U.S.
      SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549








FORM
      10-QSB








ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





**For
      the quarterly period ended September 30, 2005**


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.
                employerincorporation
                or organization
            
            identification
                No.)





7514
      Girard Ave, Suite 1509, La Jolla, CA 92037


(Address
      of principal executive offices)





Registrant's
      telephone no., including area code: (858) 456-6608





N/A


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





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 ý No  ̈ (2) Yes ý No  ̈





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      rule
      12b-2 of the Exchange Act). Yes  ̈ No ý





Common
      Stock outstanding at October 31, 2005, 34,639,050 shares of $.001 par value
      Common Stock.





DOCUMENTS
      INCORPORATED BY REFERENCE: NONE





**FORM
      10-QSB**





**FINANCIAL
      STATEMENTS AND SCHEDULES**


**VIKING
      SYSTEMS, INC.**





**For
      the Quarter ended September 30, 2005**





The
      following financial statements and schedules of the registrant are submitted
      herewith:





**PART
      I - FINANCIAL INFORMATION**


Page
      of


Form
      10-QSB








Item
                1.
            Financial
                Statements:Unaudited
                Balance Sheetat September 30, 2005
            3Unaudited
                Statements of Operationsfor the Three and Nine
                Months
              Ended
                September 30, 2005 and 2004
            4Unaudited
                Statements of Cash Flowsfor the Nine
                Months
              Ended
                September 30, 2005 and 2004
            5
                -
                6Notes
                to Financial Statements
            7
                -
                11Item
                2.
            Management's
                Discussion and Analysis of Financial Condition
              and
                Results of Operations
            11Item
                3.
            Controls
                and Procedures, Evaluation of Disclosure Controls and
                Procedures
            24








**PART
      II- OTHER INFORMATION**





Pag


Item
                  1.
              Legal
                  Proceedings
              25Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds.
              25Item
                  3.
              Defaults
                  Upon Senior Securities
              25Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              25Item
                  5.
              Other
                  Information
              25Item
                  6.
              Exhibits
              25


2


**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1: FINANCIAL STATEMENTS**





**VIKING
      SYSTEMS, INC.**


**Unaudited
      Balance Sheet**


**September
      30, 2005**





**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            161,263Accounts
                receivable, net
            
            
            769,870Inventories
            
            
            501,597Prepaids
                and other current assets
            
            
            88,134Total
                current assets
            
            
            1,520,864Property
                and equipment, net
            
            
            448,493$
            1,969,357**Liabilities
                and Stockholders' Deficit**Current
                liabilities:Accounts
                payable
            
            $
            762,241Accrued
                expenses
            
            
            535,419Short-term
                bank borrowings
            
            
            425,686Convertible
                notes payable net of debt discount of $1,071,377
            
            
            2,178,623Total
                current liabilities
            
            
            3,901,969Commitment
                and contingenciesStockholders'
                deficit:Preferred
                stock, $.001 par value, 25,000,000 sharesauthorized,
                no shares issued and outstanding
            
            
            -Common
                stock, $.001 par value, 100,000,000 sharesauthorized;
                34,639,050 shares issued and outstanding
            
            
            34,639Additional
                paid-in capital
            
            
            5,234,544Deferred
                Compensation
            
            
            (66,000
            )Accumulated
                deficit
            
            
            (7,135,795
            )Total
                stockholders' deficit
            
            
            (1,932,612
            )$
            1,969,357





See
            accompanying notes to financial statements
 3


**VIKING
      SYSTEMS, INC.**


**Unaudited
      Statements of Operations**





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Sales,
                net
            
            $
            1,117,806
            
            $
            1,094,096
            
            $
            3,076,622
            
            $
            2,125,058Cost
                of sales
            
            
            797,936
            
            
            760,348
            
            
            2,223,586
            
            
            1,537,783Gross
                profit
            
            
            319,870
            
            
            333,748
            
            
            853,036
            
            
            587,275Operating
                expenses:General
                and administrative
            
            
            418,928
            
            
            414,026
            
            
            1,248,172
            
            
            826,436Selling
                and marketing
            
            
            734,915
            
            
            204,765
            
            
            1,903,956
            
            
            378,666Research
                and development
            
            
            242,421
            
            
            152,378
            
            
            669,701
            
            
            288,706Total
                operating expenses
            
            
            1,396,264
            
            
            771,169
            
            
            3,821,829
            
            
            1,493,808Operating
                loss
            
            
            (1,076,394
            )
            
            (437,421
            )
            
            (2,968,793
            )
            
            (906,533
            )Other
                income (expense):Interest
                expense
            
            
            (1,003,649
            )
            
            (956
            )
            
            (1,851,581
            )
            
            (1,707
            )Net
                loss
            
            $
            (2,080,043
            )
            $
            (438,377
            )
            $
            (4,820,374
            )
            $
            (908,240
            )Net
                loss per commonshare
                - basic and diluted
            
            $
            (0.06
            )
            $
            (0.05
            )
            $
            (0.15
            )
            $
            (0.11
            )Weighted
                average shares - basic and diluted
            
