**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-QSB**




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





**For
      the quarterly period ended September 30, 2007**




o 
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 small business issuer as specified in its charter)





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





134
      Flanders Road, Westborough, MA 01581


(Address
      of principal executive offices)





(508)
      366-3668


(Issuer's
      telephone number)




N/A


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





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.  Yes x  No o




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




As
      of
      December 14, 2007, there were 69,934,072 shares of our Common Stock
      outstanding.





Transitional
      Small Business Disclosure Format Yes o  No x











**FORM
      10-QSB**





**FINANCIAL
      STATEMENTS AND SCHEDULES**


**VIKING
      SYSTEMS, INC.**





**For
      the Quarter ended September 30, 2007**





**PART
      I - FINANCIAL INFORMATION**





Page
                ofForm
                10-QSBItem
                1.
            Financial
                Statements (unaudited):Balance
                Sheets at September 30, 2007 and December 31, 2006
            3Statements
                of Operations for the Three and Nine Months Ended September 30, 2007
                and
                2006
            4Statements
                of Cash Flows for the Nine Months Ended September 30, 2007 and
                2006
            5Notes
                to Financial Statements
            7-16Item
                2.
            Management's
                Discussion and Analysis or Plan of Operation
            17Item
                3.
            Controls
                and Procedures
            24




**PART
      II - OTHER INFORMATION**




PageItem
                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







**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1: FINANCIAL STATEMENTS**


**VIKING
      SYSTEMS, INC.**


**Balance
      Sheets - Unaudited**





**September
                30,**
              **2007**
            
            
            **December
                31,**
              **2006****Assets**Current
                assets:Cash
                and cash
                equivalents
            
            $
            919,848
            
            
            $
            440,465Accounts
                receivable, net of allowance of $109,604 and $0 at September 30,
                2007 and
                December 31, 2006, respectively.
            
            
            989,729
            
            
            
            855,299Inventories
            
            
            1,918,376
            
            
            
            1,117,929Prepaid
                expenses
            
            
            129,511
            
            
            
            34,208Other
                current
                assets
            
            
            196,620
            
            
            
            72,535Total
                current assets
            
            
            4,154,084
            
            
            
            2,520,436Property
                and equipment, net
            
            
            726,072
            
            
            
            594,402Debt
                issuance costs
            
            
            98,423
            
            
            
            -Intangible
                assets, net
            
            
            297,500
            
            
            
            350,000Total
                Assets
            
            $
            5,276,079
            
            
            $
            3,464,838**Liabilities
                and Stockholders' Deficit**Current
                liabilities:Accounts
                payable
            
            $
            1,071,122
            
            
            $
            1,037,334Accrued
                expenses
            
            
            2,240,904
            
            
            
            1,780,302Deferred
                revenue
            
            
            137,839
            
            
            
            100,181Capital
                lease obligations -
                current
            
            
            38,016
            
            
            
            36,649Notes
                payable
            
            
            1,274,681
            
            
            
            350,000Derivative
                liabilities
            
            
            14,236,267
            
            
            
            3,373,676Total
                current liabilities
            
            
            18,998,829
            
            
            
            6,678,142Capital
                lease obligations
            
            
            46,039
            
            
            
            77,253Commitments
                and contingenciesPreferred
                stock, $0.001 par value, 25,000,000 shares authorizedSeries
                B preferred stock, $0.001 par value; 8,000 shares issued; 7,793 and
                8,000
                shares outstanding at September  30, 2007 and December 31, 2006
                respectively, (aggregate liquidation preference of $8,658,999 at
                September 30, 2007 and $8,391,014 at December 31, 2006).
            
            
            8,658,999
            
            
            
            8,391,014Stockholders'
                deficit:Common
                stock, $.001 par value, 400,000,000 shares authorized, 69,656,675
                shares
                issued and outstanding at September 30, 2007; 200,000,000 shares
                authorized and 61,864,941 shares issued and outstanding at December
                31,
                2006.
            
            
            69,657
            
            
            
            61,865Additional
                paid-in capital
            
            
            8,092,538
            
            
            
            6,804,876Accumulated
                deficit
            
            
            (30,589,983
            )
            
            
            (18,548,312
            )Total
                stockholders' deficit
            
            
            (22,427,788
            )
            
            
            (11,681,571
            )Total
                liabilities and stockholders' deficit
            
            $
            5,276,079
            
            
            $
            3,464,838




See
      accompanying notes to financial statements




3


**VIKING
      SYSTEMS, INC.**


**Statements
      of Operations - Unaudited**




**Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30,**
            
            
            **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Sales,
                net
            
            $
            1,856,162
            
            
            $
            1,514,591
            
            
            $
            6,630,951
            
            
            $
            3,652,615Cost
                of sales
            
            
            1,598,833
            
            
            
            1,012,554
            
            
            
            5,013,804
            
            
            
            2,645,254Gross
                profit
            
            
            257,329
            
            
            
            502,037
            
            
            
            1,617,147
            
            
            
            1,007,361Operating
                expenses:General
                and administrative
            
            
            1,106,199
            
            
            
            706,777
            
            
            
            2,486,761
            
            
            
            1,920,401Selling
                and marketing
            
            
            1,073,121
            
            
            
            1,311,849
            
            
            
            3,641,921
            
            
            
            3,321,458Research
                and development
            
            
            563,214
            
            
            
            445,023
            
            
            
            1,601,643
            
            
            
            1,069,283Total
                operating expenses
            
            
            2,742,534
            
            
            
            2,463,649
            
            
            
            7,730,325
            
            
            
            6,311,142Operating
                loss
            
            
            (2,485,205
            )
            
            
            (1,961,612
            )
            
            
            (6,113,178
            )
            
            
            (5,303,781
            )Other
                income (expense):Interest
                income
            
            
            12,316
            
            
            
            31,147
            
            
            
            41,770
            
            
            
            52,934Interest
                expense
            
            
            (257,315
            )
            
            
            (118,126
            )
            
            
            (670,230
            )
            
            
            (424,121
            )Gain
                on extinguishment of debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,975,824Amortization
                of debt discount
            
            
            (700,741
            )
            
            
            -
            
            
            
            (1,306,227
            )
            
            
            (8,480,878
            )Accrued
                liquidated damages
            
            
            (429,248
            )
            
            
            -
            
            
            
            (1,006,864
            )
            
            
            -Loss
                on abandonment of property and equipment
            
            
            (100,883
            )
            
            
            -
            
            
            
            (100,883
            )
            
            
            -Gain
                (loss) on derivative liability
            
            
            (2,270,162
            )
            
            
            3,549,839
            
            
            
            (2,886,059
            )
            
            
            1,937,229Net
                (loss) income
            
            $
            (6,231,238
            )
            
            $
            1,501,248
            
            
            $
            (12,041,671
            )
            
            $
            (7,242,793
            )Series
                B Preferred stock accretion to redemption and  accrued
                dividend
            
            
            (156,278
            )
            
            
            (161,315
            )
            
            
            (481,001
            )
            
            
            (8,229,699
            )Net
                (loss) income  applicable to common stockholders
            
            $
            (6,387,516
            )
            
            $
            1,339,933
            
            
            $
            (12,522,672
            )
            
            $
            (15,472,492
            )Net
                (loss) income applicable to common stockholders per share -
                basic
            
            $
            (0.09
            )
            
            $
            0.02
            
            
            $
            (0.19
            )
            
            $
            (0.32
            )Basic
                weighted average shares
            
            
            68,659,089
            
            
            
            61,864,941
            
            
            
            66,194,627
            
            
            
            47,769,802Diluted
                (loss) earnings per common share
            
            $
            (0.09
            )
            
            $
            0.01
            
            
            $
            (0.19
            )
            
            $
            (0.32
            )Diluted
                weighted average shares
            
            
            68,659,089
            
            
            
            106,536,537
            
            
            
            66,194,627
            
            
            
            47,769,802




See
      accompanying notes to financial statement**s**




4


**VIKING
      SYSTEMS, INC.**


**Statements
      of Cash Flows - Unaudited**


Nine
      months ended September 30,


**2007**
            
            **2006****Cash
                flows from operating activities:**Net
                loss
            
            $
            (12,041,671
            )
            $
            (7,242,793
            )Adjustment
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            409,545
            
            
            279,859Common
                stock issued for services
            
            
            -
            
            
            44,041Stock
                based compensation expense
            
            
            289,316
            
            
            540,229Amortization
                of debt discount
            
            
            1,306,227
            
            
            8,480,878Gain
                on extinguishment of debt
            
            
            -
            
            
            (4,975,824
            )Loss
                on abandonment of property and equipment
            
            
            100,883
            
            
            -Loss
                (gain) on derivative liability
            
            
            2,886,058
            
            
            (1,937,229)Change
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            (134,430
            )
            
            (663,592
            )Inventories,
                net
            
            
            (1,230,480
            )
            
            (754,259
            )Prepaid
                expenses
            
            
            (95,303
            )
            
            32,440Other
                current assets
            
            
            (124,085
            )
            
            (49,260
            )Accounts
                payable
            
            
            33,788
            
            
            343,371Accrued wages
                and salaries
            
            
            (27,097
            )
            
            (1,706
            )Accrued
                royalties
            
            
            -
            
            
            78,792Other
                accrued expenses
            
            
            1,764,353
            
            
            232,216Deferred
                revenue
            
            
            37,658
            
            
            68,844Net
                cash used in operating activities
            
            
            (6,825,238)
            
            
            (5,523,993
            )**Cash
                flows from investing activities:**Purchase
                of property and equipment
            
            
            (159,565
            )
            
            (322,446
            )Net
                cash used in investing activities
            
            
            (159,565
            )
            
            (322,446
            )**Cash
                flows from financing activities:**Net
                change in short-term bank borrowings
            
            
            -
            
            
            184,673Proceeds
                from issuance of preferred stock, net
            
            
            
