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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

Form 10-K

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

For the fiscal year ended December 31, 2010

[ ] 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 registrant as specified 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 registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Check whether the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]

Check whether the registrant (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 whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-K 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-K
or any amendment to this Form 10-K. [X]

Check whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.

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|Large accelerated filer [ ] |                                               | Accelerated filer [ ]         
|--------------------------- | --------------------------------------------- | ------------------------------
|Non-accelerated filer [ ]   | (Do not check if a smaller reporting company) | Smaller reporting company [ 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:
$3,916,924 ($3,895,773 in Canadian dollars converted at an exchange rate of
US$1.0054/CDN$ 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 the last business day of the registrants most recently completed
second fiscal quarter: $2,140,950 as at June 30, 2010.

State the number of shares outstanding of each of the issuers
classes of common equity, as of the latest practicable date: 21,841,250 shares
of common stock as at March 15, 2011.

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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-K, which Proxy Statement is to be filed within 120 days after the end of the
Registrant's fiscal year ended December 31, 2010.

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Form 10-K

Table of Contents

|Part | Item No. |                                                                                                      |   
|---- | -------- | ---------------------------------------------------------------------------------------------------- | --
|I    | 1        | Business                                                                                             | 2 
|     | 1A       | Risk Factors                                                                                         | 14
|     | 2        | Properties                                                                                           | 15
|     | 3        | Legal Proceedings                                                                                    | 15
|     | 4        | Removed and Reserved                                                                                 | 15
|II   | 5        | Market for Common Equity, Related Stockholder
      Matters and Purchase of Equity Securities        | 15
|     | 6        | Select Financial Data                                                                                | 16
|     | 7        | Managements Discussion and Analysis or Plan of
      Operation                                      | 16
|     | 8        | Financial Statements and
      Supplementary Data                                                    | 20
|     | 9        | Changes in and Disagreements With Accountants
      on Accounting and Financial Disclosure           | 20
|     | 9A       | Controls and Procedures                                                                              | 20
|     | 9B       | Other Information                                                                                    | 21
|III  | 10       | Directors, Executive Officers,
      and Corporate Governance                                        | 21
|     | 11       | Executive Compensation                                                                               | 21
|     | 12       | Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder Matters | 21
|     | 13       | Certain Relationships and Related Transactions,
      and Director Independence                      | 21
|     | 14       | Principal Accounting Fees and
      Services                                                         | 21
|     | 15       | Exhibits, Financial Statement Schedules                                                              | 22
|     |          | Signatures                                                                                           | 23

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FORM 10-K

VISCOUNT SYSTEMS, INC.

PART I.

FORWARD-LOOKING STATEMENTS

ALL STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT
OTHERWISE INCLUDE THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS",
"PROJECTS", "ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR
EXPRESSIONS OR FUTURE OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND
"COULD" ARE GENERALLY FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE
FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED
UTILIZING NUMEROUS IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR
FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES.
THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE
HEADING "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN
THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS
ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE
UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-K,
UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31, 2007. AS USED HEREIN, THE
"COMPANY," "VISCOUNT," "WE," "US," "OUR" AND WORDS OF SIMILAR MEANING REFER TO
VISCOUNT SYSTEMS, INC.

Currency of Financial Information and Exchange Rate
Table

The Company maintains its 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. The high and low exchange rates
for each month during the previous six months were as follows:

|               | High   | Low   
|-------------- | ------ | ------
|February 2011  | 0.9984 | 0.9710
|January 2011   | 1.0060 | 0.9848
|December 2010  | 1.0216 | 0.9931
|November 2010  | 1.0286 | 0.9980
|October 2010   | 1.0374 | 0.9986
|September 2010 | 1.0604 | 1.0216

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The following table sets out the exchange rate information as
at each of the years ended December 31, 2010 and 2009.

|                           |  | Year Ended December 31 | 
|-------------------------- |  | ---------------------- | 
|                           |  |                        | 
|                           |  | 2010                   | 
|Rate at end of Period      |  | 0.9946                 | 
|Average Rate during Period |  | 1.0299                 | 
|Low                        |  | 0.9931                 | 
|High                       |  | 1.0848                 | 

Item 1. BUSINESS

GENERAL

The Company is a manufacturer, developer and service provider
of access control security products. In 2010, commercial sales of its MESH
product line accounted for over 50% of its total sales. MESH (Multimedia
Embedded Security Hub) 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.

In addition to MESH, the Companys 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 various accessories.
The Company also has a service division that provides service for the Enterphone
2000. We currently have 1,482 service agreements in place.

The Companys website address is www.viscount.com. All periodic and current reports are
available, free of charge, on the Companys 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 the
Companys filings are also available, free of charge, upon request.

BUSINESS OVERVIEW

The Company designs, manufactures and services 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. Much of
the Companys current revenues are now derived from sales of the MESH product
line. Service sales from the Companys existing 1,482 service agreements also
continue to provide a significant source of revenues.

MESH is now the Companys leading sales product, accounting for
54.3% of total sales for the year ended December 31, 2010. 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. The Companys 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.

Enterphone sales have decreased over the past few years, due to
the emergence of MESH, accounting for 9.0% of total sales for the year ended
December 31, 2010. Enterphone is a building access control system that uses a
buildings internal phone wiring thereby avoiding use of telephone utility
services. The Companys products include access control panels that use the
Enterphone technology. The Companys 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. The Companys Enterphone technology control
panels are sold through an established distribution network, and can be found
installed in approximately 35,000 buildings throughout North America. The
Company also packages and sells access control and security products that are
complementary to its Enterphone product, including card access systems, radio
frequency remote controls, intercom monitors and closed circuit cameras.

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COMPANY HISTORY

The Companys current business is operated primarily through
its wholly owned subsidiary Viscount Communication and Control Systems Inc. The
business of the Companys 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 the Companys products. Blue Mountain
Technologies Inc. simultaneously assigned its contractual rights to acquire all
of the business assets, except for certain leasehold interests, to the Companys
subsidiary, Viscount Communication. BC Tel consented to the assignment and
accordingly the business was acquired by the Companys subsidiary, Viscount
Communication and Control Systems Inc.

The Company was incorporated on May 24, 2001 under the laws of
the State of Nevada under the name OMW4 Corp. The Companys subsidiary, Viscount
Communication was incorporated in 1997 under the laws of British Columbia,
Canada, for the purposes of carrying on the present access control business. The
Company acquired all of the issued and outstanding shares in the capital of
Viscount Communication on July 27, 2001, in exchange for 10,000,000 shares of
the Companys 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, the Company changed its name to Viscount Systems Inc. effective
August 27, 2001.

In 2003, the Company acquired certain inventory and 2,165
service agreements from Telus Corporation. The service agreements related to the
maintenance 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, the Company has 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 the Companys corporate development.

INDUSTRY OVERVIEW

The Company competes 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. The Companys
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.

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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, the Company has
turned to current high-technology solutions in order to reduce costs of
ownership of security systems, while improving functionality. The Company has
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.

Access Control Systems Technology

The access control industry has traditionally used a technology
known as Wiegand. Approximately 90% of the worlds 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.

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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.

The Company is participating in this advance in the access
control industry with its proprietary MESH intelligent access control and
communication technology system. The Company believes that intelligent systems,
including smart chip readers and cards will replace reliance on systems based on
Wiegand technology.

PRODUCTS

The Company is a manufacturer, developer, reseller and service
provider of intercom and access control systems based on telephone, new and
traditional access card and reader technologies. The Companys 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, 2010, approximately 15% of
total sales of the Companys products and services were generated in the United
States and 85% in Canada. This represents a change from 2009, where sales to the
United States and Canada were 17% and 83%, respectively. Information on the
Companys existing products can be viewed on our website at www.viscount.com.

Enterphone Access Control Products

Historically, the Companys principal product was the
Enterphone intercom and access control system. Enterphone is the Companys
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
the Companys 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 the Companys Enterphone system distinct from other dial-up
telephone entry systems that use telephone company lines. Sales of products
based on the Enterphone system account for approximately 9.0% of total sales in
fiscal 2010. This is down from approximately 9.5% in fiscal 2009, due in part to
the development of other sources of sales, including Enterphone maintenance
contracts, new product lines such as MESH Freedom Bridge, and original equipment
manufactured (OEM) product lines. OEM products lines are products or
components that are purchased by the Company and resold under the Companys
brand name.

The 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.

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The Company also manufactures electronic entry access panels
that can operate using either the Enterphone system, or dial-up telephone
company lines. The Companys panels are manufactured in various sizes and with
various features in order to accommodate varying purposes and building types.
For example, the Company manufactures 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 the Company manufactures incorporate the Enterphone technology,
however most panels can also be installed to use telephone company lines.

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. The Company purchases
these technologies from other manufacturers and resells them under the Companys
brand names. Most of the products that the Company resells 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. The Company
continues to develop technology that was initially conceptualized in 1998. MESH
was 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.

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, known as the MPNode
computer chip, a programmable chip. The Company purchases the MPNode
chips and programs 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 system 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.

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MESH panels, located at entrance doors for visitor access, can
operate independently or as slaves off the MESH server. The basic MESH panel
that the Company has 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 the Companys 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 the
Companys belief that addressable networks pose a serious threat to the
continued use of the Wiegand format.

MESH is a modular product, meaning that the software can
accommodate add-on features or upgraded features. The Company has developed
various modules for our MESH technology, and intends 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. This module is currently in development.
- The MESH server provides new opportunities to host video on the unified
  platform with voice and data. This product enhancement 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.

