UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q








(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended March 31, 2008




OR




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from ________ to _________




Commission
file number 000-49636







VIKING
SYSTEMS, INC.


(Exact
name of Registrant as specified in its Charter)




Delaware
            
            86-0913802(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            (I.R.S.
      Employer
              Identification
      Number)





134 Flanders Road,
Westborough, MA 01581


(Address
of Principal Executive Offices including Zip Code)




(508)
366-3668


(Registrant’s
Telephone Number, Including Area Code)




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days.    YES  
x    NO    ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b2 of the Exchange Act.




 ̈  Large
      accelerated filer
            
            Accelerated
      filer    ̈ ̈    Non-accelerated filer (Do not check if a
      smaller reporting company)
            
            Smaller
      reporting company   x




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).    YES  
 ̈    NO   x




The
Registrant had 42,556,610 shares of Common Stock, $0.001 par value per share,
outstanding as of April 28, 2008.





















FORM
10-Q





FINANCIAL
STATEMENTS AND SCHEDULES


VIKING
SYSTEMS, INC.





For
the Quarter ended March 31, 2008





PART I - FINANCIAL
INFORMATION





Page
      ofForm
      10-QItem
      1.
            Financial
      Statements (unaudited):Balance
      Sheets at March 31, 2008 and December 31, 2007
            3Statements
      of Operations for the Three Months Ended March 31, 2008 and
      2007
            4Statements
      of Cash Flows for the Three Months Ended March 31, 2008 and
      2007
            5-6Notes
      to Financial Statements
            7-11Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              .
            12-19Item
      3
            Quantitative
      and Qualitative Disclosure About Market Risk
            19Item
      4T.
            Controls
      and Procedures
            19




PART II - OTHER
INFORMATION




PageItem
      1.
            Legal
      Proceedings
            20Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            20Item
      3.
            Defaults
      Upon Senior Securities
            20Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            20Item
      5.
            Other
      Information
            20Item
      6.
            Exhibits
            20




















PART
I - FINANCIAL INFORMATION





ITEM
1: FINANCIAL STATEMENTS


VIKING
SYSTEMS, INC.


Balance
Sheets - Unaudited







March
      31,
              2008
            
            
            December
      31,
              2007AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            1,293,004
            
            
            $
            317,098Accounts
      receivable
            
            
            765,752
            
            
            
            1,371,913Inventories
            
            
            2,075,134
            
            
            
            1,816,621Prepaid
      expenses
            
            
            139,695
            
            
            
            64,324Other
      current assets
            
            
            68,211
            
            
            
            108,512Total
      current assets
            
            
            4,341,796
            
            
            
            3,678,468Property
      and equipment, net
            
            
            472,672
            
            
            
            583,372Other
      non-current assets
            
            
            -
            
            
            
            127,500Intangible
      assets, net
            
            
            262,500
            
            
            
            280,000Total
      assets
            
            $
            5,076,968
            
            
            $
            4,669,340Liabilities
      and Stockholders' Equity (Deficit)Current
      liabilities:Accounts
      payable
            
            $
            1,124,669
            
            
            $
            1,828,831Accrued
      expenses
            
            
            1,037,083
            
            
            
            2,662,687Deferred
      revenue
            
            
            84,486
            
            
            
            232,331Capital
      lease obligations - current
            
            
            39,087
            
            
            
            38,541Convertible
      debentures, related party net
            
            
            -
            
            
            
            506,531Convertible
      debentures, net
            
            
            -
            
            
            
            1,637,707Derivative
      liability
            
            
            -
            
            
            
            349,105Total
      current liabilities
            
            
            2,285,325
            
            
            
            7,255,733Capital
      lease obligations
            
            
            24,545
            
            
            
            35,364Commitments
      and contingencies (Note 9)Preferred
      Stock, 25,000,000 shares authorizedSeries
      B redeemable preferred stock, $0.001 par value; 0, and 7,789 shares
      outstanding at March 31, 2008 and December 31, 2007, respectively(aggregate
      liquidation preference of  $8,814,241 at December 31,
      2007)
            
            
            -
            
            
            
            8,814,241Stockholders’
      Equity (Deficit):Common
      stock, $.001 par value, 400,000,000 shares authorized;42,556,610 and
      1,398,681 issued and outstanding at March 31, 2008 and December 31,
      2007, respectively
            
            
            42,557
            
            
            
            1,399Additional
      paid-in capital
            
            
            26,157,617
            
            
            
            8,034,205Accumulated
      deficit
            
            
            (23,433,076
            )
            
            
            (19,471,602
            )Total
      stockholders' equity (deficit)
            
            
            2,767,098
            
            
            
            (11,435,998
            )Total
      liabilities and stockholders' equity (deficit)
            
            $
            5,076,968
            
            
            $
            4,669,340




The
accompanying notes are an integral part of the financial
statements.





3





VIKING
SYSTEMS, INC.


Statements of Operations -Unaudited






Three
      Months Ended
              March
      31,2008
            
            
            2007Sales,
      net
            
            $
            1,396,917
            
            
            $
            1,925,245Cost
      of sales
            
            
            1,235,560
            
            
            
            1,380,215Gross
      profit
            
            
            161,357
            
            
            
            545,030Operating
      expenses:Selling
      and marketing
            
            
            390,823
            
            
            
            1,144,773Research
      and development
            
            
            237,508
            
            
            
            411,917General
      and administrative
            
            
            1,383,892
            
            
            
            632,074Total
      operating expenses
            
            
            2,012,223
            
            
            
            2,188,764Operating
      loss
            
            
            (1,850,866
            )
            
            
            (1,643,734
            )Other
      income (expense):Interest
      income
            
            
            15,237
            
            
            
            15,409Other
      income
            
            
            270,873
            
            
            
            -Interest
      expense
            
            
            -
            
            
            
            (182,287
            )Loss
      on recapitalization transaction
            
            
            (2,703,776
            )
            
            
            -Amortization
      of debt discount and debt issuance costs
            
            
            -
            
            
            
            (143,430
            )Gain
      (loss) on derivative liability
            
            
            307,061
            
            
            
            (2,432,739
            )Total other income
      (expense)
            
            
            (2,110,605
            )
            
            
            (2,743,047
            )Net
      loss
            
            $
            (3,961,471
            )
            
            $
            (4,386,781
            )Series
      B Preferred Stock dividend
            
            
            -
            
            
            
            (161,315
            )Net
      loss applicable to common stockholders
            
            $
            (3,961,471
            )
            
            $
            (4,548,096
            )Net
      loss per share - basic and diluted
            
            $
            (0.10
            )
            
            $
            (3.59
            )Weighted
      average shares outstanding - basic and diluted
            
            
            41,199,755
            
            
            
            1,268,410






The
accompanying notes are an integral part of the financial
statements.









