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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION** Washington, D.C. 20549

FORM 10-KSB

x  ANNUAL
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 2004

 ̈  TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
  
  For the transition period from ______________ to ______________

Commission file number:**000-49746**

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

|**NEVADA**                                                            | **88-0498783******                  
|--------------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of                                       | (I.R.S. Employer Identification No.)
|incorporation or organization)                                        |                                     
|                                                                      |                                     
|**4585 Tillicum Street, Burnaby, British
      Columbia, Canada****** | **V5J 5K9******                     
|(Address of principal executive offices)                              | (Zip Code)                          

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

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

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

Check if there is no disclosure of delinquent filers in response
  to Item 405 of Regulation S-B is not contained in this form, and no disclosure
  will be contained, to the best of the registrant’s knowledge, in definitive
  proxy or information statements incorporated by reference in Part III of this
  Form 10-KSB or any amendment to this Form 10-KSB.  ̈

State issuer’s revenues for its most recent fiscal year:
  $3,653,859 ($4,391,658 in Canadian dollars converted at an exchange
  rate of US$0.832/CDN$ 1.000) .

State the aggregate market value of the voting and non-voting
  common equity held by non-affiliates computed by reference to the price at which
  the common equity was sold, or the average bid and asked price of such common
  equity, as of a specified date within the past 60 days. (See definition of affiliate
  in Rule 12b-2 of the Exchange Act.): $15,950,575 as at February 24,
  2005.

State the number of shares outstanding of each of the issuer’s
  classes of common equity, as of the latest practicable date: 15,950,075
  shares of common stock as at February 24, 2005.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the Annual
  Meeting of Stockholders are incorporated by reference into Part III of this
  Form 10-KSB, which Proxy Statement is to be filed within 120 days after the
  end of the Registrant's fiscal year ended December 31, 2004.

Transitional Small Business Disclosure Format (Check one): Yes  ̈;
  No x

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Form 10-KSB

Table of Contents

|Part | Item No |                                                                                                                        |   
|---- | ------- | ---------------------------------------------------------------------------------------------------------------------- | --
|     |         |                                                                                                                        |   
|I    | 1       | Description of Business                                                                                                | 2 
|     |         |                                                                                                                        |   
|     | 2       | Description of Property                                                                                                | 13
|     |         |                                                                                                                        |   
|     | 3       | Legal Proceedings                                                                                                      | 13
|     |         |                                                                                                                        |   
|     | 4       | Submission of Matters to a Vote of Security
      Holders                                                              | 13
|     |         |                                                                                                                        |   
|II   | 5       | Market for Common Equity and Related Stockholder
      Matters                                                         | 13
|     |         |                                                                                                                        |   
|     | 6       | Management’s Discussion and Analysis
      or Plan of Operation                                                        | 14
|     |         |                                                                                                                        |   
|     | 7       | Financial Statements                                                                                                   | 17
|     |         |                                                                                                                        |   
|     | 8       | Changes in and Disagreements With Accountants
      on Accounting and Financial Disclosure                             | 17
|     |         |                                                                                                                        |   
|     | 8A      | Controls and Procedures                                                                                                | 17
|     |         |                                                                                                                        |   
|III  | 9       | Directors, Executive Officers, Promoters,
      and Control Persons; Compliance With Section 16(a) of the Exchange Act | 17
|     |         |                                                                                                                        |   
|     | 10      | Executive Compensation                                                                                                 | 17
|     |         |                                                                                                                        |   
|     | 11      | Security Ownership of Certain Beneficial
      Owners and Management                                                   | 17
|     |         |                                                                                                                        |   
|     | 12      | Certain Relationships and Related Transactions                                                                         | 17
|     |         |                                                                                                                        |   
|     | 13      | Exhibits                                                                                                               | 18
|     |         |                                                                                                                        |   
|     | 14      | Principal Accountant Fees and Services                                                                                 | 17
|     |         |                                                                                                                        |   
|     |         | Signatures                                                                                                             | 19

1

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FORM 10-KSB

VISCOUNT SYSTEMS, INC.

PART I.

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

Currency of Financial Information and Exchange Rate Table

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

The following table sets forth, for the periods indicated,
  certain exchange rates based on the noon buying rate in New York City for cable
  transfers in Canadian dollars. Such rates are the number of Canadian dollars
  per one (1) U.S. dollar and are the inverse of rates quoted by the Federal Reserve
  Bank of New York for U.S. dollars per CDN$1.00. On March 2, 2005, the exchange
  rate was US$1.00 per CDN$1.2395. The high and low exchange rates for
  each month during the previous six months were as follows:

|               | High   | Low   
|-------------- | ------ | ------
|February 2005  | 1.2559 | 1.2249
|January 2005   | 1.2470 | 1.2003
|December 2004  | 1.2467 | 1.1796
|November 2004  | 1.2274 | 1.1746
|October 2004   | 1.2755 | 1.2158
|September 2004 | 1.3140 | 1.2592

The following table sets out the exchange rate information as at each of the years ended December 31, 2004 and 2003.

|                           | Year Ended December 31 |        | 
|-------------------------- | ---------------------- | ------ | 
|                           |                        |        | 
|                           | 2004                   | 2003   | 
|                           |                        |        | 
|Rate at end of Period      | 1.2020                 | 1.2923 | 
|Average Rate during Period | 1.3015                 | 1.4012 | 
|Low                        | 1.1746                 | 1.2923 | 
|High                       | 1.4003                 | 1.5750 | 

Item 1. DESCRIPTION OF BUSINESS

GENERAL

We are a provider of access control security products. In
  2004 we commenced commercial sales of our MESH product line. MESH (Multimedia
  Embedded Security Hub) is a new technology developed by Viscount that converges
  voice (intercom, emergency communications), data (access control, elevator control,
  alarm) and some video to provide increased security at a reduced cost of hardware,
  cabling and installation and with simplified database management.

In addition to MESH, our current access control and security
  product lines include the following: Enterphone, 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.

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

BUSINESS OVERVIEW

We design and manufacture access control and security products,
  including intercom and door access control systems and emergency communications
  systems. These systems use telecommunications wiring to control access to buildings
  and other facilities for security purposes. While much of our current revenues
  are derived from sales of the Enterphone technology and related security products,
  we expect our recently released MESH technology to be a significant new source
  of revenues. We also provide maintenance services to approximately 1,868 Enterphone
  installations in Western Canada.

Enterphone is historically our leading product offering. Enterphone
  is a building access control system that uses a building’s internal phone
  wiring thereby avoiding use of telephone utility services. Our products include
  access control panels that use the Enterphone technology. Our control panels
  are typically installed at entrances to apartment buildings, government facilities,
  and other buildings and facilities where security concerns require access control
  systems. The control panels are sold in various formats and with varying features
  and capabilities. Our Enterphone technology control panels are sold through
  an established distribution network, and can be found installed in approximately
  30,000 buildings throughout North America. We also package and sell access control
  and security products that are complementary to our Enterphone product, including
  card access systems, radio frequency remote controls, intercom monitors and
  closed circuit cameras.

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

COMPANY HISTORY

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

We were incorporated on May 24, 2001 under the laws of the
  State of Nevada under the name OMW4 Corp. Our subsidiary, Viscount Communication
  was incorporated in 1997 under the laws of British Columbia, Canada, for the
  purposes of carrying on our present access control business. We acquired all
  of the issued and outstanding shares in the capital of Viscount Communication
  on July 27, 2001, in exchange for 10,000,000 shares of our common stock, thereby
  making it our wholly owned subsidiary. As a result of the acquisition, the former
  shareholders of Viscount Communication obtained a controlling interest in OMW4
  Corp. In connection with the acquisition, we changed our name to Viscount Systems
  Inc. effective August 27, 2001.

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In 2002, we acquired the assets of Sigma Data Systems of British
  Columbia, Canada. Sigma Data Systems has been designing and manufacturing electronic
  assemblies for telecommunications and hydroelectric applications since 1993.
  Sigma Data Systems’ largest customer was BC Hydro, the government owned
  hydro-electric utility for the Province of British Columbia. We assumed their
  contract with BC Hydro, which will expire in May of 2005.Services
  to BC Hydro involve custom manufacturing of communications equipment. In 2003
  we acquired certain inventory and a service contracts from Telus Corporation.
  The service contracts relate to the maintenance of approximately 1,868 Enterphone
  installations throughout Western Canada. The inventory is comprised of various
  products and components for installation and repair of our Enterphone systems.

