- Quarterly Report (10-Q)

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 MARCH 31, 2009

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

Exchange Act of 1934

For the transition period from _________ to _________

COMMISSION FILE NUMBER 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 o	Accelerated filer o

Non-accelerated filer o	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 May 11, 2009 was 99,086,152.

Avensys Corporation

Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

	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)

	March 31,			June 30,
	2009			2008
	$			$
ASSETS
Current Assets

Cash and cash equivalents		387,540			369,396
Accounts receivable, net of allowance for doubtful accounts of $84,728 and $50,053, respectively		3,818,756			5,121,058
Other receivables (Note 5)		1,631,776			1,924,767
Inventories (Note 5)		2,138,708			2,178,686
Prepaid expenses and deposits		70,702			149,213
Current assets of discontinued operations (Note 4)		66,344			94,196
Total Current Assets		8,113,826			9,837,316

Property and equipment, net		1,759,636			2,490,215
Intangible assets		2,752,510			3,879,086
Goodwill (Note 18)		-			4,644,864
Deferred financing costs		310,801			404,630
Deposits		126,010			84,363
Total Assets		13,062,783			21,340,474

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities

Accounts payable and accrued liabilities (Note 5)		4,709,521			6,401,379
Bank and other loans payable (Note 7)		2,946,382			2,431,948
Current portion of long-term debt (Note 10)		105,664			122,423
Current portion of convertible debentures (Note 11)		553,031			-
Current portion of balance of purchase price (Notes 8 and 11)		73,288			92,818
Current liabilities of discontinued operations (Note 4)		71,704			88,245
Total Current Liabilities		8,459,590			9,136,813
Long-term debt, less current portion (Note 10)		89,965			191,352
Convertible debentures, less current portion (Note 11)		1,415,020			1,299,412
Balance of purchase price payable (Note 8)		1,259,274			1,706,363
Derivative financial instruments (Note 9)		116,593			1,363,543
Total Liabilities		11,340,442			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		38,346,854			38,223,391
Accumulated other comprehensive income		(163,909	)		1,817,006
Deficit		(36,461,594	)		(32,406,073	)
Total Stockholders’ Equity		1,722,341			7,635,314

Total Liabilities and Stockholders’ Equity		13,062,783			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 Nine Months Ended
	March 31,						March 31,
	2009			2008			2009			2008
	$			$			$			$

Revenue		5,409,599			5,780,795			16,497,120			14,659,223

Cost of Revenue		3,495,889			3,774,855			11,019,585			9,336,052
Gross Margin		1,913,710			2,005,940			5,477,535			5,323,171

Operating Expenses

Depreciation and amortization		208,387			222,350			644,128			712,317
Selling, general and administration		1,790,050			1,676,049			5,061,673			4,785,985
Loss on impairment of goodwill (Note 18)		-			-			3,888,644			-
Research and development		249,812			643,452			1,003,857			1,805,714
Total Operating Expenses		2,248,249			2,541,851			10,598,302			7,304,016

Loss from Operations		(334,539	)		(535,911	)		(5,120,767	)		(1,980,845	)

Other Income (Expenses)

Other income (expenses), net		8,229			55,025			27,488			57,364
Loss on redemption of convertible debentures		-			-			-			(1,422,577	)
Financial expenses, net		(77,240	)		(82,615	)		(107,353	)		(552,158	)
Debentures and balance of purchase price accretion (Note 8)		(342,481	)		(234,168	)		(952,776	)		(679,398	)
Loss on extinguishment of debt		-			-			(47,044	)		-
Change in fair value of derivative financial instruments (Note 9)		440,328			(97,088	)		1,616,994			241,777
Total Other Income (Expenses)		28,836			(358,846	)		537,309			(2,354,992	)
Net Loss Before Income Tax Benefit		(305,703	)		(894,757	)		(4,583,458	)		(4,335,837	)
Income Tax Benefit - Refundable tax credits (Note 16)		181,696			274,922			538,205			869,345
Net Loss before Non-Controlling Interest		(124,007	)		(619,835	)		(4,045,253	)		(3,466,492	)
Non-Controlling Interest		(1	)		86			(19	)		(213	)
Net Loss from Continuing Operations		(124,008	)		(619,749	)		(4,045,272	)		(3,466,705	)
Results of Discontinued Operations (Note 4)		(10,249	)		345,970			(10,249	)		631,250
Net Loss		(134,257	)		(273,779	)		(4,055,521	)		(2,835,455	)
Basic and diluted earnings (loss) per share

From Continuing Operations		(0.00	)		(0.01	)		(0.04	)		(0.04	)
From Discontinued Operations		(0.00	)		0.00			(0.00	)		0.01
Net Loss per share - Basic and Diluted		(0.00	)		(0.00	)		(0.04	)		(0.03	)
Weighted Average Common Shares Outstanding		99,086,152			98,290,264			99,082,755			96,866,392

Statement of Comprehensive Loss

Net Loss		(134,257	)		(273,779	)		(4,055,521	)		(2,835,455	)

Foreign currency translation adjustments		(197,103	)		(291,235	)		(1,980,915	)		574,651

Comprehensive Loss		(331,360	)		(565,014	)		(6,036,436	)		(2,260,804	)

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 Nine Months Ended
	March 31,						March 31,
	2009			2008			2009			2008
	$			$			$			$

Net Loss		(134,257	)		(273,779	)		(4,055,521	)		(2,835,455	)

Results of discontinued operations		10,249			(345,970	)		10,249			(631,250	)
Adjustments to reconcile net loss to cash generated by (used in) operating activities
Stock-based compensation		38,439			50,688			123,463			202,834
Expenses settled with issuance of common shares		-			-			-			17,500
Depreciation and amortization		261,828			322,785			833,774			940,459
Non-cash financial and other expenses		213,961			(79,145	)		144,431			42,151
Loss on impairment of goodwill (Note 18)		-			-			3,888,644			-
Non-controlling interest		1			(86	)		19			213
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		342,481			234,168			952,776			679,398
Change in fair value of derivative financial instruments		(440,328	)		97,088			(1,616,994	)		(241,777	)
Amortization of deferred financing costs		22,306			-			66,918			57,458
Changes in operating assets and liabilities
Decrease in accounts receivables		459,073			(284,020	)		700,704			(245,871	)
(Increase) in inventories		151,967			159,110			(557,854	)		(500,519	)
(Increase) decrease in other receivables		261,899			(315,882	)		(81,875	)		(466,449	)
(Increase) decrease in prepaid expenses and other assets		67,643			87,991			(2,179	)		114,019
Increase in accounts payable and accrued liabilities		(970,158	)		(304,857	)		(488,125	)		(89,510	)
Net Cash Generated by (Used In) Operating Activities from Continuing Operations		285,046			(691,627	)		(34,584	)		(1,573,941	)
Net Cash Generated by (Used In) Operating Activities from Discontinued Operations		-			342,237			-			333,725
Net Cash (Used In) Operating Activities		285,046			(349,390	)		(34,584	)		(1,240,216	)
Investing Activities
Purchase of property and equipment		(51,836	)		-			(139,485	)		(412,644	)
Disposal of property and equipment		870			13,322			870			51,059
Purchase of a minority interest		-			-			(6,474	)		-
Net Cash Generated by (Used in) Investing Activities from Continuing Operations		(50,966	)		(88,967	)		(145,089	)		(463,874	)
Net Cash Generated by (Used in) Investing Activities		(50,966	)		(88,967	)		(145,089	)		(463,874	)
Financing Activities
Proceeds (repayment) of bank and working capital credit line		156,265			727,376			546,397			1,241,092
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		-			-			-			30,015
Long term debt repayments		(18,358	)		-			(59,127	)		(21,348	)
Proceeds from investment tax credit financing		1,194,246			-			1,194,246			570,071
Repayments of investment tax credit financing		(1,218,413	)		-			(1,218,413	)		(94,509	)
Proceeds from capital leases		(0	)		-			21,586			4,024
Repayments of capital leases		(8,114	)		-			(24,238	)		(9,509	)
Repayments of balance of purchase price		(80,366	)					(80,366	)
Proceeds from restricted held-to-maturity security		-			93,861			-			93,861
Net Cash Generated by Financing Activities from Continuing Operations		25,259			821,237			380,084			1,963,175
Net Cash Generated by (Used in) Financing Activities from Discontinued Operations		-			53,824			-			(352,511	)
Net Cash Generated by Financing Activities		25,259			875,061			380,084			1,610,664
Effect of Exchange Rate Changes on Cash and Cash Equivalents		(49,041	)		(599,398	)		(182,268	)		(54,852	)
(Decrease) Increase in Cash and Cash Equivalents		210,299			(162,694	)		18,144			(148,278	)
Cash and Cash Equivalents – Beginning of period		177,241			495,439			369,396			481,023
Cash and Cash Equivalents – End of period		387,540			332,745			387,540			332,745

