UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-KSB


(MarkOne)





S
            ANNUAL REPORT UNDER SECTION 13 OR
      15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year endedDecember 31,
      2007.





o
            TRANSITION REPORT UNDER SECTION
      13 OR l5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition
      period from    ________ to  ________





Commission
file number 0-7475





NATURE
VISION, INC.


(Name of
small business issuer in its charter)





MINNESOTA
            41-0831186(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)1480
      Northern Pacific Road, Brainerd, MN
            56401(Address
      of principal executive offices)
            (Zip
      Code)





Issuer's
telephone number (218) 825 -
0733





Securities registered under Section
12(b) of the Exchange Act:





Title
      of each class
            Name
      of each exchange on which registeredCommon Stock, par
      value $0.16 per share
            The NASDAQ Stock
      Market LLC





Securities
registered under Section l2(g) of the Exchange
Act:        None





Check whether the issuer is not
required to file reports pursuant to Section 13 or l5(d) of the Exchange Act.o





Check whether the issuer (1) filed all
reports required to be filed by Section 13 or 15 (d) of the Exchange Act during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes SNoo





Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B contained in this
form, and no disclosure will be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. x





Indicate by check mark whether the
registrant is a shell company (as defined in Rule l2b-2 of the Exchange Act).
Yes £No S





Issuer’s
revenues for fiscal year ended December 31, 2007 were $9,607,686.





The
aggregate market value of the voting common equity held by non-affiliates of
registrant as of March 19, 2008 was $2,484,890, based on the last sale price of
the common stock as reported on the NASDAQ Capital Market on such date. For
purposes of these computations, the affiliates of the registrant are deemed only
to be the registrant’s directors and officers.





The
number of shares outstanding of the registrant’s common stock, par value $0.16
per share, as of March 19, 2008 was 2,312,583.




DOCUMENTS
INCORPORATED BY REFERENCE





The
definitive proxy statement for the 2008 Annual Meeting of Shareholders is
incorporated by reference into Part III of this annual report.




£  No S




1





PART
I


Item
1.   DESCRIPTION OF BUSINESS.





General





Nature
Vision, Inc. (“Nature Vision” or the “Company”) designs, manufactures and
markets outdoor recreation products for the sport fishing and hunting markets
and other consumer and industrial products.





Nature
Vision, Inc. was incorporated under the laws of the State of Minnesota in 1959
and operated under the name “Photo Control Corporation” until August 31, 2004.
On August 31, 2004, the corporate name was changed to “Nature Vision, Inc.” in
connection with a merger transaction with Nature Vision Operating Inc. (f/k/a
Nature Vision, Inc.) Our executive offices are located at 1480 Northern Pacific
Road, Brainerd, Minnesota 56401; our telephone number is (218)
825-0733.





Our
annual report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports
on Form 8-K and all amendments to such reports filed pursuant to Section 13(a)
or 15(d) of the Exchange Act are available, free of charge, on or through our
Internet website located atwww.naturevisioninc.com, as soon as reasonably practicable after they are
filed with or furnished to the Securities and Exchange Commission.





Sale
of Bookendz Product Line





On
October 28, 2005, we completed the sale of our Bookendz product line, related
patent and remaining inventory. We initially purchased Bookendz docking stations
for Apple PowerBook and iBook in October of 2000, but decided to sell this
product line to allow the Photography division to focus on its core
products.





Sale
of Photo Control Division





Nature
Vision operated two separate divisions: the Nature Vision division and the Photo
Control division. Nature Vision designs, manufactures and markets outdoor
recreation products primarily for the sport fishing, hunting and industrial
markets. Photo Control designed, manufactured and marketed
professional cameras, electronic flash equipment, lens shades and related
photographic accessories and provided peripheral products for the
videoconferencing and the audiovisual markets. The photography product lines
were marketed under the Norman product line. The videoconferencing and
audiovisual product lines were marketed under the Vaddio product line. Photo
Control Corporation acquired the assets comprising the Vaddio product line in
January of 2004.




On
October 20, 2006, Nature Vision sold its Norman product line to Promark
International, Inc. Pursuant to the terms of the asset purchase agreement dated
October 20, 2006, we sold the inventory, equipment, intellectual property and
certain other assets relating to the Norman product line for a total purchase
price of approximately $2,400,000, of which $300,000 was payable pursuant to the
terms of a three-year note.   As of December 31, 2007, the entire
three-year note was received in full.





Following
the sale of our Norman product line, we also sold the Vaddio product line to New
Vad, LLC, under the terms of the asset purchase agreement dated as of February
5, 2007. New Vad, LLC is owned in part by former managers of Nature Vision’s
Photo Control division, including Robin K. Sheeley, who served as
President of the Photo Control division. The transaction involved the sale of
fixed assets, equipment, licenses, intellectual property and certain other
assets relating to the Vaddio product line for a total estimated purchase price
of approximately $1,500,000. As part of the sale, the parties also entered into
a consignment sale agreement, providing for the sale of the inventory related to
Vaddio product line to New Vad over the subsequent 12 months after the closing
at cost for $2,031,359, and a collection agreement, under which New Vad agreed
to collect and transmit to us payments made by customers on our accounts
receivable for products or services sold or provided before the closing date.
Under the terms of the consignment sale agreement, New Vad also agreed to
purchase the consigned inventory from us as needed before purchasing similar
type of item from a third party until the inventory is sold in its entirety, or
January 31, 2008, at which time the remaining inventory will be
purchased.  As of December 31, 2007 the remaining inventory to be
purchased under the sale agreement was approximately $298,000, with this
remaining amount to be purchased in January 2008, of which $200,000 has been
paid to date and the remaining $98,000 is due.  Nature Vision will
receive 2% of receipts from the gross sale of all Vaddio products sold by New
Vad after March 1, 2007, paid on a monthly basis with a six month deferral,
until a total payment of $750,000 is received. The potential deferral proceeds
of up to $750,000 will be recorded when earned and collection is deemed
probable.  Deferred sale proceeds of $48,474 were recorded during the
year ended December 31, 2007.





The
amount of consideration paid for the assets of Vaddio product line was
determined after an extensive effort to sell the Vaddio product line and the
final price was the result of arms-length negotiations with New
Vad.


2




The sale
of our Photo Control division was part of our planned strategic move to exit
from the photography and audiovisual markets and to focus on the long—term
growth in the outdoor recreation markets. We anticipate the revenues lost in the
sale to be replaced organically through our remaining products, new products and
strategic acquisitions of companies or product lines all within the outdoor
recreation markets. The sale of Photo Control reduced the Company’s overall
sales volume thus placing all of the corporate overhead expenses on the
remaining operation. Therefore, it is critical for the Company to continue to
expand its sales base to return to profitability.





Investment
Considerations





Investors
should consider all of the information contained in this report including the
factors discussed under Item 1 - Description of Business - Factors That May
Affect Future Results, Item 6 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations and Item 7 - Financial Statements,
before making an investment decision with regard to our securities.





Some of
the statements made in this report in the sections listed above and elsewhere in
this report constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are subject
to the safe harbor provisions of the reform act. Forward-looking statements may
be identified by the use of the terminology such as may, will, expect,
anticipate, intend, believe, estimate, should or continue or the negatives of
these terms or other variations on these words or comparable terminology. To the
extent that this report contains forward-looking statements regarding the
financial condition, operating results, business prospects or any other aspect
of our business, you should be aware that our actual financial condition,
operating results and business performance may differ materially from that
projected or estimated by us in the forward-looking statements. We have
attempted to identify, in context, some of the factors that we currently believe
may cause actual future experience and results to differ from their current
expectations. These differences may be caused by a variety of factors including,
but not limited to, adverse economic conditions, intense competition, including
entry of new competitors, inability to obtain sufficient financing to support
our operations, progress in research and development activities, variations in
costs, fluctuations in foreign currencies against the U.S. dollar in countries
where we source products, adverse federal, state and local government
regulation, unexpected costs, lower sales and net income (or higher net losses,
than forecasted), price increases for equipment, inability to raise prices,
failure to obtain new customers, the possible fluctuation and volatility of our
operating results and financial condition, inability to carry out marketing and
sales plans, loss of key executives and other specific risks that may be alluded
to in this report.





Products





Overview





Nature
Vision designs, manufactures and markets outdoor recreation products
primarily for the sport fishing and hunting markets. We have also adapted our
outdoor recreation products and core technologies for sale into certain
industrial markets. Manufacturing of most of these products is outsourced to
companies located in Asia, where we use approximately six suppliers for key
components, sub-assemblies and raw materials. We have identified but not
qualified alternative Asian suppliers. Some final assembly is undertaken at our
Brainerd, Minnesota facility, which also serves as the distribution center and
corporate headquarters.





Our
outdoor recreation products have historically been offered to the public by
traditional sporting goods distribution channels. We have continued to focus on
significant retailers and large catalog houses to offer our products as we
expand our product categories, including Cabela’s, Bass Pro Shops,
Gander Mountain, Dick’s Sporting Goods and Mills Fleet Farm. Sales to each
of Cabela’s, Bass Pro Shops and Gander Mountain accounted for in excess of
10% of our 2007 and 2006 revenues. We primarily rely upon independent sales
representatives to sell our outdoor recreation products to retailers. Demand for
our outdoor recreation products is seasonal, with the majority of sales
occurring in the fourth and first calendar quarters.





Underwater
Viewing Systems





We
manufacture, distribute and market a family of products known as underwater
viewing systems that are sold under the trade name “Aqua-Vu.” We are credited as
the creator of the underwater viewing system product category and were the first
to market a self-contained underwater viewing system. An underwater viewing
system consists of a submersible video camera with internal lighting and a hand
held monitor-viewing device with a battery power supply. With the use of
attachable weights and fins, the underwater camera can be lowered into a body of
water and used to look in the direction a boat is traveling. In the past the
Aqua-Vu systems have relied on cathode ray tube (CRT) display technology which
required a sunshield to shadow the display. In 2004, we began to market Aqua-Vu
systems that incorporate a proprietary sunlight viewable liquid crystal display
(LCD) technology that allows multi-person viewing on color display monitors. The
2004 Aqua-Vu systems also incorporated “on-screen display” information,
including the water temperature at the camera, camera depth and camera
direction. In 2005, we expanded the Aqua-Vu systems to include the Scout series
that offers a 5-inch screen, at a retail price point of $199, Scout XL series
that offers 7-inch screens, with brightness and contrast controls and the Scout
SRT series that offers the same 7-inch screen along with on screen display of
water temperature at the camera and our patent-pending Spectral-Response
lighting system. Another innovative product we introduced in 2005 is our new
Aqua-Vu Quad 360 Nighthawk. Instead of providing only one-directional view, our
Aqua-Vu Quad 360 Nighthawk offers a split-screen 360 degrees view. In 2006, we
enhanced four-way viewing, introducing the Quad 4x4, which has replaced the
Nighthawk. The 4x4 incorporates a new monitor case designed around the existing
7-inch screen and has the ability to select one of the four quadrants to be
viewed full screen. We also added a digital recording Aqua-Vu DVR line that
allows anglers to record their underwater discoveries on San DiskTM media cards.
Aside from recreational viewing, Aqua-Vu DVR allows serious anglers to create
video logs of their favorite fishing grounds to help them analyze repeatable
fishing patterns. In 2005 we developed the Aqua-Vu MAV (Motorized Aqua-Vu) that
allows anglers the ability to fish and view at the same time much more
efficiently. Utilizing foot controls the angler is able to adjust the depth of
the camera while viewing on a 10.5-inch daylight viewable LCD monitor. The MAV
was released into the market during 2007. During 2007, we also introduced a new
low cost brand of underwater viewing system under the trade name “FishTV”. The
current model of FishTV has a basic 5-inch black & white CRT monitor with
infrared lighting.  FishTV is currently selling for a $99 retail price
and in management’s opinion represents the best value in underwater viewing
systems.


3




Sonar
Systems





The
Company marketed its first sonar system during 2006 under the VPG model
name.  During 2007 we rolled out a more advanced version of the
product under the trade name “ShowDown”. The ShowDown is a new style of vertical
digital fish finder offering superior performance that anglers find
intuitive to understand.





Fishing
Trolling Systems





In 2006
we purchased substantially all of the assets of Vector Teknologies, LLC. Vector
marketed all machined metal downriggers and accessories for controlled depth
fishing. We began marketing these in Spring 2006 through our channels of
distribution as the Heavy Metal Series. The Vector line provides a “trolling
products platform” which will include our new wireless underwater video viewing
system. This wireless product line will transmit a video signal and other useful
data from the camera to the boat for viewing on a large LCD monitor. The
wireless technology is planned to undergo final testing in the Spring of 2008
with an anticipated release date into the market later in the year. We
anticipate new product innovation in the trolling products platform extending
beyond 2008.





On July
3, 2007, the Company purchased substantially all the assets of Fish Hawk
Electronics Corporation. The purchase provides the Company with downrigger
display technology that compliments its Vector line of downrigger trolling
products and enhances the “trolling products platform”.




Hunting
Products





We also
sell products for the recreational hunting market. These products include
“Woodland Whisper” hearing enhancers, Digital Deer Scales, Digital Archery
Scales, Digital Turkey Scales and the Quick Set Chair Blind. The Woodland
Whisper hearing enhancers aid wild turkey hunters by detecting distant game
calls, and big game hunters by amplifying the sounds of approaching prey.
Introduced in 2005, the Digital Deer Scale allows hunters to accurately weigh
their game, up to 300 lbs, and display that weight on a digital read out in
order to get those all important pictures for the “brag book.” In 2006 we began
to market the Digital Archery Scale to archery shops and shooters alike. Once
the scale is hooked on the draw string and pulled, the scale will display the
draw weight of a bow up to 100 lbs with accuracy +/- .5 lbs. The scale will
provide the shops and shooters the ability to set up their bows with a high
degree of accuracy. The Digital Turkey Scale is a National Wild Turkey
Federation, NWTF, licensed product which we began to market in 2006. The scale
allows hunters the ability to calculate their prized gobblers score based on the
NWTF system utilizing weight, beard length and spur length. Also introduced in
2006 was the Quick Set Chair Blind, patent pending, featuring Mossy Oak licensed
fabric. In 2007 we introduced the new Quick Sit Low Profile hunting blinds in
one and two person units. The blinds which fit neatly into an over the shoulder
carry bag will allow hunters to be very mobile, set up quickly and
comfortably disappear into the woods.





On
September 20, 2007, Nature Vision closed on the acquisition of substantially all
of the assets of Cass Creek, a manufacturer and distributor of electronic game
calling devices, pursuant to the terms of an Asset Purchase
Agreement.  The purchase provides the Company with a significant
hunting brand from which to expand its annual hunting sales.  Cass
Creek products consist of various types of digital electronic game calling
devices including predator, big game, turkey and waterfowl.  The calls
can be used as training devices or in the field where local regulations
permit.  Additionally the Company gained numerous new hunting products
under development and some new relationships with key design and manufacturing
entities.  Cass Creek has a successful European distribution network
which will be used to leverage sales of existing Nature Vision
products.


4




Ice
Fishing Products





In 2003,
we introduced a product for the ice fishing market called the “Buzz Stix.” A
Buzz Stix ice fishing rod incorporates a miniature vibrating motor activated
with a push button switch. In 2004, Nature Vision expanded the Buzz Stix ice
fishing rod product line. An automatic jigging rod called the AutoBuzz Stix
was introduced that incorporates a small micro processor and three
pre-programmed jigging routines. Also introduced, was the Hot Stix ice fishing
rod with a heated handle.





In 2005,
recognizing the burgeoning popularity of glow-in-the-dark ice fishing lures, we
introduced the Blazer Stix series of fishing rods that feature a built-in LED
light that anglers can use to recharge their phosphorescent ice fishing lures.
The Blazer Stix LED concept was also offered in a clip-on version that attaches
to any fishing rod, ice or open-water.





During
2006 we developed and marketed a portable ice shelter under the trade name “Pak
Shack”.  Since then we have expanded the product line to include a two
and three person shelter as well as a Pak Sled to conveniently transport
equipment.  The shelters fit neatly into an over the shoulder carry
bag that allow the fisherman mobility and quick set up.





Fishing
Lures





On
January 21, 2008 the Company acquired substantially all of the assets associated
with the Castaic Softbait brand under an asset purchase agreement. The
purchase provides the Company with a proven fishing tackle product platform.Throughout the fishing tackle industry, Castaic Softbait brand remains
the recognized inventor of the swimbait category, and is currently one of the
hottest lures for big bass in North America. Recognized by Field & Streammagazine
as one of the top 50 all-time fishing lures, Castaic Softbaits brand has twice
graced the cover of this prestigious publication. The addition of the Castaic
Softbait brand provides Nature Vision not only a proven fishing tackle product
platform, but will immediately generate additional revenues during the spring
and summer periods, traditionally the Company’s historically slower season. The
Castaic Softbait brand acquisition now gives us a fully balanced mix of
products, completing our 3-tiered product equation. Castaic Softbait’s brand
founder Jason Scott will remain active within the organization, and has been
hired as research and development director for Nature Vision’s tackle division.
The move combines into a single company the collective talents of Scott and
Zernov, we believe to be two of the fishing industry’s sharpest
innovators.





Industrial
Products





We have
adapted our underwater viewing technology for use in the water well inspection
industry, offering a line of cameras under the trade name “Well-Vu.” Our Well-Vu
underwater viewing systems are submersible to 1,000 feet. In addition, we sell
viewing system products called “Tool-Vu” and “Mini-Vu” for use in automotive and
building inspections.





