Document:

Exhibit 10.2 - Form Convertible Promissory Note

    Exhibit
      10.2

    Form
      8-K

    Viking
      Systems, Inc.

    File
      No.
      000-49636

    

    

    THIS
      NOTE
      AND THE COMMON STOCK REFERENCED HEREIN HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”), OR UNDER THE PROVISIONS OF
      ANY APPLICABLE STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED BY THE REGISTERED
      HOLDER HEREOF FOR PURPOSES OF INVESTMENT AND IN RELIANCE ON STATUTORY EXEMPTIONS
      UNDER THE 1933 ACT, AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. NEITHER
      THE
      NOTE NOR THE COMMON STOCK MAY BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT
      IN A TRANSACTION WHICH IS EXEMPT UNDER PROVISIONS OF THE 1933 ACT AND ANY
      APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EFFECTIVE REGISTRATION
      STATEMENT; AND IN THE CASE OF AN EXEMPTION, ONLY IF THE COMPANY HAS RECEIVED
      AN
      OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION DOES NOT
      REQUIRE REGISTRATION OF THIS NOTE AND THE COMMON STOCK REFERENCED HEREIN.

    

    This
      note
      is one of a series issued in the aggregate principal amount of up to Three
      Million Dollars ($3,000.000).

    

    

    VIKING
      SYSTEMS, INC.

    

    

    
      	
              December
                12, 2005

            	
              $750,000.00

            

    

    

    10%
      SECURED CONVERTIBLE PROMISSORY NOTE

    

    

    Viking
      Systems, Inc. (the “Company”), for value received, hereby promises to pay to ST.
      CLOUD CAPITAL PARTNERS, L.P. or registered assigns (the “Holder”) on March 22,
      2006, or such earlier date as this Note may become due and payable pursuant
      to
      Section 6 hereof (the “Maturity Date”), the principal sum of Seven Hundred and
      Fifty Thousand Dollars ($750,000.00), and to pay interest on the outstanding
      principal sum hereof at the rate of ten percent (10%) per annum. This 10%
      Secured Convertible Promissory Note (this “Note”) is issued to the Holder
      pursuant to the terms and conditions of that certain Securities Purchase
      Agreement, dated as of August 12, 2005 hereof, and any amendments thereto (the
      “Securities Purchase Agreement”) entered into by the Company, the Lead Lender
      and Collateral Agent, and those persons and entities described in the Securities
      Purchase Agreement as an “Investor.” All capitalized terms used herein without
      definitions shall have the respective meanings provided therefore in the
      Securities Purchase Agreement. THIS NOTE SUPERCEDES NOTES IN THE AMOUNT OF
      $300,000, $200,000, AND $250,000 DATED AUGUST 12, 2005, SEPTEMBER 11, 2005
      AND
      DECEMBER 1, 2005.

    

    1. Repayment.
      Monthly
      payments of interest only shall be paid by the Company to Holder commencing
      on
      January 1, 2006, and on the last business day of each succeeding month through
      and including March 22, 2006. The unpaid principal amount of this Note and
      accrued but unpaid interest thereon, if any, shall be paid on the Maturity
      Date
      by the Company to the Holder.

    
      
        

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    Both
      principal hereof and interest thereon are payable at the address of the Holder
      designated in the Securities Purchase Agreement or at such other place as the
      Holder may from time to time designate in writing. Any payment otherwise due
      on
      a Saturday, Sunday or legal bank holiday may be paid on the following business
      day. Payments shall be made in lawful money of the United States of America.
      Interest hereunder shall be computed on the basis of a year of three hundred
      sixty (360) days for the actual number of days elapsed.

    

    2. Security.
      This
      Note is secured as provided for in the Securities Purchase Agreement and the
      Security Agreement referred to therein.

    

    3. Transfers
      of Note to Comply with the 1933 Act.
      The
      Holder agrees that this Note may not be sold, transferred, pledged, hypothecated
      or otherwise disposed of except as follows: (1) to a Person whom the Note may
      legally be transferred without registration and without delivery of a current
      prospectus under the 1933 Act with respect thereto and then only against receipt
      of an agreement of such Person to comply with the provisions of this Section
      3
      with respect to any resale or other disposition of the Note; or (2) to any
      Person upon delivery of a prospectus then meeting the requirements of the 1933
      Act relating to such securities and the offering thereof for such sale or
      disposition, and thereafter to all successive assignees.

    

    4. Prepayment;
      Repayment Upon Consolidation or Merger.
      The
      principal amount of this Note may be prepaid by the Company, in whole or in
      part
      without premium or penalty, at any time in installments not less than the lesser
      of (i) twenty-five percent (25%) of the original principal amount of the Note
      and (ii) the remaining outstanding principal balance of this Note; provided
      that
      the Company gives not less than thirty (30) days’ prior written notice to Holder
      of the Company’s election to prepay this Note. Upon any prepayment of the entire
      principal amount of this Note, all accrued, but unpaid, interest shall be paid
      to the Holder on the date of prepayment. 

    

    This
      Note
      shall be paid in full, without premium, in the event the Company (i) sells,
      leases or transfers all or a substantial portion of the assets of the Company
      or
      (ii) reorganizes, consolidates or merges with or into another Person, unless
      (A)
      the Company shall be the surviving corporation and the shareholders of the
      Company immediately prior to such reorganization, consolidation or merger own
      more than fifty (50%) of the voting securities of the Company immediately after
      such transaction or (B) the other corporation controls, is under common control
      with or is controlled by the Company immediately prior to the consolidation
      or
      merger whether or not the Company shall be the surviving corporation in such
      consolidation or merger, in which event this Note shall remain outstanding
      as an
      obligation of the consolidated or surviving corporation. 

