**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-KSB**





x
            Annual
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934FOR
                THE FISCAL YEAR ENDED**JUNE
                30, 2007**ORo
            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**





**MANARIS
      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 under Section 12(b) of the Act:





None.





Securities
      registered under Section 12(g) of the Act:





**Common
      stock, par value $0.00001**


**Title
      of each class**





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





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of **JUNE
      30, 2007: 93,437,654**





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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. x Yes     o
      No







Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to this Form 10-KSB. o





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


o
      Yes     x No





Issuer's
      revenues for the year ended June 30, 2007 were $18,740,561. Aggregate market
      value of voting stock held by non-affiliates of **93,437,654** shares
      outstanding at June 30, 2007 was approximately $7,475,012. Amount was computed
      using the average bid and ask price as of June 30, 2007, which was $0.08. As
      of
      June 30, 2007, a total of **93,437,654** shares
      of
      common stock were outstanding.





Documents
      incorporated by reference. None.










TABLE
      OF
      CONTENTS


**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
              51ITEM
                  9.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE
              52ITEM
                  9A.
              CONTROLS
                  AND PROCEDURES
              53ITEM
                  9B.
              OTHER
                  INFORMATION.
              54**PART
                  III**
              
              **55**ITEM
                  10.
              DIRECTORS,
                  OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH SECTION
                  16(a) OF
                  THE EXCHANGE ACT
              55ITEM
                  11.
              EXECUTIVE
                  COMPENSATION
              59ITEM
                  12.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
              62ITEM
                  13.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS
              63ITEM
                  14.
              EXHIBITS
              64ITEM
                  15.
              PRINCIPAL
                  ACCOUNTING FEES AND SERVICES
              66


**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**





Manaris,
      the holding company, operates the following wholly-owned subsidiaries:


·
            Avensys
                Inc. which, through its manufacturing division Avensys Technologies,
                designs, manufactures, distributes, and markets high reliability
                optical
                components and modules and FBGs (Fiber Bragg Gratings) for the telecom
                market, as well as high power devices and sub-assemblies for the
                industrial market. Avensys Technologies is also a pioneer in the
                development of packaged fiber-based sensors and possesses leading
                edge
                intellectual property. Avensys Solutions, Avensys’ other division, is an
                industry leader in providing environmental monitoring solutions for
                air,
                water and soil, as well as geostructure in the Canadian marketplace.


·
            C-Chip
                Technologies Corporation (North America) ("C-Chip"), which has licensed
                its technology to its partner iMetrik Inc, whereby, C-Chip receives
                royalties from iMetrik for its worldwide sales of GSM-based “locate and
                disable” products within the BHPH (“Buy Here Pay Here”) used car
                market.


**Corporate
      History**





Manaris
      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."





3




**Recent
      Developments**





*Imperium
      Financing and Redemption of Series B Notes*




During
        the first quarter of fiscal year 2008, the Company redeemed its Series B
        Subordinated Secured Convertible Promissory Notes and its Original Issue
        Discount Series B Subordinated Secured Convertible Promissory Notes
        (collectively the “Notes”), both 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
        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 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
  *Cashless
        exercise of Series G and Series I warrants*
  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.




4




*Departure
      of President and CEO of Avensys Inc.*





On
        July
        16, 2007, Martin d’Amours resigned as President of Avensys Inc. Mr. d’Amours had
        joined the company as President and CEO of the Manaris subsidiary in February
        2005.  John G. Fraser, President and CEO of Manaris Corporation, now
        fulfills the duties of the President of Avensys Inc. on an interim basis.


*Appointment
      of Corporate Secretary of Manaris Corporation’s Board of
      Directors*





On
      May
      23, 2007, Tony J. Giuliano was appointed as the Company’s Corporate Secretary.
      Mr. Giuliano had already been appointed as our Chief Financial Officer on
      October 25, 2006, and now holds both these titles.





*Departure
      of Director of Manaris Corporation*




On
        February 13, 2007, Marc Bouchard resigned from the Company’s Board of Directors.
        Mr. Bouchard had served as Director of the Board since January 13, 2006.
  On
      February 14, 2007, the Company retained the services of Toll Cross Securities,
      of which Mr. Bouchard is President and founder, to act as financial consultant
      for the Company.





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





On
      December 28, 2006, C-Chip Technologies Corporation (North America) (herein
      referred to as “C-Chip) announced that it had entered into a technology license
      agreement with its partner iMetrik Solutions Inc. (herein referred to as
“iMetrik”)




In
        the
        spring of 2006, C-Chip, in partnership with iMetrik, launched the Credit-Chip
        200G, a GSM-based product developed by iMetrik, with a complete web-based
        “locate and disable” platform, for the North American used car market. The
        relationship with iMetrik was a key factor in the development of the Credit-Chip
        product and allowed C-Chip to provide its customers with a very competitive
        and
        highly reliable solution. Building upon the relationship, C-Chip entered
        into an
        agreement with iMetrik whereby iMetrik has the exclusive right to manufacture
        and sell products based on the GSM-based “locate and disable” technology
        platform for the BHPH (“Buy Here Pay Here”) market worldwide. In exchange,
        C-Chip receives royalties for each product sold by iMetrik.
  *August
      2006 Private Placement*





On
      August
      11, 2006, Manaris Corporation 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").




5





Gross
      proceeds of approximately $2.1 million were initially disbursed. The remaining
      $1.5 million was disbursed upon effectiveness of the Company's registration
      statement, which occurred in November 2006.





The
      Notes
      matured 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 Notes was 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.





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.





**Technologies
      and Solutions**





Our
      Avensys and C-Chip subsidiaries offer the following technologies and solutions:
      Optical Components and Modules, Environment Monitoring, and Credit Management
      Solutions.





*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
      2007.





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





1-
            Fiber
                Bragg Grating





2-
            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:





1-
            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
                2007.






6




2-
            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.





3-
            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.





*Environmental
      Monitoring*





Environmental
      monitoring solutions are provided by the Avensys Solutions division of our
      Avensys subsidiary. Avensys Solutions has developed a distinctive expertise
      in
      monitoring contaminants in air and water. Avensys Solutions distributes
      environmental monitoring instrumentation from leading manufacturers around
      the
      world and provides integrated turn-key solutions as well as services to
      government and industries in the Canadian marketplace.





Avensys
      Solutions is considered a key player in the environment monitoring market and
      has been catering to the Canadian marketplace for over 30 years. It is well
      established in over one thousand (1000) accounts and has acquired a solid
      reputation built on years of experience in addressing its customers’
environmental monitoring challenges. Through its integrated solutions team,
      Avensys combines skills, staff and the knowledge to integrate multiple
      monitoring technologies to deliver real-time, automated, cost-effective systems
      providing reliable data often used for regulatory reporting.





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





Avensys
      Solutions addresses its markets through local sales teams located in Montreal,
      Toronto, Edmonton 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.





*Credit
      Management/Asset tracking Solutions*





The
      basic
      system component of the iMetrik solutions for which C-Chip receives royalties
      entails a chipset embedded in target devices, which allows authorized users
      to
      process the commands and to manage their own database of embedded devices from
      a
      central point using a Web application supported by iMetrik. The target devices
      include a cellular radio, GPS technology and a microprocessor. Other required
      components include access to wireless networks and internet access. The hardware
      unit is addressable through a communication bridge based on the GSM digital
      network. The processor accepts an input signal and compares the signal to a
      number of criteria to determine if the current operating conditions should
      be
      maintained or modified.




7





**Warranties**





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





**Insurance**





Manaris
      currently maintains an insurance coverage of USD$ 5,000,000 for its
      Directors and Officers. Avensys maintains an insurance coverage of CAD$1,825,000
      for its inventory, CAD$43,630,000 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.





**Employees**





As
      of
      September 14, 2007, we have one hundred and sixty-two (162) employees; 159
      (Avensys including ITF Labs), 0 (C-Chip), 3 (Manaris) employees. Of the 159
      employees at Avensys and ITF Labs, 126 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, 2007 disclose that there exists
      doubt that the company will be able to continue as a going concern. Our
      financial statements for the nine-month period ended March 31, 2007 included
      similar disclosure. 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, 2007 we had a
        working
        capital surplus of $596,801 and an accumulated deficit of $29,285,550.
 
 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.





**We
        may not be able to implement our acquisition
        strategy.**





While
      our
      management has some experience in identifying and integrating acquisitions,
      we
      may not be able to identify suitable acquisition candidates, obtain the capital
      necessary to pursue our acquisition strategy or complete acquisitions on
      satisfactory terms or at all. When companies are acquired, we may not be able
      to
      integrate or manage these businesses to produce returns that justify our
      investment. A number of our competitors have also adopted the strategy of
      expanding and diversifying through acquisitions. We experience competition
      in
      our effort to execute our acquisition strategy and expect the level of
      competition to increase. As a result, we may be unable to continue to make
      acquisitions or may be forced to pay more for the companies we are able to
      acquire.





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 problems 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.





**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.




14





**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. Our functional currency
      is Canadian dollars 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.




**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 "MANS."
      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.




15





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





As
      of
      September 24, 2007, 97,096,844 shares of our common stock were outstanding,
      88,502,517 of which were freely tradable and  8,594,327
      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.





**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
      September 24, 2007 we had 97,096,844 shares of common stock issued and
      outstanding. There exists warrants to purchase 15,099,037 shares of common
      stock
      at an exercise price ranging between $0.00001 and $0.50. The sale of these
      shares may adversely affect the market price of our common stock.





16




**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 may be 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 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 Manaris and our wholly owned subsidiaries, Avensys Inc. and C-Chip
      Technologies Corporation (North America), is located at 400 Montpellier, Ville
      Saint-Laurent, Quebec, Canada. Manaris moved to this location in December 2006
      as a means of reducing costs and to be closer to its main operating
      subsidiaries. The current lease is for approximately 35,160 square feet for
      use by administration and production. The base rent for the current premises
      is
      approximately CND$31,357, inclusive of all taxes. This lease expires on January
      31, 2010 with an option to renew for an additional 5 years until January 31,
      2015.





Avensys
      Solutions has also two field offices in Canada. They currently lease
      approximately 3,615 square feet at 1131 Derry Road East, Mississauga, 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$4,460 per month and is subject to annual
      increases equivalent to the increase in the Consumer Price Index ("CPI"). This
      lease expires on June 30, 2008. They also currently lease approximately 400
      square feet for a sales office at 301-1493 Johnston Road, White Rock, British
      Columbia, Canada. The base rent for the current premises is approximately
      CAD$843 per month inclusive of taxes, and is subject to annual increases
      equivalent to the increase in the Consumer Price Index ("CPI"). This lease
      expired on January 31, 2007 and we continue to occupy the premises based on
      a
      month-to-month agreement. 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$3,648 per month inclusive of taxes, and
      is
      subject to annual increases equivalent to the increase in the Consumer Price
      Index ("CPI").




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.
        Resolution of Canadian Security Agency Case*
  On
        March
        29, 2007, a lawsuit was filed under Quebec Law in the Superior Court of Quebec
        against Canadian Security Agency (2004) Inc. (“CSA”), a former operating
        subsidiary of Manaris. The plaintiff was suing CSA, amongst other parties,
        as a
        defendant in warranty, and was claiming a total amount of $585,414 (CAD
        $623,700). The Company responded and obtained the Court’s rejection of the case
        due to a failure by the plaintiff to follow the rules of procedure prescribed
        by
        the *Quebec
        Code of Civil Procedure* .


*2.
      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 $256,530 (CAD $273,307),
      with
      regards to alleged breach of employment contract and wrongful dismissal. The
      Company has prepared its response, and is in the process of contesting the
      case
      vigorously.





*3.
      Intellectual Property Litigation*




On
      September 27, 2006 our subsidiary C-Chip received a letter claiming that the
      Company was infringing on a patent of another similar device to that being
      sold
      by C-Chip. C-Chip responded to the alleged claim, following which verbal
      communications were exchanged between the parties. No further legal action
      or
      claim has been undertaken by either of the parties.




Manaris
      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 Manaris’
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 "MANS." 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****2008****7-01-07
                - 9-30-07***
            
            
            **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**2006**04-01-06
                - 06-30-06
            
            
            0.44
            
            
            0.2701-01-06
                - 03-31-06
            
            
            0.40
            
            
            0.3010-01-05
                - 12-31-05
            
            
            0.38
            
            
            0.3107-01-05
                - 09-30-05
            
            
            0.61
            
            
            0.29





*
      through
      September 14, 2007





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, 2007, the Company had authority to issue 500,000,000 shares of common stock.
      The Company had 93,437,654 and 77,671,281 of common shares outstanding at June
      30, 2007 and 2006, respectively.





For
      the
      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 described in Note 16(c), 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.





f)
            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.





g)
            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.






22





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





For
      the
      fiscal year ended June 30, 2006:





a)
            The
                Company issued 1,758,000 common shares for total proceeds of $100,013
                from
                the exercise of stock options.





b)
            The
                Company issued 10,221,522 common shares in connection with the Series
                A
                Notes. Of that amount, 5,897,695 common shares, with a fair value
                of
                $2,099,793, 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
                $2,099,793 was removed from the carrying value of the convertible
                debentures and credited to capital stock and additional paid in capital.
                In addition, the holders of the convertible debentures converted
                debentures with a principal amount of $1,249,360 into 3,575,008 common
                shares at the existing conversion rate of $0.35. This amount has
                been
                removed from the carrying value of the convertible debentures and
                credited
                to capital stock and additional paid in capital, and the unamortized
                accretion in the amount of $1,181,188 has been charged as additional
                accretion expense and credited to capital stock and additional paid
                in
                capital. Furthermore, a total of 748,819 common shares, with a fair
                value
                of $265,436, 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.





c)
            The
                Company issued 7,525,124 common shares for total proceeds of $2,309,296
                following the exercise of 7,525,124
                warrants.





d)
            A
                total of 257,000 stock options were exercised after issuance to settle
                outstanding payables in the amount of $105,501. The fair value of
                the
                options issued was $136,860 resulting in a loss of $31,359, which
                has been
                charged to other expense.





e)
            In
                February 2006, the Company issued 631,038 common shares valued at
                $224,397
                as the repayment of secured convertible debentures with a principle
                amount
                of $224,397 in accordance with the original terms of the debt. Since
                the
                Company had been accounting for this debt on the basis that the principal
                payments would be made in shares, no gain or loss was
                recorded.





f)
            In
                April 2006, the Company issued 2,550,795 restricted common shares
                having a
                value of $872,372 for the acquisition of ITF
                assets.





g)
            In
                April 2006, the Company cancelled 70,000 restricted common shares
                out of
                120,000 restricted common shares issued in May 2005 for consulting
                fees.
                These shares had originally been issued and held in escrow with 10,000
                shares being released from escrow each month. Consequently, there
                was no
                unearned compensation expense to reverse upon
                cancellation.




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.




**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.





As
      of
      June 30, 2007, stock options to purchase 15,808,489 shares had been granted
      of
      which 5,903,686 options had been exercised, 1,243,733 had been forfeited and
      8,661,070 are outstanding. As at September 14, 2007, we have 5,365,244 stock
      options available for issuance.





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.





24






**Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights**
              
              **Weighted-average
                  exercise price of outstanding options, warrants and
                  rights**
              
              **Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities
                  reflected****Plan
                  category**
              
              **(a)**
              
              **(b)**
              
              **In
                  column (a)) (c)**Equity
                  compensation plans approved by security holders
              
              
              0
              
              
              0
              
              
              0Equity
                  compensation plans not approved by securities holders
              
              
              8,661,070
              
              $
              0.42
              
              
              9,365,244Total
              
              
              8,661,070
              
              $
              0.42
              
              
              9,365,244




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 Manaris Corporation should be read in conjunction with the
      financial statements and notes thereto of the Company for the years ended June
      30, 2007 and 2006 as included in this Form 10-KSB.





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**





Manaris
      is a holding company which operates the following wholly-owned subsidiaries:





·
            Avensys
                Inc. ("Avensys"), which operates two divisions, Avensys Tech which
                manufactures and distributes fiber optical components and sensors
                worldwide and Avensys Solutions, which distributes and integrates
                environmental monitoring solutions.


·
            C-Chip
                Technologies Corporation (North America) ("C-Chip"), which has licensed
                its technology to its partner iMetrik Inc, whereby, C-Chip receives
                royalties from iMetrik for its worldwide sales of GSM-based “locate and
                disable” products into the BHPH (“Buy Here Pay Here”) used car
                market




In
      the
      twelve months ending June 30, 2007, we further made progress in sharpening
      our
      strategic focus. We improved the financial health of the Company. Revenues
      increased 78% over the previous year. The operating loss decreased
      substantially. Our usage of cash for the year from operating activities,
      excluding changes in working capital, was reduced. Our net working capital
      position was positive at year end. In the final quarter of the year ended June
      30, 2007, we generated record revenue (quarterly) of $5.5 million.





Subsequent
      to the end of the year, June 30, 2007, we took a couple of steps to reduce
      the
      dilutive impact of past financings on our shareholders, and to set the platform
      for continued growth. First and most importantly we redeemed the Series B
      convertible debenture issued in August 2006, at the same time purchasing a
      portion of the warrants attached to the debenture. In order to accomplish this
      redemption, we signed an agreement with a new strategic financial partner
      Imperium Inc., for a longer term, less onerous facility. The Imperium facility
      will also enable us to meet any immediate working capital requirements and
      fund
      future growth.





Secondly,
      we offered holders of certain past warrants, whose exercise prices had been
      ratcheted down to below current market prices, the opportunity to do a cashless
      exercise. The net result was that out of 7,595,952 warrants eligible for the
      cashless exercise, 5,307,690 warrants were surrendered, and 2,709,090 shares
      were issued.





We
      took
      steps to ensure profitability of C-Chip Technologies Corporation (North America)
      by strengthening our relationship with our technology partner iMetrik. Also,
      by
      leveraging its expertise and market presence, we were able to eliminate costs
      and generate profits from royalties. The launch of the new GSM-based Credit
      Chip
      200G provided a competitive alternative which resulted in increased sales and
      steady royalty revenues used to repay C-Chip’s loan.




26





The
      Avensys subsidiary was profitable in fiscal year 2007 with profits of
      approximately $1.5 million. In addition, Avensys’ revenues increased by 62.8% as
      compared to the same period a year ago. The positive results from Avensys,
      which
      continue to represent more than 88% of Manaris’ total revenue, confirm the
      validity of our strategic choice to use Avensys as a primary vehicle for future
      growth.





Avensys
      Inc. continued to work on the integration of ITF Optical which was acquired
      in
      April 2006. For Avensys’ fiber components production business, the acquisition
      led to access to a ten thousand (10,000) square foot clean room thereby
      providing economies of scale, and the capacity for significant future growth.
      It
      also provided office and warehouse space for the Avensys environmental
      monitoring solutions business. During the course of the year, several new
      products, which had been under development at ITF Optical, reached a marketable
      stage and were transferred from R&D to production into the Avensys Tech
      division. Considerable efforts and investments have also gone into yield
      improvement initiatives which resulted in increased margins on some of our
      critical product lines.





Avensys
      Solutions, Avensys Inc.’s division providing environmental monitoring solutions
      to the Canadian marketplace, continued to grow at a rate of approximately 10%
      whereas accepted growth figures for this market is approximately 3%. During
      the
      past year, Avensys Solutions signed exclusive distribution agreements for Canada
      with four (4) leading equipment manufacturers thus completing its portfolio
      in
      certain key areas.





In
      order
      to provide a working capital cushion, we concluded a private placement in
      August, 2006, for $3.6 million. The Series A debenture issued in February 2005
      for $4.68 million was completely repaid in January 2007.





For
      fiscal year 2008, our primary objective is to continue to grow revenues, to
      generate positive cash flow, and to identify potential merger and/or acquisition
      targets which would provide complementary product lines, access to new markets
      and/or economies of scales. We are also continuously seeking to improve our
      manufacturing process and decrease costs.





For
      the
      three month period ended June 30, 2007, Manaris’ revenues increased to $5.5
      million, as compared to $3.4 million for the same period last year. Revenues
      for
      the three month period were 60.6% ahead of the same period last year. Manaris’
operating loss for the three month period, including tax credits, was $160,000,
      compared to an operating loss of $2.1 million, including tax credits and after
      taking into consideration the reversal to income of an excessive goodwill
      impairment charge taken in the third quarter of fiscal year 2006 in the amount
      of $2,747,870 for the same period last year. Net cash generated from operating
      activities during the three month period totaled approximately $356,000, as
      compared with net cash used of $1.44 million in the previous year. Of these
      amounts, net cash used totaled approximately $53,000 from the statement of
      operations after excluding changes in working capital, as compared with $1.76
      million cash used for the same period a year earlier after excluding changes
      in
      working capital. The balance of the net cash generated or used in operating
      activities occurred as a result of changes in working capital.




27





For
      the
      fiscal year ended June 30, 2007, Manaris’ revenues increased to $18.7 million,
      as compared to $10.5 million for the same period last year. Revenues for the
      year were 78.5% ahead of the previous year. Manaris’ operating loss for the
      year, including tax credits, was $1.18 million, compared to an operating loss
      of
      $7.27 million, including tax credits, in the previous year. Net cash used in
      operating activities during the year totaled $2.42 million, as compared with
      net
      cash used of $4.26 million in the previous year. Of these amounts, net cash
      used
      totaled approximately $406,000 from the statement of operations after excluding
      changes in working capital, as compared with $4.57 million used in the previous
      year after excluding changes in working capital. The balance of the net cash
      generated or used in operating activities occurred as a result of changes in
      working capital. We have reduced our operating expenses at the holding company
      level significantly compared to the previous year. This was accomplished through
      a combination of measures, including reducing personnel, relocating both the
      Manaris and C-Chip offices to the new Avensys offices, and reducing professional
      fees.





Net
      loss
      applicable to shareholders for the three month period ended June 30, 2007 has
      decreased to approximately $712,000 compared with $2.68 million, after taking
      into consideration the reversal to income of an excessive goodwill impairment
      charge taken in the third quarter of Fiscal year 2006 in the amount of
      $2,747,870, for the same period last year.





Net
      loss
      applicable to shareholders for the year ended June 30, 2007 has decreased to
      $2.37 million compared with $14.1 million for last year.





While
      our
      management believes that we can further improve our results, we are proud of
      the
      progress we have made. We believe that there is a sustained demand for our
      products and services in the marketplace, and we are working hard to sustain
      the
      momentum created over the past several quarters.





**OVERVIEW
      OF AVENSYS SUBSIDIARY**





Manaris
      Corporation acquired Avensys in February 2005. The plan was to complete a period
      of approximately one year of organic growth to maximize operations and
      processes. Following this first successful year of operations, our goal was
      to
      become a participant in the consolidation of the respective markets of Avensys
      Solutions and Avensys Technology.





