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 June 30, 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 June 30, 2011 the registrant’s outstanding common stock consisted of 76,473,750 shares.

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 June 30, 2011, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$0.9645 for USD$1.0000 or CAD$1.0000 for USD$1.0368.

Item 1.      Financial Statements

VISCOUNT SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)

JUNE 30, 2011

VISCOUNT SYSTEMS, INC.
Interim Condensed Consolidated Balance Sheets
(Expressed in Canadian dollars)

Commitments and contingencies (note 11)
Subsequent events (note 13)
See accompanying notes to interim condensed consolidated financial statements.

VISCOUNT SYSTEMS, INC.
Interim Condensed Consolidated Statements of Operations
(Unaudited)
(Expressed in Canadian dollars)

See accompanying notes to interim condensed consolidated financial statements.

VISCOUNT SYSTEMS, INC.
Interim Consolidated Statement of Stockholders' Equity (Deficit)
(Unaudited)
(Expressed in Canadian dollars)

See accompanying notes to interim consolidated financial statements.

VISCOUNT SYSTEMS, INC.
Interim Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in Canadian dollars)

For the six months ended

See accompanying notes to interim condensed consolidated financial statements.

During the six months ended June 30, 2011, the Company recognized a charge to operations of $1,541,296 (2010 – credit of $107,769) being the change in the fair value of the warrants during the period, or since the warrants were issued.

During the three month period ended June 30, 2011, the Company obtained the consent of certain warrant holders to have the currency that the exercise price of their warrants is denominated in, changed from United States dollars to Canadian dollars. As the exercise price of these warrants no longer differs from the Company’s functional currency, their fair value was reclassified to equity on the date of conversion. The total amount reclassified to equity during the period was $1,865,692.

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

On April 11, 2011, the Company granted 2,325,000 stock options to various employees. The options have an exercise price of US0.08 and expire on April 11, 2016. The Company recorded stock-based compensation expense of $292,424, being the estimated fair value of this grant. The fair value was determined using the Black-Scoles option pricing model using the following assumptions: expected life of 5 years; volatility of 180%; risk-free interest rate of 2.24%; and a dividend rate of 0%.

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of US$0.12 per share as of June 30, 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 June 30, 2011 was 8,565,000 (December 31, 2010 – 6,240,000).

Warrants:

A summary of warrant activity during the three months ended June 30, 2010 is as follows:

Item 2.      Management Discussion and Analysis or Plan of Operation

Results of Operations

Sales for the three months ended June 30, 2011 and 2010 were $900,131 and $893,872, respectively, an increase of $6,259 or 0.7% . Sales for the six months ended June 30, 2011 and 2010 were $1,761,328 and $1,905,061, respectively, a decrease of $143,733 or 7.5% . This decrease was due to decreased MESH sales. MESH sales for the three months ended June 30, 2011 and 2010 were $507,362 and $471,092, respectively, an increase of $36,270 or 7.7% . MESH sales for the six months ended June 30, 2011 and 2010 were $934,541 and $1,090,512, respectively, a decrease of $155,971 or 14.3% . 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 June 30, 2011 and 2010 were $83,921 and $97,296, respectively, a decrease of $13,375 or 13.7% . Enterphone 2000 sales for the six months ended June 30, 2011 and 2010 were $167,995 and $162,935, respectively, an increase of $5,060 or 3.1% . 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 six months ended June 30, 2011 and 2010, MESH sales were 53.1% and 57.2%, 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 1,444 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 six months ended June 30, 2011 and 2010, customer service contracts and new equipment sales generated aggregate sales revenues of $562,501 and $619,773, respectively, a decrease of $57,272 or 9.2% . 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 1,444 at June 30, 2011, as compared to 1,482 and 1,539 at December 31, 2010 and June 30, 2010, respectively. During the first two quarters 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 June 30, 2011, the cost of the service agreements, net of accumulated amortization, was $78,346.

Cost of sales and services as a percentage of sales was 39.7% and 45.4% for the three months ended June 30, 2011 and 2010, respectively. Cost of sales and services as a percentage of sales was 43.8% and 40.2% for the six months ended June 30, 2011 and 2010. Cost of sales has remained consistent during these two comparative periods due to moderate fluctuations 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.

Gross profit for the three months ended June 30, 2011 and 2010 was $542,965 and $488,363, respectively, an increase of $54,602 or 11.2% . For the six months ended June 30, 2011 and 2010, gross profit was $989,218 and $1,140,175, respectively, a decrease of $150,957 or 13.2% . This decrease in gross profit corresponds with decreased sales and consistent cost of sales for the six months ended months ended June 30, 2011.

Selling, general and administrative expenses for the three months ended June 30, 2011 and 2010 were $1,030,478 and $552,465, respectively, an increase of $478,013 or 86.5% . Selling, general and administrative expenses for the six months ended June 30, 2011 and 2010 were $1,793,396 and $1,086,527, respectively, an increase of $706,869 or 65.1% . This increase was mainly due to increased marketing expenses to promote the new MESH Freedom product and various selling, general and administrative expenses. Also included in selling, general and administrative expenses for the six months ended June 30, 2011 was stock-based compensation expense of $299,571, compared to $Nil in the corresponding period in 2011. For the six months ended June 30, 2011 and 2010, selling, general and administrative expenses, as a percentage of sales, were 101.8% and 57.0%, respectively.

Research and development costs for the three months ended June 30, 2011 and 2010 were $121,804 and $57,134, respectively, an increase of $64,670. Research and development costs for the six months ended June 30, 2011 and 2010 were $259,858 and $100,704, respectively, an increase of $159,154. This increase was due to increased engineering expenses to produce and develop the MESH Freedom product.

Net loss for the three month period ended June 30, 2011 was $1,511,298, as compared to a net loss of $71,074 for the three month period ended June 30, 2010, an increase of $1,440,224. Net loss for the six months ended June 30, 2011 was $2,618,710 as compared to a net income of $44,489 for the six months ended June 30, 2010. This equates to an increase in six month period over six month period loss of $2,663,199. 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 June 30, 2011 was $895,332 compared to $58,411 credited to net income for the six months ended June 30, 2010.

Liquidity and Capital Resources

Cash as of June 30, 2011, as compared to December 31, 2010 was $366,552 and $820,344, respectively. Cash as of June 30, 2010 was $125,111. Cash increased by $241,441 at June 30, 2011, as compared to June 30, 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 June 30, 2011, $nil was drawn on this facility. The facility is secured by substantially all of our assets under a general security agreement.

At June 30, 2011, working capital was $708,067, as compared to a working capital of $984,984 at December 31, 2010. Working capital has decreased by $276,917. The current ratio at June 30, 2011 was 1.91 to 1.0, as compared with 2.05 to 1.0 at December 31, 2010.

The accounts receivable turnover ratio at June 30, 2011 was 55 days, as compared 73 days at December 31, 2010 and 91 days at June 30, 2010. The decrease at June 30, 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 June 30, 2010 would have been 48 days, which is comparable to June 30, 2011. 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 $135,307 at June 30, 2011, as compared to $97,642 at December 31, 2010. The accounts receivable reserve has increased by $37,665 or 38.6%, 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 six months ended June 30, 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 June 30, 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 June 30, 2011 that have or are expected to have a material impact on the Company.

Item 4.      Controls and Procedures

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 June 30, 2011. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of June 30, 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.

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

PART II – OTHER INFORMATION

Item 6.      Exhibits

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.