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

The recently completed MESH, which we have been developing
  since 1998, is a new integrated platform for building access control and management.
  MESH is currently the focus of our corporate development.

INDUSTRY OVERVIEW

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

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

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

Along with certain other industry participants, we have recently
  turned to current high-technology solutions in order to reduce costs of ownership
  of security systems, while improving functionality. New system platforms are
  being designed 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 will be reduced.

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Access Control Systems Technology

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

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

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

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

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

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

PRODUCTS

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

For the year ended December 31, 2004, approximately 28% of
  total sales of our products and services were generated in the United States,
  and 72% in Canada. This represents a change from 2003, where sales to the United
  States and Canada were 31% and 69%, respectively. The change is in part due
  to increased sales of products and

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services in Canada as a result of our acquisition of service
  contracts and inventory from Telus Corporation. Information on our existing
  products can be viewed on our website at www.viscount.com.

Our Enterphone Access Control Products

Historically our principal product was the Enterphone intercom
  and access control system. Enterphone is our patented building entry control
  system that uses a building’s internal phone wiring to allow access control
  for tenants and intercom and access control between visitors and tenants. The
  use of a building’s internal phone wiring by our Enterphone system provides
  an option to using telephone company wiring, thereby bypassing monthly telephone
  charges. It also does not require tenants to pay for an individual phone line
  to operate their intercom and door access system and is not affected by interruptions
  in telephone company service. This makes our Enterphone system distinct from
  other “dial-up” telephone entry systems that use telephone company
  lines. Sales of our products based on the Enterphone system account for approximately
  48% of our total sales in fiscal 2004. This is down from approximately 61% in
  fiscal 2003, due in part to the development of other sources of sales, including
  Enterphone maintenance contracts, new product lines, and our OEM product lines.

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

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

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

Our MESH Access Control System

Overview

MESH is a new software based building management system designed
  to replace traditional systems that are more hardware intensive. We have been
  developing this new technology since 1998 which was pre-commercially released
  in late 2003.

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

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

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

MESH Structure

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

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

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

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

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

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

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|• | MESH Photo-badging software
        is being designed to allow digital photo-imaging of individuals accessing
        a building, which can be stored in a database; in development                                                                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|• | MESH Time and Attendance
        software will allow human resources personnel to use the card reader database
        to track employee attendance and to automatically adjust card user characteristics
        based on vacation schedules, holiday dates and termination; in development                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|• | MESH has the inherent ability
        to control other electrical circuits. For example, this allows MESH to
        turn lights on or off based on the sections of a building used by a card
        holder or to interface with air conditioning units;                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|• | The MESH server provides
        new opportunities to host video on the unified platform with voice and
        data. This would represent an entirely new concept in the security industry;
        not full video – capture only                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|• | 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 an open architecture platform which is fully functional to integrate
        with any existing automation network;                                                                                                                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|• | The initial MESH card reader
        release will be based on proximity technology. We intend to expand the
        product line to include readers based on our own infrared system, biometrics,
        radio frequency and any other reader type which appears to have potential.
        This may also include the world’s first readers with built-in audio
        and video ability; and                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|• | A new and emerging market
        segment tracks not just people, but equipment. A typical application is
        the embedding of anti-theft chips in computers, which integrate with card
        reader systems.                                                                                                                                                                                                                                                                                                                                                        

Our other products

In addition to our MESH technology we will be releasing a
  new series of Enterphone systems in 2005. The new Enterphone is being designed
  to improve compatibility with MESH and other newer telephony technologies. The
  Enterphone 2000 design dates back to 1990 and the architecture has created complications
  for both manufacturing and installation. The new universal controller will eliminate
  the need for Viscount to manufacture and carry inventory for 10 different circuit
  boards. Overall, the new system will reduce cost, produce higher margins, and
  improve our ability to market MESH.

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

OTHER SERVICES

In addition to sales of our Enterphone, MESH and OEM products,
  we also service approximately 1,868 existing Enterphone installations within
  Western Canada, and provide custom communications equipment manufacturing to
  BC Hydro.

8

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PRODUCTION

Viscount has facilities for circuit board manufacture and
  mechanical assembly. We use a range of processes to produce our products. Some
  products including Enterphone, Infraclik, and Axess are completely manufactured
  in-house. MESH and Emerphone use outsourced circuit boards with final assembly
  and software installed at Viscount. Some access control, card readers, Elektra
  panels, Infraclik and various product accessories are purchased from other manufacturers
  and resold under our brand-names. We maintain full facilities to assemble through-hole
  circuit boards and limited facilities for assembling surface mount circuits.
  We have a policy of supporting old products for up to 20 years and having an
  assembly staff that allows us the flexibility to produce small runs of high
  margin legacy products. We plan to continue this process for our older products
  such as previous versions of the Enterphone. Any new hardware based product
  designed on a surface mount platform will be produced on a subcontract basis
  with final mechanical assembly at our facilities. We are designing our new Enterphone
  to be backwards compatible with the 200 series to improve the longevity and
  serviceability of both products.

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

RESEARCH AND DEVELOPMENT

Our research and development focus continues to be at the
  rollout and enhancement stages for the MESH and Emerphone product lines. A number
  of these enhancements were identified in the “MESH Structure” and
  “Our other products” section of this document. Specific custom MESH
  applications are also being designed and considered. These include built-in
  badging printers and a virtual concierge. Ongoing product development includes
  DSL modifications to our existing Enterphone 2000.

MARKET AND MARKETING

The Market

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

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

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

9

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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 will be to enhance our core business,
  while finding applications where the new features expand the traditional market
  for such systems.

We will also target upgrades and retrofits to existing apartments
  and other complexes that use traditional telephone wire intercom access control
  systems. The low hardware costs and increased functionality of the MESH system
  will 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 will be competing with traditional Wiegand systems.
  We believe the cost reduction aspects of MESH will provide us with a competitive
  advantage over traditional Wiegand systems. For example, a typical condominium
  developer does not manage a building after construction. Therefore, the developer
  is looking for a very affordable, reliable access control system. Unless a more
  sophisticated product will help sell suites the developer tends to keep the
  system simple. At the middle of the spectrum are customers who will adopt MESH
  mainly due to system benefits. For a commercial high-rise this may be the flexibility
  derived from a new user profile approach MESH uses for programming. On the enhanced
  service end of the spectrum we find customers who need to develop a much closer
  relationship due to the level of sophistication of their needs. At this level,
  we anticipate additional revenue opportunities for custom programming, data
  mining and hosting, and direct installations for national accounts.

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

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

Distribution Plan

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

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

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

10

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While we will initially be targeting our existing markets
  for the sale of our MESH technology, the market for our MESH product is worldwide.
  MESH is designed to accommodate foreign languages with minimal modifications
  to the software. This is in contrast to other products of its type which require
  a heavy software investment to provide alternative language software. With MESH,
  the core software can be applied in all languages with only the on screen text
  displays needing to be translated. Translation can be accomplished using commercially
  available translation software.

MESH Marketing Strategy

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

Advertising

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

Trade Shows

We have experienced that the marginal dollar benefit of trade
  show participation is much less than other promotional media (print ad, direct
  mail etc.). Therefore, we intend to be very selective in introducing MESH this
  way.

Direct Marketing

One of the most effective ways to market security systems
  is to identify major institutional and corporate users and market directly to
  key individuals. We intend to hire direct marketing staff to market our MESH
  technology and institute an aggressive program to meet key decision making individuals.
  Because of the proprietary nature of MESH, we are flexible to meet customer
  specifications. We will use this approach to push MESH technology into the market.

Pricing Strategy

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

With a unique product and a position of product leadership,
  we will have a strategy of building market share. This implies a product sold
  at reasonable 50-60% margins. With the telephony component, we are targeting
  a price which provides MESH panels at a price that is competitive with similar
  products, but with new 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 US 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.

