U.S.
      SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549








FORM
      10-QSB/A


(Amendment
      No. 1)








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


SECURITIES
      EXCHANGE ACT OF 1934





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


OR


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


SECURITIES
      EXCHANGE ACT OF 1934


**Commission
      file number 000-49636**








**VIKING
      SYSTEMS, INC.**


(Name
      of
      Small Business Issuer as specified in its charter)





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





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


(Address
      of principal executive offices)





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





N/A


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





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





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





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





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





Common
      Stock outstanding at November 11, 2005, 34,639,050 shares of $.001 par value
      Common Stock.








DOCUMENTS
      INCORPORATED BY REFERENCE: NONE








**Explanatory
      Note**




This
      Amendment No. 1 to Viking Systems, Inc.’s (“Viking Systems” or the
“Company”) Quarterly Report on Form 10-QSB/A for the three and six month
      periods ended June 30, 2005 includes unaudited restated financial statements
      as
      of June 30, 2005 and for the three and six months then ended. The restatement
      affects the Company’s balance sheet at June 30, 2005, and its statements of
      operations, for the three and six months ended June 30, 2005 and the statement
      of cash flows for the six months ended June 30, 2005.




This
      Form
      10-QSB/A amends and restates Items 1, 2 and 3 Part I and Item 6 of Part II
      of the original Form 10-QSB, and no other information included in the original
      Form 10-QSB is amended hereby.




See
      Note
      2 in the Notes to Financial Statements for an explanation of the
      restatement.




The
      Audit
      Committee of the Company’s Board of Directors has reviewed the matter with
      management and with the Company’s independent registered public accounting firm.


















































2


**FORM
      10-QSB/A**





**FINANCIAL
      STATEMENTS AND SCHEDULES**


**VIKING
      SYSTEMS, INC.**





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





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





**PART
      I - FINANCIAL INFORMATION**


Page
      of


Form
      10-QSB








Item
                1.
            Financial
                Statements:Unaudited
                Balance Sheet at June 30, 2005 (restated)
            4Unaudited
                Statements of Operations for the Three and Six Months
              Ended
                June 30, 2005 (restated) and 2004
            5Unaudited
                Statements of Cash Flows for the Six Months
              Ended
                June 30, 2005 (restated) and 2004
            6
                - 7Notes
                to Financial Statements
            8
                - 10Item
                2.
            Management's
                Discussion and Analysis of Financial Condition
              and
                Results of Operations
            13Item
                3.
            Controls
                and Procedures, Evaluation of Disclosure Controls and
                Procedures
            24








**PART
      II - OTHER INFORMATION**





Page





Item
                1.
            Legal
                Proceedings
            25Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds.
            25Item
                3.
            Defaults
                Upon Senior Securities
            25Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            25Item
                5.
            Other
                Information
            25Item
                6.
            Exhibits
            26










3


**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1: FINANCIAL STATEMENTS**





**VIKING
      SYSTEMS, INC.**


**Unaudited
      Balance Sheet**


**June
      30, 2005**


**Assets**
            
            **(Restated)**Current
                assets:Cash
                and cash equivalents
            
            $
            100,144Accounts
                receivable, net
            
            
            351,341Inventories
            
            
            522,705Prepaids
                and other current assets
            
            
            73,128Total
                current assets
            
            
            1,047,318Property
                and equipment, net
            
            
            443,810$
            1,491,128**Liabilities
                and Stockholders' Equity**Current
                liabilities:Accounts
                payable
            
            $
            586,877Accrued
                expenses
            
            
            452,980Short-term
                bank borrowings
            
            
            166,000Convertible
                notes payable net of debt discount of $1,995,967
            
            
            754,033Total
                current liabilities
            
            
            1,959,890Commitment
                and contingenciesStockholders'
                deficit:Preferred
                stock, $.001 par value, 25,000,000 sharesauthorized,
                no shares issued and outstanding
            
            
            -Common
                stock, $.001 par value, 100,000,000 sharesauthorized;
                31,919,050 shares issued and outstanding
            
            
            31,919Additional
                paid-in capital
            
            
            4,555,071Accumulated
                deficit
            
            
            (5,055,752
            )Total
                stockholders' deficit
            
            
            (468,762
            )$
            1,491,128  See
              accompanying notes to financial statements
 4


**VIKING
      SYSTEMS, INC.**


**Unaudited
      Statements of Operations**


**Three
      and Six Months Ended June 30, 2005 and 2004**





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005
                (Restated)**
            
