UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


(Mark One)





x
            ANNUAL REPORT PURSUANT TO SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year
      endedDecember 31,
      2008.





o
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR l5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the
      transition period fromto.





Commission
file number 0-7475





NATURE
VISION, INC.


(Exact
name of registrant as specified 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)





Registrant'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




Indicate by check mark if the
registrant is a well-known seasoned registrant, as defined in Rule 405 of the
Securities Act. YesoNox





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or l5(d) of
the Exchange Act.YesoNox





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 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. YesxNoo





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not 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-K or any amendmentto this Form 10-K.o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated, or a smaller reporting company. See the
definitions of “large accelerated filer,” accelerated filer,” and smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated filero
            Accelerated filero
            Non-accelerated filero
            Smaller reporting companyx








Indicate by check mark whether
the registrant is a shell company (as defined in Rule l2b-2 of the Exchange
Act).YesoNox





The
aggregate market value of the voting common equity held by non-affiliates of
registrant as of March 16, 2009 was $153,309, 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.







1





The
number of shares outstanding of the registrant’s common stock, par value $0.16
per share, as of March 16, 2009 was 2,312,583.




DOCUMENTS
INCORPORATED BY REFERENCE





The
definitive proxy statement for the 2009 Annual Meeting of Shareholders is
incorporated by reference into Part III of this annual report.




Forward
Looking Statements





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 7 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations and Item 8 - 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.







PART
I


Item
1.    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.   The Company
operates a small leased lure facility in Mexico.





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-K,
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.





Products





Overview





Nature Vision designs, manufactures and
markets outdoor recreation products primarily for the angling and hunting
markets. We have also adapted our core camera technology for sale into certain
industrial markets. Manufacturing of most of these products is outsourced to
companies located in Asia. Our Brainerd, Minnesota facility serves as the
distribution, and service center, and corporate
headquarters.  In addition, the Company maintains a
manufacturing operation in Mexico that is used to manufacture fishing lures
associated with the Castaic Swim bait brand.





2





Our
outdoor recreation products are offered to the public through traditional
sporting goods distribution channels. We have partnered with several large
retailers, catalog houses, and e-commerce sellers to offer our products as
we expand our product categories. Major customers include: Cabela’s, Bass Pro
Shops, Gander Mountain, Dick’s Sporting Goods, Canadian Tire Corporation,
Wal-Mart Canada and Mills Fleet Farm. In 2009 we are working to expand our
customer base to include hardware chains, big box consumer electronics
retailers, and home-improvement stores that currently sell outdoor recreation
products. Independent sales representatives sell our products to retailers.
Demand for our outdoor recreation products is highly seasonal, with the majority
of our sales occurring in the fourth quarter.





Underwater
Viewing Systems





We
manufacture, distribute and market a family of products known as underwater
viewing systems that are sold under the trade name(s) “Aqua-Vu,” “Fish TV,” and
“MarCum.” We are credited as the creator of the underwater viewing system
product category, and have been awarded six US patents for underwater viewing
technology and have numerous patents pending.





An
underwater viewing system consists of a submersible video camera with lighting
and a monitor-viewing device with a power supply. The camera portion is lowered
into the water on the cable and the image us displayed on the monitor. Systems
use both cathode ray tube (CRT) display technology, and sunlight viewable liquid
crystal display (LCD) technology. Several models incorporate on-screen display
information, including the water temperature at the camera, camera depth and
camera direction. In 2009, fish attracting sounds to be played through an
underwater speaker built into the camera will be added. An optional Digital
Video Recorder allows users to capture and share their experience with others.
Aqua-Vu is the brand most associated with underwater viewing systems which is
attributable to our continuous product innovation.





During
2007, we introduced an entry level brand of underwater viewing system under the
trade name “Fish TV.” Fish TV has successfully introduced over 60,000 consumers
to the underwater viewing category, seeding future demand for new products.
Currently two models of Fish TV are offered, a 5” screen and a 7” screen, both
feature a black and white camera with Ultra-Red lighting and sell for less than
$200 at retail.





In April
2008, the Company purchased certain assets of MarCum Technologies, Inc.
(MarCum), a manufacturer and distributor of electronic sonar and underwater
camera devices. The purchase of MarCum (Nature Vision’s only branded competitor
in the underwater viewing category) expanded Nature Vision’s technology platform
to include a rotating underwater camera and two highly sought models featuring
an LCD display.





The
Company continues to dominate the underwater viewing system category. Several
new viewing systems will be introduced under the Aqua Vu and MarCum brand names
in 2009.





Sonar
Systems





The
Company marketed its first sonar system during 2007. In 2008 we rolled out a
more advanced version of that product under the trade name “ShowDown.” The
ShowDown is a new style of digital fish finder used for ice fishing, offering
superior performance and an intuitive vertical display. The ShowDown enjoys
significant momentum in the marketplace, a result of overwhelming positive
consumer word-of-mouth advertising. In 2009 an entry level version of ShowDown
will be launched to draw new consumers into the ice sonar category





The
2008 addition of MarCum electronic sonar expanded the Company’s fishing
electronics platform and provides strong intellectual property from which to
develop new products.  MarCum Sonar products are recognized as the
technology leader for LED flasher products with technology protected by several
MarCum patents.





The
MarCum patents for “Signal Interference Rejection”, “Movable Zoom”, and a “Fiber
Optic Flasher Display” are critical pieces of intellectual property for the
future products.





Fishing
Trolling Systems





In 2006
we purchased substantially all of the assets of Vector Technologies, LLC. Vector
products include all machined metal downriggers and rod holders for controlled
depth fishing. We began marketing these in spring 2006 through our channels of
distribution. The Vector brand provides a trolling products platform which we
will use to launch several new products. The Company has obtained exclusive
distribution rights to a newly tooled line of rod holder products. This new line
of products is the most extensive line of products of any known company in the
world and we expect will generate sales beginning the first quarter of
2010.





3





On July
3, 2007, the Company purchased substantially all the assets of Fish Hawk
Electronics Corporation. The purchase provided the Company with technology
that compliments its Vector line of trolling products and enhances the company’s
position in that market. Fish Hawk systems send speed and water temperature
information via sonar to a boat mounted display. This information is critical to
serious anglers trolling for multiple species of fish. In 2008 the Company
introduced the newly design Fish Hawk X-4 trolling data system which has become
the market leader in performance and is gaining significant market
share.  Fish Hawk also provides a platform to launch a new wireless
underwater video viewing system. This wireless product line transmits a video
signal and other useful data from the camera to the boat for viewing. The
wireless technology has been field tested down to 150-feet and showed very
favorable results.





Hunting
Products





We also
sell products for the recreational hunting market. These products include
“Woodland Whisper” hearing enhancers, “Quick Sit” hunting chair blinds, and
“Cass Creek” electronic game calls. Woodland Whisper hearing enhancers’ aid
hunters by detecting distant game calls and by amplifying the sounds of
approaching animals. Quick Sit chair blinds 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 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
annual hunting sales, providing needed revenue in the first and third quarters
of the year.  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 successful mass
merchant and European distribution networks which will be used to leverage sales
of other Nature Vision products.





The
Company has recently introduced upgraded and redesigned versions of Cass Creek
calls, called the Ergo series. Also new is the 10-sound Amplifier call for
deer/moose, geese and predators.  The Company currently has six major
development projects underway to advance the Cass Creek technology platform over
the next three years.





Ice
Fishing Products





Since
2003, we have held a significant portion of the ice fishing rod and reel combo
business.  Currently the Company sells ice fishing rods under the “Rip
City” brand name and assists select trade customers by designing and producing
their private label brands of ice rods





In 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
three person shelter. The shelters fit neatly into an over the shoulder carry
bag that allow fisherman mobility and quick set-up. This product line
matches consumer trends for lower cost shelters that can be transported in
smaller vehicles.





In 2008
the Company purchased the assets of Catch Cover, a line of ice hole sleeves,
covers and accessories for permanent fish houses. The Catch Cover brand has both
retail and OEM distribution and is growing with product class with the Company’s
trade customers.





Fishing
Lures





On
January 21, 2008 the Company acquired substantially all of the assets associated
with the Castaic Soft bait brand.  The purchase provides the Company
with a proven fishing tackle product platform.Throughout the fishing tackle
industry, the Castaic brand remains the recognized inventor of the swim bait
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 brand has twice graced the cover of this prestigious
publication.





The 2009
introduction of 12 new, four-section injection molded “Rock Hard Swim Baits,”
and 18 new “Catch 22 Soft Swim Baits,” gives the Company the most extensive line
of “true” swim baits on the market.





In
2008 the Company invented and applied for a patent for a new fiber lined soft
plastic bait.  This “Inner-Armor” technology creates extremely
durable, lifelike soft plastic swim baits which are unique in the
market.  This technology is currently being used in the Catch 22
series of lures.





4





Castaic
provides additional revenue during the spring and summer periods, historically
the Company’s slowest sales season. The Castaic acquisition gave the Company a
balanced mix of products to work with, reducing single season
dependence.





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. The Company believes
the industrial product line is a building block platform and is actively working
on numerous new product developments that will be introduced in
2009.





Intellectual
Property





We
consider our patents and trademarks to be valuable, and innovative applications
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 Marcum patents for “Signal interference rejection”, “Movable Zoom”, and a
“Fiber Optic Flasher Display” are critical platforms of intellectual property
for the future.  Showdown has grown to be recognized as a leader in
Ice Fishing systems with its intuitive dispel and ease of use and the Company
believes it will be a platform product for the future. The patents expire during
the period 2014 through 2026. 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, Cass Creek, MarCum, Castaic, RTG and Ice Pro. We consider
these trademarks important in assuring consumer recognition of our
products.





Competition





Our
Aqua-Vu, Fish TV and MarCum systems compete with underwater cameras sold by only
one large retailer directly sourcing products under their own label. 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 and have significantly more capital and resources available to
them.





Research
and Development





For the
years ended December 31, 2008 and 2007, we spent $490,000 and $158,000
respectively, on research activities relating to the development of new outdoor
recreation products.  The increase in research and development costs
in 2008 can be attributed to the following: (i) addition of independent
contractors hired in May 2008 in order to assist with the development of new
products associated with the underwater cameras and sonar (ii) addition of a
fishing lure designer in January 2008 and increased expenses associated with the
development of fishing lures.  We anticipate that spending on research
and development in 2009 will be comparable as a percentage of net sales to that
in 2008. The Company currently has over forty-five development projects underway
covering all product lines.





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.





5





Employees





As
of December 31, 2008, we employed 23 associates, consisting of 20 full-time
employees and 3 seasonal employees in our Brainerd, Minnesota
facility.  As of December 31, 2008, we employed 46 full-time employees
in our Mexico manufacturing facility.