11

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

Competitive Threats

While we have a strong dealer and distribution plan in place,
  MESH will position us in a market dominated by much larger players. The higher
  security MESH applications are also somewhat outside of our traditional scope
  of business. We must rapidly develop a market for MESH and educate users of
  the MESH benefits in order to achieve market share that will allow us to be
  competitive in this market. There is no guarantee that we will be able to successfully
  compete against our larger competitors.

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

From an initial commercial point of view, one challenge for
  us is the relatively long sales cycles of security projects. Systems such as
  MESH may take up to 2 years from specification to installation, so sales forecasts
  can be adversely affected by the pace of construction and the general decision
  making process.

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

INTELLECTUAL PROPERTY

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

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

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

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

GOVERNMENT REGULATIONS

All of our Enterphone and OEM products are FCC and IC approved
  as well as ADA approved where required by law depending specifically on particular
  products and place of installation. We are in the process of obtaining UL certifications
  for our MESH products.

12

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

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

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

OUR SOURCES OF REVENUES

The majority of the Company’s revenues are derived from
  the Enterphone product line. Historically, the Enterphone product sales represented
  approximately 60% to 80% of total revenues. In fiscal 2004, this percentage
  decreased to 47.7% due in part to new sources of revenues, including service
  contracts purchased from Telus Corporation, and the commercial launch of MESH,
  which collectively represented 39.22% of revenues in fiscal 2004. The balance
  of the Company’s revenues are derived from other products such as access
  tracking and control, closed circuit monitors, infrared and radio frequency
  remotes.

EMPLOYEES

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

Item 2. DESCRIPTION OF PROPERTY

PROPERTY

Our executive office and central factory is located in Burnaby,
  British Columbia, where we currently lease 12,040 square feet. We lease this
  space under an industry standard operating lease with a term expiring May 31,
  2007, renewable at the option of Viscount. Current monthly lease obligations
  are $7,224. We believe that our current facilities are adequate and are
  suitable for our current use, and that suitable additional facilities will be
  available, when needed, upon commercially reasonable terms. Our facilities are
  adequately insured against perils in a manner consistent with industry practice.

Item 3. LEGAL PROCEEDINGS

To the best of our knowledge, there are no legal actions pending,
  threatened, or contemplated against us.

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

PART II.

Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY
  AND RELATED STOCKHOLDER MATTERS

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

13

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The OTC Bulletin Board has a limited and sporadic trading
  market and does not constitute an established trading market. Our shares began
  trading on February 12, 2002. The following table sets forth the range of high
  and low price information of the common shares as reported on the OTC Bulletin
  Board for the last two fiscal years and the subsequent period ending March 9,
  2004. 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. $)
|---- | ------------------------------------------- | ------------- | ------------
|2005 | First Quarter (through March 02, 2005)      | $1.07         | $0.85       
|2004 | Fourth Quarter                              | 1.48          | 0.75        
|     | Third Quarter                               | 2.68          | 1.20        
|     | Second Quarter                              | 2.22          | 1.21        
|     | First Quarter                               | 2.05          | 0.59        
|2003 | Fourth Quarter                              | 0.73          | 0.22        
|     | Third Quarter                               | 0.29          | 0.20        
|     | Second Quarter                              | 0.34          | 0.20        
|     | First Quarter (beginning February 12, 2002) | 0.44          | 0.12        

As of March 2, 2005 there were 31 holders of record of our
  common stock, holding a total of 15,950,575 shares, and an unknown number of
  beneficial holders.

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

The following table sets forth information respecting our
  compensation plans as at December 31, 2004, under which shares of our common
  stock are authorized to be issued.

|Plan Category                                                    | Number of securities to be issued upon exercise of outstanding options, warrants and rights(a) | Weighted-average exercise price of outstanding options, warrants and rights(b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(c)
|---------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security
      holders     | 3,296,925                                                                                      | US$0.27                                                                        | 0                                                                                                                                             
|Equity compensation plans not approved by security
      holders | N/a                                                                                            | N/a                                                                            | N/a                                                                                                                                           
|Total                                                            | 3,296,925                                                                                      | --                                                                             | 0                                                                                                                                             

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

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

RESULTS OF OPERATIONS

Sales revenues for the year ended December 31, 2004 have increased
  by $307,065 or 7.5% to $4,391,658, as compared to sales revenues of
  $4,084,593 for the year ended December 31, 2003. Our core Enterphone product
  lines have continued to be stable and show steady growth. The acquisition of
  customer service contracts from TELUS Corporation (“Telus”) which
  was completed on September 15, 2003, with a total of 2,215 assigned service
  contracts, of which we had 1,868 service contracts remaining on hand at December
  31, 2004, due to 347 contract cancellations, continued to generate strong sales.
  On average, each service contract acquired represents ongoing

14

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revenues of approximately $33 per month, inclusive of
  parts and labor. These contracts allow us to provide Enterphone support and
  maintenance services to these assigned customers. 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 year ended December 31, 2004, customer service contracts and new equipment
  sales generated aggregate sales revenues of $1,386,153. This included MESH
  sales by the service division.

The cost of sales as a percentage of sales was 42.6% for the
  year ended December 31, 2004, as compared with the cost of sales as a percentage
  of sales of 42.4% for the year ended December 31, 2003. Costs of sales as a
  percentage of sales has remained consistent due to management’s commitment
  of reviewing input costs regularly. Our policy of managing cost of sales remains
  the same. We are continuously focusing on controlling costs, by using multiple
  suppliers to ensure that the best and most inexpensive raw materials are used
  in our products.

Gross profit for the year ended December 31, 2004 was $2,522,385,
  an increase of 7.2%, as compared to a gross profit of $2,353,544 for the
  year ended December 31, 2003. This increase corresponds with the improved sales
  revenues and consistent cost of sales percentage for the year ended December
  31, 2004.

Selling, general and administrative expenses increased by
  $850,715 or 47.8% for the year ended December 31, 2004 in comparison to
  the prior year comparative period. These increases were incurred primarily in
  the first, third and fourth quarters of 2004, due to the increased advertising
  and tradeshow costs incurred to promote our new MESH product and the preparation
  of promotional materials. The Company also hired additional staff to manage
  the customer service contracts. Management will continue to review selling,
  general and administrative expenses monthly to ensure that these expenses are
  reduced for 2005. As a percentage of revenues, selling, general and administrative
  costs were 59.9% for the year ended December 31, 2004, as compared to 43.6%
  for the year ended December 31, 2003.

Research and development costs were $209,028 for the year
  ended December 31, 2004, as compared to $281,487 for the year ended December
  31, 2003. This reduction in cost reflects the decreased research and development
  costs incurred due the completion of the initial stages of the MESH project.

Loss before income tax for the year ended December 31, 2004
  was $(398,565) as compared to the income before tax of $222,633 for
  the year ended December 31, 2003. This is a decrease in income of $621,198.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased as of December 31, 2004,
  as compared to December 31, 2003. At December 31, 2004, cash and cash equivalents
  totaled $290,850, as compared with the cash and cash equivalents of $411,447
  at December 31, 2003. During the year ended December 31, 2004, cash disbursements
  increased due to the increased advertising and promotional costs associated
  with the MESH product. We have a bank credit facility available for an operating
  loan of up to a maximum of $300,000 at the prime lending rate plus 1.0%
  . Amounts drawn are repayable on demand. At December 31, 2004, $104,670
  was drawn on this facility. The facility is secured by a general security agreement.

At December 31, 2004, working capital was $770,798, as
  compared to a working capital of $1,132,224 at December 31, 2003. Working
  capital has decreased by $361,426. The current ratio at December 31, 2004
  was 1.72 to 1.0, as compared with 2.19 to 1.0 at December 31, 2003. The working
  capital decreased mainly due to the decreased cash and cash equivalents balance
  and increased current debt due to reclassifying notes payable from long term
  to current at December 31, 2004.

