U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2004
                                       OR
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                        Commission file number 000-49636

                              VIKING SYSTEMS, INC.
           (Name of Small Business Issuer as specified in its charter)

               Nevada                                          86-0913802
   -------------------------------                        -------------------
   (State or other jurisdiction of                        (I.R.S. employer
   incorporation or organization)                         identification No.)

                         7514 Girard Avenue, Suite 1509
                               La Jolla, CA 92037
                    (Address of principal executive offices)

         Issuer's telephone number, including area code: (858) 456-6608

    Securities registered pursuant to Section 12(b) of the Exchange Act: None

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                          $.001 Par Value Common Stock

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

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K __.

     The Issuer's  revenues  for the fiscal year ended  December 31, 2004 were $
2,846,863.

     As of March 29, 2005,  there were 31,900,300  shares of the Issuer's common
stock issued and outstanding of which 2,244,650 were held by non-affiliates.  As
of March 29, 2005, there was no active market for the Issuer's common stock.



                    DOCUMENTS INCORPORATED BY REFERENCE: NONE




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                                TABLE OF CONTENTS


                                                                            Page
                                                                            ----
PART I.........................................................................2

    Item 1.  Description of Business...........................................2

    Item 2.  Properties.......................................................10

    Item 3.  Legal Proceedings................................................10

    Item 4.  Submission of Matters to a Vote of Security Holders..............10

PART II.......................................................................11

    Item 5.  Market for the Registrant's Common Stock and Related Security
                   Holder Matters.............................................11

    Item 6.  Management's Discussion and Analysis of Financial Condition
                   and Results of Operation...................................13

    Item 7.  Financial Statements.............................................24

    Item 8.  Changes and Disagreements with Accountants on Accounting
                   and Financial Disclosure...................................48

    Item 8A.  Controls and Procedures.........................................48

    Item 8B. Other Information................................................49

PART III......................................................................49

    Item 9.  Directors, Executive Officers, Promoters and Control Persons;
                   Compliance with Section 16(a) of the Exchange Act..........49

    Item 10. Executive Compensation...........................................54

    Item 11. Security Ownership of Certain Beneficial Owners and Management...57

    Item 12. Certain Relationships and Related Party Transactions.............59

    Item 13. Exhibits.........................................................60

    Item 14. Principal Accountant Fees and Services...........................62

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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

General

     Viking  Systems,   Inc.   ("Viking"  or  "Viking  Systems")  provides  high
performance  3D endoscopic  vision  systems to hospitals for minimally  invasive
surgery.  Viking  intends to leverage that position to become a market leader in
bringing integrated solutions to the digital surgical environment.  We intend to
develop a portfolio of targeted medical technologies and services that serve the
current and emerging needs of the digital  healthcare  network.  Our focus is to
deliver  integrated  information,  visualization,  and control  solutions to the
surgical team,  enhancing their capability and performance in minimally invasive
surgery (MIS) and complex surgical procedures.

     We established our Vision Systems Group ("VSG") in Westborough, MA with the
acquisition  of Vista Medical  Technologies,  Inc.'s  proprietary  3-dimensional
surgical  visualization  business and digital platform for surgical  information
delivery  (Infomatix(TM)).  Viking was  incorporated  in Nevada on May 28, 1998,
discontinued  previous  operations  and in 2003,  changed our business  plan and
management.   During  2004  our  mission   consisted  of  making  the  following
substantial   investments  in  the  Company's   products,   marketing  programs,
infrastructure and personnel:

     o    In April,  Viking  invested in the  acquisition of the assets of Vista
          Medical  Technologies,  Inc.'s  proprietary 3D surgical  visualization
          business.

     o    New high  resolution  2D cameras were  introduced in the first half of
          the year to the Company's key Original Equipment Manufacturers ("OEM")
          accounts,  underscoring our continuing  commitment to the OEM business
          which remained at historical revenue levels.

     o    Substantial  investment  was  made  in  the  upgrade,   redevelopment,
          expansion and  re-branding of the 3Di Digital Vision product line from
          April through  October.  This after  suspending  active selling of the
          systems product post acquisition.

     o    Significant  marketing expenses were incurred for the re-launch of the
          3Di  Digital  Vision  System  at  the  American  College  of  Surgeons
          Conference in October.

     o    Senior sales  management and regional sales managers were recruited to
          launch the sales of our new 3Di Digital  Vision  Systems in the second
          half of the year.

     Our  strategy is to build our  revenue  base with our  EndoSite  3Di Vision
System and OEM camera  products.  We believe our  investments  in our  products,
technology,  new markets and  organization  in 2004 will  generate a substantial
improvement  in our operations in late 2005 and 2006.  Our  improvements  in the
technology and focus on the commercialization of this technology are expected to
produce better results than achieved historically by this business under Vista.

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     We also believe there is tremendous  opportunity at this time as the result
of  the  fragmented  nature  of the  medical  products  industry,  the  pace  of
advancement in both technological and scientific applications,  and the emerging
macro changes associated with national healthcare initiatives. We intend to take
advantage of this fragmentation  through additional strategic  acquisitions that
complement our vision business.

     In addition to serving healthcare  providers,  we believe that our focus on
the digital surgical  environment uniquely positions the business to be a valued
strategic partner to the many of the world's leading healthcare  information and
equipment providers, such as Boston Scientific, Medtronic, and Aesculap.

Vision Systems Group

     Our Vision  Systems  Group's lead products are EndoSite 3Di Digital  Vision
Systems for hospitals and a line of advanced 2D cameras for OEM  customers.  Our
new  generation  of systems is engineered to be the standard of care for complex
and minimally invasive  surgeries.  After taking the system off the market early
in 2004 for an  upgrade,  the product was  re-launched  to the market  under the
Viking brand at the ACS Conference in October with vastly improved  performance,
new peripheral  products,  more options and a distinctive new look. The patented
EndoSite  True View head  mounted  display  provides  a  precise  and  immersive
field-of-view  for the surgeon and surgical  team, as well as the  Infomatix(TM)
digital  information  platform.  These solutions are assisting surgeons today in
the  performance  of a variety  of  minimally  invasive  and  complex  surgeries
including bariatric,  cardiac, urologic,  pediatric and neurological procedures.
Viking Systems intends to market its solutions to the surgeons  performing these
complex surgical procedures.

     The Vision  Systems Group is also the strategic  visualization  supplier to
several leading procedure-specific medical device manufacturers such as Aesculap
and Richard Wolf. VSG provides high resolution 2D cameras to it's OEM customers.
As the procedural  business of its partners and customers  continues to shift to
minimally  invasive  techniques,  the Vision  Systems  Group will  introduce new
products,  services  and  capabilities  to  respond to this  important  business
segment.  Viking is committed to the growth of its OEM business and believes its
engineering  capabilities and advanced  technologies make it an ideal partner of
choice.

Medical Equipment and the Minimally Invasive Surgery (MIS) Market

     The primary  market for  Viking's  products is minimally  invasive  surgery
products.  This  market  is  approximately  $6  billion  per year and is a small
segment of the $175 billion market for medical  products  worldwide.  Within the
medical  products  market,  the US  market  is over  $76  billion.  The  medical
equipment market has outpaced the S&P 500 over the last 12 months, and 25 of 200
companies on the Forbes  fastest-growing  small  company list in 2004 served the
medical  products market.  Frost and Sullivan has forecast an industry  compound
annual  growth  rate of over 8% for the  next 12  years.  More  importantly  for
Viking,  several  studies  forecast a 14% annual  increase in  hospital  capital
spending over the next five years after many years of lowered capital budgets.

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Market Share and System Sales

     Viking believes that while the MIS market will grow from $6 billion to $8.3
billion in 2008, the premium segment for  visualization  products will grow from
$116 million to $416 million worldwide by 2008. Our current worldwide  installed
base is over 100 systems and 1000 OEM cameras.

Description of Vision Systems Group

     Viking's Vision Systems Group develops,  manufactures  and markets products
that provide  information to physicians  performing  minimally  invasive general
surgical,  cardiac  surgical and other selected  endoscopic  and  interventional
procedures.  VSG's technology products combine a head mounted display with video
cameras to provide  surgeons with critical  visual  information  during  complex
minimally  invasive  procedures,  and also  incorporate  the  benefit of viewing
complementary information in a voice-controlled,  picture-in-picture  format, to
facilitate  real-time  decision  making during  surgery.  VSG also  manufactures
compact,  high-resolution endoscopic cameras for original equipment manufacturer
customers and strategic partners.

Background to Visualization Technology Products

     Minimally  invasive  surgery.  The  development  and subsequent  widespread
adoption of minimally  invasive  surgical  procedures have  revolutionized  many
surgical fields, including general surgery, orthopedics, gynecology and urology.
Minimally  invasive  surgical  procedures  are performed  through  strategically
placed  ports or  mini-incisions  as opposed to using  large  incisions  to gain
surgical  access.  These  procedures are designed to be as safe and effective as
conventional  surgery.  The goal in using a minimally  invasive  procedure is to
substantially  reduce trauma,  pain and suffering,  speed recovery,  shorten the
length of hospital stays and decrease many of the costs  associated with patient
care.  A minimally  invasive  procedure is most  advantageous  in cases in which
significant  trauma would  otherwise  result from gaining  surgical access to an
affected organ or site through the use of a large incision. This movement toward
minimally  invasive surgery has been driven by advances in device technology and
surgical technique, as well as patient demand.

     Our Medical  Solution.  Viking  technology  provides  surgeon with enhanced
depth perception when performing  complicated,  physically  intricate tasks, and
will provide the surgeon with the ability to view  additional  information  in a
voice-controlled,  picture-in-picture  format, to facilitate  real-time decision
making during a procedure. We believe that conventional 2D visualization systems
compromise  the  ability  of  a  surgeon  to  maneuver,  especially  in  complex
reconstructive surgery, and that our natural 3D picture will provide the surgeon
with an advantage in these cases.

The Technology

     Viking  technology  provides a 3D  visualization  solution to the  inherent
vision restrictions and demands of minimally invasive microsurgery.  It provides
the surgeon with a clear view of the anatomy with the ability to view additional
information in a voice-controlled,  picture-in-picture format, which facilitates
real-time  decision-making during the procedure.  Our technology is based on the

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following  principles  that we believe are essential in advancing the techniques
of minimally  invasive  microsurgery.  We believe these principles offer several
key advantages over other visualization approaches:

     o    3D View.  The  surgeon's  ability to view the  principal  image of the
          anatomy in 3D provides the accurate depth perception necessary so that
          vital  anatomical  structures are  accurately  identified and located.
          This improves  safety,  precision and speed of the procedure.  Also, a
          secondary video image is available in picture-in-picture  format, when
          the procedure will benefit from two different views of the anatomy.

     o    High Resolution  Images.  The  availability of a high resolution image
          which  can be  electronically  managed  by the  surgeon  significantly
          enhances the surgeon's ability to differentiate  critical tissues in a
          confined setting and perform intricate dissection,  reconstruction and
          removal.

     o    Access.  The surgeon  benefits  from  technology  which allows for the
          direct  insertion  of a camera  into the body  cavities  or organs and
          provides high quality images that are easy to see and understand.

     o    Ergonomics.  Due to the complex and time consuming nature of minimally
          invasive  microsurgery  procedures,  the surgeon requires an ergonomic
          display  system  which  allows   comfortable   operating  posture  and
          maximizes hand-eye coordination without strain.

     o    Information  Integration  (Infomatix(TM)).  The  surgeon's  access  to
          critical  monitoring and diagnostic data, on demand,  in real time and
          integrated  with the  anatomical  image  within the  surgeon's  visual
          field, enhances procedure performance.

Head Mounted Display

     The head mounted  display  ("HMD") was  originally  developed  for critical
applications in military  aerospace by Kaiser  Aerospace.  Vista believed that a
HMD was the optimal solution to the challenge of displaying  information  during
minimally invasive  microsurgery.  The fundamental  technology and human factors
experience  incorporated  in  our  surgical  HMD is the  result  of  substantial
investment  and  development  by  Kaiser  Aerospace,   originally  for  military
applications.  This human factors knowledge, derived from many years of analysis
of the display  characteristics which enable pilots performing critical physical
tasks to  simultaneously  absorb  and  react to  crucial  information,  is a key
element in our head  mounted  display  design.  Kaiser's  original  know-how and
technical knowledge have been transferred to us under our development  agreement
with Kaiser  Electro-Optics,  Inc., a subsidiary  of Kaiser  Aerospace.  We have
performed significant  additional development work, and have proprietary rights,
in the surgical head mounted display design.  Our HMD provides 3D  visualization
of small delicate body  structures,  has the capability of integrating  relevant
data and presents the image seen by the surgeon in the most  correct,  intuitive
and  ergonomic  way.  Wearing  the HMD,  the surgeon  can also  perform  surgery
"in-line"--meaning  with the  eyes,  hands,  instruments  and  subject  in-line.
In-line surgery cannot be performed when the surgeon is observing the anatomy on
a remotely-positioned video monitor.

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     Our HMD is a proprietary,  lightweight, high resolution display designed to
allow the surgeon to view  information  on demand,  whether such  information is
generated from attached  endoscopes,  microscopes or monitoring equipment in the
operating  room.  Further  enhancements  to the HMD  allow  for  voice-activated
control and information display from other diagnostic  equipment in the hospital
or from remote locations via information networks.  The video display in the HMD
is fixed in relation to the  surgeon's  eyes,  but his or her head may move into
any position  necessary  for comfort.  The display  design allows the surgeon to
have a constant view of the surgical  anatomy required for the procedure as well
as full  awareness of the  surroundings  in the operating  room.  The display is
designed  to  provide a true 3D image by  replicating  the way the human  visual
system works; left and right acquired images are delivered  directly to left and
right liquid crystal  displays.  It is also designed so that it can be worn with
conventional surgical loupes.

Three-Dimensional Image Acquisition

     We believe that three-dimensional  visualization  capability is critical in
minimally invasive  microsurgery  procedures such as cardiac surgery and complex
endoscopic procedures in general surgery, gynecology and urology. VSG technology
for stereo visualization  consists of the following  proprietary  elements:  the
optical system, the stereo camera and the stereo processor.

     VSG  technology  can  package  the twin  cameras in two ways.  In the first
method,  a stereo  micro-camera  is  attached  to the end of a flexible or rigid
guide which can then be inserted  directly into the body cavity and organs.  The
image is directly captured by the camera chips without being transmitted through
multiple rod lenses as in a  conventional  design.  The  elimination  of optical
surfaces  produces  several  important  advantages,  including  increased  image
quality, improved contrast, better reliability and improved ability to sterilize
the  instrument.  Alternatively,  for  applications  where  standard  endoscopic
surgical technique remains preferable,  a stereo camera is mounted externally on
a stereo endoscope.  This second method is preferred for the procedures in which
we are  primarily  involved.  The  image  acquired  by either  approach  is then
processed  for  display  by control  electronics  which we have  developed.  The
controller   also  includes   image   management   features   which   contribute
significantly  to procedure  performance,  such as dual image  presentation  and
picture-in-picture.

Information management

     Medicine is an information rich discipline, but the ability of a surgeon to
obtain  relevant  information  in  real-time  during  a  procedure  has not been
developed to its full  potential.  The head mounted  display is designed to give
the surgeon real-time access on demand to critical  information  integrated with
the anatomical images generated by our camera systems.  In addition to real-time
display,  the  information  can be stored or transmitted  within the hospital or
transmitted  to  remote  locations  for  training,  advisory  or  administrative
purposes. The applications software to control this flow of information is a key
element in our long-term product strategy which positions  visualization  within
the context of a total information management system for the surgeon.

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Visualization Technology Products

     Our product lines are as follows:

     EndoSite 3Di Digital  Vision  System for general  surgery and other complex
endoscopic  procedures.  The visualization  system is designed to be modular and
consists of the following major components:

   Component            Description
   ----------------------------------------------------------------------------

   True View -          Head-mounted display and operating room personal
   head mounted display computer which integrates multiple video images in a
                        picture-in-picture format using voice commands from the
                        head mounted display. Up to three head mounted displays
                        can be used per system.

   Stereo laparoscopes  Ten millimeter diameter stereo laparoscopes in both
                        0 degree and 30 degree angles of view.

   EndoSite 3Di         Three-dimensional camera head for  attachment  to our
   Digital Camera       stereo laparoscopes.

   3Di Camera           High resolution stereo image processor.
   Controller

   EndoSite Xenon       High intensity 300 watt xenon light source to
                        illuminate the Stereo Laparoscopes.

   Endoscopy Cart       Cart which holds the EndoSite 3Di Digital Vision
                        System

     All necessary  510(k) and CE mark  clearances  which are required to market
the components of the EndoSite have been received.

     OEM Endoscopic Cameras.  Our endoscopic cameras are the state-of-the-art in
two-dimensional  endoscopic  imaging.  We currently  manufacture  compact,  high
resolution  endoscopic cameras for original equipment  manufacture customers and
strategic partners.

Governmental Regulation: Medical Devices

     Our  business  plan  calls for us to engage in the  business  of  marketing
medical  devices.  The  manufacture  and sale of medical  devices  intended  for
commercial  distribution are subject to extensive governmental regulation in the
United States.  Medical devices are regulated in the United States  primarily by
the FDA and, to a lesser extent, by certain state agencies.  Generally,  medical
devices require pre-market  clearance or pre-market approval prior to commercial
distribution.  In addition,  certain material  changes or modifications  to, and
changes in intended use of,  medical  devices also are subject to FDA review and
clearance or approval.  The FDA regulates the  research,  testing,  manufacture,



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safety,   effectiveness,   labeling,  storage,  record  keeping,  promotion  and
distribution  of  medical  devices  in the  United  States  and  the  export  of
unapproved   medical  devices  from  the  United  States  to  other   countries.
Non-compliance  with  applicable  requirements  can  result  in  failure  of the
government to grant pre-market clearance or approval for devices,  withdrawal or
suspension  of  approval,  total or partial  suspension  of  production,  fines,
injunctions,  civil  penalties,  refunds,  recall or  seizure  of  products  and
criminal prosecution.

