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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended **December 31,
2006**

[   ] 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:******000-49746**

VISCOUNT SYSTEMS, INC.(Name of small business issuer in its charter)

|NEVADA                                                        | 88-0498181                          
|------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of                               | (I.R.S. Employer Identification No.)
|incorporation or organization)                                |                                     
|                                                              |                                     
|4585 Tillicum Street, Burnaby, British Columbia,
      Canada | V5J 5K9                             
|(Address of principal executive offices)                      | (Zip Code)                          

Issuers telephone number: **(604) 327-9446**

|Securities registered pursuant to Section 12(b) of the
      Act: | None                         
|----------------------------------------------------------------- | -----------------------------
|                                                                  |                              
|Securities registered pursuant to Section 12(g) of the
      Act: | Common Stock, $.001 per share
|                                                                  | (Title of class)             

Check whether the issuer is not required to file reports pursuant
  to Section 13 or 15(d) of the Exchange Act. [   ]

Check whether the issuer (1) filed all reports required to be
  filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
  for such shorter period that the registrant was required to file such reports),
  and (2) has been subject to such filing requirements for the past 90 days. Yes
  [X] No [   ]

Check if there is no disclosure of delinquent filers in response
  to Item 405 of Regulation S-B contained in this form, and no disclosure will
  be contained, to the best of the registrants knowledge, in definitive
  proxy or information statements incorporated by reference in Part III of this
  Form 10-KSB or any amendment to this Form 10-KSB. [X]

Check whether the registrant is a shell company (as defined in
  Rule 12b-2 of the Exchange Act). YES [   ] NO [X]

State issuers revenues for its most recent fiscal year:
  $3,914,302 ($4,562,124 in Canadian dollars converted at an exchange rate of
  US$0.858/CDN$ 1.000) .

State the aggregate market value of the voting and non-voting
  common equity held by non-affiliates computed by reference to the price at which
  the common equity was sold, or the average bid and asked price of such common
  equity, as of a specified date within the past 60 days. (See definition of affiliate
  in Rule 12b-2 of the Exchange Act.): $4,020,612 as at January 16, 2007.

State the number of shares outstanding of each of the issuers
  classes of common equity, as of the latest practicable date: 16,082,450 shares
  of common stock as at January 16, 2007.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the Annual Meeting
  of Stockholders are incorporated by reference into Part III of this Form 10-KSB,
  which Proxy Statement is to be filed within 120 days after the end of the Registrant's
  fiscal year ended December 31, 2006.

Transitional Small Business Disclosure Format (Check one): Yes
  [   ] No [X]

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Form 10-KSB

Table of Contents

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FORM 10-KSB

VISCOUNT SYSTEMS, INC.

PART I.

Certain statements in this Form 10-KSB regarding future
expectations and financial performance should be regarded as forward-looking
statements and are subject to various risks and uncertainties including those
described elsewhere in this Form 10-KSB, and in our filings with the Securities
and Exchange Commission.

Currency of Financial Information and Exchange Rate Table

We maintain our books of account in Canadian dollars and
references to dollar amounts herein are to the lawful currency of Canada unless
otherwise indicated.

The following table sets forth, for the periods indicated,
certain exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of Canadian dollars per
one (1) U.S. dollar and are the inverse of rates quoted by the Federal Reserve
Bank of New York for U.S. dollars per CDN$1.00. On January 15, 2007, the
exchange rate was US$1.00 per CDN$1.1667. The high and low exchange rates for
each month during the previous six months were as follows:

High
      LowFebruary 2007
      1.1878
      1.1565January 2007
      1.1848
      1.1630December 2006
      1.1670
      1.1380November 2006
      1.1495
      1.1256October 2006
      1.1415
      1.1146September 2006
      1.1289
      1.1035


The following table sets out the exchange rate information as
at each of the years ended December 31, 2006 and 2005.

Year Ended December 312006
    2005Rate at end of Period
    1.1654
    1.1630Average Rate during Period
    1.1341
    1.2116Low
    1.0948
    1.1467High
    1.1794
    1.2696


Item 1. DESCRIPTION OF BUSINESS

GENERAL

We are a manufacturer, developer and service provider of access
control security products. In 2006, commercial sales of our MESH product line
continued to impact our total sales. MESH (Multimedia Embedded Security Hub) was
a new technology developed by Viscount that converges voice (intercom, emergency
communications), data (access control, elevator control, alarm) and some video
to provide increased security at a reduced cost of hardware, cabling and
installation and with simplified database management.

In addition to MESH, our current access control and security
product lines include the following: Enterphone 2000, a building intercom;
Entercheck, a card access system; RadioClik and InfraClik, radio frequency and
infrared remote controls; Elektra, liquid crystal display intercom panels;
EmerPhone, emergency telephone entry systems; and

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various accessories. We also have a service division that
provides service for the Enterphone 2000. We currently have 1,705 service
agreements in place.

Our website address is www.viscount.com. All periodic
and current reports are available, free of charge, on our website as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the U.S. Securities and Exchange Commission. Electronic or paper
copies of our filings are also available, free of charge, upon request.

BUSINESS OVERVIEW

We design, manufacture and service access control and security
products, including intercom and door access control systems and emergency
communications systems. These systems use telecommunications wiring to control
access to buildings and other facilities for security purposes. While much of
our current revenues are derived from sales of the Enterphone technology and
related security products, sales from our MESH product line continues to impact
and provide a significant source of revenues. Service sales from our existing
1,705 service agreements also continue to provide a significant source of
revenues.

Enterphone continues to be our leading sales product.
Enterphone is a building access control system that uses a buildings internal
phone wiring thereby avoiding use of telephone utility services. Our products
include access control panels that use the Enterphone technology. Our control
panels are typically installed at entrances to apartment buildings, government
facilities, and other buildings and facilities where security concerns require
access control systems. The control panels are sold in various formats and with
varying features and capabilities. Our Enterphone technology control panels are
sold through an established distribution network, and can be found installed in
approximately 35,000 buildings throughout North America. We also package and
sell access control and security products that are complementary to our
Enterphone product, including card access systems, radio frequency remote
controls, intercom monitors and closed circuit cameras.

MESH technology is based on a proprietary software platform
that can be used for a variety of security and access control applications as
well as communication functions. The technology represents a departure from
traditional access control and security systems. Traditional systems use
controllers that have a capacity to control from 1 to 8 access points per
controller. A building access system using the MESH technology can control
several hundred points of access from a single remote hardware and software
platform. The technology also allows several previously independent building
control systems to be hosted on a single hardware and software platform. Our
proprietary MESH software is designed to be modular, permitting additional
applications to be added as modules, each operating other building and area
control systems and high technology requirements.

COMPANY HISTORY

Our current business is operated primarily through our wholly
owned subsidiary Viscount Communication and Control Systems Inc. The business of
our subsidiary began operations in 1969 as a manufacturer of video switching
equipment. In 1970, the business was acquired by B.C. Telecom Inc. (BC Tel),
which was acquired by Telus Corporation in 1999. BC Tel was the telephone
utility for British Columbia, Canada controlled by GTE Corporation (now Verizon
Communications Inc.). Under BC Tel, the business operated as an electronics
research laboratory and manufacturing facility. Among the products manufactured
were central office telephone test equipment, telephone demarcation blocks, and
a satellite based kiosk system used to provide information at airports and other
public facilities. Responsibility for the manufacture of the Enterphone system
was transferred into the business in 1984 from BC Tel. BC Tel contracted to sell
the business in 1997 to Blue Mountain Technologies Inc., a company that
purchases and installs our products. Blue Mountain Technologies Inc.
simultaneously assigned its contractual rights to acquire all of the business
assets, except for certain leasehold interests, to our subsidiary, Viscount
Communication. BC Tel consented to the assignment and accordingly the business
was acquired by our subsidiary, Viscount Communication and Control Systems
Inc.

We were incorporated on May 24, 2001 under the laws of the
State of Nevada under the name OMW4 Corp. Our subsidiary, Viscount Communication
was incorporated in 1997 under the laws of British Columbia, Canada, for the
purposes of carrying on our present access control business. We acquired all of
the issued and outstanding shares in

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the capital of Viscount Communication on July 27, 2001, in
exchange for 10,000,000 shares of our common stock, thereby making it our wholly
owned subsidiary. As a result of the acquisition, the former shareholders of
Viscount Communication obtained a controlling interest in OMW4 Corp. In
connection with the acquisition, we changed our name to Viscount Systems Inc.
effective August 27, 2001.

In 2003 we acquired certain inventory and service agreements
from Telus Corporation. The service agreements relate to the maintenance of
approximately 1,705 Enterphone installations throughout Western Canada. The
inventory was comprised of various products and components for installation and
repair of these Enterphone installations.

Enterphone is a specialized telephone switch used to provide
intercom and access control functions in buildings. It was originally developed
by BC Tel in 1965. Mirroring the increased security awareness in buildings over
the past few years, we have been providing a more comprehensive package of
complementary products. Products packaged, using third party technologies for
this purpose, include card access systems, radio frequency remote controls,
intercom display panels and closed circuit cameras.

The MESH product line, which has been under development since
1998, is an integrated platform for building access control and management. MESH
continues to be the focus of our corporate development.

INDUSTRY OVERVIEW

We compete in the building intercom and access control systems
industry. The intercom and access control industry is sometimes referred to as a
segment of the low voltage systems industry. Our intercom and access control
systems are designed to automate the control of access to buildings or other
restricted access areas. Intercom systems and access control systems are
complementary; however they can also be used independently depending on user
requirements. For example, most modern residential apartment or condominium
buildings have an intercom system for visitors wishing to communicate with
residents. Residents, on the other hand, are issued access cards that can be
used in conjunction with card readers installed beside doors or elevators in
order to gain access.

Access control systems provide two functions for a building.
Building tenants use access cards and readers that control access through doors,
gates or elevators, while visitors use telephone intercoms to be granted
admission by a building occupant or manager. The systems also provide
sophisticated alarm functions such as identifying doors left open or forced
entry. The sophistication of systems ranges from controlling a single door where
records are kept manually, to large enterprise systems covering hundreds of
buildings from a dedicated security facility.

The building control industry has traditionally been highly segmented
  based on function. This has meant that makers of heating/ventilation and air-conditioning
  systems and security card access systems essentially manufacture input/output
  systems, while intercom makers manufacture voice systems, and security camera
  makers manufacture closed circuit video systems. Stated otherwise, audio, video,
  environment and access control systems are traditionally all separate building
  control systems that are independently controlled. There has been strong convergence
  of technologies in the computer and telephone related industries based on digital
  standards; however the building control industry has not as yet undergone a
  similar convergence of technologies. Traditionally, where systems need to be
  compatible, the industry has relied on integration instead of convergence. Integration
  is the use of a host computer to tie separate and distinct systems, typically
  from different manufacturers, together on a common software platform. Convergence,
  in the case of building control systems, is the provision of a new service that
  is designed to operate multiple systems using homogenous control parameters.
  Convergence is generally considered preferable to integration, as fewer distinct
  systems means lower operational and maintenance costs.

Along with certain other industry participants, we have turned
to current high-technology solutions in order to reduce costs of ownership of
security systems, while improving functionality. We have developed new system
platforms that will permit convergence of the control of various building
functions, such as access control, intercom, closed circuit television, and
heating/ventilation and air-conditioning. These systems can be operated on a
single commercially available host server and can operate using standard
communications techniques. As a result of using a single full service system to
replace the three or more separate dedicated systems, each requiring its own
host server, the overall cost of ownership of a security and control system has
been reduced.