            **2004**
            
            **2005
                (Restated)**
            
            **2004**Sales,
                net
            
            $
            1,082,413
            
            $
            1,030,962
            
            $
            1,958,816
            
            $
            1,030,962Cost
                of sales
            
            
            806,425
            
            
            777,435
            
            
            1,425,650
            
            
            777,435Gross
                profit
            
            
            275,988
            
            
            253,527
            
            
            533,166
            
            
            253,527Operating
                expenses:General
                and administrative
            
            
            337,476
            
            
            300,734
            
            
            829,242
            
            
            412,410Selling
                and marketing
            
            
            695,225
            
            
            173,901
            
            
            1,169,043
            
            
            173,901Research
                and development
            
            
            235,904
            
            
            136,328
            
            
            427,280
            
            
            136,328Total
                operating expenses
            
            
            1,268,605
            
            
            610,963
            
            
            2,425,565
            
            
            722,639Operating
                loss
            
            
            (992,617
            )
            
            (357,436
            )
            
            (1,892,399
            )
            
            (469,112
            )Other
                income (expense):Interest
                expense
            
            
            (757,602
            )
            
            (751
            )
            
            (847,932
            )
            
            (751
            )Total
                other income (expense)
            
            
            (757,602
            )
            
            (751
            )
            
            (847,932
            )
            
            (751
            )Net
                loss
            
            $
            (1,750,219
            )
            $
            (358,187
            )
            $
            (2,740,331
            )
            $
            (469,863
            )Net
                loss per commonshare
                - basic and diluted
            
            $
            (0.06
            )
            $
            (0.04
            )
            $
            (0.09
            )
            $
            (0.05
            )Weighted
                average shares - basic
            
            
            31,911,000
            
            
            8,874,000
            
            
            31,331,000
            
            
            8,874,000Weighted
                average shares - diluted
            
            
            31,911,000
            
            
            8,874,000
            
            
            31,331,000
            
            
            8,874,000




See
            accompanying notes to financial statements
 5


**VIKING
      SYSTEMS, INC.**


**Unaudited
      Statements of Cash Flows**


**Six
      Months Ended June 30,**





**2005
                (Restated)**
            
            **2004****Cash
                flows from operating activities:**Net
                loss
            
            $
            (2,740,331
            )
            $
            (469,863
            )Adjustment
                to reconcile net loss to net cashused
                in operating activities:Depreciation
                and amortization
            
            
            108,255
            
            
            3,627Common
                Stock issued for services
            
            
            7,500
            
            
            -Amortization
                of debt discount
            
            
            754,033
            
            
            -Change
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            (73,574
            )
            
            (156,493
            )Inventories,
                net
            
            
            144,383
            
            
            (10,164
            )Prepaids
                and other current assets
            
            
            72,414
            
            
            (75,366
            )Accounts
                payable
            
            
            (954,077
            )
            
            308,991Accrued
                expenses
            
            
            118,491
            
            
            64,008Deferred
                revenue
            
            
            (159,150
            )
            
            (5,250
            )Net
                cash used in operating activities
            
            
            (2,722,056
            )
            
            (340,510
            )**Cash
                flows from investing activities:**Purchase
                of property and equipment
            
            
            (273,978
            )
            
            (15,127
            )Net
                cash paid in acquisition
            
            
            -
            
            
            (158,718
            )Net
                cash used in investing activities
            
            
            (273,978
            )
            
            (173,845
            )**Cash
                flows from financing activities:**Net
                change in short-term bank borrowings
            
            
            106,785
            
            
            -Proceeds
                from issuance of preferred stock
            
            
            -
            
            
            400,000Payments
                on capital lease obligations
            
            
            -
            
            
            (2,086
            )Proceeds
                from convertible debt
            
            
            2,750,000
            
            
            -Proceeds
                from related-party note payable
            
            
            100,000
            
            
            100,548Net
                cash provided by financing activities
            
            
            2,956,785
            
            
            498,462Net
                decrease in cash and cash equivalents
            
            
            (39,249
            )
            
            (15,893
            )Cash
                and cash equivalents at beginning of period
            
            
            139,393
            
            
            35,525Cash
                and cash equivalents at end of period
            
            $
            100,144
            
            $
            19,632**Supplemental
                disclosure of cash flow information:**Cash
                paid during the period for:Interest
            
            $
            23,797
            
            $
            -Income
                taxes
            
            $
            -
            
            $
            -


See
          accompanying notes to financial statements
 6


During
      the six months ended June 30, 2005, the Company:





·
            Allocated
                $825,000 of the proceeds from convertible notes payable to the value
                of
                the warrants issued and the remaining amount of the proceeds of $1,925,000
                to the value of the beneficial conversion feature, recording the
                total
                amount of proceeds of $2,750,000 as a debt
                discount.





·
            Converted
                a $500,000 note payable and $16,659 of accrued interest into 1,291,650
                shares of common stock.





