to occupy
      an
      even more important market space in the future through both organic growth
      and
      mergers & acquisitions.





The
      successful integration of Avensys’ acquisition of ITF Optical Technologies has
      enabled Avensys Tech to concentrate on organic revenue growth namely,





1-
            Increase
                direct and indirect distribution
                channels





2-
            Improve
                operational efficiencies and increase
                margins





3-
            Introduce
                new complementary products to our
                customers





The
      market for fiber optics components continues to experience solid growth. The
      telecom segment represents about 75% of our optical sales. Fiber laser
      components and modules and optical sensors comprise the remaining 25% of optical
      sales. Undersea telecom components, DPSK demodulators (“Differential Phase Shift
      Keying”) as well as our traditional terrestrial telecom components and fiber
      laser components, developed by our R&D partner ITF labs, saw important
      growth. On this note, Avensys Tech has surpassed the mark of 42,614 Fiber Bragg
      Gratings (FBG) units shipped during the first quarter of fiscal 2009. This
      milestone was achieved through a steady growth in the monthly production of
      FBG’s and represents an increase of 199% compared to 14,268 units shipped during
      the same period last year.





Our
      DPSK
      product is now adopted by the telecom industry. Consequently, we expect
      substantial volume growth in the next years but also a pressure on cost
      reduction. To face this challenge ITF Labs, our R&D partner, undertook a
      major R&D project two years ago to design the new generation of our
      demodulators, the micro-DPSK. On February 20, 2008, ITF Labs announced the
      R&D completion of its micro-DPSK. This device is designed small enough to be
      incorporated into the industry standard 300-pin Multi-Source Agreement (MSA)
      compliant transponder package, and will be available with bitrates for 40Gb/s
      DPSK and DQPSK with free-spectral-range from 20 GHz to 70GHz. The device has
      the
      lowest loss and highest extinction ratio on the market with an almost
      insignificant polarization dependency of less than 1% of free-spectral range.
      All dimensions of the device have been reduced, making this the thinnest,
      fastest tuning, lowest power consumption product available on the market which
      enables the integration of either DPSK or DQPSK formats into the MSA package.





28




Many
      Tier
      1 and Tier 2 companies are currently developing their own platforms. So far,
      we
      have distributed demonstration micro-DPSKs and the reception is encouraging.
      We
      recently received a purchase order for 40 units for some beta productions.
      The
      majority of our customers are targeting to start their production in January
      2009. Most of them expect to buy between 100 and 300 units in 2009. However,
      three of them are planning to buy more than 500 units in 2009.





Finally,
      the micro-DPSK design allows significant cost reduction and high manufacturing
      yield. ITF Labs anticipates transferring the production of its micro-DPSK to
      Avensys Tech in the second quarter of 2009.





Three
      major fiber laser providers have chosen to incorporate our technology into
      their
      product lines. Optical sensors remain part of our long term strategy, although
      the current growth of this market segment is still limited to the single digit
      range. Recently, our partner, ITF labs have won military contracts from
      different countries to build leading edge high power fiber laser components
      and
      systems.





We
      increased our coverage of the Asian and European market by entering into
      distribution agreements with three (3) new partners, who will represent our
      product lines in both the telecom and fiber laser markets.





The
      demonstration of above kilowatt operation of our fiber laser components as
      well
      as our successes with DPSK demodulator modules constitute two areas where we
      see
      new sources of revenue that are clearly part of our long term path to success.
      In addition, the undersea telecom market has been rich in new initiatives with
      recent announcement for various long haul systems. Avensys Tech, as one of
      the
      few components companies in the world with undersea certified production lines,
      is often an indirect beneficiary of such large scale projects.





*The
      Avensys Solutions Division of Avensys Inc.*





Avensys
      Solutions competes in the Canadian marketplace providing instrumentation and
      integrated systems capable of detecting and quantifying the presence of specific
      pollutants, gases and other components in ambient air, stack emissions, waste
      water, natural water sources and soil. It also addresses the monitoring needs
      of
      industrial processes for the purpose of surveillance and optimization.





The
      market for these solutions in Canada is quite mature, with specific areas
      growing faster due to increased regulation, pressures on reducing Greenhouse
      gas
      emissions and emerging opportunities associated with carbon credit trading.
      We
      continue to be firm believers in this exciting business segment that has allowed
      us, through its stability, to be a more solid organization.





29




We
      anticipate that this market will experience overall growth and consolidation
      as
      the private and public sectors recognize the value of sustainable development
      and environmentally responsible behavior. Consistent with our intentions to
      be
      active in the consolidation movement, on March 28, 2008, we completed the
      acquisition of the assets of Willer Engineering Limited (“Willer”) a privately
      held company which provided professional instrumentation solutions, products
      and
      service to the industrial, process and scientific markets in Eastern Canada
      for
      over 45 years. The Willer assets have being integrated into Avensys Solutions,
      pooling resources and complementary product lines and doubling our sales force.
      We have secured existing distribution agreements with most of the major Willer
      suppliers and we were successful in retaining key employees. We intend to
      maintain the additional office locations gained from this acquisition, in Sarnia
      and Atlantic Canada.





In
      March,
      we transferred our Western Office from White Rock, British Columbia to Calgary,
      Alberta where most of the growth is expected to come, and where local support
      will be more critical as we increase the percentage of our revenues coming
      from
      integrated solutions and maintenance contracts and as we increase our
      penetration into the industrial process market.





The
      portion of our revenues stemming from our traditional environmental business
      FY2008 have remained relatively stable despite the downward pressure on market
      prices resulting from the strength of the Canadian dollar. Overall, Avensys
      Solutions revenues have grown by 26.3% over FY2007, a significant portion of
      this growth being attributable to the acquisition of Willer Engineering’s
      assets.




30




**Results
      of Operations for the three and twelve month periods ended June 30, 2008
      compared to the three and twelve month periods ended June 30, 2007**





The
      results of operations include the accounts of the Company and its
      subsidiaries.





**Three
                Months Ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **Change****$**
            
            **$**
            
            **$**
            
            **%**Revenue
            
            
            6,943,859
            
            
            5,389,262
            
            
            1,554,597
            
            
            28.8
            %Cost
                of Revenue
            
            
            4,361,799
            
            
            3,056,974
            
            
            1,304,825
            
            
            42.7
            %Gross
                margin
            
            
            2,582,060
            
            
            2,332,288
            
            
            249,772
            
            
            10.7
            %Gross
                Margin as % of Revenue
            
            
            37.2
            %
            
            43.3
            %Operating
                expensesDepreciation
                and amortization
            
            
            257,790
            
            
            301,981
            
            
            (44,191
            )
            
            -14.6
            %Selling,
                general and administration
            
            
            2,427,500
            
            
            2,166,435
            
            
            261,065
            
            
            12.1
            %Research
                and development
            
            
            671,109
            
            
            425,075
            
            
            246,034
            
            
            57.9
            %Total
                Operating expenses
            
            
            3,356,399
            
            
            2,893,491
            
            
            462,908
            
            
            16.0
            %Operating
                loss
            
            
            (774,339
            )
            
            (561,203
            )
            
            (213,136
            )
            
            38.0
            %Other
                income (expenses)
            
            
            258,254
            
            
            (532,823
            )
            
            791,077
            
            
            -148.5
            %Income
                tax benefits - refundable tax credits
            
            
            255,474
            
            
            360,677
            
            
            (105,203
            )
            
            -29.2
            %Non-Controlling
                interest
            
            
            419
            
            
            3,877
            
            
            (3,458
            )
            
            -89.2
            %Results
                of discontinued operations
            
            
            (24,876
            )
            
            17,220
            
            
            (42,096
            )
            
            -244.5
            %Net
                loss for the period
            
            
            (285,068
            )
            
            (712,252
            )
            
            427,184
            
            
            -60.0
            %Foreign
                currency translation adjustments
            
            
            (26,267
            )
            
            416,000
            
            
            (442,267
            )
            
            -106.3
            %Comprehensive
                (loss) income
            
            
            (311,335
            )
            
            (296,252
            )
            
            (15,083
            )
            
            5.1
            %




**Fiscal
                Year Ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **Change****$**
            
            **$**
            
            **$**
            
            **%**Revenue
            
            
            21,603,082
            
            
            16,576,124
            
            
            5,026,958
            
            
            30.3
            %Cost
                of Revenue
            
            
            13,697,851
            
            
            10,473,196
            
            
            3,224,655
            
            
            30.8
            %Gross
                margin
            
            
            7,905,231
            
            
            6,102,928
            
            
            1,802,303
            
            
            29.5
            %Gross
                Margin as % of Revenue
            
            
            36.6
            %
            
            36.8
            %Operating
                expensesDepreciation
                and amortization
            
            
            970,107
            
            
            851,318
            
            
            118,789
            
            
            14.0
            %Selling,
                general and administration
            
            
            7,213,485
            
            
            6,041,371
            
            
            1,172,114
            
            
            19.4
            %Research
                and development
            
            
            2,476,823
            
            
            1,571,572
            
            
            905,251
            
            
            57.6
            %Total
                Operating expenses
            
            
            10,660,415
            
            
            8,464,261
            
            
            2,196,154
            
            
            25.9
            %Operating
                loss
            
            
            (2,755,184
            )
            
            (2,361,333
            )
            
            (393,851
            )
            
            16.7
            %Other
                income (expenses)
            
            
            (2,096,738
            )
            
            (1,285,217
            )
            
            (811,521
            )
            
            63.1
            %Income
                tax benefits - refundable tax credits
            
            
            1,124,819
            
            
            1,217,948
            
            
            (93,129
            )
            
            -7.6
            %Non-Controlling
                interest
            
            
            206
            
            
            1,890
            
            
            (1,684
            )
            
            -89.1
            %Results
                of discontinued operations
            
            
            606,374
            
            
            55,958
            
            
            550,416
            
            
            983.6
            %Net
                loss for the period
            
            
            (3,120,523
            )
            
            (2,370,754
            )
            
            (749,769
            )
            
            -31.6
            %Foreign
                currency translation adjustments
            
            
            548,384
            
            
            592,730
            
            
            (44,346
            )
            
            -7.5
            %Comprehensive
                loss
            
            
            (2,572,139
            )
            
            (1,778,024
            )
            
            (794,115
            )
            
            -44.7
            %




31




Revenue





Sales
      from the Avensys Tech and Avensys Solutions divisions of Avensys Inc., for
      the
      three and twelve month periods ended June 30, 2008, account for 100% of our
      net
      revenues. Avensys products were sold directly to customers throughout the world.





Our
      revenues were composed of the following:





**Three
                Months Ended June 30,****%
                of**
            
            
            
            **%
                of****2008**
            
            **Revenue**
            
            **2007**
            
            **Revenue**
            
            **Change**
            
            **Change****$**
            
            
            
            **$**
            
            
            
            **$**
            
            **%**Avensys
                Tech
            
            
            3,949,552
            
            
            57
            %
            
            3,777,318
            
            
            70
            %
            
            172,234
            
            
            4.6
            %Avensys
                Solutions
            
            
            2,994,307
            
            
            43
            %
            
            1,611,944
            
            
            30
            %
            
            1,382,363
            
            
            85.8
            %Revenue
            
            
            6,943,859
            
            
            
            
            
            5,389,262
            
            
            
            
            
            1,554,597
            
            
            28.8
            %





**Fiscal
                Year Ended June 30,****2008**
            
            **%
                of**
              **Revenue**
            
            **2007**
            
            **%
                of**
              **Revenue**
            
            **Change**
            
            **Change****$**
            
            
            
            **$**
            
            
            
            **$**
            
            **%**Avensys
                Tech
            
            
            14,533,370
            
            
            67
            %
            
            10,977,252
            
            
            66
            %
            
            3,556,118
            
            
            32.4
            %Avensys
                Solutions
            
            
            7,069,712
            
            
            33
            %
            
            5,598,872
            
            
            34
            %
            
            1,470,840
            
            
            26.3
            %Revenue
            
            
            21,603,082
            
            
            
            
            
            16,576,124
            
            
            
            
            
            5,026,958
            
            
            30.3
            %




Our
      revenues for the three and twelve month periods ended June 30, 2008 increased
      by
      28.8% and 30.3%, respectively, over the same periods in the previous year.
      The
      twelve month increase is primarily due to the Willer acquisition and our Avensys
      Tech operating division, whose sales increased for the twelve month period
      ended
      June 30, 2008 by 32.4%. Avensys Tech maintained its strong internal growth
      by
      the continued expansion and diversification of its product lines, and the
      addition of new customers.





The
      85.8%
      and 26.3% growth in revenues at Avensys Solutions for the three and twelve
      month
      periods, respectively, is primarily due to the Willer transaction. The Willer
      transaction is responsible for approximately $1,355,000 in revenues for Avensys
      Solutions during the three and twelve month periods ended June 30, 2008.
      Excluding the effects of the Willer transaction, Avensys Solutions recorded
      a
      1.7% and 2.1% growth in revenues for the three and twelve month periods ended
      June 30, 2008.





Cost
      of revenue and gross margin





Cost
      of
      goods sold as a percentage of revenue was 62.8% and 63.4% for the three and
      twelve month periods ended June 30, 2008 compared with 56.7% and 63.2% for
      the
      same periods in the previous year. Gross margin, relative to revenues, for
      the
      three month period ended June 30, 2008 decreased as a result of decreasing
      margins at Avensys Tech.





Gross
      margins for the Avensys Tech division were 38.3% and 36.2%, respectively, for
      the three and twelve month periods ended June 30, 2008 compared with 44.5%
      and
      36.3%, respectively, for the same periods in the previous year. Gross margins
      for the Avensys Solutions division were 35.8% and 37.3%, respectively, for
      the
      three and twelve month periods ended June 30, 2008 compared with 40.4% and
      37.8%, respectively, for the same periods in the previous year.




32




Avensys
      Tech saw increases in the costs of production, for three months ended June
      30,
      2008, due to significantly increased sales of lower margin products, the
      training of additional production staff, and the negative effects of a weaker
      U.S. dollar, as compared to the Canadian dollar. The average rate of the U.S.
      Dollar for the three and twelve month periods ended June 30, 2008 was $0.9901
      and $0.9898, respectively, compared to $0.9104 and $0.8828, respectively, for
      the three and twelve month periods ended June 30, 2007.





Avensys
      Solutions gross margins for the year ended June 30, 2008 were unchanged
      primarily due to the beneficial effects of a weaker U.S. dollar. Avensys
      Solutions sales are primarily denominated in the Canadian dollar, while supplier
      purchases are denominated in the U.S. dollar.





Division
      Direct Contribution





Division
      direct contribution consists of division revenues less division direct costs.
      Direct costs include specific costs of net revenues, sales and marketing
      expenses, and general and administrative expenses over which division managers
      have direct discretionary control, such as sales programs, customer support
      expenses, bank charges and bad debt write-offs. Changes in direct contribution
      for the Avensys Tech and Avensys Solutions divisions are outlined, as
      follows:





**Avensys
                Tech****Year
                Ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **Change****$**
            
            **$**
            
            **$**
            
            **%**Net
                revenues from external customers
            
            
            14,533,370
            
            
            10,977,252
            
            
            3,556,118
            
            
            32.4
            %Cost
                of net revenues
            
            
            9,265,185
            
            
            6,988,429
            
            
            2,276,756
            
            
            32.6
            %Marketing
                and sales expense
            
            
            727,953
            
            
            519,266
            
            
            208,687
            
            
            40.2
            %General
                and administrative expense
            
            
            1,118,049
            
            
            831,867
            
            
            286,182
            
            
            34.4
            %Research
                and development expense
            
            
            2,476,823
            
            
            1,571,572
            
            
            905,251
            
            
            57.6
            %Depreciation
                and amortization expense
            
            
            351,025
            
            
            282,769
            
            
            68,256
            
            
            24.1
            %Direct
                costs
            
            
            13,939,035
            
            
            10,193,904
            
            
            3,745,132
            
            
            36.7
            %Direct
                contribution
            
            
            594,335
            
            
            783,349
            
            
            (189,014
            )
            
            -24.1
            %




Direct
      costs for the Avensys Tech division increased 36.7% for the year ended June
      30,
      2008, over the same period in the previous year, primarily due to increased
      marketing and sales and research and development expenses. Marketing and sales
      expenses saw a 40.2% increase during fiscal 2008 as a result of efforts to
      expand the geographic distribution of sales. Research and development programs
      have been increased 57.6% as a result of the expanded roster of research
      projects at ITF Labs related to the development of fiber laser components and
      micro-DPSKs.




33




**Avensys
                Solutions****Year
                Ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **Change****$**
            
            **$**
            
            **$**
            
            **%**Net
                revenues from external customers
            
            
            7,069,712
            
            
            5,598,872
            
            
            1,470,840
            
            
            26.3
            %Cost
                of net revenues
            
            
            4,432,666
            
            
            3,484,767
            
            
            947,900
            
            
            27.2
            %Marketing
                and sales expense
            
            
            1,937,278
            
            
            1,606,842
            
            
            330,436
            
            
            20.6
            %General
                and administrative expense
            
            
            948,749
            
            
            455,479
            
            
            493,270
            
            
            108.3
            %Research
                and development expense
            
            
            -
            
            
            -
            
            
            -
            
            
            0.0
            %Depreciation
                and amortization expense
            
            
            57,527
            
            
            22,440
            
            
            35,087
            
            
            156.4
            %Direct
                costs
            
            
            7,376,220
            
            
            5,569,527
            
            
            1,806,693
            
            
            32.4
            %Direct
                contribution
            
            
            (306,508
            )
            
            29,344
            
            
            (335,852
            )
            
            -1144.5
            %




Direct
      costs for the Avensys Solutions division increased 32.4% for the year ended
      June
      30, 2008, over the same period in the previous year. The growth in direct costs
      is highlighted by an increase in general and administrative expenses associated
      with the administrative salaries from the Willer acquisition, increased training
      and recruiting costs, and increased rental expenses.





Operating
      Expenses





*Depreciation
      and amortization*


Depreciation
      and amortization expenses for the three and twelve month periods ended June
      30,
      2008 decreased by $44,191 and increased by $118,789, respectively, over the
      same
      periods in the previous year. Avensys continues to invest in production
      equipment to keep pace with the significant increases in revenues.





*Selling
      General and Administrative expenses*


Selling,
      general and administrative (“SG&A”) expenses consisted primarily of general
      and administrative expenses, marketing and sales expenses, payroll and related
      expenses, and professional fees. SG&A expenses for the three and twelve
      month periods ended June 30, 2008 increased by $261,065 and $1,172,114
      respectively, compared to the same periods in the previous year. SG&A are
      composed of the following:





**Three
                Months Ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **Change****$**
            
            **$**
            
            **$**
            
            **%**General
                and administrative
            
            
            447,514
            
            
            272,679
            
            
            174,835
            
            
            64.1
            %Marketing
                and Sales
            
            
            185,232
            
            
            168,544
            
            
            16,688
            
            
            9.9
            %Payroll
                and related expenses
            
            
            1,413,928
            
            
            1,282,263
            
            
            131,665
            
            
            10.3
            %Professional
                fees
            
            
            312,670
            
            
            174,404
            
            
            138,266
            
            
            79.3
            %Stock
                based compensation
            
            
            46,645
            
            
            187,122
            
            
            (140,477
            )
            
            -75.1
            %Travel
            
            
            19,905
            
            
            27,035
            
            
            (7,130
            )
            
            -26.4
            %Other
            
            
            1,607
            
            
            54,388
            
            
            (52,781
            )
            
            -97.0
            %Selling,
                General and Administrative Expenses
            
            $
            2,427,501
            
            $
            2,166,435
            
            $
            261,066
            
            
            12.1
            %




34




**Fiscal
                Year Ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **Change****$**
            
            **$**
            
            **$**
            
            **%**General
                and administrative
            
            
            989,218
            
            
            676,821
            
            
            312,397
            
            
            46.2
            %Marketing
                and Sales
            
            
            729,269
            
            
            599,900
            
            
            129,369
            
            
            21.6
            %Payroll
                and related expenses
            
            
            4,139,955
            
            
            3,387,393
            
            
            752,562
            
            
            22.2
            %Professional
                fees
            
            
            991,123
            
            
            560,304
            
            
            430,819
            
            
            76.9
            %Stock
                based compensation
            
            
            249,479
            
            
            453,206
            
            
            (203,727
            )
            
            -45.0
            %Travel
            
            
            95,891
            
            
            84,544
            
            
            11,347
            
            
            13.4
            %Other
            
            
            18,550
            
            
            279,203
            
            
            (260,653
            )
            
            -93.4
            %Selling,
                General and Administrative Expenses
            
            $
            7,213,485
            
            $
            6,041,371
            
            $
            1,172,114
            
            
            19.4
            %





General
      and administrative expenses for the three and twelve month periods ended June
      30, 2008 increased compared with the same periods in the previous year primarily
      due to the cost of severance paid to departed executives and the cost of
      compliance with the Sarbanes Oxley Act during the year.





Marketing
      and sales expenses for the three and twelve month periods ended June 30, 2008
      increased compared to the same periods in the previous year. The increases
      for
      the three and twelve month periods are primarily due to the growth in the
      Company’s operations, because of increased sales.





Payroll
      expenses for the three and twelve month periods ended June 30, 2008 increased
      compared with the same periods in the previous year due to the growth in the
      operations of Avensys Inc, because of increased sales.





Professional
      fees for the three and twelve month periods ended June 30, 2008 increased by
      79.3% and 76.9%, respectively, compared with the same periods in the previous
      years. The increases for the three and twelve month periods are primarily
      attributable to legal fees in connection with the Senior Secured Original Issue
      Discount financing and the Willer transaction, as well as added consulting
      fees.





Research
      and Development





For
      the
      three and twelve months ended June 30, 2008, research and development expenses
      primarily consisted of salaries and related expenses for research personnel,
      prototype manufacturing and testing at the ITF Labs facility in Montreal,
      Quebec.





Research
      and development expenses for the three and twelve month periods ended June
      30,
      2008, increased by $246,034 and $905,251 compared with the same periods in
      the
      previous year. The three and twelve month periods increase is primarily
      attributable to the expanded roster of research and development projects at
      ITF
      Labs.





Stock
      Based Compensation





Stock
      based compensation, which is included in ‘Other selling, general and
      administrative’ expenses, for the three and twelve month periods ended June 30,
      2008, was $46,645 and $249,479, respectively, compared to $187,122 and $453,206,
      respectively, for the same periods in the previous year. Stock based
      compensation for the twelve month period ended June 30, 2008 includes the
      severance amount for the former President of Avensys Inc of $64,684. The
      decreases in stock based compensation expenses are primarily attributed to
      the
      decrease in calculated fair values of employee stock options issued during
      the
      year ended June 30, 2008. The fair value of the employee stock options is
      determined using the Black-Scholes Model.





35




Intangible
      asset impairment





There
      is
      no intangible assets impairment charge recorded for the year ended June 30,
      2008.





Goodwill
      impairment





During
      the fourth quarter of Fiscal 2008, the Company completed its annual goodwill
      impairment test. In evaluating whether there was an impairment of goodwill,
      management compared the fair value of the Avensys Tech and Avensys Solutions
      reporting units against their carrying amounts, including the goodwill.
      Measurement of the fair value was based on the reporting units’ present value of
      expected future cash flows. As the estimated fair value exceeded the carrying
      amount, Management determined that there was no adjustment necessary to the
      reporting units’ underlying assets and liabilities and the goodwill
      recorded.





Other
      Income (Expenses)





Other
      income (expenses) consists of the following:





**Three
                Months Ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **Change****$**
            
            **$**
            
            **$**
            
            **%**Other
                income (expenses), net
            
            
            (76
            )
            
            41,661
            
            
            (41,737
            )
            
            -100.2
            %Loss
                on redemption of convertible debentures
            
            
            -
            
            
            -
            
            
            -
            
            
            -Interest
                expense, net
            
            
            (150,180
            )
            
            (234,750
            )
            
            84,570
            
            
            -36.0
            %Debentures
                and preferred shares accretion
            
            
            (286,031
            )
            
            (438,888
            )
            
            152,857
            
            
            -34.8
            %Change
                in fair value of derivative financial instruments
            
            
            694,541
            
            
            99,154
            
            
            595,387
            
            
            600.5
            %Other
                income (expenses)
            
            $
            258,254
            
            $
            (532,823
            )
            $
            791,077
            
            
            -148.5
            %





**Twelve Months Ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **Change****$**
            
            **$**
            
            **$**
            
            **%**Other
                income (expenses), net
            
            
            57,288
            
            
            172,269
            
            
            (114,981
            )
            
            -66.7
            %Loss
                on redemption of convertible debentures
            
            
            (1,422,577
            )
            
            -
            
            
            (1,422,577
            )
            
            N/AInterest
                expense, net
            
            
            (702,338
            )
            
            (798,856
            )
            
            96,518
            
            
            -12.1
            %Debentures
                and preferred shares accretion
            
            
            (965,429
            )
            
            (2,420,791
            )
            
            1,455,362
            
            
            -60.1
            %Change
                in fair value of derivative financial instruments
            
            
            936,318
            
            
            1,762,161
            
            
            (825,843
            )
            
            -46.9
            %Other
                income (expenses)
            
            $
            (2,096,738
            )
            $
            (1,285,217
            )
            $
            (811,521
            )
            
            63.1
            %





Other
      expenses for the three and twelve month periods are heavily affected by changes
      in the fair value of derivative financial instruments and the loss on redemption
      of convertible debentures. Also, there was a significant reduction in debenture
      and preferred shares accretion for the twelve month period of $1,455,362:




36




**Three
                Months Ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **Change****$**
            
            **$**
            
            **$**
            
            **%**Series
                A Notes accretion
            
            
            -
            
            
            -
            
            
            -
            
            
            0.0
            %Series
                B Notes & Series B OID Notes accretion
            
            
            167,367
            
            
            358,082
            
            
            (190,715
            )
            
            -53.3
            %Preferred
                shares accretion
            
            
            118,664
            
            
            80,806
            
            
            37,858
            
            
            46.9
            %Debentures
                and preferred shares accretion
            
            $
            286,031
            
            $
            438,888
            
            $
            (152,857
            )
            
            -34.8
            %




**Twelve
                Months Ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **Change****$**
            
            **$**
            
            **$**
            
            **%**Series
                A Notes accretion
            
            
            -
            
            
            1,025,613
            
            
            (1,025,613
            )
            
            -100.0
            %Series
                B Notes & Series B OID Notes accretion
            
            
            583,066
            
            
            1,135,302
            
            
            (552,236
            )
            
            -48.6
            %Preferred
                shares accretion
            
            
            382,363
            
            
            259,876
            
            
            122,487
            
            
            47.1
            %Debentures
                and preferred shares accretion
            
            $
            965,429
            
            $
            2,420,791
            
            $
            (1,455,362
            )
            
            -60.1
            %




Refundable
      Tax Credits





Refundable
      tax credits for the three and twelve month periods ended June 30, 2008,
      decreased by $105,203 and $93,129, respectively, compared with the same periods
      in 2007. The Company includes investment tax credits arising from research
      and
      development activities as part of the income tax provision for the year. The
      Company’s income tax provision for the three and twelve month periods ended June
      30, 2008 includes only such tax credits, arising from research and development
      activities. The Company’s investment tax credit recovery for the years ended
      June 30, 2008 and 2007 were positively affected as a result of revisions to
      amounts previously estimated and recorded for credits related to the fiscal
      year
      ended June 30, 2006. As a result of these revisions, which relate to new
      information obtained following the taxation authorities’ reviews, the investment
      tax credit recoveries of the years ended June 30, 2008 and 2007 were increased
      by $103,872 and $475,193, respectively. The Company includes investment tax
      credits arising from research and development activities as part of the income
      tax provision for the year. The Company’s income tax provision for the year
      ended June 30, 2008 includes only such tax credits, arising from research and
      development activities.





Net
      Loss





Our
      net
      loss for the three month period ended June 30, 2008 of $285,068 represents
      a
      decrease in net loss of $427,184 compared to the net loss of $712,252 for the
      same period in 2007. Our net loss for the twelve month period ended June 30,
      2008 of $3,120,523, represents an increase in net loss of $749,769 compared
      to
      the net loss of $2,370,754 for the same period in the previous year. These
      changes, however, were affected by the addition of derivative financial
      instruments to our balance sheet and the loss of $1,422,577 on redemption of
      Series B and Series OID Notes in August 2007.





37


**Financial
      Condition, Liquidity and Capital Resources**




As
        discussed in Note 1 to the financial statements the Company’s operating
        subsidiary, Avensys Inc., maintains a line of credit from a financial
        institution, and the covenants pertaining to such were not respected as at
        June
        30, 2008. This constitutes an event of default and could result in the financial
        institution requiring repayment of a loan. The failed covenants with the
        financial institution triggered cross-default clauses affecting the Company’s
        Working Capital Facility and Senior Secured Convertible Debenture. Subsequent
        to
        year-end, the Company has obtained waivers with respect to such cross-default
        clauses for the Working Capital Facility and Senior Secured Convertible
        Debenture. Avensys Inc. is seeking to renegotiate the credit agreement with
        the
        financial institution and is also seeking to obtain additional conventional
        bank
        credit-line financing to that which it already has, to support its growing
        operations. The material uncertainties resulting from the above events and
        conditions are such that there exists substantial doubt that the Company
        would
        be able to continue as a going concern at June 30, 2008. The Company’s
        continuation as a going concern is dependent upon the continued support of
        shareholders, lenders and suppliers and its ability to obtain additional
        cash to
        allow for the satisfaction of its obligations on a timely basis.
 
 During
        the first quarter of fiscal 2009, as described in Note 22 to the financial
        statements, the Company amended an agreement with the former shareholders
        of ITF
        Optical Technologies. The amendment postponed, by 18 months, the exercise
        date
        of a put option that could have required the cash outlay of CAD $2,000,000
        between April and October 2009.