     Device Classes.  In the United States,  medical devices are classified into
one of three classes, Class I, II or III, on the basis of the controls deemed by
the FDA to be necessary to reasonably ensure their safety and effectiveness. The
products  we intend to market as a result of the Vista  acquisition  have either
been classified as Class I or Class II devices.

     Class I devices  are  subject to general  controls,  such as  establishment
registration  and  product  listing,  labeling,   adulteration  and  misbranding
provisions and medical device  reporting  requirements  and,  unless exempt,  to
pre-market   notification  and  adherence  to  "good   manufacturing   practice"
standards.  Class II  devices  are  subject  to  general  controls  and  special
controls,  such as  performance  standards,  post-market  surveillance,  patient
registries and FDA guidelines.  Generally, Class III devices are those that must
receive pre-market approval by the FDA to ensure their safety and effectiveness.
Examples of Class III products  include,  life-sustaining,  life-supporting  and
implantable  or new  devices  which  have  not been  found  to be  substantially
equivalent to legally marketed  devices.  Class III devices  ordinarily  require
clinical testing to ensure safety and  effectiveness  and FDA clearance prior to
marketing and  distribution.  The FDA also has the authority to require clinical
testing of Class I and Class II devices. A pre-market approval  application must
be filed if a  proposed  device  is not  substantially  equivalent  to a legally
marketed  predicate  device or if it is a Class III device for which the FDA has
called for such application.  A pre-market approval application  typically takes
several years to be approved by the FDA.

     Device Approval.  Generally, before a new device can be introduced into the
market in the United States,  the  manufacturer  or distributor  must obtain FDA
clearance of a 510(k)  notification  or submission  and approval of a pre-market
approval  application.  If a medical  device  manufacturer  or  distributor  can
establish  that a device is  "substantially  equivalent"  to a legally  marketed
Class I or Class II  device,  or to a Class III device for which the FDA has not
called for a pre-market approval, the manufacturer or distributor may market the
device  upon  receipt of an FDA order  determining  such a device  substantially
equivalent  to a  predicate  device.  The  510(k)  notification  may  need to be
supported by appropriate performance,  clinical or testing data establishing the
claim of substantial  equivalence.  The FDA requires a rigorous demonstration of
substantial equivalence.

     Following  submission  of the  510(k)  notification,  the  manufacturer  or
distributor may not place the device into commercial  distribution  until an FDA
substantial  equivalence  order permitting the marketing of a device is received
by the  person who  submitted  the 510(k)  notification.  At this time,  the FDA
typically responds to the submission of a 510(k)  notification  within 90 to 200
days. An FDA letter may declare that the device is substantially equivalent to a
legally  marketed  device and allow the  proposed  device to be  marketed in the
United States.  The FDA, however,  may determine that the proposed device is not
substantially  equivalent or require  further  information,  including  clinical
data,  to  make  a  determination   regarding  substantial   equivalence.   Such

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determination   or  request  for  additional   information   will  delay  market
introduction of the product that is the subject of the 510(k) notification.

     Investigational Device Exemption Application.  All clinical  investigations
involving the use of an  unapproved  or uncleared  device on humans to determine
the safety or  effectiveness  of the device must be conducted in accordance with
the FDA's investigational device exemption regulations. If the device presents a
"significant risk," the manufacturer or distributor of the device is required to
file an  investigational  device  exemption  application  with the FDA  prior to
commencing  human clinical  trials.  This application must be supported by data,
typically the result of animal and bench testing. If the application is approved
by  the  FDA,  human  clinical   trials  may  begin  at  a  specific  number  of
investigational sites with a maximum number of patients, as approved by the FDA.
If the device presents a  "non-significant  risk," approval by an  institutional
review board prior to commencing  human clinical trials is required,  as well as
compliance  with labeling,  record keeping,  monitoring and other  requirements.
However, the FDA can disagree with a non-significant risk device finding.

     Any products  which we  manufacture or distribute are subject to continuing
regulation by the FDA, which includes record keeping requirements,  reporting of
adverse experience with the use of the device, "good manufacturing" requirements
and post-market  surveillance,  and may include  post-market  registry and other
actions  deemed  necessary  by the FDA. A new  510(k),  pre-market  approval  or
pre-market   approval   supplement  is  also  required  when  a  medical  device
manufacturer  makes a change or modification  to a legally  marketed device that
could  significantly  affect the safety or effectiveness of the device, or where
there is a major change or  modification  in the intended use of the device or a
new indication for use of the device. When any change or modification is made to
a device or its intended use, the  manufacturer  is expected to make the initial
determination  as to whether the change or  modification is of a kind that would
necessitate  the  filing of a new  510(k),  pre-market  approval  or  pre-market
approval supplement.

     Foreign  Requirements.  Sales of medical device products outside the United
States are subject to foreign regulatory  requirements that vary from country to
country. The time required to obtain approvals required by foreign countries may
be longer or shorter than that required for FDA clearance,  and requirements for
licensing  may  differ  from  FDA  requirements.  Our  failure  to  comply  with
regulatory requirements would jeopardize our ability to market our products. The
current   regulatory   environment  in  Europe  for  medical   devices   differs
significantly  from that in the United  States.  Since June  1998,  all  medical
devices  sold in the  European  Union  must  bear the CE mark.  Devices  are now
classified  by  manufacturers  according  to the  risks  they  represent  with a
classification  system  giving Class III as the highest risk devices and Class I
as the lowest. Once the device has been classified,  the manufacturer can follow
one of a series of conformity assessment routes,  typically through a registered
quality system, and demonstrate  compliance to a "European Notified Body." After
that,  the CE mark may be applied to the  device.  Maintenance  of the system is
ensured  through  annual  on-site  audits by the notified body and a post-market
surveillance  system requiring the manufacturer to submit serious  complaints to
the appropriate governmental authority.

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Employees

     As of the date of this Form 10-KSB, we have 25 full time employees. None of
our employees are represented by a collective bargaining agreement,  nor have we
experienced  work  stoppages.  We believe our  relations  with our employees are
good.

Previous Operations

     Viking was  initially  formed for the  purpose of  providing  training  and
curriculum  for the  information  technology  industry on "Open Source"  topics.
"Open  Source"  refers to software  which has its source code open and available
for anyone to see,  utilize or alter.  The cornerstone of "Open Source" software
is the Linux operating system. After its formation Viking established a training
center in Phoenix,  Arizona and developed  and taught three  courses  including:
"Linux  New  User",   "Linux  Install  and   Configuration"  and  "Linux  System
Administration".  Viking  developed and taught  various  instructional  courses,
which gave participants a basic  understanding of Linux. In conjunction with the
training  program,  Viking  developed  three  publications  for classroom  based
instruction.  The costs of  maintaining  the training  center and the support to
develop new curriculum  exceeded the revenues we generated.  Viking's management
discontinued  the training and curriculum  business at the beginning of 2002 and
focused on  web-hosting,  web  designing,  small  computer  systems and computer
networking.  Viking's  management  determined  that  it  would  be in  the  best
interests  of the Company  and its  shareholders  to  discontinue  its  computer
related operations which it did in December 2002. Viking conducted no operations
in 2003 and in November  2003,  new  management  was  appointed  and the current
business plan of the Company was adopted.

ITEM 2.  PROPERTIES

     Our executive office is currently located at the personal office of our CEO
in La Jolla,  CA. The  corporate  office will be  relocated in La Jolla in April
2005.  Our Vision  Systems  Group  facility is located in  approximately  17,850
square feet located in Westborough,  Massachusetts. The lease expires in October
2007.

ITEM 3.  LEGAL PROCEEDINGS

     We are not a party to any legal proceedings

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were  submitted to Viking's  shareholders  for a vote during the
last quarter of the year ended December 31, 2004.

                                       10

<PAGE>


                                     PART II

ITEM 5. MARKET FOR THE  REGISTRANT'S  COMMON STOCK AND RELATED  SECURITY  HOLDER
MATTERS

     Our common  stock is quoted on the OTC  "Bulletin  Board"  under the symbol
"VKSY".  During the last two years,  there has only been limited  trading in our
common stock.  The prices  reported  below reflect  inter-dealer  prices and are
without  adjustments for retail markups,  markdowns or commissions,  and may not
necessarily represent actual transactions.

                                                             High Bid    Low Bid
                                                             --------    -------
      Fiscal Year Ended December 31, 2003

                        First Quarter                        $  .75      $  .75
                        Second Quarter                          .75         .75
                        Third Quarter                           .75         .75
                        Fourth Quarter                          .76         .75

      Fiscal Year Ended December 31, 2004

                        First Quarter                        $ 1.50      $  .75
                        Second Quarter                          .75         .55
                        Third Quarter                           .90         .40
                        Fourth Quarter                          .95         .75

      Fiscal Year Ended December 31, 2005

                        First Quarter                        $  .80      $  .55
                        Through March 25, 2005

Shares Issued in Unregistered Transactions

     We issued shares of our common stock in  unregistered  transactions  during
2004.  All of the  following  shares of common  stock  issued were issued in non
registered  transactions  in reliance on Section 4(2) of the  Securities  Act of
1933, as amended (the "Securities  Act"). The shares of common stock issued were
as follows:

     In April 2004, we issued  3,054,000  shares to Vista Medical  Technologies,
Inc. as part of the Asset Purchase Agreement for the Technology Division.

     In July 2004, we issued  1,250,000  shares of our common stock, at $.40 per
share, to 16 individuals  for cash used as working  capital,  including  125,000
shares to Donald Tucker.

                                       11

<PAGE>

     In September  2004, we issued 7,500 shares of our common stock, at $.40 per
share, to our non-employee directors, as compensation.

     In December, 2004 we issued 20,000,000 shares of our common stock to Donald
Tucker in connection with his conversion of 5,000,000 shares of Series Preferred
Stock into common stock.

Holders

     As of March  25,  2005,  there  were  31,900,300  shares  of  common  stock
outstanding and approximately 102 stockholders of record of common stock.

Dividends

     We have  not  paid  any  cash  dividends  since  our  inception  and do not
anticipate or contemplate paying dividends in the foreseeable future.

Purchases  of Equity  Securities  by the Small  Business  Issuer and  Affiliated
Purchasers

     None

Limitation on Directors' Liability, Charter Provisions and Other Matters

     Nevada law  authorizes  corporations  to limit or  eliminate  the  personal
liability of  directors  to  corporations  and their  stockholders  for monetary
damages  for  breach  of  directors'  fiduciary  duty of care.  The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed  business  judgment  based on all  material  information  reasonably
available to them.  Absent the limitations  authorized by Nevada law,  directors
are accountable to corporations and their  stockholders for monetary damages for
conduct  constituting  gross  negligence  in the exercise of their duty of care.
Nevada law enables  corporations to limit available relief to equitable remedies
such as injunction or rescission.  Our Certificate of  Incorporation  limits the
liability of our directors to us or to our  stockholders  (in their  capacity as
directors but not in their capacity as officers) to the fullest extent permitted
by Nevada law.

     The inclusion of this  provision in the  Certificate of  Incorporation  may
have the effect of reducing the  likelihood  of  derivative  litigation  against
directors and may discourage or deter stockholders or management from bringing a
lawsuit against  directors for breach of their duty of care, even though such an
action,  if  successful,  might  otherwise  have  benefited  the Company and its
stockholders.

     Our Bylaws  provide  indemnification  to our  officers  and  directors  and
certain   other   persons   with   respect  to  certain   matters.   Insofar  as
indemnification  for liabilities  arising under the 1933 Act may be permitted to
our  directors  and  officers,  we have been  advised that in the opinion of the
Securities  and Exchange  Commission,  such  indemnification  is against  public
policy as expressed in the 1933 Act and is, therefore, unenforceable.

                                       12

<PAGE>

Transfer Agent and Registrar

     Our transfer agent is Fidelity  Transfer  Company,  1800 South West Temple,
Suite 301, Salt Lake City, UT 84115; telephone (801) 484-7222.


ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

     The  following  discussion  of  our  financial  condition  and  results  of
operations should be read in conjunction with our Financial Statements and Notes
thereto,  and the other financial  information  included  elsewhere in this Form
10-K Report.  This Management's  Discussion and Analysis of Financial  Condition
and Results of Operations  contain  descriptions  of the Company's  expectations
regarding future trends affecting our business. These forward-looking statements
and other forward-looking statements made elsewhere in this document are made in
reliance upon safe harbor provisions of the Private Securities Litigation Reform
Act of 1995.  The following  discussion  sets forth  certain  factors we believe
could cause actual results to differ  materially from those  contemplated by the
forward-looking statements.

Overview

     Viking Systems  provides high  performance 3D endoscopic  vision systems to
hospitals  for  minimally  invasive  surgery.  Viking  intends to leverage  that
position  to become a market  leader in  bringing  integrated  solutions  to the
digital  surgical  environment.  We intend to develop a  portfolio  of  targeted
medical  technologies  and services that serve the current and emerging needs of
the digital healthcare network. Our focus is to deliver integrated  information,
visualization,  and control  solutions to the  surgical  team,  enhancing  their
capability  and  performance  in minimally  invasive  surgery  (MIS) and complex
surgical procedures.

     We  established  our  Vision  Systems  Group  in  Westborough,  MA with the
acquisition  of Vista Medical  Technologies,  Inc.'s  proprietary  3-dimensional
surgical  visualization  business and digital platform for surgical  information
delivery (Infomatix(TM)).

     Our  strategy is to build our  revenue  base with our  EndoSite  3Di Vision
System  and OEM camera  products.  At the same time we are  developing  a new HD
video engine that will provide us a feature rich, high resolution,  low cost and
fully  integrated  platform  for our OEM,  strategic  partner  and system  sales
initiatives.  This new engine has the  potential  to  dramatically  increase the
functionality  of the endoscopic  vision system at a  substantially  lower price
than  competitive  systems.  This will  have  both an impact on our  competitive
position in the hospital OR market and also open up new markets for Viking in 2D
systems for Outpatient Surgery Centers and doctor's offices.

                                       13

<PAGE>


Liquidity and Capital Resources

     Since December 31, 2003, our principal sources of liquidity have been funds
raised from the sale of our equity securities and the sale of Convertible Notes.
At December 31, 2004, we had cash, cash  equivalents and short-term  investments
of $139,393.

     During the first quarter of 2005, we raised $1,550,000 through the issuance
of  convertible  notes  (the  "Notes").  We  expect  to  receive  an  additional
$1,200,000 as part of the same financing by the second quarter of 2005;  however
there can be no  assurances  that the full amount will be received.  The general
terms of this financing are as follows:

      Maturity Date of Notes  Twelve Months from the date of issuance

      Interest Rate of Notes  Ten percent per annum

      Security                The Notes are secured by all of the assets of
                              Viking.

      Optional                Conversion The Notes may, at the option of the
                              Investors, be converted into shares of Viking
                              common stock at the price of $.20 share. The
                              conversion price is subject to downward
                              adjustment, upon certain conditions pursuant to
                              the terms of Security Purchase Agreement and other
                              transaction documents

      Mandatory               Conversion Viking shall have the right to require
                              an Investor to convert all or a portion of such
                              Investor's Note at the conversion price in the
                              event that:

                                    (i) no event of default exists or is
                                    continuing at the time of such mandatory
                                    conversion; and

                                    (ii)Viking has raised a minimum of
                                    $3,000,000 in public and/or private equity
                                    offerings on or prior to the one-year
                                    anniversary date of the initial closing at
                                    an average price equal to or greater than
                                    $0.30 per share of common stock.

      Warrants                 As additional consideration for the Investors
                               purchasing the Notes, Viking has issued the
                               Investors Warrants to purchase shares of Viking
                               common stock at the price of $.40 per share. The
                               exercise price is subject to downward adjustment,
                               upon certain conditions pursuant to the terms of
                               Security Purchase Agreement and other transaction
                               documents. The Warrants are exercisable for a
                               period of 42 months from the date of issuance.

                                       14

<PAGE>

      Registration             Rights Viking has agreed to register with the
                               Securities and Exchange Commission and applicable
                               state securities agencies, the shares of common
                               stock that are issuable upon the conversion of
                               the Notes and the shares of common stock that
                               underlie the Warrants.

     Net cash usage in  operating  activities  was  approximately  $791,000  and
$33,768  in 2004 and  2003,  respectively.  The  increased  usage in net cash in
operating  activities  during  2004  compared  to 2003 was  attributable  to the
acquisition  of the  Technology  Business of Vista  Medical  Technologies,  Inc.
("Vista")  and the  development  of our  EndoSite 3Di product line and sales and
marketing organization.

     Net cash used in investing activities was approximately  $459,000 and $0 in
2004 and 2003, respectively.  The increase in cash usage in investing activities
in 2004 was attributable to the acquisition of the Technology  Business of Vista
and its property,  plant, and equipment and the need for demonstration equipment
for our new 3Di product line.

     Cash flows provided by financing  activities were approximately  $1,354,000
and  $69,000  in 2004 and 2003,  respectively.  The cash  flows  from  financing
activities  in 2004  were  primarily  attributable  to  proceeds  from a private
placement of preferred stock for  approximately  $400,000,  private placement of
our common stock for  approximately  $450,000,  proceeds  from Notes  Payable of
approximately $500,000 and short term bank borrowings of $59,215.