During
      the six months ended June 30, 2004, the Company **** acquired
      certain assets of the visualization technologies business of Vista Medical
      Technologies, Inc. in exchange for cash, stock and the assumption of certain
      liabilities. Assets acquired, liabilities assumed, common stock issued, and
      cash
      paid in the acquisition is detailed as follows:





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











See
            accompanying notes to financial statements
 7





**VIKING
      SYSTEMS**


**Notes
      to Financial Statements(Unaudited)**


**Six
      Months Ended June 30, 2005 and 2004**








**1.
      Interim Financial Statements**





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





**2.
      Restated Financial Statements**





The
      Company restated its balance sheet as of June 30, 2005 and its statements of
      operations for the three and six months ended June 30, 2005, and its statement
      of cash flows for the six months ended June 30, 2005. This restatement related
      to the beneficial conversion feature recorded in connection with the issuance
      of
      convertible notes (see Note 6). The Company originally accounted for the
      beneficial conversion feature in accordance with EITF 98-5, which required
      the
      interest expense resulting from the beneficial conversion feature to be
      recognized at inception since the convertible notes were immediately
      convertible. EITF 00-27 revised the accounting treatment for beneficial
      conversion features. In accordance with EITF 00-27, beneficial conversion
      features are recorded as a debt discount and amortized into interest expense
      over the life of the note. Accordingly, the Company has restated the financial
      statements to record the beneficial conversion feature as a debt discount and
      record the applicable interest expense resulting from the beneficial conversion
      feature over the life of the notes (12 months) rather than at issuance of the
      notes.




The
      following table reflects the effects of this restatement on net loss and related
      loss per share.





As
                Reported Three
              Months
                Ended
              June
                30, 2005
            
            As
                Restated Three
              Months
                Ended
              June
                03, 2005
            
            As
                Reported Six
              Months
                Ended
              June
                30, 2005
            
            As
                Restated Six
              Months
                Ended
              June
                30, 2005Net
                loss
            
            $
            (1,268,970
            )
            $
            (1,750,219
            )
            $
            (4,117,548
            )
            $
            (2,740,331
            )Loss
                per share
            
            $
            (.04
            )
            $
            (.06
            )
            $
            (.13
            )
            $
            (.09
            )





8


**3.
      Stock-Based Compensation**





The
      Company accounts for its employee stock-based compensation plans using the
      intrinsic value method, as prescribed by APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related interpretations. Accordingly, the Company records deferred compensation
      costs related to its employee stock options when the current market price of
      the
      underlying stock exceeds the exercise price of each stock option on the
      measurement date (usually the date of grant). The Company records and measures
      deferred compensation for stock options granted to non-employees, other than
      members of the Company's Board of Directors, using the fair value based method.
      Deferred compensation is expensed on a straight-line basis over the vesting
      period of the related stock option. During the periods ended June 30, 2005
      and
      2004, the Company did not grant any stock options to employees or members of
      the
      Company's Board of Directors with exercise prices below the market price on
      the
      measurement date.





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





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





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005
                (Restated)**
            
            **2004**
            
            **2005
                (Restated)**
            
            **2004**Net
                loss, as reported
            
            $
            (1,750,219
            )
            $
            (358,187
            )
            $
            (2,740,331
            )
            $
            (469,863
            )Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            
            (16,749
            )
            
            (807
            )
            
            (33,499
            )
            
            (807
            )Pro
                forma net loss
            
            $
            (1,766,968
            )
            $
            (358,994
            )
            $
            (2,773,830
            )
            $
            (470,670
            )Earnings
                per share-Basic
                and diluted - as
              Reported
            
            $
            (0.06
            )
            $
            (0.04
            )
            $
            (0.09
            )
            $
            (0.05
            )Basic
                and diluted -
              pro
                forma
            
            $
            (0.06
            )
            $
            (0.04
            )
            $
            (0.09
            )
            $
            (0.05
            )








9




The
      weighted average fair value of options granted during the six months ended
      June
      30, 2005 is $0.36, and $0.35 during the six months ended June 30, 2004. The
      weighted average fair value and the pro forma expense noted above were
      calculated using the Black-Scholes option pricing model based on the following
      assumptions:





**2005**
            **2004**Expected
                dividend yield
            $
            -
            $
            -Expected
                stock price volatility
            