Historically,
      our operations have been financed primarily from cash on hand, from the sale
      of
      common shares or the sale of convertible debentures. The operations of our
      subsidiary Avensys have been supported primarily from revenue from the sales
      of
      its products and services.





As
      at
      June 30, 2008, net working capital increased to $700,503, compared to net
      working capital of $596,800 at June 30, 2007. Included in these figures for
      net
      working capital:





**June
                30,****2008**
            
            **2007**
            
            **Change**
            
            **Change****$**
            
            **$**
            
            **$**
            
            **%**Cash,
                cash equivalents, and short term investments
            
            
            369,396
            
            
            481,023
            
            
            (111,627
            )
            
            -23
            %Receivables
            
            
            7,045,825
            
            
            4,906,536
            
            
            2,139,289
            
            
            44
            %Inventory
            
            
            2,178,686
            
            
            1,478,835
            
            
            699,851
            
            
            47
            %Other
                current assets
            
            
            243,409
            
            
            480,328
            
            
            (236,919
            )
            
            -49
            %Current
                assets
            
            
            9,837,316
            
            
            7,346,722
            
            
            2,490,594
            
            
            34
            %Accounts
                payable and accrued liabilities
            
            
            6,361,379
            
            
            3,938,188
            
            
            2,423,191
            
            
            62
            %Loans
                payable
            
            
            2,554,371
            
            
            440,310
            
            
            2,114,061
            
            
            480
            %Other
                current liabilities
            
            
            221,063
            
            
            2,371,423
            
            
            (2,150,360
            )
            
            -91
            %Current
                Liabilities
            
            
            9,136,813
            
            
            6,749,921
            
            
            2,386,892
            
            
            35
            %Net
                working capital
            
            
            700,503
            
            
            596,801
            
            
            103,702
            
            
            17
            %




38




During
        the three month period ended June 30, 2008, the Company, having produced
        a net
        loss of $285,068, generated $470,428 of cash to fund Operating Activities
        from
        continuing operations. Excluding working capital items, the Company used
        $93,672
        of cash to fund Operating Activities from continuing operations. During the
        three month period ended June 30, 2007, the Company, having produced a net
        loss
        of $712,252, generated $593,030 of cash to fund Operating Activities from
        continuing operations. Excluding working capital items, the Company generated
        $39,750 of cash to fund Operating Activities from continuing
        operations.


An
      analysis of the three month periods is as follows:


**Three
                    Months Ended June 30,****2008**
                
                **2007**
                
                **Change****$**
                
                **$**
                
                **$**Net
                    (loss) income
                
                
                (285,068
                )
                
                (712,252
                )
                
                427,184Net
                    adjustments to reconcile net profit (loss) to cash generated
                    by (used in)
                    operating activities
                
                
                191,396
                
                
                752,002
                
                
                (560,606
                )(93,672
                )
                
                39,750
                
                
                (133,422
                )Change
                    in accounts receivable and other receivables
                
                
                (556,493
                )
                
                (395,051
                )
                
                (161,442
                )Change
                    in accounts payable and accrued liabilities
                
                
                1,176,799
                
                
                823,669
                
                
                353,130Change
                    in other current assets and current liabilities
                
                
                (56,206
                )
                
                124,662
                
                
                (180,868
                )Net
                    cash generated by (used in) operating activities from continuing
                    operations
                
                $
                470,428
                
                $
                593,030
                
                
                (122,602
                )








During
      the twelve month period ended June 30, 2008, the Company, having produced a
      net
      loss of $3,120,523 used $1,026.474 of cash to fund Operating Activities from
      continuing operations. Excluding working capital items, the Company used
      $402,244, of cash to fund Operating Activities from continuing operations.
      During the twelve month period ended June 30, 2007, the Company, having produced
      a net loss of $2,370,754 used $2,271,031 of cash to fund Operating Activities
      from continuing operations. Excluding working capital items, the Company
      generated $68,725 of cash to fund Operating Activities from continuing
      operations.





An
      analysis of the twelve month periods is as follows:


**Twelve Months Ended June 30,****2008**
              
              **2007**
              
              **Change****$**
              
              **$**
              
              **$**Net
                  loss
              
              
              (3,120,523
              )
              
              (2,370,754
              )
              
              (749,769
              )Net
                  adjustments to reconcile net profit (loss) to cash generated by
                  (used in)
                  operating activities
              
              
              2,718,279
              
              
              2,439,479
              
              
              278,800(402,244
              )
              
              68,725
              
              
              (470,969
              )Change
                  in accounts receivable and other receivables
              
              
              (1,268,813
              )
              
              (1,717,764
              )
              
              448,951Change
                  in accounts payable and accrued liabilities
              
              
              1,087,289
              
              
              (599,436
              )
              
              1,686,725Change
                  in other current assets and current liabilities
              
              
              (442,706
              )
              
              (22,556
              )
              
              (420,150
              )Net
                  cash generated by (used in) operating activities from continuing
                  operations
              
              $
              (1,026,474
              )
              $
              (2,271,031
              )
              
              1,244,557




During
      the three and twelve month periods ended June 30, 2008, we mainly financed
      our
      operations through the Senior Secured OID Convertible Debenture financing,
      the
      Senior Secured Working Capital Note and the cash flows generated by Avensys
      through the sales of products and services.





Selected
      Balance Sheet information:





**As
                of June 30,****2008**
            
            **2007****$**
            
            **$**Total
                Assets
            
            
            21,340,474
            
            
            18,193,489Current
                Liabilities
            
            
            9,136,813
            
            
            6,749,921Long-Term
                Liabilities
            
            
            4,560,670
            
            
            2,708,476Non-Controlling
                Interest
            
            
            7,677
            
            
            23,193Total
                Stockholder's Equity
            
            
            7,635,314
            
            
            8,711,899





39





The
      increase in total assets is attributable to increases in accounts receivable
      of
      $1,381,763, from $3,739,295 to $5,121,058, increases in inventories of $699,851,
      from $1,478,835 to $2,178,686, increases in net property and equipment of $
      210,242, from $2,279,973 to $2,490,215, and increases in goodwill of $527,992,
      from $4,116,872 to $4,644,864. The increase in current liabilities is mainly
      attributable to an increase in trade accounts payable of $2,423,191, from
      $3,938,188 to $6,361,379, and an increase in bank and other loans payable of
      $2,085,955, from $345,993 to $2,431,948, offset by a decrease in the current
      portion of convertible debentures of $1,568,519, from $1,568,519 to zero, and
      a
      decrease in the current liabilities of discontinued operations of $674,659,
      from
      $762,904 to $88,245. The increase in long-term liabilities is attributable
      to an
      increase in the balance of purchase price payable of $512,267, from $1,194,096
      to $1,706,363, and an increase in derivative financial instruments of
      $1,299,033, from $64,510 to $1,363,543 due to the addition of the Convertible
      Note.





The
      changes in current assets, fixed assets, goodwill, and current liabilities
      are
      partly attributed to the acquisition of the assets of Willer Engineering
      Limited, which impacted the balance sheet of the Company as
      follows:





$Accounts
                receivable
            
            
            791,075Inventories
            
            
            258,051Prepaid
                expenses and deposits
            
            
            41,516Property
                and equipment
            
            
            96,610Customer
                Relationships
            
            
            203,982Trade
                Names
            
            
            112,778Goodwill
            
            
            343,485Accounts
                payable and accrued liabilities
            
            
            (1,381,436
            )466,061




As
      of
      June 30, 2008, the Company had 99,036,152 issued and outstanding shares compared
      to 93,437,654 on June 30, 2007. The increase in common shares is mainly due
      to
      the issuance of 649,955 common shares in connection with the Series B Notes,
      the
      issuance of 2,759,235 common shares in connection with the cashless exercise
      of
      warrants, and the issuance of 1,477,273 common shares for placement agent fees
      in connection with the Senior Secured OID Convertible Debenture.


Stock
      options outstanding at June 30, 2008 totaled 10,036,773 at a weighted average
      exercise price of $0.35 and have a weighted average remaining contractual life
      of 4.05 years. Stock options outstanding at June 30, 2007 totaled 8,661,070
      at a
      weighted average exercise price of $0.42 and had a weighted average remaining
      contractual life of 5.26 years.





Senior
      Secured OID Convertible Debenture





During
      the first quarter of fiscal 2008, the Company redeemed its Series B Subordinated
      Secured Convertible Promissory Notes and its Original Issue Discount Series
      B
      Subordinated Secured Convertible Promissory Notes, both originally due February
      11, 2009 (collectively the “Notes”). Under an arrangement with a majority of the
      holders of the Notes, the Company also redeemed half of the associated Series
      Y
      and Series Z Warrants (collectively the “Warrants”) previously issued in August
      2006 and November 2006 relating to the redeemed Notes. The total purchase price
      for the redemption of the Notes and half of the Warrants was $3.4 million.
      The
      remaining half of the Warrants that are retained by the holders of the Notes
      will have their exercise prices reduced to and fixed at $0.11 per share, with
      no
      further ratchet or anti-dilution provisions.





40




In
      connection with the redemption of the Notes, the Company recorded a non-cash
      charge of $1,422,577 in the first quarter which is included as part of Other
      Expenses in the Statement of Operations and Comprehensive Loss.





As
      a
      result of the redemption of the Notes, the security relating to the Notes has
      been released.





In
      connection with the redemption of the Notes described in Note 15(a), the Company
      received a $3.4 million secured loan facility from Imperium Master Fund, LTD
      (the “Investor”). The terms of the loan facility state that interest will be
      paid by the Company on the unpaid principal amount at an annual rate equal
      to
      8.5%. It was the intention of the Company and the Investor to replace the
      secured loan facility with a comprehensive refinancing to facilitate a capital
      restructuring that would provide the Company with additional working capital
      and
      credit facilities. On September 24, 2007, the Company entered into a Securities
      Purchase and Loan Agreement (“SPL Agreement”) with the Investor for the sale of
      a 6% Original Issue Discount Senior Secured Convertible Note (“Convertible
      Note”) in the amount of $4,708,900. The principal value and the gross proceeds
      of the Convertible Note is $4,000,000. The gross proceeds were used to repay
      the
      secured loan facility of $3.4 million, with the balance of funds, $0.6 million,
      for the Company’s working capital purposes.





The
      Convertible Note matures on September 24, 2012 and the original principal amount
      is convertible into common shares of the Company at a conversion price of $0.11.
      The principal value will accrete to the value of the Convertible Note over
      a
      two-year period and will subsequently accrue interest at 6%. Monthly
      installments of principal and interest will be payable commencing after the
      second year up to the maturity date. The SPL Agreement also provides the holder
      of the Convertible Note with Series Q warrants to purchase, subject to
      adjustment, 20,276,190 shares of the Company’s outstanding common stock on a
      fully diluted basis. On August 22, 2007, the Company issued to the holder of
      the
      Convertible Note Series P warrants, representing compensation for advisory
      services rendered to the Company, to purchase up to 5% of the Company’s
      outstanding common stock, initially amounting to 8,091,403 shares and subject
      to
      adjustment, on a fully diluted basis. In addition, the SPL Agreement provides
      the Company with a $2,500,000 Working Capital Facility.





In
      connection with this financing, specifically the shares to be received upon
      potential conversion of the Convertible Note and the exercise of the Warrants,
      the Company was obligated to file a registration statement with the Securities
      and Exchange Commission (“SEC”). The registration statement was filed with the
      SEC and became effective as of January 14, 2008.





To
      secure
      payment of the principal amount of the Convertible Note, the Company
      hypothecated, in favor of the holder of the Convertible Note, the universality
      of all of the immoveable and moveable assets, corporeal and incorporeal, present
      and future of the Company.





The
      Convertible Note contains events of default that would permit the Investor
      to
      demand repayment. At June 30, 2008, certain failed covenants with a financial
      institution triggered a cross-default clause within the Convertible Note.
      However, subsequent to year-end, the Company has obtained waivers with respect
      to the cross-default clause for the Working Senior Secured Convertible
      Debenture.





41




The
      SPL
      with respect to this Convertible Note contains certain covenants (a) related
      to
      the conduct of the business of the Company and its subsidiaries; (b) related
      to
      certain financial covenants; (c) related to creation or assumption of liens
      other than liens created pursuant to the SPL, as defined in the SPL; (d) for
      so
      long as this Note remains outstanding, the Company shall not, without the
      consent of the holder of the Convertible Note, create, incur, guarantee, issue,
      assume or in any manner become liable in respect of any indebtedness, other
      than
      permitted indebtedness, or issue other securities that rank senior to this
      Convertible Note provided however that the Company could have a certain maximum
      amount of outstanding bank debt.





Critical
      Accounting Policies and Estimates





The
      accompanying management discussion and analysis of our results of operations
      and
      financial condition are based on our consolidated financial statements, which
      are prepared in accordance with accounting principles generally accepted in
      the
      United States of America (U.S. GAAP). The preparation of financial statements
      in
      conformity with United States Generally Accepted Accounting Principles requires
      management to make estimates and assumptions that affect the reported amount
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from those
      estimates. Our management routinely makes estimates about the effects of matters
      that are inherently uncertain. These estimates form the basis for making
      judgments about the financial position and results of operations, which are
      integral to understanding the Company’s financial statements. We base our
      estimates and judgments on historical experience and on other assumptions that
      we believe are reasonable under the circumstances. However, future events cannot
      be forecasted with certainty and the best estimates and judgments routinely
      require adjustments. We are required to make estimates and judgments in many
      areas, including those related to fair value of derivative financial
      instruments, recording of various accruals, bad debts and inventory reserves,
      the useful lives of long-lived assets such as property and equipment, warranty
      obligations and potential losses from contingencies and litigation. We believe
      the policies disclosed are the most critical to our financial statements because
      their application places the most significant demands on management’s judgment.
      Senior management has discussed the development, selection and disclosure of
      these estimates with the Audit Committee of our Board of Directors.





There
      have been no significant changes during the fiscal year 2008 to the items that
      we disclosed as our critical accounting policies and estimates in our discussion
      and analysis of financial condition and results of operations in our Form 10-K
      for the fiscal year ended June 30, 2008, except as noted below for stock-based
      compensation.





Stock-Based
      Compensation Expense





Effective
      July 1, 2006, we adopted Statement of Financial Accounting Standards No. 123
      (Revised 2004), “Share-Based Payment. SFAS 123(R) requires the recognition of
      the fair value of stock-based compensation as an expense in the calculation
      of
      net income. Under the fair value recognition provisions of SFAS 123(R),
      stock-based compensation cost is estimated at the grant date based on the fair
      value of the award and is recognized as expense ratably over the requisite
      service period of the award. Determining the appropriate fair value model and
      calculating the fair value of stock-based awards requires judgment, including
      estimating stock price volatility and expected lives. The Company has elected
      the modified prospective transition method for adopting FAS 123(R). Under this
      method, the provisions of FAS 123(R) apply to all stock-based awards granted
      or
      modified after the July 1, 2006 effective date. The unrecognized expense of
      awards not yet vested as of July 1, 2006, is also recognized as an expense
      in
      the calculation of net income.





42




Fair
      Value of Financial Instruments





The
      fair
      value of cash and cash equivalents, accounts receivable, restricted marketable
      securities, accounts payable and accrued liabilities are comparable to the
      carrying amount thereof given their short-term maturity. Bank and other loans
      payable, mortgage loan, capital lease obligations and due to related parties
      are
      recorded at their carrying values which also approximate their fair values.
      Other debt instruments, such as the convertible debentures, balance of purchase
      price payable and the derivative financial instrument, have been recorded at
      discounted values, present values or fair values depending on the nature of
      the
      debt instrument.





Impairment
      of Long-Lived Assets





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets”, the Company tests long-lived assets or asset groups for
      future recoverability when events or changes in circumstances indicate that
      their carrying amount may not be recoverable. Circumstances which could trigger
      a review include, but are not limited to significant decreases in the market
      price of the asset; significant adverse changes in the business climate or
      legal
      factors, accumulation of costs significantly in excess of the amount originally
      expected for the acquisition or construction of the asset, current period cash
      flow or operating losses combined with a history of losses or a forecast of
      continuing losses associated with the use of the asset, and current expectation
      that the asset will more likely than not be sold or disposed significantly
      before the end of its estimated useful life. The Company’s long-lived assets
      consist primarily of property and equipment and intangible assets.





Recoverability
      of a long-lived asset is assessed by comparing the carrying amount of the asset
      to the sum of the estimated undiscounted future cash flows expected from its
      use
      and the eventual disposal of the asset. An impairment loss is recognized when
      the carrying amount of a long-lived asset is not recoverable and the amount
      of
      such impairment loss is determined as the excess of the carrying amount over
      the
      asset’s fair value.





Business
      Combinations and Goodwill





Acquisitions
      of businesses are accounted for using the purchase method and, accordingly,
      the
      results of operations of the acquired businesses are included in the
      Consolidated Statement of Operations effective from their respective dates
      of
      acquisition.





Goodwill
      represents the excess of the purchase price of acquired businesses over the
      fair
      values of the identifiable tangible and intangible assets acquired and
      liabilities assumed. Pursuant to SFAS No. 141, the Company does not amortize
      goodwill, but tests for impairment of goodwill annually. The Company evaluates
      the carrying value of goodwill in accordance with the guidelines set forth
      in
      Statement of Financial Accounting Standards No. 142, “Goodwill and Other
      Intangible Assets” (SFAS142). Management tests for impairment of goodwill on an
      annual basis and at any other time if events occur or circumstances change
      that
      would indicate that it is more likely than not that the fair value of the
      reporting unit has been reduced below its carrying amount. Factors considered
      important which could trigger an impairment review include, but are not limited
      to, significant underperformance relative to expected historical or projected
      future operating results, significant changes in the manner of use of the
      acquired assets or the strategy for the overall business, significant negative
      industry or economic trends, a significant decline in the stock price for a
      sustained period and the Company’s market capitalization relative to net book
      value.





43




The
      goodwill impairment test is a two-step process. Step one consists of a
      comparison of the fair value of a reporting unit with its carrying amount,
      including the goodwill allocated to the reporting unit. Measurement of the
      fair
      value of a reporting unit may be based on one or more fair value measures
      including present value techniques of estimated future cash flows and estimated
      amounts at which the unit as a whole could be bought or sold in a current
      transaction between willing parties. If the carrying amount of the reporting
      unit exceeds the fair value, step two requires the fair value of the reporting
      unit to be allocated to the underlying tangible and intangible assets and
      liabilities of that reporting unit, resulting in an implied fair value of
      goodwill. If the carrying amount of the goodwill of the reporting unit exceeds
      the implied fair value of that goodwill, an impairment loss equal to the excess
      is recorded in the Consolidated Statement of Operations and Comprehensive Loss.





Research
      and Development Expenses and Investment Tax Credits





Research
      and development expenses are expensed as they are incurred. Investment tax
      credits (“ITCs”) arising from research and development activities are accounted
      for as a reduction of the income tax provision for the year. Refundable tax
      credits and non-refundable tax credits are recorded in the year in which the
      related expenses are incurred, provided there is reasonable assurance that
      the
      credits will be realized.





The
      Company is subject to examination by taxation authorities in various
      jurisdictions. The determination of tax liabilities and ITCs recoverable involve
      certain uncertainties in the interpretation of complex tax regulations. As
      a
      result, the Company provides potential tax liabilities and ITC’s recoverable
      based on Management’s best estimates. Differences between the estimates and the
      ultimate amounts of taxes and ITCs are recorded in earnings at the time they
      can
      be determined.





Income
      Taxes





The
      Company utilizes the tax liability method to account for income taxes as set
      forth in SFAS No. 109, "Accounting for Income Taxes" (SFAS109). Under this
      method, deferred future income tax assets and liabilities are determined based
      on the differences between the carrying value and the tax bases of assets and
      liabilities.





This
      method also requires the recognition of deferred income tax benefits and a
      valuation allowance is recognized to the extent that, in the opinion of
      Management, it is more likely than not that the future income tax assets will
      not be realized. The Company has incurred U.S. operating losses, as at June
      30,
      2008, of approximately $23.9 million from its inception which are available
      and
      which expire starting in 2022. The Company has incurred Canadian operating
      losses, as at June 30, 2008, of approximately $3.3 million from its inception
      which are available and which expire starting in 2015. For Canadian income
      tax
      purposes, the Company also has, as at June 30, 2008, approximately $3.7 million
      of Scientific Research and Experimental Development unclaimed expenses available
      indefinitely to reduce taxable income in future years. The potential benefit
      of
      net operating losses has not been recognized in these financial statements
      because the Company cannot be assured it is more likely than not it will utilize
      the net operating losses carried forward in future years.





44




Deferred
      income tax assets and liabilities are measured by applying enacted or
      substantively enacted tax rates and laws at the date of the financial statements
      for the years in which the differences are expected to reverse.





Derivative
      instruments





In
      connection with the sale of debt or equity instruments, we may sell options
      or
      warrants to purchase our common stock. In certain circumstances, these options
      or warrants may be classified as derivative liabilities, rather than as equity.
      Additionally, the debt or equity instruments may contain embedded derivative
      instruments, such as conversion options, which in certain circumstances may
      be
      required to be bifurcated from the associated host instrument and accounted
      for
      separately as a derivative instrument liability.





The
      identification of, and accounting for, derivative instruments is complex. Our
      derivative instrument liabilities are re-valued at the end of each reporting
      period, with changes in the fair value of the derivative liability recorded
      as
      charges or credits to income, in the period in which the changes occur. For
      options, warrants and bifurcated conversion options that are accounted for
      as
      derivative instrument liabilities, we determine the fair value of these
      instruments using the Black-Scholes option pricing model. That model requires
      assumptions related to the remaining term of the instruments and risk-free
      rates
      of return, our current common stock price and expected dividend yield, and
      the
      expected volatility of our common stock price over the life of the option.
      Due
      to the fact that the trading history for our common stock is limited, we have
      estimated the future volatility of our common stock price based on not only
      the
      history of our stock price but also the experience of other entities considered
      comparable to us. The identification of, and accounting for, derivative
      instruments and the assumptions used to value them can significantly affect
      our
      financial statements.





Recent
      Accounting Pronouncements





a)
      Recent
      Accounting Pronouncements Adopted During 2008





The
      Company, as required, adopted the provisions of Financial Standards Accounting
      Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN
      48”), an interpretation of FASB Statement No. 109 “Accounting for Income Taxes”
(“SFAS 109”), effective July 1, 2007. FIN 48 clarifies the accounting for income
      taxes by prescribing a minimum recognition threshold and a measurement attribute
      for the financial statement recognition and measurement of a tax position taken
      or expected to be taken in a tax return. With respect to a minimum recognition
      threshold, FIN 48 requires that the Company recognize, in its financial
      statements, the impact of a tax position if that position is more likely than
      not of being sustained on an audit, based on the technical merits of the
      position. In addition, FIN 48 specifically excludes income taxes from the scope
      of Statement of Financial Accounting Standards No. 5, “Accounting for
      Contingencies”. FIN 48 applies to all tax positions related to income taxes that
      are subject to SFAS 109, including tax positions considered to be routine.
      As a
      result of the implementation, no adjustment was required to the amount of the
      unrecognized tax benefits.





The
      Company recognizes interest and penalties related to uncertain tax positions
      in
      interest expense. At July 1, 2007, the Company had $168,230 in unrecognized
      tax
      benefits which would favorably impact the Company’s effective tax rate if
      subsequently recognized. The amount of unrecognized tax benefits was $290,859
      at
      June 30, 2008.




45


The
      Company and its subsidiaries file income tax returns in Canadian and U.S.
      federal jurisdictions, and various provincial jurisdictions. The Company is
      subject to Canadian and provincial income tax examination for fiscal years
      2003
      through 2007. The Company is subject to U.S. federal income tax examination
      by
      U.S. tax authorities for all taxation years since its inception.





In
      addition, upon inclusion of the Canadian operating losses and Experimental
      Development unclaimed expenses carryforward tax benefits, from prior tax years,
      in future tax returns, the related tax benefit for the period in which the
      benefit arose may be subject to examination.





b)
      Recent
      Accounting Pronouncements Adopted During Fiscal Year 2007





In
      May
      2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections -
      a
      replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 replaces
      APB Opinion No. 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes
      in Interim Financial Statements, changes the requirements for the accounting
      for
      and reporting of a change in accounting principle. SFAS 154 applies to all
      voluntary changes in accounting principle. It also applies to changes required
      by an accounting pronouncement in the unusual instance that the pronouncement
      does not include specific transition provisions. SFAS 154 provides guidance
      on
      the accounting for and reporting of accounting changes and error corrections.
      It
      establishes, unless impracticable, retrospective application as the required
      method for reporting a change in accounting principle in the absence of explicit
      transition requirements specific to the newly adopted accounting principle.
      It
      also provides guidance for determining whether retrospective application of
      a
      change in accounting principle is impracticable and for reporting a change
      when
      retrospective application is impracticable. The correction of an error in
      previously issued financial statements is not an accounting change. However,
      the
      reporting of an error correction involves adjustments to previously issued
      financial statements similar to those generally applicable to reporting an
      accounting change retrospectively. Therefore, the reporting of a correction
      of
      an error by restating previously issued financial statements is also addressed
      by this Statement. The provisions of SFAS 154 apply for accounting changes
      and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      Early adoption is permitted for accounting changes and corrections of errors
      made in fiscal years beginning after May 2005. SFAS 154 does not change the
      transition provisions of any existing accounting pronouncements. This FASB
      Statement was implemented by the Company commencing July 1, 2006 and such did
      not have a material effect on the Company's results of operations or financial
      position.





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current year Financial Statements (“SAB 108”). SAB
      108 provides interpretive guidance on how the effects of prior year uncorrected
      misstatements should be considered when quantifying misstatements in the current
      year financial statements. SAB 108 requires registrants to quantify
      misstatements using both an income statement (“rollover”) and balance sheet
      (“iron curtain”) approach and evaluate whether either approach results in a
      misstatement that, when all relevant quantitative and qualitative factors are
      considered, is material. If prior year errors that had been previously
      considered immaterial now are considered material based on either approach,
      no
      restatement is required so long as management properly applied its previous
      approach and all relevant facts and circumstances were considered. If prior
      years are not restated, the cumulative effect adjustment is recorded in opening
      accumulated earnings as of the beginning of the fiscal year of adoption. SAB
      108
      is effective for fiscal years ending after November 15, 2006.


46





The
      Company initially applied the provisions of SAB 108 during the year ended June
      30, 2007, prior to which, the Company evaluated misstatements using only the
      iron curtain method. In applying the provisions of SAB 108, the Company made
      a
      cumulative effect adjustment to correct an error, which originated during the
      year ended June 30, 2005 and which had previously been, and continues to be,
      considered to be immaterial to the financial statements for that fiscal year.
      This error resulted from the use of an exchange rate other than the current
      exchange rate to translate the elements related to certain intangible assets
      and
      goodwill from the functional currency to the reporting currency. The carrying
      values of intangible assets and goodwill should have been translated at the
      exchange rate at the balance sheet date and the amortization expense related
      to
      intangible assets and impairment charge for goodwill should have been translated
      at the average exchange rate for the year. The following summarizes the impact
      of the error on the financial statements for the year ended June 30, 2006,
      along
      with the adjustments made to the corresponding accounts as of July 1,
      2006:





Account
            
            Cumulative impact as at June 30,
              2006 of the misstatement
              originating during the year ended
              June 30, 2005
            
            Adjustments recorded
              as of July 1, 2006Understatement
                of intangible assets
            
            
            554,017
            
            
            554,017Understatement
                of goodwill
            
            
            171,736
            
            
            171,736Understatement
                of accumulated other comprehensive income
            
            
            992,458
            
            
            (992,458
            )Understatement
                of net loss
            
            
            266,705
            
            
            -Overstatement
                of comprehensive loss
            
            
            725,753
            
            
            -Understatement
                of deficit
            
            
            266,705
            
            
            266,705





c)
      Recent
      Accounting Pronouncements Not Yet Adopted





In
      September 2006, FASB issued Statement of Financial Accounting Standards No.
      157
      (“SFAS 157”), “Fair Value Measurements”, which defines fair value, establishes
      guidelines for measuring fair value and expands disclosures regarding fair
      value
      measurements. SFAS 157 does not require any new fair value measurements but
      rather eliminates inconsistencies in guidance found in various prior accounting
      pronouncements. SFAS 157 was initially effective for fiscal years beginning
      after November 15, 2007. FASB Staff Position FAS 157-2 (FSP 157-2), deferred
      the
      effective date for non-financial assets of SFAS 157 to fiscal years beginning
      after November 15, 2008. Earlier adoption is permitted, provided the company
      has
      not yet issued financial statements, including for interim periods, for that
      fiscal year. The Company is evaluating the impact of the adoption of this
      standard on its consolidated financial position and results of
      operations.


47





In
      February 2007, FASB issued SFAS No.159, “The Fair Value Option for Financial
      Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies the
      option, at specified election dates, to measure financial assets and liabilities
      at their current fair value, with the corresponding changes in fair value from
      period to period recognized in the income statement. Additionally, SFAS 159
      establishes presentation and disclosure requirements designated to facilitate
      comparisons between companies that choose different measurement attributes
      for
      similar assets and liabilities. SFAS 159 is effective as of the beginning of
      the
      first fiscal year that begins after November 15, 2007. The Company is evaluating
      the impact of the adoption of this standard on its consolidated financial
      position and results of operations.





In
      June
      2007, FASB issued EITF Issue 07-3 “Accounting for Advance Payments for Goods or
      Services to Be Used in Future Research and Development Activities” (EITF 07-3).
      The scope of this issue is limited to non-refundable advance payments for goods
      and services related to research and development activities. EITF 07-3 requires
      that all non-refundable advance payments for R&D activities that will be
      used in future periods be capitalized until used. In addition, the deferred
      research and development costs need to be assessed for recoverability. The
      Company is required to adopt EITF 07-3 effective July 1, 2008. As of June 30,
      2008, the Company does not have any arrangements that would be subject to the
      scope of EITF 07-3.





