EXHIBIT
3.1
 
 CERTIFICATE
OF INCORPORATION
 OF
 VIKING
SYSTEMS, INC.
 
  ARTICLE
I
 
 The name
of this corporation is Viking Systems, Inc. (the “Corporation”).
 
 ARTICLE
II
 
 The
address of the Corporation’s registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
 
 ARTICLE
III
 
 The
purpose of the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of
Delaware.
 
 ARTICLE
IV
 
 (A) The
Corporation is authorized to issue two classes of stock to be designated,
respectively, “Common Stock” and “Preferred Stock.” The total number of shares
which the Corporation is authorized to issue is Two Hundred Twenty-Five Million
(225,000,000) shares, each with a par value of $0.001 per share. Two Hundred
Million (200,000,000) shares shall be Common Stock and Twenty-Five Million
(25,000,000) shares shall be Preferred Stock.
 
 (B) The
Preferred Stock may be issued from time to time in one or more series. The Board
of Directors is hereby authorized, by filing a certificate pursuant to the
applicable law of the State of Delaware and within the limitations and
restrictions stated in this Certificate of Incorporation, to determine or alter
the rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock and the number of shares
constituting any such series and the designation thereof, or any of them; and to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status which
they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
 
 (C) The
holders of shares of Common Stock shall not have cumulative voting
rights.
 
 (D) No
holder of shares of Common Stock shall be entitled to preemptive or subscription
rights.
  
  ARTICLE
V
 
 The
number of directors of the Corporation shall be fixed from time to time pursuant
to the Bylaws.
 
 ARTICLE
VI
 
 In the
election of directors, each holder of shares of any class or series of capital
stock of the Corporation shall be entitled to one vote for each share held. The
candidates receiving the highest number of affirmative votes, up to the number
of directors to be elected, shall be elected; votes against any candidate and
votes withheld shall have no legal effect.
 
 A
director shall hold office until the annual meeting for the year in which his or
her term expires and until his or her successor shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
 
 Subject
to terms of any one or more classes or series of Preferred Stock, any vacancy on
the Board of Directors may be filled by a majority of the Board of Directors
then in office, even if less than a quorum, or by a sole remaining director. Any
director elected to fill a vacancy not resulting from an increase in the number
of directors shall have the same remaining term as that of his predecessor. If
the vacancy arose from an increase in the number of directors, the newly elected
director will hold office until the next annual meeting or until his or her
successor shall be elected and shall qualify. Subject to the rights, if any, of
the holders of shares of Preferred Stock then outstanding, any or all of the
directors of the Corporation may be removed from office at any time, with or
without cause, by the affirmative vote of the holders of at least a majority of
the voting power of the Corporation’s then outstanding capital stock entitled to
vote generally in the election of directors.
 
 ARTICLE
VII
 
 The
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
 
 ARTICLE
VIII
 
 (A) In
furtherance and not in limitation of the powers conferred upon it by the laws of
the State of Delaware, the Board of Directors shall have the power to adopt,
amend, alter or repeal the Corporation’s By-Laws. The affirmative vote of at
least a majority of the entire Board of Directors shall be required to adopt,
amend, alter or repeal the Corporation’s By-Laws. The Corporation’s By-Laws also
may be adopted, amended, altered or repealed by the affirmative vote of the
holders of at least a majority of the voting power of the shares entitled to
vote at an election of directors.
  2
  (B) Advance
notice of stockholder nominations for the election of directors or of business
to be brought by the stockholders before any meeting of the stockholders of the
Corporation shall be given in the manner provided in the Bylaws.
 
 ARTICLE
IX
 
 Meetings
of stockholders may be held within or without the State of Delaware, as the
Bylaws may provide. The books of the Corporation may be kept (subject to any
provision of the General Corporation Law of Delaware) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws.
 
 ARTICLE
X
 
 (A) To
the fullest extent permitted by the General Corporation Law of Delaware, as the
same may be amended from time to time, a director of the Corporation shall not
be personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director. If the General Corporation Law of
Delaware is hereafter amended to authorize, with the approval of a corporation’s
stockholders, further reductions in the liability of a corporation’s directors
for breach of fiduciary duty, then a director of the Corporation shall not be
liable for any such breach to the fullest extent permitted by the General
Corporation Law of Delaware, as so amended.
 
 (B) Any
repeal or modification of the foregoing provisions of this Article X shall not
adversely affect any right or protection of a director of the Corporation with
respect to any acts or omissions of such director occurring prior to such repeal
or modification.
 
 ARTICLE
XI
 
 (A) To
the fullest extent permitted by applicable law, the Corporation is also
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and other agents of the Corporation (and any
other persons to which Delaware law permits the Corporation to provide
indemnification) through Bylaw provisions, agreements with such agents or other
persons, vote of stockholders or disinterested directors or otherwise, in excess
of the indemnification and advancement otherwise permitted by Section 145 of the
General Corporation Law of Delaware, subject only to limits created by
applicable Delaware law (statutory or non-statutory), with respect to actions
for breach of duty to a corporation, its stockholders, and others.
 
 (B) Any
repeal or modification of any of the foregoing provisions of this Article XII
shall not adversely affect any right or protection of any such agent or other
person existing at the time of, or increase the liability of any such agent or
other person with respect to any acts or omissions of such agent or other person
occurring prior to such repeal or modification.
  3
  ARTICLE
XII
 
 The name
and mailing address of the incorporator are as follows:
 
 A. O.
Headman, Jr.
 Cohne,
Rappaport & Segal
 257 East
200 South, Suite 700
 Salt Lake
City, UT 84111
 
 Executed
this 8th day of
June, 2006.
 
 I, THE
UNDERSIGNED, being the Sole Incorporator hereinbefore named, for the purpose of
forming a corporation pursuant to the GCL, do make this Certificate, hereby
declaring and certifying that this is my act and deed and the facts herein
stated are true, and accordingly have hereunto set my hand this 8th day of
June, 2006.
   /s/
      A. O. Headman, Jr.
                Incorporator
  4
  VIKING
SYSTEMS, INC.
 
 CERTIFICATE
OF DESIGNATION OF PREFERENCES,
 RIGHTS
AND LIMITATIONS
 OF
 SERIES
B VARIABLE DIVIDEND CONVERTIBLE PREFERRED STOCK
 
 PURSUANT
TO SECTION 151 OF THE
 DELAWARE
GENERAL CORPORATION LAW
 
 The
undersigned, Gregory M. Decker, Chief Financial Officer, does hereby certify
that:
 
 1.         
 He is the Chief Financial Officer of Viking Systems, Inc., a Delaware
corporation (the “Corporation”).
 
 2.           The
Corporation is authorized to issue 25,000,000 shares of preferred stock, none of
which have been issued.
 
 3.           The
following resolutions were duly adopted by the Board of Directors:
 
 WHEREAS,
the Certificate of Incorporation of the Corporation provides for a class of its
authorized stock known as preferred stock, comprised of 25,000,000 shares,
$0.001 par value per share, issuable from time to time in one or more
series;
 
 WHEREAS,
the Board of Directors of the Corporation is authorized to fix the dividend
rights, dividend rate, voting rights, conversion rights, rights and terms of
redemption and liquidation preferences of any wholly unissued series of
preferred stock and the number of shares constituting any series and the
designation thereof, of any of them; and
 
 WHEREAS,
it is the desire of the Board of Directors of the Corporation, pursuant to its
authority as aforesaid, to fix the rights, preferences, restrictions and other
matters relating to a series of the preferred stock, which shall consist of,
except as otherwise set forth in the Purchase Agreement, up to 8,000 shares of
the preferred stock which the Corporation has the authority to issue, as
follows:
 
 NOW,
THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for
the issuance of a series of preferred stock for cash or exchange of other
securities, rights or property and does hereby fix and determine the rights,
preferences, restrictions and other matters relating to such series of preferred
stock as follows:
  
 
 TERMS
OF PREFERRED STOCK
 
 Section 1.  Definitions.
Capitalized terms used and not otherwise defined herein that are defined in the
Purchase Agreement shall have the meanings given such terms in the Purchase
Agreement. For the purposes hereof, the following terms shall have the following
meanings:
 
 “Alternate
Consideration” shall have the meaning set forth in Section
7(e).
  “Bankruptcy Event”
means any of the following events: (a) the Corporation or any Significant
Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof
commences a case or other proceeding under any bankruptcy, reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction relating to the Corporation or
any Significant Subsidiary thereof; (b) there is commenced against the
Corporation or any Significant Subsidiary thereof any such case or proceeding
that is not dismissed within 60 days after commencement; (c) the Corporation or
any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any
order of relief or other order approving any such case or proceeding is entered;
(d) the Corporation or any Significant Subsidiary thereof suffers any
appointment of any custodian or the like for it or any substantial part of its
property that is not discharged or stayed within 60 calendar days after such
appointment; (e) the Corporation or any Significant Subsidiary thereof makes a
general assignment for the benefit of creditors; (f) the Corporation or any
Significant Subsidiary thereof calls a meeting of its creditors with a view to
arranging a composition, adjustment or restructuring of its debts; or (g) the
Corporation or any Significant Subsidiary thereof, by any act or failure to act,
expressly indicates its consent to, approval of or acquiescence in any of the
foregoing or takes any corporate or other action for the purpose of effecting
any of the foregoing.
 
 “Base Conversion
Price” shall have the meaning set forth in Section 7(b).
 
 “Business Day” means
any day except Saturday, Sunday, any day which shall be a federal legal holiday
in the United States or any day on which banking institutions in the State of
New York are authorized or required by law or other governmental action to
close.
 
 “Buy-In” shall have
the meaning set forth in Section 6(e)(iii).
 