Intellectual
Property





Although
our patents and trademarks are valuable, they are not considered to be essential
to our Company’s success. Innovative application of existing technology along
with providing efficient and quality products are of primary
importance.





We have
entered into agreements with employees that grant us the exclusive right to use,
make and sell inventions conceived by our employees during their employment.
Management believes that the right to use, make and sell such inventions
adequately protects against any employee who might claim an exclusive
proprietary right in an invention developed while the employee was employed by
us.





We hold
numerous patents and have several patent applications pending for products
offered by our outdoor recreation products division. Most patents relate to
aspects of the Aqua-Vu underwater viewing system, including the camera housing.
Other patents cover our Buzz Stix ice fishing pole, a bird feeder with a
built-in video camera and transmitter and a hand-held monocular video monitor.
Some of the pending patents include the MAV, Quick Set Chair Blind, and Game Vu.
The patents expire during the period 2014 through 2023. There is no guarantee
that others may not copy any of our products in whole or in part to produce a
product similar in design and purpose. Patent protection of our products does
not imply that we will recognize any substantial, competitive edge in the
marketplace.





We also
hold various trademarks relating to our outdoor recreation products, including
Aqua-Vu, ShowDown, Game-Vu, Tool-Vu, Mini-Vu, Woodland Whisper, Pak Shack, Buzz
Stix, Hot Stix, PIDS, RTG and Ice Pro. We consider these trademarks important in
assuring consumer recognition of our products.


5




Competition





Our
Aqua-Vu systems compete with underwater cameras sold by several companies,
including large retailers directly sourcing products under their own labels. We
also face competition from manufacturers of sonar and global positioning system
(GPS) devices. Sonar devices detect schools of fish and, at times, individual
fish, and can provide information about lake and river bottom contours. GPS
devices allow fishers to “mark” spots where fish are located and then
easily find them again. Large consumer and marine electronics companies as well
as established companies offering fishing and hunting equipment are sources of
potential competition.





Research
and Development





For the
years ended December 31, 2007 and 2006, we spent $158,000 and $166,000
respectively, on research activities relating to the development of new outdoor
recreation products. We anticipate that spending on research and development in
2008 will be comparable as a percentage of net sales to that in
2007.





Government
Regulation





Our
outdoor recreation and photography products are not subject to significant
government regulations other than those regulations applicable to businesses
generally. When they were introduced in 1998, the Aqua-Vu systems were the
subject of proposed legislation to ban the devices in Minnesota, but the
legislation was never enacted.





Employees





As
of December 31, 2007, we employed 24 associates, consisting of 18 full-time
employees and 6 seasonal employees.





Compliance
with Environmental Laws





We are in
compliance with all applicable federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants. Compliance
with these environmental laws and regulations has had no material effect on our
capital expenditures, earnings or competitive position.





Management





Executive
officers of Nature Vision are as follows:


Name
            
            Age
            
            PositionJeffrey P. Zernov
            
            55
            
            President,
      Chief Executive Officer and a directorDavid M. Kolkind
            
            50
            
            Chief
      Financial Officer and Secretary





JeffreyP.Zernov has
served as our President and Chief Executive Officer and as a director since
August 31, 2004. Prior to August 31, 2004, Mr. Zernov served in the same
capacities for Nature Vision Operating, Inc. (f/k/a Nature Vision, Inc.), which
he founded in 1998. Mr. Zernov also served as Chief Financial Officer of
Nature Vision Operating, Inc from 1998 through 2002. In 1979, Mr. Zernov
founded Zercom Corporation, a defense electronics contractor, which he sold to
Communication Systems Inc. in 1990. Mr. Zernov served as Zercom's Chief
Executive Officer until 1996 and, in addition, from 1990 through 1996, he
established and served as President of the Zercom Marine division, a designer
and manufacturer of sonar products for sports fishing applications. Prior to
1979, Mr. Zernov served as a field promotion specialist with Lindy Tackle
and was a co-founder of In-Fisherman, a sports fishing publisher and producer of
television shows.





David M.
Kolkind was appointed Chief Financial Officer and Secretary of the
Company on November 26, 2007. From June, 2006 to July, 2007, Mr. Kolkind served
as the Chief Financial Officer of MCHH Holdings, LLC, a holding company
specializing in the real estate industry. Between June, 2003 and June 2006, Mr.
Kolkind worked as a consultant in various capacities, mainly as Interim
Financial Officer and Controller, primarily in construction and real estate
industries. From August, 2002 to June, 2003, Mr. Kolkind served as the
controller of North American Membership Group, Inc., a consortium of various
clubs that represent special groups, including the North American Hunting Club
and the North American Fishing Club. Mr. Kolkind also held other various
positions, including Chief Financial Officer of Asset Marketing Services, Inc. a
direct marketing services and telemarketing company from May, 2000 to June,
2002, and as Vice President of Finance/Treasurer and Controller of the
Sportsman's Guide, Inc., a public mail order/e-commerce company between October,
1994 and May, 2000.


6




Factors
That May Affect Future Results





Factors
that may affect our future results include, but are not limited to, the
following items as well as the information in Item 6 - Management’s Discussion
and Analysis of Financial Condition and Results of Operations.





We
may need additional capital in the future.While we believe that we currently have
sufficient resources with current cash and our current credit facility to
conduct business, we may need additional capital in the future. We may not be
able to obtain additional debt or equity financing or, if we do, it may not be
on favorable terms. Sources of additional capitalmay include additional bank debt
financing or the sale of debt or equity securities, the latter of which could
result in significant dilution to existing shareholders.





We depend on
patents and proprietary technology.Our current sales levels may depend
on our ability to defend current patents and obtain patent protection for future
products and processes. We currently have numerous United States patents.
In addition, we have applied for patent protection on additional aspects of our
current products. These patent applications may not be granted. Even if they
are, the scope of any patent protection may be limited, allowing for competitive
products, or the patents may be held invalid if challenged. We also rely upon
trade secrets, and no assurance can be given that others will not independently
develop or otherwise acquire substantially equivalent know-how or otherwise gain
access to our proprietary technology.





We depend on our
key personnel.Our future success depends to a significant degree upon
the continued services of key technical and senior management personnel
including, but not limited to, Jeffrey P. Zernov, our Chief Executive
Officer and President, as well as our ability to attract, retain and motivate
highly qualified managerial and technical personnel if we expand. Failure to
attract and retain skilled personnel could hinder our research and development
and manufacturing efforts, and could limit our ability to expand our product
offering or to manage growth. The loss of one or more key employees could
similarly affect us.





The future growth
of Nature Vision will depend upon our ability to continue to develop new and
innovative products and enter new markets.A significant portion of our
outdoor recreation products division’s current revenue has been historically
dependent upon sales to traditional sporting goods dealers. In addition to
current products, we intend to introduce new products for other applications in
the outdoor recreation market. Because some of these new product categories may
be new to us, we may need to develop relationships with major participants in
this market, which in many cases are different from our existing customers. Any
new products may not be accepted by the ultimate users. Even if they are, we may
need to continue to develop relationships with significant retailers to
penetrate markets and compete against suppliers of similar
products.





We use
Asian-based sources of supply for some of our products.We currently
purchase, and will continue to purchase, finished goods, components and raw
materials from Asian-based vendors for our outdoor recreation products. Although
we have identified alternative finished goods manufacturers and suppliers for
key components, sub-assemblies and raw materials, at the present time we use
approximately six Asian suppliers. Should a key supplier be unwilling or unable
to supply components or sub-assemblies in a timely manner or subject to
specifications, or should approval of a current or proposed supplier be delayed,
withheld or withdrawn, we could experience delays in obtaining alternative
suppliers, which might result in reduced product output. In addition, the price
that we pay for these products could increase due to trade barriers, tariffs or
other trade restrictions imposed by the United States or changes in
international currency rates.





Quality control
of outsourced production.We
are reliant on our suppliers to produce quality products.  The
inability of our suppliers to meet quality control standards could affect the
Company’s costs associated with returns and defective
merchandise.  The Company hired two quality control associates during
2007.  One independent offshore quality control consultant performs
routine inspections on Company shipments and inspects production lines on a
daily basis.  A domestic quality control associate performs further
product quality inspections and documents engineering
standards.  There is no assurance that these quality control processes
will eliminate defective products in the future.





Government
regulation banning or restricting the use of underwater video cameras would hurt
our business.The use of the Aqua-Vu underwater viewing system is not
regulated by any federal or state governmental entity, nor is management aware
of any similar restrictions in Canada or other foreign countries. In 1998, at
the time the product was introduced, the Minnesota Senate passed a bill that
would have outlawed the use of underwater video cameras for sport fishing. The
Minnesota House of Representatives did not act upon the bill, and it was never
enacted. If a federal, state or foreign governmental entity were to enact
legislation banning or restricting the use of underwater video cameras, sales of
the Aqua-Vu underwater viewing system would decline and our business would
suffer as a result of fewer sales of our flagship product.





Potential
competitors could lower our revenues or cause expenses to increase.Our
current competition for the Aqua-Vu underwater viewing system and other products
consists of several companies, including large retailer’s directly sourcing
products under their own labels. Potential competitors include large consumer
and marine electronics companies with broader product lines and better name
recognition and market acceptance. These companies also have significantly
greater financial, technical, marketing and other resources. Increased
competition, especially by these larger, more established potential competitors,
may result in increased pricing pressure resulting in reduced gross profit
margins. We may also be forced to increase spending on marketing, sales and
product development, which would further reduce profits.


7




We may never
replace the lost revenue generated by the former Photo Control division.
We sold our Photo Control division to focus our efforts on the long—term growth
of our outdoor recreation markets. Although we hope to replace the lost revenue
previously generated by the Photo Control division by expanding our outdoor
recreation markets, our growth will significantly depend on this outdoor
recreational products sector. Unless we successfully develop and market new and
innovative products in the outdoor recreation markets, we may lose market share
and may never compensate for the lost source of revenue from the former Photo
Control division.





We may experience
difficulties integrating the operations of newly acquired business or product
lines.Newly
acquired business operations will require management to adapt to the
idiosyncrasies of each individual operation including marketing, pricing,
returns, sourcing, and accounting.  The addition of certain product
lines are manufactured directly by the Company, therefore the Company will be
required to become more efficient at manufacturing and product
costing.





Item
2. DESCRIPTION OF PROPERTY.





In late
2006, Nature Vision moved its operations into a leased 35,600 square foot
facility located at 1480 Northern Pacific Road, Brainerd, Minnesota which houses
corporate, accounting, administrative, manufacturing and light assembly,
research and development, sales, and customer service departments. Management
felt that the former facility located at 213 NW 4th street did not provided us
with sufficient space to meet our future growth plan. Accordingly, the Company
sold its former location in late 2006, and the mortgage securing the former
facility was paid in full.





In
connection with the sale of the Vaddio product line on February 5, 2007, Nature
Vision entered in to a lease with New Vad, LLC effective as of February 1, 2007
to lease 10,000 square feet of our 55,000 square foot facility located at 4800
Quebec Avenue North, Minneapolis, Minnesota. Under the terms of the lease, New
Vad agreed to pay to Nature Vision a monthly gross rent of $10,000.  New
Vad, LLC vacated the facility in early 2007.  Recently, management has
entered into a purchase agreement to sell this facility which they intend to
close by April 15, 2008. The Company intends to use $1.9 million of the proceeds
from the sale to pay off the mortgage loan with M&I Business Credit, LLC
with the remainder used for general working capital purposes. There is
no assurance the sale will close on the estimated date or at all.





Item
3. LEGAL PROCEEDINGS.





Not
applicable.





Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.





Not
applicable.


8




PART
II





Item
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.





Market Information.The
number of record holders of our common stock on March 19, 2008 was 272. The
table below sets forth the high and low sale prices for the common stock during
the two years ended December 31, 2007.  The information shown is based
on information provided by Yahoo! Inc. and Nasdaq Stock Market. These quotations
represent prices between dealers, and do not include retail markups, markdowns
or commissions, and may not represent actual transactions. Our common stock is
currently traded on the Nasdaq Capital Market under the symbol “NRVN.” Nature
Vision did not pay any cash dividends on its common stock during the periods
presented nor does it anticipate paying any dividends in the future as the
Company plans to utilize all available resources to expand its sales
base.





Common
      StockQuarter
      Ended
              
              Low
              
              
              
              High2006March
      31
              
              $
              8.26
              
              
              
              $
              11.47June
      30
              
              $
              8.40
              
              
              
              $
              10.57September
      30
              
              $
              8.40
              
              
              
              $
              10.20December
      31
              
              $
              5.72
              
              
              
              $
              9.902007March
      31
              
              $
              4.10
              
              
              
              $
              6.00June
      30
              
              $
              2.20
              
              
              
              $
              4.10September
      30
              
              $
              2.10
              
              
              
              $
              2.66December
      31
              
              $
              1.40
              
              
              
              $
              3.04








Securities Authorized for Issuance
Under Equity Compensation Plans.The following table sets forth the
securities authorized for issuance under Nature Vision’s compensation plans as
of December 31, 2007.





Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            Weighted
      average exercise price of outstanding options, warrants and
      rights
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in
      column (a))(a)
            
            
            (b)
            
            
            (c)Equity
      compensation plans approved bysecurity
      holders
            109,450
            
            $
            4.13
            
            
            60,500Equity
      compensation plans notapproved by securities
      holders
            -
            
            
            -
            
            
            -Total
            109,450
            
            $
            4.13
            
            
            60,500


9




Item
6.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS




The
following discussion and analysis of financial condition, results of operations,
liquidity and capital resources should be read in conjunction with our audited
consolidated financial statements and notes thereto appearing elsewhere in this
report. This discussion contains forward-looking statements that involve risks
and uncertainties, including information with respect to the plans, intentions
and strategies for our businesses. The actual results may differ materially from
those estimated or projected in any of these forward-looking
statements.




Company
History and Overview




Nature
Vision, Inc., (f/k/a Photo Control Corporation) (the “Company” or “we”) was
incorporated as a Minnesota corporation in 1959. On August 31, 2004, the Company
changed its name to Nature Vision, Inc. in connection with a merger transaction
with Nature Vision Operating Inc. (f/k/a Nature Vision, Inc.) a Minnesota
corporation that was incorporated in 1998. As a part of the merger, Nature
Vision Operating Inc. became a wholly-owned subsidiary of the Company. The
shares of the combined company trade on the Nasdaq Capital Market under the
symbol, “NRVN.”




The
Company’s continuing operations are composed of one operating division, the
Nature Vision Division for outdoor recreation products, located in Brainerd,
Minnesota. On October 20, 2006, Nature Vision, Inc. sold the Norman product line
of its Photo Control division (Norman) and renamed the division the Vaddio
Division. On February 5, 2007, the Company sold certain assets and transferred
certain liabilities related to its Vaddio division (Vaddio). The Norman and
Vaddio divisions designed, manufactured and marketed professional cameras,
electronic flash equipment, lens shades and related photographic accessories and
sold audio visual peripheral products used in the video conferencing and
presentation industry. The Company began discussions and efforts to sell Norman
and Vaddio in the third and fourth quarter of 2006, respectively. The assets and
liabilities of Vaddio at December 31, 2006 met the requirements of Statement of
Financial Accounting Standards (SFAS) No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" as being held for sale. Operations and cash flows
will be eliminated as a result of the sale and the Company will not have any
significant involvement in the operations after the sale. In accordance with
appropriate accounting rules, the Company has reclassified the previously
reported financial results to exclude the results of the Norman and Vaddio
operations and have presented on a historical basis these operations as a
separate line in the consolidated statements of operations and the consolidated
balance sheets under discontinued operations. All of the financial information
in the consolidated financial statements and notes to the consolidated financial
statements has been revised to reflect only the results of continuing operations
of the Company’s outdoor recreation products.





On July
3, 2007, the Company purchased substantially all the assets of Fish Hawk
Electronics Corporation, for $323,310.   The purchase provides the
Company with downrigger display technology that compliments its Vector line of
downrigger trolling products.





On
September 20, 2007, Nature Vision closed on the acquisition of substantially all
of the assets of Cass Creek International, LLC (Cass Creek), a manufacturer and
distributor of electronic game calling devices, pursuant to the terms of an
Asset Purchase Agreement. The transaction involved the acquisition of
equipment, inventories, intellectual property, books and records, permits,
licenses, accounts receivable, cash, goodwill, general intangibles and certain
other assets of Cass Creek for a total purchase price of approximately
$2,600,000.





On
January 21, 2008 the Company acquired substantially all of the assets associated
with the Castaic Softbait brand under an asset purchase agreement. The
purchase provides the Company with a proven fishing tackle product platform.Throughout the fishing tackle industry, Castaic Softbait brand remains
the recognized inventor of the swimbait category, and is currently one of the
hottest lures for big bass in North America. Recognized by Field & Streammagazine
as one of the top 50 all-time fishing lures, the Castaic Softbaits brand has
twice graced the cover of this prestigious publication. The addition of the
Castaic Softbait brand provides Nature Vision not only a proven fishing tackle
product platform, but will immediately generate additional revenues during the
spring and summer periods, traditionally the Company’s historically slower
season. The Castaic Softbait brand acquisition now gives us a fully balanced mix
of products, completing our 3-tiered product equation. Castaic Softbait’s brand
founder Jason Scott will remain active within the organization, and has been
hired as research and development director for Nature Vision’s tackle
division.





