UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT

For the transition period from _________to __________________

Commission File Number: 000-49746

VISCOUNT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

4585 Tillicum Street, Burnaby, British Columbia, Canada V5J 5K9
(Address of principal executive offices)

(604) 327-9446
Registrant’s telephone number

_________________________________________________________________
Former name, former address, and former fiscal year, if changed since last report

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

Check whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filed [ ] Smaller reporting company [X]

Check whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of March 31, 2011 the registrant’s outstanding common stock consisted of 25,491,250 shares (being 76,473,750 shares on a post forward-stock-split basis).

PART I. FINANCIAL INFORMATION

Safe Harbor Statement

Certain statements in this filing that relate to financial results, projections, future plans, events, or performance are forward-looking statements and involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs, and risk of declining revenues. Terms such as “we believe”, “we expect” or “we project”, and similar terms, are examples of forward looking statements that we may use in this report. Such statements also relate to the sales trends of our Enterphone 2000, EPX, previously named Enterphone 3000, and MESH product lines, general revenues, income, the number of new construction projects or building upgrades that may generate sales of our product, and in general the market for our products. Any projections herein are based solely on management’s views, and were not prepared in accordance with any accounting guidelines applicable to projections. Accordingly, these forward looking statements are intended to provide the reader with insight into management’s proposals, expectations, strategies and general outlook for our business and products, but because of the risks associated with those statements, including those described herein and in our annual report, readers should not rely upon those statements in making an investment decision. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements are made as of the date of this filing, and the Company assumes no obligation to update such forward-looking statements.

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. Unless otherwise noted as USD or U.S. dollars, all dollar references herein are in Canadian dollars. As at March 31, 2011, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$1.0314 for USD$1.0000 or CAD$1.0000 for USD$0.9696.

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VISCOUNT SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)

MARCH 31, 2011

Commitments (note 11)
Subsquent events (note 13)

See accompanying notes to interim consolidated financial statements.

See accompanying notes to interim consolidated financial statements.

See accompanying notes to interim consolidated financial statements.

See accompanying notes to interim consolidated financial statements.

During the three months ended March 31, 2011, the Company recognized a charge to operations of $645,964 (2010 – credit of $49,358) being the change in the fair value of the warrants during the period, or since the warrants were issued.

The fair value of these warrants were determined using the Black-Scholes option pricing model using the following assumptions:

A summary of the stock options outstanding and exercisable at March 31, 2011 is as follows:

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of US$0.093 per share as of March 31, 2011 (December 31, 2010 –US$0.077), which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options vested and exercisable as of March 31, 2011 was 6,240,000 (December 31, 2010 – 6,240,000).

A summary of the warrants outstanding and exercisable at March 31, 2011 is as follows:

Rent expense included in the statements of operations for the three months ended March 31, 2011 is $34,133 (2010 - $33,668).

Results of Operations

Sales for the three months ended March 31, 2011 and 2010 were $861,197 and $1,011,189, respectively, a decrease of $149,992 or 14.8% . This decrease was due to decreased MESH sales. MESH sales for the three months ended March 31, 2011 and 2010 were $427,179 and $619,420, respectively, a decrease of $192,241 or 31.0% . MESH is a convergent technology developed by Viscount that increases security at a reduced cost of hardware, cabling and installation, and with simplified database management. Enterphone 2000 sales for the three months ended March 31, 2011 and 2010 were $84,074 and $65,639, respectively, an increase of $18,435 or 28.1% . As an older technology, Enterphone sales are no longer a significant part of our total sales. MESH EPX is the replacement for our old Enterphone system. MESH EPX is the next generation of Enterphone systems but with features that are compatible with high speed internet and other newer technologies. The Company has also introduced MESH Freedom, the new IT platform, developed and released during the last quarter of 2010. This IT platform can turn any card reader into an IP device by connecting the Freedom IP device with built-in I/O to a POE switch and then every card usage is processed on a redundant MESH server either in your building or anywhere in the world. The software component of MESH Freedom is the MESH web browser security operating platform. Unlike control panels, the user database and the door control software is written in IT language located on a server(s), thereby future proofing systems from the traditional issue of proprietary hardware version obsolescence and improving scalability by eliminating the need for additional hardware every time a reader is added to the system.

For the three months ended March 31, 2011 and 2010, MESH sales were 49.6% and 61.3%, respectively, of total sales.

We also provide Enterphone support and maintenance services pursuant to service contracts that were assigned to us from Telus Corporation in 2003. Sales from the 1,468 existing service contracts continue to be steady. On average, each service contract represents ongoing revenues of approximately $38 per month, inclusive of parts and labor. Typical customers include strata management and building owners as well as various residential, business and industrial users of Enterphone access control and security systems. During the three months ended March 31, 2011 and 2010, customer service contracts and new equipment sales generated aggregate sales revenues of $283,485 and $347,014, respectively, a decrease of $63,529 or 18.3% . This decrease was due to the slower local economy.

The intangible assets held by the Company are comprised primarily of service contracts for our Enterphone 2000 product line. The number of service agreements held by the Company was 1,468 at March 31, 2011, as compared to 1,482 and 1,559 at December 31, 2010 and March 31, 2010, respectively. During the first quarter of 2011, the Company performed a test for impairment and evaluated the status of service agreements. Management determined that no charge for impairment was required but the continuing reduction in the number of service contracts held, indicated that the intangible asset should be deemed to have a definitive life. Accordingly, the Company continued to amortize the cost of the service agreements on a straight-line basis over an estimated useful life of 10 years, which became effective as of April 1, 2005. At March 31, 2011, the cost of the service agreements, net of accumulated amortization, was $83,569.

