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, 2012

[   ] 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)

Nevada	88-0498181
(State or other jurisdiction of	(I.R.S. Employer I.D. No.)
incorporation or organization)

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, 2012 the registrant’s outstanding common stock consisted of 76,733,750 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, 2012, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$1.0181 for USD$1.0000 or CAD$1.0000 for USD$0.9822.

Item 1. Financial Statements

VISCOUNT SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)

JUNE 30, 2012

VISCOUNT SYSTEMS, INC.

Interim Condensed Consolidated Balance Sheets

(Expressed in Canadian dollars)

		June 30,			December 31,
		2012			2011
		(Unaudited)			(Audited)
Assets
Current assets
Cash	$	572,491		$	169,322
Trade accounts receivable, less allowance for doubtful accounts     of $107,251 (2011 - $133,389)		492,386			397,813
Inventory (note 2)		424,768			523,943
Total current assets		1,489,645			1,091,078
Deposits		1,391			1,391
Equipment (note 3)		27,245			29,567
Intangible assets		57,454			67,900
Total assets	$	1,575,735		$	1,189,936
		.
Liablilities and stockholders' deficit
Current liabilities
Accounts payable	$	211,582		$	153,642
Accrued liabilities		547,726			567,271
Deferred revenue		51,560			49,545
Due to related parties (note 4)		172,402			187,171
Total current liabilities		983,270			957,629
Derivative financial liabilities (note 5)		2,167,309			390,824
		3,150,579			1,348,453
Stockholders' equity (deficit)
Capital stock (note 6)
Authorized:
300,000,000 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:
76,733,750 common shares (2011 - 76,473,750)		99,512			99,252
1,000 preferred shares (2011 - nil)		1			-
Additional paid-in capital		5,637,853			5,617,313
Obligation to issue shares					20,800
Deferred compensation (note 6)					(126,855	)
Accumulated deficit		(7,312,210	)		(5,769,027	)
Total stockholders' deficit		(1,574,844	)		(158,517	)
Total liabilities and stockholders' deficit	$	1,575,735		$	1,189,936

Commitments and contingencies (note 8)
See accompanying notes to interim condensed consolidated financial statements.

VISCOUNT SYSTEMS, INC.

Interim Condensed Consolidated Statements of Operations

(Unaudited)

(Expressed in Canadian dollars)

							(Note 2)
		Three months ended					Six months ended
		June 30					June 30
		2012		2011			2012		2011
Sales	$	901,088 $		900,131		$	1,768,089 $		1,761,328
Cost of sales		355,140		357,166		$	703,551		772,110
Gross profit		545,948		542,965			1,064,538		989,218
Expenses
Selling, general and administrative		988,818		1,030,478			1,708,319		1,793,396
Research and development		69,601		121,804			142,600		259,858
Depreciation and amortization		6,354		6,663			12,768		13,403
		1,064,773		1,158,945			1,863,687		2,066,657
Loss before other items		(518,825	)	(615,980	)		(799,149	)	(1,077,439	)
Other items
Interest income		7		14			12		25
Interest expense		(700	)	-			(760	)	-
Fair value adjustment of derivative liability (note 5)		(855,374	)	(895,332	)		(743,286	)	(1,541,296	)
		(856,067	)	(895,318	)		(744,034	)	(1,541,271	)
Net loss and comprehensive loss		(1,374,892	)	(1,511,298	)		(1,543,183	)	(2,618,710	)
Basic and diluted loss per common share	$	(0.02	) $	(0.02	)	$	(0.02	) $	(0.04	)
Weighted average number of common shares outstanding,  Basic and diluted		76,733,750		76,473,750			76,473,750		72,762,917

See accompanying notes to interim condensed consolidated financial statements.

VISCOUNT SYSTEMS, INC.