The accounts receivable turnover ratio for year ended December
  31, 2004 was 57 days, as compared to 69 days for the year ended December 31,
  2003. The turnover ratio for the year ended December 31, 2004 improved by 12
  days, as compared to the turnover ratio for the year ended December 31, 2003.
  Management is reviewing customer accounts regularly to improve the collection
  process. The accounts receivable reserve was $73,573 at December 31, 2004,
  as compared to $72,902 for the year ended December 31, 2003. The accounts
  receivable reserve remains consistent, as management continues to recognize
  and remove older doubtful customer accounts from the accounts receivable ledger,
  as well as more consistent follow-up on certain customer accounts. There has
  been no significant or material business conditions that would warrant an increase
  to the reserve at this time.

For the year ended December 31, 2004, there were no capital
  expenditures other than the purchase of equipment.

15

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

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

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

We do not have any material commitments for capital expenditures
  as of December 31, 2004.

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

Related Party Transactions

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

Critical Accounting Policies:

The Company’s discussion and analysis of its financial
  condition and results of operations, including the discussion on liquidity and
  capital resources, are based upon the Company’s financial statements,
  which have been prepared in accordance with accounting principles generally
  accepted in the United States. The preparation of these financial statements
  requires the Company to make estimates and judgments that affect the reported
  amounts of assets, liabilities, revenues and expenses, and related disclosure
  of contingent assets and liabilities. On an ongoing basis, management re-evaluates
  its estimates and judgments, particularly those related to the determination
  of the estimated recoverable amounts of investment tax credits, trade accounts
  receivable, and deferred tax assets. The Company believes the following critical
  accounting policies require its more significant judgment and estimates used
  in the preparation of the consolidated financial statements.

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

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

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

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

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

16

---

RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

Item 7. FINANCIAL STATEMENTS

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

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

Not applicable.

Item 8A. CONTROLS AND PROCEDURES

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

As of the end of the period covered by this report, management
  carried out an evaluation, under the supervision and with the participation
  of the management, including the Chief Executive Officer and Chief Financial
  Officer, of the effectiveness of the design and operation of our disclosure
  controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the
  foregoing, the Chief Executive Officer and Chief Financial Officer concluded
  that our disclosure controls and procedures are effective in connection with
  the filing of this Annual Report on Form 10-KSB for the year ended December
  31, 2004.

Such evaluation did not identify any change in our internal
  controls over financial reporting that occurred during the three months ended
  December 31, 2004 that has materially affected or is reasonably likely to materially
  affect the Company’s internal control over financial reporting.

PART III.

Items 9 – 12, 14

Information with respect to Items 9 – 12 and 14 is set
  forth in the Proxy Statement to be filed with the Securities and Exchange Commission
  on or before April 29, 2004 and is incorporated herein by reference.

17

---

Item 13. EXHIBITS

|Exhibit No. | Description of Exhibit                                                                                                                      |  | Manner of Filing                                                                                                                  
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                             |  |                                                                                                                                   
|3.1         | Articles of Incorporation                                                                                                                   |  | Incorporated by reference
        to Exhibit 3.1 to the Form SB-2 of the Company, SEC File No. 333- 68998
        (the “Form SB-2)
|            |                                                                                                                                             |  |                                                                                                                                   
|3.2         | Amendment to the
        Articles of Incorporation                                                                                          |  | Incorporated by reference
        to Exhibit 3.2 to the Form SB-2                                                                 
|            |                                                                                                                                             |  |                                                                                                                                   
|3.3         | Bylaws                                                                                                                                      |  | Incorporated by reference
        to Exhibit 3.1 to the Form SB-2                                                                 
|            |                                                                                                                                             |  |                                                                                                                                   
|10.1        | Stock Acquisition
        Agreement with OMW 4 Corp., dated July 18, 2001                                                                   |  | Incorporated by reference
        to Exhibit 10.1 to the Form SB-2                                                                
|            |                                                                                                                                             |  |                                                                                                                                   
|10.2        | Employment Agreement
        with Stephen Pineau                                                                                            |  | Incorporated by reference
        to Exhibit 10.2 to the Form SB-2                                                                
|            |                                                                                                                                             |  |                                                                                                                                   
|10.3        | Employment Agreement
        with Greg Chen                                                                                                 |  | Incorporated by reference
        to Exhibit 10.3 to the Form SB-2                                                                
|            |                                                                                                                                             |  |                                                                                                                                   
|10.4        | 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
|            |                                                                                                                                             |  |                                                                                                                                   
|10.5        | 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
|            |                                                                                                                                             |  |                                                                                                                                   
|10.6        | Asset Purchase
        Agreement between Viscount Communication and Control Systems Inc. and
        TELUS Corporation dated April 15, 2003 |  | Incorporated by reference to
        Exhibit 10.1 to the Form 8-K filed with the SEC on May 28, 2003                              
|            |                                                                                                                                             |  |                                                                                                                                   
|10.7        | Amending Agreement
        between Viscount Communication and Control Systems Inc. and TELUS Corporation
        dated April 30, 2003       |  | Incorporated by reference
        to Exhibit 10.2 to the Form 8-K filed with the SEC on May 28, 2003                              
|            |                                                                                                                                             |  |                                                                                                                                   
|21.1        | Subsidiaries of
        the registrant                                                                                                      |  | Incorporated by reference
        to Exhibit 21.1 to the Form SB-2                                                                
|            |                                                                                                                                             |  |                                                                                                                                   
|23.1        | Consent
        of J.H. Cohn LLP                                                                                                            |  | Filed
        herewith                                                                                                            
|            |                                                                                                                                             |  |                                                                                                                                   
|31.1        | Rule
        13a-14(a)/15d-14(a) Certification of the Chief Executive Officer                                                               |  | Filed
        herewith                                                                                                            
|            |                                                                                                                                             |  |                                                                                                                                   
|31.2        | Rule 13a-14(a)/15d-14(a) Certification
        of the Chief Financial Officer                                                               |  | Filed
        herewith                                                                                                            
|            |                                                                                                                                             |  |                                                                                                                                   
|32.1        | Section
        1350 Certification of the Chief Executive Officer and Chief Financial
        Officer                                       |  | Filed
        herewith                                                                                                            

18

---

Signatures

In accordance with Section 13 or 15(d) of the Exchange Act,
  the registrant caused this report to be signed on its behalf by the undersigned,
  thereunto duly authorized, on March 30, 2005.

| | VISCOUNT SYSTEMS, INC.               
| | -------------------------------------
| |                                      
| | By: /s/ Stephen Pineau               
| | Stephen Pineau                       
| | President and Chief Executive Officer

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

|    | Signature          | Title                                 | Date          
|--- | ------------------ | ------------------------------------- | --------------
|    |                    |                                       |               
|By: | /s/ Stephen Pineau | President, Secretary, Chief Executive | March 30, 2005
|    | Stephen Pineau     | Officer and Director                  |               
|    |                    |                                       |               
|    |                    |                                       |               
|By: | /s/ Greg Shen      | Chairman of the Board and             | March 30, 2005
|    | Greg Shen          | Director                              |               
|    |                    |                                       |               
|    |                    |                                       |               
|By: | /s/ Les Fong       | Chief Financial Officer               | March 30, 2005
|    | Les Fong           |                                       |               

19

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders 
  Viscount Systems, Inc.

We have audited the accompanying consolidated balance sheets
  of Viscount Systems, Inc. and Subsidiary as of December 31, 2004 and 2003, 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 auditing standards
  generally accepted in the United States of America. Those standards require
  that we plan and perform the audit to obtain reasonable assurance about whether
  the financial statements are free of material misstatement. An audit includes
  examining, on a test basis, evidence supporting the amounts and disclosures
  in the financial statements. An audit also includes assessing the accounting
  principles used and significant estimates made by management, as well as evaluating
  the overall financial statement presentation. We believe that our audits provide
  a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
  to above present fairly, in all material respects, the financial position of
  Viscount Systems, Inc. and Subsidiary at December 31, 2004 and 2003, and their
  results of operations and cash flows for the years then ended, in conformity
  with accounting principles generally accepted in the United States of America.