            34.68%
            
            33.85%Risk-free
                interest rate
            
            4.17%
            
            2.0%Expected
                life of options
            
            10
                years
            
            4
                years





**4.
      Going Concern**





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





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





During
      the first quarter of 2005, the Company raised approximately $2,750,000 through
      the issuance of convertible notes (the “Notes”). The Notes mature 12 months from
      the date of issuance, accrue interest at 10% per annum, and are secured by
      all
      of the assets of the Company. The notes also may be converted, at the option
      of
      the Investors, into shares of common stock of the Company at a conversion price
      of $.20 per share. The conversion price is subject to adjustment based on
      certain conditions of the Security Purchase Agreement. The Company may require
      conversion of the Notes if the Company raises $3 million in public or private
      equity offerings, at a price equal to or greater than $.30 per share of common
      stock, within 12 months of the date of issuance of the Notes. In connection
      with
      the issuance of the Notes, the Company also issued warrants to purchase common
      stock at a price of $.40 per share (subject to adjustment upon certain
      conditions pursuant to the terms of the Security Purchase Agreement). The
      warrants are exercisable for a period of 42 months from the date of issuance.
      Viking has agreed to register with the Securities and Exchange Commission and
      applicable state securities agencies, the shares of common stock that are
      issuable upon the conversion of the Notes and the shares of common stock that
      underline the Warrants.





10


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





Management
      believes that in order to continue its operations, development of its products,
      and implementation of its business plan, the Company will need additional
      financing. The Company is pursuing additional financing through a private
      placement offering of its common stock in which it is attempting to raise
      approximately $4 million during 2005. Additionally, the Company is continuing
      its efforts to increase revenues by obtaining new customers and to minimize
      operating costs. There can be no assurance that the Company will be successful
      in obtaining additional financing or in its efforts to increase revenues and
      decrease operating costs. If the Company is unable to obtain additional
      financing, it may be required to reduce operations, reduce or discontinue
      further research and development, and/or reduce or eliminate further acquisition
      activities.




**5.
      Loss Per Share**





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





The
      computation of diluted loss per common share is based on the weighted average
      number of shares outstanding during the period plus common stock equivalents
      which would arise from the exercise of stock options using the treasury stock
      method and the conversion of convertible instruments. Options and warrants
      to
      purchase 6,323,500 shares of common stock at prices ranging from $.02 to $.65,
      and debt convertible into 13,750,000 shares of common stock were outstanding
      at
      June 30, 2005, but were not included in the diluted loss per share calculation
      because the effect would have been antidilutive.





**6.
      Convertible Notes Payable**





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





11


$500,000
      of the $2,750,000 convertible notes were issued to a significant shareholder.
      $750,000 of the $2,750,000 convertible notes were issued to a company that
      appointed a member of our board of directors.





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





The
      conversion price of $0.20 was less than the fair market value of the stock
      of
      $0.40 on the date the convertible notes were issued, creating a beneficial
      conversion feature. Since the beneficial conversion feature was greater than
      the
      $1,925,000 allocated fair value of the convertible notes, the entire allocated
      amount of the convertible notes payable was recorded as beneficial conversion
      feature. Therefore, the entire amount of $2,750,000 was initially recorded
      as a
      debt discount to be amortized over the life of the notes (12 months), resulting
      in an effective interest rate of 110%. Using the effective interest method,
      $687,501 and $754,033 was amortized and recorded as interest expense during
      the
      three and six months ended June 30, 2005, respectively. The remaining debt
      discount will continue to be amortized over the remaining life of the
      notes.





**7.
      Conversion of Related Party Notes Payable**





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





**8.
      Acquisition**





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


12


**9.
      Subsequent Events**





Subsequent
      to the quarter ended June 30, 2005, the Company's Board of Directors approved
      a
      bridge financing round of up to $4,000,000 in convertible notes. In August
      2005,
      we raised $500,000 through the issuance of convertible notes (the “Notes”) and
      expect to receive up to $3,500,000 more through the sale of the Notes. The
      Notes
      mature 12 months from the date of issuance, accrue interest at 10% per annum,
      and are secured by all of our assets. The Notes may be converted, at the option
      of the Investors, into shares of our common stock. The conversion price and
      terms are dependent upon the terms of a proposed private or public offering
      of
      our securities that we anticipate will commence during the current quarter.
      We
      anticipate the conversion price will be approximately 20% less than the offering
      price per share in such anticipated public or private offering. In connection
      with the issuance of the Notes, we also issued warrants to purchase common
      stock
      at a price of $0.60 per share or other price subject to adjustment upon certain
      conditions pursuant to the terms of the transaction.





On
      August
      12, 2005, the holder of a $500,000 convertible promissory note issued by Viking,
      converted such note into 2,500,000 shares of Viking’s common stock.





**10.
      Interest Expense**




As
      noted
      in Note 6, during the six months ended June 30, 2005, the company recorded
      interest expense of $754,033 as a result of the beneficial conversion feature
      of
      the convertible notes payable.