8

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Enterphone X

The next generation of Enterphone systems, called Enterphone X,
EPX, was released during the second quarter of 2008. The EPX product line has
replaced the EP2000 product line. EPX, also a no phone line system like EP2000,
is the next generation of Enterphone. EPX is more cost effective because it
requires less assembly and material input costs. EPX improves compatibility with
MESH and other newer telephony technologies. EPX sales are classified as a
source of MESH revenue.

The Enterphone 2000 design dates back to 1990 and the
architecture has created complications for both manufacturing and installation.
The new universal controller eliminates the need for Viscount to manufacture and
carry inventory for 10 different circuit boards. Overall, EPX reduces cost,
produces higher margins, and improves the Companys ability to market MESH.

MESH Freedom

MESH Freedom is the new IT platform developed and released
during the last quarter of 2010. This IT platform can turn any card reader into
an IP device by connecting the Freedom IP device with built-in I/O to a POE
switch and then every card usage is processed on a redundant MESH server either
in your building or anywhere in the world. The software component of MESH
Freedom is the MESH web browser security operating platform. Unlike control
panels, the user database and the door control software is written in IT
language located on a server(s), thereby future proofing systems from the
traditional issue of proprietary hardware version obsolescence and improving
scalability by eliminating the need for additional hardware every time a reader
is added to the system.

Other products

Other products include RadioClick and InfraClik. These are
remote control access control products for doors and parking gates. They are
sold separately or as complementary to the Enterphone, Entercheck and MESH
systems. The Company also manufactures and sells EmerPhone, an intercom system
that is sold in elevator phone, emergency phone and entry phone
applications.

OTHER SERVICES

In addition to sales of the Enterphone, MESH and OEM products,
the Company also services approximately 1,482 existing Enterphone installations
within Western Canada.

PRODUCTION

Viscount has facilities for circuit board manufacture and
mechanical assembly. The Company uses a range of processes to produce its
products. Some products including Enterphone, InfraClik, and Axess are
completely manufactured in-house. MESH, EPX, MESH Freedom 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 the Companys brand-names. The Company maintains full facilities to
assemble through-hole circuit boards and limited facilities for assembling
surface mount circuits. The Company has a policy of supporting old products as
long as parts are available for servicing and replacement. We have designed EPX
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. The Company is 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, the Company improves time to market, eliminate
hardware debugging and increases the Companys ability to be technologically
flexible in the future. The Company is primarily executing final mechanical
assembly of the MESH systems.

9

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RESEARCH AND DEVELOPMENT

Research and development continues to be focused on enhancing
MESH. A number of these enhancements were identified in the MESH Structure and
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. Expenditures in
connection with research and development during the last two fiscal years
totaled $607,649.

MARKET AND MARKETING

The Market

The intercom and access control market is serviced by a number
of large and small competitors. The Companys traditional products compete in a
mature market place that largely uses the 30 year old Wiegand technology. The
Company believes that there currently exists an opportunity in the building and
access control market for innovative products that use current technologies to
reduce user costs. The Company has positioned its 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 the
Company competes in involves computerized access control systems that typically
control access through multiple access points, such as the 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.

The Companys traditional market for the 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 the
Companys first in-house product that addresses these multiple requirements. The
modular nature of MESH also provides the Company 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 panel provides features previously unavailable for this market. The overall
effect of these system advances has enhanced the Companys core business, while
allowing the Company to find applications where the new features expand the
traditional market for such systems.

The Company is targeting upgrades and retrofits to existing
apartments and various government agencies that use traditional telephone wire
intercom access control systems. New construction projects are also part of the
MESH installation market. 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. The Company believes the cost reduction aspects of
MESH have provided it 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 the Company finds
customers who need to develop a much closer relationship due to the level of
sophistication of their needs. At this level, the Company anticipates additional
revenue opportunities for custom programming, data mining and hosting, and
direct installations for national accounts.

10

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While the core function is controlling access/egress, through
the planned development of various MESH technology modules, the Company has 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 the EmerPhone, can function to combat
vandalism and to secure parking lots.

The Company ranks controlling access/egress and securing
parking facilities as the primary concerns of its traditional core
multi-residential business.

Distribution Plan

The Company currently has approximately 500 dealers for its
existing products throughout North America. When the existing business was
acquired from BC Tel, the Company relied primarily on exclusive and
semi-exclusive dealers in certain major metropolitan areas. The Companys
distribution network is not static and the Company is constantly seeking
additional sales channels. In October and November of 2003, the Company signed a
distributor deal with Tri Ed, the security distribution subsidiary of Tyco. The
agreement placed the Companys 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, employees may be directly involved with the customer in
designing, installing and servicing the product. In other cases, 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 the existing dealer base,
gave the Company immediate access to the largest networks of dealers in the US,
Canada and Mexico.

During the past year, the Company has been targeting its
existing markets for the sale of MESH technology, as well as targeting the
international marketplace. Internationally, the Company has 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

The Company has been using its established distribution
channels, as well as new distribution channels to access its 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 the Companys 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.

11

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Advertising

Products are advertised on an ongoing basis in various print
publications, which the Company 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 sale per
advertising dollar spent ratio. While the sales cycle is sometimes fairly long,
this approach has given the Company a very accurate measure of the effectiveness
of various publications and individual ads.

Trade Shows

During 2010, the Company increased its participation at
tradeshows to increase the awareness of MESH and MESH Freedom. During 2011, we
will continue to attend tradeshows to keep up the exposure for MESH and MESH
Freedom.

Direct Marketing

The Company continued educating customers about MESH technology
by holding MESH training seminars throughout the U.S. and at our head office,
via the internet.

Pricing Strategy

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, the
Company has devised a strategy of building market share. This strategy involves
selling MESH at reasonable 50-60% margins. With the telephony component, the
Company has 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
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 manufacturers using traditional Wiegand technology are limited
from 1 to 8 doors per host.

Competitive Threats

The Company has a strong dealer and distribution plan in place
and MESH has positioned it in a market dominated by much larger players. The
higher security MESH applications are also somewhat outside of the traditional
scope of business and therefore, the Company is rapidly trying to develop a
market for MESH and in the process, educating users of MESH through training
seminars. The Company believes that marketing strategies and training seminars
will provide benefits that will help it achieve market share that will allow it
to remain competitive. There is no guarantee that the Company will be able to
successfully compete against its 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 the
Company has marketed MESH from this point of view; that is to stress the
inevitability of all access control systems evolving this way.

12

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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 the Company still has a three-year market lead.
Fortunately, the wide range of MESH software applications should provide the
Company with an ongoing lead, as long as it is aggressive with research and
development.

INTELLECTUAL PROPERTY

The Company will rely on a combination of non-disclosure and
other contractual agreements, and technical measures to protect the confidential
information, know-how, and proprietary rights relating to Enterphone, MESH and
other Viscount products. The Company has contractual rights with respect to
registered North American trademark and trade name for Enterphone (word alone).
The Company is still considering registering North American trade names for
MESH.

The Company has registered active Internet domain names for
www.viscount.com, www.enterphone.net, and www.enterphone.org.

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

To date the Company has not received notification that its
services or products infringe the proprietary rights of third parties. Third
parties could however make such claims of infringement in the future. The
Company 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 the Companys services, thereby substantially
reducing the value of its proprietary rights. Furthermore, there can be no
assurance that any confidentiality agreements between the Company and its
employees or any license agreements will provide meaningful protection for its
proprietary information in the event of any unauthorized use or disclosure of
such proprietary information.

GOVERNMENT REGULATIONS

Some of the Companys 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 Enterphone
to share the telephone backbone.

The history of government deregulation for the Company 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.

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 the Company using direct dealers in those
regions.

SOURCES OF REVENUES

The majority of the Companys revenues were derived from the
MESH and Enterphone product lines. In fiscal 2010, MESH sales represented 54.3%
of total revenue, while Enterphone product sales represented 9.0% of total
revenue. The balance of the Companys revenues were derived from service
agreements, and other products such as access tracking and control, closed
circuit monitors, infrared and radio frequency remotes.

13

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EMPLOYEES

Viscount employs twenty six staff at its production facility
and head office located in Burnaby, British Columbia, Canada.

Item 1A. RISK FACTORS

Risks related to the business and the Companys shares:

Other companies with greater resources than we have are
currently developing or have commercially available products that use similar
technology to MESH product and the company may lose potential market share as a
result.

The MESH access control product is based on intelligent access
modules, which use commercially available programmable microchip technology. Due
to increasing availability and decreasing price of programmable microchips, the
development and commercialization of intelligent access control systems is not
unique to the Company. There are other companies that have developed or are
developing similar products that use intelligent cards and card readers that
will be competing with the Company in the access control industry. These
competitors may have substantially greater financial, technical, marketing and
management resources than the Company has. The Companys ability to compete
successfully will depend on its ability to educate and use existing sales
channels and develop new sales channels. To the extent that competitors have
more resources to market products based on similar technology, the Company may
lose market share which would decrease the value of an investment in its common
stock, or may cause the value of an investment in the Companys common stock to
decrease.

The loss or unavailability of Stephen Pineau, the
Companys President, Principal Executive Officer, and Principal Financial
Officer for an extended period of time could adversely affect business
operations and prospects.

The Companys success depends, to a significant degree, upon
the effort and skill of Stephen Pineau, president and chief executive officer.
The Company does not maintain key man insurance on Mr. Pineau. Due to his
knowledge of operations and products, the loss, incapacity, or unavailability of
Mr. Pineau could have a material adverse effect on the business, financial
condition or results of operations, which would likely result in a decrease in
the value of an investment in our common stock.