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
                        
                        56
                        
                        President,
      Chief Executive Officer and a directorRobert
      P. King
                        
                        58
                        
                        Chief
      Financial Officer and
Secretary





Jeffrey P.
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.





Robert P.
King was appointed as the Secretary and Chief Financial Officer of the
Company on September 22, 2008.   From October, 2007 to September,
2008, Mr. King worked as a business consultant providing financial and
operational services to a variety of businesses.  During 2007, Mr.
King served as Vice President of Finance of a multi-plant metal manufacturing
division of IMI, PLC, a U.K.-based publicly traded manufacturing conglomerate.
From 2000 to 2006, Mr. King held several management positions, including Chief
Financial Officer and President, of Imperial Custom Molding, Inc., a plastics
manufacturer, where his responsibilities included financial reporting, banking
relations and strategic leadership of the company.  Prior to that, Mr.
King served as the General Manager for Vialog, Inc., a telecommunication
company, from 1998 to 1999.  During earlier part of his career, Mr.
King held the positions of Chief Financial Officer and Controller in public and
private companies in a variety of industries, including consumer food products
and transportation.





Item
1A:  RISK FACTORS





Factors
that may affect our future results include, but are not limited to, the
following items as well as the information in Item 7 - Management’s Discussion
and Analysis of Financial Condition and Results of Operations. If any of
the events or circumstances described in the following risks actually occurs,
our business, financial condition or results of operations could be materially
adversely affected. In such cases, the trading price of our common stock could
decline.




There
is substantial doubt about our ability to continue as a going concern.Theconsolidated financial statements were
prepared assuming we will continue as a going concern and further states that
our recurring losses from operations, accumulated deficit andinability to generate sufficient cash
flow to meet our obligations and sustain our operations raise substantial doubt
about our ability to continue as a going concern. Our plans concerning these
mattersare discussed in Note1to the accompanying audited
consolidated financial statements. Our future is dependent on our
ability to raise capital
or sell the Company.If we fail to do so for any reason, we
would not be able to continue as a going concern and could potentially be forced
to seek relief through a filing under the U.S. Bankruptcy
Code.





We May Not Be
Able to Maintain our Listing on the Nasdaq Global Market if we are Unable to
Satisfy the Minimum Bid Price Requirements.On September 25, 2008,
Nature Vision, Inc. (the “Company”) received a notice from The Nasdaq Stock
Market indicating that the Company is in violation of the minimum bid price
requirement for continued listing set forth in Nasdaq Marketplace Rule
4310(c)(4) as the bid price of the Company’s common stock closed below $1.00 per
share for 30 consecutive days.  The notice from Nasdaq further stated
that the Company will have 180 calendar days, or until March 24, 2009, to regain
compliance with Rule 4310(c)(4) by demonstrating a closing bid price of $1.00 or
more for at least ten consecutive business days. On December 19, 2008 Nasdaq
informed the Company had until September 27, 2009 to regain compliance with
minimum bid price for continued listing set forth in Rule
4310(c)(4).   If the Company cannot demonstrate compliance with
Rule 4310(c)(4) by September 27, 2009, subject to certain limited exceptions,
the Company’s common stock will be delisted from The Nasdaq Capital Markets and
thereafter would be quoted on the Over-the-Counter Bulletin Board.





6





We
may be unable to return to profitability or raise additional
capital.We
incurred net losses of $2.5 million in fiscal 2008 and $2.6 million in fiscal
2007 and had an accumulated deficit of $4.7 million as of December 31, 2008. The
Company is currently evaluating strategic alternatives that include the
following: (i) raising of capital (ii) the sale of the Company to another
entity.  This process is ongoing and can be lengthy and has inherent
costs.  There can be no assurance that the exploration of strategic
alternatives will result in any specific action to alleviate the Company’s 12
month working capital needs or result in any other
transaction.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.





Failure to Comply
with Requirements and Restrictive Covenants in Our Credit Facility Could Have a
Material Adverse Affect on Our Business.   Our credit
facility contains restrictive covenants and requirements that we comply with
certain financial covenants. The credit facility requires, among other things,
that we be in compliance with the following affirmative covenants as of December
31, 2008:  minimum net worth (including subordinated debt) of
$5,500,000 and minimum tangible net worth of $2,200,000 and annual capital
expenditures not to exceed $500,000.  The Company did not meet the
minimum net worth and capital expenditure covenants as of December 31,
2008, but has received a noncompliance waiver from M&I Bank as of December
31, 2008.  The waiver does not entitle the Company to any future
waiver.   If our lender fails to agree to such future
concessions, the lender would be under no obligation to advance additional funds
to us, which would have an immediate, material adverse effect on us. In addition,
failure to maintain the required covenants could result in acceleration of our
indebtedness under the credit facility. If we are not able to maintain our
borrowing availability under our credit facility and/or raise additional capital
when needed, we may be forced to sharply curtail our efforts to manufacture and
promote the sale of our products or a material effect on Company’s ability to
continue operations.





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.





Trademark
infringement or other intellectual property claims relating to our products
could increase our costs.Our industry is
susceptible to litigation regarding trademark and patent infringement and other
intellectual property rights. We could be either a plaintiff or defendant in
trademark and patent infringement claims and claims of breach of license from
time to time. The prosecution or defense of intellectual property litigation is
both costly and disruptive of the time and resources of our management even if
the claim or defense against us is without merit. We could also be required to
pay substantial damages or settlement costs to resolve intellectual property
litigation.




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 formajorityour 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 several 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.





7





Quality control
fromoutsourced
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.  Our independent offshore quality control consultant
performs routine inspections on Company shipments and inspects production lines
on a daily basis.  The Company performs further quality inspections at
our facility and documents engineering standards.  There is no
assurance that these quality control processes will eliminate defective products
in the future.





Sources of and
fluctuations in market prices of raw materials can affect our operating results.The primary raw materials we use are metals, resins and packaging
materials. These materials are generally available from a number of suppliers,
but we have chosen to concentrate our sourcing with a limited number of vendors
for each commodity or purchased component. We believe our sources of raw
materials are reliable and adequate for our needs. However, the development of
future sourcing issues related to the availability of these materials as well as
significant fluctuations in the market prices of these materials may have an
adverse affect on our financial results.




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.





Sales of our
products are seasonal, which causes our operating results to vary from quarter
to quarter.Sales of our products
are seasonal. Historically, our net sales will peak in the fourth quarter due to
the buying patterns of our customers. Seasonal variations in operating results
may cause our results to fluctuate significantly in the first, second and third
quarters.





General economic
conditions affect our results.Our revenues are affected by
economic conditions and consumer confidence worldwide, but especially in the
United States.  In times of economic uncertainty, consumers tend to
defer expenditures for discretionary items, which affect demand for our
products.  Our businesses are cyclical in nature, and their success is
dependent upon favorable economic conditions, the overall level of consumer
confidence and discretionary income levels.  Any substantial
deterioration in general economic conditions that diminish consumer confidence
or discretionary income can reduce our sales and adversely affect our financial
results including the potential for future impairments of intangible
assets.  The impact of weakening consumer credit markets; corporate
restructurings; layoffs; declines in the value of investments and residential
real estate; higher fuel prices and increases in federal and state taxation all
can negatively affect our results.





Impairment
charges could reduce our profitability.In accordance with the
provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, the Company tests goodwill and other intangible assets with
indefinite useful lives for impairment on an annual basis or on an interim basis
if an event occurs that might reduce the fair value of the reporting unit below
its carrying value.  We conduct testing for impairment during the
fourth quarter of our fiscal year.  Various uncertainties, including
changes in consumer preferences, deterioration in the political environment,
continued adverse conditions in the capital markets or changes in general
economic conditions, could impact the expected cash flows to be generated by an
intangible asset or group of intangible assets, and may result in an impairment
of those assets.  Although any such impairment charge would be a
non-cash expense, any impairment of our intangible assets could materially
increase our expenses and reduce our profitability.   We had an
independent appraisal firm complete an appraisal of goodwill and other
intangibles as of November 30, 2008.  For our fiscal year ending
December 31, 2008, we recorded an impairment charge of $1,338,250.  As
a result of the appraisal findings the Company wrote off its entire goodwill of
$666,373 and wrote off $671,877 of other intangible assets.   There is
no assurance that the remaining intangibles will not be impaired in future
years.





8





We may experience
difficulties integrating the operations of newly acquired business or product
lines.Newly
acquired business operations require management to integrate each operation
including marketing, pricing, returns, sourcing, and
accounting.  These acquisitions if not effectively integrated or if we
have difficulties in achieving cost savings and synergies can result in lower
revenues and profitability.





The trading price
of shares of our common stock fluctuates and investors in our common stock may
experience substantial losses.The trading price of our
common stock could decline or fluctuate in response to a variety of factors,
including:





·
            the timing of Company
      announcements or those of our competitors concerning significant product
      developments, acquisitions or financial
  performance;


·
            fluctuation in our quarterly
      operating results;


·
            substantial common stock
      sales;


·
            general stock market conditions;
      or


·
            other
      economic or external factors.





A limited number
of our shareholders can exert significant influence over the
Company.As
of December 31, 2008, Jeffery P. Zernov, CEO, Richard P. Kiphart, Chairman with
other Board of Directors and Capra family (large shareholder) who is supportive
of management holds approximately 52% of the voting power of our common stock
taken as a whole. This voting power would permit these shareholders, if they
chose to act together, to exert significant influence over the outcome of
shareholder votes, including votes concerning the election of directors, by-law
amendments, possible mergers, corporate control contests and other significant
corporate transactions.





Our
shares of common stock are thinly traded and our stock price may be more
volatile.


Because
our common stock is thinly traded, its market price may fluctuate significantly
more than the stock market in general or the stock prices of similar companies,
which are exchanged, listed or quoted on NASDAQ. We believe there are 1,393,720
shares of our common stock held by nonaffiliates as of March 16, 2009. Thus, our
common stock will be less liquid than the stock of companies with broader public
ownership, and as a result, the trading prices for our shares of common stock
may be more volatile. Among other things, trading of a relatively small volume
of our common stock may have a greater impact on the trading price for our stock
than would be the case if our public float were larger.





Critical
Accounting Policies and Estimates




The
Company’s management discussion and analysis of its financial condition and
results of operations are based upon the Company’s consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the U.S. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of its assets, liabilities, sales and expenses, and related footnote
disclosures. On an on-going basis, the Company evaluates its estimates for
product returns, bad debts, inventories, intangible assets, income taxes,
warranty obligations, pensions and other post-retirement benefits, and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.