4





VIKING
SYSTEMS, INC.


Statements of Cash Flows-Unaudited





Three Months
      Ended
              March
      31,2008
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (3,961,471
            )
            
            $
            (4,386,781
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            131,512
            
            
            
            130,303Stock
      based compensation expense
            
            
            724,791
            
            
            
            74,732Amortization
      of debt discount and debt issuance costs
            
            
            -
            
            
            
            143,430(Gain)
      loss on derivative liability
            
            
            (307,061
            )
            
            
            2,432,739Loss
      on recapitalization transaction
            
            
            2,703,776
            
            
            
            -Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            606,161
            
            
            
            (403,117
            )Inventories,
      net
            
            
            (243,495
            )
            
            
            (496,985
            )Prepaid
      expenses
            
            
            (75,371
            )
            
            
            34,208Other
      current assets
            
            
            40,301
            
            
            
            (286,183
            )Accounts
      payable
            
            
            (704,162
            )
            
            
            (158,667
            )Accrued
      expenses
            
            
            (352,531
            )
            
            
            134,932Deferred
      revenue
            
            
            (147,845
            )
            
            
            3,556Net
      cash used in operating activities
            
            
            (1,585,395
            )
            
            
            (2,777,833
            )Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            (18,331
            )
            
            
            (3,482
            )Net
      cash used in investing activities
            
            
            (18,331
            )
            
            
            (3,482
            )





Cash
      flows from financing activities:Net proceeds from issuance of common
      stock
            
            
            2,589,905
            
            
            
            -Payment
      of debt offering costs
            
            
            -
            
            
            
            (47,152
            )Proceeds
      from related party notes
            
            
            -
            
            
            
            300,000Repayment
      of capital lease obligations
            
            
            (10,273
            )
            
            
            (9,842
            )Proceeds
      from convertible debt
            
            
            -
            
            
            
            4,675,000Net
      cash provided by financing activities
            
            
            2,579,632
            
            
            
            4,918,006Net
      change in cash and cash equivalents
            
            
            975,906
            
            
            
            2,136,691Cash
      and cash equivalents at beginning of period
            
            
            317,098
            
            
            
            440,465Cash
      and cash equivalents at end of period
            
            $
            1,293,004
            
            
            $
            2,577,156Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
            
            $
            1,767
            
            
            $
            11,301Income
      taxes
            
            $
            -
            
            
            $
            -






The
accompanying notes are an integral part of the financial
statements.








5








VIKING
SYSTEMS, INC.
 Statements of Cash
Flows-Unaudited(continued)











Non-cash,
investing and financing activities:





As more
fully described in Note 2 to these financial statements, during the three months
ended March 31, 2008 the Company:
 
 ●
                  Issued
      22,400,020 shares of common stock in exchange for all outstanding
      convertible debentures and related accrued interest and liquidated
      damages.
 
 ●
                  Issued
      4,197,849 shares of common stock in exchange for all outstanding Preferred
      Stock and related accrued dividends, interest on unpaid dividends and
      liquidated damages.
 
 ●
                  Issued
      warrants to purchase 11,200,011 shares of the Company’s common stock to
      the former convertible debenture holders in exchange for their then
      outstanding warrants to purchase 443,141 shares of common
      stock.
 
 ●
                  Issued
      warrants to purchase 2,098,027 shares of the Company’s common stock to the
      former Preferred Stockholders in exchange for their then outstanding
      warrants to purchase 666,667 shares of common
  stock.


During
the three months ended March 31, 2007, the Company:




●
            Converted
      $350,000 principal amount of notes payable issued in December 2006 plus
      $6,534 in accrued but unpaid interest under such notes into $356,534
      of  the Company’s 8% Secured Convertible Debentures due February
      23, 2009.




●
            Converted
      $300,000 principal amount of notes payable issued in 2007 held by a
      related party into $300,000 original principal amount of the Company’s 8%
      Secured Convertible Debentures due February 23,
  2009.




●
            Issued
      80,000 shares of common stock with a fair value of $840,000 for liquidated
      damages to holders of the Company’s Series B Preferred stock in connection
      with the Company’s February 2007 issuance of its 8% Secured Convertible
      Debentures due February 23, 2009.















The accompanying notes are
an integral part of the financial statements.





6








1.           INTERIM
FINANCIAL STATEMENTS





The
balance sheet of Viking Systems, Inc. (“we,” “us, “our,” “Viking” or the
“Company”) as of March 31, 2008 and the statements of operations and cash flows
for the three month periods ended March 31, 2008 and 2007 are unaudited.
However, management, in its opinion, has made all adjustments necessary
to make the information presented not misleading. The balance sheet as of
December 31, 2007 was derived from the Company's audited financial statements.
The financial statements and notes thereto should be read in conjunction with
the financial statements and notes for the years ended December 31, 2007,
included in Viking's Form 10-KSB filed on March 31, 2008 with the Securities and
Exchange Commission. The results of operations and cash flows for the three
months ended March 31, 2008 are not necessarily indicative of results to be
expected for the fiscal year ending December 31, 2008.