In
      December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations”
(“SFAS 141R”), which replaces SFAS No. 141, Business Combinations. SFAS 141R
      expands the definition of a business combination and requires the acquisition
      method of accounting to be used for all business combinations and an acquirer
      to
      be identified for each business combination. SFAS 141R also requires that all
      assets, liabilities, contingent considerations, and contingencies of an acquired
      business be recorded at fair value at the acquisition date. In addition, SFAS
      141R establishes requirements in the recognition of acquisition costs,
      restructuring costs and changes in accounting for deferred tax asset valuation
      allowances and acquired income tax uncertainties. SFAS 141R is to be applied
      prospectively to business combinations for which the acquisition date is on
      or
      after the beginning of the first annual reporting period beginning on or after
      December 15, 2008. Earlier adoption is prohibited. The Company is currently
      evaluating the impact of the adoption of the provisions of SFAS 141R on its
      consolidated financial statements.





In
      December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in
      Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS 160”).
      SFAS 160 establishes new accounting and reporting standards for the
      non-controlling interest in a subsidiary and for the deconsolidation of a
      subsidiary. Specifically, SFAS 160 requires the recognition of a non-controlling
      interest (minority interest) as equity in the consolidated financial statements
      and separate from the parent’s equity. The amount of net income attributable to
      the non-controlling interest will be included in consolidated net income on
      the
      face of the income statement. SFAS 160 clarifies that changes in a parent’s
      ownership interest in a subsidiary that do not result in deconsolidation are
      equity transactions if the parent retains its controlling financial interest.
      In
      addition, SFAS 160 requires that a parent recognize a gain or loss in net income
      when a subsidiary is deconsolidated. Such gain or loss will be measured using
      the fair value of the non-controlling equity investment on the deconsolidation
      date. SFAS 160 also includes expanded disclosure requirements regarding the
      interests of the parents and its non-controlling interest. SFAS is effective
      for
      fiscal years, and interim periods within those fiscal years, beginning on or
      after December 15, 2008. Earlier adoption is prohibited. The Company is
      currently evaluating the impact of the adoption of the provisions of SFAS 160
      on
      its consolidated financial statements.


48





In
      March
      2008, FASB issued FASB Statement No. 161, “Disclosures about Derivative
      Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires disclosure
      of the fair values of derivative instruments and their gains and losses in
      a
      tabular format. It also requires disclosure of additional information about
      an
      entity’s liquidity by requiring disclosure of derivative features that are
      credit risk-related. Finally, it requires cross-referencing within footnotes
      to
      enable financial statement users to locate important information about
      derivative instruments. SFAS 161 is effective for financial statements issued
      for fiscal years and interim periods beginning after November 15, 2008. Earlier
      adoption is permitted. The Company is currently evaluating the impact of the
      adoption of the provisions of SFAS 161 on its consolidated financial
      statements.





In
      April
      2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP)
      FAS 142-3, “Determination of the Useful Life of Intangible Assets,” to provide
      guidance for determining the useful life of recognized intangible assets and
      to
      improve consistency between the period of expected cash flows used to measure
      the fair value of a recognized intangible asset and the useful life of the
      intangible asset as determined under Statement 142. The FSP requires that an
      entity consider its own historical experience in renewing or extending similar
      arrangements. However, the entity must adjust that experience based on
      entity-specific factors under FASB Statement 142, Goodwill and Other Intangible
      Assets. FSP FAS 142-3 is effective for fiscal years and interim periods that
      begin after November 15, 2008. The Company intends to adopt FSP FAS 142-3
      effective July 1, 2009 and to apply its provisions prospectively to recognized
      intangible assets acquired after that date.





In
      May
      2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP)
      APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in
      Cash upon Conversion (Including Partial Cash Settlement),” to require issuers of
      convertible debt to account separately for the liability and equity components
      of these instruments if they have stated terms permitting cash settlement upon
      conversion. This practice marks a significant change from the current accounting
      practice for convertible debt instruments in the scope of the FSP. Current
      practice does not require separation of the liability and equity components
      of
      such instruments. Separately accounting for these instruments’ liability and
      equity components results in the recording of more interest cost over the life
      of the convertible debt instrument, because of an initial debt discount. FSP
      APB
      14-1 is effective for fiscal years beginning after December 15, 2008 and interim
      periods within those fiscal years. The Company intends to adopt FSP APB 14-1
      effective July 1, 2009 and apply its provisions retrospectively to all periods
      presented in its financial statements. The Company has issued convertible debt
      instruments and is in the process of evaluating the impact that the adoption
      of
      FSP APB 14-1 will have on its financial statements.





In
      June
      2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP)
      EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
      Transactions Are Participating Securities,” to clarify that all outstanding
      unvested share-based payment awards that contain nonforfeitable rights to
      dividends or dividend equivalents, whether paid or unpaid, are participating
      securities. An entity must include participating securities in its calculation
      of basic and diluted earnings per share (EPS) pursuant to the two-class method,
      as described in FASB Statement 128, Earnings per Share. FSP EITF 03-6-1 is
      effective for fiscal years beginning after December 15, 2008 and interim periods
      within those fiscal years. The Company intends to adopt FSP EITF 03-6-1
      effective July 1, 2009 and apply its provisions retrospectively to all
      prior-period EPS data presented in its financial statements. The Company does
      not issue share-based payment awards that contain nonforfeitable rights to
      dividends and, as a result, does not believe that the adoption of FSP EITF
      03-6-1 will have a significant effect on its financial
      statements.


49





In
      June
      2008, the Financial Accounting Standards Board ratified a consensus opinion
      reached by the Emerging Issues Task Force (EITF) on EITF Issue 08-4, “Transition
      Guidance for Conforming Changes to Issue No. 98-5,” to provide transition
      guidance for conforming changes made to the abstract for EITF Issue 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
      Contingently Adjustable Conversion Ratios,” relating to EITF Issue 00-27,
“Application of Issue No. 98-5 to Certain Convertible Instruments,” and FASB
      Statement 150, Accounting for Certain Financial Instruments with Characteristics
      of both Liabilities and Equity. The Company intends to adopt EITF Issue 08-4
      effective June 30, 2009 and apply its provisions retrospectively to all periods
      presented in its financial statements. The Company is in the process of
      evaluating the impact that the adoption of the EITF Issue will have on its
      financial statements.





In
      June
      2008, the Financial Accounting Standards Board ratified a consensus opinion
      reached by the Emerging Issues Task Force (EITF) on EITF Issue 07-5,
“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
      Entity’s Own Stock,” to provide guidance for determining whether an
      equity-linked financial instrument or embedded feature is considered indexed
      to
      an entity’s own stock. The consensus establishes a two-step approach as a
      framework for determining whether an instrument or embedded feature is indexed
      to an entity’s own stock. The approach includes evaluating (1) the instrument’s
      contingent exercise provisions, if any, and (2) the instrument’s settlement
      provisions. EITF Issue 07-5 applies to (i) any freestanding financial instrument
      or embedded feature that has all the characteristics of a derivative in
      paragraphs 6-9 of FASB Statement 133, Accounting for Derivative Instruments
      and
      Hedging Activities, for purposes of evaluating whether the financial instrument
      or embedded feature qualifies for the first part of the scope exception in
      paragraph 11(a) of Statement 133, and (ii) any freestanding financial
      instruments that are potentially settled in an entity’s own stock, regardless of
      whether they have all the characteristics of a derivative in paragraphs 6-9
      of
      Statement 133, for the purpose of determining whether those instruments are
      within the scope of EITF Issue 00-19, “Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”.
      Entities that issue financial instruments such as warrants or options on their
      own shares, convertible debt, convertible preferred stock, forward contracts
      on
      their own shares, or market-based employee stock option valuation instruments
      will be affected by EITF Issue 07-5. The Company intends to adopt EITF Issue
      07-5 effective January 1, 2009 and apply its provisions to its outstanding
      instruments as of that date. The cumulative effect of the change in accounting
      principle, if any, will be recognized as an adjustment to the opening balance
      of
      retained earnings for that fiscal year. The Company has periodically issued
      financial instruments indexed to its own stock, in particular convertible debt
      and convertible preferred stock. The Company is in the process of evaluating
      the
      impact that the adoption of EITF Issue 07-5 will have on its financial
      statements.


50


Off-Balance
      Sheet Arrangements





None.


51


**ITEM
      8.**  **FINANCIAL
      STATEMENTS AND SUPPLEMENTAL DATA**





Avensys
      Corporation (formerly Manaris Corporation)


Consolidated
      Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008




IndexReport
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Balance Sheets
            F-2Consolidated
                Statements of Operations and Comprehensive Loss
            F-3Consolidated
                Statements of Cash Flows
            F-4Consolidated
                Statement of Stockholders’ Equity
            F-6Notes
                to Consolidated Financial Statements
            F-7




52





[LETTERHEAD
      OF RAYMOND CHABOT GRANT THORNTON LLP]





**REPORT
      OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors and Shareholders of Avensys Corporation





We
      have
      audited the accompanying consolidated balance sheets of Avensys Corporation
      (formerly Manaris Corporation) and its subsidiaries as of June 30, 2008 and
      2007
      and the related consolidated statements of operations and comprehensive loss,
      cash flows and stockholders’ equity for the years ended June 30, 2008 and 2007.
      These financial statements are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Avensys Corporation and
      its
      subsidiaries as of June 30, 2008 and 2007 and the results of their operations
      and their cash flows for the years then ended in conformity with accounting
      principles generally accepted in the United States of America.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company has incurred significant losses since inception and
      has
      relied on non-operational sources of financing to fund operations, which raise
      substantial doubt about its ability to continue as a going concern. Management’s
      plans in regard to these matters are also described in Note 1. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.





/s/
      Raymond Chabot Grant Thornton LLP





Chartered
      Accountants





Montreal,
      Canada


October
      15, 2008




F-1





Avensys
      Corporation (formerly Manaris Corporation)


Consolidated
      Balance Sheets


(Expressed
      in U.S. Dollars)





June 30,
            
            June 30,2008
            
            2007$
            
            $ASSETSCurrent
                AssetsCash
                and cash equivalents
            
            
            369,396
            
            
            481,023Accounts
                receivable, net of allowance for doubtful accounts of $50,053 and
                $54,128,
                respectively
            
            
            5,121,058
            
            
            3,739,295Other
                receivables (Note 9)
            
            
            1,924,767
            
            
            1,167,241Inventories
                (Note 9)
            
            
            2,178,686
            
            
            1,478,835Prepaid
                expenses and deposits
            
            
            149,213
            
            
            208,914Restricted
                held-to-maturity security
            
            
            -
            
            
            93,861Current
                assets of discontinued operations (Note 4)
            
            
            94,196
            
            
            177,553Total
                Current Assets
            
            
            9,837,316
            
            
            7,346,722Property
                and equipment, net (Note 6)
            
            
            2,490,215
            
            
            2,279,973Intangible
                assets (Note 7)
            
            
            3,879,086
            
            
            3,967,213Goodwill
                (Note 8)
            
            
            4,644,864
            
            
            4,116,872Deferred
                financing costs
            
            
            404,630
            
            
            376,794Deposits
            
            
            84,363
            
            
            105,915Total
                Assets
            
            
            21,340,474
            
            
            18,193,489LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                LiabilitiesAccounts
                payable and accrued liabilities (Note 9)
            
            
            6,361,379
            
            
            3,938,188Bank
                and other loans payable (Note 12)
            
            
            2,431,948
            
            
            345,993Current
                portion of long-term debt (Note 14)
            
            
            122,423
            
            
            94,317Current
                portion of convertible debentures (Note 15)
            
            
            -
            
            
            1,568,519Due
                to related parties (Note 11)
            
            
            40,000
            
            
            40,000Current
                portion of balance of purchase price (Note 5)
            
            
            92,818
            
            
            -Current
                liabilities of discontinued operations (Note 4)
            
            
            88,245
            
            
            762,904Total
                Current Liabilities
            
            
            9,136,813
            
            
            6,749,921Long-term
                debt, less current portion (Note 14)
            
            
            191,352
            
            
            174,412Convertible
                debentures (Note 15)
            
            
            1,299,412
            
            
            1,275,458Balance
                of purchase price payable (Note 5 and 13)
            
            
            1,706,363
            
            
            1,194,096Derivative
                financial instruments (Notes 13 and 15)
            
            
            1,363,543
            
            
            64,510Total
                Liabilities
            
            
            13,697,483
            
            
            9,458,397Non-controlling
                Interest
            
            
            7,677
            
            
            23,193Stockholders’
                EquityCommon
                Stock, 500,000,000 shares authorized with a par value of $0.00001;
                99,036,152 and 93,437,654 issued and outstanding,
                respectively
            
            
            990
            
            
            934Additional
                Paid-in Capital
            
            
            38,223,391
            
            
            36,727,893Accumulated
                other comprehensive income
            
            
            1,817,006
            
            
            1,268,622Deficit
            
            
            (32,406,073
            )
            
            (29,285,550
            )Total
                Stockholders’ Equity
            
            
            7,635,314
            
            
            8,711,899Total
                Liabilities and Stockholders’ Equity
            
            
            21,340,474
            
            
            18,193,489


Going
        Concern (Note 1)
 Contingencies
        (Note 18)
 (The
        Accompanying Notes are an Integral Part of the Consolidated Financial
        Statements)


F-2





Avensys
      Corporation (formerly Manaris Corporation)


Consolidated
      Statements of Operations and Comprehensive Loss


(Expressed
      in U.S. Dollars)





For the Year EndedJune 30,2008
            
            2007$
            
            $Revenue
                (Note 4)
            
            
            21,603,082
            
            
            16,576,124Cost
                of Revenue
            
            
            13,697,851
            
            
            10,473,196Gross
                Margin
            
            
            7,905,231
            
            
            6,102,928Operating
                ExpensesDepreciation
                and amortization
            
            
            970,107
            
            
            851,318Selling,
                general and administration
            
            
            7,213,485
            
            
            6,041,371Research
                and development
            
            
            2,476,823
            
            
            1,571,572Total
                Operating Expenses
            
            
            10,660,415
            
            
            8,464,261Loss
                from Operations
            
            
            (2,755,184
            )
            
            (2,361,333
            )Other
                Income (Expenses)Other
                income (expenses), net
            
            
            57,288
            
            
            172,269Loss
                on redemption of convertible debentures (Note 15(a))
            
            
            (1,422,577
            )
            
            -Interest
                expense, net
            
            
            (702,338
            )
            
            (798,856
            )Debentures
                and balance of purchase price accretion (Notes 13 and 15)
            
            
            (965,429
            )
            
            (2,420,791
            )Change
                in fair value of derivative financial instruments (Notes 13 and 15)
            
            
            936,318
            
            
            1,762,161Total
                Other Income (Expenses)
            
            
            (2,096,738
            )
            
            (1,285,217
            )Net
                Loss Before Income Tax Benefit
            
            
            (4,851,922
            )
            
            (3,646,550
            )Income
                Tax Benefit - Refundable tax credits (Note 19)
            
            
            1,124,819
            
            
            1,217,948Net
                Loss before Non-Controlling Interest
            
            
            (3,727,103
            )
            
            (2,428,602
            )Non-Controlling
                Interest
            
            
            206
            
            
            1,890Net
                Loss from Continuing Operations
            
            
            (3,726,897
            )
            
            (2,426,712
            )Results
                of Discontinued Operations (Note 4)
            
            
            606,374
            
            
            55,958Net
                Loss
            
            
            (3,120,523
            )
            
            (2,370,754
            )Basic
                and diluted earnings (loss) per shareFrom
                continuuing operations
            
            
            (0.04
            )
            
            (0.03
            )From
                discontinued operations
            
            
            0.01
            
            
            -Net
                loss
            
            
            (0.03
            )
            
            (0.03
            )Weighted
                Average Common Shares Outstanding
            
            
            97,408,832
            
            
            82,513,000Statement
                of Comprehensive LossNet
                Income (Loss)
            
            
            (3,120,523
            )
            
            (2,370,754
            )Foreign
                currency translation adjustments
            
            
            548,384
            
            
            592,730Comprehensive
                Loss
            
            
            (2,572,139
            )
            
            (1,778,024
            )


Going
        Concern (Note 1)
 Contingencies
        (Note 18)
 (The
        Accompanying Notes are an Integral Part of the Consolidated Financial
        Statements)


F-3




Avensys
      Corporation (formerly Manaris Corporation)


Consolidated
      Statements of Cash Flows


(Expressed
      in U.S. Dollars)





For
                the Year EndedJune
                30,2008
            
            2007$
            
            $Net
                Loss
            
            
            (3,120,523
            )
            
            (2,370,754
            )Results
                of discontinued operations
            
            
            (606,374
            )
            
            (55,958
            )Adjustments
                to reconcile net loss to cash generated by (used in) operating activitiesStock-based
                compensation
            
            
            249,479
            
            
            453,206Expenses
                settled with issuance of common shares
            
            
            17,500
            
            
            77,102Depreciation
                and amortization
            
            
            1,223,362
            
            
            1,076,845Non-cash
                financial and other expenses
            
            
            300,513
            
            
            120,971Gain
                on disposal of property and equipment
            
            
            (39,718
            )
            
            (308,676
            )Non-controlling
                interest
            
            
            (206
            )
            
            (1,890
            )Loss
                on redemption of convertible debentures (Note 15 (a))
            
            
            1,422,577
            
            
            129,922Debentures
                and balance of purchase price accretion
            
            
            965,429
            
            
            2,420,791Change
                in fair value of derivative financial instruments
            
            
            (936,318
            )
            
            (1,762,161
            )Amortization
                of deferred financing costs
            
            
            122,035
            
            
            289,327Changes
                in operating assets and liabilitiesIncrease
                in accounts receivables
            
            
            (545,739
            )
            
            (989,810
            )(Increase)
                decrease in inventories
            
            
            (574,234
            )
            
            26,995Increase
                in other receivables
            
            
            (723,074
            )
            
            (727,954
            )(Increase)
                decrease in prepaid expenses and other assets
            
            
            131,528
            
            
            (49,551
            )Increase
                (decrease) in accounts payable and accrued liabilities
            
            
            1,087,289
            
            
            (599,436
            )Net
                Cash Generated by (Used In) Operating Activities from Continuing
                Operations
            
            
            (1,026,474
            )
            
            (2,271,031
            )Net
                Cash Generated by (Used In) Operating Activities from Discontinued
                Operations
            
            
            391,533
            
            
            (282,541
            )Net
                Cash (Used In) Operating Activities
            
            
            (634,941
            )
            
            (2,553,572
            )Investing
                ActivitiesAcquisition
                of a business, including transaction costs
            
            
            (293,151
            )
            
            -Purchase
                of property and equipment
            
            
            (761,479
            )
            
            (154,500
            )Disposal
                of property and equipment
            
            
            52,277
            
            
            835,041Deposits
                in trust
            
            
            -
            
            
            79,304Purchase
                of a minority interest
            
            
            (16,982
            )Proceeds
                from the restricted held-to-maturity security
            
            
            93,861
            
            
            -Net
                Cash Generated by (Used in) Investing Activities from Continuing
                Operations
            
            
            (925,474
            )
            
            759,845Net
                Cash Generated by (Used in) Investing Activities from Discontinued
                Operations
            
            
            -
            
            
            (2,553
            )Net
                Cash Generated by (Used in) Investing Activities
            
            
            (925,474
            )
            
            757,292Financing
                ActivitiesProceeds
                (repayment) of bank and working capital credit line
            
            
            1,593,658
            
            
            (715,708
            )Repayment
                of senior convertible debt
            
            
            -
            
            
            (774,073
            )Repayment
                of convertible debentures
            
            
            (533,304
            )
            
            -Proceeds
                from issue of senior secured convertible debentures (Note 15 (b))
            
            
            3,726,621
            
            
            3,179,849Redemption
                of secured convertible debentures (Note 15 (a))
            
            
            (3,440,421
            )
            
            -Long
                term debt proceeds
            
            
            30,015
            
            
            -Long
                term debt repayments
            
            
            (45,798
            )
            
            (74,156
            )Proceeds
                from investment tax credit financing
            
            
            570,071
            
            
            397,099Repayments
                of investment tax credit financing
            
            
            (94,509
            )
            
            (311,983
            )Proceeds
                from capital leases
            
            
            75,311
            
            
            38,770Repayments
                of capital leases
            
            
            (24,688
            )
            
            (29,990
            )Repayment
                of other loans payable
            
            
            -
            
            
            (42,139
            )Deferred
                financing costs
            
            
            (73,678
            )
            
            -Net
                Cash Generated by Financing Activities from Continuing Operations
            
            
            1,783,278
            
            
            1,667,669Net
                Cash Generated by (Used in) Financing Activities from Discontinued
                Operations
            
            
            (352,511
            )
            
            -Net
                Cash Generated by Financing Activities
            
            
            1,430,767
            
            
            1,667,669Effect
                of Exchange Rate Changes on Cash and Cash Equivalents
            
            
            18,021
            
            
            200,398(Decrease)
                Increase in Cash and Cash Equivalents
            
            
            (111,627
            )
            
            71,787Cash
                and Cash Equivalents – Beginning of period
            
            
            481,023
            
            
            409,236Cash
                and Cash Equivalents – End of period
            
            
            369,396
            
            
            481,023




Going
      Concern (Note 1)


Contingencies
      (Note 18)


(The
      Accompanying Notes are an Integral Part of the Consolidated Financial
      Statements)


F-4





Avensys
      Corporation (formerly Manaris Corporation)


Consolidated
      Statements of Cash Flows (continued)


(Expressed
      in U.S. Dollars)





For the Year EndedJune 30,2008
            
            2007$
            
            $Non-Cash
                Financing and Investing ActivitiesIssuance
                of common shares for services
            
            
            -
            
            
            3,640Issuance
                of common shares for late filing of registration statement
            
            
            -
            
            
            73,462Issuance
                of common shares for interest payments
            
            
            -
            
            
            58,410Issuance
                of common shares for repayment of senior convertible notes, Series
                A
            
            
            -
            
            
            341,458Issuance
                of common shares for conversion of senior convertible notes, Series
                A
            
            
            -
            
            
            -Issuance
                of common shares for repayment of secured convertible notes, Series
                B
            
            
            52,186
            
            
            1,034,545Issuance
                of stock options to settle outstanding legal claims
            
            
            -
            
            
            -Issuance
                of common shares for repayment of senior convertible debentures
            
            
            -
            
            
            527,752Issuance
                of common shares pursuant to cashless exercise of warrants (Note
                17(b))
            
            
            28
            
            
            -Issuance
                of stock options for debt settlement
            
            
            -
            
            
            -Issuance
                of common shares to settle outstanding payables
            
            
            17,497
            
            
            25,709Issuance
                of common stock to settle placement agent fees on issuance of Senior
                Secured Convertible OID Note (Note 15(b))
            
            
            15
            
            
            -Issuance
                of common stock to settle a pricing adjustment shortfall in connection
                with the acquisition of the manufacturing assets of ITF Optical
                Technologies (Note 16 (a))
            
            
            4
            
            
            -Supplemental
                DisclosuresInterest
                (paid) collected from continuing operations
            
            
            74,663
            
            
            (164,870
            )Income
                tax benefits received
            
            
            378,831
            
            
            358,437


Going
        Concern (Note 1)
 Contingencies
        (Note 18)
 (The
        Accompanying Notes are an Integral Part of the Consolidated Financial
        Statements)


F-5





Avensys
      Corporation (formerly Manaris Corporation)


Consolidated
      Statement of Stockholders’ Equity


(Expressed
      in U.S. Dollars)




AccumulatedAdditional
            
            Other
            
            
            
            TotalCommon Shares
            
            Paid-In
            
            Comprehensive
            
            
            
            Stockholders’Number of
            
            Amount
            
            Capital
            
            Income
            
            Deficit
            
            EquityShares
            
            $
            
            $
            
            $
            
            $
            
            $Balance,
                June 30, 2006
            
            
            77,671,281
            
            
            777
            
            
            34,169,867
            
            
            (316,566
            )
            
            (26,648,091
            )
            
            7,205,987Correction
                of error (Note 3)
            
            
            -
            
            
            -
            
            
            -
            
            
            992,458
            
            
            (266,705
            )
            
            725,753Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            453,206
            
            
            -
            
            
            -
            
            
            453,206Common
                stock issued to settle outstanding payables
            
            
            122,934
            
            
            2
            
            
            29,347
            
            
            -
            
            
            -
            
            
            29,349Common
                stock issued pursuant to interest payments on Senior Secured Convertible
                Notes Series A
            
            
            182,609
            
            
            2
            
            
            58,408
            
            
            -
            
            
            -
            
            
            58,410Common
                stock issued pursuant to repayments of Senior Secured Convertible
                Notes
                Series A
            
            
            1,101,004
            
            
            11
            
            
            381,447
            
            
            -
            
            
            -
            
            
            381,458Common
                stock issued pursuant to repayments of Secured Convertible Notes
                Series
                B
            
            
            12,450,353
            
            
            124
            
            
            1,034,421
            
            
            -
            
            
            -
            
            
            1,034,545Common
                stock issued upon conversion of Unsecured Convertible
                Debentures
            
            
            1,654,394
            
            
            16
            
            
            527,736
            
            
            -
            
            
            -
            
            
            527,752Common
                stock issued for late filing of registration statement
            
            
            255,079
            
            
            2
            
            
            73,461
            
            
            -
            
            
            -
            
            
            73,463Translation
                adjustment
            
            
            
            
            
            
            
            
            
            
            
            592,730
            
            
            
            
            
            592,730Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,370,754
            )
            
            (2,370,754
            )Balance,
                June 30, 2007
            
            
            93,437,654
            
            
            934
            
            
            36,727,893
            
            
            1,268,622
            
            
            (29,285,550
            )
            
            8,711,899Balance,
                June 30, 2007
            
            
            93,437,654
            
            
            934
            
            
            36,727,893
            
            
            1,268,622
            
            
            (29,285,550
            )
            
            8,711,899Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            249,479
            
            
            -
            
            
            -
            
            
            249,479Common
                stock issued to settle outstanding payables
            
            
            250,000
            
            
            3
            
            
            17,497
            
            
            -
            
            
            -
            
            
            17,500Issuance
                of Senior Secured Convertible OID Note (Note 15(b))
            
            
            -
            
            
            -
            
            
            1,176,383
            
            
            -
            
            
            -
            
            
            1,176,383Common
                stock issued pursuant to repayments of Secured Convertible Notes
                Series
                B
            
            
            649,955
            
            
            6
            
            
            52,186
            
            
            -
            
            
            -
            
            
            52,192Common
                stock issued pursuant to cashless exercise of warrants (Note
                17(b))
            
            
            2,759,235
            
            
            28
            
            
            
            (28)
            
            -
            
            
            -
            
            
            -Common
                stock issued to settle placement agent fees on issuance of Senior
                Secured
                Convertible OID Note (Note 15(b))
            
            
            1,477,273
            
            
            15
            
            
            
            (15)
            
            -
            
            
            -
            
            
            -Common
                stock issued to settle a pricing adjustment shortfall in connection
                with
                the acquisition of the manufacturing assets of ITF Optical Technologies
                Inc. (Note 16 (a))
            
            
            462,035
            
            
            4
            
            
            
            (4)
            
            -
            
            
            -
            
            
            -Translation
                adjustment
            
            
            
            
            
            
            
            
            
            
            
            548,384
            
            
            
            
            
            548,384Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,120,523
            )
            
            (3,120,523
            )Balance,
                June 30, 2008
            
            
            99,036,152
            
            
            990
            
            
            38,223,391
            
            
            1,817,006
            
            
            (32,406,073
            )
            
            7,635,314


Going
        Concern (Note 1)
 Contingencies
        (Note 18)
 (The
        Accompanying Notes are an Integral Part of the Consolidated Financial
        Statements)
  F-6


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





1.
            Going
                Concern





The
      accompanying financial statements have been prepared using generally accepted
      accounting principles applicable to a going concern, which assumes Avensys
      Corporation (the “Company”) will be able to realize the carrying value of its
      assets and discharge its liabilities in the normal course of operations. The
      Company has incurred significant losses since inception and has relied on
      non-operational sources of financing to fund operations. Furthermore, the
      Company’s operating subsidiary, Avensys Inc. (“AVI”), maintains a line of credit
      from a financial institution, and the covenants pertaining to such were not
      respected as at June 30, 2008. This constitutes an event of default and could
      result in the financial institution requiring repayment of a loan. The failed
      covenants with the financial institution triggered cross-default clauses
      affecting the Company’s Working Capital Facility (note 12(c)) and Senior Secured
      Convertible Debenture (note 15(b)). Subsequent to year-end, the Company has
      obtained waivers with respect to such cross-default clauses for the Working
      Capital Facility and Senior Secured Convertible Debenture. AVI is seeking to
      renegotiate the credit agreement with the financial institution and is also
      seeking to obtain additional conventional bank credit-line financing to that
      which it already has, to support its growing operations. The material
      uncertainties resulting from the above events and conditions are such that
      there
      exists substantial doubt that the Company would be able to continue as a going
      concern at June 30, 2008. The Company’s continuation as a going concern is
      dependent upon the continued support of shareholders, lenders and suppliers
      and
      its ability to obtain additional cash to allow for the satisfaction of its
      obligations on a timely basis.





Management
      has taken steps to revise the Company’s operating and financial requirements.
      During the first quarter of fiscal 2009, as described in Note 22, the Company
      amended an agreement with the former shareholders of ITF Optical Technologies.
      The amendment postponed, by 18 months, the exercise date of a put option that
      could have required the cash outlay of CAD $2,000,000 or the issuance of CAD
      $1,500,000 in Company shares at a reference share price of $0.342 between April
      and October 2009. The amended agreement stipulates:





·
            The
                date permitting the exercise of the put option by the ITF Preferred
                Shareholders is postponed by 18 months from April 1, 2009 to October
                1,
                2010. The date at which the put option expires has also been postponed
                from October 1, 2009 to December 31,
                2010.