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 Nine Months Ended
	March 31,					March 31,
	2009			2008		2009			2008
	$			$		$			$

Non-Cash Financing and Investing Activities

Issuance of common shares for repayment of secured convertible notes, Series B		-			-		-			52,186
Issuance of common shares pursuant to cashless exercise of warrants		-			-		-			28
Issuance of common shares to settle outstanding payables		-			-		-			17,497
Issuance of common stock to settle placement agent fees on issuance of Senior Secured Convertible OID Note (Note 11(b))		-			15		-			15
Issuance of common stock to settle a pricing adjustment shortfall in connection with the acquisition of the manufacturing assets of ITF Tecnologies Optique (Note 12 (a))		-			4		-			4

Supplemental Disclosures

Interest (paid) earned from continuing operations		(89,423	)		24,557		(164,037	)		(47,780	)

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)

					Additional			Accumulated 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		-		-		123,463			-			-			123,463
Common stock issued in connection with the exercise of stock options		50,000		-		-			-			-			-
Translation adjustment		-		-		-			(1,980,915	)		-			(1,980,915	)
Net loss for the period		-		-		-			-			(4,055,521	)		(4,055,521	)

Balance, March 31, 2009		99,086,152		990		38,346,854			(163,909	)		(36,461,594	)		1,722,341

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)

March 31, 2009

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 renewed working capital financing that matures from one to three months after issuance and subject to maturity dates being extended on maturity at the option of the issuer. Additionally, the Company’s operating subsidiary, Avensys Inc. (“AVI”) renewed its line of credit with a financial institution in March 2009. The line of credit will come up for renewal no later than October 31, 2009, and will be reviewed based on AVI’s financial statements of June 30, 2009. At December 31, 2008 AVI was not in respect of the financial covenants pertaining to its line of credit with the financial institution. This constituted an event of default which triggered cross-default clauses affecting the Company’s Working Capital Facility (Note 7(a)) and Senior Secured Convertible Debenture (Note 11). Subsequently, the Company obtained waivers with respect to such cross-default clauses for the Working Capital Facility and Senior Secured Convertible Debenture, and AVI obtained an exemption from the requirement to respect certain financial covenants until June 30, 2009. 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 March 31, 2009. 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 third quarter of fiscal 2009, as described in Note 7 (d), the Company obtained additional research and development investment tax credit financing from a financial institution. Also, 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 March 31, 2009 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)

March 31, 2009

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 March 31, 2009 and for the three and nine month periods ended March 31, 2009 and 2008 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 nine month periods ended March 31, 2009 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 $24,973 and $57,149 for the three and nine month periods ended March 31, 2009, respectively, and $57,652 and $61,956 for the three and nine month periods ended March 31, 2008, 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)

March 31, 2009

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.

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 adopted the provisions of SFAS 160 effective January 1, 2009. The adoption of this standard did not have a significant impact on the consolidated financial position and results of operations of the Company.

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)

March 31, 2009

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 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 financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company adopted FSP FAS 142-3 effective January 1, 2009. The Company is in the process of evaluating the impact that the adoption of the EITF Issue will have on its financial statements.

In June 2008, FASB ratified a consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue 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)

March 31, 2009

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:

	March 31, 2009						June 30, 2008
	C-Chip		CSA		Total		C-Chip		CSA		Total
	$		$		$		$		$		$
Cash and cash equivalents		50,084		403		50,487		31,560		589		32,149
Accounts receivable		15,857		-		15,857		54,958		-		54,958
Prepaid Expenses		-		-		-		7,089		-		7,089
Current assets of discontinued operations		65,941		403		66,344		93,607		589		94,196

Accounts Payable and accrued liabilities		71,704		-		71,704		88,245		-		88,245
Other loans payable				-		-		-		-		-
Current liabilities of discontinued operations		71,704		-		71,704		88,245		-		88,245

Summary results of discontinued operations for the three-month periods ended March 31, 2009 and 2008 are as follows:

	Total						C-Chip						CSA
	2009			2008			2009			2008			2009		2008
	$			$			$			$			$		$
Revenues from discontinued operations		-			-			-			-			-		-
Pre-tax earnings (loss) from Discontinued Operations		(10,249	)		(5,089	)		(10,249	)		(5,089	)		-		-

After tax earnings (loss) from Discontinued Operations		(10,249	)		(5,089	)		(10,249	)		(5,089	)		-		-
Gain on extinguishment of loan		-			351,059			-			351,059			-		-
Results of discontinued operations		(10,249	)		345,970			(10,249	)		345,970			-		-

Summary results of discontinued operations for the nine-month periods ended March 31, 2009 and 2008 are as follows:

	Total					C-Chip					CSA
	2009			2008		2009			2008		2009		2008
	$			$		$			$		$		$
Revenues from discontinued operations		-			398,100		-			398,100		-		-
Pre-tax earnings (loss) from Discontinued Operations		(10,249	)		280,191		(10,249	)		280,191		-		-

After tax earnings (loss) from Discontinued Operations		(10,249	)		280,191		(10,249	)		280,191		-		-
Gain on extinguishment of loan		-			351,059		-			351,059		-		-
Results of discontinued operations		(10,249	)		631,250		(10,249	)		631,250		-		-

F-10

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

5.	Balance Sheet Details

	March 31,		June 30,
	2009		2008
	$		$

Other Receivables
Investment tax credits receivable		1,600,687		1,854,095
Sales tax receivable		30,408		65,416
Other		681		5,256

		1,631,776		1,924,767

Inventories
Raw materials		740,716		905,988
Work in process		673,036		314,105
Finished goods		724,956		958,593

		2,138,708		2,178,686

Accounts Payable and Accrued Liabilities
Accounts payable		3,178,785		4,085,102
Payroll and benefits		971,444		1,801,437
Income taxes payable		-		1,614
Rent payable		-		36,200
Deferred revenue		227,366		138,338
Lease termination		19,800		24,408
Provision for Warranty		292,441		282,234
Other		19,685		32,046

		4,709,521		6,401,379

F-11

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

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 March 31, 2009, since AVI is the primary beneficiary. The impact of including the accounts of ITF Laboratories Inc. in the consolidated balance sheet as at March 31, 2009 consists of the following additions:

Current assets of $3,008,132 (June 30, 2008 - $2,785,075)

Net property and equipment of $681,085 (June 30, 2008 - $916,421)

Intangible assets of $166,574 (June 30, 2008 - $237,834)

Current liabilities of $1,258,584 (June 30, 2008 - $1,370,102)

The impact on the consolidated statement of operations for three months ended March 31, 2009 and 2008 was:

Increase in revenue of $549,784 and $477,556, respectively

Increase in expenses of $538,083 and $1,786,837, respectively, including an amount for research and development expenses of $249,812 and $589,387, respectively

