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, 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 September 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 September 30, 2012, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$0.9832 for USD$1.0000 or CAD$1.0000 for USD$1.0171.

Item 1. Financial Statements

VISCOUNT SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)

SEPTEMBER 30, 2012

VISCOUNT SYSTEMS, INC.

Interim Condensed Consolidated Balance Sheets

(Expressed in Canadian dollars)

		September 30,			December 31,
		2012			2011
		(Unaudited)
Assets
Current assets
Cash	$	107,653		$	169,322
Trade accounts receivable, less allowance for doubtful accounts of $115,445 (2011 - $133,389)		517,141			397,813
Inventory (note 2)		381,260			523,943
Total current assets		1,006,054			1,091,078
Deposits		1,391			1,391
Equipment (note 3)		26,171			29,567
Intangible assets		52,231			67,900
Total assets	$	1,085,847		$	1,189,936
		.
Liablilities and stockholders' deficit
Current liabilities
Accounts payable	$	159,661		$	153,642
Accrued liabilities		506,097			567,271
Deferred revenue		34,475			49,545
Due to related parties (note 4)		160,902			187,171
Total current liabilities		861,135			957,629
Derivative financial liabilities (note 5)		2,579,850			390,824
		3,440,985			1,348,453
Stockholders' 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		(8,092,504	)		(5,769,027	)
Total stockholders' deficit		(2,355,138	)		(158,517	)
Total liabilities and stockholders' deficit	$	1,085,847		$	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)

		Three months ended						Nine months ended
		September 30						September 30
		2012			2011			2012			2011
Sales	$	858,128		$	903,477		$	2,626,217		$	2,664,805
Cost of sales		330,947			312,232		$	1,034,498			1,084,342
Gross profit		527,181			591,245			1,591,719			1,580,463
Expenses
Selling, general and administrative		768,565			763,396			2,476,884			2,556,793
Research and development		120,085			105,484			262,685			365,342
Depreciation and amortization		6,297			6,590			19,065			19,993
		894,947			875,470			2,758,634			2,942,128
Loss before other items		(367,766	)		(284,225	)		(1,166,915	)		(1,361,665	)
Other items
Interest income		12			17			24			42
Interest expense		-			(1	)		(760	)		(1	)
Initial loss on recognition of derivative instruments (note 5)		-			-			(858,391	)		-
Fair value adjustment of derivative liability (note 5)		(412,540	)		(41,643	)		(297,435	)		(1,582,939	)
		(412,528	)		(41,627	)		(1,156,562	)		(1,582,898	)
Net loss and comprehensive loss		(780,294	)		(325,852	)		(2,323,477	)		(2,944,563	)
Basic and diluted loss per common share	$	(0.01	)	$	(0.00	)	$	(0.03	)	$	(0.04	)
Weighted average number of common shares outstanding, Basic and diluted		76,733,750			76,473,750			76,728,988			74,018,051

See accompanying notes to interim condensed consolidated financial statements.

VISCOUNT SYSTEMS, INC.

Interim Consolidated Statement of Stockholders' 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	-		-	-		-		-		-			-			(2,323,477	)		(2,323,477	)
Balance, September 30, 2012	76,733,750	$	99,512	1,000	$	1	$	5,637,853	$	-		$	-		$	(8,092,504	)	$	(2,355,138	)

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 nine months ended
		September 30,			September 30,
		2012			2011
Operating activities:
Net loss	$	(2,323,477	)	$	(2,944,563	)
Items not involving cash:
Depreciation and amortization		19,065			19,993
Initial loss on recognition of derivative instruments		858,391			-
Fair value adjustment of derivative liability		297,435			1,582,939
Selling, general and administrative expenses paid by stock options and warrants		126,855			363,000
Changes in non-cash working capital balances (note 7)		(46,869	)		(132,305	)
Net cash used in operating activities		(1,068,600	)		(1,110,936	)
Financing activities:
Proceeds from private placement		1,033,200			487,522
Repayment of related party indebtedness		(26,269	)		-
Net cash provided by (used in) financing activities		1,006,931			487,522
Decrease in cash		(61,669	)		(623,414	)
Cash, beginning of period		169,322			820,344
Cash, end of period	$	107,653		$	196,930
Supplementary information:
Interest paid	$	760		$	1
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)

Nine months ended September 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 September 30, 2012 and for the three month and nine month periods ended September 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.

