VSYS Viscount Systems Inc (CE)

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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, 2008

[ ] 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 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, 2008 the registrant’s outstanding common stock consisted of 17,841,250 shares.

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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, 2008, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$1.0642 for USD$1.0000 or CAD$1.0000 for USD$0.9397.

Item 1. Financial Statements

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VISCOUNT SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)

SEPTEMBER 30, 2008

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VISCOUNT SYSTEMS, INC.

Interim Condensed Consolidated Balance Sheets

(Expressed in Canadian dollars)

		September 30			December 31,
		2008			2007
		(Unaudited)			(Audited)
Assets
Current assets
Cash	$	124,773		$	111,173
Trade accounts receivable, less allowance for doubtful accounts
of $262,148 (2007 - $223,390)		894,850			619,287
Inventory (note 2)		487,911			756,234
Prepaid expenses		6,028			6,028
Lease receivable		1,093			1,037
Total current assets		1,514,655			1,493,759
Lease receivable		104			931
Equipment (note 3)		67,794			76,344
Intangible assets (note 4)		135,799			151,468
Total assets	$	1,718,352		$	1,722,502
Liablilities and stockholders' equity
Current liabilities
Bank indebtedness (note 5)	$	285,592		$	263,951
Accounts payable and accrued liabilities		501,776			490,585
Deferred revenue		22,191			27,087
Due to stockholders (note 6)		392,402			292,402
Notes payable (note 7)		70,000			70,000
Total current liabilities		1,271,961			1,144,025
Commitments and contingencies (note 10)
Stockholders' equity
Capital stock (note 8)
Authorized:
100,000,000 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:
17,841,250 common shares (2007 - 17,841,250)		25,434			25,434
Additional paid-in capital		2,353,030			2,353,030
Accumulated deficit		(1,932,073	)		(1,799,987	)
Total stockholders' equity		446,391			578,477
Total liabilities and stockholders' equity	$	1,718,352		$	1,722,502

See accompanying notes to interim condensed consolidated financial statements.

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VISCOUNT SYSTEMS, INC.

Interim Condensed Consolidated Statements of Operations

(Unaudited)

(Expressed in Canadian dollars)

		Three months ended			Nine months ended
		September 30						September 30
		2008			2007			2008			2007
Sales	$	1,299,280		$	1,295,136		$	3,942,767		$	3,961,057
Cost of sales and services		597,637			611,274			1,686,780			1,720,030
Gross profit		701,643			683,862			2,255,987			2,241,027
Expenses
Selling, general and administrative		626,196			849,396			2,067,797			2,206,414
Research and development		78,994			73,284			251,811			233,112
Depreciation and amortization		7,925			8,567			24,219			26,266
		713,115			931,247			2,343,827			2,465,792
Loss before other items		(11,472	)		(247,385	)		(87,840	)		(224,765	)
Other items
Interest income		99			1,392			892			3,334
Interest expense		(17,935	)		(10,792	)		(45,138	)		(40,698	)
		(17,836	)		(9,400	)		(44,246	)		(37,364	)
Loss before income taxes		(29,308	)		(256,785	)		(132,086	)		(262,129	)
Provision for income taxes		-			-			-			-
Net loss	$	(29,308	)	$	(256,785	)	$	(132,086	)	$	(262,129	)
Basic and diluted net loss per common share	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.02	)
Weighted average number of common shares outstanding,
Basic and diluted		17,841,250			17,772,637			17,841,250			17,114,981

See accompanying notes to interim condensed consolidated financial statements.

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VISCOUNT SYSTEMS, INC.

Interim Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

(Expressed in Canadian dollars)

							Additional
	Common Stock			paid-in
	Shares			Amount			capital			Accumulated deficit			Total
Balance, December 31, 2007	17,841,250		$	25,434		$	2,353,030		$	(1,799,987	)	$	578,477
Net loss	-			-			-			(132,086	)		(132,086	)
Balance, September 30, 2008	17,841,250		$	25,434		$	2,353,030		$	(1,932,073	)	$	446,391

See accompanying notes to interim condensed consolidated financial statements.

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VISCOUNT SYSTEMS, INC.