Increase in the income tax benefit from refundable investment tax credits of $181,696 and $274,922, respectively

The impact on the consolidated statement of operations for nine months ended March 31, 2009 and 2008 was:

Increase in revenue of $2,484,280 and $1,453,003, respectively

Increase in expenses of $2,316,884 and $3,253,528, respectively, including an amount for research and development expenses of $1,003,857 and $1,836,749, respectively

Increase in the income tax benefit from refundable investment tax credits of $538,205 and $869,345, respectively

F-12

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

7.	Bank and Other Loans Payable

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

	March 31,		June 30,
	2009		2008
	$		$

Senior Secured Working Capital Notes of the Company, bearing interest at 8.5%, maturing April 30, 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))		580,931		843,540
Investment tax credit financing of AVI, bearing interest at 18%, repayable on demand (Note 7 (c))		-		588,408
Investment tax credit financing of AVI, bearing interest at prime plus 2% (Note 7(d))		754,590		-
		2,946,382		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”). As of March 31, 2009, the Company had obtained a total of $1,610,861 from the Facility in the form of three Senior Secured Working Capital Notes (“WC Note”), bearing interest at 8.5% payable at maturity, all maturing on April 30, 2009. In the normal course of operations, these notes usually mature one to three months after issuance and are subject to maturity dates being extended and the notes are therefore renewed on maturity (see Note 19 – Subsequent Event).

AVI maintains a line of credit from a financial institution for an authorized amount of $1,078,253 (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 March 31, 2009 amounted to $580,931 (CAD $732,729) (June 30, 2008 $843,540 – CAD $860,157). AVI’s accounts receivable totaling $3,208,450 (CAD $4,046,818) and inventories totaling $1,690,372 (CAD $2,132,066) serve as guarantees for the line of credit.

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 bore interest at 18%, with interest payable on a monthly basis, and was 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) at December 31, 2008. During the three months ended March 31, 2009, ITF Labs reimbursed the full loan balance by obtaining new investment tax credit financing discussed in Note 7 b).

ITF Labs obtained investment tax credit financing from a financial institution during the three months ended March 31, 2009 in the amount of $1,178,150 (CAD $1,486,000). The demand loan bears interest at prime plus 2%, with interest payable on a monthly basis, and is secured by the Federal and Provincial tax credits receivable of ITF Labs. During the three months ended March 31, 2009, ITF Labs reimbursed $423,560 (CAD $534,236) of the loan, resulting in a loan balance of $754,590 (CAD $951,764) as of March 31, 2009.

F-13

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

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 March 31, 2009:

						Net Present Value at
	Transaction	Maturity /	Effective			June		March
	Date	Expiry Date	Interest Rate				30, 2008		31, 2009

Willer Transaction (Note 8 (a))	03/31/2008	01/30/2009		10	%		92,818		-
Willer Transaction (Note 8 (a))	03/31/2008	01/29/2010		10	%		84,470		73,288
							177,288		73,288

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	%		-		1,259,274
							1,621,893		1,259,274

Total							1,799,181		1,332,562

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)

March 31, 2009

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 March 31, 2009 and the resulting gain or loss recorded in the statement of operations:

				Value at
	Maturity /	# of underlying		June		March		Gain (Loss) on
	Expiry Date	Shares			30, 2008		31, 2009	Changes in FV

Senior Secured Convertible Debenture

Series P warrants	09/24/2012		8,091,403		226,032		16,818		209,214
Beneficial Conversion Option - Convertible debenture	09/24/2012		39,516,148		1,086,304		86,716		999,588
					1,312,336		103,534		1,208,802

Serie B Subordinated Secured Convertible Debentures
Series Y Warrants	11/09/2010		145,005		2,628		53		2,575
Series Z Warrants	11/09/2010		2,175,063		39,413		801		38,612
Series W Warrants (placement fees)	11/09/2010		711,490		2,886		20		2,866
Series Y Warrants (placement fees)	11/09/2010		17,789		322		7		315
Series Z Warrants (placement fees)	11/09/2010		266,810		4,835		98		4,737
					50,084		979		49,105

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		-		12,080		358,719
					1,123		12,080		359,087
Total					1,363,543		116,593		1,616,994

10.	Long-Term Debt

	March 31,		June 30,
	2009		2008
	$		$
Mortgage loan secured by AVI's intangible and movable tangible assets (March 31, 2009 - CAD $140,000; June 30, 2008 - CAD $203,000), bearing interest at the lender's prime rate (March 31, 2009 - 6.75%; June 30, 2008 - 6.75%) plus 1.75%, payable in monthly instalments of CAD$7,000 plus interest, maturing in November 2010		110,997		199,079

Capital lease obligations (March 31, 2009 - CAD $87,712; June 30, 2008 - CAD $92,396), bearing interest between 9.07% and 16.23%, maturing between February 2010 and December 2011.		69,541		90,610

Secured note (March 31, 2009 - CAD $19,034; June 30, 2008 - CAD $24,560) bearing no interest, payable in 48 monthly instalments of $614, maturing October 2011.		15,091		24,086
		195,629		313,775
Less: Current portion of long-term debt		105,664		122,423
Long-term debt		89,965		191,352

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

			$

2009			26,373
2010			103,475
2011			56,266
2012			9,516
2013			-
Total			195,629

F-15

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

11.	Convertible Debenture

	March 31,		June 30,
	2009		2008
	$		$

Senior Secured Original Issue Discount Convertible Debenture at 6% (original principal amount of $4,000,000) maturing September 24, 2012.		1,968,051		1,299,412
Less: Current portion of convertible debentures		553,031		-
Convertible debenture		1,415,020		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		2,740,849
Total		1,968,051

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 March 31, 2009, the outstanding principal amount on the Convertible Debenture was $4,526,731.

F-16

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

Convertible Debenture (continued)

The following table illustrates the values of the various components of the financing at June 30, 2008 and March 31, 2009.

	Issue Date	Maturity /	# of underlying		Value at June		Value at March
		Expiry Date	Shares		30, 2008		31, 2009

Derivative Liabilities

Series P warrants	09/24/2007	09/24/2012		8,091,403		226,032		16,818
Beneficial Conversion Option - Convertible debenture	09/24/2007	09/24/2012		40,334,793		1,086,034		86,716
						1,312,066		103,534

Carrying Value of Original Issue Discount
Senior Secured Convertible Debenture

Convertible debenture	09/24/2007	09/24/2012				1,299,412		1,968,051

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		3,247,968

(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 March 31, 2009, all the covenants contained within this Convertible Debenture were respected, except as discussed in Note 1.

F-17

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

12.	Common Stock

At March 31, 2009, the Company had authority to issue 500,000,000 shares of common stock. The Company had 99,086,152 common shares outstanding at March 31, 2009 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 March 31, 2009 common stock of the Company, reserved for future issuance, was as follows:

	March 31,		June 30,
	2009		2008

Stock Options (Note 14 (a))
Options outstanding		9,406,773		10,036,773
Available for awards		4,569,541		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		41,152,104		38,714,119

		103,003,817		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)

March 31, 2009

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 nine months ended March 31, 2009, 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:

	March 31, 2009					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		(830,000	)		0.36		(1,724,297	)		(0.18	)
Balance at end of period		9,406,773			0.34		10,036,773			0.35

Additional information regarding options outstanding as at March 31, 2009 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		3,602,334		4.57		0.09		2,102,334		0.09
0.26 – 0.50		3,028,189		4.91		0.31		2,553,189		0.30
0.51 – 0.75		1,675,000		0.39		0.66		1,675,000		0.66
0.76 – 1.00		1,101,250		0.61		0.83		1,101,250		0.83
		9,406,773		3.47		0.35		7,431,773		0.40

F-19

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

Stock Options and Warrants (continued)

Stock Options (continued)

The weighted average fair value of options granted for the three and nine month periods ended March 31, 2009 was nil and $0.03, respectively, ($0.09 and $0.08 for the respective periods ended March 31, 2008) as summarized below. No options were granted during the three months ended March 31, 2009.