     We incurred  operating  losses in 2004 and 2003,  and at December 31, 2004,
had an accumulated deficit of approximately $2,315,000. At December 31, 2004, we
had cash of $139,000. In January 2005 we received a $200,000 line of credit from
Silicon  Valley  Bank.  In February  and March 2005,  we received  $800,000  and
$750,000  respectively,  of a total committed of $2,750,000 from the issuance of
convertible notes payable.  In addition,  we have amounts available under a bank
line of credit  facility  equal to 80% of our  outstanding  receivables  up to a
maximum of $400,000,  which  expires in September  2005 and is subject to annual
renewals. We believe that these sources of liquidity,  together with anticipated
2005 product  revenues and interest  income,  will be  sufficient to operate our
business  beyond 2005. We are pursuing  additional  sources of funds,  including
private placements of our common shares. However, there can be no assurance that
the requisite  funds will be consummated in the necessary time frame or on terms
acceptable  to us.  Should  we be unable to raise  sufficient  funds,  we may be
required  to curtail  our  operating  plans and  possibly  relinquish  rights to
portions of our  technology or products.  In addition,  increases in expenses or
delays in product  development  may  adversely  impact our cash position and may
require  cost  reductions.  No  assurance  can be given  that we will be able to
operate profitably on a consistent basis, or at all, in the future.

Results of Operations

     We had product sales from continuing  operations of $2,846,863 for the year
ended  December  31, 2004 and no sales  revenue for the year ended  December 31,
2003,  representing  an increase of $2,846,863.  The increase in revenues during
2004 was due to a partial year of product  sales from our Vision  Systems  Group

                                       15

<PAGE>

business,  which we  acquired  in April  2004 from  Vista.  Sales to  individual
customers  exceeding 10% or more of revenues in the year ended December 31, 2004
were to  three  customers  who  accounted  for  25%,  24%  and 17% of  revenues,
respectively.

     We had gross  margins of  $853,333 or 30% for the year ended  December  31,
2004 and gross margins of $0 for the year ended December 31, 2003,  representing
an increase of $853,333. The increase in gross margin during 2004 was due to the
partial year of product sales in 2004 compared to no sales in 2003.

     We had  operating  expenses of $2,831,362  for the year ended  December 31,
2004 and $0 for the year ended  December 31, 2003,  representing  an increase of
$2,831,362.  The  increase in  operating  expenses was due to the restart of our
operations.

     We had General and Administrative expenses of $1,381,948 for the year ended
December 31, 2004 and $0 for the year ended December 31, 2003,  representing  an
increase of $1,381,948.  The increase in general and  administrative  expense in
2004 was due to the  acquisition  from Vista. We had  approximately  $500,000 in
payroll  and  fringe  benefits,  $107,000  in legal  expenses,  $86,000 in audit
expenses,  including  a two year  audit of the  Technology  Business  of  Vista,
$136,000 in consulting expenses,  including $115,000 in acquisition consultants,
$157,000 in royalty and license fees and $108,000 in insurance  expenses for the
year ended December 31, 2004 and $0 for these expenses in 2003.

     We had Sales and Marketing expenses of $831,731 for the year ended December
31, 2004 and $0 for the year ended December 31, 2003,  representing  an increase
of $831,731.  The increase was due to the acquisition from Vista. We established
Viking Systems as a medical  equipment  provider,  hired 8 additional  sales and
marketing employees,  developed new brochures and literature, created trade show
booths, and launched our EndoSite 3Di Digital Vision System.

     We had  Research  and  Development  expenses of $617,683 for the year ended
December 31, 2004 and $0 for the year ended December 31, 2003,  representing  an
increase of $617,683.  The increases in research and  development  expenses were
due to the  acquisition  from Vista.  We developed  the new EndoSite 3Di Digital
Vision System and continued to maintain and enhance our 2D OEM camera products.

     We had net losses of  $1,984,728  for the year ended  December 31, 2004 and
net losses of $41,646 for the year ended  December  31,  2003,  representing  an
increase of  $1,943,082.  The increase in net losses  during 2004 was due to the
change from discontinued operations in 2003 to acquiring the Technology Business
in April 2004 from Vista, and the costs of restarting Viking sales and marketing
efforts,  developing and improving our 3Di products line,  and  maintaining  the
operations of the Technology Division of Vista.

Off-Balance Sheet Arrangements

     We do  not  have  any  off-balance  sheet  arrangements  that  have  or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial  condition,  revenues or expenses,  results of  operations,

                                       16

<PAGE>

liquidity,  capital  expenditures  or  capital  resources  that is  material  to
investors.

Contractual Obligations and Commitments

     At December 31, 2004, we are obligated under one operating  lease,  for the
Westborough, MA location occupied by the Vision Systems Group. The lease expires
in October 2007 and requires us to make payments  totaling  $163,980,  $163,980,
and $133,650 in 2005, 2006, and 2007 respectively.

     In  connection  with the  acquisition  with Vista Medical  Technology,  the
Company  entered  into a license  agreement  for the  intellectual  property and
product rights used in the operation of the business  acquired.  In exchange for
this license grant,  the Company will pay Vista  royalties of 5% of all original
equipment  manufacturer  (OEM)  sales and 10% of all  sales of the 3Di  EndoSite
System over the next five (5) years.  The  license  agreement  contains  minimum
royalties  of  $150,000 in year one,  $300,000  in each of years two,  three and
four, and $375,000 in year five. The royalties  payable by the Company under the
license agreement are capped at $4,500,000 in the aggregate,  over the five-year
period.  Vista will retain  ownership of all  intellectual  property and product
rights under the license  agreement  until these royalty  obligations  have been
satisfied,  at which time Vista will  transfer  ownership  of such  intellectual
property and product and product rights to the Company. As of December 31, 2004,
the Company had accrued  royalties  related to this  agreement of  approximately
$39,000.  During 2004, the Company paid approximately $78,000 in royalties under
this agreement.

     Viking has an  agreement  with a bank  through  which the bank will advance
funds to the Company  equal to 80% of  receivables  resulting  from sales by the
Company up to a maximum of $400,000.  Funds  advanced  accrue  interest at prime
plus 3.5%.  The agreement  expires  September 14, 2005.  Upon  collection of the
receivable from the customer, the bank is paid the funds advanced and a interest
accrued,  and the remaining amount of the collection is remitted to the Company.
Viking has a License Agreement with Harry McKinley,  dated as of April 15, 2004,
whereas Viking has exclusive use of Mr. McKinley's  stereo imaging patents.  The
agreement expires on April 15, 2005.

     Viking has a Loan and  Security  Agreement,  dated as of  February 9, 2005,
with Silicon  Valley bank,  whereas  Viking can borrow up to $200,000  against a
Certificate  of  Deposit  owned by Donald  Tucker.  This  agreement  expires  on
September 13, 2005.

     During the first quarter of 2005, we raised $1,550,000 through the issuance
of  convertible  notes  (the  "Notes").  We  expect  to  receive  an  additional
$1,200,000 as part of the same financing by the second quarter of 2005;  however
there can be no  assurances  that the full amount will be received.  The general
terms of this financing are as follows:

     Maturity Date of Notes   Twelve Months from the date of issuance.

     Interest Rate of Notes   Ten percent per annum.

     Security                 The Notes are secured by all of the assets
                              of Viking.

                                       17

<PAGE>

      Optional  Conversion    The Notes  may,  at the option of the  Investors,
                              be converted into shares of Viking common stock at
                              the price of $.20 per share. The conversion  price
                              is subject to downward adjustment, upon certain
                              conditions pursuant to the terms of Security
                              Purchase Agreement and other transaction
                              documents.

      Mandatory               Conversion Viking shall have the right to require
                              an Investor to convert all or a portion of such
                              Investor's Note at the conversion price in the
                              event that:

                                    (i) no event of default exists or is
                                    continuing at the time of such mandatory
                                    conversion; and

                                    (ii)Viking has raised a minimum of
                                    $3,000,000 in public and/or private equity
                                    offerings on or prior to the one-year
                                    anniversary date of the initial closing at
                                    an average price equal to or greater than
                                    $0.30 per share of common stock.

      Warrants                As additional consideration for the Investors
                              purchasing the Notes, Viking has issued the
                              Investors Warrants to purchase shares of Viking
                              common stock at the price of $.40 per share. The
                              exercise price is subject to downward adjustment,
                              upon certain conditions pursuant to the terms of
                              Security Purchase Agreement and other transaction
                              documents. The Warrants are exercisable for a
                              period of 42 months from the date of issuance.

      Registration            Rights Viking has agreed to register with the
                              Securities and Exchange Commission and applicable
                              state securities agencies, the shares of common
                              stock that are issuable upon the conversion of the
                              Notes and the shares of common stock that underlie
                              the Warrants.

Plan of Operation

     Our  current  business  plan  is  described  in  "Item 1 -  Description  of
Business."

Critical Accounting Policies

     This  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations  discuss the Company's  Financial  Statements,  which have
been prepared in accordance with accounting principles generally accepted in the

                                       18

<PAGE>

United States.  We have  terminated our previous  operations and such operations
are treated as discontinued operations for financial statement purposes.

     We commenced  operations in the medical  device  business  during 2004. The
preparation of our financial  statements  requires  management to make estimates
and assumptions  that affect reported  amounts of assets and liabilities and the
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period. On an ongoing basis,  management  evaluates its estimates and
assumptions,  including  those  related  to  inventory,  income  taxes,  revenue
recognition and  restructuring  initiatives.  We anticipate that management will
base its estimates and judgments on historical  experience of the  operations we
may acquire and on various  other  factors  that are  believed to be  reasonable
under  the  circumstances,  the  results  of which  form the  basis  for  making
judgments  about the  carrying  value of  assets  and  liabilities  that are not
readily  apparent  from other  sources.  Actual  results  may differ  from these
estimates under different assumptions or conditions.

     Management  believes the  following  critical  accounting  policies,  among
others,  will affect its more  significant  judgments and estimates  used in the
preparation of our Consolidated Financial Statements.

     Inventory.  The  Company  reduces  the stated  value of its  inventory  for
obsolescence or impairment in an amount equal to the difference between the cost
of the inventory and the estimated market value,  based upon  assumptions  about
future  demand  and  market  conditions.  If  actual  future  demand  or  market
conditions  are less favorable  than those  projected by management,  additional
reductions in stated value may be required.

     Income  Taxes.  In  determining  the carrying  value of the  Company's  net
deferred tax assets, the Company must assess the likelihood of sufficient future
taxable income in certain tax jurisdictions, based on estimates and assumptions,
to realize the  benefit of these  assets.  If these  estimates  and  assumptions
change in the  future,  the  Company  may record a  reduction  in the  valuation
allowance,  resulting in an income tax benefit in the  Company's  Statements  of
Operations.  Management  evaluates the  realizability of the deferred tax assets
and assesses the valuation allowance quarterly.

     Goodwill and Other  Long-Lived  Asset  Valuations.  In June 2001,  the FASB
issued SFAS 141,  "Business  Combinations",  and SFAS 142,  "Goodwill  and Other
Intangible Assets", effective for fiscal years beginning after December 15, 2001
with early adoption  permitted for companies with fiscal years  beginning  after
March 15, 2001.  We adopted the new rules on  accounting  for goodwill and other
intangible  assets during the first quarter of fiscal 2004. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual  impairment tests in accordance with the
statements.  Other  intangible  assets will continue to be amortized  over their
useful lives.

     In accordance with SFAS 142, we initiated a goodwill impairment  assessment
during the first quarter of fiscal 2004. The results of this analysis  concluded
that there was no impairment charge.

                                       19

<PAGE>

     Revenue  Recognition.  The Company's  revenues are derived from the sale of
surgical  visualization  technology  products  to end  users,  distributors  and
original equipment manufactures. Revenue from the sale of products is recognized
when a  purchase  order has been  received,  the system  has been  shipped,  the
selling price is fixed or  determinable,  and collection is reasonable  assured.
Most system sales are F.O.B.  shipping  point,  therefore  shipment is deemed to
have occurred when the product is delivered to the transportation  carrier. Most
of the Company's sales through December 31, 2004 have been for products that did
not include  installation  services.  If installation is included as part of the
contract,  revenue is not recognized until  installation has occurred,  or until
any remaining installation obligation is deemed to be perfunctory. Some sales of
systems may include  training as part of the sale. In such cases, the portion of
the revenue related to the training,  calculated  based on the amount that would
be charged for training on a stand-alone  basis, is deferred and recognized when
the training has been  provided.  The sales of products do not require  specific
customer acceptance  provisions and do not include the right of return except in
cases where the product does not  function as  guaranteed  by the  Company.  The
Company provides a reserve  allowance for estimated  returns.  To date,  returns
have not been  significant.  Shipping and handling costs are included in cost of
sales.

     Stock-Based Compensation. The Company accounts for its employee stock-based
compensation  plans using the  intrinsic  value  method,  as  prescribed  by APB
Opinion  No.  25,  Accounting  for  Stock  Issued  to  Employees,   and  related
interpretations.  Accordingly,  the Company records deferred  compensation costs
related to its  employee  stock  options  when the current  market  price of the
underlying  stock  exceeds  the  exercise  price  of each  stock  option  on the
measurement  date (usually the date of grant).  The Company records and measures
deferred  compensation  for stock options granted to  non-employees,  other than
members of the Company's Board of Directors,  using the fair value based method.
Deferred  compensation  is  expensed on a  straight-line  basis over the vesting
period of the related  stock option.  During 2004 and 2003,  the Company did not
grant any stock  options  to  employees  or members  of the  Company's  Board of
Directors with exercise prices below the market price on the  measurement  date.
The Company  granted stock options to  non-employees  for services  resulting in
$3,750 of general and administrative expense during 2004.

     An  alternative  method to the  intrinsic  value method of  accounting  for
stock-based  compensation is the fair value based method prescribed by Statement
of Financial  Accounting  Standards (SFAS) No. 123,  "Accounting for Stock-Based
Compensation,"  as  amended  by  SFAS  No.  148,   "Accounting  for  Stock-Based
Compensation  - Transition and  Disclosure."  If the Company used the fair value
based  method,  the Company  would be required to record  deferred  compensation
based on the fair  value of the stock  option  at the date of grant as  computed
using an option-pricing  model, such as the Black-Scholes  option pricing model.
The  deferred  compensation  calculated  under the fair value based method would
then be amortized over the vesting period of the stock option.

Recent Accounting Pronouncements

     See footnote 10 to the financial statements included as Item 7 of this Form
10-KSB.

                                       20

<PAGE>


Interest Rate Risk

     We currently  have notes  payable that accrue  interest at a fixed rate. We
anticipate  that a  substantial  amount of our  future  debt and the  associated
interest  expense  will be subject to  changes in the level of  interest  rates.
Increases in interest rates would result in incremental interest expense.

Inflation

     The Company  does not believe that  inflation  will  negatively  impact its
business plans.

Forward Outlook and Risks

     This  Form  10-KSB   contains  and   incorporates   by  reference   certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act  and  Section  21E of the  Exchange  Act  with  respect  to  results  of our
operations and businesses.  All statements,  other than statements of historical
facts,  included in this Form 10-KSB,  including those regarding  market trends,
our  financial  position,  business  strategy,  projected  costs,  and plans and
objectives of management for future operations, are forward-looking  statements.
In general,  such statements are identified by the use of forward- looking words
or phrases including,  but not limited to, "intended,"  "will," "should," "may,"
"expects," "expected,"  "anticipates," and "anticipated" or the negative thereof
or variations thereon or similar terminology.  These forward-looking  statements
are based on our current expectations. Although we believe that the expectations
reflected in such  forward-looking  statements are  reasonable,  there can be no
assurance   that  such   expectations   will  prove  to  be   correct.   Because
forward-looking  statements involve risks and uncertainties,  our actual results
could differ  materially.  Important  factors that could cause actual results to
differ materially from our expectations are disclosed hereunder and elsewhere in
this Form 10-KSB. These forward-looking  statements represent our judgment as of
the date of this Form 10-KSB.  All subsequent  written and oral  forward-looking
statements  attributable to Viking are expressly  qualified in their entirety by
the Cautionary  Statements.  We disclaim,  however,  any intent or obligation to
update our forward-looking statements.

     Operating  History.  We were inactive in 2002 and 2003. We commenced active
operations by acquiring  assets from Vista Potential  investors  should be aware
that there is only a limited  basis upon which to  evaluate  our  prospects  for
achieving our intended business  objectives.  We have limited resources and have
had limited revenues since our formation.

     Possibility of Total Loss of Investment. An investment in the Company is an
extremely high risk  investment,  and should not be made unless the investor has
no need for current  income from the invested  funds and unless the investor can
afford a total loss of his or her investment.

     Additional  Financing  Requirements.  We will  likely be  required  to seek
additional  financing in order to fund our operations and carry out our business
plan. In order to fund our operations  and effect  additional  acquisitions,  we
will be required to obtained additional capital.  There can be no assurance that
such financing will be available on acceptable  terms, or at all. We do not have
any  arrangements  with any bank or financial  institution to secure  additional
financing and there can be no assurance that any such  arrangement,  if required

                                       21

<PAGE>

or otherwise  sought,  would be  available  on terms  deemed to be  commercially
acceptable and in our best interests.

     No Public Market for  Securities.  There is no public market for our common
stock and we can give no assurance  that an active  market will  develop,  or if
developed, that it will be sustained.