            
            33,403,000
            
            
            9,720,000
            
            
            32,027,000
            
            
            8,298,000











See
            accompanying notes to financial statements
 4


**VIKING
      SYSTEMS, INC.**


**Unaudited
      Statements of Cash Flows**


**Nine
      Months Ended September 30,**


**2005**
            
            **2004****Cash
                flows from operating activities:**Net
                loss
            
            $
            (4,820,374
            )
            $
            (908,240
            )Adjustment
                to reconcile net loss to net cashused
                in operating activities:Depreciation
                and amortization
            
            
            188,114
            
            
            12,752Common
                Stock issued for services
            
            
            101,694Amortization
                of Deferred Compensation
            
            
            22,000Interest
                expense from beneficial conversion feature
            
            
            1,678,623Amortization
                of debt discount
            
            
            -Change
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            (492,103
            )
            
            19,124Inventories,
                net
            
            
            165,491
            
            
            (161,120
            )Prepaids
                and other current assets
            
            
            57,408
            
            
            (134,973
            )Accounts
                payable
            
            
            (778,713
            )
            
            451,398Accrued
                expenses
            
            
            200,929
            
            
            175,484Deferred
                revenue
            
            
            (159,150
            )
            
            (8,250
            )Net
                cash used in operating activities
            
            
            (3,836,081
            )
            
            (553,825
            )**Cash
                flows from investing activities:**Net
                cash paid in acquisition
            
            
            -
            
            
            (158,718
            )Purchase
                of property and equipment
            
            
            (358,520
            )
            
            (123,573
            )Net
                cash used in investing activities
            
            
            (358,520
            )
            
            (282,291
            )**Cash
                flows from financing activities:**Net
                change in short-term bank borrowings
            
            
            366,471Proceeds
                from issuance of preferred stock
            
            
            -
            
            
            400,000Payments
                on capital lease obligations
            
            
            
            
            
            (4,032
            )Payments
                on related party notes
            
            
            
            
            
            (50,000
            )Proceeds
                from issuance of Common Stock
            
            
            
            
            
            450,000Proceeds
                from convertible debt
            
            
            3,750,000Proceeds
                from related-party note payable
            
            
            100,000
            
            
            100,000Net
                cash provided by financing activities
            
            
            4,216,471
            
            
            895,968Net
                increase in cash and cash equivalents
            
            
            21,870
            
            
            59,852Cash
                and cash equivalents at beginning of period
            
            
            139,393
            
            
            35,525Cash
                and cash equivalents at end of period
            
            $
            161,263
            
            $
            95,377**Supplemental
                disclosure of cash flow information:**Cash
                paid during the period for:Interest
            
            $
            79,060
            
            $
            1,707Income
                taxes
            
            $
            -
            
            $
            -








See
            accompanying notes to financial statements
 5


During
      the nine months ended September 30, 2005 the Company: 
 ·
              Allocated
                  $825,000 of the proceeds from convertible notes payable to the
                  value of
                  the warrants issued and the remaining amount of the proceeds of
                  $1,925,000
                  to the value of the beneficial conversion feature, recording the
                  total of
                  the proceeds of $2,750,000 as a debt
                  discount.
 
 ·
              Converted
                  a $500,000 note payable and $16,659 of accrued interest into 1,291,650
                  shares of common stock.
 
 ·
              Converted
                  a $500,000 note payable into 2,500,000 shares of common
                  stock.
 
 ·
              Recorded
                  deferred compensation of $88,000 for common stock issued with a
                  consulting
                  agreement




During
      the nine months ended September 30, 2004 the Company:





·
            Received
                $400,000 from the sale of shares of our Series A Preferred
                Stock





·
            Received
                $100,000 from the issuance of a convertible
                note





·
            Paid
                $50,000 payment of the convertible note, and converted $50,000 into
                common
                stock





·
            Received
                $450,000 from the sale of shares of our common
                stock





·
            Converted
                5,000,000 shares of Series A Preferred Stock into 20,000,000 shares
                of
                common stock





·
            On
                April 15, 2004 the Company acquired certain assets of the visualization
                technologies business of Vista Medical Technologies, Inc. in exchange
                for
                cash, stock and the assumption of certain liabilities. Assets acquired,
                liabilities assumed, common stock issued, and cash paid in the acquisition
                is detailed as follows:





Accounts
                receivable
            $
            374,027Inventory
            
            266,344Property
                and equipment
            
            33,309Accounts
                payable
            
            (347,309)Accrued
                compensation
            
            (77,188)Other
                accrued expenses
            
            (14,767)Deferred
                revenue
            
            (9,250)Capital
                lease
            
            (5,368)Common
                stock issued
            
            (61,080)Net
                cash paid in acquisition
            $
            158,718








6


**VIKING
      SYSTEMS**


**Notes
      to Financial Statements(Unaudited)**


**Nine
      Months Ended September 30, 2005 and 2004**








**1.
      Interim Financial Statements**





The
      financial statements as of September 30, 2005 and for the three months and
      nine
      months ended September 30, 2005 and 2004 are unaudited. However, management,
      in
      its opinion, has made all adjustments (consisting only of normal recurring
      accruals) necessary to present fairly the financial position, results of
      operations and cash flows for the periods presented. The financial statements
      and notes thereto should be read in conjunction with the financial statements
      and notes for the years ended December 31, 2004 and 2003, included in the
      Company’s Form 10-KSB filed on March 31, 2005 with the Securities and Exchange
      Commission. The results of operations and cash flows for the nine months ended
      September 30, 2005, are not necessarily indicative of results for the year
      ending December 31, 2005.