    

    5. Conversion
      of Note. The
      Holder shall have the right from time to time, and at any time on or prior
      to
      the Maturity Date, to convert all or any part of the entirety of the debt then
      outstanding under this Note into fully-paid and non-assessable shares of Common
      Stock,
      or any
      shares of capital stock or other securities of the Company into which such
      Common Stock shall hereafter be changed or reclassified, in
      accordance with the terms of Section 4 of the Securities Purchase Agreement.
      

    
      
        

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    Notwithstanding
      the foregoing, in the event that any sums due under this Note are not repaid
      on
      the Maturity Date, in lieu of accepting repayment of the Note from the Company,
      the Holder will have the option at any time and from time to time to convert
      the
      entirety of the debt then outstanding, plus any accrued but unpaid interest
      thereon, under this Note into fully paid and non-assessable shares of Common
      Stock, or any shares of capital stock or other securities of the Company into
      which such Common Stock shall hereafter be changed or reclassified, pursuant
      to
      the terms of Section 4 of the Securities Purchase Agreement. 

    

    The
      Company may require the Holder to convert this Note into shares of Common Stock
      pursuant to the terms and conditions of the Securities Purchase
      Agreement.

    

    As
      long
      as this Note is outstanding, the Company shall reserve and keep available,
      free
      from preemptive rights, out of its authorized and unissued Common Stock a
      sufficient number of shares to provide for the issuance of Common Stock upon
      the
      conversion in full of this Note and, from time to time, shall take all steps
      necessary to amend its certificate of incorporation to provide sufficient
      reserves of shares of Common Stock issuable upon conversion in whole of this
      Note. The Company covenants that all shares of Common Stock which may be issued
      upon conversion of this Note will, upon issue, be fully paid, nonassessable,
      free of preemptive rights and free from all taxes, liens, charges and security
      interests with respect to the issue thereof.

    

    6. Events
      of Default and Remedies. 

    

    (a) Any
      one
      or more of the following events which shall have occurred and be continuing
      shall constitute an event of default (“Event of Default”):

    

    (i) Failure
      to make any payment hereunder when due or interest thereon within five days
      of
      the date when due; or

    

    (ii) Any
      representation or warranty made by the Company or any officer of the Company
      in
      the Securities Purchase Agreement, this Note, the Security Instruments, or
      in
      any agreement, report, certificate or other document delivered to the Holder
      pursuant to the Loan Documents shall have been incorrect in any material respect
      when made which shall not have been remedied ten (10) days after written notice
      thereof shall have been given to the Company; or

    

    (iii) The
      Company shall fail to perform or observe any covenant contained in the
      Securities Purchase Agreement or any other Loan Document and such default,
      if
      capable of being remedied, shall not have been remedied ten (10) days after
      written notice thereof shall have been given to the Company; or 

    

    
      
        

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    (iv) The
      Company (A) shall institute any proceeding or voluntary case seeking to
      adjudicate it bankrupt or insolvent, or seeking dissolution, liquidation,
      winding up, reorganization, arrangement, adjustment, protection, relief or
      composition of it or its debts under any law relating to bankruptcy, insolvency
      or reorganization or relief of debtors, or seeking the entry of any order for
      relief or the appointment of a receiver, trustee, custodian or other similar
      official for the Company or for any substantial part of its property, or shall
      consent to the commencement against it of such a proceeding or case, or shall
      file an answer in any such case or proceeding commenced against it consenting
      to
      or acquiescing in the commencement of such case or proceeding, or shall consent
      to or acquiesce in the appointment of such a receiver, trustee, custodian or
      similar official; (B) shall be unable to pay its debts as such debts become
      due,
      or shall admit in writing its inability to apply its debts generally; (C) shall
      make a general assignment for the benefit of creditors; or (D) shall take any
      action to authorize or effect any of the actions set fort above in this
      subsection; or

    

    (v) Any
      proceeding shall be instituted against the Company seeking to adjudicate it
      bankrupt or insolvent, or seeking dissolution, liquidation, winding up,
      reorganization, arrangement, adjustment, protection, relief of debtors, or
      seeking the entry of an order for relief or the appointment of a receiver,
      trustee, custodian or other similar official for the Company or for any
      substantial part of its property, and either such proceeding shall not have
      been
      dismissed or shall not have been stayed for a period of sixty (60) days or
      any
      of the actions sought in such proceeding (including, without limitation, the
      entry of any order for relief against it or the appointment of a receiver,
      trustee, custodian or other similar official for it or for any substantial
      part
      of its property) shall occur; or

    

    (vi) The
      occurrence of any event of default or other event triggering acceleration of
      any
      indebtedness by the Company under any note, agreement or other instrument
      involving the issuance of indebtedness (but not including any trade payables
      incurred in the ordinary course of business), whether such indebtedness now
      exists or may hereafter be created, if, as a result of such event of default
      or
      other event, the maturity of such indebtedness has been accelerated or has
      otherwise become or been declared to be due prior to its stated maturity and
      the
      principal amount of such indebtedness which has been accelerated or has
      otherwise become or been declared to be due exceeds, individually or in the
      aggregate, One Hundred Thousand Dollars ($100,000); or

    

    (vii) The
      making or filing of any money judgment, writ or similar process in excess of
      One
      Hundred Thousand Dollars ($100,000) against the Company or any of the property
      or other assets of the Company which shall remain unsatisfied, unvacated,
      unhanded or unstayed until the date that is the earlier to occur of thirty
      (30)
      days after such judgment, writ or similar process is entered and five (5) days
      prior to the date of any proposed sale thereunder; or