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Access Control Systems Technology

The access control industry has traditionally used a technology
known as Wiegand. Approximately 90% of the worlds installed access systems are
based on Wiegand technology. Today, these systems are commonly found in
residential, commercial and industrial buildings in the form of access control
cards and card readers. Wiegand was initially developed in 1970 by Senso
Engineering as an access card technology. The card technology uses a special
patented process whereby wires are imbedded in a plastic access card to encode
its data. When passed through a magnetic field generated by a card reader, the
card generated a signal which is received and interpreted by the card reader. If
the signal is recognized, the reader will transmit the information to a host
controller to activate a switch, which for example purposes, may release a lock
or open an elevator to permit building access to the cardholder. A host
controller is essentially computer hardware that is programmed to receive
information from the card reader in order to permit access to a building.
Wiegand technology has established itself as the industry standard as it is
viewed as being reliable and difficult to counterfeit the access cards.

Other products that use the Wiegand principals for access
control are magnetic strip cards and radio frequency cards. These products
function similarly by providing a card reader with a signal that the reader
interprets and transmits to a host controller in order to grant or deny
access.

Wiegand access control technology requires card readers that
are connected to a host controller. Each host controller can operate between 1
to 8 doors. Accordingly, a building with a large number of controlled access
points could require a large number of host controllers, resulting in greater
hardware costs. Host controllers can in turn be connected to a central server
that monitors the host controllers and collects information on access point
usage.

The underlying technology that operates these traditional
access control systems is approximately 30 years old. The readers are considered
dumb readers as they simply receive information from the access card and
transmit it to a host controller. The host controller processes the information
in order to determine whether to grant or deny access. If access is granted, the
host controller then transmits a signal to activate a switch to open the access
point where the reader is located. This is a simple input/output type relay
system which requires a separate host controller for approximately every eight
access points.

As a result of the limitations and hardware requirements of the
traditional access control systems, some security industry manufacturers are
developing and marketing intelligent access control and communications
systems. Intelligent systems allow several previously independent building
control systems, such as intercom, access control, video, and climate control,
to be controlled by a single server. These systems are based on software
designed to control hundreds of readers from a single computer server, combined
with smart chips installed in readers at each control point. Smart chips are
programmable computer chips that permit access card readers to grant or deny
access without the need to relay a signal to and from a central host controller.
Smart chips can be programmed to perform tasks for a diverse range of building
control systems, such as fire alarm systems, heating/ventilation and air
conditioning, and building access and elevator controls. As the smart chip is
programmed to make its own decisions on a given application, this reduces the
load on the central host computer. The host computer accordingly performs
primarily a monitoring and information collection function.

We are participating in this advance in the access control
industry with our proprietary MESH intelligent access control and communication
technology system. We believe that intelligent systems, including smart chip
readers and cards will replace reliance on systems based on Wiegand technology.

PRODUCTS

We are a manufacturer, developer, reseller and service provider
of intercom and access control systems based on telephone, new and traditional
access card and reader technologies. Our intercom and access control systems are
installed throughout North America for various applications including:
condominium/apartment building access and intercom; residential intercom; gated
home/community access and intercom; seniors/government housing access, tracking
and intercom; elevator access and tracking; garage or perimeter gate control,
and emergency communications.

For the year ended December 31, 2006, approximately 21% of
total sales of our products and services were generated in the United States,
and 79% in Canada. This represents a change from 2005, where sales to the United

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States and Canada were 17% and 83%, respectively. The change is
in part due to increased sales of products and services in Canada as a result of
our acquisition of service agreements and inventory from Telus Corporation.
Information on our existing products can be viewed on our website at
www.viscount.com.

Our Enterphone Access Control Products

Historically our principal product was the Enterphone intercom
and access control system. Enterphone is our patented building entry control
system that uses a buildings internal phone wiring to allow access control for
tenants and intercom and access control between visitors and tenants. The use of
a buildings internal phone wiring by our Enterphone system provides an option
to using telephone company wiring, thereby bypassing monthly telephone charges.
It also does not require tenants to pay for an individual phone line to operate
their intercom and door access system and is not affected by interruptions in
telephone company service. This makes our Enterphone system distinct from other
dial-up telephone entry systems that use telephone company lines. Sales of our
products based on the Enterphone system account for approximately 31% of our
total sales in fiscal 2006. This is down from approximately 42% in fiscal 2005,
due in part to the development of other sources of sales, including Enterphone
maintenance contracts, new product lines, and our OEM product lines.

Our Enterphone system is sold as a central control panel which
is installed in a buildings telephone control room. The control panel connects
an intercom panel located at an entrance to the building with the telephone of
building tenants. A visitor wishing to gain access to the building dials a 1 to
4 digit number at the entrance panel. The call is directed from the entrance
panel, through the common control equipment and up to the tenants telephone.
The tenant hears a unique ring and can unlock the entrance door by pressing a
number on the telephones numeric keypad. The tenant does not need to rent a
telephone line from the telephone company. Each control panel can process
connections to as many as 840 suites.

We also manufacture electronic entry access panels that can
operate using either our Enterphone system, or dial-up telephone company lines.
Our panels are manufactured in various sizes and with various features in order
to accommodate varying purposes and building types. For example, we manufacture
panels that provide intercom and access control from 1 suite to up to 1000
suites; or panels that provide on-screen name search capabilities; or panels
that are streamlined in shape or small in size. All panels that we manufacture
incorporate the Enterphone technology, however most panels can also be installed
to use telephone company lines.

Our Enterphone panels can also be combined with other
technologies such as access tracking and control, closed circuit monitors,
infrared and radio frequency remotes, and Wiegand cards and card readers. We
purchase these technologies from other manufacturers and resell them under our
brand names. Most of the products that we resell can be integrated into our
Enterphone access control system.

Our MESH Access Control System

Overview

MESH is a software based building management system designed to
replace traditional systems that are more hardware intensive. We continue to
develop this technology that was started in 1998. MESH was pre-commercially
released in late 2003.

MESH is a software platform that communicates with a network of
intelligent input/output devices, such as card readers or building environment
sensors. As such, the intelligence of the system can be said to be distributed
among the input/output devices. This is contrasted with the traditional access
control industry, which uses dumb readers that require information to be
processed at a central host computer. An intelligent reader or input/output
device uses a pre-programmed smart chip which allows it to process information
on its own, and does not require the host computer to make action decisions,
such as to grant or deny access to a door or to activate air-conditioning. The
use of intelligent devices accordingly reduces the load on the host computer
which allows the host computer to allocate its resources to a greater number and
diversity of tasks. The networked distribution of intelligent devices also
means reduced cost resulting from reduced hardware requirements, easier training
of control system operators, and the use of commercially available host computer
hardware and communication techniques. Initially, we will apply the MESH
technology for access control system purposes.

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The conceptual basis for MESH is simple. Virtually every low
voltage building technology, except building access, has evolved using
intelligent addressable network devices. This includes fire alarms and
heating/ventilation and air-conditioning. An addressable network is one in which
devices can constantly communicate with a host server controller or can be
polled for information. For example, if a smoke detector on a non-addressable
fire alarm system fails, a fire in that location may go undetected since there
is no way to identify the failure without actually testing the device. In
contrast, the smart chip in an addressable smoke detector may be able to
notify the fire panel of a problem immediately and call for service. Access
control systems, however, continue to be based on a 30-year-old standard called
Wiegand. The limitations of this standard continue to plague the industry due to
the slow data transmission speed (9600 baud) between the reader and the host
controller, the high cost and quantity of specialized and dedicated hardware,
and the inability of the host computer to process voice or video signals. For
example, buildings requiring elevator access control have traditionally required
a significant amount of expensive dedicated hardware. The MESH network with
intelligent readers can accomplish these functions without dedicated hardware,
resulting in cost reductions, both in terms of the actual hardware required and
the labor, cable and conduit costs associated with installation.

The MESH system bypasses the need for specialized and dedicated
hardware. Instead, MESH provides a software-based platform that operates on an
industrial computer server connected to intelligent readers transmitting data
at high speed rates of up to 156,000 baud, while simultaneously running voice
and video applications. The benefits and functionality derived from this
approach can be significant.

MESH Structure

The MESH network consists of a main control computer server
communicating with a series of intelligent readers, panels, and input/output
devices. The key to the technology is the smart chip we use, known as the
MPNode computer chip, a programmable chip. We purchase the MPNode chips and
program them to perform certain functions upon detecting certain data. For
access control applications, the chip is installed into a card reader. When data
from an access card is received by the card reader, the chip processes the data
and makes a decision to grant or deny access. Information on the transaction is
passed along to the host computer for data storage and analysis purposes.
Traditional Wiegand style card readers require an intermediate controller for
every two or three reading devices. An intermediate controller is connected
between the host computer and the group of readers controlled by it. In
contrast, the MESH systems allows intelligent readers to be installed in
series, or daisy-chain fashion, without the need for intermediate controllers.
Small interface modules are used instead to maintain data flow. This reduces
hardware costs as only one host computer is required.

MESH panels, located at entrance doors for visitor access, can
operate independently or as slaves off the MESH server. The basic MESH panel
that we have commercially released is a full color screen industrial computer.
Panels may be located at entrance doors for visitor access or can be on-site
managed by security guards as they manage the MESH network. The slave/master
architecture of MESH panels reduces cost, simplifies programming, and improves
data base management.

In designing MESH, much consideration has been made of the many
dissimilar applications requiring a MESH network. In cases where building
control is accomplished with on-site security and concierge staff, limited MESH
hardware or possibly only software may be needed to perform the required
functions. For example, MESH software may be sold as a simple visitor tracking
system for commercial or gated residential sites.

In general, MESH has been designed to allow simple
installations to be performed by small independent alarm contractors. However,
provision has also been made for direct involvement by our staff in large campus
wide and enterprise wide installations.

MESH has many additional benefits, both in terms of building
security and particularly relative to the legacy Wiegand protocol. It is our
belief that addressable networks pose a serious threat to the continued use of
the Wiegand format.

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MESH is a modular product, meaning that the software can
accommodate add-on features or upgraded features. We have developed various
modules for our MESH technology, and we intend to develop further modules which
will be released in a series of phases. Some of these product enhancement
modules are described below:

- MESH Photo-badging software is being designed to allow digital
  photo-imaging of individuals accessing a building, which can be stored in a
  database; in development
- MESH Time and Attendance software will allow human resources personnel to
  use the card reader database to track employee attendance and to automatically
  adjust card user characteristics based on vacation schedules, holiday dates
  and termination; in development
- The MESH server provides new opportunities to host video on the unified
  platform with voice and data. This would represent an entirely new concept in
  the security industry
- The nature of the MESH server makes MESH telephony products inherently
  Internet enabled. Future MESH appliances may include the MESH television line,
  which allows residents to view visitors at the door. MESH panels will be able
  to connect to web enabled set top boxes being promoted as part of the web TV
  market. MESH may be able to connect to videoconferencing telephones that would
  compete in the large offshore video intercom business but at a fraction of the
  cost by saving on conduit and cable;
- The distributed intelligence of MESH makes the product suited to the
  growing emergency call/nurse call industry;
- MESH networks are built on a proprietary architecture platform which is
  functional to integrate with any existing automation network;
- A new and emerging market segment tracks not just people, but equipment. A
  typical application is the embedding of anti-theft chips in computers, which
  integrate with card reader systems.

Our other products

Our next generation of Enterphone systems, called Enterphone X,
EPX (previously named EP3000), was due to release during the first quarter of
2006, but due to continued research and development, this new product is now
scheduled for release during the second quarter of 2007. We expect this product
to generate commercial sales during the first quarter of 2007. EPX will replace
EP2000. EPX, also a no phone line system like EP2000, is the next generation of
Enterphone. EPX will be more cost effective because it will require less
assembly and material input costs. EPX is designed to improve compatibility with
MESH and other newer telephony technologies.