     Auditor's Opinion has a Going Concern  Qualification.  Our auditor's report
dated  January 28, 2005 for the year ended  December  31, 2004  included a going
concern  qualification which stated that our significant  operating losses raise
substantial doubt about our ability to continue as a going concern.

     No Appraisal of Vista Assets. We did not obtain an independent appraisal or
valuation of the assets and operations we acquired from Vista.

     We do  not  anticipate  paying  any  dividends  and  any  gains  from  your
investment  in our stock will have to come from  increases  in the price of such
stock. We currently intend to retain any future earnings for use in our business
and do not anticipate paying any cash dividends in the foreseeable future.

Medical Operations Risks

     We acquired  assets and operations from Vista as described in Item 1 above.
We also intend to attempt to acquire  additional medical products and operations
from time to time as  opportunities  become  available.  Our  operations  in the
medical product industry will subject us to various risks which include, but are
not limited, to the following:

     We Operate in a  Competitive  Market.  The market for medical  products and
services  is  competitive  and  new  offerings  and  technologies  are  becoming
available  regularly.  We cannot  guarantee  that we will  compete  successfully
against our potential  competitors,  especially those with significantly greater
financial resources or brand name recognition.

     If We Fail to Retain Key  Personnel and Hire,  Train and Retain  Additional
Qualified and Experienced Employees,  We May Not Be Able to Compete Effectively.
Our future  success will depend to a large extent on retaining our employees and
recruiting sufficient qualified employees to fill vacancies created by attrition
or expansion of our operations. There is likely to be a competitive labor market
for such staff and there is no  assurance  that we will be able to  attract  and
retain an adequate number of suitable employees.

     We Are Subject To Significant Domestic and International Regulation and May
Not Be Able To Obtain Necessary Regulatory  Clearances to Sell Our Products.  We
sell medical  devices.  The manufacture and sale of medical devices intended for
commercial  distribution are subject to extensive governmental  regulation.  Our
failure to comply with regulatory  requirements  would jeopardize our ability to
market our products.  Noncompliance  with applicable  requirements can result in
failure of the regulatory  agency to grant pre-market  clearance or approval for
devices,  withdrawal or suspension of approval,  total or partial  suspension of
production,  fines, injunctions,  civil penalties, refunds, recall or seizure of
products and criminal  prosecution.  Medical devices are regulated in the United

                                       22

<PAGE>

States primarily by the FDA and, to a lesser extent, by state agencies. Sales of
medical  device  products  outside  the  United  States  are  subject to foreign
regulatory  requirements that vary from country to country.  Generally,  medical
devices require pre-market  clearance or pre-market approval prior to commercial
distribution.  A determination that information  available on the medical device
is not  sufficient  to grant the needed  clearance or approval will delay market
introduction of the product. In addition,  material changes or modifications to,
and changes in intended use of,  medical  devices also are subject to FDA review
and clearance or approval. The FDA regulates the research, testing, manufacture,
safety,   effectiveness,   labeling,  storage,  record  keeping,  promotion  and
distribution  of  medical  devices  in the  United  States  and  the  export  of
unapproved  medical devices from the United States to other countries.  The time
required  to obtain  approvals  required by foreign  countries  may be longer or
shorter than that required for FDA clearance, and requirements for licensing may
differ from FDA requirements.  The current regulatory  environment in Europe for
medical devices differs significantly from that in the United States.

     We  Expect  to  Encounter  Rapid   Technological   Change  and  Significant
Competition.  The medical device market in which we compete is  characterized by
intensive  development  efforts and  rapidly  advancing  technology.  Our future
success will depend, in large part, upon our ability to anticipate and keep pace
with advancing technology and competing innovations. We may not be successful in
identifying,  developing  and  marketing  new products or enhancing our existing
products.  We  believe  that a number  of large  companies,  with  significantly
greater  financial,   manufacturing,   marketing,   distribution  and  technical
resources  and  experience  than  ours,  are  focusing  on  the  development  of
visualization products for minimally invasive microsurgery.

     Our  Profitability is Directly Related to the Level Of  Reimbursements  for
Surgical  Procedures  Using the  Offered  Products.  Our  profitability  will be
directly related to the level of payments for the surgical procedures,  in which
our  products  will  be  involved,  either  by  Medicare  or  private  insurance
companies.  We could be  adversely  affected  by changes in payment  policies of
government or private  health care payors,  particularly  to the extent any such
changes  affect  payment for the procedure in which our products are intended to
be used.  It is a continuing  trend in U.S.  health care for such payments to be
under continual scrutiny and downward pressure. We believe that reimbursement in
the future will be subject to increased restrictions,  both in the United States
and in foreign markets and that the overall  escalating cost of medical products
and services has led to and will continue to lead to increased  pressures on the
health care industry,  both foreign and domestic, to reduce the cost of products
and services, including products which we offer.

     We  expect  that  our  products  typically  will be used by  hospitals  and
surgical centers,  which bill various  third-party  payors, such as governmental
programs and private  insurance plans, for the health care services  provided to
their patients.  Third-party payors carefully review and increasingly  challenge
the prices  charged for medical  products  and services or negotiate a flat rate
fee in advance.  Payment rates from private companies also vary depending on the
procedure  performed,  the  third-party  payor,  the  insurance  plan and  other
factors.  Medicare compensates hospitals at a predetermined fixed amount for the
costs  associated  with an  in-patient  hospitalization  based on the  patient's
discharge diagnosis and compensates  physicians at a pre-determined fixed amount

                                       23

<PAGE>

based on the procedure performed, regardless of the actual costs incurred by the
hospital or  physician  in  furnishing  the care and  unrelated  to the specific
devices or systems used in that procedure. Medicare and other third-party payors
are  increasingly  scrutinizing  whether to cover new  products and the level of
payment  for new  procedures.  The  flat  fee  reimbursement  trend  is  causing
hospitals to control  costs  strictly in the context of a managed care system in
which health care providers contract to provide  comprehensive health care for a
fixed cost per person. We are unable to predict what changes will be made in the
reimbursement methods utilized by such third-party payors.

     If we obtain the necessary foreign  regulatory  registrations or approvals,
market  acceptance of our products in international  markets would be dependent,
in part, upon the acceptance by the prevailing  health care financing  system in
each  country.  Health care  financing  systems in  international  markets  vary
significantly  by country  and include  both  government  sponsored  health care
programs  and  private  insurance.  We cannot  assure you that  these  financing
systems will endorse the use of our products.

     We May Be Subject To Product  Liability  Claims And Have Limited  Insurance
Coverage.  By engaging in the medical devices business, we will face an inherent
and  significant  business risk of exposure to product  liability  claims in the
event that the use of our products results in personal injury or death. Also, in
the event that any of our products proves to be defective, we may be required to
recall or redesign  such  products.  We will need to maintain  adequate  product
liability  insurance coverage.  If we are able to maintain  insurance,  of which
there can be no assurance, our coverage limits may not be adequate to protect us
from  any  liabilities  we  might  incur in  connection  with  the  development,
manufacture and sale of our products.  Product liability  insurance is expensive
and in the future may not be available to us on acceptable  terms,  if at all. A
successful  product  liability  claim or series of claims brought  against us in
excess of our insurance coverage or a product recall would negatively impact our
business.

ITEM 7.     FINANCIAL STATEMENTS

                          Index to Financial Statements

                                                                            Page
                                                                            ----
Independent Auditor's Report..................................................25

Balance Sheet.................................................................26

Statement of Operations.......................................................27

Statement of Stockholders' Deficit............................................28

Statement of Cash Flows..................................................29 - 30

Notes to Financial Statements............................................31 - 47

                                       24

<PAGE>



                                                REPORT OF INDEPENDENT REGISTERED
                                                          PUBLIC ACCOUNTING FIRM




To the Board of Directors and Stockholders of
Viking Systems, Inc.


We have audited the  accompanying  balance sheet of Viking  Systems,  Inc. as of
December  31,  2004  and  2003,  and  the  related   statements  of  operations,
stockholders'  deficit, and cash flows for the years then ended. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the overall financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Viking  Systems,  Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the years then ended in conformity with U.S. generally  accepted  accounting
principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial  statements,  the Company has had  recurring  losses and cash outflows
from  operations.  These  factors raise  substantial  doubt about its ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 2. The  financial  statements  do not include any  adjustments
that might result from the outcome of this uncertainty.


/s/ TANNER LC


Salt Lake City, Utah
January 28, 2005, except
for note 18 which is dated
March 28, 2005

                                       25

<PAGE>




--------------------------------------------------------------------------------
                                                            VIKING SYSTEMS, INC.
                                                                   Balance Sheet
                                                               December 31, 2004
--------------------------------------------------------------------------------

        Assets                                             2004          2003
                                                      --------------------------
Current assets:
  Cash                                                  $ 139,393     $  35,525
  Accounts receivable                                     277,767             -
  Inventories                                             667,088             -
  Prepaids and other current assets                       145,542             -
                                                      --------------------------

         Total current assets                           1,229,790        35,525

Property and equipment, net                               278,087             -
                                                      --------------------------

                                                      $ 1,507,877     $  35,525
                                                      --------------------------

--------------------------------------------------------------------------------

        Liabilities and Stockholders' Deficit

Current liabilities:
  Accounts payable                                    $ 1,540,954     $  21,218
  Accrued expenses                                        351,149             -
  Deferred revenue                                        159,150             -
  Short-term bank borrowings                               59,215             -
  Related party convertible notes payable                 400,000             -
                                                      --------------------------

         Total current liabilities                      2,510,468        21,218

Stockholders' equity (deficit):
  Preferred stock, $.001 par value, 25,000,000
    shares authorized; no shares issued and
    outstanding                                                 -             -
  Common stock, $.001 par value, 100,000,000
    shares authorized; 30,606,150 and 6,294,650
    shares issued and outstanding, respectively            30,607         6,295
  Additional paid-in capital                            1,282,223       338,705
  Accumulated deficit                                  (2,315,421)     (330,693)
                                                      --------------------------

         Total stockholders' equity (deficit)          (1,002,591)       14,307
                                                      --------------------------

                                                      $ 1,507,877     $  35,525
                                                      --------------------------

--------------------------------------------------------------------------------
See accompanying notes to financial statements.                               26



<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                         Statement of Operations
                                                         Years Ended December 31
--------------------------------------------------------------------------------

                                                        2004           2003
                                                      --------------------------

Sales, net                                            $ 2,846,863  $          -
Cost of sales                                           1,993,530             -
                                                      --------------------------

         Gross profit                                     853,333             -
                                                      --------------------------

Operating expenses:
  General and administrative                            1,381,948             -
  Selling and marketing                                   831,731             -
  Research and development                                617,683             -
                                                      --------------------------

         Total operating expenses                       2,831,362             -
                                                      --------------------------
         Operating loss                                (1,978,029)            -

  Interest expense                                         (6,699)            -
                                                      --------------------------
Loss from continuing operations
  before benefit from income taxes                     (1,984,728)            -

Income tax benefit                                              -             -
                                                      --------------------------

Loss from continuing operations                        (1,984,728)            -

Loss from discontinued operations,
  net of income taxes                                           -       (41,646)
                                                      --------------------------

Net loss                                              $(1,984,728) $    (41,646)
                                                      --------------------------

Net loss per share from continuing operations         $     (0.22) $          -
                                                      --------------------------
Net loss per share from
  discontinued operations                             $         -  $      (0.01)
                                                      --------------------------

Net loss per share - basic and diluted                $     (0.22) $      (0.01)
                                                      --------------------------

Weighted average shares - basic and diluted             9,044,000     3,061,000
                                                      --------------------------

--------------------------------------------------------------------------------
See accompanying notes to financial statements.                               27


<PAGE>

<TABLE>
<CAPTION>
                                                                                                                VIKING SYSTEMS, INC.
                                                                                                  Statement of Stockholders' Deficit
                                                                                              Years Ended December 31, 2004 and 2003
------------------------------------------------------------------------------------------------------------------------------------
                                                           Preferred Stock       Common Stock   Additional
                                                     ------------------------------------------  Paid-in    Accumulated
                                                        Shares    Amount     Shares     Amount   Capital      Deficit       Total
                                                     -------------------------------------------------------------------------------

<S>                                                  <C>        <C>        <C>         <C>         <C>     <C>           <C>
Balance January 1, 2003                                       - $       -   2,691,150  $  2,691 $  261,959 $   (289,047) $  (24,397)

Issuance of common stock for the conversion of debt           -         -      81,000        81      8,019            -       8,100

Issuance of common stock for services                         -         -      72,500        73      3,177            -       3,250

Issuance of common stock for cash                             -         -   3,450,000     3,450     65,550            -      69,000

Net loss                                                      -         -           -         -          -      (41,646)    (41,646)
                                                     -------------------------------------------------------------------------------

Balance December 31, 2003                                     -         -   6,294,650     6,295    338,705     (330,693)     14,307

Issuance of preferred stock to related party for
  cash                                                5,000,000     5,000           -         -    395,000           -      400,000

Issuance of common stock for cash                             -         -   1,125,000     1,125    448,875           -      450,000

Issuance of common stock to related party for
  conversion of note payable                                  -         -     125,000       125     49,875           -       50,000

Issuance of common stock to related party for the
  conversion of preferred stock                      (5,000,000)   (5,000) 20,000,000    20,000    (15,000)          -            -

Issuance of common stock to Board of Directors for
  services                                                    -         -       7,500         8      2,992           -        3,000

Issuance of common stock in acquisition                       -         -   3,054,000     3,054     58,026           -       61,080

Issuance of stock options for services                        -         -           -         -      3,750           -        3,750

Net loss                                                      -         -           -         -          -  (1,984,728)  (1,984,728)
                                                     -------------------------------------------------------------------------------
Balance December 31, 2004                                     -  $      -  30,606,150  $ 30,607 $1,282,223 $(2,315,421) $(1,002,591)
                                                     -------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                                                                   28
</TABLE>


<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                         Statement of Cash Flows
                                                         Years Ended December 31
--------------------------------------------------------------------------------

                                                           2004          2003
                                                       -------------------------
Cash flows from operating activities:
  Net loss                                             $(1,984,728)    $(41,646)
  Adjustment to reconcile net loss to net cash
    used in operating activities:
    Depreciation and amortization                           55,240            -
    Common stock and stock options issued for services       6,750        3,250
    Debt issued for lease expense                                -          920
    Change in operating assets and liabilities:
     Accounts receivable, net                               96,260        1,333
     Inventories, net                                     (400,744)           -
     Prepaids and other current assets                    (145,542)           -
     Accounts payable                                    1,172,427        2,375
     Accrued expenses                                      259,194           -
     Deferred revenue                                      149,900           -
                                                       -------------------------

         Net cash used in operating activities            (791,243)     (33,768)
                                                       -------------------------
Cash flows from investing activities:
  Net cash paid in acquisition                            (158,718)           -
  Purchase of property and equipment                      (300,018)           -
                                                       -------------------------

         Net cash used in investing activities            (458,736)           -
                                                       -------------------------
Cash flows from financing activities:
  Proceeds from issuance of preferred stock                400,000            -
  Proceeds from issuance of common stock                   450,000       69,000
  Payments on long-term debt                                (5,368)           -
  Proceeds from related-party notes payable                500,000        4,665
  Payments on related-party notes payable                  (50,000)      (4,730)
  Short-term bank borrowings                                59,215            -
                                                       -------------------------

         Net cash provided by financing activities       1,353,847       68,935
                                                       -------------------------

         Net increase (decrease) in cash                   103,868       35,167

Cash at beginning of year                                   35,525          358
                                                       -------------------------
Cash at end of year                                    $   139,393     $ 35,525
                                                       -------------------------

Supplemental disclosure of cash flow information:
Cash paid during the years for:
     Interest                                          $     1,740     $      -
                                                       -------------------------

     Income taxes                                      $         -     $      -
                                                       -------------------------

--------------------------------------------------------------------------------
See accompanying notes to financial statements.                               29

<PAGE>


                                                            VIKING SYSTEMS, INC.
                                                         Statement of Cash Flows
                                                                       Continued
--------------------------------------------------------------------------------
Supplemental Cash Flow Information:

During the year ended December 31, 2004, the Company:

     o    Converted 5 million shares of Series A convertible  preferred stock to
          20 million shares of common stock.

     o    Converted  $50,000 of  convertible  notes payable to 125,000 shares of
          common stock

     o    Acquired the assets of the visualization  technology business of Vista
          Medical  Systems,  Inc.  in a purchase  transaction  (see note 3). The
          transaction  required  the  payment of  $158,718,  the  assumption  of
          $453,882  of  liabilities,  and the  issuance of  3,054,000  shares of
          common  stock.  In  connection  with  this  acquisition,  the  Company
          recorded the following:

                Accounts receivable                     $   374,027
                Inventories                                 266,344
                Property and equipment                       33,309
                Accounts payable and accrued expenses      (448,514)
                Long-term debt                               (5,368)
                Common stock issued                         (61,080)
                                                        ------------

                Net cash paid                           $   158,718
                                                        ------------


During the year ended  December  31, 2003 the Company  issued  81,000  shares of
common stock to retire related party notes payable of $8,100.




