 “Change of Control
Transaction” means the occurrence after the date hereof of any of (i) an
acquisition after the date hereof by an individual, legal entity or “group” (as
described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective
control (whether through legal or beneficial ownership of capital stock of the
Corporation, by contract or otherwise) of in excess of 33% of the voting
securities of the Corporation (other than by means of conversion or exercise of
Preferred Stock and the Securities issued together with the Preferred Stock), or
(ii) the Corporation merges into or consolidates with any other Person, or any
Person merges into or consolidates with the Corporation and, after giving effect
to such transaction, the stockholders of the Corporation immediately prior to
such transaction own less than 66% of the aggregate voting power of the
Corporation or the successor entity of such transaction, or (iii) the
Corporation sells or transfers all or substantially all of its assets to another
Person and the stockholders of the Corporation immediately prior to such
transaction own less than 66% of the aggregate voting power of the acquiring
entity immediately after the transaction, or (iv) a replacement at one time or
within a one year period of more than one-half of the members of the
Corporation’s board of directors which is not approved by a majority of those
individuals who are members of the board of directors on the date hereof (or by
those individuals who are serving as members of the board of directors on any
date whose nomination to the board of directors was approved by a majority of
the members of the board of directors who are members on the date hereof), or
(v) the execution by the Corporation of an agreement to which the Corporation is
a party or by which it is bound, providing for any of the events set forth in
clauses (i) through (iv) above.
  2
  “Closing Date” means
the Trading Day when all of the Transaction Documents have been executed and
delivered by the applicable parties thereto and all conditions precedent to (i)
such Holders’ obligations to pay the Subscription Amount and (ii) the
Corporation’s obligations to deliver the Securities have been satisfied or
waived.
 
 “Commission” means the
Securities and Exchange Commission.
 
 “Common Stock” means
the Corporation’s common stock, par value $0.001 per share, and stock of any
other class of securities into which such securities may hereafter be
reclassified or changed into.
 
 “Common Stock
Equivalents” means any securities of the Corporation or the Subsidiaries
which would entitle a holder thereof to acquire at any time Common Stock,
including, without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles such holder thereof to receive, Common
Stock.
 
 “Conversion Amount”
means the sum of the Stated Value at issue.
 
 “Conversion Date”
shall have the meaning set forth in Section 6(a).
 
 “Conversion Price”
shall have the meaning set forth in Section 6(b).
 
 “Conversion Shares”
means, collectively, the shares of Common Stock issuable upon conversion of the
shares of Preferred Stock in accordance with the terms hereof.
 
 “Conversion Shares
Registration Statement” means a registration statement that registers the
resale of all Conversion Shares of the Holders, who shall be named as a “selling
stockholder” therein and meets the requirements of the Registration Rights
Agreement.
  “Dilutive Issuance”
shall have the meaning set forth in Section 7(b).
 
 “Dilutive Issuance
Notice” shall have the meaning set forth in Section 7(b).
 
 “Dividend Payment
Date” shall have the meaning set forth in Section 3(a).
  “Dividend Share
Amount” shall have the meaning set forth in Section 3(a).
 
 “Effective Date” means
the date that the Conversion Shares Registration Statement is declared effective
by the Commission.
  3
  “Equity Conditions”
means, during the period in question, (i) the Corporation shall have duly
honored all conversions scheduled to occur or occurring by virtue of one or more
Notices of Conversion of the applicable Holder on or prior to the dates so
requested or required, if any, (ii) the Corporation shall have paid all
liquidated damages and other amounts owing to the applicable Holder in respect
of the Preferred Stock, (iii) there is an effective Conversion Shares
Registration Statement pursuant to which the Holders are permitted to utilize
the prospectus thereunder to resell all of the shares of Common Stock issuable
pursuant to the Transaction Documents (and the Corporation believes, in good
faith, that such effectiveness will continue uninterrupted for the foreseeable
future), (iv) the Common Stock is trading on a Trading Market and all of the
shares issuable pursuant to the Transaction Documents are listed for trading on
such Trading Market (and the Corporation believes, in good faith, that trading
of the Common Stock on a Trading Market will continue uninterrupted for the
foreseeable future), (v) there is a sufficient number of authorized, but
unissued and otherwise unreserved, shares of Common Stock for the issuance of
all of the shares of Common Stock issuable pursuant to the Transaction
Documents, (vi) there is no existing Triggering Event or no existing event
which, with the passage of time or the giving of notice, would constitute a
Triggering Event, (vii) the issuance of the shares in question (or, in the case
of a redemption, the shares issuable upon conversion in full of the redemption
amount) to the applicable Holder would not violate the limitations set forth in
Section 6(c) herein, (viii) there has been no public announcement of a pending
or proposed Fundamental Transaction or Change of Control Transaction that has
not been consummated, (ix) no Holder is in possession of any information that
constitutes, or may constitute, material non-public information, and (x) the
Corporation shall have timely complied with the covenants set forth in Section
4.19 of the Purchase Agreement.
 
 “Exchange Act” means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
 
 “Exempt Issuance”
means the issuance of (a) shares of Common Stock or options to employees,
officers or directors of the Corporation pursuant to any stock or option plan
duly adopted by a majority of the non-employee members of the Board of Directors
of the Corporation or a majority of the members of a committee of non-employee
directors established for such purpose, (b) securities upon the exercise of or
conversion of any securities issued hereunder and/or other securities
exercisable or exchangeable for or convertible into shares of Common Stock
issued and outstanding on the date of the Purchase Agreement, provided that such
securities have not been amended since the date of the Purchase Agreement to
increase the number of such securities or to decrease the exercise or conversion
price of any such securities, and (c) securities issued pursuant to acquisitions
or strategic transactions approved by a majority of the disinterested directors,
provided that any such issuance shall only be to a Person which is, itself or
through its subsidiaries, an operating company in a business synergistic with
the business of the Corporation and shall provide to the Corporation additional
benefits in addition to the investment of funds, but shall not include a
transaction in which the Corporation is issuing securities primarily for the
purpose of raising capital or to an entity whose primary business is investing
in securities.
  4
  “Fundamental
Transaction” shall have the meaning set forth in Section
7(e).
 
 “Holder” shall have
the meaning given such term in Section 2.
 
 “Junior Securities”
means the Common Stock and all other Common Stock Equivalents of the Corporation
other than those securities which are explicitly senior or pari passu to the
Preferred Stock in dividend rights or liquidation preference.
 
 “Liquidation” shall
have the meaning set forth in Section 5.
 
 “New York Courts”
shall have the meaning set forth in Section 11(d).
 
 “Notice of Conversion”
shall have the meaning set forth in Section 6(a).
 
 “Optional Redemption”
shall have the meaning set forth in Section 8(b).
 
 “Optional Redemption
Amount” means the sum of (i) 100% of the aggregate Stated Value then
outstanding, (ii) accrued but unpaid dividends and (iii) all liquidated damages
and other amounts due in respect of the Preferred Stock.
 
 “Optional Redemption
Date” shall have the meaning set forth in Section 8(b).
 
 “Optional Redemption
Notice” shall have the meaning set forth in Section 8(b).
 
 “Optional Redemption Notice
Date” shall have the meaning set forth in Section 8(b).
 
 “Original Issue Date”
means the date of the first issuance of any shares of the Preferred Stock
regardless of the number of transfers of any particular shares of Preferred
Stock and regardless of the number of certificates which may be issued to
evidence such Preferred Stock.
 
 “Permitted
Indebtedness” means (a) the Indebtedness existing on the Original Issue
Date and set forth on Schedule 3.1(aa)
attached to the Purchase Agreement (other than the Convertible Debt) and (b)
additional Indebtedness incurred by the Corporation that does not mature or
require payments of principal prior to the 3 year anniversary of the Original
Issue Date and is made expressly subordinate in right of payment to the
Preferred Stock, as reflected in a written agreement acceptable to the Holders
and approved by such Holders in writing.
 
 “Permitted Lien” means
the individual and collective reference to the following: (a) Liens for taxes,
assessments and other governmental charges or levies not yet due or Liens for
taxes, assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves (in the
good faith judgment of the management of the Corporation) have been established
in accordance with GAAP; (b) Liens imposed by law which were incurred in the
ordinary course of the Corporation’s business, such as carriers’, warehousemen’s
and mechanics’ Liens, statutory landlords’ Liens, and other similar Liens
arising in the ordinary course of the Corporation’s business, and which (x) do
not individually or in the aggregate materially detract from the value of such
property or assets or materially impair the use thereof in the operation of the
business of the Corporation and its consolidated Subsidiaries or (y) which are
being contested in good faith by appropriate proceedings, which proceedings have
the effect of preventing for the foreseeable future the forfeiture or sale of
the property or asset subject to such Lien and (c) Liens incurred in connection
with Permitted Indebtedness under clause (b) thereunder, provided that such
Liens are not secured by assets of the Corporation or its Subsidiaries other
than the assets so acquired or leased.
  5
  “Preferred Stock”
shall have the meaning set forth in Section 2.
 
 “Purchase Agreement”
means the Securities Purchase Agreement, dated as of the Original Issue Date, to
which the Corporation and the original Holders are parties, as amended, modified
or supplemented from time to time in accordance with its terms.
 
 “Registration Rights
Agreement” means the Registration Rights Agreement, dated as of the date
of the Purchase Agreement, to which the Corporation and the original Holder are
parties, as amended, modified or supplemented from time to time in accordance
with its terms.
 
 “Securities Act” means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
 
 “Share Delivery Date”
shall have the meaning set forth in Section 6(e).
 
 “Stated Value” shall
have the meaning set forth in Section 2, as the same may be increased pursuant
to Section 3.
 
 “Subscription Amount”
means, as to each Purchaser, the amount in United States Dollars and in
immediately available funds to be paid for the Preferred Stock purchased
pursuant to the Purchase Agreement as specified below such Purchaser’s name on
the signature page of the Purchase Agreement and next to the heading
“Subscription Amount.”
 
 “Subsidiary” shall
have the meaning set forth in the Purchase Agreement.
 