The Enterphone 2000 design dates back to 1990 and the
architecture has created complications for both manufacturing and installation.
The new universal controller will eliminate the need for Viscount to manufacture
and carry inventory for 10 different circuit boards. Overall, EPX will reduce
cost, produce higher margins, and improve our ability to market MESH.

Our other products include RadioClick and InfraClick. These are
remote control access control products for doors and parking gates. They are
sold separately or as complementary to our Enterphone, Entercheck and MESH
systems. We also manufacture and sell EmerPhone, an intercom system that is sold
in elevator phone, emergency phone and entry phone applications.

OTHER SERVICES

In addition to sales of our Enterphone, MESH and OEM products,
we also service approximately 1,705 existing Enterphone installations within
Western Canada.

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PRODUCTION

Viscount has facilities for circuit board manufacture and
mechanical assembly. We use a range of processes to produce our products. Some
products including Enterphone, Infraclik, and Axess are completely manufactured
in-house. MESH and Emerphone use outsourced circuit boards with final assembly
and software installed at Viscount. Some access control, card readers, Elektra
panels, Infraclik and various product accessories are purchased from other
manufacturers and resold under our brand-names. We maintain full facilities to
assemble through-hole circuit boards and limited facilities for assembling
surface mount circuits. We have a policy of supporting old products as long as
parts are available for servicing and replacement. We are designing our
Enterphone X to be backwards compatible with the 2000 series to improve the
longevity and serviceability of both products.

The MESH software platform is loaded on standard industrial
computer chassis. We are not developing hardware internally for MESH, since the
required hardware controllers are commercially available at quality and price
levels that make internal development uneconomical. In addition, by using
off-the-shelf components, we improve our time to market, eliminate hardware
debugging and increase our ability to be technologically flexible in the future.
We are primarily executing final mechanical assembly of the MESH systems.

RESEARCH AND DEVELOPMENT

Our research and development continues to be focused on
enhancing MESH and completing the development of EPX. A number of these
enhancements were identified in the MESH Structure and Our other products
section of this document. Specific custom MESH applications are being
considered, evaluated and implemented. An example of this process would be
considering built-in badging printers and a virtual concierge.

MARKET AND MARKETING

The Market

The intercom and access control market is serviced by a number
of large and small competitors. Our traditional products compete in a mature
marketplace, that largely uses the 30 year old Wiegand technology. We believe
that there currently exists an opportunity in the building and access control
market for innovative products that use current technologies to reduce user
costs. We have positioned our MESH technology to take advantage of this
opportunity.

The access control market can generally be described as the
market for any equipment used to control passage through a door, gate or other
portal. A portion of this market is comprised of mechanical and electronic door
locks that typically control access through single doors. Many of the single
door systems have been engineered for low security levels for customers who do
not desire a full access control host. The access control market that we compete
in involves computerized access control systems that typically control access
through multiple access points, such as our Enterphone system. MESH was designed
to present a new technology to this computerized market niche. In particular, in
large high-rises with a full MESH system, individual tenants may use the MESH
server to control access to one or two doors.

Our traditional market for our Enterphone product was apartment
and condominium buildings. While the market for telephone entry type systems
amounts to about US$100 million, in the past 10 years there has been a strong
trend towards increased building security resulting in much more sophisticated
integrated installations. For example, in 1990, a typical condominium building
would be equipped with an intercom to admit visitors. Today, a typical new
building installation includes telephone entry, card access, closed circuit
cameras, individual burglar alarms and panic stations. This puts pressure on
manufacturers to provide a comprehensive package and represents an opportunity
for significant revenue growth per system. MESH is our first in-house product
that addresses these multiple requirements. The modular nature of MESH also
provides us with an excellent opportunity to design additional products on the
MESH platform to provide enhanced options for a comprehensive building security
package.

In addition to apartment entrances, MESH is also designed to
provide access control for the rapidly growing gated community market. Monitor
style directory panels are also used in thousands of commercial high-rises. The
MESH

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panel provides features previously unavailable for this market.
The overall effect of these system advances has enhanced our core business,
while allowing us to find applications where the new features expand the
traditional market for such systems.

We are targeting upgrades and retrofits to existing apartments
  and other complexes that use traditional telephone wire intercom access control
  systems. The low hardware costs and increased functionality of the MESH system
  continue to be marketed to building management companies, along with its turnkey
  installation as a replacement to existing access control systems for most modern
  buildings.

While complete MESH networks will typically be installed, the
modular nature of MESH allows additional segmentation based on product
application and end-user need. The nature and scope of a MESH installation
depends on the level of security required, the product alternatives, the number
of buildings, and the level of system management required. The nature and scope
of an installation can be described in terms of a user spectrum ranging from
price sensitive users to users requiring enhanced services. At one end of this
spectrum is price. For these applications MESH has been competing with
traditional Wiegand systems. We believe the cost reduction aspects of MESH has
provided us with a competitive advantage over traditional Wiegand systems. For
example, a typical condominium developer does not manage a building after
construction. Therefore, the developer is looking for a very affordable,
reliable access control system. Unless a more sophisticated product will help
sell suites, the developer tends to keep the system simple. At the middle of the
spectrum are customers who will adopt MESH mainly due to system benefits. For a
commercial high-rise this may be the flexibility derived from a new user profile
approach MESH uses for programming. On the enhanced service end of the spectrum
we find customers who need to develop a much closer relationship due to the
level of sophistication of their needs. At this level, we anticipate additional
revenue opportunities for custom programming, data mining and hosting, and
direct installations for national accounts.

While the core function is controlling access/egress, through
the planned development of various MESH technology modules, we have been
actively targeting all of these segments. For example, a MESH add-on module can
be developed to provide an asset tracking system to prevent computer theft. The
inherent alarm functions of MESH allow it to be used as an integrated
theft/burglar alarm system for large facilities. The MESH telephony video
capture function will allow government agencies to track alcohol and drug
problem tenants of controlled housing complexes or other regulatory monitoring
functions. Finally, MESH, along with our EmerPhone, can function to combat
vandalism and to secure parking lots.

We rank controlling access/egress and securing parking
facilities as the primary concerns of our traditional core multi-residential
business.

Distribution Plan

We currently have approximately 500 dealers for our existing
products throughout North America. When our existing business was acquired from
BC Tel, we relied primarily on exclusive and semi-exclusive dealers in certain
major metropolitan areas. Our distribution network is not static and we are
constantly seeking additional sales channels. In October and November of 2003,
we signed a distributor deal with Tri Ed, the security distribution subsidiary
of Tyco. The agreement placed our security products in 27 Canadian and U.S. Tyco
branches, including Denver, Dallas, Phoenix, Seattle and six locations in
California.

As previously noted MESH can serve several different markets
and the type of dealer serving each may vary. Simple installations may be
performed by small independent dealers, but as the overall scope of the project
increases, the technical ability of the dealer becomes increasingly important.
At the extreme, our employees may be directly involved with the customer in
designing, installing and servicing the product. In other cases, our personnel
may be involved on a co-op basis with large national security, building
automation and heating/ventilation and air-conditioning contractors.

These distribution deals, along with our existing dealer base,
gave us immediate access to the largest networks of dealers in the US, Canada
and Mexico.

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During the past year, we have been targeting our existing
markets for the sale of our MESH technology, as well as targeting the
international marketplace. Internationally, we have sold MESH in China, India,
France, and New Zealand. MESH is designed to accommodate foreign languages with
minimal modifications to the software. This is in contrast to other products of
its type which require a heavy software investment to provide alternative
language software. With MESH, the core software can be applied in all languages
with only the on screen text displays needing to be translated. Translation can
be accomplished using commercially available translation software.

MESH Marketing Strategy

We have been using our established distribution channels, as
well as new distribution channels to access our target markets for the MESH
technology. As a unique technology, however, end-users as well as dealers must
be educated about MESH benefits. It is our experience that a stronger initial
emphasis on end-user decision-makers and large national system integrators will
be the most effective in developing the MESH market.

Advertising

Our products are advertised on an ongoing basis in various
print publications, which we will continue to do. We have been testing new
publications on a regular basis to evaluate response, sales and readership. All
leads are followed up and magazines are rated based on a dollar sales per
advertising dollar spent ratio. While the sales cycle is sometimes fairly long,
this approach has given us a very accurate measure of the effectiveness of
various publications and individual ads.

Trade Shows

We have experienced that the marginal dollar benefit of trade
show participation is much less than other promotional media (print ad, direct
mail etc.). Therefore, we will continue to be very selective in choosing which
tradeshows would introduce MESH most effectively.

Direct Marketing

One of the most effective ways to market security systems is to
identify major institutional and corporate users and market directly to key
individuals. We hired additional sales representatives in the U.S. to continue
marketing our MESH technology. We continued educating customers about our MESH
technology by holding MESH training seminars throughout the U.S. and at hour
head office.

Pricing Strategy

Our system provides features never before available in a
building control security system. The MESH technology is built on an
architecture which can reduce user costs significantly. The modular nature of
the technology amplifies this effect the larger the system becomes.

With a unique product and a position of product leadership, we
have devised a strategy of building market share. This strategy involves selling
MESH at reasonable 50-60% margins. With the telephony component, we have been
targeting a price which provides MESH panels at a price that is competitive with
similar products, but with newer enhanced features.

COMPETITION

Competitive Summary

The security and building control industry is undergoing a
rapid period of consolidation. Large multi-national companies are integrating
vertically by acquiring equipment providers to build house brands. Recent
examples are the purchase of Cardkey by Johnson Controls, Guardall by Chubb and
ADI/Northern Computers by Honeywell. The access control industry is very
segmented with no company having a dominant market position. Canada has
approximately six access control product manufacturers, while the U.S. has at
least fifty. There is a certain amount of vertical integration in the business
and several large multinational companies own their own house brands. Many

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branches of these multinational companies often have their own
brand preferences and buy outside their internal distribution channels.

Almost all manufacturers build control hosts based on Wiegand
technology. Due to these limitations, most research and development is focused
on cost reducing hardware and making the control hosts more network capable. In
all cases, the manufacturer using traditional Wiegand technology are limited
from 1 to 8 doors per host.

Competitive Threats

We have a strong dealer and distribution plan in place, and
MESH has positioned us in a market dominated by much larger players. The higher
security MESH applications are also somewhat outside of our traditional scope of
business and therefore, we are rapidly trying to develop a market for MESH and
in the process, educating users of MESH through our training seminars. We
believe that our marketing strategies and training seminars will provide
benefits that will help us achieve market share that will allow us to be
competitive. There is no guarantee that we will be able to successfully compete
against our larger competitors.

While MESH is still a new product in an established growing
market, technological change can be met with resistance. Some buyers are nervous
about new products, and new protocols even more so. Most buyers are familiar
with the benefits of addressable fire alarms and we have marketed MESH from this
point of view; that is to stress the inevitability of all access control systems
evolving this way.

A key concern is the ability of competitors to imitate the
product and the ability of large imitators to more easily commercialize their
product. We have estimated that we still have a three-year market lead.
Fortunately, the wide range of MESH software applications should provide us with
an ongoing lead, as long as we are aggressive with research and development.

INTELLECTUAL PROPERTY

We will rely on a combination of patent laws, trade secret
laws, non-disclosure and other contractual agreements, and technical measures to
protect the confidential information, know-how, and proprietary rights relating
to our Enterphone, MESH and other Viscount products. We have contractual rights
with respect to registered North American trademarks and tradenames including
the following: Viscount, Enterphone, Enterchek, InfraClick, RadioClick, and
EmerPhone. We are still considering and evaluating the need for a North American
patent for our MESH technology, and registering North American tradenames for
MESH.