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


**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**





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





**Overview**





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





Discussion
      of our financial results relative to the quarter ending June 30, 2005. Our
      current results are best understood in the context of our objectives and results
      during the balance of 2004 and the first part of 2005. During 2004, our mission
      consisted of making the following substantial investments in the Company’s
      products, marketing programs, infrastructure and personnel:


13


·
            In
                April 2004, Viking purchased the assets of Vista Medical Technologies,
                Inc.’s proprietary 3D surgical visualization
                business.





·
            New
                high resolution 2D cameras were introduced in the first half of 2004
                to
                the Company’s key Original Equipment Manufacturers (“OEM”) accounts,
                underscoring our continuing commitment to the OEM business which
                remained
                at historical revenue levels.





·
            Substantial
                investment was made in the upgrade, redevelopment, expansion and
                re-branding of the 3Di Digital Vision product line from April through
                October 2004, after suspending active selling of the systems product
                post
                acquisition.





·
            Significant
                marketing expenses were incurred for the re-launch of the 3Di Digital
                Vision System at the American College of Surgeons Conference in October
                2004.





·
            Senior
                sales management and regional sales managers were recruited to launch
                the
                sales of our new 3Di Digital Vision Systems in the second half of
                2004.





In
      the
      first quarter of 2005, we continued the progress begun in 2004 with investment
      in sales personnel, training, equipment and marketing programs. We expanded
      our
      trade show schedule from four to thirteen in 2005 and tripled the size of our
      direct sales force in the US. We have added two independent sales representative
      firms to supplement our coverage and expect to add several more by year end.
      Our
      international distribution already counts six distributors compared to none
      last
      year. We believe our investments in our products, technology, new markets and
      organization in 2004 and early 2005 will generate a substantial improvement
      in
      our operations in late 2005 and 2006. Our improvements in the technology and
      focus on the commercialization of this technology are expected to produce growth
      in our system placements from 20 in 2005 to 600 in 2008.





In
      the
      second quarter of 2005, we continued our progress in the general surgical market
      and started developing new markets. Our primary focus has been in the Urology
      market and we have began working with several surgeons at top academic
      institutions to validate the efficacy of 3D visualization in surgery, in
      particular the Laparoscopic Radical Prostatectomy (LRP), and surgical training.
      Late in the quarter we established similar programs with OB/GYN surgeons in
      developing that specialty.  Preliminary results of the first study will be
      published in August 2005.





We
      are
      the strategic visualization supplier to several leading procedure-specific
      medical device manufacturers such as Aesculap and Richard Wolf. We provide
      high
      resolution 2D cameras to these OEM customers and added new programs with Boston
      Scientific and Medtronic the second quarter. As the procedural business of
      our customers continues to shift to minimally invasive techniques, we
      intend to attempt to introduce new products, services and capabilities to
      respond to this growing business segment. We are committed to the growth of
      our
      OEM business and believe our engineering capabilities and advanced
      technologies make us an attractive strategic partner and supplier to
      various other companies.





14


**Critical
      Accounting Policies**





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





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





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





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





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





***Long-Lived
      Asset Valuations.*** ****** The
      Company reviews long-lived assets such as property, equipment and definite-lived
      intangibles for impairment whenever events or changes in circumstances indicate
      that the carrying value of an asset may not be recoverable. As required by
      SFAS
      No. 144, the Company uses an estimate of the future undiscounted net cash flows
      of the related asset or group of assets over their remaining economic useful
      lives in measuring whether the assets are recoverable. If the carrying amount
      of
      an asset exceeds its estimated future cash flows, an impairment charge is
      recognized for the amount by which the carrying amount exceeds the estimated
      fair value of the asset. Impairment of long-lived assets is assessed at the
      lowest levels for which there are identifiable cash flows that are independent
      of other groups of assets. Assets to be disposed of are reported at the lower
      of
      the carrying amount or fair value, less the estimated costs to sell. In
      addition, depreciation of the asset ceases.


15


***Revenue
      Recognition.***  The
      Company's revenues are derived from the sale of surgical visualization
      technology products to end users, distributors and original equipment
      manufactures. Revenue from the sale of products is recognized when a purchase
      order has been received, the system has been shipped, the selling price is
      fixed
      or determinable, and collection is reasonable assured. Most system sales are
      F.O.B. shipping point, therefore shipment is deemed to have occurred when the
      product is delivered to the transportation carrier. Most of the Company's sales
      through June 30, 2005, have been for products that did not include installation
      services. If installation is included as part of the contract, revenue is not
      recognized until installation has occurred, or until any remaining installation
      obligation is deemed to be perfunctory. Some sales of systems may include
      training as part of the sale. In such cases, the portion of the revenue related
      to the training, calculated based on the amount that would be charged for
      training on a stand-alone basis, is deferred and recognized when the training
      has been provided. The sales of products do not require specific customer
      acceptance provisions and do not include the right of return except in cases
      where the product does not function as guaranteed by the Company. The Company
      provides a reserve allowance for estimated returns. To date, returns have not
      been significant. Shipping and handling costs are included in cost of
      sales.