 “Trading Day” means a
day on which the principal Trading Market is open for business.
 
 “Trading Market” means
the following markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the American Stock Exchange, the Nasdaq
Capital Market, the Nasdaq National Market, the New York Stock Exchange or the
OTC Bulletin Board.
 
 “Transaction
Documents” shall have the meaning set forth in the Purchase
Agreement.
 
 “Triggering Event”
shall have the meaning set forth in Section 9(a).
 
 “Triggering Redemption
Amount” means, for each share of Preferred Stock, the sum of (i) the
greater of (A) 130% of the Stated Value and (B) the product of (a) the VWAP on
the Trading Day immediately preceding the date of the Triggering Event and (b)
the Stated Value divided by the then Conversion Price, (ii) all accrued but
unpaid dividends thereon and (iii) all liquidated damages and other costs,
expenses or amounts due in respect of the Preferred Stock.
 
 “Triggering Redemption
Payment Date” shall have the meaning set forth in Section
9(b).
  6
  “VWAP” means, for any
date, the price determined by the first of the following clauses that applies:
(a) if the Common Stock is then listed or quoted on a Trading Market, the daily
volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed
or quoted for trading as reported by Bloomberg L.P. (based on a Trading Day from
9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)); (b) if the
OTC Bulletin Board is not a Trading Market, the volume weighted average price of
the Common Stock for such date (or the nearest preceding date) on the OTC
Bulletin Board; (c) if the Common Stock is not then quoted for trading on the
OTC Bulletin Board and if prices for the Common Stock are then reported in the
“Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per
share of the Common Stock so reported; or (d) in all other cases, the fair
market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by the Holders and reasonably acceptable to the
Corporation, the fees and expenses of which shall be paid by the
Corporation.
 
 Section 2.
 Designation,
Amount and Par Value. The series of preferred stock shall be designated
as its Series B Variable Dividend Convertible Preferred Stock (the “Preferred Stock”) and
the number of shares so designated shall be up to 8,000 (which shall not be
subject to increase without the written consent of all of the Holders of the
Preferred Stock (each, a “Holder” and
collectively, the “Holders”)). Each
share of Preferred Stock shall have a par value of $0.001 per share and a stated
value equal to $1,000, subject to increase set forth in Section 3(a) below (the
“Stated
Value”).
  7
  Section 3.
 Dividends.
 
 a) Dividends in Cash or in
Kind. Holders shall be entitled to receive, and the Corporation shall
pay, cumulative dividends at the rate per share (as a percentage of the Stated
Value per share) of, (i) up to and including May 22, 2009, 8% per annum,
(ii)from May 22,
2009 up to and including May 22, 2010, 11% per annum and (iii) after May 22,
2010, 14% per annum, payable quarterly on January 1, April 1, July 1 and October
1, beginning on the Effective Date and on each Optional Redemption Date (with
respect only to the Preferred Stock being redeemed) and Conversion Date (with
respect only to the Preferred Stock being converted)(except that, if such date
is not a Trading Day, the payment date shall be the next succeeding Trading Day)
(each such date, a “Dividend Payment
Date”) in cash or duly authorized, validly issued, fully paid and
non-assessable shares of Common Stock as set forth in this Section 3(a), or a
combination thereof (the amount to be paid in shares of Common Stock, the “Dividend Share
Amount”). The form of dividend payments to each Holder shall be
determined in the following order of priority: (i) if funds are legally
available for the payment of dividends and the Equity Conditions have not been
met during the 20 consecutive Trading Days immediately prior to the applicable
Dividend Payment Date, in cash only; (ii) if funds are legally available for the
payment of dividends and the Equity Conditions have been met during the 20
consecutive Trading Days immediately prior to the applicable Dividend Payment
Date, at the sole election of the Corporation, in cash or shares of Common Stock
which shall be valued solely for such purpose at 90% of the average of the VWAPs
for the 20 consecutive Trading Days ending on the Trading Day that is
immediately prior to the Dividend Payment Date; (iii) if funds are not legally
available for the payment of dividends and the Equity Conditions have been met
during the 20 consecutive Trading Days immediately prior to the applicable
Dividend Payment Date, in shares of Common Stock which shall be valued solely
for such purpose at 90% of the average of the VWAPs for the 20 consecutive
Trading Days ending on the Trading Day that is immediately prior to the Dividend
Payment Date; (iv) if funds are not legally available for the payment of
dividends and the Equity Condition relating to an effective Conversion Shares
Registration Statement has been waived by a Holder, as to such Holder only, in
unregistered shares of Common Stock which shall be valued solely for such
purpose at 90% of the average of the VWAPs for the 20 consecutive Trading Days
ending on the Trading Day that is immediately prior to the Dividend Payment
Date; and (v) if funds are not legally available for the payment of dividends
and the Equity Conditions have not been met during the 20 consecutive Trading
Days immediately prior to the applicable Dividend Payment Date, then, at the
election of each Holder, such dividends shall accrue to the next Dividend
Payment Date or shall be accreted to, and increase, the outstanding Stated
Value. The Holders shall have the same rights and remedies with respect to the
delivery of any such shares as if such shares were being issued pursuant to
Section 6. On the Closing Date, the Corporation shall have notified the Holders
whether or not it may legally pay cash dividends as of the Closing Date. The
Corporation shall promptly notify such Holders at any time the Corporation shall
become able or unable, as the case may be, to legally pay cash dividends. If at
any time the Corporation has the right to pay dividends in cash or Common Stock,
the Corporation must provide the Holders with at least 20 Trading Days’ notice
of its election to pay a regularly scheduled dividend in Common Stock (the
Corporation may indicate in such notice that the election contained in such
notice shall continue for later periods until revised by a subsequent
notice).
  8
  Dividends
on the Preferred Stock shall be calculated on the basis of a 360-day year, shall
accrue daily commencing on the Original Issue Date, and shall be deemed to
accrue from such date whether or not earned or declared and whether or not there
are profits, surplus or other funds of the Corporation legally available for the
payment of dividends. Except as otherwise provided herein, if at any time the
Corporation pays dividends partially in cash and partially in shares, then such
payment shall be distributed ratably among the Holders based upon the number of
shares of Preferred Stock held by each Holder on such Dividend Payment Date. Any
dividends, whether paid in cash or shares of Common Stock, that are not paid
within three Trading Days following a Dividend Payment Date shall continue to
accrue and shall entail a late fee, which must be paid in cash, at the rate of
18% per annum or the lesser rate permitted by applicable law (such fees to
accrue daily, from the Dividend Payment Date through and including the date of
payment). If at any time the Corporation delivers a notice to the Holders of its
election to pay the dividends in shares of Common Stock, the Corporation shall
timely file a prospectus supplement pursuant to Rule 424 disclosing such
election.
  b) So long as any Preferred Stock
shall remain outstanding, neither the Corporation nor any Subsidiary thereof
shall redeem, purchase or otherwise acquire directly or indirectly more than a
de minimis number of
Junior Securities except as expressly permitted hereunder. So long as any
Preferred Stock shall remain outstanding, neither the Corporation nor any
Subsidiary thereof shall directly or indirectly pay or declare any dividend or
make any distribution upon (other than a dividend or distribution described in
Section 6 or dividends due and paid in the ordinary course on preferred stock of
the Corporation at such times when the Corporation is in compliance with its
payment and other obligations hereunder), nor shall any distribution be made in
respect of, any Junior Securities as long as any dividends due on the Preferred
Stock remain unpaid, nor shall any monies be set aside for or applied to the
purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities or shares pari passu with the
Preferred Stock.
 
 Section 4.
 Voting
Rights. Except as otherwise provided herein or as otherwise required by
law, the Preferred Stock shall have no voting rights. However, as long as any
shares of Preferred Stock are outstanding, the Corporation shall not, without
(i) if any shares of the Preferred Stock are held by any Qualified Investor, the
affirmative vote of each Qualified Investor holding any shares of the Preferred
Stock or (ii) if no shares of the Preferred Stock are held by any Qualified
Investor, the affirmative vote of the Holders of a majority of the then
outstanding shares of the Preferred Stock, (a) alter or change adversely the
powers, preferences or rights given to the Preferred Stock or alter or amend
this Certificate of Designation, (b) authorize or create any class of stock
ranking as to dividends, redemption or distribution of assets upon a Liquidation
(as defined in Section 5) senior to or otherwise pari passu with the
Preferred Stock, (c) amend its certificate of incorporation or other charter
documents in any manner that adversely affects any rights of the Holders, (d)
increase the authorized number of shares of Preferred Stock, or (e) enter into
any agreement with respect to any of the foregoing.
  9
  Section 5.
 Liquidation. Upon any
liquidation, dissolution or winding-up of the Corporation, whether voluntary or
involuntary (a “Liquidation”), the
Holders shall be entitled to receive out of the assets, whether capital or
surplus, of the Corporation an amount equal to the Stated Value, plus any
accrued and unpaid dividends thereon and any other fees or liquidated damages
owing thereon, for each share of Preferred Stock before any distribution or
payment shall be made to the Holders of any Junior Securities, and if the assets
of the Corporation shall be insufficient to pay in full such amounts, then the
entire assets to be distributed to the Holders shall be ratably distributed
among the Holders in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full. A
Fundamental Transaction or Change of Control Transaction shall not be deemed a
Liquidation. The Corporation shall mail written notice of any such Liquidation,
not less than 45 days prior to the payment date stated therein, to each
Holder.
 