	Number of options				Weighted average exercise price				Weighted average grant- date fair value
	March 31,				March 31,				March 31,
	2009		2008		2009		2008		2009		2008
Options granted during the year ended June 30, 2009 and 2008, exercise prices equal to market price at time of grant		250,000		2,950,000		0.07		0.09000		0.03		0.08

The Company recognized stock-based compensation for employees and directors in the amount of $38,439 and $123,463 for the three and nine month periods ended March 31, 2009 respectively ($50,688 and $202,834 for the respective periods ended March 31, 2008). The amount of stock-based compensation for the nine months ended March 31, 2008 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:

	Nine month periods March 31,
	2009			2008
Risk - free interest rate		1.96	%		-
Expected volatility		100	%		-
Expected life of stocks options (in years)		4.00			-
Assumed dividends	None				-

As at March 31, 2009, the Company has $115,037 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 fiscal years (June 30, 2009 - $38,439, June 30, 2010 - $30,899, June 30, 2011 - $30,182, June 30, 2012 - $15,518).

Options for 50,000 Company common stock shares were exercised during the nine months ended March 31, 2009 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)

March 31, 2009

Stock Options and Warrants (continued)

Warrants

Warrants outstanding as at March 31, 2009 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)

March 31, 2009

15.	Commitments and Contingencies

Commitments

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

	$
2009		91,743
2010		238,379
2011		34,892
2012		1,659
2013		-
		366,673

The Company leases premises for its various offices located across Canada. Total rent expense was $91,743 and $294,268 for the three and nine month periods ended March 31, 2009, respectively, and $108,317 and $315,173 for the three and nine month periods ended March 31, 2008, 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 $216,687 (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 $95,140 (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)

March 31, 2009

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 March 31, 2009

	Fiber Technologies			Solutions		Consolidated
Net revenues from external customers		2,919,069			2,490,530		5,409,599

Cost of net revenues		2,150,878			1,345,011		3,495,889
Marketing and sales expense		169,257			659,539		828,796
General and administrative expense		282,984			279,101		562,085
Loss on impairment of goodwill		-			-		-
Research & development		249,812			-		249,812
Depreciation & amortization		83,365			26,408		109,773

Direct costs		2,936,297			2,310,059		5,246,356

Direct contribution		(17,227	)		180,471		163,244
Other operating expenses & indirect costs of net revenues							(497,783	)

Loss from Operations							(334,539	)

Other income (expense)							8,229
Loss on redemption of convertible debentures							-
Interest expense, net							(77,240	)
Debenture accretion and change in fair value of derivative financial instruments							97,847
Loss on extinguishment of debt							-
Income Tax Benefit - Refundable tax credits (*)							181,696
Non-Controlling Interest							(1	)

Net Loss from Continuing Operations							(124,008	)

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

F-23

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

Segment Disclosure (continued)

For the three month period ended March 31, 2008

	Fiber Technologies			Solutions		Consolidated
Net revenues from external customers		3,790,100			1,990,695		5,780,795

Cost of net revenues		2,538,980			1,235,875		3,774,855
Marketing and sales expense		256,147			461,123		717,270
General and administrative expense		428,492			151,782		580,274
Loss on impairment of goodwill		-			-		-
Research & development		643,452			-		643,452
Depreciation & amortization		140,231			8,585		148,816

Direct costs		4,007,302			1,857,365		5,864,667

Direct contribution		(217,202	)		133,330		(83,872	)

Other operating expenses & indirect costs of net revenues							(452,039	)

Loss from Operations							(535,911	)

Other income (expense)							55,025
Loss on redemption of convertible debentures							-
Interest expense, net							(82,615	)
Debenture accretion and change in fair value of derivative financial instruments							(331,256	)
Loss on extinguishment of debt							-
Income Tax Benefit - Refundable tax credits (*)							274,922
Non-Controlling Interest							86

Net Loss from Continuing Operations							(619,749	)

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

F-24

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

Segment Disclosure (continued)

For the nine month period ended March 31, 2009

	Fiber Technologies			Solutions			Consolidated
Net revenues from external customers		9,378,547			7,118,573			16,497,120

Cost of net revenues		6,850,023			4,169,562			11,019,585
Marketing and sales expense		430,363			2,033,817			2,464,180
General and administrative expense		911,730			812,793			1,724,523
Loss on impairment of goodwill		2,605,391			1,283,253			3,888,644
Research & development		1,003,857			-			1,003,857
Depreciation & amortization		230,486			85,118			315,604

Direct costs		12,031,850			8,384,543			20,416,393

Direct contribution		(2,653,303	)		(1,265,970	)		(3,919,273	)
Other operating expenses & indirect costs of net revenues								(1,201,494	)

Loss from Operations								(5,120,767	)

Other income (expense)								27,488
Loss on redemption of convertible debentures								-
Interest expense, net								(107,353	)
Debenture accretion and change in fair value of derivative financial instruments								664,218
Loss on extinguishment of debt								(47,044	)
Income Tax Benefit - Refundable tax credits (*)								538,205
Non-Controlling Interest								(19	)

Net Loss from Continuing Operations								(4,045,272	)

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

F-25

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

Segment Disclosure (continued)

For the nine month period ended March 31, 2008

	Fiber Technologies		Solutions			Consolidated
Net revenues from external customers		10,583,818		4,075,405			14,659,223

Cost of net revenues		6,826,466		2,509,586			9,336,052
Marketing and sales expense		527,636		1,244,062			1,771,698
General and administrative expense		721,136		419,680			1,140,816
Loss on impairment of goodwill		-		-			-
Research and development expense		1,805,714		-			1,805,714
Depreciation and amortization expense		273,720		23,251			296,971

Direct costs		10,154,672		4,196,579			14,351,251

Direct contribution		429,146		(121,174	)		307,972
Other operating expenses & indirect costs of net revenues							(890,649	)

Loss from Operations							(1,980,845	)

Other income (expense)							57,364
Loss on redemption of convertible debentures							(1,422,577	)
Interest expense, net							(552,158	)
Debenture accretion and change in fair value of derivative financial instruments							(437,621	)
Loss on extinguishment of debt							-
Income Tax Benefit - Refundable tax credits (*)							869,345
Non-Controlling Interest							(213	)

Net Loss from Continuing Operations							(3,466,705	)

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

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

Revenue generated from two customers of the Company’s Fiber Technologies segment for the three and nine month periods ended March 31, 2009 and 2008 was approximately as follows:

	Three months ended March 31,
	2009		2008
	$		$

Customer 1		1,223,080		2,001,110
Customer 2		702,851		779,669
		1,925,931		2,780,779

	Nine months ended March 31,
	2009		2008
	$		$

Customer 1		2,937,545		5,695,610
Customer 2		2,663,301		2,075,254
		5,600,846		7,770,864

The outstanding receivable balances for these customers at March 31, 2008 amounted to $1,194,647 (Customer 1 represented $595,155 and Customer 2 represented $599,492).

F-26

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

Segment Disclosure (continued)

The Company’s assets are allocated as follows:

	March 31,		June 30,
	2009		2008
	$		$

Fiber Technologies		5,133,540		9,101,193
Solutions		3,047,264		3,977,932
All Other (*)		4,881,976		8,261,349
		13,062,780		21,340,474

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

The Company has three geographic business areas, Americas, Europe and Asia, determined based on the locations of the customers. Revenues for the three months ended March 31, 2009 and 2008 for the Americas include approximately $1,725,000 and $2,465,000, respectively, of sales to the United States of America and $2,382,000 and $2,063,000, respectively, of sales to Canada. Revenues for Asia for the three months ended March 31, 2009 and 2008 include sales of $788,000 and $850,000, respectively, to China.

