UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

For the transition period from _________ to _________

COMMISSION FILE NUMBER 000-33199

AVENSYS CORPORATION

(Exact name of registrant as specified in its charter)

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

400 Montpellier Blvd.

Montreal, Quebec

Canada H4N 2G7

(Address of principal executive offices)

(514) 904-6030

(Registrant's telephone number, including area code)

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

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

Large accelerated filer ¨	Accelerated filer ¨

Non-accelerated filer ¨	Smaller reporting company x
(Do not check if smaller reporting company)

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

The number of shares of the registrant's Common Stock, $0.00001 par value per share, outstanding as of February 10, 2009 was 99,086,152.

Avensys Corporation

Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

	Index

Interim Consolidated Balance Sheets	F–1

Interim Consolidated Statements of Operations and Comprehensive Loss	F–2

Interim Consolidated Statements of Cash Flows	F–3

Interim Consolidated Statement of Stockholders’ Equity	F–5

Notes to Interim Consolidated Financial Statements	F–6

Avensys Corporation

Consolidated Balance Sheets

Unaudited

(Expressed in U.S. Dollars)

	December 31,			June 30,
	2008			2008
	$			$
ASSETS
Current Assets

Cash and cash equivalents		177,241			369,396
Accounts receivable, net of allowance for doubtful accounts of $67,652 and $50,053, respectively		4,360,222			5,121,058
Other receivables (Note 5)		1,929,490			1,924,767
Inventories (Note 5)		2,310,854			2,178,686
Prepaid expenses and deposits		105,309			149,213
Current assets of discontinued operations (Note 4)		78,662			94,196
Total Current Assets		8,961,778			9,837,316

Property and equipment, net		1,904,500			2,490,215
Intangible assets		2,982,755			3,879,086
Goodwill (Note 18)		-			4,644,864
Deferred financing costs		333,107			404,630
Deposits		140,236			84,363
Total Assets		14,322,376			21,340,474

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities

Accounts payable and accrued liabilities (Note 5)		5,720,034			6,401,379
Bank and other loans payable (Note 7)		2,631,836			2,431,948
Current portion of long-term debt (Note 10)		110,392			122,423
Current portion of convertible debentures (Note 11)		261,514			-
Current portion of balance of purchase price (Notes 8 and 11)		81,529			92,818
Current liabilities of discontinued operations (Note 4)		73,878			88,245
Total Current Liabilities		8,879,183			9,136,813

Long-term debt, less current portion (Note 10)		119,233			191,352
Convertible debentures, less current portion (Note 11)		1,455,600			1,299,412
Balance of purchase price payable (Note 8)		1,294,283			1,706,363
Derivative financial instruments (Note 9)		558,815			1,363,543
Total Liabilities		12,307,114			13,697,483
Non-controlling Interest		-			7,677

Stockholders’ Equity

Common Stock, 500,000,000 shares authorized with a par value of $0.00001; 99,086,152 and 99,036,152 issued and outstanding, respectively		990			990
Additional Paid-in Capital		38,308,415			38,223,391
Accumulated other comprehensive income		33,194			1,817,006
Deficit		(36,327,337	)		(32,406,073	)
Total Stockholders’ Equity		2,015,262			7,635,314

Total Liabilities and Stockholders’ Equity		14,322,376			21,340,474

Going Concern (Note 1)

Contingencies (Note 15)

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

F-1

Avensys Corporation

Consolidated Statements of Operations and Comprehensive Loss

Unaudited

(Expressed in U.S. Dollars)

	For the Three Months Ended						For the Six Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
	$			$			$			$

Revenue		5,396,271			4,080,420			11,087,521			8,878,428

Cost of Revenue		3,593,635			2,811,805			7,523,696			5,561,197

Gross Margin		1,802,636			1,268,615			3,563,825			3,317,231

Operating Expenses

Depreciation and amortization		204,459			281,076			435,741			489,967
Selling, general and administration		1,501,464			1,545,928			3,271,623			3,109,936
Loss on impairment of goodwill (Note 18)		3,888,644			-			3,888,644			-
Research and development		357,263			697,951			754,045			1,162,262

Total Operating Expenses		5,951,830			2,524,955			8,350,053			4,762,165

Loss from Operations		(4,149,194	)		(1,256,340	)		(4,786,228	)		(1,444,934	)

Other Income (Expenses)

Other income (expenses), net		17,535			(9,612	)		19,259			2,339
Loss on redemption of convertible debentures		-			-			-			(1,422,577	)
Financial expenses, net		44,675			(160,563	)		(30,113	)		(469,543	)
Debentures and balance of purchase price accretion (Note 8)		(307,727	)		(218,694	)		(610,295	)		(445,230	)
Loss on extinguishment of debt		-			-			(47,044	)		-
Change in fair value of derivative financial instruments (Note 9)		844,530			610,694			1,176,666			338,865

Total Other Income (Expenses)		599,013			221,825			508,473			(1,996,146	)
Net Loss Before Income Tax Benefit		(3,550,181	)		(1,034,515	)		(4,277,755	)		(3,441,080	)

Income Tax Benefit - Refundable tax credits (Note 16)		198,757			425,422			356,509			594,423

Net Loss before Non-Controlling Interest		(3,351,424	)		(609,093	)		(3,921,246	)		(2,846,657	)

Non-Controlling Interest		-			(160	)		(18	)		(299	)
Net Loss from Continuing Operations		(3,351,424	)		(609,253	)		(3,921,264	)		(2,846,956	)

Results of Discontinued Operations (Note 4)		-			189,429			-			285,280

Net Loss		(3,351,424	)		(419,824	)		(3,921,264	)		(2,561,676	)