 Section 6.
 Conversion.
 
 a) Conversions at Option of
Holder. Each share of Preferred Stock shall be convertible at the option
of the Holder thereof, at any time and from time to time from and after the
Original Issue Date into that number of shares of Common Stock (subject to the
limitations set forth in Section 6(c)) determined by dividing the Stated Value
of such share of Preferred Stock by the Conversion Price. Holders shall effect
conversions by providing the Corporation with the form of conversion notice
attached hereto as Annex A (a “Notice of
Conversion”). Each Notice of Conversion shall specify the number of
shares of Preferred Stock to be converted, the number of shares of Preferred
Stock owned prior to the conversion at issue, the number of shares of Preferred
Stock owned subsequent to the conversion at issue and the date on which such
conversion is to be effected, which date may not be prior to the date the
converting Holder delivers by facsimile such Notice of Conversion to the
Corporation (the “Conversion Date”). If
no Conversion Date is specified in a Notice of Conversion, the Conversion Date
shall be the date that such Notice of Conversion to the Corporation is deemed
delivered hereunder. The calculations and entries set forth in the Notice of
Conversion shall control in the absence of manifest or mathematical error. To
effect conversions of shares of Preferred Stock, a Holder shall not be required
to surrender the certificate(s) representing such shares of Preferred Stock to
the Corporation unless all of the shares of Preferred Stock represented thereby
are so converted, in which case such Holder shall deliver the certificate
representing such shares of Preferred Stock promptly following the Conversion
Date at issue. Shares of Preferred Stock converted into Common Stock or redeemed
in accordance with the terms hereof shall be canceled and shall not be
reissued.
 
 b) Conversion Price. The
conversion price for the Preferred Stock shall equal $0.18, subject to adjustment
herein (the “Conversion
Price”).
  10
  c) Beneficial Ownership
Limitation.The Corporation shall
not effect any conversion of the Preferred Stock, and a Holder shall not have
the right to convert any portion of the Preferred Stock, to the extent that,
after giving effect to the conversion set forth on the applicable Notice of
Conversion, such Holder (together with such Holder’s Affiliates, and any other
person or entity acting as a group together with such Holder or any of such
Holder’s Affiliates) would beneficially own in excess of the Beneficial
Ownership Limitation (as defined below).  For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by a Holder
and its Affiliates shall include the number of shares of Common Stock issuable
upon conversion of the Preferred Stock with respect to which such determination
is being made, but shall exclude the number of shares of Common Stock which are
issuable upon (A) conversion of the remaining, unconverted Stated Value of
Preferred Stock beneficially owned by such Holder or any of its Affiliates and
(B) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Corporation subject to a limitation on conversion or
exercise analogous to the limitation contained herein (including the Warrants)
beneficially owned by such Holder or any of its Affiliates.  Except as set
forth in the preceding sentence, for purposes of this Section 6(c), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder.  To the
extent that the limitation contained in this Section 6(c) applies, the
determination of whether the Preferred Stock is convertible (in relation to
other securities owned by a Holder together with any Affiliates) and of how many
shares of Preferred Stock are convertible shall be in the sole discretion of
such Holder, and the submission of a Notice of Conversion shall be deemed to be
such Holder’s determination of whether the shares of Preferred Stock may be
converted (in relation to other securities owned by such Holder together with
any Affiliates) and how many shares of the Preferred Stock are convertible, in
each case subject to such aggregate percentage limitations. To ensure compliance
with this restriction, each Holder will be deemed to represent to the
Corporation each time it delivers a Notice of Conversion that such Notice of
Conversion has not violated the restrictions set forth in this paragraph and the
Corporation shall have no obligation to verify or confirm the accuracy of such
determination. In addition, a determination as to any group status as
contemplated above shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder. For purposes
of this Section 6(c), in determining the number of outstanding shares of Common
Stock, a Holder may rely on the number of outstanding shares of Common Stock as
stated in the most recent of the following: (A) the Corporation’s most recent
Form 10-QSB or Form 10-KSB, as the case may be, (B) a more recent public
announcement by the Corporation or (C) a more recent notice by the Corporation
or the Corporation’s transfer agent setting forth the number of shares of Common
Stock outstanding.  Upon the written or oral request of a Holder, the
Corporation shall within two Trading Days confirm orally and in writing to such
Holder the number of shares of Common Stock then outstanding.  In any case,
the number of outstanding shares of Common Stock shall be determined after
giving effect to the conversion or exercise of securities of the Corporation,
including the Preferred Stock, by such Holder or its Affiliates since the date
as of which such number of outstanding shares of Common Stock was reported. The
“Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the issuance of
shares of Common Stock issuable upon conversion of Preferred Stock held by the
applicable Holder. The Beneficial Ownership Limitation provisions of this
Section 6(c) may be waived by a Holder, at the election of such Holder, upon not
less than 61 days’ prior notice to the Corporation, to change the Beneficial
Ownership Limitation to 9.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to the issuance of shares of Common
Stock upon conversion of Preferred Stock held by such Holder and the provisions
of this Section 6(c) shall continue to apply. Upon such a change by a Holder of
the Beneficial Ownership Limitation from such 4.99% limitation to such 9.99%
limitation, the Beneficial Ownership Limitation shall not be further waived by
the applicable Holder. The provisions of this paragraph shall be construed and
implemented in a manner otherwise than in strict conformity with the terms of
this Section 6(c) to correct this paragraph (or any portion hereof) which may be
defective or inconsistent with the intended Beneficial Ownership Limitation
herein contained or to make changes or supplements necessary or desirable to
properly give effect to such limitation. The limitations contained in this
paragraph shall apply to a successor holder of Preferred Stock.
  11
  d) [INTENTIONALLY
DELETED]
 
 e) Mechanics of
Conversion
 
 i. Delivery of Certificate Upon
Conversion. Not later than three Trading Days after each Conversion Date
(the “Share Delivery
Date”), the Corporation shall deliver, or cause to be delivered, to the
converting Holder (A) a certificate or certificates which, on or after the
Effective Date, shall be free of restrictive legends and trading restrictions
(other than those which may then be required by the Purchase Agreement)
representing the number of shares of Common Stock being acquired upon the
conversion of shares of Preferred Stock, and (B) a bank check in the amount of
accrued and unpaid dividends (if the Corporation has elected or is required to
pay accrued dividends in cash). On or after the Effective Date, the Corporation
shall, upon request of a Holder, use its best efforts to deliver any certificate
or certificates required to be delivered by the Corporation under this Section 6
electronically through the Depository Trust Company or another established
clearing corporation performing similar functions. If in the case of any Notice
of Conversion such certificate or certificates are not delivered to or as
directed by the applicable Holder by the third Trading Day after the Conversion
Date, such Holder shall be entitled to elect by written notice to the
Corporation at any time on or before its receipt of such certificate or
certificates, to rescind such Conversion Notice by written notice to the
Corporation, in which event the Corporation shall promptly return to such Holder
any original Preferred Stock certificate delivered to the Corporation and such
Holder shall promptly return any Common Stock certificates representing the
shares of Preferred Stock tendered for conversion to the
Corporation.
  ii. Obligation Absolute; Partial
Liquidated Damages. The Corporation’s obligation to issue and deliver the
Conversion Shares upon conversion of Preferred Stock in accordance with the
terms hereof are absolute and unconditional, irrespective of any action or
inaction by the applicable Holder to enforce the same, any waiver or consent
with respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
applicable Holder or any other Person of any obligation to the Corporation or
any violation or alleged violation of law by the applicable Holder or any other
person, and irrespective of any other circumstance which might otherwise limit
such obligation of the Corporation to such Holder in connection with the
issuance of such Conversion Shares; provided, however, that such
delivery shall not operate as a waiver by the Corporation of any such action
that the Corporation may have against such Holder. In the event a Holder shall
elect to convert any or all of the Stated Value of its Preferred Stock, the
Corporation may not refuse conversion based on any claim that such Holder or any
one associated or affiliated with such Holder has been engaged in any violation
of law, agreement or for any other reason, unless an injunction from a court, on
notice to such Holder, restraining and/or enjoining conversion of all or part of
the Preferred Stock of such Holder shall have been sought and obtained, and the
Corporation posts a surety bond for the benefit of such Holder in the amount of
150% of the Stated Value of Preferred Stock which is subject to the injunction,
which bond shall remain in effect until the completion of arbitration/litigation
of the underlying dispute and the proceeds of which shall be payable to such
Holder to the extent it obtains judgment. In the absence of such injunction, the
Corporation shall issue Conversion Shares and, if applicable, cash, upon a
properly noticed conversion.
  12
  If the
Corporation fails to deliver to such Holder such certificate or certificates
pursuant to Section 6(e)(i) on the second Trading Day after the Share Delivery
Date applicable to such conversion, the Corporation shall pay to such Holder, in
cash, as liquidated damages and not as a penalty, for each $5,000 of Stated
Value of Preferred Stock being converted, $50 per Trading Day (increasing to
$100 per Trading Day on the third Trading Day and increasing to $200 per Trading
Day on the sixth Trading Day after such damages begin to accrue) for each
Trading Day after such second Trading Day after the Share Delivery Date until
such certificates are delivered. Nothing herein shall limit a Holder’s right to
pursue actual damages or declare a Triggering Event pursuant to Section 9 for
the Corporation’s failure to deliver Conversion Shares within the period
specified herein and such Holder shall have the right to pursue all remedies
available to it hereunder, at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief. The Exercise of any
such rights shall not prohibit a Holder from seeking to enforce damages pursuant
to any other Section hereof or under applicable law.
  iii. Compensation for Buy-In on
Failure to Timely Deliver Certificates Upon Conversion. If the
Corporation fails to deliver to a Holder such certificate or certificates by the
second Trading Day after the Share Delivery Date pursuant to Section 6(e)(i),
and if after such second Trading Day after the Share Delivery Date such Holder
is required by its brokerage firm to purchase (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by such
Holder of the Conversion Shares which such Holder was entitled to receive upon
the conversion relating to such Share Delivery Date (a “Buy-In”), then the
Corporation shall (A) pay in cash to such Holder (in addition to any other
remedies available to or elected by such Holder) the amount by which (x) such
Holder’s total purchase price (including any brokerage commissions) for the
shares of Common Stock so purchased exceeds (y) the product of (1) the aggregate
number of shares of Common Stock that such Holder was entitled to receive from
the conversion at issue multiplied by (2) the actual sale price at which the
sell order giving rise to such purchase obligation was executed (including any
brokerage commissions) and (B) at the option of such Holder, either reissue (if
surrendered) the shares of Preferred Stock equal to the number of shares of
Preferred Stock submitted for conversion or deliver to such Holder the number of
shares of Common Stock that would have been issued if the Corporation had timely
complied with its delivery requirements under Section 6(e)(i). For example, if a
Holder purchases shares of Common Stock having a total purchase price of $11,000
to cover a Buy-In with respect to an attempted conversion of shares of Preferred
Stock with respect to which the actual sale price (including any brokerage
commissions) giving rise to such purchase obligation was a total of $8,000 under
clause (A) of the immediately preceding sentence, the Corporation shall be
required to pay such Holder $1,000. Such Holder shall provide the Corporation
written notice indicating the amounts payable to such Holder in respect of the
Buy-In and, upon request of the Corporation, evidence of the amount of such
loss. Nothing herein shall limit a Holder’s right to pursue any other remedies
available to it hereunder, at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief with respect to the
Corporation’s failure to timely deliver certificates representing shares of
Common Stock upon conversion of the shares of Preferred Stock as required
pursuant to the terms hereof.
  13
  iv. Reservation of Shares
Issuable Upon Conversion. The Corporation covenants that it will at all
times reserve and keep available out of its authorized and unissued shares of
Common Stock for the sole purpose of issuance upon conversion of the Preferred
Stock and payment of dividends on the Preferred Stock, each as herein provided,
free from preemptive rights or any other actual contingent purchase rights of
Persons other than such Holders of the Preferred Stock, not less than such
aggregate number of shares of the Common Stock as shall (subject to the terms
and conditions in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 7) upon the conversion of all
outstanding shares of Preferred Stock and payment of dividends hereunder. The
Corporation covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly authorized, validly issued, fully paid and
nonassessable and, if the Conversion Shares Registration Statement is then
effective under the Securities Act, shall be registered for public sale in
accordance with such Conversion Shares Registration Statement.
 