            -
            
            7,250,000Payment
                of convertible debt and preferred stock offering costs
            
            
            (84,967
            )
            
            (436,142)Proceeds
                from exercise of stock options
            
            
            4,000
            
            
            -Proceeds
                from related party notes
            
            
            300,000
            
            
            200,000Repayment
                of capital lease obligations
            
            
            (29,847
            )
            
            (200,000
            )Proceeds
                from convertible debt
            
            
            7,275,000
            
            
            250,000Net
                cash provided by financing activities
            
            
            7,464,186
            
            
            7,248,531Net
                increase in cash and cash equivalents
            
            
            479,383
            
            
            1,402,092Cash
                and cash equivalents at beginning of period
            
            
            440,465
            
            
            434,503Cash
                and cash equivalents at end of period
            
            $
            919,848
            
            $
            1,836,595**Supplemental
                disclosure of cash flow information:**Cash
                paid during the period for:Interest
            
            $
            178,368
            
            $
            332,754Income
                taxes
            
            $
            -
            
            $
            -





See
      accompanying notes to financial statements


5


**Non-Cash
      Investing and Financing Activity**


*Nine
      months ended September 30, 2007:*





During
      the nine months ended September 30, 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 related party Donald Tucker, at the time a significant shareholder
                and
                the Company's President and Chief Executive Officer, into $300,000
                original principal amount of the Company’s 8% Secured Convertible
                Debentures due February 23, 2009·
            Issued
                4,000,000 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.·
            Issued
                1,202,165 shares of common stock in connection with the conversion
                of 207
                shares of the Company’s Series B Preferred stock plus accrued but unpaid
                dividends on the stock that was converted.·
            Recorded
                derivative liability of $5,376,533 in connection with the Company’s
                issuance in February 2007 of its 8% Secured Convertible Debentures
                due
                February 23, 2009.·
            Issued 2,389,570 shares of common stock as payment for interest and
              liquidated damages on the Company's convertible
              debt.





During
      the**nine months ended September 30, 2006, the
      Company*:*





·
            Converted
                $4,300,000 of convertible notes payable into 23,888,891 shares of
                common
                stock.·
            Converted
                $450,000 of convertible notes payable held by Donald Tucker, at the
                time a
                significant shareholder and the Company's  President and Chief
                Executive Officer, into 2,500,000 shares of common
                stock.·
            Converted
                $750,000 of convertible notes payable into 750 shares of Series B
                Preferred stock·
            Issued
                837,000 shares of common stock pursuant to a cashless exercise of
                1,000,000 non-qualified stock options issued in December
                2003.





·
            Acquired computer equipment and software through capital leases in
                the
                amount of $123,639.




See
      accompanying notes to financial statements




6


**1.           
      INTERIM FINANCIAL STATEMENTS**





The
      balance sheet of Viking Systems, Inc. (“we,” “us, “our,” “Viking” or the
“Company”) as of September 30, 2007 and the statements of operations and cash
      flows for the periods ended September 30, 2007 and 2006 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 balance sheet as
      of
      December 31, 2006 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, 2006,
      included in Viking's Form 10-KSB filed on March 27, 2007 with the Securities
      and
      Exchange Commission. The results of operations and cash flows for the three
      and
      nine months ended September 30, 2007 are not necessarily indicative of results
      to be expected for the fiscal year ending December 31, 2007.





**2.       
          LIQUIDITY, GOING CONCERN AND PROPOSED
      RECAPITALIZATION**





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 incurred
      significant losses and has not demonstrated the ability to generate sufficient
      cash flows from operations to satisfy its liabilities and sustain operations.
      Our independent registered public accounting firm included a going concern
      uncertainty explanatory paragraph in their report dated March 23, 2007, which
      is
      included in our Form 10-KSB for the year ended December 31, 2006.





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 ended September 30, 2007, the Company generated net proceeds of
      approximately $7.5 million from financing activities. In addition, the Company
      continues to examine all aspects of its business for areas of improvement and
      in
      October 2007 reported significant changes to its operating
      strategy.





On
      October 12, 2007, the Company reported the resignation of three of its directors
      and its President and Chief Executive Officer and the appointment of three
      new
      directors and a new President and Chief Operating Officer.





Despite
      significant efforts to raise capital, the Company does not have sufficient
      capital to continue to operate its business as historically
      conducted.  In light of the Company's current financial position, in
      order to preserve existing capital and to facilitate ongoing efforts to raise
      additional capital, the Board of Directors has approved a revised strategic
      direction for the Company.





Going
      forward, the Company is focusing its operations on its Original Equipment
      Manufacturing (“OEM”) business and has significantly reduced its 3Di Vision
      Systems business, which will continue on a reduced basis through the Company's
      existing distributor network.





The
      Company believes that this revised strategic direction enables it to eliminate
      expenses, primarily associated with the 3Di Vision Systems business,
      that are not expected to generate positive cash flow in the near
      term.  The Company has initiated several cost cutting measures aimed
      at eliminating expenses, including a significant reduction in force focused
      on
      the elimination of the Company's U.S. direct sales force and a reduction in
      related clinical and marketing expenses. Despite reducing its expenses, the
      Company requires immediate funding in order to continue its reduced operations.
      The Company is in discussions regarding funding with certain investors that
      have
      expressed support for the revised strategic direction and indicated preliminary
      interest in providing financial support.





The
      Company is in default under the terms of its Secured Convertible Debentures,
      which were issued in February and July 2007.  Consequently, the
      holders of these debentures may demand immediate repayment.  If such
      demand request were made, the Company would not have the financial resources
      to
      satisfy its outstanding obligations.  The Company is in discussions
      with the debenture holders regarding modifications to the terms of the
      debentures, but there can be no assurance that such efforts will be
      successful.





**Proposed
      Recapitalization.**On November 13, 2007, the Company received
      approval, subject to execution of final documentation, from 100% of the holders
      of  both its Series B  Convertible Preferred Stock (the
“Preferred Stock”) and the Company's 8% Secured Convertible Debentures due
      February 23, 2009 (the “Debentures”), of a plan to recapitalize the Company (the
“Plan”).  The Plan calls for an additional investment of between $2.5
      and $3.0 million in the common stock of the Company (the “New Investment”) and a
      redistribution of the Company's common stock among the current holders of the
      Company's common stock, Preferred Stock, Debentures and the investors providing
      the New Investment.


7




The
      redistribution of the Company's ownership is planned to be implemented through
      (i) a 1:50 “reverse split” of the Company's common stock, (ii) entry of the
      Company into one or more exchange agreements (or conversion agreements) with
      the
      applicable holders, pursuant to which the holders of the Preferred Stock and
      Debentures will exchange (or convert) their respective Company securities
      (including modification of the amount and terms of existing warrants that were
      issued in connection with the Preferred Stock and the Debentures) for shares
      of
      the Company's common stock; and (iii) entry of the Company into a subscription
      agreement with those parties making the New Investment pursuant to which they
      will be issued shares of the Company's common stock and warrants which may
      be
      exercised for shares of the Company's common stock.  Certain of these
      actions will require an affirmative vote of a majority of the current holders
      of
      the Company's common stock.   A majority of the Company's
      outstanding common stock is held by holders of the Debentures who have
      previously approved the proposed recapitalization.  On November 19,
      2007, the Company received shareholder approval of the 1:50 reverse
      split.





Successful
      implementation of the Plan is subject to a variety of risks and the Company
      can
      make no assurances that the Plan as presented will be implemented successfully,
      or at all.  If the Plan is completed as currently proposed, the
      Company's common stock ownership would be substantially as follows (excluding
      warrants and stock options):





Percent Ownership
                Assuming New Investment ($ in millions)Stockholder
                by type
            
            $
            2.5
            
            
            $
            3.0Current
                common stock
            
            
            3.3%
            
            
            
            3.1%Current
                Preferred Stock
            
            
            10.0%
            
            
            
            9.4%Current
                Debentures
            
            
            53.4%
            
            
            
            50.0%New
                investment
            
            
            33.3%
            
            
            
            37.5%Total—all
                holders
            
            
            100.0%
            
            
            
            100.0%





The
      terms
      of the New Investment include 100% warrant coverage.  For each share
      of common stock issued to the investors providing the New Investment, one
      warrant to purchase a share of the Company's common stock will also be
      issued.  The warrant will have an exercise price equal to the per
      share valuation of the Company implied by the price per share of the common
      stock issued for the New Investment inclusive of the new capital
      raised.





The
      terms
      of the existing warrants issued in connection with the Debentures and Preferred
      Stock will be modified and reduced (or exchanged) to provide those holders
      one
      warrant for every two shares of common stock issued in exchange for their
      current Notes and Convertible Stock.  These modified (or exchanged)
      warrants will have an exercise price equal to the price of the warrants issued
      in connection with the New Investment.





The
      Company believes that if the Plan is implemented, it will provide the Company
      with sufficient liquidity until the Company can begin generating positive cash
      flow anticipated in the second half of 2008, based upon (i) the $2.5 to $3.0
      million of New Investment; (ii) the reduced cost structure which is an integral
      part of the Company's revised strategic direction, as previously disclosed
      in
      the Company's Current Report on Form 8-K, filed with the Securities and Exchange
      Commission on October 15, 2007; and (iii) the revised capital structure of
      the
      Plan, including the corresponding reduction in accrual and payment of interest
      and dividends regarding the Preferred Stock and the Debentures, as
      applicable.  However, the Company can provide no assurance that a
      breakeven point will be reached in 2008, or at all, or that additional capital
      will not be required by the Company to reach a breakeven point, or
      otherwise.  If additional capital is required by the Company beyond
      that contemplated by the Plan, no assurance can be made that such capital will
      be available to the Company on commercially reasonable terms, or at
      all.  Any additional capital required in the future could have a
      detrimental impact on stockholders of the Company.  The Company
      anticipates implementation of the Plan and receipt of the related funding in
      January 2008, however, no assurance can be made that this will be implemented
      by
      such date, or at all.