Cost of sales and services as a percentage of sales was 48.2% and 35.5% for the three months ended March 31, 2011 and 2010, respectively. Cost of sales has increased during these two comparative periods due to a combination of increases in the overall costs for many MESH component parts. However, management continues to focus on controlling the input costs by using multiple suppliers to ensure that the best and most cost effective raw materials are used in all of our products.

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Gross profit for the three months ended March 31, 2011 and 2010 was $446,253 and $651,812, respectively, a decrease of $205,559 or 31.5% . This decrease in gross profit corresponds with consistent decreased sales and increased cost of sales for the three months ended March 31, 2011.

Selling, general and administrative expenses for the three months ended March 31, 2011 and 2010 were $762,918 and $534,062, respectively, an increase of $228,856 or 42.9% . This increase was mainly due to increased marketing expenses to promote the new MESH Freedom product and various selling, general and administrative expenses. For the three months ended March 31, 2011 and 2010, selling, general and administrative expenses, as a percentage of sales, were 88.6% and 52.8%, respectively.

Research and development costs for the three months ended March 31, 2011 and 2010 were $138,054 and $43,570, respectively, an increase of $94,484. This increase was due to increased engineering expenses to produce and develop the MESH Freedom product.

Net loss for the quarter ended March 31, 2011 was $1,107,412, as compared to net income of $115,563 for the quarter ended March 31, 2010. This equates to an increase in quarter over quarter loss of $1,222,975. This increase in loss was the result of increased advertising, travel, tradeshow, consulting fees, and various office expenses. The increase in loss was also a result of a fair value adjustment of certain outstanding warrants that are accounted for as derivative financial instruments. The fair value adjustment has no cash flow impact and the charge to net loss for the three months ended March 31, 2011 was $645,964 compared to $49,358 credited to net income for the three months ended March 31, 2010.

Liquidity and Capital Resources

Cash as of March 31, 2011, as compared to December 31, 2010 was $807,580 and $820,344, respectively. These two periods were consistent. Cash as of March 31, 2010 was $127,798. Cash increased by $679,782 at March 31, 2011, as compared to March 31, 2010. On December 7, 2010, the Company completed a private placement of 4,000,000 units (12,000,000 units on a post 3:1 forward-stock-split basis) at a price of $0.15 per unit for total proceeds of $600,000. Each unit consisted of one common share and one share purchase warrant of the Company, with each warrant exercisable to acquire an additional share of the Company at a price of $0.24 ($0.08 on a post forward-stock-split basis) for a period of 5 years, expiring December 7, 2015. On March 3, 2011, the Company completed a private placement of 3,650,000 units (10,950,000 units on a post 3:1 forward-stock-split basis) at a price of $0.15 per unit for total proceeds of $547,500. Each unit consisted of one common share and one share purchase warrant of the Company, with each warrant exercisable to acquire an additional share of the Company at a price of $0.24 ($0.08 on a post forward-stock-split basis) for a period of 5 years, expiring March 3, 2016. In addition to cash on hand, the Company has a credit facility that can be drawn upon to the lesser of $500,000 or 75% of accounts receivable less than 90 days at the prime lending rate plus 1.75% . Amounts drawn are repayable on demand. At March 31, 2011, $nil was drawn on this facility. The facility is secured by substantially all of our assets under a general security agreement.

At March 31, 2011, working capital was $1,017,798, as compared to a working capital of $984,984 at December 31, 2010. Working capital has increased by $32,814. The current ratio at March 31, 2011 was 2.25 to 1.0, as compared with 2.05 to 1.0 at December 31, 2010.

The accounts receivable turnover ratio at March 31, 2010 was 51 days, as compared 73 days at December 31, 2010 and 91 days at March 31, 2010. The decrease at March 31, 2011 was the result of receiving payment in its entirety by one large accounts receivable from a large customer. Ignoring this receivable, the turnover ratio at March 31, 2010 would have been 51 days, which is comparable to March 31, 2011.

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This consistency was due to consistent follow up and monitoring of slower paying accounts on a monthly basis by management. The accounts receivable reserve was $117,206 at March 31, 2011, as compared to $97,642 at December 31, 2010. The accounts receivable reserve has increased by $19,564 or 20.0%, since the year ended December 31, 2010. Management continues to follow-up on customer accounts to improve cash flow and to minimize bad debts. There had been no significant or material business conditions that would warrant further increases to the reserve at this time.

For the three months ended March 31, 2011, there were no capital expenditures.

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 March 31, 2011.

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

Related Party Transactions

None.

Recently Issued Accounting Standards

There were no new accounting standards issued during this period ended March 31, 2011 that have or are expected to have a material impact on the Company.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of March 31, 2011. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of March 31, 2011, we have maintained effective disclosure controls and procedures in all material respects, including those necessary to ensure that information required to be disclosed in reports filed or submitted with the SEC (i) is recorded, processed, and reported within the time periods specified by the SEC, and (ii) is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decision regarding required disclosure.

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PART II – OTHER INFORMATION

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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