The
long-term plans for the Company are to continue to expand its sales base in the
outdoor recreational markets. This growth will be achieved organically and
through anticipated strategic acquisitions.




Revenue




Revenue
consists of sales of ourproducts net of
returns and allowances. Direct revenue includes sales from orders to
distributors, dealers and direct consumers and includes customer service and
shipping charges. New product innovation through the use of technology will
continue to be the basis of our organic growth. Demand for our outdoor
recreation products is seasonal, with the majority of sales occuring in the
fourth and first quarters. We will look to strategic acquisitions to provide
penetration into new product categories and channels as well as level
seasonality.


10





Cost
of Goods Sold




Cost of
goods sold for our products consists of the cost of direct materials, labor to
produce the products, freight in, depreciation of production equipment,
amortization of molds and patents, warehousing, associated management, occupancy
costs, customer service and warranty, shipping and receiving costs, quality
assurance and other indirect miscellaneous manufacturing costs. Cost of goods
sold can fluctuate based on the product mix sold for a given period. Increasing
oil costs continue to drive up the cost of components and freight to receive and
ship products. In addition, currency fluctuations can impact our landed costs in
the U.S.A. We continue to evaluate make versus outsource opportunities to
minimize product costs. We look to increase our distribution abilities and
capacities in order to achieve efficiencies in certain operating
costs.




Gross
Profit




We define
gross profit as the difference between revenue and cost of goods sold. We
believe our gross profit is our best metric to manage the business on a product
line basis.





Selling, General and
Administrative Expenses




Selling,
general and administrative expenses include directly identifiable operating
costs and other expenses. The majority of these costs are fairly consistent from
month to month, with the exception of sales commissions. Selling expenses
consist of payroll, commissions, product management, marketing, advertising and
customer relationship costs. General and administrative expenses include
payroll, product design, product development, engineering, order processing,
management information systems, accounting and administrative costs. Other costs
consist primarily of interest on the existing line of credit. The interest rate
on the credit facility floats with prime, at prime plus .75%.




Loss
from Operations




Loss from
Operations is defined as revenue less cost of goods sold and selling, general
and administrative expenses.




Gain
from Discontinued Operations




On
October 20, 2006, Nature Vision, Inc. sold the Norman product line of its Photo
Control division (Norman) and renamed the division the Vaddio Division. On
February 5, 2007, the Company sold certain assets and transferred certain
liabilities related to its Vaddio division (Vaddio). In accordance with
Statement of Financial Accounting Standards No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” this operating segment was
classified as discontinued operations and the financial results are reported
separately as discontinued operations for all periods presented.




Trends
and Opportunities




Retail Expansion by Larger
Customers.Our large customers, such as Cabela’s, Bass Pro Shops and
Gander Mountain continue to represent a large concentration of our revenue.
Our smaller customers continue to reduce in quantity and quality. These new
large retail store expansion plans will provide significant opportunities for
growth at the expense of the smaller owner operator establishments. We
anticipate the number of customers within the Outdoor recreation products market
to continue to reduce as the average size of our customer continues to increase.
This consolidation puts significant pressure on the business with its increased
reliance on fewer customers. Failure to continue business with an existing
customer or even maintain an existing sales level with a customer could have a
significant impact on earnings.




Increased Inventories.
Inventory has increased in comparison to historic levels from 2006 and
2005.  At the end of 2007, our inventory increased primarily relating
to the purchase of Cass Creek. We currently have stock in place to fulfill
incoming orders and management feels that the inventory is readily saleable. We
anticipate the ability to increase inventory turnover during future quarters. A
high rate of inventory turnover will be difficult to achieve as the Company
experiences approximately a twelve week lead time to land goods from foreign
markets. Should sales of existing products not achieve forecasted levels, such
reductions may not be obtainable.




Increased oil prices.Increased oil prices may affect us more negatively than our competition.
If gasoline prices should continue to increase, consumers may opt to reduce the
amount of discretionary spending on entertainment items and take fewer
vacations. Increased oil prices continue to impact the costs of material
components. We rely on outsourced production and the costs for the associated
shipping could materially impact the cost of product and gross profit
margins.


11





Increased interest costs.Given the cyclical nature of our business we are reliant on a credit
facility. As the Company continues to grow additional borrowings maybe
necessary.  An increased debt structure and changing interest rates
may impact the costs of operating the business. If we are unable to obtain
favorable financing arrangements it may impact the ability of the Company to
expand.




Acquisition opportunities. We
continue to evaluate opportunities for strategic acquisitions in order to expand
sales and net income.  Potential acquisitions will require financing
which management believes will be reasonably available.   There
is no assurance, however, that acquisitions will occur or financing would be
available on terms acceptable to the Company or at all.




Investment in infrastructure.We anticipate the continuing investment in infrastructure to support our
current distribution facility. We will also continue to invest in qualified
employees to support our organic growth with new product
innovation.





Foreign
Currency.The Company sources a significant
amount of its products from overseas.  As foreign currencies fluctuate
with the U.S. dollar it may impact the overall profitability of the
operations.




12




Results of
Operations




The
following table provides the percentage change in our net sales, gross profit,
loss from operations, and net loss for 2007 and 2006.




(in
      thousands)
            
            2007
            
            
            2006
            
            
            Favorable/
      (Unfavorable)NET
      SALES
            
            $
            9,608
            
            
            $
            8,994
            
            
            
            6.8
            %GROSS
      PROFIT
            
            
            1,774
            
            
            
            1,936
            
            
            
            (8.4
            %)LOSS
      FROM OPERATIONS
            
            
            (2,256
            )
            
            
            (2,132
            )
            
            
            (5.8
            %)NET
      LOSS
            
            $
            (2,639
            )
            
            $
            (1,081
            )
            
            
            (144.1
            %)





The
following table presents our gross profit, loss from operations and net loss as
a percentage of net sales for 2007 and 2006.




2007
            
            
            2006GROSS
      PROFIT
            
            
            18.5
            %
            
            
            21.5
            %LOSS
      FROM OPERATIONS
            
            
            (23.5
            )
      %
            
            
            (23.7
            )%NET
      LOSS
            
            
            (27.5
            )
      %
            
            
            (12.0
            )
      %





Operating
results for 2007





Net sales
during 2007 of $9.6 million were up by approximately $600,000, or 6.8% compared
to net sales of $9.0 million for 2006.  Gross sales of $10.97 million
during 2007 were 10.4% or $1,035,000 favorable to last year.  Gains in
gross sales were driven by new products and expanded markets as well as through
acquisitions and were partially offset by weak performance in sales of viewing
systems.  New products in the hunting category bolstered gross sales
for 2007 by $480,000 or 129% over last year and expanded markets in the
industrial category led to sales gains of $117,000 or 16.6% over last
year.  Recent acquisitions during the last two years have produced
sales gain during 2007 of $695,000 with Cass Creek, Fish Hawk and Crazy Crank
delivering sales of $476,000, $58,000 and $72,000 respectively versus zero in
2006 and Vector delivering gains of $84,000 year over year.  The
Fishing Division, which is primarily made up of viewing and sonar systems,
experienced a lack luster year with gross sales down by $281,000 or 3.6% from
last year.  Unit sales in the Fishing Division continue to increase as
the average sales prices declines.





The
Company experienced a significant increase in sales/warranty returns during 2007
with returns and allowances of approximately $1,478,000 or 13.5% of gross sales
versus returns and allowances of approximately $1,079,000 or 10.9% for 2006. The cause
of the increased sales/warranty returns relates to product quality issues for
certain viewing systems in the Fishing Products Division.  Returns in
the Fishing Products Division were up by approximately $300,000 and account for
most of the unfavorable variance.  The Company anticipates and has
experienced initial favorable results from placing some significant quality
control processes in place during 2007. The Company hired two quality control
associates, one independent off-shore quality consultant and one domestic
employee.  The off-shore consultant performs routine quality control
inspections on approximately 80% of all Company shipments.  In
addition, he inspects production lines on a daily basis recommending quality
control enhancements.  The domestic employee located in Brainerd has
quality control inspections completed on most incoming inventory, especially if
no foreign inspection was performed.  The domestic quality control
associate also maintains standards for engineering product
documentation.   The Company continues to experience much lower
returns rates in the hunting product categories, which on a historical basis,
generally run at approximately 3% of gross sales.





Gross
profit during 2007 of $1,774,000, or 18.5% of net sales, compares unfavorably by
3.0 margin points to gross profit during 2006 of $1,936,000, or 21.5% of
sales.  The unfavorable trend in gross margin was driven largely by
four factors.  Gains in primary gross margin (selling price less
landed product cost) of approximately 2.2 gross margin points were more than
offset by lost margin on sales returns/warranty of approximately (2.0) gross
margin points and increases in indirect product costs of approximately (3.2)
gross margin points.  The increase in indirect product costs during
2007 were due to increased depreciation and amortization costs associated with
new product lines and acquisitions causing a drop of gross margin by
approximately (2.2) points and increased Service and Warranty Department costs
causing a drop of gross margin by approximately (1.0) points.


13




Total
selling, general and administrative expenses of $4,030,000, or 41.9% of sales,
were down slightly from spending of $4,068,000, or 45.2% of sales during
2006.   The favorable spending variance was driven by lower
engineering costs of $197,000, lowering administrative costs of $55,000,
partially offset by higher spending in selling and advertising of $136,000 and
depreciation expense of approximately $40,000.





For 2007
the Company experienced an operating loss of $2,256,000 versus an operating loss
in 2006 of $2,132,000.  In summary, the increase in operating loss on
a year over year basis of $124,000 was largely resulting from a decrease in
gross margin, partially offset by higher sales and slightly lower selling,
general & administrative expenses.





Net other
expenses during 2007 of $480,000 were slightly over prior year expenses of
$471,000.  Higher interest costs of $92,000 were largely offset by
lower other expenses of $68,000 and higher interest income of
$15,000.  Interest costs were higher during the year primarily
relating to the short amortization period of costs associated with the
subordinated debt warrants.





The
Company did not record any deferred tax benefit associated with the 2007
operating losses due to the uncertainty of being able to recognize the future
economic recovery of such deferred tax assets.  The Company does
maintain a deferred tax asset on the books of approximately
$1,023,000.  In addition, the Company has recorded a deferred tax
valuation allowance of approximately $1,005,000 during 2007.





A loss
from continuing operations of $2,735,000 was realized during 2007 compared to a
loss of $1,582,000 during 2006 with the primary difference year over year being
related to the increase in the valuation allowance on the net operating loss
deferred tax asset.  Net gain on discontinued operations and
subsequent disposal of related assets for 2007 was $96,000 versus $501,000 from
2006.  Net loss for 2007 of $2,639,000 compares to a net loss of
$1,081,000 during 2006 and primarily relates to the aforementioned tax treatment
and gain from discontinued operations.





Liquidity
and Capital Resources




The
Company had a cash balance of $131,000 at December 31, 2007 compared to $2,000
at December 31, 2006. The change is a combination of many economic factors
including the results of operations, new borrowings and the daily cash
management of the Company. Since the Company is a net borrower and maintains an
open line of credit our daily cash management strategy is to hold a minimum cash
balance in order to minimize debt and related interest expense. Cash used in
operating activities
was $1,846,000 during 2007. Operating activities consuming cash from
operations include the net loss of $2,639,000, gain on sale of property,
plant, and equipment of $164,000, gain on sale of discontinued operations of
$237,000, the reduction in accounts payable of $435,000, lower accrued expenses
of $198,000 and payments relating to deferredretirement benefits of
$72,000. These items were partially offset by operating activities providing
cash including depreciation and amortization of $502,000, a reduction in
inventory of $880,000 and lower prepaid expenses of $298,000.





Cash
provided by investing activities was $1,093,000 during 2007 primarily resulted
from cash provided by the sale of discontinued operations, partially offset by
the acquisition of assets for the Cass Creek and Fish Hawk
operations.





The Company
received various cash proceeds relating to the sale of assets from discontinued
operations of $3,077,000 , the payoff of notes receivable totaling $300,000 and
surrender of life insurance policies totaling $148,000.





On
September 20, 2007, Nature Vision closed on the acquisition of substantially all
of the assets of Cass Creek, a manufacturer and distributor of electronic game
calling devices, pursuant to the terms of an Asset Purchase Agreement. The
transaction involved the acquisition of equipment, inventories, intellectual
property, books and records, permits, licenses, accounts receivable, cash,
goodwill, general intangibles and certain other assets of Cass Creek for a total
purchase price net of cash and notes payable totaling $2,106,000.





On July
3, 2007, the Company purchased substantially all the assets of Fish Hawk
Electronics Corporation, a manufacturer of electronic downrigger accessories,
pursuant to the terms of an Asset Purchase Agreement. The transaction
involved the acquisition of equipment, inventories, intellectual property, books
and records, permits, licenses, accounts receivable, cash, goodwill, general
intangibles and certain other assets of Fish Hawk for a total purchase price net
of cash and notes payable totaling $208,000.





In
addition, the Company purchased $282,000 of property, equipment, and intangibles
during 2007.


14





Cash
provided by financing activities was $882,000 for 2007.  Financing
activities providing cash include receiving proceeds of $2,000,000 relating to
the financing of our New Hope Facility, receiving $1,000,000 from the placement
of subordinated debt
(from a related party as described in foot note 6), and receipt of $78,000 from
exercise of stock options.  Financing activities consuming cash were
made up of net payments on the Company’s line of creditof $1,362,000,
payments made on contract payable of $762,000 relating to discontinued
operations and a decrease in checks issued in excess of cash in bank of
approximately $71,000.




As of
December 31, 2007 working capital decreased to $1,062,000 from $4,158,000 at
December 31, 2006.  The Company’s current ratio as of December 31,
2007 is 1.15 compared with 1.55 last year.  The reduction in working
capital is primarily driven by the net loss of $2.7 million and the financing
our of New Hope facility on a short term note in order to finance the Cass Creek
purchase.  Management has entered into a purchase agreement to sell
the New Hope facility which they intend to close by April 15,
2008.  The sale, if closed, will result in an increase in working
capital of approximately $2.3 million.




Nature
Vision maintains a line of credit for financing inventory and accounts
receivable up to $6,000,000 at prime plus .75%. The prime rate as of December
31, 2007 was 7.25%.  As of December 31, 2007, the Company had the ability
to borrow amounts up to $4,000,000 under the facility for working capital
requirements as the remaining $2,000,000 of the loan was carved out against the
mortgage on the New Hope building facility. The loan is secured against the
accounts receivable, inventory, equipment and other assets of the Company, with
the $2,000,000 mortgage secured against the New Hope building. Borrowings under
the line are subject to advanced rates of 75% of eligible accounts receivable
and 50% of eligible inventory.  The line of credit facility is
considered a demand type loan and henceforth does not have a maturity
date.  The terms of the credit agreement are written such that the
line will stay in place for up to three years if the Company can satisfactorily
perform within certain parameters outlined by the bank.  The agreement
requires and the Company is in compliance with the following affirmative
covenants as of December 31, 2007, minimum net worth (including subordinated
debt) of $6,000,000, and minimum tangible net worth of
$2,800,000.  Management believes short-term liquidity needs of the
Company will be provided through working capital and the line of credit, and
will be sufficient to finance operations for a period of at least the next 12
months.Management
anticipates continued advances against the line of credit to fund anticipated
sales growth in future quarters.





The
Company sold its Vaddio product line to New Vad, LLC on February 5, 2007
pursuant to the terms of the Asset Purchase Agreement. The transaction involved
the sale most of the assets relating to Nature Vision’s Vaddio product line. The
original purchase price paid by the Buyer was $757,372 which consisted of
$710,694 in cash at closing and $46,678 in assumed vacation pay. The Company
utilized the net proceeds to pay down the contract payable liability that was
retained by the Company in the sale and to reduce the line of credit. In
connection with the asset purchase agreement, Nature Vision will receive 2% of
receipts from the gross sale of all Vaddio products sold by New Vad after March
1, 2007, paid on a monthly basis with a six month deferral, until a total
payment of $750,000 is received. Through December 31, 2007 the Company has
received $48,000 of royalty payments with an additional $82,000 of payments
received during the first quarter of 2008.  The proceeds from these
deferred payments are recognized into income as received. As part of the
transaction, the parties also entered into a Consignment Sale Agreement,
providing for the sale of Nature Vision’s inventory to New Vad LLC over the next
12 months at a book value estimated to be $2,031,359. As of December 31, 2007
the remaining inventory to be purchased under this agreement was approximately
$298,000, of which $200,000 has been paid to date and the remaining $98,000
is due.




It is
management’s belief that it will fund any potential acquisitions through
additional financing and the potential issuance of common stock. Management
believes that any additional long-term debt requirements and additional lines of
credit will be available. There is no assurance the Company will be able to
obtain the necessary financing if needed.




We
incurred a net loss for the years ended December 31, 2007 and 2006 of
approximately $2.6 million and $1.1 million, respectively.  In the
event future cash flows and borrowing capacities are not sufficient to fund
operations at the present level, additional measures will be taken including
efforts to further reduce expenditure levels.  In addition, we believe
that other sources of liquidity are available which may include the expansion of
our credit facility.  However, there is no assurance that these other
sources of liquidity will be available or on terms acceptable to the
Company.   In addition, management plans to retain the funds
received associated with the related party note on a short-term basis while the
2008 business plan matures.