The
      Plan
      was presented to the Board of Directors of the Company by an investment group
      led by William C. Bopp, recently appointed and current  Chairman of
      the Board of Directors of the Company and a Debenture holder.  Under
      the terms of the Plan, following its implementation, Mr. Bopp would continue
      to
      serve as the Company's Chairman of the Board and become Chief Executive
      Officer.  The Plan provides that Mr. Bopp would enter into a
      twenty-four month lock-up agreement regarding his holdings of the Company's
      common stock.  J. Winder Hughes, a recently appointed and current
      member of the Company's Board of Directors and a Debenture holder, is also
      a
      member of Mr. Bopp's investment group.





To
      assist
      in the Company's evaluation of alternative courses of action (including the
      Plan) available in light of the Company's previously disclosed financial
      condition, on October 30, 2007 the Board of Directors established a Special
      Committee of the Board of Directors (the “Special Committee”).  The
      Special Committee membership comprises those members of the Board of Directors
      who do not hold investment in either the Debentures or Preferred Stock, and
      it
      includes one outside director, Richard M Kipperman, as Special Committee
      chairman.


8





In
      seeking the approval of the Plan from holders of Debentures and holders of
      Preferred Stock, the Special Committee also requested from them any alternative
      proposal that had committed funding adequate to permit the Company to continue
      its operations without a court-supervised reorganization.  None, other
      than the Plan, was forthcoming.  The Company notes that any such
      alternative proposal should be delivered to the Special Committee as soon as
      possible, such that it may be considered.





The
      Company can provide no assurance that the Plan or any competing proposal will
      be
      adopted by the Company or that any other particular action will be taken by
      the
      Company.  Implementation of the Plan will be subject to a variety of
      items, including, but not limited to the Company's ability to obtain various
      approvals from third-parties and the Company's ability to successfully obtain
      final consents and approvals from holders of its common stock, Preferred Stock
      and Debentures.





As
      previously disclosed, if the Company cannot successfully
      implement the Plan, it will consider other options, including legal
      reorganization protection.





**3.           
      EARNINGS (LOSS) PER SHARE**





The
      following table illustrates the calculation of basic and diluted earnings (loss)
      per common share:





For
                the three
              months
              ended
              September
                30,
              2007
            
            
            For
                the three
              months
              ended
              September
                30,
              2006
            
            
            For
                the nine
              months
              ended
              September
                30,
              2007
            
            
            For
                the nine
              months
              ended
              September
                30,
              2006BasicNet
                income (loss) applicable to common stockholders
            
            $
            (6,387,516
            )
            
            $
            1,339,933
            
            
            $
            (12,522,672
            )
            
            $
            (15,472,492
            )Basic
                weighted average shares
            
            
            68,659,089
            
            
            
            61,864,941
            
            
            
            66,194,627
            
            
            
            47,769,802Basic
                earnings (loss) per share
            
            $
            (0.09
            )
            
            $
            0.02
            
            
            $
            (0.19
            )
            
            $
            (0.32
            )DilutedNet
                income (loss) applicable to common stockholders
            
            
            (6,387,516
            )
            
            $
            1,501,247
            
            
            $
            (12,522,672
            )
            
            $
            (15,472,492
            )Weighted
                average common shares outstanding
            
            
            68,659,089
            
            
            
            61,864,941
            
            
            
            66,194,627
            
            
            
            47,769,802Add:
              
              Conversion
                of Preferred Series B
            
            
            -
            
            
            
            44,444,444
            
            
            
            -
            
            
            
            -Exercise
                of stock options
            
            
            -
            
            
            
            227,152
            
            
            
            -
            
            
            
            -Diluted
                weighted average shares
            
            
            68,659,089
            
            
            
            106,536,537
            
            
            
            66,194,627
            
            
            
            47,769,802Diluted
                earnings (loss) per common share
            
            $
            (0.09
            )
            
            $
            0.01
            
            
            $
            (0.19
            )
            
            $
            (0.32
            )




Due
      to
      the net losses for the three month period ended September 30, 2007 and the
      nine
      month periods ended September 30, 2007 and 2006, potentially dilutive securities
      have been excluded in the calculation of diluted loss per share because their
      inclusion would be anti-dilutive. Accordingly, the weighted average shares
      used
      in the calculation of basic and diluted loss per share for those periods are
      the
      same. For the purposes of this calculation, net loss for the three month period
      ended September 30, 2006 has been adjusted for dividends on preferred stock
      accrued during the period.




9


**4.           INVENTORY**




Details
      of our inventory account balances are as follows:





**September
                30,**
              **2007**
            
            
            **December
                31,**
              **2006**Inventories:Parts
                and supplies
            
            $
            1,045,191
            
            
            $
            558,669Work-in-progress
            
            
            390,217
            
            
            
            344,483Finished
                goods
            
            
            564,505
            
            
            
            310,559Valuation
                reserve
            
            
            (81,537
            )
            
            
            (95,782
            )$
            1,918,376
            
            
            $
            1,117,929





**5.           ACCRUED
      EXPENSES**





Accrued
      expenses consist of the following:





**September
                30,**
              **2007**
            
            
            **December
                31,**
              **2006**Accrued
                wages and salaries
            
            $
            325,293
            
            
            $
            352,390Accrued
                liquidated damages
            
            
            693,178
            
            
            
            840,000Accrued
                registration delay fees
            
            
            355,808
            
            
            
            192,300Accrued
                board of director fees
            
            
            241,126
            
            
            
            151,625Accrued
                debenture interest
            
            
            142,775
            
            
            
            -Other
                accrued expenses
            
            
            482,724
            
            
            
            243,987$
            2,240,904
            
            
            $
            1,780,302





**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 January
      1
      and September 30, 2007, the Company had no accruals for interest or penalties
      related to income tax matters.





**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.




10





Under
      the
      modified prospective approach, SFAS 123R applies to new awards and to awards
      that were outstanding on January 1, 2006 that are subsequently modified,
      repurchased or cancelled. Under the modified prospective approach, compensation
      cost includes compensation cost for all share-based payments granted prior
      to,
      but not yet vested on, January 1, 2006, based on the grant-date fair value
      estimated in accordance with the pro forma provisions of SFAS 123, and
      compensation cost for all share-based payments granted subsequent to January
      1,
      2006, based on the grant-date fair value estimated in accordance with the
      provisions of SFAS 123R. Prior periods were not restated to reflect the impact
      of adopting the new standard. During the three months ended September 30, 2007
      and 2006, the Company recorded $89,998 and $82,801 respectively, and during
      the
      nine months ended September 30, 2007 and 2006 the Company recorded $289,316
      and
      $325,165, respectively, in non-cash stock-based compensation expense pursuant
      to SFAS 123R. As of September 30, 2007, there was approximately $828,315
      total unrecognized compensation costs related to unvested options, which is
      expected to be recognized over a weighted average period of approximately 1.9
      years.





The
      fair
      value of stock options at date of grant was estimated using the Black-Scholes
      model with the following assumptions: expected volatility ranging from 76.89%
      to
      112.28%, expected term of 7.5 years, risk-free interest rate ranging from 4.30%
      to 5.23%, and expected dividend yield of 0%. Expected volatility is based on
      the
      historical volatilities of the Company's common stock. The expected life of
      employee stock options is determined using historical data of employee exercises
      and represents the period of time that stock options are expected to be
      outstanding. The risk free interest rate is based on U.S. Treasury constant
      maturing for the expected life of the stock option.





The
      following table summarizes the stock option transactions during the nine months
      ended September 30, 2007:





**Number
                of**
              **Shares**
            
            
            **Weighted
                - Average**
              **Exercise
                Price**
            
            
            **Weighted
                - Average**
              **Contractual
                Life**
              **(in
                years)**Options
                outstanding December 31, 2006
            
            
            6,976,000
            
            
            $
            0.42
            
            
            
            4.95Granted
            
            
            3,520,000
            
            
            
            0.23
            
            
            
            9.70Exercised
            
            
            (200,000
            )
            
            
            0.02
            
            
            
            -Cancelled
            
            
            (612,000
            )
            
            
            0.39
            
            
            
            -Options
                outstanding September  30, 2007
            
            
            9,684,000
            
            
            $
            0.36
            
            
            
            7.13Options
                exercisable at September 30, 2007
            
            
            4,840,000
            
            
            $
            0.44
            
            
            
            3.45




**8.           RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      June
      2006, the FASB ratified the consensus on Emerging Issues Task Force (“EITF”)
      Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental
      Authorities Should Be Presented in the Income Statement” (“EITF No. 06-3”). The
      scope of EITF No. 06-3 includes any tax assessed by a governmental authority
      that is directly imposed on a revenue-producing transaction between a seller
      and
      a customer and may include, but is not limited to, sales, use, value added,
      Universal Service Fund (“USF”) contributions and some excise taxes. The Task
      Force affirmed its conclusion that entities should present these taxes in the
      income statement on either a gross or a net basis, based on their accounting
      policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of
      Accounting Policies.” If such taxes are significant and are presented on a gross
      basis, the amounts of those taxes should be disclosed. The consensus on EITF
      No.
      06-3 is effective for interim and annual reporting periods beginning after
      December 15, 2006. The adoption of EITF No. 06-3 during the first quarter of
      2007 did not have a significant impact on our financial position, results of
      operations or cash flows.





In
      November 2006, the EITF reached a final consensus in EITF Issue 06-06 “Debtor's
      Accounting for a Modification (or Exchange) of Convertible Debt Instruments”
(“EITF No. 06-6”). EITF No. 06-6 addresses the modification of a convertible
      debt instrument that changes the fair value of an embedded conversion option
      and
      the subsequent recognition of interest expense for the associated debt
      instrument when the modification does not result in a debt extinguishment
      pursuant to EITF No. 96-19, “Debtor's Accounting or a Modification or Exchange
      of Debt Instruments.” The consensus should be applied to modifications or
      exchanges of debt instruments occurring in interim or annual periods beginning
      after November 29, 2006. The adoption of EITF No. 06-6 during the first quarter
      of 2007 did not have a material impact on our consolidated financial position,
      results of operations or cash flows.