***Stock-Based
      Compensation.*** The
      Company accounts for its employee stock-based compensation plans using the
      intrinsic value method, as prescribed by APB Opinion No. 25, Accounting for
      Stock Issued to Employees, and related interpretations. Accordingly, the Company
      records deferred compensation costs related to its employee stock options when
      the current market price of the underlying stock exceeds the exercise price
      of
      each stock option on the measurement date (usually the date of grant). The
      Company records and measures deferred compensation for stock options granted
      to
      non-employees, other than members of the Company's Board of Directors, using
      the
      fair value based method. Deferred compensation is expensed on a straight-line
      basis over the vesting period of the related stock option. During the six months
      ended June 30, 2005 and 2004, the Company did not grant any stock options to
      employees or members of the Company's Board of Directors with exercise prices
      below the market price on the measurement date.





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





**RESULTS
      OF OPERATIONS**





In
      December 2002 we discontinued our previous operations. As described above,
      we
      are now engaged in the medical device market. Our first acquisition was
      completed during the quarter ended June 30, 2004.


16


**Three
      and Six-Month Period Ended June 30, 2005 Compared to the Three and Six-Month
      Period Ended June 30, 2004**





***Revenues.*** ** For
      the
      three months ended June 30, 2005, we had product sales $1,082,413 compared
      to
      product sales of $1,030,962 for the three months ended June 30, 2004.
      Representing an increase of $51,451 or 5%. Sales to individual customers
      exceeding 10% or more of revenues in the three months ended June 30, 2005 were
      to three customers who accounted for 35%, 15% and 10% of revenues, respectively.
      For the six months ended June 30, 2005 we had product sales of $1,958,816
      compared to product sales of $1,030,962 for the six months ended June 30, 2004,
      representing an increase of $927,854 or 90%. Sales to individual customers
      exceeding 10% or more of revenues in the six months ended June 30, 2005 were
      to
      three customers who accounted for 25%, 23%, and 18% of revenues,
      respectively.





***Gross
      Profit.*** We had
      gross profit of $275,988 or 25.5% for the three months ended June 30, 2005
      and
      gross profit of $253,527 or 24.6% for the three months ended June 30, 2004,
      representing an increase of $22,461. The increase in gross profit during 2005
      was due to the increase in 3Di System sales during the three months ended June
      30, 2005 compared to the 3Di System sales during the quarter ended June 30,
      2004. We expect our gross profit to improve as we increase our 3Di System sales.
      For the six months ended June 30, 2005 we had gross profit of $533,166 or 32.7%
      compared to $253,527 or 24.6% for the six months ended June 30,
      2004.




***Sales
      and Marketing Expenses*** **.** Sales
      and
      Marketing expenses were $695,225 for the three months ended June 30, 2005 and
      $173,901 for the three months ended June 30, 2004. For the six month period
      ended June 30, 2005 Sales and Marketing expenses were $1,169,041 compared to
      expenses of $173,901 for the six month period ended June 30, 2004. The increase
      in operating expenses was due to the increased efforts to develop market
      awareness for our 3Di products. We expect that our sales and marketing expenses
      will remain at this level as we establish our 3Di Systems business. We had
      no
      Sales and Marketing expenses until after the acquisition from Vista Medical
      Technologies, Inc. on April 15, 2004.





***Research
      and Development Expenses.*** ** Research
      and Development expenses were $235,904 for the three months ended June 30,
      2005
      and $136,328 for the three months ended June 30, 2004. Research and Development
      expenses for the six months ended June 30, 2005 were $427,280 compared to
      $136,328 for the six months ended June 30, 2004. The increase is due to the
      continued development of our 3Di product line. We expect that our research
      and
      development expenses will remain at their current levels as we continue to
      develop, maintain and support our current products. We had no Research and
      Development expenses until after the acquisition from Vista Medical
      Technologies, Inc. on April 15, 2004.