We have registered active Internet domain names for
www.viscount.com and www.enterphone.com.

Our standard employment agreements and license agreements
contain provisions that protect the confidentiality of our proprietary property.
All our employees and sales agents are required to sign these agreements prior
to their employment or engagement.

To date we have not received notification that our services or
products infringe the proprietary rights of third parties. Third parties could
however make such claims of infringement in the future. We cannot be certain
that others will not develop substantially equivalent or superseding proprietary
technology, or that equivalent services will not be marketed in competition with
our services, thereby substantially reducing the value of our proprietary
rights. Furthermore, there can be no assurance that any confidentiality
agreements between us and our employees or any license agreements will provide
meaningful protection for our proprietary information in the event of any
unauthorized use or disclosure of such proprietary information.

GOVERNMENT REGULATIONS

Our Enterphone and OEM products are FCC and IC approved as well
as ADA approved where required by law depending specifically on particular
products and place of installation. Our MESH products conform to UL
certifications.

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Some of our products are still under government regulation. The
Enterphone is an interposition technology which in U.S. states can only be
installed where the local public service commission has designated the original
point of entry of a building as the demarcation point between the telephone
company and building owners responsibility. Conversely, it can also be
installed where the telephone company has given consent to allow Enterphoneto share the telephone backbone.

The history of government deregulation for us mainly relates to
the demarcation point in a building. Until government deregulation came to the
access control industry, Enterphone type systems could only be installed by
telephone companies.

Historically, Enterphone was approved by MA Bell. After the
break-up each regional telephone company began to make its own decisions. As a
result of this, Chicago, New York, and Boston became strong markets for the
Enterphone. Another result of government deregulation was that many telephone
companies withdrew from the access control systems industry, which resulted in
our using direct dealers in those regions.

OUR SOURCES OF REVENUES

The majority of the Companys revenues are derived from
  the Enterphone product line. Historically, the Enterphone product sales represented
  approximately 60% to 80% of total revenues. In fiscal 2006, this percentage
  decreased to 31% due in part to new sources of revenues, including service contracts
  purchased from Telus Corporation, and the commercial launch of MESH, which collectively
  represented 28% of revenues in fiscal 2006. The balance of the Companys
  revenues are derived from other products such as access tracking and control,
  closed circuit monitors, infrared and radio frequency remotes.

EMPLOYEES

Viscount employs twenty-eight full time staff at its production
facility and head office located in Burnaby, British Columbia, Canada.

Item 2. DESCRIPTION OF PROPERTY

PROPERTY

Our executive office and central factory is located in Burnaby,
British Columbia, where we currently lease 12,040 square feet. We lease this
space under an industry standard operating lease with a term expiring May 31,
2007, renewable at the option of Viscount. Current monthly lease obligations are
$10,108. We believe that our current facilities are adequate and are suitable
for our current use, and that suitable additional facilities will be available,
when needed, upon commercially reasonable terms. Our facilities are adequately
insured against perils in a manner consistent with industry practice.

Item 3. LEGAL PROCEEDINGS

Viscount was named as a third party defendant in litigation
that involved the alleged malfunction of certain equipment installed in a
residential rental building in Chicago, Illinois. This litigation was first
reported in its Form 10QSB filed for the period ended June 30, 2004, identified
as follows: Joyce M. Smith, Administrator of Estate of Helen Delaney, deceased
v. Metroplex, Inc., et al. Docket No. 03 L 7595 (Law Division, Circuit Court of
Cook County, Illinois). Subsequent to June 30, 2006, we settled the suit through
our insurer for US$20,000 and on July 18, 2006, the Circuit Court of Cook
County, Illinois, accepted the settlement and issued an order dismissing us as a
party to the lawsuit.

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

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PART II.

Item 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED
  STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

Trades in our common shares are quoted on the Over-the-Counter
Bulletin Board (OTC Bulletin Board) which is a quotation service administered by
the National Association of Securities Dealers (NASD). Our trading symbol on
this service is VSYS.

The OTC Bulletin Board has a limited and sporadic trading
market and does not constitute an established trading market. Our shares began
trading on February 12, 2002. The following table sets forth the range of high
and low price information of the common shares as reported on the OTC Bulletin
Board for the last two fiscal years and the subsequent period ending March 15,
2007. The price information available reflects inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.

|     |                                              | High (U.S. $) | Low (U.S. $)
|---- | -------------------------------------------- | ------------- | ------------
|2007 | First Quarter
      (through March 15, 2007) | $0.35         | $0.22       
|2006 | Fourth Quarter                               | 0.35          | 0.22        
|     | Third Quarter                                | 0.48          | 0.25        
|     | Second Quarter                               | 0.53          | 0.32        
|     | First Quarter                                | 0.55          | 0.39        
|2005 | Fourth Quarter                               | 0.71          | 0.52        
|     | Third Quarter                                | 0.96          | 0.61        
|     | Second Quarter                               | 0.97          | 0.68        
|     | First Quarter                                | 1.07          | 0.85        

As of January 5, 2007 there were 25 holders of record of our
common stock, holding a total of 16,082,450 shares, and an unknown number of
beneficial holders.

We have not declared any dividends in the last two fiscal
years.

The following table sets forth information respecting our
compensation plans as at December 31, 2006, under which shares of our common
stock are authorized to be issued.

Plan Category
    Number of securities to
      be issued upon exercise of outstanding options,
      warrants and rights (a)
    Weighted-average
      exercise price of outstanding options,
      warrants and rights (b)
    Number of securities remaining
      available for future issuance under equity
      compensation plans (excluding securities reflected
      in column (a)) (c)Equity compensation plans approved by security
      holders
    3,117,550
    US$0.27
    0Equity compensation plans not approved by security
      holders
    N/a
    N/a
    N/aTotal
    3,117,550
    US$0.27
    0


Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION

The following discusses our financial condition and results of
operations based upon our consolidated financial statements which have been
prepared in conformity with accounting principles generally accepted in the
United States of America. It should be read in conjunction with our financial
statements and the notes thereto included elsewhere herein. All dollar amounts
are in Canadian dollars unless otherwise noted.

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RESULTS OF OPERATIONS

Sales revenues for the year ended December 31, 2006 have
decreased by $451,368 or 9.0% to $4,562,124, as compared to sales revenues of
$5,013,492 for the year ended December 31, 2005. The decrease in sales for the
year ended December 31, 2006 resulted from decreased sales of our legacy
Enterphone 2000 system. Enterphone sales for the years ended December 31, 2006
and 2005 were $1,390,357 and $2,117,190, respectively, a decrease of $726,833 or
34.3% . MESH sales for the years ended December 31, 2006 and 2005 were
$1,265,097 and $1,000,138, respectively, an increase of $264,959 or 26.5% . MESH
sales for the year ended December 31, 2006 were 27.7% of total sales, as
compared to 19.9% of total sales for the year ended December 31, 2005. MESH was
a new technology developed by Viscount that converged voice (intercom, emergency
communications), data (access control, elevator control, alarm) and some video
to provide increased security at a reduced cost of hardware, cabling and
installation and with simplified database management.

Enterphone sales continued to fluctuate based on new
construction orders and we believe the trend over the last twelve months does
not reflect the Companys overall corporate direction. We expect the future
growth of MESH and the size of the related MESH market to offset, either fully
or partially, any further shrinkage of Enterphone sales in the coming years. The
Enterphone 2000 is a 15 year old technology and management believes the
introduction of the next generation of Enterphone systems, Enterphone 3000,
currently projected to occur in the first quarter of 2007, will improve
Enterphone sales. Similar to the Enterphone 2000 product line, the Enterphone
3000 does not require the use of external phone lines. Enterphone 3000 product
line is designed to be more cost effective, as it will require less assembly and
material input costs. In addition, we have designed the Enterphone 3000 to
provide improved compatibility with our MESH system, as well as with other newer
telephony technologies

We also provide Enterphone support and maintenance services
pursuant to service contracts that were assigned to us from Telus Corporation in
2003. Sales from the 1,705 existing service contracts continue to be steady. On
average, each service contract represents ongoing revenues of approximately $33
per month, inclusive of parts and labor. Typical customers include strata
management and building owners as well as various residential, business and
industrial users of Enterphone access control and security systems. During the
twelve months ended December 31, 2006, customer service contracts and new
equipment sales generated aggregate sales revenues of $1,512,182, as compared to
$1,561,434 for the year ended December 31, 2005. This included MESH sales by the
service division.

The intangible assets held by the Company are comprised
primarily of service agreements for our product known as Enterphone 2000. The
number of service agreements held by the Company decreased from 1,780 at
December 31, 2005 to 1,760, 1,745, 1,712 and 1,705 at March 31, June 30,
September 30, and December 31, 2006, respectively. During the four quarters of
2006, the Company performed a test for impairment in accordance with Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS 142) and evaluated the status of service agreements. Management
determined that no charge for impairment was required but the continuing
reduction in the number of service contracts held, indicated that the intangible
asset should be deemed to have a definitive life based on the provisions of SFAS
142. Accordingly, the Company continued to amortize the cost of the service
agreements on a straight-line basis over an estimated useful life of 10 years,
which became effective as of April 1, 2005. At December 31, 2006, the cost of
the service agreements, net of accumulated amortization, was $172,360.

The cost of sales as a percentage of sales was 42.6% for the
year ended December 31, 2006, as compared with the cost of sales as a percentage
of sales of 42.4% for the year ended December 31, 2005. Costs of sales as a
percentage of sales had remained consistent due to managements commitment of
reviewing input costs regularly. Our policy of managing cost of sales remains
the same. We are continuously focusing on controlling costs, by using multiple
suppliers to ensure that the best and most inexpensive raw materials are used in
our products.

Gross profit for the year ended December 31, 2006 was
$2,620,874, an decrease of $215,511 or 7.6%, as compared to a gross profit of
$2,836,385 for the year ended December 31, 2005. This decrease corresponds with
the decreased sales revenues and consistent cost of sales percentage for the
year ended December 31, 2006.

Selling, general and administrative expenses were $2,563,343
and $2,392,903 for the years ended December 31, 2006 and 2005, respectively, an
increase of $170,440 or 7.1% . This increase was due to increases in variable
costs such as travel, tradeshow and various office expenses. As a percentage of
sales, selling, general and administrative expenses were 56.2% and 47.7% for the
years ended December 31, 2006 and 2005, respectively.

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Research and development costs were $392,876 for the year ended
December 31, 2006, as compared to $361,983 for the year ended December 31, 2005.
Research and development costs increased by $30,893 or 8.5% due to costs
incurred in designing our new Enterphone 3000 unit and additional costs incurred
to complete the next phase of MESH.

Loss before income tax for the year ended December 31, 2006 was
$(433,761), as compared to income before income tax of $404 for the year ended
December 31, 2005. This is a decrease in income of $434,165.

LIQUIDITY AND CAPITAL RESOURCES

Cash decreased as of December 31, 2006, as compared to December
31, 2005. At December 31, 2006, cash totaled $134,552, as compared with the cash
of $246,563 at December 31, 2005. This represented a decrease of $112,011. We
have a bank credit facility available for an operating loan of up to a maximum
of $500,000 at the prime lending rate plus 1.0% . Amounts drawn are repayable on
demand. At December 31, 2006, $319,687 was drawn on this facility. The facility
is secured by substantially all of our assets under a general security
agreement.

At December 31, 2006, working capital was $490,255, as compared
to a working capital of $869,442 at December 31, 2005. Working capital has
decreased by $379,187. The current ratio at December 31, 2006 was 1.37 to 1.0,
as compared with 1.82 to 1.0 at December 31, 2005.