 v. Fractional Shares.
Upon a conversion hereunder, the Corporation shall not be required to issue
stock certificates representing fractions of shares of Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the VWAP at such time. If the Corporation elects not, or is
unable, to make such a cash payment, a Holder shall be entitled to receive, in
lieu of the final fraction of a share, one whole share of Common
Stock.
 
 vi. Transfer Taxes. The
issuance of certificates for shares of the Common Stock on conversion of this
Preferred Stock shall be made without charge to any Holder hereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificates, provided that the Corporation shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate upon conversion in a name
other than that of such Holder of such shares of Preferred Stock so converted
and the Corporation shall not be required to issue or deliver such certificates
unless or until the Person or Persons requesting the issuance thereof shall have
paid to the Corporation the amount of such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid.
  14
  Section 7.
 Certain
Adjustments.
 
 a) Stock Dividends and Stock
Splits. If the Corporation, at any time while this Preferred Stock is
outstanding: (A) pays a stock dividend or otherwise makes a distribution or
distributions payable in shares of Common Stock on shares of Common Stock or any
other Common Stock Equivalents (which, for avoidance of doubt, shall not include
any shares of Common Stock issued by the Corporation upon conversion of, or
payment of a dividend on, this Preferred Stock); (B) subdivides outstanding
shares of Common Stock into a larger number of shares; (C) combines (including
by way of a reverse stock split) outstanding shares of Common Stock into a
smaller number of shares; or (D) issues, in the event of a reclassification of
shares of the Common Stock, any shares of capital stock of the Corporation, then
the Conversion Price shall be multiplied by a fraction of which the numerator
shall be the number of shares of Common Stock (excluding any treasury shares of
the Corporation) outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event. Any adjustment made pursuant to this Section 7(a)
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
  b) Subsequent Equity
Sales. If the Corporation or any Subsidiary thereof, at any time while
this Preferred Stock is outstanding, sells or grants any option to purchase or
sells or grants any right to reprice its securities, or otherwise disposes of or
issues (or announces any sale, grant or any option to purchase or other
disposition) any Common Stock or Common Stock Equivalents entitling any Person
to acquire shares of Common Stock at an effective price per share that is lower
than the then Conversion Price (such lower price, the “Base Conversion
Price” and such issuances collectively, a “Dilutive Issuance”)
(if a holder of the Common Stock or Common Stock Equivalents so issued shall at
any time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which are issued in connection with such
issuance, be entitled to receive shares of Common Stock at an effective price
per share that is lower than the Conversion Price, such issuance shall be deemed
to have occurred for less than the Conversion Price on such date of the Dilutive
Issuance), then the Conversion Price shall be reduced, and only reduced, by
multiplying the Conversion Price by a fraction, the numerator of which is the
number of shares of Common Stock issued and outstanding immediately prior to the
Dilutive Issuance plus the number of shares of Common Stock which the actual
cash offering price for such Dilutive Issuance would purchase at the then
Exercise Price, and the denominator of which shall be the sum of the number of
shares of Common Stock issued and outstanding immediately prior to the Dilutive
Issuance plus the number of shares of Common Stock so issued or issuable in
connection with the Dilutive Issuance, but in no event shall such adjustment
reduce the Conversion Price to less than $0.05. Notwithstanding the foregoing,
no adjustment will be made under this Section 7(b) in respect of an Exempt
Issuance. The Corporation shall notify each Holder in writing, no later than the
Business Day following the issuance of any Common Stock or Common Stock
Equivalents subject to this Section 7(b), indicating therein the applicable
issuance price, or applicable reset price, exchange price, conversion price and
other pricing terms (such notice, the “Dilutive Issuance
Notice”). For purposes of clarification, whether or not the Corporation
provides a Dilutive Issuance Notice pursuant to this Section 7(b), upon the
occurrence of any Dilutive Issuance, each Holder is entitled to receive a number
of Conversion Shares based upon the Base Conversion Price on or after the date
of such Dilutive Issuance, regardless of whether such Holder accurately refers
to the Base Conversion Price in the Notice of Conversion.
  15
  c) Subsequent Rights
Offerings. If the Corporation, at any time while this Preferred Stock is
outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of
Common Stock at a price per share that is lower than the VWAP on the record date
referenced below, then the Conversion Price shall be multiplied by a fraction of
which the denominator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of additional shares of Common Stock offered for subscription or purchase, and
of which the numerator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares so
offered (assuming delivery to the Corporation in full of all consideration
payable upon exercise of such rights, options or warrants) would purchase at
such VWAP. Such adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights, options or
warrants.
  d) Pro Rata
Distributions. If the Corporation, at any time while this Preferred Stock
is outstanding, distributes to all holders of Common Stock (and not to Holders)
evidences of its indebtedness or assets (including cash and cash dividends) or
rights or warrants to subscribe for or purchase any security (other than Common
Stock, which shall be subject to Section 7(b)), then in each such case the
Conversion Price shall be adjusted by multiplying such Conversion Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the then
fair market value at such record date of the portion of such assets, evidence of
indebtedness or rights or warrants so distributed applicable to one outstanding
share of the Common Stock as determined by the Board of Directors of the
Corporation in good faith. In either case the adjustments shall be described in
a statement delivered to the Holders describing the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable
to one share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above.
 
 e) Fundamental
Transaction. If, at any time while this Preferred Stock is outstanding,
(A) the Corporation effects any merger or consolidation of the Corporation with
or into another Person, (B) the Corporation effects any sale of all or
substantially all of its assets in one transaction or a series of related
transactions, (C) any tender offer or exchange offer (whether by the Corporation
or another Person) is completed pursuant to which holders of Common Stock are
permitted to tender or exchange their shares for other securities, cash or
property, or (D) the Corporation effects any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or property
(in any such case, a “Fundamental
Transaction”), then, upon any subsequent conversion of this Preferred
Stock, each Holder shall have the right to receive, for each Conversion Share
that would have been issuable upon such conversion immediately prior to the
occurrence of such Fundamental Transaction, the same kind and amount of
securities, cash or property as it would have been entitled to receive upon the
occurrence of such Fundamental Transaction if it had been, immediately prior to
such Fundamental Transaction, a holder of one share of Common Stock (the “Alternate
Consideration”).
  16
  For
purposes of any such conversion, the determination of the Conversion Price shall
be appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Corporation shall apportion the
Conversion Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then
each Holder shall be given the same choice as to the Alternate Consideration it
receives upon any conversion of this Preferred Stock following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions, any
successor to the Corporation or surviving entity in such Fundamental Transaction
shall file a new Certificate of Designation with the same terms and conditions
and issue to each Holder new preferred stock consistent with the foregoing
provisions and evidencing such Holder’s right to convert such preferred stock
into Alternate Consideration. The terms of any agreement pursuant to which a
Fundamental Transaction is effected shall include terms requiring any such
successor or surviving entity to comply with the provisions of this Section 7(e)
and insuring that this Preferred Stock (or any such replacement security) will
be similarly adjusted upon any subsequent transaction analogous to a Fundamental
Transaction.
  f) Calculations. All
calculations under this Section 7 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be. For purposes of this Section 7,
the number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding
any treasury shares of the Corporation) issued and outstanding.
 
 g) Notice to the
Holders.
 