Interim Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30

		2008			2007
Operating activities:
Net loss	$	(132,086	)	$	(262,129	)
Items not involving cash:
Depreciation and amortization		24,219			26,266
Selling, general and administrative expenses paid by stock options		-			73,778
Changes in non-cash working capital balances (note 9)		(174	)		144,319
Net cash used in operating activities		(108,041	)		(17,766	)
Investing activities:
Purchase of equipment		-			-
Net cash used in investing activities		-			-
Financing activities:
Proceeds from (repayment of) bank indebtedness		21,641			(166,094	)
Proceeds from exercise of stock options		-			2,928
Proceeds from private placement		-			308,485
Proceeds from stockholder loan		100,000			-
Repayment of notes payable		-			(90,000	)
Net cash provided by financing activities		121,641			55,319
Increase in cash		13,600			37,553
Cash, beginning of period		111,173			134,552
Cash, end of period	$	124,773		$	172,105
Supplementary information:
Interest paid	$	19,951		$	18,792
Income taxes paid	$	-		$	-

See accompanying notes to interim condensed consolidated financial statements.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2008 and 2007

1.	Basis of presentation
	These unaudited interim condensed 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. Readers of these statements should read the audited annual consolidated financial statements of the Company filed on Form 10-KSB for the year ended December 31, 2007 in conjunction therewith. Operating results for the periods presented are not necessarily indicative of the results that will occur for the year ending December 31, 2008 or for any other interim period.
	The financial information as at September 30, 2008 and for the nine and three month periods ended September 30, 2008 and 2007 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. The accompanying condensed consolidated balance sheet as of December 31, 2007 has been derived from the audited consolidated balance sheet as of that date included in the Form 10-KSB.
	These financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize assets and discharge liabilities in the normal course of business for the foreseeable future. These financial statements do not include the adjustments that would be necessary should the Company be unable to continue as a going concern.
	The Company has incurred losses and the ability of the Company to continue as a going- concern depends upon its ability to restore profitable operations and to continue to raise adequate financing. Management is actively targeting sources of additional financing which would assure continuation of the Company’s operations.
	There can be no assurance that the Company will be able to restore profitable operations and continue to raise funds in which case the Company may be unable to meet its obligations. Should the Company be unable to realize on its assets and discharge its liabilities in the normal course of business, the net realizable value of its assets may be materially less than the amounts recorded on the balance sheets.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2008 and 2007

1.	Basis of presentation (cont’d…)
	The Company adopted SFAS No. 157, Fair Value Measurements, on January 1, 2008. SFAS No. 157 applies to all financial instruments being measured and reported on a fair value basis. In February 2008, the FASB issued a staff position that delays the effective date of SFAS 157 for all nonfinancial assets and liabilities except for those recognized or disclosed at least annually. Therefore, the Company has adopted the provision of FAS 157 with respect to its financial assets and liabilities only.
	SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 – Quoted prices that are available in active markets for identical assets or liabilities. The types of financial instruments included in Level 1 are marketable equity available for sale securities that are traded in an active exchange market.
	Level 2 – Pricing inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Instruments included in this category are warrants and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
	Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 includes assets and liabilities whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
	Effective January 1, 2008, the Company adopted FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company did not elect to adopt the fair value option under this statement.
	The adoption of these pronouncements did not have a material effect on the Company’s consolidated financial position or results of operations.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2008 and 2007

2.

Inventory

			September 30,			December 31,
			2008			2007
	Raw materials	$	186,371		$	509,003
	Work in process		91,488			27,578
	Finished goods		210,052			219,653
		$	487,911		$	756,234

3.