Interim Consolidated Statement of Stockholders' Equity (Deficit)

(Unaudited)

(Expressed in Canadian dollars)

								Additional
	Common Stock			Preffered Stock				paid-in		Obligation to			Deferred
	Shares		Amount	Shares		Amount		capital		issue shares			Compensation			Accumulated deficit			Total
Balance, December 31, 2010	65,523,750	$	88,302	-	$	-	$	2,937,979	$	-		$	-		$	(2,885,723	)	$	140,558
Units issued for cash from private placement	10,950,000		10,950	-		-		209,217		-			-			-			220,167
Units to be issued for consulting services			-	-		-		-		20,800			-			-			20,800
Stock-based compenastion -options	-		-	-		-		292,424		-			-			-			292,424
Stock-based compensation - warrants	-		-	-		-		312,001		-			(126,855	)		-			185,146
Warrant reclassification (Note 5)	-		-	-		-		1,865,692		-			-			-			1,865,692
Net loss	-		-	-		-		-		-			-			(2,883,304	)		(2,883,304	)
Balance, December 31, 2011	76,473,750		99,252	-		-		5,617,313		20,800			(126,855	)		(5,769,027	)		(158,517	)
Units issued for cash from equity securities	-		-	1,000		1		-		-			-			-			1
Units issued for consulting services	260,000		260	-		-		20,540		(20,800	)		-			-			-
Stock-based compensation - warrants	-		-	-		-		-		-			126,855						126,855
Net loss	-		-	-		-		-		-			-			(1,543,183	)		(1,543,183	)
Balance, June 30, 2012	76,733,750	$	99,512	1,000	$	1	$	5,637,853	$	-		$	-		$	(7,312,210	)	$	(1,574,844	)

See accompanying notes to interim condensed consolidated financial statements.

VISCOUNT SYSTEMS, INC.

Interim Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Expressed in Canadian dollars)

For the six months ended
		June 30,			June 30,
		2012			2011
Operating activities:
Net loss	$	(1,543,183	)	$	(2,618,710	)
Items not involving cash:
Depreciation and amortization		12,768			13,403
Fair value adjustment of derivative liability		743,286			1,541,296
Selling, general and administrative expenses paid by stock options and warrants		106,316			299,571
Changes in non-cash working capital balances (note 7)		45,012			(176,875	)
Net cash used in operating activities		(635,802	)		(941,315	)
Financing activities:
Proceeds from private placement		1,053,740			487,523
Repayment of related party indebtedness		(14,769	)		-
Net cash provided by financing activities		1,038,971			487,523
Increase (decrease) in cash		403,169			(453,792	)
Cash, beginning of period		169,322			820,344
Cash, end of period	$	572,491		$	366,552
Supplementary information:
Interest paid	$	760		$	-
Income taxes paid	$	-		$	-

See accompanying notes to interim condensed consolidated financial statements.

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Six months ended June 30, 2012

1.	Basis of presentation
	These unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with instructions for Form 10-Q and by Article 8-03 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of annual financial statements. These financial statements should be read in conjunction with the audited annual consolidated financial statements of Viscount Systems, Inc. (the “Company”) filed on Form 10-K for the year ended December 31, 2011. Operating results for the periods presented are not necessarily indicative of the results that will occur for the year ending December 31, 2012 or for any other interim period.
	The financial information as at June 30, 2012 and for the three month and six month periods ended June 30, 2012 and 2011 is unaudited; however, such financial information includes all adjustments, consisting solely of normal recurring adjustments, which, in the opinion of management, are necessary for the fair presentation of the financial information in conformity with accounting principles generally accepted in the United States of America.
	Effective April 18, 2011, the Company completed a three for one forward-split of its common stock. All common stock and related per share amounts in these unaudited interim consolidated financial statements are stated on an after-forward-split basis (Note 6).
	These financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has an accumulated deficit of $7,312,210, reported a loss for the three month period ended June 30, 2012 of $1,374,892 and has positive working capital of $506,375 as at June 30, 2012. Cash flows used in operating activities for the six months ended June 30, 2012 were $635,802. Although management is confident that the company can access sufficient working capital to maintain operations and ultimately generate positive cash flows from operations, the ability to sustain the current level of operations is dependent upon growing sales and achieving profits. The Company’s bank credit facility was suspended on December 30, 2011 due to the bank’s assessment of the Company’s financial position. Management has determined that the Company will need to raise a minimum of $500,000 by way of new debt or equity financing to continue normal operations for the next twelve months. Management has been actively seeking new investors and developing customer relationships, however a financing arrangement has not yet completed. Short- term loan financing is anticipated from related parties, however there is no certainty that loans will be available when required. These factors raise substantial doubt about the ability of the Company to continue operations as a going concern.