Management
believes that existing, current and future lending capacity and cash generated
from operations will supply sufficient cash flow to meet short-term and
long-term debt obligations, working capital, capital expenditure and operating
requirements for at least the next 12 months.




The
Company believes that the effect of inflation has not been material during the
year ended December 31, 2007.




Off-Balance
Sheet Financing Arrangements




As of
December 31, 2007 and 2006, there were no off-balance sheet arrangements,
unconsolidated subsidiaries and commitments or guaranties of other
parties.


15




Critical
Accounting Policies





The
accompanying consolidated financial statements are based on the selection and
application of United States generally accepted accounting principles (“GAAP”),
which require estimates and assumptions about future events that may affect the
amounts reported in these financial statements and the accompanying notes.
Future events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment.
Actual results could differ from those estimates, and any such differences may
be material to the financial statements. We believe that the following
accounting policies may involve a higher degree of judgment and complexity in
their application and represent the critical accounting policies used in the
preparation of our financial statements. If different assumptions or conditions
were to prevail, the results could be materially different from reported
results.





Management’s
estimate of the sales and warranty reserve is based on historical company data
and management’s best estimate. We evaluated the key factors and assumptions
used to develop the sales and warranty reserve in determining that it is
reasonable in relation to the consolidated financial statements taken as a
whole.  Should actual claims exceed our estimate, the impact maybe
material to the results of operations.




The
Company recognizes revenue when products are shipped and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price is
fixed or determinable.  The Company’s revenue recognition policy is in
accordance with SEC Staff Accounting Bulletin, No. 104.




Management
records a reserve on accounts receivable which is an estimate of the amount of
accounts receivable that are uncollectible. The reserve is based on a
combination of specific customer knowledge, general economic conditions and
historical trends. Management believes the results could be materially different
if economic conditions change for our customers.





Considerable
management judgment is necessary in estimating future cash flows and other
factors affecting the valuation of long-lived assets, including intangible
assets, including the operating and macroeconomic factors that may affect them.
The Company uses historical financial information, internal plans and
projections and industry information in making such estimates. The Company did
not recognize any impairment charges for our long-lived assets, including
intangible assets, during 2007 or 2006. Although the Company has not generated
positive cash flows in 2007 and 2006, management believes that based on cost
reduction actions and estimated revenue growth and margin improvement
initiatives, that the Company will have cash flows from these long-lived assets
in the future. While the Company currently believes the expected cash flows from
these long-lived assets, including intangible assets, exceeds the carrying
amount, materially different assumptions regarding future performance and
discount rates could result in future impairment losses. In particular, if the
Company no longer believes it will achieve its long-term projected sales or
operating expenses, the Company may conclude in connection with any future
impairment tests that the estimated fair value of its long-lived assets,
including intangible assets, are less than the book value and recognize an
impairment charge. Such impairment would adversely affect the Company’s
earnings.





The
Company’s inventory obsolescence reserve is an estimate of the net realizable
value of our inventory. It is based on historical trends, product life cycles,
forecast of future inventory needs and on-hand inventory levels. Management
believes reserve levels could be materially affected by changes in technology,
our customer base, customer needs, general economic conditions and the success
of certain Company sales programs.





Significant
management judgment is required in determining the provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recorded against
net deferred tax assets. We record a current provision for income taxes based on
amounts payable or refundable. Deferred tax assets and liabilities are
recognized for the future tax consequences of differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes
the enactment date. The overall change in deferred tax assets and liabilities
for the period measures the deferred tax expense or benefit for the period. We
recognize a valuation allowance for deferred tax assets when it is more likely
than not that deferred assets are not recoverable.   In addition,
we recognized deferred tax assets of approximately $1 million based on when it
is more likely than not the deferred tax assets are recoverable.  A
significant portion of deferred tax assets recorded ($650,000) is based on a
large gain we anticipate to realize in 2008 upon the sale of our building and
land held for sale.  If actual taxable income by jurisdiction and the
period over which our deferred tax assets are recoverable are materially
different than our estimate, the change could be material to our consolidated
financial statements.


16





Recent
Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51” (“SFAS
160”).  This statement establishes accounting and reporting standards
for noncontrolling interests in subsidiaries and for the deconsolidation of
subsidiaries and clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements.  This Statement also
requires expanded disclosures that clearly identify and distinguish between the
interests of the parent owners and the interests of the noncontrolling owners of
a subsidiary.  SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008.  The Company does not believe that the
adoption of SFAS 160 will have a material effect on the results of operations or
financial position.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141
(Revised 2007)”).  While this statement retains the fundamental
requirement of SFAS 141 that the acquisition method of accounting (which SFAS
141 called the purchase
method) be used for all business combinations, SFAS 141 (Revised 2007)
now establishes the principles and requirements for how an acquirer in a
business combination:  1) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interests in the acquiree; 2) recognizes and measures the
goodwill acquired in the business combination or the gain from a bargain
purchase; and 3) determines what information should be disclosed in the
financial statements to enable the users of the financial statements to evaluate
the nature and financial effects of the business combination.SFAS 141 (Revised 2007)
is effective for fiscal years beginning on or after December 15,
2008.  The impact upon the adoption of SFAS 141 (Revised 2007) will
have a material effect on our results of operations or financial position for
any potential future acquisitions in 2009.





In
February 2007, FASB issued Statement 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This statement allows all entities
to choose, at specified election dates, to measure eligible items at fair value.
Under this option, an entity will report unrealized gains and losses on items
for which the fair value option has been elected in earnings. This statement is
effective as of the beginning of the first fiscal year which begins after
November 15, 2007. Early adoption is permitted as of the beginning of the
fiscal year that begins on or before November 15, 2007 provided the company
has also elected to apply the provisions of FASB Statement No. 157, Fair
Value Measurements. We are currently evaluating the impact of adopting FASB
Statement 159 on our financial statements.




Item
7.   FINANCIAL STATEMENTS.





See
Financial Statements beginning on page F-1.





Item
8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.





Not
applicable.





Item
8A.   CONTROLS AND PROCEDURES.





Disclosure
Controls and Procedures





An
evaluation was carried out under the supervision and with the participation of
Nature Vision’s management, including our Chief Executive Officer, Jeffrey P.
Zernov, and our Chief Financial Officer, David M. Kolkind, of the effectiveness
of Nature Vision’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this report.  Based upon this review, Messrs. Zernov
and Kolkind concluded that our disclosure controls and procedures are
effective.





There
have been no significant changes in internal control over financial reporting
(as defined in Rules 13a-15 and 15d-15 under the Exchange Act) that occurred
during the fiscal period covered by this report that have materially affected,
or are reasonably likely to materially affect, Nature Vision’s internal control
over financial reporting.





Management’s
Annual Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-5(f)
under the Exchange Act).  Our management assessed the effectiveness of
our internal control over financial reporting as of December 31,
2007.  In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control-Integrated Framework.  Our management has
concluded that, as of December 31, 2007, our internal control over financial
reporting is effective based on these criteria.  This annual report
does not include an attestation report of Nature Vision’s registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by
Nature Vision’s independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit Nature
Vision to provide only management’s report in this annual
report.


17




Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our internal control over financial reporting will prevent
all error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within Nature Vision have been detected.  Nature Vision’s
internal control over financial reporting, however, are designed to provide
reasonable assurance that the objectives of internal control over financial
reporting are met.





18




PART
III





Item
9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.





Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2008 Annual
Meeting of Shareholders.





Item
10.   EXECUTIVE COMPENSATION.





Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2008 Annual
Meeting of Shareholders.





Item
11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.





Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2008 Annual
Meeting of Shareholders.





Item
12.   CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.





Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2008 Annual
Meeting of Shareholders.





Item
13.   EXHIBITS.





For
a list of Exhibits filed as a part of this report, see Exhibit Index page
following the signature page to this annual report on Form 10-KSB.





Item
14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES.





Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2008 Annual
Meeting of Shareholders.


19




SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Nature
      Vision, Inc.Date:  March
      24, 2008
            By:   /s/JeffreyP.ZernovJeffrey P. Zernov,
      Presidentand
      Chief Executive Officer





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.





/s/JeffreyP.ZernovMarch
      24, 2008Jeffrey P. Zernov(President, Chief Executive Officer and
      a Director)/s/DavidM.KolkindMarch
      24, 2008David M. Kolkind(Chief Financial Officer, Chief Accounting Officer
      and
      Secretary)/s/RichardP.KiphartMarch
      24, 2008Richard P. Kiphart(Director)/s/SteveShanesyMarch
      24, 2008Steve Shanesy(Director)/s/ScottS.MeyersMarch
      24, 2008Scott S. Meyers(Director)/s/CurtisA.SampsonMarch
      24, 2008Curtis A. Sampson(Director)/s/PhilipM.McLaughlinMarch
      24, 2008Philip M. McLaughlin(Director)


20




Exhibit
Index





2.1
            
            Merger
      agreement and plan of reorganization dated April 15, 2004, by and
      among Nature Vision, Inc. (n/k/a Nature Vision Operating Inc.), Photo
      Control Corporation (n/k/a Nature Vision, Inc.), PC Acquisition, Inc.,
      Jeffrey P. Zernov (as shareholders’ representative) and certain
      Nature Vision, Inc. (n/k/a Nature Vision Operating Inc.) shareholders
      (previously filed as Exhibit 10.2 to the Registrant’s Quarterly
      Report on Form 10-QSB for the period ended March 31,
      2004).3.1
            
            Amended
      and restated articles of incorporation (previously filed as
      Exhibit 3.1 to the Registrant’s Report on Form 8-K dated
      September 7, 2004).3.2
            
            Amended
      and restated bylaws (previously filed as Exhibit 3.2 to the
      Registrant’s Report on Form 8-K dated September 7,
      2004).10.1
            
            Amended
      and restated retention agreement with Curtis R. Jackels
      (previously filed as Exhibit 10.1 to the Registrant’s Quarterly Report on
      Form 10-QSB for the period ended March 31, 2004).10.2
            
            Amended
      and Restated 2004 Stock Incentive Plan, dated June 3, 2004 (previously
      filed as Exhibit 10.1 to Registrant's Form 10-QSB Registration for the
      period ended June 30, 2005).10.3
            
            Executive
      salary continuation plan adopted August 9, 1985, including exhibits
      (previously filed as Exhibit 10.4 to the Registrant’s Annual Report on
      Form 10-K for the year ended June 30, 1986).10.4
            
            1983
      Stock Option Plan (previously filed as Exhibit 10.4 to the Registrant’s
      Annual Report on Form 10-K for the fiscal year ended June 30,
      1989).10.5
            
            Form
      of stock option agreement under the 1983 Stock Option Plan (previously
      filed as Exhibit 5 to the Registrant’s Registration Statement on Form S-8,
      Commission File No. 2-85849).10.6
            
            Form
      of Nonstatutory Option Agreement under the 2004 Stock Incentive Plan and
      Form of First Amendment thereto (previously filed as Exhibit 10.6 to the
      Registrant’s Annual Report on Form 10-KSB for the fiscal year ended
      December 31, 2005).10.7
            
            Incentive
      Stock Option Agreement for Jeffrey Zernov, dated August 31, 2004
      (previously filed as Exhibit 10.7 to the Registrant’s Annual Report on
      Form 10-KSB for the fiscal year ended December 31,
  2005).10.8
            
            Amendment
      to the registrant’s 1983 Stock Option Plan dated August 29, 1994
      (previously filed as Exhibit 10.5 to the Registrant’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 1994).10.9
            
            Amendment
      to the registrant’s 1983 Stock Option Plan dated February 23, 1996
      (previously filed as Exhibit 10.6 to the Registrant’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 1995).10.10
            
            Amendment
      to the registrant’s 1983 Stock Option Plan dated November 7, 1997
      (previously filed as Exhibit 10.7 to the Registrant’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 1997).10.11
            
            Subscription
      and investment representation agreement with Richard P. Kiphart,
      including form of irrevocable proxy (previously filed as Exhibit 10.3 to
      the Registrant’s Quarterly Report on Form 10-QSB for the period ended
      March 31, 2004).10.12
            
            Employment
      agreement between Nature Vision, Inc. and Jeff Zernov dated August
      31, 2004 (previously filed  as Exhibit 10.1 to the Registrant's
      Report on Form 8-K dated September 7, 2004).10.13
            
            Bonus
      plan for the fiscal year ending December 31, 2005 for certain executive
      officers (previously disclosed in the Registrant’s Report on Form 8-K
      dated March 23, 2005).10.14
            
            Summary
      of director compensation for 2005 (previously filed as Exhibit 10.16 to
      the Registrant’s Report on Form 10-KSB dated April 14,
    2005).10.15
            
            Asset
      Purchase Agreement, dated October 20, 2006, by and between Promark
      International, Inc. d/b/a Photogenic Professional Lighting and Nature
      Vision, Inc. (previously filed as Exhibit 10.1 to the Registrant’s Report
      on Form 8-K dated October 20,
2006).




21




10.16
            
            Asset
      Purchase Agreement, dated February 5, 2007, by and between New Vad, LLC
      and Nature Vision, Inc. (previously filed as Exhibit 10.1 to the
      Registrant’s Report on Form 8-K dated February 5,
2007).10.17
            
            Consignment
      Sale Agreement, dated February 5, 2007, by and between New Vad, LLC and
      Nature Vision, Inc. (previously filed as Exhibit 10.2 to the Registrant’s
      Report on Form 8-K dated February 5, 2007).10.18
            
            Collection
      Agreement, dated February 5, 2007, by and between New Vad, LLC and Nature
      Vision, Inc. (previously filed as Exhibit 10.3 to the Registrant’s Report
      on Form 8-K dated February 5, 2007).10.19
            
            Demand
      Term Note, dated September 19, 2007, in the principal amount of $2,000,000
      executed by Nature Vision, Inc. in favor of M&I Business Credit, LLC
      (previously filed as Exhibit 10.1 to the Registrant’s Report on Form 8-K
      dated September 19, 2007).10.20
            
            Security
      Agreement, dated September 19, 2007, between Nature Vision, Inc. and
      M&I Business Credit, LLC (previously filed as Exhibit 10.3 to the
      Registrant’s Report on Form 8-K dated September 19,
  2007).10.21
            
            Revolving
      Mortgage, Assignment of Rents, Security Agreement and Fixture Financing
      Statement, dated September 19, 2007, between Nature Vision, Inc. and
      M&I Business Credit, LLC (previously filed as Exhibit 10.4 to the
      Registrant’s Report on Form 8-K dated September 19,
  2007).10.22
            
            Credit
      and Security Agreement, dated November 8, 2007, among Nature Vision, Inc.,
      Nature Vision Operating, Inc. and M&I Business Credit, LLC (previously
      filed as Exhibit 10.5 to the Registrant’s Report on Form 8-K dated
      November 8, 2007).10.23
            
            Patent
      Collateral Assignment, dated November 8, 2007, among Nature Vision, Inc.,
      Nature Vision Operating, Inc and M&I Business Credit, LLC (previously
      filed as Exhibit 10.6 to the Registrant’s Report on Form 8-K dated
      November 8, 2007).10.24
            
            Trademark
      Security Agreement, dated November 8, 2007, among Nature Vision, Inc.
      Nature Vision Operating, Inc. and M&I Business Credit, LLC (previously
      filed as Exhibit 10.7 to the Registrant’s Report on Form 8-K dated
      November 8, 2007).10.25
            
            Debt
      Subordination Agreement, dated November 8, 2007, among Nature Vision,
      Inc., Richard Kiphart and M&I Business Credit, LLC (previously
      filed as Exhibit 10.8 to the Registrant’s Report on Form 8-K dated
      November 8, 2007).10.26
            
            Support
      Agreement, dated November 8, 2007, among Jeffrey P. Zernov, Nature Vision,
      Inc. and M&I Business Credit, LLC (previously filed as Exhibit 10.9 to
      the Registrant’s Report on Form 8-K dated November 8,
    2007).10.27
            
            Asset
      Purchase Agreement, dated September 20, 2007, among Nature Vision, Inc.,
      Cass Creek International, LLC, Gary R. Lynn,
      John T. Bergstue and James G. Streib (previously filed
      as Exhibit 10.5 to the Registrant’s Report on Form 8-K dated September 19,
      2007).10.28
            
            Promissory
      Note, dated September 20, 2007, in the principal amount of $500,000
      executed by Nature Vision, Inc. in favor of Cass Creek International, LLC
      (previously filed as Exhibit 10.6 to the Registrant’s Report on Form 8-K
      dated September 19, 2007).10.29
            
            Noncompetition
      Agreement, dated September 20, 2007, among Nature Vision, Inc., Cass Creek
      International, LLC, Gary R. Lynn, John T. Bergstue,
      Todd E. Hallquist and James G. Streib (previously
      filed as Exhibit 10.8 to the Registrant’s Report on Form 8-K dated
      September 19, 2007).10.30
            
            Inventions
      Royalty Agreement, dated September 20, 2007, among Nature Vision, Inc.,
      Gary R. Lynn, John T. Bergstue,
      James G. Streib, Todd E. Hallquist and Jabez
      Development, LLC (previously filed as Exhibit 10.9 to the Registrant’s
      Report on Form 8-K dated September 19, 2007).10.31
            
            Demand
      Promissory Note, dated October 19, 2007, in the principal amount of
      $1,000,000 executed by Nature Vision, Inc. in favor of
      Richard Kiphart (previously filed as Exhibit 10.1 to the Registrant’s
      Report on Form 8-K dated October 19, 2007).10.32
            
            Warrant
      for the Purchase of Shares of Common Stock of Nature Vision, Inc., dated
      October 19, 2007, issued to Richard Kiphart (previously filed as
      Exhibit 10.2 to the Registrant’s Report on Form 8-K dated October 19,
      2007).