Equipment

						Accumulated			Net book
	September 30, 2008		Cost			depreciation			value
	Computer equipment	$	110,838		$	88,436		$	22,402
	Office furniture and equipment		77,269			36,434			40,835
	Leasehold improvements		46,814			42,257			4,557
		$	234,921		$	167,127		$	67,794

						Accumulated			Net book
	December 31, 2007		Cost			depreciation			value
	Computer equipment	$	110,838		$	84,478		$	26,360
	Office furniture and equipment		77,269			33,173			44,096
	Leasehold improvements		46,814			40,926			5,888
		$	234,921		$	158,577		$	76,344

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VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2008 and 2007

4.	Intangible assets
	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. The cost of the service agreements was included in intangible assets. The service agreements were initially considered to have an indefinite life and were not amortized through March 31, 2005. The number of service agreements held by the Company decreased to 1,868 at December 31, 2004, 1,780 at December 31, 2005, 1,705 at December 31, 2006 and 1,664 at December 31, 2007. During fiscal 2005, the Company performed a test for impairment in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) 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 based on the provisions of SFAS 142. Accordingly, the Company began, effective as of April 1, 2005, to amortize the cost of the service agreements on a straight-line basis over an estimated useful life of 10 years. At September 30, 2008, the Company held 1,638 service agreements (December 31, 2007 – 1,664) at a cost, net of accumulated amortization of $73,122 (December 31, 2007 - $57,453), of $135,799 (December 31, 2007 - $151,468).
5.	Bank indebtedness
	Bank indebtedness represents cheques written in excess of funds on deposit ($15,592) and amounts drawn under a bank credit facility ($270,000) available to a maximum of $500,000. Amounts outstanding under the bank credit facility bear interest at the bank’s prime lending rate plus 1% and are repayable on demand. The facility is secured by substantially all of our assets under a general security agreement. The Company is required to maintain a current ratio greater than 1.5:1, measured quarterly, and a debt to tangible net worth ratio less than 1.5:1, measured annually, under the terms of the demand facility agreement. For purposes of debt covenant calculations, amounts due to stockholders are considered a component of equity and not a liability. The Company is also allowed to draw on the credit facility up to 75% of accounts receivable less than 90 days. At September 30, 2008, the Company was in compliance with the ratio requirements.
	During the year ended December 31, 2006, the bank required additional security for the credit facility consisting of a pledge of personal property of a significant shareholder.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2008 and 2007

6.	Due to stockholders
	Amounts due to stockholders are non-interest bearing, unsecured and have no fixed terms of repayment.
7.	Notes payable
	The notes payable to individuals bear interest at 8% per annum, are unsecured, and are due December 31, 2008. Principal prepayments are made at the discretion of the Board of Directors.
8.	Capital stock
	On April 16, 2007, the Company completed a private placement of 1,677,550 units at a price of US$0.16 per unit for gross proceeds of US$268,408. Each unit consists of one common share of the Company and one share purchase warrant. Each share purchase warrant entitles the holder to acquire one additional common share of the Company for US$0.25 per share until April 16, 2012.
	On August 2, 2007, the Company granted 327,500 stock options exercisable at a price of US$0.40 per share until August 1, 2012.
	On December 12, 2007, the Company extended stock option agreements for 168,125 stock options under its 2001 and 2003 Stock Option Plans with an expiration date of December 21, 2007 to December 21, 2009.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2008 and 2007

8.	Capital stock (cont’d…)
	Stock Options
	A summary of the stock option activity is as follows:

		Number of options			Weighted average
					Exercise price
	Outstanding at December 31, 2007	3,363,800			US$0.30
	Granted	-			-
	Exercised	-			-
	Expired/cancelled	-			-
	Outstanding at September 30, 2008	3,363,800		$	0.30

A summary of the stock options outstanding and exercisable at September 30, 2008 is as follows:

			Weighted
			Average	Weighted
			Remaining	Average
	Exercise Price	Number	Contractual	Exercise
			Life	Price
	US$0.12	2,068,750	4.97 years	US$0.12
	$0.18	11,250	1.22 years	$0.18
	$0.40	327,500	3.84 years	$0.40
	$0.45	7,500	1.22 years	$0.45
	$0.55	5,000	1.22 years	$0.55
	$0.60	10,000	1.22 years	$0.60
	$0.65	933,800	3.22 years	$0.65
		3,363,800	4.33 years	$0.30

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VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2008 and 2007

8.	Capital stock (cont’d…)
	Warrants
	A summary of warrant activity is as follows:

		Number of warrants			Weighted average
					Exercise price
	Outstanding at December 31, 2007	1,677,550			US$ 0.25
	Granted	-			-
	Exercised	-			-
	Expired	-			-
	Outstanding at September 30, 2008	1,677,550			0.25