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 $8,092,504, reported a loss for the three month period ended September 30, 2012 of $780,294 and has positive working capital of $144,919 as at September 30, 2012. Cash flows used in operating activities for the nine months ended September 30, 2012 were $1,068,600. 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)

Nine months ended September 30, 2012

2. Inventory

		September 30,		December 31,
		2012		2011
Raw materials	$	144,071	$	297,741
Work in process		26,065		2,679
Finished goods		211,124		223,523
	$	381,260	$	523,943

3. Equipment

				Accumulated		Net book
September 30, 2012		Cost		depreciation		value
Computer equipment	$	110,838	$	99,306	$	11,532
Office furniture and equipment		77,269		62,791		14,478
Leasehold improvements		46,814		46,653		161
	$	234,921	$	208,750	$	26,171

				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)

Nine months ended September 30, 2012

4.	Due to related parties
	Amounts due to related parties in the amount of $160,902 for outstanding loans (December 31, 2011 - $187,171) 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 nine months ended September 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 September 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		64,984			232,451		297,435
Balance, September 30, 2012	$	1,159,626		$	1,420,224	$	2,579,850

During the nine months ended September 30, 2012, the Company recognized a charge to operations of $297,435 (2011 – $1,582,939) being the change in the fair value of the derivative liability warrants and conversion option during the period.

During the nine months ended September 30, 2012, the Company recognized an initial loss on recognition of $858,391 (2011 - $nil) being the difference in fair value of the derivative liability warrants and conversion option and the cash proceeds received from the 1,000 Series A redeemable convertible preferred shares issued.

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 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:

	September 30,	December 31,
	2012	2011
Volatility	180%	180%
Dividend yield	-	-
Risk-free interest rate	3.50% - 5.80%	0.20% - 5.95%
Expected life	3.19 – 4.69 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)

Nine months ended September 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 US Securities and Exchange Commission (“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. At December 31, 2011 an obligation to issue shares was recorded in the amount of $20,800.
	Stock Options:
	A summary of the stock option activity during the nine months ended September 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	1,432,500	US$0.11
Outstanding at September 30, 2012	8,315,625	US$0.05

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2012

6.	Capital Stock (cont’d) Stock Options:
	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 $126,855 (2011 - $292,424), being the estimated fair value of the vesting options recognized over the service period. The fair value was determined using the Black-Scholes 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 September 30, 2012, 450,000 of the options granted on April 11, 2011 had been cancelled.
	A summary of the stock options outstanding and exercisable at September 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	1.36 years	US$ 0.040	US$ 124,125
0.080	1,875,000	3.53 years	0.080	-
0.060	33,750	3.23 years	0.060	-
0.150	22,500	3.23 years	0.150	-
0.183	15,000	3.23 years	0.183	-
0.200	7,500	3.23 years	0.200	-
0.217	155,625	0.96 years	0.217	-
	8,315,625	1.86 years	US$ 0.050	US$ 124,125

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of US$0.06 per share as of September 30, 2012, 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, 2012 was 6,206,250.

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2012

6.	Capital Stock (cont’d) Warrants:
	A summary of warrant activity during the nine months ended September 30, 2012 is as follows:

	Number of warrants			Weighted average
				Exercise price
Outstanding at December 31, 2011	37,482,650		$	0.08
Issued as part of private placement	12,285,012			0.08
Issued as agent purchase warrants	2,457,002			0.05
Expired	(5,032,650	)		0.08
Outstanding at September 30, 2012	47,192,014			0.08

On June 22, 2011, the Company issued 2,500,000 warrants to a consultant in connection with a professional services agreement. 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 nine month period ended September 30, 2012, the Company recorded stock-based compensation expense of $126,855.

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

		Weighted Average
Weighted Average		Remaining Contractual
Exercise Price	Number	Life
US$ 0.080	2,749,998	3.19 years
$ 0.080	9,250,002	3.19 years
US$ 0.080	10,950,000	3.43 years
$ 0.080	6,000,000	3.23 years
$ 0.150	2,500,000	1.69 years
$ 0.100	1,000,000	2.18 years
US$ 0.080	12,285,012	4.69 years
US$ 0.050	2,457,002	4.69 years
$ 0.083	47,192,014	3.62 years

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2012

7. Changes in non-cash working capital balances

		Nine months ended
		September 30,
		2012			2011
Trade accounts receivable	$	(119,328	)	$	73,566
Inventory		142,683			(22,752	)
Accounts payable		6,019			(57,886	)
Accrued liabilities		(61,173	)		(119,315	)
Deferred revenue		(15,070	)		(5,917	)
	$	(46,869	)	$	(132,304	)

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 2015 as follows:

Year or period ending December 31:	$
2012	139,804
2013	151,314
2014	21,474
2015	8,365

Rent expense included in the statements of operations for the three months ended September 30, 2012 is $35,186 (2011 - $34,583) and for the nine months ended September 30, 2012 is $104,553 (2011 - $102,999).