·
            AVI
                will pay interest at 10% annually from April 1, 2009 until the date
                of
                exercise of the put option on each ITF Preferred Shareholder’s
                proportional share of the consideration, should they choose to exercise
                their option.


·
            AVI
                will also raise the total amount of the share consideration from
                CAD
                $1,500,000 to CAD $2,000,000 and will reduce the reference price
                from
                $0.342 to $0.11, should the Preferred Holders choose to exercise
                the put
                option for their proportionate amount of common shares of the
                Company.





While
      management believes the use of the going concern assumption is appropriate,
      there is no assurance the above actions will be successful. These financial
      statements do not include any adjustments or disclosures that may be necessary
      should the Company not be able to continue as a going concern. If the use of
      the
      going concern assumption is not appropriate for these financial statements,
      then
      adjustments may be necessary to the carrying value and classification of assets
      and liabilities and reported results of operations and such adjustments could
      be
      material.





2.
            Nature
                of Operations





The
      Company was incorporated in the State of Nevada on June 26, 2000 as Keystone
      Mines Limited. The Company subsequently changed its name to C-Chip Technologies
      Corporation. In July 2005, the Company changed its name to Manaris Corporation,
      and in December 2007, to Avensys Corporation. The Company has achieved
      significant revenue from acquired companies and also has disposed of companies.
      The Company’s assets and operations at June 30, 2008 are located across Canada.
      The Company currently derives all of its revenues from its subsidiary. As
      discussed in Note 20, the Company operates two reporting segments, Fiber
      Technologies and Solutions, corresponding to the Avensys Technologies and
      Avensys Solutions divisions of AVI, as follows:





·
            Avensys
                Tech manufactures and distributes fiber optical components and sensors
                worldwide to the telecommunications, industrial laser and sensor
                markets.


·
            Avensys
                Solutions distributes and integrates environmental monitoring solutions
                in
                both the public and private sectors of the Canadian
                marketplace.





Since
      February 6, 2008, the Company ceased to operate C-Chip Technologies Corporation
      (North America) Inc., and the former operation was classified as a discontinued
      operation (Note 4(a)).


F-7


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





3.
            Basis
                of Presentation and Significant Accounting
                Policies





Basis
      of
      Presentation





These
      consolidated financial statements are prepared in conformity with accounting
      principles generally accepted (“GAAP”) in the United States of America (“US”)
      and are presented in US dollars, the reporting currency.





Basis
      of
      Consolidation





These
      consolidated financial statements include the accounts of the Company and its
      subsidiaries. Consolidated companies include AVI and its subsidiaries, Fizians
      Inc., of which AVI owns 90% of its outstanding shares, and ITF Laboratories
      Inc.
      (“ITF Labs”), which has been determined to be a variable interest entity and for
      which AVI is the primary beneficiary; and the two discontinued operations of
      the
      C-Chip and CSA subsidiaries (see note 4). All inter-company accounts and
      transactions have been eliminated in the consolidation.





Cash
      and
      Cash Equivalents





The
      Company considers all highly liquid instruments with a term to maturity of
      three
      months or less at the time of acquisition to be cash and cash equivalents.
      The
      Company invests its excess cash in deposits with major financial institutions.
      The Company mitigates the credit risk related to cash and cash equivalents
      by
      dealing with major Canadian financial institutions that have low or minimal
      credit risk.





Accounts
      Receivable





Accounts
      receivable are stated net of an allowance for doubtful accounts. The Company
      establishes an allowance for doubtful accounts based on a detailed assessment
      of
      the credit risk and collectability of specific customer accounts, as well as
      historical trends and other information. The Company sells the majority of
      its
      products and services in North America. The Company generally does not require
      collateral. Credit losses have not been historically significant.





Fair
      Value of Financial Instruments





The
      fair
      value of cash and cash equivalents, accounts receivable, other receivable,
      restricted held-to-maturity securities, due to related parties and accounts
      payable and accrued liabilities approximate their carrying value given their
      short-term maturity. The derivative financial instruments are carried at fair
      value. The Company has estimated the fair value of its bank loan and other
      loans
      payable, long-term debt, capital leases, convertible debentures and balance
      of
      purchase price payable by discounting future cash flows using interest rates
      which the Company could obtain for loans with similar terms conditions and
      maturity dates. The fair value and carrying value of all such debt instruments,
      as at June 30, 2008, amounted to $6,934,611 (June 30, 2007 - $5,462,000 and
      $5,426,000, respectively).





Advertising





The
      Company’s advertising costs, which amounted to $102,699 for the year ended June
      30, 2008 and $139,975 for the year ended June 30, 2007 are expensed as
      incurred.





Impairment
      of Long-Lived Assets





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets”, the Company tests long-lived assets or asset groups for
      future recoverability when events or changes in circumstances indicate that
      their carrying amount may not be recoverable. Circumstances which could trigger
      a review include, but are not limited to: significant decreases in the market
      price of the asset; significant adverse changes in the business climate or
      legal
      factors; accumulation of costs significantly in excess of the amount originally
      expected for the acquisition or construction of the asset; current period cash
      flow or operating losses combined with a history of losses or a forecast of
      continuing losses associated with the use of the asset; and current expectation
      that the asset will more likely than not be sold or disposed significantly
      before the end of its estimated useful life. The Company’s long-lived assets
      consist primarily of property and equipment and intangible assets.





Recoverability
      of a long-lived asset is assessed by comparing the carrying amount of the asset
      to the sum of the estimated undiscounted future cash flows expected from its
      use
      and the eventual disposal of the asset. An impairment loss is recognized when
      the carrying amount of a long-lived asset is not recoverable and the amount
      of
      such impairment loss is determined as the excess of the carrying amount over
      the
      asset’s fair value.


F-8


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Foreign
      Currency





The
      functional currency of the Company is the U.S. dollar. The functional currency
      of the Company’s Canadian subsidiary, AVI, is the Canadian dollar. Accordingly,
      the financial statements of AVI are converted into the reporting currency (the
      US dollar) using the current rate method as follows: assets and liabilities
      are
      converted at the exchange rate in effect at the date of the balance sheet,
      and
      revenue and expenses are converted using the average exchange rate for the
      period. All gains and losses resulting from the conversion are included in
      other
      comprehensive income or loss for the period and accumulated in a separate
      component of stockholders’ equity as accumulated other comprehensive income or
      loss.





Transactions
      concluded in foreign currencies are converted into the functional currency
      using
      the exchange rate in effect at the date of the transaction or the average rate
      for the period in the case of recurring revenue and expense transactions.
      Monetary assets and liabilities are revalued into the functional currency at
      each balance sheet date using the exchange rate in effect at that date, with
      any
      resulting exchange gains or losses being credited or charged to the statement
      of
      operations. Non-monetary assets and liabilities are recorded in the functional
      currency using the exchange rate in effect at the date of the transaction and
      are not revalued for subsequent changes in exchange rates.





Use
      of
      Estimates





The
      preparation of financial statements in conformity with U.S. GAAP requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities, the disclosure of contingent liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Estimates are used for revenue recognition,
      establishment of certain expenses, allowance for doubtful accounts, impairments
      of long-lived assets and goodwill, accounting for certain financing
      transactions, annual measurement of the fair values of derivative financial
      instruments, stock-based compensation and income taxes, among others.





Estimates
      and assumptions are reviewed periodically and the effects of revisions are
      reflected in the Consolidated Financial Statements in the period they are
      determined to be necessary. Management bases its estimates on historical
      experience, industry standards and on various other assumptions believed to
      be
      reasonable under the circumstances. Actual results could differ materially
      from
      those estimates.





Net
      Profit (Loss) Per Share





Basic
      net
      profit (loss) per share is computed by dividing the net profit (loss) applicable
      to common stockholders for the period by the weighted average number of shares
      of common stock outstanding during the period. Diluted net profit (loss) per
      share is computed by dividing the net profit (loss) applicable to common
      stockholders for the period by the weighted average number of shares of common
      stock and potential common stock outstanding during the period, such as stock
      options, warrants and conversion rights on convertible debentures, if dilutive.
      Since the Company has not recorded a positive basic net profit per share for
      all
      periods presented, there is no difference between basic and diluted per share
      figures. The items of potential common stock noted above are anti-dilutive
      and
      have therefore been excluded from the calculation.





Stock-Based
      Compensation





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), Share Based
      Payments. SFAS 123R requires all entities to recognize compensation cost for
      share-based awards, including options granted to employees. SFAS 123R eliminates
      the ability to account for share-based compensation transactions using the
      Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock
      Issued To Employees, and generally requires instead that such transactions
      be
      accounted for using a fair-value based method. Public companies are required
      to
      measure stock-based compensation classified as equity by valuing the instrument
      the employee receives at its grant-date fair value. The Company implemented
      SFAS
      123R commencing July 1, 2006 using the modified prospective transition approach.
      SFAS 123R requires that the compensation cost relating to share-based payment
      transactions be recognized in financial statements. The Company recognizes
      the
      expense over the period during which an employee is required to provide service
      in exchange for the award.





SFAS
      123R
      does not change the accounting guidance for share-based payment transactions
      with parties other than employees provided in Statement of Financial Accounting
      Standards No. 123 (“SFAS 123”) Accounting for Stock-Based Compensation as
      originally issued and Emerging Issues Task Force Issue No.96-18, Accounting
      for
      Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
      in
      Conjunction with Selling, Goods or Services.





Revenue
      Recognition





The
      Company recognizes revenue in accordance with Staff Accounting Bulletin No.
      104
      (SAB104), “Revenue Recognition" issued by the Securities and Exchange
      Commission.





AVI
      generates revenues from the sale of fiber-based sensors, instruments and
      components, and environmental monitoring products. Revenue is recognized when
      there exists persuasive evidence of an arrangement, the sales price is fixed
      or
      determinable, the product has been delivered and collectability is reasonably
      assured.


F-9


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Basis
      of
      Presentation and Significant Accounting Policies (continued)





Business
      Combinations and Goodwill





Acquisitions
      of businesses are accounted for using the purchase method and, accordingly,
      the
      results of operations of the acquired businesses are included in the
      Consolidated Statement of Operations effective from their respective dates
      of
      acquisition.





Goodwill
      represents the excess of the purchase price of acquired businesses over the
      fair
      values of the identifiable tangible and intangible assets acquired and
      liabilities assumed. Pursuant to SFAS No. 141, the Company does not amortize
      goodwill, but tests for impairment of goodwill at least annually. The Company
      evaluates the carrying value of goodwill in accordance with the guidelines
      set
      forth in Statement of Financial Accounting Standards No. 142, “Goodwill and
      Other Intangible Assets” (SFAS142). Management tests for impairment of goodwill
      on an annual basis and at any other time if events occur or circumstances change
      that would indicate that it is more likely than not that the fair value of
      the
      reporting unit has been reduced below its carrying amount. Factors considered
      important which could trigger an impairment review include, but are not limited
      to, significant underperformance relative to expected historical or projected
      future operating results, significant changes in the manner of use of the
      acquired assets or the strategy for the overall business, significant negative
      industry or economic trends, a significant decline in the stock price for a
      sustained period and the Company’s market capitalization relative to net book
      value.





The
      goodwill impairment test is a two-step process. Step one consists of a
      comparison of the fair value of a reporting unit with its carrying amount,
      including the goodwill allocated to the reporting unit. Measurement of the
      fair
      value of a reporting unit may be based on one or more fair value measures
      including present value techniques of estimated future cash flows and estimated
      amounts at which the unit as a whole could be bought or sold in a current
      transaction between willing parties. If the carrying amount of the reporting
      unit exceeds the fair value, step two requires the fair value of the reporting
      unit to be allocated to the underlying tangible and intangible assets and
      liabilities of that reporting unit, resulting in an implied fair value of
      goodwill. If the carrying amount of the goodwill of the reporting unit exceeds
      the implied fair value of that goodwill, an impairment loss equal to the excess
      is recorded in the Consolidated Statement of Operations and Comprehensive Loss.





Property
      and Equipment





The
      Company's property and equipment are recorded at cost. The Company provides
      for
      depreciation and amortization using the following methods and applying rates
      estimated to amortize the cost over the useful life of the assets:





Computer
                equipment
            
            Declining
                balance
            
            30%-331/3%Furniture
                and fixture
            
            Declining
                balance
            
            20%Leasehold
                improvements
            
            Straight-line over the lease terms
            
            5
                to 8 yearsLaboratory
                equipment
            
            Declining
                balance
            
            20%Automotive
                equipment and software
            
            Declining
                balance
            
            30%Machinery
                and office equipment
            
            Declining
                balance
            
            20%Capital
                leases
            
            Straight-line and declining balance over the lease terms
            
            3
                years





Capital
      Leases





The
      Company enters into leases relating to computer equipment in which substantially
      all the benefits and risks of ownership are transferred to the Company and
      are
      recorded as capital leases and classified as property and equipment and long
      term borrowings. All other leases are classified as operating leases under
      which
      leasing costs are expensed in the period in which they are
      incurred.





Inventory





Inventory
      consists of finished products available for sale to customers, raw materials
      and
      components. Raw materials are stated at the lower of cost and replacement cost.
      Finished goods are stated at the lower of cost and net realizable value. Cost
      of
      materials inventory for the Avensys Solutions division of AVI is determined
      on
      an average cost basis, while the cost of materials inventory for the Avensys
      Tech division of AVI is calculated on a first in first out (FIFO) basis. The
      Company evaluates ending inventories for estimated excess quantities and
      obsolescence. This evaluation includes analyses of inventory turnover by item
      within specific time horizons. Work in process inventory includes direct
      materials, direct labor and the proportionate share of production overhead
      costs.


F-10


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Basis
      of
      Presentation and Significant Accounting Policies (continued)





Deferred
      Financing Fees





Costs
      incurred in connection with financing activities are deferred and amortized
      using the straight-line basis over the expected life of the related agreements
      ranging from one to five years. Amortization of these costs is charged to
      interest expense in the accompanying consolidated statements of operations
      and
      comprehensive loss. During the year ended June 30, 2008 the Company wrote off
      approximately $371,000 of deferred financing costs associated with the Series
      B
      Subordinated Secured Convertible Debentures (Note 15(a)), which are included
      in
      loss on redemption of convertible debentures in the consolidated statement
      of
      operations and comprehensive loss.





Intangible
      Assets





An
      acquired intangible asset of a technological product or service that has reached
      technological feasibility is capitalized at cost. Intangible assets with
      definite lives are reported at cost, less accumulated amortization. The Company
      does not have any identified intangible assets with an indefinite life. Acquired
      in-process research and development is charged to operations in the period
      of
      acquisition. The Company provides for amortization on a straight-line basis
      over
      the following periods:





Customer
                relationships
            
            3-10
                yearsTechnology
            
            4-5
                yearsTrade
                names
            
            5-7
                years





Research
      and Development Expenses and Investment Tax Credits





Research
      and development expenses are expensed as they are incurred. Investment tax
      credits (“ITCs”) arising from research and development activities are accounted
      for as a reduction of the income tax provision for the year. Refundable tax
      credits and non-refundable tax credits are recorded in the year in which the
      related expenses are incurred. A valuation allowance is provided against such
      tax credits to the extent that the recovery is not considered to be more likely
      than not.





The
      Company is subject to examination by taxation authorities in various
      jurisdictions. The determination of tax liabilities and ITCs recoverable involve
      certain uncertainties in the interpretation of complex tax regulations. As
      a
      result, the Company provides potential tax liabilities and ITCs recoverable
      based on management’s best estimates. Differences between the estimates and the
      ultimate amounts of taxes and ITCs are recorded in earnings at the time they
      can
      be determined.





Income
      Taxes





The
      Company utilizes the tax liability method to account for income taxes as set
      forth in SFAS No. 109, "Accounting for Income Taxes" (SFAS109). Under this
      method, deferred income tax assets and liabilities are determined based on
      the
      differences between the carrying value and the tax bases of assets and
      liabilities.





A
      valuation allowance is recognized to the extent that, in the opinion of
      Management, it is more likely than not that the deferred income tax assets
      will
      not be realized. The Company has incurred U.S. operating losses, as at June
      30,
      2008, of approximately $23.9 million from its inception which are available
      and
      which expire starting in 2022. The Company has incurred Canadian operating
      losses, as at June 30, 2008, of approximately $3.3 million from its inception
      which are available and which expire starting in 2015. For Canadian income
      tax
      purposes, the Company also has, as at June 30, 2008, approximately $3.7 million
      of Scientific Research and Experimental Development unclaimed expenses available
      indefinitely to reduce taxable income in future years. The potential benefit
      of
      operating losses has not been recognized in these financial statements because
      the Company cannot be assured it is more likely than not it will utilize the
      operating losses carried forward in future years.





Deferred
      income tax assets and liabilities are measured by applying enacted tax rates
      and
      laws at the date of the financial statements for the years in which the
      differences are expected to reverse.





Shipping
      and Handling Costs





The
      Company’s shipping and handling costs are included in cost of
      revenues.


F-11


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Basis
      of
      Presentation and Significant Accounting Policies (continued)





Recent
      Accounting Pronouncements





a)
            Recent
                Accounting Pronouncements Adopted During Fiscal Year
                2008





The
      Company, as required, adopted the provisions of Financial Accounting Standards
      Board (“FASB”) Interpretation No. 48 “Accounting for Uncertainty in Income
      Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109 “Accounting for
      Income Taxes” (“SFAS 109”), effective July 1, 2007. FIN 48 clarifies the
      accounting for income taxes by prescribing a minimum recognition threshold
      and a
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. With respect
      to a
      minimum recognition threshold, FIN 48 requires that the Company recognize,
      in
      its financial statements, the impact of a tax position if that position is
      more
      likely than not of being sustained on an audit, based on the technical merits
      of
      the position. In addition, FIN 48 specifically excludes income taxes from the
      scope of Statement of Financial Accounting Standards No. 5, “Accounting for
      Contingencies”. FIN 48 applies to all tax positions related to income taxes that
      are subject to SFAS 109, including tax positions considered to be routine.
      As a
      result of the implementation, no adjustment was required to the amount of the
      unrecognized tax benefits.





The
      Company recognizes interest and penalties related to uncertain tax positions
      in
      interest expense. At July 1, 2007, the Company had $168,230 in unrecognized
      tax
      benefits which would favorably impact the Company’s effective tax rate if
      subsequently recognized. The amount of unrecognized tax benefits was $290,859
      at
      June 30, 2008.





The
      Company and its subsidiaries file income tax returns in Canadian and U.S.
      federal jurisdictions, and various provincial jurisdictions. The Company is
      subject to Canadian and provincial income tax examination for fiscal years
      2003
      through 2007. The company is subject to U.S. federal income tax examination
      by
      U.S. tax authorities for all taxation years since its inception.





In
      addition, upon inclusion of the Canadian operating losses and Experimental
      Development unclaimed expenses carryforward tax benefits, from prior tax years,
      in future tax returns, the related tax benefit for the period in which the
      benefit arose may be subject to examination.





b)
            Recent
                Accounting Pronouncements Adopted During Fiscal Year 2007





In
      May
      2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections -
      a
      replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 replaces
      APB Opinion No. 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes
      in Interim Financial Statements, changes the requirements for the accounting
      for
      and reporting of a change in accounting principle. SFAS 154 applies to all
      voluntary changes in accounting principle. It also applies to changes required
      by an accounting pronouncement in the unusual instance that the pronouncement
      does not include specific transition provisions. SFAS 154 provides guidance
      on
      the accounting for and reporting of accounting changes and error corrections.
      It
      establishes, unless impracticable, retrospective application as the required
      method for reporting a change in accounting principle in the absence of explicit
      transition requirements specific to the newly adopted accounting principle.
      It
      also provides guidance for determining whether retrospective application of
      a
      change in accounting principle is impracticable and for reporting a change
      when
      retrospective application is impracticable. The correction of an error in
      previously issued financial statements is not an accounting change. However,
      the
      reporting of an error correction involves adjustments to previously issued
      financial statements similar to those generally applicable to reporting an
      accounting change retrospectively. Therefore, the reporting of a correction
      of
      an error by restating previously issued financial statements is also addressed
      by this Statement. The provisions of SFAS 154 apply for accounting changes
      and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      Early adoption is permitted for accounting changes and corrections of errors
      made in fiscal years beginning after May 2005. SFAS 154 does not change the
      transition provisions of any existing accounting pronouncements. This FASB
      Statement was implemented by the Company commencing July 1, 2006 and such did
      not have a material effect on the Company's results of operations or financial
      position.





In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements
      when Quantifying Misstatements in Current year Financial Statements (“SAB 108”).
      SAB 108 provides interpretive guidance on how the effects of prior year
      uncorrected misstatements should be considered when quantifying misstatements
      in
      the current year financial statements. SAB 108 requires registrants to quantify
      misstatements using both an income statement (“rollover”) and balance sheet
      (“iron curtain”) approach and evaluate whether either approach results in a
      misstatement that, when all relevant quantitative and qualitative factors are
      considered, is material. If prior year errors that had been previously
      considered immaterial now are considered material based on either approach,
      no
      restatement is required so long as management properly applied its previous
      approach and all relevant facts and circumstances were considered. If prior
      years are not restated, the cumulative effect adjustment is recorded in opening
      accumulated earnings as of the beginning of the fiscal year of adoption. SAB
      108
      is effective for fiscal years ending after November 15, 2006.


F-12


Basis
      of
      Presentation and Significant Accounting Policies (continued)





Recent
      Accounting Pronouncements (continued)





Recent
      Accounting Pronouncements Adopted During Fiscal Year 2007
      (continued)





The
      Company initially applied the provisions of SAB 108 during the year ended June
      30, 2007, prior to which, the Company evaluated misstatements using only the
      iron curtain method. In applying the provisions of SAB 108, the Company made
      a
      cumulative effect adjustment to correct an error, which originated during the
      year ended June 30, 2005 and which had previously been, and continues to be,
      considered to be immaterial to the financial statements for that fiscal year.
      This error resulted from the use of an exchange rate other than the current
      exchange rate to translate the elements related to certain intangible assets
      and
      goodwill from the functional currency to the reporting currency. The carrying
      values of intangible assets and goodwill should have been translated at the
      exchange rate at the balance sheet date and the amortization expense related
      to
      intangible assets and impairment charge for goodwill should have been translated
      at the average exchange rate for the year. The following summarizes the impact
      of the error on the financial statements for the year ended June 30, 2006,
      along
      with the adjustments made to the corresponding accounts as of July 1,
      2006:





Account
            
            Cumulative impact as at June 30,
              2006 of the misstatement originating
              during the year ended June 30, 2005
            
            Adjustments recorded as
              of July 1, 2006Understatement
                of intangible assets
            
            
            554,017
            
            
            554,017Understatement
                of goodwill
            
            
            171,736
            
            
            171,736Understatement
                of accumulated other comprehensive income
            
            
            992,458
            
            
            (992,458
            )Understatement
                of net loss
            
            
            266,705
            
            
            -Overstatement
                of comprehensive loss
            
            
            725,753
            
            
            -Understatement
                of deficit
            
            
            266,705
            
            
            266,705





c)
            Recent
                Accounting Pronouncements Not Yet
                Adopted





In
      September 2006, FASB issued Statement of Financial Accounting Standards No.
      157
      (“SFAS 157”), “Fair Value Measurements”, which defines fair value, establishes
      guidelines for measuring fair value and expands disclosures regarding fair
      value
      measurements. SFAS 157 does not require any new fair value measurements but
      rather eliminates inconsistencies in guidance found in various prior accounting
      pronouncements. SFAS 157 was initially effective for fiscal years beginning
      after November 15, 2007. FASB Staff Position FAS 157-2 (FSP 157-2), deferred
      the
      effective date for non-financial assets of SFAS 157 to fiscal years beginning
      after November 15, 2008. Earlier adoption is permitted, provided the Company
      has
      not yet issued financial statements, including for interim periods, for that
      fiscal year. The Company plans to adopt the provisions of SFAS 157 beginning
      on
      July 1, 2009 and is currently evaluating the impact of the adoption of this
      standard on its consolidated financial position and results of
      operations.





In
      February 2007, FASB issued SFAS No.159, “The Fair Value Option for Financial
      Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies the
      option, at specified election dates, to measure financial assets and liabilities
      at their current fair value, with the corresponding changes in fair value from
      period to period recognized in the income statement. Additionally, SFAS 159
      establishes presentation and disclosure requirements designated to facilitate
      comparisons between companies that choose different measurement attributes
      for
      similar assets and liabilities. SFAS 159 is effective as of the beginning of
      the
      first fiscal year that begins after November 15, 2007. The Company plans to
      adopt the provisions of SFAS 159 beginning on July 1, 2008 and does not expect
      the adoption of this standard will have a significant impact on its consolidated
      financial position and results of operations.





In
      June
      2007, FASB issued EITF Issue 07-3 “Accounting for Advance Payments for Goods or
      Services to Be Used in Future Research and Development Activities” (EITF 07-3).
      The scope of this issue is limited to non-refundable advance payments for goods
      and services related to research and development activities. EITF 07-3 requires
      that all non-refundable advance payments for R&D activities that will be
      used in future periods be capitalized until used. In addition, the deferred
      research and development costs need to be assessed for recoverability. The
      Company is required to adopt EITF 07-3 effective July 1, 2008. As of June 30,
      2008, the Company does not have any arrangements that would be subject to the
      scope of EITF 07-3.


F-13


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Basis
      of
      Presentation and Significant Accounting Policies (continued)





Recent
      Accounting Pronouncements (continued)





Recent
      Accounting Pronouncements Not Yet Adopted (continued)





In
      December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations”
(“SFAS 141R”), which replaces SFAS No. 141, Business Combinations. SFAS 141R
      expands the definition of a business combination and requires the acquisition
      method of accounting to be used for all business combinations and an acquirer
      to
      be identified for each business combination. SFAS 141R also requires that all
      assets, liabilities, contingent considerations, and contingencies of an acquired
      business be recorded at fair value at the acquisition date. In addition, SFAS
      141R establishes requirements in the recognition of acquisition costs,
      restructuring costs and changes in accounting for deferred tax asset valuation
      allowances and acquired income tax uncertainties. SFAS 141R is to be applied
      prospectively to business combinations for which the acquisition date is on
      or
      after the beginning of the first annual reporting period beginning on or after
      December 15, 2008. Earlier adoption is prohibited. SFAS 141R may have a material
      impact on the reporting of future acquisitions in the Company’s financial
      statements.





In
      December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in
      Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”).
      SFAS 160 establishes new accounting and reporting standards for the
      non-controlling interest in a subsidiary and for the deconsolidation of a
      subsidiary. Specifically, SFAS 160 requires the recognition of a non-controlling
      interest (minority interest) as equity in the consolidated financial statements
      and separate from the parent’s equity. The amount of net income attributable to
      the non-controlling interest will be included in consolidated net income on
      the
      face of the income statement. SFAS 160 clarifies that changes in a parent’s
      ownership interest in a subsidiary that do not result in deconsolidation are
      equity transactions if the parent retains its controlling financial interest.
      In
      addition, SFAS 160 requires that a parent recognize a gain or loss in net income
      when a subsidiary is deconsolidated. Such gain or loss will be measured using
      the fair value of the non-controlling equity investment on the deconsolidation
      date. SFAS 160 also includes expanded disclosure requirements regarding the
      interests of the parents and its non-controlling interest. SFAS is effective
      for
      fiscal years, and interim periods within those fiscal years, beginning on or
      after December 15, 2008. Earlier adoption is prohibited. The Company is
      currently evaluating the impact of the adoption of the provisions of SFAS 160
      on
      its consolidated financial statements.





In
      March
      2008, FASB issued FASB Statement No. 161, “Disclosures about Derivative
      Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires disclosure
      of the fair values of derivative instruments and their gains and losses in
      a
      tabular format. It also requires disclosure of additional information about
      an
      entity’s liquidity by requiring disclosure of derivative features that are
      credit risk–related. Finally, it requires cross-referencing within footnotes to
      enable financial statement users to locate important information about
      derivative instruments. SFAS 161 is effective for financial statements issued
      for fiscal years and interim periods beginning after November 15, 2008. Earlier
      adoption is permitted. The Company is currently evaluating the impact of the
      adoption of the provisions of SFAS 161 on its consolidated financial
      statements.





In
      April
      2008, FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the
      Useful Life of Intangible Assets,” to provide guidance for determining the
      useful life of recognized intangible assets and to improve consistency between
      the period of expected cash flows used to measure the fair value of a recognized
      intangible asset and the useful life of the intangible asset as determined
      under
      Statement 142. The FSP requires that an entity consider its own historical
      experience in renewing or  extending
      similar arrangements. However, the entity must adjust that experience based
      on
      entity-specific factors under FASB Statement 142, Goodwill and Other Intangible
      Assets.  FSP
      FAS
      142-3 is effective for fiscal years and interim periods that begin after
      November 15, 2008. The Company intends to adopt FSP FAS 142-3 effective July
      1,
      2009 and to apply its provisions prospectively to recognized intangible assets
      acquired after that date.





In
      May
      2008, FASB issued FASB Staff  Position
      (FSP) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled
      in Cash upon Conversion (Including Partial Cash Settlement),” to require issuers
      of convertible debt to account separately for the liability and equity
      components of these instruments if they have stated terms permitting cash
      settlement upon conversion. This practice marks a significant change from the
      current accounting practice for convertible debt instruments in the scope of
      the
      FSP. Current practice does not require separation of the liability and equity
      components of such instruments. Separately accounting for these instruments’
liability and equity components results in the recording of more interest cost
      over the life of the convertible debt instrument, because of an initial debt
      discount. FSP APB 14-1 is effective for fiscal years beginning after December
      15, 2008 and interim periods within those fiscal years. The Company intends
      to
      adopt FSP APB 14-1 effective July 1, 2009 and apply its provisions
      retrospectively to all periods presented in its financial statements. The
      Company has issued convertible debt instruments and is in the process of
      evaluating the impact that the adoption of FSP APB 14-1 will have on its
      financial statements.


