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

Form 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from _________to __________________

Commission File Number: 000-49746

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

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

(604) 327-9446
Registrant’s telephone number

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

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

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

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

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of March 31, 2010 the registrant’s outstanding common stock consisted of 17,841,250 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 March 31, 2010, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$1.0158 for USD$1.0000 or CAD$1.0000 for USD$0.9844.

Item 1. Financial Statements

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VISCOUNT SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)

MARCH 31, 2010

See accompanying notes to interim consolidated financial statements.

See accompanying notes to interim consolidated financial statements.

See accompanying notes to interim consolidated financial statements.

See accompanying notes to interim consolidated financial statements.

In April 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance for estimating the fair value of assets and liabilities when the volume and level of activity associated with those assets and liabilities has decreased significantly. The guidance also requires the disclosure of the inputs and valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. The adoption had no material impact on the Company's financial position, results of operations or cash flows.

In May 2009, the FASB issued guidance that establishes general standards of accounting for and disclosure of events that occur subsequent to the balance sheet date but before financial statements are issued. The statement defines two types of subsequent events (1) recognized subsequent events, which provide additional evidence about conditions that existed at the balance sheet date, and (2) non-recognized subsequent events, which provide evidence about conditions that did not exist at the balance sheet date, but arose before the financial statements were issued. Recognized subsequent events are required to be recognized in the financial statements, and non-recognized subsequent events are required to be disclosed. The guidance requires entities to disclose the date through which subsequent events have been evaluated and the basis for the date. The adoption had no material impact on the Company's financial position, results of operations or cash flows.

In June 2009, the FASB issued “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 168”. Upon its adoption, the FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. Following this, the FASB will not issue new accounting standards in the form of FASB Statements, FASB Staff Positions, or Emerging Issues Task Force abstracts. This will also modify the existing hierarchy of GAAP to include only two levels — authoritative and non-authoritative. This is effective for financial statements issued for interim and annual periods ending after September 15, 2009, and early adoption is not permitted. The adoption of this standard did not have a material impact on its financial position, results of operations or cash flows.

In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective beginning July 1, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The Company believes the adoption of this new guidance will not have a material impact on the financial statements.

In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which is effective beginning July 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. The Company believes adoption of this new guidance will not have a material impact on the financial statements.

On May 16, 2003, the Company consummated an agreement for the purchase of certain assets of Telus Corporation (“Telus”) comprised primarily of service agreements for a product sold by Telus known as “Enterphone 2000”. At December 31, 2003, the Company had acquired 2,215 service agreements for which it paid a total of $208,921. At March 31, 2010, the Company held 1,559 service agreements (December 31, 2009 – 1,577) at a cost, net of accumulated amortization of $104,460 (December 31, 2009 - $99,237), of $104,461 (December 31, 2009 - $109,684). The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows:

A summary of the stock options outstanding and exercisable at March 31, 2010 is as follows:

A summary of the warrants outstanding and exercisable at March 31, 2010 is as follows:

Rent expense included in the statements of operations for the three months ended March 31, 2010 is $33,668 (2009 - $32,765).

Item 2. Management Discussion and Analysis or Plan of Operation

Results of Operations

Sales for the three months ended March 31, 2010 and 2009 were $1,011,189 and $1,070,644, respectively, a decrease of $59,455 or 5.5% . This decrease was due to decreased Enterphone sales. MESH sales for the three months ended March 31, 2010 and 2009 were $619,420 and $605,138, respectively, an increase of $14,282 or 2.4% . MESH is a convergent technology developed by Viscount that increases security at a reduced cost of hardware, cabling and installation, and with simplified database management. Enterphone 2000 sales for the three months ended March 31, 2010 and 2009 were $65,639 and $103,978, respectively, a decrease of $38,339 or 36.9% . As an older technology, Enterphone sales have been dropping for several years and negating much of our MESH growth. 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. With MESH EPX, we can anticipate recovering our lost Enterphone revenue while continuing to increase our MESH business.

Management believes that sales of the MESH product will continue to represent an increasing proportion of total sales relative to sales of our Enterphone products. For the three months ended March 31, 2010 and 2009, MESH sales were 61.3% and 56.5%, 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 1,559 existing service contracts continue to be steady. On average, each service contract represents ongoing revenues of approximately $38 per month, inclusive of parts and labor. Typical customers include strata management and building owners as well as various residential, business and industrial users of Enterphone access control and security systems. During the three months ended March 31, 2010 and 2009, customer service contracts and new equipment sales generated aggregate sales revenues of $347,014 and $374,726, respectively, a decrease of $27,712 or 7.4% . These sales included MESH sales by the service division.