    

    
      
        

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    (viii) The
      levying of any writ of attachment against any property or other assets of the
      Company not fully covered by insurance in force valued individually or in the
      aggregate at an amount equal to or greater than One Hundred Thousand Dollars
      ($100,000) unless the Company posts a bond or obtains other relief for the
      release of such attachment within thirty (30) days; or

    

    (ix) The
      suspension of the usual business activities of the Company or the winding up
      or
      the complete or partial liquidation of the Company’s business; or

    

    (x) The
      Company shall challenge, or institute or join in any proceedings to challenge
      the validity, binding effect or enforceability of this Note or any endorsement
      of this Note or any other obligation to Holder; or

    

    (xi) The
      Security Agreement or any provision thereof shall cease to be in full force
      or
      effect or shall be declared to be null or void or otherwise unenforceable in
      whole or in part; or Holder shall not have or shall cease to have a valid and
      perfected security interest in the collateral described in the Security
      Agreement; or

    

    (xii) The
      removal of the Lead Lender Director for any reason without the approval of
      St.
      Cloud.

    

    (b) In
      the
      event of and immediately upon the occurrence of an Event of Default, the Note
      shall become immediately due and payable without any action by the Holder and
      the Note shall bear interest until paid at the rate of 15% per annum (the
“Default Interest Rate”). If an Event of Default occurs and is continuing,
      Holder may pursue any remedy available at law or in equity or provided for
      in
      any Loan Document to collect the payment of all amounts due under the Note
      or to
      enforce the performance of any provision of the Note, and all expenses incurred
      by Holder in connection with any remedy shall be deemed indebtedness of the
      Company. For the avoidance of doubt, the occurrence of an Event of Default
      as
      set forth in Section 6(a)(iv) and Section 6(a)(v) above shall make all sums
      of
      principal and interest then remaining unpaid and all other amounts payable
      hereon due and payable, all without demand, presentment, notice or protest,
      all
      of which hereby are expressly waived, and will permit Holder to exercise any
      other right available to it at law or in equity, all which rights and powers
      may
      be exercised cumulatively. No
      delay
      or failure of Holder in the exercise of any right or remedy provided for under
      this Note or under any of the Loan Documents shall be deemed a waiver of such
      right by Holder. No exercise or partial exercise or waiver of any right or
      remedy shall be deemed a waiver of any further exercise of such right or remedy
      or of any other right or remedy that Holder may have under this Note or under
      any of the Loan Documents. Enforcement of any of Holder’s rights as to any
      security for the Promissory Note shall not affect Holder’s right to enforce
      payment of the Promissory Note and to recover judgment for any portion thereof
      remaining unpaid. The rights and remedies set forth in this Note and in any
      of
      the Loan Documents are cumulative and not exclusive of any other right or remedy
      that Holder may have.

    

    
      
        

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    (c) In
      no
      event shall Holder be entitled to interest exceeding the maximum rate permitted
      by law or under the applicable regulations promulgated by the United States
      Small Business Administration (the “SBA”). If any excess interest is provided
      for or shall be adjudicated to be so provided for in this Note, or if any
      payment or other consideration under this Note or the Securities Purchase
      Agreement is determined by the SBA to exceed the amount permitted under
      applicable regulations promulgated by the SBA, then in such event: (i) the
      provisions of this paragraph shall govern and control; (ii) the Company shall
      not be obligated to pay the amount of such interest or other payment or
      consideration to the extent that it is in excess of the maximum amount permitted
      by law, and the same shall be construed as a mutual mistake of the parties;
      and
      (iii) any such excess which may have been collected or attributed shall, at
      the
      option of Holder, be subtracted from the then unpaid principal amount hereof
      or
      refunded to the Company.

     

    7. Failure
      to Pay Upon Maturity.
      In the
      event that the sum due under the Note is not repaid on the Maturity Date, the
      Holder will have the option to either have the Note accrue interest at the
      Default Interest Rate or such amount as legally allowed until paid, or to
      convert the entirety of the debt then outstanding under the Note into the shares
      of Common Stock at the a price equal to $.05 per share. Such conversion price
      in
      the event of default is subject to adjustment pursuant to the terms of the
      Securities Purchase Agreement. 

    

    8. Unconditional
      Obligation; Fees, Waivers, Other.

    

    (a) The
      obligations to make the payments provided for in this Note are absolute and
      unconditional and not subject to any defense, set-off, counterclaim, rescission,
      recoupment or adjustment whatsoever.

    

    (b) The
      Company promises to pay all costs and expenses, including reasonable attorneys’
fees, all as provided in the Securities Purchase Agreement, incurred in the
      collection and enforcement of this Note and to indemnify Holder against any
      losses, claims, damages and liabilities and related expenses, including counsel
      fees and expenses, incurred by Holder in connection with the collection and
      enforcement of this Note (including, without limitation, in connection with
      any
      bankruptcy, insolvency, reorganization or workout). In addition, the Company
      agrees to pay, and to save Holder harmless from all liability for, any stamp
      or
      other documentary taxes which may be payable in connection with the Company’s
      execution or delivery of this Note.