The accounts receivable turnover ratio for year ended December
31, 2006 was 66 days, as compared to 61 days for the year ended December 31,
2005, an increase of 5 days. This increase was due to certain slower paying
accounts which are closely being monitored by management. The accounts
receivable reserve was $164,924 at December 31, 2006, as compared to $92,421 for
the year ended December 31, 2005, an increase of $72,503. The reserve was
increased to be conservative in recognizing some of the slower paying accounts.
Management continues to recognize and remove older doubtful customer accounts
from the accounts receivable sub-ledger, as well as more regular follow-up on
certain customer accounts to improve the collection process. There had been no
significant or material business conditions that would warrant additional
increases to the reserve at this time.

For the year ended December 31, 2006, there were no capital
expenditures other than the purchase of equipment.

To date, we have not invested in derivative securities or any
other financial instruments that involve a high level of complexity or risk. We
expect that in the future, any excess cash will continue to be invested in high
credit quality, interest-bearing securities.

We will likely require additional funds to support the
development and marketing of our new MESH product. There can be no assurance
that additional financing will be available on acceptable terms, if at all. If
adequate funds are not available, we may be unable to develop or enhance our
products, take advantage of future opportunities, respond to competitive
pressures, and may have to curtail operations.

There are no legal or practical restrictions on the ability to
transfer funds between parent and subsidiary companies.

We do not have any material commitments for capital
expenditures as of December 31, 2006.

There are no known trends or uncertainties that will have a
material impact on revenues.

Related Party Transactions

There were no related party transactions for the period covered
by this report.

Critical Accounting Policies:

The Companys discussion and analysis of its financial
condition and results of operations, including the discussion on liquidity and
capital resources, are based upon the Companys financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial

16

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statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an ongoing
basis, management re-evaluates its estimates and judgments, particularly those
related to the determination of the estimated recoverable amounts of investment
tax credits, trade accounts receivable, and deferred tax assets. The Company
believes the following critical accounting policies require its more significant
judgment and estimates used in the preparation of the consolidated financial
statements.

The Company follows the cost reduction method of accounting for
investment tax credits and recognizes the estimated net recoverable amount when
reasonable assurance exists as to their collectability. Investment tax credits
claimed are ultimately subject to finalization of a review by Canada Customs and
Revenue Agency. No assurances can be provided that the Companys investment tax
credit claims will be accepted as filed.

The Company maintains an allowance for doubtful accounts for
estimated losses that may arise if any of its customers are unable to make
required payments. Management specifically analyzes the age of customer
balances, historical bad debt experience, customer credit-worthiness, and
changes in customer payment terms when making estimates of the uncollectability
of the Companys trade accounts receivable balances. If the Company determines
that the financial conditions of any of its customers deteriorated, whether due
to customer specific or general economic issues, increases in the allowance may
be made.

The Company reviews its intangible assets on an annual basis
for impairment. The intangible assets are comprised of Enterphone service
contracts. Management specifically reviews the number of contracts on hand and
if there will be significant future cash flows to be generated from these
contracts. If the Company determines that there is an impairment, then a
write-down will be made.

The Company maintains an allowance for inventory obsolescence.
Management reviews the inventory on a quarterly basis by directly testing for
obsolete inventory. If management determines that obsolete inventory has
increased, then an increase in the allowance will be made.

Income taxes are accounted for under the asset and liability
method. Under this method, to the extent that it is not more likely than not
that a deferred tax asset will be recovered, a valuation allowance is provided.
In making this determination, the Company considers estimated future taxable
income and taxable timing differences expected to reverse in the future. Actual
results may differ from those estimates.

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the FASB issued SFAS No. 123R, Share-Based
Payment (SFAS 123R), a revision of SFAS No. 123, Accounting for Stock-Based
Compensation, requiring that the compensation cost relating to share-based
payment transactions, including grants of employee stock options, be measured
and recognized in the financial statements using the fair value of the
compensation awards. The provisions of SFAS 123R are effective for the Company
for the first interim or annual period that begins after December 15, 2005;
therefore, the Company will adopt the new requirements no later than the
beginning of the first quarter of its year ending December 31, 2006. Adoption of
the expensing requirements will reduce the Companys reported earnings.
Management is currently evaluating the two methods of adoption allowed by SFAS
123R; the modified-prospective transition method and the modified-retrospective
transition method.

In November 2004, the FASB issued SFAS No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies
that abnormal inventory costs such as costs of idle facilities, excess freight
and handling costs, and wasted materials (spoilage) are required to be
recognized as current period charges. The provisions of SFAS 151 are effective
for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not
expected to have a significant impact on the Companys consolidated financial
position or results of operations.

Item 7. FINANCIAL STATEMENTS

The financial statements are attached to this report following
the signature page.

Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

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Not applicable.

Item 8A. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our reports
filed pursuant to the Securities Exchange Act of 1934 are recorded, processed,
summarized and reported within the time periods specified in the rules and forms
promulgated under such Act, and that such information is accumulated and
communicated to management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.

As of the end of the period covered by this report, management
carried out an evaluation, under the supervision and with the participation of
the management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in connection with the
filing of this Annual Report on Form 10-KSB for the year ended December 31,
2006.

Such evaluation did not identify any change in our internal controls
  over financial reporting that occurred during the three months ended December
  31, 2006 that has materially affected or is reasonably likely to materially
  affect the Companys internal control over financial reporting.

Item 8B. OTHER INFORMATION

Not applicable.

PART III.

Items 9  12, 14

Information with respect to Items 9  12 and 14 is set forth in
the Proxy Statement to be filed with the Securities and Exchange Commission on
or before May 1, 2007 and is incorporated herein by reference.

Item 13. EXHIBITS

|Exhibit No. | Description of Exhibit                     | Manner of Filing                                                                                                        
|----------- | ------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------
|            |                                            |                                                                                                                         
|3.1         | Articles of Incorporation                  | Incorporated by reference to Exhibit 3.1 to the Form SB-2
      of the Company, SEC File No. 333- 68998 (the Form SB-2)
|            |                                            |                                                                                                                         
|3.2         | Amendment to the Articles of Incorporation | Incorporated by reference to Exhibit 3.2 to the Form SB-2                                                               
|            |                                            |                                                                                                                         
|3.3         | Bylaws                                     | Incorporated by reference to Exhibit 3.1 to the Form SB-2                                                               
|            |                                            |                                                                                                                         
|10.1        | Employment Agreement with Stephen Pineau   | Incorporated by reference to Exhibit 10.2 to the Form
      SB-2                                                        
|            |                                            |                                                                                                                         
|10.2        | Employment Agreement with Greg Chen        | Incorporated by reference to Exhibit 10.3 to the Form
      SB-2                                                        
|            |                                            |                                                                                                                         
|10.3        | 2001 Stock Option Plan                     | Incorporated by reference to Exhibit A to the Proxy
      Statement on Schedule 14A filed with the SEC on April 30, 2002
|            |                                            |                                                                                                                         
|10.4        | 2003 Stock Option Plan                     | Incorporated by reference to Exhibit A to the Proxy
      Statement on Schedule 14A filed with the SEC on April 30, 2003

18

---

|21.1 | Subsidiaries of the registrant                                                                         | Incorporated by reference to
        Exhibit 21.1 to the Form SB-2
|---- | ------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------
|     |                                                                                                        |                                                                   
|31.1 | Rule 13a-14(a)/15d-14(a)
        Certification of the Chief Executive Officer                          | Filed
        herewith                                            
|     |                                                                                                        |                                                                   
|31.2 | Rule 13a-14(a)/15d-14(a)
        Certification of the Chief Financial Officer                          | Filed
        herewith                                            
|     |                                                                                                        |                                                                   
|32.1 | Section 1350 Certification
        of the Chief Executive Officer and 
        Chief Financial Officer | Filed
        herewith                                            

19

---

Signatures

In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 30, 2007.

VISCOUNT SYSTEMS, INC.

By: /s/ Stephen Pineau
Stephen Pineau President and Chief Executive Officer

In accordance with the requirements of the Exchange Act, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on the dates indicated.

|    | Signature           | Title                       | Date          
|--- | ------------------- | --------------------------- | --------------
|    |                     |                             |               
|By: | /s/ Stephen Pineau  | President, Secretary,       | March 30, 2007
|    | Stephen Pineau      | Chief Executive Officer and |               
|    |                     | Director                    |               
|    |                     |                             |               
|    |                     |                             |               
|By: | /s/ Greg
      Shen | Chairman of the Board and   | March 30, 2007
|    | Greg Shen           | Director                    |               
|    |                     |                             |               
|    |                     |                             |               
|    |                     |                             |               
|By: | /s/ Les
      Fong  | Chief Financial Officer     | March 30, 2007
|    | Les Fong            |                             |               

20

---



VISCOUNT SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS 
  (Expressed in Canadian Dollars)

DECEMBER 31, 2006

F-1

---

|DAVIDSON& COMPANYLLP |                       | A Partnership of Incorporated Professionals
|-------------------- | --------------------- | -------------------------------------------
|                     | Chartered Accountants |                                            

**REPORT OF INDEPENDENT REGISTERED
  PUBLIC ACCOUNTING FIRM**

To the Stockholders of
  Viscount Systems, Inc.

We have audited the accompanying consolidated balance sheets
  of Viscount Systems, Inc. as at December 31, 2006 and 2005 and the related consolidated
  statements of operations, stockholders' equity and cash flows for the years
  then ended. These consolidated financial statements are the responsibility of
  the Company's management. Our responsibility is to express an opinion on these
  financial statements based on our audits.

We conducted our audits in accordance with the standards of
  the Public Company Accounting Oversight Board (United States). Those standards
  require that we plan and perform the audit to obtain reasonable assurance about
  whether the financial statements are free of material misstatement. An audit
  includes examining, on a test basis, evidence supporting the amounts and disclosures
  in the financial statements. An audit also includes assessing the accounting
  principles used and significant estimates made by management, as well as evaluating
  the overall financial statement presentation. We believe that our audits provide
  a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
  to above present fairly, in all material respects, the financial position of
  the Company as at December 31, 2006 and 2005 and the results of its operations
  and its cash flows for the years then ended in conformity with generally accepted
  accounting principles in the United States of America.

As discussed in Note 2 to the consolidated financial statements,
  effective January 1, 2006, the Company adopted Statement of Financial Accounting
  Standards No. 123 (R), Share-Based Payment.

The accompanying consolidated financial statements have been
  prepared assuming that the Company will continue as a going concern. As discussed
  in Note 1 to the consolidated financial statements, the Company has suffered
  losses from operations. These matters raise substantial doubt about the Company's
  ability to continue as a going concern. Management's plans in regards to these
  matters are discussed in Note 1. The consolidated financial statements do not
  include any adjustments that might result from the outcome of this uncertainty.