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 1,559 at March 31, 2010, as compared to 1,577 and 1,615 at December 31, 2009 and March 31, 2009, respectively. During the first quarter of 2010, the Company performed a test for impairment and evaluated the status of service agreements. Management determined that no charge for impairment was required but the continuing reduction in the number of service contracts held, indicated that the intangible asset should be deemed to have a definitive life. Accordingly, the Company continued to amortize the cost of the service agreements on a straight-line basis over an estimated useful life of 10 years, which became effective as of April 1, 2005. At March 31, 2010, the cost of the service agreements, net of accumulated amortization, was $104,461.

Cost of sales and services as a percentage of sales was 35.5% and 47.1% for the three months ended March 31, 2010 and 2009, respectively. Cost of sales has decreased considerably during these two comparative periods due to a combination of decreases in the overall costs for many MESH component parts and management’s continued 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 March 31, 2010 and 2009 was $651,812 and $566,436, respectively, an increase of $85,376 or 15.1% . This increase in gross profit corresponds with consistent sales and decreased cost of sales for the three months ended March 31, 2010.

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Selling, general and administrative expenses for the three months ended March 31, 2010 and 2009 were $534,062 and $522,985, respectively, an increase of $11,077 or 2.1% . These two comparative periods were consistent. For the three months ended March 31, 2010 and 2009, selling, general and administrative expenses, as a percentage of sales, were 52.8% and 48.8%, respectively.

Research and development costs for the three months ended March 31, 2010 and 2009 were $43,570 and $43,237, respectively. These two comparative periods were consistent.

Income before income tax for the quarter ended March 31, 2010 was $66,205, as compared to loss before income tax of $(20,153) for the quarter ended March 31, 2009. This equates to an increase in quarter over quarter income of $86,358. The increase in profitability is the result of reductions in staffing costs, advertising, travel, tradeshow, various office expenses and the aforementioned reductions in input prices.

Liquidity and Capital Resources

Cash as of March 31, 2010, as compared to December 31, 2009 was $127,798 and $124,378, respectively. Cash as of March 31, 2009 was $266,561. We have a bank credit facility available for an operating loan of up to a maximum of $500,000 at the prime lending rate plus 1.75% . Amounts drawn are repayable on demand. At March 31, 2010, $140,105 was drawn on this facility. The facility is secured by substantially all of our assets under a general security agreement.

At March 31, 2010, working capital was $852,243, as compared to a working capital of $778,879 at December 31, 2009. Working capital has increased by $73,366. The current ratio at March 31, 2010 was 1.79 to 1.0, as compared with 1.67 to 1.0 at December 31, 2009.

The accounts receivable turnover ratio at March 31, 2010 was 91 days, as compared 61 days at December 31, 2009 and 42 days at March 31, 2009. The increase at March 31, 2010 and December 31, 2009 is caused in its entirety by one large accounts receivable from a large customer. Ignoring this receivable, the turnover ratio at March 31, 2010 would have been 51 days, which is more consistent with the 42 days at March 31, 2009. This consistency was due to consistent follow up and monitoring of slower paying accounts on a monthly basis by management. The accounts receivable reserve was $343,951 at March 31, 2010, as compared to $337,475 at December 31, 2009. The accounts receivable reserve has increased by $6,476 or 1.9%, since the year ended December 31, 2009. Management continues to follow-up on customer accounts to improve cash flow and to minimize bad debts. There had been no significant or material business conditions that would warrant further increases to the reserve at this time.

For the three months ended March 31, 2010, there were no capital expenditures.

To date, we have not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk. We expect that in the future, any excess cash will continue to be invested in high credit quality, interest-bearing securities.

We will likely require additional funds to support the development and marketing of our new MESH product. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be unable to develop or enhance our products, take advantage of future opportunities, respond to competitive pressures, and may have to curtail operations.

There are no legal or practical restrictions on the ability to transfer funds between parent and subsidiary companies.

We do not have any material commitments for capital expenditures as of March 31, 2010.

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

Related Party Transactions

None.

Recently Issued Accounting Standards

There were no new accounting standards issued during this period ended March 31, 2009.

Item 4(T). 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 March 31, 2010. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of March 31, 2010, 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

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SIGNATURES

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

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