Revenues for the nine months ended March 31, 2009 and 2008 for the Americas include approximately $4,450,000 and $6,899,000, respectively, of sales to the United States of America and $7,113,000 and $4,256,000, respectively, of sales to Canada. The revenues for Asia for the nine months ended March 31, 2009 and 2008 include sales of $2,888,000 and $2,278,000, respectively, to China.

Geographic Information

	Three months ended March 31,
Revenues	2009		2008
	$		$
Americas		4,107,630		4,541,131
Europe		418,721		271,092
Asia		883,248		968,572
Total		5,409,599		5,780,795

	Nine months ended March 31,
Revenues	2009		2008
	$		$
Americas		11,568,833		11,171,693
Europe		1,737,801		948,410
Asia		3,190,486		2,539,120
Total		16,497,120		14,659,223

F-27

Avensys Corporation

Notes to Interim Consolidated Financial Statements

Unaudited

(Expressed in U.S. Dollars)

March 31, 2009

18.	Goodwill Impairment

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed. 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 a 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, a downturn in the Canadian and international economies, 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 a reporting unit exceeds the fair value, step two requires the fair value of the reporting unit to be allocated to the underlying 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 net earnings (loss).

In light of external and internal indicators of impairment, the Company has performed an interim goodwill impairment test for the second quarter of fiscal 2009, and has estimated that the fair values of the Avensys Tech and Avensys Solutions reporting units are below their respective carrying values. The fair values of the Company’s reporting units have been impacted by the continued decline in the Company’s market capitalization coupled with weak industry outlook and a change in the timeframe to realize growth and cash flows objectives, and the deterioration of the financial markets. The fair values of the reporting units were estimated using present value techniques of estimated future cash flows and estimated amounts at which the units could be bought or sold in a current transaction between willing parties. Management has not yet performed step two due to time constraints, but will proceed in the future. Based on the preliminary estimates of step one, the Company determined that an impairment loss of goodwill was probable, and an impairment charge of $3.9 million was estimated and recorded in the quarter, representing a full write-down of goodwill.

19.	Subsequent Event

As discussed in Note 7 (a), WC Notes for an amount of $1,610,861 matured on April 30, 2009. The Company has paid the interest due on the WC Notes and, as of May 13, 2009, is still in negotiations with the holder of the WC Notes over the terms of renewal. Specifically, the holder of the WC Notes and the Company are negotiating the annual rate of interest that would apply to the renewed WC Notes.

F-28

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management's discussion and analysis of financial condition and results of operations of Avensys Corporation should be read in conjunction with the financial statements and notes thereto of the Company for the three month periods ended March 31, 2009 and 2008 as included in this Form 10-Q.

CORPORATE OVERVIEW

Avensys Corporation (“Avensys”) operates two divisions, through its wholly owned subsidiary Avensys Inc.:

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

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

For the three month period ended March 31, 2009, Avensys’ revenues were $5.4 million, compared to $5.8 million for the same period last year which represents a decline of 6.4%. The gross margin of $1.9 million for the quarter was 35.4% as a percentage of sales compared with $2.0 million and 34.7% a year earlier. Avensys’ loss from operations for the three month period was $334,539. This compares to a loss from operations of $535,911 for the same period last year.

Net cash generated by operating activities from continuing operations during the three month period ended March 31, 2009, totaled $285,046, as compared with net cash used of $691,627 for the same period last year.

Net loss for the three month period ended March 31, 2009 was $134,257, compared with a net loss of $273,779 for the same period a year earlier. The net loss for the three month period being reported includes a $218,000 provision for severance costs as the Company continues to cut costs, to match costs with revenues, and to maintain revenues by diversifying its client base.

Finally, and irrespective of the current economic downturn which management is confident the Company will survive, the current capital structure of Avensys may not be sufficient to support its future plans for growth and technology development. To this end, the Company has engaged Lightwave Advisors, Inc., a financial advisory firm based in Connecticut, to assist the Company in reviewing and evaluating its financial and strategic alternatives.

Avensys Tech Division of Avensys Inc.

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

Our optical components and modules sales are now distributed as follows: 67% for the telecom business, 24% for fiber laser components and modules and 9% for optical sensors. During the third quarter, the impact of the current recession was quite significant. Overall revenues totaled $2,919,069 for the third quarter and were 23% behind revenues achieved in the same period last year. This decline in revenues is broadly in the range of our industry’s decline. The main explanation is the decrease in sales of our undersea components (down 35% year on year) and of our DPSK components (“Differential Phase Shift Keying”) – down 9% year on year. It is interesting to notice that we continued to ship large quantities of Fiber Bragg Gratings, one of our traditional terrestrial telecom components. Fiber laser components and related contract revenues, developed by our R&D partner ITF labs, again saw an important growth of 45% in the third quarter ending March 31, 2009.

Our DPSK product is now adopted by the telecom industry. Consequently, we expect substantial volume growth in the next years but also a pressure on cost reduction. To face this challenge ITF Labs, our R&D partner, undertook a major R&D project two years ago to design the new generation of our demodulators, the micro-DPSK. On February 20, 2008, ITF Labs announced the R&D completion of its micro-DPSK. This device is designed small enough to be incorporated into the industry standard 300-pin Multi-Source Agreement (MSA) compliant transponder package, and will be available with bitrates for 40Gb/s DPSK and DQPSK with free-spectral-range from 20 GHz to 70GHz. The device has the lowest loss and highest extinction ratio on the market with an almost insignificant polarization dependency of about 1.5% of free-spectral range. All dimensions of the device have been reduced, making this the thinnest, fastest tuning, lowest power consumption product available on the market which enables the integration of either DPSK or DQPSK formats into the MSA package.

Many Tier 1 and Tier 2 companies are currently developing their own platforms. Because of the current economy climate, we don’t have short-term visibility of realistic forecasts for our Demodulation Formats technology. Finally, the micro-DPSK design allows significant cost reduction and high manufacturing yield, two key parameters to win the business on competitiveness side. The Telcordia qualification of the micro-DPSK has been completed and announced in January 2009, during the last Photonics west conference..

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.

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

The Avensys Solutions Division of Avensys Inc.

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

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

During the third quarter, we continued the restructuring of Avensys Solutions by reducing the size and related costs of our management team. Dr. Hassan Kassi was appointed Chief Operating Officer (COO) of Avensys Inc., replacing the previous General Manager of Avensys Solutions. In his new role as COO, Dr. Kassi is now responsible for the operations of both divisions: Avensys Tech and Avensys Solutions. In addition, Mr. Pierre Michaud was promoted as Vice-President of Sales & Marketing for Avensys Solutions, replacing the previous Sales Director of Avensys Solutions. Mr. Michaud has more than 20 years of experience in the field of instrumentation including 5 years heading Sales & Service departments. Mr. Michaud has been employed with Avensys since 1996.

We have also harmonized our processes and successfully undergone ISO re-certification, a key requirement to qualify has a vendor in several of our markets. Our Systems Integration teams has doubled in size and was successful in booking orders approaching $1.8M, with the majority of these orders deliverables within the first two quarters of the fiscal year. This is, for the most part, attributable to our industrial customer base, a segment where complex applications often require the integration of several technologies into a turn-key solution.