 i. Adjustment to Conversion
Price. Whenever the Conversion Price is adjusted pursuant to any
provision of this Section 7, the Corporation shall promptly mail to each Holder
a notice setting forth the Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment. If the
Corporation issues a variable rate security, despite the prohibition thereon in
the Purchase Agreement, the Corporation shall be deemed to have issued Common
Stock or Common Stock Equivalents at the lowest possible conversion or exercise
price at which such securities may be converted or exercised in the case of a
Variable Rate Transaction (as defined in the Purchase
Agreement).
  17
  ii. Notice to Allow Conversion
by Holder. If (A) the Corporation shall declare a dividend (or any other
distribution in whatever form) on the Common Stock, (B) the Corporation shall
declare a special nonrecurring cash dividend on or a redemption of the Common
Stock, (C) the Corporation shall authorize the granting to all holders of the
Common Stock of rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights, (D) the approval of any
stockholders of the Corporation shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Corporation is a party, any sale or transfer of all or substantially all of the
assets of the Corporation, of any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or property or (E) the
Corporation shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Corporation, then, in each case,
the Corporation shall cause to be filed at each office or agency maintained for
the purpose of conversion of this Preferred Stock, and shall cause to be
delivered to each Holder at its last address as it shall appear upon the stock
books of the Corporation, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which such Holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange, provided that the failure to deliver such
notice or any defect therein or in the delivery thereof shall not affect the
validity of the corporate action required to be specified in such notice. Each
Holder is entitled to convert the Conversion Amount of this Preferred Stock (or
any part hereof) during the 20-day period commencing on the date of such notice
through the effective date of the event triggering such notice.
  Section 8.
 Optional
Redemption.
 
 a) [INTENTIONALLY
DELETED]
  b) Optional Redemption at
Election of Corporation. Subject to the provisions of this Section 8, at
any time after the 4 year anniversary of the Effective Date, the Corporation may
deliver a notice to the Holders (an “Optional Redemption
Notice” and the date such notice is deemed delivered hereunder, the
“Optional Redemption
Notice Date”) of its irrevocable election to redeem some or all of the
then outstanding Preferred Stock, for cash in an amount equal to the Optional
Redemption Amount on the 20th Trading
Day following the Optional Redemption Notice Date (such date, the “Optional Redemption
Date” and such redemption, the “Optional Redemption”). The Optional
Redemption Amount is payable in full on the Optional Redemption Date. The
Corporation may only effect an Optional Redemption if on each Trading Day
occurring during the period commencing on the Optional Redemption Notice Date
through to the Optional Redemption Date and through and including the date
payment of the Optional Redemption Amount is actually made, each of the Equity
Conditions shall have been met. If any of the Equity Conditions shall cease to
be satisfied at any time during the 20 Trading Day period, then a Holder may
elect to nullify the Optional Redemption Notice by notice to the Corporation
within 3 Trading Days after the first day on which any such Equity Condition has
not been met (provided that if, by a provision of the Transaction Documents, the
Corporation is obligated to notify such Holders of the non-existence of an
Equity Condition, such notice period shall be extended to the third Trading Day
after proper notice from the Corporation) in which case the Optional Redemption
Notice shall be null and void, ab initio. Each Holder may elect to convert the
Preferred Stock subject to this Section 8(b) pursuant to Section 6 prior to
actual payment in cash for any redemption under this Section 8(b) by the
delivery of a Notice of Conversion to the Corporation prior to the date of
actual cash payment. The Corporation covenants and agrees that it will honor all
Notices of Conversion tendered from the time of delivery of the Optional
Redemption Notice through the date the Optional Redemption Amount is paid in
full.
  18
  c) Redemption Procedure.
The payment of cash shall be made on the Optional Redemption Date. If any
portion of the payment pursuant to an Optional Redemption shall not be paid by
the Corporation by the applicable due date, interest shall accrue thereon until
such amount is paid in full at an interest rate equal to the lesser of 18% per
annum or the maximum rate permitted by applicable law. Notwithstanding anything
herein contained to the contrary, if any portion of the Optional Redemption
Amount remains unpaid after such date, a Holder may elect, by written notice to
the Corporation given at any time thereafter, to invalidate ab initio such
redemption and the Corporation shall have no further right to exercise such
Optional Redemption. Notwithstanding anything to the contrary in this Section 8,
the Corporation’s determination to redeem in cash or its elections under Section
8(b) shall be applied ratably among the Holders of the Preferred
Stock.
 
 Section 9. Redemption Upon Triggering
Events.
  a) “Triggering Event”
means any one or more of the following events (whatever the reason and whether
it shall be voluntary or involuntary or effected by operation of law or pursuant
to any judgment, decree or order of any court, or any order, rule or regulation
of any administrative or governmental body):
 
 i. the
failure of a Conversion Shares Registration Statement to be declared effective
by the Commission on or prior to the 180th day
after the Original Issue Date;
  ii. if,
during the Effectiveness Period, the effectiveness of the Conversion Shares
Registration Statement lapses for more than an aggregate of 60 calendar days
(which need not be consecutive calendar days) during any 12 month period, or the
Holders shall not otherwise be permitted to resell Registrable Securities under
the Conversion Shares Registration Statement for more than an aggregate of 60
calendar days (which need not be consecutive calendar days) during any 12 month
period;
 
 iii. the
Corporation shall fail to deliver certificates representing Conversion Shares
issuable upon a conversion hereunder that comply with the provisions hereof
prior to the seventh Trading Day after such shares are required to be delivered
hereunder, or the Corporation shall provide written notice to any Holder,
including by way of public announcement, at any time, of its intention not to
comply with requests for conversion of any shares of Preferred Stock in
accordance with the terms hereof;
 
 iv. one
of the Events (as defined in the Registration Rights Agreement) described in
subsections (i), (ii) or (iii) of Section 2(b) of the Registration Rights
Agreement shall not have been cured to the satisfaction of the Holders prior to
the expiration of 30 calendar days from the Event Date (as defined in the
Registration Rights Agreement) relating thereto (other than an Event resulting
from a failure of a Conversion Shares Registration Statement to be declared
effective by the Commission on or prior to the 180th day after the Original
Issue Date, which shall be covered by Section 9(a)(i));
  19
  v. the
Corporation shall fail for any reason to pay in full the amount of cash due
pursuant to a Buy-In within five calendar days after notice therefor is
delivered hereunder or shall fail to pay all amounts owed on account of any
Event (as defined in the Registration Rights Agreement) within five days of the
date due;
 
 vi. the
Corporation shall fail to have available a sufficient number of authorized and
unreserved shares of Common Stock to issue to the Holder upon a conversion
hereunder;
 
 vii. unless
specifically addressed elsewhere in this Certificate of Designation as a
Triggering Event, the Corporation shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any breach of
the Transaction Documents, and such failure or breach shall not, if subject to
the possibility of a cure by the Corporation, have been cured within 30 calendar
days after the date on which written notice of such failure or breach shall have
been delivered (other than Section 4.19 of the Purchase Agreement which shall
have no cure period);
 
 viii. the
Corporation shall redeem more than a de minimis number of
Junior Securities other than as to repurchases of Common Stock or Common Stock
Equivalents from departing officers and directors of the Corporation, provided
that, while any of the Preferred Stock remains outstanding, such repurchases
shall not exceed an aggregate of $100,000 from all officers and
directors;
 
 ix. the
Corporation shall be party to a Change of Control Transaction;
 
 x. there
shall have occurred a Bankruptcy Event;
 
 xi. the
Common Stock shall fail to be listed or quoted for trading on a Trading Market
for more than five Trading Days, which need not be consecutive Trading Days;
or
 
 xii. any
monetary judgment, writ or similar final process shall be entered or filed
against the Corporation, any Subsidiary or any of their respective property or
other assets for greater than $50,000, and such judgment, writ or similar final
process shall remain unvacated, unbonded or unstayed for a period of 45 calendar
days.
  20
  b) Upon
the occurrence of a Triggering Event, each Holder shall (in addition to all
other rights it may have hereunder or under applicable law) have the right,
exercisable at the sole option of such Holder, to require the Corporation to,
(A) with respect to the Triggering Events set forth in Sections 9(a)(iii), (v),
(vi), (vii), (viii), (ix) (as to Changes of Control approved by the Board of
Directors of the Corporation) and (x) (as to voluntary filings only), redeem all
of the Preferred Stock then held by such Holder for a redemption price, in cash,
equal to the Triggering Redemption Amount or (B) at the option of such Holder
and with respect to the Triggering Events set forth in Sections 9(a)(i), (ii),
(iv), (ix) (as to Changes of Control not approved by the Board of Directors of
the Corporation), (x) (as to involuntary filings only), (xi) and (xii), either
(a) redeem all of the Preferred Stock then held by such Holder for a redemption
price, in shares of Common Stock, equal to a number of shares of Common Stock
equal to the Triggering Redemption Amount divided by 75% of the average of the
10 VWAPs immediately prior to the date of election hereunder or (b) increase the
dividend rate on all of the outstanding Preferred Stock held by such Holder to
18% per annum thereafter. The Triggering Redemption Amount, in cash or in
shares, shall be due and payable or issuable, as the case may be, within five
Trading Days of the date on which the notice for the payment therefor is
provided by a Holder (the “Triggering Redemption
Payment Date”). If the Corporation fails to pay in full the Triggering
Redemption Amount hereunder on the date such amount is due in accordance with
this Section (whether in cash or shares of Common Stock), the Corporation will
pay interest thereon at a rate equal to the lesser of 18% per annum or the
maximum rate permitted by applicable law, accruing daily from such date until
the Triggering Redemption Amount, plus all such interest thereon, is paid in
full. For purposes of this Section, a share of Preferred Stock is outstanding
until such date as the applicable Holder shall have received Conversion Shares
upon a conversion (or attempted conversion) thereof that meets the requirements
hereof or has been paid the Triggering Redemption Amount in cash.
 