**2.
      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 the periods ended September 30,
      2005
      and 2004, 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.





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 be
      amortized over the vesting period of the stock option.





The
      following table illustrates the effect on net loss and net loss per share as
      if
      the Company had elected to use the fair value based method to account for its
      employee stock-based compensation.






7




**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Net
                loss, as reported
            
            $
            (2,080,043
            )
            $
            (438,377
            )
            $
            (4,820,374
            )
            $
            (908,240
            )Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            
            (38,425
            )
            
            (1,488
            )
            
            (76,850
            )
            
            (4,464
            )Pro
                forma net loss
            
            $
            (2,118,468
            )
            $
            (439,865
            )
            $
            (4,897,224
            )
            $
            (912,704
            )Earnings
                per share-Basic
                and diluted - as
              Reported
            
            $
            (0.06
            )
            $
            (0.05
            )
            $
            (0.15
            )
            $
            (0.11
            )Basic
                and diluted -
              pro
                forma
            
            $
            (0.06
            )
            $
            (0.05
            )
            $
            (0.15
            )
            $
            (0.11
            )





The
      weighted average fair value of options granted during the three months ended
      September 30, 2005 and 2004 was $0.41 and $0.39 respectively. The weighted
      average fair value and the pro forma expense noted above were calculated using
      the Black-Scholes option pricing model based on the following
      assumptions:





**2005**
            **2004**Expected
                dividend yield
            $
            -
            $
            -Expected
                stock price volatility
            
            161.48%
            
            33.85%Risk-free
                interest rate
            
            4.17%
            
            2.0%Expected
                life of options
            
            10
                years
            
            4
                years


8


**3.
      Going Concern**





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and the satisfaction of liabilities
      in the normal course of business. Historically, the Company has not demonstrated
      the ability to generate sufficient cash flows from operations to satisfy its
      liabilities and sustain operations, and the Company has incurred significant
      losses, and has a significant working capital deficit. These factors raise
      substantial doubt about the Company’s ability to continue as a going concern.





The
      Company’s continuation as a going concern is dependent on its ability to
      generate sufficient income and cash flow to meet its obligations on a timely
      basis and/or obtain additional financing as may be required.





During
      the nine months of 2005, the Company raised approximately $3,750,000 through
      the
      issuance of convertible notes (see Note 5).





In
      January 2005, the Company received a $200,000 line of credit from a bank,
      secured by a certificate of deposit of a significant stockholder. In addition,
      the Company has a bank line of credit that allows the Company to borrow up
      to
      80% of the outstanding accounts receivable, up to a maximum amount of $400,000.
      This agreement expires in September 2006 and is subject to annual
      renewals.





Management
      believes that in order to continue its operations, development of its products,
      and implementation of its business plan, the Company will need additional
      financing. The Company is pursuing additional financing through a private
      placement offering of its common stock in which it is attempting to raise
      approximately $10 million during 2005. Additionally, the Company is continuing
      its efforts to increase revenues by obtaining new customers and to minimize
      operating costs. There can be no assurance that the Company will be successful
      in obtaining additional financing or in its efforts to increase revenues and
      decrease operating costs. If the Company is unable to obtain additional
      financing, it may be required to reduce operations, reduce or discontinue
      further research and development, and/or reduce or eliminate further acquisition
      activities.





**4.
      Loss Per Share**




The
      computation of basic loss per common share is computed using the weighted
      average number of common shares outstanding during each period.





The
      computation of diluted loss per common share is based on the weighted average
      number of shares outstanding during the period plus common stock equivalents
      which would arise from the exercise of stock options using the treasury stock
      method and the conversion of convertible instruments. Options and warrants
      to
      purchase 6,828,500 shares of common stock at prices ranging from $.02 to $.65,
      and debt convertible into 11,250,000 shares of common stock were outstanding
      at
      September 30, 2005, but were not included in the diluted loss per share
      calculation because the effect would have been antidilutive.