Overall, Avensys Solutions revenues for the third quarter ended March 31, 2009, of $2,490,530 have grown by 25.1% over the same quarter in previous year, a significant portion of this growth being attributable to the acquisition of Willer Engineering’s assets. Despite the apparent growth, the Willer acquisition hides the negative impact of the current economic downturn because revenues continue to lag behind our sales expectations.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2009 COMPARED TO THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2008

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

	Three Months Ended March 31,
	2009			2008			Change			Change
	$			$			$			%
Revenue		5,409,599			5,780,795			(371,196	)		-6.4	%
Cost of Revenue		3,495,889			3,774,855			(278,966	)		-7.4	%
Gross margin		1,913,710			2,005,940			(92,230	)		-4.6	%
Gross Margin as % of Revenue		35.4	%		34.7	%

Operating expenses
Depreciation and amortization		208,387			222,350			(13,963	)		-6.3	%
Selling, general and administration		1,790,050			1,676,049			114,001			6.8	%
Loss on impairment of Goodwill		-			-			-			0.0	%
Research and development		249,812			643,452			(393,640	)		-61.2	%
Total Operating expenses		2,248,249			2,541,851			(293,602	)		-11.6	%

Operating (loss) gain		(334,539	)		(535,911	)		201,372			37.6	%

Other income (expenses)		28,836			(358,846	)		387,682			108.0	%
Income tax benefits - refundable tax credits		181,696			274,922			(93,226	)		-33.9	%
Non-Controlling interest		(1	)		86			(87	)		-101.2	%
Results of discontinued operations		(10,249	)		345,970			(356,219	)		-103.0	%
Net (loss) income for the period		(134,257	)		(273,779	)		139,522			51.0	%

Foreign currency translation adjustments		(197,103	)		(291,235	)		94,132
Comprehensive income		(331,360	)		(565,014	)		233,654			41.4	%

	Nine Months Ended March 31,
	2009			2008			Change			Change
	$			$			$			%
Revenue		16,497,120			14,659,223			1,837,897			12.5	%
Cost of Revenue		11,019,585			9,336,052			1,683,533			18.0	%
Gross margin		5,477,535			5,323,171			154,364			2.9	%
Gross Margin as % of Revenue		33.2	%		36.3	%

Operating expenses
Depreciation and amortization		644,128			712,317			(68,189	)		-9.6	%
Selling, general and administration		5,061,673			4,785,985			275,688			5.8	%
Loss on impairment of Goodwill		3,888,644			-			3,888,644			100.0	%
Research and development		1,003,857			1,805,714			(801,857	)		-44.4	%
Total Operating expenses		10,598,302			7,304,016			3,294,286			45.1	%

Operating (loss) gain		(5,120,767	)		(1,980,845	)		(3,139,922	)		-158.5	%

Other income (expenses)		537,309			(2,354,992	)		2,892,301			122.8	%
Income tax benefits - refundable tax credits		538,205			869,345			(331,140	)		-38.1	%
Non-Controlling interest		(19	)		(213	)		194			91.1	%
Results of discontinued operations		(10,249	)		631,250			(641,499	)		-101.6	%
Net (loss) income for the period		(4,055,521	)		(2,835,455	)		(1,220,066	)		-43.0	%

Foreign currency translation adjustments		(1,980,915	)		574,651			(2,555,566	)
Comprehensive income		(6,036,436	)		(2,260,804	)		(3,775,632	)		-167.0	%

Revenue

Sales from the Avensys Tech and Avensys Solutions divisions of Avensys Inc., for the three and nine month periods ended March 31, 2009, account for 100% of our revenues. Avensys products were sold directly and via distributors to customers throughout the world.

Our revenues were composed of the following:

	Three Months Ended March 31,
	2009		% of Revenue			2008		% of Revenue			Change			Change
	$					$					$			%
Avensys Tech		2,919,069		54	%		3,790,100		66	%		(871,031	)		-23.0	%
Avensys Solutions		2,490,530		46	%		1,990,695		34	%		499,835			25.1	%
Revenue		5,409,599					5,780,795					(371,196	)		-6.4	%

	Nine Months Ended March 31,
	2009		% of Revenue			2008		% of Revenue			Change			Change
	$					$					$			%
Avensys Tech		9,378,547		57	%		10,583,818		72	%		(1,205,271	)		-11.4	%
Avensys Solutions		7,118,573		43	%		4,075,405		28	%		3,043,168			74.7	%
Revenue		16,497,120					14,659,223					1,837,897			12.5	%

Our revenues for the three month period ended March 31, 2009 decreased 6.4% over the same period in the previous year. The three month decrease is primarily to a slowing worldwide telecoms market during the three months ended March 31, 2009 contributing to a decrease of 23.0% in revenues for Avensys Tech. The overall decrease in revenues was tempered by a 25.1% increase in Avensys Solutions revenues due to the Willer acquisition contributing $ 1.58 million in revenue.

Cost of revenue and gross margin

Cost of goods sold as a percentage of revenue was 64.6% and 66.8% for the three and nine month periods ended March 31, 2009, respectively, compared with 65.3% and 63.7%, respectively for the same periods in the previous year. Gross margin, relative to revenues, for the three month period ended March 31, 2009 increased as a result of improved margins at Avensys Solutions which were at 46.0% for the three months ended March 31, 2009, compared to 37.9% for the same period last year. The improvement at Avensys Solutions is a result of increase in sales of integrated systems products. For the nine month period, gross margin decreased due to the effect of a continuing growth in the sales of lower margin products at Avensys Tech.

Operating Expenses

Depreciation and amortization

Depreciation and amortization expenses for the three and nine month periods ended March 31, 2009 decreased by $13,963 and $68,189, respectively, over the same period in 2008. The decrease in depreciation and amortization is primarily attributable to the effects of foreign currency translation – almost all our assets are denominated in the Canadian Dollar.

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 increased by $114,001 for the three month period ended March 31, 2009 and increased by $275,688 for the nine month period ended March 31, 2009, compared to the same respective periods in 2008. SG&A are composed of the following:

	Three Months Ended March 31,
	2009		2008		Change			Change
	$		$		$			%
General and administrative		217,279		177,057		40,222			22.7	%
Marketing and Sales		183,495		227,524		(44,029	)		-19.4	%
Payroll and related expenses		1,270,137		948,997		321,140			33.8	%
Professional fees		72,796		229,942		(157,146	)		-68.3	%
Travel		6,821		21,162		(14,341	)		-67.8	%
Stock based compensation		38,439		50,688		(12,249	)		-24.2	%
Other		1,083		20,679		(19,596	)		-94.8	%
Selling, General and Administrative Expenses	$	1,790,050	$	1,676,049	$	114,001			6.8	%

	Nine Months Ended March 31,
	2009		2008		Change			Change
	$		$		$			%
General and administrative		607,199		541,704		65,495			12.1	%
Marketing and Sales		572,828		544,037		28,791			5.3	%
Payroll and related expenses		3,299,070		2,726,028		573,042			21.0	%
Professional fees		422,543		678,453		(255,910	)		-37.7	%
Travel		33,227		75,986		(42,759	)		-56.3	%
Stock based compensation		123,463		202,834		(79,371	)		-39.1	%
Other		3,343		16,943		(13,600	)		-80.3	%
Selling, General and Administrative Expenses	$	5,061,673	$	4,785,985	$	275,688			5.8	%

The increase of SG&A during the three and nine months ended March 31, 2009 includes the costs of compensation for employees affected by the restructuring at Avensys Solutions as well as expenses associated with the addition of the operations acquired in Willer transaction.

Research and Development

For the three and nine months ended March 31, 2009, 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 nine month periods ended March 31, 2009 decreased by $393,640 and $801,857, respectively, compared with the same periods in 2008. The reductions in expenses are primarily attributable to an increase in prototype and experimental product sales that result in R&D expenses being transferred to cost of goods sold.

Stock Based Compensation

Stock based compensation, which is included in ‘Selling, general and administrative’ expenses, for the three and nine month periods ended March 31, 2009, was $38,439 and $123,463, respectively, compared to $50,688 and $202,834 for the same period last year. The decreases in stock based compensation expenses are primarily attributed to the decrease in the quantities and calculated fair values of employee stock options issued during the year ended June 30, 2008. The fair value of the employee stock options is determined using the Black-Scholes Model and the expenses are recorded evenly over the vesting period on each stock option grant.