 Section 10.
 Negative
Covenants. So long as any shares of Preferred Stock are outstanding, the
Corporation shall not, and shall not permit any of its Subsidiaries to, directly
or indirectly:
 
 a) other
than Permitted Indebtedness, enter into, create, incur, assume, guarantee or
suffer to exist any indebtedness for borrowed money of any kind, including but
not limited to, a guarantee, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits
therefrom;
  b) other
than Permitted Liens, enter into, create, incur, assume or suffer to exist any
Liens of any kind, on or with respect to any of its property or assets now owned
or hereafter acquired or any interest therein or any income or profits
therefrom;
 
 c) amend
its certificate of incorporation, bylaws or other charter documents so as to
materially and adversely affect any rights of any Holder;
 
 d) repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of
shares of its Common Stock, Common Stock Equivalents or Junior Securities,
except for the Conversion Shares to the extent permitted or required under the
Transaction Documents or as otherwise permitted by the Transaction
Documents;
  21
  e) enter
into any agreement or understanding with respect to any of the foregoing;
or
 
 f) pay
cash dividends or distributions on Junior Securities of the
Corporation.
  Section
11. Miscellaneous.
 
 a) Notices. Any and all
notices or other communications or deliveries to be provided by a Holder
hereunder including, without limitation, any Notice of Conversion, shall be in
writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Corporation, at the
address set forth above, facsimile number (508) 366-3816, Attn: Joseph Warrino,
CFOor such other facsimile number or address as the Corporation may
specify for such purposes by notice to the Holders delivered in accordance with
this Section 11. Any and all notices or other communications or deliveries to be
provided by the Corporation hereunder shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile number or address of such
Holder appearing on the books of the Corporation, or if no such facsimile number
or address appears on the books of the Corporation, at the principal place of
business of such Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section 11 prior to 5:30 p.m. (New York City
time) on any date, (ii) the date immediately following the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
number specified in this Section 11 between 5:30 p.m. and 11:59 p.m. (New York
City time) on any date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be
given.
  b) Absolute Obligation.
Except as expressly provided herein, no provision of this Certificate of
Designation shall alter or impair the obligation of the Corporation, which is
absolute and unconditional, to pay liquidated damages, accrued dividends and
accrued interest, as applicable, on the shares of Preferred Stock at the time,
place, and rate, and in the coin or currency, herein prescribed.
  c) Lost or Mutilated Preferred
Stock Certificate. If a Holder’s Preferred Stock certificate shall be
mutilated, lost, stolen or destroyed, the Corporation shall execute and deliver,
in exchange and substitution for and upon cancellation of a mutilated
certificate, or in lieu of or in substitution for a lost, stolen or destroyed
certificate, a new certificate for the shares of Preferred Stock so mutilated,
lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft
or destruction of such certificate, and of the ownership hereof reasonably
satisfactory to the Corporation.
  22
  d) Governing Law. All
questions concerning the construction, validity, enforcement and interpretation
of this Certificate of Designation shall be governed by and construed and
enforced in accordance with the internal laws of the State of Delaware, without
regard to the principles of conflict of laws thereof. Each party agrees that all
legal proceedings concerning the interpretation, enforcement and defense of the
transactions contemplated by any of the Transaction Documents (whether brought
against a party hereto or its respective Affiliates, directors, officers,
shareholders, employees or agents) shall be commenced in the state and federal
courts sitting in the City of New York, Borough of Manhattan (the “New York Courts”).
Each party hereto hereby irrevocably submits to the exclusive jurisdiction of
the New York Courts for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of such New York Courts, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Certificate of Designation and
agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing contained herein shall be deemed to limit in any way
any right to serve process in any other manner permitted by applicable law. Each
party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Certificate of Designation or the
transactions contemplated hereby. If either party shall commence an action or
proceeding to enforce any provisions of this Certificate of Designation, then
the prevailing party in such action or proceeding shall be reimbursed by the
other party for its attorneys’ fees and other costs and expenses incurred in the
investigation, preparation and prosecution of such action or
proceeding.
  e) Waiver. Any waiver by
the Corporation or a Holder of a breach of any provision of this Certificate of
Designation shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Certificate of Designation or a waiver by any other Holder. The failure of the
Corporation or a Holder to insist upon strict adherence to any term of this
Certificate of Designation on one or more occasions shall not be considered a
waiver or deprive that party (or any other Holders) of the right thereafter to
insist upon strict adherence to that term or any other term of this Certificate
of Designation. Any waiver by the Corporation or a Holder must be in
writing.
  f) Severability. If any
provision of this Certificate of Designation is invalid, illegal or
unenforceable, the balance of this Certificate of Designation shall remain in
effect, and if any provision is inapplicable to any Person or circumstance, it
shall nevertheless remain applicable to all other Persons and circumstances. If
it shall be found that any interest or other amount deemed interest due
hereunder violates the applicable law governing usury, the applicable rate of
interest due hereunder shall automatically be lowered to equal the maximum rate
of interest permitted under applicable law.
  23
  g) Next Business Day.
Whenever any payment or other obligation hereunder shall be due on a day other
than a Business Day, such payment shall be made on the next succeeding Business
Day.
 
 h) Headings. The
headings contained herein are for convenience only, do not constitute a part of
this Certificate of Designation and shall not be deemed to limit or affect any
of the provisions hereof.
 
 i) Status of Converted or
Redeemed Preferred Stock. Shares of Preferred Stock may only be issued
pursuant to the Purchase Agreement. If any shares of Preferred Stock shall be
converted, redeemed or reacquired by the Corporation, such shares shall resume
the status of authorized but unissued shares of preferred stock and shall no
longer be designated as Series B Variable Dividend Convertible Preferred
Stock
 
 RESOLVED, FURTHER, that the Chairman,
the president, the Chief Financial Officer or the secretary, of the Corporation
be and they hereby are authorized and directed to prepare and file a Certificate
of Designation of Preferences, Rights and Limitations in accordance with the
foregoing resolution and the provisions of Delaware law.
 
 IN WITNESS WHEREOF, the undersigned
have executed this Certificate this 8th day of
June 2006.
   /s/
      Gregory M.
      Decker
                Name:
      Gregory M. Decker
                Title:
      Chief Financial Officer
  24
  ANNEX
A
 
 NOTICE OF
CONVERSION
 
 (TO BE
EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF PREFERRED
STOCK)
 
 The
undersigned hereby elects to convert the number of shares of Series B Variable
Dividend Convertible Preferred Stock indicated below into shares of common
stock, par value $0.001 per share (the “Common Stock”), of
Viking Systems, Inc., a Delaware corporation (the “Corporation”),
according to the conditions hereof, as of the date written below. If shares are
to be issued in the name of a Person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as may be required by the Corporation in
accordance with the Purchase Agreement. No fee will be charged to a Holder for
any conversion, except for any such transfer taxes.
 
 Conversion
calculations:
 
 Date
      to Effect Conversion:
      _______________________________________________Number
      of shares of Preferred Stock owned prior to Conversion:
       __________________Number
      of shares of Preferred Stock to be Converted: 
      __________________________Stated
      Value of shares of Preferred Stock to be Converted:
      _______________________Number
      of shares of Common Stock to be
      Issued:  _____________________________Applicable
      Conversion Price:
      _____________________________________________Number
      of shares of Preferred Stock subsequent to
      Conversion:  __________________[HOLDER]
                
                By:___________________________________
                Name:
                Title:
  25
  CERTIFICATE
OF OWNERSHIP AND MERGER
 VIKING
SYSTEMS, INC.
 A NEVADA
CORPORATION
 INTO
 VIKING
SYSTEMS. INC.
 A
DELAWARE CORPORATION
 
 (Pursuant
to the General Corporation Law of the State of Delaware)
 
 Certificate of Ownership and Merger
dated July 18th, 2006, executed by Viking Systems, Inc., a Nevada corporation,
hereinafter referred to as the "Nevada Corporation, " and Viking Systems, Inc.,
a Delaware corporation, hereinafter referred to as the "Delaware Corporation"
and/or "Surviving Corporation".
 
 The Nevada Corporation and the Delaware
Corporation do hereby certify:
 
 1.           The Nevada Corporation
Organized Pursuant to Nevada Law. The Nevada Corporation was organized
pursuant to the corporation law of the State of Nevada on May 28, 1998, which
law permits the merger of a Nevada corporation with a corporation organized
under the laws of another state.
 
 2.           The Delaware Corporation
Organized Pursuant to Delaware Law. The Delaware Corporation was
organized pursuant to the corporation law of the State o Delaware on June 8,
2006, which law permits the merger of a Delaware corporation with a corporation
organized under the laws of another state.
 
 3.           Ownership of the Delaware
Corporation Shares. The Nevada Corporation owns all of the issued and
outstanding shares of the Delaware Corporation.
 
 4.           Director Approval and
Resolutions of the Nevada Corporation. On May 22, 2006, the directors of
the Nevada Corporation duly adopted, by the unanimous written consent of its
members, filed with the minutes of the board, the following
resolutions:
 
 RESOLVED,
that the Nevada Corporation shall, subject to stockholder approval, merge itself
into the Delaware Corporation, its wholly owned subsidiary which assumes all of
the obligations of the Nevada Corporation.
 
 RESOLVED,
that the merger shall be effective upon filing Articles of Merger with the
Secretary of State of the State of Nevada and a Certificate of Ownership and
Merger with the Secretary of State of Delaware.
 
 RESOLVED, that the terms and conditions
of the merger are as set forth in the Agreement and Plan of Merger attached
hereto and by this reference made a part hereof.
  
  RESOLVED, that the proper officers of
the Nevada Corporation be, and they hereby are, directed to make and execute a
Certificate of Ownership and Merger setting forth a copy of the resolutions to
merge itself into the Delaware Corporation and to cause the same to be filed
with the Secretary of State of Delaware and a certified copy recorded in the
Office of the Recorder of deeds of New Castle County and to do all acts and
things whatsoever, whether within or without the State of Delaware, which may be
necessary or proper to effect said merger.
 