Avensys
      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 revenues for the three months ended June 30, 2007 were $5.4 million,
      as
      compared to $3.4 million for the same period last year. Revenues for the three
      month period were 58.6% ahead of the same period last year. Our Avensys revenues
      for the year ended June 30, 2007 were $16.6 million, as compared to $10.2
      million in the previous year. Revenues for the year were 62.8% 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, aerospace, and oil and gas industries.
      It
      currently operates in three vertical markets within the photonics industry:
      the
      telecommunications market, which represents close to 75% of Avensys Tech’s
      sales, the growing fiber laser market, and, the fiber sensor market. According
      to a report published by Communications Industry Researchers Inc. in June 2006,
      the global market for optical telecom components has returned to double-digit
      growth rates following a prolonged industry slowdown. Growth forecasts for
      this
      market are based on increasing needs for bandwidth and the gradual rebuilding
      of
      infrastructures to support new digital services such as internet protocol
      television. Similarly, the fiber laser market is forecast to grow at a compound
      rate of 39%, from $131 million in 2005 to $674 million by 2010, according to
      Strategies Unlimited. The global market for fiber sensors, meanwhile, is
      currently at about $300 million per year, with a projected annual average growth
      rate of 4.1% according to a report published by BCC Research in November 2005.




28





On
      April
      18, 2006 Avensys closed the acquisition of most of the assets of ITF Optical
      Technologies Inc. ("ITF"). Throughout this last fiscal year, Avensys had already
      benefited significantly from this acquisition. In May 2006, Avensys moved into
      the ITF facilities, which include a ten thousand (10,000) square feet clean
      room
      with state-of-the-art installations and ample space and equipment for growth.
      The increased production capacity of this new facility along with the commercial
      introduction of several new products, which had been in the development stage
      at
      ITF Optical contributed to the considerable increase in Avensys revenues for
      fiscal year 2007 compared to fiscal year 2006. Manaris’ consolidated financial
      statements also include 100% of the results of ITF Labs. Avensys owns 42% of
      the
      voting stock of ITF Labs. On a stand alone basis, ITF Labs generated revenues
      of
      $2.01 million during fiscal year 2007 compared to revenues of approximately
      $211,000 for last year’s partial year commencing from April 18, 2006, which
      considerably exceeded our expectations. The relationship between Avensys and
      ITF
      Labs has enabled Avensys to benefit from ITF Labs’ ongoing research and
      development activities while limiting Avensys’ direct research and development
      exposure.





In
      addition, the ITF Optical acquisition provided access to a new potential
      customer base and entry into completely new markets such as the Fiber Laser
      business. Avensys Inc. now offers a full suite of sophisticated high-end
      components for telecom, fiber lasers, submarine, military and industrial uses.





Pursuant
      to the ITF Agreement, ITF's Research and Development unit, including all of
      its
      intellectual property assets, was merged with that of Avensys' partner, Avensys
      Laboratories Inc. and renamed ITF Laboratories to leverage the strength of
      the
      ITF brand in the photonics industry. Avensys and ITF Laboratories operate under
      exclusive licensing agreements.





The
      acquisition of the assets of ITF Optical 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 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






29




The
      market for fiber optics components continued 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 fiber laser components, developed by our R&D partner ITF
      labs, were the product lines that generated the most growth. Traditional
      terrestrial telecom components saw relatively stable volumes. Our DPSK product
      line has been qualified by a major telecom manufacturer of long haul
      transmission equipment, reinforcing our position as a major supplier for
      submarine systems and allowing us to further penetrate terrestrial transport
      systems.





We
      have
      sold more than one hundred and twenty (120) components in the emerging fiber
      laser market, thus affirming our positions as a serious player and high quality
      provider. 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. Approximately 45% of the total revenue of
      Avensys was generated from activities that are directly attributable to the
      acquisition of ITF Optical.





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
      optical manufacturing industry has experienced significant pressure on margins
      over the last few years. At Manaris, this trend has been compounded by a weaker
      U.S. dollar. The fact that the majority of our optical sales are conducted
      in US
      dollars, while a majority of our cost structure is funded in Canadian dollars,
      has put significant additional pressure on our margins. Despite these negative
      factors, our gross margins have improved with increased volume and with the
      additional flexibility provided by our recent staff training efforts. We have
      now crossed the 30% level for gross margins, bringing our average gross margin
      for the last 12 months above 34%.





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.





We
      also
      officially launched our 2+1 combiners in February 2007. Although our initial
      forecast called for one thousand (1000) units to be sold over the course of
      twelve (12) months, sales for the first five (5) months have exceeded six
      hundred and fifty (650) units. Our current challenge is to scale our production
      capacity with optimized processes and additional resources to follow the current
      growth cycle.





During
      the past year, Avensys Tech and ITF Labs have also significantly increased
      their
      presence in the industry by participating in various trade shows and by
      presenting multiple scientific papers in different forums, namely Photonics
      West
      2007 in January (California), OFC 2007 (Optical Fiber Communication) in March,
      also in California, and in trade shows such as CLEO 2007 (The Conference on
      Lasers and Electro-Optics) in May, SubOptic 2007 also in May, and Laser 2007
      World of Photonics in Munich (June).




30




*The
      Avensys Solutions Division of Avensys*





Although
      the most drastic changes this year are associated with Avensys Technology,
      the
      other division, Avensys Solutions remains an important part of Avensys and
      has
      experienced a growth this year of 10%.





Avensys
      Solutions competes in the Canadian environmental monitoring market 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. The market for
      environment monitoring in Canada is quite mature, with an average growth in
      the
      3% range. According to Statistics Canada, current environment monitoring
      expenditures in Canada are estimated at CAD $320 million annually. 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. We intend to be active in any
      consolidation movement that may emerge.





In
      September 2007, we announced Marie-Annick Riel’s appointment to general manager
      of the division. This nomination of Marie-Annick, a leader with a proven track
      record in the industry, confirmed our commitment to the growth of this division.
      We expect to realize this growth through both organic initiatives and potential
      merger or acquisition opportunities. We continue to be firm believers in this
      exciting business segment that has allowed us, through its stability, to be
      a
      more solid organization.





While
      we
      remain focused on delivering growth, this past year has also been one of
      significant strategic investments, particularly in our human resources. Several
      new skilled members have joined our sales and integration team, with significant
      investment in training and marketing efforts. We have also opened a new sales
      office in Edmonton and initiated several partnerships with service providers,
      specifically in the Air sector, a sector which holds better growth promises
      considering the current emphasis on clean air and new regulations.





The
      creation of a value-added engineering and integration team within the Solutions
      division has helped us go up the value chain throughout the year. Gross margins
      have remained healthy particularly on turn-key contracts.





The
      division has renewed several contracts with key suppliers, including ISCO which
      Avensys Solutions has been representing for close to thirty (30) years and
      IDEXX. We have also signed new exclusive distribution agreements for Canada
      with
      four (4) leading equipment manufacturers thus enhancing our portfolio in certain
      key areas, particularly in the Air sector where we are expanding our integrated
      solutions capabilities.





The
      stable nature of Avensys Solutions, combined with healthy organic growth, has
      significantly helped Avensys to balance the growth challenges of Avensys
      Technology. We believe that our unique position in the industry, consisting
      of a
      combination of manufacturing of optical components and offering of services
      through our Solutions division, has contributed to a position of strength that
      few of our competitors can enjoy. We intend to continue to fully leverage this
      balance in the future.





31




**OVERVIEW
      OF C-CHIP TECHNOLOGIES SUBSIDIARY**





The
      Credit Chip 200G and its related service offering which were developed in
      partnership with iMetrik, and introduced in the spring of 2006, have been well
      received in the market place. As of August 2006, we had shipped in excess of
      two
      thousand (2000) units. The main obstacle preventing a faster ramp up during
      the
      summer of 2006 was related to the supply chain, primarily difficulty in securing
      and financing the parts for what was a new product.





During
      the first quarter, C-Chip focused on developing a network of knowledgeable
      and
      established resellers to distribute the Credit Chip 200G product primarily
      in
      the United States to the BHPH (“Buy Here, Pay Here”) used car market. By the
      time C-Chip entered into its licensing agreement with iMetrik, it had a network
      of seventeen (17) resellers for the Credit Chip 200G.





The
      licensing agreement between C-Chip and iMetrik was signed in December 2007.
      Pursuant to this Licensing Agreement, C-Chip has been receiving royalties from
      iMetrik for its worldwide sales of GSM-based “locate and disable” products into
      the BHPH used car market. This Licensing Agreement effectively positioned C-Chip
      to benefit from potential growth in this market, while protecting its
      intellectual property and leveraging iMetrik’s engineering and development
      expertise. The royalties have been applied against the outstanding balance
      of a
      loan from iMetrik to C-Chip. The agreement also included an additional reduction
      by $200,000 of the outstanding amount of the loan.





The
      initial term of the License Agreement ends on the first anniversary of the
      date
      that the outstanding amount of the loan has been satisfied as a result of the
      royalties being applied thereto (the "Repayment Date"). iMetrik shall thereafter
      have an option to purchase C-Chip's intellectual property within ninety (90)
      days of the repayment date.





The
      Licensing Agreement also affects the accounting treatment of C-Chip’s revenues
      and costs of goods sold. As disclosed in our quarterly report for the quarter
      ended September 30, 2006, C-Chip revenues and cost of goods sold had previously
      been deferred over the thirty-six (36) month life of the service contracts
      with
      our customers. As a result of the Licensing Agreement, C-Chip was relieved
      of
      any obligation with respect to services pertaining to devices sold prior to
      December 1, 2006 and as such, previously deferred revenues of $1,685,566 and
      deferred contract costs of $1,586,814 have been reflected in our income
      statement for the second quarter.





For
      the
      remainder of the year, and going forward, C-Chip’s primary income is derived
      from earned royalties that are based on the number of units sold by iMetrik.
      The
      total amount of royalties recorded during fiscal year 2007 is about
      USD$360,000.





32




**Results
      of Operations for the three and twelve month periods ended June 30, 2007
      compared to the three and twelve month periods ended June 30, 2006**





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





The
      results of operations of ITF have been included in the consolidated results
      of
      Manaris commencing from the date of acquisition on April 18,
      2006.


**Three
                    Months Ended June 30,****2007**
                
                **2006**
                
                **Change**
                
                **Change****$**
                ****
                **$**
                ****
                **$**
                ****
                **%**Revenue
                
                
                5,532,812
                
                
                3,444,488
                
                
                2,088,324
                
                
                60.6
                %Cost
                    of Revenue
                
                
                3,056,974
                
                
                2,702,866
                
                
                354,108
                
                
                13.1
                %Gross
                    margin
                
                
                2,475,838
                
                
                741,622
                
                
                1,734,216
                
                
                233.8
                %Gross
                    Margin as % of Revenue
                
                
                44.7
                %
                
                21.5
                %Operating
                    expensesDepreciation
                    and amortization
                
                
                301,981
                
                
                276,869
                
                
                25,112
                
                
                9.1
                %Selling,
                    general and administration
                
                
                2,273,601
                
                
                1,800,376
                
                
                473,225
                
                
                26.3
                %Loss
                    on impairment of Goodwill
                
                
                -
                
                
                (2,747,870
                )
                
                2,747,870
                
                
                -100.0
                %Loss
                    on impairment of Intangible Assets
                
                
                -
                
                
                107,715
                
                
                (107,715
                )
                
                -100.0
                %Research
                    and development
                
                
                425,075
                
                
                456,454
                
                
                (31,379
                )
                
                -6.9
                %Total
                    Operating expenses
                
                
                3,000,657
                
                
                (106,456
                )
                
                3,107,113
                
                
                -2918.7
                %Operating
                    (loss) gain
                
                
                (524,819
                )
                
                848,078
                
                
                (1,372,897
                )
                
                -161.9
                %Other
                    income (expenses)
                
                
                (551,987
                )
                
                (1,025,984
                )
                
                473,997
                
                
                -46.2
                %Income
                    tax benefits - refundable tax credits
                
                
                360,676
                
                
                (163,391
                )
                
                524,067
                
                
                -320.7
                %Non-Controlling
                    interest
                
                
                3,877
                
                
                674
                
                
                3,203
                
                
                475.2
                %Results
                    of discontinued operations
                
                
                -
                
                
                410,308
                
                
                (410,308
                )
                
                -100.0
                %Net
                    (loss) income for the period
                
                
                (712,253
                )
                
                69,685
                
                
                (781,938
                )
                
                -1122.1
                %Effect
                    of reduction in exercise price of outstanding warrants
                
                
                -
                
                
                -
                
                
                -
                
                
                0
                %Net
                    (loss) income applicable to common shareholders
                
                
                (712,253
                )
                
                69,685
                
                
                (781,938
                )
                
                -1122.1
                %Foreign
                    currency translation adjustments
                
                
                408,004
                
                
                67,307
                
                
                340,697
                
                
                506.2
                %Comprehensive
                    income
                
                
                (304,249
                )
                
                136,992
                
                
                (441,241
                )
                
                -322.1
                %


33




**Fiscal
                  Year Ended June 30,****2007**
              
              **2006**
              
              **Change**
              
              **Change****$**
              
              **$**
              
              **$**
              
              **%**Revenue
              
              
              18,740,561
              
              
              10,498,505
              
              
              8,242,056
              
              
              78.5
              %Cost
                  of Revenue
              
              
              12,226,804
              
              
              7,464,710
              
              
              4,762,094
              
              
              63.8
              %Gross
                  margin
              
              
              6,513,757
              
              
              3,033,795
              
              
              3,479,962
              
              
              114.7
              %Gross
                  Margin as % of Revenue
              
              
              34.8
              %
              
              28.9
              %Operating
                  expensesDepreciation
                  and amortization
              
              
              875,827
              
              
              979,635
              
              
              (103,808
              )
              
              -10.6
              %Selling,
                  general and administration
              
              
              6,468,080
              
              
              6,937,860
              
              
              (469,780
              )
              
              -6.8
              %Loss
                  on impairment of Goodwill
              
              
              -
              
              
              1,529,767
              
              
              (1,529,767
              )
              
              -100.0
              %Loss
                  on impairment of Intangible Assets
              
              
              -
              
              
              107,715
              
              
              (107,715
              )
              
              -100.0
              %Research
                  and development
              
              
              1,571,572
              
              
              1,106,259
              
              
              465,313
              
              
              42.1
              %Total
                  Operating expenses
              
              
              8,915,479
              
              
              10,661,236
              
              
              (1,745,757
              )
              
              -16.4
              %Operating
                  (loss)
              
              
              (2,401,722
              )
              
              (7,627,441
              )
              
              5,225,719
              
              
              -68.5
              %Other
                  income (expenses)
              
              
              (1,188,870
              )
              
              (4,771,904
              )
              
              3,583,034
              
              
              -75.1
              %Income
                  tax benefits - refundable tax credits
              
              
              1,217,948
              
              
              351,242
              
              
              866,706
              
              
              246.8
              %Non-Controlling
                  interest
              
              
              1,890
              
              
              (3,977
              )
              
              5,867
              
              
              -147.5
              %Results
                  of discontinued operations
              
              
              -
              
              
              149,637
              
              
              (149,637
              )
              
              -100.0
              %Net
                  loss for the year
              
              
              (2,370,754
              )
              
              (11,902,443
              )
              
              9,531,689
              
              
              -80.1
              %Effect
                  of reduction in exercise price of outstanding warrants
              
              
              -
              
              
              (2,197,296
              )
              
              2,197,296
              
              
              -100.0
              %Net
                  loss applicable to common shareholders
              
              
              (2,370,754
              )
              
              (14,099,739
              )
              
              11,728,985
              
              
              -83.2
              %Foreign
                  currency translation adjustments
              
              
              584,735
              
              
              47,849
              
              
              536,886
              
              
              1122.0
              %Comprehensive
                  loss
              
              
              (1,786,019
              )
              
              (11,854,594
              )
              
              10,068,575
              
              
              -84.9
              %




Revenue





Sales
      from the Fiber & Monitoring operating segment of Avensys products and
      solutions for the three and twelve month periods ended June 30, 2007 account
      for
      97.4% and 88.5% 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,****2007**
              
              **2006**
              
              **Change**
              
              **Change****$**
              
              **$**
              
              **$**
              
              **%**Avensys
              
              
              5,389,262
              
              
              3,414,157
              
              
              1,975,105
              
              
              57.9
              %C-Chip
                  (Royalties)
              
              
              139,262
              
              
              -
              
              
              139,262
              
              
              100
              %C-Chip
                  (Sales)
              
              
              4,288
              
              
              30,331
              
              
              (26,043
              )
              
              -85.9
              %Revenue
              
              
              5,532,812
              
              
              3,444,488
              
              
              2,088,324
              
              
              60.6
              %
   34
   **Fiscal
                  Year Ended June 30,****2007**
              
              **2006**
              
              **Change**
              
              **Change****$**
              
              **$**
              
              **$**
              
              **%**Avensys
              
              
              16,576,124
              
              
              10,179,426
              
              
              6,396,698
              
              
              62.8
              %C-Chip
                  (Royalties)
              
              
              355,928
              
              
              -
              
              
              355,928
              
              
              100
              %C-Chip
                  (Sales)
              
              
              1,808,509
              
              
              319,079
              
              
              1,489,430
              
              
              466.8
              %Revenue
              
              
              18,740,561
              
              
              10,498,505
              
              
              8,242,056
              
              
              78.5
              %


Our
      revenues for the three and twelve months periods ended June 30, 2007 increased
      by 60.6% and 78.5%, respectively, over the same periods in 2006. This increase
      is primarily due to the addition of new customers by both Avensys and C-Chip
      during the course of the periods ended June 30, 2007. Avensys maintained its
      own
      strong internal growth resulting from the continued expansion and
      diversification of Avensys’ product lines and the ITF transaction. C-Chip’s
      revenues for the twelve month period ended June 30, 2007 include an adjustment
      brought about by a change in its accounting policy relating to revenue
      recognition. The change in accounting policy resulted from a license agreement
      signed during the second quarter, effective December 1, 2006, whereby C-Chip
      would receive royalties from the licensee on the sale of credit management
      devices. As a result of the change in business model and corresponding revenue
      recognition policy, all Deferred Revenue and Deferred Contract Costs accumulated
      until November 30, 2006, under the previous revenue recognition policy have
      been
      taken into revenue and expense and thus included in the results of operations
      for the nine month period ended March 31, 2007. This resulted in an increase
      in
      revenue and expense for the twelve month period ended June 30, 2007, in the
      amounts of $1,685,566 and $1,586,814, respectively. Excluding this adjustment,
      our revenues for the twelve month period ended June 30, 2007 increased by
      62.5%.





Cost
      of revenue and gross margin





Cost
      of
      goods sold as a percentage of revenue was at 55.3% and 65.2% for the three
      and
      twelve month periods ended June 30, 2007, respectively, compared with 78.5%
      and
      71.1%, respectively, for the same periods in 2006. Gross margin, relative to
      revenues, for the three and twelve month periods ended June 30, 2007, surged
      as
      a result of improved margins at Avensys and the new C-Chip business model.
      Avensys saw significant reductions in the operational costs of production,
      following the ITF transaction, but these were partially offset by the negative
      effects of a weaker U.S. dollar.





Operating
      Expenses





*Depreciation
      and amortization*




Depreciation
      and amortization expenses for the three and twelve month periods ended June
      30,
      2007, increased by $25,112 and decreased by $103,808, respectively, over the
      same periods in 2006. The decrease for the twelve month period is primarily
      attributable to the rationalization of manufacturing and research and
      development assets as part of the acquisition of ITF Optical
      assets.





*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, 2007, increased by $473,225 and decreased by
      $469,780, respectively, compared to the same periods in 2006. SG&A are
      composed of the following:




35





**Three
                  Months Ended June 30,****2007**
              
              **2006**
              
              **Change**
              
              **Change****$**
              
              **$**
              
              **$**
              
              **%**General
                  and administrative
              
              
              330,359
              
              
              57,445
              
              
              272,914
              
              
              475.1
              %Marketing
                  and Sales
              
              
              169,434
              
              
              209,183
              
              
              (39,749
              )
              
              -19.0
              %Payroll
                  and related expenses
              
              
              1,282,263
              
              
              946,070
              
              
              336,193
              
              
              35.5
              %Professional
                  fees
              
              
              174,404
              
              
              396,799
              
              
              (222,395
              )
              
              -56.0
              %Travel
              
              
              27,034
              
              
              24,119
              
              
              2,915
              
              
              12.1
              %Other
              
              
              290,107
              
              
              166,760
              
              
              123,347
              
              
              74.0
              %Selling,
                  General and Administrative Expenses
              
              $
              2,273,601
              
              $
              1,800,376
              
              $
              473,225
              
              
              26.3
              %





**Fiscal
                  Year Ended June 30,****2007**
              
              **2006**
              
              **Change**
              
              **Change****$**
              
              **$**
              
              **$**
              
              **%**General
                  and administrative
              
              
              838,655
              
              
              956,478
              
              
              (117,823
              )
              
              -12.3
              %Marketing
                  and Sales
              
              
              701,237
              
              
              933,387
              
              
              (232,150
              )
              
              -24.9
              %Payroll
                  and related expenses
              
              
              3,412,997
              
              
              2,805,194
              
              
              607,803
              
              
              21.7
              %Professional
                  fees
              
              
              650,482
              
              
              1,452,983
              
              
              (802,501
              )
              
              -55.2
              %Travel
              
              
              84,698
              
              
              66,099
              
              
              18,599
              
              
              28.1
              %Other
              
              
              780,011
              
              
              723,719
              
              
              56,292
              
              
              7.8
              %Selling,
                  General and Administrative Expenses
              
              $
              6,468,080
              
              $
              6,937,860
              
              $
              (469,780
              )
              
              -6.8
              %





·
            General
                and administrative expenses for the three and twelve month periods
                ended
                June 30, 2007, increased by $272,914 and decreased by $117,823,
                respectively, compared with the same periods in 2006. The decrease
                for the
                twelve month period is primarily due to aggressive cost control throughout
                the Company that took place in the context of significant growth
                in
                revenues for the twelve month period.





·
            Marketing
                and sales expenses decreased by $39,749 and $232,150, respectively,
                compared to the same periods in 2006. Again, the decreases for the
                periods
                are primarily due to aggressive cost control throughout the
                Company.





·
            Payroll
                expenses for the three and twelve month periods ended June 30, 2007
                increased by $336,193 and $607,803, respectively, compared with the
                same
                periods in 2006. The increases in payroll are directly attributable
                to the
                revenue growth for the periods but are significantly less than the
                actual
                revenue increases, which were 60.6% and 78.5% for the three and twelve
                month periods ended June 30, 2007. Payroll expenses were also
                significantly reduced at the holding company,
                Manaris.