/s/ J. H. Cohn LLP

San Diego, California 
  February 14, 2005

F-1

---

|VISCOUNT SYSTEMS INC.
      Consolidated Balance Sheets 
      (Expressed in Canadian dollars)
|----------------------------------------------------------------------------------------------
|                                                                                              

|                                                                                 |   | December 31 |   |   | December 31, |  
|-------------------------------------------------------------------------------- | - | ----------- | - | - | ------------ | -
|                                                                                 |   | 2004        |   |   | 2003         |  
|                                                                                 |   |             |   |   |              |  
|Assets                                                                           |   |             |   |   |              |  
|                                                                                 |   |             |   |   |              |  
|Current assets                                                                   |   |             |   |   |              |  
|Cash and cash equivalents                                                        | $ | 290,850     |   | $ | 411,447      |  
|Trade accounts receivable,
      less allowance for doubtful accounts            |   |             |   |   |              |  
|of $73,573 at December 31, 2004 and $72,902
      at December 31, 2003 (note 14) |   | 656,527     |   |   | 744,309      |  
|Inventory (note 3)                                                               |   | 898,843     |   |   | 857,133      |  
|Prepaid expenses                                                                 |   | 1,391       |   |   | 1,391        |  
|Lease receivable (note
      4)                                                  |   | 198         |   |   | -            |  
|Income taxes recoverable                                                         |   | -           |   |   | 67,352       |  
|Total current assets                                                             |   | 1,847,809   |   |   | 2,081,632    |  
|                                                                                 |   |             |   |   |              |  
|Leases receivable (note 4)                                                       |   | 4,680       |   |   | 16,778       |  
|                                                                                 |   |             |   |   |              |  
|Equipment, net (note 5)                                                          |   | 115,848     |   |   | 121,425      |  
|                                                                                 |   |             |   |   |              |  
|Intangible assets, net (note 6)                                                  |   | 208,921     |   |   | 225,289      |  
|                                                                                 |   |             |   |   |              |  
|Total assets                                                                     | $ | 2,177,258   |   | $ | 2,445,124    |  
|                                                                                 |   |             |   |   |              |  
|Liablilities and stockholders' equity                                            |   |             |   |   |              |  
|                                                                                 |   |             |   |   |              |  
|Current liabilities                                                              |   |             |   |   |              |  
|Bank indebtedness
      (note 7)                                                 | $ | 104,670     |   | $ | 86,115       |  
|Accounts payable and
      accrued liabilities                                   |   | 415,146     |   |   | 387,463      |  
|Deferred revenue                                                                 |   | 29,793      |   |   | 27,428       |  
|Due to stockholders
      (note 8)                                               |   | 292,402     |   |   | 448,402      |  
|Notes payable (note 9)                                                           |   | 235,000     |   |   | -            |  
|Total current liabilities                                                        |   | 1,077,011   |   |   | 949,408      |  
|                                                                                 |   |             |   |   |              |  
|Notes payable (note 9)                                                           |   | -           |   |   | 265,000      |  
|Total liabilities                                                                |   | 1,077,011   |   |   | 1,214,408    |  
|                                                                                 |   |             |   |   |              |  
|Commitments and contingencies (note 13)                                          |   |             |   |   |              |  
|                                                                                 |   |             |   |   |              |  
|Stockholders' equity                                                             |   |             |   |   |              |  
|Capital stock
      (note 10)                                                    |   |             |   |   |              |  
|Authorized:                                                                      |   |             |   |   |              |  
|100,000,000
      common shares with a par value of US$0.001 per share           |   |             |   |   |              |  
|20,000,000 preferred
      shares with a par value of US$0.001 per share         |   |             |   |   |              |  
|Issued and outstanding:                                                          |   |             |   |   |              |  
|15,903,075 and 15,201,250
      common shares                                    |   | 23,494      |   |   | 22,792       |  
|Additional paid-in
      capital                                                 |   | 1,819,813   |   |   | 1,552,419    |  
|Accumulated deficit                                                              |   | (743,060    | ) |   | (344,495     | )
|Total stockholders' equity                                                       |   | 1,100,247   |   |   | 1,230,716    |  
|                                                                                 |   |             |   |   |              |  
|Total liabilities and stockholders' equity                                       | $ | 2,177,258   |   | $ | 2,445,124    |  

See accompanying notes to consolidated financial statements.

F-2

---

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

|                                                     |   | 2004       |   |   | 2003       |  
|---------------------------------------------------- | - | ---------- | - | - | ---------- | -
|                                                     |   |            |   |   |            |  
|                                                     |   |            |   |   |            |  
|Sales                                                | $ | 4,391,658  |   | $ | 4,084,593  |  
|Cost of sales                                        |   | 1,869,273  |   |   | 1,731,049  |  
|Gross profit                                         |   | 2,522,385  |   |   | 2,353,544  |  
|                                                     |   |            |   |   |            |  
|Expenses                                             |   |            |   |   |            |  
|Selling, general
      and administrative            |   | 2,632,240  |   |   | 1,781,525  |  
|Research and
      development, net (note 11)        |   | 209,028    |   |   | 281,487    |  
|Depreciation and amortization                        |   | 39,629     |   |   | 42,357     |  
|                                                     |   | 2,880,897  |   |   | 2,105,369  |  
|                                                     |   |            |   |   |            |  
|Income (loss) before other items                     |   | (358,512   | ) |   | 248,175    |  
|                                                     |   |            |   |   |            |  
|Other items                                          |   |            |   |   |            |  
|Other income                                         |   | 2,509      |   |   | 4,110      |  
|Interest and bank charges                            |   | (42,562    | ) |   | (29,652    | )
|                                                     |   | (40,053    | ) |   | (25,542    | )
|                                                     |   |            |   |   |            |  
|Income (loss) before income taxes                    |   | (398,565   | ) |   | 222,633    |  
|                                                     |   |            |   |   |            |  
|Current credit for income
      taxes (note 12)      |   | -          |   |   | (12,879    | )
|                                                     |   |            |   |   |            |  
|Net income (loss)                                    | $ | (398,565   | ) | $ | 235,512    |  
|                                                     |   |            |   |   |            |  
|Basic net income (loss) per common share             | $ | (0.03      | ) | $ | 0.02       |  
|                                                     |   |            |   |   |            |  
|Diluted net income (loss) per common share           | $ | (0.03      | ) | $ | 0.02       |  
|                                                     |   |            |   |   |            |  
|Weighted average number of common shares outstanding |   |            |   |   |            |  
|Basic                                                |   | 15,645,729 |   |   | 15,183,551 |  
|Diluted                                              |   | 15,645,729 |   |   | 15,446,761 |  

See accompanying notes to consolidated financial statements.

F-3

---

|VISCOUNT SYSTEMS INC.
        Consolidated Statements of Stockholders' Equity 
        (Expressed in Canadian dollars)
      Years Ended December 31, 2004 and 2003
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                   

|                                 |              |  |   |         |  |   | Additional |  |   |                     |   |   |           |  
|-------------------------------- | ------------ |  | - | ------- |  | - | ---------- |  | - | ------------------- | - | - | --------- | -
|                                 | Common Stock |  |   | paid-in |  |   |            |  |   |                     |  
|                                 | Shares       |  |   | Amount  |  |   | capital    |  |   | Accumulated deficit |   |   | Total     |  
|                                 |              |  |   |         |  |   |            |  |   |                     |   |   |           |  
|                                 |              |  |   |         |  |   |            |  |   |                     |   |   |           |  
|Balance, January 1, 2003         | 15,181,250   |  | $ | 22,772  |  | $ | 1,482,408  |  | $ | (580,007            | ) | $ | 925,173   |  
|                                 |              |  |   |         |  |   |            |  |   |                     |   |   |           |  
|Stock issued for cash upon       |              |  |   |         |  |   |            |  |   |                     |   |   |           |  
|exercise of
      stock options  | 20,000       |  |   | 20      |  |   | 3,157      |  |   | -                   |   |   | 3,177     |  
|Fair value of options issued to  |              |  |   |         |  |   |            |  |   |                     |   |   |           |  
|non-employees
      for services | -            |  |   | -       |  |   | 66,854     |  |   |                     |   |   | 66,854    |  
|Net income                       | -            |  |   | -       |  |   | -          |  |   | 235,512             |   |   | 235,512   |  
|                                 |              |  |   |         |  |   |            |  |   |                     |   |   |           |  
|Balance, December 31, 2003       | 15,201,250   |  |   | 22,792  |  |   | 1,552,419  |  |   | (344,495            | ) |   | 1,230,716 |  
|                                 |              |  |   |         |  |   |            |  |   |                     |   |   |           |  
|Stock issued for cash upon       |              |  |   |         |  |   |            |  |   |                     |   |   |           |  
|exercise of
      stock options  | 701,825      |  |   | 702     |  |   | 222,235    |  |   |                     |   |   | 222,937   |  
|Fair value of options issued to  |              |  |   |         |  |   |            |  |   |                     |   |   |           |  
|non-employees
      for services | -            |  |   | -       |  |   | 45,159     |  |   | -                   |   |   | 45,159    |  
|Net loss                         |              |  |   |         |  |   |            |  |   | (398,565            | ) |   | (398,565  | )
|                                 |              |  |   |         |  |   |            |  |   |                     |   |   |           |  
|Balance, December 31, 2004       | 15,903,075   |  | $ | 23,494  |  | $ | 1,819,813  |  | $ | (743,060            | ) | $ | 1,100,247 |  

See accompanying notes to consolidated financial statements.