22




10.33
            
            Employment
      Letter, dated November 26, 2007, between Nature Vision, Inc. and
      David M. Kolkind (previously filed as Exhibit 10.1 to the
      Registrant’s Report on Form 8-K dated November 19,
  2007).10.34
            
            Proprietary
      Information and Inventions Agreement, dated November 26, 2007, between
      Nature Vision, Inc. and David Kolkind (previously filed as Exhibit
      10.2 to the Registrant’s Report on Form 8-K dated November 19,
      2007).10.35
            
            Summary
      of compensation arrangements for Chief Executive Officer and non-employee
      members of the board of directors (previously disclosed in the
      Registrant’s Report on Form 8-K dated December 12,
  2007).14.1
            
            Code
      of Business Conduct and Ethics (previously filed as Exhibit 14.1 to the
      Registrant’s Annual Report on Form 10-KSB for the fiscal year ended
      December 31, 2005).21.1
            
            Subsidiaries
      (previously filed as Exhibit 21.1 to the Registrant’s Annual Report on
      Form 10-KSB for the fiscal year ended December 31,
  2005).23.1
            
            Consent
      of Independent Registered Public Accounting Firm.31.1
            
            Certification
      of Chief Executive Officer.31.2
            
            Certification
      of Chief Financial Officer.32.1
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.


23




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Shareholders, Audit Committee and Board of Directors


Nature
Vision, Inc.


Brainerd,
Minnesota








We have
audited the accompanying consolidated balance sheets of Nature Vision, Inc. as
of December 31, 2007 and 2006, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
its internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Nature Vision, Inc. as of
December 31, 2007 and 2006 and the results of their operations and their cash
flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.








/s/
Virchow, Krause & Company, LLP








Minneapolis,
Minnesota


March 11,
2008


F-1




Nature
Vision, Inc. and Subsidiaries


Consolidated
Balance Sheets


December
31, 2007 and 2006





2007
            
            
            2006ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
            
            $
            131,487
            
            
            $
            2,344Accounts
      Receivable, net
            
            
            2,774,618
            
            
            
            2,664,246Current
      Portion of Note Receivable
            
            
            -
            
            
            
            100,000Inventories,
      net
            
            
            4,769,648
            
            
            
            4,466,189Current
      Portion of Prepaid Expenses
            
            
            229,594
            
            
            
            390,608Current
      Assets Sold Relating to Discontinued Operations
            
            
            -
            
            
            
            84,855Current
      Assets Retained Relating to Discontinued Operations
            
            
            343,413
            
            
            
            4,066,480Total
      Current Assets
            
            
            8,248,760
            
            
            
            11,774,722PROPERTY
      AND EQUIPMENT, NET
            
            
            1,555,052
            
            
            
            1,637,569NON-CURRENT
      ASSETSBuilding
      and Land Held for Sale, Net
            
            
            701,719
            
            
            
            643,263Other
      Assets Sold Relating to Discontinued Operations
            
            
            -
            
            
            
            186,701Cash
      Surrender Value of Life Insurance
            
            
            -
            
            
            
            148,310Note
      Receivable, net of Current Portion
            
            
            -
            
            
            
            200,000Prepaid
      Expenses, net of Current Portion
            
            
            47,468
            
            
            
            61,040Deferred
      Income Taxes
            
            
            1,022,546
            
            
            
            1,022,546Goodwill
            
            
            666,373
            
            
            
            -Intangibles
      - net
            
            
            1,056,746
            
            
            
            72,073Total
      Non-Current Assets
            
            
            3,494,852
            
            
            
            2,333,933TOTAL
      ASSETS
            
            $
            13,298,664
            
            
            $
            15,746,224LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESChecks
      Issued in Excess of Cash in Bank
            
            $
            -
            
            
            $
            71,394Current
      Portion of Long-Term Debt
            
            
            2,133,333
            
            
            
            -Note
      Payable – Related Party
            
            
            979,159
            
            
            
            -Current
      Portion of Deferred Retirement Benefits
            
            
            74,657
            
            
            
            72,795Line
      of Credit, Bank
            
            
            2,537,835
            
            
            
            3,900,000Accounts
      Payable
            
            
            558,040
            
            
            
            632,398Accrued
      Payroll and Payroll Taxes
            
            
            166,758
            
            
            
            175,582Accrued
      Expenses
            
            
            710,654
            
            
            
            840,005Income
      Taxes Payable
            
            
            -
            
            
            
            5,000Current
      Liabilities Sold Relating to Discontinued Operations
            
            
            -
            
            
            
            46,678Current
      Liabilities Retained Relating to Discontinued
    Operations
            
            
            25,952
            
            
            
            1,872,901Total
      Current Liabilities
            
            
            7,186,388
            
            
            
            7,616,753LONG-TERM
      LIABILITIESLong-term
      Debt, Net of Current Portion
            
            
            466,667
            
            
            
            -Deferred
      Retirement Benefits, Net of Current Portion
            
            
            483,214
            
            
            
            557,871Total
      Non-Current Liabilities
            
            
            949,881
            
            
            
            557,871Total
      Liabilities
            
            
            8,136,269
            
            
            
            8,174,624COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITYCommon
      Stock, $.16 Par Value per Share 25,000,000 Shares Authorized Common Shares
      Issued and Outstanding at December 31, 2007 were 2,312,583 and December
      31, 2006 were 2,225,377
            
            
            370,013
            
            
            
            356,062Additional
      Paid-In Capital
            
            
            7,005,553
            
            
            
            6,789,287Retained
      Earnings (Accumulated Deficit)
            
            
            (2,213,171
            )
            
            
            426,251Total
      Stockholders’ Equity
            
            
            5,162,395
            
            
            
            7,571,600TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            13,298,664
            
            
            $
            15,746,224






See
accompanying notes to consolidated financial statements.


F-2




Nature
Vision, Inc. and Subsidiaries


Consolidated
Statements of Operations


Years
Ended December 31, 2007 and 2006




2007
            
            
            2006SALES,
      NET
            
            $
            9,607,686
            
            
            $
            8,993,993COST
      OF GOOD SOLD
            
            
            7,833,215
            
            
            
            7,057,603GROSS
      PROFIT
            
            
            1,774,471
            
            
            
            1,936,390SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
            
            
            4,030,040
            
            
            
            4,068,385LOSS
      FROM OPERATIONS
            
            
            (2,255,569
            )
            
            
            (2,131,995
            )OTHER
      INCOME (EXPENSE)Interest
      Expense
            
            
            (466,757
            )
            
            
            (375,072
            )Interest
      Income
            
            
            15,301
            
            
            
            -Other
      Income (Expense)
            
            
            (28,310
            )
            
            
            (95,847
            )Net
      Other Expenses
            
            
            (479,766
            )
            
            
            (470,919
            )LOSS
      FROM CONTINUING OPERATIONS BEFORE TAXES
            
            
            (2,735,335
            )
            
            
            (2,602,914
            )PROVISION
      FOR INCOME TAX EXPENSE (BENEFIT)
            
            
            -
            
            
            
            (1,021,000
            )LOSS
      FROM CONTINUING OPERATIONS
            
            
            (2,735,335
            )
            
            
            (1,581,914
            )GAIN
      FROM DISCONTINUED OPERATIONS, NET OF TAX OF $0 AND
      $334,000
            
            
            95,913
            
            
            
            500,844NET LOSS
            
            $
            (2,639,422
            )
            
            $
            (1,081,070
            )Loss
      from Continuing Operations per Common ShareBasic
            
            $
            (1.20
            )
            
            $
            (0.71
            )Diluted
            
            $
            (1.20
            )
            
            $
            (0.71
            )Income
      from Discontinued Operations per Common ShareBasic
            
            $
            0.05
            
            
            $
            0.22Diluted
            
            $
            0.05
            
            
            $
            0.22Loss
      per Common ShareBasic
            
            $
            (1.15
            )
            
            $
            (0.49
            )Diluted
            
            $
            (1.15
            )
            
            $
            (0.49
            )Weighted
      Average Common SharesBasic
            
            
            2,287,757
            
            
            
            2,215,021Diluted
            
            
            2,287,757
            
            
            
            2,215,021






See
accompanying notes to consolidated financial statements.


F-3




Nature
Vision, Inc. and Subsidiaries


Consolidated
Statements of Stockholders’ Equity


Years
Ended December 31, 2007 and 2006





Shares
            
            
            Common
              Stock
            
            
            Additional
      Paid-In Capital
            
            
            Retained
      Earnings (Accumulated Deficit)
            
            
            Total
              Stockholders’
              EquityBalance,
      December 31, 2005
            
            
            2,178,877
            
            
            $
            348,620
            
            
            $
            6,436,409
            
            
            $
            1,507,321
            
            
            $
            8,292,350Exercise
      of common stockoptions
            
            
            46,500
            
            
            
            7,442
            
            
            
            293,878
            
            
            
            —
            
            
            
            301,320Tax
      benefit of common stock option exercises
            
            
            —
            
            
            
            —
            
            
            
            59,000
            
            
            
            —
            
            
            
            59,000Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,081,070
            )
            
            
            (1,081,070
            )Balance,
      December 31, 2006
            
            
            2,225,377
            
            
            
            356,062
            
            
            
            6,789,287
            
            
            
            426,251
            
            
            
            7,571,600Exercise
      of common stockoptions
            
            
            87,206
            
            
            
            13,951
            
            
            
            63,662
            
            
            
            —
            
            
            
            77,613Stock
      options issued in lieu of cash for debt guarantee
            
            
            —
            
            
            
            —
            
            
            
            50,256
            
            
            
            —
            
            
            
            50,256Warrants
      issued in connection with note payable – related
    party
            
            
            —
            
            
            
            —
            
            
            
            102,010
            
            
            
            —
            
            
            
            102,010Stock
      based compensation expense
            
            
            —
            
            
            
            —
            
            
            
            338
            
            
            
            —
            
            
            
            338Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,639,422
            )
            
            
            (2,639,422
            )Balance,
      December 31, 2007
            
            
            2,312,583
            
            
            $
            370,013
            
            
            $
            7,005,553
            
            
            $
            (2,213,171
            )
            
            $
            5,162,395







See
accompanying notes to consolidated financial statements.


F-4


Nature
Vision, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows


For Years EndedDecember 31, 2007and 2006




2007
            
            
            2006CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (2,639,422
            )
            
            $
            (1,081,070
            )Adjustments
      to reconcile net loss to net cash flows from operating
      activitiesDepreciation
      and amortization
            
            
            501,742
            
            
            
            435,737Loss
      (gain) on disposal of property and equipment
            
            
            (163,689
            )
            
            
            14,412Gain
      on sale of discontinued operations
            
            
            (236,965
            )
            
            
            (276,169
            )Benefit
      from deferred income taxes
            
            
            -
            
            
            
            (692,000
            )Stock
      based compensation
            
            
            338
            
            
            
            -Amortization
      of original issue discount
            
            
            81,169
            
            
            
            -Change
      in deferred retirement benefits
            
            
            -
            
            
            
            (16,311
            )Change
      in contract payable
            
            
            -
            
            
            
            511,800Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            198,178
            
            
            
            (797,133
            )Inventories,
      net
            
            
            880,037
            
            
            
            (315,356
            )Prepaid
      expenses
            
            
            297,538
            
            
            
            (163,810
            )Other
      non-current assets
            
            
            -
            
            
            
            (12,612
            )Accounts
      payable
            
            
            (435,058
            )
            
            
            143,749Income
      taxes payable
            
            
            (5,000
            )
            
            
            3,000Accrued
      payroll and payroll taxes
            
            
            (53,689
            )
            
            
            (181,080
            )Accrued
      expenses
            
            
            (198,330
            )
            
            
            187,654Payments
      on deferred retirement benefits
            
            
            (72,795
            )
            
            
            (76,148
            )Net
      Cash Flows from Operating Activities
            
            
            (1,845,946
            )
            
            
            (2,315,337
            )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
            
            
            (268,824
            )
            
            
            (719,711
            )Purchase
      of Cass Creek assets, net of cash received and promissory
      note
            
            
            (2,105,860
            )
            
            
            -Purchase
      of Fish Hawk assets, net of promissory note
            
            
            (208,310
            )
            
            
            -Purchase
      of Vector Teknologies assets
            
            
            -
            
            
            
            (384,074
            )Proceeds
      from cash value on terminated life insurance
policies
            
            
            148,310
            
            
            
            -Proceeds
      from sale of property and equipment
            
            
            163,689
            
            
            
            30,905Proceeds
      from sale of building and land held for sale
            
            
            -
            
            
            
            643,640Proceeds
      from sale of discontinued operations
            
            
            475,106
            
            
            
            2,003,418Payments
      received on note receivable
            
            
            300,000
            
            
            
            -Net
      proceeds from sale of working capital associated with discontinued
      operations
            
            
            2,602,685
            
            
            
            -Purchases
      of intangibles
            
            
            (13,530
            )
            
            
            (16,574
            )Net
      Cash Flows from Investing Activities
            
            
            1,093,266
            
            
            
            1,557,604CASH
      FLOWS FROM FINANCING ACTIVITIESDecrease
      in checks issued in excess of cash in bank
            
            
            (71,394
            )
            
            
            (306,158
            )Net
      advances from (payments on) line of credit, bank
            
            
            (1,362,165
            )
            
            
            1,670,000Proceeds
      from long-term debt
            
            
            2,000,000
            
            
            
            -Proceeds
      from note payable – related party and warrants
            
            
            1,000,000
            
            
            
            -Principal
      payments on long-term debt
            
            
            -
            
            
            
            (442,665
            )Payments
      on contract payable
            
            
            (762,231
            )
            
            
            (462,420
            )Cash
      received on exercise of options
            
            
            77,613
            
            
            
            301,320Net
      Cash Flows from Financing Activities
            
            
            881,823
            
            
            
            760,077Net
      Change in Cash and Cash Equivalents
            
            
            129,143
            
            
            
            2,344CASH AND CASH
      EQUIVALENTS - January 1, 2007 and 2006
            
            
            2,344
            
            
            
            -CASH AND CASH
      EQUIVALENTS - December 31, 2007 and 2006
            
            $
            131,487
            
            
            $
            2,344








See
accompanying notes to consolidated financial statements


F-5


NATURE
VISION, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2007 and 2006




NOTE 1 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




NATURE OF
OPERATIONS




Nature
Vision, Inc. (the Company or we) is an outdoor recreation products
Company.  The Company designs and markets primarily outdoor recreation
products for the sport fishing and sport hunting markets.  The Company
grants unsecured credit to its customers which are primarily dealers and
consumers located throughout the United States and Canada.  The
Company contracts with outside organizations for the manufacture and sale of its
products.  The geographic market in which the Company competes
consists of the entire United States and Canada and, to a lesser extent some
foreign countries.




On
October 20, 2006, Nature Vision, Inc. sold the Norman product line (Norman) of
its Photo Control division and renamed the division the Vaddio
Division.  On February 5, 2007, the Company sold certain assets and
transferred certain liabilities related to its Vaddio division
(Vaddio).  The Norman and Vaddio divisions designed, manufactured and
marketed professional cameras, electronic flash equipment, lens shades and
related photographic accessories and sold products used in the video
conferencing and presentation industry. The Company began discussions and
efforts to sell Norman and Vaddio in the third and fourth quarter of 2006,
respectively. See Note 15 for additional information related to the sale of the
Norman and Vaddio operations, respectively.  The assets and
liabilities of Vaddio at December 31, 2007 and 2006 met the requirements of
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" as being held for sale. Operations
and cash flows were eliminated as a result of the sale and the Company did not
have any significant involvement in the operations after the sale. All of the
financial information in the consolidated financial statements and notes to the
consolidated financial statements has been revised to reflect only the results
of continuing operations of the Company’s outdoor recreation
products.  As a result of the sale of the Vaddio and Norman divisions,
the Company has only one segment.





LIQUIDITY





We
incurred a net loss for the years ended December 31, 2007 and 2006 of
approximately $2.6 million and $1.1 million, respectively.  In the
event future cash flows and borrowing capacities are not sufficient to fund
operations at the present level, additional measures will be taken including
efforts to further reduce expenditure levels.  In addition, we believe
that other sources of liquidity are available which may include the expansion
of our credit facility.  However, there is no assurance that these
other sources of liquidity will be available or on terms acceptable to the
Company.  Managementplans to retain the funds received
associated with the related party note on a short-term basis while the 2008
business plan matures.





Management
believes that existing, current and future lending capacity and cash generated
from operations will
supply sufficient cash flow to meet short-term and long-term debt obligations,
working capital, capital expenditure and operating requirements for at least the
next 12 months. In addition, the Company has entered into a contract to
sell its facility located in New Hope, MN (see Note
18).





PRINCIPLES
OF CONSOLIDATION




The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant inter-company transactions and
balances have been eliminated in consolidation.




FINANCIAL
INSTRUMENTS




The
carrying amounts for all financial instruments approximate fair value. The
carrying amounts for cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the short
maturity of these instruments. The fair value of long-term debt, line of
credit-bank, contract payable and deferred liabilities - retirement benefits
approximates the carrying amounts based upon the Company’s expected borrowing
rate for debt with similar remaining maturities and comparable
risk.