·
            Professional
                fees for the three and twelve month periods ended June 30, 2007 decreased
                by $222,395 and $802,501, respectively, compared with the same periods
                in
                2006. The large decreases were primarily attributable to the holding
                company, Manaris.





·
            SG&A
                expenses classified as ‘Other selling, general and administrative’, which
                include stock based compensation, for the three and twelve month
                periods
                ended June 30, 2007, increased by $123,347 and $56,292, respectively,
                compared with the same periods in 2006. The small increase for the
                twelve
                month period is primarily due to aggressive cost control throughout
                the
                Company that, again, took place in the context of significant growth
                in
                revenues for the twelve month period.




36




Research
      and Development





For
      the
      three and twelve months ended June 30, 2007, 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,
      2007, decreased by $31,379 and increased by $465,313, respectively, compared
      with the same periods in 2006. The twelve month period 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,
      2007, was $187,122 and $453,206, respectively, compared to $17,625 and $490,795,
      respectively, for the same periods in 2006, which represents an increase of
      $169,497 and a decrease of $37,589,





Intangible
      asset impairment





In
      the
      fourth quarter of Fiscal year 2006, Management recorded an intangible assets
      impairment charge of $107,715 in the Consolidated Statement of Operations.
      There
      is no intangible assets impairment charge recorded for the year ended June
      30,
      2007.





Goodwill
      impairment





During
      the fourth quarter of Fiscal year 2006, 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 reporting unit
      against its carrying amount, including the goodwill. Measurement of the fair
      value was based on the reporting unit’s present value of expected future cash
      flows. As the carrying amount exceeded the estimated fair value, the fair value
      was allocated to the reporting unit’s underlying assets and liabilities, and
      management then determined that the carrying value of the goodwill exceeded
      the
      implied fair value of the goodwill. Accordingly, the Company recorded a goodwill
      impairment charge (labeled "Loss on Impairment of Goodwill") of $1,529,767.
      Management believes this impairment arose primarily as a result of an extension
      in the timeframe for realizing growth objectives and anticipated cash flows
      of
      the Avensys reporting unit.




During
      the fourth quarter of Fiscal 2007, 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 reporting unit against its
      carrying amount, including the goodwill. Measurement of the fair value was
      based
      on the reporting unit’s 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 unit’s underlying assets and
      liabilities and the goodwill recorded.




37




Other
      Income (Expenses)





Other
      income (expenses) consists of the following:


**Three
                  Months Ended June 30,****2007**
              
              **2006**
              
              **Change**
              
              **Change****$**
              
              **$**
              
              **$**
              
              **%**Other
                  income (expenses), net
              
              
              41,661
              
              
              (60,945
              )
              
              102,606
              
              
              -168.4
              %Interest
                  expense, net
              
              
              (253,914
              )
              
              (73,837
              )
              
              (180,077
              )
              
              243.9
              %Debentures
                  and preferred shares accretion
              
              
              (438,888
              )
              
              (936,745
              )
              
              497,857
              
              
              -53.1
              %Change
                  in fair value of derivative financial instruments
              
              
              99,154
              
              
              45,543
              
              
              53,611
              
              
              117.7
              %Other
                  income (expenses)
              
              $
              (551,987
              )
              $
              (1,025,984
              )
              $
              473,997
              
              
              -46.2
              %




**Twelve
                  Months Ended June 30,****2007**
              
              **2006**
              
              **Change**
              
              **Change****$**
              
              **$**
              
              **$**
              
              **%**Other
                  income (expenses), net
              
              
              372,269
              
              
              (18,187
              )
              
              390,456
              
              
              -2146.9
              %Interest
                  expense, net
              
              
              (902,509
              )
              
              (762,488
              )
              
              (140,021
              )
              
              18.4
              %Debentures
                  and preferred shares accretion
              
              
              (2,420,791
              )
              
              (4,036,772
              )
              
              1,615,981
              
              
              -40.0
              %Change
                  in fair value of derivative financial instruments
              
              
              1,762,161
              
              
              45,543
              
              
              1,716,618
              
              
              3769.2
              %Other
                  income (expenses)
              
              $
              (1,188,870
              )
              $
              (4,771,904
              )
              $
              3,583,034
              
              
              -75.1
              %





Other
      expenses for the three and twelve month periods year ended June 30, 2007,
      decreased by $473,997 (46.2%) and $3,583,034 (75.1%), respectively, compared
      with the same periods in 2006. The decreases were primarily due to a significant
      reduction in debenture and preferred shares accretion, a significant credit
      increase in the change in fair value of derivative financial instruments (see
      discussion on derivative financial instruments under ‘Net Loss’) and a
      significant increase in other income. With respect to the decrease in accretion
      expense, the Series A Notes, which matured on January 31, 2007, provided a
      substantially higher amount of accretion expense than the current Series B
      Notes
      and Series B OID Notes, as follows:


**Three
                  Months Ended June 30,****2007**
              
              **2006**
              
              **Change**
              
              **Change****$**
              
              **$**
              
              **$**
              
              **%**Series
                  A Notes accretion
              
              
              -
              
              
              875,915
              
              
              (875,915
              )
              
              -100.0
              %Series
                  B Notes & Series B OID Notes accretion
              
              
              358,082
              
              
              -
              
              
              358,082
              
              
              100
              %Preferred
                  shares accretion
              
              
              80,806
              
              
              60,830
              
              
              19,976
              
              
              32.8
              %Debentures
                  and preferred shares accretion
              
              $
              438,888
              
              $
              936,745
              
              $
              (497,857
              )
              
              -53.1
              %




**Twelve
                  Months Ended June 30,****2007**
              
              **2006**
              
              **Change**
              
              **Change****$**
              
              **$**
              
              **$**
              
              **%**Series
                  A Notes accretion
              
              
              1,025,613
              
              
              3,975,942
              
              
              (2,950,329
              )
              
              -74.2
              %Series
                  B Notes & Series B OID Notes accretion
              
              
              1,135,302
              
              
              -
              
              
              1,135,302
              
              
              100
              %Preferred
                  shares accretion
              
              
              259,876
              
              
              60,830
              
              
              199,046
              
              
              327.2
              %Debentures
                  and preferred shares accretion
              
              $
              2,420,791
              
              $
              4,036,772
              
              $
              (1,615,981
              )
              
              -40.0
              %





38





Refundable
      Tax Credits





Refundable
      tax credits for the three and twelve month periods ended June 30, 2007,
      increased by $524,067 and $866,706, respectively, compared with the same periods
      in 2006, primarily due to the inclusion of ITF Labs for the full fiscal year
      ended June 30, 2007, as compared to approximate three months for the fiscal
      year
      ended June 30, 2006.





Net
      Loss





Our
      net
      loss of $712,253 for the three months ended June 30, 2007 represents an
      improvement of $1,965,932 compared to the net loss of $2,678,185 for the same
      period in 2006, after taking into consideration the reversal to income of an
      excessive goodwill impairment charge taken in the third quarter of Fiscal year
      2006 in the amount of $2,747,870. Our net loss of $2,370,754 for the twelve
      months ended June 30, 2007, represents an improvement of $9,531,689 compared
      to
      the net loss of $11,902,443 for the same period in 2006. These changes, however,
      were affected by the addition of derivative financial instruments to our balance
      sheet. We incurred liabilities that are treated as derivative financial
      instruments as part of our acquisition of ITF Optical assets and the August
      2006
      (First Tranche) and November 2006 (Second Tranche) financing ("derivative
      liabilities"). These derivative liabilities are re-evaluated at each period
      end
      using the Black-Scholes option pricing model, and are consequently, sensitive
      to
      changes in the market price of our own shares. Due to this expanded use of
      derivative financial instruments, the volatility of our results of operations
      has increased considerably, as they are increasingly affected by fluctuations
      in
      the fair value of our shares. At June 30, 2007, our share price had dropped
      to
      $0.08 a share, which significantly reduced the fair values of the derivative
      liabilities on our balance sheet, and reduced our net loss by $99,154 and
      $1,762,161 for the three and twelve month periods ended June 30, 2007. Excluding
      the gain from changes in fair values of these derivative liabilities, our net
      loss would have been $811,407 for the three months ended March 31, 2007 and
      $4,132,915 for the twelve months ended June 30, 2007. Two non-recurring matters
      also had a significant impact on the net loss for the twelve months ended June
      30, 2007. A gain on sale of fixed assets amounting to $300,848, recorded in
      the
      first quarter, and a revaluation of our estimates for research and development
      tax credits receivable amounting to $475,193, of which $185,482 was recorded
      in
      the first quarter, $178,991 was recorded in the third quarter and $110,720
      was
      recorded in the fourth quarter, with both matters improving our results by
      reducing the net loss for the twelve months ended June 30, 2007.





Net
      Loss Applicable to Common Shareholders





In
      the
      first quarter of fiscal year 2006, the Company incurred a charge for the effect
      of the reduction in the exercise price of outstanding warrants in the amount
      of
      $2,197,296.





This
      charge was shown after the calculation of our net loss resulting in a further
      loss applicable to common shareholders. The Company incurred no such charge
      in
      fiscal year 2007.





**Financial
      Condition, Liquidity and Capital Resources**





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. Avensys recorded a net profit for the first time
      in
      fiscal year 2007 and thus generated a positive cash flow.




39





As
      at
      June 30, 2007, we had working capital surplus of $596,801 compared to a working
      capital deficiency of $1,657,698 at June 30, 2006, an improvement of $2,254,499.
      Included in these figures for net working capital:


**June
                  30,****2007**
              
              **2006**
              
              **Change**
              
              **Change****$**
              
              **$**
              
              **$**
              
              **%**Cash,
                  cash equivalents, and short term investments
              
              
              559,257
              
              
              438,708
              
              
              120,549
              
              
              27
              %Receivables
              
              
              3,834,474
              
              
              3,480,649
              
              
              353,825
              
              
              10
              %Inventory
              
              
              1,478,835
              
              
              1,563,805
              
              
              (84,970
              )
              
              -5
              %Other
                  current assets
              
              
              1,474,156
              
              
              589,302
              
              
              884,854
              
              
              150
              %Current
                  assets
              
              
              7,346,722
              
              
              6,072,464
              
              
              1,274,258
              
              
              21
              %Accounts
                  payable and accrued liabilities
              
              
              3,992,847
              
              
              4,666,858
              
              
              (674,011
              )
              
              -14
              %Loans
                  payable
              
              
              1,054,238
              
              
              2,331,696
              
              
              (1,277,458
              )
              
              -55
              %Other
                  current liabilities
              
              
              1,702,836
              
              
              731,608
              
              
              971,228
              
              
              133
              %Current
                  Liabilities
              
              
              6,749,921
              
              
              7,730,162
              
              
              (980,241
              )
              
              -13
              %Net
                  working capital (deficiency)
              
              
              596,801
              
              
              (1,657,698
              )
              
              2,254,499
              
              
              -136
              %




We
      have
      implemented the following measures to address our concerns over the liquidity
      of
      the Company and its ability to continue as a going concern:





·
            Secured
                convertible debt financing, on August 11, 2006 (First Tranche) and
                November 17, 2006 (Second Tranche), to fund our operations and
                growth.





·
            C-Chip
                signed a License Agreement establishing a new and profitable business
                model. This will allow for the reduction of the debt at our C-Chip
                subsidiary through continued payments from our royalty
                revenue.





·
            Executed
                the Avensys business plan resulting in its generation of positive
                cash
                flows.





·
            Significantly
                rationalized the operating and cost structure of our holding company,
                Manaris.





·
            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 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 (“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
                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





40





During
      the three month period ended June 30, 2007, the Company, having produced a
      net
      loss of $712,253, generated $355,544 of cash to fund Operating Activities from
      continuing operations. Excluding working capital items, the Company used $52,884
      of cash to fund Operating Activities from continuing operations. During the
      three month period ended June 30, 2006, the Company, having produced a net
      income of $69,685 (includes the reversal to income of an excessive goodwill
      impairment charge taken in the third quarter of Fiscal year 2006 in the amount
      of $2,747,870), used $1,438,029 of cash to fund Operating Activities from
      continuing operations. Excluding working capital items, the Company used
      $1,763,466 of cash to fund Operating Activities from continuing operations.
      An
      analysis of the three month periods is as follows:


**Three
                    Months Ended June 30,****2007**
                
                **2006**
                
                **Change****$**
                
                **$**
                
                **$**Net
                    (loss) income
                
                
                (712,253
                )
                
                69,685
                
                
                (781,938
                )Net
                    adjustments to reconcile net profit (loss) to cash generated
                    by (used in)
                    operating activities
                
                
                659,369
                
                
                (1,833,151
                )
                
                2,492,520(52,884
                )
                
                (1,763,466
                )
                
                1,710,582Change
                    in accounts receivable and other receivables
                
                
                (425,661
                )
                
                (760,352
                )
                
                334,691Change
                    in accounts payable and accrued liabilities
                
                
                988,833
                
                
                1,217,379
                
                
                (228,546
                )Change
                    in other current assets and current liabilities
                
                
                (154,744
                )
                
                (131,590
                )
                
                (23,154
                )Net
                    cash generated by (used in) operating activities from continuing
                    operations
                
                $
                355,544
                
                $
                (1,438,029
                )
                
                1,793,573





41





During
      the twelve month period ended June 30, 2007, the Company, having produced a
      net
      loss of $2,370,754, used $2,415,200,of cash to fund Operating Activities from
      continuing operations. Excluding working capital items, the Company used
      $406,125, of cash to fund Operating Activities from continuing operations.
      During the twelve month period ended June 30, 2006, the Company, having produced
      a net loss of $11,902,443, used $4,262,551 of cash to fund Operating Activities
      from continuing operations. Excluding working capital items, the Company used
      $4,569,772 of cash to fund Operating Activities from continuing operations.
      An
      analysis of the twelve month periods is as follows:


**Twelve
                  Months Ended June 30,****2007**
              
              **2006**
              
              **Change****$**
              
              **$**
              
              **$**Net
                  loss
              
              
              (2,370,754
              )
              
              (11,902,443
              )
              
              9,531,689Net
                  adjustments to reconcile net profit (loss) to cash generated by
                  (used in)
                  operating activities
              
              
              1,964,629
              
              
              7,332,671
              
              
              (5,368,042
              )(406,125
              )
              
              (4,569,772
              )
              
              4,163,647Change
                  in accounts receivable and other receivables
              
              
              (1,425,638
              )
              
              (814,454
              )
              
              (611,184
              )Change
                  in accounts payable and accrued liabilities
              
              
              (850,534
              )
              
              1,594,692
              
              
              (2,445,226
              )Change
                  in other current assets and current liabilities
              
              
              267,097
              
              
              (473,017
              )
              
              740,114Net
                  cash generated by (used in) operating activities from continuing
                  operations
              
              $
              (2,415,200
              )
              $
              (4,262,551
              )
              
              1,847,351


During
      the three and twelve month periods ended June 30, 2007, we mainly financed
      our
      operations through the August 11, 2006, and November 17, 2006, Series B Notes,
      the positive cash flow generated by Avensys through the sales of products and
      services and the positive cash flow generated by C-Chip through the new and
      profitable business model.





Selected
      Balance Sheet information:


**As
                  of June 30,****2007**
              
              **2006****$**
              
              **$**Total
                  Assets
              
              
              18,193,489
              
              
              17,143,434Current
                  Liabilities
              
              
              6,749,921
              
              
              7,730,162Long-Term
                  Liabilities
              
              
              2,708,476
              
              
              2,183,345Non-Controlling
                  Interest
              
              
              23,193
              
              
              23,940Total
                  Stockholder's Equity
              
              
              8,711,899
              
              
              7,205,987





The
      increase in total assets is attributable to increases in accounts receivable
      of
      $729,567, from $3,104,907 to $3,834,474, and other receivables of $791,499,
      from
      $375,742 to $1,167,241, offset by a decrease in net property and equipment
      of
      $802,429, from $3,082,402 to $2,279,973. The decrease in current liabilities
      is
      attributable to decreases in accounts payable and accrued liabilities of
      $674,011, from $4,666,859 to $3,992,848, and bank and other loans payable of
      $1,277,458, from $2,331,696 to $1,054,238, offset by increases in the current
      portion of convertible debentures of $980,628, from $587,891 to $1,568,519.
      The
      increase in long-term liabilities is attributable to increases in convertible
      debentures of $932,349, from $343,109 to $1,275,458, and balance of purchase
      price payable of $316,421, from $877,675 to 1,194,096, offset by a decrease
      in
      derivative financial instruments of $393,761, from $458,271 to
      $64,510.





As
      of
      June 30, 2007, the Company had 93,437,654 issued and outstanding shares compared
      to 77,671,281 on June 30, 2006. The increase in common shares is mainly due
      to
      the issuance of 1,283,613 common shares  in
      connection with the Series A Notes, to the issuance of 12,450,353 common shares
      in connection with the Series B Notes and Series B OID Notes and to the issuance
      of 1,654,394 common shares on conversion of an unsecured convertible
      debenture.





Stock
      options outstanding at June 30, 2007 totaled 8,661,070 at a weighted average
      exercise price of $0.42 and have a weighted average remaining contractual life
      of 5.26 years. Stock options outstanding at June 30, 2006 totaled 4,486,750
      at a
      weighted average exercise price of $0.60 and had a weighted average remaining
      contractual life of 3.4 years.




42





The
      Series A Notes we issued in February 2005, in an aggregate principal amount
      of
      $4,675,000, was fully repaid in January 2007.





August
      2006 Convertible Note and Warrant Private Placement





On
      August
      11, 2006, we entered into a Note and Warrant Purchase Agreement 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") 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"). Gross proceeds
      of
      approximately $2.1 million were received by August 22, 2006, with net proceeds
      of approximately $1.8 million, after transaction fees.





On
      November 17, 2006, we completed the second tranche (the "Second Tranche") of
      the
      Purchase Agreement. In connection with the Second Tranche, we issued (i) Series
      B Notes in an aggregate principal amount of $1,509,226 (ii) OID Notes in an
      aggregate principal amount of $226,384, and (iii) 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 of Series Z Warrants and 2.5%
      of
      the number of common shares underlying the Series B Notes of Series Y Warrants.
      The Company received net proceeds of approximately $1,360,237 in connection
      with
      the Second Tranche. Also in connection with the Second Tranche, we agreed to
      accelerate the commencement date of the quarterly principal payments on the
      Notes to February 1, 2007, and reduce the amount of the quarterly principal
      payments to 1/9th of the original principal amount of the Notes.





The
      Notes
      mature thirty (30) months from the date of issuance (the "Maturity Date") and
      are 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 Notes is 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 is required to make principal
      payments equal to one-eighth of the aggregate principal amount of the Notes
      on a
      quarterly basis. The Company may pay 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
      Company's obligations under the Purchase Agreement and the Notes are secured
      by
      a subordinated lien on substantially all of the assets of the Company, pursuant
      to a Pledge and Security Agreement.





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.




43





There
      have been no significant changes during the fiscal year 2007 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-KSB
      for the fiscal year ended June 30, 2007, except as noted below for stock-based
      compensation and C-Chip’s revenue recognition policy.





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
      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.





C-Chip
      Revenue Recognition





C-Chip
      derives revenues from the sale of credit management devices and associated
      services. The devices are bundled with service agreements which provide the
      customer with access to C-Chip’s web-based application, thus allowing the
      customer to locate and disable subject vehicles during the service period,
      which
      is generally three years. Since the services are essential to the functionality
      of the device, revenues from the sale of devices (including services) are
      deferred and recognized as revenue over the contractual service period and
      the
      related cost of revenues is deferred and amortized to cost of revenues over
      the
      corresponding period. Such items are described on the Consolidated Balance
      Sheet
      as Deferred Revenue and Deferred Contract Costs. In addition to the up-front
      fees charged to a customer, C-Chip may also earn other amounts during the
      service period, which are charged to the customer on a pay per use basis, for
      which revenue and the related costs are recognized when proof is obtained that
      the end-user has been delivered the devices by the Licensee and collectability
      is reasonably assured by the Licensee.




44





The
      revenue recognition policy for C-Chip, as noted above, was applied until
      November 30, 2006. Effective December 1, 2006, in accordance with the Technology
      License Agreement (“Agreement”) signed by C-Chip, it will commence recording
      royalties based on C-Chip’s technology in the credit management devices. As
      consideration for the exclusive license, the licensee shall pay to C-Chip
      royalties equal to the greater of: (i) $20 per device sold or (ii) $30,000
      per
      month. As a result of the change in business model and corresponding revenue
      recognition policy, all Deferred Revenue and Deferred Contract Costs accumulated
      until November 30, 2006 under the previous revenue recognition policy have
      been
      taken into revenue and expense and thus included in the results of operations
      for the year ended June 30, 2007. This resulted in an increase in revenue and
      expense for the year ended June 30, 2007 in the amounts of $1,685,566 and
      $1,586,814, respectively.





C-Chip
      recorded royalties’ income of $139,262 and $355,928 for the three and twelve
      month periods ended June 30, 2007.





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.




45





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.





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.





46





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 net operating losses of $23.1 million
      from its inception which expire starting in 2015. 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.





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.





47




Recent
      Accounting Pronouncements





a)
              Recent
                  Accounting Pronouncements Adopted During 2007
 
 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.
 
 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
                  impactas at June 30, 2006 of the misstatement originatingduring
                  the year endedJune 30, 2005
              
              Adjustments
                  recordedas 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




48




b)
              Recent
                  Accounting Pronouncements Not Yet
                  Adopted
 
 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
        February 2006, FASB issued SFAS 155, Accounting for Certain Hybrid Financial
        Instruments - an amendment of FASB Statements No. 133 and 144. SFAS 155 amends
        FASB Statements No. 133, Accounting for Derivative Instruments and Hedging
        Activities, and No. 140, Accounting for Transfers and Servicing of Financial
        Assets and Extinguishments of Liabilities. This Statement resolves issues
        addressed in Statement 133 Implementation Issue No. D1, “Application of
        Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS 155
        permits fair value re-measurement for any hybrid financial instrument that
        contains an embedded derivative that otherwise would require bifurcation;
        clarifies which interest-only strips and principal-only strips are not subject
        to the requirements of SFAS 133; establishes a requirement to evaluate interests
        in securitized financial assets to identify interests that are freestanding
        derivatives or that are hybrid financial instruments that contain an embedded
        derivative requiring bifurcation; clarifies that concentrations of credit
        risk
        in the form of subordination are not embedded derivatives; and amends SFAS
        140
        to eliminate the prohibition on a qualifying special purpose entity from
        holding
        a derivative financial instrument that pertains to a beneficial interest
        other
        than another derivative financial instrument. SFAS 155 will be effective
        for all
        financial instruments acquired, issued, or subject to a re-measurement (new
        basis) event occurring after the beginning of an entity’s first fiscal year that
        begins after September 15, 2006. The Company is evaluating the impact of
        the
        adoption of this standard on the Company's results of operations and financial
        position.
 