Because common stock trades at prices below US$5.00 per
share, and because the Company is not listed on a national exchange, there are
additional regulations imposed on broker-dealers trading in the Companys shares
that may make it more difficult for you to resell the Companys shares.

Because of rules that apply to shares with a market price of
less than US$5.00 per share, known as the penny stock rules, investors in this
offering will find it more difficult to sell their securities. The penny stock
rules currently apply to trades in the Companys shares. These rules in most
cases require a broker-dealer to deliver a standardized risk disclosure document
to a potential purchaser of the securities, along with additional information
including current bid and offer quotations, the compensation of the
broker-dealer and its salesperson in the transaction, monthly account statements
showing the market value of each penny stock held in the customers account, and
to make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchasers written agreement to
the transaction.

Directors and officers hold approximately 42% of the
Companys common stock and acting together may have the ability to control
management and affairs of Viscount and to deter changes in control.

The Companys directors and officers collectively hold
approximately 42% of our current issued and outstanding voting shares. As a
result, such persons, acting together, may have the ability to control most
matters submitted to our stockholders for approval, including the election and
removal of directors, and to control the management and affairs of Viscount. In
addition, Articles of Incorporation include provisions that management can use
to retain control over Viscount. Accordingly, such concentration of ownership,
coupled with management friendly anti-takeover provisions, may have the effect of delaying, deferring
or preventing a change in control of Viscount, impeding a merger, consolidation,
takeover or other business combination or discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control of the Company,
which limits the ability of stockholders to participate in opportunities that
may increase the value of their stock.

14

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Item 2. DESCRIPTION OF PROPERTY

PROPERTY

The Companys executive office and central factory is located
in Burnaby, British Columbia, where the Company currently leases 12,040 square
feet. The Company leases this space under an industry standard operating lease
with a term expiring May 31, 2013, renewable at the option of Viscount. Current
monthly lease obligations are $11,378. The Company believes that its current
facilities are adequate and are suitable for its current use, and that suitable
additional facilities will be available, when needed, upon commercially
reasonable terms. The Companys facilities are adequately insured against perils
in a manner consistent with industry practice.

Item 3. LEGAL PROCEEDINGS

None.

Item 4. REMOVED AND RESERVED

PART II.

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

Trades in the Companys common shares are quoted on the
Over-the-Counter Bulletin Board (OTC Bulletin Board) which is a quotation
service administered by the Financial Industry Regulatory Authority (FINRA). The
Companys 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. The Companys
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 three fiscal years and the subsequent period
ending March 14, 2011. 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. $) | 
|---- |  | -------------------------------------------- |  | - | ------------- |  | - | ------------ | 
|     |  |                                              |  |   |               |  |   |              | 
|2011 |  | First Quarter (through March
      14, 2011) |  | $ | 0.34          |  | $ | 0.23         | 
|2010 |  | Fourth Quarter                               |  |   | 0.25          |  |   | 0.10         | 
|     |  | Third Quarter                                |  |   | 0.20          |  |   | 0.10         | 
|     |  | Second Quarter                               |  |   | 0.18          |  |   | 0.12         | 
|     |  | First Quarter                                |  |   | 0.19          |  |   | 0.14         | 
|2009 |  | Fourth Quarter                               |  |   | 0.22          |  |   | 0.10         | 
|     |  | Third Quarter                                |  |   | 0.23          |  |   | 0.10         | 
|     |  | Second Quarter                               |  |   | 0.22          |  |   | 0.05         | 
|     |  | First Quarter                                |  |   | 0.08          |  |   | 0.05         | 

15

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As of March 14, 2011 there were 39 holders of record of the
Companys common stock, holding a total of 21,841,250 shares, and an unknown
number of beneficial holders.

The Company has not declared any dividends in the last two
fiscal years.

The following table sets forth information detailing the
Companys compensation plans as at December 31, 2010, 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)
|---------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Stock Options Warrants                                                 | 3,363,800 7,677,550                                                                                         | US$0.30 US$0.24                                                                             | 0 0                                                                                                                                                              
|Equity compensation plans       not approved by security
      holders | N/a                                                                                                         | N/a                                                                                         | N/a                                                                                                                                                              
|Total                                                                  | 11,041,350                                                                                                  |                                                                                             | 0                                                                                                                                                                

Item 6. SELECTED FINANCIAL DATA

Not applicable.

Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION

The following discusses the Companys financial condition and
results of operations based upon its 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 the
Companys financial statements and the notes thereto included elsewhere herein.
All dollar amounts are in Canadian dollars unless otherwise noted.

RESULTS OF OPERATIONS

Sales revenues for the years ended December 31, 2010 and 2009
were $3,916,924 and $4,892,440, respectively, a decrease of $975,516 or 19.9% .
This decrease in sales for the year ended December 31, 2010 resulted from
decreased sales of MESH and Enterphone systems due to the slower U.S. and
Canadian economies. MESH sales for the years ended December 31, 2010 and 2009
were $2,125,142 and $2,993,897, respectively, a decrease of $868,755 or 29.0% .
MESH sales for the year ended December 31, 2010 were 54.3% of total sales, as
compared to 61.2% of total sales for the year ended December 31, 2009. MESH is a
convergent technology developed by Viscount that increases security at a reduced
cost of hardware, cabling and installation, and with simplified database
management. Enterphone 2000 sales for the years ended December 31, 2010 and 2009
were $353,573 and $465,014, respectively, a decrease of $111,441 or 24%.
Enterphone 2000 sales for the year ended December 31, 2010 were 9.0% of total
sales, as compared to 9.5% of total sales for the year ended December 31, 2009.
As an old technology, Enterphone sales have been dropping for several years and
negating much of the MESH growth. MESH EPX is the replacement for the older
Enterphone system. MESH EPX is the next generation of Enterphone systems but
with features that are compatible with high speed internet and other newer
technologies. With MESH EPX, the Company has been recovering its lost Enterphone
revenue while continuing to increase its MESH business. Management believes that
sales of the MESH product will continue to represent an increasing proportion of
total sales relative to sales of Enterphone products.

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The Company also provides Enterphone support and maintenance
services pursuant to service contracts that were assigned to the Company from
Telus Corporation in 2003. Sales from the 1,482 existing service contracts
continue to be steady. On average, each service contract represents ongoing
revenues of approximately $38 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, 2010, customer
service contracts and new equipment sales generated aggregate sales revenues of
$1,246,835, as compared to $1,568,134 for the year ended December 31, 2009, a
decrease of $321,299 or 20.5% . This decrease was due to a slower Canadian
economy.

The intangible assets held by the Company are comprised
primarily of service agreements for the Enterphone 2000. The number of service
agreements held by the Company decreased from 1,577 at December 31, 2009 to
1,559, 1,539, 1,512, and 1,482 at March 31, June 30, September 30, and December
31, 2010, respectively. During the four quarters of 2010, the Company performed
a test for impairment 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. 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, 2010, the cost of the service agreements, net of
accumulated amortization, was $88,792.

The cost of sales as a percentage of sales was 45.4% for the
year ended December 31, 2010, as compared with the cost of sales as a percentage
of sales of 39.3% for the year ended December 31, 2009. Costs of sales as a
percentage of sales has increased due to an adjustment to inventory provisions
to recognize increased obsolete inventory. The Companys policy of managing cost
of sales remains the same. The Company is continuously focusing on controlling
costs, by using multiple suppliers to ensure that the best and most inexpensive
raw materials are used in its products.

Gross profit for the year ended December 31, 2010 was
$2,138,357, as compared to $2,971,829 for the year ended December 31, 2009, a
decrease of $833,472 or 28.1% . This decrease corresponds with a decreased sales
and increased cost of sales for the year ended December 31, 2010.

Selling, general and administrative expenses were $2,628,495
and $2,249,316 for the years ended December 31, 2010 and 2009, respectively, an
increase of $379,179 or 16.9% . This increase was due to increased travel,
tradeshow and various office expenses, as well as $456,647 recorded as
stock-based compensation expense for the issuance of 2 million compensation
warrants during December 2010. As a percentage of sales, selling, general and
administrative expenses were 67.1% and 46.0% for the years ended December 31,
2010 and 2009, respectively.

Research and development costs were $363,816 for the year ended
December 31, 2010, as compared to $243,833 for the year ended December 31, 2009.
Research and development costs increased by $119,983 or 49.2% . Research and
development have increased during these two comparative periods, as we have been
developing the new MESH Freedom system.

Loss before income tax for the year ended December 31, 2010 was
$(1,340,053), as compared to income before income tax of $266,523 for the year
ended December 31, 2009. This equates to a decrease in year over year income of
$1,606,576. The decrease in profitability was the result of increased travel,
tradeshow and various office expenses, as well as including in selling, general
and administrative expenses $456,647 as stock-based compensation expense for the
issuance of 2 million warrants during December 2010. The decrease in
profitability was also a result of a fair value adjustment of certain
outstanding warrants that are accounted for as derivative financial instruments.
The fair value adjustment has no cash flow impact and the charge to net loss for
the year ended December 31, 2010 was $455,810 compared to $158,977 charged to
net income for the year ended December 31, 2009.