11





In
      November 2006, the FASB ratified EITF Issue No. 06-7, “Issuer's Accounting for a
      Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
      the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
      No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF
      No. 06-7”). At the time of issuance, an embedded conversion option in a
      convertible debt instrument may be required to be bifurcated from the debt
      instrument and accounted for separately by the issuer as a derivative under
      SFAS
      No. 133, based on the application of EITF No. 00-19. Subsequent to the issuance
      of the convertible debt, facts may change and cause the embedded conversion
      option to no longer meet the conditions for separate accounting as a derivative
      instrument, such as when the bifurcated instrument meets the conditions of
      EITF
      No. 00-19 to be classified in stockholders' equity. Under EITF No. 06-7, when
      an
      embedded conversion option previously accounted for as a derivative under SFAS
      No. 133 no longer meets the bifurcation criteria under that standard, an issuer
      shall disclose a description of the principal changes causing the embedded
      conversion option to no longer require bifurcation under SFAS No. 133 and the
      amount of the liability for the conversion option reclassified to stockholders'
      equity. EITF No. 06-7 should be applied to all previously bifurcated conversion
      options in convertible debt instruments that no longer meet the bifurcation
      criteria in SFAS No. 133 in interim or annual periods beginning after December
      15, 2006, regardless of whether the debt instrument was entered into prior
      or
      subsequent to the effective date of EITF No. 06-7. The adoption of EITF 06-7
      during the first quarter of 2007 did not have a material impact on our financial
      position, results of operations or cash flows.




In
        December 2007, the FASB issued
        Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business
        Combinations” (“SFAS No. 141R).  SFAS 141R retains the fundamental
        requirements in SFAS 141 that the acquisition method of accounting (which
        SFAS
        141 called the*purchase
        method*) be used for
        all business combinations and for an acquirer to be identified for each business
        combination. SFAS 141R also establishes principles and requirements for how
        the
        acquirer: (a) recognizes and measures in its financial statements the
        identifiable assets acquired, the liabilities assumed, and any non-controlling
        interest in the acquiree; (b) improves the completeness of the information
        reported about a business combination by changing the requirements for
        recognizing assets acquired and liabilities assumed arising from contingencies;
        (c) recognizes and measures the goodwill acquired in the business
        combination or a gain from a bargain purchase; and (d) determines what
        information to disclose to enable users of the financial statements to evaluate
        the nature and financial effects of the business combination. SFAS No. 141R
        applies prospectively to business combinations for which the acquisition
        date is
        on or after the beginning of the first annual reporting period beginning
        on or
        after December 15, 2008. Early application is not permitted. The Company
        has not yet determined the impact, if any,  SFAS No. 141R will have on
        its financial statements.
 
 In
        December 2007, the FASB issued
        SFAS No. 160, “Non-controlling
        Interests in Consolidated
        Financial Statements”
(“SFAS NO. 160”). SFAS No. 160 amends
        ARB 51 to establish accounting and
        reporting standards for the non-controlling (minority) interest in a
        subsidiary and for the deconsolidation of a subsidiary. It clarifies that
        a
        non-controlling interest in a subsidiary is an ownership interest in the
        consolidated entity that should be reported as equity in the consolidated
        financial statements and establishes a single method of accounting for changes
        in a parent’s ownership interest in a subsidiary that do not result in
        deconsolidation. SFAS No. 160 is effective for fiscal years beginning on or
        after December 15, 2008. The Company has not yet determined the impact, if
        any, that SFAS No. 160 will have on its financial
        statements.





**9.           CONVERTIBLE
      NOTES PAYABLE**





During
      January 2007, we issued a $300,000 promissory note to Donald E. Tucker, our
      then
      chief executive officer who was also at the time a significant shareholder
      and
      one of our directors. This promissory note and  a $350,000 note to
      another party issued in December 2006, including accrued but unpaid interest
      thereon, were converted into the February 2007 debentures described
      below.




In
      February 2007, we issued a total of $5,376,533 of 8% secured convertible
      debentures due February 23, 2009.  Net proceeds from the issuance of
      these debentures consisted of $4,675,000 in cash, net of $45,000 of offering
      costs retained by certain of the investors, and conversion of $656,533 of notes
      payable and accrued interest. On July 31, 2007, an additional $2,600,000 of
      such
      debentures were sold on the same terms and conditions as sold in February
      2007.  We refer to these debentures, collectively, as the
“Debentures.”  The general terms of this financing are as
      follows:





Maturity
      Date.  The Debentures are due February 28, 2009, subject to
      acceleration rights which holders have in the event of default.





Interest
      Rate.  Eight percent per annum, payable quarterly and, subject to
      certain conditions, we may pay interest by issuing shares of our common
      stock.





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





Optional
      Redemption.  We may not prepay the Debentures, but we may redeem
      some or all of them if certain conditions are met.  If we redeem the
      debentures before the first anniversary date of their issuance, we must pay
      an
      amount equal to 120% of the principal amount of the Debentures being
      redeemed.  If we redeem the debentures after the first anniversary
      date of their issuance but before the second anniversary date of their issuance,
      we must pay an amount equal to 140% of the principal amount of the Debentures
      being redeemed. The conditions for optional redemption are currently not
      met.




Warrants.  As
      additional consideration, we issued to the purchasers of the Debentures,
      warrants to purchase shares of our common stock at an initial exercise price
      of
      $0.18 per share. In October 2007, the exercise price was reduced to $0.12 per
      share. The warrants expire on February 23, 2014.  The warrants provide
      that each holder is able to purchase that number of shares of common stock
      that
      equals 50% of the number of shares of common stock issuable upon conversion
      of
      the Debentures prior to adjustments.





Registration
      Rights.  We agreed to register with the shares of common stock
      issuable upon the conversion of the Debentures and exercise of the
      warrants.  We will pay all expenses and cost of registration except
      for commissions.  In the event that we fail to file or if the
      securities underlying the Debentures and warrants are not registered by the
      dates agreed to in the transaction documents, we will be required to pay
      liquidated damages to the holders. Such liquidated damages amount to 2% per
      month but will not exceed 18% of the face amount of the Debentures. We were
      required to file an initial registration statement by April 2, 2007, which
      has
      not yet been filed and which constitutes a default under the
      Debentures.


12





On
      July
      19, 2007, Viking and the Debenture holders at that time entered into a Consent,
      Waiver and Amendment Agreement dated June 22, 2007, pursuant to which Viking
      agreed to issue to the Debenture holders a total of 2,389,570 shares of common
      stock in lieu of the payment of (i) accrued but unpaid cash liquidated damages
      and (ii) the payment of accrued interest on the Debentures through June 30,
      2007. These shares were issued in July 2007.





The
      parties to the Consent, Waiver and Amendment Agreement also agreed to amend
      the
      registration obligations for the debentures issued in February
      2007.  This deferred the registration obligation until 30 days after
      the date on which the Company receives a registration demand from investors
      holding a majority of the debentures issued in February.  No such
      demand has been received from the Company. The registration rights of the
      debentures issued in July 2007 were not amended and as a result, the Company
      is
      accruing liquidated damages on the $2.6 million of debentures issued in
      July.  At September 30, 2007, the Company had accrued $142,775 related
      to interest and $104,000 related to the liquidated damages associated with
      the
      Debentures.





Optional
      Conversion by Investors.  The holder of each Debenture has the
      option to convert the Debenture into shares of our common stock.





Reset
      of Conversion Price.  In October 2007 we determined we did not
      meet the operational milestones contained in the Debentures for the quarter
      ended September 30, 2007.  As a result, the conversion price of the
      Debentures and the exercise price of the related warrants were reset from $0.18
      to $0.12 effective October 4, 2007.  This reset triggered
      additional changes to the conversion price of the Preferred Stock and its
      related warrants.





The
      following table sets forth the effect on the Debentures, Preferred Stock and
      the
      warrants associated with each as a result of the Company's not meeting one
      of
      the operational milestones, pursuant to the adjustment provisions contained
      in
      the agreements governing these securities:





Conversion
                  or Exercise
                Price
                  ($)
            
            Number
                  of Shares of Viking
                Common
                  Stock Issuable
                Upon
                  Conversion/ExerciseName
                  of Security
            
            Old
            New
            
            Old
            NewDebentures
            
            0.18
            0.12
            
            44,314,072
            66,471,108Warrants
                (associated with Debentures)
            
            0.18
            0.12
            
            22,157,026
            22,157,026Preferred
                Stock
            
            0.18
            0.146
            
            43,294,444
            53,376,712Warrants
                (associated with Preferred Stock)
            
            0.18
            0.12
            
            22,222,222
            33,333,333





Defaults.   We
      are in default under the terms of the Debentures.  We have not paid
      interest due on the Debentures for the quarter ended September 30, 2007 and
      have
      not met the registration requirements related to the Debentures.  We
      have not received notice of default from any holders of the debentures and
      are
      working with the holders on a recapitalization of the Company.  See
      Note 2.





Additional
      Information.





The
      Debentures were assessed under SFAS No. 133 and management determined that
      the
      conversion option represented an embedded derivative liability. Accordingly,
      the
      Company bifurcated the embedded conversion option and accounted for it as a
      derivative liability. In accordance with SFAS No. 133, the embedded conversion
      option of the Debenture was revalued each period end and the change in fair
      value was reflected as a gain (loss) for the period. The proceeds received
      on
      issuance of the February 2007 Debentures were first allocated to the fair value
      of the bifurcated conversion option and the fair value of the derivative
      liability resulting from the warrants issued in connection with these
      Debentures. The aggregate fair values of the embedded conversion option and
      the
      warrant derivative liability totaled $6,859,608. Of this total, $5,376,533
      was
      recorded as a discount to the face amount the February 2007 Debentures and
      $1,483,075 was recorded as a loss on derivative liability.