Other Income (Expenses)

Other income (expenses) consists of the following:

	Three Months Ended March 31,
	2009			2008			Change			Change
	$			$			$			%
Other income (expenses), net		8,229			55,025			(46,796	)		-85.0	%
Loss on redemption of convertible debentures		-			-			-			0.0	%
Financial expenses, net		(77,240	)		(82,615	)		5,375			-6.5	%
Debentures and balance of purchase price accretion		(342,481	)		(234,168	)		(108,313	)		46.3	%
Loss on extinguishment of debt		-			-			-			0.0	%
Change in fair value of derivative financial instruments		440,328			(97,088	)		537,416			-553.5	%
Other income (expenses)	$	28,836		$	(358,846	)	$	387,682			-108.0	%

	Nine Months Ended March 31,
	2009			2008			Change			Change
	$			$			$			%
Other income (expenses), net		27,488			57,364			(29,876	)		-52.1	%
Loss on redemption of convertible debentures		-			(1,422,577	)		1,422,577			-100.0	%
Interest expense, net		(107,353	)		(552,158	)		444,805			-80.6	%
Debentures and balance of purchase price accretion		(952,776	)		(679,398	)		(273,378	)		40.2	%
Loss on extinguishment of debt		(47,044	)		-			(47,044	)		-100.0	%
Change in fair value of derivative financial instruments		1,616,994			241,777			1,375,217			568.8	%
Other income (expenses)	$	537,309		$	(2,354,992	)	$	2,892,301			-122.8	%

Refundable Tax Credits

Refundable tax credits for the three and nine month periods ended March 31, 2009, decreased by $93,226 and $331,140, respectively, compared with the same period in 2008. As with R&D expenses, the decrease in refundable tax credits is also related to the increase in sales of prototype and experimental products at the Avensys Tech division. 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 month period ended March 31, 2009 includes only such tax credits, arising from research and development activities. The Company’s investment tax credit recovery for the nine months ended March 31, 2009 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 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.

Division Direct Contribution

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

	Avensys Tech
	Three Months Ended March 31,
	2009			2008			Change			Change
	$			$			$			%
Net revenues from external customers		2,919,069			3,790,100			(871,031	)		-23.0	%

Cost of net revenues		2,150,878			2,538,980			(388,101	)		-15.3	%
Marketing and sales expense		169,257			256,147			(86,890	)		-33.9	%
General and administrative expense		282,984			428,492			(145,508	)		-34.0	%
Research and development expense		249,812			643,452			(393,640	)		-61.2	%
Depreciation and amortization expense		83,365			140,231			(56,866	)		-40.6	%

Direct costs		2,936,297			4,007,302			(1,071,005	)		-26.7	%

Direct contribution		(17,227	)		(217,202	)		199,974			92.1	%

	Avensys Tech
	Nine Months Ended March 31,
	2009			2008		Change			Change
	$			$		$			%
Net revenues from external customers		9,378,547			10,583,818		(1,205,271	)		-11.4	%

Cost of net revenues		6,850,023			6,826,466		23,557			0.3	%
Marketing and sales expense		430,363			527,636		(97,273	)		-18.4	%
General and administrative expense		911,730			721,136		190,593			26.4	%
Loss on impairment of Goodwill		2,605,391			-		2,605,391			100.0	%
Research and development expense		1,003,857			1,805,714		(801,857	)		-44.4	%
Depreciation and amortization expense		230,486			273,720		(43,234	)		-15.8	%

Direct costs		12,031,850			10,154,672		1,877,178			18.5	%

Direct contribution		(2,653,303	)		429,146		(3,082,449	)		-718.3	%

Direct costs for the Avensys Tech division decreased 26.7 % and increased 18.5% for the three and nine month periods ended March 31, 2009, respectively, over the same periods in the previous year. The decrease for the three month period is primarily due to a reduction in research and development expenses due to an increase in prototype and experimental product sales that result in R&D expenses being transferred to cost of goods sold. The increase for the nine month period is attributed to the loss on impairment of goodwill recorded in the second quarter.

	Avensys Solutions
	Three Months Ended March 31,
	2009		2008		Change		Change
	$		$		$		%
Net revenues from external customers		2,490,530		1,990,695		499,835		25.1	%

Cost of net revenues		1,345,011		1,235,875		109,136		8.8	%
Marketing and sales expense		659,539		461,123		198,416		43.0	%
General and administrative expense		279,101		151,782		127,319		83.9	%
Research and development expense		-		-		-		0.0	%
Depreciation and amortization expense		26,408		8,585		17,823		207.6	%

Direct costs		2,310,059		1,857,365		452,694		24.4	%

Direct contribution		180,471		133,330		47,141		35.4	%

	Avensys Solutions
	Nine Months Ended March 31,
	2009			2008			Change			Change
	$			$			$			%
Net revenues from external customers		7,118,573			4,075,405			3,043,168			74.7	%

Cost of net revenues		4,169,562			2,509,586			1,659,976			66.1	%
Marketing and sales expense		2,033,817			1,244,062			789,755			63.5	%
General and administrative expense		812,793			419,680			393,113			93.7	%
Loss on impairment of goodwill		1,283,253			-			1,283,253			100.0	%
Research and development expense		-			-			-			0.0	%
Depreciation and amortization expense		85,118			23,251			61,867			266.1	%

Direct costs		8,384,543			4,196,579			4,187,964			99.8	%

Direct contribution		(1,265,970	)		(121,174	)		(1,144,796	)		-944.8	%

Direct costs for the Avensys Solutions division increased 24.4% and 99.8% for the three and nine month periods ended March 31, 2009, over the same periods in the previous year. The growth in direct costs is highlighted by an increase in general and administrative expenses associated with the administrative salaries from the Willer acquisition and increased training costs.

Net Loss

Our net loss of $134,257 for the three month period ended March 31, 2009 decreased by $139,522 compared to the net loss of $273,779 for the same period in 2008. This decrease is the result of reduced research and development expenses due to an increase in prototype and experimental product sales that result in R&D expenses being transferred to cost of goods sold.

For the nine month period ended March 31, 2009, net loss of $4,055,521 increased by $1,220,066 compared to the net loss of $2,835,455 for the same period last year. This increase resulted from the goodwill impairment of $3,888,644 for the nine month period ended March 31, 2009, compared to zero for the same period in 2008. The impairment of goodwill resulted from an estimate that the fair values of the Avensys Solutions and Avensys Tech reporting units are below their respective carrying values. The estimated fair values have been impacted by the continued decline in the Company’s market capitalization coupled with weak industry outlook and a change in the timeframe to realize growth and cash flows objectives.

We incurred liabilities that are treated as derivative financial instruments as part of our acquisition of ITF Optical assets, the August 2006 (First Tranche) and November 2006 (Second Tranche) financing ("derivative liabilities") and the Senior Secured OID Convertible Note issued in September 2007. 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 March 31, 2009 and 2008, our share price was $0.012 and $0.085 a share, respectively, which impacted the fair values of the derivative liabilities on our balance sheet at those dates and reduced our net loss for the three and nine month periods ended March 31, 2009 by $440,328 and $1,616,994, respectively, and impacted our net loss for the three and nine month periods ended March 31, 2008 by an increase of $97,088 and a decrease of $241,777, respectively.

Financial Condition, Liquidity and Capital Resources

As discussed in Note 1 to the financial statements the Company’s operating subsidiary, Avensys Inc., renewed its line of credit with a financial institution in March 2009. The line of credit will come up for renewal no later than October 31, 2009, and will be reviewed based on AVI’s financial statements of June 30, 2009. At December 31, 2008 AVI was not in respect of the financial covenants pertaining to its line of credit with the financial institution. This constituted an event of default which triggered cross-default clauses affecting the Company’s Working Capital Facility (Note 7(a)) and Senior Secured Convertible Debenture (Note 11). Subsequently, the Company obtained waivers with respect to such cross-default clauses for the Working Capital Facility and Senior Secured Convertible Debenture, and AVI obtained an exemption from the requirement to respect certain financial covenants until June 30, 2009. 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 March 31, 2009. The Company’s continuation as a going concern is dependent upon the continued support of shareholders, lenders and suppliers and its ability to obtain additional cash to allow for the satisfaction of its obligations on a timely basis.