9


**5.
      Convertible Notes Payable**





During
      the quarter ended September 30, 2005, the Company's Board of Directors approved
      a bridge financing round of up to $4,000,000 in convertible notes. As of
      September 30, 2005 the Company had raised $1,000,000 through the issuance of
      these convertible notes (the “Notes”) and expect to receive up to $1,500,000
      more through the sale of the Notes. The Notes mature 12 months from the date
      of
      issuance, accrue interest at 10% per annum, and are secured by all of the
      Company’s assets. The Notes may be converted, at the option of the Investors,
      into shares of our common stock. The conversion price and terms are dependent
      upon the terms of a proposed private or public offering of the
      Company's securities that the Company anticipates will commence
      during the current quarter. The Company anticipates the conversion price
      will be approximately 20% less than the offering price per share in such
      anticipated public or private offering. In connection with the issuance of
      the
      Notes, the Company also issued warrants to purchase common stock at a
      price of $0.60 per share or other price subject to adjustment upon certain
      conditions pursuant to the terms of the transaction. 
 During
        the quarter ended March 31, 2005, the Company raised $2,750,000 through the
        issuance of convertible notes (the “First Quarter Notes”). The First Quarter
        Notes mature 12 months from the date of issuance, accrue interest at 10%
        per
        annum, and are secured by all of the assets of the Company. The First Quarter
        Notes also may be converted, at the option of the Investors, into shares
        of
        common stock of the Company at a conversion price of $0.20 per share. The
        conversion price is subject to adjustment based on certain conditions of
        the
        Security Purchase Agreement. The Company may require conversion of the First
        Quarter Notes if the Company raises $3 million in public or private equity
        offerings, at a price equal to or greater than $0.30 per share of common
        stock,
        within 12 months of the date of issuance of the First Quarter Notes. In
        connection with the issuance of the First Quarter Notes, the Company also
        issued
        warrants to purchase common stock at a price of $0.40 per share (subject
        to
        adjustment upon certain conditions pursuant to the terms of the Security
        Purchase Agreement). The warrants are exercisable for a period of 42 months
        from
        the date of issuance.





$500,000
      of the $2,750,000 First Quarter Notes were issued to a significant shareholder
      and were converted to 2,500,000 shares of the Company’s common stock. $750,000
      of the $2,750,000 First Quarter Notes were issued to a company that appointed
      a
      member of the Company's board of directors.





The
      $2,750,000 proceeds from the convertible notes payable were allocated between
      the convertible debt and the warrants based on the relative fair value method
      with $825,000 being allocated to the warrants as a debt discount and the
      remainder of $1,925,000 being allocated to the convertible notes. The $825,000
      warrant value was recorded as a debt discount and is being amortized over the
      twelve month term of the note.





10


The
      conversion price of $0.20 was less than the fair market value of the stock
      of
      $0.40 on the date the convertible notes were issued, creating a beneficial
      conversion feature. Since the beneficial conversion feature was greater than
      the
      $1,925,000 allocated fair value of the convertible notes, the entire allocated
      amount of the convertible notes payable was recorded as a beneficial conversion
      feature. Therefore, the entire amount of $2,750,000 was initially recorded
      as a
      debt discount to be amortized over the life of the notes (12 months), resulting
      in an effective interest rate of 110%. Using the effective interest method,
      $1,003,649 and $1,678,623 was amortized and recorded as interest expense during
      the three and nine months ended September 30, 2005, respectively. The remaining
      debt discount will continue to be amortized over the remaining life of the
      notes.





**6.
      Conversion of Related Party Notes Payable**





In
      March
      2005, a significant stockholder converted notes payable of $500,000 and related
      accrued interest of $16,659, into 1,291,650 shares of the Company’s common stock
      at $0.40 per share.





In
      August
      2005, a significant stockholder converted notes payable of $500,000 into
      2,500,000 shares of the Company’s common stock at $0.20 per share.





**7.
      Interest Expense**





During
      the nine months ended September 30, 2005, the Company recorded interest expense
      of $1,678,623, as a result of the amortization of the debt discount described
      in
      Note 5.





**ITEM
      2:MANAGEMENT'S DISCUSSION AND ANALYSIS
      OF**


**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**





In
      this
      report references to "Viking," "we," "us," and "our" refer to Viking Systems,
      Inc.





**Overview**





Viking
      Systems, Inc. designs, manufactures and markets FDA cleared, high performance
      laparoscopic vision systems. Viking’s primary product is the EndoSite 3Di
      Digital Vision System (the “EndoSite 3Di System”), an advanced three dimensional
      (“3-D”) vision system used by surgeons for complex minimally invasive
      laparoscopic surgery, with an initial focus on applications in urology,
      bariatrics and laparoscopic gynecology. The Company also manufactures advanced
      two dimensional (“2-D”) digital cameras that are sold through strategic partner
      and OEM programs.





The
      Company’s technology and know-how center on its core technical competencies in
      optics, digital imaging, sensors, surgical robotics and image management. The
      Company’s focus is to deliver advanced integrated information, visualization and
      control solutions to the surgical team, enhancing their capability and
      performance in complex minimally invasive surgical procedures.





The
      value
      proposition of the Company’s EndoSite 3Di System is based on three principles:






11




·
            That
                3-D vision, providing natural depth perception and a clear view of
                a
                patient’s anatomy, is superior in facilitating the performance of complex
                surgical tasks;





·
            That
                an HMD is a more ergonomic display solution for surgeons and
                interventional physicians than conventional video monitors;
                and





·
            That
                integrating additional information in a voice controlled,
                picture-in-picture format into the surgeon's view, in conjunction
                with the
                anatomical view, can facilitate decision making during
                surgery.