The
      proceeds received from issuance of the July 2007 Debentures were also first
      allocated to the conversion option and also the related warrants issued in
      connection with such debentures.  The aggregate fair value of the
      conversion option and the warrants was $3,562,507, with $2,600,000 recorded
      as a
      discount to these Debentures and the $962,507 recorded as a loss on derivate
      liability.


13




The
      recorded discount is being accreted as interest expense using the effective
      interest method over the term of the Debentures.




The
      carrying value of the Debentures will accrete up to the face value over the
      life
      of the Debentures. The Company recorded accretion of $1,274,681 during the
      nine
      months ended September 30, 2007 related to the Debentures. The amount recorded
      on the balance sheet at September 30, 2007 has been calculated as
      follows:





Face
                value of the February 2007 Debentures
            
            $
            5,376,533Discount
                recorded related to valuation of conversion feature
            
            
            (5,376,533
            )Face
                value of  the July 2007 Debentures
            
            
            2,600,000Discount
                recorded related to valuation of conversion feature
            
            
            (2,600,000)Accretion
                of discount
            
            
            1,274,681Carrying
                value at September 30, 2007
            
            $
            1,274,681





**10.          SERIES
      B CONVERTIBLE PREFERRED STOCK**





In
      May
      2006, our Board of Directors adopted a resolution designating a Series B
      preferred stock consisting of 8,000 shares. All 8,000 shares of Series B
      Preferred Stock (“Preferred Stock”) authorized have been issued. Each share of
      Preferred Stock, par value $0.001 per share, has a stated value of
      $1,000 per share (“Stated Value”).  In May 2006, the Company
      issued the Preferred Stock for gross proceeds of $8,000,000, and incurred
      approximately $436,143 in issuance costs, which are recorded as a discount
      to
      the carrying value of the Preferred stock. Proceeds from the sale of the
      Preferred Stock consisted of $7,250,000 in cash and the conversion of $750,000
      of convertible notes.





The
      Company applied the proceeds for general corporate purposes. The Company has
      recorded the redeemable convertible preferred stock as mezzanine equity on
      the
      accompanying balance sheet in accordance with the provisions of EITF Topic
      D-98:
“Classification and Measurement of Redeemable Securities” (“EITF Topic
      D-98”).





During
      the nine months ended September 30, 2007, the Company recorded preferred stock
      dividends of approximately $481,001 as an increase to the net loss available
      to
      common stockholders in the accompanying consolidated statement of operations.
      Dividends accrued and amounting to approximately $866,000 remain unpaid as
      of
      September 30, 2007.





The
      following table summarizes the change in carrying value of the Preferred Stock
      for the nine months ended September 30, 2007.




Carrying
                value at December 31, 2006
            
            $
            8,391,014Plus:Accrued
                dividends
            
            
            481,001Less:Conversion
                of shares to common stock
            
            
            (207,000
            )Dividend
                on converted preferred shares to common stock
            
            
            (6,016
            )Carrying
                value at September 30, 2007
            
            $
            8,658,999




A
      summary
      of the material terms of the Preferred Stock is set forth below.





Conversion.
      The Preferred Stock is convertible into shares of common stock at an initial
      conversion price of $0.18 per share.   The conversion price
      decreased in October 2007 to $0.146 per shares.  See Note
      9.





Dividends.
      The Preferred Stock has a dividend rate of 8% through May 22, 2009, increasing
      to 11% from May 23, 2009 through May 22, 2010, and 14% thereafter. The Company
      is in default with respect to its obligation to pay dividends on the Preferred
      Stock. We have accumulated unpaid preferred stock dividends at September 30,
      2007 in the amount of $866,000. The Company has not had sufficient capital
      to
      pay such dividends in cash and the Company does not have a contractual right
      to
      pay the dividends in common stock. We continue to accrue approximately $161,000
      in preferred dividends on a quarterly basis.





Registration
      Rights. In connection with the sale of the Preferred Stock, we agreed to
      register the shares of common stock issuable upon conversion of the Preferred
      Stock and exercise of the related warrants.  Although a certain amount
      of such shares of common stock have been registered, we were unable to register
      the entire amount required to be registered as a result of the SEC's application
      of Rule 415. The failure to register all of the shares required to be registered
      constituted a default.  We entered into a Consent, Waiver and
      Amendment Agreement with the holders of the Preferred Stock pursuant to which
      the parties agreed as follows:


14




·
            In
                exchange for the waiver by the Preferred Stock holders of the default
                with
                respect to the failure to register all of the shares of common stock
                required to be registered, we agreed to issue the Preferred Stock
                holders
                a total of 4,000,000 shares of common stock·
            The
                Preferred Stock holders consented to the issuance of the Debentures
                and
                agreed to waive certain breaches of the Preferred Stock financing
                documents, and we agreed to amend certain provisions of the Preferred
                Stock documents to modify the terms of the 22,222,222 warrants issued
                in
                connection with the Preferred Stock to reduce the exercise price
                from
                $0.35 to $0.18 and increase the contractual life from five years
                to seven
                years.





Liquidated
      damages in the amount $840,000 were accrued as of December 31, 2006 based on
      the
      estimated fair value of the four million shares of common stock issued by the
      Company in February 2007 pursuant to this Consent, Waiver and Amendment
      Agreement.





As
      discussed above, a registration statement covering certain of the shares of
      common stock required to be registered for resale by the holders of the
      Preferred Stock was declared effective on August 10, 2006.  As of May
      11, 2007, the effectiveness of such registration statement lapsed.  As
      a result, on or about July 11, 2007, the Preferred Stock holders had the right
      to additional dividends and/or redemption in exchange for common stock, and
      are
      entitled to liquidated damages. We have accrued $589,178 at September 30, 2007
      for such liquidated damages. We prepared and filed a post-effective amendment
      to
      the registration statement which was declared effective on September 28,
      2007.





**11.           DERIVATIVE
      LIABILITIES**





Evaluation
      of criteria under EITF Issue 00-19, “Accounting for Derivative Instruments
      Indexed to and Potentially Settled in, a Company's own Stock,” resulted in the
      determination that the fair value of warrants to purchase common stock issued
      in
      connection with the Preferred Stock, and all other issued and outstanding
      warrants, should be classified as derivative liabilities. In
      accordance with EITF 00-19, warrants classified as derivative liabilities are
      marked to market value each reporting period with the corresponding non-cash
      gain or loss reflected in the current period. We estimate the value of the
      derivatives using the Black-Scholes option pricing model.  Utilization
      of this model requires use of assumptions including volatility and discount
      rates.  We use the historical volatility rates of our common stock and
      the risk free interest rate is based on U.S. Treasury constant maturing for
      the
      expected life of the derivative. The expected volatility used ranges from 98%
      to
      126%, the risk-free interest rate is 5%, and expected dividend yield of
      0%.





The
      following table summarizes warrants to purchase common stock outstanding as
      of
      September 30, 2007:





**Shares**
            
            
            **Range
                of Exercise Prices**
            
            
            **Weighted
                Average Exercise Prices**
            
            
            **Weighted
                Average Remaining Contractual Life (in years)**Warrants
                outstanding December 31, 2006
            
            
            31,694,444
            
            
            $
            0.35
                - 0.75
            
            
            $
            0.25
            
            
            
            4.56Granted
            
            
            22,157,026
            
            
            
            0.18
            
            
            
            0.18
            
            
            
            6.41Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Cancelled
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
                outstanding September 30, 2007
            
            
            53,851,470
            
            
            $
            0.18
                - 0.75
            
            
            $
            0.22
            
            
            
            5.32




See
      Note
      9 regarding changes to number of warrants and exercise prices effective October
      2007 related to the Company not meeting certain operating
      milestones.





During
      the nine months ended September 30, 2007, we granted warrants to purchase a
      total of 22,157,026 shares of common stock to the purchasers of the
      Debentures.


15




In
      February 2007, we granted warrants to purchase a total of 22,222,222 shares
      of
      common stock to the purchasers of the Preferred Stock at an initial exercise
      price of $0.35, which was subsequently reduced to $0.18 in connection with
      the
      issuance of the Debentures in February 2007. The life of these warrants also
      increased from five years to seven years.





As
      discussed in Note 9, the Company recorded the embedded conversion option of
      the
      Debentures as a derivative liability. The aggregate fair value of the derivative
      liability for all warrants and the conversion option derivative liability on
      September 30, 2007 was $14,236,267.





The
      loss
      on derivative liability is comprised of the following:





**Three
                months ended September 30, 2007**
            
            
            **Nine
                months ended September 30, 2007**Loss
                on derivative liability upon issuance of Debentures
            
            $
            962,507
            
            
            $
            2,445,582Change
                in estimated valuation of derivative liability  during the
                period
            
            
            1,307,655
            
            
            
            440,477Total
                loss on derivative liability
            
            $
            2,270,162
            
            
            $
            2,886,059




**12.          
      COMMON STOCK**




In
      January 2007, our stockholders approved an increase in the number of authorized
      shares of our common stock from 200,000,000 to 400,000,000. In May 2007, we
      filed an amendment to our certificate of incorporation with the Delaware
      Secretary of State to effect such change.




**13.**         **RELATED
      PARTY TRANSACTIONS**




During
      the nine months ended September 30, 2007, the following related party
      transactions occurred:





·
            During  2007,
                we issued a $300,000 promissory note to Donald E. Tucker, at the
                time
                our  President, CEO and director, who was also a significant
                shareholder. The promissory note was subsequently converted into
                Debentures in February 2007.·
            During
                June 2007, we received $200,000 from Brian Miller, at the time a
                shareholder and director, as a deposit which was subsequently converted
                into Debentures in July 2007.