Basic and diluted earnings (loss) per share

From Continuing Operations		(0.03	)		(0.01	)		(0.04	)		(0.03	)
From Discontinued Operations		-			-			-			0.00
Net Loss per share - Basic and Diluted		(0.03	)		(0.00	)		(0.04	)		(0.03	)

Weighted Average Common Shares Outstanding		99,086,152			97,096,800			99,079,359			96,154,500

Statement of Comprehensive Loss

Net Loss		(3,351,424	)		(419,824	)		(3,921,264	)		(2,561,676	)

Foreign currency translation adjustments		(1,347,781	)		84,699			(1,783,812	)		865,886

Comprehensive Loss		(4,699,205	)		(335,125	)		(5,705,076	)		(1,695,790	)

Going Concern (Note 1)

Contingencies (Note 15)

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

F-2

Avensys Corporation

Consolidated Statements of Cash Flows

Unaudited

(Expressed in U.S. Dollars)

	For the Three Months Ended						For the Six Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
	$			$			$			$

Net Loss		(3,351,424	)		(419,824	)		(3,921,264	)		(2,561,676	)

Results of discontinued operations		-			(189,429	)		-			(285,280	)
Adjustments to reconcile net loss to cash generated by (used in) operating activities
Stock-based compensation		42,679			40,107			85,024			152,146
Expenses settled with issuance of common shares		-			-			-			17,500
Depreciation and amortization		265,817			320,323			571,946			617,674
Non-cash financial and other expenses		(216,586	)		83,185			(69,530	)		121,295
Loss on impairment of goodwill (Note 18)		3,888,644			-			3,888,644			-
Non-controlling interest		-			160			18			299
Loss on redemption of convertible debentures		-			-			-			1,422,577
Loss on extinguishment of debt (Note 8)		-			-			47,044			-
Debentures and balance of purchase price accretion		307,727			218,694			610,295			445,230
Change in fair value of derivative financial instruments		(844,530	)		(610,694	)		(1,176,666	)		(338,865	)
Amortization of deferred financing costs		20,766			33,870			44,612			57,458
Changes in operating assets and liabilities
Decrease in accounts receivables		515,756			92,764			241,631			38,149
(Increase) in inventories		(400,358	)		(461,957	)		(709,821	)		(659,629	)
(Increase) decrease in other receivables		(186,022	)		(325,074	)		(343,774	)		(150,567	)
(Increase) decrease in prepaid expenses and other assets		33,564			73,085			(69,822	)		26,028
Increase in accounts payable and accrued liabilities		458,618			800,244			482,033			215,347
Net Cash Generated by (Used In) Operating Activities from Continuing Operations		534,651			(344,546	)		(319,630	)		(882,314	)
Net Cash Generated by (Used In) Operating Activities from Discontinued Operations		-			(356,007	)		-			(8,512	)
Net Cash (Used In) Operating Activities		534,651			(700,553	)		(319,630	)		(890,826	)
Investing Activities
Purchase of property and equipment		(37,487	)		(324,128	)		(87,649	)		(412,644	)
Disposal of property and equipment		-			1,253			-			37,737
Purchase of a minority interest		(6,474	)		-			(6,474	)		-
Net Cash Generated by (Used in) Investing Activities from Continuing Operations		(43,961	)		(322,875	)		(94,123	)		(374,907	)
Net Cash Generated by (Used in) Investing Activities		(43,961	)		(322,875	)		(94,123	)		(374,907	)
Financing Activities
Proceeds (repayment) of bank and working capital credit line		(452,674	)		449,192			390,132			513,716
Repayment of convertible debentures		-			-			-			(136,722	)
Proceeds from issue of senior secured convertible debentures (Note 11)		-			-			-			3,726,621
Redemption of secured convertible debentures		-			-			-			(3,440,421	)
Long term debt proceeds		-			50,113			-			30,015
Long term debt repayments		(21,611	)		(21,348	)		(40,769	)		(21,348	)
Proceeds from investment tax credit financing		-			-			-			570,071
Repayments of investment tax credit financing		-			-			-			(94,509	)
Proceeds from capital leases		5,939			2,097			21,586			4,024
Repayments of capital leases		(7,563	)		(4,227	)		(16,124	)		(9,509	)
Net Cash Generated by Financing Activities from Continuing Operations		(475,910	)		475,827			354,824			1,141,938
Net Cash Generated by (Used in) Financing Activities from Discontinued Operations		-			-			-			(406,335	)
Net Cash Generated by Financing Activities		(475,910	)		475,827			354,824			735,603
Effect of Exchange Rate Changes on Cash and Cash Equivalents		(40,186	)		377,491			(133,227	)		544,546
(Decrease) Increase in Cash and Cash Equivalents		(25,405	)		(170,110	)		(192,155	)		14,416
Cash and Cash Equivalents – Beginning of period		202,646			665,549			369,396			481,023
Cash and Cash Equivalents – End of period		177,241			495,439			177,241			495,439

Going Concern (Note 1)

Contingencies (Note 15)

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

F-3

Avensys Corporation

Interim Consolidated Statements of Cash Flows (continued)

Unaudited

(Expressed in U.S. Dollars)

	For the Three Months Ended						For the Three Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
	$			$			$			$

Non-Cash Financing and Investing Activities

Issuance of common shares for repayment of secured convertible notes, Series B		-			52,192			-			52,192
Issuance of common shares pursuant to cashless exercise of warrants		-			28			-			28
Issuance of common shares to settle outstanding payables		-			17,500			-			17,500

Supplemental Disclosures

Interest (paid) earned from continuing operations		(74,614	)		(72,337	)		(74,614	)		(72,337	)

Going Concern (Note 1)

Contingencies (Note 15)