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Six months ended June 30, 2012

2. Inventory

		June 30,		December 31,
		2012		2011
Raw materials	$	161,858	$	297,741
Work in process		15,278		2,679
Finished goods		247,632		223,523
	$	424,768	$	523,943

3. Equipment

				Accumulated		Net book
June 30, 2012		Cost		depreciation		value
Computer equipment	$	110,838	$	98,946	$	11,892
Office furniture and equipment		77,269		62,247		15,022
Leasehold improvements		46,814		46,483		331
	$	234,921	$	207,676	$	27,245

				Accumulated		Net book
December 31, 2011		Cost		depreciation		value
Computer equipment	$	110,838	$	98,133	$	12,705
Office furniture and equipment		77,269		61,082		16,187
Leasehold improvements		46,814		46,139		675
	$	234,921	$	205,354	$	29,567

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Six months ended June 30, 2012

4.	Due to related parties
	Amounts due to related parties in the amount of $172,402 for outstanding loans (December 31, 2011 - $172,402) are non-interest bearing, unsecured and have no fixed terms of repayment.
	Amounts due to related parties for director fees and travel expenses were $nil (2011 - $14,769).
5.	Derivative financial liabilities
	Derivative financial liabilities consist of warrants, originally issued in private placements or as compensation, that have exercise prices denominated in United States dollars, which differs from the Company’s functional currency and the conversion option associated with the Preferred shares (Note 6).
	During the six months ended June 30, 2012, the Company issued 1,000 Series A redeemable convertible preferred shares and a total of 14,742,014 share purchase warrants in connection with a financing. The preferred shares were determined to be a debt host contract and the warrants are derivative liabilities in accordance with ASC 815.
	The table below provides a summary of the changes in fair value, including net transfers, in and/or out, of financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period ended June 30, 2012:

Fair Value Measurements Using Level 3 Inputs
		Derivative liability			Derivative liability
		- warrants			– conversion
					option			Total
Balance, December 31, 2010	$	974,297		$	-		$	974,297
Total fair value adjustment		1,014,864			-			1,014,864
Fair value of warrants issued in March 2011		267,355			-			267,355
Transfers out to Equity		(1,865,692	)		-			(1,865,692	)
Balance, December 31, 2011		390,824			-			390,824
Preferred share conversion option		-			1,187,773			1,187,773
Share purchase warrants issued		703,818			-			703,818
Total fair value adjustment		(113,825	)		(1,281	)		(115,106	)
Balance, June 30, 2012	$	980,817		$	1,186,492		$	2,167,309

During the six months ended June 30, 2012, the Company recognized a charge to operations of $115,106 (2011 – charge of $1,541,296) being the change in the fair value of the derivative liability warrants and conversion option during the period.

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Six months ended June 30, 2012

5.	Derivative financial liabilities (cont’d)
	The fair value of the warrants and conversion option were determined using the Black-Scholes option pricing model and the lattice binomial pricing model, respectively, using the following current market assumptions:

	June 30,	December 31,
	2012	2011
Volatility	180%	180%
Dividend yield	-	-
Risk-free interest rate	0.50% - 7.54%	0.20% - 5.95%
Expected life	0.04 – 4.96 yrs	0.29 – 4.17 yrs

6.	Capital stock
	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 retroactively restated to reflect the forward-stock-split.
	Series A Convertible Redeemable Preferred Stock (“Series A shares”)
	On June 7, 2012, the Company completed the sale of 1,000 shares of Series A Converitble Redeemable preferred Stock, par value US$0.001 per share and stated value of US$1,000 per share, for gross proceeeds of US$1,000,000. The Series A shares contain certain rights and preferences as follows: The Series A Shares are convertible into shares of common stock of the Company at the rate of US$0.0407 per common share or 85% of the previous twenty day volume weighted average pricing. dividends of 8% payable in cash or Series A Shares. voting and conversion rights to 4.99% of the outstanding common stock per holder registration rights to the holders of the Series A Shares that may be exercised in certain circumstances. holders of Series A Shares are entitled to be paid 125% of the stated value of the Series A Shares, plus all accrued, but unpaid dividends on Series A Shares, upon liquidation or dissolution of the Company, including forms of mergers and acquisitions, in priority to any payments to the holders of shares of common stock.

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Six months ended June 30, 2012

6.

Capital Stock (cont’d) the Series A Shares may be redeemed by the holders for 150% of their stated value, plus all accrued, but unpaid dividends on Series A Shares, upon the occurrence of a default, which includes performance conditions, delisting or late filing with the SEC.