F-4

---

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

|                                                                         |   | 2004     |   |   | 2003     |  
|------------------------------------------------------------------------ | - | -------- | - | - | -------- | -
|                                                                         |   |          |   |   |          |  
|                                                                         |   |          |   |   |          |  
|Operating activities:                                                    |   |          |   |   |          |  
|Net income (loss)                                                        | $ | (398,565 | ) | $ | 235,512  |  
|Items not involving
      cash:                                          |   |          |   |   |          |  
|Depreciation and amortization                                            |   | 39,629   |   |   | 42,357   |  
|Selling, general and administrative
      expenses paid by stock options |   | 45,159   |   |   | 66,854   |  
|Changes in non-cash working
      capital balances (note 14)             |   | 155,372  |   |   | (320,886 | )
|Net cash provided by (used in) operating activities                      |   | (158,405 | ) |   | 23,837   |  
|                                                                         |   |          |   |   |          |  
|Investing activities:                                                    |   |          |   |   |          |  
|Purchase of
      equipment                                              |   | (17,684  | ) |   | (2,914   | )
|Purchase of service agreements                                           |   | -        |   |   | (208,920 | )
|Net cash used in investing activities                                    |   | (17,684  | ) |   | (211,834 | )
|                                                                         |   |          |   |   |          |  
|Financing activities:                                                    |   |          |   |   |          |  
|Proceeds from
      bank indebtedness                                    |   | 18,555   |   |   | 58,703   |  
|Repayment of
      stockholder loans                                     |   | (156,000 | ) |   | -        |  
|Proceeds from
      notes payable                                        |   | -        |   |   | 310,000  |  
|Repayment of
      notes payable                                         |   | (30,000  | ) |   | (45,000  | )
|Proceeds from exercise of
      stock options                            |   | 222,937  |   |   | 3,177    |  
|Net cash provided by financing activities                                |   | 55,492   |   |   | 326,880  |  
|                                                                         |   |          |   |   |          |  
|Increase (decrease) in cash and cash equivalents                         |   | (120,597 | ) |   | 138,883  |  
|                                                                         |   |          |   |   |          |  
|Cash and cash equivalents, beginning of year                             |   | 411,447  |   |   | 272,564  |  
|                                                                         |   |          |   |   |          |  
|Cash and cash equivalents, end of year                                   | $ | 290,850  |   | $ | 411,447  |  
|                                                                         |   |          |   |   |          |  
|                                                                         |   |          |   |   |          |  
|Supplementary information:                                               |   |          |   |   |          |  
|Interest paid                                                            | $ | 20,332   |   | $ | 11,414   |  
|Income taxes recovered                                                   |   | (67,352  | ) |   | (12,879  | )

See accompanying notes to consolidated financial statements.

F-5

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|1. | Operations                                                                                                                                                                                                                                                                                 
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | Viscount Systems Inc. (the “Company”)
        was incorporated on May 24, 2001. The Company manufactures and distributes
        electronic premises access and security equipment. The functional currency
        for the Company and its wholly-owned subsidiary is the Canadian dollar.
|  
|2. | Significant accounting policies                                                                                                                                                                                                                                                            
|  
|   | These consolidated financial statements
        have been prepared in conformity with accounting principles generally
        accepted in the United States of America. The significant accounting policies
        adopted by the Company are as follows:                                 
|  
|   | (a)                                                                                                                                                                                                                                                                                        
|  
|   |                                                                                                                                                                                                                                                                                            
|  
|   | (b)                                                                                                                                                                                                                                                                                        
|  
|   |                                                                                                                                                                                                                                                                                            

F-6

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

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

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

F-7

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

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

F-8

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

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

F-9

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|2. | Significant accounting policies (cont’d...)
|-- | -------------------------------------------
|  
|   | (p)                                        
|  
|   |                                            
|  
|   |                                            
|  
|3. | Inventory                                  

| |                 |   | 2004    |  |   | 2003   
| | --------------- | - | ------- |  | - | -------
| |                 |   |         |  |   |        
| |                 |   |         |  |   |        
| | Raw materials   | $ | 564,710 |  | $ | 567,665
| | Work in process |   | 58,632  |  |   | 65,615 
| | Finished goods  |   | 275,501 |  |   | 223,853
| |                 |   |         |  |   |        
| |                 | $ | 898,843 |  | $ | 857,133

F-10

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|4. | Leases receivable                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | Leases receivable include amounts due from customers
        in monthly installments on five-year leasing contracts expiring in 2009.
        Contracts bear interest rates of 7% and 11% per annum and are secured
        by the equipment under lease.
|  
|5. | Equipment                                                                                                                                                                                                                                                

| |                                |   |         |  |   | Accumulated      |  |   |         
| | ------------------------------ | - | ------- |  | - | ---------------- |  | - | --------
| |                                |   |         |  |   | depreciation and |  |   | Net book
| | 2004                           |   | Cost    |  |   | amortization     |  |   | value   
| |                                |   |         |  |   |                  |  |   |         
| | Computer equipment             | $ | 106,246 |  | $ | 56,864           |  | $ | 49,382  
| | Office furniture and equipment |   | 68,713  |  |   | 18,815           |  |   | 49,898  
| | Manufacturing equipment        |   | 28,360  |  |   | 26,218           |  |   | 2,142   
| | Leasehold improvements         |   | 46,814  |  |   | 32,388           |  |   | 14,426  
| |                                |   |         |  |   |                  |  |   |         
| |                                | $ | 250,133 |  | $ | 134,285          |  | $ | 115,848 
| |                                |   |         |  |   |                  |  |   |         
| |                                |   |         |  |   |                  |  |   |         
| |                                |   |         |  |   | Accumulated      |  |   |         
| |                                |   |         |  |   | depreciation and |  |   | Net book
| | 2003                           |   | Cost    |  |   | amortization     |  |   | value   
| |                                |   |         |  |   |                  |  |   |         
| | Computer equipment             | $ | 88,562  |  | $ | 45,366           |  | $ | 43,196  
| | Office furniture and equipment |   | 68,713  |  |   | 13,435           |  |   | 55,278  
| | Manufacturing equipment        |   | 28,360  |  |   | 23,716           |  |   | 4,644   
| | Leasehold improvements         |   | 46,814  |  |   | 28,507           |  |   | 18,307  
| |                                |   |         |  |   |                  |  |   |         
| |                                | $ | 232,449 |  | $ | 111,024          |  | $ | 121,425 