--------------------------------------------------------------------------------
See accompanying notes to financial statements.                               30


<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements

                                                      December 31, 2004 and 2003
--------------------------------------------------------------------------------

1. Organization     Organization and Business
   and Summary      Viking  Systems,  Inc.,  (the  Company)  was  organized as a
   of Significant   corporation  in the state of Nevada on May 28, 1998, for the
   Accounting       purpose  of  providing   training  and  curriculum  for  the
   Policies         information  technology  industry.  During 2001, the Company
                    changed its business  focus to the  development  of software
                    applications,  hardware sales and leasing,  and training and
                    support.  As of December 31, 2002, the Company  discontinued
                    its  operations.  During  2004,  the Company  purchased  the
                    assets of the  visualization  technology  business  of Vista
                    Medical   Systems,   Inc.   ("Vista").   Vista,  a  Delaware
                    Corporation,  is involved in the  development,  manufacture,
                    and sale of medical  devices  and  related  technology.  The
                    Company has continued to develop,  manufacture, and sell the
                    products  associated with Vista's  visualization  technology
                    business.

                    Concentrations of Credit Risk
                    Financial  instruments which potentially subject the Company
                    to concentration  of credit risk consist  primarily of trade
                    receivables.  In the normal course of business,  the Company
                    provides  credit terms to its  customers.  Accordingly,  the
                    Company performs ongoing credit evaluations of its customers
                    and maintains  allowances  for possible  losses which,  when
                    realized,   have  been  within  the  range  of  management's
                    expectations.

                    The  Company  maintains  its cash in bank  deposit  accounts
                    which, at times,  may exceed federally  insured limits.  The
                    Company has not  experienced  any losses in such account and
                    believes it is not exposed to any significant credit risk on
                    cash and cash equivalents.

                    Cash and Cash Equivalents
                    The Company  considers  all highly  liquid debt  instruments
                    with an original maturity of three months or less to be cash
                    equivalents.

                                       31

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

1. Organization     Accounts Receivable
   and Summary      Accounts   receivable   are  carried  at   original  invoice
   of Significant   amount  less  an  estimate  made  for  doubtful  receivables
   Accounting       based on a review of all outstanding  amounts  on a  monthly
   Policies         basis.  Specific  reserves  are   estimated   by  management
   Continued        based on certain  assumptions  and variables,  including the
                    customer's  financial  condition,   age  of  the  customer's
                    receivables,   and  changes  in  payment  histories.  As  of
                    December 31, 2004, no allowance for doubtful receivables was
                    necessary.  Trade  receivables  are  written off when deemed
                    uncollectible.  Recoveries of trade  receivables  previously
                    written off are recorded when received.

                    A trade  receivable  is  considered  to be  past  due if any
                    portion of the  receivable  balance has not been received by
                    the contractual  pay date.  Interest is not charged on trade
                    receivables that are past due.

                    Inventories
                    Parts and  supplies  inventories  are stated at the lower of
                    cost or market.  Cost is  determined  using the average cost
                    method. Work-in-process and finished goods are stated at the
                    lower of the accumulated manufacturing costs or market.

                    Property and Equipment
                    Property  and   equipment   are   recorded  at  cost,   less
                    accumulated  depreciation.  Depreciation is calculated using
                    the  straight-line  method  over  the  useful  lives  of the
                    equipment.  Expenditures  for  maintenance  and  repairs are
                    expensed  when  incurred and  betterments  are  capitalized.
                    Gains  and  losses on sale of  property  and  equipment  are
                    reflected in operations.

                    Revenue Recognition
                    The Company's revenues are derived from the sale of surgical
                    visualization technology products to end users, distributors
                    and original equipment  manufactures.  Revenue from the sale
                    of products  is  recognized  when a purchase  order has been
                    received,  the system has been shipped, the selling price is
                    fixed or determinable, and collection is reasonably assured.
                    Most  system  sales are F.O.B.  shipping  point,  therefore,
                    shipment  is deemed to have  occurred  when the  product  is
                    delivered to the transportation carrier.

                                       32

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

1. Organization     Revenue Recognition - Continued
   and Summary      Most of the  Company's   sales  through   December  31, 2004
   of Significant   have  been  for products  that did not include  installation
   Accounting       services.   If  installation  is   included  as  part of the
   Policies         contract,  revenue  is  not  recognized  until  installation
   Continued        has   occurred,   or  until   any   remaining   installation
                    obligation  is  deemed  to be  perfunctory.  Some  sales  of
                    systems  may include  training as part of the sale.  In such
                    cases,  the portion of the revenue  related to the training,
                    calculated  based on the amount  that  would be charged  for
                    training on a stand-alone  basis, is deferred and recognized
                    when the training has been provided.

                    The  sales of  products  do not  include  specific  customer
                    acceptance provisions and do not include the right of return
                    except  in cases  where the  product  does not  function  as
                    guaranteed  by the Company.  The Company  provides a reserve
                    allowance for estimated  returns.  To date, returns have not
                    been significant.

                    Impairment or Disposal of Long-Lived Assets
                    During the year ended December 31, 2002, the Company adopted
                    Statement of Financial  Accounting  Standards No. 144 ("SFAS
                    144"),   Accounting   for  the  Impairment  or  Disposal  of
                    Long-Lived   Assets.   Accordingly,   the  Company   reviews
                    long-lived   assets   such  as   property,   equipment   and
                    definite-lived intangibles for impairment whenever events or
                    changes in circumstances indicate that the carrying value of
                    an asset may not be  recoverable.  As  required  by SFAS No.
                    144, the Company uses an estimate of the future undiscounted
                    net cash flows of the related  asset or group of assets over
                    their remaining  economic useful lives in measuring  whether
                    the assets are  recoverable.  If the  carrying  amount of an
                    asset exceeds its estimated future cash flows, an impairment
                    charge is  recognized  for the amount by which the  carrying
                    amount  exceeds  the  estimated  fair  value  of the  asset.
                    Impairment  of  long-lived  assets is assessed at the lowest
                    levels for which there are identifiable  cash flows that are
                    independent of other groups of assets. Assets to be disposed
                    of are reported at the lower of the carrying  amount or fair
                    value,  less  the  estimated  costs to  sell.  In  addition,
                    depreciation  of the asset  ceases.  During the years  ended
                    December  31, 2004 and 2003,  no  impairment  of  long-lived
                    assets was recorded.

                                       33

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------
1. Organization     Income Taxes
   and Summary      The Company accounts for income taxes using the asset and
   of               liability method. Under the asset and liability deferred tax
   Significant      assets and liabilities are method, recognized for the future
   Accounting       tax consequences attributable to differences between the
   Policies         financial statement carrying amounts of existing assets and
   Continued        liabilities  and their  respective  tax bases.  Deferred tax
                    assets and  liabilities are measured using enacted tax rates
                    expected  to apply to  taxable  income in the years in which
                    those temporary  differences are expected to be recovered or
                    settled.  The effect on deferred tax assets and  liabilities
                    of a change  in tax  rates is  recognized  in  income in the
                    period that includes the enactment date.

                    Use of Estimates in the Preparation of Financial Statements
                    The  preparation of financial  statements in conformity with
                    U.S.  generally  accepted  accounting   principles  requires
                    management to make estimates and assumptions that affect the
                    reported amounts of assets and liabilities and disclosure of
                    contingent  assets  and  liabilities  at  the  date  of  the
                    financial  statements  and the reported  amounts of revenues
                    and expenses  during the reporting  period.  Actual  results
                    could differ from those estimates.

                    Earnings Per Common and Common Equivalent Share
                    The  computation  of  basic  earnings  per  common  share is
                    computed using the weighted  average number of common shares
                    outstanding during the year.

                    The  computation  of diluted  earnings  per common  share is
                    based on  weighted  average  number  of  shares  outstanding
                    during the year plus common  stock  equivalents  which would
                    arise from the conversion of convertible preferred stock and
                    convertible  notes payable and the exercise of stock options
                    and/or warrants  outstanding using the treasury stock method
                    and the  average  market  price per share  during  the year.
                    Common  stock  equivalents  are not  included in the diluted
                    earnings  per  share   calculation   when  their  effect  is
                    antidilutive. 800,000 shares issuable upon conversion of the
                    related party convertible notes payable and 2,816,000 shares
                    issuable  upon  exercise of stock options were excluded from
                    the weighted  average  shares  calculation  for 2004 because
                    their  effect  was  anti-dilutive.  Options  to  purchase  5
                    million shares of Series A preferred stock, convertible into
                    20 million  common  shares,  were excluded from the weighted
                    average shares calculation for 2003 because their effect was
                    antidilutive.

                                       34

<PAGE>


                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

1. Organization     Stock-Based Compensation
   and Summary      The   Company   accounts   for  its   employee   stock-based
   of Significant   compensation  plans using the  intrinsic  value  method,  as
   Accounting       prescribed  by APB  Opinion  No.  25,  Accounting  for Stock
   Policies         Issued   to   Employees,    and   related   interpretations.
   Continued        Accordingly, the Company records deferred compensation costs
                    related  to its  employee  stock  options  when the  current
                    market price of the  underlying  stock  exceeds the exercise
                    price of each stock option on the measurement  date (usually
                    the  date  of  grant).  The  Company  records  and  measures
                    deferred   compensation   for  stock   options   granted  to
                    non-employees,  other than members of the Company's Board of
                    Directors,  using  the fair  value  based  method.  Deferred
                    compensation is expensed on a  straight-line  basis over the
                    vesting period of the related stock option.  During 2004 and
                    2003,  the  Company  did not  grant  any  stock  options  to
                    employees  or members of the  Company's  Board of  Directors
                    with   exercise   prices  below  the  market  price  on  the
                    measurement  date.  The  Company  granted  stock  options to
                    non-employees  for  services  resulting in $3,750 of general
                    and administrative expense during 2004.

                    An  alternative  method  to the  intrinsic  value  method of
                    accounting for  stock-based  compensation  is the fair value
                    based method prescribed by Statement of Financial Accounting
                    Standards  (SFAS)  No.  123,   "Accounting  for  Stock-Based
                    Compensation,"  as amended by SFAS No. 148,  "Accounting for
                    Stock-Based  Compensation - Transition and  Disclosure."  If
                    the Company  used the fair value based  method,  the Company
                    would be required to record deferred  compensation  based on
                    the fair  value of the stock  option at the date of grant as
                    computed  using  an   option-pricing   model,  such  as  the
                    Black-Scholes    option   pricing   model.    The   deferred
                    compensation  calculated  under the fair value based  method
                    would then be amortized over the vesting period of the stock
                    option.

                                       35

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

1. Organization     Stock-Based Compensation - Continued
   and Summary      The following  table  illustrates the effect on net loss and
   of Significant   net loss per share as if the  Company had elected to use the
   Accounting       fair  value  based   method  to  account  for  its  employee
   Policies         stock-based compensation.
   Continued
                                                               Years Ended
                                                               December 31,
                                                         -----------------------
                                                             2004         2003
                                                         -----------------------
                        Net loss, as reported            $(1,984,728)  $(41,646)
                        Deduct:
                        Total stock-based employee
                         compensation expense determined
                         under fair value based method
                         for all awards, net of related
                         tax effects                         (24,116)    (3,132)
                                                         -----------------------
                        Pro forma net loss               $(2,008,844)  $(44,778)
                                                         =======================
                        Loss per share:
                         Basic and diluted - as reported $      (.22)  $   (.01)
                                                         =======================
                         Basis and diluted - pro forma   $      (.22)  $   (.01)
                                                         =======================

                    The fair value of each option grant is estimated on the date
                    of grant using the  Black-Scholes  option pricing model with
                    the following assumptions:
                                                             2004         2003
                                                         -----------------------
                        Expected dividend yield          $         -   $      -
                        Expected stock price volatility        24-35%         0%
                        Risk-free interest rate                 4.17%         2%
                        Expected life of options           1-10 years    5 years

                    The weighted  average fair value of options  granted  during
                    the  years  ended  December  31,  2004 and 2003 was $.15 and
                    $.02, respectively.

                                       36

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

2. Going            The  accompanying  financial  statements  have been prepared
   Concern          under the  assumption  that the Company  will  continue as a
                    going concern. Such assumption  contemplates the realization
                    of assets  and  satisfaction  of  liabilities  in the normal
                    course of business. As shown in the financial statements for
                    the years ended  December 31, 2004 and 2003, the Company has
                    a substantial working capital deficiency,  has recurring net
                    losses,  and has incurred net cash outflows  from  operating
                    activities.  These factors raise substantial doubt about the
                    Company's ability to continue as a going concern.

                    The financial statements do not include any adjustments that
                    might be necessary  should the Company be unable to continue
                    as a going concern.  The Company's  continuation  as a going
                    concern is dependent upon its ability to generate sufficient
                    cash  flow to meet its  obligations  on a timely  basis,  to
                    obtain  additional   financing  as  may  be  required,   and
                    ultimately  to attain  profitability.  The Company  plans to
                    obtain  financing  through  the sale of  equity  securities.
                    There  can be no  assurance  that  such  financing  will  be
                    available on acceptable terms, or at all.





                                       37

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

3. Acquisition      On April 15, 2004, the Company acquired all of the assets of
                    the  visualization  business  segment (the Segment) of Vista
                    Medical Technologies, Inc. (Vista). Pursuant to the terms of
                    the Asset  Purchase  Agreement,  the Company  purchased  all
                    assets  related to the Segment in exchange for a combination
                    of   cash,   common   stock,   and   assumed    liabilities.
                    Specifically,  at closing,  the Company was  required to pay
                    Vista cash of the sum of  $158,718,  and issue shares of its
                    common stock equal to ten percent (10%) of the fully-diluted
                    common   shares  of   Viking   stock   (3,054,000   shares).
                    Additionally, at closing, the Company entered into a license
                    agreement for the  intellectual  property and product rights
                    used in the  operation of the Segment.  In exchange for this
                    license grant, the Company will pay Vista royalties over the
                    next five (5) years  based on sales of the  products  of the
                    Segment  by the  Company.  The  license  agreement  contains
                    minimum  royalties of $150,000 in year one, $300,000 in each
                    of years two, three and four, and $375,000 in year five. The
                    royalties payable by the Company under the License Agreement
                    are  capped  at  $4,500,000  in  the  aggregate,   over  the
                    five-year  period.   Vista  will  retain  ownership  of  all
                    intellectual  property and product  rights under the License
                    Agreement   until  these  royalty   obligations   have  been
                    satisfied,  at which time Vista will  transfer  ownership of
                    such  intellectual   property  and  product  rights  to  the
                    Company.  Lastly,  Vista consigned to the Company at closing
                    its current  inventory  of products  and parts.  The Company
                    will  reimburse  Vista the value of that  inventory,  if and
                    when sold, over the course of the next year.

                    Assets acquired,  liabilities assumed,  common stock issued,
                    and cash paid in the acquisition is detailed as follows:

                        Accounts receivable                     $ 374,027
                        Inventories                               266,344
                        Property and equipment                     33,309
                        Accounts payable and accrued
                         expenses                                (448,514)
                        Long-term debt                             (5,368)
                        Common stock issued                       (61,080)
                                                                ----------
                        Net cash paid in acquisition            $ 158,718
                                                                ==========


                                       38

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

4. Detail of        Details of certain balance sheet accounts as of December 31,
   Certain Balance  2004 and 2003, are as follows:
   Sheet Accounts
                                                             2004         2003
                                                         -----------------------
                        Inventories:
                          Parts and supplied             $ 228,598    $       -
                          Work-in-progress                 240,091            -
                          Finished goods                   198,399            -
                                                         -----------------------
                                                         $ 667,088    $       -
                                                         =======================
                        Accrued expenses:
                          Accrued wages and salaries     $ 126,278    $       -
                          Accrued vacation                  83,756            -
                          Accrued royalties                 46,251            -
                          Other accrued expenses            94,864            -
                                                         -----------------------
                                                         $ 351,149    $       -
                                                         =======================

5. Property and     Property and equipment consists of the following at December
   Equipment        31:
                                                             2004         2003
                                                         -----------------------
                          Equipment                      $ 287,158    $   6,027
                          Furniture and fixtures            46,169            -
                                                         -----------------------

                                                           333,327        6,027
                          Less accumulated depreciation    (55,240)      (6,027)

                                                         $ 278,087    $       -
                                                         =======================

6. Deferred         As of Revenue  December 31,  2004,  the Company had deferred
   Revenue          revenue of  $159,150,  which  consisted  of a sale for which
                    product had been  delivered and invoiced,  but  installation
                    had not occurred.

                                       39

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

7. Short-term       The Company has an agreement  with a bank through  which the
   Bank             bank  will  advance  funds  to the  Company  equal to 80% of
                    receivables  resulting  from  sales by the  Company  up to a
                    maximum of $400,000. Funds advanced accrue interest at prime
                    plus 3.5%. The agreement  expires  September 14, 2005.  Upon
                    collection of the receivable from the customer,  the bank is
                    paid the funds  advanced  and an interest  accrued,  and the
                    remaining  amount  of  the  collection  is  remitted  to the
                    Company. As of December 31, 2004, the Company had $59,215 of
                    advances due to the bank.

8. Related Party    The Company has  borrowings  under  unsecured  notes payable
   Convertible      from a significant stockholder totaling $400,000 at December
   Notes Payable    31, 2004.  The notes  accrue  interest at 10%, are due March
                    31, 2005, and are convertible,  at the note-holder's option,
                    into common stock at $.50 per share.

9. Preferred        In March 2004, the Company sold 5,000,000 shares of Series A
   Stock            Preferred  Stock to a significant  stockholder for $400,000.
                    During  2004,  all  5,000,000  shares of Series A  Preferred
                    Stock were converted into 20,000,000 shares of common stock.