In connection with the Series A share issuance, the Company also issued to the shareholders 12,285,012 shares purchase warrants, each exercisable into one common shares at US$0.08 per share for a period of 5 years. The Company paid a cash comission of US$100,000 and issued 2,457,002 Agents warrants. Each Agent warrant exercisable into one common share of the Company at US$0.05 per share for a period of 5 years. The warrants may be exercised on a cashless basis.

The above Series A shares and share purchase warrants were first assessed under ASC 480, “Distinguishing Liabilities from Equity”, and determined that neither financial instrument was within the scope of ASC 480. These financial instruments were then assessed under ASC 815, “Derivatives and Hedging”. As a result of this evaluation, the share purchase warrants are recorded at their fair value at each reporting period, with the change in fair value recorded in the consolidated statement of operations. The Series A shares are deemed to be a debt host contract and accordingly the conversion option is subject to bifurcation and separate evaluation. The conversion option has been bifurcated and recorded at fair value at each reporting period, with the change in fair value recorded in the consolidated statement of operations.

On November 10, 2011, the Company entered into a consulting agreement for business relations, research services and consulting for equity placements, whereby the Company was required to issue 260,000 common shares at a price of $0.08, the stock price at the agreement date. The shares were issued on January 6, 2012. As at December 31, 2011 an obligation to issue shares was recorded in the amount of $20,800 as the shares had not yet been issued.

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Six months ended June 30, 2012

6.	Capital Stock (cont’d) Stock Options:
	A summary of the stock option activity during the six months ended June 30, 2012 is as follows:

		Weighted average
	Number of options	Exercise price
Outstanding at December 31, 2011	9,748,125	US$0.06
Granted	-	-
Expired/cancelled	-	-
Outstanding at June 30, 2012	9,748,125	US$0.06

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 each and expire on April 11, 2016. The Company recorded stock-based compensation expense of $63,428 (2011 - $nil), being the estimated fair value of the vesting options recognized over the service period. The fair value was determined using the Black-Scoles option pricing model with the following assumptions: expected life of 5 years; volatility of 180%; risk-free interest rate of 2.24%; and a dividend rate of 0%. As at March 31, 2012, 93,900 of the options granted on April 11, 2011 had been cancelled.

A summary of the stock options outstanding and exercisable at June 30, 2012 is as follows:

		Weighted
		Average	Weighted	Aggregate
Exercise		Remaining	Average	Intrinsic
Price	Number	Contractual Life	Exercise Price	Value
US$ 0.040	6,206,250	1.61 years	US$ 0.040	US$ 62,063
0.080	2,325,000	3.78 years	0.080	-
0.060	33,750	3.48 years	0.060	-
0.133	982,500	0.09 years	0.133	-
0.150	22,500	3.48 years	0.150	-
0.183	15,000	3.48 years	0.183	-
0.200	7,500	3.48 years	0.200	-
0.217	155,625	1.21 years	0.217	-
	9,748,125	1.98 years	US$  0.060	US$ 124,125

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Six months ended June 30, 2012

6.	Capital Stock (cont’d) Stock Options (cont’d):
	The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of US$0.05 per share as of June 30, 2012 (December 31, 2011 – US$0.06), 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, 2012 was 6,206,250 (December 31, 2011 – 6,206,250).
	Warrants:
	A summary of warrant activity during the six months ended June 30, 2012 is as follows:

	Number of warrants			Weighted average
				Exercise price
Outstanding at December 31, 2011	37,482,650		$	.08
Issued as part of private placement	12,285,012			.08
Issued as agent purchase warrants	2,457,002			.05
Expired	(5,032,650	)		.08
Outstanding at June 30, 2012	47,192,014			.08

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 six month period ended June 30, 2012, the Company recorded stock-based compensation expense of $126,855.