F-11

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|6. | Intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | On May 16, 2003, the Company consummated an agreement
        for the purchase of certain assets of Telus Corporation (“Telus”)
        comprised primarily of service agreements for a product sold by Telus
        known as “Enterphone 2000”. The Enterphone 2000 is a building
        access control system that uses a building’s internal phone wiring
        thereby avoiding the use of telephone utility services. Each customer
        that entered into a service agreement with Telus must agree to assign
        the service agreement to the Company. The Company had agreed to pay Telus
        a specified amount from time to time through September 15, 2003, based
        on the number of customers that agreed to assign service agreements to
        it and, accordingly, the aggregate purchase price would vary based on
        the number of assignments. At December 31, 2003, the Company had acquired
        2,215 service agreements for which it paid a total of $208,921. The
        cost of the service agreements is included in intangible assets at December
        31, 2004 and 2003. At December 31, 2004, the Company held 1,868 service
        agreements. However, the Company performed its annual test for impairment
        in the fourth quarter of 2004 and determined that there had been no impairment.
|  
|   | During June 2002, the Company acquired certain net
        assets and business operations of Sigma Data Systems, an unrelated company
        and allocated $40,920 of the purchase price to its sales contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   | The sales contracts were being amortized using the
        straight-line method over an estimated useful life of 2.5 years. As at
        December 31, 2004, the sales contracts have been amortized to $nil.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|7. | Bank indebtedness                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   | Bank indebtedness represents cheques written in
        excess of funds on deposit and amounts drawn under a bank credit facility
        available to a maximum of $300,000. Amounts outstanding under the
        bank credit facility bear interest at the bank’s prime lending rate
        plus 1% and are repayable on demand. The facility is secured by a general
        security agreement. The Company is required to maintain a current ratio
        that is greater than 1.5:1 and a debt to tangible net worth ratio that
        is less than 1.5:1 under the terms of the demand facility agreement. At
        December 31, 2004 the Company was in compliance with the ratio requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|8. | Due to stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   | Amounts due to stockholders are non-interest bearing,
        unsecured and have no fixed terms of repayment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-12

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|9.  | Notes payable                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    | The notes payable bear interest at 8%
        per annum, are unsecured, and are due April 30, 2005. Principal prepayments
        are made at the discretion of the Board of Directors.
|   
|10. | Capital stock                                                                                                                                                                          
|   
|    | (a)                                                                                                                                                                                    
|   
|    | (b)                                                                                                                                                                                    
|   
|    |                                                                                                                                                                                        
|   
|    | (c)                                                                                                                                                                                    
|   
|    |                                                                                                                                                                                        
|   
|    |                                                                                                                                                                                        

F-13

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|10. | Capital stock (cont’d...)                            
|--- | -----------------------------------------------------
|    |                                                      
|    | A summary of the stock option activity is as follows:

| |                                        |                   |   |   |                 
| | -------------------------------------- | ----------------- | - | - | ----------------
| |                                        | Number of options |   |   | Weighted average
| |                                        |                   |   |   | Exercise price  
| | Outstanding at January 1, 2003         | 1,073,750         |   | $ | 0.65            
| | Granted                                | 3,062,500         |   |   | 0.13            
| | Exercised                              | (20,000           | ) |   | 0.12            
| | Expired/cancelled                      | (117,500          | ) |   | 0.31            
| | Outstanding at December 31, 2003       | 3,998,750         |   |   | 0.27            
| | Granted                                | -                 |   |   | -               
| | Exercised                              | (701,825          | ) |   | 0.23            
| | Expired/cancelled                      | -                 |   |   | -               
| | Outstanding at December 31, 2004       | 3,296,925         |   |   | 0.27            
| | Weighted average grant-date fair value |                   |   |   |                 
| | during
      2003                      |                   |   | $ | 0.09            
| | Weighted average grant-date fair value |                   |   |   |                 
| | during
      2004                      |                   |   | $ | 0.00            

| | During the year ended December 31, 2004, the Company
        recognized stock-based compensation expense on the issuance of stock options
        to employees of $38,585 (2003 - $62,388) and recorded $6,574
        (2003 - $4,466) relating to the fair value of stock options issued
        to non-employees. Total stock-based compensation, related to the vesting
        of previously granted options, of $45,159 (2003 – $66,854)
        has been recorded in selling, general and administrative expenses in the
        consolidated statements of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|10. | Capital stock (cont’d...)                                                             
|--- | --------------------------------------------------------------------------------------
|    |                                                                                       
|    | A summary of the stock options outstanding at December
        31, 2004 is as follows:

| |                |                     |             |                    
| | -------------- | ------------------- | ----------- | -------------------
| |                | Outstanding Options |             | Exercisable Options
| |                |                     | Weighted    |                    
| |                |                     | Average     | Weighted           
| |                |                     | Remaining   | Average            
| | Exercise Price | Number              | Contractual | Exercise           
| |                |                     | Life        | Price              
| |                |                     |             |                    
| | $ 0.12         | 2,316,250           | 8.25 years  | $ 0.12             
| | $ 0.18         | 10,000              | 2.97 years  | $ 0.18             
| | $ 0.20         | 7,500               | 2.97 years  | $ 0.20             
| | $ 0.45         | 7,500               | 2.97 years  | $ 0.45             
| | $ 0.55         | 5,000               | 2.97 years  | $ 0.55             
| | $ 0.60         | 12,500              | 2.97 years  | $ 0.60             
| | $ 0.65         | 938,175             | 6.98 years  | $ 0.65             
| |                |                     |             |                    
| |                | 3,296,925           | 7.82 years  | $ 0.27             

F-15

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|10. | Capital stock (cont’d...)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    | The Company used the Black-Scholes option pricing
        model to compute estimated fair value of options granted in 2003 based
        on the following assumptions: average expected stock price volatility
        of 87%, expected dividend yield of 0%, risk-free interest rate of 3.26%
        and expected option life of 1 to 4 years.                                                                                                                                                                                                                                  
|   
|    | The following table illustrates the pro forma effect
        on net income (loss) and net income (loss) per common share as if the
        Company had applied the fair value recognition provisions of SFAS 123
        instead of the intrinsic value method to the options granted to employees
        under the Company’s stock option plans which assumes that compensation
        cost had been determined based on the fair value of the options at the
        date of grant using the Black-Scholes option pricing model and amortized
        over the vesting period.

| |                                                              |   |          |   |   |          |  
| | ------------------------------------------------------------ | - | -------- | - | - | -------- | -
| |                                                              |   | 2004     |   |   | 2003     |  
| |                                                              |   |          |   |   |          |  
| | Net income (loss), as reported                               | $ | (398,565 | ) | $ | 235,512  |  
| | Add: Total stock-based employee compensation expense         |   |          |   |   |          |  
| | included in net income (loss), as reported, determined under |   |          |   |   |          |  
| | APB 25, net of related
      tax effects                     |   | 38,585   |   |   | 62,388   |  
| | Deduct: Total stock-based employee compensation              |   |          |   |   |          |  
| | expense determined
      under fair value based              |   |          |   |   |          |  
| | method for all awards, net of related
      tax effects      |   | (134,947 | ) |   | (253,996 | )
| | Pro forma net income (loss)                                  | $ | (494,927 | ) | $ | 43,904   |  
| |                                                              |   |          |   |   |          |  
| |                                                              |   |          |   |   |          |  
| |                                                              |   |          |   |   |          |  
| | Net income (loss) per common share –                         |   |          |   |   |          |  
| | Basic and diluted,
      as reported                         | $ | (0.03    | ) | $ | 0.02     |  
| | Basic and diluted, pro forma                                 |   | (0.03    | ) |   | 0.00     |  

| | As a result from amendments to SFAS 123, the Company
        will be required to expense the fair value of employee options beginning
        with its fiscal quarter ending March 31, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|11. | Research and development                                                                                                                                           
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    | Research and development expenditures
        are recorded net of investment tax credits, which totaled $nil for
        the year ended December 31, 2004 and 2003.
|   
|12. | Income taxes                                                                                                                                                       
|   
|    | (a)                                                                                                                                                                
|   
|    |                                                                                                                                                                    

| |  |                                                                                                                             |   |      |  |   |        | 
| |  | --------------------------------------------------------------------------------------------------------------------------- | - | ---- |  | - | ------ | 
| |  |                                                                                                                             |   | 2004 |  |   | 2003   | 
| |  | Federal and provincial income taxes
      recoverable                                                                       | $ | -    |  | $ | 67,352 | 
| |  | Investment tax credits recognized                                                                                           |   | -    |  |   | -      | 
| |  | Income taxes recoverable                                                                                                    | $ | -    |  | $ | 67,352 | 
| |  |                                                                                                                            
| |  | Investment tax credits claimed are ultimately
      subject to the finalization of the review by the Canada Revenue Agency.
| |  |                                                                                                                             |   |      |  |   |        | 
| |  | Income taxes broken down federally and provincially are as
      follows:                                                   |   |      |  |   |        | 

| |  |                            |   |      |  |   |         |  
| |  | -------------------------- | - | ---- |  | - | ------- | -
| |  |                            |   | 2004 |  |   | 2003    |  
| |  | Current (credit) provision |   |      |  |   |         |  
| |  | Federal                    | $ | -    |  | $ | (8,255  | )
| |  | Provincial                 |   | -    |  |   | (4,624  | )
| |  | Total                      | $ | -    |  | $ | (12,879 | )