RESTATEMENT

The consolidated financial statements for the year ended
December 31, 2009 have been restated to correct the accounting for warrants that
were issued in connection with a private placement completed on April 16, 2007.
The exercise price of these warrants is denominated in United States dollars,
which differs from the Companys functional currency (Canadian dollars) and
therefore these warrants cannot be considered to be indexed to the Corporations own stock and accordingly must be accounted for
as a derivative liability with changes in fair value recorded in the statement
of operations. The effect on net income for the year ended December 31, 2009 was
a decrease of $158,977 being the fair value adjustment of the derivative
liability. Further details of the effect of the restatement are described in
Note 16 to the consolidated financial statements.

17

---

LIQUIDITY AND CAPITAL RESOURCES

Cash on hand was $820,344 and $124,378, for December 31, 2010,
and December 31, 2009 respectively. This represented an increase of $695,966. On
December 7, 2010, the Company completed a private placement of 4,000,000 units
at a price of $0.15 per unit for total proceeds of $600,000. Each unit consists
of one common share and one share purchase warrant of Viscount, with each
warrant exercisable to acquire an additional share of Viscount at a price of
$0.24 for a period of 5 years from the closing date. In addition to cash on
hand, the Company has a credit facility that can be drawn upon to the lesser of
$500,000 or 75% of accounts receivable less than 90 days at the prime lending
rate plus 1.75% . Amounts drawn are repayable on demand. At December 31, 2010,
$nil was drawn on this facility. The facility is secured by substantially all of
the Companys assets under a general security agreement.

At December 31, 2010, working capital was $984,984 as compared
to a working capital of $778,878 at December 31, 2009. Working capital has
increased by $206,106 due to the private placement of 4,000,000 units at a price
of $0.15 per unit for total proceeds of $600,000. The current ratio at December
31, 2010 was 2.05 to 1.0, as compared with 1.67 to 1.0 at December 31, 2009.

The accounts receivable turnover ratio at December 31, 2010 was
73 days, as compared 61 days at December 31, 2009. The increase was due to less
proportionate sales to outstanding receivables at December 31, 2010, resulting
in a greater time period where receivables remain outstanding. Management
continues to follow up and monitor slower paying accounts on a monthly basis to
minimize the outstanding days. The accounts receivable reserve was $97,642 at
December 31, 2010, as compared to $337,475 for the year ended December 31, 2009,
a decrease of $239,833. This decrease was due to recovering certain slower
paying accounts. Management continues to conduct regular follow-up on certain
customer accounts to improve the collection process. Management is not aware of
any significant or material changes to business conditions that would warrant a
change to the reserve at this time.

For the year ended December 31, 2010, there were no capital
expenditures.

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

The Company will likely require additional funds to support the
development and marketing of its 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, the Company may be unable to develop or
enhance its 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.

The Company does not have any material commitments for capital
expenditures as of December 31, 2010.

Related Party Transactions

During the 2008 fiscal year, the President loaned the Company
$100,000. The loan carried interest at 9.5% per annum, was unsecured and had no
fixed terms of repayment. The loan was repaid during the fourth quarter of
2009.

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 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 allowance for doubtful accounts, inventory
obsolescence, the provision for future warranty costs, the estimated useful
lives of equipment and intangible assets, the deferred tax valuation allowance,
and assumptions used to determine the fair value of stock-based compensation.
Details are provided for critical estimates are as follows:

18

---

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 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. The Company increased its provision for obsolete inventory
by approximately $187,000 during the fourth quarter of 2010 as a result of a
revised estimate by management.

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.

Derivative financial instruments that are not classified as
equity and are not used in hedging relationships are measured at fair value.
Susequent changes to fair value are recorded in the statement of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

Adoption of new accounting pronouncements

In January 2010, the Company adopted an amendment to Financial
Accounting Standards Board (or FASB) Accounting Standards Codification (or ASC)
810, Consolidations, that eliminates certain exceptions to consolidating
qualifying special-purpose entities, contains new criteria for determining the
primary beneficiary, and increases the frequency of required reassessments to
determine whether a company is the primary beneficiary of a variable interest
entity. This amendment also contains a new requirement that any term,
transaction, or arrangement that does not have a substantive effect on an
entitys status as a variable interest entity, a companys power over a variable
interest entity, or a companys obligation to absorb losses or its right to
receive benefits of an entity must be disregarded. The elimination of the
qualifying special-purpose entity concept and its consolidation exceptions means
more entities will be subject to consolidation assessments and reassessments.
During February 2010, the scope of the revised standard was modified to
indefinitely exclude certain entities from the requirement to be assessed for
consolidation. The adoption of this amendment did not have an impact on the
Companys consolidated financial statements.

On January 21, 2010, the FASB issued ASU 2010-06, which amends
ASC 820 to add new requirements for disclosures about transfers into and out of
Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and
settlements relating to Level 3 measurements. The ASU also clarifies existing
fair value disclosures about the level of disaggregation and about inputs and
valuation techniques used to measure fair values. Further, the ASU amends
guidance on employers disclosures about postretirement benefit plan assets
under ASC 715 to require that disclosure be provided by classes of assets
instead of by major categories of assets. The ASU is effective for the first reporting period (including interim periods) beginning
after December 15, 2009, except for the requirement to provide the Level 3
activity of purchases, sales, issuances, and settlements on a gross basis, which
will be effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The adoption of this standard had no
impact on the Companys consolidated financial statements.

19

---

Recent accounting pronouncements

In October 2009, the FASB issued authoritative guidance on
revenue recognition which was effective beginning July 1, 2010. Under the new
guidance on arrangements that include software elements, tangible products that
have software components that are essential to the functionality of the tangible
product will no longer be within the scope of the software revenue recognition
guidance, and software-enabled products will now be subject to other relevant
revenue recognition guidance. Additionally, the FASB issued authoritative
guidance on revenue arrangements with multiple deliverables that are outside the
scope of the software revenue recognition guidance. Under the new guidance, when
vendor specific objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling price method affects
the timing and amount of revenue recognition. Adoption of this new guidance has
not had a material impact on the financial statements.

Other recently issued pronouncements are not expected to be
applicable to the Company or have significant impact on the Companys financial
statements.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

Not applicable.

Item 9A. CONTROLS AND PROCEDURES

Managements Evaluation of Disclosure Controls and
Procedures

The Companys management, including its principal executive
officer who is also our principal financial officer, evaluated the effectiveness
of disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) as of the end of the period covered by this report. Based on that
evaluation, the principal executive officer and principal financial officer
concluded that as of the end of the period covered by this report, the Company
has maintained effective disclosure controls and procedures in all material
respects, including those necessary to ensure that information required to be
disclosed in reports filed or submitted with the SEC (i) is recorded, processed,
and reported within the time periods specified by the SEC, and (ii) is
accumulated and communicated to management, including the principal executive
officer and principal financial officer, as appropriate to allow for timely
decision regarding required disclosure.

There have been no changes in internal control over financial
reporting that occurred during the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, internal control over
financial reporting.

Managements Report on Internal Control over Financial
Reporting

The Companys management is responsible for establishing and
maintaining effective internal control over financial reporting as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934. The Companys
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.

20

---

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2010 using the criteria set
forth in Internal Control  Integrated Frameworkissued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31, 2010, the Companys
internal control over financial reporting was not effective based on those
criteria. Based on the assessment, management has found the following material
weaknesses and significant deficiencies in internal controls:

|Material Weaknesses:
|--------------------
|                    
|                    
|                    

|Significant Deficiencies:
|-------------------------
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         

Management is in the preliminary stages of addressing known
material weaknesses and significant deficiencies. It plans to remain vigilant
and to add additional staff and system improvements as resources permit.

Item 9B. OTHER INFORMATION

Not applicable.

PART III.

Items 10 14

Information with respect to Items 10 through 14 is set forth in
the Proxy Statement to be filed with the Securities and Exchange Commission on
or before April 30, 2011 and is incorporated herein by reference. If the
definitive Proxy Statement cannot be filed on or before April 30, 2011, the
issuer will instead file an amendment to this Form 10K disclosing the
information with respect to Items 10 through 14.

21

---

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

|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
|21.1        | Subsidiaries of the registrant                                                                                | Incorporated by reference to Exhibit 21.1 to the
      Form SB-2                                                              
|31.1        | Certification
      Pursuant to Rule 13a-14(a) or 15d-14(a) of the U.S. Securities Exchange
      Act of 1934 | Filed
      herewith                                                                                                          
|32.1        | Section 1350 Certification
      of the Principal Executive Officer and Principal Financial Officer           | Filed herewith                                                                                                                

22

---

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 18, 2011.

| | VISCOUNT SYSTEMS, INC.                   
| | -----------------------------------------
| |                                          
| | By:
      /s/ Stephen Pineau             
| | Stephen Pineau                           
| | President and Principal 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 18, 2011
|    | Stephen Pineau           |  | Principal Executive Officer, Principal |               
|    |                          |  | Financial Officer and Director         |               
|    |                          |  |                                        |               
|    |                          |  |                                        |               
|By: | /s/
      Greg Shen      |  | Chairman of the Board and              | March 18, 2011
|    | Greg Shen                |  | Director                               |               

23

---

VISCOUNT SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS 
  (Expressed in Canadian Dollars)

DECEMBER 31, 2010

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of Viscount Systems
  Inc:

We have audited the accompanying consolidated balance sheets of Viscount Systems Inc. (the “Company”) as at December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our 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 an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  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 audit provides a reasonable basis for our opinion.