The
Company believes critical accounting policies (See Item
7:  Management’s Discussion and Analysis of Financial Condition and
Results of Operations for a listing of critical accounting policies) affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. Management has discussed these policies with
the Audit Committee of the Company’s Board of Directors.




Item
1B.  UNRESOLVED STAFF COMMENTS





None





Item
2. PROPERTIES.





The
Company currently leases a 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.





In
addition, the Company currently leases a 14,600 square foot facility located in
Mexico.  This facility is used to manufacture lures associated with
the Castaic Softbait brand.





9





Item
3. LEGAL PROCEEDINGS.





Not
applicable.





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





Not
applicable.





10





PART
II





Item
5. MARKET FOR REGISTRANT’S COMMON EQUITY, NASDAQ DELISTING, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.





Market Information.The
number of record holders of our common stock on December 31, 2008 was 267. The
table below sets forth the high and low sale prices for the common stock during
the two years ended December 31, 2008.  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.





On
September 25, 2008, Nature Vision, Inc. (the “Company”) received a notice from
The Nasdaq Stock Market indicating that the Company is in violation of the
minimum bid price requirement for continued listing set forth in Nasdaq
Marketplace Rule 4310(c)(4) as the bid price of the Company’s common stock
closed below $1.00 per share for 30 consecutive days.  The notice from
Nasdaq further stated that the Company will have 180 calendar days, or until
March 24, 2009, to regain compliance with Rule 4310(c)(4) by demonstrating a
closing bid price of $1.00 or more for at least ten consecutive business days.
On December 19, 2008 Nasdaq informed the Company had until September 27, 2009 to
regain compliance with minimum bid price for continued listing set forth in Rule
4310(c)(4).  If the Company cannot demonstrate compliance with Rule
4310(c)(4) by September 27, 2009, subject to certain limited exceptions, the
Company’s common stock will be delisted from The Nasdaq Capital Markets and
thereafter would be quoted on the Over-the-Counter Bulletin Board.











Common
      StockQuarter
      Ended
                            
                            Low
                            
                            
                            High2007March
      31
                            
                            $
                            4.10
                            
                            
                            $
                            6.00June
      30
                            
                            $
                            2.20
                            
                            
                            $
                            4.10September
      30
                            
                            $
                            2.10
                            
                            
                            $
                            2.66December
      31
                            
                            $
                            1.40
                            
                            
                            $
                            3.042008March
      31
                            
                            $
                            1.51
                            
                            
                            $
                            3.43June
      30
                            
                            $
                            1.20
                            
                            
                            $
                            1.90September
      30
                            
                            $
                            0.70
                            
                            
                            $
                            1.48December
      31
                            
                            $
                            0.25
                            
                            
                            $
                            1.00








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, 2008.





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
                                        
                                        
                                        118,900
                                        
                                        
                                        $
                                        3.07
                                        
                                        
                                        
                                        141,100Equity
      compensation plans notapproved by securities
      holders
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
                                        
                                        
                                        118,900
                                        
                                        
                                        $
                                        3.07
                                        
                                        
                                        
                                        141,100





11





Item
6.   SELECTED FINANCIAL DATA





Not
applicable





Item
7.   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.




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.”





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.




Recent
Developments





The
consolidated financial statements were prepared assuming we will continue as a
going concern and further states that our recurring losses from operations,
accumulated deficit and inability to generate sufficient cash flow to meet our
obligations and sustain our operations raise substantial doubt about our ability
to continue as a going concern. Our plans concerning these matters are discussed
in Note 1 to the accompanying audited consolidated financial
statements.





Despite
cost reduction initiatives, the Company will be unable to pay its obligations in
the normal course of business or service its debt in a timely manner throughout
2009 without raising additional debt or equity capital.





The
Company is currently evaluating strategic alternatives that include the
following: (i) raising of capital (ii) the sale of the Company to another
entity.  This process is ongoing and can be lengthy and has inherent
costs.  There can be no assurance that the exploration of strategic
alternatives will result in any specific action to alleviate the Company’s 12
month working capital needs or result in any other transaction.





During
the fourth quarter of fiscal 2008, the Company implemented a restructuring plan
that would reduce operating expenses (and other fixed costs included in cost of
sales) by approximately $1,000,000 in 2009.  See operating expenses
for more detail.





During
the fourth quarter of fiscal 2008, the Company performed its annual goodwill
impairment test with the assistance of a third-party valuation
firm.  Due to reduced growth expectations resulting from weakening
economic conditions and lower future earnings expectations, the Company recorded
a non-cash charge of $666,373 in the fourth quarter of fiscal 2008 for goodwill
impairment.  In addition, the Company carried out its annual fair
value based impairment test on the intangible assets.  This resulted in the
Company recording an impairment charge of $671,877 in the fourth quarter of
fiscal 2008.





On
October 27, 2008, the Company borrowed $700,000 from its Chief Executive Officer
(CEO) in order to meet its short-term cash flow requirements. This promissory
note was unsecured and had an interest rate of 15%. The entire principal and
accrued interest was payable on January 1, 2009, of which the Company paid
$250,000.  The Company is currently in default on the remaining
$450,000 of the note and is in negotiations to extend the remaining $450,000 of
the CEO’s note.





During
the third quarter of 2008, we increased our valuation allowance for the entire
amount of our deferred tax assets, due to the uncertainties surrounding our
ability to utilize some or all of our deferred tax assets. The increase in the
valuation allowance resulted in $428,274 income tax expense for the year ended
December 31, 2008.





In July
2008, the Company purchased certain assets of Innovative Outdoors, Inc.
(Innovative Outdoors) for approximately $193,000.  Innovative Outdoors
is a manufacturer and distributor of ice fishing hole covers and other related
devices, pursuant to the terms of an asset purchase agreement.  This
purchase allows the Company to become vertically integrated by purchasing the
intellectual property of an existing sales product line.





12





In April
2008, the Company purchased certain assets of MarCum Technologies, Inc. (MarCum)
for approximately $760,000. MarCum is a manufacturer and distributor of
electronic sonar and underwater camera devices.  The purchase provides
the Company with an expanded fishing platform and a strong intellectual property
platform to develop new products.





On April
7, 2008, the Company sold its facility located in New Hope, Minnesota. Under the
terms of the Agreement, the Buyer purchased from the Company the real property,
building, improvements and certain personal property for a purchase price of
approximately $2,400,000.  The Company recorded a gain of $998,950
($1,593,222 pretax gain less income taxes of $594,272) that is included in
discontinued operations.  The Company used $1,917,000 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.





On
January 21, 2008 the Company acquired substantially all of the assets associated
with the Castaic Softbait brand for approximately $505,000. 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.





Results
of Operations





Our
primary products are categorized into six product lines. The following table
sets forth, for the periods indicated, net sales by product line along with the
change from the previous year:





For
      the Year Ended December 31:2008
                        
                        
                        2007Net
      Sales
                        
                        
                        Percent
                          Change
                        
                        
                        Net
      SalesUnderwater
      Viewing systems and Sonars
                        
                        $
                        7,530,000
                        
                        
                        
                        24.3
                        %
                        
                        $
                        6,058,000Fishing
      Trolling systems
                        
                        
                        238,000
                        
                        
                        
                        13.9
                        %
                        
                        
                        209,000Hunting
                        
                        
                        2,008,000
                        
                        
                        
                        59.1
                        %
                        
                        
                        1,262,000Ice
      Fishing
                        
                        
                        861,000
                        
                        
                        
                        (7.7
                        %)
                        
                        
                        933,000Fishing
      Lures
                        
                        
                        463,000
                        
                        
                        
                        543.1
                        %
                        
                        
                        72,000Industrial
                        
                        
                        595,000
                        
                        
                        
                        (27.2
                        %)
                        
                        
                        817,000Other
      (including freight and service)
                        
                        
                        360,000
                        
                        
                        
                        40.1
                        %
                        
                        
                        257,000Total
      Net Sales
                        
                        $
                        12,055,000
                        
                        
                        
                        25.5
                        %
                        
                        $
                        9,608,000





The
following table contains selected information from our historical consolidated
statement of operations, expressed as a percentage of net sales:





2008
                              
                              
                              2007Net
      Sales
                              
                              
                              100.0
                              %
                              
                              
                              100.0
                              %Cost
      of goods sold
                              
                              
                              75.8
                              
                              
                              
                              81.5Gross
      margin
                              
                              
                              24.2
                              
                              
                              
                              18.5Sales
      and marketing expenses
                              
                              
                              17.2
                              
                              
                              
                              21.7Research
      & development and engineering expenses
                              
                              
                              6.7
                              
                              
                              
                              3.0General
      and administrative expenses
                              
                              
                              13.8
                              
                              
                              
                              17.3Goodwill
      and intangible impairment charges
                              
                              
                              11.1
                              
                              
                              
                              -Total
      operating expenses
                              
                              
                              48.8
                              
                              
                              
                              42.0Operating
      loss
                              
                              
                              (24.6
                              )
                              
                              
                              (23.5
                              )Other
      expense
                              
                              
                              (5.0
                              )
                              
                              
                              (5.0
                              )Provision
      for income taxes
                              
                              
                              (3.6
                              )
                              
                              
                              -Gain
      from discontinued operations
                              
                              
                              12.8
                              
                              
                              
                              1.0Net
      loss
                              
                              
                              (20.4
                              %)
                              
                              
                              (27.5
                              %)





13





Year
ended December 31, 2008 compared to year ended December 31, 2007





Sales,
Net





Fiscal 2008netsales increased 25.5% to
$12,055,000 compared to $9,608,000 in fiscal 2007.  Net sales mainly
increased as a result of incremental revenue from acquisitions that took place
in fiscal 2007 and 2008 reductions in product returns as a percent of sales in
2008.





The
underwater viewing system and sonar product net sales increased mainly due to
the incremental $1,625,000 of sales related to the Marcum acquisition that took
place in April 2008.  In addition, the underwater viewing system and
sonar products benefited by approximately $520,000 in revenue from a decrease in
returns in 2008.The
Company experienced favorable results from putting significant quality control
processes in place during 2007, including the hiring of an independent off-shore
quality consultant to increase quality inspections.  The
increases in the underwater viewing system and sonar product revenue were offset
by declining organic net sales of approximately $700,000 in later life cycle
products.





The
hunting product revenue increased due to the incremental $950,000 of sales
related to the Cass Creek acquisition that took place in September
2007.  The increases in the hunting product revenue was offset by
decreases in revenues generated from hunting blinds due to proliferation of
competitors that has turned the product line into a commodity.





The
fishing lure product revenue increased due to the incremental $390,000 of sales
related to the Castaic acquisition that took place in January 2008.