As
      of
      September 30, 2005, the Company had an installed base of more than 70 3-D vision
      systems installed worldwide and more than 3,500 2-D digital cameras with OEM
      partners, including Boston Scientific Corporation (“Boston Scientific”, NYSE:
      BSX) and Medtronic, Inc. (“Medtronic”, NYSE: MDT). Products range in price from
      $160,000 to $200,000 for EndoSite 3Di Systems and from $3,000 to $27,000 for
      2-D
      digital cameras and components. Viking currently projects to increase its annual
      EndoSite 3Di System placements from 13 in 2004 to approximately 350 per year
      in
      2008, at the same time expanding its sales of 2-D digital cameras at a compound
      annual growth rate (“CAGR”) of 20%.





**Discussion
      of our financial results relative to the quarter ending September 30, 2005.**





In
      Q3 the
      Company accomplished significant milestones, both strategic and
      operational, and in the quarter, closed and shipped four 3Di system orders.
      While these initial system orders are important financially, the real
      accomplishments of the quarter were in our product and clinical objectives.
      These are the foundation blocks on which we can build the business. Significant
      accomplishments are as follows:





·
            First
                urology sale and LRP procedure outside of
                academics





·
            Completed
                the three setting camera optimized for urology, gynecology and
                bariatrics





·
            Won
                SLS award for innovation with our 3Di
                system





·
            Upgraded
                sales demo systems





·
            Completed
                our first telesurgery at SLS
                conference





·
            Signed
                Dr. Camran Nezhat and Dr. Andriole to our Clinical Advisory
                Board





·
            Completed
                our first clinical study





·
            First
                OEM shipments to new programs for Boston Scientific and
                Medtronic







12


·
            Record
                revenue month in September





·
            Record
                quarter revenue and sustained quarter to quarter
                growth





·
            Completed
                search and selection of investment banker for
                financing





·
            Completed
                first $1,000,000 of bridge
                financing





**Background**





Since
      the
      acquisition of the Vista Assets in April 2004, the Company has executed on
      several strategic and operating initiatives that have positioned the Company
      to
      commercialize its technology, including the following:





·
            Completed
                the development of the EndoSite 3Di System, which was launched at
                the
                American College of Surgeons Congress in October 2004;





·
            Rebranded
                the visualization technology product developed from the Vista Assets
                in
                the Viking product image;





·
            Completed
                the initial staffing of the commercial organization, including regional
                sales managers, independent sales representatives, international
                distributors, clinical development staff and service and marketing
                personnel;





·
            Validated
                the performance of the EndoSite 3Di System in urology and gynecology,
                including many complex minimally invasive surgical procedures, such
                as
                laparoscopic radical prostatectomy (“LRP”), laparoscopic bariatric
                surgery, laparoscopic pyeloplasty and laparoscopic pelvic floor
                reconstruction;





·
            Added
                two new significant OEM customers, Medtronic and Boston Scientific;
                and





·
            Created
                bariatric, urologic and gynecologic clinical advisory boards.





**Market**





The
      primary market for Viking’s products is complex minimally invasive surgery that
      relies heavily on the use of endoscopic instruments and technologies. The $6.7
      billion MIS market currently accounts for 20% of all surgical procedures
      performed worldwide. Viking believes that MIS procedures will grow at a 17%
      CAGR
      and the market will expand from $6.7 billion in 2004 to $8.3 billion in 2007.





The
                Company believes that the key growth drivers in MIS include the
                following:







13


·
            More
                highly complex procedures are adapting to MIS techniques, including
                radical prostatectomy, donor nephrectomy, pyeloplasty, adrenalectomy,
                gastric bypass, nissen fundoplication, supra pubic hysterectomy,
                pelvic
                floor reconstruction, skull based and pediatric based procedures;





·
            Proactive
                and informed patients will continue to seek out minimally invasive
                surgeries;





·
            Technological
                improvements that will permit more complex surgeries to be performed
                using
                MIS techniques; and





·
            The
                aging baby boomer population will focus on a healthy lifestyle.





**Competition
      and Market Opportunity**





Although
      competition exists for aspects of Viking’s visualization product line, the
      Company believes that no single company offers a complete and independent 3-D
      visualization and information solution specifically directed at complex
      minimally invasive procedures. In addition, Viking is not aware of any other
      true 3-D HMD that has been cleared for marketing in surgical applications by
      the
      FDA.





Viking’s
      competition comes from two directions. The traditional competition is from
      2-D
      vision systems where the prices per system range from $20,000 to $80,000 and
      represent the low end of the market. The worldwide medical market for standard
      2-D vision systems is between 12,000 and 14,000 units per year. Karl Storz
      Endoscopy America, Inc., Stryker Corporation (NYSE: SYK), ACMI Corporation
      (recently acquired by Gyrus), Olympus America, Inc. and Smith & Nephew PLC
      (NYSE: SNN) are key competitors supplying 2-D units.