During
      the nine months ended September 30, 2006, the following related party
      transactions occurred:





·
            Converted
                a $450,000 related party note payable to Donald E. Tucker, at the
                time a
                significant shareholder and the Company's  President and CEO,
                into 2,500,000 shares of common stock.·
            Had
                an unsecured note payable to Donald E. Tucker, at the time significant
                shareholder and the Company's  President and CEO, in the amount
                of $200,000. This note was repaid on June 14, 2006.·
            Issued
                87,500 warrants to purchase common stock at an exercise price of
                $0.35 per
                share to Donald E. Tucker, at the time a significant shareholder
                and the
                Company's  President and CEO.·
            Cancelled
                1,187,500 warrants to purchase common stock at an exercise price
                of $0.40
                per share that were previously issued to Donald E. Tucker, at the
                time a
                significant shareholder and the Company's  President and
                CEO.




**14.**          **SUBSEQUENT
      EVENTS**





On
      November 19, the Company’s
      stockholders authorized the Company to implement a 1 for 50 reverse stock split
      in connection with the recapitalization discussed in Note 2 to these financials
      above.




16


**ITEM
                2:**
            **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OR PLAN 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 Report. This Management's
      Discussion and Analysis or Plan of Operations contains descriptions of our
      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.***





**Forward
      Outlook and Risks**





This
      Form
      10-QSB contains 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 us are expressly qualified in their entirety by the cautionary statements
      referred to in this section. We disclaim, however, any intent or obligation
      to
      update our forward-looking statements.





As
      described in this quarterly report (below and elsewhere) there have been
      material changes to the quantitative and qualitative disclosures of our Risk
      Factors previously reported in the Annual Report contained in the Company's
      Form
      10-KSB for the year ended December 31, 2006. See “Risk Factors” in the Company's
      in the Management’s Discussion and Analysis Section of  Form 10-KSB for the
      year ended December 31, 2006 and the entire Item 2 of this Form 10-QSB for
      a
      detailed discussion.




**Overview**





The
      Company designs, manufactures, and markets FDA-cleared high performance
      laparoscopic vision systems. We manufacture advanced two dimensional (“2-D”)
      digital cameras that are sold through strategic partner and original equipment
      manufacture (“OEM”) programs. We also sell our 3Di Digital Vision System (the
“3Di System”), an advanced three dimensional (“3-D”) vision system used by
      surgeons for complex minimally invasive surgery.





**Use
      of Estimates and Critical Accounting Policies**





This
      Management's Discussion and Analysis or Plan of Operation discusses 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 the 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.


17





***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.





***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, 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
      subsequent to December 31, 2003 remain open to examination by U.S. federal
      and
      state tax authorities. In addition, the Company's policy is to recognize
      interest and penalties related to income tax matters in income tax expense.
      As
      of January 1 and September 30, 2007, the Company 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. 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 years ended December 31, 2006 and 2005, 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, and 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. The allocation of fair value for a
      multiple-element arrangement is based on vendor specific objective evidence
      (“VSOE”) or in absence of VSOE for delivered elements, the residual method. In
      the absence of VSOE for undelivered elements, revenue is deferred and
      subsequently recognized over the term of the arrangement. 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 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.





***Valuation
      of Derivative Liabilities.*** At each balance sheet date, the
      fair value of all warrants and other derivative liabilities are remeasured,
      and
      any changes in the fair value are recorded as a gain or loss on derivatives
      in
      the statement of operations. We estimate the value of the derivatives using
      the
      Black-Scholes option pricing model.  Utilization of this model
      requires use of assumptions including volatility and discount
      rates.  We use the historical volatility rates of our common stock and
      the risk free interest rate is based on U.S. Treasury constant maturing for
      the
      expected life of the derivative.


18





**Recent
      Accounting Pronouncements**





In
      June
      2006, the FASB ratified the consensus on Emerging Issues Task Force (“EITF”)
      Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental
      Authorities Should Be Presented in the Income Statement” (“EITF No. 06-3”). The
      scope of EITF No. 06-3 includes any tax assessed by a governmental authority
      that is directly imposed on a revenue-producing transaction between a seller
      and
      a customer and may include, but is not limited to, sales, use, value added,
      Universal Service Fund (“USF”) contributions and some excise taxes. The Task
      Force affirmed its conclusion that entities should present these taxes in the
      income statement on either a gross or a net basis, based on their accounting
      policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of
      Accounting Policies.” If such taxes are significant and are presented on a gross
      basis, the amounts of those taxes should be disclosed. The consensus on EITF
      No.
      06-3 will be effective for interim and annual reporting periods beginning after
      December 15, 2006. The adoption of EITF 06-3 during the first quarter of 2007
      did not have a material impact on our financial position, results of operations
      or cash flows.





In
      November 2006, the EITF reached a final consensus in EITF Issue 06-06 “Debtor's
      Accounting for a Modification (or Exchange) of Convertible Debt Instruments”
(“EITF No. 06-6”). EITF No. 06-6 addresses the modification of a convertible
      debt instrument that changes the fair value of an embedded conversion option
      and
      the subsequent recognition of interest expense for the associated debt
      instrument when the modification does not result in a debt extinguishment
      pursuant to EITF No. 96-19, “Debtor's Accounting or a Modification or Exchange
      of Debt Instruments.” The consensus should be applied to modifications or
      exchanges of debt instruments occurring in interim or annual periods beginning
      after November 29, 2006. The adoption of EITF 06-6 during the first quarter
      of 2007 did not have a material impact on our financial position, results of
      operations or cash flows.





In
      November 2006, the FASB ratified EITF Issue No. 06-7, “Issuer's Accounting for a
      Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
      the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
      No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF
      No. 06-7”). At the time of issuance, an embedded conversion option in a
      convertible debt instrument may be required to be bifurcated from the debt
      instrument and accounted for separately by the issuer as a derivative under
      SFAS
      No. 133, based on the application of EITF No. 00-19. Subsequent to the issuance
      of the convertible debt, facts may change and cause the embedded conversion
      option to no longer meet the conditions for separate accounting as a derivative
      instrument, such as when the bifurcated instrument meets the conditions of
      EITF
      No. 00-19 to be classified in stockholders' equity. Under EITF No. 06-7, when
      an
      embedded conversion option previously accounted for as a derivative under SFAS
      No. 133 no longer meets the bifurcation criteria under that standard, an issuer
      shall disclose a description of the principal changes causing the embedded
      conversion option to no longer require bifurcation under SFAS No. 133 and the
      amount of the liability for the conversion option reclassified to stockholders'
      equity. EITF No. 06-7 should be applied to all previously bifurcated conversion
      options in convertible debt instruments that no longer meet the bifurcation
      criteria in SFAS No. 133 in interim or annual periods beginning after December
      15, 2006, regardless of whether the debt instrument was entered into prior
      or
      subsequent to the effective date of EITF No. 06-7. Earlier application of EITF
      No. 06-7 is permitted in periods for which financial statements have not yet
      been issued. The adoption of EITF 06-7 during the first quarter of 2007 did
      not have a material impact on our financial position, results of operations
      or
      cash flows.




In
          December 2007, the FASB issued
          Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business
          Combinations” (“SFAS No. 141R).  SFAS 141R retains the fundamental
          requirements in SFAS 141 that the acquisition method of accounting (which
          SFAS
          141 called the*purchase
          method*) be used for
          all business combinations and for an acquirer to be identified for each
          business
          combination. SFAS 141R also establishes principles and requirements for
          how the
          acquirer: (a) recognizes and measures in its financial statements the
          identifiable assets acquired, the liabilities assumed, and any non-controlling
          interest in the acquiree; (b) improves the completeness of the information
          reported about a business combination by changing the requirements for
          recognizing assets acquired and liabilities assumed arising from contingencies;
          (c) recognizes and measures the goodwill acquired in the business
          combination or a gain from a bargain purchase; and (d) determines what
          information to disclose to enable users of the financial statements to
          evaluate
          the nature and financial effects of the business combination. SFAS No.
          141R
          applies prospectively to business combinations for which the acquisition
          date is
          on or after the beginning of the first annual reporting period beginning
          on or
          after December 15, 2008. Early application is not permitted. The Company
          has not yet determined the impact, if any,  SFAS No. 141R will have on
          its financial statements.
 
 In
          December 2007, the FASB issued
          SFAS No. 160, “Non-controlling
          Interests in Consolidated
          Financial Statements”
(“SFAS NO. 160”). SFAS No. 160 amends
          ARB 51 to establish accounting and
          reporting standards for the non-controlling (minority) interest in a
          subsidiary and for the deconsolidation of a subsidiary. It clarifies that
          a
          non-controlling interest in a subsidiary is an ownership interest in the
          consolidated entity that should be reported as equity in the consolidated
          financial statements and establishes a single method of accounting for
          changes
          in a parent’s ownership interest in a subsidiary that do not result in
          deconsolidation. SFAS No. 160 is effective for fiscal years beginning on or
          after December 15, 2008. The Company has not yet determined the impact, if
          any, that SFAS No. 160 will have on its financial
          statements.




19


**RESULTS
      OF OPERATIONS**





**Three
      Month and Nine Month Periods Ended September 30, 2007 Compared to the Three
      and
      Nine Month Periods Ended September 30, 2006**





***Revenues.*****For
      the three months ended September 30, 2007, we had sales of $1,856,162 compared
      with sales of $1,514,591 for the three months ended September 30, 2006. This
      represents an increase of $341,571, or 23%. Sales to individual customers
      exceeding 10% or more of revenues in the three months ended September 30, 2007
      were to four customers who accounted for 20%, 14%, 13%, and 10% of revenues,
      respectively. For the nine months ended September 30, 2007, we had sales of
      $6,630,751 compared with sales of $3,652,615 for the nine months ended September
      30, 2006. This represents an increase of $2,977,410, or 82%. Sales to individual
      customers exceeding 10% or more of revenues in the nine months ended September
      30, 2007 were to three customers who accounted for 21%, 19%, and 14% of
      revenues, respectively. The increase in sales for both the three and nine month
      periods ended September 30, 2007, as compared with the same periods in the
      prior
      year, was due to increased sales of the Company's 3-D vision systems and
      increased volume of cameras and related components sold to OEM
      customers.