17


***General
      and Administrative Expenses.*** ** We had
      General and Administrative expenses of $337,477 for the three months ended
      June
      30, 2005 and $300,734 for the three months ended June 30, 2004. General and
      Administrative expenses were $829,244 for the six months ended June 30, 2005
      compared to $412,410 for the six months ended June 30, 2004. The increase in
      general and administrative expense in 2005 was due to the increased Royalty
      expense, in accordance with our Royalty agreement with Vista Medical
      Technologies, Inc. Our general and administrative expenses for the three months
      ended June 30, 2005 consisted primarily of the following:





·
            $104,586
                in payroll and fringe benefits,





·
            $32,940
                in legal expenses,





·
            $17,780
                in audit expenses,





·
            $44,666
                in consulting expenses,





·
            $70,731
                in royalty and license fees,





·
            $47,491
                in insurance expenses,





***Net
      Income (Loss).*** We had a
      net loss of $1,750,219 for the three months ended June 30, 2005 and a net loss
      of $358,187 for the three months ended June 30, 2004, representing an increase
      of $1,392,032. For the six months ended June 30, 2005 we had a net loss of
      $2,740,331 compared to a net loss of $469,863 for the six months ended June
      30,
      2004. The increase in net loss for 2005, was due to the increase in operating
      expenses due to a full year of operations. We incurred significant costs
      implementing our sales and marketing plan, developing and improving our 3Di
      products line, and maintaining operations of the Visualization business. We
      also
      incurred $754,033 in non-cash interest expense related to the Convertible Notes
      for the six months ended June 30, 2005. Our net loss for the three months ended
      June 30, 2005 was the result of us having revenues of $1,082,413, costs of
      sales
      of $806,425, operating expenses $1,228,605 and interest expense of $757,602.





**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      have
      financed our operations principally through private sales of equity securities
      and convertible notes. From January 1, 2004 through June 30, 2005, we have
      raised net proceeds of $900,000 through the sale of common and preferred stock
      in private placements, and $3,300,000 through the issuance of convertible
      promissory notes. As of June 30, 2005, we had cash, cash equivalents and
      short-term investments of $100,144 compared to $139,393 as of December 31,
      2004.





18


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





Net
      cash
      used in operating activities was $2,722,056 **** and
      $340,510 during the six months ended June 30, 2005 and June 30, 2004,
      respectively. The increase in net cash used in operating activities during
      2005
      compared to 2004 was attributable to the acquisition of the Vision Systems
      Group
      in April 2004, the development of our EndoSite 3Di product line, the increase
      in
      our sales and marketing organization, and the beneficial conversion feature
      of
      our convertible notes and the debt discount related to our warrants.





Net
      cash
      used in investing activities was $273,978 and $173,845 during the six months
      ended June 30, 2005 and June 30, 2004, respectively. The increase in cash used
      in investing activities in 2005 was attributable to increased purchases of
      equipment needed for demonstration equipment of our new 3Di product
      line.





Cash
      flow
      provided by financing activities was $2,956,785 and $498,462 during the six
      months ended June 30, 2005 and June 30, 2004, respectively. The cash flows
      from
      financing activities in 2005 were attributable to proceeds from a private
      placement of secured convertible notes in the amount of $2,750,000, proceeds
      received from short-term bank borrowings of $106,785, and proceeds from related
      party notes payable of $100,000.





We
      incurred operating losses in 2005 and 2004, and at June 30, 2005, had an
      accumulated deficit of approximately $5,055,752. At June 30, 2005, we had cash
      of $100,144.





In
      January 2005, we received a $200,000 line of credit from Silicon Valley Bank.
      In
      February and March 2005, we received $2,750,000 from the issuance of convertible
      notes payable. In addition, we have amounts available under a bank line of
      credit facility equal to 80% of our outstanding receivables up to a maximum
      of
      $400,000, which expires in September 2005 and is subject to annual renewals.





19


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





**Additional
      Capital Summary**





In
      August
      2005, we raised $500,000 through the issuance of convertible notes (the “Notes”)
      and expect to receive up to $3,500,000 more through the sale of the Notes.
      The
      Notes mature 12 months from the date of issuance, accrue interest at 10% per
      annum, and are secured by all of our assets. The Notes may be converted, at
      the
      option of the Investors, into shares of our common stock. The conversion price
      and terms are dependent upon the terms of a proposed private or public offering
      of our securities that we anticipate will commence during the current quarter.
      We anticipate the conversion price will be approximately 20% less than the
      offering price per share in such anticipated public or private offering. In
      connection with the issuance of the Notes, we also issued warrants to purchase
      common stock at a price of $0.60 per share or other price subject to adjustment
      upon certain conditions pursuant to the terms of the transaction.