2.           RECAPITALIZATION





On
January 4, 2008 the Company completed execution of a Recapitalization Plan (the
“Recapitalization Plan”).  This Recapitalization Plan was developed
during the fourth quarter of 2007. In November 2007 Viking received approval,
subject to finalization of  certain terms and execution of final
documentation, from 100% of the holders of its Series B Variable Dividend
Convertible Preferred Stock (the “Preferred Stock”) and Viking’s 8% Secured
Convertible Debentures due February 23, 2009 (the “Debentures”), of the
Recapitalization Plan.  The Recapitalization Plan called for an
additional investment of between $2.5 and $3.0 million in the common stock of
Viking  (the “New Investment”) and a redistribution of Viking’s common
stock among the current holders of Viking’s common stock, Preferred Stock,
Debentures and the investors providing the New Investment.




In
consummating the Recapitalization Plan, the redistribution of Viking’s capital
was accomplished on January 4, 2008, through the following: (i) a 1:50 “reverse
split” of Viking’s common stock, (ii) entry of Viking into a Recapitalization
Agreement with the applicable holders, pursuant to which the holders of the
Preferred Stock and Debentures exchanged their respective Viking securities
(including warrants that were issued in connection with the Preferred Stock and
the Debentures) for shares of Viking’s common stock and warrants which may be
exercised for common stock; and (iii) entry of Viking into a Securities Purchase
Agreement with those parties making the New Investment of $2.6 million pursuant
to which they were issued shares of Viking’s common stock and warrants which may
be exercised for shares of Viking’s common stock.   As part of the
recapitalization, Viking executed the Securities Purchase Agreement and
completed a sale of 14,560,037 shares of our common stock for $0.178571 per
share or aggregate consideration of $2,600,000.





Following
the consummation of the Recapitalization Plan, the equity ownership of the
Company is as follows:




POST-RECAPITALIZATION EQUITY (excluding
      warrants)Stockholder
      by type
            
            Ownership
      of
              Outstanding
              Common
      Stock
            
            
            Percent
      Ownership
              Common
      StockPre-Recapitalization
      common stockholders
            
            
            1,398,704
            
            
            
            3.3%Pre-Recapitalization
      preferred stockholders
            
            
            4,197,849
            
            
            
            9.9%Pre-Recapitalization  debenture
      holders
            
            
            22,400,020
            
            
            
            52.6%New
      investment ($2.6 million)
            
            
            14,560,037
            
            
            
            34.2%Total—all
      holders
            
            
            42,556,610
            
            
            
            100.0%




The total
outstanding debentures of $7,976,533 face amount with a carrying value of
$2,144,238 at December 31, 2007, plus all related interest and liquidated
damages, were exchanged for 22,400,020 shares of common
stock.  Additionally all warrants to purchase 443,141 shares of the
Company’s common stock issued with the Debentures were exchanged for warrants to
purchase 11,200,011 shares of the Company’s common stock.  The
warrants have an exercise price of $0.18 and a five year term.





All of
the Company’s outstanding Preferred Stock, 7,789 shares with a carrying value of
$8,814,241 at December 31, 2007, plus all related liquidated damages, were
exchanged for 4,197,849 shares of the Company’s common stock. No gain
was recorded on the exchange of the Preferred Stock as the book value was
reclassified to common stock (par value totaling $4,198) and the remainder of
$8,810,043  reclassified to additional paid-in capital. Additionally,
all warrants to purchase 666,667 shares of the Company’s common stock issued in
connection with Preferred Stock were exchanged for warrants to purchase
2,098,027 shares of the Company’s common stock.  The warrants have an
exercise price of $0.18 and a five year term.







7





On
January 4, 2008, pursuant to a Securities Purchase Agreement, the Company
completed a sale of 14,560,037 shares of its common stock for $0.178571 per
share or aggregate consideration of $2,600,000, of which the Company received
proceeds of $2,600,000. Pursuant to the Securities Purchase Agreement, the
Company issued to the investors providing the New Investment warrants to
purchase up to 14,560,037 shares of common stock. The warrants have a term of
five years and are exercisable for shares of common stock at a price of $0.18
per share.




The
purchasers of the common stock pursuant to the Securities Purchase Agreement
were three institutional investors and William C. Bopp,  at the time
the Company’s Chairman of the Board (currently chairman and CEO), who tendered
$1,750,000 for 9,800,024 shares of common stock and warrants which may be
exercised for 9,800,024 shares of common stock.





Loss
on Recapitalization


In
connection with the January 4, 2008 Recapitalization the Company recorded a non
cash charge of $2,703,776.  We determined the fair value of the common
stock issued in exchange for the Debentures based on the $0.18 price for common
shares sold as part of the Recapitalization.  The
charge  comprises the following;





Three
      Months EndedMarch
      31, 2008Debentures
      outstanding
            
            $
            7,976,533Less
      unamortized debt discount
            
            
            (5,832,295
            )Net
      carrying value
            
            
            2,144,238Fair
      value of common stock exchanged for Debentures
            
            
            4,000,644Loss
      on conversion of debentures into common stock
            
            
            
            
            
            $
            (1,856,406
            )Write-off
      unamortized debt issue costs
            
            
            
            
            
            
            (80,738
            )Estimated
      fair value of warrants issued to Debenture and Preferred Stockholders in
      excess of  estimated fair value of warrants
      cancelled
            
            
            
            
            
            
            (2,039,705
            )Accrued obligations
      extinguished/forgiven in connection with
      Recapitalization:Debenture
      interest
            
            $
            302,306Liquidated
      damages
            
            
            849,178Interest
      on unpaid Preferred Stock dividends
            
            
            121,589Total
      gain from extinguished obligations
            
            
            
            
            
            
            1,273,073Total
      loss on Recapitalization transaction
            
            
            
            
            
            $
            (2,703,776
            )











Reverse
Stock Split


Effective
January 4, 2008, the Company completed a 1 for 50 reverse stock
split.  All prior period common stock share data, including warrants
and stock options to purchase common stock have been restated for all periods
presented to give effect to the reverse stock split.  Additionally per
share prices and number of shares related to convertible conversion securities
have also been restated.  Per share amounts, including loss per share,
have been increased by a factor of 50 and shares have been divided by
50.