 In
        June
        2006, FASB issued Interpretation No. 48 - an interpretation of FASB Statement
        No. 109, Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the
        accounting for uncertainty in income taxes recognized in financial statements
        in
        accordance with SFAS 109. FIN 48 prescribes a recognition threshold and
        measurement attribute for the financial statement recognition and measurement
        of
        a tax position taken or expected to be taken in a tax return. It also provides
        guidance on de-recognition, classification, interest and penalties, accounting
        in interim periods, disclosure, and transition. The evaluation of a tax position
        in accordance FIN 48 is a two-step process. The first step is recognition:
        The
        enterprise determines whether it is more likely than not that a tax position
        will be sustained upon examination, including resolution of any related appeals
        or litigation processes, based on the technical merits of the position. The
        second step is measurement: A tax position that meets the more-likely-than-not
        recognition threshold is measured to determine the amount of benefit to
        recognize in the financial statements. Under FIN 48, differences resulting
        from
        this evaluation of tax positions would result in either of an increase of
        liabilities or decrease of assets. FIN 48 is effective for fiscal years
        beginning after December 15, 2006. The Company is evaluating the impact of
        the
        adoption of this interpretation on the Company's results of operations and
        financial position.




49




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 is effective for fiscal years beginning after November
        15, 2007. 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.
 
 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,
        2007, the Company does not have any arrangements that would be subject to
        the
        scope of EITF 07-3.


Off-Balance
      Sheet Arrangements





None.




50





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




Manaris
      Corporation


Consolidated
      Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2007




Index


Report
                  of Independent Registered Public Accounting Firm
              F-1Consolidated
                  Balance Sheets
              F-2Consolidated
                  Statements of Operations and Comprehensive Income (Loss)
              F-3Consolidated
                  Statements of Cash Flows
              F-4Consolidated
                  Statement of Stockholders’ Equity
              F-6Notes
                  to Consolidated Financial Statements
              F-7
   51


**[LETTERHEAD
      OF RAYMOND CHABOT GRANT THORNTON LLP]**




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




Board
      of
      Directors and Shareholders of Manaris Corporation




We
      have
      audited the accompanying consolidated balance sheet of Manaris Corporation
      and
      its subsidiaries as of June 30, 2007 and the related consolidated statements
      of
      operations and comprehensive loss, cash flows and stockholders’ equity for the
      year then ended. 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 audit. The financial statements of Manaris
      Corporation and its subsidiaries, as of June 30, 2006 and for the year then
      ended, were audited by other auditors whose report dated September 29, 2006
      expressed an unqualified opinion on those statements.




We
      conducted our audit 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 Manaris Corporation and
      its
      subsidiaries as of June 30, 2007 and the results of its operations and its
      cash
      flows for the year then ended in conformity with accounting principles generally
      accepted in the United States of America.




We
      also
      audited the adjustments described in Note 21 that were applied to restate the
      2006 financial statements. In our opinion, such adjustments are appropriate
      and
      have been properly applied.





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


September
      27, 2007




F-1


Manaris
                CorporationConsolidated
                Balance Sheets(Expressed
                in U.S. Dollars)




June
                  30,
              
              June
                  30,2007
              
              2006$
              
              $ASSETSCurrent
                  AssetsCash
                  and cash equivalents
              
              
              559,257
              
              
              438,708Accounts
                  receivable, net of allowance for doubtful accounts of $54,128 and
                  $115,721, respectively
              
              
              3,834,474
              
              
              3,104,907Deposits
                  in trust
              
              
              -
              
              
              79,781Other
                  receivables (Note 10)
              
              
              1,167,241
              
              
              375,742Inventories
                  (Note 10)
              
              
              1,478,835
              
              
              1,563,805Prepaid
                  expenses and deposits
              
              
              212,359
              
              
              259,552Deferred
                  contract costs (Note 4)
              
              
              -
              
              
              151,272Restricted
                  held-to-maturity security
              
              
              93,861
              
              
              89,686Current
                  assets of discontinued operations
              
              
              695
              
              
              9,011Total
                  Current Assets
              
              
              7,346,722
              
              
              6,072,464Property
                  and equipment, net (Note 7)
              
              
              2,279,973
              
              
              3,082,402Intangible
                  assets (Note 8)
              
              
              3,967,213
              
              
              3,757,272Goodwill
                  (Note 9)
              
              
              4,116,872
              
              
              3,762,000Deferred
                  financing costs
              
              
              376,794
              
              
              101,681Deposits
              
              
              105,915
              
              
              86,225Deferred
                  contract costs (Note 4)
              
              
              -
              
              
              281,390Total
                  Assets
              
              
              18,193,489
              
              
              17,143,434LIABILITIES
                  AND STOCKHOLDERS’ EQUITYCurrent
                  LiabilitiesAccounts
                  payable and accrued liabilities (Note 10)
              
              
              3,992,847
              
              
              4,666,858Bank
                  and other loans payable (Note 13)
              
              
              1,054,238
              
              
              2,331,696Current
                  portion of long-term debt (Note 15)
              
              
              94,317
              
              
              103,717Current
                  portion of convertible debentures (Note 16)
              
              
              1,568,519
              
              
              587,891Due
                  to related parties (Note 12)
              
              
              40,000
              
              
              40,000Total
                  Current Liabilities
              
              
              6,749,921
              
              
              7,730,162Long-term
                  debt, less current portion (Note 15)
              
              
              174,412
              
              
              222,900Deferred
                  revenue (Note 4)
              
              
              -
              
              
              281,390Convertible
                  debentures (Note 16)
              
              
              1,275,458
              
              
              343,109Balance
                  of purchase price payable (Note 14)
              
              
              1,194,096
              
              
              877,675Derivative
                  financial instruments (Notes 14 and 16)
              
              
              64,510
              
              
              458,271Total
                  Liabilities
              
              
              9,458,397
              
              
              9,913,507Non-controlling
                  Interest
              
              
              23,193
              
              
              23,940Stockholders’
                  EquityCommon
                  Stock, 500,000,000 shares authorized with a par value of $0.00001;
                  93,437,654 and 77,671,281 issued and outstanding,
                  respectively
              
              
              934
              
              
              777Additional
                  Paid-in Capital
              
              
              36,727,893
              
              
              34,169,867Accumulated
                  other comprehensive income (loss)
              
              
              1,268,622
              
              
              (316,566
              )Deficit
              
              
              (29,285,550
              )
              
              (26,648,091
              )Total
                  Stockholders’ Equity
              
              
              8,711,899
              
              
              7,205,987Total
                  Liabilities and Stockholders’ Equity
              
              
              18,193,489
              
              
              17,143,434




Going
        Concern (Note 1)
 Contingencies
        (Note 19)
  (The
        Accompanying Notes are an Integral Part of the Consolidated Financial
        Statements)


F-2




Manaris
                  CorporationConsolidated
                  Statements of Operations and Comprehensive Income
                  (Loss)(Expressed
                  in U.S. Dollars)
 For
                    the Years EndedJune
                    30,2007
                
                2006$
                
                $Revenue
                    (Note 4)
                
                
                18,740,561
                
                
                10,498,505Costs
                    of Revenue
                
                
                12,226,804
                
                
                7,464,710Gross
                    Margin
                
                
                6,513,757
                
                
                3,033,795Operating
                    ExpensesDepreciation
                    and amortization
                
                
                875,827
                
                
                979,635Selling,
                    general and administration (Note 18)
                
                
                6,468,080
                
                
                6,937,860Loss
                    on impairment of goodwill (Note 9)
                
                
                -
                
                
                1,529,767Loss
                    on impairment of intangible assets (Note 8)
                
                
                -
                
                
                107,715Research
                    and development
                
                
                1,571,572
                
                
                1,106,259Total
                    Operating Expenses
                
                
                8,915,479
                
                
                10,661,236Loss
                    from Operations
                
                
                (2,401,722
                )
                
                (7,627,441
                )Other
                    Income (Expenses)Other
                    income (expenses), net
                
                
                372,269
                
                
                (18,187
                )Interest
                    expense, net
                
                
                (902,509
                )
                
                (762,488
                )Debentures
                    and preferred shares accretion (Notes 14 and 16)
                
                
                (2,420,791
                )
                
                (4,036,772
                )Change
                    in fair value of derivative financial instruments (Notes 14 and
                    16)
                
                
                1,762,161
                
                
                45,543Total
                    Other Income (Expenses)
                
                
                (1,188,870
                )
                
                (4,771,904
                )Net
                    Loss from Continuing Operations Before Income Tax Benefit
                
                
                (3,590,592
                )
                
                (12,399,345
                )Income
                    Tax Benefit - Refundable tax credits (Note 20)
                
                
                1,217,948
                
                
                351,242Net
                    Income (Loss) from Continuing Operations before Non-Controlling
                    Interest
                
                
                (2,372,644
                )
                
                (12,048,103
                )Non-Controlling
                    Interest
                
                
                1,890
                
                
                (3,977
                )Net
                    Loss from Continuing Operations
                
                
                (2,370,754
                )
                
                (12,052,080
                )Results
                    of Discontinued Operations (Note 5)
                
                
                -
                
                
                149,637Net
                    Loss
                
                
                (2,370,754
                )
                
                (11,902,443
                )Effect
                    of reduction in exercise price of outstanding warrants
                
                
                -
                
                
                (2,197,296
                )Net
                    Loss applicable to common stockholders
                
                
                (2,370,754
                )
                
                (14,099,739
                )Net
                    Loss from continuing operations per share - Basicand
                    Diluted (Note 18)
                
                
                (0.03
                )
                
                (0.21
                )Net
                    Loss per share - Basic and Diluted (Note 18)
                
                
                (0.03
                )
                
                (0.20
                )Weighted
                    Average Common Shares Outstanding
                
                
                82,513,000
                
                
                69,363,000Statement
                    of Comprehensive Income (Loss):Net
                    Income (Loss)
                
                
                (2,370,754
                )
                
                (11,902,443
                )Foreign
                    currency translation adjustments
                
                
                592,730
                
                
                47,849Comprehensive
                    Loss
                
                
                (1,778,024
                )
                
                (11,854,594
                )
  Going
            Concern (Note 1)
 Contingencies
            (Note 19)
  (The
            Accompanying Notes are an Integral Part of the Consolidated Financial
            Statements)
 F-3


Manaris
                CorporationConsolidated
                Statements of Cash Flows(Expressed
                in U.S. Dollars)


For
                  the Years Ended
                June
                  30,2007
              
              2006$
              
              $Net
                  (loss) income
              
              
              (2,370,754
              )
              
              (11,902,443
              )Adjustments
                  to reconcile net loss to cash generated by (used in) operating
                  activitiesResults
                  of discontinued operations
              
              
              -
              
              
              (149,637
              )Stock
                  based compensation
              
              
              453,206
              
              
              490,795Expenses
                  settled with issuance of common shares
              
              
              77,102
              
              
              5,400Depreciation
                  and amortization
              
              
              1,101,965
              
              
              1,046,355Reduction
                  of loan payable (Note 4)
              
              
              (200,000
              )
              
              -Non-cash
                  financial expenses
              
              
              9,766
              
              
              (59,293
              )Gain
                  on disposal of property and equipment
              
              
              (308,676
              )
              
              -Loss
                  on disposal of discontinued operations
              
              
              -
              
              
              -Loss
                  on impairment of goodwill
              
              
              -
              
              
              1,529,767Loss
                  on impairment of intangible assets
              
              
              -
              
              
              107,715Non-controlling
                  interest
              
              
              (1,890
              )
              
              3,977Loss
                  on conversion of convertible debentures
              
              
              129,922
              
              
              -Debentures
                  and preferred shares accretion
              
              
              2,420,791
              
              
              4,036,772Change
                  in fair value of derivative financial instruments
              
              
              (1,762,161
              )
              
              (45,543
              )Amortization
                  of deferred financing costs
              
              
              289,327
              
              
              335,004Non-cash
                  revenue
              
              
              (355,928
              )
              
              -Other
                  non-cash items
              
              
              111,205
              
              
              31,359Changes
                  in operating assets and liabilities, net of acquisitions(Increase)
                  in accounts receivables
              
              
              (697,684
              )
              
              (1,297,820
              )(Increase)
                  decrease in inventories
              
              
              85,797
              
              
              (87,689
              )(Increase)
                  decrease in other receivables
              
              
              (727,954
              )
              
              483,366(Increase)
                  decrease in deferred contract costs
              
              
              423,471
              
              
              (432,662
              )Decrease
                  (increase) in deferred revenue
              
              
              (275,412
              )
              
              432,662(Decrease)
                  increase in prepaid expenses and other assets
              
              
              33,241
              
              
              (259,085
              )(Decrease)
                  in due to related parties
              
              
              -
              
              
              (126,243
              )Increase
                  (decrease) in accounts payable and accrued liabilities
              
              
              (850,534
              )
              
              1,594,692Net
                  Cash Generated by (Used In) Operating Activities from Continuing
                  Operations
              
              
              (2,415,200
              )
              
              (4,262,551
              )Net
                  Cash Generated by (Used in) Operating Activities from Discontinued
                  Operations
              
              
              8,357
              
              
              803,522Net
                  Cash Generated by (Used In) Operating Activities
              
              
              (2,406,843
              )
              
              (3,459,029
              )Investing
                  ActivitiesNet
                  Loss from Continuing Operations
              
              
              -
              
              
              (654,279
              )Purchase
                  of property and equipment
              
              
              (154,500
              )
              
              (182,851
              )Disposal
                  of property and equipment and inventory
              
              
              835,041
              
              
              -Deposits
                  in trust
              
              
              79,304
              
              
              (79,781
              )Net
                  Cash Generated by (Used in) Investing Activities from Continuing
                  Operations
              
              
              759,845
              
              
              (916,911
              )Net
                  Cash Generated by (Used in) Investing Activities from Discontinued
                  Operations
              
              
              -
              
              
              3,007,568Net
                  Cash Generated by (Used in) Investing Activities
              
              
              759,845
              
              
              2,090,657Financing
                  ActivitiesRepayment
                  of bank credit line
              
              
              (715,708
              )
              
              169,620Repayment
                  of senior convertible debt
              
              
              (774,073
              )
              
              (625,353
              )Repayment
                  of secured convertible debt
              
              
              -
              
              
              (1,225,257
              )Proceeds
                  from issue of secured convertible debentures
              
              
              3,179,849
              
              
              -Long
                  term debt repayments
              
              
              (74,156
              )
              
              (64,355
              )Proceeds
                  from investment tax credit financing
              
              
              397,099
              
              
              -Repayments
                  of investment tax credit financing
              
              
              (311,983
              )
              
              -Proceeds
                  from capital leases
              
              
              38,770
              
              
              25,186Repayments
                  of capital leases
              
              
              (29,990
              )
              
              (50,539
              )Repayment
                  of related party advances
              
              
              -
              
              
              (49
              )Common
                  stock issued pursuant to stock options exercised
              
              
              -
              
              
              100,013Common
                  stock issued pursuant to warrants exercised
              
              
              -
              
              
              2,206,022Proceeds
                  (repayment) of other loans payable
              
              
              (142,659
              )
              
              837,077Net
                  Cash Generated by (Used in) Financing Activities from Continuing
                  Operations
              
              
              1,567,149
              
              
              1,372,365Net
                  Cash Generated by (Used in) Financing Activities from Discontinued
                  Operations
              
              
              -
              
              
              (257,162
              )Net
                  Cash Generated by (Used in) Financing Activities
              
              
              1,567,149
              
              
              1,115,203Effect
                  of Exchange Rate Changes on Cash and Cash Equivalents
              
              
              200,398
              
              
              404,730(Decrease)
                  Increase in Cash and Cash Equivalents
              
              
              120,549
              
              
              151,561Cash
                  and Cash Equivalents - Beginning of period
              
              
              438,708
              
              
              287,147Cash
                  and Cash Equivalents - End of period
              
              
              559,257
              
              
              438,708


Going
      Concern (Note 1)




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





F-4




Manaris
                  CorporationInterim
                  Consolidated Statements of Cash Flows (continued)(Expressed
                  in U.S. Dollars)
  For
                  the Year EndedJune
                  30,2007
              
              2006$
              
              $Non-Cash
                  Financing and Investing ActivitiesIssuance
                  of common shares for services
              
              
              3,640
              
              
              5,400Issuance
                  of common shares for late filing of registration statement
              
              
              73,462
              
              
              -Issuance
                  of common shares for interest payments
              
              
              58,410
              
              
              265,436Issuance
                  of common shares for repayment of senior convertible notes, Series
                  A
              
              
              341,458
              
              
              2,099,792Issuance
                  of common shares for conversion of senior convertible notes, Series
                  A
              
              
              -
              
              
              1,249,360Issuance
                  of common shares for repayment of secured convertible notes, Series
                  B
              
              
              1,034,545
              
              
              -Issuance
                  of stock options to settle outstanding legal claims
              
              
              -
              
              
              77,000Issuance
                  of common shares for repayment of senior convertible debentures
              
              
              -
              
              
              224,397Issuance
                  of common shares for repayment of unsecured convertible debentures
              
              
              527,752
              
              
              -Issuance
                  of stock options for debt settlement
              
              
              -
              
              
              -Issuance
                  of common shares to settle outstanding payables
              
              
              25,709
              
              
              136,860Supplemental
                  DisclosuresInterest
                  (paid) earned from continuing operations
              
              
              (164,870
              )
              
              (18,935
              )Interest
                  paid from discontinued operations
              
              
              -
              
              
              17,420Income
                  taxes paid from discontinued operations
              
              
              -
              
              
              120,647
  Going
        Concern (Note 1)
  (The
        Accompanying Notes are an Integral Part of the Consolidated Financial
        Statements)
  F-5


Manaris
                CorporationConsolidated
                Statement of Stockholders’ Equity(Expressed
                in U.S. Dollars)





AccumulatedCommon
                    Shares
                
                Additional
                
                Other
                
                
                
                Total#
                    of
                
                
                
                Paid-In
                
                Comprehensive
                
                
                
                Stockholders’Shares
                
                Amount
                
                Capital
                
                Income
                
                Deficit
                
                Equity$
                
                $
                
                $
                
                $
                
                $Balance,
                    June 30, 2005
                
                
                54,782,802
                
                
                548
                
                
                24,142,078
                
                
                (364,415
                )
                
                (12,548,352
                )
                
                11,229,859Common
                    stock issued for services
                
                
                15,000
                
                
                -
                
                
                5,400
                
                
                -
                
                
                -
                
                
                5,400Issuance
                    of common shares from exercise of stock options
                
                
                1,758,000
                
                
                18
                
                
                99,995
                
                
                -
                
                
                -
                
                
                100,013Stock-based
                    compensation
                
                
                -
                
                
                -
                
                
                490,795
                
                
                -
                
                
                -
                
                
                490,795Settlement
                    of outstanding legal claims by the issuance of options
                
                
                -
                
                
                -
                
                
                77,000
                
                
                -
                
                
                -
                
                
                77,000Common
                    stock issued to settle outstanding payables
                
                
                257,000
                
                
                3
                
                
                136,857
                
                
                -
                
                
                -
                
                
                136,860Common
                    stock issued pursuant to interest payments on Senior Secured
                    Convertible
                    Notes "A"
                
                
                748,819
                
                
                7
                
                
                265,429
                
                
                -
                
                
                -
                
                
                265,436Common
                    stock issued pursuant to repayments of Senior Secured Convertible
                    Notes
                    "A"
                
                
                5,897,695
                
                
                59
                
                
                2,099,734
                
                
                -
                
                
                -
                
                
                2,099,793Common
                    stock issued pursuant to repayment of Secured convertible
                    debenture
                
                
                631,038
                
                
                6
                
                
                224,391
                
                
                -
                
                
                -
                
                
                224,397Common
                    stock issued upon conversion of Senior Secured Convertible Notes
                    "A"
                
                
                3,575,008
                
                
                36
                
                
                1,249,324
                
                
                -
                
                
                -
                
                
                1,249,360Reduction
                    in exercise price of outstanding warrants
                
                
                -
                
                
                -
                
                
                2,197,296
                
                
                -
                
                
                (2,197,296
                )
                
                -Common
                    stock issued pursuant to warrants exercised
                
                
                7,525,124
                
                
                75
                
                
                2,309,221
                
                
                -
                
                
                -
                
                
                2,309,296Common
                    stock issued for purchase of business
                
                
                2,550,795
                
                
                26
                
                
                872,346
                
                
                -
                
                
                -
                
                
                872,372Common
                    Stock cancellation
                
                
                (70,000
                )
                
                (1
                )
                
                1
                
                
                -
                
                
                -
                
                
                -Translation
                    adjustment
                
                
                
                
                
                
                
                
                
                
                
                47,849
                
                
                
                
                
                47,849Net
                    loss for the year
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (11,902,443
                )
                
                (11,902,443
                )Balance,
                    June 30, 2006
                
                
                77,671,281
                
                
                777
                
                
                34,169,867
                
                
                (316,566
                )
                
                (26,648,091
                )
                
                7,205,987Balance,
                    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
                )
                
                8,711,899
  Going
        Concern (Note 1)
  (The
        Accompanying Notes are an Integral Part of the Consolidated Financial
        Statements)




F-6


Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
 
 1.
              Going
                  Concern
 
 The
        accompanying financial statements have been prepared using generally accepted
        accounting principles applicable to a going concern, which assumes Manaris
        Corporation (the “Company” or "Manaris") 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. Accordingly,
        there exists substantial doubt that the Company would be able to continue
        as a
        going concern at June 30, 2007. The Company’s continuation as a going concern is
        dependent upon its ability to obtain additional cash to allow for the
        satisfaction of its obligations on a timely basis.
 
 In
        order
        to address this situation, management will continue its focus on the core
        business of the Company, which primarily includes the operations of Avensys
        Inc.
        (‘Avensys”), its wholly-owned subsidiary. Also, during the first quarter of
        fiscal 2008, as described in Note 23 (e), the Company redeemed its Series
        B
        Subordinated Secured Convertible Promissory Notes and its Original Issue
        Discount Series B Subordinated Secured Convertible Promissory Notes. 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”)). On
        September 24, 2007, also as described in Note 23 (e), 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
        will be
        used to repay the secured loan facility with the balance of funds to be used
        for
        working capital purposes. In addition, the SPL Agreement provides the Company
        with a $2,500,000 Working Capital Facility.
 
 Avensys
        is also seeking additional conventional bank credit-line financing to that
        which
        it already has, to support its growing operations. In addition to the above,
        the
        ability of the Company to continue as a going concern depends on the ability
        of
        the Company’s main subsidiary, Avensys, to continue to realize its business plan
        and continue to generate positive cash flows.
 