The
industrial product revenue decreased by approximately $220,000 due to weakening
conditions surrounding the construction industry.





Gross
Profit




Gross
profit of $2,916,000 was 24.2% of net sales for fiscal 2008 compared to
$1,774,000 or 18.5% of net sales for fiscal 2007.





The
reduction in returns as a percentage of sales resulted in a favorable gross
margin impact of approximately 3.4%.  As discussed above this is the
result of the Company putting some significant quality control processes in
place during 2007.  The higher net revenues in 2008 as compared to
2007 resulted in fixed costs being lower as a percentage of net sales and
resulted in approximately 0.8% favorable impact in the gross
margin.  The improvement of gross profit was a result of newer
products with higher margins and lower sourcing costs and resulted in a
favorable gross margin impact of approximately 1.5%.





Operating
Expenses




Total
operating expenses were $5,879,000 for fiscal 2008 compared to $4,030,000 for
fiscal 2007, an increase of $1,849,000.  A portion of the increase in
operating expenses can be attributed to a non-cash impairment charge of
$1,338,000 related to the impairment of goodwill and other intangible
assets.





During
the fourth quarter of fiscal 2008, the Company implemented a restructuring plan
that could reduce operating expenses (and other fixed costs included in cost of
sales) by approximately $1,000,000 in 2009, which is detailed
below.





Sales and
marketing expenses decreased approximately $15,000 from the prior year due
primarily to the decrease in advertising expenses of approximately
$115,000.  This reduction in advertising expense was offset by
increases in our commission expenses as a result of the higher sales volume in
2008.  Our commission expense is variable and is paid to outside sales
representatives.  The Company has taken measures to reduce advertising
expenses, travel expenses, and employees.  The Company believes these
measures could result in aggregate savings of approximately $550,000 in fiscal
2009.





Research
and development and engineering expenses increased by approximately $520,000
from the prior year.   This increase is primarily due to the
following:





14





·
            The addition of independent
      contractors hired in May 2008 in order to assist with the development of
      new products associated with the underwater cameras and
      sonar.


·
            The addition of a fishing lure
      designer in January 2008 and increased expenses associated with the
      development of fishing
lures.




The
Company has taken measures to reduce employees in the research and development
and engineering department and has reduced the overall expenses for this
department.  The Company believes the potential savings of these
measures to be approximately $100,000 in fiscal 2009.  A portion of
these 2009 planned savings will be negated by incurring a full year of expense
relating to certain research and development commitments the Company entered
into in May 2008.





General
and administrative expenses have remained consistent year over
year.  The Company plans to reduce general and administrative expenses
relating to accounting, legal, and outside consultant fees by relying more on
the Company’s internal resources.  The Company believes the potential
savings to be approximately $200,000 in fiscal 2009.





As part
of the restructuring plan the Company reduced its employees in the
shipping/receiving and production departments.  In addition, the
Company believes it can reduce its inbound and outbound freight expenses by
using lower cost carriers, utilizing less air freight, and shipping more product
container direct.  The Company believes that these measures could
result in annual aggregate savings of approximately $150,000 in fiscal
2009.





Other
Income and Expenses




Other
expense increased by approximately $120,000 from the prior
year.  Interest expense increased to $612,000 for fiscal 2008 from
$467,000 in fiscal 2007.  The increase is the result of greater
short-term and long-term borrowings incurred to fund acquisitions and working
capital needs.





Pretax
Loss and Income Taxes




The
Company recognized a pretax loss of $3,566,000 in fiscal 2008, compared to a
pretax loss of $2,735,000 in fiscal 2007.  The increase in the pretax
loss is attributable to a non-cash impairment expense of $1,338,000 recorded in
fiscal 2008.





During
fiscal 2008 the Company increased its deferred tax valuation allowance resulting
in $428,000 of income tax expense for the year ended December 31, 2008, due to
the uncertainties surrounding the Company’s ability to utilize some or all of
its deferred tax assets.





Loss
from Continuing Operations




The loss
from continuing operations was $3,994,000 for fiscal year 2008 including the
$1,338,250 one-time impairment expense, compared to a loss from continuing
operations of $2,735,000 in the prior year as a result of the fluctuations
discussed above.





Gain
from Discontinued Operations





In
connection with the Company’s sale of the Vaddio product line that closed in
February, 2007, the Company would receive 2% of receipts from the gross sale of
all Vaddio products sold by the New Vad, LLC until a total payment of $750,000
is received.   The Company recognized approximately $600,000 and
$50,000 during the years ended December 31, 2008 and 2007,
respectively.





In April
2008, the Company sold its facility located in New Hope, Minnesota. Under the
terms of the Agreement, the Buyer purchased from the Company the real property,
building, improvements and certain personal property for a purchase price of
approximately $2,400,000.  The Company recorded a gain of $998,950
($1,593,222 pretax gain less income taxes of $594,272).




Net
Loss




The
Company recognized a net loss of approximately $2,455,000 in fiscal 2008
compared to a net loss of $2,639,000 in fiscal 2007.





Liquidity
and Capital Resources





The
Company’s cash flow from operating, investing and financing activities, as
reflected in the consolidated statements of cash flows, is summarized in the
following table:





15








(thousands)
                
                2008
                
                
                2007Cash
      provided by (used for):Operating
      activities
                
                $
                (585
                )
                
                $
                (1,846
                )Investing
      activities
                
                
                1,307
                
                
                
                1,093Financing
      activities
                
                
                (853
                )
                
                
                882Increase
      (decrease) in cash and cash equivalents
                
                $
                (131
                )
                
                $
                129








The
following table sets forth the Company’s working capital position at the end of
each of the past two years:




(thousands)
                  
                  2008
                  
                  
                  2007Current
      assets
                  
                  $
                  7,739
                  
                  
                  $
                  8,249Current
      liabilities
                  
                  
                  5,923
                  
                  
                  
                  7,186Working
      capital
                  
                  $
                  1,816
                  
                  
                  $
                  1,063Current
      ratio
                  
                  1.31:1
                  
                  
                  1.15:1





Operating
Activities




Cash
flows used in operations totaled $585,000 and $1,846,000 in fiscal 2008 and
2007, respectively. The primary reasons for the improving cash flow from
operations was the loss on the impairment of intangibles assets and goodwill of
$1,338,000 recorded in fiscal 2008, the write off of the deferred tax asset of
$428,000 in fiscal 2008, the increase in depreciation and amortization of
$287,000 in fiscal 2008, and the favorable net changes in operating assets and
liabilities of $163,000 as compared to the prior year.   These
items were partially offset by the gain on sale of the building of $999,000
recorded in 2008 and the increase of gains recorded in 2008 of $191,000 relating
to other discontinued operations and the sale of property and
equipment.





Investing
Activities




Cash
flows provided from investing activities totaled $1,307,000 and $1,093,000 in
fiscal 2008 and 2007, respectively.   The proceeds from the sale
of the building generated $2,294,000 of cash in 2008.  The Company
received various cash proceeds relating to the collection of the deferred
proceeds related to the sale of Vaddio and the sale of remaining Vaddio
inventory totaling $661,000.   The acquisition of MarCum used
$760,000 of cash in 2008.  The acquisition of Castaic used $341,000 in
2008.  The Company incurred capital expenditures and intangible
expenditures totaling $551,000 in fiscal 2008.





Financing
Activities





Cash
flows provided by (used for) financing activities totaled ($853,000) and
$882,000 in fiscal 2008 and 2007, respectively.  Payments on long-term
debt were $2,169,000 in fiscal year 2008.





On
November 8, 2007, the Company entered into a line of credit agreement, a demand
note, with M&I Bank for up to a maximum amount of
$6,000,000.  Interest is payable monthly at the greater of one month
LIBOR plus 3.75% or 5.25% (5.25% at December 31, 2008).  The line of
credit is collateralized by accounts receivable, inventories, property and
equipment, and other assets of the Company.  The facility is based on
the following borrowing base restrictions, 75% of eligible accounts receivable
and 50% of eligible inventories. Effective from August 1, 2008 through October
31, 2008 the Company received an over advance amount of $600,000 in order to
assist the Company with meeting it’s short term cash flow requirements. 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 balance
outstanding on the line of credit was $3,084,956 and $2,537,835 at December 31,
2008 and 2007, respectively.  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 covenants outlined by the bank.  The agreement
required the Company to be in compliance with the following affirmative
covenants as of December 31, 2008:  minimum net worth (including
subordinated debt) of $5,500,000 and minimum tangible net worth of $2,200,000
and annual capital expenditures not to exceed $500,000.   The
Company did not meet the minimum net worth and capital
expenditure covenants as of December 31, 2008, but has received a
noncompliance waiver from M&I Bank as of December 31, 2008. The waiver does
not entitle the Company to any future waiver.





In
October 2008, the Company borrowed $700,000 from its Chief Executive Officer in
order to meet its short-term cash flow requirements. This promissory note was
unsecured and had an interest rate of 15%. The entire principal and accrued
interest was payable on January 1, 2009, of which the Company paid
$250,000.  In connection with the loan, the Company issued warrants to
the Chief Executive Officer to purchase 50,555 shares of common stock at an
exercise price of $.90. The warrants are exercisable from October 28, 2008
through October 27, 2010.  The Company is currently in default on the
remaining $450,000 of the note and is in negotiations to extend the remaining
$450,000 of the CEO’s note.





16





In July
2008, the Company amended the terms and replaced the original $1,000,000 demand
note issued to the member of its Board of Directors in October
2007.  The amended $1,000,000 demand note is held by the same member
of the Company’s Board of Directors.  The demand promissory note is
unsecured and bears an interest rate of 15%.  Interest is payable on
the first day of each month commencing on August 1, 2008.  The entire
principal and interest is payable upon demand anytime after June 30,
2010.  In connection with the new loan, the Company issued additional
warrants to the Director to purchase 100,000 shares of common stock at an
exercise price of $1.31.





In May
2008, the Company entered into a research and development consulting agreement
with an entity that had common ownership with MarCum.  The agreement
requires the Company to pay the entity as follows:  (i) $525,000 in 36
monthly installments of $14,583 for research and development services beginning
June 1, 2008, (ii) $200,000 in 24 monthly installments of $8,333 for product
support services beginning June 1, 2008.  The Company has recognized
approximately $183,000 of expense relating to this agreement for the year ended
December 31, 2008, which is included in research and development and engineering
expense.





In May
2008, the Company entered into a research and development consulting agreement
with an entity that had common ownership with MarCum.  The agreement
requires the Company to pay the entity as follows:  (i) $180,000 in 36
monthly installments of $5,000 for research and development services beginning
June 1, 2008, (ii) $100,000 in 24 monthly installments of $4,166 for product
support services beginning June 1, 2008.  The Company has recognized
approximately $73,000 of expense relating to this agreement for the year ended
December 31, 2008, which is included in research and development and engineering
expense.