8





3.           EARNINGS
(LOSS) PER SHARE





Due
to the net losses for the three months ended March 31, 2008 and 2007,
potentially dilutive securities have been excluded in the calculation of diluted
loss per share because their inclusion would be anti-dilutive. Accordingly,
basic and diluted loss per share for the three month period ended March 31, 2008
presented are the same. For the purposes of this calculation, net loss for the
three months ended March 31, 2007 has been adjusted for dividends on preferred
stock accrued during that period.





4.           INVENTORY




Details
of our inventory account balances are as follows:






March 31,
              2008
            
            
            December
      31,
              2007Inventories:Parts
      and supplies
            
            $
            1,156,419
            
            
            $
            992,338Work-in-progress
            
            
            484,891
            
            
            
            548,268Finished
      goods
            
            
            597,664
            
            
            
            439,855Valuation
      reserve
            
            
            (163,840
            )
            
            
            (163,840
            )$
            2,075,134
            
            
            $
            1,816,621





5.           ACCRUED
EXPENSES





Accrued
expenses consist of the following:





March
      31,
              2008
            
            
            December
      31,
              2007Wages
      and salaries
            
            $
            389,207
            
            
            $
            388,382Board
      of director fees
            
            
            193,263
            
            
            
            251,100Registration
      delay fees
            
            
            161,574
            
            
            
            434,214Liquidated
      damages
            
            
            -
            
            
            
            849,178Interest
      on unpaid preferred stock dividends
            
            
            -
            
            
            
            121,589Debenture
      interest
            
            
            -
            
            
            
            302,306Other
      accrued expenses
            
            
            293,039
            
            
            
            315,918$
            1,037,083
            
            
            $
            2,662,687





6.           INCOME
TAXES





Viking
accounts for income taxes using the asset and liability method. Under the asset
and liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and 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. A valuation allowance is
recognized against deferred tax assets when it is more likely than not that the
assets will not be realized.





Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.” The
implementation of FIN 48 had no impact on the Company's financial
statements.




The
Company is primarily subject to U.S. federal and state income tax. Tax years
ended December 31, 2004 and after remain open to examination by U.S. federal and
state tax authorities. The Company's policy is to recognize interest and
penalties related to income tax matters in income tax expense. As of March 31,
2008 and December 31, 2007, the Company had no accruals for interest or
penalties related to income tax matters.




















9





7.           STOCK-BASED
COMPENSATION




On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No.123 (Revised 2004), “Share Based Payment,” (“SFAS 123R”), using the
modified prospective method. In accordance with SFAS 123R, the Company measures
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost is
recognized over the period during which an employee is required to provide
service in exchange for the award - the requisite service period. The Company
determines the grant-date fair value of employee share options using the
Black-Scholes option-pricing model.




During
the three months ended March 31, 2008 and 2007, the Company recorded $724,791
and $74,732 respectively, in non-cash stock-based compensation expense pursuant
to SFAS 123R. As of March 31, 2008, there was approximately $1.5 million
total unrecognized compensation costs related to unvested options, which is
expected to be recognized over a weighted average period of approximately 3
years.





The fair
value of stock options granted during the three months ended March 31, 2008 was
estimated using the Black-Scholes model with the following assumptions:
volatility of 133%, life of 5-7 years, risk-free interest rate
of  3.33%, and expected dividend yield of 0%. Volatility is based on
the historical volatility of the Company's common stock. The life of employee
stock options is based on the average of the vesting period and contractual
life. The risk free interest rate is based on U.S. Treasury constant maturity
rate for the expected life of the stock option.





Using the
assumption described above, the 6,865,000 stock options granted during the three
months ended March 31, 2008 were valued at $1,779,528.  Based on
vesting terms, $312,168 of this amount was recognized during the quarter,
leaving $1,467,360 to be recognized over the remaining weighted average vesting
period of 3 years.





The
following table summarizes the stock option transactions during the three months
ended March 31, 2008:





Number
      of
              Shares
            
            Weighted
      - Average
              Exercise
      Price
            
            Weighted
      – Average Remaining
              Contractual
      Life
              (in
      years)Options
      outstanding December 31, 2007
            
            
            154,840
            
            $
            18.50
            
            
            6.5Granted
            
            
            6,865,000
            
            
            .33
            
            
            9.9Exercised
            
            
            -Surrendered
            
            
            (79,000
            )
            
            19.16Options
      outstanding March  31, 2008
            
            
            6,940,840
            
            $
            .58
            
            
            9.86Options
      exercisable at March 31, 2008
            
            
            861,020
            
            $
            2.27
            
            
            9.46











During
the quarter, shareholders approved  the Viking Systems, Inc. 2008
Equity Incentive Plan (the “2008 Equity Plan”), and the Viking Systems, Inc.
2008 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan,” ). The
maximum number of shares that may be issued pursuant to the 2008 Equity Plan is
6,720,000 shares plus such number of shares that are issuable pursuant to awards
outstanding under the 2004 Plan as of the effective date and which would have
otherwise reverted to the share reserve of the 2004 Plan. We have reserved a
total of 1,500,000 shares of our common stock for issuance under the Directors’
Plan.  During the three months ended March 31, 2008, 6,715,000 shares
were issued under the 2008 equity plan and 150,000 shares were issued under the
Directors’ Plan.




During
the three months ended March 31, 2008, six employees surrendered 79,000
previously issued stock options. As a result, the total amount of shares
issuable under 2008 Equity Plan increased by 79,000.  At March 31,
2008, 84,000 shares remain available for grant under that plan.  In
connection with the surrender of stock options, the Company recognized the
remaining non-cash stock option compensation of $410,258 related to these stock
options.