 While
        management believes the use of the going concern assumption is appropriate,
        there is no assurance that 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
 
 Manaris
        operates the following wholly-owned subsidiaries:
 
 ·
              Avensys
                  Inc. ("Avensys"), which develops optical components & sensors and
                  provides environmental monitoring solutions. Avensys sells its
                  optical
                  products and services primarily in North America, Asia and Europe
                  to the
                  telecommunications, aerospace, and oil and gas industries. Environmental
                  monitoring services and solutions are primarily targeted at public
                  sector
                  organizations across Canada.
 
 ·
              C-Chip
                     Technologies Corporation (North America) ("C-Chip"), which,
                  through a
                  recently signed Technology License Agreement (Note 4), has granted
                  a
                  former supplier an exclusive license to manufacture and sell devices
                  based
                  on C-Chip’s technology in the sub-prime used vehicle market. C-Chip earns
                  royalties with respect to the devices sold by the licensee to the
                  credit
                  management marketplace.
 
 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.
        The Company has achieved significant revenue from acquired companies and
        also
        has disposed of companies. The Company’s assets and operations at June 30, 2007
        are located largely in Quebec and in Ontario, Canada. The Company currently
        derives the substantial portion of its revenues from its Avensys
        subsidiary.
 
 F-7
  Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
  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.
 
 Basis
        of
        Consolidation
 
 These
        consolidated financial statements include the accounts of the Company and
        its
        subsidiaries. Consolidated companies include: a) 100% of Avensys and its
        subsidiaries, Fizians Inc., of which Avensys owns 70% of its outstanding
        shares,
        and ITF Laboratories Inc. (“ITF”), in which Avensys holds variable interests and
        is the primary beneficiary, and b) 100% of C-Chip. 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.
 
 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, 2007, amounted to approximately $5,462,000 and $5,426,000,
        respectively (June 30, 2006 - $5,849,000 and $4,925,000,
        respectively).
 
 Advertising
 
 The
        Company’s advertising costs, which amounted to $139,975 for the year ended June
        30, 2007 (2006 - $80,499), 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
  Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
  Basis
        of
        Presentation and Significant Accounting Policies (continued)
 
 Foreign
        Currency
 
 a)
              Reporting
                  Currency
 
 The
        Company's functional currency is the Canadian dollar. Accordingly, the
        consolidated financial statements are converted into the reporting currency
        (the
        US dollar) using the current rate method. Under this method, the consolidated
        financial statements are converted into US dollars 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 of
        the
        consolidated financial statements into the reporting currency 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.
 
 b)
              Foreign
                  Currency Transactions
 
 Transactions
        denominated in currencies other than the functional currency are converted
        into
        Canadian dollars (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, 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.
  F-9
  Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
  Basis
        of
        Presentation and Significant Accounting Policies (continued)
 
 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.
 
 The
        impact, for the Company, of applying SFAS 123R are described in Note 18 .
        Prior
        to the implementation of SFAS 123R, the Company was applying the intrinsic
        value
        method of accounting for stock options granted to employees.
 
 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.
 
 Avensys
        generates revenues from the sale of fibre-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.
 
 For
        periods prior to December 1, 2006, C-Chip derived revenues from the sale
        of
        credit management devices and associated services. The devices were bundled
        with
        service agreements which provided the customer with access to C-Chip’s web-based
        application, thus allowing the customer to locate and disable subject vehicles
        during the service period, which were generally three years. Since the services
        were essential to the functionality of the device, revenues from the sale
        of
        devices (including services) were deferred and recognized as revenue over
        the
        contractual service period and the related cost of revenues was deferred
        and
        amortized to cost of revenues over the corresponding period. Such items were
        described on the Consolidated Balance Sheet as Deferred Revenue and Deferred
        Contract Costs. In addition to the up-front fees charged to a customer, C-Chip
        could also earn other amounts during the service period, which were charged
        to
        the customer on a pay per use basis, for which revenue and the related costs
        were recognized when the related service was provided.
 
 The
        revenue recognition policy for C-Chip, as noted above, was applied until
        November 30, 2006. Effective December 1, 2006, in conjunction with the
        ratification of a new Technology License Agreement, C-Chip’s revenue stream was
        modified. C-Chip now earns royalties from the granting of licenses, based
        on the
        number of devices sold by the Licensee (Note 4). Revenue is recognized when
        proof is obtained that the end-user has been delivered the devices by the
        Licensee and collectability is reasonably assured.
  F-10
  Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
  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.
 
 Restricted
        Held-to-Maturity Security
 
 An
        irrevocable letter of credit for $93,861 (CAD$100,000) was issued by Manaris
        to
        partially guarantee the Avensys line of credit (Note 13). A term deposit,
        maturing on October 17, 2007 and bearing interest at 3.0% per annum, is
        designated as collateral for this amount and accounted for at cost.
 
 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.
  F-11
  Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
  Basis
        of
        Presentation and Significant Accounting Policies (continued)
 
 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 is determined on an average cost 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.
 
 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
                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 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 Canadian operating losses of
        approximately $23.1 million from its inception which are available and which
        expire starting in 2008. For Canadian income tax purposes, the Company also
        has
        approximately $2.3 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 (refer to Note 22).
 
 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-12
  Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
  Basis
        of
        Presentation and Significant Accounting Policies (continued)
 
 a)
        Recent
        Accounting Pronouncements Adopted During 2007
 
 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.
 
 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
 
 b)
        Recent
        Accounting Pronouncements Not Yet Adopted
 
 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.
  F-13
  Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
  Basis
        of
        Presentation and Significant Accounting Policies (continued)
 
 Recent
        Accounting Pronouncements Not Yet Adopted (continued)
 
 In
        February 2006, FASB issued SFAS 155, Accounting for Certain Hybrid Financial
        Instruments - an amendment of FASB Statements No. 133 and 144. SFAS 155 amends
        FASB Statements No. 133, Accounting for Derivative Instruments and Hedging
        Activities, and No. 140, Accounting for Transfers and Servicing of Financial
        Assets and Extinguishments of Liabilities. This Statement resolves issues
        addressed in Statement 133 Implementation Issue No. D1, “Application of
        Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS 155
        permits fair value re-measurement for any hybrid financial instrument that
        contains an embedded derivative that otherwise would require bifurcation;
        clarifies which interest-only strips and principal-only strips are not subject
        to the requirements of SFAS 133; establishes a requirement to evaluate interests
        in securitized financial assets to identify interests that are freestanding
        derivatives or that are hybrid financial instruments that contain an embedded
        derivative requiring bifurcation; clarifies that concentrations of credit
        risk
        in the form of subordination are not embedded derivatives; and amends SFAS
        140
        to eliminate the prohibition on a qualifying special purpose entity from
        holding
        a derivative financial instrument that pertains to a beneficial interest
        other
        than another derivative financial instrument. SFAS 155 will be effective
        for all
        financial instruments acquired, issued, or subject to a re-measurement (new
        basis) event occurring after the beginning of an entity’s first fiscal year that
        begins after September 15, 2006. The Company is evaluating the impact of
        the
        adoption of this standard on the Company's results of operations and financial
        position.
 
 In
        June
        2006, FASB issued Interpretation No. 48 - an interpretation of FASB Statement
        No. 109, Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the
        accounting for uncertainty in income taxes recognized in financial statements
        in
        accordance with SFAS 109. FIN 48 prescribes a recognition threshold and
        measurement attribute for the financial statement recognition and measurement
        of
        a tax position taken or expected to be taken in a tax return. It also provides
        guidance on de-recognition, classification, interest and penalties, accounting
        in interim periods, disclosure, and transition. The evaluation of a tax position
        in accordance FIN 48 is a two-step process. The first step is recognition:
        The
        enterprise determines whether it is more likely than not that a tax position
        will be sustained upon examination, including resolution of any related appeals
        or litigation processes, based on the technical merits of the position. The
        second step is measurement: A tax position that meets the more-likely-than-not
        recognition threshold is measured to determine the amount of benefit to
        recognize in the financial statements. Under FIN 48, differences resulting
        from
        this evaluation of tax positions would result in either of an increase of
        liabilities or decrease of assets. FIN 48 is effective for fiscal years
        beginning after December 15, 2006. The Company is evaluating the impact of
        the
        adoption of this interpretation on the Company's results of operations and
        financial position.
 
 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 is effective for fiscal years beginning after November
        15, 2007. 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.
 
 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.
  F-14
  Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
  Basis
        of
        Presentation and Significant Accounting Policies (continued)
 
 Recent
        Accounting Pronouncements Not Yet Adopted (continued)
  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,
        2007, the Company does not have any arrangements that would be subject to
        the
        scope of EITF 07-3.
  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.
 
 4.
              Technology
                  License Agreement
 
 On
        December 22, 2006, with an effective date of December 1, 2006, C-Chip entered
        into a Technology License Agreement (“Agreement”) with a supplier of the
        Company. Pursuant to the Agreement, C-Chip has 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.
        The
        royalties payable will be applied against the principal and interest balance
        of
        a loan made to C-Chip from the former supplier (Note 13), which at the time
        of
        the Agreement had a balance outstanding of $1,143,321. 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 the loan was reduced by $200,000. The associated gain was included in
        other
        income in the second quarter.
 
 The
        initial term of the Agreement ends on the first anniversary of the date that
        the
        outstanding principal amount of the loan will have been satisfied as a result
        of
        the royalties being applied thereto (“Repayment Date”). The licensee shall
        thereafter have an option to purchase C-Chip’s intellectual property within 90
        days of the Repayment Date.
 
 5.
              Discontinued
                  operations
 
 CLI
 
 On
        February  8,
        2006,
        as part of efforts to streamline operations, the Company signed a Share Purchase
        Agreement (the "Agreement") to sell all of the shares of its wholly-owned
        subsidiary, 6327915 Canada Inc., the holding company of Chartrand Laframboise
        Inc. and Bureau de crédit commercial Inc. (the "CLI Group") to The Garda
        Security Group Inc. (the “Purchaser”) for a purchase price of $4,284,123
        (CAD$5,000,000) resulting in gross cash proceeds to the Company of $3,341,616
        (CAD$3,900,000) of which $1,285,237 (CAD$1,500,000) was placed in trust.
        The
        deposit in trust partially represented a holdback in the amount of $214,206
        which would become payable by the purchaser no later than 10 days following
        acceptance by the purchaser of the unaudited financial statements of the
        CLI
        Group for the period from July 1, 2005 to February 18, 2006. The remaining
        amount of $1,071,030 represented withholding tax of 25% of the sale price
        which
        was required to be withheld under Section 116 of the Canadian Income Tax
        Act
        since the Company is not a Canadian resident corporation. The withholding
        tax
        amount has been remitted to the Company as Canada Revenue Agency delivered
        a
        certificate of compliance with respect to this transaction. At June 30, 2006,
        there remained $79,781 (CAD$88,956) in trust. The Agreement stipulated a
        price
        adjustment based on certain financial criteria which resulted in a purchase
        price adjustment of $45,917 (CAD$51,538), which was paid to the purchaser
        subsequent to the year end. Following the payment of the price adjustment,
        Manaris received the balance of the funds held in trust.
 
 In
        conjunction with the Agreement, the purchaser assumed the Company’s obligations
        to two executives of the CLI Group for settlement of long-term notes payable
        amounting to $942,507 issued by Manaris when the CLI Group was originally
        acquired in February 2005. Manaris was required to repay advances from the
        CLI
        Group totaling $214,206 and accrued interest on the debt obligations of $40,978.
        In addition, the Company settled the majority of the remaining obligations
        to
        the two CLI Group executives in the amount of $481,444 by a payment of cash
        consideration totaling $257,047 and the issuance of 631,038 shares with a
        fair
        value of $224,397 or approximately $0.3556 per share. These payments resulted
        in
        net cash proceeds from the disposal of $2,644,871. The closing date of the
        transaction was February 15, 2006 and the effective date was February 18,
        2006.
  F-15
 Manaris
          Corporation
 Notes
          to
          Consolidated Financial Statements
 (Expressed
          in U.S. Dollars)
 June
          30,
          2007
 Discontinued
        operations (continued)
 
 CLI
        (continued)
 
 The
        loss
        on disposal included in the results from discontinued operations has been
        computed as follows:
 
 Proceeds:
              
              $Cash
              
              
              3,341,616Price
                  adjustment
              
              
              (45,917
              )Total
                  proceeds:
              
              
              3,295,699Direct
                  transaction costs
              
              
              (183,861
              )Sub-total:
              
              
              3,111,838Net
                  assets of discontinued operations
              
              
              (3,186,815
              )Loss
                  on disposal of the CLI Group
              
              
              (74,977
              )
 
 Cash
        proceeds noted above was used as follows:
 
 $Total
                  proceeds
              
              
              3,295,699Direct
                  transaction costs
              
              
              (183,862
              )Settlement
                  of advances from the CLI Group
              
              
              (214,206
              )Settlement
                  of debt obligations for cash
              
              
              (257,047
              )Interest
                  paid on settlement of debt obligations
              
              
              (40,978
              )Net
                  cash proceeds
              
              
              2,599,606
 
 The
        cash
        proceeds from Discontinued Operations net of cash balance disposed of amounted
        to $2,857,895. The net assets of discontinued operations in the above table
        are
        net of the obligations to the two CLI Group executives assumed by the purchaser
        in amount of $942,507.
 
 The
        carrying values of the major classes of assets and liabilities disposed of
        are
        as follows:
 
 $Cash
              
              
              253,942Accounts
                  receivable
              
              
              667,585Prepaid
                  expenses
              
              
              42,448Property
                  and equipment
              
              
              167,049Inventory
              
              
              76,947Goodwill
              
              
              2,812,293Intangible
                  assets
              
              
              773,944Accounts
                  payable
              
              
              (228,723
              )Accrued
                  liabilities
              
              
              (403,893
              )Deferred
                  income taxes
              
              
              (3,659
              )Long
                  term debt, current portion
              
              
              (18,980
              )Long
                  term debt, less current portion
              
              
              (9,631
              )Net
                  assets of discontinued operations
              
              
              4,129,322
 
 Canadian
        Security Agency (2004) Inc.
 
 On
        September 22, 2005, Canadian Security Agency (2004) Inc. (“CSA”) entered into an
        agreement with Securite Kolossal Inc. to sell its customer list for CAD$100,000,
        subject to adjustment. At December 31, 2005, the Company received CAD$50,000.
        Following a CAD$10,000 adjustment, the remaining balance of CAD$40,000 was
        received in January 2006. The Company has since wound up all remaining
        activities of CSA. On November 2, 2005, CSA filed for bankruptcy protection
        with
        the Superior Court of Quebec, district of Montreal. Pursuant to the Bankruptcy
        and Insolvency Act, CSA filed a notice of intention to make a proposal, by
        which
        the Company intended to settle its payables. All proceedings against CSA
        were
        stayed.
  F-16
  Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
  Discontinued
        operations (continued)
 
 Canadian
        Security Agency (2004) Inc. (continued)
 
 All
        assets related to CSA were written down to their net recoverable amount or
        fair
        value as appropriate during the three month period ended September 30, 2005,
        resulting in a write-off of CAD$124,477, and all liabilities remained at
        their
        face value, being the amounts expected to be allowed under the bankruptcy
        proceedings.
 
 On
        April
        4, 2006, a meeting of the creditors was concluded with the unanimous approval
        of
        the settlement proposal brought forward by CSA. The settlement proposal was
        ratified by the Superior Court of Quebec on May 3, 2006. This proposal settled
        all outstanding liabilities of CSA for $249,688 (CAD$277,507). The settlement
        was funded from CSA cash on hand of $137,423 (CAD$153,061), and a payment
        of
        $112,265 (CAD$124,446) from Manaris. Subsequent to the settlement of CSA’s
        obligations under the approved proposal, a gain on settlement of CSA liabilities
        of $474,834 (CAD$532,953) was recognized in CSA.
 
 Manaris
        on behalf of CSA incurred CAD$25,000 in reorganization expenses, which are
        professional fees payable to the Trustee as a result of the bankruptcy
        protection filing, of which CAD$12,000 was paid during the three month period
        ended December 31, 2005, and CAD$13,000 was paid during the three month period
        ended March 31, 2006. These amounts have been included in the results of
        discontinued operations.
 
 The
        carrying values of the major classes of assets of discontinued operations,
        represented by cash and accounts receivable, were not significant as at June
        30,
        2007 and 2006. There were no recorded liabilities from discontinued operations
        as at June 30, 2007 and 2006.
 
 Summary
        results of discontinued operations:
 Total
                
                CLI
                
                CSA2007
                
                2006
                
                2007
                
                2006
                
                2007
                
                2006$
                
                $
                
                $
                
                $
                
                $
                
                $Revenues
                    from Discontinued Operations
                
                
                -
                
                
                3,761,474
                
                
                -
                
                
                3,193,451
                
                
                -
                
                
                568,023Pre-tax
                    earnings (loss) from Discontinued Operations (1)
                
                
                -
                
                
                345,261
                
                
                -
                
                
                234,760
                
                
                -
                
                
                110,501After-tax
                    earnings (loss) from Discontinued Operations (1)
                
                
                -
                
                
                224,614
                
                
                -
                
                
                114,113
                
                
                -
                
                
                110,501Loss
                    on disposal of the CLI group
                
                
                -
                
                
                (74,977
                )
                
                -
                
                
                (74,977
                )
                
                -
                
                
                -Results
                    of Discontinued Operations
                
                
                -
                
                
                149,637
                
                
                -
                
                
                39,136
                
                
                -
                
                
                110,501
 (1)
              CSA
                  includes gain on settlement of liabilities of $474,834 for the
                  year ended
                  June 30, 2006.
  6.
              Business
                  Combinations
 
 ITF
 
 On
        April
        18, 2006, Manaris, Avensys and Avensys Laboratories Inc (“ALI”), entered into an
        Asset Purchase Agreement (the “Agreement”) to acquire the manufacturing assets
        and research and development assets of ITF Optical Technologies Inc., a designer
        and manufacturer of advanced photonic solutions based on proprietary all-fiber
        technology. The transaction represents the acquisition of a business, which
        adds
        complementary products to Avensys' current offerings and provides access
        to a
        new potential customer base. ITF Optical Technologies Inc. specializes in
        providing applications for submarine, military, telecom and industrial
        uses.
 
 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 Manaris common stock
        (2,550,795 common shares).
 
 The
        2,550,795 common shares were originally issued as restricted stock and became
        freely tradable on December 9, 2006 (“Free Date”). The holders of these shares
        are 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 Manaris on the OTCBB in the previous three
        month
        period. Notwithstanding the foregoing, the holders of such shares shall be
        permitted to sell any number of the common shares in any three month period
        if
        the closing price of the common shares of Manaris on the date of the sale
        of the
        common shares is higher than a specified reference price, which is $0.342.
        The
        holders of the common shares shall also be 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 sell the common
        shares through the facilities of the OTCBB at a price which is less than
        the
        specified reference price, Manaris shall, 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, if any, 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 Manaris equal to the cumulative shortfall. As of
        September 18, 2007, the estimated shortfall is approximately $160,000. The
        future payment of a shortfall amount, if any, will not have any impact on
        the
        earnings of the Company.
  F-17
  Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
  Business
        Combinations (continued)
 
 ITF
        (continued)
 
 ALI,
        Avensys' research and development partner, also pursuant to the ITF Agreement,
        purchased ITF Optical Technologies Inc.’s research and development assets and
        intellectual property rights (the "R&D assets") The consideration paid for
        the R&D assets was CAD$2,000,000 representing the fair market value of the
        R&D assets, payable in 580,000 shares of common stock of ALI and 2,000,000
        shares of Class E preferred stock of ALI (the "Avensys Laboratories Shares")
        issued to the former shareholders of ITF Optical Technologies Inc. (the "ITF
        Preferred Shareholders"). In the aggregate, the Avensys Laboratories Shares
        issued pursuant to the ITF Agreement represent 58% of the voting stock of
        ALI.
        As a result of the ITF Agreement, Avensys' ownership of the voting stock
        of ALI
        has decreased from 49% to 42%.
 
 In
        connection with the ITF Agreement, the following additional agreements were
        also
        entered into:
 
 ·
              A
                  License Agreement was entered into between Avensys and ALI, pursuant
                  to
                  which Avensys was granted an exclusive license to use ALI's intellectual
                  property and patent improvements, as defined in the License Agreement,
                  in
                  order to develop and sell products incorporating ALI's intellectual
                  property. As consideration for the license, Avensys will be making
                  royalty
                  payments to ALI. Also pursuant to the License Agreement, ALI will
                  continue
                  to conduct research and development for the mutual benefit of both
                  parties.
 
 ·
              A
                  Shareholder Agreement was entered into between Avensys and the
                  ITF
                  Preferred Shareholders. Pursuant to the Shareholder Agreement,
                  the ITF
                  Preferred Shareholders shall not transfer any Avensys Laboratories
                  Shares,
                  subject to limited exceptions. The Shareholder Agreement also stipulates
                  that, between April 1, 2009 and October 1, 2009, each ITF Preferred
                  Shareholder shall have an option to (i) sell the Avensys Laboratories
                  Shares to Avensys for its proportionate share of $1,793,722 (CAD
                  $2,000,000), or (ii) exchange the Avensys Laboratories Shares for
                  3,826,531 freely tradable shares of Manaris common shares determined
                  based
                  upon its proportionate share of $1,345,291 (CAD $1,500,000) divided
                  by a
                  reference per share price of $0.342 (CAD $0.39), the “call
                  option”.
 
 As
        a
        result of the above arrangements, ALI has been determined to be a variable
        interest entity for which Avensys is the primary beneficiary. Accordingly,
        ALI
        is accounted for as a consolidated subsidiary. The Preferred Shareholder
        arrangement entitling these 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 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 will be accreted to the face
        amount
        of CAD$2,000,000 using the effective interest rate method to the first date
        the
        shareholders could require a payment. The embedded conversion option has
        been
        classified as a liability and was recognized at its fair value on the date
        of
        issuance of $503,814. Subsequently, this conversion option is measured at
        fair
        value with changes in fair value included in the Statement of Operations.
        The
        fair value of the embedded conversion option is determined by using the
        Black-Scholes model.
 
 F-18
  Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007
 
 Business
        Combinations (continued)
 
 ITF
        (continued)
 
 The
        purchase price of the acquired assets was calculated as follows:
 $Manufacturing
                    AssetsCash
                
                
                654,279Fair
                    value of Manaris shares issued
                
                
                872,3721,526,651R&D
                    AssetsBalance
                    of purchase price payable
                
                
                794,148Fair
                    Value of Derivative Instrument
                
                
                503,8141,297,962Transaction
                    Costs
                
                
                139,4932,964,106
 
 The
        fair
        value of Manaris shares issued was determined based upon the average share
        price
        for a period of three days before and after the date the terms of the
        acquisitions were negotiated and announced, being April 4, 2006.
 