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 6). 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.

On June 15, 2012, the Company entered into a six month consulting agreement with a consultant for business development and strategic initiatives. As consideration, the Company will compensate the consultant $12,500 per month.

On August 10, 2012, the Company entered into a one year consulting agreement with a consultant for business development and strategic initiatives. As consideration, the Company will compensate the consultant US$7,500 per month.

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 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 September 30, 2012		Manufacturing			Servicing		Total
Sales to external customers	$	588,324		$	269,804	$	858,128
Depreciation and amortization		1,074			5,223		6,297
Interest expense, net		-			-		-
Segment income (loss) before income taxes		(438,321	)		70,555		(367,766	)
Total assets		1,033,616			52,231		1,085,847

For the three months ended September 30, 2011		Manufacturing			Servicing		Total
Sales to external customers	$	632,830		$	270,647	$	903,477
Depreciation and amortization		1,367			5,223		6,590
Interest expense, net		1			-		1
Segment income (loss) before other items		(372,159	)		87,934		(284,225	)
Total assets		1,283,460			73,123		1,356,583

For the nine months ended September 30, 2012		Manufacturing			Servicing		Total
Sales to external customers	$	1,833,415		$	792,802	$	2,626,217
Depreciation and amortization		3,396			15,669		19,065
Interest expense, net		760			-		760
Segment income (loss) before income taxes		(1,353,098	)		186,183		(1,166,915	)
Total assets		1,033,616			52,231		1,085,847

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2012

9. Segment information (cont’d)

For the nine months ended September 30, 2011		Manufacturing			Servicing		Total
Sales to external customers	$	1,831,657		$	833,148	$	2,664,805
Depreciation and amortization		4,324			15,669		19,993
Interest expense, net		1			-		1
Segment income (loss) before other items		(1,585,532	)		223,867		(1,361,665	)
Total assets		1,283,458			73,125		1,356,583

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 nine months ended September 30, 2012, $287,896 (2011 - $327,595) was derived from U.S.-based customers and $2,338,321 (2011 - $2,337,210) 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 nine month period ended September 30, 2012 or 2011.
(d)	Products and services:
	Enterphone 2000 sales represented 10.8% of total revenue during the nine months ended September 30, 2012 (2011 – 11.0%). MESH sales represented 53.7% of total revenue during the nine months ended September 30, 2012 (2011 – 52.0%). 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.

VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2012

10.	Subsequent Events
	(a)	On October 17, 2012, the Company issued 5.777 Series A Shares to the Series A holders as dividend payments for the June 2012 dividend payment.
	(b)	On October 17, 2012, the Company issued 20.34 Series A Shares to the Series A holders as dividend payments for the September 2012 dividend payment.
	(c)	On October 19, 2012, the Company completed the sale of 100 shares of Series A Convertible Redeemable preferred Stock, par value US$0.001 per share and stated value of US$1,000 per share, for gross proceeds of US$100,000. In connection with the Series A share issuance, the Company also issued to the shareholders 1,000,000 shares purchase warrants, each exercisable into one common share at US$0.08 per share for a period of 5 years. The company accrued a cash commission of US$10,000 and issued 200,000 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.