At
      the
      top end of the market, fully immersive 3-D vision-enabled robotics, in
      particular the daVinci system, sell for up to $1,400,000 per system and require
      disposables that cost the hospital up to $2,500 per procedure. Intuitive
      Surgical is the manufacturer of the daVinci Surgical Robot, of which there
      are
      more than 300 in use. According to Intuitive Surgical, sales of this unit are
      currently growing at rate of over 70% per year. This growth suggests a market
      demand for improved MIS surgical tools and Viking believes there is a gap in
      the
      product offerings between these two tiers in the market.





Viking’s
      solution provides a higher level of technical sophistication than 2-D for MIS
      procedures, without the high cost and technical complexity of a robotic
      solution. The Company estimates the opportunity for its 3-D technology and
      the
      gap in the market to be in excess of 1,400 systems per year. Currently, this
      represents a market opportunity of approximately $250 million.





14


**Growth
      Strategy**





The
      Company’s mission is to be recognized as the market leader in the development of
      integrated information, visualization and surgical control solutions that
      significantly enhance the surgical team’s capabilities and performance in
      complex minimally invasive surgical procedures.





To
      accomplish its mission Viking will employ the following strategy:





·
            Expand
                the Market for 3-D Visualization
                Solutions





·
            Establish
                a Leadership Position for the Viking Brand in 3-D Visualization
                Solutions





·
            Expand
                the Sales and Marketing
                Organization





·
            Protect
                and Grow the Company’s 2-D OEM
                business





·
            Maintain
                a Technical Leadership Position





·
            Build
                a Defensible Intellectual Property
                Portfolio





·
            Acquire
                or License Complementary Technologies or
                Products





**Critical
      Accounting Policies**





This
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations discusses the Company’s Financial Statements, which have been
      prepared in accordance with U.S. generally accepted accounting
      principles.





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 receivables, inventory, income taxes,
      accrued expenses, and revenue recognition. We anticipate that management will
      base its estimates and judgments on historical experience 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.





15


***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.





***Long-Lived
      Asset Valuations.*** ****** 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.





***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 September 30, 2005, 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.





16


***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 the six months
      ended June 30, 2005 and 2004, 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.





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.





**RESULTS
      OF OPERATIONS**





**Three
      and Nine-Month Period Ended September 30, 2005 Compared to the Three and
      Nine-Month Period Ended September 30, 2004**





***Revenues.*** ** For
      the
      three months ended September 30, 2005, we had product sales $1,117,806 compared
      to product sales of $1,094,096 for the three months ended September 30,
      2004.  This represents an increase of $23,710 or 2%. Sales to individual
      customers exceeding 10% or more of revenues in the three months ended September
      30, 2005 were to three customers who accounted for 25%, 13% and 11% of revenues,
      respectively. For the nine months ended September 30, 2005 we had product sales
      of $3,076,622 compared to product sales of $2,125,058 for the nine months ended
      September 30, 2004, representing an increase of $951,564 or 85%. Sales to
      individual customers exceeding 10% or more of revenues in the nine months ended
      September 30, 2005 were to three customers who accounted for 20%, 19%, and
      16%
      of revenues, respectively.





***Gross
      Profit.*** We had
      gross profit of $319,870 or 28.6% of total revenues for the three months ended
      September 30, 2005 and gross profit of $333,748 or 30.5% of total revenues
      for
      the three months ended September 30, 2004, representing a decrease of $13,878.
      The decrease in gross profit during 2005 was due to the increase in royalty
      expense, in accordance with the Vista Royalty agreement. We expect our gross
      profit, as a percentage of revenues, to improve as we increase our 3Di System
      sales. For the nine months ended September 30, 2005 we had gross profit of
      $853,036 or 27.7% of total revenues compared to $587,275 or 27.6% of total
      revenues for the nine months ended September 30, 2004.




17


***Sales
      and Marketing Expenses*** **.** Selling
      and Marketing expenses were $734,915 for the three months ended September 30,
      2005 and $204,765 for the three months ended September 30, 2004. For the nine
      month period ended September 30, 2005 Selling and Marketing expenses were
      $1,903,956 compared to expenses of $378,666 for the nine month period ended
      September 30, 2004. The increase in operating expenses was due to the increased
      efforts to develop market awareness and to build our sales organization for
      our
      3Di products. We expect that our Selling and Marketing expenses will continue
      to
      increase as we establish our 3Di Systems business. We had no Selling and
      Marketing expenses until after the acquisition from Vista Medical Technologies,
      Inc. on April 15, 2004.





***Research
      and Development Expenses.*** ** Research
      and Development expenses were $242,421 for the three months ended September
      30,
      2005 and $152,378 for the three months ended September 30, 2004. Research and
      Development expenses for the nine months ended September 30, 2005 were $669,701
      compared to $288,706 for the nine months ended September 30, 2004. The increase
      is due to the continued development of our 3Di product line. We expect that
      our
      research and development expenses will remain at their current levels as we
      continue to develop, maintain and support our current products. We had no
      Research and Development expenses until after the acquisition from Vista Medical
      Technologies, Inc. on April 15, 2004.