***Gross
      Profit.*** We had gross profit of $257,329, or 14% of total revenues,
      for the three months ended September 30, 2007 and gross profit of $502,037,
      or
      33% of total revenues, for the three months ended September 30, 2006,
      representing a decrease of $244,708.  The decrease in gross profit and
      gross profit as a percentage of sales was due to higher concentration of sales
      of lower margin OEM products during the current quarter.





We
      had
      gross profit of $1,617,147, or 24% of total revenues, for the nine months ended
      September 30, 2007 and gross profit of $1,007,361 or 28% of total revenues,
      for
      the nine months ended September 30, 2006, representing an increase of $609,786.
      The increase in gross profit during in the first nine months of 2007 as compared
      with same period in 2006 was due to higher sales.





***Selling
      and Marketing Expenses*****.**  Selling and
      marketing expenses include costs for sales, marketing personnel, sales and
      marketing activities and tradeshow expenses. Selling and marketing expenses
      were
      $1,073,121 for the three months ended September 30, 2007 and $1,311,849 for
      the
      three months ended September 30, 2006. For the nine months ended September
      30,
      2007, selling and marketing expenses were $3,641,921 compared with $3,321,458
      for the nine months ended September 30, 2006. The reduction in selling and
      marketing expenses for the three month period ended September 30, 2007 over
      the
      same period last year was due to the reduction in a senior marketing position
      earlier in 2007 as well as having two less regional sales persons during the
      2007 period.    The year to date increase in sales and
      marketing expenses was  due to a variety of factors including the
      addition of a director of OEM sales and increase sales efforts in that line
      of
      business, increased****travel, depreciation on demonstration
      equipment and tradeshow expense associated with our efforts to develop market
      awareness and to build our former sales organization for our 3Di products.
      We
      expect that our quarterly selling and marketing expenses will substantially
      decrease as, in October 2007, we eliminated our direct sales force and certain
      marketing personnel related to our 3Di Systems.





***Research
      and Development Expenses.*****Research and development
      expenses include costs associated with the design, development, testing and
      enhancement of our products*.*Research and development expenses were
      $563,214 for the three months ended September 30, 2007 and $445,023 for the
      three months ended September 30, 2006. For the nine months ended September
      30,
      2007 research and development expenses were $1,601,643 compared with $1,069,283
      for the nine months ended September 30, 2006. The year-over-year increase is
      primarily due to hiring of additional engineering personnel to support new
      development projects, the development of the HD generation of the 3Di system,
      including the new Personal Head Display (“PHD”) which was launched in May 2007
      and the development of our 2D HD OEM product





***General
      and Administrative Expenses.***** General and
      administrative expenses include costs for administrative personnel, legal and
      accounting expenses and general corporate matters. We had general and
      administrative expenses of $1,106,199 for the three months ended September
      30,
      2007 and $706,777 for the three months ended September 30, 2006. For the nine
      months ended September 30, 2007, general and administrative expenses were
      $2,486,761 compared with $1,920,401 for the nine months ended September 30,
      2006. The increase for both periods is primarily due to increased expense
      associated with personnel, information systems and legal.  For the
      quarter ended September 30, 2007, general and administrative expense included
      approximately $400,000 of costs associated with the unsuccessful acquisition
      of
      Tuebingen Scientific.





***Other
      Income and Expenses.***We had interest income of $12,316 and $31,147
      for the three months ended September 30, 2007 and 2006, respectively, and
      $41,770 and $52,394 for the nine months ended September 30, 2007 and 2006,
      respectively. Interest income for 2006 was higher as a result of the higher
      cash
      balances in interest earning accounts.


20





Interest
      expense amounted to $257,315 for the three months ended September 30, 2007
      compared with $118,126 for the three months ended September 30, 2006. Interest
      expense amounted to $670,230 for the nine months ended September 30, 2007
      compared with $424,121 for the nine months ended September 30, 2006. Interest
      expense for the nine months ended September 30, 2007 is primarily related to
      the
      interest on the Debentures and fees for failure to register common shares
      related to the convertible notes that were converted to common May stock in
      2006.





We
      had a
      $4,975,824 gain on the extinguishment of debt for the nine months ended
      September 30, 2006. We had no such income in the comparable period in 2007.
      The
      gain on extinguishment of debt resulted from the difference between the deemed
      reacquisition value of the convertible notes on the date conversion terms were
      modified in 2006 ($5,250,000) less the fair value of the modification of the
      warrants issued under the new conversion terms ($274,176).





We
      had
      non-cash amortization of debt discount of $700,741 for the three months ended
      September 30, 2007. We had no amortization of debt discount in the same period
      of 2006 as no debt securities were outstanding during that
      period.  Amortization of debt discount for the nine months ended
      September 30, 2007 totaled $1,306,227 compared with $8,480,878 of debt discount
      amortization and write-off for the same period in 2006. The amount for the
      nine
      months ended September 30, 2006 included $5,250,000 in non-cash expense
      representing the deemed reacquisition value of convertible notes due to
      modification of their conversion terms.





We
      also
      had accrued liquidated damages in the amount $429,248 for the three months
      ended
      September 30, 2007. There were no such amounts for 2006. Those amounts related
      to the expense related to the failure to register the common shares underlying
      the Preferred Stock and the Debentures.





We
      also a
      non-cash loss on the valuation of our derivative liabilities in the amount
      of
      $2,270,162 for the three months ended September 30, 2007 and a non cash gain
      of
      $3,549,839 for the three months ended September 30, 2006. For the nine months
      ended September 30, 2007 and 2006, we recognized a non-cash loss on derivative
      liability in the amounts of $2,886,059 and a non-cash gain of $1,937,229,
      respectively. The valuation of our derivative liabilities relates to the
      estimated value of outstanding derivative instruments (warrants and the
      conversion feature of the Debentures).





**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      have
      financed our operations principally through private sales of equity securities
      and convertible debt. From January 1, 2004 through September 30, 2007, we have
      raised net proceeds of $8,150,000 through the sale of common and preferred
      stock
      in private placements and approximately $13,600,000 through the issuance of
      convertible debentures. As of September 30, 2007, we had cash and cash
      equivalents of $919,848. We incurred operating losses in 2007 and 2006, and
      at
      September 30, 2007, had an accumulated deficit of approximately
      $30,600,000.





Net
      cash
      used in operating activities was $6,825,238****and $5,523,993
      during the nine months ended September 30, 2007 and 2006, respectively. The
      increase in net cash used in operating activities during 2007 compared to 2006
      was attributable primarily to a larger net loss in 2007 and cash consumed
      supporting increases in inventories related to the growth in the Company's
      business.





Net
      cash
      used in investing activities was $159,565 and $322,446 during the nine months
      ended September 30, 2007 and 2006, respectively. The higher level of cash used
      in investing activities in 2006 was attributable to purchases of demonstration
      equipment of our 3Di product line in support of our sales and marketing
      efforts.





Cash
      provided by financing activities was $7,464,186 and $7,248,531 during the nine
      months ended September 30, 2007 and 2006, respectively. The cash provided by
      financing activities in the nine months ended September 30, 2007 was primarily
      from the $7,275,000 in proceeds received from issuance of the Debentures. The
      cash provided by financing activities in 2006 primarily consisted of $7,250,000
      in net proceeds from issuance of the Preferred Stock.





Despite
      significant efforts to raise capital, the Company does not have sufficient
      capital to continue to operate its business as historically
      conducted.  In light of the Company's current financial position, in
      order to preserve existing capital and to facilitate ongoing efforts to raise
      additional capital, the Board of Directors has approved a revised strategic
      direction for the Company.





Going
      forward, the Company is focusing its operations on its Original Equipment
      Manufacturing (“OEM”) business and has significantly reduced its 3Di Vision
      Systems business, which will continue on a reduced basis through the Company's
      existing distributor network.


21




The
      Company believes that this revised strategic direction enables it to eliminate
      expenses, primarily associated with the 3Di Vision Systems business, that do
      not
      generate positive cash flow in the near term.  The Company has
      initiated several cost cutting measures aimed at eliminating expenses, including
      a significant reduction in force focused on the elimination of the Company's
      U.S. direct sales force and a reduction in related clinical and marketing
      expenses.    Despite reducing its expenses, the Company
      requires immediate funding in order to continue its reduced
      operations.  The Company is in discussions regarding funding with
      certain investors that have expressed support for the revised strategic
      direction and indicated preliminary interest in providing financial
      support.





The
      Company is in default under the terms of the debentures it issued in February
      and July 2007.  Consequently, the holders of these debentures may
      demand immediate repayment.  If such demand request was made, the
      Company would not have the financial resources to satisfy its outstanding
      obligations.  The Company is in discussions with the debenture holders
      regarding modifications to the terms of the debentures, but there can be no
      assurance that such efforts will be successful.


.


On
      November 13, 2007, the Company received approval, subject to execution of final
      documentation, from 100% of the holders of its Preferred Stock and the
      Debentures, of a plan to recapitalize the Company.  See “Note 2.
      LIQUIDITY, GOING CONCERN AND PROPOSED RECAPITALIZATION,” to the Company's
      financial statements included under Item 1 of this report for a detailed
      discussion regarding the proposed recapitalization plan.  The Company
      can provide no assurance that the proposed plan or any competing proposal will
      be adopted by the Company or that any other particular action will be taken
      by
      the Company.  Implementation of the proposed plan will be subject to a
      variety of items, including, but not limited to the Company's ability to obtain
      various approvals from third-parties and the Company's ability to successfully
      obtain final consents and approvals from holders of its common stock, Preferred
      Stock and Debentures.  If the Company cannot successfully implement
      the proposed plan, it will consider other options, including legal
      reorganization protection.