**"DAVIDSON & COMPANY LLP"**

|Vancouver, Canada | Chartered Accountants
|----------------- | ---------------------
|                  |                      
|February 8, 2007  |                      

A
  Member of SCINTERNATIONAL

1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre,
  Vancouver, BC, Canada, V7Y 1G6
  Telephone (604) 687-0947 Fax (604) 687-6172

F-2

---

|VISCOUNT SYSTEMS, INC.         
|-------------------------------
|Consolidated Balance Sheets    
|(Expressed in Canadian dollars)
|As at December 31              
|                               

|                                                                         |   | 2006       |   |   | 2005      |  
|------------------------------------------------------------------------ | - | ---------- | - | - | --------- | -
|                                                                         |   |            |   |   |           |  
|Assets                                                                   |   |            |   |   |           |  
|                                                                         |   |            |   |   |           |  
|Current assets                                                           |   |            |   |   |           |  
|Cash                                                                     | $ | 134,552    |   | $ | 246,563   |  
|Trade accounts receivable, less allowance
      for doubtful accounts    |   |            |   |   |           |  
|of $164,924 at December 31, 2006 (2005
      - $92,421)                  |   | 887,587    |   |   | 797,284   |  
|Inventory (note 3)                                                       |   | 792,551    |   |   | 881,166   |  
|Prepaid expenses                                                         |   | 6,028      |   |   | 6,028     |  
|Lease receivable (note 4)                                                |   | 1,045      |   |   | 902       |  
|Total current assets                                                     |   | 1,821,763  |   |   | 1,931,943 |  
|                                                                         |   |            |   |   |           |  
|Lease receivable (note 4)                                                |   | 1,968      |   |   | 2,936     |  
|                                                                         |   |            |   |   |           |  
|Equipment (note 5)                                                       |   | 90,107     |   |   | 98,468    |  
|                                                                         |   |            |   |   |           |  
|Intangible assets
      (note 6)                                         |   | 172,360    |   |   | 193,252   |  
|                                                                         |   |            |   |   |           |  
|Total assets                                                             | $ | 2,086,198  |   | $ | 2,226,599 |  
|                                                                         |   |            |   |   |           |  
|Liablilities and stockholders' equity                                    |   |            |   |   |           |  
|                                                                         |   |            |   |   |           |  
|Current liabilities                                                      |   |            |   |   |           |  
|Bank indebtedness (note 7)                                               | $ | 319,687    |   | $ | 11,062    |  
|Accounts payable and accrued liabilities                                 |   | 455,928    |   |   | 491,922   |  
|Deferred revenue                                                         |   | 28,491     |   |   | 32,115    |  
|Due to stockholders (note 8)                                             |   | 292,402    |   |   | 292,402   |  
|Notes payable (note 9)                                                   |   | 235,000    |   |   | 235,000   |  
|Total current liabilities                                                |   | 1,331,508  |   |   | 1,062,501 |  
|                                                                         |   |            |   |   |           |  
|Commitments and contingencies (note 13)                                  |   |            |   |   |           |  
|                                                                         |   |            |   |   |           |  
|Stockholders' equity                                                     |   |            |   |   |           |  
|Capital stock (note 10)                                                  |   |            |   |   |           |  
|Authorized:                                                              |   |            |   |   |           |  
|100,000,000 common shares
      with a par value of US$0.001 per share   |   |            |   |   |           |  
|20,000,000 preferred shares with a par
      value of US$0.001 per share |   |            |   |   |           |  
|Issued and outstanding:                                                  |   |            |   |   |           |  
|16,082,450 common shares (2005 - 16,053,075)                             |   | 23,675     |   |   | 23,645    |  
|Additional paid-in capital                                               |   | 1,907,432  |   |   | 1,883,109 |  
|Accumulated
      deficit                                                |   | (1,176,417 | ) |   | (742,656  | )
|Total stockholders' equity                                               |   | 754,690    |   |   | 1,164,098 |  
|                                                                         |   |            |   |   |           |  
|Total liabilities and stockholders' equity                               | $ | 2,086,198  |   | $ | 2,226,599 |  

See accompanying notes to consolidated financial statements.

F-3

---

|VISCOUNT SYSTEMS, INC.               
|-------------------------------------
|Consolidated Statements of Operations
|(Expressed in Canadian dollars)      
|                                     
|Years ended December
      31        

|                                                      |   | 2006       |   |   | 2005       |  
|----------------------------------------------------- | - | ---------- | - | - | ---------- | -
|                                                      |   |            |   |   |            |  
|                                                      |   |            |   |   |            |  
|Sales                                                 | $ | 4,562,124  |   | $ | 5,013,492  |  
|Cost of sales and
      services                      |   | 1,941,250  |   |   | 2,177,107  |  
|Gross profit                                          |   | 2,620,874  |   |   | 2,836,385  |  
|                                                      |   |            |   |   |            |  
|Expenses                                              |   |            |   |   |            |  
|Selling, general and administrative                   |   | 2,563,343  |   |   | 2,392,903  |  
|Research and development (note 11)                    |   | 392,876    |   |   | 361,983    |  
|Depreciation
      and amortization                   |   | 37,809     |   |   | 37,641     |  
|                                                      |   | 2,994,028  |   |   | 2,792,527  |  
|                                                      |   |            |   |   |            |  
|Income (loss) before other items                      |   | (373,154   | ) |   | 43,858     |  
|                                                      |   |            |   |   |            |  
|Other items                                           |   |            |   |   |            |  
|Other income                                          |   | 3,365      |   |   | 2,262      |  
|Interest and bank charges                             |   | (63,972    | ) |   | (45,716    | )
|                                                      |   | (60,607    | ) |   | (43,454    | )
|                                                      |   |            |   |   |            |  
|Income (loss) before income taxes                     |   | (433,761   | ) |   | 404        |  
|                                                      |   |            |   |   |            |  
|Provision for
      income taxes (note 12)            |   | -          |   |   | -          |  
|                                                      |   |            |   |   |            |  
|Net income (loss)                                     | $ | (433,761   | ) | $ | 404        |  
|                                                      |   |            |   |   |            |  
|Basic net income (loss)
      per common share        | $ | (0.03      | ) | $ | 0.00       |  
|                                                      |   |            |   |   |            |  
|Diluted net income
      (loss) per common share      | $ | (0.03      | ) | $ | 0.00       |  
|                                                      |   |            |   |   |            |  
|Weighted average number of common shares outstanding, |   |            |   |   |            |  
|Basic                                                 |   | 16,080,505 |   |   | 15,997,606 |  
|Diluted                                               |   | 16,080,505 |   |   | 17,996,630 |  

See accompanying notes to consolidated financial statements.

F-4

---

|VISCOUNT SYSTEMS, INC.                         
|-----------------------------------------------
|Consolidated Statements of Stockholders' Equity
|(Expressed in Canadian dollars)                
|                                               
|Years Ended December
      31, 2006 and 2005   

AdditionalCommon
        Stock
      
      
      paid-inShares
      
      
      Amount
      
      
      capital
      
      
      Accumulated deficit
      
      
      TotalBalance, January 1, 2005
      
      15,903,075
      
      $
      23,494
      
      $
      1,819,813
      
      $
      (743,060
      )
      $
      1,100,247Stock issued for cash uponexercise of stock options
      
      150,000
      
      
      151
      
      
      33,075
      
      
      -
      
      
      33,226Stock-based compensation (note 10)
      
      -
      
      
      -
      
      
      30,221
      
      
      -
      
      
      30,221Net income
      
      -
      
      
      -
      
      
      -
      
      
      404
      
      
      404Balance, December 31, 2005
      
      16,053,075
      
      
      23,645
      
      
      1,883,109
      
      
      (742,656
      )
      
      1,164,098Stock issued for cash uponexercise of stock options
      
      29,375
      
      
      30
      
      
      4,027
      
      
      -
      
      
      4,057Stock-based compensation (note 10)
      
      -
      
      
      -
      
      
      20,296
      
      
      -
      
      
      20,296Loss
      
      -
      
      
      -
      
      
      -
      
      
      (433,761
      )
      
      (433,761
      )Balance, December 31, 2006
      
      16,082,450
      
      $
      23,675
      
      $
      1,907,432
      
      $
      (1,176,417
      )
      $
      754,690


See accompanying notes to consolidated financial statements.

F-5

---

|VISCOUNT SYSTEMS, INC.               
|-------------------------------------
|Consolidated Statements of Cash Flows
|(Expressed in Canadian dollars)      
|                                     
|Years ended December
      31        

|                                                                         |   | 2006     |   |   | 2005    |  
|------------------------------------------------------------------------ | - | -------- | - | - | ------- | -
|                                                                         |   |          |   |   |         |  
|                                                                         |   |          |   |   |         |  
|                                                                         |   |          |   |   |         |  
|                                                                         |   |          |   |   |         |  
|Operating activities:                                                    |   |          |   |   |         |  
|Net income (loss)                                                        | $ | (433,761 | ) | $ | 404     |  
|Items not involving cash:                                                |   |          |   |   |         |  
|Depreciation and amortization                                            |   | 37,809   |   |   | 37,641  |  
|Selling, general and administrative
      expenses paid by stock options |   | 20,296   |   |   | 30,221  |  
|Changes in non-cash
      working capital balances (note 14)             |   | (40,481  | ) |   | (47,579 | )
|Net cash provided
      by (used in) operating activities                |   | (416,137 | ) |   | 20,687  |  
|                                                                         |   |          |   |   |         |  
|Investing activities:                                                    |   |          |   |   |         |  
|Purchase of
      equipment                                              |   | (8,556   | ) |   | (4,592  | )
|Net cash used in
      investing activities                              |   | (8,556   | ) |   | (4,592  | )
|                                                                         |   |          |   |   |         |  
|Financing activities:                                                    |   |          |   |   |         |  
|Proceeds from (repayment of) bank indebtedness                           |   | 308,625  |   |   | (93,608 | )
|Proceeds from exercise of stock options                                  |   | 4,057    |   |   | 33,226  |  
|Net cash provided by (used in) financing activities                      |   | 312,682  |   |   | (60,382 | )
|                                                                         |   |          |   |   |         |  
|Decrease in cash                                                         |   | (112,011 | ) |   | (44,287 | )
|                                                                         |   |          |   |   |         |  
|Cash, beginning of
      year                                            |   | 246,563  |   |   | 290,850 |  
|                                                                         |   |          |   |   |         |  
|Cash, end of year                                                        | $ | 134,552  |   | $ | 246,563 |  
|                                                                         |   |          |   |   |         |  
|                                                                         |   |          |   |   |         |  
|Supplementary information:                                               |   |          |   |   |         |  
|Interest paid                                                            | $ | 35,584   |   | $ | 22,833  |  
|Income taxes recovered                                                   |   | -        |   |   | -       |  

See accompanying notes to consolidated financial statements.