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

F-4

Avensys Corporation

Consolidated Statement of Stockholders’ Equity

Unaudited

(Expressed in U.S. Dollars)

								Accumulated
					Additional			Other						Total
	Common Shares				Paid-In			Comprehensive						Stockholders’
	Number of		Amount		Capital			Income			Deficit			Equity
	Shares		$		$			$			$			$

Balance, June 30, 2007		93,437,654		934		36,727,893			1,268,622			(29,285,550	)		8,711,899
Stock-based compensation		-		-		249,479			-			-			249,479
Common stock issued to settle outstanding payables		250,000		3		17,497			-			-			17,500

Issuance of Senior Secured Convertible OID Note		-		-		1,176,383			-			-			1,176,383
Common stock issued pursuant to repayments of Secured Convertible Notes Series B		649,955		6		52,186			-			-			52,192
Common stock issued pursuant to cashless exercise of warrants		2,759,235		28		(28	)		-			-			-
Common stock issued to settle placement agent fees on issuance of Senior Secured Convertible OID Note		1,477,273		15		(15	)		-			-			-
Common stock issued to settle a pricing adjustment shortfall in connection with the acquisition of the manufacturing assets of ITF Optical Technologies Inc.		462,035		4		(4	)		-			-			-
Translation adjustment									548,384						548,384
Net loss for the period												(3,120,523	)		(3,120,523	)

Balance, June 30, 2008		99,036,152		990		38,223,391			1,817,006			(32,406,073	)		7,635,314
Stock-based compensation		-		-		85,024			-			-			85,024
Common stock issued in connection with the exercise of stock options		50,000		-		-			-			-			-
Translation adjustment		-		-		-			(1,783,812	)		-			(1,783,812	)
Net loss for the period		-		-		-			-			(3,921,264	)		(3,921,264	)

Balance, December 31, 2008		99,086,152		990		38,308,415			33,194			(36,327,337	)		2,015,262

Going Concern (Note 1)

Contingencies (Note 15)

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

F-5

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

1.	Going Concern

The accompanying financial statements have been prepared using generally accepted accounting principles applicable to a going concern, which assumes Avensys Corporation (the “Company”) will be able to realize the carrying value of its assets and discharge its liabilities in the normal course of operations. The Company has incurred significant losses since inception and has relied on non-operational sources of financing to fund operations. Furthermore, the Company’s operating subsidiary, Avensys Inc. (“AVI”), maintains a line of credit from a financial institution, and the covenants pertaining to such were not respected as at December 31, 2008. This constitutes an event of default and could result in the financial institution requiring repayment of a loan. The failed covenants with the financial institution triggered cross-default clauses affecting the Company’s Working Capital Facility (Note 7(a)) and Senior Secured Convertible Debenture (Note 11). Subsequent to December 31, 2008, the Company has obtained waivers with respect to such cross-default clauses for the Working Capital Facility and Senior Secured Convertible Debenture. AVI is seeking to renegotiate the credit agreement with the financial institution and is also seeking to obtain additional conventional bank credit-line financing to that which it already has, to support its operations. The material uncertainties resulting from the above events and conditions are such that there exists substantial doubt that the Company would be able to continue as a going concern at December 31, 2008. The Company’s continuation as a going concern is dependent upon the continued support of lenders and suppliers and its ability to obtain additional cash to allow for the satisfaction of its obligations on a timely basis.

Management has taken steps to revise the Company’s operating and financial requirements. During the first quarter of fiscal 2009, as described in Note 8, the Company amended an agreement with the former shareholders of ITF Optical Technologies. The amendment postponed, by 18 months, the exercise date of a put option that could have required the cash outlay of CAD $2,000,000 or the issuance of CAD $1,500,000 in Company shares at a reference share price of $0.342 between April and October 2009. The amended agreement stipulates:

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

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

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

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

2.	Nature of Operations

The Company was incorporated in the State of Nevada on June 26, 2000 as Keystone Mines Limited. The Company subsequently changed its name to C-Chip Technologies Corporation. In July 2005, the Company changed its name to Manaris Corporation, and in December 2007, to Avensys Corporation. The Company has achieved significant revenue from acquired companies and also has disposed of companies. The Company’s assets and operations at December 31, 2008 are located across Canada. The Company currently derives all of its revenues from its subsidiary. As discussed in Note 17, the Company operates two reporting segments, Fiber Technologies and Solutions, corresponding to the Avensys Technologies and Avensys Solutions divisions of AVI, as follows:

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

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

F-6

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

3.	Basis of Presentation and Significant Accounting Policies

Basis of Presentation

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

Interim Financial Information

The financial information presented as at December 31, 2008 and for the three and six month periods ended December 31, 2008 and 2007 is unaudited. In the opinion of management, all adjustments necessary to present fairly the results of these periods have been included. The adjustments made were of a normal-recurring nature. The results of operations for the three and six month periods ended December 31, 2008 are not necessarily indicative of the operating results anticipated for the full year. The financial statements follow the same accounting principles and methods of their application as the financial statements for the year ended June 30, 2008. Other than for elements described in Recent Accounting Pronouncements below, significant accounting policies of the Company are consistent with those described in the notes to the audited consolidated financial statements of June 30, 2008.

Advertising

The Company’s advertising costs, which amounted to $20,317 and $33,112 for the three and six month periods ended December 31, 2008, respectively, and $23,013 and $27,317 for the three and six month periods ended December 31, 2007, respectively, are expensed as incurred.

Foreign Currency

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

Transactions concluded in foreign currencies are converted into the functional currency using the exchange rate in effect at the date of the transaction or the average rate for the period in the case of recurring revenue and expense transactions. Monetary assets and liabilities are revalued into the functional currency at each balance sheet date using the exchange rate in effect at that date, with any resulting exchange gains or losses being credited or charged to the financial expenses caption in 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.