Management has taken steps to revise the Company’s operating and financial requirements. During the third quarter of fiscal 2009, as described in Note 7(d), the Company obtained additional research and development investment tax credit financing from a financial institution. Also, during the first quarter of fiscal 2009, as described in Note 8 to the financial statements, the Company amended an agreement with the former shareholders of ITF Optical Technologies during the first quarter of fiscal 2009. The amendment postponed, by 18 months, the exercise date of a put option that could have required the cash outlay of CAD $2,000,000 between April and October 2009.

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

As at March 31, 2009, net working capital decreased to a deficit of $345,764, compared to net working capital of $700,503 at June 30, 2008. Included in these figures for net working capital:

	March 31,			June 30,
	2009			2008		Change			Change
	$			$		$			%
Cash, cash equivalents, and short term investments		387,540			369,396		18,144			5	%
Receivables		5,450,532			7,045,825		(1,595,293	)		-23	%
Inventory		2,138,708			2,178,686		(39,978	)		-2	%
Other current assets		137,046			243,409		(106,363	)		-44	%
Current assets		8,113,826			9,837,316		(1,723,490	)		-18	%

Accounts payable and accrued liabilities		4,709,521			6,401,379		(1,691,858	)		-26	%
Loans payable		3,052,046			2,554,371		497,675			19	%
Current portion of convertible debentures		553,031			-		553,031			100	%
Other current liabilities		144,992			181,063		(36,071	)		-20	%
Current Liabilities		8,459,590			9,136,813		(677,223	)		-7	%

Net working capital (deficit)		(345,764	)		700,503		(1,046,267	)		-149	%

During the three month period ended March 31, 2009, the Company, having produced a net loss of $134,257, generated $285,046 of cash by Operating Activities from continuing operations. During the nine month period ended March 31, 2009, the Company, having produced a net loss of $4,055,521, used $34,584 of cash to fund Operating Activities from continuing operations. Excluding working capital items, the Company generated $314,622 and $394,745, respectively, of cash by Operating Activities from continuing operations for the three and nine month periods ended March 31, 2009.

An analysis of the three month periods is as follows:

	Three Months Ended March 31,
	2009			2008			Change
	$			$			$
Net (loss) income		(134,257	)		(273,779	)		139,522
Net adjustments to reconcile net profit (loss) to cash generated by (used in) operating activities		448,879			239,810			209,069
		314,622			(33,969	)		348,591
Change in accounts receivable and other receivables		720,972			(599,902	)		1,320,874
Change in accounts payable and accrued liabilities		(970,158	)		(304,857	)		(665,301	)
Change in other current assets and current liabilities		219,610			247,101			(27,491	)
Net cash generated by (used in) operating activities from continuing operations	$	285,046		$	(691,627	)		976,673

An analysis of the nine month periods is as follows:

	Nine Months Ended March 31,
	2009			2008			Change
	$			$			$
Net (loss) income		(4,055,521	)		(2,835,455	)		(1,220,066	)
Net adjustments to reconcile net profit (loss) to cash generated by (used in) operating activities		4,450,266			2,449,845			2,000,421
		394,745			(385,610	)		780,355
Change in accounts receivable and other receivables		618,829			(712,321	)		1,331,150
Change in accounts payable and accrued liabilities		(488,125	)		(89,510	)		(398,615	)
Change in other current assets and current liabilities		(560,033	)		(386,500	)		(173,533	)
Net cash generated by (used in) operating activities from continuing operations
	$	(34,584	)	$	(1,573,941	)		1,539,357

During the three month period ended March 31, 2009, we mainly financed our operations through the cash flows generated by Avensys from the sales of products and services.

Selected Balance Sheet information:

	As of March 31,		As of June 30,
	2009		2008		Change
	$		$
Total Assets		13,062,783		21,340,474		(8,277,691	)
Current Liabilities		8,459,590		9,136,813		(677,223	)
Long-Term Liabilities		2,880,852		4,560,670		(1,679,818	)
Non-Controlling Interest		-		7,677		(7,677	)
Total Stockholder's Equity		1,722,341		7,635,314		(5,912,973	)

The $8,277,691 decrease in total assets is attributable to impairment of goodwill, decreases in long-lived assets due to depreciation and amortization, the impact of foreign currency translation and reductions in cash and accounts receivable. The $677,223 decrease in current liabilities is mainly attributable to a decrease in accounts payable and accrued liabilities, offset by increases in bank and other loans payable and the addition of a current portion of convertible debentures. The decrease in long-term liabilities is primarily attributable to the revaluation of the balance of purchase price payable described in Note 8 to the financial statements and the change in fair value of derivative financial instruments.

As of March 31, 2009, the Company had 99,086,152 issued and outstanding shares compared to 99,036,152 on June 30, 2008.

Stock options outstanding at March 31, 2009 totaled 9,406,773 at a weighted average exercise price of $0.34 and have a weighted average remaining contractual life of 3.47 years. Stock options outstanding at June 30, 2008 totaled 10,036,773 at a weighted average exercise price of $0.35 and had a weighted average remaining contractual life of 4.05 years.

Senior Secured OID convertible Debentures

During the first quarter of fiscal 2008, the Company redeemed its Series B Subordinated Secured Convertible Promissory Notes and its Original Issue Discount Series B Subordinated Secured Convertible Promissory Notes, both originally due February 11, 2009 (collectively the “Notes”). Under an arrangement with a majority of the holders of the Notes, the Company also redeemed half of the associated Series Y and Series Z Warrants (collectively the “Warrants”) previously issued in August 2006 and November 2006 relating to the redeemed Notes. The total purchase price for the redemption of the Notes and 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 recorded a non-cash charge of $1,422,577 in the first quarter of fiscal 2008 which is included as part of Other Expenses in the Statement of Operations and Comprehensive Loss.

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

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

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

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

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

The Convertible Note contains events of default that would permit the Investor to demand repayment. At December 31, 2008, certain failed covenants with a financial institution triggered a cross-default clause within the Convertible Note. However, the Company has obtained waivers with respect to the cross-default clause for the Working Senior Secured Convertible Debenture, and obtained an exemption from the requirement to respect certain financial covenants with the financial institution in question until June 30, 2009

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

Critical Accounting Policies and Estimates

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

There have been no significant changes during the third quarter of fiscal year 2009 to the items that we disclosed as our critical accounting policies and estimates in our discussion and analysis of financial condition and results of operations in our Form 10-K for the fiscal year ended June 30, 2008, Other than for elements described in Recent Accounting Pronouncements below.

Recent Accounting Pronouncements

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 adopted FSP FAS 142-3 effective January 1, 2009. The adoption of this FSP did not have a significant impact on the consolidated financial position and results of operations of the Company.

Off-Balance Sheet Arrangements

None

PART II

ITEM 1. 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.

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 $256,819 (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.

Labor Law Litigation

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 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.

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

ITEM 1A.

There have been no material changes in our risk factors from those disclosed in our Form 10-K filed with the SEC on October 17, 2008, for the period ended June 30, 2008.

ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

31.2 Certification of Principal Financial Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under the e 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).

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 13 th day of May, 2009.

AVENSYS CORPORATION
(Registrant)

BY:	/s/ John Fraser
	John Fraser, President and Chief Executive
	Officer (Principal Executive Officer)

BY:	/s/ André Maréchal
	André Maréchal, Chief Financial Officer,
	(Principal Financial and Accounting Officer)

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