CASH AND CASH
EQUIVALENTS




The
Company maintains its cash balances in various area banks. Cash balances are
insured up to $100,000 per bank by the FDIC. The balances, at times, may exceed
federally insured limits. The Company defines cash and cash equivalents as
highly liquid, short-term investments with a maturity at the date of acquisition
of three months or less.


F-6




ACCOUNTS
RECEIVABLE




The Company reviews customers' credit
history before extending unsecured credit and establishes an allowance for
uncollectible accounts based upon factors surrounding the credit risk of
specific customers and other information. Accounts receivable are generally due
30 days after invoice date. Accounts receivable over 30 days are considered past
due. TheCompany does not accrue interest on
past due accounts receivable. If accounts receivable in excess of the provided
allowance are determined uncollectible, they are charged to expense in the year
that determination ismade. Accounts receivable are written
off after all collection efforts have failed. Accounts receivable have been
reduced by an allowance for uncollectible accounts of approximately $15,000 at
bothDecember 31,
2007and
2006.





INVENTORIES




Inventories
consist of raw materials and finished goods and are valued at lower of cost
using the first-in, first-out (FIFO) method or market. Market represents
estimated realizable value in the case of finished goods and replacement or
reproduction cost in the case of other inventories. Because of changing
technology and market demand, inventory is subject to obsolescence. Management
periodically reviews all inventories to determine if any obsolete, discontinued
or slow moving items are in inventory. Based on this review, inventory is
disposed of or an allowance for obsolescence established to cover any future
disposals. Such estimates are sometimes difficult to make and it is possible
significant changes may be required to inventory reserves.




IMPAIRMENT
OF LONG-LIVED ASSETS




We assess
the impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable, in accordance with
FASB SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.”  An asset or asset group is considered impaired if its
carrying amount exceeds the undiscounted future net cash flow the asset or asset
group is expected to generate.  If an asset or asset group is
considered impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds its fair value.  If
estimated fair value is less than the book value, the asset is written down to
the estimated fair value and an impairment loss is recognized.





If we
determine that the carrying amount of long-lived assets, including intangible
assets, may not be recoverable, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model or
another valuation technique.  Net intangible assets and long-lived
assets amounted to $3.3 million as of December 31, 2007.





Considerable
management judgment is necessary in estimating future cash flows and other
factors affecting the valuation of long-lived assets, including intangible
assets, including the operating and macroeconomic factors that may affect
them.  We use historical financial information, internal plans, and
projections and industry information in making such estimates.





We did
not recognize any impairment charges for our long-lived assets, including
intangible assets during the years ended December 31, 2007 and
2006.  While we currently believe the expected cash flows from these
long-lived assets, including intangible assets, exceeds the carrying amount,
materially different assumptions regarding future performance and discount rates
could result in future impairment losses.  In particular, if we no
longer believe we will achieve our long-term projected sales or operating
expenses, we may conclude in connection with any future impairment tests that
the estimated fair value of our long-lived assets, including intangible assets,
are less than the book value and recognize an impairment charge.  Such
impairment would adversely affect our earnings.




DEPRECIATION




Property
and equipment are recorded at cost. Depreciation for leasehold improvements is
provided for using the straight-line method over the shorter of the lease term
or useful life.  Depreciation for property and equipment is provided
for using the straight-line method over useful lives ranging from three to seven
years. Improvements are capitalized while maintenance and repairs are expensed
when incurred.




DISCONTINUED
OPERATIONS





The sale
of the Company’s Norman photography product line to Promark International, Inc.
was completed on October 20, 2006 pursuant to the terms of an Asset Purchase
Agreement. The transaction involved the sale of inventory, equipment and certain
other assets relating to the Norman photography product line. The Company
negotiated the sale of these assets during the quarter ended September 30,
2006.





On
February 5, 2007, the Company sold certain assets and transferred certain
liabilities related to its Vaddio division. The Company negotiated the sale of
these assets and assumption of certain liabilities during the quarter ended
December 31, 2006.


F-7




These
assets met the requirements of SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" as being held for sale. Operations and cash flows
were eliminated as a result of the sales and the Company did not have any
significant involvement in the operations after the sales. The results of the
Norman and Vaddio product lines are presented on a historical basis as a
separate line in the consolidated statements of operations and the consolidated
balance sheets entitled "Assets/Liabilities sold relating to discontinued
operations" and “Assets/Liabilities retained relating to discontinued
operations”. In accordance with EITF 87-24, “Allocation of Interest to
Discontinued Operations”, the Company elected to not allocate consolidated
interest expense to the discontinued operations where the debt is not directly
attributed to or related to the discontinued operations.  All of the
financial information in the consolidated financial statements and notes to the
consolidated financial statements has been revised to reflect only the results
of continuing operations (see Note 15).




BUILDING
AND LAND HELD FOR SALE




On June
30, 2005, management signed an agreement to market for sale the building and
land located in Brainerd, Minnesota. The building and land included our former
assembly and distribution facility and our corporate headquarters. Accordingly,
we reflected the carrying value of the building as held for sale as of December
31, 2005. We discontinued recording depreciation on the building effective July
1, 2005. On July 14, 2006 the building was sold for net proceeds of $643,640,
prior to the repayment of the related mortgage, resulting in a loss of
$5,276.





In
November 2006, management signed an agreement and began marketing for sale the
building and land located in Minneapolis, Minnesota. Accordingly, we have
reflected the carrying value of the building as held for sale as of December 31,
2007 and December 31, 2006. As a result, we have discontinued recording
depreciation on the building in the fourth quarter of the year ended December
31, 2006.  On March 11, 2008, the Company entered into a purchase
agreement to sell the building for net proceeds of approximately $2,300,000 (see
Note 18).




GOODWILL
AND INTANGIBLE ASSETS




The
Company applies SFAS No. 142, “Goodwill and Other Intangible Assets,” which sets
forth financial and reporting standards for the acquisition of intangible
assets, other than those acquired in a business combination, and for goodwill
and other intangible assets subsequent to their acquisition.  This
accounting standard requires that goodwill no longer be amortized but tested for
impairment on a periodic basis.  The balance of goodwill related to
the Cass Creek International, LLC (Cass Creek) and Fish Hawk Electronics (Fish
Hawk) acquisitions (Note 2) and which combined totaled $666,373 at December 31,
2007.





Other
intangible assets consisted primarily of patents and identifiable intangible
assets including customer lists, other intellectual property and non-compete
agreements, which are being amortized using the straight-line method over their
estimated useful lives ranging from three to fifteen years.





The
long-term portion of prepaid expenses consists of deferred financing costs of
$47,468 at December 31, 2007.





REVENUE
RECOGNITION




The
Company recognizes revenue on the date products are shipped to customers and
does not sell products with the guaranteed right of return.  The
Company maintains a warranty on new products up to one year from the date of
retail purchase and therefore permits returns for defective product within the
first few months of purchase and repairs products up through the end of the
warranty period. Estimated reserves for sales / warranty returns are established
by management based on historical experience and are subject to ongoing review
and adjustment by the Company. Sales are reported net of the provision for
actual and estimated future returns in the accompanying consolidated statements
of operations. Revenues are reported net of discounts and allowances. The
Company’s revenue is recognized in accordance with generally accepted accounting
principles as outlined in the SEC’s Staff Accounting Bulletin No. 104 “Revenue
Recognition,” which requires that four basic criteria be met before revenue can
be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price
is fixed or determinable; (iii) reasonably assured it is collectible; and (iv)
product delivery has occurred. The Company recognizes revenue as products are
shipped based on FOB shipping point terms when title passes to
customers.





In June
2006, the Financial Accounting Standards Board (FASB) ratified the consensus of
Emerging Issues Task Force Issue No. 06-3, “How Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation)” (EITF 06-3). EITF
06-3 concluded that the presentation of taxes imposed on revenue-producing
transactions (sales, use, value added, and excise taxes) on either a gross
(included in revenues and costs) or a net (excluded from revenues) basis is an
accounting policy that should be disclosed. The Company adopted EITF 06-3 during
the year ended December 31, 2007, and it did not have any impact on our results
of operations or financial condition.  The Company's policy is to
present taxes imposed on revenue-producing transactions on a net
basis.


F-8


SHIPPING
AND HANDLING COSTS




Shipping
and handling costs charged to customers are included in sales and shipping and
handling costs incurred by the Company have been included in cost of goods
sold.




SALES AND
WARRANTY RESERVE




The
Company has established a sales and warranty reserve for sales returns and
warranty costs. Reserves are estimated based on historical experience, current
product lines being sold, and management's estimates. The Company provides a
standard one or two-year warranty program for its products. The sales and
warranty reserve for sales returns and warranty costs relating to continuing
operations was $300,000 and $175,000 at December 31, 2007 and December 31, 2006,
respectively. The sales and warranty reserve represents a significant estimate
and actual results could differ from the estimate. The following table provides
the activity through the returns and warranty accounts as recorded and
charged against the reserve relating to continuing operations for the years
ended December 31, 2007 and 2006.




2007
            
            
            2006Accrued
      balance - beginning
            
            $
            175,000
            
            
            $
            175,000Provision
            
            
            1,345,000
            
            
            
            899,000Claims
      incurred
            
            
            (1,220,000
            )
            
            
            (899,000
            )Accrued
      balance - ending
            
            $
            300,000
            
            
            $
            175,000




PREPAID
EXPENSES




Prepaid
expenses consist of purchased advertising time on television programs,
advertising space in outdoor publications and catalogs for the Company’s
products. These costs are then expensed over the contract, as the television
shows are aired, and when the publications and catalogs are issued. Prepaid
advertising expenses were $129,230 and $306,491 at December 31, 2007 and
December 31, 2006, respectively. Advertising expensed relating to the continuing
operations was $1,105,586 and $995,197 for the years ended December 31, 2007 and
2006, respectively. Advertising expensed relating to the discontinued operation
was $21,733 and $409,426 for the years ended December 31, 2007 and 2006,
respectively.





RESEARCH
AND DEVELOPMENT




The
Company expenses all costs related to product research and development as
incurred. Research and development expense relating to the continuing operations
was $158,063 and $166,320 for years ended December 31, 2007 and 2006,
respectively. Research and development expense relating to the discontinued
operation was $2,012 and $172,087 for the years ended December 31, 2007 and
2006, respectively.




STOCK-BASED
COMPENSATION





EffectiveJanuary 1, 2006, the Company adopted the fair value
recognition and measurements provisions of SFAS No. 123(R), using the
modified-prospective-transition method. Under that transition method,
compensation cost for stock options recognized during the years endedDecember 31,
2007and 2006 includes
compensation cost for all options granted prior to, but notvested as ofJanuary 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123. Compensation cost
will be recorded for all options granted, if any, subsequent toJanuary 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123(R). Results for
prior periods have not been restated.




In
accordance with SFAS No. 123(R), cash flows from income tax benefits resulting
from tax deductions in excess of the compensation cost recognized for
stock-based awards have been classified as financing cash flows prospectively
from January 1, 2006. Prior to adoption of SFAS No. 123(R), such excess income
tax benefits were presented as operating cash flows. There were no cash flows
from income tax benefits for the years ended December 31, 2007 and
2006.


F-9




The
following assumptions were used to calculate the value of the options granted
during the year ended December 31, 2007: dividend yield of 0%, risk-free
interest rate of 5%, expected life equal to 5-6 years, and volatility of
73%.There
were no stock grants for the years ended December 31, 2006. Therefore, there
were no assumptions used in calculating the fair value of the options grants
using the Black-Scholes option pricing model.





The
following are the assumptions used for the Black-Scholes model:





·
            The
      Company calculates expected volatility for stock options and awards using
      historical volatility.


·
            The
      Company used 0% as a forfeiture rate and the Company does not consider
      forfeitures to be material.


·
            The
      Company has not, and does not intend to, issue dividends; therefore, the
      dividend yield assumption is 0%.


·
            The
      expected term of options is based on the simplified method as allowed
      under Staff Accounting Bulletins (SAB) No’s. 107 and 110 issued by the
      SEC.  The simplified method assumes the option will be exercised
      midway between the vesting date and the contractual term of the
      option.  The Company is able to use the simplified method as the
      options qualify as “plain vanilla” options as defined by SAB No.
      107.


·
            The
      risk-free rates for the expected terms of the stock options and awards are
      based on the U.S. Treasury yield curve in effect at the time of
      grant.





The
Company recognizes stock-based compensation costs on a straight-line basis over
the requisite service period of the award, which is generally the option vesting
term.  As of December 31, 2007, there was $11,822 of total
unrecognized compensation costs related to the outstanding options, which is
expected to be recognized over a period of 35 months.





The
weighted average fair value of stock options granted on the date of grant during
the year ended December 31, 2007 was $1.22, excluding options to the CEO
relating to debt guarantees (see Note 2).





Stock
options issued to non-employees (which no options were issued to non-employees),
are accounted for in accordance with Emerging Issues Task Force (EITF)
96-18.




LOSS PER
COMMON SHARE




Net loss
per common share was based on the weighted average number of common shares
outstanding during the periods when computing the basic net loss per share. When
dilutive, stock options and warrants are included as equivalents using the
treasury stock market method when computing the diluted net loss per
share.  There were no dilutive common stock equivalents, options and
warrants, for the years ended December 31, 2007 and 2006. Anti-dilutive options
and warrants were 209,450 and 190,458 at December 31, 2007 and December 31,
2006, respectively.




INCOME
TAXES




The
Company accounts for income taxes using the asset and liability approach, which
requires the recognition of deferred tax assets and liabilities for tax
consequences of temporary differences between the financial statement and income
tax reporting bases of assets and liabilities based on currently enacted rates
and laws. These temporary differences principally include depreciation,
amortization, net operating losses, deferred retirement benefits, paid time off
and performance benefits, contract payable, allowance for doubtful accounts,
inventory obsolescence allowance, and warranty reserves. Deferred taxes are
reduced by a valuation allowance to the extent that realization of the related
deferred tax assets is not assured.


F-10


In June
2006, the Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No. 48, or FIN 48, "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109," which prescribes comprehensive
guidelines for recognizing, measuring, presenting and disclosing in the
financial statements tax positions taken or expected to be taken on tax returns.
FIN 48, effective for fiscal years beginning after December 15, 2006, seeks to
reduce the diversity in practice associated with certain aspects of the
recognition and measurement related to accounting for income taxes. The Company
adopted provisions of FASB Interpretation 48, Accounting for Uncertainty in
Income Taxes: an interpretation of FASB Statement 109, Accounting for Income
Taxes (“FIN 48) on January 1, 2007. As a result of the implementation of FIN 48,
the Company reclassified $400,000 of deferred tax liabilities to unrecognized
tax benefits with no impact to previously recorded retained
earnings.   The amount of the unrecognized tax benefits adjusted
the net operating loss carryforward for federal purposes by approximately
$1,000,000.  To the extent interest and penalties would be assessed by
taxing authorities on any underpayment of income taxes, such amounts would be
accrued and classified as a component of income tax expenses on the consolidated
statement of operations. The Company has no material amount of accrued
liabilities for interest or penalties recorded related to unrecognized tax
benefits.





A
reconciliation of the beginning and ending amount of recognized provision is as
follows:





AmountBalance
      at  January 1, 2007
            
            $
            400,000Additions
      for tax positions of prior years
            
            
            20,000Reduction
      for tax positions of prior years
            
            
            —Settlements
      with taxing authorities
            
            
            —Balance
      at December 31, 2007
            
            $
            420,000





The
federal and state tax returns are open to examination for the years
2004-2007.





ESTIMATES




The preparation of financial statements
in conformity with accounting principles generally accepted in theUnited States of Americarequires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenuesand expenses during the reporting
period. Actual results could differ from those estimates. For the Company,
significant estimates include the allowance for doubtful accounts receivable,
reserves for inventory valuation, reserves for sales returns, reserves for
warranty services, and the valuation allowance for deferred tax
assets.




RECENT
ACCOUNTING PRONOUNCEMENTS




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51” (“SFAS
160”).  This statement establishes accounting and reporting standards
for noncontrolling interests in subsidiaries and for the deconsolidation of
subsidiaries and clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements.  This Statement also
requires expanded disclosures that clearly identify and distinguish between the
interests of the parent owners and the interests of the noncontrolling owners of
a subsidiary.  SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008.  The Company does not believe that the
adoption of SFAS 160 will have a material effect on the results of operations or
financial position.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141
(Revised 2007)”).  While this statement retains the fundamental
requirement of SFAS 141 that the acquisition method of accounting (which SFAS
141 called the purchase
method) be used for all business combinations, SFAS 141 (Revised 2007)
now establishes the principles and requirements for how an acquirer in a
business combination:  1) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interests in the acquiree; 2) recognizes and measures the
goodwill acquired in the business combination or the gain from a bargain
purchase; and 3) determines what information should be disclosed in the
financial statements to enable the users of the financial statements to evaluate
the nature and financial effects of the business combination.SFAS 141 (Revised 2007)
is effective for fiscal years beginning on or after December 15,
2008.  The impact upon the adoption of SFAS 141 (Revised 2007) will
have a material effect on our results of operations or financial position for
any potential future acquisitions in 2009.


F-11





In
February 2007, FASB issued Statement 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This statement allows all entities
to choose, at specified election dates, to measure eligible items at fair value.
Under this option, an entity will report unrealized gains and losses on items
for which the fair value option has been elected in earnings. This statement is
effective as of the beginning of the first fiscal year which begins after
November 15, 2007. Early adoption is permitted as of the beginning of the
fiscal year that begins on or before November 15, 2007 provided the company
has also elected to apply the provisions of FASB Statement No. 157, Fair
Value Measurements. We are currently evaluating the impact of adopting FASB
Statement 159 on our financial statements.