F-14


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008


Basis
        of
        Presentation and Significant Accounting Policies (continued)
 
 Recent
        Accounting Pronouncements (continued)
 
 Recent
        Accounting Pronouncements Not Yet Adopted (continued)





In
      June
      2008, FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether
      Instruments Granted in Share-Based Payment Transactions Are Participating
      Securities,” to clarify that all outstanding unvested share-based payment awards
      that contain nonforfeitable rights to dividends or dividend equivalents, whether
      paid or unpaid, are participating securities. An entity must include
      participating securities in its calculation of basic and diluted earnings per
      share (EPS) pursuant to the two-class method, as described in FASB Statement
      128, Earnings per Share. FSP EITF 03-6-1 is effective for fiscal years beginning
      after December 15, 2008 and interim periods within those fiscal years. The
      Company intends to adopt FSP EITF 03-6-1 effective July 1, 2009 and apply its
      provisions retrospectively to all prior-period EPS data presented in its
      financial statements.  The
      Company does not issue share-based payment awards that contain nonforfeitable
      rights to dividends and, as a result, does not believe that the adoption of
      FSP
      EITF 03-6-1 will have a significant effect on its financial
      statements.





In
      June
      2008, FASB ratified a consensus opinion reached by the Emerging Issues Task
      Force (EITF) on EITF Issue 08-4, “Transition Guidance for Conforming Changes to
      Issue No. 98-5,” to provide transition guidance for conforming changes made to
      the abstract for EITF Issue 98-5, “Accounting for Convertible Securities with
      Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,”
relating to EITF Issue 00-27, “Application of Issue No. 98-5 to Certain
      Convertible Instruments,” and FASB Statement 150, Accounting for Certain
      Financial Instruments with Characteristics of both Liabilities and Equity.
      The
      Company intends to adopt EITF Issue 08-4 effective June 30, 2009 and apply
      its
      provisions retrospectively to all periods presented in its financial statements.
      The Company is in the process of evaluating the impact that the adoption of
      the
      EITF Issue will have on its financial statements.





In
      June
      2008, FASB ratified a consensus opinion reached by the Emerging Issues Task
      Force (EITF) on EITF Issue 07-5, “Determining Whether an Instrument (or Embedded
      Feature) Is Indexed to an Entity’s Own Stock,” to provide guidance for
      determining whether an equity-linked financial instrument or embedded feature
      is
      considered indexed to an entity’s own stock. The consensus establishes a
      two-step approach as a framework for determining whether an instrument or
      embedded feature is indexed to an entity’s own stock. The approach includes
      evaluating (1) the instrument’s contingent exercise provisions, if any, and (2)
      the instrument’s settlement provisions. EITF Issue 07-5 applies to (i) any
      freestanding financial instrument or embedded feature that has all the
      characteristics of a derivative in paragraphs 6-9 of FASB Statement 133,
      Accounting for Derivative Instruments and Hedging Activities, for purposes
      of
      evaluating whether the financial instrument or embedded feature qualifies for
      the first part of the scope exception in paragraph 11(a) of Statement 133,
      and
      (ii) any freestanding financial instruments that are potentially settled in
      an
      entity’s own stock, regardless of whether they have all the characteristics of a
      derivative in paragraphs 6-9 of Statement 133, for the purpose of determining
      whether those instruments are within the scope of EITF Issue 00-19, “Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock”. Entities that issue financial instruments such as warrants
      or options on their own shares, convertible debt, convertible preferred stock,
      forward contracts on their own shares, or market-based employee stock option
      valuation instruments will be affected by EITF Issue 07-5. The Company intends
      to adopt EITF Issue 07-5 effective July 1, 2009 and apply its provisions to
      its
      outstanding instruments as of that date. The cumulative effect of the change
      in
      accounting principle, if any, will be recognized as an adjustment to the opening
      balance of retained earnings for that fiscal year.  The
      Company has periodically issued financial instruments indexed to its own stock,
      in particular convertible debt and convertible preferred stock. The Company
      is
      in the process of evaluating the impact that the adoption of EITF Issue 07-5
      will have on its financial statements.





Comparative
      Financial Statements





The
      comparative Consolidated Financial Statements have been reclassified from
      statements previously presented to conform to the presentation adopted in the
      current year. The reclassifications are attributed to reporting for discontinued
      operations.


F-15


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





4.
            Discontinued
                Operations





a)
            C-Chip
                Technologies Corporation (North
                America)





On
      December 22, 2006, with an effective date of December 1, 2006, C-Chip
      Technologies Corporation (North America), a subsidiary of the Company
      (“C-Chip”), entered into a Technology License Agreement (“Agreement”) with a
      supplier of the Company. Pursuant to the Agreement, C-Chip granted this supplier
      an exclusive license to manufacture and sell devices based on C-Chip’s
      technology in the sub-prime used vehicle market. As consideration for the
      License, C-Chip shall recognize and record royalties equal to the greater of:
      (i) $20 per device sold or (ii) $30,000 per month. C-Chip will not collect
      any
      other revenues and it will not be responsible for manufacturing costs, sales
      or
      servicing or other incidental costs relating to the production and marketing
      of
      the device. By virtue of the Agreement, C-Chip was relieved of any obligations
      with respect to the delivery of services pertaining to devices sold prior to
      December 1, 2006. Such obligations are now the responsibility of the licensee.
      As such, previously deferred revenues of $1,685,566 and deferred contract costs
      of $1,586,814 were credited to revenues and applied to costs of revenues,
      respectively, effective December 1, 2006. In addition, as further consideration
      for C-Chip’s prior years’ input and development of the technology, the
      outstanding principal amount of a loan from the supplier to C-Chip was reduced
      by $200,000. The associated gain was recorded in the second quarter of fiscal
      2007. Effective July 1, 2007, the Company and the former supplier signed an
      amendment to the Agreement whereby the royalties payable and the loan repayment
      would each be settled on a cash basis on the first working day following the
      end
      of each quarter. The amendment is applicable to all royalties earned since
      the
      inception of the Agreement.





The
      royalties payable were originally to be applied against the principal and
      interest balance of a loan made to C-Chip from the former supplier which at
      the
      time of the Agreement had a balance outstanding of $1,143,321. In 2005, the
      former supplier of C-Chip extended a credit facility with an original maximum
      amount of $1,000,000 (principal and interest) bearing interest at a rate of
      10%
      per annum (June 30, 2007 - 10%). The supplier subsequently permitted C-Chip
      to
      exceed the maximum amount of the credit facility. The principal and interest
      on
      this credit facility had a balance outstanding at June 30, 2007 of $708,245
      (CAD
      $754,564).





On
      February 6, 2008, the Agreement was terminated. The termination arrangement
      stipulates that, subsequent to December 31, 2007, no further royalties would
      be
      payable to C-Chip from devices sold and the outstanding balance of the C-Chip
      loan with the former supplier, at December 31, 2007, would be forgiven.
      Royalties payable to C-Chip based on devices sold continued to accrue up to
      and
      including December 31, 2007 and were applied against the loan balance. As a
      result, the Company recognized a gain of $351,059 (CAD $352,639), during the
      third quarter, on the forgiveness of the loan, which represented the outstanding
      balance of the loan at December 31, 2007. As part of the termination of the
      Agreement, the former supplier agreed to continue to assume exclusive
      responsibility for the manufacturing costs, sales, servicing and other
      incidental costs related to the production and marketing of the devices sold
      in
      the sub-prime used vehicle market. In terminating the Agreement, the Company
      ceased to operate C-Chip, and ceased to derive any cash flows from the prior
      C-Chip activities which, starting in the third quarter of fiscal 2008, were
      classified as discontinued operations.





b)
            Canadian
                Security Agency (2004) Inc.





On
      September 22, 2005, Canadian Security Agency (2004) Inc. (“CSA”), a wholly-owned
      subsidiary of the Company, entered into an agreement to sell its customer list.
      The Company has since wound up all activities of CSA and resolved all
      outstanding liabilities and commitments during the three month period ended
      June
      30, 2006, and the remaining activities and balances of CSA have since been
      classified as discontinued operations.





The
      carrying values of the major classes of assets and liabilities of discontinued
      operations, included under the ‘Current assets of discontinued operations’ and
‘Current liabilities of discontinued operations’ captions in the consolidated
      balance sheet, are as follows:





June
                30, 2008
            
            June
                30, 2007C-Chip
            
            CSA
            
            Total
            
            C-Chip
            
            CSA
            
            Total$
            
            $
            
            $
            
            $
            
            $
            
            $Cash
                and cash equivalents
            
            
            31,560
            
            
            589
            
            
            32,149
            
            
            78,233
            
            
            696
            
            
            78,929Accounts
                receivable
            
            
            54,958
            
            
            -
            
            
            54,958
            
            
            98,624
            
            
            -
            
            
            98,624Prepaid
                Expenses
            
            
            7,089
            
            
            -
            
            
            7,089
            
            
            -
            
            
            -
            
            
            -Current
                assets of discontinued operations
            
            
            93,607
            
            
            589
            
            
            94,196
            
            
            176,857
            
            
            696
            
            
            177,553Accounts
                Payable and accrued liabilities
            
            
            88,245
            
            
            -
            
            
            88,245
            
            
            54,659
            
            
            -
            
            
            54,659Other
                loans payable
            
            
            -
            
            
            -
            
            
            -
            
            
            708,245
            
            
            -
            
            
            708,245Current
                liabilities of discontinued operations
            
            
            88,245
            
            
            -
            
            
            88,245
            
            
            762,904
            
            
            -
            
            
            762,904


F-16


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Discontinued
      Operations (continued)





Summary
      results of discontinued operations for the years ended June 30, 2008 and 2007
      are as follows:





Total
            
            C-Chip
            
            CSA2008
            
            2007
            
            2008
            
            2007
            
            2008
            
            2007$
            
            $
            
            $
            
            $
            
            $
            
            $Revenues
                from discontinued operations
            
            
            398,100
            
            
            2,164,437
            
            
            398,100
            
            
            2,164,437
            
            
            -
            
            
            -Pre-tax
                earnings (loss) from Discontinued Operations
            
            
            255,315
            
            
            (144,042
            )
            
            255,315
            
            
            (144,042
            )
            
            -
            
            
            -After
                tax earnings (loss) from Discontinued Operations
            
            
            255,315
            
            
            (144,042
            )
            
            255,315
            
            
            (144,042
            )
            
            -
            
            
            -Gain
                on extinguishment of loan
            
            
            351,059
            
            
            200,000
            
            
            351,059
            
            
            200,000
            
            
            -
            
            
            -Results
                of discontinued operations
            
            
            606,374
            
            
            55,958
            
            
            606,374
            
            
            55,958
            
            
            -
            
            
            -





5.
            Business
                Combination





On
      March
      28, 2008, the Company’s subsidiary, AVI completed the remaining conditions of an
      Asset Purchase Agreement (“Willer Agreement”) to acquire the operating assets of
      Willer Engineering Limited, a provider of industrial process measurement and
      continuous emission monitoring instrumentation solutions to the Canadian
      industrial marketplace. The transaction represents the acquisition of a
      business, and will be integrated into the Environmental Solutions reporting
      segment. The acquired operating assets provide complementary products and
      services, and provide access to new customer and supplier bases to the
      Environmental Solutions reporting segment. The Company reports the revenues
      and
      results of operations from the acquired business since April 1,
      2008.





The
      initial purchase price incurred for the operating assets acquired pursuant
      to
      the Willer Agreement was $275,881 (CAD $281,316), comprising $102,971 (CAD
      $105,000) in cash paid at the time of the transaction, $90,561 representing
      the
      present value, discounted using a discount rate of 10% of a committed amount
      of
      CAD $100,000 payable in cash on January 30, 2009, and $82,349 representing
      the
      present value, discounted using a discount rate of 10% of a committed amount
      of
      CAD $100,000 payable in cash on January 29, 2010. Transaction costs of $190,180
      were also incurred for the acquisition. The Willer Agreement also provides
      for
      the payment of an additional base line amount of CAD $200,000 in contingent
      consideration subject to the Avensys Solutions reporting segment achieving
      specified revenue targets for the fiscal year ending June 30, 2009, and an
      additional base line amount of CAD $200,000 in contingent consideration subject
      to the Avensys Solutions reporting segment achieving specified revenue targets
      for the fiscal year ending June 30, 2010. The contingent consideration will
      only
      be determinable at the end of each of the two fiscal years ending June 30,
      2009
      and 2010 and is therefore not recorded as of the date of acquisition. The
      contingent consideration may be settled in cash or common stock shares of the
      Company, at the option of the seller, using reference common stock share prices
      of $0.15 for the fiscal year ending June 30, 2009, and $0.20 for the fiscal
      year
      ending June 30, 2010. The number of shares issuable, at the option of the
      seller, will be determinable when the contingency is resolved, at the end of
      each of the two fiscal years ending June 30, 2009 and 2010. The contingent
      consideration will be accounted for as an increase in goodwill when it will
      become determinable.





As
      a
      result of the above agreement, the purchase price of the acquired business
      was
      calculated as follows:





$Cash
                amount paid
            
            
            102,971Minimum
                balance of purchase price payable
            
            
            172,910275,881Transaction
                Costs
            
            
            190,180466,061


F-17


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Business
      Combination (continued)





The
      goodwill arising from the acquisition consists largely of the synergies and
      economies of scale expected from combining the operations of Willer with the
      Avensys Solutions division of AVI. All the goodwill was assigned to the
      Solutions reporting segment. After the completion of an evaluation of the excess
      of cost over the fair value of acquired net assets, and the identification
      and
      valuation of intangible assets, the purchase price was allocated to the
      following assets and liabilities:





$Accounts
                receivable
            
            
            791,075Inventories
            
            
            258,051Prepaid
                expenses and deposits
            
            
            41,516Property
                and equipment
            
            
            96,610Customer
                Relationships (+)
            
            
            203,982Trade
                Names (+)
            
            
            112,778Goodwill
                (*)
            
            
            343,485Accounts
                payable and accrued liabilities
            
            
            (1,381,436
            )466,061


(*)
      deductible for tax purposes


(+)
      amortized on a straight-line basis over five years





6.
            Property
                and Equipment





June
                30, 2008Accumulated
            
            Net
                BookCost
            
            Amortization
            
            Value$
            
            $
            
            $Automotive
                equipment
            
            
            35,806
            
            
            9,390
            
            
            26,417Computer
                equipment
            
            
            545,634
            
            
            485,823
            
            
            59,811Furniture
                and fixtures
            
            
            373,323
            
            
            348,475
            
            
            24,847Laboratory
                equipment
            
            
            3,331,122
            
            
            1,348,813
            
            
            1,982,310Leasehold
                improvements
            
            
            517,599
            
            
            300,809
            
            
            216,790Machinery
                and office equipment
            
            
            67,271
            
            
            58,988
            
            
            8,283Software
            
            
            189,036
            
            
            114,789
            
            
            74,247Capital
                leases - computer equipment
            
            
            171,295
            
            
            73,785
            
            
            97,509Total
                property and equipment
            
            
            5,231,086
            
            
            2,740,871
            
            
            2,490,215Depreciation
                during the year
            
            
            
            
            
            
            
            
            632,602





June
                30, 2007Accumulated
            
            Net
                BookCost
            
            Amortization
            
            Value$
            
            $
            
            $Automotive
                equipment
            
            
            41,951
            
            
            31,035
            
            
            10,916Computer
                equipment
            
            
            484,675
            
            
            436,862
            
            
            47,813Furniture
                and fixtures
            
            
            343,047
            
            
            328,307
            
            
            14,741Laboratory
                equipment
            
            
            2,711,664
            
            
            873,160
            
            
            1,838,504Leasehold
                improvements
            
            
            437,836
            
            
            179,548
            
            
            258,288Machinery
                and office equipment
            
            
            60,355
            
            
            54,766
            
            
            5,590Software
            
            
            148,750
            
            
            87,615
            
            
            61,135Capital
                leases - computer equipment
            
            
            96,617
            
            
            53,630
            
            
            42,987Total
                property and equipment
            
            
            4,324,896
            
            
            2,044,923
            
            
            2,279,973Depreciation
                during the year
            
            
            
            
            
            
            
            
            532,064


F-18


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





7.
            Intangible
                Assets





The
      following table presents details of the Company’s purchased intangible assets
      with definite lives:





June
                30, 2008Weighted
                Average Life in Years
            
            Cost
            
            Accumulated
                Amortization
            
            Net
                Book Value$
            
            $
            
            $Technology
            
            
            2.80
            
            
            235,520
            
            
            103,628
            
            
            131,892Customer
                relationships
            
            
            6.56
            
            
            5,245,536
            
            
            1,690,717
            
            
            3,554,819Trade
                name
            
            
            4.75
            
            
            238,389
            
            
            46,014
            
            
            192,375Total
                intangible assets
            
            
            6.34
            
            
            5,719,445
            
            
            1,840,359
            
            
            3,879,086





June
                30, 2007Weighted
                Average Life in Years
            
            Cost
            
            Accumulated
                Amortization
            
            Net
                Book Value$
            
            $
            
            $Technology
            
            
            3.75
            
            
            225,418
            
            
            56,354
            
            
            169,064Customer
                relationships
            
            
            7.67
            
            
            4,825,298
            
            
            1,125,903
            
            
            3,699,395Trade
                name
            
            
            5.75
            
            
            120,222
            
            
            21,468
            
            
            98,754Total
                intangible assets
            
            
            7.46
            
            
            5,170,938
            
            
            1,203,725
            
            
            3,967,213





The
      estimated future amortization expense of acquired intangible assets with
      definite lives for the next five fiscal years is as follows:





$2009
            
            
            632,5562010
            
            
            632,5562011
            
            
            623,1352012
            
            
            585,4522013
            
            
            565,128Thereafter
            
            
            840,2593,879,086





The
      changes in the carrying amount of intangible assets during the years ended
      June
      30, 2007, and 2008 is as follows:





$Balance
                as of June 30, 2006
            
            
            3,757,272Adjustment
                following correction of an error (Note 3)
            
            
            554,017Impact
                of foreign exchange
            
            
            168,693Amortization
                during year
            
            
            (512,769
            )Balance
                as of June 30, 2007
            
            
            3,967,213Acquisition
                of intangible assets
            
            
            316,760Impact
                of foreign exchange
            
            
            185,873Amortization
                during year
            
            
            (590,760
            )Balance
                as of June 30, 2008
            
            
            3,879,086


F-19


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





8.
            Goodwill





The
      changes in the carrying amount of goodwill during the years ended June 30,
      2007
      and 2008 is as follows:





$Balance
                as of June 30, 2006
            
            
            3,762,000Adjustment
                following correction of an error (Note 3)
            
            
            171,736Impact
                of foreign exchange
            
            
            183,136Balance
                as of June 30, 2007
            
            
            4,116,872Acquisition
                of goodwill
            
            
            343,485Impact
                of foreign exchange
            
            
            184,507Balance
                as of June 30, 2008
            
            
            4,644,864





During
      the fourth quarter of Fiscal 2008, the Company completed its annual goodwill
      impairment test. In evaluating whether there was an impairment of goodwill,
      management compared the fair value of the Avensys Tech and Avensys Solutions
      reporting units against their carrying amounts, including the goodwill.
      Measurement of the fair value was based on the reporting units’ present values
      of expected future cash flows. As the estimated fair value exceeded the carrying
      amount, Management determined that no adjustments were necessary to the
      reporting units’ underlying assets and liabilities and the goodwill
      recorded.


F-20


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





9.
            Balance
                Sheet Details


June 30,
              
              June 30,2008
              
              2007$
              
              $Other
                  ReceivablesInvestment
                  tax credits receivable
              
              
              1,854,095
              
              
              1,081,787Sales
                  tax receivable
              
              
              65,416
              
              
              39,825Grants
                  receivable
              
              
              -
              
              
              9,877Other
              
              
              5,256
              
              
              35,7521,924,767
              
              
              1,167,241InventoriesRaw
                  materials
              
              
              905,988
              
              
              726,484Work
                  in process
              
              
              314,105
              
              
              179,659Finished
                  goods
              
              
              958,593
              
              
              572,6922,178,686
              
              
              1,478,835Accounts
                  Payable and Accrued LiabilitiesAccounts
                  payable
              
              
              4,045,102
              
              
              2,056,896Payroll
                  and benefits
              
              
              1,801,437
              
              
              1,447,935Income
                  taxes payable
              
              
              1,614
              
              
              4,189Rent
                  payable
              
              
              36,200
              
              
              34,648Deferred
                  revenue
              
              
              138,338
              
              
              173,517Lease
                  termination
              
              
              24,408
              
              
              33,457Provision
                  for Warranty
              
              
              282,234
              
              
              150,703Other
              
              
              32,046
              
              
              36,8436,361,379
              
              
              3,938,188


F-21




Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





10.
            Variable
                Interest Entity





The
      Financial Accounting Standards Board (“FASB”) finalized FASB Interpretation No.
      46R, “Consolidation of Variable Interest Entities—An Interpretation of ARB51”
(“FIN46R”) in December 2003. FIN46R expands the scope of ARB51 and can require
      consolidation of "variable interest entities” (“VIEs”). Once an entity is
      determined to be a VIE, the primary beneficiary is required to consolidate
      that
      entity.





During
      the year ended June 30, 2005, AVI transferred its research activities to AVI
      Laboratories Inc. (“ALI”). AVI owned at the time 49% of ALI and the two entities
      entered into an agreement (the “ALI Agreement”) whereby ALI would perform
      research and development activities for AVI. The ALI Agreement was for a period
      of five years with a two-year renewal period and calls for ALI to provide AVI
      with a commercialization license for products developed in return for a royalty
      of 5% of sales generated. AVI sold intellectual property related to research
      & development projects to ALI for tax planning purposes in return for
      500,000 preferred shares redeemable for $429,037 (CAD$500,000). ALI provided
      research & development for AVI only. However, it may also have entered into
      agreements with third parties. ALI has no financing other than amounts received
      from AVI.





As
      a
      result of the above, ALI had been included in the consolidated financial
      statements commencing in the year ended June 30, 2005 since AVI was the primary
      beneficiary.





During
      the year ended June 30, 2006, ALI purchased ITF Optical Technologies' R&D
      assets as part of a business combination. As a result of the ITF Optical
      Technologies transaction, AVI's ownership of the voting stock of ALI decreased
      from 49% to 42%. Following this acquisition, ALI continues to qualify as a
      VIE,
      of which AVI is the primary beneficiary. Consequently, ALI will continue to
      be
      consolidated by AVI and the Company following the ITF Optical Technologies
      transaction. Following this transaction, ALI changed its name to ITF
      Laboratories Inc.





ITF
      Laboratories Inc. (“ITF Labs”) provides research & development to AVI and
      other parties. As a result, ITF Laboratories Inc. continues to be included
      in
      the consolidated financial statements of the Company for the year ended June
      30,
      2008, since AVI is the primary beneficiary. The impact of including the accounts
      of ITF Laboratories Inc. in the consolidated balance sheet as at June 30, 2008
      consists of additions to current assets of $2,785,075 (June 30, 2007 -
      $1,862,614), net property and equipment of $916,421 (June 30, 2007 - $903,564),
      intangible assets of $237,834 (June 30, 2007 - $344,892) and current liabilities
      of $1,370,102 (June 30, 2007 - $867,218). The impact on the consolidated
      statement of operations for years ended June 30, 2008 and 2007 was an increase
      in revenue of $2,063,254 and $1,595,618, respectively, an increase in expenses
      of $4,152,636 and $760,553, respectively, and an increase in the income tax
      benefit from refundable investment tax credits of $1,124,819 and $1,217,148,
      respectively. The increase in expenses includes an amount for research and
      development expenses of $2,507,858 and $746,111, respectively.





11.
            Related
                Party Transactions and Balances





The
      total
      amount due to a shareholder of the Company at June 30, 2008 is $40,000 (June
      30,
      2007 - $40,000). The amount due is non-interest bearing, unsecured and has
      no
      fixed terms of repayment.





12.
            Bank
                and Other Loans Payable





The
      details of bank and other loans payable is as follows:





June
                30,
            
            June
                30,2008
            
            2007$
            
            $Senior
                Secured Working Capital Note of the Company, bearing interest at
                8.5%,
                maturing October 1, 2008 ($500,000) and November 2, 2008 ($500,000),
                repayable on demand (Note 12(c))
            
            
            1,000,000
            
            
            -Secured
                bank line of credit of AVI, bearing interest at Canadian bank prime
                rate
                plus 1.5% (Note 12(a))
            
            
            843,540
            
            
            253,125Investment
                tax credit financing of AVI, bearing interest at 18%, repayable on
                demand
                (Note 12(b))
            
            
            588,408
            
            
            92,8682,431,948
            
            
            345,993




a)
            AVI
                maintains a line of credit from a financial institution for an authorized
                amount of $1,333,726 (CAD$1,360,000), which bears interest at the
                Canadian
                bank prime rate plus 1.5%. The outstanding balance under the line
                of
                credit as at June 30, 2008 amounted to $843,540 (CAD $860,157) (June
                30,
                2007 $253,125 - CAD$269,679). AVI’s accounts receivable totaling
                $4,676,473 (CAD $4,768,600) and inventories totaling $1,706,735 (CAD
                $1,740,358) serve as guarantees for the line of credit. As discussed
                in
                Note 1, according to terms of the credit agreement, AVI is subject
                to
                certain financial covenants which were not respected as at June 30,
                2008.


F-22


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Bank
      and
      Other Loans Payable (continued)





b)
            ITF
                Labs obtained investment tax credit financing during fiscal 2007
                in the
                form of a demand loan in the amount of $397,099 (CAD $460,000). ITF
                Labs
                repaid $304,231 (CAD $361,058) of the demand loan during fiscal 2007
                leaving a balance owing at June 30, 2007 of $92,868 (CAD $98,942).
                ITF
                Labs repaid the balance of the demand loan during the quarter ended
                September 30, 2007. It also obtained additional investment tax credit
                financing during the quarter ended September 30, 2007 in the amount
                of
                $588,408 (CAD $600,000). The demand loan bears interest at 18%, with
                interest payable on a monthly basis, and is secured by the Federal
                and
                Provincial tax credits receivables and the assets of ITF
                Labs.





In
      connection with the issue of a Senior Secured Original Issue Discount
      Convertible Debenture (Note 15 (b)), the Company obtained access to a $2,500,000
      Working Capital Facility (the “Facility”). On November 2, 2007, the Company
      obtained $500,000 from the Facility in the form of a Senior Secured Working
      Capital Note (“WC Note”), bearing interest at 8.5% payable at maturity, maturing
      on February 2, 2008 and repayable on demand. The Company renewed the $500,000
      WC
      Note on the same terms and conditions on February 2, 2008, May 2, 2008 and
      August 2. 2008 and the maturity date was extended to November 2, 2008. On April
      1, 2008, the Company obtained an additional $500,000 WC Note from the Facility
      bearing interest at 8.5% payable at maturity, maturing on July 1, 2008, which
      was extended to October 1, 2008 on the same terms and conditions. In the normal
      course of operations, these notes are subject to maturity dates being extended
      and the notes are therefore renewed on maturity. As discussed in Note 1,
      subsequent to year-end, the Company obtained a waiver, from the holder of the
      WC
      Notes, for a failed condition of the Facility which resulted from the triggering
      of a cross-default clause.





13.
            Balance
                of Purchase Price and Derivative Liability on ITF
                Purchase





Since
      the
      acquisition in 2006 of the manufacturing and research and development assets
      of
      ITF Optical Technologies Inc., the Company has recorded a balance of purchase
      price payable and derivative liability related to an embedded conversion
      option.





The
      Preferred Shareholder arrangement entitling the former shareholders of ITF
      Optical Technologies Inc. (the “ITF Preferred Shareholders”) to a right to
      receive a fixed amount of CAD$2,000,000 or a fixed number of the Company’s
      common shares has been accounted for as a convertible liability consisting
      of a
      debt instrument with an embedded conversion option. The debt instrument has
      been
      originally measured at its present value using a discount rate of 30% resulting
      in a net present value of $794,148 on the date of issuance. This carrying value
      is accreted to the face amount of CAD$2,000,000 using the effective interest
      rate method to the first date the ITF Preferred Shareholders could require
      a
      payment. The carrying value of the liability as at June 30, 2008 was $1,621,893
      ($1,194,096 as of June 30, 2007). The embedded conversion option has been
      classified as a liability and was originally recognized at its fair value of
      $503,814 on the date of issuance. Subsequently, this conversion option is
      re-measured at fair value with changes in fair value recorded in the Statement
      of Operations. The fair value of this embedded conversion option was $1,122
      as
      of June 30, 2008 ($17,045 as of June 30, 2007). The fair value of the embedded
      conversion option is determined using the Black-Scholes Model.





14.
            Long-Term
                Debt


June
                  30,
              
              June
                  30,2008
              
              2007$
              
              $Mortgage
                  loan secured by AVI's intangible and movable tangible assets, June
                  30,
                  2008 - CAD $203,000 (June 30, 2007 - CAD $245,000), bearing interest
                  at
                  the lender's prime rate, June 30, 2008 - 6.75% (June 30, 2007 -
                  8.25%)
                  plus 1.75%, payable in monthly instalments of CAD$7,000 plus interest,
                  maturing in November 2010
              
              
              199,079
              
              
              229,961Capital
                  lease obligations, June 30, 2008 - CAD $92,396 (June 30, 2007 -
                  CAD
                  $41,304), bearing interest between 9.07% and 16.23%, maturing between
                  October 2009 and April 2012
              
              
              90,610
              
              
              38,768Secured
                  note, June 30, 2008 - CAD $24,560, bearing no interest, payable
                  in 48
                  monthly instalments of $614, maturing October 2011.
              