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 on August 31, 2016.  The lease was
amended in May 2008 for additional space, a sprinkler system improvement
addition, and the term extension through August 31, 2018.  The monthly
base rent increases from $16,900 to $24,400 over the revised term of the
lease.





As noted
above, working capital increased to $1,816,000 at December 31, 2008 from
$1,063,000 at December 31, 2007.  The Company’s current ratio as of
December 31, 2008 is 1.31 compared with 1.15 last year.  The increase
in working capital is primarily driven by the sale of the New Hope facility in
April 2008 that generated approximately $2,294,000 in cash and the amendment of
the $1,000,000 Board of Director note in July 2008 that resulted in the note
being classified as a long-term liability as of December 31, 2008. The increase
in working capital was offset by the $2,455,000 net loss the Company incurred in
fiscal 2008.




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of
business.  We incurred net losses of $2.5 million in fiscal 2008 and
$2.6 million in fiscal 2007 and had an accumulated deficit of $4.7 million as of
December 31, 2008.  We have managed our liquidity during the fourth
quarter of 2008 and first part of first quarter of 2009 through cost reduction
initiatives and a related party note payable.




The
Company has historically been a seasonal business with the majority of the
Company’s revenue being realized in the fourth quarter.  The general
economic conditions, including a lowering of overall consumer confidence as
consumers continue to pull back discretionary spending, our historical high
working capital  usage in first nine months of the fiscal year,
competition in certain product lines, and the higher than anticipated 2007 and
2008 acquisitions transition costs have impacted our operating
results.  In addition to the factors described above, the global
credit market crisis has impacted our ability to find subordinated debt or other
additional financing.  We have not seen an improvement in the general
economic conditions that impact our Company through February 2009.




Despite
the cost reduction initiatives, the Company will be unable to pay its
obligations in the normal course of business or service its debt in a
timely manner throughout 2009 without raising additional debt or equity
capital.




The
Company is currently evaluating strategic alternatives that include the
following: (i) raising of capital (ii) the sale of the Company to another
entity.  This process is ongoing and can be lengthy and has inherent
costs.  There can be no assurance that the exploration of strategic
alternatives will result in any specific action to alleviate the Company’s 12
month working capital needs or result in any other transaction.





The
Company believes that the effect of inflation has not been material during the
year ended December 31, 2008.





17





Off-Balance
Sheet Financing Arrangements




As of
December 31, 2008 and 2007, there were no off-balance sheet arrangements,
unconsolidated subsidiaries and commitments or guaranties of other
parties.




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.





Sales
and Warranty Reserve





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.





Revenue
Recognition





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.




Allowance
for doubtful accounts





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.





Impairment
of long lived assets





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. We had an
independent appraisal firm complete an appraisal of goodwill and other
intangibles as of November 30, 2008.  For our fiscal year ending
December 31, 2008, we recorded an impairment charge of $1,338,250.  As
a result of the appraisal findings the Company wrote off its entire goodwill of
$666,373 and wrote off $671,877 of other intangible assets.  We did
not recognize any impairment charges for our long-lived assets during the year
ended December 31, 2007.  Although the Company has not generated
positive cash flows in 2008 and 2007, management believes that based on cost
reduction actions and estimated revenue growth and margin improvement
initiatives, that the Company will have cash flows from the remaining 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.





Inventory
obsolescence reserve





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 level of
success of certain Company sales programs.





Income
taxes





18





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.   During
fiscal 2008, the Company increased its valuation allowance for the entire amount
of the deferred tax assets.  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.





Recent
Accounting Pronouncements




In May
2008, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard
(FAS) 142-3, Determination of
the Useful Life of Intangible Assets, which is effective for fiscal years
beginning after December 15, 2008 and for interim periods within those
years. FSP FAS 142-3 provides guidance on the renewal or extension assumptions
used in the determination of the useful life of a recognized intangible asset.
The intent of FSP FAS 142-3 is to better match the useful life of the recognized
intangible asset to the period of the expected cash flows used to measure its
fair value. The Company is currently evaluating the impact of FSP FAS 142-3 on
its consolidated financial statements.




In May
2008, the FASB issued Statements of Financial Standards No. 162 (SFAS
162), “The Hierarchy of Generally Accepted Accounting
Principles.” SFAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (GAAP) for
nongovernmental entities.




Prior to
the issuance of SFAS 162, GAAP hierarchy was defined in the American
Institute of Certified Public Accountants (AICPA) Statement on Auditing
Standards No. 69 (SAS 69), “The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles.” SAS 69 has been criticized
because it is directed to the auditor rather than the entity. SFAS 162 addresses
these issues by establishing that the GAAP hierarchy should be directed to
entities because it is the entity (not its auditor) that is responsible for
selecting accounting principles for financial statements that are presented in
conformity with GAAP.




SFAS
162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board Auditing amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.” The Company does not expect SFAS 162 to have a material effect on
its consolidated financial statements.




In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements
(“SFAS No. 157”), which is effective for fiscal years beginning after
November 15, 2007 and for interim periods within those years. This
statement defines fair value, establishes a framework for measuring fair value
and expands the related disclosure requirements. The adoption of SFAS No. 157
did not  have a material impact on the Company’s consolidated
financial statements.





In
February 2008, the FASB issued FASB Staff Position (FSP) Financial
Accounting Standard (FAS) 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Its Related Interpretive
Accounting Pronouncements That Address Leasing Transactions, and FSP FAS
157-2, Effective Date of FASB
Statement No. 157. FSP FAS 157-1 removes leasing from the scope of
SFAS No. 157, “Fair Value Measurements.” FSP FAS 157-2 delays the effective
date of SFAS No. 157 from 2008 to 2009 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). The
Company is evaluating the impact of the delayed portion of SFAS No. 157 on
its consolidated financial statements.





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.




19




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) may
have a material effect on our results of operations or financial position for
any potential future acquisitions in 2009.




Item
7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Financial
instruments that potentially subject us to concentrations of credit risk consist
primarily of cash and accounts receivable.  We maintain our accounts
for cash principally at one bank in the United States.  We have not
experienced any losses on our deposits of our cash.  As a result, we
do not believe the Company has material market risk exposure.





With
respect to accounts receivable, we have our customers complete credit
applications and do not require collateral.  There have been no
material losses on accounts receivable.  Based on current
unprecedented economic conditions there is no assurance the Company may not
sustain material losses in the future.





The
Company does transact business in international markets.  However, as
all foreign transactions are denominated in United States dollars, there is
minimal exposure to the Company due to currency fluctuations.





The
Company does not use derivative financial instruments nor do we enter into any
futures or forward commodity contracts since we do not have significant market
risk exposure with respect to commodity prices.





We
currently have a line of credit where we are exposed to changes in interest
rates.  Advances under our revolving credit line bear interest that is
payable monthly at the greater of one month LIBOR plus 3.75% or
5.25%.  We will thus be exposed to interest rate risk with respect to
amounts outstanding under the line of credit to the extent that interest rates
rise.  We do not use interest rate derivative instruments to manage
exposure to interest rate changes.





Item
8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





See
Financial Statements beginning on page F-1.





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





Not
applicable.





Item
9A.   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, Robert P. King, 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 King 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-15(f) under the Exchange
Act).  Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2008.  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, 2008, 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.





20





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, is designed to provide reasonable assurance that the objectives of
internal control over financial reporting are met.





21





PART
III





Item
10.   DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2009 Annual
Meeting of Shareholders.





Item
11.   EXECUTIVE COMPENSATION.





Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2009 Annual
Meeting of Shareholders.





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





Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2009 Annual
Meeting of Shareholders.





Item
13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.





Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2009 Annual
Meeting of Shareholders.





Item
14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES.





Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2009 Annual
Meeting of Shareholders.








PART
IV





Item
15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES





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 10K.





22





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
      30, 2009
                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
      30, 2009Jeffrey P. Zernov(President,
      Chief Executive Officerand
      a Director)/s/RobertP.KingMarch
      30, 2009Robert P. King(Chief
      Financial Officer, Chief Accounting Officerand
      Secretary)/s/RichardP.KiphartMarch
      30, 2009Richard P. Kiphart(Director)/s/ScottS.MeyersMarch
      30, 2009Scott S. Meyers(Director)/s/CurtisA.SampsonMarch
      30, 2009Curtis A. Sampson(Director)/s/PhilipM.McLaughlinMarch
      30, 2009Philip M. McLaughlin(Director)





23





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).





24





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).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).





25





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).10.36
                                      
                                      Purchase
      Agreement, dated March 10, 2008, between Nature Vision, Inc. and Natzel,
      LLC (previously filed as Exhibit 10.1 to the Registrant’s Report on
      Form 8-K dated March 14, 2008).10.37
                                      
                                      Demand
      Promissory Note, dated July 8, 2008, 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 July 11, 2008).10.38
                                      
                                      Warrant
      for the Purchase of Shares of Common Stock of Nature Vision, Inc., dated
      July 8, 2008, issued to Richard Kiphart (previously filed as Exhibit 10.2
      to the Registrant’s Report on
      Form 8-K dated July 11, 2008).10.39
                                      
                                      Promiossory
      Note dated October 27, 2008 in the principal amount of $700,000 executed
      by Nature Vision, Inc. in favor of Jeffrey P. Zemov (previously filed as
      Exhibit 10.1 to the Registrant’s Report on
      Form 8-K dated October 30, 2008).10.40
                                      
                                      Warrant
      for the Purchase of Shares of Common Stock of Nature Vision, Inc., dated
      October 27, 2008, issued to Jeffrey P. Zernov (previously filed
      as Exhibit 10.2 to the Registrant’s Report on
      Form 8-K dated October 30, 2008).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.





26





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, 2008 and 2007, 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, 2008 and 2007 and the results of their operations and their cash
flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.





The
accompanying consolidated financial statements have been prepared assuming that
the company will continue as a going concern.  As discussed in Note 1
to the consolidated financial statements, the company has suffered recurring
losses from operations and negative cash flows from operations the past three
years.  These factors raise substantial doubt about its ability to
continue as a going concern.  Management’s plans in regard to these
matters are also described in Note 1.  The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.