    

    
      
        

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    All
      payments made by the Company under this Note shall be made free and clear of,
      and without deduction or withholding for or on account of, any present or future
      income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions
      or withholdings, now or hereafter imposed, levied, collected, withheld or
      assessed by any governmental authority, excluding net income taxes and franchise
      taxes (imposed in lieu of net income taxes) imposed on Holder as a result of
      a
      present or former connection between Holder and the jurisdiction of the
      governmental authority imposing such tax or any political subdivision or taxing
      authority thereof or therein (other than any such connection arising solely
      from
      Holder having executed, delivered or performed its obligations or received
      a
      payment under, or enforced, this Note). If any such non-excluded taxes, levies,
      imposts, duties, charges, fees deductions or withholdings (“Non-Excluded Taxes”)
      are required to be withheld from any amounts payable to Holder under this Note,
      the amounts so payable to Holder shall be increased to the extent necessary
      to
      yield to Holder (after payment of all Non-Excluded Taxes) interest or any such
      other amounts payable hereunder at the rates or in the amounts specified in
      this
      Note. Whenever any Non-Excluded Taxes are payable by the Company, as promptly
      as
      possible thereafter (and, in any event, within five (5) business days) the
      Company shall send to Holder for its own account a certified copy of an original
      official receipt received by the Company showing payment thereof. If the Company
      fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority
      or fails to remit to Holder the required receipts or other required documentary
      evidence, the Company shall indemnify, defend and hold Holder harmless for
      any
      incremental taxes, interest or penalties that may become payable by Holder
      as a
      result of any such failure. 

    

    (c) No
      forbearance, indulgence, delay or failure to exercise any right or remedy with
      respect to this Note shall operate as a waiver or as an acquiescence in any
      default, nor shall any single or partial exercise of any right or remedy
      preclude any other or further exercise thereof or the exercise of any other
      right or remedy.

    

    (d) This
      Note
      may not be modified or discharged (other than by payment or conversion) except
      in a writing duly executed by the Company and Holder.

    

    (e) Holder
      hereby expressly waives demand and presentment for payment, notice of
      nonpayment, notice of dishonor, protest, notice of protest, bringing of suit,
      and diligence in taking any action to collect amounts called for hereunder,
      and
      shall be directly and primarily liable for the payment of all sums owing and
      to
      be owing hereon, regardless of and without any notice, diligence, act or
      omission with respect to the collection of any amount called for hereunder
      or in
      connection with any right, lien, interest or property at any and all times
      which
      the Company had or is existing as security for any amount called for
      hereunder.

    

    9. Miscellaneous.

    

    (a) The
      headings of the various paragraphs of this Note are for convenience of reference
      only and shall in no way modify any of the terms or provisions of this
      Note.

    
      
        

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    (b) Any
      notice required or desired to be given by the parties hereto shall be in writing
      and may be personally delivered; mailed by regular mail or certified mail,
      return receipt requested; sent by telephone facsimile with a hard copy sent
      by
      regular mail; or sent by a nationally recognized receipted overnight delivery
      service, including, by example and not limita-tion, United Parcel Service,
      Federal Express, or Airborne Express. Any such notice shall be deemed given
      when
      personally delivered; if mailed by regular mail, three (3) days after deposit
      in
      the United States mail, postage prepaid; if mailed by certified mail, return
      receipt requested, three (3) days after deposit in the United States mail,
      postage prepaid, or on the day of receipt by the recipient, whichever is sooner;
      if sent by telephone facsimile, on the day sent if sent on a business day during
      normal business hours of the recipient or on the next business day if sent
      at
      any other time; or if sent by overnight delivery service, one (1) business
      day
      after deposit in the custody of the delivery service. The addresses and
      telephone numbers for the mailing, transmitting, or delivering of notices shall
      be as follows:

     

    

    
      	
              If
                to Holder to:

            	
              St.
                Cloud Capital Partners, L.P.

            
	 	
              10866
                Wilshire Boulevard, Suite 1450

            
	 	
              Los
                Angeles, California 90024

            
	 	
              Facsimile:
                (310)475-0550

            
	 	
              Attn:
                Robert Lautz

            
	 	 
	
              If
                to the Company, to:

            	
              Viking
                Systems, Inc.

            
	 	
              7514
                Girard Avenue, Suite 1509

            
	 	
              La
                Jolla, CA 92037

            
	 	
              Facsimile:
                858-225-0467

            
	 	
              Attn:
                Tom Marsh

            
	 	 
	
              With
                copies to:

            	
              Cohne,
                Rappaport & Segal

            
	 	
              257
                East 200 South, Suite 700

            
	 	
              Salt
                Lake City, UT 84111

            
	 	
              Facsimile:
                801-355-1813

            
	 	
              Attn:
                A. O. Headman, Jr.

            

    

    

    Notices
      of a change of address of a party shall be given in the same manner as all
      other
      notices as hereinabove provided.

    

    (c) Except
      as
      set forth in the Loan Documents, the Holder shall not, by virtue, hereof, be
      entitled to any rights of a shareholder in the Company, whether at law or in
      equity, and the rights of the Holder are limited to those expressed in this
      Note
      and in the other Loan Documents.

    

    (d) Upon
      receipt by the Company of evidence reasonably satisfactory to it of the loss,
      theft, destruction or mutilation of this Note, and (in the case of loss, theft
      or destruction) of reasonably satisfactory indemnification, and upon surrender
      and cancellation of this Note, if mutilated, the Company shall execute and
      deliver a new Note of like tenor and date.

    
      
        

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    (e) At
      any
      time or from time to time upon the request of Holder, the Company will execute
      and deliver such further documents and do such other acts and things as Holder
      may reasonably request in order fully to effectuate the purposes of this Note,
      and to provide for the payment of the principal and interest due hereunder.
      

    

    (f) This
      Note
      shall be construed and enforced in accordance with the laws of the State of
      California, without giving effect to the conflicts of law principles thereof
      or
      the actual domiciles of the parties. The Company and the Holder hereby consent
      to the jurisdiction of the Courts of the State of California and the United
      States District Courts situated therein in connection with any action concerning
      the provisions of this Note instituted by the Holder against the
      Company.