 RESOLVED, that upon the Effective Date
of the Merger, each share of Nevada Corporation common stock, issued and
outstanding immediately prior thereto shall, by virtue of the Merger and without
any action, the holder of such shares or any other person, be changed and
converted on a pro rata basis into and exchanged for one fully paid and
nonassessable share of common Stock of the Delaware Corporation. Upon the
Effective Date of the Merger, each share of Viking Corporation Series B
Preferred Stock issued and outstanding immediately prior thereto shall, by
virtue of the Merger and without any action by the holder of such shares or any
other person, be changed and converted on a pro rata basis into and exchanged
for one fully paid and nonassessable share of Series B Preferred Stock of the
Delaware Corporation.
 
 5.           Stockholder Consent.
On May 22, 2006, the holder of a majority of the outstanding shares of the
Nevada Corporation that were entitled to vote, approved the Plan and Agreement
of Merger in accordance with the requirements of the Nevada Revised
Statutes.
 
 6.           Separate Existence:
Surviving Corporation. At the effective time of the merger, the separate
existence of the Nevada Corporation shall cease and the Nevada Corporation shall
be merged in accordance with the applicable provision of the Revised Nevada
Business Corporations Act and the General Corporation Law of Delaware, into the
Delaware Corporation, which shall be the Surviving Corporation.
 
 7.           Governing Law. The
laws which are-to govern the Surviving Corporation, the Delaware Corporation,
are the laws of the State of Delaware. The Certificate of Incorporation of the
Delaware Corporation shall be the Certificate of Incorporation of the Surviving
Corporation, the Delaware Corporation, until the same shall be altered or
amended in accordance with the laws of the State of Delaware.
 
 8.           Directors and
Officers. The directors and officers of the Surviving Corporation shall,
at the effective date of the merger, be as follows:
  Daniel F.
      Crowley
              Chairman of the
      BoardDonald E.
      Tucker
              CEO/President/DirectorGregory M.
      Decker
              Chief Financial
      OfficerRonald A.
      Walrod
              DirectorRobin B1ackstone,
      M.D.
              DirectorNathan J. Harrison,
      M.D.
              DirectorJoseph
    Warrino
              Vice President of
      Finance &Administrative SecretaryLonna
      Williams
              Sr. VP of Commercial
      Operations
 
 2
  9.           Effect of
Merger.  The merger shall be effective at such time as this
Certificate of Merger is filed with the Office of the Secretary of State of
Delaware and Articles of Merger are filed with the office of the Secretary of
State of Nevada.  At the effective time of the merger, the Surviving
Corporation, the Delaware Corporation, shall retain or succeed to, without other
transfer, and shall possess and enjoy all rights, privileges, immunities,
powers, purposes, and franchises and be subject to all the restrictions,
disabilities and duties of each corporation.  All property, both real
and personal, tangible, and intangible and all debts due to either corporation
shall be vested in the Surviving Corporation.  All debts, liabilities,
and duties of either corporation shall be vested in the Surviving
Corporation.  All debts, liabilities, and duties of either corporation
shall be the responsibility of and enforceable against the Surviving Corporation
as if said debts, liabilities, and duties had been incurred or contracted by the
Surviving Corporation.
 
 10.         Address for Service of
Process.  The Surviving Corporation hereby appoints the
Secretary of State as its agent to accept service of process in any suit or
proceeding and agrees that it may be served in process in the State of Nevada in
any proceeding for the enforcement of any obligation of the Nevada
corporation.  Copies of such process shall be mailed to Viking
Systems, Inc., 4350 La Jolla Village Dr., Suite 900, San Diego, CA
92122.
 
 IN WITNESS WHEREOF, this Certificate
has been signed by each of the Corporations, which are the parties hereto this
18th day of July, 2006. Donald E. Tucker hereby affirms and acknowledges, under
penalties of perjury, that this Certificate of Ownership and Merger is the act
and deed of Viking Systems, Inc., a Delaware corporation, and Viking Systems,
Inc., a Nevada corporation, respectively, and the facts stated herein are
true.
 
 
  By: /s/ Donald E.
      Tucker
                Donald E.
      Tucker, Chief
                Executive
      Officer President
  3
  CERTIFICATE
OF AMENDMENT
 OF
 THE
CERTIFICATE OF INCORPORATION OF
 VIKING
SYSTEMS, INC.
 
 Under
Section 242 of the General Corporation Law
 
 The following Certificate of Amendment
to Certificate of Incorporation was recommended and approved by the Board of
Directors of Viking Systems, Inc., and was approved by the holders of a majority
of the issued and outstanding shares of common stock of Viking Systems, Inc.
pursuant to the written consent of such majority holders. Such written consent
was obtained pursuant to Section 228 of the General Corporation Law of the State
of Delaware. Such amendment to Certificate of Incorporation was adopted pursuant
to Section 242 of the General Corporation Law of the State of Delaware. It is
hereby certified that:
 
 FIRST: The name of the corporation is
VIKING SYSTEMS, INC. (the "Corporation).
 
 SECOND: The certificate of
incorporation of the Corporation is hereby amended by striking out Article IV
its entirety, and the following new Article IV is substituted in lieu
thereof:
 
 (A) The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is Four Hundred
Twenty-Five Million (425,000,000) shares, each with a par value of $0.001 per
share. Four Hundred Million (400,000,000) shares shall be Common Stock and
Twenty-Five Million (25,000,000) shares shall be Preferred Stock.
 
 (B) The Preferred Stock may be issued
from time to time in one or more series. The Board of Directors is hereby
authorized, by filing a certificate pursuant to the applicable law of the State
of Delaware and within the limitations and restrictions stated in this
Certificate of Incorporation, to determine or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and the number of shares constituting any such series
and the designation thereof, or any of them; and to increase or decrease the
number of shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
 
 (C) The holders of shares of Common
Stock shall not have cumulative voting Rights.
 
 (D) No holder of shares of Common Stock
shall be entitled to preemptive or subscription rights.
  
  (E) The Certificate of Designation of
Series B Preferred Stock filed June 8, 2006, shall not be revised, amended, or
affected by this Certificate of Amendment to the Corporation's Certificate of
Incorporation.
 
 THIRD: The amendment of the Certificate
of Incorporation herein certified has been duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
 
 Signed
and attested to on May 2, 2007
   /s/ Donald E.
      TuckerDonald
      E. Tucker
                Chief
      Executive OfficerATTEST:/s/
      Gregory
      DeckerGregory
      Decker
                Chief
      Financial Officer
  2
  CERTIFICATE
OF AMENDMENT
 OF
 CERTIFICATE
OF INCORPORATION
 OF
 VIKING SYSTEMS,
INC.
  Viking
Systems, Inc., a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware,
  DOES
HEREBY CERTIFY THAT:
  FIRST:  The
Board of Directors of Viking Systems, Inc. (the “Corporation”), at a meeting
duly adopted the following resolution setting forth a proposed amendment to the
Certificate of Incorporation of the Corporation, declaring said amendment to be
advisable and calling for consideration thereof by the stockholders of the
Corporation.  The resolution setting forth the proposed amendment is
as follows:
  RESOLVED,
that Article IV of the Certificate of Incorporation of Viking Systems, Inc.
shall be amended in its entirety so as to provide as set forth on Exhibit A
hereto.
  SECOND:  Thereafter,
pursuant to a resolution of the Board of Directors, the holders of a majority of
the outstanding shares of the common stock of the Corporation voted in favor of
the amendment.
  THIRD:  The
amendment was duly adopted in accordance with the provisions of Section 242 of
the General Corporation Law of the State of Delaware.  With respect to
such adoption, written consent of the stockholders of the Corporation has been
given in accordance with the provisions of Section 228 of the General
Corporation Law of the State of Delaware and written notice has been given as
provided in Section 228.
  IN
WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be
signed by its duly authorized officer as of January 4, 2008.
  VIKING
      SYSTEMS, INC., a Delaware corporationBy:
              /s/
      Robert F.
      MathewsRobert
      Mathews, Chief Financial Officer
  
  EXHIBIT
A
  ARTICLE
IV.
  (A) The
Corporation is authorized to issue two classes of stock to be designated,
respectively, “Common Stock” and “Preferred Stock.”  The total number
of shares which the Corporation is authorized to issue is Four Hundred
Twenty-Five Million (425,000,000) shares, each with a par value of $0.001 per
share.  Four Hundred Million (400,000,000) shares shall be Common
Stock and Twenty-Five Million (25,000,000) shares shall be Preferred
Stock.
  (B) The
Preferred Stock may be issued from time to time in one or more
series.  The Board of Directors is hereby authorized, by filing a
certificate pursuant to the applicable law of the State of Delaware and within
the limitations and restrictions stated in this Certificate of Incorporation, to
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock and the number
of shares constituting any such series and the designation thereof, or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding.  In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of each series.
  (C) At
the time this amendment to the Certificate of Incorporation becomes effective
(the “Effective Time”) pursuant to the Delaware General Corporation Law, and
without any further action on the part of the Corporation or its
stockholders:  (i) the Corporation’s Common Stock issued and
outstanding immediately prior to the Effective Time (the “Old Common Stock”)
shall be converted into shares of the Common Stock and combined at the rate of
one share of Common Stock for each fifty shares of Old Common Stock, so as to
effect a one-for-fifty reverse split.  At the Effective Time, the
certificates representing shares of the Old Common Stock, the shall be deemed
cancelled and shall not be recognized as outstanding on the books of the
Corporation for any purpose.  Thereupon: (i) there shall be issued and
delivered to each holder of Old Common Stock, promptly in such holder’s name and
at the address as shown on the records of the Corporation, a certificate for the
number of shares of Common Stock into which the shares of Old Common Stock were
combined, provided, however that the Corporation shall not issue any fractional
shares of Common Stock, but that fractional shares shall be rounded up to the
next whole share.
  (D) The
holders of shares of Common Stock shall not have cumulative voting
rights.
  (E) No
holder of shares of Common Stock shall be entitled to preemptive or subscription
rights.
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