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


20


**Forward
      Outlook and Risks**





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





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





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





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





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





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


21


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





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





**Medical
      Operations Risks**





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





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





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




22


***We
      Are Subject To Significant Domestic and International Regulation and May Not
      Be
      Able To Obtain Necessary Regulatory Clearances to Sell Our Products.*** **** We sell
      medical devices **.** The
      manufacture and sale of medical devices intended for commercial distribution
      are
      subject to extensive governmental regulation.  Our failure to comply with
      regulatory requirements would jeopardize our ability to market our
      products.  Noncompliance with applicable requirements can result in failure
      of the regulatory agency to grant pre-market clearance or approval for devices,
      withdrawal or suspension of approval, total or partial suspension of production,
      fines, injunctions, civil penalties, refunds, recall or seizure of products
      and
      criminal prosecution. Medical devices are regulated in the United States
      primarily by the FDA and, to a lesser extent, by state agencies.  Sales of
      medical device products outside the United States are subject to foreign
      regulatory requirements that vary from country to country.  Generally,
      medical devices require pre-market clearance or pre-market approval prior to
      commercial distribution.  A determination that information available on the
      medical device is not sufficient to grant the needed clearance or approval
      will
      delay market introduction of the product.  In addition, material changes or
      modifications to, and changes in intended use of, medical devices also are
      subject to FDA review and clearance or approval.  The FDA regulates the
      research, testing, manufacture, safety, effectiveness, labeling, storage, record
      keeping, promotion and distribution of medical devices in the United States
      and
      the export of unapproved medical devices from the United States to other
      countries.  The time required to obtain approvals required by foreign
      countries may be longer or shorter than that required for FDA clearance, and
      requirements for licensing may differ from FDA requirements.  The current
      regulatory environment in Europe for medical devices differs significantly
      from
      that in the United States.




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




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





23


We
      expect
      that our products typically will be used by hospitals and surgical centers,
      which bill various third-party payors, such as governmental programs and private
      insurance plans, for the health care services provided to their patients. 
Third-party payors carefully review and increasingly challenge the prices
      charged for medical products and services or negotiate a flat rate fee in
      advance.  Payment rates from private companies also vary depending on the
      procedure performed, the third-party payor, the insurance plan and other
      factors.  Medicare compensates hospitals at a predetermined fixed amount
      for the costs associated with an in-patient hospitalization based on the
      patient’s discharge diagnosis and compensates physicians at a pre-determined
      fixed amount based on the procedure performed, regardless of the actual costs
      incurred by the hospital or physician in furnishing the care and unrelated
      to
      the specific devices or systems used in that procedure.  Medicare and other
      third-party payors are increasingly scrutinizing whether to cover new products
      and the level of payment for new procedures.  The flat fee reimbursement
      trend is causing hospitals to control costs strictly in the context of a managed
      care system in which health care providers contract to provide comprehensive
      health care for a fixed cost per person.  We are unable to predict what
      changes will be made in the reimbursement methods utilized by such third-party
      payors.




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




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





**ITEM
      3. CONTROLS AND PROCEDURES**


**EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES**





(a)
            Evaluation
                of Disclosure Controls and
                Procedures





24


Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we evaluated the effectiveness
      of
      the design and operation of our disclosure controls and procedures as of March
      31, 2005 (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities
      Exchange Act of 1934 (the "Exchange Act")). In connection with this evaluation,
      management identified a deficiency that existed in the design or operation
      of
      our internal control over financial reporting that it considers to be a
“material weaknesses.” The Public Company Accounting Oversight Board has defined
      a material weakness as a “significant deficiency or combination of significant
      deficiencies that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected.”





The
      deficiency in our internal control related to accounting for the debt discount
      resulting from the warrants issued in connection with the convertible notes
      and
      the related beneficial conversion feature. The adjustment to record the debt
      discount and beneficial conversion feature was detected and has been
      appropriately recorded and disclosed in this Form 10-QSB/A. We are in the
      process of improving our internal control over financial reporting in an effort
      to remediate this deficiency.





Based
      upon that evaluation and the deficiency identified above, the Chief Executive
      Officer and Chief Financial Officer concluded that, as of the end of the period
      covered by this report, our disclosure controls and procedures were not
      effective in timely alerting them to the material information relating to us
      (or
      our consolidated subsidiaries) required to be included in the reports we file
      or
      submit under the Exchange Act.





(b)  Changes
      in Internal Controls





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








**PART
      II- OTHER INFORMATION**





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





Item
      2.  Unregistered
      Sales of Equity Securities .
      None





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





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





Item
      5.  Other
      Information .





25


**Loan
      Guarantee Collateral**





On
      January 27, 2005, we entered into a Loan and Security Agreement with Silicon
      Valley Bank. The Loan Agreement provides for a maximum borrowing of $200,000.
      The loan is secured by the assets of the Company. The loan is also secured
      by a
      $200,000 certificate of deposit owned by Donald Tucker. In April 2005 this
      Loan
      and Security Agreement with Silicon Valley Bank was reduced to
      $100,000.





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





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

















SIGNATURE





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





Dated:
                November 18, 2005
            VIKING
                SYSTEMS, INC.By/s/
                Thomas B. MarshChief
                Executive Officer, PresidentBy/s/
                Joseph WarrinoChief
                Financial Officer





26