Deferred Financing Fees

Costs incurred in connection with financing activities are deferred and amortized using the straight-line basis over the expected life of the related agreements ranging from one to five years. Amortization of these costs is charged to interest expense in the accompanying consolidated statements of operations and comprehensive loss. During the quarter ended September 30, 2007, the Company wrote-off approximately $371,000 of deferred financing costs associated with the redemption of Series B Subordinated Secured Convertible Debentures, which are included in loss on redemption of convertible debentures 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. 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.

F-7

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

Basis of Presentation and Significant Accounting Policies (continued)

Recent Accounting Pronouncements

a) Recent Accounting Pronouncements Adopted During Fiscal Year 2009

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 adopted the provisions of SFAS 159 beginning on July 1, 2008. The adoption of this standard did not have a significant impact on the consolidated financial position and results of operations of the Company.

In March 2008, FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires disclosure of additional information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk–related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Earlier adoption is permitted. The Company adopted the provisions of SFAS 161 beginning on July 1, 2008 and presents the fair values and gains and losses of derivative instruments in Note 9.

b) Recent Accounting Pronouncements Adopted During Fiscal Year 2008

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

F-8

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

Basis of Presentation and Significant Accounting Policies (continued)

Recent Accounting Pronouncements (continued)

c) Recent Accounting Pronouncements Not Yet Adopted

The following represent recent accounting pronouncements not yet adopted that have not been previously discussed in the notes to the audited financial statements of June 30, 2008 or for which the Company is updating its description of evaluation of impact.

In December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, SFAS 160 requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parents and its non-controlling interest. SFAS is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company intends to adopt to adopt SFAS 160 effective January 1, 2009 and is currently evaluating the impact of the adoption of the provisions of SFAS 160 on its consolidated financial statements.

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

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

Comparative Financial Statements

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

F-9

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

4.	Discontinued Operations

As described in the notes to the June 30, 2008 audited consolidated financial statements of the Company:

The operations of C-Chip Technologies Corporation (North America), a subsidiary of the Company (“C-Chip”) were ceased on February 6, 2008. Starting in the third quarter of Fiscal 2008, the former operations of C-Chip were classified as discontinued operations as the Company ceased to derive any cash flows from the prior C-Chip activities.

The operations of Canadian Security Agency (2004) Inc. (“CSA”), a wholly-owned subsidiary of the Company, have been classified as discontinued operations since the fourth quarter of Fiscal 2006.

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

	December 31, 2008						June 30, 2008
	C-Chip		CSA		Total		C-Chip		CSA		Total
	$		$		$		$		$		$
Cash and cash equivalents		26,301		415		26,717		31,560		589		32,149
Accounts receivable		46,010		-		46,010		54,958		-		54,958
Prepaid Expenses		5,935		-		5,935		7,089		-		7,089
Current assets of discontinued operations		78,246		415		78,662		93,607		589		94,196

Accounts Payable and accrued liabilities		73,878		-		73,878		88,245		-		88,245
Other loans payable				-		-		-		-		-
Current liabilities of discontinued operations		73,878		-		73,878		88,245		-		88,245

Summary results of discontinued operations for the three-month periods ended December 31, 2008 and 2007 are as follows:

	Total				C-Chip				CSA
	2008		2007		2008		2007		2008		2007
	$		$		$		$		$		$
Revenues from discontinued operations		-		226,228		-		226,228		-		-
Pre-tax earnings (loss) from Discontinued Operations		-		189,429		-		189,429		-		-
After tax earnings (loss) from Discontinued Operations		-		189,429		-		189,429		-		-
Gain on extinguishment of loan		-		-		-		-		-		-
Results of discontinued operations		-		189,429		-		189,429		-		-

Summary results of discontinued operations for the six-month periods ended December 31, 2008 and 2007 are as follows:

	Total				C-Chip				CSA
	2008		2007		2008		2007		2008		2007
	$		$		$		$		$		$
Revenues from discontinued operations		-		398,100		-		398,100		-		-
Pre-tax earnings (loss) from Discontinued Operations		-		285,280		-		285,280		-		-
After tax earnings (loss) from Discontinued Operations		-		285,280		-		285,280		-		-
Gain on extinguishment of loan		-		-		-		-		-		-
Results of discontinued operations		-		285,280		-		285,280		-		-

F-10

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

5.	Balance Sheet Details

	December 31,		June 30,
	2008		2008
	$		$

Other Receivables
Investment tax credits receivable		1,884,979		1,854,095
Sales tax receivable		38,338		65,416
Other		6,173		5,256

		1,929,490		1,924,767

Inventories
Raw materials		730,025		905,988
Work in process		808,048		314,105
Finished goods		772,780		958,593

		2,310,854		2,178,686

Accounts Payable and Accrued Liabilities
Accounts payable		3,719,599		4,085,102
Payroll and benefits		989,036		1,801,437
Income taxes payable		-		1,614
Rent payable		-		36,200
Deferred revenue		684,254		138,338
Lease termination		20,481		24,408
Provision for Warranty		299,174		282,234
Other		7,490		32,046

		5,720,034		6,401,379

F-11

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

6.	Variable Interest Entity

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

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

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

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

ITF Laboratories Inc. (“ITF Labs”) provides research & development to AVI and other parties. As a result, ITF Laboratories Inc. continues to be included in the consolidated financial statements of the Company for the three months ended December 31, 2008, since AVI is the primary beneficiary. The impact of including the accounts of ITF Laboratories Inc. in the consolidated balance sheet as at December 31, 2008 consists of the following additions:

Current assets of $3,466,391 (June 30, 2008 - $2,785,075)

Net property and equipment of $715,297 (June 30, 2008 - $916,421)

Intangible assets of $172,675 (June 30, 2008 - $237,834)

Current liabilities of $1,310,729 (June 30, 2008 - $1,370,102)

The impact on the consolidated statement of operations for three months ended December 31, 2008 and 2007 was:

Increase in revenue of $994,564 and $975,448, respectively

Increase in expenses of $641,607 and $1,466,691, respectively, including an amount for research and development expenses of $357,263 and $1,247,362, respectively

Increase in the income tax benefit from refundable investment tax credits of $198,757 and $425,422, respectively

The impact on the consolidated statement of operations for six months ended December 31, 2008 and 2007 was:

Increase in revenue of $1,934,496 and $1,337,889, respectively

Increase in expenses of $1,778,801 and $1,663,891, respectively, including an amount for research and development expenses of $754,045 and $1,592,981, respectively

Increase in the income tax benefit from refundable investment tax credits of $356,509 and $594,423, respectively

F-12

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

7.	Bank and Other Loans Payable

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

	December 31,		June 30,
	2008		2008
	$		$

Senior Secured Working Capital Notes of the Company, bearing interest at 8.5%, maturing February 28, 2009 (Note 7 (a))		1,610,861		1,000,000
Secured bank line of credit of AVI, bearing interest at Canadian bank prime rate plus 1.5% (Note 7 (b))		459,254		843,540
Investment tax credit financing of AVI, bearing interest at 18%, repayable on demand (Note 7 (c))		561,721		588,408
		2,631,836		2,431,948

In connection with the issue of a Senior Secured Original Issue Discount Convertible Debenture (Note 11), the Company obtained access to a $2,500,000 Working Capital Facility (the “Facility”). On November 2, 2007, the Company obtained $500,000 from the Facility in the form of a Senior Secured Working Capital Note (“WC Note”), bearing interest at 8.5% payable at maturity, maturing on February 2, 2008. The Company renewed the $500,000 WC Note on the same terms and the maturity date was extended to November 2, 2008 – the maturity date was subsequently extended to February 28, 2009 with a payable balance of $510,861, representing the original $500,000 WC Note including $10,861 of unpaid interest. On April 1, 2008, the Company obtained an additional $500,000 WC Note from the Facility bearing interest at 8.5% payable at maturity, maturing on July 1, 2008, which was extended to February 28, 2009 on the same terms and conditions. The Company obtained a further $600,000 WC Note from the Facility, also bearing interest at 8.5% payable at maturity, maturing on November 29, 2008, which was extended to February 28, 2009 on the same terms and conditions. In the normal course of operations, these notes mature ninety days after issuance and are subject to maturity dates being extended and the notes are therefore renewed on maturity. As discussed in Note 1, subsequent to December 31, 2008, the Company obtained a waiver, from the holder of the WC Notes, for a failed condition of the Facility which resulted from the triggering of a cross-default clause.

AVI maintains a line of credit from a financial institution for an authorized amount of $1,116,585 (CAD$1,360,000), which bears interest at the Canadian bank prime rate plus 1.5%. The outstanding balance under the line of credit as at December 31, 2008 amounted to $459,254 (CAD $559,371) (June 30, 2008 $843,540 – CAD $860,157). AVI’s accounts receivable totaling $3,342,153 (CAD $4,070,742) and inventories totaling $1,921,664 (CAD $2,340,587) serve as guarantees for the line of credit. As discussed in Note 1, according to terms of the credit agreement, AVI is subject to certain financial covenants which were not respected as at December 31, 2008.

ITF Labs obtained investment tax credit financing during the quarter ended September 30, 2007 in the amount of $492,611 (CAD $600,000). The demand loan bears interest at 18%, with interest payable on a monthly basis, and is secured by the Federal and Provincial tax credits receivables and the assets of ITF Labs. On July 30, 2008, ITF Labs refinanced the investment tax credit loan at which time interest and fees were added to the principal, resulting in a loan balance of $561,721 (CAD $684,176).

F-13

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

8.	Balance of Purchase Price Payable

The balance of purchase payable is classified as a liability in the consolidated balance sheet of the Company, measured at net present value and accreted to the face amount using the effective interest rate method to the first date a payment would be required. Balance of purchase price accretion is recorded in the Statement of Operations. The following table illustrates the book values of these balances of purchase price payable at June 30, 2008 and December 31, 2008:

						Net Present Value at
	Transaction	Maturity /	Effective			June		December
	Date	Expiry Date	Interest Rate			30, 2008		31, 2008

Willer Transaction (Note 8 (a))	03/31/2008	01/30/2009		10	%		92,818		81,529
Willer Transaction (Note 8 (a))	03/31/2008	01/29/2010		10	%		84,470		74,193
							177,288		155,722

ITF Transaction (Note 8 (b))	04/18/2006	04/01/2009		30	%		1,621,893		-
ITF Transaction - Amendment (Note 8 (b))	09/11/2008	10/01/2010		30	%		-		1,220,090
							1,621,893		1,220,090

Total							1,799,181		1,375,812

As part of the acquisition in 2008 of the net operating assets of Willer Engineering Ltd (“Willer Transaction”), the Company has recorded a balance of purchase price payable.

In the case of the Willer Transaction, the initial purchase price incurred for the operating assets acquired included balances of purchase price payable, measured at net present value and accreted to the face amount using an effective interest rate of 10% to the dates payments would be first required – January 30, 2009 and January 29, 2010.