10





8.
            WARRANTS
      TO PURCHASE COMMON STOCK





The
following table summarizes warrant activity during the three months ended March
31, 2008:





Weighted
      Average
            
            Weighted
              AverageShares
            
            
            Exercise
      Price
            
            Remaining
      LifeWarrants
      outstanding December 31, 2007
            
            
            1,299,252
            
            
            $
            8.21Cancelled
      in Recapitalization
            
            
            (1,109,808
            )
            
            $
            6.00Exchanged/issued
      for cancelled warrants
            
            
            13,298,038
            
            
            $
            0.18Issued
      in connection with Recapitalization sale of common stock
            
            
            14,560,037
            
            
            $
            0.18Outstanding
      March 31, 2008
            
            
            28,047,519
            
            
            $
            0.18
            
            4.75
      years














9.           COMMITMENTS
AND CONTINGENCIES





In
conjunction with the conversion of $4,750,000 of convertible notes into common
stock in 2006, Viking agreed to file a registration statement covering the
shares of common stock issued upon such conversion and covering the warrants
originally issued with those notes. Such shares and warrants were not
registered. Effective June 2006, Viking offered to pay to note holders, who
elect to receive it, a registration delay fee of one percent per month of their
initial principal balance. At December 31, 2007 we had accrued $434,214 related
to this matter. Effective February 15, 2008, the Securities and Exchange
Commission made revisions to its rules regarding the trading of non registered
securities. Additionally, certain holders of the convertible notes did not
respond to the company’s 2006 proposal to pay a delay fee related to this
proposed filing.  The Company has reversed amounts accrued related to
parties that did not respond to the 2006 proposal and ceased accruing further
delay fees effective February 15, 2008.  At March 31, 2008 the Company
has accrued $161,574 related to this matter.














11








ITEM
2:                      MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS








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-Q. This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of Viking’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 is
a leading worldwide developer, manufacturer and marketer of visualization
solutions for complex minimally invasive surgery.  We partner with
medical device companies and healthcare facilities to provide surgeons with
proprietary visualization systems enabling minimally invasive surgical
procedures, which reduce patient trauma and recovery time.





We
manufacture two dimensional (“2D”) digital cameras that are sold to third-party
companies who sell to end users through their Original Design Manufacturer
(“ODM”) programs and Original Equipment Manufacturer (“OEM”)
programs.




We sell
our proprietary visualization system, (3Di Vision System) under the Viking
brand to hospitals and outpatient surgical centers through a network of
independent sales representatives in the United States and outside the United
States through our distributor network.  We also sell our CardioCam
product through these channels.





Liquidity
and Capital Resources





Recapitalization





On
January 4, 2008 the Company completed execution of a Recapitalization Plan (the
“Recapitalization Plan”).  This Recapitalization Plan was developed
during the fourth quarter of 2007. In November 2007 Viking received approval,
subject to finalization of certain terms and execution of final documentation,
from 100% of the holders of its Series B Variable Dividend Convertible Preferred
Stock (the “Preferred Stock”) and Viking’s 8% Secured Convertible Debentures due
February 23, 2009 (the “Debentures”), of the Recapitalization
Plan.  The Recapitalization Plan called for an additional investment
of between $2.5 and $3.0 million in the common stock of Viking  (the
“New Investment”) and a redistribution of Viking’s common stock among the
current holders of Viking’s common stock, Preferred Stock, Debentures and the
investors providing the New Investment.




In
consummating the Recapitalization Plan, the redistribution of Viking’s capital
was accomplished on January 4, 2008 through the following: (i) a 1:50 “reverse
split” of Viking’s common stock, (ii) entry of Viking into a Recapitalization
Agreement with the applicable holders, pursuant to which the holders of the
Preferred Stock and Debentures exchanged their respective Viking securities
(including warrants that were issued in connection with the Preferred Stock and
the Debentures) for shares of Viking’s common stock and warrants which may be
exercised for common stock; and (iii) entry of Viking into a Securities Purchase
Agreement with those parties making the New Investment of $2.6 million pursuant
to which they were issued shares of Viking’s common stock and warrants which may
be exercised for shares of Viking’s common stock.   As part of the
recapitalization Viking executed the Securities Purchase Agreement and completed
a sale of 14,560,037 shares of our common stock for $0.178571 per share, or
aggregate consideration of $2,600,000.





In
October 2007, Viking’s board of directors approved a revised strategic
direction for Viking.  This strategy includes focus on Viking’s
Original Development Manufacturing (“ODM”)/Original Equipment Manufacturing
(“OEM”) business and significantly reducing the expenses associated with our 3Di
Vision Systems business with such business continuing on a reduced basis through
Viking’s independent sales representatives and our existing distributor network.
This strategic direction was approved by a five-person Board of Directors, none
of whom is on the Board today.  The currently-constituted Board of
Directors is re-evaluating this decision in light of the Company’s experience
over the past six months.  It is too early in this process to indicate
what, if any, modifications to the strategy will result from this
re-evaluation.





Viking
continues to believe that the revised strategic direction of October 2007 has
enabled it to eliminate expenses, primarily associated with the 3Di Vision
Systems business, that are not expected to contribute to positive cash
flow in the near term,  including the elimination of Viking’s U.S. direct
sales force and a reduction in related clinical and marketing
expenses.








12





We
historically financed our operations principally through private sales of equity
securities and convertible debt. From January 1, 2004 through March 31, 2008, we
raised net proceeds of $10,750,000 through the sale of common and preferred
stock in private placements and approximately $13,600,000 through the issuance
of convertible notes and debentures. As of March 31, 2008, we had cash of
$1,293,004.





Net cash
used in operating activities was $1,585,395 and $2,777,833 during the three
months ended March 31, 2008 and 2007, respectively. The decrease in net cash
used in operating activities during 2008 compared with 2007 was attributable
primarily to a smaller operating loss in 2008, after excluding non-cash stock
option expense combined with less cash consumed in working capital.





Net cash
provided by financing activities was approximately $2.6 million and $4.9 million
during the three month periods ended March 31, 2008 and 2007, respectively. The
net cash provided by financing activities in 2008 was from selling common stock
in connection with the Recapitalization.