A summary of the warrants outstanding and exercisable at September 30, 2008 is as follows:

			Weighted
			Average	Weighted
			Remaining	Average
	Exercise Price	Number	Contractual	Exercise
			Life	Price
	US$0.25	1,677,550	3.55 years	US$0.25

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VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2008 and 2007

9.	Changes in non-cash working capital balances

			Nine months ended
			September 30,
			2008			2007
	Trade accounts receivable	$	(275,563	)	$	17,207
	Inventory		268,323			88,198
	Prepaid expenses		-			(17,576	)
	Lease receivable		771			796
	Accounts payable and accrued liabilities		11,191			65,066
	Deferred revenue		(4,896	)		(9,372	)
		$	(174	)	$	144,319

10.	Commitments and contingencies
	The Company is committed to make minimum annual payments on its premises, automobile and office equipment operating leases that expire in 2012 as follows:

	Year or period ending December 31:
	2008	$ 48,580
	2009	179,093
	2010	85,831
	2011	7,757
	2012	1,221

Rent expense included in the statements of operations for the nine month period ended September 30, 2008 is $96,790 (2007 - $93,024) and for the three month period ended September 30, 2008 is $32,765 (2007 - $31,862).

The Company was named as the sole defendant in litigation for wrongful dismissal that involves a former employee. The Company filed a defense to this claim and is actively defending its position. At this time, the likelihood of the outcome is not determinable and no provision has been made for the claim in the accounts.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2008 and 2007

11.	Segment information
	(a)	Operating segments:
		Commencing with the acquisition of the service agreements from Telus on May 16, 2003, as described in Note 4 herein and Note 6 in the financial statements in the most recent Form 10-KSB, the Company has organized 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. The segments’ accounting policies are the same as those described in Note 2 in the financial statements in the most recent Form 10-KSB. 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.
		Information as to these reportable segments for the three and nine months ended September 30, 2008 and 2007 are as follows:

For the three months ended September 30,		Manufacturing			Servicing			Total
2008
Sales to external customers	$	879,517		$	419,763		$	1,299,280
Depreciation and amortization		2,702			5,223			7,925
Interest expense, net		16,535			1,400			17,935
Segment income (loss) before income taxes		(71,202	)		41,894			(29,308	)
Total assets		1,582,553			135,799			1,718,352

For the three months ended September 30,		Manufacturing			Servicing			Total
2007
Sales to external customers	$	975,725		$	319,411		$	1,295,136
Depreciation and amortization		3,343			5,224			8,567
Interest expense, net		7,592			3,200			10,792
Segment income (loss) before income taxes		(240,003	)		(16,782	)		(256,785	)
Total assets		1,852,169			156,691			2,008,860

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VISCOUNT SYSTEMS, INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2008 and 2007

11.	Segment information (cont’d…)

For the nine months ended September 30,		Manufacturing			Servicing			Total
2008
Sales to external customers	$	2,651,722		$	1,291,045		$	3,942,767
Depreciation and amortization		8,550			15,669			24,219
Interest expense, net		40,938			4,200			45,138
Segment income (loss) before income taxes		(169,064	)		36,978			(132,086	)
Total assets		1,582,553			135,799			1,718,352

For the nine months ended September 30,		Manufacturing			Servicing			Total
2007
Sales to external customers	$	2,745,697		$	1,215,360		$	3,961,057
Depreciation and amortization		10,597			15,669			26,266
Interest expense, net		28,698			12,000			40,698
Segment income (loss) before income taxes		(417,347	)		155,218			(262,129	)
Total assets		1,852,169			156,691			2,008,860

	(b)	Of the total revenues for the nine months ended September 30, 2008, $760,294 (2007 - $950,840) was derived from U.S.-based customers and $3,182,473 (2007 - $3,010,217) 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 of the nine months ended September 30, 2008 and 2007.
	(d)	Products and services:
		Enterphone 2000 sales represented 19% of total revenue during the nine months ended September 30, 2008 (2007 – 28%). MESH sales represented 51% of total revenue during the nine months ended September 30, 2008 (2007 – 40%). 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.