***Off-Balance
      Sheet Arrangements.*** We do not have any off balance sheet
      arrangements that are reasonably likely to have a current or future effect
      on
      our financial condition, changes in our financial condition revenues or
      expenses, results of operation, liquidity, capital expenditures or capital
      resources that is material to our investors.




***Issuance
      of Debentures.*** During the nine months ended September 30,
      2007, Viking Systems****issued a total of $7,976,533 of 8%
      convertible debentures. These Debentures mature February 23, 2009 or may be
      accelerated upon default by Viking Systems. We are required to pay interest
      on
      these Debentures at 8% per annum. The Debentures are secured by all of the
      assets of Viking Systems. The Debentures may, at the option of the Investors,
      be
      converted into shares of Viking Systems common stock.  The Company did
      not achieve certain operational milestones (described in the Debentures and
      related Warrants transaction documents).  As a result, effective
      October 2007, the conversion price was reduced from its original price of $.18
      to $.12 per share (see Note 9 to the financial statements regarding this price
      adjustment).  The conversion price is also subject to other downward
      adjustment, upon certain conditions pursuant to the terms of Security Purchase
      Agreement, the Debentures and other Transaction Documents. Other terms and
      conditions of the Debentures are described in Note 9 to the financial statements
      included in this form 10-QSB.





As
      additional consideration for the Investors purchasing the Debentures, Viking
      Systems issued approximately 22.2 million warrants to purchase shares of Viking
      Systems common stock at the price of $0.18 per share. The exercise price of
      these warrants was also reduced to $.12 per share due to failure to meet an
      operational milestone.  The exercise price is also subject to other
      downward adjustment, upon certain conditions pursuant to the terms of Security
      Purchase Agreement, the Warrant and other Transaction Documents.




Viking
      Systems has agreed to register with the Securities and Exchange Commission,
      the
      shares of common stock that are issuable upon the conversion of the Debentures
      and the shares of common stock that underlie the Warrants. Viking Systems will
      pay all expenses and cost of registration except for commissions. In the event
      the securities underlying the debentures and warrants are not registered by
      the
      dates agreed to in the transaction documents, Viking Systems will be required
      to
      pay liquidated damages to the Holders. Such liquidated damages amount to 2%
      per
      month but will not exceed 18% of the face amount of the Debentures. Viking
      Systems has not filed a registration statement relating to the shares underlying
      the Debentures and warrants we issued in February 2007, which constitutes a
      default by Viking Systems of the terms and conditions of the Debenture
      transaction documents.


22





On
      July
      19, 2007, Viking Systems and the Debenture holders at that time entered into
      a
      Consent, Waiver and Amendment Agreement dated June 22, 2007, pursuant to which
      Viking agreed to issue to the Investors a total of 2,389,570 shares of Viking
      common stock in lieu of the payment of (i) accrued but unpaid cash liquidated
      damages and (ii) the payment of accrued interest on the debentures through
      June
      30, 2007. These shares were issued by Viking in July 2007.  The
      parties to the Consent, Waiver and Amendment Agreement also agreed to amend
      the
      registration obligations for the debentures issued in February
      2007.  This deferred the registration obligation until 30 days after
      the date on which the Company receives a registration demand from investors
      holding a majority of the debentures issued in February.  No such
      demand has been received from the Company. The registration rights of the
      debentures issued in July 2007 were not amended and as a result, the Company
      is
      accruing liquidated damages on the $2.6 million of debentures issued in
      July.





***Obligation
      to Pay Interest on Our Convertible Debentures.*** We have accrued
      unpaid interest on the  Debentures in the amount of $142,775 at
      September 30, 2007. In July 2007, the Debenture holders agreed to receive an
      interest payment of $107,531 for the quarter ended June 30, 2007 in the form
      of
      Company's common stock at $0.18 per share totaling 597,394 shares.





***Obligations
      to Pay Dividends on Our Preferred Stock.*** The Company is in default
      with respect to its obligation to pay dividends on the Series B Preferred Stock.
      We have accumulated unpaid preferred stock dividends at September 30, 2007
      in
      the amount of $866,000. The Company has not had sufficient capital to pay such
      dividends in cash. Although the Company does not have a contractual right to
      pay
      the dividends in common stock, we intend to discuss with our preferred
      shareholders paying the accrued dividends and future dividends in stock. There
      can be no assurance that the preferred stockholders will allow dividends to
      be
      paid with shares rather than cash and if this were to occur, Viking may not
      have
      the cash necessary to pay such dividends. We continue to accrue approximately
      $156,000 in preferred dividends on a quarterly basis or until the preferred
      stock is converted into common stock.





***Potential
      Impact from Defaults.*** The Transaction Documents relating to both
      the Preferred Stock Transaction and the  Debenture Transaction are
      complex, subject us to numerous requirements and provide the investors with
      numerous rights, including, but not limited to, liquidated damages rights,
      default rights, rights to accelerate required payments and required repurchase
      rights. We have been in default in certain provisions of the Transaction
      Documents for both transactions. Some of these defaults were related to our
      obligations to register underlying securities. We have received some waiver
      of
      some of the defaults in the past, but there can be no assurance that we have
      received waivers for all of such defaults or that we will receive waivers for
      any future defaults. If the investors in the Preferred Stock transaction and
      the
      Debenture transaction were to declare a default and demand repayment or exercise
      other rights, there can be no assurance that we would be able to continue with
      our business operations. In such event, our shareholders would likely suffer
      a
      complete loss of their investment.




***Failure
      to Achieve and Maintain Effective Internal Controls.***Pursuant to
      current rules related to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section
      404”), beginning with our Annual Report on Form 10-KSB for the fiscal year
      ending December 31, 2007, we will be required to furnish a report by our
      management on our internal control over financial reporting.




In
      order
      to achieve compliance with Section 404 within the prescribed period, we will
      need to engage in and complete a process to document and evaluate our internal
      control over financial reporting, which will be both costly and challenging.
      In
      this regard, management will need to dedicate internal resources, engage outside
      consultants and adopt a detailed work plan. Due to the financial condition
      of
      the Company and its limited financial and human resources, the Company may
      not
      be able to complete the evaluation of internal controls for the fiscal year
      ending December 31, 2007 during the year.  The implications of not
      being able to complete such evaluation in a timely manner have not been made
      clear by the SEC or other regulatory bodies.





During
      the course of our testing, we may identify deficiencies that we may not be
      able
      to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act
      for
      compliance with the requirements of Section 404. In addition, if we fail to
      achieve and maintain the adequacy of our internal controls, as such standards
      are modified, supplemented or amended from time to time, we may not be able
      to
      ensure that we can conclude on an ongoing basis that we have effective internal
      controls over financial reporting in accordance with Section 404 of the
      Sarbanes-Oxley Act. Moreover, effective internal controls,  are
      necessary for us to produce reliable financial reports and are important to
      helping prevent financial fraud. If we are unable to comply with Section 404
      requirements on a timely basis, or if we cannot provide reliable financial
      reports or prevent fraud, then our business and operating results could be
      harmed, investors could lose confidence in our reported financial information,
      and the trading price of our stock could drop significantly.


23




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 that occurred during the last quarter that have materially
      affected, or are reasonably likely to materially affect our internal control
      over financial reporting.





**ITEM
      3:                      CONTROLS
      AND PROCEDURES**




Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that information required to be disclosed in our reports filed pursuant
      to the Exchange Act is recorded, processed, summarized and reported within
      the
      time periods specified in the SEC's rules and forms and that such information
      is
      accumulated and communicated to our management, including our principal
      executive officer and chief financial officer, as appropriate, to allow for
      timely decisions regarding required disclosure.  We maintain such
      disclosure controls and procedures.





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
      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 not effective
      at the reasonable assurance level discussed above. They have concluded that
      there are deficiencies in our controls.  We are reviewing our disclosure
      controls and procedures and our internal controls over financial reporting
      and
      attempting to implement changes to our controls and procedures to
      improve their effectiveness. These changes are expected to include hiring of
      additional finance and accounting personnel, enhancements to improve our
      internal review process, improved communication among those responsible for
      financial accounting and disclosure and more formalized processes and
      procedures.  Lack of sufficient capital has adversely impacted our ability
      to improve our controls and procedures.





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 that occurred during the last quarter that have materially
      affected, or are reasonably likely to materially affect our internal control
      over financial reporting.




24


**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.**





During
      the quarter ended September 30, 2007, we issued an aggregate of 2,800,758 shares
      of our common stock in an unregistered transaction. Approximately 211,188 shares
      were issued in connection with the conversion of convertible Series B preferred
      stock and certain accrued dividends into shares of our common stock at the
      price
      of $.18 per share. We also issued 2,389,570 shares in July 2007 at the price
      of
      $.18 per share to our debenture holders for payment of the July 1, 2007
      quarterly interest payment and as liquidated damages for not timely registering
      the underlying shares in connection with debentures.  We also issued
      200,000 common at the exercise price of $0.02 per share in connection with
      the
      exercise on stock options to a former director.  Such shares of common
      stock and Series B Preferred Stock were not registered and were issued in
      reliance on Section 4(2) of the Securities Act of 1933, as amended.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES.**





The
      Company is in default under the terms of the debentures it issued in February
      and July 2007 for failure to pay interest and failure to register the shares
      of
      common stock issuable upon conversion of the debentures.  For more
      information, see “Note 9. Convertible Notes Payable” to our financial statements
      included in “Item 1. Financial Statements” of Part 1 of this
      report.





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





None.





**ITEM
      5.********OTHER
      INFORMATION**.





None





**ITEM
      6. EXHIBITS**





ExhibitNumber
            Description31.1
            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




25


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:
                December 19, 2007
            VIKING
                SYSTEMS, INC.
              
              
              By
                /s/ John Kennedy
                
                Principal
                  Executive Officer, President
                
                
                By
                  /s/ Robert Mathews
                Chief
                    Financial Officer






26