    

    (g)
       No
      recourse shall be had for the payment of the principal or interest of this
      Note
      against any incorporator or any past, present or future stockholder officer,
      director, agent or attorney of the Company, or of any successor corporation,
      either directly or through the Company or any successor corporation, otherwise
      all such liability of the incorporators, stockholders, officers, directors,
      attorneys and agents being waived, released and surrendered by the Holder hereof
      by the acceptance of this Note.

    

    (g)
       This
      Note
      shall bind the Company and its successors and assigns.

    

    

    [Signature
      Page Follows]

    

    
      
        

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    IN
      WITNESS WHEREOF, the undersigned has duly executed and delivered this Note
      as of
      the day and year first above written.

    

    

    
      	 	
              VIKING
                SYSTEMS, INC.

            
	 	 
	 	 
	 	
              By: /s/
                Thomas B. Marsh

            
	 	
              Name: Thomas
                B. Marsh

            
	 	
              Title: President
                and Chief Executive Officer

            

    

    

     

     

    
      
         

      

      
        10Exhibit 10.3 - Form Warrant

    Exhibit
      10.3

    Form
      8-K

    Viking
      Systems, Inc.

    File
      No.
      000-49636

    

    THE
      SALE
      AND ISSUANCE OF THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN
      REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER
      THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. THESE SECURITIES MAY
      NOT
      BE OFFERED, SOLD, PLEDGED, OR TRANSFERRED, UNLESS A REGISTRATION STATEMENT
      UNDER
      THE ACT IS IN EFFECT AS TO THESE SECURITIES OR AN EXEMPTION FROM SUCH
      REGISTRATION REQUIREMENTS IS AVAILABLE, AND SUCH OFFER, SALE, PLEDGE, OR
      TRANSFER IS IN COMPLIANCE WITH APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER
      JURISDICTION.

     

    

    

    WARRANT
      TO PURCHASE COMMON STOCK

    

    of

    

    VIKING
      SYSTEMS, INC.

    

    

    This
      certifies that ST. CLOUD CAPITAL PARTNERS, L.P., and its assignees (the
“Holder”) are entitled, subject to the terms set forth below, to purchase from
      Viking Systems, Inc., a Nevada corporation (the “Company”), Nine Hundred
      Thirty-Seven Thousand Five Hundred (937,500) shares (the “Warrant Shares”) of
      common stock, $.001 par value, of the Company (the “Common Stock”) upon
      surrender of this warrant at the principal office of the Company referred to
      below, together with a notice of exercise in the form of annex 1 duly completed
      and executed (the “Notice of Exercise”), and simultaneous payment for the
      Warrant Shares in lawful money of the United States, or otherwise as provided
      below, at the exercise price referred to in section 2. This warrant is issued
      to
      the Holder pursuant to the terms and conditions of that certain Securities
      Purchase Agreement dated as of August 12, 2005, and any amendments, supplements
      or addendums thereto (the “Securities Purchase Agreement”) entered into by the
      Company, the Lead Lender and Collateral Agent and those Persons described in
      the
      Securities Purchase Agreement as an “Investor.” Capitalized terms not otherwise
      defined herein shall have the meanings ascribed to them in the Securities
      Purchase Agreement. 

     

    1. Term.
      Subject
      to the terms set forth in this warrant, this warrant shall be exercisable by
      the
      Holder, in whole or in part, at any time before 5:00 p.m., California time,
      on
      June 12, 2009 (the “Expiration Date”), and shall not be exerciseable
      thereafter.

    

    2. Exercise
      Price.
      The
      exercise price at which this warrant may be exercised shall equal $.40 per
      share
      of Common Stock (the “Exercise Price”), as adjusted from time to time pursuant
      to section 9. If the Exercise Price is reduced, it is referred to as the
“Adjusted Exercise Price.” 

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    3. Exercise
      of Warrant.
      This
      warrant is exercisable by the Holder in whole at any time or in part from time
      to time by the surrender of this warrant and the Notice of Exercise duly
      completed and executed by the Holder, at the principal office of the Company,
      and upon payment to the Company by wire transfer of the exercise price referred
      to in section 2 provided that the warrant is exercised for at least 25% of
      the
      Warrant Shares. If this warrant shall be exercised in part only, the Company
      shall, upon surrender of this warrant for cancellation, issue to or on the
      order
      of the Holder a new warrant evidencing the rights of the Holder thereof to
      purchase the balance of the Warrant Shares purchasable hereunder as to which
      the
      warrant has not been exercised.

    

    4. Fractional
      Shares.
      No
      fractional shares shall be issued upon exercise of this warrant. At the
      Company’s sole discretion, in lieu of any fractional share to which the Holder
      would otherwise be entitled, the Company may make a cash payment equal to the
      fair market value of a share of Common Stock on the date of exercise multiplied
      by that fraction. 

    

    5. Replacement
      of Warrant.
      On
      receipt of evidence reasonably satisfactory to the Company of the loss, theft,
      destruction, or mutilation of this warrant and, in the case of loss, theft,
      or
      destruction, on delivery of an indemnity agreement reasonably satisfactory
      in
      form and substance to the Company or, in the case of mutilation, on surrender
      and cancellation of this warrant, the Company, at its expense, shall execute
      and
      deliver, in lieu of this warrant, a new warrant of identical tenor and
      amount.