A summary of the warrants outstanding and exercisable at June 30, 2012 is as follows:

		Weighted Average
Weighted Average		Remaining Contractual
Exercise Price	Number	Life
US$ 0.080	2,749,998	3.44 years
$ 0.080	9,250,002	3.44 years
US$ 0.080	10,950,000	3.68 years
$ 0.080	6,000,000	3.48 years
$ 0.150	2,500,000	1.94 years
$ 0.100	1,000,000	2.43 years
US$ 0.080	12,285,012	4.94 years
US$ 0.050	2,457,002	4.94 years
$ 0.083	47,192,014	3.87 years

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Six months ended June 30, 2012

7. Changes in non-cash working capital balances

		Six months ended
		June 30,
		2012		2011
Trade accounts receivable	$	(94,573	) $	(90,903	)
Inventory		99,175		72,889
Accounts payable		57,940		(105,844	)
Accrued Liabilities		(19,545	)	(57,201	)
Deferred revenue		2,015		4,184
	$	45,012 $		(176,875	)

8.	Commitments and contingencies
	The Company is committed to minimum annual payments on its premises, automobiles and office equipment operating leases that expire in 2014 and 2016 as follows:

Year or period ending December 31:	$
2012	83,579
2013	96,254
2014	26,414
2015	13,305
2016	4,528

Rent expense included in the statements of operations for the three months ended June 30, 2012 is $34,784 (2011 - $34,283) and for the six months ended June 30, 2012 is $69,367 (2011 - $68,416).

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 to acquire up to 2,500,000 shares (Note 8). Additionally 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.

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Six months ended June 30, 2012

9.	Segment information
	(a)	Operating segments:
		The Company organizes its business into two reportable segments: manufacturing and servicing. The manufacturing segment designs, produces and sells intercom and door access control systems that utilize telecommunications wiring to control access to buildings and other facilities for security purposes. The servicing segment provides maintenance to these intercom and other door access control systems.
		Each of the segments’ accounting policies are the same as those described in Note 2 in the annual financial statements included in the most recent Form 10-K. Management evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses, if any. Retail prices are used to report intersegment sales.

For the three months ended June 30, 2012		Manufacturing			Servicing		Total
Sales to external customers	$	633,584		$	267,504	$	901,088
Depreciation and amortization		1,131			5,223		6,354
Interest expense, net		700			-		700
Segment income (loss) before income taxes		(1,419,159	)		44,267		(1,374,892	)
Total assets		1,518,281			57,454		1,575,735

For the three months ended June 30, 2011		Manufacturing			Servicing		Total
Sales to external customers	$	621,115		$	279,016	$	900,131
Depreciation and amortization		1,440			5,223		6,663
Interest expense, net		-			-		-
Segment income (loss) before income taxes		(1,615,948	)		104,650		(1,511,298	)
Total assets		1,523,276			78,346		1,601,622

For the six months ended June 30, 2012		Manufacturing			Servicing		Total
Sales to external customers	$	1,245,091		$	522,998	$	1,768,089
Depreciation and amortization		2,322			10,446		12,768
Interest expense, net		760			-		760
Segment income (loss) before income taxes		(1,658,811	)		115,628		(1,543,183	)
Total assets		1,518,281			57,454		1,575,735

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Six months ended June 30, 2012

9. Segment information (cont’d)

For the six months ended June 30, 2011		Manufacturing			Servicing		Total
Sales to external customers	$	1,198,827		$	562,501	$	1,761,328
Depreciation and amortization		2,957			10,446		13,403
Interest expense, net		-			-		-
Segment income (loss) before income taxes		(2,793,836	)		175,126		(2,618,710	)
Total assets		1,523,276			78,346		1,601,622

As at December 31, 2011		Manufacturing		Servicing		Total
Total assets	$	1,122,036	$	67,900	$	1,189,936

(b)	Of the total revenues for the six months ended June 30, 2012, $208,714 (2011 - $229,757) was derived from U.S.-based customers and $1,559,375 (2011 - $1,531,571) from Canadian-based customers.
	Substantially all of the Company's operations, assets and employees are located in Canada.
(c)	Major customers:
	No customer represented more than 10% of total revenues in either six months ended June 30, 2012 or 2011.
(d)	Products and services:
	Enterphone 2000 sales represented 11.2% of total revenue during the six months ended June 30, 2012 (2011 – 9.5%). MESH sales represented 55.1% of total revenue during the six months ended June 30, 2012 (2011 – 53.1%). 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 and servicing of intercom equipment.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Results of Operations

