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 September 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 September 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 September 30, 2011, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$0.9626 for USD$1.0000 or CAD$1.0000 for USD$1.0389.

Item 1. Financial Statements

VISCOUNT SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)

SEPTEMBER 30, 2011

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

See accompanying notes to interim condensed consolidated financial statements.

See accompanying notes to interim consolidated financial statements.

See accompanying notes to interim condensed consolidated financial statements.

On May 16, 2003, the Company completed an agreement for the purchase of certain assets of Telus Corporation (“Telus”) comprised primarily of service agreements for a product sold by Telus known as “Enterphone 2000”. At December 31, 2003, the Company had acquired 2,215 service agreements for which it paid a total of $208,921. At September 30, 2011, the Company held 1,434 service agreements (December 31, 2010 – 1,482) at a cost, net of accumulated amortization of $135,798 (December 31, 2010 - $120,129), of $73,123 (December 31, 2010 - $88,792). The aggregate amortization expense for each of the five succeeding fiscal years is as follows:

The Company has a bank credit facility which allows it to borrow up to a maximum of $500,000 or 75% of its accounts receivable, less than 90 days old. Amounts outstanding under the bank credit facility bear interest at the bank’s prime lending rate plus 1.75% and are repayable on demand. The facility is secured by substantially all of the Company’s assets under a general security agreement and a pledge of personal property of a significant shareholder. When the faicility is in use, the Company is required to maintain a current ratio greater than 1.5:1, measured quarterly, under the terms of the demand facility agreement. At September 30, 2011, the Company was in compliance with debt covenants. At September 30, 2011 and December 31, 2010, the balance of amounts drawn under this facility was $Nil.(See Note 7)

During the nine months ended September 30, 2011, the Company recognized a charge to operations of $1,582,939 (2010 – credit of $141,581) being the change in the fair value of the derivative warrants during the period.

During the three month period ended June 30, 2011, the Company obtained the consent of 16,063,002 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 additional paid-in capital totalled $1,865,692.

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

Common Stock:

On March 3, 2011, the Company completed a private placement of 10,950,000 units at a price of US$0.05 per unit for total proceeds of $542,272 (US$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 US$0.08 for a period of 5 years, expiring March 3, 2016. Upon issuance of the units, $267,355 of the proceeds were allocated to the warrants and recorded as a derivative liability and the balance of $220,167, which is net of share issuance costs of $54,750, was allocated to common stock and additional paid-in capital. The fair value of the warrants was determined using the Black-Scholes option pricing model using the following assumptions: volatility of 177%; a dividend yield rate of 0%; a risk-free interest rate of 2.24% and an expected life of five years, adjusted for market liquidity and allocated on a relative basis.

Effective April 18, 2011, the Company completed a three for one forward-stock-split of its common stock with a corresponding increase in its authorized common stock from 100,000,000 shares of common stock to 300,000,000 shares of common stock. All common stock, option, warrant and per share amounts are stated on a post forward-stock-split basis.

Stock Options:

A summary of the stock option activity during the nine months ended September 30, 2011 is as follows:

On April 11, 2011, the Company granted 2,325,000 fully vested stock options to various employees. The options have an exercise price of US$0.08 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%.

Stock Options (cont’d…):

A summary of the stock options outstanding and exercisable at September 30, 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$0.09 per share as of September 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 September 30, 2011 was 8,565,000 (December 31, 2010 – 6,240,000).

Warrants:

A summary of warrant activity during the nine months ended September 30, 2011 is as follows:

Warrants (cont’d…)

On June 22, 2011, the Company issued 2,500,000 warrants to a consultant in connection with a professional services agreement (Note 11). These warrants have an exercise price of $ 0.15 and expire on June 22, 2014. The agreement has a minimum term of twelve months. The Company estimated the fair value of these warrants at grant to be $260,858 using the Black-Scholes option pricing model with the following assumptions: expected life of 3 years; volatility of 180%; risk-free interest rate of 2.24%; and a dividend rate of 0%. For the three and nine month periods ended September 30, 2011, the Company recorded stock-based compensation expense of $63,428 and $363,000, respectively, with the remainder of the fair value ($190,283) recorded in deferred compensation in equity which will be amortized over a twelve month term.

The Company is committed to minimum annual payments on its premises, automobiles and office equipment operating leases that expire in 2014 and 2015 as follows:

Rent expense included in the statements of operations for the three months ended September 30, 2011 is $34,583 (2010 - $34,133) and for the nine months ended September 30, 2011 is $102,999 (2010 - $101,624).

On June 22, 2011, the Company entered into a professional services agreement with a consultant for business development and stragetic initiatives. As consideration, the Company will compensate the consultant at $8,500 per month, pay commissions of 8% new sales and issue warrants for 2,500,000 shares (Note 9). Additoinally for providing specific involvement in a M&A transaction or Capital raise transaction, the consultant will be compensated at 7% or 10%, repsectively, of the transaction value. The agreement may be terminated by 30 days written notice, after an intial term of 8 months. The commission arrangement shall extend for 12 months beyond termination.