    

    6. Rights
      of Stockholders.
      The
      Holder, as such, shall not be entitled to vote or receive dividends or be deemed
      the holder of Common Stock or any other securities of the Company that may
      at
      any time be issuable on the exercise of this warrant for any purpose, nor shall
      anything in this warrant be construed to confer upon the Holder, as such, any
      rights of a stockholder of the Company or any right to vote for the election
      of
      directors or upon any matter submitted to stockholders at any meeting, or to
      give or withhold consent to any corporate action or to receive notice of
      meetings, or to receive dividends or subscription rights or otherwise, until
      this warrant shall have been exercised.

    

    7. Transfers.
      The
      Holder may transfer this warrant by executing an assignment in the form of
      annex
      2 and delivering this warrant and the executed assignment form in the same
      manner as a negotiable instrument. The Company, on surrender of this warrant
      for
      exchange properly endorsed on the assignment form and at its expense, shall
      issue to or on the order of the Holder a new warrant or warrants of like tenor,
      in the name of the Holder or as the Holder may direct (on payment by the Holder
      of any applicable transfer taxes), for the number of shares then issuable upon
      exercise of this warrant. The Holder, by acceptance of this warrant,
      acknowledges that this warrant and the shares of Common Stock to be issued
      upon
      exercise of this warrant are being or will be acquired by the Holder for
      investment, and that the Holder shall not offer, sell, or otherwise dispose
      of
      this warrant or any shares of Common Stock to be issued upon exercise of this
      warrant, except under circumstances that will not result in a violation of
      the
      Act or any state securities laws. 

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    8. Reservation
      of Stock.
      As long
      as this warrant is exercisable, the Company shall reserve and keep available,
      free from preemptive rights, out of its authorized and unissued Common Stock
      a
      sufficient number of shares to provide for the issuance of Common Stock upon
      the
      exercise in whole of this warrant and, from time to time, shall take all steps
      necessary to amend its certificate of incorporation to provide sufficient
      reserves of shares of Common Stock issuable upon exercise in whole of this
      warrant. The Company covenants that all Warrant Shares which may be issued
      upon
      exercise of this warrant will, upon issue and full payment thereof by Holder
      in
      accordance with the terms of this warrant, be fully paid, nonassessable, free
      of
      preemptive rights and free from all taxes, liens, charges and security interests
      with respect to the issue thereof.

    

    9. Adjustments.
      The
      Exercise Price in effect at any time and the number and kind of securities
      issuable upon exercise of this warrant shall be subject to adjustment from
      time
      to time upon the happening of certain events as follows:

    

    (a)
       New
      Issuances.
      If, at
      any time after the issuance of this warrant and prior to the Expiration Date,
      the Company issues or sells any shares of Common Stock, or any warrants, options
      or other rights to purchase Common Stock (a “New Issuance”), for a consideration
      per share (the “New Issuance Price”), which is less than the lower of (x) the
“Initial Base Price” (as defined below) or (y) the “Adjusted Base Price” (as
      defined below), the Exercise Price of this warrant shall be reduced to an amount
      equal to the product of (A) the Exercise Price in effect immediately prior
      to
      the New Issuance and (B) an amount determined by dividing the New Issuance
      Price
      by the lower of the Initial Base Price or the Adjusted Base Price.

    

    (i) For
      purposes of this Agreement, the “Initial Base Price” shall be $.20 per share.
      The Initial Base Price shall be reduced to the New Issuance Price if the New
      Issuance Price is less than the Initial Base Price. The result of such reduction
      is referred to as the “Adjusted Base Price.” An example of the adjustments
      required by this section 9(a) is as follows:

    

    
      	 	 	
              At
                a time when the Exercise Price is $.40 per share and the Initial
                Base
                Price is $.20 per share, the Company sells shares of Common Stock
                at $.15
                per share (i.e., the New Issuance Price). The Exercise Price of the
                warrant shall be reduced as
                follows:

            

    

    

    $.40
      x
      ($.15 ÷ $.20) = $.30, the new Exercise Price.

    

    Thereafter,
      the Adjusted Base Price is $.15 per share. If the Company then sells shares
      of
      its Common Stock at $.12 per share (i.e., the New Issuance Price), the Exercise
      Price of the warrant shall be reduced as follows:

    

    $.30
      x
      ($.12 ÷ $.15) = $.24, the new Exercise Price.

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    

    (ii)
      For
      purposes of this Agreement, the New Exercise Price of a warrant, option or
      other
      right to purchase shares of the Common Stock shall be the exercise or conversion
      price of such warrant, option or other right plus any consideration paid to
      acquire such warrant, option or other right.

    

    (iii)
      Notwithstanding anything in this Agreement to the contrary, the issuance of
      any
      shares of Common Stock to the Investors under the terms of the Securities
      Purchase Agreement shall not affect the Exercise Price or the Initial Base
      Price
      or Adjusted Base Price for purposes of this section 9(a).

    

    (b) Splits
      and Subdivisions.
      If the
      Company should at any time or from time to time prior to the Expiration Date
      fix
      a record date for the effectuation of a split or subdivision of the outstanding
      shares of Common Stock or the determination of the holders of Common Stock
      entitled to receive a dividend or other distribution payable in additional
      shares of Common Stock or other securities or rights convertible into, or
      entitling the holder thereof to receive directly or indirectly, additional
      shares of Common Stock (hereinafter referred to as the “Warrant Stock
      Equivalents”) without payment of any consideration by such holder for the
      additional shares of Common or Warrant Stock Equivalents, then, as of such
      record date (or the date of such distribution, split or subdivision if no record
      date is fixed), the Exercise Price shall be proportionately decreased and the
      number of shares of Common Stock which this warrant is exercisable for, if
      any,
      shall be appropriately increased in proportion to such increase of outstanding
      shares. 