              
              24,086
              
              
              -313,775
              
              
              268,729Less:
                  Current portion of long-term debt
              
              
              122,423
              
              
              94,317Long-term
                  debt
              
              
              191,352
              
              
              174,412
  Principal
        payments on long-term debt and capital leases are as follows:
 
 $2009
              
              
              122,4232010
              
              
              120,6672011
              
              
              60,9282012
              
              
              9,7572013
              
              
              -Total
              
              
              313,775




F-23


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





15.
            Convertible
                Debentures


June
                  30,
              
              June
                  30,2008
              
              2007$
              
              $Series
                  B Subordinated Secured Convertible Debentures (original principal
                  amount
                  of $3,622,143) and Original Issue Discount Series B Subordinated
                  Secured
                  Convertible debentures (original principal amount equal to 15%
                  of the
                  Series B debentures), maturing February 11, 2009 (Note 15
                  (a))
              
              
              -
              
              
              2,470,867Senior
                  Secured Original Issue Discount Convertible Debenture at 6% (original
                  principal amount of $4,000,000) maturing September 24, 2012 (Note
                  15
                  (b))
              
              
              1,299,412
              
              
              -Unsecured
                  Convertible Debentures bearing interest at 12% maturing March 1,
                  2008,
                  original principal amount of $375,446 (CAD$400,000) (Note 15
                  (c))
              
              
              -
              
              
              373,1101,299,412
              
              
              2,843,977Less:
                  Current portion of convertible debentures
              
              
              -
              
              
              1,568,519Convertible
                  debentures
              
              
              1,299,412
              
              
              1,275,458
 
 Principal
        payments on the convertible debentures for the next five years are as
        follows:
 
 $2009
              
              
              -2010
              
              
              1,177,2252011
              
              
              1,569,6332012
              
              
              1,569,6332013
              
              
              392,4094,708,900Less:
                  Impact of accretion / present value
              
              
              3,409,488Total
              
              
              1,299,412




a)
            Series
                B Subordinated Secured Convertible
                Debentures





During
      the first quarter of fiscal 2008, the Company redeemed its Series B Subordinated
      Secured Convertible Promissory Notes and its Original Issue Discount Series
      B
      Subordinated Secured Convertible Promissory Notes, both originally due February
      11, 2009 (collectively the “Notes”). Under an arrangement with a majority of the
      holders of the Notes, the Company also redeemed half of the associated Series
      Y
      and Series Z Warrants (collectively the “Warrants”) previously issued in August
      2006 and November 2006 relating to the redeemed Notes. The total purchase price
      for the redemption of the Notes and the Warrants was $3.4 million. The remaining
      half of the Warrants that are retained by the holders of the Notes have had
      their exercise prices reduced to and fixed at $0.11 per share, with no further
      ratchet or anti-dilution provisions.





In
      connection with the redemption of the Notes, the Company recorded a non-cash
      charge of $1,422,577 in the first quarter of fiscal 2008 which is included
      as
      part of Other Expenses in the Statement of Operations and Comprehensive Loss.
      At
      June 30, 2008, the outstanding principal amount on the Notes was zero.





As
      a
      result of the redemption of the Notes, the security relating to the Notes has
      been released.





Prior
      to
      the redemption, the Company recorded the issuance of the Series B Subordinated
      Secured Convertible Debentures as follows:





(i)
            On
                August 11, 2006, the Company entered into a Note and Warrant Purchase
                Agreement for the sale of Series B Subordinated Secured Convertible
                Notes
                (“Series B Notes”), for a principal amount of $2,112,917, Original Issue
                Discount Series B Subordinated Secured Convertible Notes (“OID Notes”),
                for a principal amount of $316,938, and Series Y and Z Warrants (see
                Note
                17(b)). Such amounts represented the first tranche of the debt financing.
                On November 17, 2006, the Company received the second tranche of
                the
                Series B Notes, for a principal amount of $1,509,226, and OID Notes,
                for a
                principal amount of $226,384. After deducting commissions and other
                debt
                issue expenses, the net proceeds to the Company of the first tranche
                were
                $1,819,612 and were $1,360,238 for the second
                tranche.




F-24


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Convertible
      Debentures (continued)





Series
      B
      Subordinated Secured Convertible Debentures (continued)





(ii)
            In
                accordance with EITF 00-19 “*Accounting
                for Derivative Financial Instruments Indexed to, and Potentially
                Settled
                in, a Company’s Own Stock*”,
                the Company allocated, with respect to the first tranche, $14,179
                to the
                Warrants Series Y, $266,168 to the Warrants Series Z, and recognized
                an
                embedded conversion option feature of $608,440. The warrants and
                the
                embedded conversion option feature components were accounted for
                as a
                derivative liability. The Company allocated the remaining proceeds
                to the
                Series B Notes in the amount of $1,064,461 and to the OID Notes in
                the
                amount of $159,669. The Company also allocated $84,049 to the Placement
                Fee Warrants made up of Warrants Series Y, Warrants Series Z and
                Warrants
                Series W and such are also accounted for as derivative liabilities.
                The
                Company allocated, with respect to the second tranche, $6,146 to
                the
                Warrants Series Y, $120,870 to the Warrants Series Z, and recognized
                an
                embedded conversion option feature of $236,230. The warrants and
                the
                embedded conversion option feature components, as in the first tranche,
                were accounted for as a derivative liability. The Company allocated
                the
                remaining proceeds to the Series B Notes in the amount of $996,504
                and to
                the OID Notes in the amount of $149,476. The Company also allocated
                $37,948 to the Placement Fee Warrants made up of Warrants Series
                Y,
                Warrants Series Z and Warrants Series W and such were also accounted
                for
                as derivative liabilities. The carrying amounts of the Series B Notes
                and
                the OID Notes were increased monthly by periodic accretion under
                the
                effective interest method. The Company used the Black-Scholes option
                pricing model to value the warrants and the embedded conversion option
                feature at the issue date and used the same model to value these
                elements
                on a quarterly basis.





(iii)
            The
                convertible notes included both Series B Notes and OID Notes. The
                Series B
                Notes were non-interest bearing and the OID Notes effectively provided
                the
                interest component on the Series B Notes. Pursuant to the Purchase
                Agreement, the Company issued four year warrants to purchase shares
                of the
                Company's common stock in an amount equal to 37.5% of the number
                of common
                shares underlying the Series B Notes at $0.45 per share (the "Series
                Z
                Warrants") and 2.5% of the number of common shares underlying the
                Series B
                Notes at $0.65 per share (the "Series Y Warrants").





(iv)
            The
                Series B Notes and OID Notes would mature thirty (30) months from
                the date
                of issuance (the "Maturity Date") and were convertible at any time
                into
                shares of the Company's common stock at a fixed conversion price
                of $0.42,
                subject to a conversion price reset of $0.35. The conversion price
                of the
                Series B Notes and OID Notes were subject to adjustment for certain
                events, including dividends, distributions or split of the Company's
                common stock, or in the event of the Company's consolidation, merger
                or
                reorganization. Beginning nine months from the issuance date, the
                Company
                was required to make principal payments equal to one-ninth of the
                aggregate principal amount of the Series B Notes and OID notes on
                a
                quarterly basis commencing February 1, 2007. The Company may have
                paid the
                principal payment in either cash plus a premium of 7% of each principal
                payment or in shares of registered common stock at a 15% discount
                to the
                market price of the Company's common stock. The Series B and OID
                noteholders, upon notification by the Company that they would be
                repaid in
                shares at the particular repayment date, could elect the date, without
                limitation, upon which to base the number of common shares to be
                received
                for the principal amount owing at the repayment date. At June 30,
                2007,
                Series B and OID principal, for which noteholders had not accepted
                their
                common shares as repayment, amounted to $46,296 and was included
                in the
                carrying value of the subordinated secured convertible debentures.
                Such
                amount was converted to common shares, on July 18, 2007, resulting
                in an
                additional 649,955 common shares being issued to repay the principal
                amount.





(v)
            The
                Company's obligations under the Purchase Agreement and the Notes
                were
                secured by a subordinated lien on substantially all of the assets
                of the
                Company, pursuant to a Pledge and Security Agreement. The purchase
                agreement with respect to these Notes contained certain covenants
                (a)
                related to the conduct of the business of the Company and its
                subsidiaries; (b) related to creation or assumption of lien other
                than
                liens created pursuant to the Security Documents and Permitted Liens,
                as
                defined in the purchase agreement; (c) related to permitted acquisitions
                and disposition of the assets; (d) for so long as the Notes remain
                outstanding, the Company shall not issue any securities that rank
                pari
                passu or senior to the Notes without the prior written consent of
                a
                majority of the principal amount of the Notes outstanding at such
                time
                except for secured non-equity linked commercial debt which shall
                rank
                senior to the Notes in an amount equal to the greater of (i) $2,000,000
                or
                (ii) fifty percent (50%) of the Purchase
                Price.


F-25


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Convertible
      Debentures (continued)





Series
      B
      Subordinated Secured Convertible Debentures (continued)





The
      following table illustrates the values of the various components of this
      financing at the issue dates, and the balance sheet dates, June 30, 2007 and
      June 30, 2008.





Expiry Date
            
            # of Underlying
              Shares
            
            Value at Issue
              Dates
            
            Value at June
              30, 2007
            
            Value at June
              30, 2008$
            
            $
            
            $**Derivative
                Liabilities**Series
                B Notes
            
            
            2/11/2009
            
            
            
            
            
            734,495
            
            
            9,895
            
            
            -OID
                Notes
            
            
            2/11/2009
            
            
            
            
            
            110,175
            
            
            1,484
            
            
            -Series
                Y Warrants
            
            
            11/9/2010
            
            
            145,005
            
            
            20,325
            
            
            1,048
            
            
            2,628Series
                Z Warrants
            
            
            11/9/2010
            
            
            2,175,063
            
            
            387,038
            
            
            26,421
            
            
            39,4131,252,033
            
            
            38,848
            
            
            42,041**Carrying
                Value of Subordinated Secured Convertible
                Debentures**Series
                B Notes
            
            
            2/11/2009
            
            
            
            
            
            2,060,965
            
            
            2,155,684
            
            
            -OID
                Notes
            
            
            2/11/2009
            
            
            
            
            
            309,145
            
            
            315,183
            
            
            -2,370,110
            
            
            2,470,867
            
            
            -**Value
                of Series B Notes**
            
            
            
            
            3,622,143
            
            
            2,509,715
            
            
            42,041**Derivative
                Liabilities (Placement Fees)**Series
                W Warrants
            
            
            11/9/2010
            
            
            711,490
            
            
            88,472
            
            
            6,351
            
            
            2,886Series
                Y Warrants
            
            
            11/9/2010
            
            
            17,789
            
            
            1,672
            
            
            86
            
            
            322Series
                Z Warrants
            
            
            11/9/2010
            
            
            266,810
            
            
            31,853
            
            
            2,180
            
            
            4,835121,997
            
            
            8,617
            
            
            8,043**Total
                Derivative Liabilities**
            
            
            
            
            1,374,030
            
            
            47,465
            
            
            50,084


F-26


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Convertible
      Debentures (continued)





b)
            Senior
                Secured Original Issue Discount Convertible
                Debenture





In
      connection with the redemption of the Notes described in Note 15(a), the Company
      received a $3.4 million secured loan facility from Imperium Master Fund, LTD
      (the “Investor”). The terms of the loan facility state that interest will be
      paid by the Company on the unpaid principal amount at an annual rate equal
      to
      8.5%. It was the intention of the Company and the Investor to replace the
      secured loan facility with a comprehensive refinancing to facilitate a capital
      restructuring that would provide the Company with additional working capital
      and
      credit facilities. On September 24, 2007, the Company entered into a Securities
      Purchase and Loan Agreement (“SPL Agreement”) with the Investor for the sale of
      a 6% Senior Secured Original Issue Discount Convertible Debenture (“Convertible
      Note”) in the amount of $4,708,900. The principal value and the gross proceeds
      of the Convertible Note is $4,000,000. The gross proceeds were used to repay
      the
      secured loan facility of $3.4 million, being the amount which had been used
      to
      repay the Notes described in Note 15(a), with the balance of funds, $0.6
      million, for the Company’s working capital purposes.





The
      Convertible Debenture matures on September 24, 2012 and the original principal
      amount is convertible into common shares of the Company at a conversion price
      of
      $0.11. The principal value will accrete to the value of the Convertible Note
      over a two-year period and will subsequently accrue interest at 6%. Monthly
      installments of principal and interest will be payable commencing after the
      second year up to the maturity date. The SPL Agreement also provides the holder
      of the Convertible Note with Series Q warrants to purchase, subject to
      adjustment, 20,276,190 shares of the Company’s outstanding common stock on a
      fully diluted basis. On August 22, 2007, the Company issued to the holder of
      the
      Convertible Note Series P warrants, representing compensation for advisory
      services rendered to the Company, to purchase up to 5% of the Company’s
      outstanding common stock, initially amounting to 8,091,403 shares and subject
      to
      adjustment, on a fully diluted basis. The warrants have an exercise price of
      $0.11, subject to adjustment, and expire after five years. In addition, the
      SPL
      Agreement provides the Company with a $2,500,000 Working Capital Facility.





In
      accordance with EITF 00-19, EITF 05-2, EITF 05-4, FASB 133 and APB 14, the
      Company allocated $479,816 to the Series P Warrants and recognized an embedded
      conversion option feature of $1,711,199. The Series P warrants and the embedded
      conversion option feature components are accounted for as derivative
      liabilities. The Company allocated $162,500 and $53,624, respectively, to the
      common stock and warrants issued to the placement agent, and allocated $960,259
      to the Series Q warrants, all of which were recorded as additional paid-in
      capital. The Company allocated the remaining proceeds to the Convertible
      Debenture in the amount of $848,725. The carrying amount of the Convertible
      Debenture will be increased by periodic accretion under the effective interest
      method. The Company used the Black-Scholes option pricing model to value the
      Series P warrants and the embedded conversion option feature, recorded as
      derivative liabilities, at the issue date and uses the same model to value
      these
      elements on a quarterly basis. The Company recorded deferred financing costs
      of
      $446,124 at the issue date, representing common stock and warrants issued to
      the
      placement agent valued at $162,500 and $53,624, respectively, and cash fees
      paid
      of $230,000. These deferred financing costs are amortized on a straight-line
      basis over the term of the Convertible Debenture. At June 30, 2008, the
      outstanding principal amount on the Convertible Debenture was $4,258,553.





The
      following table illustrates the values of the various components of the
      financing at the issue date, September 24, 2007, and the balance sheet date,
      June 30, 2008.





Issue
                Date
            
            Maturity
                /
            
            # of underlying
            
            Value at September
            
            Value at JuneExpiry
                Date
            
            Shares
            
            24,
                2007
            
            30,
                2008**Derivative
                Liabilities**Series
                P warrants
            
            
            9/24/2007
            
            
            9/24/2012
            
            
            8,091,403
            
            
            479,816
            
            
            226,032Beneficial
                Conversion Option - Convertible debenture
            
            
            9/24/2007
            
            
            9/24/2012
            
            
            
            
            
            1,711,199
            
            
            1,086,0342,191,015
            
            
            1,312,066**Carrying Value of Original Issue Discount****Senior Secured Convertible Debenture**Convertible
                debenture
            
            
            9/24/2007
            
            
            9/24/2012
            
            
            38,714,119
            
            
            848,725
            
            
            1,299,412**Additional
                Paid-In Capital**Common
                stock issued for fees (1)
            
            
            9/24/2007
            
            
            
            
            
            
            
            
            162,500
            
            
            162,500Warrants
                issued for fees
            
            
            9/24/2007
            
            
            
            
            
            1,936,937
            
            
            53,624
            
            
            53,624Series
                Q warrants
            
            
            9/24/2007
            
            
            
            
            
            20,276,190
            
            
            960,259
            
            
            960,2591,176,383
            
            
            1,176,383**Total**
            
            
            
            
            
            
            
            
            
            
            
            4,216,123
            
            
            3,787,861




(1)
      Common shares to the Placement Agent totaling 1,477,273 were issued in the
      third
      quarter of fiscal year 2008.


F-27


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Convertible
      Debentures (continued)





Senior
      Secured Original Issue Discount Convertible Debenture (continued)





In
      connection with this financing, specifically the shares to be delivered upon
      potential conversion of the Convertible Debenture and the exercise of the
      Warrants, the Company was obligated to file a registration statement with the
      Securities and Exchange Commission (“SEC”). The Company’s registration
      statement, filed with the SEC, became effective as of January 14, 2008.





To
      secure
      payment of the principal amount of the Convertible Note, the Company
      hypothecated, in favor of the holder of the Convertible Debenture, the
      universality of all of the immoveable and moveable assets, corporeal and
      incorporeal, present and future of the Company.





The
      Convertible Debenture contains events of default that would permit the Investor
      to demand repayment.





The
      SPL
      Agreement with respect to this Convertible Debenture contains certain covenants
      (a) related to the conduct of the business of the Company and its subsidiaries;
      (b) related to certain financial covenants; (c) related to creation or
      assumption of liens other than liens created pursuant to the SPL Agreement,
      as
      defined in the SPL Agreement; (d) for so long as this Note remains outstanding,
      the Company shall not, without the consent of the holder of the Convertible
      Debenture, create, incur, guarantee, issue, assume or in any manner become
      liable in respect of any indebtedness, other than permitted indebtedness, or
      issue other securities that rank senior to this Convertible Debenture provided
      however that the Company could have a certain maximum amount of outstanding
      bank
      debt. At June 30, 2008, all the covenants contained within this Convertible
      Debenture were respected, except as discussed in Note 1. Subsequent to year-end,
      the Company obtained a waiver from its lenders for a failed condition of the
      Senior Secured Convertible Debenture which resulted from the triggering of
      a
      cross-default clause.





c)
            Unsecured
                Convertible Debentures





With
      the
      acquisition of AVI in February 2005, the Company assumed 15% unsecured
      convertible debentures having a nominal value of $918,068 (CAD$1,125,000) and
      maturing on September 1, 2007. When the debentures were originally issued,
      AVI
      recorded an equity component of $378,445 (CAD$463,747) and a liability component
      of $539,623 (CAD$661,253), for a total of $918,068 (CAD$1,125,000). In April
      2005, the Company issued 680,000 shares in settlement of $520,238 (CAD$637,500)
      of the debentures outstanding, the value of the debt settlement representing
      the
      fair value of the shares. The remainder of the debentures, $397,829
      (CAD$487,500) was replaced by a new 15% unsecured debenture. The new debenture
      is convertible into shares of the Company using the following formula: principal
      and interest divided by a 17.5% discount on the 10 day weighted average price
      of
      the Company’s shares. At June 30, 2006, the discount related to the conversion
      feature was $37,657. On August 10, 2006 the debenture was fully converted into
      1,654,394 common shares of the Company. Pursuant to the conversion agreement,
      the Company has filed a registration statement that includes the said shares.
      On
      October 9, 2006, the Company’s registration statement became effective enabling
      the shares to be issued The shares were issued on April 2, 2007.The share price
      was calculated using the following formula: principal and interest divided
      by a
      17.5% discount on the 10 day weighted average price of the Company’s shares
      which equaled $0.26 (CAD$0.29) per share. The transaction resulted in the
      Company recognizing a loss on conversion of $129,922 in the first quarter of
      fiscal 2007.





With
      the
      acquisition of AVI in February 2005, the Company also assumed 12% unsecured
      convertible debentures having a nominal value of $652,848 (CAD$800,000) and
      maturing on March 1, 2008. When the debentures were originally issued, AVI
      recorded an equity component of $305,857 (CAD$374,797) and a liability component
      of $346,991 (CAD$425,203), for a total amount of $652,848 (CAD$800,000). In
      April 2005, the Company issued 426,667 shares in settlement of $326,424
      (CAD$400,000) of the debentures outstanding, the value of the debt settlement
      representing the fair value of the shares. The remainder of the debentures,
      $346,440 (CAD$400,000) were modified to be convertible into 330,251 shares
      of
      the Company. At June 30, 2007, the discount related to the conversion feature
      was $2,336 (June 30, 2006 - $15,635).  During
      the three months ended March 31, 2008, AVI made the first of four cash payments,
      as agreed by the holder of the debentures, to reimburse the 12% unsecured
      convertible debentures, which matured on March 1, 2008. As of June 30, 2008,
      the
      balance is paid in full.


F-28


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





16.
            Common
                Stock





At
      June
      30, 2008, the Company had authority to issue 500,000,000 shares of common stock.
      The Company had 99,036,152 and 93,437,654 of common shares outstanding at June
      30, 2008 and June 30, 2007, respectively.





For
      the
      year ended June 30, 2008:





a)
            In
                February 2008, the Company issued 462,035 common shares upon the
                resolution of a contingency related to the acquisition of the
                manufacturing assets of ITF Optical Technologies Inc. in April
                2006.





On
      April
      18, 2006, Avensys Corporation, AVI and Avensys Laboratories Inc (“ALI”), entered
      into an Asset Purchase Agreement (the “ITF Agreement”) to acquire the
      manufacturing assets and research and development assets of ITF Optical
      Technologies Inc. The purchase price paid for the manufacturing assets acquired
      by AVI, pursuant to the ITF Agreement, was $1,526,651 (CAD $1,750,000),
      comprised of $654,279 (CAD $750,000) in cash and $872,372 (CAD$1,000,000) of
      Avensys Corporation common stock (2,550,795 common shares). The 2,550,795 common
      shares were originally issued as restricted stock and became freely tradable
      on
      November 9, 2006 (“Free Date”). The holders of these shares were permitted to
      sell, in every three month period following the Free Date, the lesser of (i)
      25%
      of the shares and (ii) the average weekly reported volume of trading in the
      common shares of Avensys Corporation on the OTCBB in the previous three month
      period. Notwithstanding the foregoing, the holders of such shares were permitted
      to sell any number of the common shares in any three month period if the closing
      price of the common shares of Avensys Corporation on the date of the sale of
      the
      common shares was higher than a specified reference price, which was $0.342.
      The
      holders of the common shares were also permitted to transfer all or any of
      the
      common shares at any time and at any price by private sale to a bona fide third
      party purchaser. In addition, if within the period ending one year after the
      Free Date (“Period”), the holders of the common shares sold their common shares
      through the facilities of the OTCBB at a price which was less than the specified
      reference price, Avensys Corporation would, at the option of the holders of
      the
      common shares, within five days of the end of the Period, either pay in cash
      the
      cumulative shortfall between the specified reference price and the actual sale
      price of the common shares or issue that number of free trading shares of common
      stock of Avensys Corporation equal to the cumulative shortfall. On November
      9,
      2007, the shortfall based on actual common shares sold was established at
      $34,653 and the holders elected to be paid in common shares using the November
      9, 2007 closing share price of $0.075, with such amount totaling 462,035 common
      shares.





b)
            In
                February 2008, the Company issued 1,477,273 registered common shares,
                representing $162,500 in placement agent fees, in connection with
                the
                Senior Secured Original Issue Discount Convertible Debenture described
                in
                Note 15(b)





c)
            In
                the quarter ended September 30, 2007, the Company issued 649,955
                common
                shares representing scheduled principal payments on the Series B
                Notes and
                the OID Notes.





d)
            In
                August 2007, pursuant to the cashless exercise of warrants described
                in
                Note 17(b) and other warrants exercised on a cashless basis, the
                Company
                issued 2,759,235 common shares.





e)
            In
                August 2007, the Company issued 250,000 registered common shares
                as
                compensation for legal services.





For
      the
      year ended June 30, 2007:





a)
            In
                the third and fourth quarters of fiscal 2007, the Company issued
                12,450,353 common shares representing scheduled principal payments
                on the
                Series B Notes and the OID Notes.





b)
            In
                April 2007, pursuant to the conversion of the unsecured convertible
                debentures described in Note 15(c), the Company issued 1,654,394
                common
                shares.





c)
            In
                February 2007, the Company issued 40,000 restricted common shares
                as
                compensation for legal services.





d)
            In
                November 2006, the Company issued 6,055 common shares in connection
                with
                the Series A Notes as an adjustment to a previous issuance for principal
                payment.





e)
            During
                the first quarter of fiscal 2007, the Company issued 1,277,558 common
                shares in connection with the Series A Notes. Of that amount, 1,094,949
                common shares with a fair value of $341,458, were issued for scheduled
                principal payments. Since the Company had been accreting the debt
                on the
                basis that the principal payments would be settled in shares, no
                gain or
                loss was recorded and the $341,458 was removed from the carrying
                value of
                the convertible debentures and credited to capital stock and additional
                paid in capital. Also, a total of 182,609 common shares, with a fair
                value
                of $58,410, were issued for interest payments. Since the Company
                had been
                accruing interest on the basis that the interest would be settled
                in
                shares, no gain or loss was
                recorded.


F-29


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Common
      Stock (continued)





f)
            In
                September 2006, pursuant to the ITF transaction and in connection
                with the
                Company’s failure to file the required registration statement within the
                time period required by the Asset Purchase Agreement, the Company
                issued
                255,079 restricted common stock shares to the ITF preferred shareholders.
                The fair value of the shares at the issue date that was expensed
                in the
                financial statements was $73,463.





g)
            In
                August 2006, the Company issued 82,934 common shares to settle outstanding
                payables in the amount of $25,709.





Common
      stock reserved for issuance at June 30, 2008 was as follows:





June
                30,
            
            June
                30,2008
            
            2007Stock
                OptionsOptions
                outstanding
            
            
            10,036,773
            
            
            8,661,070Reserved
                for future issuance
            
            
            3,989,541
            
            
            365,244Stock
                Plan (1)Reserved
                for future issuance
            
            
            3,750,000
            
            
            -Warrants
            
            
            44,125,399
            
            
            17,752,882Conversion
                feature of OID Senior Secured Convertible Note
            
            
            38,714,119
            
            
            -Conversion
                feature of Series B Notes and OID Notes
            
            
            -
            
            
            48,325,000Conversion
                feature of unsecured convertible debentures
            
            
            -
            
            
            330,251100,615,832
            
            
            75,434,447




(1)
            On
                August 21, 2007, the Company filed an S-8 with the Securities and
                Exchange
                Commission establishing an Employee Compensation Plan (“Plan”). The Plan
                is designed to retain employees, consultants, advisors and professionals
                (“Participants”) and reward them for making major contributions to the
                success of the Company. These objectives are accomplished by making
                long-term incentive awards under the Plan thereby providing Participants
                with a proprietary interest in the growth and performance of the
                Company.
                The Company registered 4,000,000 common shares for issuance under
                the
                Plan. In August 2007, the Company issued 250,000 common shares from
                the
                Plan as compensation for legal
                services.


F-30




Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





17.
            Stock
                Options and Warrants





a)
            Stock
                Options





Under
      the
      Avensys Corporation 2006 Nonqualified Stock Option Plan (“Plan”), the Company
      may grant options to its Directors, Officers and employees for the acquisition
      of up to 15,000,000 common shares. Stock options are generally granted with
      an
      exercise price equal to the common share’s fair market value at the date of
      grant. Options are granted periodically and both the maximum term of an option
      and the vesting period are set at the Board of Directors’ discretion. On
      September 5, 2007, the Plan was amended and restated as the Amended and Restated
      2006 Nonqualified Stock Option Plan and augmented by 5,000,000 stock options,
      allowing the Company to issue options for the acquisition of up to 20,000,000
      common shares.





During
      the year ended June 30, 2008, 3,100,000 stock options were granted to employees
      and directors with exercise prices equivalent to the market price on the
      respective grant dates (4,499,069 for the year ended June 30,
      2007).





During
      the year ended June 30, 2008, zero stock options were granted to employees
      and
      directors with exercise prices below the market price on the respective grant
      dates (zero for the year ended June 30, 2007).





During
      the year ended June 30, 2008, zero stock options were granted to non-employees
      with exercise prices equivalent the market price on the respective grant dates
      (zero for year ended June 30, 2007)





During
      the year ended June 30, 2008, zero stock options were granted to non-employees
      with exercise prices below the market price on the respective grant dates
      (64,834 for the year ended June 30, 2007).





During
      the year ended June 30, 2007, a certain director resigned and is no longer
      providing any services to the Company. Under his stock option agreement, the
      director forfeited the stock options that would have vested beyond his
      termination date, and no stock based compensation expense was recorded for
      the
      forfeited stock options.




A
        summary
        of the changes in the Company's common share stock options is presented
        below:




June
                30, 2008
            
            June
                30, 2007Weighted
            
            
            
            WeightedNumber of
            
            Average Exercise
            
            Number of
            
            Average ExerciseOptions
            
            Price
                ($)
            
            Options
            
            Price
                ($)Balance
                at beginning of the year
            
            
            8,661,070
            
            
            0.42
            
            
            4,486,750
            
            
            0.60Granted
            
            
            3,100,000
            
            
            0.09
            
            
            4,563,903
            
            
            0.22Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            (1,724,297
            )
            
            (0.18
            )
            
            (389,583
            )
            
            (0.25
            )Balance
                at end of year
            
            
            10,036,773
            
            
            0.35
            
            
            8,661,070
            
            
            0.42




F-31


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Stock
      Options and Warrants (continued)





Stock
      Options (continued)





Additional
      information regarding options outstanding as at June 30, 2008 is as
      follows:


Outstanding
                
                ExercisableWeightedAverage
                
                Weighted
                
                
                
                WeightedRange of
                
                
                
                remaining
                
                average
                
                
                
                averageExercise prices
                
                Number of
                
                contractual
                
                exercise price
                
                Number of
                
                exercise price$
                
                shares
                
                life (years)
                
                $
                
                shares
                
                $0.00
                    – 0.25
                
                
                3,839,834
                
                
                5.15
                
                
                0.09
                
                
                1,339,834
                
                
                0.090.26
                    – 0.50
                
                
                3,078,189
                
                
                5.62
                
                
                0.31
                
                
                2,328,189
                
                
                0.320.51
                    – 0.75
                
                
                1,895,000
                
                
                1.05
                
                
                0.67
                
                
                1,895,000
                
                
                0.670.76
                    – 1.00
                
                
                1,223,750
                
                
                1.26
                
                
                0.83
                
                
                1,223,750
                
                
                0.8310,036,773
                
                
                4.05
                
                
                0.35
                
                
                6,786,773
                
                
                0.46




The
      weighted average fair value of options granted for the years ended June 30,
      2008
      and 2007 was $0.06 and $0.18, respectively, as summarized below.