Sales for the three months ended June 30, 2012 and 2011 were $901,088 and $900,131, respectively, an increase of $957 or 0.1% . Sales for the six months ended June 30, 2012 and 2011 were $1,768,089 and $1,761,328, respectively, an increase of $6,761 or 0.4% . These two comparative periods were consistent. MESH sales, which also include MESH EPX and MESH Freedom, for the three months ended June 30, 2012 and 2011 were $518,795 and $507,362, respectively, an increase of $11,433 or 2.3% . MESH sales for the six months ended June 30, 2012 and 2011 were $974,769 and $934,541, respectively, an increase of $40,228 or 4.3% These two comparative periods were consistent. 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, 2012 and 2011 were $79,878 and $83,921, respectively, a decrease of $4,043 or 4.8% . Enterphone 2000 sales for the six months ended June 30, 2012 and 2011 were $198,855 and $167,995, respectively, an increase of $30,860 or 18.4% . 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 started selling MESH Freedom, the new IT platform, developed and released during the last quarter of 2010. The MESH Freedom 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, 2012 and 2011, MESH sales were 55.1% and 53.1%, 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 1,386 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, 2012 and 2011, customer service contracts and new equipment sales generated aggregate sales revenues of $522,998 and $562,501, respectively, a decrease of $39,503 or 7.0% . These two comparative periods were consistent.

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 1,386 at June 30, 2012, as compared to 1,428 at December 31, 2011 and 1,444 at June 30, 2011. During the first two quarters of 2012, 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, 2012, the cost of the service agreements, net of accumulated amortization, was $57,454.

Cost of sales and services as a percentage of sales was 39.4% and 39.7% for the three months ended June 30, 2012 and 2011, respectively. Cost of sales as a percentage of sales was 39.8% and 43.8% for the six months ended June 30, 2012 and 2011. Cost of sales has decreased as a result of the using 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 June 30, 2012 and 2011 was $545,948 and $542,965, respectively, an increase of $2,983 or 0.5% . Gross profit for the six months ended June 30, 2012 and 2011 was $1,064,538 and 989,218, respectively, an increase of $75,320 or 7.6% . This increase corresponds with consistent sales and the declining cost of sales for the three and six months ended months ended June 30, 2012 mentioned above.

Selling, general and administrative expenses for the three months ended June 30, 2012 and 2011 were $988,818 and $1,030,478, respectively, a decrease of $41,660 or 4.0% . Selling, general and administrative expenses for the six months ended June 30, 2012 and 2011 were $1,708,319 and $1,793,396, respectively, a decrease of $85,077 or 4.7% . These two comparative periods were consistent. For the six months ended June 30, 2012 and 2011, selling, general and administrative expenses, as a percentage of sales, were 96.6% and 101.8%, respectively. The six month period ending June 30, 2012 saw management controlling costs in advertising, travel, tradeshow, consulting fees, and various office expenses.

Research and development costs for the three months ended June 30, 2012 and 2011 were $69,601 and $121,804, respectively, a decrease of $52,203 or 42.9% . Research and development costs for the six months ended June 30, 2012 and 2011 were $142,600 and $259,858, respectively, a decrease of $117,258 or 45.1% . Engineering expenses were reduced due to the completion of the MESH Freedom hardware.

Net loss for the three month period ended June 30, 2012 was $1,374,892, as compared to a net loss of $1,511,298 for the three month period ended June 30, 2011, a decreased loss of $136,406. Net loss for the six month period ended June 30, 2012 was $1,543,183, as compared to a net loss of $2,618,710 for the six month period ended June 30, 2011, a decreased loss of $1,075,527. During the first two quarters of 2012, expenses were controlled to maintain cash flow and to minimize the net loss. The loss during 2011 was due to increased advertising, travel, tradeshow, consulting fees, and various office expenses. The loss in 2011 was increased $645,964 as a result of a fair value adjustment of certain outstanding warrants that are accounted for as a derivative financial instrument. The loss in 2012 was increased by $743,286 as a result of a fair value adjustment of certain warrants that are accounted for as a derivative financial instrument. The fair value adjustment has no cash flow impact.

Liquidity and Capital Resources

Cash as of June 30, 2012, as compared to December 31, 2011 was $572,491 and $169,322, respectively, an increase of $403,169.