 F-19


Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007


Business
      Combinations (continued)





ITF
      (continued)





The
      purchase price was allocated to the following assets and
      liabilities:


$Current
                  Assets
              
              
              506,960Depreciable
                  Fixed Assets
              
              
              2,599,190Developed
                  Technologies
              
              
              209,509Trade
                  Name
              
              
              111,738Current
                  Liabilities
              
              
              (463,291
              )2,964,106





The
      Company is amortizing the fair value of the purchased intangible assets on
      a
      straight-line basis over the remaining estimated useful life of five (5) years
      for Developed Technologies and seven (7) years for Trade Names.





Unaudited
      Pro Forma Results of Operations





The
      pro
      forma data of the Company set forth below is unaudited and gives effect to
      the
      ITF purchase transaction completed in fiscal 2006 as if it had occurred at
      the
      beginning of fiscal 2006 (being July 1, 2005). The unaudited pro forma financial
      information is not intended to represent or be indicative of the consolidated
      results of operations or financial condition of the Company that would have
      been
      reported had the acquisition been completed as of the dates presented, and
      should not be taken as representative of the future consolidated results of
      operations or financial condition of the Company.


June
                  30,2006(In
                  thousands, except per share amounts)
              
              
              $Pro
                  forma net revenues
              
              
              13,227Pro
                  forma net loss applicable to common shareholders
              
              
              (17,257
              )Pro
                  forma net loss per share (basic and diluted)
              
              
              (0.24
              )




F-20




Manaris
      Corporation


Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007


7.
              Property
                  and Equipment




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
              
              
              328,306
              
              
              14,741Laboratory
                  equipment
              
              
              1,998,053
              
              
              429,231
              
              
              1,568,822Leasehold
                  improvements
              
              
              437,836
              
              
              179,548
              
              
              258,288Machinery
                  and office equipment
              
              
              773,965
              
              
              498,694
              
              
              275,271Software
              
              
              148,750
              
              
              87,615
              
              
              61,135Capital
                  leases - computer equipment
              
              
              96,617
              
              
              53,630
              
              
              42,987Total
                  property and equipment
              
              
              4,324,894
              
              
              2,044,921
              
              
              2,279,973Depreciation
                  during the year
              
              
              
              
              
              
              
              
              532,064




June
                  30, 2006Accumulated
              
              Net
                  BookCost
              
              Amortization
              
              Value$
              
              $
              
              $Automotive
                  equipment
              
              
              43,141
              
              
              24,845
              
              
              18,296Computer
                  equipment
              
              
              470,631
              
              
              395,952
              
              
              74,679Furniture
                  and fixtures
              
              
              327,787
              
              
              309,461
              
              
              18,326Laboratory
                  equipment
              
              
              2,762,980
              
              
              323,812
              
              
              2,439,168Leasehold
                  improvements
              
              
              383,364
              
              
              73,408
              
              
              309,956Machinery
                  and office equipment
              
              
              315,328
              
              
              184,581
              
              
              130,747Software
              
              
              127,632
              
              
              61,755
              
              
              65,877Capital
                  leases - computer equipment
              
              
              49,039
              
              
              23,686
              
              
              25,353Total
                  property and equipment
              
              
              4,479,902
              
              
              1,397,500
              
              
              3,082,402Depreciation
                  during the year
              
              
              
              
              
              
              
              
              270,270




F-21




Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007




8.
              Intangible
                  Assets


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


June
                  30, 2007Weighted
                  Average
              
              
              
              AccumulatedLife
                  in Years
              
              Cost
              
              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




June
                  30, 2006Weighted
                  Average
              
              
              
              AccumulatedLife
                  in Years
              
              Cost
              
              Amortization
              
              Net
                  Book Value$
              
              $
              
              $Technology
              
              
              4.80
              
              
              209,509
              
              
              8,313
              
              
              201,196Customer
                  relationships
              
              
              8.97
              
              
              4,286,704
              
              
              839,106
              
              
              3,447,598Trade
                  name
              
              
              6.80
              
              
              111,738
              
              
              3,260
              
              
              108,478Total
                  intangible assets
              
              
              8.68
              
              
              4,607,951
              
              
              850,679
              
              
              3,757,272




The
        estimated future amortization expense of purchased intangible assets with
        definite lives for the next five years is as follows:
 
 $2008
              
              
              544,7892009
              
              
              544,7892010
              
              
              544,7892011
              
              
              533,5182012
              
              
              499,705Thereafter
              
              
              1,299,6233,967,213




F-22
 Manaris
          Corporation
 Notes
          to
          Consolidated Financial Statements
 (Expressed
          in U.S. Dollars)
 June
          30,
          2007




Intangible
      Assets (continued)





The
      changes in the carrying amount of intangible assets during the years ended
      June
      30, 2006, and 2007 are as follows:


Balance
                  as of June 30, 2005
              
              
              2,931,984Acquisition
                  of intangible assets
              
              
              321,247Adjustment
                  upon finalization of purchase price allocation (1)
              
              
              1,387,841Impairment
                  of intangible assets during fiscal 2006 (2)
              
              
              (107,715
              )Amortization
                  during year
              
              
              (776,085
              )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
              
              
              3,967,213





(1)
            During
                the second quarter of fiscal 2006, the Company completed the purchase
                price allocation related to the acquisition of Avensys, which resulted
                in
                an increase in the carrying value of customer relationships and a
                corresponding decrease in goodwill.





(2)
              Management
                  recorded an intangible assets impairment charge of $107,715 in
                  the
                  Consolidated Statement of Operations for the year ended June 30,
                  2006
                  relating to intangible assets of Manaris which were no longer in
                  use.




9.
              Goodwill





The
      changes in the carrying amount of goodwill pertaining to Avensys during the
      years ended June 30, 2006 and 2007 is as follows:


Balance
                  as of June 30, 2005
              
              
              6,679,608Impairment
                  of goodwill
              
              
              (1,529,767
              )Adjustment
                  of goodwill following finalization of Avensys purchase
                  priceallocation
              
              
              (1,387,841
              )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
              
              
              4,116,872


During
      the fourth quarter of fiscal 2006, 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 reporting unit against its
      carrying amount, including the goodwill. Measurement of the fair value was
      based
      on the reporting unit’s present value of expected future cash flows. As the
      carrying amount exceeded the estimated fair value, the fair value was allocated
      to the reporting unit’s underlying assets and liabilities, and management then
      determined that the carrying value of the goodwill exceeded the implied fair
      value of the goodwill. Accordingly, the Company recorded a goodwill impairment
      charge (labeled "Loss on Impairment of Goodwill") of $1,529,767 in the
      Consolidated Statement of Operations for the fiscal year ended June 30, 2006.
      Management believes this impairment arose primarily as a result of an increase
      in the timeframe for realizing growth objectives and anticipated cash flows
      of
      the Avensys reporting unit.




F-23


Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007




Intangible
      Assets (continued)





During
      the fourth quarter of fiscal 2007, 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 reporting unit against its
      carrying amount, including the goodwill. Measurement of the fair value was
      based
      on the reporting unit’s 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 unit’s underlying assets and
      liabilities and the goodwill recorded.





10.
            Balance
                Sheet Details





June
                30,
            
            June
                30,2007
            
            2006$
            
            $Other
                ReceivablesInvestment
                tax credits receivable
            
            
            1,081,787
            
            
            117,190Sales
                tax receivable
            
            
            39,825
            
            
            151,332Grants
                receivable
            
            
            9,877
            
            
            -Other
            
            
            35,752
            
            
            107,2201,167,241
            
            
            375,742InventoriesRaw
                materials
            
            
            726,484
            
            
            635,405Work
                in process
            
            
            179,659
            
            
            120,864Finished
                goods
            
            
            572,692
            
            
            807,5361,478,835
            
            
            1,563,805Accounts
                Payable and Accrued LiabilitiesAccounts
                payable
            
            
            2,961,952
            
            
            3,911,609Payroll
                and benefits
            
            
            585,909
            
            
            184,785Income
                taxes payable
            
            
            4,188
            
            
            1,794Rent
                payable
            
            
            34,648
            
            
            12,894Deferred
                revenue
            
            
            173,517
            
            
            151,272Lease
                termination
            
            
            78,323
            
            
            -Other
            
            
            154,310
            
            
            404,5043,992,847
            
            
            4,666,858






F-24


Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007





11.
            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, Avensys transferred its research activities to
      Avensys Laboratories Inc. (“ALI”). Avensys 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 Avensys. The ALI Agreement
      was
      for a period of five years with a two-year renewal period and calls for ALI
      to
      provide Avensys with a commercialization license for products developed in
      return for a royalty of 5% of sales generated. Avensys 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 Avensys only.
      However, it may also have entered into agreements with third parties. ALI has
      no
      financing other than amounts received from Avensys.





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





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





ITF
      Laboratories Inc. provides research & development to Avensys 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,
      2007, since Avensys is the primary beneficiary. The impact of including the
      accounts of ITF Laboratories Inc. in the consolidated balance sheet as at June
      30, 2007 consists of additions to current assets of $1,862,614 (June 30, 2006
      -
      $967,397), net property and equipment of $903,564 (June 30, 2006 - $1,201,358),
      intangible assets of $344,892 (June 30, 2006 - $343,717) and current liabilities
      of $867,218 (June 30, 2006 - $1,138,306). The impact on the consolidated
      statement of operations for years ended June 30, 2007 and 2006 was an increase
      in revenue of $1,595,618 and approximately $180,000, respectively, an increase
      in expenses of $760,553 and approximately $1,300,000, respectively, and an
      increase in the income tax benefit from refundable investment tax credits of
      $1,217,948 and $351,242, respectively. The increase in expenses includes an
      amount for research and development expenses of $746,111 and approximately
      $1,100,000, respectively.





12.
              Related
                  Party Transactions and
                  Balances





The
      total
      amount due to a shareholder of the Company at June 30, 2007 is $40,000 (June
      30,
      2006 - $40,000). The amount due is non-interest bearing, unsecured and has
      no
      fixed terms of repayment.





13.
            Bank
                and Other Loans Payable




Avensys
      maintains a line of credit from a financial institution for an authorized amount
      of $1,276,516 (CAD$1,360,000), which bears interest at the Canadian bank prime
      rate (June 30, 2007 - 6%; June 30, 2006 - 6%) plus 1.5%. The outstanding balance
      under the line of credit as at June 30, 2007 amounted to $253,125 (CAD$269,679)
      (June 30, 2006 $967,004 - CAD$1,078,209). Avensys has designated its accounts
      receivable totaling $3,666,040 (CAD$3,905,799) and inventories totaling
      $1,478,835 (CAD$1,575,551) as collateral for the line of credit. According
      to
      terms of the credit agreement, the Company is subject to certain financial
      covenants which were all respected as at June 30, 2007.





In
      2005,
      a supplier of C-Chip extended a credit facility with an original maximum amount
      of $1,000,000 (principal and interest) which bears interest at a rate of 10%
      per
      annum (June 30, 2006 - 10%). The supplier subsequently permitted C-Chip to
      exceed the maximum amount of the credit facility. Effective December 1, 2006,
      the supplier signed a Technology License Agreement (“Agreement”) with C-Chip to
      manufacture and sell devices based on C-Chip’s technology in the sub-prime used
      vehicle market. As a result of this Agreement, as described in Note 4, the
      balance outstanding under the facility as at June 30, 2007 was reduced to
      $708,245 (CAD$754,564) (June 30, 2006 $1,364,692 - CAD$1,521,632).





Avensys
      obtained investment tax credit financing during fiscal 2007 in the form of
      a
      demand loan in the amount of $397,099.(CAD$460,000) Avensys repaid $304,231
      (CAD$361,058) of the demand loan during the fiscal 2007 leaving a balance owing
      at June 30, 2007 of $92,868. 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 Laboratories
      Inc.




F-25


Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007




14.
              Balance
                  of Purchase Price and Derivative Liability on ITF
                  Purchase





Since
      the
      acquisition of ITF (see Note 6), 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 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 Preferred
      Shareholders could require a payment. The carrying value of the note as at
      June
      30, 2006 was $877,675. The carrying value of the note as at June 30, 2007 was
      $1,194,096. 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 included in the Statement of Operations. The fair value
      of
      this embedded conversion option was $458,271 as of June 30, 2006. The fair
      value
      of this embedded conversion option was $17,045 as of June 30, 2007. The fair
      value of the embedded conversion option is determined by using the Black-Scholes
      model.





15.
              Long-Term
                  Debt




June
                  30,
              
              June
                  30,2007
              
              2006$
              
              $Mortgage
                  loan secured by Avensys’ intangible and movable tangible assets (June 30,
                  2007-CAD$245,000), bearing interest at the lender's prime rate
                  (June 30,
                  2007 - 8.25%; June 30, 2006 - 8.0%) plus 1.75%, payable in monthly
                  instalments of CAD$7,000 plus interest, maturing in May
                  2010
              
              
              229,961
              
              
              295,067Capital
                  lease obligations (June 30,2007-CAD$41,304), bearing interest between
                  6.17% and 9.83%, maturing between October 2007 and May
                  2010
              
              
              38,768
              
              
              25,353Note
                  payable (June 30, 2007-CAD$0), non-interest bearing, payable in
                  monthly
                  instalments of $691, unsecured, matured in April 2007
              
              
              -
              
              
              6,197268,729
              
              
              326,617Less:
                  Current portion of long-term debt
              
              
              94,317
              
              
              103,717Long-term
                  debt
              
              
              174,412
              
              
              222,900


Principal
        payments on long-term debt and capital leases are as follows:


$2008
              
              
              94,3172009
              
              
              92,6372010
              
              
              81,7752011
              
              
              -2012
              
              
              -Total
              
              
              268,729




F-26


Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007




16.
              Convertible
                  Debentures




June
                    30,
                
                June
                    30,2007
                
                2006$
                
                $Series
                    A Senior Secured Convertible Debentures bearing interest at 7%,
                    capitalrepayments
                    for 20 months beginning June 16, 2005, interest payable each
                    June
                    andDecember,
                    maturing January 31, 2007, original principal amount of $4,675,000
                    (Note16
                    (a))
                
                
                -
                
                
                188,328Series
                    B Subordinated Secured Convertible Debentures (original principal
                    amount
                    of$3,622,143)
                    and Original Issue Discount Series B Subordinated Secured
                    Convertibledebentures
                    (original principal amount equal to 15% of the Series B
                    debentures),maturing
                    February 11, 2009 (Note 16 (b))
                
                
                2,470,867
                
                
                -Unsecured
                    Convertible Debentures bearing interest at 15%, maturing September
                    1,2007,
                    original principal amount of $457,575 (CAD$487,500) (Note 16
                    (c))
                
                
                -
                
                
                399,563Unsecured
                    Convertible Debentures bearing interest at 12% maturing March
                    1,
                    2008,original
                    principal amount of $375,446 (CAD$400,000) (Note 16 (c))
                
                
                373,110
                
                
                343,1092,843,977
                
                
                931,000Less:
                    Current portion of convertible debentures
                
                
                1,568,519
                
                
                587,891Convertible
                    debentures
                
                
                1,275,458
                
                
                343,109




Principal
        payments on the convertible debentures for the next five years are as
        follows:


$2008
              
              
              1,568,5192009
              
              
              1,275,4582010
              
              
              -2011
              
              
              -2012
              
              
              -Total
              
              
              2,843,977




a)
            Series
                A Senior Secured Convertible
                Debentures





On
      February 16, 2005, the Company issued Series A Senior Secured Convertible Notes
      (“Series A Notes”) and Series E and F Warrants (see Note 18(b)) for an aggregate
      principal amount of $4,675,000.




In
      accordance with EITF 98-5 “ *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios* ”
and
      with EITF 00-27 “ *Application
      of Issue No. 98-5 to Certain Convertible Instruments* ”,
      the
      Company allocated $1,863,870 to the Warrants Series E, $339,456 to the Warrants
      Series F and recognized an embedded beneficial conversion feature of $2,470,674
      accounted for as additional paid-in capital and an equivalent discount against
      the Notes. The carrying amount of the Notes was being increased monthly by
      periodic accretion under the effective interest method. At the time of issuance,
      the Company was obligated for the entire contractual balance of the Notes of
      $4,675,000. At June 30, 2007, the outstanding principal amount on the Notes
      was
      zero as a result of the last monthly installment having been made in January
      2007.





These
      Series A Notes bore interest at 9% per year from February 16, 2005 until the
      first principal payment date on June 16, 2005 and 7% per year after this date.
      The principal amount on these Notes was payable in twenty (20) equal monthly
      installments of $233,750 subject to certain adjustments. Interest on these
      Notes
      was payable on the last day of June and December of each year commencing on
      June
      30, 2005.





All
      payments of interest could be made, at the option of the Company, (a) in cash;
      (b) by the issuance of additional Series A Notes in the principal amount equal
      to the interest payment due; or (c) in shares of common stock of the Company
      valued at 90% of the average price of such security in the most recent five
      trading days (“Market Price”).




F-27




Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007


Convertible
      Debentures (continued)





Series
      A
      Senior Secured Convertible Debentures (continued)





All
      payments of principal could be made, at the option of the Company, (a) in cash
      with a premium equal to 10% of the cash amount paid; or (b) in shares of common
      stock of the Company valued at 85% of the Market Price.





All
      payments made by the issuance of shares were acceptable only if the related
      shares of the Company had first been registered with the Securities and Exchange
      Commission.





The
      holders of these Series A Notes had the right, at their option at any time,
      to
      convert some or all of the Notes including the principal amount and the amount
      of any accrued but unpaid interest into a number of common shares of the Company
      valued initially at $0.65 per share, subject to certain adjustments as described
      in the purchase agreement. As part of a special warrant offering, the conversion
      price on such notes was reduced to $0.35.





In
      connection with the placement of these Series A Notes, the Company issued
      Warrant Series: IB1, IB2, IB3, IB4, and IB5 granting the right to acquire up
      to
      881,538 shares of the Company’s common stock at prices ranging from $0.01 to
      $0.76 per share subject to certain adjustments, (see Note 18(b)) and expiring
      from three months following the date of their Registration until February 16,
      2010.





The
      Company valued the warrants at $486,586 and recognized this amount to additional
      paid in capital of Warrants Series IB1, IB2 and, IB3, IB4, and IB5 and as
      deferred issue expenses for the Series A Notes and issue expenses for the
      Warrants Series E and F.





To
      secure
      payment of the principal amount of the Series A Notes and the interest thereon,
      the Company hypothecated, in favor of the note holders, the universality of
      all
      of the immovable and movable assets, corporeal and incorporeal, present and
      future of the Company. As a result of the last monthly installment having been
      made in January 2007, the security relating to the Series A Notes has been
      released.





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 liens other than liens created pursuant
      to
      the Security Documents and Permitted Liens, as defined in the purchase
      agreement; (c) for so long as at least $2,500,000 principal amount of these
      Notes remained outstanding, the Company shall not, without the consent of
      holders representing at least 50% of the then outstanding principal amount,
      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 these Notes provided however that the Company
      could have outstanding bank debt.





b)
            Series
                B Subordinated Secured Convertible
                Debentures





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.




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 are 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,
      are
      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 are also accounted for as derivative liabilities. The carrying amounts
      of the Series B Notes and the OID Notes are being 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 uses the same model to value
      these elements on a quarterly basis At June 30, 2007, the outstanding principal
      amount on the Notes was $3,286,100.




F-28


Manaris
      Corporation


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2007




Convertible
      Debentures (continued)





Series
      B
      Subordinated Secured Convertible Debentures (continued)





The
      following table illustrates the values of the various components at the issue
      dates, August 11, 2006 for the first tranche and November 17, 2006 for the
      second tranche, and the balance sheet date, June 30, 2007.


Value
                  at August 11,
              
              Value
                  at November
              
              Value
                  at JuneIssue
                  Date
              
              Expiry
                  Date
              
              2006
              
              17,
                  2006
              
              30,
                2007**Derivative
                  Liabilities**
              
              
              
              
              
              $
              
              $
              
              $Series
                  B Notes
              
              
              8/11/2006
              
              
              2/11/2009
              
              
              529,078
              
              
              
              
              
              5,448OID
                  Notes
              
              
              8/11/2006
              
              
              2/11/2009
              
              
              79,362
              
              
              
              
              
              817Series
                  B Notes
              
              
              11/17/2006
              
              
              2/11/2009
              
              
              
              
              
              205,417
              
              
              4,447OID
                  Notes
              
              
              11/17/2006
              
              
              2/11/2009
              
              
              
              
              
              30,813
              
              
              667Series
                  Y Warrants
              
              
              8/11/2006
              
              
              11/9/2010
              
              
              14,179
              
              
              
              
              
              612Series
                  Z Warrants
              
              
              8/11/2006
              
              
              11/9/2010
              
              
              266,168
              
              
              
              
              
              15,412Series
                  Y Warrants
              
              
              11/17/2006
              
              
              11/9/2010
              
              
              
              
              
              6,146
              
              
              436Series
                  Z Warrants
              
              
              11/17/2006
              
              
              11/9/2010
              
              
              
              
              
              120,870
              
              
              11,009888,787
              
              
              363,246
              
              
              38,848**Carrying
                  Value of Subordinated Secured Convertible
                  Debentures**Series
                  B Notes
              
              
              8/11/2006
              
              
              2/11/2009
              
              
              1,064,461
              
              
              
              
              
              1,175,220OID
                  Notes
              
              
              8/11/2006
              
              
              2/11/2009
              
              
              159,669
              
              
              
              
              
              176,283Series
                  B Notes
              
              
              11/17/2006
              
              
              2/11/2009
              
              
              
              
              
              996,504
              
              
              980,464OID
                  Notes
              
              
              11/17/2006
              
              
              2/11/2009
              
              
              
              
              
              149,476
              
              
              138,9001,224,130
              
              
              1,145,980
              
              
              2,470,867**Value
                  of Series B Notes**
              
              
              
              
              2,112,917
              
              
              1,509,226
              
              
              2,509,715**Derivative
                  Liabilities (Placement Fees)**Series
                  W Warrants
              
              
              8/11/2006
              
              
              11/9/2010
              
              
              60,920
              
              
              
              
              
              3,705Series
                  Y Warrants
              
              
              8/11/2006
              
              
              11/9/2010
              
              
              1,170
              
              
              
              
              
              50Series
                  Z Warrants
              
              
              8/11/2006
              
              
              11/9/2010
              
              
              21,959
              
              
              
              
              
              1,272Series
                  W Warrants
              
              
              11/17/2006
              
              
              11/9/2010
              
              
              
              
              
              27,552
              
              
              2,646Series
                  Y Warrants
              
              
              11/17/2006
              
              
              11/9/2010
              
              
              
              
              
              502
              
              
              36Series
                  Z Warrants
              
              
              11/17/2006
              
              
              11/9/2010
              
              
              
              
              
              9,894
              
              
              90884,049
              
              
              37,948
              
              
              8,617**Total
                  Derivative Liabilities**
              
              
              
              
              972,836
              
              
              401,194
              
              
              47,465


The
      convertible notes include both Series B Notes and OID Notes. The Series B Notes
      are non-interest bearing and the OID Notes effectively provide 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").