NOTE 2 –
ACQUISITIONS





Cass
Creek Acquisition




On
September 20, 2007, Nature Vision closed on the acquisition of substantially all
of the assets of Cass Creek, a manufacturer and distributor of electronic game
calling devices, pursuant to the terms of an Asset Purchase
Agreement.  The transaction involved the acquisition of equipment,
inventories, intellectual property, books and records, permits, licenses,
accounts receivable, cash, goodwill, general intangibles and certain other
assets of Cass Creek for a total purchase price of approximately $2,600,000. The
purchase price was paid as follows: (i) $1,560,000 cash was paid at closing,
(ii) $386,000 by the assumption of an existing line of credit for Cass Creek
that was paid off, by the Company upon closing, and (iii) $500,000 by a five
year unsecured promissory note payable in annual installments of $100,000 of
principal plus interest accrued at 8% per annum.  In connection with
the acquisition, the Company incurred transaction costs of $167,036. The assets
acquired and liabilities assumed in the acquisition are based on their value
estimates at the date of acquisition.  The assets and liabilities were
recorded at fair value pursuant to SFAS No. 141.  The purchase
provides the Company with an expanded hunting platform and is intended to smooth
the seasonal sales cycle.  The goodwill is deductible for tax purposes
over 15 years.





In order
to fund the acquisition, the Company borrowed $2,000,000 from M&I Business
Credit, LLC (“M&I”) under the terms of a Demand Term Note dated September
19, 2007 in the principal amount of $2,000,000. The amount borrowed was
payable upon demand and bore interest at an annual rate of .75% per annum
above the prime rate of interest publicly announced by M&I Bank. If not
sooner demanded, principal on the Demand Term Note was due and payable in equal
consecutive monthly installments of $16,677 commencing on November 1, 2007 and
continuing until April 1, 2008. In any event, all principal and accrued interest
on the Demand Term Note is due and payable in full upon demand but not later
than April 1, 2008.  See Note 8.




In
connection with the financing of the Cass Creek acquisition, on September 20,
2007, the Company granted a non-qualified stock option for the purchase of
33,000 shares of its common stock at an exercise price of $2.10 per share to the
Company’s Chief Executive Officer, in consideration of his personal guarantee of
the payment of the demand term note (Note 8) and the promissory note payable
(Note 8).  The fair value of the options granted (associated with debt
guarantee) was calculated at $50,256 using the Black-Scholes model and are
included in long-term prepaid expenses on the balance sheet and will be
amortized over the life of the guarantee. The following assumptions were used to
calculate the value of the options: dividend yield of 0%, risk-free interest
rate of 5%, expected life equal to 6 years, and volatility of 81%.




The
purchase price allocation for Cass Creek is as follows:




Cash
            
            $
            7,176Accounts
      receivable
            
            
            123,154Inventories
            
            
            815,657Prepaid
      expenses
            
            
            60,007Property
      and equipment
            
            
            100,000Intangibles
      **
            
            
            880,000Goodwill
            
            
            627,042Total
      purchase price
            
            
            2,613,036Less
      – Cash acquired
            
            
            (7,176)Less
      – Promissory note
            
            
            (500,000)Net
      cash expended at the time of acquisition
            
            $
            2,105,860





**
Intangibles consist of $260,000 related to intellectual property, useful life of
5 years, $100,000 related to non-compete, useful life of 5 years, and $520,000
related to customer lists, useful life of 5 years.


F-12




Fish
Hawk Acquisition





On July
3, 2007, the Company purchased substantially all the assets of Fish Hawk
Electronics Corporation, for $323,310.  The amount of $100,000 was
paid at closing, $68,979 was due and paid in October 2007, and $100,000 is
payable pursuant to a three year promissory note in addition, the Company
incurred transaction costs of $54,331 connection with the acquisition. The note
bears interest at 8% and requires annual principal payments of $33,333 plus
interest at 8% through July 2010.  The purchase provides the Company
with downrigger display technology that compliments its Vector line of
downrigger trolling products.  In Connection with this transaction,
the Company expensed in process research and development of $15,000 during
the year ended December 31, 2007.  The goodwill is deductible for tax
purposes over 15 years. The pro forma results of operations for Fish Hawk
Electronics Corporation are not included as of January 1, 2006 as they were not
considered material.




The
purchase price allocation for Fish Hawk is as follows:




Inventory
            
            $
            68,979Property
      and equipment
            
            
            30,000Intangibles
      *
            
            
            170,000In
      process research and development (included in selling, general, and
      administrative expenses )
            
            
            15,000Goodwill
            
            
            39,331Total
      purchase price
            
            $
            323,310Less
      – Promissory note
            
            
            (100,000)Net
      cash expended at the time of acquisition
            
            $
            223,310





*
Intangibles consist of $100,000 related to trademarks, useful life of 5 years,
$50,000 related to non-compete, useful life of 5 years and $20,000 related to
customer lists, useful life of 5 years.





Vector
Acquisition




On
February 28, 2006, the Company purchased substantially all the assets of
Vector Teknologies, LLC for $384,074 in cash. The Company also entered into
a royalty agreement for sales of the purchased products until December 31, 2009.
The royalty agreement is not anticipated to be material. The purchase provides
the Company with a new line of products, downriggers for controlled depth
fishing, for the outdoor recreation division, Nature Vision. The product line
will also provide a platform for additional product innovation. The acquisition
was financed with the existing line of credit. The pro forma results of
operations as if the Vector Teknologies, LLC purchase occurred on January
1, 2006 are not material.





The
results of Cass Creek and Fish Hawk have been included in the consolidated
financial statements since the date of the acquisitions.  The
following un-audited pro forma condensed results of operations for the years
ended December 31, 2007 and 2006 give effect to the acquisition of Cass Creek as
if such transaction had occurred on January 1, 2006.  The unaudited
pro forma information does not purport to represent what the Company's results
of operations would actually have been if such transaction in fact had occurred
at such date or to project the Company's results of future
operations.





For the
years ended December 31, 2007 and 2006:





December
      31, 2007
            
            December
      31, 2006As
      reported
            
            Pro
      forma
            
            As
      reported
            
            Pro
      formaNet
      sales
            
            $
            9,607,686
            
            
            $
            11,022,517
            
            
            $
            8,993,993
            
            
            $
            11,424,929Loss
      from continuing operations
            
            
            (2,735,335
            )
            
            
            (2,305,533
            )
            
            
            (1,581,914
            )
            
            
            (1,333,896
            )Gain
      from discontinued operations
            
            
            95,913
            
            
            
            95,913
            
            
            
            500,844
            
            
            
            500,844Net
      loss
            
            $
            (2,639,422
            )
            
            $
            (2,209,620
            )
            
            $
            (1,081,070
            )
            
            $
            (833,052
            )Loss
      per common share:Basic
            
            $
            (1.15
            )
            
            $
            (.97
            )
            
            $
            (.49
            )
            
            $
            (.38
            )Diluted
            
            $
            (1.15
            )
            
            $
            (.97
            )
            
            $
            (.49
            )
            
            $
            (.38
            )


F-13




Information
regarding goodwill is summarized below:




Goodwill
      December 31, 2006
            
            $
            -Goodwill
      – Fish Hawk acquisition
            
            
            39,331Goodwill
      – Cass Creek acquisition
            
            
            627,042Goodwill,
      December 31, 2007
            
            $
            666,373


F-14


NOTE 3 -
INVENTORIES




Inventories
consisted of the following at:




December
      31,
              2007
            
            
            December
      31,
              2006Raw
      Materials
            
            $
            1,953,000
            
            
            $
            2,611,257Finished
      Goods
            
            
            3,011,510
            
            
            
            2,009,932Total
            
            
            4,964,510
            
            
            
            4,621,189Less:
      Valuation Allowance
            
            
            (194,862
            )
            
            
            (155,000
            )Inventories,
      net
            
            $
            4,769,648
            
            
            $
            4,466,189




NOTE 4 -
PROPERTY AND EQUIPMENT




Property
and equipment consisted of the following at:




December
      31,
              2007
            
            
            December
      31,
              2006Tooling
            
            $
            1,268,868
            
            
            $
            1,669,071Office
      furniture and equipment
            
            
            459,586
            
            
            
            528,383Warehouse
      equipment
            
            
            305,724
            
            
            
            293,834Vehicles
            
            
            20,279
            
            
            
            20,279Leasehold
      improvements
            
            
            256,750
            
            
            
            199,257Construction
      in progress
            
            
            106,717
            
            
            
            44,620Total
            
            
            2,417,924
            
            
            
            2,755,444Less:
      Accumulated depreciation
            
            
            (862,872
            )
            
            
            (1,117,875
            )Net
            
            $
            1,555,052
            
            
            $
            1,637,569




Depreciation
expense relating to continuing operations of $422,885 and $313,671 was recorded
for the years ended December 31, 2007 and 2006, respectively. Depreciation
expense related to discontinued operations of $0 and $75,589 was recorded for
the years ended December 31, 2007 and 2006, respectively.




NOTE 5 -
INTANGIBLES





Schedule
of Intangible Assets at December 31:




2007Gross
              Amount
            
            Accumulated
              Amortization
            
            Net
      Value
              at
      December 31, 2007Intangible
      assets subject to amortization:Trademarks
            
            $
            109,234
            
            
            $
            13,873
            
            
            $
            95,361Patents
            
            
            59,865
            
            
            
            38,332
            
            
            
            21,533Non-compete
            
            
            206,420
            
            
            
            28,080
            
            
            
            178,340Customer
      lists
            
            
            540,000
            
            
            
            27,333
            
            
            
            512,667Intellectual
      property
            
            
            260,000
            
            
            
            13,000
            
            
            
            247,000Other
            
            
            2,000
            
            
            
            155
            
            
            
            1,845Totals
            
            $
            1,177,519
            
            
            $
            120,773
            
            
            $
            1,056,746


F-15




2006Gross
              Amount
            
            Accumulated
              Amortization
            
            Net
      Value
              at
      December 31, 2006Intangible assets
      subject to amortization:Trademarks
            
            $
            9,234
            
            
            $
            6,456
            
            
            $
            2,778Patents
            
            
            46,335
            
            
            
            26,976
            
            
            
            19,359Non-compete
            
            
            56,420
            
            
            
            8,462
            
            
            
            47,958Other
            
            
            2,000
            
            
            
            22
            
            
            
            1,978Totals
            
            $
            113,989
            
            
            $
            41,916
            
            
            $
            72,073







Future
estimated amortization for the next five years and thereafter ending after
December 31, 2007 are as follows:


AmountYear
      ending December 31:2008
            
            $
            232,6802009
            
            
            230,2842010
            
            
            224,8312011
            
            
            212,9762012
            
            
            154,798Thereafter
            
            
            1,177Total
            
            $
            1,056,746




Amortization
expense was $78,857 and $22,412 relating to continuing operations for the years
ended December 31, 2007 and 2006, respectively, and $0 and $24,065 relating to
discontinued operations for the years ended December 31, 2007 and 2006,
respectively.




NOTE 6 –
RELATED PARTY NOTE PAYABLE AND WARRANTS





On
October 19, 2007, the Company borrowed $1,000,000 from a member of its Board of
Directors in order to meet its short-term cash flow requirement. This demand
promissory note is unsecured and bears an interest rate of 15% (55.8% effective
rate including fair value of warrants amortized over a three month term).
Interest is payable on the first day of each month commencing on December 1,
2007. The entire principal and accrued interest is payable upon demand anytime
after January 19, 2008. In connection with the loan, the Company issued warrants
to purchase 100,000 shares of common stock at an exercise price of $2.21. The
warrants are exercisable from October 19, 2007 through October 19, 2009. The
fair value of the warrants was calculated at $102,010 using the Black Scholes
model. The following assumptions were used to calculate to value of the
warrants: dividend yield of 0%, risk free interest of 5% expected life to two
years, and volatility of 81%. The resulting original issue discount, the fair
value of the warrants, is being amortized over the life of the debenture using
the straight-line method.  Amortization expense on the original issue
discount was $81,169 for the year ended December 31, 2007 and is included in
interest expense.  The note payable is subordinate to the bank notes
(see Notes 7 and 8).


F-16




NOTE 7 -
LINE OF CREDIT, BANK





On
November 8, 2007, the Company entered into a line of credit agreement, a demand
note, with M&I Bank up to a maximum amount of
$6,000,000.  This line of credit was used to pay off its existing line
of credit with First National Bank of Deerwood. The Demand Term Note with
M&I Bank (Note 8) was incorporated into this
facility.  Interest is payable monthly at prime plus .75% (8.00% at
December 31, 2007).  The line of credit is collateralized by accounts
receivable, inventories, property and equipment, and other assets of the
Company. The line of credit facility is considered a demand type loan and
henceforth does not have a maturity date.  The terms of the credit
agreement are written such that the line will stay in place for up to three
years if the Company can satisfactorily perform within certain parameters
outlined by the bank.  The agreement requires and the Company is in
compliance with the following affirmative covenants as of December 31, 2007,
minimum net worth (including subordinated debt) of $6,000,000, and minimum
tangible net worth of $2,800,000.   Minimum stockholders' equity annual
increases will be $100,000 year over year during the duration of the
agreement.  The facility is based on the following borrowing base
restrictions, 75% of eligible accounts receivable and 50% of eligible
inventories.  In connection with this agreement, the Company is
required to pay an annual line fee of $45,000 and minimum interest of $120,000
on an annual basis.  The weighted average interest rate on all lines
of credit excluding fees for the years ended December 31, 2007 and 2006 was
8.92% and 8.69%, respectively.  The balance outstanding on the line of
credit was $2,537,835 and $3,900,000 (First National Bank of Deerwood at
December 31, 2006) at December 31, 2007 and 2006 respectively.





NOTE 8 -
LONG-TERM DEBT




Long-term
debt consisted of the following at:




December 31,
              2007
            
            
            December 31,
              2006Unsecured
      Promissory Note – Cass Creek – annual installments of $100,000 plus
      interest at 8% from September 2008 through September 2012, guaranteed by
      the CEO of the Company
            
            $
            500,000
            
            
            $
            -Unsecured
      Note Payable – Fish Hawk -  annual installments of $33,333 from
      July 2008 through July 2010
            
            
            100,000
            
            
            
            -Demand
      Term Note – M&I Business Credit, LLC - monthly installments of $16,667
      starting November 2007 plus interest at a variable rate of .75% over the
      prime rate (8.0% at December 31, 2007) with a final payment due April 1,
      2008, secured by the property located in New Hope, MN and a second lien on
      substantially all of the Company’s assets including its inventory,
      accounts, equipment, fixtures, investment property, and general
      intangibles
            
            
            2,000,000
            
            
            
            -Totals
            
            
            2,600,000
            
            
            
            -Less:
      Current portion
            
            
            2,133,333
            
            
            
            -Net
      Long-term Debt
            
            $
            466,667
            
            
            $
            -


F-17




Future
maturities of long-term debt for years ending after December 31, 2007 are as
follows:




TotalYear
      ending December 31:2008
            
            $
            2,133,3332009
            
            
            133,3332010
            
            
            133,3342011
            
            
            100,0002012
            
            
            100,000Total
      Long-Term Debt
            
            $
            2,600,000




NOTE 9 –
STOCKHOLDERS’ EQUITY





The
Company has a Stock Option Plan, (the Plan), which provides for granting of
incentive and non-statutory stock options to employees and others. The aggregate
of 169,950 shares of the Company’s common stock may be granted at exercise
prices not less than fair market value at the date of grant. The Compensation
Committee from the Board of Directors administers the Plan. In general, options
vest immediately and up to 4.5 years, and expire 5 years from the date of
grant.




Information
regarding stock options is summarized below:




Number
      of
              Options
            
            
            Weighted
              Average
              Option
              ExerciseOptions
      Outstanding, December 31, 2005
            
            
            241,458
            
            
            $
            3.95Granted
            
            
            -
            
            
            
            -Expired
            
            
            (4,500
            )
            
            
            6.88Exercised
            
            
            (46,500
            )
            
            
            6.48Options
      Outstanding, December 31, 2006
            
            
            190,458
            
            
            
            3.26Granted
            
            
            43,000
            
            
            
            2.13Expired
            
            
            (36,802
            )
            
            
            4.95Exercised
            
            
            (87,206
            )
            
            
            .89Options
      Outstanding, December 31, 2007
            
            
            109,450
            
            
            $
            4.13





The
weighted average contractual life of options outstanding at December 31, 2007
and 2006 was 3.29 and 2.53 years, respectively.


F-18




Following
is a schedule of options outstanding and exercisable at December 31,
2007:




Options
Outstanding




Options
      Outstanding
            
            
            Options
      ExercisableExercise
      Price
            
            
            Number
              Outstanding
            
            
            Remaining
              Contractual
              Life
            
            
            Wgt-Ave
              Exercise
              Price
            
            
            Number
      Exercise
              Exercisable
            
            
            Wgt-Ave
              Exercise
              Prices$
            2.10
            
            
            
            33,000
            
            
            
            5.72
            
            
            $
            2.10
            
            
            
            33,000
            
            
            $
            2.10$
            2.21
            
            
            
            10,000
            
            
            
            4.91
            
            
            
            -
            
            
            
            -
            
            
            
            -$
            5.43
            
            
            
            66,450
            
            
            
            1.84
            
            
            
            5.43
            
            
            
            66,450
            
            
            
            5.43$
            2.10-5.43
            
            
            
            109,450
            
            
            
            3.29
            
            
            $
            4.33
            
            
            
            99,450
            
            
            $
            4.33




The
intrinsic value of the options outstanding and exercisable at December 31, 2007
and 2006 was $0 and $468,527, respectively. The intrinsic value of the options
exercised during the years ended December 31, 2007 and 2006 was $242,433 and
$147,735, respectively.