In our opinion, based on our audits, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2010 and 2009 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has an accumulated deficit of $2,885,723 and has reported a loss of $1,340,053 for the year ended December 31, 2010 raising substantial doubt about the Company's ability to continue as a going concern. Management’s plans in this regard are disclosed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As described in Note 16, the consolidated financial statements for the year ended December 31, 2009 have been restated.

|                                      | “DMCL”
|------------------------------------- | ------
|                                     
|DALE MATHESON CARR-HILTON LABONTE LLP
|CHARTERED ACCOUNTANTS                
|Vancouver, Canada                    
|March 11, 2011                       



---

|VISCOUNT SYSTEMS, INC.          
|--------------------------------
|Consolidated Balance Sheets     
|(Expressed in Canadian dollars) 
|As at December 31, 2010 and 2009

|                                                                                                                                                                                          |   |            |   |   | Restated   |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | -
|                                                                                                                                                                                          |   |            |   |   | (note 16)  |  
|                                                                                                                                                                                          |   | 2010       |   |   | 2009       |  
|                                                                                                                                                                                          |   |            |   |   |            |  
|Assets                                                                                                                                                                                    |   |            |   |   |            |  
|                                                                                                                                                                                          |   |            |   |   |            |  
|Current assets                                                                                                                                                                            |   |            |   |   |            |  
|Cash                                                                                                                                                                                      | $ | 820,344    |   | $ | 124,378    |  
|Trade accounts receivable, less allowance
      for doubtful accounts of $97,642 (2009 - $337,475)                                                                                        |   | 560,727    |   |   | 1,182,434  |  
|Inventory (note
      3)                                                                                                                                                                  |   | 539,861    |   |   | 626,566    |  
|Total current assets                                                                                                                                                                      |   | 1,920,932  |   |   | 1,933,378  |  
|                                                                                                                                                                                          |   |            |   |   |            |  
|Deposits                                                                                                                                                                                  |   | 5,891      |   |   | 5,891      |  
|Equipment (note 4)                                                                                                                                                                        |   | 35,188     |   |   | 42,358     |  
|Intangible assets (note 5)                                                                                                                                                                |   | 88,792     |   |   | 109,684    |  
|                                                                                                                                                                                          |   |            |   |   |            |  
|Total assets                                                                                                                                                                              | $ | 2,050,803  |   | $ | 2,091,311  |  
|                                                                                                                                                                                          |   |            |   |   |            |  
|Liablilities and stockholders' equity                                                                                                                                                     |   |            |   |   |            |  
|                                                                                                                                                                                          |   |            |   |   |            |  
|Current liabilities                                                                                                                                                                       |   |            |   |   |            |  
|Bank indebtedness (note 6)                                                                                                                                                                | $ | -          |   | $ | 218,702    |  
|Accounts payable                                                                                                                                                                          |   | 203,638    |   |   | 155,840    |  
|Accrued liabilities                                                                                                                                                                       |   | 515,611    |   |   | 447,878    |  
|Deferred revenue                                                                                                                                                                          |   | 44,297     |   |   | 39,678     |  
|Due to stockholders
      (note 7)                                                                                                                                                        |   | 172,402    |   |   | 292,402    |  
|Total current liabilities                                                                                                                                                                 |   | 935,948    |   |   | 1,154,500  |  
|                                                                                                                                                                                          |   |            |   |   |            |  
|Derivative liabilities (notes 8 and 16)                                                                                                                                                   |   | 974,297    |   |   | 225,456    |  
|                                                                                                                                                                                          |   | 1,910,245  |   |   | 1,379,956  |  
|                                                                                                                                                                                          |   |            |   |   |            |  
|Stockholders' equity                                                                                                                                                                      |   |            |   |   |            |  
|Capital stock (note 9)                                                                                                                                                                    |   |            |   |   |            |  
|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:
      
              21,841,250 common shares (2009
      - 17,841,250)                                                                                           |   | 29,434     |   |   | 25,434     |  
|Additional paid-in capital                                                                                                                                                                |   | 2,996,847  |   |   | 2,231,591  |  
|Accumulated deficit                                                                                                                                                                       |   | (2,885,723 | ) |   | (1,545,670 | )
|Total stockholders'
      equity                                                                                                                                                          |   | 140,558    |   |   | 711,355    |  
|                                                                                                                                                                                          |   |            |   |   |            |  
|Total liabilities
      and stockholders' equity                                                                                                                                          | $ | 2,050,803  |   | $ | 2,091,311  |  

Commitments (note 12) 
  Subsequent event (note 17)

---

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

|Years ended December
      31, 2010 and 2009                                  |   |            |   |   |            |  
|----------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | -
|                                                                              |   |            |   |   | Restated   |  
|                                                                              |   |            |   |   | (note 16)  |  
|                                                                              |   | 2010       |   |   | 2009       |  
|                                                                              |   |            |   |   |            |  
|                                                                              |   |            |   |   |            |  
|Sales                                                                         | $ | 3,916,924  |   | $ | 4,892,440  |  
|Cost of sales                                                                 |   | 1,778,567  |   |   | 1,920,611  |  
|Gross profit                                                                  |   | 2,138,357  |   |   | 2,971,829  |  
|                                                                              |   |            |   |   |            |  
|Expenses                                                                      |   |            |   |   |            |  
|Selling, general and administrative                                           |   | 2,628,495  |   |   | 2,249,316  |  
|Research and development (note
      10)                                      |   | 363,816    |   |   | 243,833    |  
|Depreciation
      and amortization                                           |   | 28,062     |   |   | 39,037     |  
|                                                                              |   | 3,020,373  |   |   | 2,532,186  |  
|                                                                              |   |            |   |   |            |  
|Income (loss) before other items                                              |   | (882,016   | ) |   | 439,643    |  
|                                                                              |   |            |   |   |            |  
|Other items                                                                   |   |            |   |   |            |  
|Interest income                                                               |   | 117        |   |   | 95         |  
|Interest expense                                                              |   | (2,344     | ) |   | (14,238    | )
|Fair
      value adjustment of derivative liability                           |   | (455,810   | ) |   | (158,977   | )
|                                                                              |   | (458,037   | ) |   | (173,120   | )
|                                                                              |   |            |   |   |            |  
|Net income (loss)                                                             | $ | (1,340,053 | ) | $ | 266,523    |  
|                                                                              |   |            |   |   |            |  
|Basic and diluted income (loss) per common share                              | $ | (0.07      | ) | $ | 0.01       |  
|                                                                              |   |            |   |   |            |  
|Weighted average number of common shares outstanding, Basic and
      diluted |   | 18,104,986 |   |   | 17,841,250 |  

See accompanying notes to consolidated financial statements.

---

|VISCOUNT SYSTEMS, INC.                         
|-----------------------------------------------
|Consolidated Statements of Stockholders' Equity
|(Expressed in Canadian dollars)                

|Years Ended December
      31, 2010 and 2009    |  |              |  |   |         |  |   |            |  |   |                     |   |   |            |  
|----------------------------------------------- |  | ------------ |  | - | ------- |  | - | ---------- |  | - | ------------------- | - | - | ---------- | -
|                                                |  |              |  |   |         |  |   |            |  |   |                     |   |   |            |  
|                                                |  |              |  |   |         |  |   | Additional |  |   |                     |   |   |            |  
|                                                |  | Common Stock |  |   | paid-in |  |   |            |  |   |                     |  
|                                                |  | Shares       |  |   | Amount  |  |   | capital    |  |   | Accumulated deficit |   |   | Total      |  
|                                                |  |              |  |   |         |  |   |            |  |   |                     |   |   |            |  
|                                                |  |              |  |   |         |  |   |            |  |   |                     |   |   |            |  
|Balance, December 31, 2008 (restated - note 16) |  | 17,841,250   |  | $ | 25,434  |  | $ | 2,212,393  |  | $ | (1,812,193          | ) | $ | 425,634    |  
|                                                |  |              |  |   |         |  |   |            |  |   |                     |   |   |            |  
|Stock-based compensation                        |  | -            |  |   | -       |  |   | 19,198     |  |   | -                   |   |   | 19,198     |  
|Net income (restated
      - note 16)           |  | -            |  |   | -       |  |   | -          |  |   | 266,523             |   |   | 266,523    |  
|                                                |  |              |  |   |         |  |   |            |  |   |                     |   |   |            |  
|Balance, December 31, 2009 (restated - note 16) |  | 17,841,250   |  |   | 25,434  |  |   | 2,231,591  |  |   | (1,545,670          | ) |   | 711,355    |  
|                                                |  |              |  |   |         |  |   |            |  |   |                     |   |   |            |  
|Units issued for cash from private placement    |  | 4,000,000    |  |   | 4,000   |  |   | 308,609    |  |   | -                   |   |   | 312,609    |  
|Stock-based compensation                        |  | -            |  |   | -       |  |   | 456,647    |  |   | -                   |   |   | 456,647    |  
|Net loss                                        |  | -            |  |   | -       |  |   | -          |  |   | (1,340,053          | ) |   | (1,340,053 | )
|                                                |  |              |  |   |         |  |   |            |  |   |                     |   |   |            |  
|Balance, December
      31, 2010                |  | 21,841,250   |  | $ | 29,434  |  | $ | 2,996,847  |  | $ | (2,885,723          | ) | $ | 140,558    |  

See accompanying notes to consolidated financial statements.