***General
      and Administrative Expenses.*** ** We had
      General and Administrative expenses of $418,928 for the three months ended
      September 30, 2005 and $414,026 for the three months ended September 30, 2004.
      General and Administrative expenses were $1,248,172 for the nine months ended
      September 30, 2005 compared to $826,436 for the nine months ended September
      30,
      2004. We expect that our General and Administrative expenses will increase
      from
      their current levels as we hire additional personnel and prepare for SOX
      404 compliance. We had limited General and Administrative expenses prior to
      the
      acquisition from Vista Medical Technologies, Inc. on April 15,
      2004.





***Net
      Income (Loss).*** We had a
      net loss of $2,080,043 for the three months ended September 30, 2005 and a
      net
      loss of $438,377 for the three months ended September 30, 2004, representing
      an
      increase of $1,641,666. For the nine months ended September 30, 2005 we had
      a
      net loss of $4,820,374 compared to a net loss of $908,240 for the nine months
      ended September 30, 2004. The increase in net loss for 2005, was due to the
      increase in operating expenses due to 9 months of operations. We incurred
      significant costs implementing our sales and marketing plan, developing and
      improving our 3Di products line, and maintaining operations of the Visualization
      business. We also incurred $1,678,623 in non-cash interest expense related
      to
      the amortization of the debt discount on the Convertible Notes for the nine
      months ended September 30, 2005. Our net loss for the three months ended
      September 30, 2005 was the result of us having revenues of $1,117,806, costs
      of
      sales of $797,936, operating expenses $1,396,264 and interest expense of
      $1,003,649.





18


**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      have
      financed our operations principally through private sales of equity securities
      and convertible notes. From January 1, 2004 through September 30, 2005, we
      have
      raised net proceeds of $900,000 through the sale of common and preferred stock
      in private placements, and $4,300,000 through the issuance of convertible
      promissory notes. As of September 30, 2005, we had cash, cash equivalents and
      short-term investments of $161,263 compared to $139,393 as of December 31,
      2004.





In
      the
      three months ended September 30, 2005, we raised $1,000,000 through the issuance
      of convertible notes (the “Notes”) and expect to receive up to $1,500,000 more
      through the sale of the Notes. The Notes mature 12 months from the date of
      issuance, accrue interest at 10% per annum, and are secured by all of our
      assets. The Notes may be converted, at the option of the Investors, into shares
      of our common stock. The conversion price and terms are dependent upon the
      terms
      of a proposed private or public offering of our securities that we anticipate
      will commence during the current quarter. We anticipate the conversion price
      will be approximately 20% less than the offering price per share in such
      anticipated public or private offering. In connection with the issuance of
      the
      Notes, we also issued warrants to purchase common stock at a price of $0.60
      per
      share or other price subject to adjustment upon certain conditions pursuant
      to
      the terms of the transaction.





During
      the three months ended March 31, 2005, we raised $2,750,000 through the issuance
      of convertible notes (the “First Quarter Notes”). The First Quarter Notes mature
      12 months from the date of issuance, accrue interest at 10% per annum, and
      are
      secured by all of our assets. The First Quarter Notes also may be converted,
      at
      the option of the Investors, into shares of our common stock at a conversion
      price of $0.20 per share. The conversion price is subject to adjustment based
      on
      certain conditions of the Security Purchase Agreement. We may require conversion
      of the First Quarter Notes if we raise $3 million in public or private equity
      offerings, at a price equal to or greater than $0.30 per share of common stock,
      within 3 months of the date of issuance of the First Quarter Notes. In
      connection with the issuance of the First Quarter Notes, we also issued warrants
      to purchase common stock at a price of $0.40 per share (subject to adjustment
      upon certain conditions pursuant to the terms of the Security Purchase
      Agreement). The warrants are exercisable for a period of 42 months from the
      date
      of issuance.





Net
      cash
      used in operating activities was $3,836,081 **** and
      $553,825 during the nine months ended September 30, 2005 and September 30,
      2004,
      respectively. The increase in net cash used in operating activities during
      2005
      compared to 2004 was attributable to the significant increase in net loss
      resulting from the development of our EndoSite 3Di product line, the increase
      in
      our sales and marketing organization, and the payment of accounts payable and
      accrued liabilities.





Net
      cash
      used in investing activities was $358,520 and $282,291 during the nine months
      ended September 30, 2005 and September 30, 2004, respectively. The increase
      in
      cash used in investing activities in 2005 was attributable to increased
      purchases of equipment needed for demonstration equipment of our new 3Di product
      line.





19


Cash
      flow
      provided by financing activities was $4,216,471 and $895,968 during the nine
      months ended September 30, 2005 and September 30, 2004, respectively. The cash
      flows from financing activities in 2005 were attributable to proceeds from
      a
      private placement of secured convertible notes in the amount of $3,750,000,
      proceeds received from short-term bank borrowings of $366,471, and proceeds
      from
      related party notes payable of $100,000.