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Item 2. Management Discussion and Analysis or Plan of Operation

Results of Operations

Sales for the three months ended September 30, 2008 and 2007 were $1,299,280 and $1,295,136, respectively, an increase of $4,144 or 0.32% . Sales for the nine months ended September 30, 2008 and 2007 were $3,942,767 and $3,961,057, respectively, a decrease of $18,290 or 0.46% . These three and nine month comparative periods were consistent. MESH sales for the three months ended September 30, 2008 and 2007 were $632,821 and $501,134, respectively, an increase of $131,687 or 26.3% . MESH sales for the nine months ended September 30, 2008 and 2007 were $2,011,596 and $1,594,144, respectively, an increase of $417,452 or 26.2% . 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, 2008 and 2007 were $252,610 and $391,041, respectively, a decrease of $138,431 or 35.4% . Enterphone sales for the nine months ended September 30, 2008 and 2007 were $735,296 and $ 1,099,179, respectively, a decrease of $363,883 or 33.1% . As an old 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 nine months ended September 30, 2008 and 2007, MESH sales were 51.0% and 40.2%, respectively, of total sales.

We also provide Enterphone support and maintenance services pursuant to service contracts that were assigned to us from Telus Corporation in 2003. Sales from the 1,638 existing service contracts continue to be steady. On average, each service contract represents ongoing revenues of approximately $33 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, 2008 and 2007, customer service contracts and new equipment sales generated aggregate sales revenues of $1,291,045 and $1,215,360, respectively, an increase of $75,685 or 6.2% . 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 1,638 at September 30, 2008, as compared to 1,664 and 1,671 at December 31, 2007 and September 30, 2007, respectively. During the first, second and third quarter of 2008, the Company performed a test for impairment in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) 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 based on the provisions of SFAS 142. 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, 2008, the cost of the service agreements, net of accumulated amortization, was $135,799.

Cost of sales and services as a percentage of sales was 46.0% and 47.2% for the three months ended September 30, 2008 and 2007, respectively. Cost of sales for the nine months ended September 30, 2008 and 2007 was 42.8% and 43.5%, respectively. Cost of sales has remained consistent during these two comparative periods. Management continues to focus on controlling the input costs by using multiple suppliers to ensure that the best and most cost effective raw materials are used in all of our products.

Gross profit for the three months ended September 30, 2008 and 2007 was $701,643 and $683,862, respectively, an increase of $17,781 or 2.6% . For the nine months ended September 30, 2008 and 2007, gross profit was $2,255,987 and $2,241,027, respectively, a increase of $14,960 or 0.7% . This marginal

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increase in gross profit corresponds with the consistent sales and cost of sales for the three and nine months ended September 30, 2008

Selling, general and administrative expenses for the three months ended September 30, 2008 and 2007 were $626,196 and $849,396, respectively, a decrease of $223,200 or 26.3% . Selling, general and administrative expenses for the nine months ended September 30, 2008 and 2007 were $2,067,797 and $2,206,414, respectively, a decrease of $138,617 or 6.3% . The decreases during these two comparative periods were due to decreases in variable costs such as advertising, tradeshow and various office expenses. For the nine months ended September 30, 2008 and 2007, selling, general and administrative expenses, as a percentage of sales, were 52.5% and 55.7%, respectively.

Research and development costs for the three months ended September 30, 2008 and 2007 were $78,994 and $73,284, respectively, an increase of $5,710 or 7.8% . Research and development costs for the nine months ended September 30, 2008 and 2007 were $251,811 and $233,112, respectively, an increase of $18,699 or 8.0% . Research and development costs remained consistent during these two comparative periods.

Net loss for the quarters ended September 30, 2008 and 2007 were $29,308 and $256,785, respectively, a decrease in net loss of $227,477. Net loss for the nine months ended September 30, 2008 and 2007 was $132,086 and $262,129, respectively, a decrease in net loss of $130,043. The decrease in net loss during these two comparative periods was the result of decreased variable costs such as tradeshow, traveling, and various office expenses.

Liquidity and Capital Resources

Cash as of September 30, 2008, as compared to December 31, 2007 was $124,773 and $111,173, respectively. Cash as of September 30, 2007 was $172,105. 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 1.0% . Amounts drawn are repayable on demand. At September 30, 2008, $285,592 was drawn on this facility. The facility is secured by substantially all of our assets under a general security agreement.