---

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

|Years ended December
      31, 2010 and 2009           |   |            |   |   |           |  
|------------------------------------------------------ | - | ---------- | - | - | --------- | -
|                                                       |   |            |   |   | Restated  |  
|                                                       |   |            |   |   | (note 16) |  
|                                                       |   | 2010       |   |   | 2009      |  
|                                                       |   |            |   |   |           |  
|Operating activities:                                  |   |            |   |   |           |  
|Net income (loss)                                      | $ | (1,340,053 | ) | $ | 266,523   |  
|Items not involving cash:                              |   |            |   |   |           |  
|Depreciation and amortization                          |   | 28,062     |   |   | 39,037    |  
|Fair value adjustment of
      derivative liability    |   | 455,810    |   |   | 158,977   |  
|Stock-based compensation                               |   | 456,647    |   |   | 19,198    |  
|Changes in non-cash working capital balances (note 13) |   | 828,562    |   |   | (625,455  | )
|Net cash provided by (used in) operating activities    |   | 429,028    |   |   | (141,720  | )
|                                                       |   |            |   |   |           |  
|                                                       |   |            |   |   |           |  
|Financing activities:                                  |   |            |   |   |           |  
|Proceeds from private placement                        |   | 605,640    |   |   | -         |  
|Proceeds from (repayment of) bank indebtedness         |   | (218,702   | ) |   | 160,926   |  
|Repayment of stockholder loan                          |   | (120,000   | ) |   | (100,000  | )
|Repayment of notes payable                             |   | -          |   |   | (50,000   | )
|Net cash provided by financing activities              |   | 266,938    |   |   | 10,926    |  
|                                                       |   |            |   |   |           |  
|Increase (decrease) in cash                            |   | 695,966    |   |   | (130,794  | )
|                                                       |   |            |   |   |           |  
|Cash, beginning of
      year                          |   | 124,378    |   |   | 255,172   |  
|                                                       |   |            |   |   |           |  
|Cash, end of year                                      | $ | 820,344    |   | $ | 124,378   |  
|                                                       |   |            |   |   |           |  
|Supplementary information:                             |   |            |   |   |           |  
|Interest paid                                          | $ | 2,344      |   | $ | 14,238    |  
|Income taxes
      paid                                |   | -          |   |   | -         |  

See accompanying notes to consolidated financial statements.

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|1. | Nature and continuance of operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Viscount Systems Inc. (the Company)
        was incorporated on May 24, 2001 in the State of Nevada. The Company manufactures,
        distributes, and provides services for electronic premises access and
        security equipment primarily through its wholly owned Canadian subsidiary
        Viscount Communication and Control Systems Inc. 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. The Company has an accumulated
        deficit of $2,885,723 and has reported a loss in 2010 of $1,340,053. Although
        management is confident that the company has sufficient working capital
        to maintain operations and will continue to generate positive cash flow
        from operations for the ensuing year, the ability to sustain normal operations
        is dependent upon growing sales and profits for the foreseeable future.
        Additional capital may be required in the future depending on profitability,
        sales and enterprise needs. Management will seek other private placements
        of common stock if additional capital is needed. (Note 17)
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|2. | Significant accounting policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | These consolidated financial statements have
        been prepared in conformity with accounting principles generally accepted
        in the United States of America (GAAP). Certain prior year
        figures have been reclassified to agree with current presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The prior year figures have been restated
        due to an accounting error identified during the preparation of these
        consolidated financial statements (Note 16).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The significant accounting policies adopted
        by the Company are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

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

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

| | (g) | Intangible assets                                                                                                                                                                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                           
| |     | Intangible assets consist of intercom service agreements
        that are considered to have a finite useful life. They are recorded at
        cost and are reviewed annually for impairment. On April 1, 2005, the Company
        began amortizing the cost on a straight-line basis over an estimated useful
        life of 10 years.

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

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

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

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

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

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

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|2. | Significant accounting policies (contd)
|-- | -----------------------------------------
|   |                                          
|   | (q)                                      
|   |                                          
|   |                                          
|   |                                          
|3. | Inventory                                

| |                 |   | 2010    |  |   | 2009    | 
| | --------------- | - | ------- |  | - | ------- | 
| | Raw materials   | $ | 210,442 |  | $ | 237,463 | 
| | Work in process |   | 106,852 |  |   | 106,457 | 
| | Finished goods  |   | 222,567 |  |   | 282,646 | 
| |                 |   |         |  |   |         | 
| |                 | $ | 539,861 |  | $ | 626,566 | 

|**4.** | Equipment
|------ | ---------

| |                                |   |         |  |   | Accumulated  |  |   | Net book | 
| | ------------------------------ | - | ------- |  | - | ------------ |  | - | -------- | 
| | 2010                           |   | Cost    |  |   | depreciation |  |   | value    | 
| |                                |   |         |  |   |              |  |   |          | 
| | Computer equipment             | $ | 110,838 |  | $ | 96,088       |  | $ | 14,750   | 
| | Office furniture and equipment |   | 77,269  |  |   | 58,362       |  |   | 18,907   | 
| | Leasehold improvements         |   | 46,814  |  |   | 45,283       |  |   | 1,531    | 
| |                                |   |         |  |   |              |  |   |          | 
| |                                | $ | 234,921 |  | $ | 199,733      |  | $ | 35,188   | 

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|**4.** | Equipment (contd)
|------ | -------------------

| |                                |   |         |  |   | Accumulated  |  |   | Net book | 
| | ------------------------------ | - | ------- |  | - | ------------ |  | - | -------- | 
| | 2009                           |   | Cost    |  |   | depreciation |  |   | value    | 
| |                                |   |         |  |   |              |  |   |          | 
| | Computer equipment             | $ | 110,838 |  | $ | 93,318       |  | $ | 17,520   | 
| | Office furniture and equipment |   | 77,269  |  |   | 55,034       |  |   | 22,235   | 
| | Leasehold improvements         |   | 46,814  |  |   | 44,211       |  |   | 2,603    | 
| |                                |   |         |  |   |              |  |   |          | 
| |                                | $ | 234,921 |  | $ | 192,563      |  | $ | 42,358   | 

|5. | Intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | On May 16, 2003, the Company entered into 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.
        At December 31, 2010, the Company held 1,482 service agreements (December
        31, 2009  1,577) at a carrying value, net of accumulated amortization
        of $120,129 (December 31, 2009 - $99,237) of $88,792 (December 31, 2009
        - $109,684). The estimated aggregate amortization expense for each of
        the four succeeding fiscal years is as follows:

| | Year ending December
      31: |   |        | 
| | ------------------------------ | - | ------ | 
| | 2011                           | $ | 20,892 | 
| | 2012                           |   | 20,892 | 
| | 2013                           |   | 20,892 | 
| | 2014                           |   | 20,892 | 

|6. | Bank indebtedness                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Bank indebtedness represents cheques written in excess
        of funds on deposit of $Nil (December 31, 2009 - $18,702) and amounts
        drawn under a bank credit facility of $Nil (December 31, 2009 - $200,000)
        available to draw upon up to the lesser of $500,000 and 75% of accounts
        receivable less than 90 days old. Amounts outstanding under the bank credit
        facility bear interest at the banks prime lending rate plus 1.75%
        and are repayable on demand. The facility is secured by substantially
        all of the Companys assets under a general security agreement and
        a pledge of personal property of a significant shareholder. 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. At December 31, 2010, the Company was in
        compliance with debt covenants.

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|7. | Due to stockholders                                                                                                                                                                                                                                                                                                                        
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                            
|   | Amounts due to stockholders in the amount of $172,402
        (2009 - $292,402) are non-interest bearing, unsecured and have no fixed
        terms of repayment. Amounts due to stockholders are subordinated to amounts
        due on the companys credit facility.                                                                    
|   |                                                                                                                                                                                                                                                                                                                                            
|8. | Derivative liabilities                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                            
|   | Derivate financial liabilities consist of warrants that
        were originally issued in private placements which have exercise prices
        denominated in United States dollars which differs from the Companys
        functional currency. The fair value of these warrants as at December 31,
        2010 and 2009 is as follows:

| |                                                       |  | Exercise       |  |   | 2010    |  |   | 2009    | 
| | ----------------------------------------------------- |  | -------------- |  | - | ------- |  | - | ------- | 
| |                                                       |  | price          |  |   |         |  |   |         | 
| | 1,677,550 warrants expiring on April 16, 2012         |  | US$ 0.25       |  | $ | 282,997 |  | $ | 225,456 | 
| | 4,000,000 warrants
      expiring on December 7, 2015 |  | US$
      0.24 |  |   | 691,300 |  |   | -       | 
| |                                                       |  |                |  |   |         |  |   |         | 
| |                                                       |  |                |  | $ | 974,297 |  | $ | 225,456 | 

The fair value of these warrants was
  determined using the Black-Scholes option pricing model, and adjusted for market
  liquidity, using the following assumptions:

| |                         |  | 2010                  |  |  | 2009           | 
| | ----------------------- |  | --------------------- |  |  | -------------- | 
| | Volatility              |  | 175% - 201%           |  |  | 202%           | 
| | Dividend yield          |  | -                     |  |  | -              | 
| | Risk-free interest rate |  | 0.29% - 2.01%         |  |  | 1.14%          | 
| | Expected life           |  | 1.29
       4.94 yrs |  |  | 2.29
      yrs | 

|9. | Capital stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Common stock:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Each share of common stock has the same rights, privileges
        and preferences. The holders of the outstanding common stock are entitled,
        in the event of liquidation, to a pro rata share of net assets, subject
        to any rights that may be applicable on any preferred stock. The Board
        of Directors has the authority to determine and amend the designation,
        preferences, limitations and relative rights of preferred stock. There
        was no preferred stock issued and outstanding at December 31, 2010 and
        2009.                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | On December 7, 2010, the Company completed a private
        placement of 4,000,000 units, at a price of US$0.15 per unit, for gross
        proceeds of US$600,000 (CDN$605,640). Each unit consisted of one common
        share of the Company and one common share purchase warrant. Each share
        purchase warrant entitles the holder to acquire one additional common
        share of the Company for US$0.24 per share until December 7, 2015. $293,031
        of the proceeds were allocated to the warrants and recorded as a derivative
        liability. The fair value was determined using the Black-Scholes option
        pricing model, adjusted for market liquidity and allocated on a relative
        basis.