10. Income Taxes    The difference  between income taxes at statutory  rates and
                    the amount presented in the financial statements is a result
                    of the following:
                                                             2004         2003
                                                         -----------------------
                        Income tax benefit at statutory
                         rate                            $ 740,000     $  8,000
                        Tax amortization of excess
                         purchase price allocation          55,000            -
                        Meals and entertainment             (3,000)           -
                        Research and development
                         tax credit                         63,000            -
                        Other                               57,000            -
                        Change in valuation allowance     (912,000)      (8,000)
                                                         -----------------------
                                                         $       -     $      -
                                                         =======================


                                       40

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


10. Income Taxes    Deferred tax assets are as follows at December 31,:
    Continued
                                                             2004         2003
                                                         -----------------------
                        Operating loss carryforwards     $ 825,000    $  66,000
                        Research and development
                         tax credit                        100,000            -
                        Accrued vacation and bonuses        53,000            -
                        Valuation allowance               (978,000)     (66,000)
                                                         -----------------------
                                                         $       -    $       -
                                                         =======================

                    The Company has a net operating loss of  approximately  $2.2
                    million  which  begins to expire in 2019.  The amount of net
                    operating loss carryforward that can be used in any one year
                    will be limited by  significant  changes in ownership of the
                    Company and by the  applicable  tax laws which are in effect
                    at the time such carryforwards can be utilized.

11. Operating       The  Company  leases its  office  space and  certain  office
    Leases          equipment under  non-cancelable  operating lease agreements.
                    Future minimum lease payments on these leases as of December
                    31, 2004, are as follows:

                        Years Ending December 31,
                        -------------------------

                                2005                            $ 163,980
                                2006                              163,080
                                2007                              133,650
                                                                ---------
                                                                $ 460,710
                                                                =========

                    Annual rent expense for all  operating  leases for the years
                    ended  December  31,  2004  and 2003  totaled  approximately
                    $164,000 and $0, respectively.




                                       41

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

12. Related Party   During the year ended December 31, 2004, the Company:
    Transactions

                    o    Sold 5 million shares of Series A Preferred  Stock to a
                         significant stockholder for $400,000.
                    o    Issued  125,000 shares of common stock to a significant
                         stockholder    upon   conversion   of   related   party
                         convertible notes payable of $50,000.

                    During the year ended  December 31, 2003, the Company issued
                    81,000 shares of common stock to retire  related party notes
                    payable of $8,100.

13. Stock           Common Stock Options
    Options         A summary of the status of options to purchase  common stock
                    granted as of December 31, 2004 and 2003 and changes  during
                    the periods then ended is presented below:

                                                                        Weighted
                                                                        Average
                                                                        Exercise
                                                                Shares   Price
                                                              ------------------
                      Options outstanding January 1, 2003             - $     -
                       Granted                                1,200,000     .02
                                                              ------------------
                      Options outstanding December 31, 2003   1,200,000 $   .02
                       Granted                                1,616,000     .44
                                                              ------------------
                      Options outstanding December 31, 2004   2,816,000 $   .26
                                                              ==================


                                       42

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

13. Stock Options   The  following  table  summarizes  information  about  stock
    Continued       options to purchase common stock outstanding at December 31,
                    2004:

                               Options and Warrants     Options and Warrants
                                    Outstanding               Exercisable
                       --------------------------------------------------------
                                    Remaining    Weighted               Weighted
           Range of                 Contractual  Average                Average
           Exercise      Number        Life      Exercise    Number     Exercise
           Prices      Outstanding   (Years)      Price    Exercisable   Price
           ---------------------------------------------------------------------
           $     0.02  1,200,000      4.00       $  0.02    1,200,000   $  0.02
           $0.35-0.65  1,616,000      5.00       $  0.44       25,000      0.40

                    Preferred Stock Options
                    In December  2003,  the Company g a significant  stockholder
                    the option to purchas 0,000 shares of the Company's Series A
                    Preferrranted k at $.08 per preferred share. Each share of e
                    5,00  A  Preferred  Stock  is  convertible   into  4  shared
                    Stocommon  stock.  During 2004, the option was exerc Seriesd
                    the Company  issued  5,000,000  shares of Seriees of cferred
                    Stock in exchange for $400,000. ised an s A Pre

14. Major           During the year ended  December  31,  2004,  the Company had
    Customers       sales  to two  customers  that  accounted  for 49% and  17%,
                    respectively, of total sales.

15. Discontinued    On December 31, 2002, the Company's  management and board of
    Operations      directors decided to discontinue  current  operations due to
                    the Company's insufficient cash flows to support operations.

                                       43

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

15. Discontinued    Liabilities  from  discontinued  oeprations  consist  of the
    Operations      following as of December 31:
    Continued
                                                             2004         2003
                                                         -----------------------
                        Liabilities from discontinued
                         operations:
                          Accounts payable               $        -   $  21,218
                                                         =======================

                    Income  statement presentation  for the years ended December
                    31:
                                                             2004         2003
                                                         -----------------------
                        Revenue                          $        -   $   7,935
                        Cost and expenses                         -     (49,581)
                                                         -----------------------
                        Net loss from discontinued
                         operations                      $        -   $ (41,646)
                                                         =======================

16. Contingencies   In connection with the acquisition  discussed in Note 3, the
                    Company   entered   into  a   license   agreement   for  the
                    intellectual   property  and  product  rights  used  in  the
                    operation  of the  business  acquired.  In exchange for this
                    license grant, the Company will pay Vista royalties of 5% of
                    all original  equipment  manufacturer (OEM) sales and 10% of
                    all sales of the 3Di Endosite  System over the next five (5)
                    years. The license  agreement  contains minimum royalties of
                    $150,000 in year one,  $300,000 in each of years two,  three
                    and four, and $375,000 in year five.  The royalties  payable
                    by the  Company  under the license  agreement  are capped at
                    $4,500,000  in the  aggregate,  over the  five-year  period.
                    Vista will retain ownership of all intellectual property and
                    product  rights  under the  license  agreement  until  these
                    royalty obligations have been satisfied, at which time Vista
                    will transfer  ownership of such  intellectual  property and
                    product and product  rights to the  Company.  If the Company
                    fails to make a minimum  royalty payment in any period under
                    the   license   agreement,   the  license   agreement   will
                    automatically  terminate and the  intellectual  property and
                    product rights will be retained by Vista. As of December 31,
                    2004,  the  Company had  accrued  royalties  related to this
                    agreement of approximately $39,000. During 2004, the Company
                    paid   approximately   $78,000  in   royalties   under  this
                    agreement.

                                       44

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

16. Contingencies   The Company has also entered into a royalty agreement with a
    Continued       supplier.  The royalty agreement  requires payments of 4% of
                    sales that use the  supplier's  product.  As of December 31,
                    2004,  the  Company had  accrued  royalties  related to this
                    agreement of approximately  $7,000. During 2004, the Company
                    did not pay any royalties under this agreement.

17. Recent          In December  2004,  the FASB issued FASB  Statement  No. 123
    Accounting      (revised 2004),  "Shared-Based  Payment."  Statement  123(R)
    Pronounce-      addresses   the   accounting   for    share-based    payment
    ments           transactions  in  which  an  enterprise   receives  employee
                    services  in  exchange  for (a)  equity  instruments  of the
                    enterprise  or (b)  liabilities  that are  based on the fair
                    value of the enterprise's  equity instruments or that may be
                    settled  by  the   issuance  of  such  equity   instruments.
                    Statement   123(R)  requires  an  entity  to  recognize  the
                    grant-date   fair-value   of   stock   options   and   other
                    equity-based  compensation issued to employees in the income
                    statement.  The revised Statement generally requires that an
                    entity   account   for   those    transactions   using   the
                    fair-value-based  method, and eliminates the intrinsic value
                    method of accounting in APB Opinion No. 25,  "Accounting for
                    Stock  Issued  to  Employees",  which  was  permitted  under
                    Statement 123, as originally issued.

                    The  revised   Statement   requires   entities  to  disclose
                    information  about  the  nature of the  share-based  payment
                    transactions  and the effects of those  transactions  on the
                    financial statements.

                    Statement  123(R) is effective for public  companies that do
                    not file as small  business  issuers as of the  beginning of
                    the first  interim or annual  reporting  period  that begins
                    after June 15, 2005. For public companies that file as small
                    business  issuers,  Statement  123(R) is effective as of the
                    beginning of the first  interim or annual  reporting  period
                    that begins  after  December 15, 2005 (i.e.,  first  quarter
                    2006 for the Company).  All public companies must use either
                    the  modified  prospective  or  the  modified  retrospective
                    transition  method.  Early  adoption of this  Statement  for
                    interim or annual periods for which financial  statements or
                    interim  reports  have not been  issued is  encouraged.  The
                    Company has not yet evaluated the impact of adoption of this
                    pronouncement  which must be adopted in the first quarter of
                    our fiscal year 2006.

                                       45

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

17. Recent          In  November  2004,  the  FASB  issued  Statement  No.  151,
    Accounting      "Inventory  Costs",  to amend the  guidance  in  Chapter  4,
    Pronounce-      "Inventory  Pricing",  of FASB Accounting  Research Bulletin
    ments           No. 43,  "Restatement  and Revision of  Accounting  Research
    Continued       Bulletins."  Statement No. 151 clarifies the  accounting for
                    abnormal amounts of idle facility expense, freight, handling
                    costs,  and  wasted  material   (spoilage).   The  Statement
                    requires that those items be  recognized  as  current-period
                    charges.   Additionally,   Statement   151   requires   that
                    allocation  of fixed  production  overheads  to the costs of
                    conversion be based on the normal capacity of the production
                    facilities.  Statement No. 151 is effective for fiscal years
                    beginning  after June 15,  2005.  The  Company is  currently
                    evaluating  the  impact of the  adoption  of this  Statement
                    which is required to be adopted in the fiscal year 2006.

                    As part of its short-term international  convergence project
                    with the  IASB,  on  December  16,  2004,  the  FASB  issued
                    Statement  153 to address the  accounting  for  non-monetary
                    exchanges of productive assets. Statement 153 amends APB No.
                    29,   "Accounting   for   Non-monetary   Exchanges",   which
                    established a narrow exception for non-monetary exchanges of
                    similar productive assets from fair value measurement.  This
                    Statement  eliminates that exception and replaces it with an
                    exception  for  exchanges   that  do  not  have   commercial
                    substance.  Under Statement 153  non-monetary  exchanges are
                    required to be accounted for at fair value,  recognizing any
                    gains or losses, if their fair value is determinable  within
                    reasonable   limits  and  the   transaction  has  commercial
                    substance.

                    The Statement  specifies  that a  non-monetary  exchange has
                    commercial  substance if future cash flows of the entity are
                    expected  to  change   significantly  as  a  result  of  the
                    exchange. An entity should apply the provisions of Statement
                    153   prospectively   for   non-monetary    asset   exchange
                    transactions  in fiscal  periods  beginning  after  June 15,
                    2005.  The Company will adopt this  Statement in fiscal 2005
                    and  adoption is not  expected to have a material  impact on
                    the financial position or results of operations.

                                       46

<PAGE>

                                                            VIKING SYSTEMS, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------

18. Subsequent      Subsequent  to December 31, 2004
    Events
                    In January  2005 the  Company  received  a $200,000  line of
                    credit from Silicon  Valley Bank. The line of credit accrues
                    interest  at prime plus 1%, and is secured by a  certificate
                    of deposit of a significant stockholder.

                    In  February  and  March  of  2005,  the  Company   received
                    approximately  $1,550,000  in exchange  for 10%  convertible
                    notes  payable.  The notes are  convertible  into  shares of
                    common stock of the Company at $.20 per share if the Company
                    receives equity  financing  within twelve months of at least
                    $3  million,  sold at a minimum  of $.30 per  share.  If the
                    Company does not  complete the equity  financing or does not
                    repay the notes within twelve months, the conversion rate is
                    reduced to $.05.

                    In March 2005, a significant stockholder converted his notes
                    payable of $500,000  and related  interest of $16,660,  into
                    1,291,650  shares of the Company's common stock at $0.40 per
                    share.



                                       47

<PAGE>


ITEM 8. CHANGES AND  DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

      None.

ITEM 8A.  CONTROLS AND PROCEDURES

     We maintain  disclosure  controls  and  procedures  designed to ensure that
information  required to be disclosed in our reports filed under the  Securities
Exchange Act of 1934,  as amended (the Exchange  Act),  is recorded,  processed,
summarized,  and  reported  within  the  required  time  periods,  and that such
information is accumulated and  communicated  to our  management,  including our
Chief Executive Officer and Chief Financial  Officer,  as appropriate,  to allow
for timely decisions regarding disclosure.

     As required by Rule  13a-15(b)  under the  Exchange  Act, we  conducted  an
evaluation,  with the participation of our Chief Executive Officer and the Chief
Financial  Officer,   of  the  effectiveness  of  our  disclosure  controls  and
procedures  as of December 31, 2004. In  connection  with the  completion of its
audit of, and the issuance of its report on, our  financial  statements  for the
year ended December 31, 2004, Tanner LC identified  deficiencies that existed in
the design or operation of our internal control over financial reporting that it
considers to be "material  weaknesses." The Public Company Accounting  Oversight
Board  has  defined  a  material  weakness  as  a  "significant   deficiency  or
combination  of  significant  deficiencies  that  results  in more than a remote
likelihood  that a material  misstatement  of the  annual or  interim  financial
statements will not be prevented or detected."

     The  deficiencies in our internal  control related to revenue  recognition,
and  the  disclosure  controls  deficiencies  related  to  equity  transactions,
purchase accounting, statements of cash flows, deferred revenue, short-term bank
borrowings,  related party convertible notes payable,  and operating leases. The
adjustment to revenue and the footnote disclosure  deficiencies were detected in
the audit  process and have been  appropriately  recorded and  disclosed in this
Form  10-KSB.  We are in the process of  improving  our  internal  control  over
financial  reporting  in an  effort  to  remediate  these  deficiencies  through
improved  supervision and training of our accounting staff.  These  deficiencies
have been disclosed to our Audit Committee. Additional effort is needed to fully
remedy  these  deficiencies  and we are  continuing  our  efforts to improve and
strengthen  our  control  processes  and  procedures.   Our  management,   audit
committee,  and  directors  will  continue to work with our  auditors  and other
outside  advisors to ensure that our  controls and  procedures  are adequate and
effective.

     There has been no change in our internal  control over financial  reporting
during the fourth quarter ended December 31, 2004 that has materially  affected,
or is  reasonably  likely  to  materially  affect,  our  internal  control  over
financial  reporting.  Since the most recent evaluation date, there have been no
significant changes in our internal control structure,  policies, and procedures
or in other areas that could  significantly  affect our  internal  control  over
financial reporting.

     The  Sarbanes-Oxley  Act of 2002  (the  "Act")  imposed  many  requirements
regarding corporate  governance and financial  reporting.  One requirement under

                                       48

<PAGE>

section  404 of the Act,  beginning  with our  annual  report for the year ended
December  31,  2006,  is for  management  to  report on the  Company's  internal
controls over  financial  reporting and for our  independent  registered  public
accountants to attest to this report.

ITEM 8B. OTHER INFORMATION

     We must disclose under this item any  information  required to be disclosed
in a report on Form 8-K during the  fourth  quarter of the year  covered by this
Form 10-KSB,  but not reported,  whether or not otherwise  required by this Form
10-KSB.  If disclosure of such  information is made under this item, it need not
be  repeated  in a report on Form 8-K which  would  otherwise  be required to be
filed with respect to such information or in a subsequent report on Form 10-KSB.
No additional disclosure is required under this item.

                                   PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.

Identification of Directors and Executive Officers

     The current  directors and officers of Viking who will serve until the next
annual  meeting  of  shareholders  or until  their  successors  are  elected  or
appointed and qualified, are set forth below:

      Name                          Position

      Daniel F. Crowley             Chairman of the Board, Audit Committee
                                        Chairman
      Thomas B. Marsh               CEO/President/Director
      Ronald A. Walrod              Director, Compensation Committee Chairman
      Robin Blackstone, M.D.        Director,  Nominating and Corporate
                                        Governance Committee Chairman
      Nathan J. Harrison, M.D.      Director
      Marshall Geller               Director
      Joseph Warrino                Chief Financial Officer/Secretary

     Background  information  about the  Company's  officers and directors is as
follows:

     Thomas B. Marsh.  Mr. Marsh was appointed  President and Director of Viking
in November 2003. Prior to joining Viking, he served as Secretary, Treasurer and
Director of PurchaseSoft,  Inc. and was a partner and co-founder of Marsh+Flagg.
Marsh+Flagg is a merger and acquisition advisory firm with offices in La Jolla &
Newport Beach,  California and Stuttgart,  Germany.  Prior to November 2001, Mr.
Marsh  served  as COO  of  Co-Mack  Technology,  CEO of  Emark  Corporation  and
President of Spectrum Companies International. He attended Williams College with
a major in economics.

                                       49

<PAGE>

     Daniel F.  Crowley.  Mr.  Crowley  was  appointed  a director  of Viking in
December  2003 and  Chairman of the Board in March  2005.  He has been a private
investor and business  consultant  since 2002. Mr. Crowley is a principal in and
co-founder  of  Spectrum  Partners  LLC, a  business  strategy  and  development
advisory firm  specializing in the  transportation  and logistics  industry with
offices in Scottsdale,  Arizona. Prior to Spectrum Partners LLC, Mr. Crowley was
Executive  VP & CFO at BAX Global from 1998  through  2002.  Previous  positions
include senior  management  positions with  Frito-Lay  International,  and Grand
Metropolitan  PLC companies  including The Pillsbury  Company and Pearle Vision.
Mr. Crowley holds a CPA certificate  from the State of New York, and a M.B.A. in
Finance from Columbia University.