    

    (c) Combination
      of Shares.
      If
      prior to the Expiration Date, the number of shares of Common Stock outstanding
      at any time after the date hereof is decreased by a combination of the
      outstanding shares of Common Stock, the Exercise Price shall be proportionately
      increased and the number of shares of Common Stock which this warrant is
      exercisable for, if any, shall be appropriately decreased in proportion to
      such
      decrease in outstanding shares. 

    

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    (d) Reorganization,
      Merger, Consolidation or Sale.
      If at
      any time or from time to time prior to the Expiration Date, there shall be
      a
      capital reorganization (other than a subdivision, combination, reclassification
      or exchange of shares provided for elsewhere in this Section 9) or a merger
      or
      consolidation of the Company with or into another corporation, or the sale
      or
      transfer of all or substantially all of the Company’s assets to another Person
      shall be effected in such a way that holders of shares of Common Stock shall
      be
      entitled to receive stock, securities or assets with respect to or in exchange
      for their shares of Common Stock, then as a part of such reorganization, merger,
      consolidation, sale or transfer, provision shall be made so that the Holder
      shall thereafter be entitled to receive upon the exercise of this warrant,
      the
      number of shares of stock or other securities or property of the Company, or
      of
      the successor corporation resulting from such reorganization, merger,
      consolidation, sale or transfer, to which a holder of the number of shares
      of
      Common Stock (or any shares of stock or other securities which may be) issuable
      upon the exercise of this warrant would have received if this warrant had been
      exercised immediately prior to such reorganization, merger, consolidation,
      sale
      or transfer. The Company will not effect any such consolidation, merger, sale
      or
      transfer unless prior to the consummation thereof the successor entity (if
      other
      than the Company) resulting from such consolidation, merger or the entity
      purchasing such assets shall assume by written instrument (i) the obligation
      to
      deliver to the Holder such securities or assets as, in accordance with the
      foregoing provisions, the Holder may be entitled to purchase, and (ii) all
      other
      obligations of the Company under this warrant. The provisions of this section
      9(d) shall similarly apply to successive consolidations, mergers, exchanges,
      sales and transfers. In the event that in connection with any such capital
      reorganization, consolidation, merger, sale or transfer, additional shares
      of
      Common Stock shall be issued in exchange, conversion, substitution or payment,
      in whole or in part, for a security of the Company other than Common Stock,
      any
      such issue shall be treated as an issue of Common Stock covered by the
      provisions of section 9(d) hereof.

    

    (e) Reclassification,
      Conversion or Reorganization.
      If the
      Common Stock (or any shares of stock or other securities which may be) issuable
      upon the exercise of this Common shall be changed into the same or different
      number of shares of any class or classes of stock, whether by capital
      reorganization, conversion, reclassification or otherwise (other than a
      subdivision or combination of shares or stock dividend provided for in sections
      9(b) and 9(c) above, or a reorganization, merger, consolidation, sale or
      transfer provided for in section 9(d) above), then and in each such event the
      Holder shall be entitled to receive upon the exercise of this warrant the kind
      and amount of shares of stock and other securities and property receivable
      upon
      such reorganization, conversion, reclassification or other change, to which
      a
      holder of the number of shares of Common Stock (or any shares of stock or other
      securities which may be) issuable upon the exercise of this warrant would have
      received if this warrant had been exercised immediately prior to such
      reorganization, conversion, reclassification or other change, all subject to
      further adjustment as provided herein. 

    

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    (f) Notice
      of Adjustment.
      Upon
      any adjustment of the Exercise Price and the number of Warrant Shares or other
      capital stock, as applicable, issuable upon exercise of the warrant, then and
      in
      each such case the Company, at its sole expense, shall give written notice
      thereof (i) by certified or registered mail, postage prepaid, (ii) by a
      nationally known overnight delivery service, or (iii) delivered by hand,
      addressed to the Holder at his address as shown on the books of the Company,
      which notice shall state the exercise price resulting from such adjustment
      and
      adjusted number of Warrant Shares or other capital stock, as applicable,
      issuable upon exercise of the warrant, setting forth in reasonable detail the
      method upon which such calculation is based. 

    

    (g) Limitations
      on Adjustments.
      Anything in this warrant to the contrary notwithstanding, no adjustment of
      the
      exercise price shall be required, unless such adjustment, either by itself
      or
      with other adjustments not previously made, would require a change of at least
      $0.01 in such exercise price; provided, that any adjustment that, by reason
      of
      this section 9(g), is not required to be made shall be carried forward and
      taken
      into account in any subsequent adjustment. 

    

    10. Early
      Termination. The
      Holder shall have no right to exercise this warrant at any time after the later
      of (a) the consummation of a Termination Event (as defined below), and (b)
      the
      20th
      trading
      day following the date on which the Company gives the Holder the written notice
      referred to in the next sentence. The Company shall give the Holder not fewer
      than 20 trading days’ advance written notice of the consummation of a
      Termination Event. As used in this agreement, the term “Termination Event” means
      (y) the consummation of a merger of the Company with an unaffiliated third
      party, in which the shares of Common Stock are converted solely into the right
      to receive cash, or (z) if the Common Stock is quoted on NASDAQ or the New
      York
      Stock Exchange (the “NYSE”) or American Stock Exchange (the “AMEX”), the average
      of the closing price of the Common Stock on any 30 consecutive trading days
      on
      NASDAQ, the NYSE, or the AMEX, as the case may be, during the exercise period
      equals or exceeds 300% of the exercise price at which this warrant may then
      be
      exercised.