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|9. | Capital stock (contd)                                                                                                                                                                                                                                              
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                      
|   | Stock options:                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                      
|   | The Company has the following stock option plans which
        serve as equity incentive programs for management, qualified employees,
        members of the Board of Directors and independent advisors or consultants
        outstanding as at December 31, 2010:

| | (i)  | The 2001 Stock Option Plan (the 2001 Plan),
        which became effective on December 21, 2001, permits, at any one time,
        up to 1,500,000 shares of common stock to be reserved for issuance. The
        maximum term during which a vested option may be exercised is ten years
        from the date of grant. The vesting period and the option price are determined
        by the compensation committee. The option price may be set at a discount
        to the closing price on the date of grant unless it is an incentive stock
        option. As at December 31, 2010, the total number of stock options outstanding
        under the 2001 Plan is 1,001,925.                          
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (ii) | The 2003 Stock Option Plan (the 2003 Plan),
        which became effective on January 3, 2003 and amended on July 10, 2007
        permits, at any one time, up to 2,935,510 shares of common stock to be
        reserved for issuance. The maximum term during which a vested option may
        be exercised is ten years from the date of grant. The vesting period and
        the option price are determined by the compensation committee. The option
        price may be set at a discount to the closing price on the date of grant
        unless it is an incentive stock option. As at December 31, 2010, the total
        number of stock options outstanding under the 2003 Plan is 2,361,875.

The Company did not grant any stock options
  during the years ended December 31, 2010 or 2009.

During the year ended December 31, 2010,
  the Company recorded stock-based compensation of $456,647 relating to the issuance
  of 1,000,000 warrants each to the President of the Company and an employee.
  The stock-based compensation reflects the issue date fair value of the warrants.
  Each warrant is exercisable into a common share of the Company at a price of
  US$0.24 per share for a period of 5 years expiring December 23, 2015. To determine
  the fair value of these warrants the Company used the Black-Scholes option pricing
  model with the following weighted average assumptions: average expected stock
  price volatility of 174%, expected dividend yield of 0%, risk-free interest
  rate of 2.09% and an expected option life of 5 years.

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|9. | Capital stock (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Stock options (contd):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | During the year ended December 31, 2009, the Company
        recorded stock-based compensation expense of $19,198 relating to the extension
        of the expiration date of 168,125 stock options from December 21, 2009
        to December 21, 2015. The stock-based compensation expense reflects the
        incremental increase in the fair value of the options as a result of the
        extension. To determine the incremental increase in the fair value of
        these options the Company used the Black-Scholes option pricing model
        with the following weighted average assumptions: average expected stock
        price volatility of 109%, expected dividend yield of 0%, risk-free interest
        rate of 2.77% and an expected option life of 3 years.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | A summary of the stock options outstanding and exercisable
        at December 31, 2010 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |                |  |           |  |  | Weighted    |  |   |          |  |   |           | 
| | -------------- |  | --------- |  |  | ----------- |  | - | -------- |  | - | --------- | 
| |                |  |           |  |  | Average     |  |   |          |  |   |           | 
| |                |  |           |  |  | Remaining   |  |   | Weighted |  |   |           | 
| |                |  |           |  |  | Contractual |  |   | Average  |  |   | Aggregate | 
| |                |  |           |  |  | Life        |  |   | Exercise |  |   | Intrinsic | 
| | Exercise Price |  | Number    |  |  | (Years)     |  |   | Price    |  |   | Value     | 
| |                |  |           |  |  |             |  |   |          |  |   |           | 
| | US$ 0.12       |  | 2,068,750 |  |  | 3.11        |  | $ | 0.12     |  | $ | 227,563   | 
| | 0.18           |  | 11,250    |  |  | 4.98        |  |   | 0.18     |  |   | 563       | 
| | 0.40           |  | 327,500   |  |  | 1.59        |  |   | 0.40     |  |   | -         | 
| | 0.45           |  | 7,500     |  |  | 4.98        |  |   | 0.45     |  |   | -         | 
| | 0.55           |  | 5,000     |  |  | 4.98        |  |   | 0.55     |  |   | -         | 
| | 0.60           |  | 10,000    |  |  | 4.98        |  |   | 0.60     |  |   | -         | 
| | 0.65           |  | 933,800   |  |  | 0.97        |  |   | 0.65     |  |   | -         | 
| |                |  |           |  |  |             |  |   |          |  |   |           | 
| |                |  | 3,363,800 |  |  | 2.38        |  | $ | 0.30     |  | $ | 228,126   | 

The aggregate intrinsic value in the
  preceding table represents the total intrinsic value, based on the Companys
  closing stock price of US$0.23 per share as of December 31, 2010 (2009 
  US$0.19), which would have been received by the option holders had all option
  holders exercised their options as of that date. The total number of in-the-money
  options vested and exercisable as of December 31, 2010 was 2,080,000 (2009 
  2,080,000).

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|9. | Capital stock (contd)                     
|-- | --------------------------------------------
|   |                                             
|   | Warrants (contd)                          
|   |                                             
|   | A summary of warrant activity is as follows:

| |                                           |  | Number of |  |  | Weighted
      average | 
| | ----------------------------------------- |  | --------- |  |  | ---------------------- | 
| |                                           |  | warrants  |  |  | exercise price         | 
| | Outstanding at December 31, 2009 and 2008 |  | 1,677,550 |  |  | US$ 0.25               | 
| | Issued in respect of private placement    |  | 4,000,000 |  |  | 0.24                   | 
| | Issued as compensation                    |  | 2,000,000 |  |  | 0.24                   | 
| |                                           |  |           |  |  |                        | 
| | Outstanding at December 31, 2010          |  | 7,677,550 |  |  | US$ 0.24               | 

On December 7, 2010, the Company issued
  4,000,000 warrants as part of the 4,000,000 unit private placement for total
  proceeds of $600,000. Each unit consisted of one common share and one share
  purchase warrant of Viscount, with each warrant exercisable to acquire an additional
  share of Viscount at a price of US$0.24 for a period of 5 years expiring December
  7, 2015.

On December 23, 2010, the Company granted
  1,000,000 compensation warrants each to the President of the Company and an
  employee. Each warrant is exercisable into a common share of the Company at
  a price of US$0.24 per share for a period of 5 years expiring December 23, 2015.

All warrants issued vested upon granting.

A summary of the warrants outstanding
  and exercisable at December 31, 2010 is as follows:

| |                |  |           |  |  | Weighted    |  |  |          | 
| | -------------- |  | --------- |  |  | ----------- |  |  | -------- | 
| |                |  |           |  |  | Average     |  |  | Weighted | 
| |                |  |           |  |  | Remaining   |  |  | Average  | 
| | Exercise Price |  | Number    |  |  | Contractual |  |  | Exercise | 
| |                |  |           |  |  | Life        |  |  | Price    | 
| |                |  |           |  |  |             |  |  |          | 
| |                |  |           |  |  |             |  |  |          | 
| | US$0.25        |  | 1,677,550 |  |  | 1.29 years  |  |  | US$0.25  | 
| | US$0.24        |  | 4,000,000 |  |  | 4.94 years  |  |  | US$0.24  | 
| | US$0.24        |  | 2,000,000 |  |  | 4.98 years  |  |  | US$0.24  | 

|10. | Research and development                                                                                                                                            
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                     
|    | Research and development expenditures are recorded net
        of investment tax credits, which totaled $nil for the years ended December
        31, 2010 and 2009.

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|**11.** | Income taxes
|------- | ------------

| | (a) | The provision for income taxes differs from the amount
        that would have resulted in applying the combined Canadian federal and
        statutory income tax rates as follows:
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                           |   | 2010       |   |   | 2009     |  
| | ------------------------------------------------------------------------- | - | ---------- | - | - | -------- | -
| |                                                                           |   |            |   |   |          |  
| | Net income (loss) before income tax rates                                 | $ | (1,340,053 | ) | $ | 266,523  |  
| | Statutory income tax
      rate                                           |   | 28.5%      |   |   | 30%      |  
| | Expected income tax expense (recovery) at statutory
      income tax rate | $ | (381,915   | ) | $ | 79,957   |  
| | Non-deductible expenses and other items                                   |   | (805       | ) |   | 236,869  |  
| | Change in valuation allowance                                             |   | 417,956    |   |   | (84,269  | )
| | Recognized investment
      tax credit                                    |   | (35,236    | ) |   | (232,556 | )
| |                                                                           |   |            |   |   |          |  
| | Income tax expense                                                        | $ | -          |   | $ | -        |  

| | (b) | Temporary differences that give rise to the following
      deferred income tax assets as follows:
| | --- | --------------------------------------------------------------------------------------------------

| |                                         |   | 2010       |   |   | 2009       |  
| | --------------------------------------- | - | ---------- | - | - | ---------- | -
| | Equipment                               | $ | 18,732     |   | $ | 16,939     |  
| | Intangible assets                       |   | 27,627     |   |   | 26,154     |  
| | Derivative liability                    |   | 243,574    |   |   | 56,364     |  
| | Investment tax credits (non-refundable) |   | 517,839    |   |   | 402,215    |  
| | Research and development costs          |   | 626,907    |   |   | 550,248    |  
| | Warranty provision                      |   | 109,428    |   |   | 74,230     |  
| |                                         |   |            |   |   |            |  
| |                                         |   | 1,544,107  |   |   | 1,126,151  |  
| | Valuation allowance                     |   | (1,544,107 | ) |   | (1,126,151 | )
| |                                         |   |            |   |   |            |  
| | Net deferred income tax assets          | $ | -          |   | $ | -          |  

The Company has non-refundable federal
  investment tax credits of $346,717 (2009 -$277,924) which will expire up to
  2030 and provincial investment tax credits of $171,122 (2009 - $133,425), which
  will expire up to 2020.