We
believe that we will need to raise additional capital to execute our business
plan and continue our operations for the remainder of 2008.  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, financial institutions or
investors to secure additional financing and there can be no assurance that any
such arrangement, if required or otherwise sought, would be available on terms
deemed to be commercially acceptable and in our best interests.If we fail to secure such
financing, we will consider other options, including legal reorganization
protection.





RESULTS
OF OPERATIONS





Three
Month Period Ended March 31, 2008 Compared with the Three Month Period Ended
March 31, 2007





Sales.  We
had sales of approximately $1,397,000 for the three months ended March 31, 2008
and of approximately $1,925,000 for the three months ended March 31, 2007,
representing a decrease of approximately 27%. The decrease in revenues during
2008 was due to decreased sales in both 3Di and OEM products and
service.  The decrease in OEM sales is a result of fluctuations of
significant specific customer demand combined with approximately $260,000 in
orders that could not be shipped during the first quarter of 2008 due to a lack
of certain raw materials. These orders were subsequently shipped during the
second quarter of 2008. The decline in 3Di systems sales is a result of the
transition of a sales force orientation to indirect sales through our
distribution channels.  Sales to individual customers exceeding 10% or
more of revenues in the three months ended March 31, 2008 were to three
customers who accounted for 31%, 16% and 16% of revenues,
respectively.





Gross
Profit. Gross profit was approximately $161,000 or 12% for the months
ended March 31, 2008 and approximately $545,000 or 28% for the three months
ended March 31, 2007, representing a decrease of approximately
$384,000. The decrease in gross margin percentage is due to the higher per
unit production cost associated with lower volumes as compared with
2007.





Operating
Expenses.  We incurred operating expenses of approximately
$2,012,000 for the three months ended March 31, 2008 and approximately
$2,189,000 for the three months ended March 31, 2007.  For the three
months ended March 31, 2008 and 2007, excluding non-cash stock based
compensation expense, total operating expenses were approximately $1,287,000 and
$2,114,000, respectively.  This decrease of approximately $827,000 is
primarily a result of cost reductions implemented in the fourth quarter of
2007.





Sales and
Marketing Expense. Sales and marketing expenses were approximately
$391,000 for the three months ended March 31, 2008 and approximately $1,145,000
for the three months ended March 31, 2007.  This decrease of
approximately $754,000 is due to reductions in our marketing efforts and the
elimination in October 2007 of our 3Di direct sales force.  We
currently anticipate our sales and marketing expense to be in the range of
$400,000 to $500,000 per quarter in 2008.





Research and
Development Expense.  We had research and development expenses
of approximately $238,000 for the three months ended March 31, 2008 and $412,000
for the three months ended March 31, 2007, representing a decrease of
approximately $174,000. This decrease is due to the temporary elimination of
certain expenses related to next generation 3Di systems as well as
classification of certain engineering expenses as cost of sales for activities
associated with a third party development contract for 3Di vision products. We
currently anticipate our research and development expense to be in the range of
$200,000 to 300,000 per quarter during 2008.








13





General and
Administrative Expense.  General and administrative expenses
include costs for administrative personnel, legal and accounting expenses and
various public company expenses. General and administrative expenses were
approximately $1,383,000 for the three months ended March 31, 2008 and
approximately $632,000 for the three months ended March 31,
2007.  During the three months ended March 31, 2008, we recorded
approximately $725,000 related to non-cash stock option compensation expense
compared with approximately $75,000 for the same period in
2007.  Excluding these charges, general and administrative expense
increased approximately $101,000.  Legal expense increased
approximately $158,000 as compared with the prior year due to services
associated with the Recapitalization and public company
costs. Additionally, we accrued an employee separation charge of
approximately $90,000 during the quarter ended March 31, 2008. Partially
offsetting these increases was lower facilities costs associated with the
elimination of our San Diego office during the fourth quarter of 2007. We
currently anticipate our general and administrative expenses, excluding non-cash
stock based compensation charges, to be in the range of $500,000 to $600,000,
per quarter during 2008.





Other Income and
Expenses.  During the three months ended 2008, other income
and expense totaled a net charge of approximately $2,110,000 compared with a net
charge of $2,743,000 for the same period in 2007.  During the first
quarter of 2008, we recorded a charge of approximately $2,704,000 related to the
Recapitalization transaction (see Note 2 to the interim financial
statements).  This charge was offset by the reversal of approximately
$271,000 related to accrued fees associated with the Company’s failure to file a
registration statement for common stock and warrants issued during
2006.  Additionally, during the first quarter of 2008, we recorded a
non-cash gain of approximately $307,000 related to the decrease in value of the
Company’s derivative instruments.  During the first quarter of 2007,
we recorded a charge of approximately $2,433,000 related to the Company’s
derivative instruments that were classified as
liabilities.  Subsequent to the Recapitalization, all of the Company’s
outstanding derivative instruments (warrants) were classified as equity
instruments and, as such, will no longer be revalued each balance sheet
date.





Operating
Loss Before Non-Cash Charges


A
reconciliation of net loss in accordance with generally accepted accounting
principles (GAAP) to the non-GAAP measure of operating loss before non-cash
charges is as follows:





Three
      Months Ended March 31,2008
            
            
            2007Net
      loss, as reported
            
            $
            (3,961,471
            )
            
            $
            (4,386,781
            )Add
      back:Total
      other income/(expense)
            
            
            2,110,605
            
            
            
            2,743,047Non-cash
      stock option expense
            
            
            724,791
            
            
            
            74,732Depreciation
      and amortization
            
            
            131,512
            
            
            
            130,303Operating
      loss before non cash charges
            
            $
            (994,563
            )
            
            $
            (1,438,699
            )








Use
of Estimates and Critical Accounting Policies





This
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States.





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, long lived
asset valuation, revenue recognition, stock based compensation and derivative
liabilities. Management bases its estimates and judgments on historical
experience of operations 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
Financial Statements.