     Ronald A. Walrod.  Mr.  Walrod was  appointed a director of Viking in April
2004. He has served as President,  CEO and Director of JMAR  Technologies,  Inc.
since October 2002. From 1998 to 2000, Mr. Walrod served as President and CEO of
Kinetic  Probe,  a  privately  held  company   engaged  in  the  development  of
semiconductor  probe cards. From 1996 to 1998, he served as President and CEO of
Nautronix,  a supplier of automation systems for marine applications.  From 1984
to 1993,  Mr. Walrod served as President and CEO of Applied  Remote  Technology,
Inc. (ART), a company he founded to develop undersea vehicle (AUV) systems.  Mr.
Walrod  graduated  from the United  States  Coast Guard  Academy and earned both
Masters of Science and  Professional  Engineer  Degrees  from the  Massachusetts
Institute of Technology in 1970 and received his M.B.A.  from the  University of
San Diego in 1983. Mr. Walrod was awarded a fellowship in Ocean Engineering from
the National Science  Foundation and has twice received the Industrial  Research
and Development IR 100 Award for Remotely Operated Vehicles.

     Nathan J. Harrison, M.D. Dr. Harrison was appointed a director of Viking in
August 2004. Dr. Harrison has been the Medical Director of Dunhill Marketing and
Insurance,  Inc.  since  retiring  from  clinical  practice  in 1999.  He joined
Obstetrics/Gynecology  Associates  Medical Group, Inc. in 1977 and was President
from 1981 to 1999.  Dr.  Harrison  also  served as Chief of Staff,  Chairman  of
Obstetrics and Gynecology and as a Director of Sharp Memorial Hospital.  He also
served as a Director of Sharp Health Care and Sharp Community  Medical Group all
in San Diego. Prior to this, Dr. Harrison was a Flight Surgeon in the U.S. Army.
He has  been a  member  of the  Physicians  Advisory  Committee  for  Prudential
Insurance,  CIGNA  Insurance  and Aetna/US  Health,  as well as several  medical
societies.  Dr. Harrison earned his M.D. from University of Illinois  College of
Medicine.

     Robin Blackstone, M.D. Dr. Blackstone was appointed a director of Viking in
November 2004. She is Medical  Director of the Scottsdale  Healthcare  Bariatric
Program  and  Surgeon  and  Director of the  Scottsdale  Bariatric  Center.  Dr.
Blackstone  specializes in Advanced  Laparoscopic  General  Surgery and Surgical
Oncology.  Dr.  Blackstone has served as Chairman of the  Scottsdale  Healthcare
Cancer  Committee.  She  received  her  Doctor  of  Medicine  in 1988  from  the
University of Texas in San Antonio,  and completed her General Surgery residency
at the  University  of Colorado  in 1993.  She later  served as the  Director of
Women's Health Services at Natividad Medical Center in Salinas,  California. Dr.
Blackstone  is a member of the ASBS,  SSAT,  SAGES,  and serves on the  Surgical
Review  Corporation  Center Review Committee.  She is consultant and proctor for
Ethicon Endosurgery.

                                       50

<PAGE>

     Marshall Geller.  Mr. Geller is a Senior Managing Director of St. Cloud. He
was formerly the Chairman  and CEO of Geller & Friend  Capital  Partners,  a Los
Angeles based private  merchant  bank. He has extensive  experience  initiating,
arranging and making  investments  in public and private  companies.  Mr. Geller
spent over twenty years as Senior Managing Director for Bear, Stearns & Company,
with oversight of all operations in Los Angeles,  San Francisco,  Chicago,  Hong
Kong and the Far East. He is currently a director of public companies  including
1st Century Bank, NA  (Nasdaq:FCNA)  and GP Strategies  Corporation  (NYSE:GPX).
Additionally,  Mr. Geller is the  non-executive  Chairman of ValueVision  Media,
Inc.  (NasdaqNM:VVTV).  Mr.  Geller  also  serves  as a member  of the  Board of
Governors of  Cedars-Sinai  Medical Center,  Los Angeles.  He was previously the
Interim  Co-Chairman of Hexcel Corporation  (NYSE:HXL) and Interim President and
COO of Players  International,  Inc. Mr. Geller  graduated from California State
University, Los Angeles, with a BS in Business Administration, were he currently
serves on the Dean's Advisory Council for the College of Business & Economics.

     Joseph A.  Warrino.  Mr.  Warrino was  appointed  the CFO and  Secretary of
Viking on April 15, 2004.  Prior to joining  Viking he was  Controller  of Vista
Medical  Technologies,  Inc.  From  1999  to 2000  Mr.  Warrino  was a  Division
Controller  and Human  Resources  Manager  of Lakso  Packaging,  a  division  DT
Industries,  Inc. From 1998 to 1999, he was a senior cost  accountant  for Vista
Medical  Technologies,  Inc.  and from 1989 to 1998,  Mr.  Warrino  worked as an
accountant for several different publicly held companies. Mr. Warrino earned his
B.S.  degree in  accounting  from Salem  State  College  and his A.S.  degree in
Management from Middlesex Community College.

Key Employees

John "Jed" Kennedy. Mr. Kennedy is the President, Vision Systems Group at Viking
Systems.  Mr.  Kennedy joined Vista Medical in January 1997 as Vice President of
Research and  Development.  He was appointed Vice  President/General  Manager of
Westborough  Operations in January 2000 before being  appointed  Executive  Vice
President and COO in December  2000.  Prior to joining  Vista,  Mr. Kennedy held
various positions in Manufacturing,  Quality Engineering and Product Development
at Smith & Nephew  Endoscopy from 1984 through  January 1997.  From 1996 through
January 1997 he was the Group Director of Product  Development  responsible  for
managing all Divisional Product Development activities.  From 1993 through 1996,
Mr.  Kennedy  was  Director,   Research  and  Development  responsible  for  the
management of four technology product development groups. Prior to 1984, he held
various  engineering  positions  at  Honeywell's   Electro-Optics  and  Avionics
divisions. Mr. Kennedy received a B.S. in Manufacturing  Engineering from Boston
University in 1979.

     Lonna J. Williams.  In September  2004, Ms.  Williams joined Viking as Vice
President,  Sales and Marketing for all Viking business units.  Ms. Williams was
formerly President of  MedicalMarketSolutions,  a health care product consulting
firm.  She  has  20  years  of  experience  in  marketing,  sales  and  business
development in medical  diagnostics,  devices and  pharmaceuticals  and has held
executive level  positions in several public and privately held  companies.  Ms.
Williams  has brought  over 25 new  products to market and  commercialized  four
novel  technologies.  She has held senior  management  positions  at Johnson and
Johnson/Clinical  Diagnostics,   Hybritech/Eli  Lilly,  GenProbe,  Inc.,  Quidel
Corporation and LifePoint,  Inc. She has been involved in corporate acquisitions

                                       51

<PAGE>

and  technology  licensing  and has  created  and  implemented  business  plans,
integration  and  commercialization  plans  supporting  the  acquisitions.   She
graduated from the University of Southern Colorado.

Control Persons

     Mr. Tucker  acquired a voting  control  position in the Company in December
2003. Information about Donald E. Tucker is as follows:

     Donald E.  Tucker.  Donald E.  Tucker,  age 50, is a Senior  Partner with a
large  consulting  and  technology  company and has over 24 years of  consulting
experience across a number of industry segments.  He has held several management
and   leadership   positions   during  his  career  and   currently  has  global
responsibility  for the Medical  Technology,  Diagnostics  and Devices  industry
segment, as well as the west coast biotech/pharmaceutical market. He has primary
responsibility  for  establishing  global market and  operational  leadership in
these  industry  segments and is an advisor to a number of  associations  in the
life sciences  industry.  Mr. Tucker has experience and has been involved in the
strategy,  planning and  implementation  of large-scale  complex change programs
with extensive  experience in new product  development,  supply chain management
and  commercial  operations.  He has served  numerous  Fortune 100  companies in
planning and executing global mergers, consolidating operations and implementing
new strategic  capabilities.  He has worked extensively throughout the America's
and Europe.  From 1997 to 2000, Mr. Tucker led the development and operations of
a west  coast  Business  Launch  Center,  where  over 16 new  technology-centric
businesses  were formed,  funded and launched.  Mr. Tucker  graduated  Magna Cum
Laude with a BS degree in business management from Northern Michigan University.

Other Involvement in Certain Legal Proceedings

     There have been no events under any bankruptcy act, no criminal proceedings
and any judgments or  injunctions  material to the evaluation of the ability and
integrity of any director or executive officer during the last five years.

Code of Ethics

     We adopted a code of ethics that  applies to all  officers,  directors  and
employees of the Company, a copy of which was filed as Exhibit 14 to Form 10-KSB
for the year ended December 31, 2002. To view this code of ethics,  please visit
our website at www.vikingsytems.com (the information contained in our website is
not intended to be a part of this filing).  We intend to satisfy the  disclosure
requirements  under Item 5.05 of Form 8-K  regarding an amendment  to, or waiver
from, a provision of this code of ethics, if any, by posting such information on
our website as set forth above.

                                       52

<PAGE>


Committees of the Board of Directors

     Our board of directors has an audit committee, a compensation committee and
a  nominating  and  corporate  governance  committee,  each  of  which  has  the
composition and responsibilities described below:

     Audit Committee.  The audit committee  provides  assistance to the board of
directors in fulfilling its legal and fiduciary obligations in matters involving
our  accounting,  auditing,  financial  reporting,  internal  control  and legal
compliance  functions by approving  the  services  performed by our  independent
accountants and reviewing their reports  regarding our accounting  practices and
systems of internal accounting  controls.  The audit committee also oversees the
audit efforts of our independent accountants and takes those actions as it deems
necessary to satisfy itself that the  accountants are independent of management.
The audit  committee  currently  consists of Daniel  Crowley  (Chairman),  Robin
Blackstone and Nathan Harrison,  each of whom is a non-management  member of our
board of  directors.  Daniel F.  Crowley is also our audit  committee  financial
expert as currently  defined under Securities and Exchange  Commission rules. We
believe  that the  composition  of our audit  committee  meets the  criteria for
independence under, and the functioning of our audit committee complies with the
applicable requirements of, the Sarbanes-Oxley Act of 2002, the current rules of
the Nasdaq  Stock  Market  and  Securities  and  Exchange  Commission  rules and
regulations.  We intend to comply with future audit  committee  requirements  as
they become applicable to us.

     Compensation  Committee.  The compensation committee determines our general
compensation  policies  and  the  compensation  provided  to our  directors  and
officers. The compensation committee also reviews and determines bonuses for our
officers and other employees.  In addition,  the compensation  committee reviews
and determines equity-based compensation for our directors,  officers, employees
and  consultants  and  administers  our stock option  plans and  employee  stock
purchase  plan.  The current  members of the  compensation  committee are Ronald
Walrod  (Chairman),  Daniel  Crowley  and  Nathan  Harrison,  each  of whom is a
non-management member of our board of directors. We believe that the composition
of our compensation committee meets the criteria for independence under, and the
functioning  of  our  compensation   committee   complies  with  the  applicable
requirements of, the Sarbanes-Oxley Act of 2002, the current rules of the Nasdaq
Stock Market and Securities and Exchange  Commission rules and  regulations.  We
intend to comply with future compensation  committee requirements as they become
applicable to us.

     Nominating and Corporate Governance Committee. The nominating and corporate
governance  committee is responsible for making  recommendations to the board of
directors regarding candidates for directorships and the size and composition of
the board.  In addition,  the nominating and corporate  governance  committee is
responsible for overseeing our corporate governance guidelines and reporting and
making recommendations to the board concerning corporate governance matters. The
current members of the nominating and governance  committee are Robin Blackstone
(Chairman),  Ronald Walrod and Nathan Harrison.  We believe that the composition
of our nominating and governance  committee meets the criteria for  independence
under, and the functioning of our nominating and corporate  governance committee
complies with the applicable  requirements of, the  Sarbanes-Oxley  Act of 2002,
the  current  rules of the Nasdaq  Stock  Market  and  Securities  and  Exchange

                                       53

<PAGE>

Commission rules and regulations. We intend to comply with future nominating and
corporate governance committee requirements as they become applicable to us.

Communications with Board Members

     We have not adopted a formal process by which  stockholders may communicate
with the Board of Directors.  Until a formal process  occurs,  stockholders  may
contact our CEO/President at tmarsh@vikingsystems.com.

Compliance with Section 16(a)

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
the Company's directors and executive officers, and persons who beneficially own
more than 10% of a registered class of the Company's equity securities,  to file
reports of  beneficial  ownership  and changes in  beneficial  ownership  of the
Company's  securities  with the SEC on Forms 3 (Initial  Statement of Beneficial
Ownership), 4 (Statement of Changes of Beneficial Ownership of Securities) and 5
(Annual Statement of Beneficial Ownership of Securities).  Directors,  executive
officers and  beneficial  owners of more than 10% of the Company's  Common Stock
are  required  by SEC  regulations  to furnish  the  Company  with copies of all
Section 16(a) forms that they file. The Company  believes that,  during the year
ended December 31, 2004, the Reporting Persons met all applicable  Section 16(a)
filing requirements.

ITEM 10.  EXECUTIVE COMPENSATION

Summary Compensation Table

     The following table sets forth certain information concerning  compensation
for services  rendered for the past three years to the Company's Chief Executive
Officer and to the Company's  most highly  compensated  officers  other than the
CEO, whose annual salary and bonus exceeded $100,000:

<TABLE>
<CAPTION>
                             Annual Compensation                 Long-Term Compensation
                      -----------------------------------  ------------------------------------
                                                                  Awards             Payouts
                                                           -----------------------  ------------      All
Name and Other Annual                        Other Annual                Options/                    Other
Principal Position    Year  Salary   Bonus   Compensation  Stock Awards  SAR's (#)  LTIP Payouts  Compensation
------------------    ----  ------   -----   ------------  ------------  ---------  ------------  ------------
<S>                   <C>  <C>      <C>      <C>           <C>           <C>        <C>           <C>
Thomas B. Marsh (1)   2004 $151,600 18,000(3)     -0-            -0-       320,000       -0-            -0-
     CEO              2003 $   - 0-    -0-        -0-            -0-     1,000,000       -0-            -0-

John Kennedy (2)      2004 $132,385 18,000(3)     -0-            -0-       280,000       -0-            -0-
</TABLE>

1)   Mr. Marsh was appointed as President and CEO of Viking in December 2003.

2)   Mr. Kennedy was appointed as President of the Vision Systems Group in April
     2004

3)   The bonus was earned in 2004 but is  payable  only when the  Company  meets
     certain liquidity conditions and as of March 25, 2005, has not been paid.

                                       54

<PAGE>

Stock Options Granted in the Last Fiscal Year

     The following table sets forth information on grants of options to purchase
shares of our common stock in fiscal year 2004 to our officers and directors.

                                     Individual Grants
                   -------------------------------------------------------------
                                     % of Total
                   Number of         Options
                   Securities        Granted to     Exercise
                   Underlying        Employees in   Price        Expiration
Name               Options Granted   Fiscal Year    ($/Sh)(1)    Date
--------------------------------------------------------------------------------
Thomas B. Marsh        320,000           20%           $.50      12/31/09
John Kennedy           150,000          9.8%           $.35      04/23/08
John Kennedy           130,000          9.6%           $.50      12/31/09
---------

(1)  The  exercise  price was equal to 100% of the fair market value on the date
     of grant.

Aggregated  Option  Exercises  in Last  Fiscal Year and Fiscal  Year-end  Option
Values
<TABLE>
<CAPTION>
                                             Securities Underlying         Value of Unexercised In-the-
                                             Unexercised Options at        Money Options at
                 Shares                      December 31, 2004             December 31, 2004 ($)(1)
                 Acquired on   Value         ---------------------------   ----------------------------
Name             Exercise (#)  Realized ($)  Exercisable   Unexercisable   Exercisable   Unexercisable
-------------------------------------------------------------------------------------------------------
<S>              <C>           <C>           <C>           <C>             <C>           <C>
Thomas B. Marsh       -0-        -0-          1,000,000       320,000          -0-             NA
John Kennedy          -0-        -0-                -0-       280,000          -0-             NA
</TABLE>
----------
(1)  Calculated  on the  basis  of  the  fair  market  value  of the  underlying
     securities at December 31, 2004 minus the exercise  price.  Viking's common
     stock is quoted on the Bulletin Board.  As of December 31, 2004,  there was
     limited,  if any,  trading  volume in  Viking's  common  stock.  Management
     believes  that the quoted  price of Viking's  common  stock on the Bulletin
     Board as of December 31, 2004 did not reflect fair market value of Viking's
     common stock for the following reasons:

     o    Viking's   per  share  book  value  as  of   December   31,  2004  was
          approximately $(0.07);
     o    Viking had revenues of $2,846,863 in 2004;
     o    Viking had a loss of $1,984,729 for the year ended December 31, 2004;
     o    Viking had a cumulative deficit of $2,315,419 as of December 31, 2004;
          and
     o    Viking had limited trading  activity during 2004 including  during the
          month of December 2004.

Compensation of Directors

     In April 2004, we adopted a  compensation  plan for our Board of Directors.
Pursuant  to such  plan we grant an  initial  option  of  20,000  shares to each
non-employee  director  at the time he or she is  appointed  a  director  of the
Company.  The  options  vest one year from the date of grant.  Beginning  in the
second year of their term, each non-employee  director is also granted an annual
option of 10,000 shares of our common stock.

     In addition to an option for 20,000 shares granted under the Non-Employee's
Directors  Stock  Ownership  Plan, we had granted  Director Daniel F. Crowley an
option to purchase 200,000 shares of our common stock.