/s/ Virchow, Krause & Company,
LLP





Minneapolis,
Minnesota


March 27,
2009





F-1





Nature
Vision, Inc. and Subsidiaries


Consolidated
Balance Sheets


December
31, 2008 and 2007








2008
                
                
                2007ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
                
                $
                -
                
                
                $
                131,487Accounts
      Receivable, net
                
                
                2,962,869
                
                
                
                2,774,618Other
      Receivables
                
                
                4,260
                
                
                
                -Inventories,
      net
                
                
                4,313,759
                
                
                
                4,769,648Current
      Portion of Prepaid Expenses
                
                
                221,443
                
                
                
                229,594Current
      Assets Retained Relating to Discontinued Operations
                
                
                236,927
                
                
                
                343,413Total
      Current Assets
                
                
                7,739,258
                
                
                
                8,248,760PROPERTY
      AND EQUIPMENT, NET
                
                
                1,901,650
                
                
                
                1,555,052NON-CURRENT
      ASSETSBuilding
      and Land Held for Sale, Net
                
                
                -
                
                
                
                701,719Prepaid
      Expenses, net of Current Portion
                
                
                32,422
                
                
                
                47,468Deferred
      Income Taxes
                
                
                -
                
                
                
                1,022,546Goodwill
                
                
                -
                
                
                
                666,373Intangibles
      - net
                
                
                965,430
                
                
                
                1,056,746Total
      Non-Current Assets
                
                
                997,852
                
                
                
                3,494,852TOTAL
      ASSETS
                
                $
                10,638,760
                
                
                $
                13,298,664LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESChecks
      Issued in Excess of Cash in Bank
                
                $
                22,236
                
                
                $
                -Current
      Portion of Long-Term Debt
                
                
                258,405
                
                
                
                2,133,333Note
      Payable – Related Party
                
                
                700,000
                
                
                
                979,159Current
      Portion of Deferred Retirement Benefits
                
                
                60,438
                
                
                
                74,657Line
      of Credit, Bank
                
                
                3,084,956
                
                
                
                2,537,835Accounts
      Payable
                
                
                679,673
                
                
                
                558,040Accrued
      Payroll and Payroll Taxes
                
                
                107,858
                
                
                
                166,758Accrued
      Sales and Warranty Reserve
                
                
                450,000
                
                
                
                300,000Accrued
      Expenses
                
                
                559,377
                
                
                
                410,654Current
      Liabilities Retained Relating to Discontinued
    Operations
                
                
                -
                
                
                
                25,952Total
      Current Liabilities
                
                
                5,922,943
                
                
                
                7,186,388LONG-TERM
      LIABILITIESLong-term
      Debt, Net of Current Portion
                
                
                525,401
                
                
                
                466,667Note
      Payable – Related Party
                
                
                924,775
                
                
                
                -Deferred
      Retirement Benefits, Net of Current Portion
                
                
                422,776
                
                
                
                483,214Total
      Non-Current Liabilities
                
                
                1,872,952
                
                
                
                949,881Total
      Liabilities
                
                
                7,795,895
                
                
                
                8,136,269COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITYCommon
      Stock, $.16 Par Value per Share 25,000,000 Shares Authorized Common Shares
      Issued and Outstanding at December 31, 2008 and 2007 were
      2,312,583
                
                
                370,013
                
                
                
                370,013Additional
      Paid-In Capital
                
                
                7,141,368
                
                
                
                7,005,553Accumulated
      Deficit
                
                
                (4,668,516
                )
                
                
                (2,213,171
                )Total
      Stockholders’ Equity
                
                
                2,842,865
                
                
                
                5,162,395TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                10,638,760
                
                
                $
                13,298,664




See
accompanying notes to consolidated financial statements.





F-2





Nature
Vision, Inc. and Subsidiaries


Consolidated
Statements of Operations


Years
Ended December 31, 2008 and 2007




2008
                    
                    
                    2007SALES,
      NET
                    
                    $
                    12,054,883
                    
                    
                    $
                    9,607,686COST
      OF GOOD SOLD
                    
                    
                    9,139,328
                    
                    
                    
                    7,833,215GROSS
      PROFIT
                    
                    
                    2,915,555
                    
                    
                    
                    1,774,471OPERATING
      EXPENSESSales
      and Marketing
                    
                    
                    2,070,997
                    
                    
                    
                    2,085,555Research
      and Development and Engineering
                    
                    
                    803,487
                    
                    
                    
                    284,297General
      and Administrative
                    
                    
                    1,666,754
                    
                    
                    
                    1,660,188Goodwill
      and Intangible Impairment
                    
                    
                    1,338,250
                    
                    
                    
                    -Total
      Operating Expenses
                    
                    
                    5,879,488
                    
                    
                    
                    4,030,040LOSS
      FROM OPERATIONS
                    
                    
                    (2,963,933
                    )
                    
                    
                    (2,255,569
                    )OTHER
      INCOME (EXPENSE)Interest
      Expense
                    
                    
                    (612,317
                    )
                    
                    
                    (466,757
                    )Interest
      Income
                    
                    
                    666
                    
                    
                    
                    15,301Other
      Income (Expense)
                    
                    
                    9,845
                    
                    
                    
                    (28,310
                    )Net
      Other Expenses
                    
                    
                    (601,806
                    )
                    
                    
                    (479,766
                    )LOSS
      FROM CONTINUING OPERATIONS BEFORE TAXES
                    
                    
                    (3,565,739
                    )
                    
                    
                    (2,735,335
                    )PROVISION
      FOR INCOME TAX EXPENSE
                    
                    
                    428,274
                    
                    
                    
                    -LOSS
      FROM CONTINUING OPERATIONS
                    
                    
                    (3,994,013
                    )
                    
                    
                    (2,735,335
                    )GAIN
      FROM DISCONTINUED OPERATIONS, NET OF TAX OF $594,272 AND
      $0
                    
                    
                    1,538,668
                    
                    
                    
                    95,913NET
      LOSS
                    
                    $
                    (2,455,345
                    )
                    
                    $
                    (2,639,422
                    )Loss
      from Continuing Operations per Common ShareBasic
                    
                    $
                    (1.73
                    )
                    
                    $
                    (1.20
                    )Diluted
                    
                    $
                    (1.73
                    )
                    
                    $
                    (1.20
                    )Income
      from Discontinued Operations per Common ShareBasic
                    
                    $
                    0.67
                    
                    
                    $
                    0.05Diluted
                    
                    $
                    0.67
                    
                    
                    $
                    0.05Loss
      per Common ShareBasic
                    
                    $
                    (1.06
                    )
                    
                    $
                    (1.15
                    )Diluted
                    
                    $
                    (1.06
                    )
                    
                    $
                    (1.15
                    )Weighted
      Average Common SharesBasic
                    
                    
                    2,312,583
                    
                    
                    
                    2,287,757Diluted
                    
                    
                    2,312,583
                    
                    
                    
                    2,287,757




See
accompanying notes to consolidated financial statements.





F-3





Nature
Vision, Inc. and Subsidiaries


Consolidated
Statements of Stockholders’ Equity


Years
Ended December 31, 2008 and 2007





Shares
                
                
                Common
                  Stock
                
                
                Additional
      Paid-In Capital
                
                
                Retained
      Earnings (Accumulated Deficit)
                
                
                Total
                  Stockholders’
                  EquityBalance,
      December 31, 2006
                
                
                2,225,377
                
                
                $
                356,062
                
                
                $
                6,789,287
                
                
                $
                426,251
                
                
                $
                7,571,600Exercise
      of common stock options
                
                
                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
                )
                
                
                5,162,395Warrants
      issued in connection with note payable – related
    party
                
                
                —
                
                
                
                —
                
                
                
                100,300
                
                
                
                —
                
                
                
                100,300Warrants
      issued in connection with note payable – related
    party
                
                
                —
                
                
                
                —
                
                
                
                31,071
                
                
                
                —
                
                
                
                31,071Stock
      based compensation expense
                
                
                —
                
                
                
                —
                
                
                
                4,444
                
                
                
                —
                
                
                
                4,444Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (2,455,345
                )
                
                
                (2,455,345
                )Balance,
      December 31, 2008
                
                
                2,312,583
                
                
                $
                370,013
                
                
                $
                7,141,368
                
                
                $
                (4,668,516
                )
                
                $
                2,842,865








See
accompanying notes to consolidated financial statements.





F-4





Nature
Vision, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows


For Years EndedDecember 31, 2008and 2007





2008
                
                
                2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                
                $
                (2,455,345
                )
                
                $
                (2,639,422
                )Adjustments
      to reconcile net loss to net cash flows from operating
      activitiesDepreciation
      and amortization
                
                
                789,016
                
                
                
                501,742Loss
      on impairment of goodwill
                
                
                666,373
                
                
                
                -Loss
      on impairment of intangibles
                
                
                671,877
                
                
                
                -Loss
      on impairment of tooling
                
                
                28,180
                
                
                
                -Loss
      (gain) on disposal of property and equipment
                
                
                (6,931
                )
                
                
                (163,689
                )Gain
      on sale of discontinued operations
                
                
                (585,209
                )
                
                
                (236,965
                )Gain
      on sale of building, net of income taxes
                
                
                (998,950
                )
                
                
                -Increase
      in bad debt reserve
                
                
                22,500
                
                
                
                -Provision
      for deferred income taxes
                
                
                428,274
                
                
                
                -Stock
      based compensation
                
                
                4,444
                
                
                
                338Amortization
      of original issue discount
                
                
                76,987
                
                
                
                81,169Changes
      in operating assets and liabilitiesAccounts
      receivable
                
                
                (210,751
                )
                
                
                198,178Inventories,
      net
                
                
                715,545
                
                
                
                880,037Prepaid
      expenses
                
                
                23,197
                
                
                
                297,538Accounts
      payable
                
                
                121,633
                
                
                
                (435,058
                )Income
      taxes payable
                
                
                -
                
                
                
                (5,000
                )Accrued
      payroll and payroll taxes
                
                
                (58,900
                )
                
                
                (53,689
                )Accrued
      sales and warranty reserve
                
                
                150,000
                
                
                
                -Accrued
      expenses
                
                
                107,988
                
                
                
                (198,330
                )Payments
      on deferred retirement benefits
                
                
                (74,657
                )
                
                
                (72,795
                )Net
      Cash Flows from Operating Activities
                
                
                (584,729
                )
                
                
                (1,845,946
                )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
                
                
                (461,275
                )
                
                
                (268,824
                )Purchase
      of assets from Innovative Outdoors, net of promissory
      note
                
                
                (10,753
                )
                
                
                -Purchase
      of assets from MarCum Technologies
                
                
                (759,521
                )
                
                
                -Purchase
      of assets associated with Castaic Softbait Brand, net of promissory
      note
                
                
                (340,641
                )
                
                
                -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
                )Proceeds
      from cash value on terminated life insurance
policies
                
                
                -
                
                
                