F-6

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|1. | Nature and continuance of operations                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Viscount Systems Inc. (the Company)
        was incorporated on May 24, 2001. The Company manufactures, distributes,
        and provides services for electronic premises access and security equipment.
        The functional currency for the Company and its wholly-owned subsidiary
        is the Canadian dollar.                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | These financial statements have been prepared
        on a going concern basis, which assumes the Company will be able to realize
        assets and discharge liabilities in the normal course of business for
        the foreseeable future. These financial statements do not include the
        adjustments that would be necessary should the Company be unable to continue
        as a going concern.                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company has incurred losses and the ability
        of the Company to continue as a going- concern depends upon its ability
        to restore profitable operations and to continue to raise adequate financing.
        Management is actively targeting sources of additional financing which
        would assure continuation of the Companys operations.                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | There can be no assurance that the Company
        will be able to restore profitable operations and continue to raise funds
        in which case the Company may be unable to meet its obligations. Should
        the Company be unable to realize on its assets and discharge its liabilities
        in the normal course of business, the net realizable value of its assets
        may be materially less than the amounts recorded on the balance sheets.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|2. | Significant accounting policies                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | These consolidated financial statements have
        been prepared in conformity with accounting principles generally accepted
        in the United States of America. The significant accounting policies adopted
        by the Company are as follows:                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-7

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|2. | Significant accounting policies (contd)
|-- | -----------------------------------------
|   |                                          
|   | (b)                                      
|   |                                          
|   |                                          
|   |                                          
|   | (c)                                      
|   |                                          
|   |                                          
|   |                                          
|   | (d)                                      
|   |                                          
|   |                                          
|   |                                          
|   | (e)                                      
|   |                                          
|   |                                          
|   |                                          
|   | (f)                                      
|   |                                          
|   |                                          

| |                                |                   |     
| | ------------------------------ | ----------------- | ----
| | Asset                          | Basis             | Rate
| |                                |                   |     
| | Computer equipment             | declining balance | 30% 
| | Office furniture and equipment | declining balance | 20% 
| | Manufacturing equipment        | declining balance | 20% 
| | Leasehold improvements         | straight-line     | 20% 
| |                                |                   |     

F-8

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|2. | Significant accounting policies (contd)
|-- | -----------------------------------------
|   |                                          
|   | (g)                                      
|   |                                          
|   |                                          
|   |                                          
|   | (h)                                      
|   |                                          
|   |                                          
|   |                                          
|   | (i)                                      
|   |                                          
|   |                                          
|   |                                          
|   |                                          
|   |                                          
|   | (j)                                      
|   |                                          
|   |                                          

F-9

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|2. | Significant accounting policies (contd)
|-- | -----------------------------------------
|   |                                          
|   | (k)                                      
|   |                                          
|   |                                          
|   |                                          
|   | (l)                                      
|   |                                          
|   |                                          
|   |                                          
|   | (m)                                      
|   |                                          
|   |                                          
|   |                                          
|   | (n)                                      
|   |                                          
|   |                                          
|   |                                          
|   |                                          

F-10

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|2. | Significant accounting policies (contd)
|-- | -----------------------------------------

| | (o) | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Effective January 1, 2006, the Company adopted the
        fair value recognition provisions of SFAS 123R Share-Based Payment,
        using the modified-prospective transition method. Under this transition
        method, stock-based compensation expense was recognized in the consolidated
        financial statements for granted, modified, or settled stock options.
        The provisions of SFAS 123R apply to new stock options and stock options
        outstanding, but not yet vested, on the effective date of January 1, 2006.
        Results for prior periods have not been restated, as provided for under
        the modified-prospective transition method.                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | During the twelve months ended December 31, 2005 and
        for previous fiscal periods, the Company accounted for its employee stock-based
        compensation arrangements using the intrinsic value method in accordance
        with the provisions of Accounting Principles Board Opinion No. 25, Accounting
        for Stock Issued to Employees (APB 25), and related
        interpretations. As such, compensation expense would be recorded on the
        date of grant only if the market value of the underlying stock at the
        date of grant exceeded the exercise price. Statement of Financial Accounting
        Standards No. 123, Accounting for Stock- Based Compensation
        (SFAS 123), required entities that continued to apply the
        provisions of APB 25 for transactions with employees to provide pro forma
        income (loss) and pro forma income (loss) per share disclosures for employee
        stock option grants made as if the fair value-based method defined in
        SFAS 123 had been applied to these transactions.

F-11

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|2. | Significant accounting policies (contd)
|-- | -----------------------------------------

The following table illustrates the
  effect on the net income and net income per share if the Company had applied
  the fair value recognition provisions of SFAS No. 123 to the stock-based employee
  compensation (see note 10).

| |                                                                    |   |         |  
| | ------------------------------------------------------------------ | - | ------- | -
| |                                                                    |   | 2005    |  
| |                                                                    |   |         |  
| | Net income as reported                                             | $ | 404     |  
| | Add: Total stock-based employee compensation expense               |   |         |  
| | included
      in net income (loss), as reported, determined under |   |         |  
| | APB 25, net
      of related tax effects                           |   | 26,833  |  
| | Deduct: Total stock-based employee compensation                    |   |         |  
| | expense determined
      under fair value based                    |   |         |  
| | method for all
      awards, net of related tax effects            |   | (65,176 | )
| | Pro forma net loss                                                 | $ | (37,939 | )
| |                                                                    |   |         |  
| |                                                                    |   |         |  
| |                                                                    |   |         |  
| | Net income (loss) per common share                                |   |         |  
| | Basic and diluted, as reported                                     | $ | 0.00    |  
| | Basic and diluted, pro forma                                       |   | (0.00   | )
| |                                                                    |   |         |  

| |     | Disclosures for 2006 are not presented because the amounts
        are recognized in the consolidated statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | The Company used the Black-Scholes option pricing model
        to compute estimated fair value of options granted based on the following
        assumptions: average expected stock price volatility of 251%, expected
        dividend yield of 0%, risk-free interest rate of 4.02% and expected option
        life of 1 to 4 years.                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (p) | Recent accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | In July 2006, FASB issued Financial Instrument No. 48,
        Accounting for Uncertainty in Income Taxes-an interpretation of
        FASB Statement No. 109 (FIN 48), which is a change in
        accounting for income taxes. FIN 48 specifies how tax benefits for uncertain
        tax positions are to be recognized, measured, and derecognized in financial
        statements; requires certain disclosures of uncertain tax matters; specifies
        how reserves for uncertain tax positions should be classified on the balance
        sheet; and provides transition and interim period guidance; among other
        provisions. FIN 48 is effective for fiscal years beginning after December
        15, 2006.

F-12

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|2. | Significant accounting policies (contd)
|-- | -----------------------------------------

In September 2006, FASB issued SFAS
  No. 157 (SFAS 157), Fair Value Measurements. Among other
  requirements, SFAS 157 defines fair value and establishes a framework for measuring
  fair value and also expands disclosure about the use of fair value to measure
  assets and liabilities. SFAS 157 is effective for fiscal years beginning after
  November 15, 2007.

The adoption of these new pronouncements
  are not expected to have a material effect on the Companys consolidated
  financial position or results of operations.

|3. | Inventory
|-- | ---------

| |                 |   | 2006    |  |   | 2005    | 
| | --------------- | - | ------- |  | - | ------- | 
| | Raw materials   | $ | 546,444 |  | $ | 575,820 | 
| | Work in process |   | 60,000  |  |   | 60,035  | 
| | Finished goods  |   | 186,107 |  |   | 245,311 | 
| |                 |   |         |  |   |         | 
| |                 | $ | 792,551 |  | $ | 881,166 | 

|4. | Lease receivable                                                                                                                                                                                                                                           
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                            
|   | Lease receivable includes an amount due from a customer
        in monthly installments on a five- year leasing contract expiring in 2009.
        The contract bears an interest rate of 7% per annum and is secured by
        the equipment under lease.
|   |                                                                                                                                                                                                                                                            
|5. | Equipment                                                                                                                                                                                                                                                  

| |                                |   |         |  |   | Accumulated  |  |   | Net book | 
| | ------------------------------ | - | ------- |  | - | ------------ |  | - | -------- | 
| | 2006                           |   | Cost    |  |   | depreciation |  |   | value    | 
| |                                |   |         |  |   |              |  |   |          | 
| | Computer equipment             | $ | 110,838 |  | $ | 77,585       |  | $ | 33,253   | 
| | Office furniture and equipment |   | 77,269  |  |   | 28,422       |  |   | 48,847   | 
| | Leasehold improvements         |   | 46,814  |  |   | 38,807       |  |   | 8,007    | 
| |                                |   |         |  |   |              |  |   |          | 
| |                                | $ | 234,921 |  | $ | 144,814      |  | $ | 90,107   | 

F-13

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|5. | Equipment (contd)
|-- | -------------------

| |                                |   |         |  |   | Accumulated  |  |   | Net book | 
| | ------------------------------ | - | ------- |  | - | ------------ |  | - | -------- | 
| | 2005                           |   | Cost    |  |   | depreciation |  |   | value    | 
| |                                |   |         |  |   |              |  |   |          | 
| | Computer equipment             | $ | 110,838 |  | $ | 68,754       |  | $ | 42,084   | 
| | Office furniture and equipment |   | 68,713  |  |   | 23,680       |  |   | 45,033   | 
| | Manufacturing equipment        |   | 28,360  |  |   | 28,263       |  |   | 97       | 
| | Leasehold improvements         |   | 46,814  |  |   | 35,560       |  |   | 11,254   | 
| |                                |   |         |  |   |              |  |   |          | 
| |                                | $ | 254,725 |  | $ | 156,257      |  | $ | 98,468   | 

Manufacturing equipment with a cost of
  $28,360 and accumulated depreciation of $28,263 as at December 31, 2005 were
  fully amortized during Fiscal 2006 and removed from the balances presented for
  December 31, 2006.

F-14


---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|6. | Intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | On May 16, 2003, the Company consummated an agreement
        for the purchase of certain assets of Telus Corporation (Telus)
        comprised primarily of service agreements for a product sold by Telus
        known as Enterphone 2000. At December 31, 2003, the Company
        had acquired 2,215 service agreements for which it paid a total of $208,921.
        The cost of the service agreements was included in intangible assets.
        The service agreements were initially considered to have an indefinite
        life and were not amortized through March 31, 2005. The number of service
        agreements held by the Company decreased to 1,868 at December 31, 2004,
        1,780 at December 31, 2005 and 1,705 at December 31, 2006. During fiscal
        2005, and fiscal 2006, the Company performed a test for impairment in
        accordance with Statement of Financial Accounting Standards No. 142, Goodwill
        and Other Intangible Assets (SFAS 142) and evaluated
        the status of service agreements. Management determined that no charge
        for impairment was required but the continuing reduction in the number
        of service contracts held indicated that the intangible asset should be
        deemed to have a definitive life based on the provisions of SFAS 142.
        Accordingly, the Company began, effective as of April 1, 2005, to amortize
        the cost of the service agreements on a straight-line basis over an estimated
        useful life of 10 years. At December 31, 2006, the cost of the service
        agreements, net of accumulated amortization of $36,561 (2005 - $15,669)
        was $172,360 (2005 - $193,252).
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|7. | Bank indebtedness                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Bank indebtedness represents cheques written in excess
        of funds on deposit and amounts drawn under a bank credit facility available
        to a maximum of $500,000. Amounts outstanding under the bank credit
        facility bear interest at the banks prime lending rate plus 1% and
        are repayable on demand. The facility is secured by substantially all
        of our assets under a general security agreement. The Company is required
        to maintain a current ratio greater than 1.5:1, measured quarterly, and
        a debt to tangible net worth ratio less than 1.5:1, measured annually,
        under the terms of the demand facility agreement. For purposes of debt
        covenant calculations, amounts due to stockholders are considered a component
        of equity and not a liability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | During the year ended December 31, 2006, the bank
        required additional security for the credit facility consisting of a pledge
        of personal property of a significant shareholder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-15

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|8.  | Due to stockholders                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                          
|    | Amounts due to stockholders are non-interest
        bearing, unsecured and have no fixed terms of repayment.                                                                                            
|    |                                                                                                                                                                                                          
|9.  | Notes payable                                                                                                                                                                                            
|    |                                                                                                                                                                                                          
|    | The notes payable to individuals bear interest
        at 8% per annum, are unsecured, and are due December 31, 2007. Principal
        prepayments are made at the discretion of the Board of Directors.
|    |                                                                                                                                                                                                          
|10. | Capital stock                                                                                                                                                                                            
|    |                                                                                                                                                                                                          
|    | (a)                                                                                                                                                                                                      
|    |                                                                                                                                                                                                          
|    | (b)                                                                                                                                                                                                      
|    |                                                                                                                                                                                                          
|    |                                                                                                                                                                                                          
|    |                                                                                                                                                                                                          
|    | (c)                                                                                                                                                                                                      
|    |                                                                                                                                                                                                          
|    |                                                                                                                                                                                                          
|    |                                                                                                                                                                                                          
|    |                                                                                                                                                                                                          

F-16

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|10. | Capital stock (contd)
|--- | -----------------------

an incentive stock option. As at December
  31, 2006, the total number of stock options outstanding under the 2003 Plan
  is 2,118,125.