    

    11. Equity
      Participation.
      This
      warrant is issued in connection with the Securities Purchase Agreement. It
      is
      intended that this warrant constitute an equity participation under California
      law and not constitute interest on the Promissory Note. If under any
      circumstances whatsoever, fulfillment of any obligation of this warrant, the
      Securities Purchase Agreement, or any other agreement or document executed
      in
      connection with the Securities Purchase Agreement, shall violate the lawful
      limit of any applicable usury statute or any other applicable law with regard
      to
      obligations of like character and amount, then the obligation to be fulfilled
      shall be reduced to such lawful limit, such that in no event shall there occur,
      under this warrant, the Securities Purchase Agreement, or any other document
      or
      instrument executed in connection with the Securities Purchase Agreement, any
      violation of such lawful limit, but such obligation shall be fulfilled to the
      lawful limit. If any sum is collected in excess of the lawful limit, such excess
      shall be applied to reduce the principal amount of the Promissory Note and,
      following full payment of the Promissory Note, shall be returned to the
      Company.

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    12. Expenses.
      The
      Company shall pay all expenses and other charges payable in connection with
      the
      preparation, issuance and delivery of this warrant and all substitute warrants.
      and all taxes (other than any issuance taxes, including, without limitation,
      documentary stamp taxes, transfer taxes and other governmental charges, which
      shall be paid by the Company) in connection with such issuance and delivery
      of
      this warrant and the Warrant Shares.

    

    13. Severability.
      If
      any
      provision of this warrant or the application thereof to any person or
      circumstances shall be invalid or unenforceable to any extent, the remainder
      of
      this warrant and the application of such provisions to other persons or
      circumstances shall not be affected thereby and shall be enforced to the
      greatest extent permitted by law.

    

    14. Amendments.
      This
      warrant may be amended only by an instrument executed by the Company and the
      Holder.

    

    15. Governing
      Law.
      This
      warrant shall be governed by and construed in accordance with the law of the
      State of California, applicable to agreements made and to be performed in
      California, without giving effect to its conflict of laws principles.

    

    

    Dated:
      December 12, 2005

    

    
      	 	
              VIKING
                SYSTEMS, INC.

            
	 	 
	 	 
	 	 
	 	
              By:
                

            
	 	
              Name: Thomas
                B. Marsh

            
	 	
              Title: President
                and Chief Executive Officer

            

    

    

    

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    ANNEX
      1

    

    NOTICE
      OF EXERCISE

    

    To:
      Viking Systems, Inc.

    

    (1) The
      undersigned hereby irrevocably elects to purchase _________ shares of Common
      Stock of Viking Systems, Inc. pursuant to the attached warrant, and tenders
      payment of the purchase price for such shares by a cash payment of
      $__________.

    

    (2) In
      exercising the warrant, the undersigned hereby confirms and acknowledges that
      the shares of Common Stock are being acquired for investment, and that the
      undersigned shall not offer, sell, or otherwise dispose of any such shares
      of
      Common Stock except under circumstances that will not result in a violation
      of
      the Securities Act of 1933, as amended, or any state securities
      laws.

    

    (3) Please
      issue a certificate or certificates representing such shares of Common Stock,
      and, to the extent the Company determines not to issue fractional shares, pay
      any cash for any fractional share, to:

    

    
      	 	
              Name

            	
              Address

            	
              Number
                of Shares

            	 

    

    

    

    

    

    

    

    

    (4) Please
      issue a new warrant for the unexercised portion of the attached warrant in
      the
      name of the undersigned and/or, if the undersigned has completed an assignment
      form in the form of annex 2 to the warrant, in such other names and amounts
      as
      specified in the assignment form.

    

    

    

    
      	
              Dated:

            	
              Holder:
                

            
	 	 
	 	 
	 	
              By:

            
	 	
              Name:

            
	 	
              Title:

            

    

    

    

    
      
        
          

        

         

      

      
         

        
          

        

      

      
         

        
          

        

      

    

    ANNEX
      2

    

    

    

    ASSIGNMENT
      FORM

    

    For
      value
      received, the undersigned registered owner of this warrant hereby sells, assigns
      and transfers to the assignee named below all the rights of the undersigned
      under the warrant attached to this assignment with respect to the number of
      shares of Common Stock set forth below:

    

    
      	
              Name
                of Assignee

            	
              Address

            	
              Number
                of Shares

            

    

    

    

    

    

    

    

    

    

    The
      undersigned represents and warrants to the Company that the assignee has
      represented and warranted to the undersigned that (a) it is an “accredited
      investor” within the meaning of Regulation D under the Securities Act of 1933,
      as amended (the “Act”), (b) by reason of its business or financial experience,
      it has the capacity to protect its own interests in connection with the
      acquisition of this warrant and the underlying shares of Common Stock, and
      (c)
      this warrant and the shares of Common Stock to be issued upon exercise of this
      warrant are being acquired for investment and that it shall not offer, sell,
      or
      otherwise dispose of this warrant or any shares of stock to be issued upon
      exercise of this warrant, except under circumstances that will not result in
      a
      violation of the Act or any state securities laws. Further, the undersigned
      represents and warrants to the Company that it has furnished the assignee a
      copy
      of this instrument, and the assignee has acknowledged that, upon exercise of
      this warrant, the assignee shall, if requested by the Company, confirm in
      writing, in a form satisfactory to the Company, that the shares of stock so
      purchased are being acquired for investment and not with a view toward
      distribution or resale in violation of the Act.

    

    
      	
              Dated:

            	
              Holder:
                

            
	 	 
	 	 
	 	
              By:

            
	 	
              Name:
                

            
	 	
              Title:

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