                148,310Proceeds
      from sale of property and equipment
                
                
                12,000
                
                
                
                163,689Proceeds
      from sale of building and land held for sale
                
                
                2,294,941
                
                
                
                -Proceeds
      from sale of discontinued operations
                
                
                344,022
                
                
                
                475,106Payments
      received on note receivable
                
                
                -
                
                
                
                300,000Net
      proceeds from sale of working capital associated with discontinued
      operations
                
                
                317,461
                
                
                
                2,602,685Purchases
      of intangibles
                
                
                (89,708
                )
                
                
                (13,530
                )Net
      Cash Flows from Investing Activities
                
                
                1,306,526
                
                
                
                1,093,266CASH
      FLOWS FROM FINANCING ACTIVITIESIncrease
      (Decrease) in checks issued in excess of cash in
bank
                
                
                22,236
                
                
                
                (71,394
                )Net
      advances from (payments on) line of credit, bank
                
                
                547,121
                
                
                
                (1,362,165
                )Proceeds
      from long-term debt
                
                
                46,054
                
                
                
                2,000,000Proceeds
      from note payable – related party and warrants
                
                
                700,000
                
                
                
                1,000,000Principal
      payments on long-term debt
                
                
                (2,168,695
                )
                
                
                -Payments
      on contract payable
                
                
                -
                
                
                
                (762,231
                )Cash
      received on exercise of options
                
                
                -
                
                
                
                77,613Net
      Cash Flows from Financing Activities
                
                
                (853,284
                )
                
                
                881,823Net
      Change in Cash and Cash Equivalents
                
                
                (131,487
                )
                
                
                129,143CASH
      AND CASH EQUIVALENTS - January 1, 2008 and 2007
                
                
                131,487
                
                
                
                2,344CASH
      AND CASH EQUIVALENTS - December 31, 2008 and 2007
                
                $
                -
                
                
                $
                131,487




See
accompanying notes to consolidated financial statements





F-5





NATURE
VISION, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008 and 2007




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 the
majority 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 assets and liabilities of
Vaddio at December 31, 2007 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.





GOING
CONCERN




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of
business.  We incurred net losses of $2.5 million in 2008 and $2.6
million in 2007 and had an accumulated deficit of $4.7 million as of December
31, 2008.  We have managed our liquidity during the fourth quarter of
2008 and first part of first quarter of 2009 through cost reduction initiatives
and the proceeds from a related party note payable.  The Company is
currently in default of the remaining $450,000 of the note and is in
negotiations to extend the remaining $450,000 of the CEO’s note (see Note
6).




The
Company has historically been a seasonal business with the majority of the
Company’s revenue being realized in the fourth quarter.  The general
economic conditions, including a lowering of overall consumer confidence as
consumers continue to pull back discretionary spending, our historical high
working capital usage in first nine months of the fiscal year, competition
in certain product lines, and the higher than anticipated 2008 and 2007
acquisitions transition costs have impacted our operating results.  In
addition to the factors described above, the global credit market crisis has
impacted our ability to find subordinated debt or other additional
financing.  We have not seen an improvement in the general economic
conditions that impact our Company through February 2009.




Despite
cost reduction initiatives, the Company will be unable to pay its obligations in
the normal course of business or service its debt in a timely manner throughout
2009 without raising additional debt or equity capital.




The
Company is currently evaluating strategic alternatives that include the
following: (i) raising of capital (ii) the sale of the Company to another
entity.  This process is ongoing and may be lengthy and has inherent
costs.  There can be no assurance that the exploration of strategic
alternatives will result in any specific action to alleviate the Company’s 12
month working capital needs or result in any other transaction.





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.





F-6





CASH AND CASH
EQUIVALENTS




The
Company maintains its cash balances in various area banks. Cash balances are
insured up to $250,000 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.




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 areduebased on agreed upon customer
terms. Accounts receivable
are considered past dueonce they are over the due date of these terms. 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 is made. Accounts receivable are written off after all
collection efforts have failed. Accounts receivable have been reduced by an
allowance for uncollectible accounts of approximately$37,500 and $15,000 at December 31,
2008 and 2007, respectively.





INVENTORIES




Inventories
consist of raw materials and finished goods and are valued at the lower of
standard cost (which approximates 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, our customer base, customer needs, general
economic conditions, and the level of success of certain sales programs, 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.  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. Net intangible assets and long-lived
assets amounted to $2.9 million and $3.3 million as of December 31, 2008 and
2007, respectively.





We had an
independent appraisal firm complete an appraisal of goodwill and other
intangibles as of November 30, 2008. Due to reduced growth expectations
resulting from weakening economic conditions and anticipated lower impact on
revenues and profitability in future years, we recognized impairment charges of
$671,877 for our long-lived assets, including intangible assets, during the year
ended December 31, 2008.  We did not recognize any impairment charges
for our long-lived assets during the year ended December 31,
2007.   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 additional impairment charge.  Such impairment would
adversely affect our earnings.





F-7





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.





Upon
retirement or disposition, cost and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in the
results of operations.




DISCONTINUED
OPERATIONS





On
February 5, 2007, the Company sold certain assets and transferred certain
liabilities related to its Vaddio division.





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
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 14).




BUILDING
AND LAND HELD FOR SALE




In
November 2006, management signed an agreement and began marketing for sale the
building and land located in New Hope, Minnesota. As a result, we discontinued
recording depreciation on the building in the fourth quarter of the year ended
December 31, 2006. Accordingly,
we reflected the carrying value of the building as held for sale as of December
31, 2007.  On April 7, 2008, the Company sold its facility located in
New Hope, Minnesota. Under the terms of the Agreement, the Buyer purchased from
the Company the real property, building, improvements and certain personal
property for a purchase price of approximately $2,400,000.  The
Company recorded a gain of $998,950 ($1,593,222 pretax gain less income taxes of
$594,272) that is included in gain from discontinued operations for the year
ended December 31, 2008.  The Company used $1,917,000 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.




GOODWILL




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.





During
the fourth quarter of fiscal 2008, the Company performed its annual goodwill
impairment test with the assistance of a third-party valuation
firm.  Due to reduced growth expectations resulting from weakening
economic conditions and anticipated lower impact on revenues and profitability
in future years, the Company recorded a non-cash charge of $666,373 in the
fourth quarter of fiscal 2008 for goodwill impairment.  There was no
impairment recorded for the year ended December 31, 2007.





The
change in the carrying amount of goodwill for the years ending December 31, 2008
and 2007 are as follows:





AmountGoodwill
      – December 31, 2006
                  
                  $
                  -Goodwill
      – Fish Hawk acquisition
                  
                  
                  39,331Goodwill
      – Cass Creek acquisition
                  
                  
                  627,042Goodwill
      – December 31, 2007
                  
                  $
                  666,373Impairment
      charge
                  
                  
                  (666,373
                  )Goodwill
      – December 31, 2008
                  
                  $
                  -





F-8





INTANGIBLE
ASSETS AND OTHER ASSETS





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 nineteen years.





The
long-term portion of prepaid expenses consists of deferred financing costs of
$32,422 and $47,468 at December 31, 2008 and 2007,
respectively.





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 two years 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 gross
basis.





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 $450,000 and $300,000 at December 31, 2008 and December 31, 2007,
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, 2008 and 2007.




2008
                          
                          
                          2007Accrued
      balance - beginning
                          
                          $
                          300,000
                          
                          
                          $
                          175,000Provision
                          
                          
                          821,000
                          
                          
                          
                          1,345,000Claims
      incurred
                          
                          
                          (671,000
                          )
                          
                          
                          (1,220,000
                          )Accrued
      balance - ending
                          
                          $
                          450,000
                          
                          
                          $
                          300,000





F-9





PREPAID
EXPENSES AND ADVERTISING EXPENSE





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 $119,958 and $129,230 at December 31, 2008 and 2007,
respectively. Advertising expensed was $952,093 and $1,105,586 for the years
ended December 31, 2008 and 2007, respectively.





RESEARCH
AND DEVELOPMENT




The
Company expenses all costs related to product research and development as
incurred. Research and development expense was $489,607 and $158,063 for years
ended December 31, 2008 and 2007, respectively.




STOCK-BASED
COMPENSATION





Effective
January 1, 2006, the Company adopted the fair value recognition and measurements
provisions of SFAS No. 123(R), which requires companies to measure and recognize
compensation expense for all stock-based payments at fair value.  SFAS
No. 123(R) is being applied on the modified-prospective-transition
method.  Prior to the adoption of SFAS 123(R), the Company accounted
for its stock-based compensation plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees”,and related interpretations, and accordingly, recognized no
compensation expense related to the stock-based plans.





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, 2008 and
2007.





The
following assumptions were used to calculate the value of the options granted
during the year ended December 31, 2008: dividend yield of 0%, risk-free
interest rate of 3%, expected life equal to 3.5-5 years, and volatility of
76%-106%.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%.





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 and
      since the Company does not have sufficient historical exercise data to
      provide a reasonable basis to estimate expected
  term.


·
            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.  The Company recognized $4,444 and $338 of stock based
compensation for the years ended December 31, 2008 and 2007,
respectively.  As of December 31, 2008, there was $27,829 of total
unrecognized compensation costs related to the outstanding options, which is
expected to be recognized over a period of 33 months.





The
weighted average fair value of stock options granted on the date of grant during
the years ended December 31, 2008 and 2007 was $.82 and $1.22, respectively,
excluding options to the CEO relating to debt guarantees (see Note
2).





F-10





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, 2008 and 2007. Anti-dilutive options
and warrants were 369,455 and 209,450 at December 31, 2008 and December 31,
2007, 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.  There is a full valuation
allowance recorded as of December 31, 2008.





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. 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.





The
federal and state tax returns are open to examination for the years
2005-2008.





RECLASSIFICATION





Certain
prior year amounts have been reclassified to conform to the 2008
presentation.  The reclassification relates to the breakout of
operating expenses on the statement of operations into the following
categories:  sales and marketing, research and development and
engineering, general and administrative, and goodwill and intangible
impairment.  The Company felt this breakout provided insight into the
different categories of operating expenses the Company incurs.





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 differsignificantlyfrom those estimates. For the Company,
significant estimates include the allowance for doubtful accounts receivable,
reserves for inventory valuation,impairment of goodwill and long lived
assets,reserves for sales
returns, reserves for warranty services, and the valuation allowance for
deferred tax assets.