On June 7, 2012, Viscount Systems, Inc. completed a sale of 1,000 shares of Series A Convertible Redeemable Preferred Stock, par value US$0.001 per share, at a purchase price of US$1,000 and a stated value of US$1,000 per A Share, and for no additional consideration, an issuance of 12,285,012 share purchase warrants of the Company for gross proceeds of US$1,000,000. Each Warrant is exercisable to acquire a common share of the Company at a price of US$0.08 per share for a period of 5 years from the closing date. The Warrants may be exercised on a cashless basis. The A Shares are convertible, at the option of the holders, into 24,570,024 shares of common stock of the Company at a conversion price of US$0.0407 per share, subject to adjustment provisions.

In connection with the offering, the Company paid to a registered broker-dealer a cash commission of US$100,000 and issued share purchase warrants to acquire 2,457,002 shares of common stock of the Company. Each Agent Warrant is exercisable to acquire one common share of the Company at a price of US$0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.

At December 30, 2011 the Company’s credit facility of which the lesser of $500,000 or 75% of accounts receivable less than 90 days at the prime lending rate plus 1.75% could have been drawn was suspended due to the bank’s assessment of the Company’s financial position. At June 30, 2012 and December 31, 2011, $nil was drawn on this facility.

At June 30, 2012, the Company had a working capital of $506,375, as compared to working capital of $133,449 at December 31, 2011. Working capital had increased by $372,926. The current ratio at June 30, 2012 was 1.51, as compared with 1.14 at December 31, 2011.

The Company has the ability to finance operations and future growth through a stock-based equity injection of up to $2 million. However, the state of the global financial markets and recession fears present significant uncertainties for the timing and successful completion of an equity investment.

The Company’s financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has an accumulated deficit of $7,312,210, reported a loss for the six months ended June 30, 2012 of $1,543,183. Cash flows used in operating activities for the six months June 30, 2012 were $635,802. Although management is confident that the company can access, sufficient working capital to maintain operations and ultimately generate positive cash flow from operations, the ability to sustain the current level of operations is dependent upon growing sales and achieving profits. Management continues seeking new investors and developing customer relationships. These factors raise substantial doubt about the ability of the Company to continue operations as a going concern.

The accounts receivable turnover ratio at June 30, 2012 was 50 days, as compared 51 days at December 31, 2011 and 55 days at June 30, 2011. The accounts receivable reserve was $107,251 at June 30, 2012, as compared to $133,389 at December 31, 2011. The accounts receivable reserve has decreased by $26,138 or 19.6%, since the year ended December 31, 2011. 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.

The Company is subject to significant liquidity risk. At June 30, 2012, the Company’s current assets consist principally of trade accounts receivables and inventory. The Company must liquidate inventories and rapidly increase collection periods on its receivables to ensure that sufficient cash is available to settle payables and operating costs as they come due.

For the six months ended June 30, 2012, 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 lines. 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, 2012.

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

Related Party Transactions

During the quarter ended March 31, 2012, the Company received a $45,000 loan from a shareholder. It was paid back this second quarter ended June 30, 2012.

Critical Accounting estimates and judgements:

The Company’s discussion and analysis of its financial condition and results of operations, including the discussion on liquidity and capital resources, are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management re-evaluates its estimates and judgments, particularly those related to the determination of the allowance for doubtful accounts, inventory obsolescence, the provision for future warranty costs, the estimated useful lives of equipment and intangible assets, the deferred tax valuation allowance, and assumptions used to determine the fair value of stock-based compensation. Details are provided for critical estimates are as follows:

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

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

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

The Company maintains an allowance for inventory obsolescence. Management reviews the inventory on a quarterly basis by directly testing obsolete inventory.

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

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

Recently Issued Accounting Standards

Recent accounting pronouncements

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

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, 2012. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of June 30, 2012, 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 2. Unregistered Sale of Equity Securities and Use of Proceeds

On January 6, 2012, the Company issued 260,000 common shares at a deemed price of $0.05 per share in consideration for consulting services provided to the Company. The securities were issued in reliance on the exemption from registration available to an accredited investor under Rule 506 of Regulation D under the United States Securities Act of 1933.

Item 6. Exhibits

31.1	Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the U.S. Securities Exchange Act of 1934
32.1	Section 1350 Certification of the Principal Executive Officer and Principal Financial Officer

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.

Date: August 14, 2012	VISCOUNT SYSTEMS, INC.
	(Registrant)
	By:	/s/ Stephen Pineau
		Stephen Pineau, President Principal Executive Officer and Principal Financial Officer