As part of the acquisition in 2006 of the manufacturing and research and development assets of ITF Optical Technologies Inc. (“ITF Transaction”), the Company entered into a shareholder agreement which stipulated that, between April 1, 2009 and October 1, 2009, each ITF Preferred Shareholder shall have an option to (i) sell their shares in ITF Labs’ ownership to AVI for its proportionate share of CAD $2,000,000 to be paid in cash, or (ii) exchange their shares in ITF Labs’ ownership for 3,826,531 freely tradable shares of Company common shares at a reference per share price of $0.342; the equivalent of CAD $1,500,000 (the “put option”). The option of the ITF Preferred Shareholders to sell their shares in ITF Labs ownership to AVI was recorded as a balance of purchase price payable with an embedded beneficial conversion feature, treated as a derivative liability (Note 9). The balance of purchase price payable was measured at net present value and accreted to the face amount using an effective interest rate of 30% to the first date a payment could be required.

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

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

The Company accounted for the amendment to the shareholder agreement as a debt extinguishment in accordance with EITF issue 96-19. As such, the debt component and the derivative liability component were re-evaluated as at September 11, 2008, to give effect to the amendment, and the carrying values were changed, as follows:

	Carrying Value
	Prior to		After		Gain (Loss) on
	Amendment		Amendment		Extinguishment

Debt Component		1,626,144		1,271,073		355,072
Derivative Liability Component		710		402,826		(402,116	)
Total		1,626,854		1,673,899		(47,044	)

F-14

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

9.	Derivative Financial Instruments

The acquisition of the manufacturing and research and development assets of ITF Optical Technologies Inc. in 2006, the issuance of Series B Subordinated Secured Convertible Debentures in 2006, and the issuance of the Senior Secured Original Issue Discount Convertible Debenture in 2007 each resulted in the recognition of derivative liabilities due to embedded conversion option features and warrants present in the associated liabilities. These embedded conversion options and warrants are classified as derivative liabilities and measured at fair value using the Black-Scholes Model. Changes in fair values of derivative liabilities are recorded in the Statement of Operations. The following table illustrates the values of the Company’s derivative liabilities at June 30, 2008 and December 31, 2008 and the resulting gain or loss recorded in the statement of operations:

				Value at
	Maturity /	# of underlying		June		December		Gain (Loss) on
	Expiry Date	Shares		30, 2008		31, 2008		Changes in Fair Value

Senior Secured Convertible Debenture

Series P warrants	09/24/2012		8,091,403		226,032		77,350		148,682
Beneficial Conversion Option - Convertible debenture	09/24/2012		39,516,148		1,086,304		388,582		697,722
					1,312,336		465,932		846,404

Serie B Subordinated Secured Convertible Debentures
Series Y Warrants	11/09/2010		145,005		2,628		587		2,041
Series Z Warrants	11/09/2010		2,175,063		39,413		8,811		30,602
Series W Warrants (placement fees)	11/09/2010		711,490		2,886		547		2,339
Series Y Warrants (placement fees)	11/09/2010		17,789		322		72		250
Series Z Warrants (placement fees)	11/09/2010		266,810		4,835		1,081		3,754
					50,084		11,098		38,986

Conversion Option on Balance of Purchase Price (Note 8)

ITF Optical Technologies Inc. assets acquisition	04/01/2009		3,826,531		1,123		-		368
ITF Optical Technologies Inc. assets acquisition (amended)	10/01/2010		20,074,832		-		81,785		290,908
					1,123		81,785		291,276
Total					1,363,543		558,815		1,176,666

10.	Long-Term Debt

	December 31,		June 30,
	2008		2008
	$		$
Mortgage loan secured by AVI's intangible and movable tangible assets (December 31, 2008 - CAD $161,000; June 30, 2008 - CAD $203,000), bearing interest at the lender's prime rate (December 31, 2008 - 5.25%; June 30, 2008 - 6.75%) plus 1.75%, payable in monthly instalments of CAD$7,000 plus interest, maturing in November 2010		132,184		199,079

Capital lease obligations (December 31, 2008 - CAD $97,808; June 30, 2008 - CAD $92,396), bearing interest between 9.07% and 16.23%, maturing between February 2010 and April 2012		80,301		90,610

Secured note (December 31, 2008 - CAD $20,876; June 30, 2008 - CAD $24,560) bearing no interest, payable in 48 monthly instalments of $614, maturing October 2011.		17,140		24,086
		229,625		313,775
Less: Current portion of long-term debt		110,392		122,423
Long-term debt		119,233		191,352

Remaining principal payments, by fiscal year, on long-term debt and capital leases are as follows:

	$

2009		54,946
2010		107,151
2011		58,266
2012		9,261
2013		-

Total		229,625

F-15

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

11.	Convertible Debenture

	December 31,		June 30,
	2008		2008
	$		$

Senior Secured Original Issue Discount Convertible Debenture at 6% (original principal amount of $4,000,000) maturing September 24, 2012.		1,717,114		1,299,412
Less: Current portion of convertible debentures		261,514		-
Convertible debenture		1,455,600		1,299,412

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

	$

2009		-
2010		1,177,225
2011		1,569,633
2012		1,569,633
2013		392,409
		4,708,900

Less: Impact of accretion / present value		2,991,786
Total		1,717,114

During the first quarter of fiscal 2008, the Company received a $3.4 million secured loan facility from Imperium Master Fund, LTD (the “Investor”) in connection with the redemption of previously issued convertible debentures. The terms of the loan facility state that interest will be paid by the Company on the unpaid principal amount at an annual rate equal to 8.5%. It was the intention of the Company and the Investor to replace the secured loan facility with a comprehensive refinancing to facilitate a capital restructuring that would provide the Company with additional working capital and credit facilities. On September 24, 2007, the Company entered into a Securities Purchase and Loan Agreement (“SPL Agreement”) with the Investor for the sale of a 6% Senior Secured Original Issue Discount Convertible Debenture (“Convertible Note”) in the amount of $4,708,900. The principal value and the gross proceeds of the Convertible Note is $4,000,000. The gross proceeds were used to repay the secured loan facility of $3.4 million, being the amount which had been used to repay the previously issued convertible debentures, with the balance of funds, $0.6 million, for the Company’s working capital purposes.