F-17

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

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

| |  |                                                        |   | 2004     |   |   | 2003     |  
| |  | ------------------------------------------------------ | - | -------- | - | - | -------- | -
| |  |                                                        |   |          |   |   |          |  
| |  |                                                        |   |          |   |   |          |  
| |  | Income (loss) before income taxes                      | $ | (398,565 | ) | $ | 222,633  |  
| |  |                                                        |   |          |   |   |          |  
| |  | Income tax expense (recovery) at
      statutory rates | $ | (141,968 | ) | $ | 83,710   |  
| |  | Non deductible expenses and other items                |   | 74,156   |   |   | 118,286  |  
| |  | Recognized operating losses                            |   | -        |   |   | (61,132  | )
| |  | Recognized investment tax credits                      |   | -        |   |   | (153,743 | )
| |  | Unrecognized benefit of operating losses               |   | 67,812   |   |   | -        |  
| |  |                                                        |   |          |   |   |          |  
| |  | Total income tax recovery                              | $ | -        |   | $ | (12,879  | )

| | (c) | Temporary differences that give rise to the following
        deferred income tax assets and liabilities are as follows:
| | --- | ------------------------------------------------------------------------------------------------------------------------

| |  |                                                              |   | 2004     |   |   | 2003     |  
| |  | ------------------------------------------------------------ | - | -------- | - | - | -------- | -
| |  |                                                              |   |          |   |   |          |  
| |  | Deferred income tax assets:                                  |   |          |   |   |          |  
| |  | Warranty provision                                           | $ | 7,040    |   | $ | 7,431    |  
| |  | Intangible
      assets                                      |   | 1,437    |   |   | 1,373    |  
| |  | Unrecognized investment
      tax credits (non-refundable)   |   | 253,333  |   |   | 169,809  |  
| |  | Unrecognized
      benefit of research and development costs |   | 254,803  |   |   | 271,961  |  
| |  | Unrecognized benefit of operating losses                     |   | 67,812   |   |   | -        |  
| |  |                                                              |   |          |   |   |          |  
| |  | Gross deferred income tax
      assets                       |   | 584,425  |   |   | 450,574  |  
| |  |                                                              |   |          |   |   |          |  
| |  | Valuation allowance                                          |   | (577,700 | ) |   | (446,779 | )
| |  |                                                              |   |          |   |   |          |  
| |  | Net deferred income tax assets                               |   | 6,725    |   |   | 3,795    |  
| |  |                                                              |   |          |   |   |          |  
| |  | Deferred income tax liabilities:                             |   |          |   |   |          |  
| |  | Equipment                                                    |   | (6,725   | ) |   | (3,795   | )
| |  |                                                              |   |          |   |   |          |  
| |  |                                                              | $ | -        |   | $ | -        |  

F-18

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|12. | Income taxes
        (cont’d...)                                                                                                                        
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                         
|    |                                                                                                                                                         
|    |                                                                                                                                                         
|    |                                                                                                                                                         
|    |                                                                                                                                                         
|    |                                                                                                                                                         
|    |                                                                                                                                                         
|    |                                                                                                                                                         
|    |                                                                                                                                                         
|    |                                                                                                                                                         
|    |                                                                                                                                                         
|13. | Commitments
        and contingencies                                                                                                                   
|    |                                                                                                                                                         
|    | The Company
        is committed to make minimum annual payments on its premises and automobile
        operating leases that expire in 2008 as follows:

| | Year ending December 31:                                                                   |          | 
| | ------------------------------------------------------------------------------------------ | -------- | 
| |                                                                                            |          | 
| | 2004                                                                                       | $171,141 | 
| | 2005                                                                                       | 182,869  | 
| | 2006                                                                                       | 166,621  | 
| | 2007                                                                                       | 73,153   | 
| | 2008                                                                                       | 2,527    | 
| |                                                                                            |          | 
| |                                                                                            |          | 
| | Rent expense included in the statements of operations
      is $111,317 (2003 - $107,886).

F-19

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|14. | Changes in non-cash working capital balances
|--- | --------------------------------------------

| |                                          |   |         |   |   |          |  
| | ---------------------------------------- | - | ------- | - | - | -------- | -
| |                                          |   | 2004    |   |   | 2003     |  
| |                                          |   |         |   |   |          |  
| | Trade accounts receivable                | $ | 87,782  |   | $ | (145,622 | )
| | Inventory                                |   | (41,710 | ) |   | (262,006 | )
| | Prepaid expenses                         |   | -       |   |   | 121      |  
| | Income taxes recoverable                 |   | 67,352  |   |   | 45,707   |  
| | Leases receivable                        |   | 11,900  |   |   | 8,741    |  
| | Accounts payable and accrued liabilities |   | 27,683  |   |   | 4,745    |  
| | Deferred revenue                         |   | 2,365   |   |   | 27,428   |  
| |                                          |   |         |   |   |          |  
| |                                          | $ | 155,372 |   | $ | (320,886 | )

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

F-20

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|15. | Segment information (cont’d...)
|--- | -------------------------------

| |                                           |   |               |   |   |           |  |   |           |  
| | ----------------------------------------- | - | ------------- | - | - | --------- |  | - | --------- | -
| | December 31, 2004                         |   | Manufacturing |   |   | Servicing |  |   | Total     |  
| |                                           |   |               |   |   |           |  |   |           |  
| |                                           |   |               |   |   |           |  |   |           |  
| | Sales to external customers               | $ | 3,005,505     |   | $ | 1,386,153 |  | $ | 4,391,658 |  
| | Depreciation and amortization             |   | 39,629        |   |   | -         |  |   | 39,629    |  
| | Interest expense, net                     |   | 23,329        |   |   | 19,233    |  |   | 42,562    |  
| | Segment income (loss) before income taxes |   | (823,412      | ) |   | 424,847   |  |   | (398,565  | )
| | Total assets                              |   | 1,968,337     |   |   | 208,921   |  |   | 2,177,258 |  
| |                                           |   |               |   |   |           |  |   |           |  
| |                                           |   |               |   |   |           |  |   |           |  
| |                                           |   |               |   |   |           |  |   |           |  
| |                                           |   |               |   |   |           |  |   |           |  
| | December 31, 2003                         |   | Manufacturing |   |   | Servicing |  |   | Total     |  
| |                                           |   |               |   |   |           |  |   |           |  
| |                                           |   |               |   |   |           |  |   |           |  
| | Sales to external customers               | $ | 3,311,947     |   | $ | 772,646   |  | $ | 4,084,593 |  
| | Depreciation and amortization             |   | 42,357        |   |   | -         |  |   | 42,357    |  
| | Interest expense, net                     |   | 13,456        |   |   | 16,196    |  |   | 29,652    |  
| | Segment income (loss) before income taxes |   | (128,109      | ) |   | 350,742   |  |   | 222,633   |  
| | Total assets                              |   | 2,236,203     |   |   | 208,921   |  |   | 2,445,124 |  
| |                                           |   |               |   |   |           |  |   |           |  

F-21

---

|VISCOUNT SYSTEMS INC.
        Notes to Consolidated Financial Statements
        (Expressed in Canadian dollars)
      December 31, 2004
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        

|15. | Segment information (cont’d.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    | (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|16. | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    | The Company's financial instruments consist
        of cash and cash equivalents, trade accounts receivable, leases receivable,
        bank indebtedness, accounts payable, accrued liabilities, due to stockholders
        and notes payable. It is management's opinion that the Company is not
        exposed to significant interest, currency, business concentration or credit
        risks arising from these financial instruments. The fair values of these
        financial instruments approximate their carrying values based on their
        liquidity and short-term nature.

F-22

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