On April 16, 2007, the Company completed a private placement of 1,677,550 units at a price of US$0.16 per unit for gross proceeds of US$268,408. Each unit consists of one common share and one warrant. Each warrant is exerciseable at a price of US$0.25 per share until April 16, 2012 to acquire an additional share of common stock.

At September 30, 2008, working capital was $242,693, as compared to a working capital of $349,734 at December 31, 2007. Working capital has decreased by $107,041. The current ratio at September 30, 2008 was 1.19 to 1.0, as compared with 1.31 to 1.0 at December 31, 2007.

The accounts receivable turnover ratio at September 30, 2008 was 61 days, as compared 63 days at December 31, 2007 and 62 days at September 30, 2007. The ratios are consistent. The accounts receivable reserve was $262,148 at September 30, 2008, as compared to $223,390 at December 31, 2007. The accounts receivable reserve has increased by $38,758 or 17.4%, since the year ended December 31, 2007. Management identified slower paying accounts to be conservative. Management continues to follow-up on customer accounts to improve cash flow and to minimize bad debts. There had been no significant or material business conditions that would warrant further increases to the reserve at this time.

For the nine months ended September 30, 2008, there were minimal 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

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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, 2008.

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

Tabular Disclosure of Contractual Obligations

Bank indebtedness represents cheques written in excess of funds on deposit ($15,592) and amounts drawn under a bank credit facility ($270,000) available to a maximum of $500,000. Amounts outstanding under the bank credit facility bear interest at the bank’s prime lending rate plus 1% and are repayable on demand. The facility is secured by substantially all of our assets under a general security agreement. The Company is required to maintain a current ratio greater than 1.5:1, measured quarterly, and a debt to tangible net worth ratio less than 1.5:1, measured annually, under the terms of the demand facility agreement. For purposes of debt covenant calculations, amounts due to stockholders are considered a component of equity and not a liability. The Company is also allowed to draw on the credit facility up to 75% of accounts receivable less than 90 days. At September 30, 2008, the Company was in compliance with the ratio requirements.

During the year ended December 31, 2006, the bank required additional security for the credit facility consisting of a pledge of personal property of a significant shareholder.

Amounts due to stockholders are non-interest bearing, unsecured and have no fixed terms of repayment.

The notes payable to individuals bear interest at 8% per annum, are unsecured, and are due December 31, 2008. Principal prepayments are made at the discretion of the Board of Directors.

Related Party Transactions

In February of 2008, Stephen Pineau, president of Viscount, loaned the Company $100,000. The loan bears interest at 9.5% per annum, is unsecured and has no fixed terms of repayment.

In April of 2007 we sold 1,677,550 units at a price of $0.16 per unit, with each unit consisting of one share in the common stock of Viscount one share purchase warrant, for aggregate proceeds of $268,408. A total of 815,000 of the units were purchased by Stephen Pineau.

Recently Issued Accounting Standards

The Company adopted SFAS No. 157, Fair Value Measurements, on January 1, 2008. SFAS No. 157 applies to all financial instruments being measured and reported on a fair value basis. In February 2008, the FASB issued a staff position that delays the effective date of SFAS 157 for all nonfinancial assets and liabilities except for those recognized or disclosed at least annually. Therefore, the Company has adopted the provision of FAS 157 with respect to its financial assets and liabilities only.

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SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices that are available in active markets for identical assets or liabilities. The types of financial instruments included in Level 1 are marketable equity available for sale securities that are traded in an active exchange market.

Level 2 – Pricing inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Instruments included in this category are warrants and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 includes assets and liabilities whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Effective January 1, 2008, the Company adopted FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company did not elect to adopt the fair value option under this statement.

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(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 September 30, 2008. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of September 30, 2008, 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.

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PART II – OTHER INFORMATION

Item 6. Exhibits

31.1	Certification 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 Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 14, 2008		VISCOUNT SYSTEMS, INC.
		(Registrant)
	By:	/s/ Stephen Pineau
		Stephen Pineau, President
		Principal Executive Officer
		and Principal Financial Officer

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