The
      Series B Notes and OID Notes mature thirty (30) months from the date of issuance
      (the "Maturity Date") and are 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 are 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 is 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 pay 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 will be repaid in shares at the particular repayment
      date, may 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 has
      been
      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.




F-29




Manaris
      Corporation


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2007




Convertible
      Debentures (continued)





The
      Company's obligations under the Purchase Agreement and the Notes are 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 contain 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.





Subsequent
      to the year end, as described in Note 23, the Company redeemed its outstanding
      Series B and Series B OID Notes.





c)
            Unsecured
                Convertible Debentures





With
      the
      acquisition of Avensys, 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, Avensys 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 Manaris. 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 equalled $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 Avensys, 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, Avensys 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 is $2,336 (June 30, 2006
      -
      $15,635).





17.
              Common
                  Stock





At
      June
      30, 2007, the Company is authorized to issue 500,000,000 shares of common stock.
      At June 30, 2007, the Company has 93,437,654 (June 30, 2006 - 77,671,281) common
      shares issued and outstanding and 406,562,346 common shares available for
      issuance.





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 16(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.




F-30




Manaris
      Corporation


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2007




Common
      Stock (continued)





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 upon issuance of shares 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
                upon
                issuance of shares.





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.




For
      the
      fiscal year ended June 30, 2006:




a)
            The Company issued 1,758,000 common shares for total
              proceeds of $100,013 from the exercise of stock
              options.





b)
            The
                Company issued 10,221,522 common shares in connection with the Series
                A
                Notes. Of that amount, 5,897,695 common shares, with a fair value
                of
                $2,099,793, 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
                $2,099,792 was removed from the carrying value of the convertible
                debentures and credited to capital stock and additional paid in capital.
                In addition, the holders of the convertible debentures converted
                debentures with a principal amount of $1,249,360 into 3,575,008 common
                shares at the existing conversion rate of $0.35. This amount has
                been
                removed from the carrying value of the convertible debentures and
                credited
                to capital stock and additional paid in capital, and the unamortized
                accretion in the amount of $1,181,188 has been charged as additional
                accretion expense and credited to capital stock and additional paid
                in
                capital. Furthermore, a total of 748,819 common shares, with a fair
                value
                of $265,436, 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.





c)
            The
                Company issued 7,525,124 common shares for total proceeds of $2,309,296
                following the exercise of 7,525,124
                warrants.





d)
            A
                total of 257,000 stock options were exercised after issuance to settle
                outstanding payables in the amount of $105,501. The fair value of
                the
                options issued was $136,860 resulting in a loss of $31,359, which
                has been
                charged to other expense.





e)
            In
                February 2006, the Company issued 631,038 common shares valued at
                $224,397
                as the repayment of secured convertible debentures with a principle
                amount
                of $224,397 in accordance with the original terms of the debt. Since
                the
                Company had been accounting for this debt on the basis that the principal
                payments would be made in shares, no gain or loss was
                recorded.





f)
            In
                April 2006, the Company issued 2,550,795 restricted common shares
                having a
                value of $872,372 for the acquisition of ITF assets. (Note
                6)





g)
            In
                April 2006, the Company cancelled 70,000 restricted common shares
                out of
                120,000 restricted common shares issued in May 2005 for consulting
                fees.
                These shares had originally been issued and held in escrow with 10,000
                shares being released from escrow each month. Consequently, there
                was no
                unearned compensation expense to reverse upon
                cancellation.





F-31





Manaris
      Corporation


Notes
      to
      Consolidated Financial Statements


(Expressed
      in U.S. Dollars)


June
      30,
      2007




Common
      Stock (continued)





Common
      stock reserved for issuance at June 30, 2007, before and after taking into
      consideration the effect of the redemption of the Series B Notes and OID Notes,
      as described in Note 23 (e), the exercise on a cashless basis of the Series
      G
      and I warrants, as described in Note 23 (b), the new Employee Stock Plan, as
      described in Note 23 (c), and the augmentation of the 2006 Non Qualified Stock
      Option Plan, as described in Note 23 (d), were as follows:


2007(Note
                  23) (1)
              
              2007
              
              2006(Unaudited)Stock
                  OptionsOptions
                  outstanding
              
              
              8,661,070
              
              
              8,661,070
              
              
              4,486,750Reserved
                  for future issuance
              
              
              5,365,244
              
              
              365,244
              
              
              4,539,564Stock
                  PlanReserved
                  for future issuance
              
              
              4,000,000
              
              
              -
              
              
              -Warrants
              
              
              15,099,037
              
              
              17,752,882
              
              
              13,015,714Conversion
                  of Series A Notes
              
              
              -
              
              
              -
              
              
              2,487,593Conversion
                  of Series B Notes and OID Notes
              
              
              649,955
              
              
              48,325,000
              
              
              -Conversion
                  of unsecured convertible debentures
              
              
              330,251
              
              
              330,251
              
              
              1,984,64534,105,557
              
              
              75,434,447
              
              
              26,514,266


(1)
      June
      30, 2007 adjusted for impact of subsequent events.




F-32




Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007


18.
            Stock
                Options and Warrants





a)
            Stock
                Options




Under
      the
      Manaris 2006 Nonqualified Stock Option Plan (‘Plan”), the Company may grant
      options to its Directors, Officers and employees for 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. Subsequent to the year end, as
      described in Note 23 (d), the Plan was amended and restated as the Amended
      and
      Restated 2006 Nonqualified Stock Option Plan and augmented by 5,000,000 stock
      options.




During
      the year ended June 30, 2007, 4,499,069 (June 30, 2006 - 1,863,000) stock
      options were granted to employees and directors.





During
      the year ended June 30, 2007, 64,834 (June 30, 2006 - 915,000) stock options
      were granted to non-employees.





During
      the year ended June 30, 2007, 64,834 stock options were granted to non-employees
      with exercise prices below the market price (64,834 stock options granted at
      .00001) on the respective grant dates. During the year ended June 30, 2006,
      915,000 stock options were granted to non-employees with exercise prices below
      the market price (915,000 stock options granted at .00001) on the respective
      grant dates. During the year ended June 30, 2006, no stock options were granted
      to non-employees with exercise prices at the market price on the respective
      grant dates. During the year ended June 30, 2006, 800,000 stock options were
      granted to employees and directors with exercise prices below the market price
      (800,000 stock options granted at .00001) on the respective grant
      dates.





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





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


June
                  30, 2007
              
              June
                  30, 2006Weighted
              
              
              
              Weightedaverage
              
              
              
              averageNumber
                  of
              
              exercise
                  price
              
              Number
                  of
              
              exercise
                  priceoptions
              
              ($)
              
              options
              
              ($)Balance
                  at beginning of the period
              
              
              4,486,750
              
              
              0.60
              
              
              3,842,500
              
              
              0.65Granted
              
              
              4,563,903
              
              
              0.22
              
              
              2,778,000
              
              
              0.14Exercised
              
              
              -
              
              
              -
              
              
              (2,015,000
              )
              
              (0.05
              )Forfeited
              
              
              (389,583
              )
              
              (0.25
              )
              
              (118,750
              )
              
              (0.78
              )Balance
                  at end of the period
              
              
              8,661,070
              
              
              0.42
              
              
              4,486,750
              
              
              0.60
  F-33





Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007




Stock
      Options and Warrants (continued)





Additional
      information regarding options outstanding as at June 30, 2007 is as
      follows:


Outstanding
              
              ExercisableRange
                    of
                  Exercise
                    prices
              
              Number
                  of
              
              Weighted
                      average
                      remaining
                      contractual
              
              Weighted
                    average
                    exercise
                      price
              
              Number
                  of
              
              Weighted
                    average
                    exercise
                      price$
              
              shares
              
              life
                  (years)
              
              $
              
              shares
              
              $0.00
                  - 0.25
              
              
              2,464,131
              
              
              7.58
              
              
              0.15
              
              
              2,340,078
              
              
              0.150.26
                  - 0.50
              
              
              3,078,189
              
              
              6.63
              
              
              0.31
              
              
              1,724,780
              
              
              0.330.51
                  - 0.75
              
              
              1,895,000
              
              
              1.96
              
              
              0.67
              
              
              1,895,000
              
              
              0.670.76
                  - 1.00
              
              
              1,223,750
              
              
              2.26
              
              
              0.83
              
              
              1,223,750
              
              
              0.838,661,070
              
              
              5.26
              
              
              0.42
              
              
              7,183,608
              
              
              0.45


The
      weighted average fair value of options granted for the years ended June 30,
      2007
      and 2006 was $0.18 and $0.32, respectively, as summarized
      below.


Number
                    of
                  options
              
              Weighted
                      average
                      exercise
                      price
              
              Weighted
                      average
                      grant-date
                      fair
                        valueOptions
                  granted during the year ended June 30,2007,
                  exercise prices below market price at time ofgrant
              
              
              64,834
              
              
              0.00001
              
              
              0.17Options
                  granted during the year ended June 30,2007,
                  exercise prices equal to market price at time ofgrant
              
              
              4,499,069
              
              
              0.23
              
              
              0.18Options
                  granted during the year ended June 30, 2007
              
              
              4,563,903
              
              
              0.22
              
              
              0.18




Number
                of
              options
            
            
            Weighted
                average exercise price
            
            
            Weighted
                average grant-date fair valueOptions
                granted during the year ended June 30, 2006, exercise prices below
                market
                price at time of grant
            
            
            1,715,000
            
            
            0.00001
            
            
            0.39Options
                granted during the year ended June 30, 2006, exercise prices equal
                to
                market price at time of grant
            
            
            1,063,000
            
            
            0.36
            
            
            0.21Options
                granted during the year ended June 30, 2006
            
            
            2,778,000
            
            
            0.14
            
            
            0.32




F-34




Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007


Stock
      Options and Warrants (continued)





Commencing
      July 1, 2006 and as described in the Company’s accounting policy relating to
      stock-based compensation, the Company began to expense the compensation cost
      relating to employee share-based payment transactions The Company recognized
      stock-based compensation for employees and directors in the amount of $442,185
      for the year ended June 30, 2007. The Company recognized stock-based
      compensation for non-employees in the amount of $11,021 and $490,795 for the
      years ended June 30, 2007 and 2006, respectively. Had the Company determined
      compensation cost based on the fair value at the date of grant for its employee
      stock options, the net loss would have increased by $396,588 for the year ended
      June 30, 2006 as described in the following table:





Year
                endedJune
                30, 2006$Net
                loss applicable to common stockholders
            
            
            (14,099,739
            )Add:
                Stock-based compensation expense included in net loss - as
                reported
            
            
            490,795Less:
                Stock-based compensation expense determined under fair value
                method
            
            
            (887,383
            )Net
                loss applicable to common stockholders - pro forma
            
            
            (14,496,327
            )Net
                loss per share (basic and diluted) - as reported
            
            
            (0.20
            )Net
                loss per share (basic and diluted) - pro forma
            
            
            (0.21
            )




F-35
 
  Manaris
          Corporation
 Notes
          to
          Consolidated Financial Statements
 (Expressed
          in U.S. Dollars)
 June
          30,
          2007





Stock
      Options and Warrants (continued)





As
      a
      result of the adoption of SFAS 123(R), the Company’s fiscal 2007 financial
      results were lower than under the previous accounting method for share-based
      compensation by the following amounts:


Year
                  endedJune
                  30, 2007$Net
                  Loss from Continuing Operations
              
              
              442,185Net
                  Loss
              
              
              442,185Net
                  Loss applicable to common stockholders
              
              
              442,185Net
                  Loss from continuing operations per share - Basicand
                  Diluted
              
              
              0.01Net
                  Loss per share - Basic and Diluted
              
              
              0.01




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:
  Year
                  endedJune
                  30,2007
              
              2006Risk
                  - free interest rate
              
              
              4.33
              %
              
              3.28
              %Expected
                  volatility
              
              
              100.00
              %
              
              100.95
              %




As
      at
      June 30, 2007, the Company has $342,193 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 two
      years (June 30, 2008 - $223,754 and June 30, 2009 - $118,439).




There
      were no stock options exercised during the year ended June 30, 2007. The Company
      received cash of $100,013 from stock options exercised during the year ended
      June 30, 2006. The impact of these cash receipts is included in financing
      activities in the accompanying consolidated statements of cash
      flows.




F-36


Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007


Stock
      Options and Warrants (continued)





b)
            Warrants




Warrants
        outstanding as at June 30, 2007
 Outstanding
                
                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
                    Averageremaining
                    contractual life(years)
                
                
                2.63
                
                
                2.78
                
                
                2.64
                
                
                2.99
                
                
                3.36
                
                
                2.63
                
                
                2.63
                
                
                2.63
                
                
                -
                
                
                3.36
                
                
                -
                
                
                2.83


Subsequent
      to the year end, as described in Note 23 (b), the holders of Series G and Series
      I warrants exercised, on a cashless basis, 2,653,845 warrants, respectively.
      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
      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-37




Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007


Stock
      Options and Warrants (continued)


Warrants
        outstanding as at June 30, 2006
 Outstanding
                
                Warrant
                      exercise
                    pricesSeries
                    E
                
                
                1,596,155
                
                
                0.35Series
                    G
                
                
                3,797,976
                
                
                0.35Series
                    H
                
                
                890,593
                
                
                0.35Series
                    I
                
                
                3,797,976
                
                
                0.50Series
                    J
                
                
                1,781,184
                
                
                0.50IB-01
                
                
                7,692
                
                
                0.00001IB-02
                
                
                215,385
                
                
                0.59IB-03
                
                
                323,077
                
                
                0.67IB-06
                
                
                605,676
                
                
                0.35Total
                
                
                13,015,714
                
                
                0.48
  Changes
          in the warrants outstanding for the year ended June 30, 2006 are as
          follows:
 Range
                      of exercise prices
                  
                  
                  0.00001
                  
                  
                  0.001
                  
                  
                  0.35
                  
                  
                  0.50
                  
                  
                  0.59
                  
                  
                  0.63
                  
                  
                  0.67
                  
                  
                  0.70
                      - 1.10
                  
                  
                  TotalBalance
                      at June 30, 2005
                  
                  
                  120,192
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  215,385
                  
                  
                  107,693
                  
                  
                  343,077
                  
                  
                  13,604,307
                  
                  
                  14,390,654Repriced
                  
                  
                  -
                  
                  
                  -
                  
                  
                  13,604,307
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (13,604,307
                  )
                  
                  -Granted
                  
                  
                  -
                  
                  
                  52,289
                  
                  
                  5,294,245
                  
                  
                  5,579,160
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  10,925,694Exercised
                  
                  
                  (112,500
                  )
                  
                  (52,289
                  )
                  
                  (7,360,335
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (7,525,124
                  )Expired
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (4,647,817
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (107,693
                  )
                  
                  (20,000
                  )
                  
                  -
                  
                  
                  (4,775,510
                  )Balance
                      as at June 30,2006
                  
                  
                  7,692
                  
                  
                  -
                  
                  
                  6,890,400
                  
                  
                  5,579,160
                  
                  
                  215,385
                  
                  
                  -
                  
                  
                  323,077
                  
                  
                  -
                  
                  
                  13,015,714Weighted
                      Averageremaining
                      contractuallife
                      (years)
                  
                  
                  3.6
                  
                  
                  -
                  
                  
                  3.2
                  
                  
                  3.6
                  
                  
                  3.6
                  
                  
                  -
                  
                  
                  3.6
                  
                  
                  -
                  
                  
                  3.4


In
      July
      2005, the company completed a special warrant offering to certain of the
      company’s warrant holders. Under the terms of the offer, the exercise price of
      13,604,307 warrants held by holders participating in the offer was reduced
      to
      $0.35. In connection with this offer, a total of 7,360,335 warrants were
      exercised for total proceeds amounting to $2,576,118. Upon exercise of the
      warrants under the offer, the holders collectively received 4,688,566 new
      warrants at an exercise price of $0.35 per share and 5,579,160 warrants at
      an
      exercise price of $0.50 per share.





As
      a
      result of the above offer, the exercise price of 666,154 warrants held by
      holders who did not participate in the offer was reduced by between $0.06 and
      $0.08 per share to exercise prices ranging between $0.59 and $0.67 per share
      which is due to an anti-dilution provision.





The
      reduction of the exercise price of the warrants held by holders who participated
      in the offer has been accounted for as an inducement. Accordingly, an amount
      of
      $1,609,000 representing the excess of the aggregate fair value of the new shares
      and warrants issued over the carrying value of the warrants subject to the
      reduction less the cash received and the fair value of the broker warrant issued
      has been credited to additional paid in capital and charged to deficit. The
      reduction of the exercise price of the warrants held by holders who did not
      participate in the offer has been accounted for as a modification of the
      outstanding warrants. Accordingly, an amount of $589,000 representing the excess
      of the fair value of the warrants immediately after the reduction over the
      fair
      value of those warrants immediately prior to the reduction, has been credited
      to
      additional paid in capital and charged to deficit.





The
      above
      offering also triggered an anti-dilution provision with respect to the Senior
      Secured Convertible Notes issued on February 16, 2005, pursuant to which the
      conversion price on such notes was reduced from $0.65 to $0.35. As a result,
      investors holding $985,985 of Senior Secured Convertible Notes exercised their
      rights to convert such notes into 2,817,098 common shares.




F-38




Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30, 2007




19.
              Commitments
                  and Contingencies





Commitments




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


$2008
              
              
              449,4562009
              
              
              379,1482010
              
              
              253,9712011
              
              
              12,5612012
              
              
              -1,095,136


The
      Company leases premises for its various offices located across Canada. Total
      rent expense was $647,955 and $400,934 for the year ended June 30, 2007 and
      2006, 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





i)
            On
                February 7, 2007, a lawsuit was filed by a former employee in Superior
                Court of Quebec for a total amount of $256,530 (CAD $273,307), with
                regards to alleged breach of employment contract and wrongful dismissal.
                The Company is in the process of preparing its response and intends
                to
                contest the case vigorously.





ii)
            On
                March 29, 2007, a lawsuit was filed by Gestion Cheers (Pointe-Claire)
                Inc.
                under Quebec Law in the Superior Court of Quebec against Canadian
                Security
                Agency (2004) Inc. (“CSA”), a former operating subsidiary of Manaris. The
                plaintiff is suing CSA, amongst other parties, as a defendant in
                warranty
                and is claiming a total amount of $585,414 (CAD $623,700). The Company
                responded and obtained the Court’s rejection of the
                case.





iii)
            On
                September 27, 2006 our subsidiary C-Chip received a letter claiming
                that
                the Company is infringing on a patent of another similar device to
                that
                being sold by C-Chip. C-Chip responded to the alleged claim, following
                which verbal communications were exchanged between the parties. No
                further
                legal action or claim has been undertaken by either of the
                parties.




iv)
            A
                lawsuit was originally filed on December 3, 2002 with the Quebec
                Labor
                Commission alleging wrongful dismissal. The former employee was claiming
                an indemnity of approximately $143,498 (CAD $160,000). The case was
                brought before the Quebec Court of Appeal, which ordered Avensys
                in August
                2006 to follow the Quebec Labor Tribunal's decision, and pay an indemnity
                of $160,731 (CAD $179,215) to the former employee. This indemnity
                was
                recorded as a liability in the consolidated financial statements
                of the
                Company as at June 30, 2006. During the Fiscal year 2007, payments
                were
                made to the former employee and the matter was discharged for
                approximately the same amount as was accrued in the preceding fiscal
                year.




20.
                Research
                    and Development Investment Tax
                    Credits





The
      Company’s investment tax credit claims previously calculated for the fiscal year
      ended June 30, 2006 have been reviewed by the tax authorities, and as a result
      of this review, the Company has collected $475,193 more than what had been
      originally recorded. The Company records investment tax credits arising from
      research and development activities as a reduction of the income tax provision
      for the year. The Company applied the above noted excess as a further reduction
      of the income tax provision for fiscal 2007.





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-39




Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007




21.
              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.




The
      Company identifies a reportable segment through the internal organizational
      structure. The Company’s structure is distributed among two reporting segments,
      Fiber & Monitoring and Credit Management, each with different product and
      service offerings. The Fiber & Monitoring reporting segment is comprised of
      the operations of Avensys and ITF and provides fiber-based technologies and
      environmental monitoring solutions. The Credit Management reporting segment
      is
      comprised of the operations of C-Chip, and offers products and services to
      the
      credit management marketplace.





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 marketing and 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.


**Fiber
                  &**
              
              **Credit****For
                    the year ended June 30, 2007**
              
              **Monitoring**
              
              **Management**
              
              **Consolidated**Net
                  revenues from external customers
              
              
              16,576,124
              
              
              2,164,437
              
              
              18,740,561Cost
                  of revenues
              
              
              10,473,196
              
              
              1,753,608
              
              
              12,226,804Marketing
                  and sales expense
              
              
              2,126,108
              
              
              101,337
              
              
              2,227,445Administrative
                  expense
              
              
              1,287,346
              
              
              325,372
              
              
              1,612,718Research
                  & development
              
              
              1,571,572
              
              
              -
              
              
              1,571,572Depreciation
                  & amortization
              
              
              305,209
              
              
              24,509
              
              
              329,718Direct
                  costs
              
              
              15,763,431
              
              
              2,204,826
              
              
              17,968,257Direct
                  contribution
              
              
              812,693
              
              
              (40,389
              )
              
              772,304Other
                  operating expenses & indirect costs of net revenues
              
              
              
              
              
              
              
              
              (3,174,026
              )Loss
                  from Operations
              
              
              
              
              
              
              
              
              (2,401,722
              )Other
                  income (expense)
              
              
              
              
              
              
              
              
              372,269Interest
                  expense, net
              
              
              
              
              
              
              
              
              (902,509
              )Debenture
                  accretion and change in fair value of derivative financialinstruments
              
              
              
              
              
              
              
              
              (658,630
              )Income
                  Tax Benefit - Refundable tax credits (1)
              
              
              
              
              
              
              
              
              1,217,948Non-Controlling
                  Interest
              
              
              
              
              
              
              
              
              1,890Net
                  Loss from Continuing Operations
              
              
              
              
              
              
              
              
              (2,370,754
              )




(1)
      -
      Relates entirely to the Research & Development activities of the Fiber &
Monitoring segment.