Number of options
            
            Weighted average
              exercise price
            
            Weighted average
              grant-date fair valueJune 30
            
            June 30
            
            June
                30
            
            June
                30
            
            June
                30
            
            June
                302008
            
            2007
            
            2008
            
            2007
            
            2008
            
            2007Options
                granted during the year ended June 30, 2008 and 2007, exercise prices
                below market price at time of grant
            
            
            -
            
            
            64,834
            
            
            -
            
            
            0.00001
            
            
            -
            
            
            0.17Options
                granted during the year ended June 30, 2008 and 2007, exercise prices
                equal to market price at time of grant
            
            
            3,100,000
            
            
            4,499,069
            
            
            0.09
            
            
            0.23
            
            
            0.06
            
            
            0.18Options
                granted during the year ended June 30, 2008 and 2007.
            
            
            3,100,000
            
            
            4,563,903
            
            
            0.09
            
            
            0.23
            
            
            0.06
            
            
            0.18




The
      Company recognized stock-based compensation for employees and directors in
      the
      amount of $249,479 and $442,185 for the years ended June 30, 2008 and 2007,
      respectively. The Company recorded zero and $11,021 of stock-based compensation
      to non-employees for the years ended June 30, 2008 and 2007, respectively.
      The
      amount of stock based compensation for the year ended June 30, 2008 includes
      $64,684 for the departure of the president of AVI in July 2007.


The
        fair
        value of the options granted during the year was measured at the date of
        grant
        using the Black-Scholes option pricing model with the following weigthed-average
        assumptions:


Years
                  endedJune
                  30,2008
              
              2007Risk
                  - free interest rate
              
              
              2.80
              %
              
              4.33
              %Expected
                  volatility
              
              
              100
              %
              
              100
              %Expected
                  life of stocks options (in years)
              
              
              3.70
              
              
              5.11Assumed
                  dividends
              
              
              None
              
              
              None




As
      at
      June 30, 2008, the Company has $251,277 of total unrecognized stock-based
      compensation expense related to non-vested stock options granted under the
      Company’s stock option plan that it expects to recognize over a period of four
      years (June 30, 2009 - $158,081, June 30, 2010 - $37,108, June 30, 2011 -
      $37,108, June 30, 2012 - $18,891).





There
      were no stock options exercised during the year ended June 30, 2008 and the
      year
      ended June 30, 2007. The impact of cash receipts from the exercise of stock
      options would be included in financing activities in the accompanying
      consolidated statements of cash flows.


F-32


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Stock
      Options and Warrants (continued)





b)
            Warrants





Warrants
                outstanding as at June 30, 2008Outstanding
            
            Warrant exercise
              pricesSeries
                E
            
            
            1,803,333
            
            
            0.31Series
                G
            
            
            1,144,131
            
            
            0.05Series
                H
            
            
            890,593
            
            
            0.35Series
                I
            
            
            1,144,131
            
            
            0.05Series
                J
            
            
            1,781,184
            
            
            0.50Series
                K
            
            
            2,653,845
            
            
            0.70Series
                P
            
            
            8,091,403
            
            
            0.11Series
                Q
            
            
            20,276,190
            
            
            0.11Series
                T
            
            
            1,936,937
            
            
            0.11Series
                W
            
            
            711,492
            
            
            0.35Series
                Y
            
            
            162,794
            
            
            0.11Series
                Z
            
            
            2,441,873
            
            
            0.11IB-01
            
            
            7,692
            
            
            0.00001IB-02
            
            
            248,532
            
            
            0.48IB-03
            
            
            374,171
            
            
            0.53IB-06
            
            
            457,098
            
            
            0.05Total
            
            
            44,125,399
            
            
            0.18




Changes
        in the warrants outstanding for the year ended June 30, 2008 was as
        follows:




Exercise
                prices
            
            0.00001
            
            0.05
            
            0.11
            
            0.31
            
            0.35
            
            0.45
            
            0.48
            
            0.50
            
            0.53
            
            0.65
            
            0.70
            
            TotalBalance
                at June 30, 2007
            
            
            7,692
            
            
            8,201,628
            
            
            -
            
            
            1,803,333
            
            
            1,602,085
            
            
            3,500,865
            
            
            248,532
            
            
            1,781,184
            
            
            374,171
            
            
            233,392
            
            
            -
            
            
            17,752,882Ratchet
                pricing effect
            
            
            -
            
            
            -
            
            
            3,734,257
            
            
            -
            
            
            -
            
            
            (3,500,865
            )
            
            -
            
            
            -
            
            
            -
            
            
            (233,392
            )
            
            -
            
            
            -Granted
            
            
            -
            
            
            -
            
            
            30,304,530
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,653,845
            
            
            32,958,375Exercised
            
            
            -
            
            
            (5,456,268
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (5,456,268
            )Forfeited
            
            
            -
            
            
            -
            
            
            (1,129,590
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,129,590
            )Balance
                as at June 30, 2008
            
            
            7,692
            
            
            2,745,360
            
            
            32,909,197
            
            
            1,803,333
            
            
            1,602,085
            
            
            -
            
            
            248,532
            
            
            1,781,184
            
            
            374,171
            
            
            -
            
            
            2,653,845
            
            
            44,125,399Weigthed
                Average remaining contractual life (years)
            
            
            1.63
            
            
            1.70
            
            
            3.91
            
            
            1.63
            
            
            1.95
            
            
            -
            
            
            1.63
            
            
            1.63
            
            
            1.63
            
            
            -
            
            
            1.15
            
            
            3.32





In
      August
      2007, the holders of Series G and Series I warrants exercised, on a cashless
      basis, 2,653,845 warrants, respectively, resulting in the issuance of 2,709,090
      common shares. The exercise price of the Series G and Series I warrants, on
      a
      cashless basis, was $0.052. The contractual provisions of the Series G warrants
      stipulate that for each such warrant exercised, a new Series K warrant shall
      be
      issued carrying an exercise price of $0.70. Therefore, as a result of the
      exercise of 2,653,845 Series G warrants, 2,653,845 Series K warrants were issued
      to the same holders of such warrants. There remains 1,144,131 Series G and
      Series I warrants outstanding.





Certain
      warrants issued by the Company contain either full ratchet or weighted average
      ratchet provisions, which reduce the exercise price of the warrant and/or
      increase the number of shares issuable on exercise, if common stock is issued
      by
      the Company below the existing exercise price of those warrants. Certain
      warrants do not contain ratchet provisions and their exercise price is not
      adjusted. The reconciliation of warrants, with respect to outstanding amounts
      and exercise prices, reflects the effect of changes in the number of warrants
      and their exercise price that have occurred as a result of the existing full
      ratchet and weighted average ratchet provisions contained in the original
      warrant agreements.


F-33


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





Stock
      Options and Warrants (continued)





Warrants
      (continued)





Warrants
                outstanding as at June 30, 2007Outstanding
            
            Warrant exercise
              pricesSeries
                E
            
            
            1,803,333
            
            
            0.31Series
                G
            
            
            3,797,976
            
            
            0.05Series
                H
            
            
            890,593
            
            
            0.35Series
                I
            
            
            3,797,976
            
            
            0.05Series
                J
            
            
            1,781,184
            
            
            0.50Series
                W
            
            
            711,492
            
            
            0.35Series
                Y
            
            
            233,392
            
            
            0.65Series
                Z
            
            
            3,500,865
            
            
            0.45IB-01
            
            
            7,692
            
            
            0.00001IB-02
            
            
            248,532
            
            
            0.48IB-03
            
            
            374,171
            
            
            0.53IB-06
            
            
            605,676
            
            
            0.05Total
            
            
            17,752,882
            
            
            0.25




Changes
      in the warrants outstanding for the year ended June 30, 2007 are as
      follows:




Exercise
                prices
            
            0.00001
            
            0.05
            
            0.31
            
            0.35
            
            0.45
            
            0.48
            
            0.50
            
            0.53
            
            0.59
            
            0.65
            
            0.67
            
            TotalBalance
                at June 30, 2006
            
            
            7,692
            
            
            -
            
            
            -
            
            
            6,890,400
            
            
            -
            
            
            -
            
            
            5,579,160
            
            
            -
            
            
            215,385
            
            
            -
            
            
            323,077
            
            
            13,015,714Ratchet
                pricing effect
            
            
            -
            
            
            8,201,628
            
            
            1,803,333
            
            
            (5,999,807
            )
            
            -
            
            
            248,532
            
            
            (3,797,976
            )
            
            374,171
            
            
            (215,385
            )
            
            -
            
            
            (323,077
            )
            
            291,419Granted
            
            
            -
            
            
            -
            
            
            -
            
            
            711,492
            
            
            3,500,865
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            233,392
            
            
            -
            
            
            4,445,749Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                as at June 30, 2007
            
            
            7,692
            
            
            8,201,628
            
            
            1,803,333
            
            
            1,602,085
            
            
            3,500,865
            
            
            248,532
            
            
            1,781,184
            
            
            374,171
            
            
            -
            
            
            233,392
            
            
            -
            
            
            17,752,882Weigthed
                Average remaining contractual life (years)
            
            
            2.63
            
            
            2.78
            
            
            2.64
            
            
            2.99
            
            
            3.36
            
            
            2.63
            
            
            2.63
            
            
            2.63
            
            
            -
            
            
            3.36
            
            
            -
            
            
            2.83


F-34


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





18.
            Commitments
                and Contingencies





Commitments




Minimum
        lease payments for the next five fiscal years are as follows:




$2009
            
            
            437,5302010
            
            
            279,3102011
            
            
            32,4052012
            
            
            2,0442013
            
            
            -751,289





The
      Company leases premises for its various offices located across Canada. Total
      rent expense was $450,205 and $647,955 for the years ended June 30, 2008 and
      2007, respectively. Total rent expense for the year ended June 30, 2007 includes
      an amount recorded as a result of an abandonment of office premises in advance
      of the expiration of the lease term. An expense and liability in the amount
      of
      $111,893 was recorded, calculated using discounted cash flows of the lease
      payments remaining, reduced by estimated sublease rentals, with a
      credit-adjusted risk-free rate of 6%. The amount will be amortized over the
      remaining period of the lease which expires on May 31, 2010.





Litigation
      and Settlement Costs





On
      February 7, 2007, a lawsuit was filed by a former employee in Superior Court
      of
      Quebec for a total amount of $268,027 (CAD $273,307), with regards to alleged
      breach of employment contract and wrongful dismissal.  The
      Company has filed its response, and is in the process of contesting the case
      vigorously. Furthermore, a court date for the hearing has been
      scheduled.





19.
            Research
                and Development Investment Tax
                Credits





The
      Company’s investment tax credit recovery for the years ended June 30, 2008 and
      2007 were positively affected as a result of revisions to amounts previously
      estimated and recorded for credits related to the fiscal year ended June 30,
      2006. As a result of these revisions, which relate to new information obtained
      following the taxation authorities’ reviews, the investment tax credit
      recoveries of the years ended June 30, 2008 and 2007 were increased by $103,872
      and $475,193, respectively. The Company includes investment tax credits arising
      from research and development activities as part of the income tax provision
      for
      the year. The Company’s income tax provision for the year ended June 30, 2008
      includes only such tax credits, arising from research and development
      activities. The investment tax credits recorded by the Company are subject
      to
      review and approval by taxation authorities and it is possible that the amounts
      granted will be different from the amounts recorded by the
      Company.


F-35


Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008





20.
            Segment
                Disclosure





The
      Company reports segment information in accordance with SFAS No. 131, “Disclosure
      About Segments of an Enterprise and Related Information”. Reporting segments are
      based upon the Company’s internal organization structure, the manner in which
      the Company’s operations are managed, the criteria used by the Company’s chief
      operating decision-maker to evaluate segment performance and the availability
      of
      separate financial information.





Commencing
      on July 1, 2007, and as a result of changes in business operations, the
      Company’s current structure is distributed among two reporting segments, Fiber
      Technologies and Solutions, each with different product and service offerings.
      The Fiber Technologies reporting segment is comprised of the operations of
      Avensys Tech and ITF and provides fiber-based technologies and products. The
      Solutions reporting segment is comprised of the operations of Avensys Solutions
      and offers products and services to the environmental monitoring solutions
      marketplace. The 2007 figures have been reclassified on this basis. The Company
      has not disclosed revenues from each group of products or services, given that
      it is impracticable to do so.





Direct
      contribution consists of revenues less direct costs. Direct costs include
      specific costs of net revenues, sales and marketing expenses, and general and
      administrative expenses over which segment managers have direct discretionary
      control, such as sales programs, customer support expenses, bank charges and
      bad
      debt write-offs. Expenses over which segment managers do not currently have
      discretionary control, such as site operations costs, product development
      expenses, and general and administrative costs, are monitored by corporate
      management and are not evaluated in the measurement of segment performance.
      Corporate management operating costs are primarily represented as part of ‘Other
      operating expenses and indirect costs of net revenues’.





**For
                the year ended June 30, 2008****Fiber**
              **Technologies**
            
            **Solutions**
            
            **Consolidated**Net
                revenues from external customers
            
            
            14,533,370
            
            
            7,069,712
            
            
            21,603,082Cost
                of net revenues
            
            
            9,265,185
            
            
            4,432,666
            
            
            13,697,851Marketing
                and sales expense
            
            
            727,953
            
            
            1,937,278
            
            
            2,665,231General
                and administrative expense
            
            
            1,118,049
            
            
            948,749
            
            
            2,066,798Research
                and development expense
            
            
            2,476,823
            
            
            -
            
            
            2,476,823Depreciation
                and amortization expense
            
            
            351,025
            
            
            57,527
            
            
            408,552Direct
                costs
            
            
            13,939,035
            
            
            7,376,220
            
            
            21,315,256Direct
                contribution
            
            
            594,335
            
            
            (306,508
            )
            
            287,827Other
                operating expenses & indirect costs of net revenues
                (+)
            
            
            
            
            
            
            
            
            (3,043,011
            )Loss
                from Operations
            
            
            
            
            
            
            
            
            (2,755,184
            )Other
                income (expense)
            
            
            
            
            
            
            
            
            57,288Loss
                on redemption of convertible debentures
            
            
            
            
            
            
            
            
            (1,422,577
            )Interest
                expense, net
            
            
            
            
            
            
            
            
            (702,338
            )Debenture
                accretion and change in fair value of derivative financial
                instruments
            
            
            
            
            
            
            
            
            (29,111
            )Income
                Tax Benefit - Refundable tax credits (*)
            
            
            
            
            
            
            
            
            1,124,819Non-Controlling
                Interest
            
            
            
            
            
            
            
            
            206Net
                Loss from Continuing Operations
            
            
            
            
            
            
            
            
            (3,726,897
            )





(*)
–
      Relates entirely to the Research & Development activities of the Fiber
      Technologies segment.


(+)
–
      Includes $212,000 of salary expense related to the departure of the President
      of
      AVI in July 2007.




F-36


Avensys
        Corporation (formerly Manaris Corporation)
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2008


Segment
      Disclosure (continued)





**For
      the year ended June 30, 2007**





**Fiber**
              **Technologies**
            
            **Solutions**
            
            **Consolidated**Net revenues from
                external customers
            
            
            10,977,252
            
            
            5,598,872
            
            
            16,576,124Cost
                of net revenues
            
            
            6,988,429
            
            
            3,484,767
            
            
            10,473,196Marketing
                and sales expense
            
            
            519,266
            
            
            1,606,842
            
            
            2,126,108General
                and administrative expense
            
            
            831,867
            
            
            455,479
            
            
            1,287,346Research
                and development expense
            
            
            1,571,572
            
            
            -
            
            
            1,571,572Depreciation
                and amortization expense
            
            
            282,769
            
            
            22,440
            
            
            305,209Direct
                costs
            
            
            10,193,904
            
            
            5,569,527
            
            
            15,763,431Direct
                contribution
            
            
            783,349
            
            
            29,344
            
            
            812,693Other
                operating expenses & indirect costs of net revenues
            
            
            
            
            
            
            
            
            (3,174,026
            )Loss
                from Operations
            
            
            
            
            
            
            
            
            (2,361,333
            )Other
                income (expense)
            
            
            
            
            
            
            
            
            172,269Loss
                on redemption of convertible debentures
            
            
            
            
            
            
            
            
            -Interest
                expense, net
            
            
            
            
            
            
            
            
            (798,856
            )Debenture
                accretion and change in fair value of derivative financial
                instruments
            
            
            
            
            
            
            
            
            (658,630
            )Income
                Tax Benefit - Refundable tax credits (*)
            
            
            
            
            
            
            
            
            1,217,948Non-Controlling
                Interest
            
            
            
            
            
            
            
            
            1,890Net
                Loss from Continuing Operations
            
            
            
            
            
            
            
            
            (2,426,712
            )





(*)
–
      Relates entirely to the Research & Development activities of the Fiber
      Technologies segment.





Revenue
      generated from two customers of the Company’s Fiber Technologies segment for the
      years ended June 30, 2008 and 2007 was approximately as follows:





Year ended June 30,2008
            
            2007$
            
            $Customer
                1
            
            
            7,942,000
            
            
            6,855,000Customer
                2
            
            
            3,035,000
            
            
            2,750,00010,977,000
            
            
            9,605,000





The
      outstanding receivable balances for these customers at June 30, 2008 amounted
      to
      $1,956,182 (Customer 1 represented $1,033,310 and Customer 2 represented
      $922,872).





The
      Company’s assets are allocated as follows:





June 30,
            
            June 30,2008
            
            2007$
            
            $Fiber
                Technologies
            
            
            9,101,193
            
            
            7,610,346Solutions
            
            
            3,977,932
            
            
            1,610,852All
                Other (*)
            
            
            8,261,349
            
            
            8,972,29121,340,474
            
            
            18,193,489





(*)
      includes Avensys Corp. assets (including goodwill and intangible assets
      identified in the acquisition of Avensys Inc. during February 2005) which cannot
      be allocated to either of the reporting segments.


F-37




Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008


Segment
      Disclosure (continued)





The
      Company has three geographic business areas, Americas, Europe and Asia,
      determined based on the locations of the customers. The revenues for the year
      ended June 30, 2008 and 2007 for the Americas include approximately $9,357,000
      and $7,490,000, respectively, of sales to the United States of America and
      $7,341,000 and $5,612,000, respectively, of sales to Canada. The revenues for
      Asia for the year ended June 30, 2008 and 2006 include sales of $3,223,000
      and
      $2,147,000, respectively, to China.





Geographic
      Information





2008
            
            2007Revenues
            
            $
            
            $Americas
            
            
            16,715,125
            
            
            13,306,970Europe
            
            
            1,307,797
            
            
            962,176Asia
            
            
            3,580,160
            
            
            2,306,978Total
            
            
            21,603,082
            
            
            16,576,124





21.
            Income
                Taxes





The
      Company utilizes the liability method of accounting for income taxes as set
      forth in SFAS No. 109, “Accounting for Income Taxes”. Under the liability
      method, deferred taxes are determined based on the temporary differences between
      the financial statement and tax bases of assets and liabilities using enacted
      tax rates. A valuation allowance is recorded when it is more likely than not
      that some of the deferred tax assets will not be realized. Pursuant to SFAS
      109
      the Company is required to compute tax asset benefits for net operating losses
      carried forward. In assessing the recoverability of deferred tax assets,
      management considers whether it is more likely than not that some portion or
      all
      of the deferred tax assets will not be realized. The ultimate realization of
      deferred tax assets is dependent upon the generation of future taxable income
      during the periods in which those temporary differences become deductible.
      Management considers the scheduled reversal of deferred tax liabilities,
      projected future taxable income, and tax planning strategies in making this
      assessment. The amount of the deferred tax asset considered realizable could
      change materially in the near term based on future taxable income during the
      carry forward period. The potential benefit of net operating losses has not
      been
      recognized in these financial statements because the Company cannot be assured
      it is more likely than not it will utilize the net operating losses carried
      forward in future years.





A
      reconciliation of the benefit for income taxes at the combined U.S. and Canadian
      tax rate compared to the Company’s effective tax rate is as
      follows:





June 30,2008
            
            2007$
            
            $Income
                tax at Federal US statutory rate (recovery)
            
            
            (1,649,653
            )
            
            (1,239,827
            )Increase
                (decrease) resulting from:Stock
                based compensation not deductible
            
            
            88,756
            
            
            137,775Increase
                in valuation allowance
            
            
            2,585,204
            
            
            632,423Research
                and development tax credits
            
            
            (1,124,819
            )
            
            (1,217,948
            )Income
                tax rate differential of foreign subsidiaries
            
            
            (26,603
            )
            
            102,501Change
                in income tax rates
            
            
            27,666
            
            
            -Recharacterization
                of tax losses between jurisdictions
            
            
            (1,541,623
            )
            
            -Non-deductible
                items and other elements
            
            
            516,253
            
            
            367,128Income
                tax benefit
            
            
            (1,124,819
            )
            
            (1,217,948
            )




F-38




Avensys
      Corporation (formerly Manaris Corporation)


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2008




Income
      Taxes (continued)





June 30,2008
            
            2007$
            
            $Deferred
                tax assets:Net
                tax losses and scientific and experimental development expenses carried
                forward
            
            
            9,723,129
            
            
            7,349,975Difference
                between book and tax depreciation
            
            
            208,812
            
            
            91,889Reserves
                and accruals not deductible for tax purposes
            
            
            74,734
            
            
            -Research
                and development tax credits
            
            
            134,609
            
            
            94,286Total
                deferred tax assets
            
            
            10,141,284
            
            
            7,536,150Valuation
                allowance
            
            
            (8,801,654
            )
            
            (6,216,450
            )1,339,630
            
            
            1,319,700Deferred
                tax liabilities:Difference
                between book and tax depreciation
            
            
            (1,183,633
            )
            
            (1,071,869
            )Long-term
                debt
            
            
            -
            
            
            (247,831
            )Investment
                tax credits
            
            
            (155,997
            )
            
            -Total
                deferred tax liabilities
            
            
            (1,339,630
            )
            
            (1,319,700
            )Net
                tax assets
            
            
            -
            
            
            -





Approximately
      $1,000,000 of the valuation allowance disclosed above relates to losses incurred
      by AVI prior to the date of the acquisition by the Company. Accordingly, any
      reversal of this portion of the valuation allowance in future periods would
      be
      recorded as a reduction of goodwill and intangible assets.





For
      Canadian income tax purposes, the Company has approximately $3,675,000 of
      Scientific Research and Experimental Development expenses available indefinitely
      to reduce taxable income in future years.





The
      Company's Canadian and American operating losses expire as follows:





Canada
            
            USA$
            
            $2015
            
            
            1,365,599
            
            
            -2022
            
            
            -
            
            
            362,8282023
            
            
            -
            
            
            1,904,1212024
            
            
            -
            
            
            2,067,0242025
            
            
            -
            
            
            6,296,9562026
            
            
            1,486,575
            
            
            6,454,8562027
            
            
            -
            
            
            2,275,2392028
            
            
            496,423
            
            
            2,507,0023,348,597
            
            
            21,868,026





F-39
 
 Avensys
          Corporation (formerly Manaris Corporation)
 Notes
          to
          Consolidated Financial Statements
 (Expressed
          in U.S. Dollars)
 June
          30,
          2008


22.
            Subsequent
              Event




Amendment
      of ITF Preferred Shareholder Agreement





As
      part
      of the acquisition of ITF Optical Technologies Inc. (Note 13), the Company
      entered into a shareholder agreement which stipulated that, between April 1,
      2009 and October 1, 2009, each ITF Preferred Shareholder shall have an option
      to
      (i) sell their shares in ITF Labs’ ownership to AVI for its proportionate share
      of CAD $2,000,000 to be paid in cash, or (ii) exchange their shares in ITF
      Labs’
ownership for 3,826,531 freely tradable shares of Company common shares at
      a
      reference per share price of $0.342; the equivalent of CAD $1,500,000 (the
“put
      option”).





On
      September 11, 2008, the Company and the ITF Preferred Shareholders amended
      the
      agreement described above as follows:





·
            The
                date permitting the exercise of the put option by the ITF Preferred
                Shareholders is postponed by 18 months from April 1, 2009 to October
                1,
                2010. The date at which the put option expires has also been
                postponed from October 1, 2009 to December 31,
                2010.


·
            AVI
                will pay interest at 10% annually from April 1, 2009 until the date
                of
                exercise of the put option on each ITF Preferred Shareholder’s
                proportional share of the consideration, should they choose to exercise
                their option.


·
            Avensys
                Inc. will also raise the total amount of the share consideration
                from CAD
                $1,500,000 to CAD $2,000,000 and will reduce the reference price
                from
                $0.342 to $0.11, should the Preferred Holders choose to exercise
                the put
                option for their proportionate amount of common shares of the
                Company.





The
      Company is in the process of analyzing the impact of this amendment on its
      financial statements, and will reflect any necessary adjustment in the financial
      statements for the quarter ending September 30, 2008.


F-40





**ITEM
      9.****CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





We
      have
      no changes in or disagreements with our independent accountants regarding
      accounting and financial disclosure.


53


**ITEM
      9A.**  **CONTROLS
      AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





Disclosure
      controls and procedures are designed to ensure that information required to
      be
      disclosed in the reports filed or submitted under the Exchange Act is recorded,
      processed, summarized and reported, within the time period specified in the
      SEC's rules and forms. Disclosure controls and procedures include, without
      limitation, controls and procedures designed to ensure that information required
      to be disclosed in the reports filed under the Exchange Act is accumulated
      and
      communicated to management, including the Chief Executive Officer and Chief
      Financial Officer, as appropriate, to allow timely decisions regarding required
      disclosure.





As
      of the
      end of the period covered by this report, the Company carried out an evaluation,
      under the supervision and with the participation of the Company's management,
      including the Company's Chief Executive Officer and Chief Financial Officer,
      of
      the effectiveness of the design and operation of the Company's disclosure
      controls and procedures. Based upon and as of the date of that evaluation, the
      Chief Executive Officer and Chief Financial Officer concluded that the Company's
      disclosure controls and procedures are effective to ensure that information
      required to be disclosed in the reports the Company files and submits under
      the
      Exchange Act is recorded, processed, summarized and reported as and when
      required.





Disclosure
      controls and procedures cannot provide absolute assurance of achieving financial
      reporting objectives because of their inherent limitations. Disclosure controls
      and procedures is a process that involves human diligence and compliance and
      is
      subject to lapses in judgment and breakdowns resulting from human failures.
      Disclosure controls and procedures also can be circumvented by collusion or
      improper management override. Because of such limitations, there is a risk
      that
      material misstatements may not be prevented or detected on a timely basis by
      disclosure controls and procedures. However, these inherent limitations are
      known features of the financial reporting process. Therefore, it is possible
      to
      design into the process safeguards to reduce, though not eliminate, this
      risk.





**Management’s
      Annual Report on Internal Control over Financial Reporting**





Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the
      Exchange Act. Our internal control over financial reporting is designed to
      provide reasonable assurance regarding the reliability of our financial
      reporting and the preparation of financial statements for external reporting
      purposes in accordance with U.S. generally accepted accounting principles.





Management
      conducted an evaluation of the effectiveness of our internal control over
      financial reporting for the first time as of June 30, 2008, using the criteria
      set forth by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO). A material weakness is a deficiency, or a combination of
      control deficiencies, in internal control over financial reporting such that
      there is a reasonable possibility that a material misstatement of the Company's
      annual or interim financial statements will not be prevented or detected on
      a
      timely basis. Based on its evaluation under the framework in Internal Control
      -
      Integrated Framework, issued by the Committee of Sponsoring Organizations of
      the
      Treadway Commission (“COSO”), our management concluded that the Company's
      disclosure controls and procedures were effective as of June 30,
      2008.





54


This
      annual report does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management was not subject to attestation by the Company’s registered public
      accounting firm pursuant to temporary rules of the Securities and Exchange
      Commission that permits the Company to provide only management’s report in this
      annual report.





**Changes
      in Internal Control over Financial Reporting**





There
      were no changes in the Company's internal control over financial reporting
      identified in connection with the Company evaluation of these controls as of
      the
      end of the period covered by this report that could have significantly affected
      those controls, including any correction action with regard to significant
      deficiencies and material weakness.





There
      were no significant changes in the Company's internal controls or in other
      factors that could significantly affect these controls subsequent to the date
      of
      their evaluation, including any significant deficiencies or material weaknesses
      of internal controls that would require corrective action.


55


**ITEM
      9B.**  **OTHER
      INFORMATION**





On
      October 27, 2007 we filed a Registration Statement that relates to the resale
      by
      the selling stockholders of 80,489,033 shares of our common stock. We then
      amended the Registration Statement in order to reduce the resale by the selling
      stockholders from 80,489,033 shares of our common stock to
      31,939,308.  On
      January 14, 2008, the Registration Statement was rendered effective by the
      SEC.