The Company has unutilized scientific
  research and development costs of $2,507,630 (2009 -$2,206,777) which may be
  available to reduce taxable income and income taxes payable in future years.

Management has determined that the realization
  of the potential deferred tax assets resulting from these tax pools and other
  temporary differences is uncertain at this time, and cannot be viewed as more
  likely than not. Accordingly, the Company has recorded a full valuation allowance
  for the potential deferred tax asset.

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|11. | Income taxes (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company files income tax returns in Canada and the
        United States of America. The Companys Canadian income tax returns
        for 2005 through 2010 are open tax years. The Companys United States
        tax returns are open from 2005 through 2010. The Company has reviewed
        its tax filings for these years to identify the existence of any uncertain
        tax positions that would require recognition in the Companys financial
        statements. The Company may from time to time be assesed interest or penalties
        by major jurisdictions, although any such assessments historically have
        been minimal and immaterial to the Companys financial results.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|12. | Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company is committed to make minimum annual payments
        on its premises, automobiles, and office equipment operating leases that
        expire in 2015 as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | Year ending December
      31: |   |         | 
| | ------------------------------ | - | ------- | 
| |                                |   |         | 
| | 2011                           | $ | 160,482 | 
| | 2012                           |   | 147,341 | 
| | 2013                           |   | 65,025  | 
| | 2014                           |   | 6,381   | 
| | 2015                           |   | 5,850   | 

Rent expense included in the statements
  of operations is $135,757 (2009 - $133,167).

|**13.** | Changes in non-cash working capital balances
|------- | --------------------------------------------

| |                           |   | 2010    |  |   | 2009     |  
| | ------------------------- | - | ------- |  | - | -------- | -
| |                           |   |         |  |   |          |  
| | Trade accounts receivable | $ | 621,707 |  | $ | (597,918 | )
| | Inventory                 |   | 86,705  |  |   | (69,994  | )
| | Prepaid expenses          |   | -       |  |   | 4,637    |  
| | Lease receivable          |   | -       |  |   | 961      |  
| | Accounts payable          |   | 47,798  |  |   | (1,853   | )
| | Accrued liabilities       |   | 67,733  |  |   | 30,314   |  
| | Deferred revenue          |   | 4,619   |  |   | 8,398    |  
| |                           |   |         |  |   |          |  
| |                           | $ | 828,562 |  | $ | (625,455 | )

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|14. | Segment information
|--- | -------------------
|    |                    
|    | (a)                
|    |                    
|    |                    
|    |                    
|    |                    

| | December 31, 2010                         |   | Manufacturing |   |   | Servicing |  |   | Total      |  
| | ----------------------------------------- | - | ------------- | - | - | --------- |  | - | ---------- | -
| |                                           |   |               |   |   |           |  |   |            |  
| |                                           |   |               |   |   |           |  |   |            |  
| | Sales to external customers               | $ | 2,670,089     |   | $ | 1,246,835 |  | $ | 3,916,924  |  
| | Depreciation and amortization             |   | 7,170         |   |   | 20,892    |  |   | 28,062     |  
| | Interest expense                          |   | 2,344         |   |   | -         |  |   | 2,344      |  
| | Segment income (loss) before income taxes |   | (1,711,849    | ) |   | 371,796   |  |   | (1,340,053 | )
| | Total assets                              |   | 1,962,011     |   |   | 88,792    |  |   | 2,050,803  |  

| | December 31, 2009                         |   | Manufacturing |  |   | Servicing |  |   | Total     | 
| | ----------------------------------------- | - | ------------- |  | - | --------- |  | - | --------- | 
| |                                           |   |               |  |   |           |  |   |           | 
| |                                           |   |               |  |   |           |  |   |           | 
| | Sales to external customers               | $ | 3,324,306     |  | $ | 1,568,134 |  | $ | 4,892,440 | 
| | Depreciation and amortization             |   | 18,145        |  |   | 20,892    |  |   | 39,037    | 
| | Interest expense                          |   | 13,438        |  |   | 800       |  |   | 14,238    | 
| | Segment income (loss) before income taxes |   | 84,846        |  |   | 181,677   |  |   | 266,523   | 
| | Total assets                              |   | 1,981,627     |  |   | 109,684   |  |   | 2,091,311 | 

| | (b) | Of the total revenues for the year ended December 31,
        2010, $570,210 (2009 - $811,606) was derived from U.S.-based customers
        and $3,346,714 (2009 - $4,080,834) from Canadian-based customers.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                               
| |     | Substantially all of the Company's operations, assets
        and employees are located in Canada.                                                                                                            
| |     |                                                                                                                                                                                                               
| | (c) | Major customers:                                                                                                                                                                                              
| |     |                                                                                                                                                                                                               
| |     | No customer represented more than 10% of total revenues
        in either of the years ended December 31, 2010 or 2009.                                                                                       

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|14. | Segment information (contd.)
|--- | -----------------------------
|    |                              
|    | (d)                          
|    |                              
|    |                              

|15. | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Companys financial instruments include cash,
        trade accounts receivable, bank indebtedness, accounts payable, accrued
        liabilities and due to stockholders. 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 Companys financial instruments also include derivative liabilities
        which are measured at fair value and are impacted by changes in interest
        rates, foreign exchange rates and the price of the Companys shares.
        The fair values of all other financial instruments approximate their carrying
        values based on their liquidity and short-term nature.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|16. | Restatement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The consolidated financial statements for the year ended
        December 31, 2009 have been restated to correct the accounting for warrants
        that were issued in connection with a private placement completed on April
        16, 2007. The exercise price of these warrants is denominated in United
        States dollars, which differs from the Companys functional currency
        (Canadian dollars) and therefore these warrants cannot be considered to
        be indexed to the Corporations own stock and accordingly must be
        accounted for as a derivative liability with changes in fair value recorded
        in the statement of operations.                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The effect of the resulting adjustments on the companys
        consolidated financial statements for the year ended December 31, 2009
        is as follows: Consolidated balance sheet as at December 31, 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |                            |   | As previously |   |   |            |   |   |             |  
| | -------------------------- | - | ------------- | - | - | ---------- | - | - | ----------- | -
| |                            |   | reported      |   |   | Adjustment |   |   | As restated |  
| |                            |   |               |   |   |            |   |   |             |  
| | Derivative liability       | $ | -             |   | $ | 225,456    |   | $ | 225,456     |  
| | Additional paid-in-capital |   | 2,372,228     |   |   | (140,637   | ) |   | 2,231,591   |  
| | Deficit                    |   | (1,460,851    | ) |   | (84,819    | ) |   | (1,545,670  | )

---

|VISCOUNT SYSTEMS, INC.                    
|------------------------------------------
|Notes to Consolidated Financial Statements
|(Expressed in Canadian dollars)           
|                                          
|December 31, 2010                         
|                                          

|16. | Restatement (contd)                                                            
|--- | ---------------------------------------------------------------------------------
|    |                                                                                  
|    | Consolidated statement of operations for the year ended
        December 31, 2009

| |                                               |   | As previously |  |   |            |   |   |             |  
| | --------------------------------------------- | - | ------------- |  | - | ---------- | - | - | ----------- | -
| |                                               |   | reported      |  |   | Adjustment |   |   | As restated |  
| |                                               |   |               |  |   |            |   |   |             |  
| | Fair value adjustment on derivative liability | $ | -             |  | $ | (158,977   | ) | $ | (158,978    | )
| | Net income                                    |   | 425,500       |  |   | (158,977   | ) |   | 266,523     |  
| | Income per common share  basic and diluted   |   | 0.02          |  |   | (0.01      | ) |   | 0.01        |  

| | Consolidated balance sheet as at December 31, 2008 |   |               |   |   |            |   |  
| | -------------------------------------------------- | - | ------------- | - | - | ---------- | - | -
| |                                                    |   | As previously |   |   |            |   |  
| |                                                    |   | reported      |   |   | Adjustment |   |  
| |                                                    |   |               |   |   |            |   |  
| | Derivative liability                               | $ | -             |   | $ | 66,479     |   | $
| | Additional paid-in-capital                         |   | 2,353,030     |   |   | (140,637   | ) |  
| | Deficit                                            |   | (1,886,351    | ) |   | 74,158     |   |  

|    | There was no impact on the presentation and classification
        of the Companys cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|17. | Subsequent event                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | On March 3, 2011 the Company entered into subscription
        agreements, pursuant to which the Company agreed to issue a total of 3,650,000
        units at a price of US$0.15 per unit for gross proceeds of US$547,500.
        Each unit consisted of one common share and one common share purchase
        warrant of the Company exercisable into an additional common share for
        US$0.24 per share for a period of five years from the closing date. As
        the warrants have an exercise price that differs from the Companys
        functional currency, these will be recorded as a derivative liability
        and measured at fair value.

---