NOTE 10 -
INCOME TAXES




The
provision for income taxes for continuing operations consists of the following
components for the years ended December 31:







2007
            
            
            2006Current
            
            $
            -
            
            
            $
            5,000Deferred
            
            
            -
            
            
            
            (1,026,000
            )Total
      Provision for (Benefit from) Income Taxes
            
            $
            -
            
            
            $
            (1,021,000
            )




A
comparison of the provision for income tax expense at the federal statutory rate
of 34% for the years ended December 31 to the Company’s effective rate is as
follows:




2007
            
            
            2006Federal
      statutory rate
            
            
            (34.0
            )
      %
            
            
            (34.0
            )
      %State
      tax, net of federal benefit
            
            
            (3.3
            )
            
            
            (2.8
            )Permanent
      differences and other including surtax exemption
            
            
            0.1
            
            
            
            (2.4
            )Valuation
      allowance
            
            
            37.2
            
            
            
            (0.0
            )Effective
      Tax Rate
            
            
            -
            %
            
            
            (39.2
            )
      %


F-19




The net
deferred tax assets and liabilities included in the financial statements consist
of the following amounts at December 31:




2007
            
            
            2006Deferred
      Tax AssetsNet
      operating loss carryforwards
            
            $
            1,953,000
            
            
            $
            1,113,000Contract
      payable
            
            
            -
            
            
            
            282,000Deferred
      compensation
            
            
            209,000
            
            
            
            233,000Returns
      allowance
            
            
            112,000
            
            
            
            71,000Inventory
      reserve
            
            
            73,000
            
            
            
            63,000Bad
      debt reserve
            
            
            6,000
            
            
            
            6,000Other
      allowances
            
            
            45,000
            
            
            
            72,800Total
            
            
            2,398,000
            
            
            
            1,840,800Less
      valuation allowances
            
            
            (1,280,454
            )
            
            
            (275,254
            )Deferred
      Tax Asset
            
            $
            1,117,546
            
            
            $
            1,565,546Deferred
      Tax LiabilitiesDepreciation
      & amortization
            
            $
            (95,000
            )
            
            $
            (543,000
            )Net
      long-term deferred tax asset
            
            $
            1,022,546
            
            
            $
            1,022,546


F-20


The
change in the valuation allowance was $1,005,200 and $0 for the years ended
December 31, 2007 and 2006, respectively.  The principal reason for the
change in the valuation allowance for the year ended December 31, 2007 was due
to the Company recording a 100% valuation allowance related to the deferred tax
asset for the loss before income taxes for the year ended December 31,
2007.  In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
historical taxable income including available net operating loss carryforwards
to offset taxable income, and projected future taxable income in making this
assessment.





The
Company has federal and state net operating losses of approximately $5,200,000
and $2,650,000, respectively, which, if not used, will begin to expire in 2024.
Future changes in the ownership of the Company may place limitations on the use
of these net operating losses.





NOTE 11 -
CONTRACT PAYABLE - VADDIO




The
Company had employment agreements with 3 employees.  The agreements,
which expired on December 31, 2006, provided for an annual base salary and bonus
payments under each employment agreement, equal to 3.4% to each employee of
annual sales of Vaddio products (net of allowances for returns and billing
errors) in excess of $1,600,000 and $2,000,000 in 2005 and 2006,
respectively.  The employees have agreed, during their employment and
for a period of three years thereafter, not to compete with the Company in any
business that the Company is conducting on the date of termination, nor will
they solicit employees, customers and suppliers of the Company or accept
employment or provide services to the Company’s customers during this three-year
time period.  Contract payments of $762,231 and $462,420 were paid
during the years ended December 31, 2007 and 2006, respectively.  The
amount owed related to the contract payable was $0 and $762,231 at December 31,
2007 and 2006, respectively, and is included in current liabilities retained
relating to discontinued operations.





NOTE 12 -
DEFERRED RETIREMENT BENEFITS




The
Company has retirement benefit agreements with past employees, which are funded
by life insurance. Under the agreements, covered individuals become vested
immediately upon death or if employed at age 65. Benefit costs were recognized
over the period of service and recorded as accrued retirement benefits. The
total accrued balance due was $557,871 and $630,666 at December 31, 2007 and
December 31, 2006, respectively.




NOTE 13 -
COMMITMENTS AND CONTINGENCIES




Employment
Agreement




The
Company has entered into an employment agreement with the President and Chief
Executive Officer. Upon termination of employment the agreement provides for a
non-compete period of 5 years. In exchange for the non-compete, the Company is
obligated to pay the employee at his base rate for a period of up to 2
years.




Lease
Commitment





The
Company entered into a lease agreement for its assembly and distribution
facility and corporate headquarters in Brainerd, Minnesota. The lease commenced
on September 1, 2006 and expires August 31, 2016. The monthly base rent
increases from $11,718 to $17,800 over the term of the lease. In addition, the
Company is contractually obligated to pay for costs relating to a sprinkler
system.  The sprinkler system improvement is being added in
2008.  The monthly rent increase cannot be determined at this time and
therefore has not been reflected in the minimum lease payments noted
below.  The final improvement cost and final negotiations with the
landlord are yet to be determined.  The Company will record monthly
rent expense equal to the total of the payments due over the lease term, divided
by the number of months of the lease term. The difference between rent expense
recorded and the amount paid will be credited or charged to deferred rent. The
Company is also required to pay its portion of operating expenses. Rent expense,
including operating expenses, was $171,709 and $148,158 for the years ended
December 31, 2007 and 2006, respectively.





Future
minimum lease payments are as follows for the years ending December
31:





2008
            
            $
            150,1132009
            
            
            157,2332010
            
            
            164,3532011
            
            
            172,0672012
            
            
            180,967Thereafter
            
            
            742,300Total
            
            $
            1,567,033


F-21




NOTE 14 -
CONCENTRATIONS




Major
Customers




The
Company derived more than 10% of its revenues from the following unaffiliated
customers and had receivable balances from those customers in the following
amounts:




2007
                
                2006Sales
                
                Receivables
                
                Sales
                
                ReceivablesCustomer
      A
                $
                
                1,714,757
                
                $
                
                579,127
                
                $
                
                1,970,130
                
                $
                
                445,923Customer
      B
                
                
                1,568,609
                
                
                
                321,934
                
                
                
                1,363,882
                
                
                
                429,095Customer
      C
                
                
                1,230,587
                
                
                
                246,686
                
                
                
                1,077,236
                
                
                
                461,742


In
addition, the company had accounts receivable from another customer of $359,998
at December 31, 2007.




Major
Suppliers




Purchases
for the year ended December 31, 2007 and 2006 include purchases from an offshore
manufacturer of outdoor recreation products that individually accounted for 46%
and 61%, respectively, of the materials and supplies used by the Company in its
continuing operations.  A second offshore manufacturer of outdoor
recreation products accounted for 12% of the materials and supplies used by the
Company in its continuing operations during the year ended December 31,
2007.  Management believes minimal risk is present under these
offshore manufacturing arrangements due to other suppliers being readily
available.





Foreign
Sales





Included in the consolidated statements
of operations are foreign sales related to continuing operations of $2,555,842
and $1,123,184 for the years endedDecember 31, 2007and 2006,
respectively.






F-22








Included
in the consolidated balance sheets are international inventories related to
continuing operations of $196,154 and $204,098 at December 31, 2007 and December
31, 2006, respectively.  Foreign inventories consist of raw material
goods held in Asia and used in the production of Nature Vision
products.





NOTE 15 -
DISCONTINUED OPERATIONS





Norman photography product
line sale





The sale
of Nature Vision’s Norman photography product line to Promark International,
Inc. was completed on October 20, 2006 pursuant to the terms of an Asset
Purchase Agreement. The transaction involved the sale of inventory, equipment
and certain other assets relating to Nature Vision’s Norman photography product
line for a total purchase price of approximately $2,400,000, of which $300,000
is payable pursuant to the terms of a three-year note. The note bears interest
at prime plus 1% and was unsecured. The note required quarterly principal
payments of $25,000 plus interest.  The remaining balance of the note
was paid off during the year ended December 31, 2007.  This product
line has been classified as discontinued operations.





The
assets sold include inventories and property and equipment based on carrying
amount of inventories of $1,979,651 and property and equipment net book value of
$9,832, and prepaid expenses of $37,766. Sales proceeds received were cash of
$1,998,252, three-year note receivable of $300,000 and a 90 day inventory
holdback of $125,000. Also recorded was transaction costs totaling $142,853. The
gain on the sale of the unit was calculated as follows:




Cash
      received
            
            $
            1,998,252Note
      receivable
            
            
            300,000Due
      from buyer
            
            
            125,000Subtotal
            
            
            2,423,252Less:
      Transaction costs
            
            
            (142,853
            )Net
      proceeds on sale
            
            
            2,280,399Less:
      Inventories carrying amount
            
            
            (1,979,651
            )Less:
      Prepaid expenses
            
            
            (37,766
            )Less:
      Property and equipment carrying amount
            
            
            (9,832
            )Gain
      on disposition of assets
            
            $
            253,150




Vaddio product line
sale




The sale
of Nature Vision’s Vaddio product line to New Vad closed on February 5, 2007
pursuant to the terms of the Asset Purchase Agreement. The transaction involved
the sale of fixed assets, equipment, licenses, intellectual property and certain
other assets relating to Nature Vision’s Vaddio product line. The original
purchase price paid by the Buyer was $757,372 which consisted of $710,694 in
cash at closing and $46,678 in assumed paid time off. In addition, Nature Vision
will receive 2% of receipts from the gross sale of all Vaddio products sold by
New Vad after March 1, 2007, paid on a monthly basis with a six month deferral,
until a total payment of $750,000 is received.




As part
of the transaction, the parties also entered into a Consignment Sale Agreement,
providing for the sale of Nature Vision’s inventory to New Vad over the next 12
months at a book value estimated to be $2,031,359.  Under the terms of
the Consignment Sale Agreement, New Vad will purchase, at the Company’s cost,
the consigned inventory from Nature Vision as needed before purchasing a similar
type of item from a third party until the inventory is sold in its entirety, or
January 31, 2008, at which time the remaining inventory will be
purchased.  The Company has sold $1,732,945 of inventory to New Vad
through December 31, 2007.  There is $44,999 included in current
assets relating to discontinued operations that is due from New Vad as part of
inventory sold during the year ended December 31, 2007.  The remaining
inventory to be purchased by New Vad was $298,414 at December 31,
2007.




In
addition, the parties entered into a Collection Agreement, under which New Vad
collected and transmitted to Nature Vision payments made by customers on Nature
Vision’s accounts receivable for products or services sold or provided before
the closing date. All amounts have been collected under this agreement at
December 31, 2007.


F-23


The gain
on the sale was calculated as follows:




Cash
      received
            
            $
            710,6942%
      royalty on net sales
            
            
            48,474Assumption
      of accrued paid time off
            
            
            46,678Subtotal
            
            
            805,846Less:
      Transaction costs
            
            
            (310,014
            )Net
      proceeds on sale
            
            
            495,832Less:
      Prepaid expenses
            
            
            (72,166
            )Less:
      Property and equipment carrying amount
            
            
            (186,701
            )Gain
      on disposition of assets
            
            $
            236,965




The
potential deferral proceeds of up to $750,000 will be recorded when earned and
collection is deemed probable.  Deferred sale proceeds of $48,474 were
recorded during the year ended December 31, 2007.




The
following are condensed statements of operations of the discontinued operations
(Vaddio and Norman) for the years ended December 31:





2007
            
            
            2006Sales,
      Net
            
            $
            736,802
            
            
            $
            14,509,256Cost
      of goods sold
            
            
            710,152
            
            
            
            9,352,023Gross
      profit
            
            
            26,650
            
            
            
            5,157,233Selling,
      general, and administrative
            
            
            391,391
            
            
            
            4,594,900Income
      (loss) from operations
            
            
            (364,741
            )
            
            
            562,333Other
      income (expense)
            
            
            60,000
            
            
            
            (3,658
            )Gain
      on sale of equipment
            
            
            163,689
            
            
            
            -Gain
      on sale of Vaddio product line
            
            
            236,965
            
            
            
            -Gain
      (loss) on sale of Bookendz product line
            
            
            -
            
            
            
            23,019Gain
      on sale of Norman product line
            
            
            -
            
            
            
            253,150Income
      and gain from discontinued operations
            
            
            95,913
            
            
            
            834,844Provision
      for income taxes
            
            
            -
            
            
            
            334,000Gain
      from discontinued operations
            
            $
            95,913
            
            
            $
            500,844




Assets
and liabilities as a result of discontinued operations (Vaddio and Norman)
consisted of the following at December 31:





2007
            
            
            2006Current
      assets sold relating to discontinued operations:Prepaid
      expenses
            
            $
            -
            
            
            $
            84,855Total
            
            $
            -
            
            
            $
            84,855Other
      assets sold relating to discontinued operations:Fixed
      assets, net
            
            
            -
            
            
            
            156,199Intangibles,
      net
            
            
            -
            
            
            
            30,502Total
            
            $
            -
            
            
            $
            186,701Current
      liabilities assumed relating to discontinued
    operations:Accrued
      vacation
            
            $
            -
            
            
            $
            46,678


F-24




Assets
and liabilities retained relating to the discontinued operations (Vaddio and
Norman) consisted of the following at December 31:


2007
            
            
            2006Current
      assets retained relating to discontinued operations:Accounts
      receivable
            
            $
            44,999
            
            
            $
            1,805,240Inventory
            
            
            298,414
            
            
            
            2,261,240Total
            
            $
            343,413
            
            
            $
            4,066,480Current
      liabilities retained relating to discontinued
      operations:Accounts
      payable
            
            $
            -
            
            
            $
            992,685Accrued
      payroll and related expenses
            
            
            -
            
            
            
            80,012Accrued
      transaction costs
            
            
            25,952
            
            
            
            -Contract
      payable
            
            
            -
            
            
            
            762,231Other
      current liabilities
            
            
            -
            
            
            
            37,973Total
            
            $
            25,952
            
            
            $
            1,872,901




NOTE 16 -
SUPPLEMENTAL CASH FLOWS




2007
            
            
            2006Supplemental
      Cash Flow DisclosuresCash
      paid for interest
            
            $
            337,148
            
            
            $
            366,611Cash
      paid for income taxes
            
            
            5,000
            
            
            
            2,000Noncash
      investing and financing activitiesNote
      receivable recorded for sale of discontinued
    operations
            
            $
            -
            
            
            $
            300,000Fair
      value of stock options issued in exchange for guarantee of
      debt
            
            $
            50,256
            
            
            
            -Transaction
      costs related to sale of segment included in current liabilities retained
      related to discontinued operations
            
            $
            25,952
            
            
            
            -Supplemental
      cash flow information regarding the Company’s acquisition of Cass
      CreekFair
      value of assets acquired
            
            $
            2,613,036Less
      liabilities assumed
            
            
            -Net
      assets acquired
            
            
            2,613,036Less
      note payable issued
            
            
            (500,000
            )Less
      cash acquired
            
            
            (7,176
            )Net
            
            $
            2,105,860Supplemental
      cash flow information regarding the Company’s acquisition of Fish
      HawkFair
      value of assets acquired
            
            $
            323,310Less
      liabilities assumed
            
            
            -Net
      assets acquired
            
            
            323,310Less
      note payable issued
            
            
            (100,000
            )Less
      in process research and development expensed
            
            
            (15,000
            )Less
      cash acquired
            
            
            -Net
            
            
            208,310


F-25




NOTE 17 -
RETIREMENT PLAN




The
Company has a 401(K) Employee Retirement Plan. Company contributions made to the
Plan for the years ended December 31, 2007 and 2006 were $26,280 and $122,057,
respectively.





NOTE 18 –
SUBSEQUENT EVENTS





On
January 21, 2008 the Company acquired substantially all of the assets associated
with the Castaic Softbait brand under an asset purchase
agreement.  The Company incurred a nominal amount of transaction costs
in connection with the acquisition. The purchase provides the Company with a
proven fishing tackle product platform.This
acquisition was immaterial to the consolidated financial statements as a
whole.





On March
11, 2008, the Company entered into a purchase agreement for the sale of its
facility located in New Hope, Minnesota. Under the
terms of the Agreement, the Buyer will purchase from the Company the real
property, building, improvements and certain personal property for a purchase
price of $2.4 million to be paid at closing.  The sale of the property
is scheduled to close on or before April 15, 2008.  The closing will
be subject to the completion of the Buyer’s due diligence and other customary
conditions. The
Company estimates it will realize a book gain of approximately $1.6 million and
further anticipates any gain for tax purposes will be offset by net operating
loss carry forwards.  The Company intends to use $1.9 million of the
proceeds from the sale to pay off the mortgage loan with M&I Business
Credit, LLC with the remainder used for general working capital
purposes.  There is no assurance the sale will be completed under the
terms of the purchase agreement or at all.




F-26