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

Results of Operations

Sales for the three months ended September 30, 2012 and 2011 were $858,128 and $903,477, respectively, a decrease of $45,349 or 5.0%. Sales for the nine months ended September 30, 2012 and 2011 were $2,626,217 and $2,664,805, respectively, a decrease of $38,588 or 1.4%. These two comparative periods were consistent. MESH sales, which also include MESH EPX and MESH Freedom, for the three months ended September 30, 2012 and 2011 were $434,344 and $451,195, respectively, a decrease of $16,851 or 3.7%. MESH sales for the nine months ended September 30, 2012 and 2011 were $1,409,113 and $1,385,736, respectively, an increase of $23,377 or 1.7%. 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 September 30, 2012 and 2011 were $85,634 and $126,442, respectively, a decrease of $40,808 or 32.3%. Enterphone 2000 sales for the nine months ended September 30, 2012 and 2011 were $284,489 and $294,437, respectively, a decrease of $9,948 or 3.4%. 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 nine months ended September 30, 2012 and 2011, MESH sales were 53.7% and 52.0%, 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 1,380 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, 2012 and 2011, customer service contracts and new equipment sales generated aggregate sales revenues of $792,802 and $833,148, respectively, a decrease of $40,346 or 4.8%. 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 1,380 at September 30, 2012, as compared to 1,428 at December 31, 2011 and 1,434 at September 30, 2011. During the three 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 September 30, 2012, the cost of the service agreements, net of accumulated amortization, was $52,231.

Cost of sales and services as a percentage of sales was 38.6% and 34.6% for the three months ended September 30, 2012 and 2011, respectively. Cost of sales as a percentage of sales was 39.4% and 40.7% for the nine months ended September 30, 2012 and 2011. Cost of sales has remained consistent as we continue to use 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, 2012 and 2011 was $527,181 and $591,245, respectively, a decrease of $64,064 or 10.8%. Gross profit for the nine months ended September 30, 2012 and 2011 was $1,591,719 and $1,580,463, respectively, an increase of $11,256 or 0.7%. This corresponds with consistent sales and the declining cost of sales for the three and nine months ended months ended September 30, 2012 mentioned above.

Selling, general and administrative expenses for the three months ended September 30, 2012 and 2011 were $768,565 and $763,396, respectively, an increase of $5,169 or 0.7%. Selling, general and administrative expenses for the nine months ended September 30, 2012 and 2011 were $2,476,884 and $2,556,793, respectively, a decrease of $79,909 or 3.1%. For the nine months ended September 30, 2012 and 2011, selling, general and administrative expenses, as a percentage of sales, were 94.3% and 95.9%, respectively. Consulting fees for the nine months ended September 30, 2012 and 2011 were $571,500 and $254,391, respectively, an increase of $317,109. Consulting fees, in part, increased due to paying a consultant US$103,000 to raise the US$1,000,000 on June 7, 2012. Other increases were related to Board of Directors fees and the addition of consultants to provide strategic advice and alliances for key markets including the US Federal Government for Freedom projects.

Research and development costs for the three months ended September 30, 2012 and 2011 were $120,085 and $105,484, respectively, an increase of $14,601 or 13.8%. Research and development costs for the nine months ended September 30, 2012 and 2011 were $262,685 and $365,342, respectively, a decrease of $102,657 or 28.1%. Engineering expenses were reduced due to the completion of the MESH Freedom hardware.

Net loss for the three month period ended September 30, 2012 was $780,294, as compared to a net loss of $325,852 for the three month period ended September 30, 2011, an increased loss of $454,442. Net loss for the nine month period ended September 30, 2012 was $2,323,477, as compared to a net loss of $2,944,563 for the nine month period ended September 30, 2011, a decreased loss of $621,086. During the first three 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, and various office expenses. The loss in 2011 was increased by $1,582,939 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 $1,155,826 as a result of an initial loss on recognition of a derivative financial instrument and 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 September 30, 2012, as compared to December 31, 2011 was $107,653 and $169,322, respectively, a decrease of $61,669.

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 September 30, 2012 and December 31, 2011, $nil was drawn on this facility.

At September 30, 2012, the Company had a working capital of $144,919, as compared to working capital of $133,449 at December 31, 2011. Working capital had increased by $11,470. The current ratio at September 30, 2012 was 1.17, 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 $8,092,504, reported a loss for the nine months ended September 30, 2012 of $2,323,477. Cash flows used in operating activities for the nine months September 30, 2012 were $1,068,600. 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 was 51 days at September 30, 2012, December 31, 2011 and September 30, 2011. The accounts receivable reserve was $115,445 at September 30, 2012, as compared to $133,389 at December 31, 2011. The accounts receivable reserve has decreased by $17,944 or 13.5%, 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 September 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 nine months ended September 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 September 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 September 30, 2012. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of September 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 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: November 7, 2012		VISCOUNT SYSTEMS, INC.
		(Registrant)
	By:	/s/ Stephen Pineau
		Stephen Pineau, President
		Principal Executive Officer
		and Principal Financial Officer