F-40




Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007


Segment
      Disclosure (continued)


**Fiber
                  &**
              
              **Credit****For
                    the year ended June 30, 2006 (Restated) (2)**
              
              **Monitoring**
              
              **Management**
              
              **Consolidated**Net
                  revenues from external customers
              
              
              10,179,426
              
              
              319,079
              
              
              10,498,505Cost
                  of revenues
              
              
              7,059,045
              
              
              405,665
              
              
              7,464,710Marketing
                  and sales expense
              
              
              1,918,171
              
              
              394,327
              
              
              2,312,498Administrative
                  expense
              
              
              1,263,369
              
              
              537,235
              
              
              1,800,604Research
                  & development
              
              
              1,105,484
              
              
              775
              
              
              1,106,259Depreciation
                  & amortization
              
              
              197,492
              
              
              5,440
              
              
              202,932Direct
                  costs
              
              
              11,543,561
              
              
              1,343,442
              
              
              12,887,003Direct
                  contribution
              
              
              (1,364,135
              )
              
              (1,024,363
              )
              
              (2,388,498
              )Other
                  operating expenses & indirect costs of net revenues
              
              
              
              
              
              
              
              
              (5,238,943
              )Loss
                  from Operations
              
              
              
              
              
              
              
              
              (7,627,441
              )Other
                  income (expense)
              
              
              
              
              
              
              
              
              (18,187
              )Interest
                  expense, net
              
              
              
              
              
              
              
              
              (762,488
              )Debenture
                  accretion and change in fair value of derivative financial instruments
              
              
              
              
              
              
              
              
              (3,991,229
              )Income
                  Tax Benefit - Refundable tax credits (1)
              
              
              
              
              
              
              
              
              351,242Non-Controlling
                  Interest
              
              
              
              
              
              
              
              
              (3,977
              )Net
                  Loss from Continuing Operations
              
              
              
              
              
              
              
              
              (12,052,080
              )




(1)
              -
            Relates
                entirely to the Research & Development activities of the Fiber &
                Monitoring segment.





(2)
              -
            Starting
                in fiscal year 2007, the Company revised the measure of segment profit
                regularly reviewed by the Chief OperatingDecision
                Maker. The new presentation adopted provides research and development
                expenses and depreciation andamortization
                for each reporting unit. The reporting units themselves have not
                changed
                from fiscal 2006. As a result, thefiscal
                year 2006 information originally presented has been restated to reflect
                the presentation adopted in the current
                year.





Revenue
      from two customers of the Company’s Fiber & Monitoring segment for the year
      ended June 30, 2007 and one customer for the year ended June 30, 2006,
      represented approximately $9,605,000 (Customer 1 represented approximately
      $6,855,000 and Customer 2 represented approximately $2,750,000) and $3,290,000,
      respectively, of which the outstanding receivable balances amounted to
      approximately $1,838,000 (Customer 1 represented approximately $1,024,000 and
      Customer 2 represented approximately $814,000) and $880,000 at June 30, 2007
      and
      2006, respectively.


The
        Company’s long-lived assets, comprised of property, plant & equipment,
        intangible assets, and goodwill, substantially all of which are located in
        Canada, are allocated as follows:




June
                  30,
              
              June
                  30,2007
              
              2006$
              
              $Fiber
                  & Monitoring
              
              
              10,340,652
              
              
              10,523,564Credit
                  Management
              
              
              -
              
              
              22,567All
                  Other
              
              
              23,406
              
              
              55,543Total
                  long-lived assets
              
              
              10,364,058
              
              
              10,601,674




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, 2007 and 2006 for the Americas include approximately $9,299,000
      and $1,679,000, respectively, of sales to the United States of America and
      approximately $5,968,000 and $5,339,000, respectively, of sales to Canada.
      The
      revenues for Asia for the year ended June 30, 2007 and 2006 include sales of
      approximately $2,147,000 and $2,888,000, respectively, to China.




F-41




Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007


Segment
      Disclosure (continued)




Geographic
      Information


2007
              
              2006$
              
              $RevenuesAmericas
              
              
              15,471,407
              
              
              7,018,155Europe
              
              
              962,176
              
              
              518,072Asia
              
              
              2,306,978
              
              
              2,962,278Total
              
              
              18,740,561
              
              
              10,498,505




22.
            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
                  30,2007
              
              2006$
              
              $Income
                  tax at Federal US statutory rate (recovery)
              
              
              (1,220,801
              )
              
              (4,215,777
              )Increase
                  (decrease) resulting from:Stock
                  based compensation not deductible
              
              
              137,775
              
              
              137,093Change
                  in valuation allowance
              
              
              632,423
              
              
              3,270,461Impairment
                  of goodwill
              
              
              -
              
              
              477,593Research
                  and development tax credits
              
              
              (1,217,948
              )
              
              (351,242
              )Income
                  tax rate differential of foreign subsidiaries
              
              
              102,501
              
              
              311,026Change
                  in income tax rate
              
              
              -
              
              
              47,115Non-deductible
                  items and other elements
              
              
              348,102
              
              
              (27,511
              )Income
                  tax benefit
              
              
              (1,217,948
              )
              
              (351,242
              )




F-42




Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007


Income
      Taxes (continued)


June
                  30,2007
              
              2006$
              
              $Deferred
                  tax assets:Net
                  tax losses and scientific and experimental development expenses
                  carried
                  forward
              
              
              7,349,975
              
              
              6,049,110Difference
                  between book and tax depreciation
              
              
              91,889
              
              
              110,050Reserves
                  and accruals not deductible for tax purposes
              
              
              -
              
              
              345,599Research
                  and development tax credits
              
              
              94,286
              
              
              228,125Total
                  deferred tax assets
              
              
              7,536,150
              
              
              6,732,884Valuation
                  allowance
              
              
              (6,216,450
              )
              
              (5,584,027
              )1,319,700
              
              
              1,148,857Deferred
                  tax liabilities:Difference
                  between book and tax depreciation
              
              
              (1,071,869
              )
              
              (893,155
              )Long-term
                  debt
              
              
              (247,831
              )
              
              (255,702
              )Investment
                  tax credits
              
              
              -
              
              
              -Total
                  deferred tax liabilities
              
              
              (1,319,700
              )
              
              (1,148,857
              )Net
                  tax assets
              
              
              -
              
              
              -




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





For
      Canadian income tax purposes, the Company has approximately $2,250,000 of
      Scientific Research and Experimental Development expenses available indefinitely
      to reduce taxable income in future years.




The
        Company's Canadian operating losses expire as follows:





$2009
            
            
            354,4862010
            
            
            2,238,8632014
            
            
            2,489,6042015
            
            
            6,532,3622026
            
            
            9,090,9102027
            
            
            2,378,40523,084,630




F-43




Manaris
        Corporation
 Notes
        to
        Consolidated Financial Statements
 (Expressed
        in U.S. Dollars)
 June
        30,
        2007


23.
            Subsequent
                Events





a)
            President
                of Subsidiary Company





On
      July
      16, 2007, the Company announced the departure of the President of Avensys.
      The
      Company will accrue approximately $212,000 of salary expense and $64,684 in
      stock-based compensation expense in the first quarter of fiscal 2008 as a result
      of a mutually agreed upon severance agreement (“Agreement”). As part of the
      Agreement, the former President has 90 days from the date of the Agreement
      to
      exercise all vested stock options granted to him in prior periods.





b)
            Cashless
                exercise of Series G and Series I warrants




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 $.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.





c)
            Employee
                Stock Plan




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
      under
      the Plan.




d)
            Amended
                and Restated 2006 Non Qualified Stock Option Plan




On
      September 5, 2007, the 2006 Non Qualified Stock Option Plan was amended and
      restated to augment the Plan by 5,000,000 stock options.




e)
            Redemption
                of Series B Notes and Series B OID
                Notes





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. 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 (“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 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.





In
      connection with the redemption of the Notes, the Company will record a non-cash
      charge of approximately $1.4 million in the first quarter of fiscal
      2008.





F-44





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





On
      October 25, 2006, Manaris Corporation (“Manaris” or the “Company”) dismissed
      PricewaterhouseCoopers LLP - Montreal Canada (the "Former Auditors") as the
      Company’s independent registered public accounting firm. The Company has engaged
      Raymond Chabot Grant Thornton LLP - Montreal, Canada (the "New Auditors"),
      as
      its new independent registered public accounting firm. The Company's decision
      to
      engage the New Auditors was approved by its Board of Directors on October 25,
      2006.





The
      Former Auditors were engaged in January 2006. The report of the Former Auditors
      on the financial statements of the Company for the year ended June 30, 2006,
      did
      not contain an adverse opinion or disclaimer of opinion and was not qualified
      or
      modified as to uncertainty, audit scope or accounting principles, except that
      the Former Auditors’ opinion includes an explanatory paragraph regarding the
      existence of substantial doubt about the company’s ability to continue as a
      going concern.





During
      the Company's fiscal year ended June 30, 2006 and the subsequent interim period
      through the date of dismissal, there were no reportable events as the term
      is
      described in Item 304(a)(1)(iv) of Regulation S-B.





During
      the Company's fiscal year ended June 30, 2006 and the subsequent interim period
      through the date of dismissal, there were no disagreements with the Former
      Auditors on any matters of accounting principles or practices, financial
      statement disclosure or auditing scope or procedure, which, if not resolved
      to
      the satisfaction of the Former Auditors would have caused it to make reference
      to the subject matter of the disagreements in connection with its reports on
      these financial statements for those periods.





The
      Company did not consult with the New Auditors regarding the application of
      accounting principles to a specific transaction, either completed or proposed,
      or the type of audit opinion that might be rendered on the Company's financial
      statements, and no written or oral advice was provided by the New Auditors
      that
      was a factor considered by the Company in reaching a decision as to the
      accounting, auditing or financial reporting issues.





52


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





**(a)**  ***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.





**(b)**  ***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.




**(c)**  ***Limitations
      on Effectiveness of Disclosure Controls and
      Procedures:*** 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.





53


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





On
      August
      14, 2006 we filed a Registration Statement that relates to the resale by the
      selling stockholders of 4,766,343 shares of our common stock.





Pursuant
      to the ITF transaction we did not file
      the
      required registration statement within the time period required, as a result
      we issued
      255,080 restricted common stock shares, on September 12, 2006, as set out in
      the
      Purchase Agreement.





On
      November 9, 2006, we filed a Registration Statement that relates to the resale
      by the selling stockholders of 24,319,497 shares of our common stock.





54





**PART
      III**





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





On
      February 13, 2007, Marc Bouchard resigned as member of the Board of Directors
      of
      Manaris Corporation (the "Company"), effective immediately. Mr. Bouchard had
      served as Director since January 13, 2006. There
      was
      no disagreement or dispute between Mr. Bouchard and the Company which led to
      his
      resignation. On
      February 14, 2007, the Company retained the services of Toll Cross Securities,
      of which Mr. Bouchard is President and Founder, to act as financial consultants
      for the Company.





The
      directors and officers, their ages and positions held as of June 30, 2007 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
              
              61
              
              President,
                  Chief Executive Officer and DirectorJos
                  J. Wintermans
              
              60
              
              DirectorBernard
                  Bougie
              
              58
              
              DirectorJohn
                  H. Simons
              
              68
              
              Director,
                  and Chairman of the Board


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.





John
      Simons, Chairman of the Board of Directors, has been Chairman of the Board
      since
      August 2006. Mr. Simons is President of John H. Simons Consultants Inc, a
      management consulting firm that provides management consulting services to
      both
      public and private high-technology companies, and is also a director of DALSA
      Corporation. He was also Chairman of the Board of ITF Optical Technologies
      Inc.
      and of ISR Technologies Inc. and was a Partner in GTI Capital Inc. Until 2002,
      Mr. Simons served as Chairman of the Board of Ad Opt Technologies Inc. and
      was
      Chairman of Engenuity Technologies Inc. until 1998. Prior to June 1994, Mr.
      Simons was President and Chief Executive Officer of Canadian Marconi Company.
      Mr. Simons has extensive experience in the aerospace, electronics and
      telecommunications industries.





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 is also a director of Hincks
      Dellcrest, a non-profit organization located in Toronto, Canada.




55




Tony
      Giuliano, Corporate Secretary and Chief Financial Officer, has served as a
      Chief
      Financial Officer since October 2006, and as our Corporate Secretary since
      May
      2007. Mr.
      Giuliano has served as the Corporate Controller of Manaris Corporation since
      August 2006. Tony spent the first nine years of his career with Deloitte &
Touche Canada in Montreal where he gained expertise with Canadian public
      companies operating in both the manufacturing and financial services sectors.
      In
      2000, he was appointed Corporate Controller of the Tirex Corporation, a public
      company in the U.S. where he was involved in commercializing a new product;
      raising capital; and ensuring SEC compliance. In 2002, Mr. Giuliano was
      appointed Vice-President, Finance for Channel Analytics Ltd., an investment
      bank
      located in Montreal that provides consulting and corporate finance services.
      In
      2004, Mr. Giuliano was appointed Chief Financial Officer of a private aviation
      company providing corporate and individual executive air travel. On October
      20,
      2006, Manaris Corporation named Tony J. Giuliano as its Chief Financial Officer.
      On May 23, 2007, Mr. Giuliano was appointed as the Company’s Corporate
      Secretary.





Jos
      J.
      Wintermans, Director, has served as a Director since November 15, 2005. Mr.
      Wintermans has held a number of executive positions in the 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). Mr. Wintermans
      is currently Chairman and Chief Executive Officer of Cygnal Technologies
      Corporation, and also served as President and Chief Executive Officer of Cygnal
      Technologies.





Bernard
      Bougie, Director, has served as a Director since December 2005. A Chartered
      Accountant (Canada) and an expert in financial information and corporate
      governance, Mr. Bougie joined Deloitte & Touche in 1975, a leading
      accounting and consulting firm, and became a partner in 1982. He retired as
      a
      senior partner from the firm in August 2004. In August 2005, Mr. Bougie was
      appointed as a Director of the Board and Chairman of the audit committee of
      the
      private Canadian company, Capital Teamsoft Inc. Mr. Bougie is on various Boards
      of companies and non-profit organizations, and is a member of the Institute
      of
      Corporate Directors.





56





**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, 2007 have not been filed
      timely:





Form
      4
      Bernard Bougie, Director, filed on January 16, 2007





Form
      4
      Jos Wintermans, Director, filed on January 16, 2007





**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
              
              58
              
              Director,
                  Audit Committee ChairmanJos
                  J. Wintermans
              
              60
              
              DirectorJohn
                  H. Simons
              
              68
              
              Director,
                  Chairman of the Board of
                  Directors




**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.





57


**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
              
              60
              
              Director,
                  Compensation Committee ChairmanBernard
                  Bougie
              
              58
              
              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.




58




**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, 2007, 2006 and
      2005
      exceeded $100,000:


Annual
                  Compensation
              
              Long
                    Term
                  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
                    Compens-
                    ation
                      ($)Stephane
                  Solis
              
              
              2005
              
              
              146,000
              
              
              
              
              
              11,190
              
              
              0
              
              
              1,100,000
              
              
              0President
                  and ChiefExecutive
                  Officer(resigned
                  Sept. 2005)Andre
                  Monette
              
              
              2007
              
              
              45,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0Treasurer
                  and Chief
              
              
              2006
              
              
              160,000
              
              
              59,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0Financial
                  Officer
              
              
              2005
              
              
              25,112
              
              
              0
              
              
              0
              
              
              0
              
              
              150,000
              
              
              0(resigned
                  Sept. 2006)John
                  Fraser
              
              
              2007
              
              
              265,000
              
              
              133,500
              
              
              0
              
              
              0
              
              
              1,500,000
              
              
              0President
                  and Chief
              
              
              2006
              
              
              171,000
              
              
              0
              
              
              0
              
              
              0
              
              
              500,000
              
              
              0Executive
                  Officer
              
              
              2005
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              75,000
              
              
              0(appointed
                  Presidentand
                  CEO Sept 2005)Tony
                  Giuliano
              
              
              2007
              
              
              110,500
              
              
              33,000
              
              
              0
              
              
              0
              
              
              150,000
              
              
              0Chief
                  Financial officerand
                  Corporate Secretary(appointed
                  Chief Financialofficer
                  in Oct. 2006, andCorporate
                  Secretary inMay
                  2007)


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





**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.





As
      of
      June 30, 2007, stock options to purchase 15,808,489 shares had been granted
      of
      which 5,903,686 options had been exercised, 1,243,733 had been forfeited and
      8,661,070 are outstanding. As at September 14, 2007, we have 5,365,244 stock
      options available for issuance.




59




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.





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


Name
              
              Number
                  of
                Securities
                Underlying
                Options/SARs
                Granted
                  (#)
              
              %
                  of Total
                Options
                Granted
                  to
                Employees
                  in
                Fiscal
                  Year
              
              Exercise
                of
                  Base
                Price
                  ($/Sh)
              
              Expiration
                DateJohn
                  Fraser
              
              
              1,500,000
              
              
              32.87
              %
              $
              0.27
              
              
              09/14/2016John
                  H. Simons
              
              
              75,000
              
              
              1.64
              %
              $
              0.07
              
              
              05/11/2017Bernard
                  Bougie
              
              
              75,000
              
              
              1.64
              %
              $
              0.215
              
              
              12/07/2016Jos
                  Wintermans
              
              
              75,000
              
              
              1.64
              %
              $
              0.24
              
              
              11/08/2016Tony
                  Giuliano
              
              
              50,000
              
              
              1.09
              %
              $
              0.33
              
              
              08/07/2011Tony
                  Giuliano
              
              
              100,000
              
              
              2.19
              %
              $
              0.091
              
              
              04/10/2016




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


Shares
                Acquired
                  on
              
              Value
                Realized
              
              Number
                  of Securities
                Underlying
                  Stock
                Options
                  at FY-End (#)
              
              Value
                  of Securities
                Underlying
                  Stock
                Options
                  at FY-End ($)Name
              
              Exercised
                  (#)
              
              ($)
              
              Exercisable
              
              Unexercisable
              
              Exercisable
              
              UnexercisableJohn
                  Fraser
              
              
              0
              
              $
              0
              
              
              1,075,000
              
              
              1,000,000
              
              $
              86,000
              
              $
              80,000Jos
                  Wintermans
              
              
              0
              
              $
              0
              
              
              181,250
              
              
              18,750
              
              $
              14,500
              
              $
              1,500John
                  H. Simons
              
              
              0
              
              $
              0
              
              
              143,750
              
              
              56,250
              
              $
              11,500
              
              $
              4,500Bernard
                  Bougie
              
              
              0
              
              $
              0
              
              
              181,250
              
              
              18,750
              
              $
              14,500
              
              $
              1,500Tony
                  Giuliano
              
              
              0
              
              $
              0
              
              
              137,500
              
              
              12,500
              
              $
              11,000
              
              $
              1,000




**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.





60





**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 75,000 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 Manaris 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 of the
        Company;
  · CAD$10,000 per annum for acting as a chair of the Audit 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 $250;
  · CAD$1,000 per day for work which is outside the scope of ordinary duties
        as a
        board or committee member.





**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, because of his position, if he acted in good faith and in a manner
      he
      reasonably believed to be in our best interest. In certain cases, we may advance
      expenses incurred in defending any such proceeding. To the extent that the
      officer or director is successful on the merits in any such proceeding as to
      which such person is to be indemnified, we must indemnify him against all
      expenses incurred, including attorney's fees. With respect to a derivative
      action, indemnity may be made only for expenses actually and reasonably incurred
      in defending the proceeding, and if the officer or director is judged liable,
      only by a court order. 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.





61


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





The
      following table sets forth certain information, as of September 14, 2007, 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
                H. Simons
            
            
            143,750
            
            
            [3
            ]
            
            Chairman
                of the Board of Directors
            
            
            *John
                Fraser
            
            
            1,245,000
            
            
            [1
            ]
            
            President
                and Chief Executive Officer and a Director [1]
            
            
            1.28
            %Tony
                Giuliano
            
            
            137,500
            
            
            
            
            
            Chief
                Financial Officer, and Corporate Secretary
            
            
            *Jos
                J. Wintermans
            
            
            181,250
            
            
            [3
            ]
            
            Director
            
            
            *Bernard
                Bougie
            
            
            181,250
            
            
            [3
            ]
            
            Director,
                Chairman of the Audit Committee
            
            
            *All
                officer and Directors as a Group
              (5
                Persons)
            
            
            1,643,750
            
            
            
            
            
            
            
            
            1.69
            %




*
              less
                  than 1%




[1]
              John
                  Fraser was appointed interim President & CEO on September 16, 2005. He
                  was appointed permanent President and CEO onSeptember
                  14, 2006.




[2]
              Based
                  on 97,096,844 shares of common stock issued and outstanding as
                  of
                  September 24, 2007
  [3]
                Options
                    to purchase an aggregate of 125,000 shares of common stock have
                    been
                    granted to newly appointed Directors pursuant tothe
                    Company's 2006 Nonqualified Stock Option Plan. Of this amount,
                    50,000 are
                    exercisable upon appointment at an exercise priceof
                    $0.0001 per share. The remaining 75,000 are vested quarterly
                    at the Market
                    Price on the date of their respective appointments tothe
                    Board of Directors. 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.




62


**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, 2007 is
      $40,000.





63


**ITEM
              14.**
            **EXHIBITS**





3.1
            Articles
                of Incorporation of Manaris 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 Manaris 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
            Manaris
                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).




64




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).





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 - Montreal





16.2
            Report
                from former independent registered public accounting
                firm,





31.1
            Certification
                of pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under
                the
                Securities Exchange Act of 1934, as
                amended





32.1
            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)




65




**ITEM
              14.**
            **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-QSBs
      or
      services that are normally provided by the accountant in connection with
      statutory and regulatory filings or engagements for those fiscal years
      was:





2007
            
            $
            203,0462006
            
            $
            459,585





**(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:





2007
            
            $
            78,7962006
            
            $
            119,909





**(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:





2007
            
            $
            45,8882006
            
            $
            20,202




**(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:





2007
            
            
            Nil2006
            
            
            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%.





66


**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  25th
      day
      of September 2007.




**MANARIS
                CORPORATION**
              (Registrant)BY:
            /s/ John
              G.
              FraserJohn
                Fraser, President, President and Chief
              Executive
                Officer (Principal Executive Officer)/s/ Tony GiulianoTony
                Giuliano, 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*
              
              *September
                27,2007**John
                  G. Fraser*
              
              *(Principal
                  Executive Officer)**/s/
                  Tony Giuliano*
              
              *Chief
                  Financial Officer, Corporate Secretary and*
              
              *September
                  27, 2007**Tony
                  Giuliano*
              
              *Treasurer**(Principal
                  Financial and Accounting*
                *Officer)**/s/
                  John Simons*
              
              *Chairman
                  of the Board of Directors*
              
              *September
                  27, 2007**John
                  Simons**/s/
                  Jos J. Wintermans*
              
              *Director*
              
              *September
                  27, 2007**Jos
                  J. Wintermans**/s/
                  Bernard Bougie*
              
              *Director,
                  Audit Committee Chairman*
              
              *September
                  27, 2007**Bernard
                  Bougie*




67