56





**PART
      III**





**ITEM
      10.**  **DIRECTORS,
      OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH SECTION 16(a) OF THE
      EXCHANGE ACT**




**OFFICERS
      AND DIRECTORS**





On
      April
      17, 2008, Mr. Tony Giuliano left the employment of the Company and resigned
      as
      its Chief Financial Officer and Corporate Secretary. Mr. André Maréchal,
      Vice-President of Finance and Administration for Avensys Inc., a wholly owned
      subsidiary of the Company, was appointed as Chief Financial Officer and
      Corporate Secretary of the Company.





On
      June
      10, 2008, John Simons retired as Chairman and a director of the Board of
      Directors of Avensys Corporation. There was no disagreement or dispute between
      Mr. Simons and the Company which led to his retirement. The Board of Directors
      accepted his retirement and appointed Jos Wintermans, a director of the Company
      since November 2005 and Chair of the Compensation Committee, to replace Mr.
      Simons as Chairman of the Board.





On
      June
      27, 2008, the Board of Directors appointed Mr. Jean-Marc Fortier as
      non-executive Director of the Board of Directors to fill the vacancy created
      by
      Mr. John Simons’ resignation. On July 3, 2008, Mr. Fortier accepted the terms of
      his appointment.





The
      directors and officers, their ages and positions held as of June 30, 2008 are
      listed below. Each director serves until our next annual meeting of the
      stockholders or unless they resign earlier. The Board of Directors elects
      officers and their terms of office are at the discretion of the Board of
      Directors.





Name
            
            Age
            
            Position HeldJohn
                Fraser
            
            62
            
            President,
                Chief Executive Officer and DirectorJos
                J. Wintermans
            
            61
            
            Director,
                and Chairman of the BoardBernard
                Bougie
            
            59
            
            DirectorJean-Marc
                Fortier
            
            59
            
            DirectorAndré
                Maréchal
            
            64
            
            Chief
                Financial Officer and Corporate
                Secretary





The
      following describes the business experience during the past five years of our
      directors and executive officers, including for each director, other
      directorships held in reporting companies. There are no family relationships
      among any of the persons listed.





Jos
      J.
      Wintermans


Director
      and Chairman of the Board of Directors, has served as a Director since November
      15, 2005, and has been Chairman of the Board since June 2008. Mr. Wintermans
      has
      held a number of executive positions in the telecom, financial services, retail,
      manufacturing and distribution sectors. From June 2001 to December 2004, Mr.
      Wintermans served as the President, Chief Executive Officer and a Director
      of
      Sodisco-Howden Group. From December 1999 to June 2001 served as the President,
      Chief Executive Officer and a Director for Skyjack. From June 1996 to May 1997,
      he was the President, Chief Executive Officer and a Director of Rogers Cable
      Ltd. From 1988 to 1995, he served as Chief Executive Officer for Canadian Tire
      Acceptance Ltd. In 1996, he was named Senior Vice-President, Diversified
      Business for its parent company, Canadian Tire Corporation (CTC). From November
      2005 to May, 2008, Mr. Wintermans was President and Chief Executive Officer,
      and
      the Chairman of Cygnal Technologies Corporation. On July 14, 2008, Mr.
      Wintermans was appointed as Chairman of Acxsys Corporation. Mr. Wintermans
      is
      Chair of the Junior Achievement of Canada Foundation, a not for profit
      organization running the Canadian Business Hall of Fame.





57


John
      Fraser


Director,
      President and Chief Executive Officer, has served as a Director since January
      2003 and as our Secretary and Treasurer from January 2003 until September 16,
      2005. On September 16, 2005, Mr. Fraser was appointed as our President and
      Chief
      Executive Officer for a minimum period of three months, replacing Stephane
      Solis. On September 14, 2006, Mr. Fraser was appointed as permanent President
      and Chief Executive Officer. He was a partner for twenty years with KPMG Canada
      until January 1998. For the last four years of his career with KPMG, he was
      Vice
      Chairman of the firm and responsible for the Canadian management consulting
      division. In January 1998, he started providing consulting services to
      professional services and high technology start-up firms. In February 2004,
      J G
      Fraser & Associates became a partner in Catalyst Consulting, a private
      Canadian consulting firm providing management consulting services to law firms
      and law departments in Canada and internationally. From July 1999 to August
      2002, Mr. Fraser was a director of ePhone Telecom Inc. (OTCBB: EPHO). Mr. Fraser
      served as a Director for Asia Payment Systems, Inc. (OTCBB: APYM) from September
      2002 to June 2006. From June 2000 to May 2003, Mr. Fraser was a director of
      Walters Forensic Engineering, a public engineering firm based in Toronto,
      Canada. (CDNX: YWL). He was also a director of Hincks Dellcrest, a non-profit
      organization located in Toronto, Canada, until June 27, 2008.





Jean-Marc
      Fortier


Director,
      has served as a Director since June 2008.  Mr.
      Jean-Marc Fortier has been a member of the Québec Bar Association since 1971. He
      also holds an MBA from the Richard Ivey School of Business Administration and
      a
      Master of Laws from the McGill Institute of Air and Space Law. From 1999 until
      2004, he served as senior officer of BCE Media Inc., a subsidiary of BCE Inc.
      During the same period, Mr. Fortier also served as chairman and director of
      certain affiliates of BCE Media, operating in the media and satellite service
      sectors. He was also executive vice-president of TQS Inc., a private Québec
      broadcaster. Since 2004, Mr. Fortier has been a senior legal advisor with a
      Montreal law firm and, at the beginning of 2008, he joined the firm Robinson
      Sheppard Shapiro where he is presently acting as senior counsel and advisor
      in
      corporate finance, merger and acquisitions, natural resources and aerospace
      matters, both on a domestic and international level.





Bernard
      Bougie


Director,
      has served as a director since December 2005. A Chartered Accountant (Canada)
      and an expert in financial information, Mr. Bougie was with Deloitte &
Touche from 1975 to 2004, a leading accounting and consulting firm, and became
      a
      partner in 1982. Mr. Bougie is on various Boards of companies and non-profit
      organizations, and is a member of the Institute of Corporate Directors (Canada).





André
      Maréchal


Corporate
      Secretary and Chief Financial Officer, has served as a chief financial officer
      since April 2008, and as corporate secretary since May, 2008. Since December
      2007, he has served as Vice-President of Finance and Administration of Avensys
      Inc., the Company’s wholly-owned subsidiary, and from 2002 to 2007 he was
      Director of Finance and Administration of Avensys Inc.


58


**COMPLIANCE
      WITH SECTION 16(A) OF THE EXCHANGE ACT**





Section
      16(a) of the Securities Exchange Act of 1934, as amended (the "1934 Act")
      requires officers and directors of a company with securities registered pursuant
      to Section 12 of the 1934 Act, and persons who own more than 10% of the
      registered class of such company's equity securities, to file reports of
      ownership and changes in ownership with the Securities and Exchange Commission
      (the "SEC"). Officers, directors and greater than 10% stockholders are required
      by SEC regulation to furnish the subject company with copies of all Section
      16(a) forms filed. To our knowledge, the following Forms 3 and 4 required
      to be filed during the fiscal year ended June 30, 2008 have not been filed
      timely:





Form
                4
            
            Bernard
                Bougie, Director, filed on January 07, 2008Form
                4
            
            Jos
                Wintermans, Director, filed on January 07, 2008Form
                3
            
            André
                Maréchal, CFO & Corporate Secretary, filed on April 28,
                2008





**AUDIT
      COMMITTEE AND CHARTER**





We
      have
      an audit committee charter, and under such charter, the committee is comprised
      of our independent directors. Our audit committee is responsible for: (1)
      selection and oversight of our independent accountant; (2) establishing
      procedures for the receipt, retention and treatment of complaints regarding
      accounting, internal controls and auditing matters; (3) establishing procedures
      for the confidential, anonymous submission by our employees of concerns
      regarding accounting and auditing matters; (4) engaging outside advisors; and,
      (5) funding for the outside auditory and any outside advisors engagement by
      the
      audit committee.





Name
            
            Age
            
            Position
                HeldBernard
                Bougie
            
            59
            
            Director,
                Audit Committee ChairmanJos
                J. Wintermans
            
            61
            
            Director,
                Chairman of the Board of DirectorsJean-Marc
                Fortier
            
            59
            
            Director





**AUDIT
      COMMITTEE FINANCIAL EXPERT**





On
      December 14, 2005, we appointed Mr. Bernard Bougie as Chairman of our audit
      committee, and as our audit committee financial expert Mr. Bougie is independent
      of our management.


59


**COMPENSATION
      COMMITTEE**





The
      compensation committee serves as the stock option committee for our stock option
      plans, and it reviews and approves any employment agreements with management
      and
      changes in compensation for our executive officers.




Name
            
            Age
            
            Position
                HeldJos
                J. Wintermans
            
            61
            
            Director,
                Compensation Committee Chairman and Boardof
                Directors ChairmanBernard
                Bougie
            
            59
            
            Director,
                Audit Committee ChairmanJean-Marc
                Fortier
            
            59
            
            Director





**CODE
      OF ETHICS**





We
      have
      adopted a corporate code of ethics. We believe our code of ethics is reasonably
      designed to deter wrongdoing and promote honest and ethical conduct; provide
      full, fair, accurate, timely and understandable disclosure in public reports;
      comply with applicable laws; ensure prompt internal reporting of code
      violations; and provide accountability for adherence to the code .





**DISCLOSURE
      COMMITTEE AND CHARTER**





We
      have a
      Disclosure Committee charter. The purpose of the committee is to provide
      assistance to Senior management in fulfilling their responsibilities regarding
      the identification and disclosure of material information about us and the
      accuracy, completeness and timeliness of our financial reports.


60


**ITEM
      11.**  **EXECUTIVE
      COMPENSATION**





**Summary
      Compensation Table**





The
      following tables set forth certain information regarding our Chief Executive
      Officer and each of our most highly-compensated executive officers whose total
      annual salary and bonus for the fiscal years ending June 30, 2008, 2007 and
      2006
      exceeded $100,000:





Long TermAnnual Compensation
            
            Compensation Awards
            
            Payouts(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)Name and
              Principal
              Position [1]
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Other
              Annual
              Compen-sation
              ($)
            
            Restricted
              Stock
              Award(s)
              ($)
            
            Securities
              Underlying
              Options /
              SARs (#)
            
            LTIP
              Payouts
              ($)
            
            All Other
              Compen
              -sation
              ($)Andre
                Monette
            
            
            2007
            
            
            45,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Treasurer
                and Chief
            
            
            2006
            
            
            160,000
            
            
            59,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Financial
                Officer(resigned
                Sept. 2006)John
                Fraser
            
            
            2008
            
            
            315,320
            
            
            0
            
            
            0
            
            
            0
            
            
            600,000
            
            
            0
            
            
            0President
                and Chief
            
            
            2007
            
            
            265,000
            
            
            133,500
            
            
            0
            
            
            0
            
            
            1,500,000
            
            
            0
            
            
            0Executive
                Officer
            
            
            2006
            
            
            171,000
            
            
            0
            
            
            0
            
            
            0
            
            
            500,000
            
            
            0
            
            
            0(appointed
                Presidentand
                CEO Sept 2005)André
                Maréchal
            
            
            2008
            
            
            29,151
            
            
            0
            
            
            0
            
            
            0
            
            
            450,000
            
            
            0
            
            
            0Chief
                Financial officerand
                Corporate Secretary(appointed
                ChiefFinancial
                officer in April 2008 and Corporate SecretaryIn
                May 2008)Tony
                Giuliano
            
            
            2008
            
            
            181,250
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0(resigned
                Apr. 2008)
            
            
            2007
            
            
            110,500
            
            
            33,000
            
            
            0
            
            
            0
            
            
            150,000
            
            
            0
            
            
            0





[1]
      All
      compensation received by the Officers and Directors has been
      disclosed.


61


**STOCK
      OPTION PLANS AND EMPLOYEE COMPENSATION PLAN**





There
      are
      no stock option, retirement, pension, or profit sharing plans for the benefit
      of
      our officers and directors, other than our 2007 Employee Compensation Plan,
      our
      Amended and Restated 2006 Non Qualified Stock Option Plan and our 2003 and
      2004
      Incentive Stock Option Plans (the “Plans”). Under these Plans, the Board of
      Directors is vested with discretionary authority to grant stock options and
      common stock to persons furnishing services to us. There are 24,000,000 stock
      options and common shares in the Plans, with 20,000,000 stock options included
      in the Stock Option Plans and 4,000,000 common shares included in the 2007
      Employee Compensation Plan. The 2006 Non Qualified Stock Option Plan was amended
      and restated to augment the Plan by 5,000,000 stock options on September 5,
      2007. The 2007 Employee Compensation Plan came into effect on August 21,
      2007.





As
      of
      October 17, 2008, stock options to purchase 18,953,489 shares had been granted
      of which 5,973,686 options had been exercised, 2,590,530 had been forfeited
      and
      10,286,773 are outstanding. As at October 17, 2008, we have 3,739,541 stock
      options available for issuance.




**STOCK
      OPTION GRANTS TO OFFICERS AND DIRECTORS DURING THE FISCAL
      YEAR**





Number of
            
            % of TotalSecurities
            
            OptionsUnderlying
            
            Granted to
            
            ExerciseOptions/SARs
            
            Employees in
            
            of Base
            
            ExpirationName
            
            Granted (#)
            
            Fiscal Year
            
            Price ($/Sh)
            
            DateJohn
                Fraser
            
            
            600,000
            
            
            19.35
            %
            $
            0.09
            
            
            01/04/2013Bernard
                Bougie
            
            
            100,000
            
            
            3.22
            %
            $
            0.08
            
            
            12/07/2012Jos
                Wintermans
            
            
            100,000
            
            
            3.22
            %
            $
            0.08
            
            
            11/15/2012André
                Maréchal
            
            
            150,000
            
            
            4.84
            %
            $
            0.07
            
            
            06/27/2013André
                Maréchal
            
            
            300,000
            
            
            9.68
            %
            $
            0.09
            
            
            01/04/2013





Aggregated
      Stock Options Exercised by Officers and Directors in Last Fiscal Year and Fiscal
      Year End Stock Option Values





Number of Securities
            
            Value of SecuritiesShares
            
            Value
            
            Underlying Stock
            
            Underlying StockAcquired on
            
            Realized
            
            Options at FY-End (#)
            
            Options at FY-End ($)Name
            
            Exercised (#)
            
            ($)
            
            Exercisable
            
            Unexercisable
            
            Exercisable
            
            UnexercisableJohn Fraser
            
            
            0
            
            $
            0
            
            
            1,575,000
            
            
            1,100,000
            
            $
            126,000
            
            $
            94,000Jos
                Wintermans
            
            
            0
            
            $
            0
            
            
            275,000
            
            
            25,000
            
            $
            22,000
            
            $
            2,000John
                H. Simons
            
            
            0
            
            $
            0
            
            
            200,000
            
            
            0
            
            $
            16,000
            
            $
            0Bernard
                Bougie
            
            
            0
            
            $
            0
            
            
            275,000
            
            
            25,000
            
            $
            22,000
            
            $
            2,000André
                Maréchal
            
            
            0
            
            $
            0
            
            
            135,703
            
            
            450,000
            
            $
            15,784
            
            $
            36,750




62


**LONG-TERM
      INCENTIVE PLAN AWARDS**





We
      do not
      have any long-term incentive plans that provide compensation intended to serve
      as incentive for performance to occur over a period longer than one fiscal
      year,
      whether such performance is measured by reference to our financial performance,
      our stock price, or any other measure, other than our 2003, 2004 and 2006
      Incentive/or Nonqualified Stock Option Plans, and our 2007 Employee Compensation
      Plan.




**COMPENSATION
      OF DIRECTORS**





Each
      non-executive director is paid a base fee of CAD$15,000 per year. Fees are
      payable quarterly. In addition non-executive Directors will receive 50,000
      options to purchase shares of the Company at $0.00001 upon their appointment
      to
      the board, and 100,000 options per annum vested quarterly to purchase shares
      of
      the Company at the market price prevailing at the date of appointment. Directors
      may, in addition, receive a fee for devoting special attention to the business
      of Avensys which is outside the scope of ordinary duties, or where any business
      journey must be undertaken. Current fees are:





•
            CAD
                $25,000 per annum for acting as chair of the Board of Directors
                ofthe Company;





•
            CAD
                $15,000 per annum for acting as a chair of the Audit Committee;





•
            CAD
                $5,000 per annum for acting as a chair of any other Committee;





•
            CAD
                $1,000 per meeting of the Board or Committee; if special circumstances
                warrant board meetings of less than 90 minute duration and are conducted
                by phone, this amount will be reduced to CAD
                $250;





•
            CAD
                $1,000 per day for work which is outside the scope of ordinary duties
                as a
                board or committee member;





•
            a
                traveling allowance covering out-of-pocket expenses for travel and
                accommodation while on Avensys
                business;





**INDEMNIFICATION**





Pursuant
      to the articles of incorporation and bylaws of the corporation, we may indemnify
      an officer or director who is made a party to any proceeding, including a
      lawsuit, against expenses (including attorneys’ fees), judgment, fines and
      amounts paid in settlement, actually and reasonably incurred by the officer
      or
      director, if such person acted in good faith and in a manner such person
      reasonably believed to be in, or not opposed to, the best interests of the
      Corporation, and with respect to any criminal action or proceeding, if the
      Corporation has no reasonable cause to believe the officer or director’s conduct
      was unlawful.





63


With
      respect to a derivative action, we may indemnify an officer or director who
      was
      or is a party or is threatened to be made a party to any threatened, pending
      or
      completed action or suit by or in the right of the Corporation to procure
      judgment in the Corporation’s favor by reason of the fact that such person is or
      was a Director, Trustee, Officer, employee or agent of the Corporation, or
      is or
      was serving at the request of the Corporation as a Director, Trustee, Officer,
      employee or agent of another corporation, partnership, joint venture, trust
      or
      other enterprise, against expenses (including attorneys’ fees) and amount paid
      in settlement, actually and reasonably incurred by such person in connection
      with the defense or settlement of such action or suit if such person acted
      in
      good faith and in a manner such person reasonably believed to be in or not
      opposed to the best interests of the Corporation, and, with respect to the
      amounts paid in settlement, the settlement of the suit or action was in the
      best
      interest of the Corporation; provided, however, that no indemnification shall
      be
      made in respect of any claim, or matter as to which such person shall have
      been
      adjudged to be liable for gross negligence or willful misconduct in the
      performance of such person’s duty to the Corporation unless and only to the
      extent that, the court in which such action or suit was brought shall determine
      upon application that, despite circumstances of the case, such person is fairly
      and reasonably entitled to indemnity for such expenses as such court shall
      deem
      proper.





The
      indemnification is intended to be to the fullest extent permitted by the laws
      of
      the state of Nevada.





Regarding
      indemnification for liabilities arising under the Securities Act of 1933 which
      may be permitted to directors or officers pursuant to the foregoing provisions,
      we are informed that, in the opinion of the Securities and Exchange Commission,
      such indemnification is against public policy, as expressed in the Act and
      is,
      therefore unenforceable.


64


**ITEM
      12.****SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The
      following table sets forth certain information, as of October 17, 2008, with
      respect to the beneficial ownership of the outstanding common stock by (i)
      any
      holder of more than five (5%) percent; (ii) each of our directors and named
      executive officers; and (iii) our directors and named executive officers as
      a
      group. Except as otherwise indicated, each of the stockholders listed below
      has
      sole voting and investment power over the shares beneficially owned. Except
      as
      otherwise indicated, the address for each person is our address at 400
      Montpellier Blvd., Montreal, Quebec, Canada H4N 2G7.





**Name of Beneficial Owner**
            
            **Direct Amount**
              **of Beneficial**
              **Ownership**
            
            **Position**
            
            **Percent**
              **of Class**
              **[2]**John
                Fraser
            
            
            3,345,000
            [1]
            
            
            
            President
                and Chief Executive Officer and a Director
            
            
            3.38
            %André
                Maréchal
            
            
            585,503
            
            
            
            
            Chief
                Financial Officer, and Corporate Secretary
            
            
            *Jos
                J. Wintermans
            
            
            300,000
            [3]
            
            
            
            Director
            
            
            *Bernard
                Bougie
            
            
            300,000
            [3]
            
            
            
            Director,
                Chairman of the Audit Committee
            
            
            *Jean-Marc
                Fortier
            
            
            100,000
            [4]
            
            
            
            Director
            
            
            *All
                officer and Directors as a Group (5 Persons)
            
            
            4,630,503
            
            
            
            
            
            
            
            4.67
            %





*
      less
      than 1%





[1]  John
      Fraser was appointed President and CEO on September 14, 2006.


[2]  Based
      on 99,086,152 shares
      of common stock issued and outstanding as of October 17, 2008


[3]  Options
      to purchase an aggregate of 150,000 shares of common stock have been granted
      to
      newly appointed Directors pursuant to the Company's 2006 Nonqualified Stock
      Option Plan. Of this amount, 50,000 are exercisable upon appointment at an
      exercise price of $0.0001 per share. The remaining 100,000 are vested quarterly
      at the Market Price on the date of their respective appointments to the Board
      of
      Directors. The aforementioned options have ten year terms.


[4] ****  Options
      to purchase an aggregate of 100,000 shares of common stock have been granted
      on
      October 2, 2008, vesting quarterly for four quarters, exercisable at $0.06
      per
      share. The aforementioned options have ten year terms.





**Changes
      in Control**





To
      the
      knowledge of management, there are no present arrangements or pledges of our
      securities that may result in a change in control of our
      Company.


65


**ITEM
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





As
      part
      of interim financing by shareholders, we purchased management services from
      Capex Investments Limited during fiscal year 2003. Capex is owned and controlled
      by Robert Clarke, who is a former member of our Board of Directors. Capex and
      related parties also paid certain operations expenses directly and advanced
      funds for working capital during fiscal year 2003. The amounts due are
      non-interest bearing, unsecured, and have no fixed terms of repayment. The
      amount due to related parties, including Capex, as of June 30, 2008 is
      $40,000.


66





**ITEM
                14.**
            ****
            **EXHIBITS**3.1
            
            Articles
                of Incorporation of Avensys Corporation dated June 22, 2000 (as
                incorporated by reference to Form SB-2 filed with the Securities
                and
                Exchange Commission on September 29, 2000).3.2
            
            Bylaws
                of Avensys Corporation dated July 13, 2000 (as incorporated by reference
                to Form SB-2 filed with the Securities and Exchange Commission on
                September 29, 2000).3.3
            
            Avensys
                Corporation Specimen Stock Certificate (as incorporated by reference
                to
                Form SB-2 filed with the Securities and Exchange Commission on September
                29, 2000).3.4
            
            Amended
                Articles of Incorporation (as incorporated by reference from our
                Form 8-K
                filed with the Securities and Exchange Commission on March 18,
                2003).3.5
            
            Amended
                Articles of Incorporation (as incorporated by reference to the Issuer's
                Form SB-2 filed with the Securities and Exchange Commission on November
                7,
                2005).10.1
            
            Avensys
                Debenture dated February 28, 2005 (as incorporated by reference to
                the
                registrant's Registration Statement on Form SB-2 filed on August
                14,
                2006)10.2
            
            Form
                of Note and Warrant Purchase Agreement (as incorporated by reference
                to
                the Issuer's Form 8-K filed with the Securities and Exchange Commission
                on
                August 17, 2006).10.3
            
            Form
                of Registration Rights Agreement (as incorporated by reference to
                the
                Issuer's Form 8-K filed with the Securities and Exchange Commission
                on
                August 17, 2006).10.4
            
            Form
                of Pledge and Security Agreement (as incorporated by reference to
                the
                Issuer's Form 8-K filed with the Securities and Exchange Commission
                on
                August 17, 2006).10.5
            
            Form
                of Series B Subordinated Secured Convertible Promissory Note (as
                incorporated by reference to the Issuer's Form 8-K filed with the
                Securities and Exchange Commission on August 17, 2006).10.6
            
            Form
                of Original Issue Discount Series B Subordinated Secured Convertible
                Promissory Note (as incorporated by reference to the Issuer's Form
                8-K
                filed with the Securities and Exchange Commission on August 17,
                2006).10.7
            
            Form
                of Series Y Warrant (as incorporated by reference to the Issuer's
                Form 8-K
                filed with the Securities and Exchange Commission on August 17,
                2006).10.8
            
            Form
                of Series Z Warrant (as incorporated by reference to the Issuer's
                Form 8-K
                filed with the Securities and Exchange Commission on August 17,
                2006).10.9
            
            Deed
                of Hypothec (as incorporated by reference to the Issuer's Form 8-K
                filed
                with the Securities and Exchange Commission on August 17,
                2006).




67


10.10
            
            Form
                of Securities Purchase and Loan Agreement dated September 24, 2007
                (as
                incorporated by reference to the Issuer's Form 8-K filed with the
                Securities and Exchange Commission on September 27,
                2007).10.20
            
            Form
                of the 6 % Original Issue Discount Senior Secured Note dated September
                24,
                2007 (as incorporated by reference to the Issuer's Form 8-K filed
                with the
                Securities and Exchange Commission on September 27,
                2007).10.30
            
            Form
                of the Warrant dated September 24, 2007 (as incorporated by reference
                to
                the Issuer's Form 8-K filed with the Securities and Exchange Commission
                on
                September 27, 2007).10.40
            
            Form
                of Advisory Warrant dated August 22, 2007 (as incorporated by reference
                to
                the Issuer's Form 8-K filed with the Securities and Exchange Commission
                on
                September 27, 2007).10.50
            
            Form
                of Registration Rights Agreement dated September 24, 2007 (as incorporated
                by reference to the Issuer's Form 8-K filed with the Securities and
                Exchange Commission on September 27, 2007).10.60
            
            Form
                of Working Capital Note dated September 24, 2007 (as incorporated
                by
                reference to the Issuer's Form 8-K filed with the Securities and
                Exchange
                Commission on September 27, 2007).10.70
            
            Form
                of Security Agreement dated September 24, 2007 (as incorporated by
                reference to the Issuer's Form 8-K filed with the Securities and
                Exchange
                Commission on September 27, 2007).10.80
            
            List
                of Subsidiaries (as incorporated by reference to the registrant's
                Registration Statement on Form SB-2 filed on August 14,
                2006).16.1
            
            Consent
                of Raymond Chabot Grant Thorton LLP.31.1
            
            Certification
                of pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under
                the
                Securities Exchange Act of 1934, as amended32.1
            
            Certification
                Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section
                906 Of
                The Sarbanes-Oxley Act of 2002 (Chief Executive
                Officer)32.2
            
            Certification
                Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section
                906 Of
                The Sarbanes-Oxley Act of 2002 (Chief Financial
                Officer)


68


**ITEM
      15.**  **PRINCIPAL
      ACCOUNTING FEES AND SERVICES** ****





**(1)
        Audit Fees**


The
      aggregate fees billed for each of the last two fiscal years for professional
      services rendered by the principal accountant for our audit of annual financial
      statements and review of financial statements included in our Form 10-K or
      services that are normally provided by the accountant in connection with
      statutory and regulatory filings or engagements for those fiscal years
      was:





2008
            
            $
            251,0742007
            
            $
            203,046





**(2)
        Audit-Related Fees**


The
      aggregate fees billed in each of the last two fiscal years for assurance and
      related services by the principal accountants that are reasonably related to
      the
      performance of the audit or review of our financial statements and are not
      reported in the preceding paragraph:





2008
            
            $
            22,9732007
            
            $
            78,796





**(3)
        Tax Fees**


The
      aggregate fees billed in each of the last two fiscal years for professional
      services rendered by the principal accountant for tax compliance, tax advice,
      and tax planning was:





2008
            
            $
            27,4182007
            
            $
            45,888




**(4)
        All Other Fees**


The
      aggregate fees billed in each of the last two fiscal years for the products
      and
      services provided by the principal accountant, other than the services reported
      in paragraphs (1), (2), and (3) was:





2008
            
            
            Nil2007
            
            
            Nil





(5)
        Our audit committee's pre-approval policies and procedures described in
      paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X were that the audit committee
      pre-approve all accounting related activities prior to the performance of any
      services by any accountant or auditor.





(6)
        The percentage of hours expended on the principal accountant's engagement
      to audit our financial statements for the most recent fiscal year that were
      attributed to work performed by persons other than the principal accountant's
      full time, permanent employees was 0%.


69


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities and Exchange Act
      of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized, on this 17 th
      day of
      October 2008.





**AVENSYS
                CORPORATION**(Registrant)BY:
            /s/
                John G. FraserJohn
                Fraser, President and Chief Executive
              Officer (Principal
                Executive Officer)/s/
                André MaréchalAndré
                Maréchal, Chief Financial Officer,
              Corporate
                Secretary and Treasurer (Principal
              Financial
                and Accounting Officer)





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





*Signatures*
            **
            *Title*
            **
            *Date***
            **
            **
            **
            ***/s/
                John Fraser*
            **
            *President
                and Chief Executive Officer*
            **
            *October
                17,2008**John
                G. Fraser*
            **
            *(Principal
                Executive Officer)*
            **
            ****
            **
            **
            **
            ***/s/
                André Maréchal*
            **
            *Chief
                Financial Officer, Corporate Secretary and Treasurer*
            **
            ***André
                Maréchal*
            **
            *(Principal
                Financial and Accounting Officer)*
            **
            *October
                17, 2008***
            **
            **
            **
            ***/s/
                Jean-Marc Fortier*
            **
            *Director*
            **
            *October
                17, 2008**Jean-Marc
                Fortier*
            **
            **
            **
            ****
            **
            **
            **
            ***/s/
                Jos J. Wintermans*
            **
            *Chairman
                of the Board of Directors*
            **
            *October
                17, 2008**Jos
                J. Wintermans*
            **
            **
            **
            ****
            **
            **
            **
            ***/s/
                Bernard Bougie*
            **
            *Director,
                Audit Committee Chairman*
            **
            *October
                17, 2008**Bernard
                Bougie*
            **




70