Inventory.Parts and supplies inventories are stated at the lower of cost or market.
Cost is determined using the standard cost method which approximates actual
cost. Work-in-process and finished goods are stated at the lower of the
accumulated manufacturing costs or market.Viking
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.








14





Income Taxes.In determining the carrying value of Viking's net deferred tax assets,
Viking 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, Viking
may record a reduction in the valuation allowance, resulting in an income tax
benefit in Viking's Statements of Operations. Management evaluates the
realizability of the deferred tax assets and assesses the valuation allowance
quarterly.





Effective
January 1, 2007, we adopted the provisions of Financial Accounting Standards
Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109. The implementation
of FIN 48 had no impact on the Company's financial statements.





We are
primarily subject to U.S. federal and state income tax. Tax years subsequent to
December 31, 2003 remain open to examination by U.S. federal and state tax
authorities. In addition, our policy is to recognize interest and penalties
related to income tax matters in income tax expense. As of March 31, 2008, we
had no accruals for interest or penalties related to income tax
matters.





Amortization and
Impairment of Long Lived Assets.Long lived assets, such as property,
equipment and intangible assets are recorded at historical cost. We amortize our
intangible assets using the straight-line method over their estimated useful
lives, usually two to five years. We review intangible assets subject to
amortization periodically to determine if any adverse conditions exist or a
change in circumstances has occurred that would indicate impairment or a change
in the remaining useful life of the applicable asset. Conditions that would
indicate impairment and trigger a more frequent impairment assessment include,
but are not limited to a significant adverse change in the legal factors or
business climate that could affect the value of an asset, or an adverse action
or assessment by a regulator. If the carrying amount of an asset exceeds its
estimated fair value, an impairment charge is recognized for the amount by which
the carrying amount exceeds the estimated fair value of the asset. 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 quarters  ended March 31, 2008 and 2007, no impairment of
long-lived assets was recorded.





Revenue
Recognition. Our revenues are derived from the sale of surgical
visualization technology products to end users, distributors and original
equipment manufacturers. Revenue from the sale of products is recognized when
evidence of an arrangement exists, the product has been shipped, the selling
price is fixed or determinable,  collection is reasonably assured and
when both title and risk of loss transfer to the customer, provided that no
significant obligations remain. 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. Shipping and
handling costs are included in cost of sales.





For the
sale of products and services as part of a multiple-element arrangement, we
allocate revenue from multiple-element arrangements to the elements based on the
relative fair value of each element. For sales of extended warranties with a
separate contract price, Viking defers revenue equal to the separately stated
price. Revenue associated with undelivered elements is deferred and recorded
when delivery occurs.





Stock-Based
Compensation. On January 1, 2006, we adopted Statement of Financial
Accounting Standards (“SFAS”) No.123 (Revised 2004), “Share Based Payment,”
(“SFAS 123R”), using the modified prospective method. In accordance with SFAS
123R, Viking measures the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award.
That cost is recognized over the period during which an employee is required to
provide service in exchange for the award - the requisite service period. We
determine the grant-date fair value of employee share options using the
Black-Scholes option-pricing model.











Recent
Accounting Pronouncements




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued (SFAS) No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51( “SFAS 160”).
SFAS 160 establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008,
with early adoption prohibited. The accounting provisions of SFAS 160 will be
effective for the Company beginning January 1, 2009. The Company is
currently evaluating the impact, if any, this statement will have on its
financial position, cash flows, or results of operations, but believes it is
unlikely to have a material impact.







15





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards (SFAS) No. 141R (revised), “Business Combinations”. The
standard changes the accounting for business combinations including the
measurement of acquirer shares issued in consideration for a business
combination, the recognition of contingent consideration, the accounting for
pre-acquisition gain and loss contingencies, the recognition of capitalized
in-process research and development, the accounting for acquisition-related
restructuring cost accruals, the treatment of acquisition related transaction
costs and the recognition of changes in the acquirer’s income tax valuation
allowance. SFAS 141R is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. The Company is currently
evaluating the impact, if any, this statement will have on its financial
position, cash flows, or results of operations, but believes it is unlikely to
have a material impact.





In
March 2008, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 161, “Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement
No. 133” (“FAS 161”). FAS 161 requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby seeks to improves the
transparency of financial reporting. Under FAS 161, entities are required to
provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. FAS 161 will be
effective for the Company beginning January 4, 2009 (the first day of
fiscal 2009). Early application is encouraged. FAS 161 also encourages, but does
not require, comparative disclosures for earlier periods at initial adoption.
The Company is currently in the process of evaluating what impact FAS 161 may
have on the disclosures in its financial statements.








Forward
Outlook and Risks




This Form
10-Q 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-Q, 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-Q and our
Form 10-KSB for the year ended December 31, 2007. These forward-looking
statements represent our judgment as of the date of this Form 10-Q. 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.





Additional
Financing Requirements.  We believe that we will need to seek
additional financing in order to fund our operations and carry out our business
plan through the year ending December 31, 2008. 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
or otherwise sought, would be available on terms deemed to be commercially
acceptable and in our best interests. Also, if we raise additional funds by
selling equity or equity-based securities, the percentage ownership of our
existing stockholders will be reduced and such equity securities may have
rights, preferences or privileges senior to those of the holders of our common
stock. Any inability to obtain additional cash as needed could have a material
adverse effect on our financial position, results of operations and ability to
continue operations.





Possibility of
Total Loss of Investment. An investment in Viking 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.








16





Operating
History. We were inactive in 2002 and 2003. We commenced active
operations by acquiring assets from Vista in April 2004, and 2005 was our first
full year of operation. 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.





We are Controlled
by a Limited Number of Stockholders.A few of our
stockholders have significant control over our voting stock which may make it
difficult to complete some corporate transactions without their support and may
prevent a change in control.  As of March 31, 2008, our directors and
executive officers as a whole, may beneficially own approximately 18,612,916
shares or  43.7% of our outstanding common stock, and assuming that
the warrants and options (exercisable as of 60 days from March 23, 2008) were
exercised, may beneficially own approximately 33,957,832 shares
or  58.6% of our outstanding common stock.  Certain of our
officers and directors disclaim beneficial ownership of certain shares included
in the description above.