The Convertible Debenture matures on September 24, 2012 and the original principal amount is convertible into common shares of the Company at a conversion price of $0.11. The principal value will accrete to the value of the Convertible Note over a two-year period and will subsequently accrue interest at 6%. Monthly installments of principal and interest will be payable commencing after the second year up to the maturity date. The SPL Agreement also provides the holder of the Convertible Note with Series Q warrants to purchase, subject to adjustment, 20,276,190 shares of the Company’s outstanding common stock on a fully diluted basis. On August 22, 2007, the Company issued to the holder of the Convertible Note Series P warrants, representing compensation for advisory services rendered to the Company, to purchase up to 5% of the Company’s outstanding common stock, initially amounting to 8,091,403 shares and subject to adjustment, on a fully diluted basis. The warrants have an exercise price of $0.11, subject to adjustment, and expire after five years. In addition, the SPL Agreement provides the Company with a $2,500,000 Working Capital Facility (Note 7 (a)).

In accordance with EITF 00-19, EITF 05-2, EITF 05-4, FASB 133 and APB 14, the Company allocated $479,816 to the Series P Warrants and recognized an embedded conversion option feature of $1,711,199. The Series P warrants and the embedded conversion option feature components are accounted for as derivative liabilities. The Company allocated $162,500 and $53,624, respectively, to the common stock and warrants issued to the placement agent, and allocated $960,259 to the Series Q warrants, all of which were recorded as additional paid-in capital. The Company allocated the remaining proceeds to the Convertible Debenture in the amount of $848,725. The carrying amount of the Convertible Debenture will be increased by periodic accretion under the effective interest method. The Company used the Black-Scholes option pricing model to value the Series P warrants and the embedded conversion option feature, recorded as derivative liabilities, at the issue date and uses the same model to value these elements on a quarterly basis. The Company recorded deferred financing costs of $446,124 at the issue date, representing common stock and warrants issued to the placement agent valued at $162,500 and $53,624, respectively, and cash fees paid of $230,000. These deferred financing costs are amortized on a straight-line basis over the term of the Convertible Debenture. At December 31, 2008, the outstanding principal amount on the Convertible Debenture was $4,436,827.

F-16

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

Convertible Debenture (continued)

The following table illustrates the values of the various components of the financing at June 30, 2008 and December 31, 2008.

	Issue Date	Maturity /	# of underlying		Value at June		Value at December
		Expiry Date	Shares		30, 2008		31, 2008

Derivative Liabilities

Series P warrants	09/24/2007	09/24/2012		8,091,403		226,032		77,350
Beneficial Conversion Option - Convertible debenture	09/24/2007	09/24/2012		40,334,793		1,086,034		388,582
						1,312,066		465,932

Carrying Value of Original Issue Discount Senior Secured Convertible Debenture
Convertible debenture	09/24/2007	09/24/2012				1,299,412		1,717,114

Additional Paid-In Capital

Common stock issued for fees (1)	09/24/2007					162,500		162,500
Warrants issued for fees	09/24/2007			1,936,937		53,624		53,624
Series Q warrants	09/24/2007			20,276,190		960,259		960,259
						1,176,383		1,176,383
Total						3,787,861		3,359,429

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

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

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

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

The SPL Agreement with respect to this Convertible Debenture contains certain covenants (a) related to the conduct of the business of the Company and its subsidiaries; (b) related to certain financial covenants; (c) related to creation or assumption of liens other than liens created pursuant to the SPL Agreement, as defined in the SPL Agreement; (d) for so long as this Note remains outstanding, the Company shall not, without the consent of the holder of the Convertible Debenture, create, incur, guarantee, issue, assume or in any manner become liable in respect of any indebtedness, other than permitted indebtedness, or issue other securities that rank senior to this Convertible Debenture provided however that the Company could have a certain maximum amount of outstanding bank debt. At December 31, 2008, all the covenants contained within this Convertible Debenture were respected, except as discussed in Note 1. Subsequent to December 31, 2008, the Company obtained a waiver from its lenders for a failed condition of the Senior Secured Convertible Debenture which resulted from the triggering of a cross-default clause.

F-17

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

12.	Common Stock

At December 31, 2008, the Company had authority to issue 500,000,000 shares of common stock. The Company had 99,086,152 common shares outstanding at December 31, 2008 compared to 99,036,152 on June 30, 2008. The company issued 50,000 shares on July 25, 2008 in connection with the exercise of stock options under the Company’s nonqualified employee stock option plan.

13.	Common Stock Reserved for Future Issuance

At December 31, 2008 common stock of the Company, reserved for future issuance, was as follows:

	December 31,		June 30,
	2008		2008

Stock Options (Note 14 (a))
Options outstanding		9,904,273		10,036,773
Available for awards		4,122,041		3,989,541

Stock Plan (1)
Available for awards		3,750,000		3,750,000

Warrants (Note 14 (b))		44,125,399		44,125,399

Conversion feature of OID Senior Secured Convertible Note		40,334,793		38,714,119

		102,236,506		100,615,832

(1)

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

F-18

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

14.	Stock Options and Warrants

Stock Options

Under the Amended and Restated 2006 Nonqualified Stock Option Plan (“Plan”), the Company may grant options to its Directors, Officers and employees for the acquisition of up to 20,000,000 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.