We
      incurred operating losses in 2005 and 2004, and at September 30, 2005, had
      an
      accumulated deficit of approximately $7,135,795. At September 30, 2005, we
      had
      cash of $161,263.





In
      January 2005, we received a $200,000 line of credit from Silicon Valley Bank.
      In
      February and March 2005, we received $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 2006 and is subject to annual renewals.
      Our
      monthly overhead currently ranges from $350,000 to $400,000. We anticipate
      that
      we will spend approximately $500,000 in research and development efforts during
      the second half of 2005 and $260,000 on capital transactions. In order to
      continue our operations, development of our products, and implementation of
      our
      business plan, we will need to raise additional capital through equity or debt
      transactions.  During the last quarter our management has spent
      considerable time and effort in discussing capital raising alternatives
      with investment bankers, institutional investors and others. We are currently
      attempting to complete a bridge loan transaction which would provide us with
      working capital while we pursuea $10 million private placement with the
      assistance of an investment bank..  We anticipate that we need to raise a
      minimum of $4,000,000 during the next twelve months in order to continue our
      business operations on current levels. Additionally, we are continuing our
      efforts to increase revenues by obtaining new customers and to minimize our
      operating costs. There can be no assurance that we will be successful in
      obtaining financing or in our efforts to increase revenues and decrease
      operating costs. If we are unable to obtain additional financing, we may be
      required to reduce operations, reduce or discontinue further research and
      development, and/or reduce or eliminate further acquisition
      activities.





**Additional
      Capital Summary**





***Off-Balance
      Sheet Arrangements.*** **** Off-balance
      sheet arrangements, as defined by SEC, include certain transactions, agreements,
      or other contractual arrangements pursuant to which a company has any obligation
      under certain guarantee contracts, certain retained or contingent interests
      in
      assets transferred to an unconsolidated entity, any obligation under certain
      derivative investments, or any obligation under a material variable interest
      in
      an unconsolidated entity that provides financing, liquidity, market risk or
      credit risk support or engages in leasing, hedging or research and development
      services with us. See Note 11 of the Notes to Consolidated Financial Statements
      contained in our annual report on Form 10-KSB for the fiscal year ended December
      31, 2004.





20


**Forward
      Outlook and Risks**





This
      Form
      10-QSB 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-QSB, 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-QSB. These forward-looking statements represent our judgment as
      of
      the date of this Form 10-QSB. 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 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.


21


***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**





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 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.


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***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
      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 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.




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***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
      3. CONTROLS AND PROCEDURES**


**EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES**





(a)
            Evaluation
                of Disclosure Controls and
                Procedures




Under
        the
        supervision and with the participation of our management, including our Chief
        Executive Officer and Chief Financial Officer, we evaluated the effectiveness
        of
        the design and operation of our disclosure controls and procedures as of
        September 30, 2005 (as defined in Rule 13a-15(e) or 15d-15(e) under the
        Securities Exchange Act of 1934 (the "Exchange Act")). In connection with
        this
        evaluation, management identified a deficiency that existed in the design
        or
        operation of our internal control over financial reporting that it considers
        to
        be a “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
      deficiency in our internal control related to accounting for the debt discount
      resulting from the warrants issued in connection with the convertible notes
      and
      the related beneficial conversion feature. The adjustment to record the debt
      discount and beneficial conversion feature was detected and has been
      appropriately recorded and disclosed in this Form 10-QSB. We are in the process
      of improving our internal control over financial reporting in an effort to
      remediate this deficiency.





Based
      upon that evaluation and the deficiency identified above, the 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 not
      effective in timely alerting them to the material information relating to us
      (or
      our consolidated subsidiaries) required to be included in the reports we file
      or
      submit under the Exchange Act.




(b)
              Changes
                  in Internal Controls


There
      were no significant changes in the Company's internal controls over financial
      reporting or in other factors that could significantly affect these internal
      controls subsequent to the date of their most recent evaluation, including
      any
      corrective actions with regard to significant deficiencies and material
      weaknesses.


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**PART
      II- OTHER INFORMATION**





Item
      1.  Legal
      Proceedings .
      We are
      not a party to any legal proceeding.





Item
      2.  Unregistered
      Sales of Equity Securities .
      None





Item
      3.  Defaults
      by the Company on its Senior Securities .
      None





Item
      4.  Submission
      of Matters to Vote of Security Holders .
      None





Item
      5.  Other
      Information .





**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. In April 2005 this
      Loan
      and Security Agreement with Silicon Valley Bank was reduced to $100,000. This
      Loan and Security Agreement expires on December 3, 2005.





Item
                6. Exhibits.
            31.1Certification
                by the Chief Executive Officer
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
                Certification by the Chief Financial Officer
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.





32.1
                Certification by the Chief Executive Officer
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2Certification
                by the Chief Financial Officer
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





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:
                November 14, 2005
            VIKING
                SYSTEMS, INC.By/s/
                Thomas B. MarshChief
                Executive Officer, PresidentBy/s/
                Joseph WarrinoChief
                Financial Officer








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