A summary of the stock option activity
  is as follows:

| |                                        |  | Number of
      options |   |   | Weighted
      average | 
| | -------------------------------------- |  | ----------------------- | - | - | ---------------------- | 
| |                                        |  |                         |   |   | Exercise price         | 
| | Outstanding at January 1, 2005         |  | 3,296,925               |   | $ | 0.27                   | 
| | Granted                                |  | -                       |   |   | -                      | 
| | Exercised                              |  | (150,000                | ) |   | 0.26                   | 
| | Expired/cancelled                      |  | -                       |   |   | -                      | 
| | Outstanding at December 31, 2005       |  | 3,146,925               |   |   | 0.33                   | 
| | Granted                                |  | -                       |   |   | -                      | 
| | Exercised                              |  | (29,375                 | ) |   | 0.12                   | 
| | Expired/cancelled                      |  | -                       |   |   | -                      | 
| | Outstanding at December 31, 2006       |  | 3,117,550               |   |   | 0.33                   | 
| | Weighted average grant-date fair value |  |                         |   |   |                        | 
| | during 2005                            |  |                         |   | $ | 0.00                   | 
| | Weighted average grant-date fair value |  |                         |   |   |                        | 
| | during 2006                            |  |                         |   | $ | 0.00                   | 

During the year ended December 31, 2006,
  the Company recorded, pursuant to the adoption of SFAS No. 123R on January 1,
  2006, under the modified prospective transition method, the fair value of stock-based
  compensation expense from the vesting of stock options issued in prior periods
  to employees of $18,867 and $1,429 relating to the fair value of stock options
  issued previously to non-employees. Total stock-based compensation of $20,296
  has been recorded in selling, general and administration expenses in the condensed
  consolidated statement of operations for the year ended December 31, 2006.

During the year ended December 31, 2005,
  the Company recognized stock-based compensation expense from the amortization
  of the intrinsic value of stock options issued in prior periods to employees
  of $26,883 and recorded $3,338 relating to the fair value of stock options issued
  to non-employees. Total stock-based compensation of $30,221 has been recorded
  in selling, general and administrative expenses in the condensed consolidated
  statements of operations for the year ended December 31, 2005.

F-17

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|10. | Capital stock (contd)
|--- | -----------------------

A summary of the stock options outstanding
  at December 31, 2006 is as follows:

Outstanding
        Options
      Exercisable
        OptionsWeightedAverage
      WeightedRemaining
      Average
      
      WeightedExercise Price
      Number
      Contractual
      Exercise
      Number
      AverageLife
      Price
      
      Exercise Price$0.12
      2,142,500
      6.39 years
      $0.12
      2,142,500
      $0.12$0.18
      8,750
      0.97 years
      $0.18
      8,750
      $0.18$0.20
      7,500
      0.97 years
      $0.20
      7,500
      $0.20$0.45
      7,500
      0.97 years
      $0.45
      7,500
      $0.45$0.55
      5,000
      0.97 years
      $0.55
      5,000
      $0.55$0.60
      12,500
      0.97 years
      $0.60
      12,500
      $0.60$0.65
      933,800
      4.98 years
      $0.65
      933,800
      $0.653,117,550
      5.90
        years
      $0.27
      3,117,550
      $0.27


F-18

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|11. | Research and development                                                                                                                                            
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                     
|    | Research and development expenditures are
        recorded net of investment tax credits, which totaled $nil for the years
        ended December 31, 2006 and 2005.
|    |                                                                                                                                                                     
|12. | Income taxes                                                                                                                                                        
|    |                                                                                                                                                                     
|    | (a)                                                                                                                                                                 

| |                                                        |   | 2006     |   |   | 2005     |  
| | ------------------------------------------------------ | - | -------- | - | - | -------- | -
| |                                                        |   |          |   |   |          |  
| |                                                        |   |          |   |   |          |  
| | Income (loss) before income taxes                      | $ | (433,479 | ) | $ | 404      |  
| |                                                        |   |          |   |   |          |  
| | Income tax expense (recovery) at statutory
      rates | $ | (147,816 | ) | $ | 138      |  
| | Non deductible expenses and other items                |   | 201,318  |   |   | 160,631  |  
| | Deductible expenses and other items                    |   | (15,640  | ) |   | -        |  
| | Recognized operating losses                            |   | (31,031  | ) |   | -        |  
| | Recognized investment tax credits                      |   | (6,831   | ) |   | (160,769 | )
| | Unrecognized benefit
      of operating losses         |   | -        |   |   | -        |  
| |                                                        |   |          |   |   |          |  
| |                                                        |   |          |   |   |          |  
| | Total income tax recovery                              | $ | -        |   | $ | -        |  

F-19

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|12. | Income taxes (contd)
|--- | ----------------------
|    |                       
|    | (b)                   

| |                                                              |   | 2006     |   |   | 2005     |  
| | ------------------------------------------------------------ | - | -------- | - | - | -------- | -
| |                                                              |   |          |   |   |          |  
| | Deferred income tax assets (liabilities)                     |   |          |   |   |          |  
| | Equipment                                                    | $ | 6,202    |   | $ | 1,020    |  
| | Intangible
      assets                                      |   | 13,002   |   |   | (10,734  | )
| | Unrecognized investment tax
      credits (non-refundable)   |   | 371,081  |   |   | 198,051  |  
| | Unrecognized
      benefit of research and development costs |   | 451,785  |   |   | 317,799  |  
| | Unrecognized benefit of operating
      losses               |   | 27,775   |   |   | 59,597   |  
| | Warranty provision                                           |   | 14,221   |   |   | 15,139   |  
| |                                                              |   |          |   |   |          |  
| |                                                              |   |          |   |   |          |  
| | Gross deferred income tax
      assets                       |   | 884,066  |   |   | 580,872  |  
| |                                                              |   |          |   |   |          |  
| | Valuation allowance                                          |   | (884,066 | ) |   | (580,872 | )
| |                                                              |   |          |   |   |          |  
| |                                                              |   |          |   |   |          |  
| |                                                              | $ | -        |   | $ | -        |  

The Company has unutilized operating
  loss carryforwards of $89,597 (2005 - $180,597) which will expire up to 2026.

The Company has non-refundable federal
  investment tax credits of $247,679 (2005 - $136,266) which will expire up to
  2026 and provincial investment tax credits of $123,402 (2005 - $61,785) which
  will expire up to 2016.

The Company has unutilized scientific
  research and development costs of $1,457,369 (2005 - $963,027) which are available
  to reduce taxable income and income taxes payable in future years.

A valuation allowance is applied to
  the deferred tax asset because it is not more likely than not that the benefits
  of the future income tax asset will be available to the Company. The Company
  has a valuation allowance of $884,066 (2005 - $580,872). This represents an
  increase of $303,194 and $3,172 as compared to December 31, 2005 and 2004.

F-20

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|13. | Commitments and contingencies
|--- | -----------------------------

The Company is committed to make minimum
  annual payments on its premises, automobile and office equipment operating leases
  that expire in 2010 as follows:

| | Year ending December
      31: |   |         | 
| | ------------------------------ | - | ------- | 
| |                                |   |         | 
| | 2007                           | $ | 153,489 | 
| | 2008                           |   | 33,931  | 
| | 2009                           |   | 21,793  | 
| | 2010                           |   | 10,537  | 
| |                                |   |         | 

|    | Rent expense included in the statements of operations
        is $117,588 (2005 - $114,277).                                                                                                                                                                                                                                                                                                                                                             
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The Company was named as a third-party defendant in
        a complaint for an alleged malfunction of certain equipment installed
        in a residential rental building in Chicago, Illinois. During fiscal 2006,
        the Company, through its insurer, settled the suit for $20,000 and the
        Circuit Court of Cook County, Illinois, accepted the settlement and issued
        an order dismissing the Company as a party to the lawsuit.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The Company was named as the sole defendant in litigation
        for wrongful dismissal that involves a former employee. The Company filed
        a defense to this claim and is actively defending its position. At this
        time, the likelihood of the outcome is not determinable and no provision
        has been made for the claim in the accounts.                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|14. | Changes in non-cash working capital balances                                                                                                                                                                                                                                                                                                                                                                                                             

| |                                          |   |         |   |   |          |  
| | ---------------------------------------- | - | ------- | - | - | -------- | -
| |                                          |   | 2006    |   |   | 2005     |  
| |                                          |   |         |   |   |          |  
| | Trade accounts receivable                | $ | (90,303 | ) | $ | (140,757 | )
| | Inventory                                |   | 88,615  |   |   | 17,677   |  
| | Prepaid expenses                         |   | -       |   |   | (4,637   | )
| | Leases receivable                        |   | 825     |   |   | 1,040    |  
| | Accounts payable and accrued liabilities |   | (35,994 | ) |   | 76,776   |  
| | Deferred revenue                         |   | (3,624  | ) |   | 2,322    |  
| |                                          |   |         |   |   |          |  
| |                                          | $ | (40,481 | ) | $ | (47,579  | )

F-21

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|15. | Segment information
|--- | -------------------
|    |                    
|    | (a)                
|    |                    
|    |                    
|    |                    
|    |                    

| |                                           |   |               |   |   |           |  |   |           |  
| | ----------------------------------------- | - | ------------- | - | - | --------- |  | - | --------- | -
| | December 31, 2006                         |   | Manufacturing |   |   | Servicing |  |   | Total     |  
| |                                           |   |               |   |   |           |  |   |           |  
| |                                           |   |               |   |   |           |  |   |           |  
| | Sales to external customers               | $ | 3,049,942     |   | $ | 1,512,182 |  | $ | 4,562,124 |  
| | Depreciation and amortization             |   | 16,917        |   |   | 20,892    |  |   | 37,809    |  
| | Interest expense                          |   | 45,172        |   |   | 18,800    |  |   | 63,972    |  
| | Segment income (loss) before income taxes |   | (744,981      | ) |   | 311,220   |  |   | (433,761  | )
| | Total assets                              |   | 1,913,838     |   |   | 172,360   |  |   | 2,086,198 |  
| |                                           |   |               |   |   |           |  |   |           |  
| |                                           |   |               |   |   |           |  |   |           |  
| |                                           |   |               |   |   |           |  |   |           |  
| |                                           |   |               |   |   |           |  |   |           |  
| | December 31, 2005                         |   | Manufacturing |   |   | Servicing |  |   | Total     |  
| |                                           |   |               |   |   |           |  |   |           |  
| |                                           |   |               |   |   |           |  |   |           |  
| | Sales to external customers               | $ | 3,452,058     |   | $ | 1,561,434 |  | $ | 5,013,492 |  
| | Depreciation and amortization             |   | 21,972        |   |   | 15,669    |  |   | 37,641    |  
| | Interest expense                          |   | 26,916        |   |   | 18,800    |  |   | 45,716    |  
| | Segment income (loss) before income taxes |   | (359,537      | ) |   | 359,941   |  |   | 404       |  
| | Total assets                              |   | 2,033,347     |   |   | 193,252   |  |   | 2,226,599 |  
| |                                           |   |               |   |   |           |  |   |           |  

F-22

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2006                         
|                                          

|15. | Segment information (contd.)
|--- | -----------------------------
|    |                              
|    | (b)                          
|    |                              
|    |                              
|    |                              
|    | (c)                          
|    |                              
|    |                              
|    |                              
|    | (d)                          
|    |                              
|    |                              

|16. | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company's financial instruments consist of cash,
        trade accounts receivable, lease receivable, bank indebtedness, accounts
        payable, accrued liabilities, due to stockholders and notes payable. It
        is management's opinion that the Company is not exposed to significant
        interest, currency, business concentration or credit risks arising from
        these financial instruments. The fair values of these financial instruments
        approximate their carrying values based on their liquidity and short-term
        nature.

F-23

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