During the three and six months ended December 31, 2008, zero and 250,000 stock options, respectively, were granted to employees and directors with exercise prices equivalent to the market price on the respective grant dates (3,100,000 for the year ended June 30, 2008).

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

	December 31, 2008					June 30, 2008
				Weighted					Weighted
	Number of			Average Exercise		Number of			Average Exercise
	Options			Price ($)		Options			Price ($)

Balance at beginning of period		10,036,773			0.35		8,661,070			0.42
Granted		250,000			0.07		3,100,000			0.09
Exercised		(50,000	)		0.00001		-			-
Forfeited		(332,500	)		0.72		(1,724,297	)		(0.18	)
Balance at end of period		9,904,273			0.34		10,036,773			0.35

Additional information regarding options outstanding as at December 31, 2008 is as follows:

		Outstanding						Exercisable
Range of		Number of		Weighted		Weighted		Number of		Weighted
Exercise prices		shares		average		average		shares		average
$				remaining		exercise price				exercise price
				contractual		$					$
				life (years)

	0.00 – 0.25		4,039,834		4.81		0.09		2,202,334		0.09
	0.26 – 0.50		3,078,189		5.12		0.31		2,603,189		0.30
	0.51 – 0.75		1,675,000		0.64		0.66		1,675,000		0.66
	0.76 – 1.00		1,111,250		0.85		0.83		1,111,250		0.83
			9,904,273		3.76		0.34		7,591,773		0.40

F-19

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

Stock Options and Warrants (continued)

Stock Options (continued)

The weighted average fair value of options granted for the three and six month periods ended December 31, 2008 was $0.03 and nil, respectively, (nil and $0.05 for the respective periods ended December 31, 2007) as summarized below. No options were granted during the three months ended December 31, 2008.

	Number of options				Weighted average exercise price				Weighted average grant- date fair value
	December 31,				December 31,				December 31,
	2008		2007		2008		2007		2008		2007
Options granted during the year ended June 30, 2009 and 2008, exercise prices equal to market price at time of grant		250,000		200,000		0.07		0.08000		0.03		0.05

The Company recognized stock-based compensation for employees and directors in the amount of $42,679 and $85,024 for the three and six month periods ended December 31, 2008 respectively ($40,107 and $152,146 for the respective periods ended December 31, 2007). The amount of stock-based compensation for the six months ended December 31, 2007 includes $64,684 for the departure of the president of AVI in July 2007.

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

	Six month periods
	December 31,
	2008			2007
Risk - free interest rate		1.96	%		-
Expected volatility		100	%		-
Expected life of stocks options (in years)		4.00			-
Assumed dividends	None				-

As at December 31, 2008, the Company has $174,254 of total unrecognized stock-based compensation expense related to non-vested stock options granted under the Company’s stock option plan that it expects to recognize over a period of four years (June 30, 2009 - $80,341, June 30, 2010 - $37,825, June 30, 2011 - $37,108, June 30, 2012 - $18,891).

Options for 50,000 Company common stock shares were exercised during the six months ended December 31, 2008 at an exercise price of $0.00001, while zero stock options were exercised during the year ended June 30, 2008. The impact to cash receipts from the exercise of stock options is included in financing activities in the accompanying consolidated statements of cash flows.

F-20

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

Stock Options and Warrants (continued)

Warrants

Warrants outstanding as at December 31 and June 30, 2008

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

F-21

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

15.	Commitments and Contingencies

Commitments

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

			$
2009			182,236
2010			232,701
2011			26,997
2012			1,703
2013			-

			443,637

The Company leases premises for its various offices located across Canada. Total rent expense was $96,458 and $202,526 for the three and six month periods ended December 31, 2008, respectively, and $105,264 and $215,567 for the three and six month periods ended December 31, 2007, respectively.

Litigation and Settlement Costs

On February 7, 2007, a lawsuit was filed by a former employee in Superior Court of Quebec for a total amount of $224,390 (CAD $273,307), with regards to alleged breach of employment contract and wrongful dismissal. The Company has filed its response, and is in the process of contesting the case vigorously. Furthermore, a court date for the hearing has been scheduled.

On November 17, 2008, a lawsuit was filed by a former employee under British Columbia Law in the Supreme Court of British Columbia for a total amount of $98,522 (CAD $120,000), with regards to alleged breach of employment contract. The Company has filed its Statement of defense, and is in the process of contesting the case vigorously.

16.	Research and Development Investment Tax Credits

The Company’s investment tax credit recovery for the three months ended September 30, 2008 was negatively affected as a result of revisions to amounts previously estimated and recorded for credits related to the fiscal year ended June 30, 2007. As a result of these revisions, which relate to new information obtained following the taxation authorities’ examination, the investment tax credit recoveries pertaining to the year ended June 30, 2007 were determined to be $59,057 less than expected. The resulting unfavorable adjustment to investment tax credits receivable was recorded during the three months ended September 30, 2008. The Company includes investment tax credits arising from research and development activities as part of the income tax provision for the period. The Company’s income tax provision for the three months ended September 30, 2008 includes only such tax credits, arising from research and development activities. The investment tax credits recorded by the Company are subject to review and approval by taxation authorities and it is possible that the amounts granted will be different from the amounts recorded by the Company.

F-22

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

December 31, 2008

17.	Segment Disclosure

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

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

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

For the three month period ended December 31, 2008
	Fiber Technologies		Solutions		Consolidated
Net revenues from external customers		3,111,489		2,284,782		5,396,271

Cost of net revenues		2,186,489		1,407,146

Avensys CORP 10-Q