                                       55

<PAGE>

Employment Agreements

     We have entered into an  employment  agreement  with our  President and CEO
Thomas B. Marsh.  The  agreement is for a term of two years and provides for the
payment of a base salary of $220,000 per year plus  participation  in bonus plan
that  includes  both cash and stock  options  based on  Company  and  individual
performance as determined from time to time by the Compensation  Committee.  The
Company  is  currently  not a party to any other  written  employment  agreement
however; we anticipate that we will enter into employment  agreements with other
officers and key employees in the future.

Equity Compensation Plan Information

     2004  Stock   Incentive   Plan.  All  key  employees  of  Viking  (and  its
subsidiaries  and affiliates in which Viking has a significant  equity interest)
are eligible to receive awards under the Plan. The Plan permits the granting of:

     o    stock  options,   including  "incentive  stock  options"  meeting  the
          requirements  of Section 422 of the  Internal  Revenue  Code and stock
          options that do not meet these requirements  (options that do not meet
          these requirements are called "nonqualified stock options");
     o    stock appreciation rights, or "SARs";
     o    restricted stock; and
     o    performance awards payable in stock.

     A total of  7,500,000  shares of Viking  common  stock were  available  for
granting  awards  under the Plan.  The  Compensation  Committee  of the Board of
Directors administers the Plan. The maximum term of any option granted under the
Plan is limited to 10 years. The exercise price per share under any stock option
or the grant price of any SAR cannot be less than the Fair Market  Value that is
defined in the Plan.

     We have issued  options to some  employees.  In April 2004,  the  Company's
board of directors granted 510,000 stock options, in aggregate,  to employees to
retain  them after the  acquisition  from  Vista  Medical  Technologies.  As the
Company hired new key employees the board granted stock options of 10,000 shares
per employee.  In December  2004,  the Company issued stock options to employees
totaling 160,000 shares.  In December 2004 the board of directors  awarded stock
options to the executive team totaling 626,000 shares.

     2004  Non-Employee  Directors  Stock Ownership Plan. The 2004 Director Plan
provides for the grant to non-employee  directors of non-qualified stock options
and  restricted  stock.  The 2004  Director  Plan provides that up to a total of
500,000 shares of Common Stock  (subject to adjustment as described  below) will
be available  for the granting of awards  thereunder.  If any shares  subject to
awards granted under the 2004 Director Plan, or to which any award relates,  are
forfeited or if an award otherwise terminates,  expires or is cancelled prior to
the delivery of all of the shares  issuable  pursuant to the award,  such shares
(assuming  the holder of the award did not  receive  dividends  on the shares or

                                       56

<PAGE>

exercise  other indicia of ownership)  will be available for the granting of new
awards under the 2004 Director Plan.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

     The following table sets forth  information  regarding shares of our Common
Stock  beneficially  owned as of March 29, 2005 by: (1) each of our officers and
directors;  (ii) all  officers and  directors as a group;  and (iii) each person
known by us to beneficially  own five percent or more of the outstanding  shares
of its common stock.

                                             Common
Shareholder                                  Stock (1)            Percentage
-----------                                 ----------            ----------
Thomas B. Marsh (2) (3)                      1,000,000               3.4 %
Joseph A. Warrino (2) (4)                       40,000               0.1 %
Daniel F. Crowley (2) (5)                      222,500               0.7 %
Ronald Walrod (2)(6)                            22,500               0.07 %
Nathan Harrison, M.D.(2)                        50,000               0.1 %
Robin Blackstone, M.D. (2)                           0                 0 %
Marshall Geller(7)                           4,687,500              12.8 %

Donald E. Tucker(8)                         27,743,650              79.2 %

All officers and directors as a
group 6 persons (1)                          6,022,500              15.9 %

TOTAL                                       31,900,300               100 %

     (1)  For purposes of this table  "beneficial  ownership"  is  determined in
          accordance with Rule 13d-3 under the Securities  Exchange Act of 1934,
          pursuant  to which a person  or group of  persons  is  deemed  to have
          "beneficial  ownership" of any common shares that such person or group
          has the right to acquire  within 60 days  after  March 29,  2005.  For
          purposes of computing the percentage of outstanding common shares held
          by each person or group of persons  named above,  any shares that such
          person or group has the right to acquire  within 60 days  after  March
          29, 2005 are deemed  outstanding  but are not deemed to be outstanding
          for purposes of computing the percentage ownership of any other person
          or group. As of December 31, 2004, there were 30,608,650 shares of our
          common  stock  issued and  outstanding.  There  were also  outstanding
          options  entitling  the  holders to purchase  1,200,000  shares of our
          common  stock.  The  holders  of these  options  are  officers  and/or
          directors of Viking. These options are currently exercisable.

     (2)  These are the officers and directors of the Company.

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<PAGE>

     (3)  Consists of 1,000,000 shares underlying a currently  exercisable stock
          option.

     (4)  Consists  of 40,000  shares  underlying  currently  exercisable  stock
          option.

     (5)  Includes  2,500  shares of  common  stock  and  currently  exercisable
          options to purchase 220,000 shares of common stock.

     (6)  Includes  2,500  shares of  common  stock  and  currently  exercisable
          options to purchase 20,000 shares of common stock.

     (7)  Consists of 3,750,000 shares underlying a convertible  promissory note
          and 937,500 shares underlying a currently  exercisable warrant each of
          which are owned by St.  Cloud  Capital  Partners,  an affiliate of Mr.
          Geller.

     (8)  Consists  of  24,618,650  shares  owned  of  record  2,500,000  shares
          underlying a convertible promissory note and 625,000 shares underlying
          a currently exercisable warrant.

Outstanding Options and Warrants

     The only outstanding options to purchase shares of our common stock are the
options  granted  to  our  employees,  directors,  and  consultants.  We  had no
outstanding warrants as of December 31, 2004.

     Subsequent to December 31, 2004, we issue common stock purchase warrants in
connection  with the  financing  described in the  Management's  Discussion  and
Analysis  section of this Form  10-KSB.  As of March 30,  2005,  we had warrants
outstanding  which  entitles  the  holders to purchase  2,812,500  shares of our
common stock at the price of $.40 per share.  The  exercise  price is subject to
reduction upon the occurrence of certain events.

Equity Compensation Plan Information

     The following  table  summarizes  information  about the  Company's  equity
compensation plans as of December 31, 2004.

                                       58

<PAGE>

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------
                                                                                        Number of
                                                                                        Securities
                                                                                   Remaining Available
                                      Number of Securities                         for Future Issuance
                                      to be issued Upon       Weighted-Average        Under Equity
                                         Exercise of          Exercise Price of    Compensation Plans
                                      Outstanding Options,   Outstanding Options,      (Excluding
                                      Warrants and Rights    Warrants and Rights   Securities Reflected
Plan Category                                 (a)                    (b)            in Column (a))(c)
-------------------------------------------------------------------------------------------------------
<S>                                   <C>                    <C>                   <C>
Equity Compensation plans                          -0-                    NA                     -0-
  approved by security holders
-------------------------------------------------------------------------------------------------------

Equity compensation plans
  not approved by security holders (*)       1,566,000                 $ .44               6,384,000
                                             =========
-------------------------------------------------------------------------------------------------------

Total                                        1,566,000                 $ .44               6,384,000
                                             =========                                     =========
-------------------------------------------------------------------------------------------------------
</TABLE>

(*)  Represents stock options granted in 2004 to our employees,  directors,  and
     outside  consultants  under the Viking  Systems,  Inc. 2004 Stock Incentive
     Plan and the Viking  Systems,  Inc. 2004  Incentive  plan for  Non-Employee
     Director stock  ownership.  6,034,000  Shares are available  under the 2004
     Stock  Incentive  Plan and  400,000  shares  are  available  under the 2004
     Incentive Plan for Non-Employee  Directors.  These plans provide for grants
     and awards in the form of stock options,  shares of restricted  stock,  and
     stock appreciation rights.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Issuance of Preferred Stock

     On December 18, 2003,  we granted  Donald  Tucker,  the  Company's  largest
shareholder,  an option to purchase  5,000,000  shares of our Series A Preferred
Stock for $400,000.  Each share of Series A Preferred Stock was convertible into
four shares of our common stock.  Mr. Tucker  subsequently  exercised his option
and  purchased  all 5,000,000  shares of Series A Preferred  Stock.  In December
2004,  he  converted  his  5,000,000  shares of Series A  Preferred  Stock  into
20,000,000 shares of our common stock.

Loan Transactions

     Donald Tucker made several loans to the Company  during 2004 and during the
first quarter of 2005. Each of such loans was unsecured and was convertible into
shares of our common  stock or other  debt  securities.  Information  about such
loans is as follows:

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<PAGE>



Date of Loan   Amount    Interest Rate  Maturity Date  Conversion Rate
----------------------------------------------------------------------

10/26/04       $200,000  10%            3/31/05        $.40 per share (1)
12/6/04        $200,000  10%            3/31/05        $.40 per share (1)
1/12/05        $ 50,000  10%            3/31/05        $.40 per share (1)
1/21/05        $ 50,000  10%            3/31/05        $.40 per share (1)
2/5/05         $500,000  10%            3/31/05        (2)


     (1) On March 22, 2005, the principal balance of these loans,  together with
accrued interest thereon,  was converted into a total of 1,291,650 shares of our
common stock.


     (2)  On  March  22,  2005,  this  loan  was  converted  into  another  debt
instrument. On that date Viking entered into a Securities Purchase Agreement and
related  agreements (the "Transaction  Documents"),  among (i) Viking,  (ii) St.
Cloud Capital Partners,  L.P., a Delaware limited  partnership ("St. Cloud"), as
"Lead Lender" and "Collateral Agent" and (iii) St. Cloud,  Donald Tucker,  Brian
Miller,  and any other  person  signing  the  signature  page of the  Securities
Purchase  Agreement as an Investor or that  becomes an Investor  after March 22,
2005,  (collectively,  the  "Investors").  Pursuant to the  Securities  Purchase
Agreement, Viking has sold and will sell promissory notes ("Notes") to Investors
in the maximum aggregate amount of $2,750,000.  One of such Investors was Donald
F. Tucker who  converted  his  February  5, 2005 loan into a $500,000  loan sold
pursuant  to the  Securities  Purchase  Agreement.  The  material  terms  of the
Securities  Purchase Agreement and other Transaction  Documents are set forth in
the Management's Discussion and Analysis Section of this Form 10-KSB.

     Marshall Geller, a recently  appointed  director of Viking, is an affiliate
of St. Cloud Capital Partners. St. Cloud Purchased a vote in the above-described
transaction in the amount of $750,000.  Such Note is convertible  into 3,750,000
shares of Viking common stock.  Pursuant to the terms of the Securities Purchase
Agreement, St. Cloud was issued a warrant to purchase 937,500 shares of Viking's
common stock.

Loan Guarantee Collateral


     On January 27, 2005,  we entered into a Loan and  Security  Agreement  with
Silicon  Valley Bank.  The Loan  Agreement  provides for a maximum  borrowing of
$200,000.  The loan is secured by the  assets of the  Company.  The loan is also
secured by a $200,000 certificate of deposit owned by Donald Tucker.

ITEM 13. EXHIBITS

        A.  Exhibits

        Exhibit
        Number    Exhibit
        ------    -------
        3.1       Article of Incorporation (1)
        3.2       Designation of Series A Preferred Stock (2)
        3.3       Bylaws (1)

                                       60

<PAGE>

        10.1      Option Agreement - Thomas B. Marsh (3)
        10.2      Option Agreement - Daniel F Crowley (3)
        10.3      Asset Purchase Agreement - Vista Medical Technologies, Inc.(3)
        10.4      Patent and Technology License Agreement (3)
        10.5      Stock Incentive Plan (4)
        10.6      Non-Employee Stock Option Plan (4)
        10.7      Employment Agreement - Thomas B. Marsh (5)
        10.8      Silicon Valley Bank Loan and Security Agreement (6)
        10.9      Intellectual Property Security Agreement (6)
        10.10     Lease Agreement (7)
        10.11     Loan and Security Agreement (8)
        10.12     Securities Purchase Agreement (9)
        10.13     Convertible Promissory Note (9)
        10.14     Security Agreement (9)
        10.15     Registration Rights Agreement (9)
        10.16     Warrant to Purchase Common Stock (9)
        14.1      Code of Ethics(2)
        21.1      Subsidiaries of Registrant - None
        31.1      Certification of Chief Executive Officer in accordance with 18
                  U.S.C. Section 1350, as adoped by Section 302 of the Sarbanes-
                  Oxley Act of 2002 (10)
        31.2      Certification of Principal Financial Officer in accordance
                  with 18 U.S.C. Section 1350, as adopted by Section 302 of the
                  Sarbanes-Oxley Act of 2002 (10)
        32.1      Certification of Chief Executive Officer in accordance with 18
                  U.S.C. Section 1350, as adoped by Section 906 of the Sarbanes-
                  Oxley Act of 2002 (10)
        32.2      Certification of Principal Financial Officer in accordance
                  with 18 U.S.C. Section 1350, as adopted by Section 906 of the
                  Sarbanes-Oxley Act of 2002 (10)

     (1)  Incorporated  herein by reference from  Registrant's  Form 10-SB dated
          February 2, 2002.

     (2)  Incorporated by reference from  Registrant's  From 10-KSb for the year
          ended December 31, 2002.

     (3)  Incorporated herein by Reference from the Registrant's  Current Report
          on Form 8-K dated December 34, 2003.

     (4)  Incorporated herein by Reference from the Registrant's  Current report
          on Form 8-K dated March 31, 2004.

     (5)  Incorporated herein by Reference from the Registrant's  Current report
          on Form 8-K dated September 23, 2004.

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<PAGE>

     (6)  Incorporated herein by Reference from the Registrant's  Current report
          on Form 8-K dated December 24, 2003.

     (7)  Incorporated herein by Reference from the Registrant's  Current report
          on Form 8-K dated October 1, 2004.

     (8)  Incorporated herein by Reference from the Registrant's  Current report
          on Form 8-K dated February 8, 2005.

     (9)  Incorporated herein by Reference from the Registrant's  Current report
          on Form 8-K dated March 24, 2005.

     (10) Attached hereto as an Exhibit.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Independent Auditors

     Tanner  LC  has  been  reappointed  to  audit  the  consolidated  financial
statements  of the Company for the year ending  December  31, 2004 and to report
the results of their audit to the Audit Committee of the Board of Directors.

Fees Billed to the Company by Tanner LC

                                                       2004       2003
                                                    ---------  ---------
     (1) Audit Fees                                 $ 101,000  $  15,500
     (2) Tax Fees                                   $     600  $     500
     (3) All Other Fees                             $       0  $       0


     (1)  Audit  fees   billed  to  the  Company  by  Tanner  LC  were  for  all
          professional  services  performed in connection  with the audit of the
          Company's  annual  financial  statements and review of those financial
          statements,  reviews of our  quarterly  reports on Form 10-QSB.  Audit
          fees  during  2004  also  included  audit  services   related  to  our
          compliance  with Section 404 of the  Sarbanes-Oxley  Act regarding our
          internal controls over financial reporting.

     (2)  Tax services  generally include fees for services performed related to
          tax compliance, consulting services.

     (3)  Tanner LC did not bill the Company for other services  during 2004 and
          2003.

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<PAGE>

     All audit and  non-audit  services and fees are  pre-approved  by the Audit
Committee  or by the  Chairman  of the Audit  Committee  pursuant  to  delegated
authority.

     Effective May 6, 2003, the Securities and Exchange Commission adopted rules
that  require  that before  Tanner LC is engaged by us to render any auditing or
permitted non-audit related service, the engagement be:

     o    approved by our Audit Committee; or

     o    entered  into  pursuant  to   pre-approval   policies  and  procedures
          established  by  the  Audit  Committee,   provided  the  policies  and
          procedures  are  detailed  as to the  particular  service,  the  Audit
          Committee  is  informed  of  each  service,   and  such  policies  and
          procedures  do  not  include   delegation  of  the  Audit  Committee's
          responsibilities to management.

     Under the direction of Audit  Committee  Chairman,  Daniel F. Crowley,  our
Audit Committee  pre-approves all services provided by our independent auditors.
All of the above  services  and fees were  reviewed  and  approved  by the Audit
Committee  either before or after the  respective  services were  rendered.  The
Audit Committee has considered the nature and amount of fees billed by Tanner LC
and believes  that the  provision of services  for  activities  unrelated to the
audit is compatible with maintaining Tanner LC independence.

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<PAGE>


                                  SIGNATURES

     In accordance  with Section 13 or 15(d) of the  Securities  Exchange Act of
1934,  the  Registrant  caused  this  report to be  signed on its  behalf by the
undersigned, thereunto duly authorized.

                                          Viking Systems, Inc.


      Dated: March 30, 2005               By: /s/ Thomas B. Marsh
                                              CEO/President
                                              Principal Executive Officer

      Dated: March 30, 2005               By: /s/ Joseph A. Warrino
                                              Chief Financial Officer/Secretary

     In accordance with the Securities Exchange Act, this report has been signed
below by the  following  persons on behalf of the Company and in the  capacities
and on the dates indicated.

Signature                          Capacity                      Date
---------                          --------                      ----

/s/ Thomas B. Marsh                CEO/President/Director        March 30, 2005

/s/ Daniel F. Crowley              Chairman of the Board         March 30, 2005

/s/ Joseph A. Warrino              CFO/Secretary                 March 30, 2005

/s/ Ronald Walrod                  Director                      March 30, 2005

/s/ Nathan Harrison, M.D.          Director                      March 30, 2005

/s/ Robin Blackstone, M.D.         Director                      March 30, 2005






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