Item 2. Management Discussion and Analysis or Plan of Operation

Results of Operations

Sales for the three months ended September 30, 2011 and 2010 were $903,477 and $1,052,658, respectively, a decrease of $149,181 or 14.2% . Sales for the nine months ended September 30, 2011 and 2010 were $2,664,805 and $2,957,718, respectively, a decrease of $292,913 or 9.9% . This decrease was due to decreased MESH sales. MESH sales for the three months ended September 30, 2011 and 2010 were $451,195 and $576,610, respectively, a decrease of $125,415 or 21.8% . MESH sales for the nine months ended September 30, 2011 and 2010 were $1,385,736 and $1,667,123, respectively, a decrease of $281,387 or 16.9% . 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 September 30, 2011 and 2010 were $126,442 and $66,245, respectively, an increase of $60,197 or 90.9% . Enterphone 2000 sales for the nine months ended September 30, 2011 and 2010 were $294,437 and $229,180, respectively, an increase of $65,257 or 28.5% . 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 nine months ended September 30, 2011 and 2010, MESH sales were 52.0% and 56.4%, 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 1,434 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 nine months ended September 30, 2011 and 2010, customer service contracts and new equipment sales generated aggregate sales revenues of $833,148 and $945,509, respectively, a decrease of $112,361 or 11.9% . 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 1,434 at September 30, 2011, as compared to 1,482 and 1,512 at December 31, 2010 and September 30, 2010, respectively. During the first three 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 September 30, 2011, the cost of the service agreements, net of accumulated amortization, was $73,123.

Cost of sales and services as a percentage of sales was 34.6% and 47.4% for the three months ended September 30, 2011 and 2010, respectively. Cost of sales and services as a percentage of sales was 40.7% and 42.7% for the nine months ended September 30, 2011 and 2010. Cost of sales has decreased as a result of a decline in sales as well as through the use of lower cost input materials in the MESH and Freedom Bridge products. Management has continued 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 September 30, 2011 and 2010 was $591,245 and $553,467, respectively, an increase of $37,778 or 6.8% . For the nine months ended September 30, 2011 and 2010, gross profit was $1,580,463 and $1,693,641, respectively, a decrease of $113,178 or 6.7% . This decrease in gross profit corresponds with decreased sales and the declining cost of sales for the nine months ended months ended September 30, 2011 as mentioned above.

Selling, general and administrative expenses for the three months ended September 30, 2011 and 2010 were $763,396 and $451,795, respectively, an increase of $311,601 or 69.0% . Selling, general and administrative expenses for the nine months ended September 30, 2011 and 2010 were $2,556,793 and $1,538,323, respectively, an increase of $1,018,470 or 66.2% . 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 nine months ended September 30, 2011 was stock-based compensation expense of $363,000, compared to $Nil in the corresponding period in 2010. For the nine months ended September 30, 2011 and 2010, selling, general and administrative expenses, as a percentage of sales, were 95.9% and 52.0%, respectively. The nine month period saw significant increases in advertising, travel, tradeshow, consulting fees, and various office expenses as part of the Company’s increased marketing and promotional efforts.

Research and development costs for the three months ended September 30, 2011 and 2010 were $105,484 and $133,757, respectively, a decrease of $28,273 or 21.1% . Research and development costs for the nine months ended September 30, 2011 and 2010 were $365,342 and $234,461, respectively, an increase of $130,881 or 55.8% . This increase was due to increased engineering expenses to produce and develop the MESH Freedom product.

Net loss for the three month period ended September 30, 2011 was $325,852, as compared to a net loss of $5,567 for the three month period ended September 30, 2010, an increased loss of $320,285. Net loss for the nine months ended September 30, 2011 was $2,944,563 as compared to a net gain of $38,920 for the nine months ended September 30, 2010. This equates to an increase in nine month period over nine month period loss of $2,983,383. 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 September 30, 2011 was $41,643 compared to $141,581 credited to net income for the nine months ended September 30, 2010.

Liquidity and Capital Resources

Cash as of September 30, 2011, as compared to December 31, 2010 was $196,930 and $820,344, respectively. Cash as of September 30, 2010 was $461,656. Cash decreased by $264,726 at September 30, 2011, as compared to September 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 September 30, 2011, $nil was drawn on this facility. The facility is secured by substantially all of our assets under a general security agreement.

At September 30, 2011, working capital was $493,873, as compared to a working capital of $984,984 at December 31, 2010. Working capital has decreased by $491,111. The current ratio at September 30, 2011 was 1.66 to 1.0, as compared with 2.05 to 1.0 at December 31, 2010.

The accounts receivable turnover ratio at September 30, 2011 was 51 days, as compared 73 days at December 31, 2010 and 78 days at September 30, 2010. The decrease at September 30, 2011 was the result of receiving payment in its entirety by one large accounts receivable from a large customer. The accounts receivable reserve was $163,632 at September 30, 2011, as compared to $97,642 at December 31, 2010. The accounts receivable reserve has increased by $65,990 or 67.6%, 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 nine months ended September 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 September 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 September 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 September 30, 2011. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of September 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

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.