The
above-described significant stockholders may have considerable influence over
the outcome of all matters submitted to our stockholders for approval, including
the election of directors. In addition, this ownership could discourage the
acquisition of our common stock by potential investors and could have an
anti-takeover effect, possibly depressing the trading price of our common
stock.




SEC Rules
Governing the Trading of "penny stocks" Limit the Trading and Liquidity of our
Common Stock, which may Adversely Affect the Trading Price of our Common
Stock.Our
common stock currently trades on the OTC Bulletin Board. Since our common stock
continues to trade below $5.00 per share, our common stock is considered a
“penny stock” and is subject to SEC rules and regulations that impose
limitations upon the manner in which our shares can be publicly traded. These
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure document explaining the penny stock market and the
associated risks. Under these regulations, brokers who recommend penny stocks to
persons other than established customers or certain accredited investors must
make a special written suitability determination for the purchaser and receive
the purchaser’s written agreement to a transaction prior to sale. These
regulations have the effect of limiting the trading activity of our common stock
and reducing the liquidity of an investment in our common stock.





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





Auditor’s Opinion
has a Going Concern Qualification. The report of our independent
registered public accounting firm dated March 31, 2008 for the year ended
December 31, 2007 includes a going concern explanatory paragraph which
states that our significant operating losses and negative operating cash
flows raise substantial doubt about our ability to continue as a going
concern.





Medical
Products Industry Operations Risks





We
acquired assets and operations from Vista as described  above. We also
may attempt to acquire additional medical products and operations from time to
time as opportunities become available. Our operations in the medical product
industry 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 a highly 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 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.








17





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 surgery.




Our Operating
Results May be Adversely Affected by the Level Of Reimbursements for Surgical
Procedures Using our Products.The level of payments
for the surgical procedures, in which our products are involved, either by
Medicare or private insurance companies may have a significant impact on future
operating results.  We could be adversely affected by changes in payment
policies of government or private health care payers, 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 United States 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 payers, such as governmental programs and private
insurance plans, for the health care services provided to their patients. 
Third-party payers 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 payer, 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 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 payers 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
payers.




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  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.











18





ITEM
3:                      QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK








Although
all of our sales are denominated in U.S. dollars, future fluctuations in the
value of the U.S. dollar may affect the price competitiveness of our products
outside the United States. Additionally, the prices of certain of our inventory
materials are denominated in Euros. We do not believe, however, that we
currently have significant direct foreign currency exchange rate risk and have
not hedged exposures denominated in foreign currencies.








ITEM
4T:                      CONTROLS
AND PROCEDURES




Limitations
on the Effectiveness of Controls





We seek
to improve and strengthen our control processes to ensure that all of our
controls and procedures are adequate and effective. We believe that a control
system, no matter how well designed and operated, can only provide reasonable,
not absolute, assurance that the objectives of the controls system are met. In
reaching a reasonable level of assurance, management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. In addition, the design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, a control may
become inadequate because of changes in conditions, or the degree of compliance
with policies or procedures may deteriorate. No evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company will be detected.  As set forth below, our Chief
Executive Officer and our Executive Vice President and Chief Financial Officer
have concluded, based on their evaluation as of the end of the period covered by
this report, that our disclosure controls and procedures were sufficiently
effective to provide reasonable assurance that the objectives of our disclosure
control system were met.





Evaluation
of Effectiveness of Disclosure Controls and Procedures





As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our principal executive officer
and chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-15(b) of the
Exchange Act.  Based upon that evaluation, our chief executive officer
and chief financial officer concluded that, as of the end of the period covered
by this report, our disclosure controls and procedures were effective at
the reasonable assurance level discussed above.





Changes
in Internal Control over Financial Reporting





There
were no changes in our internal controls over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules
13a-15 or 15d-15 that occurred during the last quarter that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.








19





PART
II
-                      OTHER
INFORMATION





ITEM
1 LEGAL PROCEEDINGS.





From time
to time, the Company may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. The Company is
currently not aware of nor has any knowledge of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating
results.





ITEM
2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.





As
previously disclosed in our Current Report on Form 8-K dated January 4, 2008,
asfiled with the Securities and Exchange Commission on January
7, 2008, during the quarter ended March 31, 2008, we issued an aggregate of
41,157,906 shares of our common stock that were not registered under the
Securities Act of 1933, as amended.





ITEM
3. DEFAULTS UPON SENIOR SECURITIES.





None.





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





On
January 18, 2008 stockholders holding 26,955,035 shares of our common stock or
approximately 63% of our outstanding common stock executed written consents in
lieu of a special meeting pursuant to which such stockholders ratified and
approved the: (i) Viking Systems, Inc. 2008 Equity Incentive Plan; and (ii)
Viking Systems, Inc. 2008 Non-Employee Directors’ Stock Option
Plan.





ITEM 5.OTHER
INFORMATION.





None





ITEM
6. EXHIBITS





ExhibitNumber
            Exhibit31.1
            Certification
      of Principal Executive Officer in accordance with 18 U.S.C. Section 1350,
      as adopted by Section 302 of the Sarbanes- Oxley Act of
    200231.2
            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
  200232.1
            Certification
      of Principal Executive Officer in accordance with 18 U.S.C. Section 1350,
      as adopted by Section 906 of the Sarbanes-Oxley Act of
  200232.2
            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








20





SIGNATURE





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





Dated:
      May 14 , 2008
            VIKING
      SYSTEMS, INC.By  /s/ William C.
      BoppChief
      Executive Officer
              (Principal
      Executive Officer)By  /s/
      Robert MathewsExecutive
      Vice President and
              Chief
      Financial Officer
              (Principal
      Financial Officer)