RECENT
ACCOUNTING PRONOUNCEMENTS





In
May 2008, the FASB issued FASB Staff Position (FSP) Financial Accounting
Standard (FAS) 142-3, Determination of the Useful Life of
Intangible Assets, which is effective for fiscal years beginning after
December 15, 2008 and for interim periods within those years. FSP FAS 142-3
provides guidance on the renewal or extension assumptions used in the
determination of the useful life of a recognized intangible asset. The intent of
FSP FAS 142-3 is to better match the useful life of the recognized intangible
asset to the period of the expected cash flows used to measure its fair value.
The Company is currently evaluating the impact of FSP FAS 142-3 on its
consolidated financial statements.





F-11




In May
2008, the FASB issued Statements of Financial Standards No. 162 (SFAS
162), “The Hierarchy of Generally Accepted Accounting
Principles.” SFAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (GAAP) for
nongovernmental entities.




Prior to
the issuance of SFAS 162, GAAP hierarchy was defined in the American
Institute of Certified Public Accountants (AICPA) Statement on Auditing
Standards No. 69 (SAS 69), “The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles.” SAS 69 has been criticized
because it is directed to the auditor rather than the entity. SFAS 162 addresses
these issues by establishing that the GAAP hierarchy should be directed to
entities because it is the entity (not its auditor) that is responsible for
selecting accounting principles for financial statements that are presented in
conformity with GAAP.




SFAS
162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board Auditing amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.” The Company does not expect SFAS 162 to have a material effect on
its consolidated financial statements.




In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements
(“SFAS No. 157”), which is effective for fiscal years beginning after
November 15, 2007 and for interim periods within those years. This
statement defines fair value, establishes a framework for measuring fair value
and expands the related disclosure requirements. The adoption of SFAS No. 157
did not  have a material impact on the Company’s consolidated
financial statements.





In
February 2008, the FASB issued FASB Staff Position (FSP) Financial
Accounting Standard (FAS) 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Its Related Interpretive
Accounting Pronouncements That Address Leasing Transactions, and FSP FAS
157-2, Effective Date of FASB
Statement No. 157. FSP FAS 157-1 removes leasing from the scope of
SFAS No. 157, “Fair Value Measurements.” FSP FAS 157-2 delays the effective
date of SFAS No. 157 from 2008 to 2009 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). The
Company is evaluating the impact of the delayed portion of SFAS No. 157 on
its consolidated financial statements.





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) may
have a material effect on our results of operations or financial position for
any potential future acquisitions in 2009.




NOTE 2 –
ACQUISITIONS





Innovative
Outdoors asset acquisition





On June
27, 2008, the Company closed on the acquisition of certain assets of Innovative
Outdoors, Inc. (Innovative Outdoors) a manufacturer and distributor of ice
fishing hole covers and other related devices, pursuant to the terms of an asset
purchase agreement. The transaction involved the acquisition by Nature Vision of
tooling, intellectual property, and general intangibles of Innovative Outdoors
for a purchase price of $188,572.  The purchase price was paid as
follows: (i) $6,000 cash was paid at closing, (ii) $32,572 by a two year
unsecured promissory note payable in monthly installments of $1,458 including
imputed interest at 7%, and (iii) $150,000 by a three year unsecured promissory
note payable in monthly installments of $4,632 including interest at
7%.  In connection with the acquisition, the Company incurred
transaction costs of $4,753.This purchase allows the Company to become
vertically integrated by purchasing the intellectual property of an existing
sales product line.  The assets acquired and liabilities assumed in
the acquisition are based on their value estimated at the date of
acquisition.  These estimates if necessary will be revised during the
allocation period, which generally does not exceed one
year.  Additional pro forma disclosures required under SFAS No. 141
“Business Combinations”, related to this acquisition, were not considered
material.





F-12





The
purchase price allocation for the Innovative Outdoors asset acquisition is as
follows:





Equipment
                
                
                27,325Intangibles*
                
                
                166,000Total
      purchase price
                
                $
                193,325





Intangibles
acquired consist of $116,000 in intellectual property and related patents
(useful life 10 years), $15,000 in trademarks (useful life of 5 years), $10,000
in customer list (useful life of 5 years), and $25,000 in non-compete (useful
life 5 years).   The weighted average amortization period for
intangibles acquired is 8.5 years.




MarCum
Technologies asset acquisition





On April
30, 2008, the Company closed on the acquisition of certain assets of MarCum
Technologies, Inc. (MarCum), a manufacturer and distributor of electronic sonar
and underwater camera devices, pursuant to the terms of an asset purchase
agreement.  The transaction involved the acquisition by Nature Vision
of select equipment, inventories, intellectual property, and general intangibles
of MarCum for a purchase price of $721,080, of which $650,000 was paid at
closing and the remaining $71,080 was paid in June 2008 as part of the inventory
adjustment.  In connection with the acquisition, the Company incurred
transaction costs of $38,441.  The assets acquired in the acquisition
are based on the fair value estimates at the date of the
acquisition.  These estimates, if necessary, will be revised during
the allocation period, which generally does not exceed on year.  The
purchase provides the Company with an expanded fishing platform and a strong
intellectual property platform to develop new products.





The
purchase price allocation for the MarCum asset acquisition is as
follows:





Inventories
              
              $
              196,080Equipment
              
              
              165,500Intangibles*
              
              
              397,941Total
      purchase price
              
              $
              759,521





*Intangibles
consists of $80,000 in intellectual property and related patents (useful life of
7 years), $77,941 in non-compete (useful life of 3 years), and $240,000 in
trademarks (useful life of 10 years).  The weighted average
amortization period for intangibles acquired is 8 years.





The
initial allocation of the purchase price has been adjusted and the impact is as
follows:  intellectual property and related patents decreased by
$147,941 from $227,941 to $80,000, non-competes decreased by $22,059 from
$100,000 to $77,941, trademarks increased by $190,000 from $50,000 to $240,000,
and customer lists decreased by $20,000 from $20,000 to $0; the above intangible
allocation reflects the current allocation as adjusted.





Castaic
Softbait brand acquisition





On
January 21, 2008, the Company acquired substantially all of the assets
associated with the Castaic Softbait brand under an asset purchase
agreement.  The amount of $323,100 was paid at closing, $81,750 is
payable pursuant to three year promissory notes, and $82,860 of liabilities were
assumed.  The Company incurred transaction costs of $17,541 in
connection with the acquisition. The purchase provides the Company with a proven
fishing tackle product platform.The
assets acquired and liabilities assumed in the acquisition are based on their
value estimated at the date of acquisition.  Additional pro forma
disclosures required under SFAS No. 141 “Business Combinations”, related to this
acquisition, were not considered material.





F-13





The
purchase price allocation for the Castaic asset acquisition is as
follows:





Inventories
              
              
              63,576Equipment
              
              
              222,314Intangibles*
              
              
              219,361Total
      purchase price
              
              $
              505,251





*Intangibles
consists of $169,361 in intellectual property and related patents (useful life
14-19 years), $40,000 in trademarks (useful life of 5 years), and $10,000 in
customer list (useful life of 3 years).   The weighted average
amortization period for intangibles acquired is 14.3 years.





In April
2008, the Company purchased a Maquiladora operation in Mexico for a nominal
amount.  The plant manufactures fishing tackle associated with the
Castaic Softbait brand.





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 connection with the sale of the
facility in New Hope, Minnesota on April 7, 2008, this note was paid in full
(See Note 1).




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





F-14





**
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.  The weighted
average amortization period for intangibles acquired is 5 years.





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 in 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
complements 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, 2007 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.  The weighted average
amortization period for intangibles acquired is 5 years.





Pro
forma Information for Material Acquisitions





The
results of Cass Creek, Fish Hawk, MarCum, Innovative Outdoors, and Castaic
Softbait brand 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, 2008 and 2007
give effect to the acquisitions of MarCum and Cass Creek as if such transaction
had occurred on January 1, 2007.  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, 2008 and 2007:





December
      31, 2008
                  
                  December
      31, 2007As
      reported
                  
                  Pro
      forma
                  
                  As
      reported
                  
                  Pro
      formaNet
      sales
                  
                  $
                  12,054,883
                  
                  
                  $
                  12,299,172
                  
                  
                  $
                  9,607,686
                  
                  
                  $
                  13,378,611Loss
      from continuing operations
                  
                  
                  (3,994,013
                  )
                  
                  
                  (4,294,562
                  )
                  
                  
                  (2,735,335
                  )
                  
                  
                  (2,664,166
                  )Gain
      from discontinued operations
                  
                  
                  1,538,668
                  
                  
                  
                  1,538,668
                  
                  
                  
                  95,913
                  
                  
                  
                  95,913Net
      loss
                  
                  $
                  (2,455,345
                  )
                  
                  $
                  (2,755,894
                  )
                  
                  $
                  (2,639,422
                  )
                  
                  $
                  (2,568,253
                  )Loss
      per common share:Basic
                  
                  $
                  (1.06
                  )
                  
                  $
                  (1.19
                  )
                  
                  $
                  (1.15
                  )
                  
                  $
                  (1.12
                  )Diluted
                  
                  $
                  (1.06
                  )
                  
                  $
                  (1.19
                  )
                  
                  $
                  (1.15
                  )
                  
                  $
                  (1.12
                  )





F-15





NOTE 3 -
INVENTORIES




Inventories
consisted of the following at:




December 31,
                    2008
                  
                  
                  December 31,
                    2007Raw
      Materials
                  
                  $
                  2,200,836
                  
                  
                  $
                  1,953,000Finished
      Goods
                  
                  
                  2,267,923
                  
                  
                  
                  3,011,510Total
                  
                  
                  4,468,759
                  
                  
                  
                  4,964,510Less:
      Valuation Allowance
                  
                  
                  (155,000
                  )
                  
                  
                  (194,862
                  )Inventories,
      net
                  
                  $
                  4,313,759
                  
                  
                  $
                  4,769,648




NOTE 4 -
PROPERTY AND EQUIPMENT




Property
and equipment consisted of the following at:




December 31,
                      2008
                    
                    
                    December 31,
                      2007Tooling
                    
                    $
                    1,603,236
                    
                    
                    $
                    1,268,868Office
      furniture and equipment
                    
                    
                    560,257
                    
                    
                    
                    459,586Warehouse
      equipment
                    
                    
                    437,952
                    
                    
                    
                    305,724Vehicles
                    
                    
                    7,418
                    
                    
                    
                    20,279Leasehold
      improvements
                    
                    
                    359,729
                    
                    
                    
                    256,750Construction
      in progress
                    
                    
                    77,845
                    
                    
                    
                    106,717Total
                    
                    
                    3,046,437
                    
                    
                    
                    2,417,924Less:
      Accumulated depreciation
                    
                    
                    (1,144,787
                    )
                    
                    
                    (862,872
                    )Net
                    
                    $
                    1,901,650
                    
                    
                    $
                    1,555,052





Depreciation
expense of $496,567 and $422,885 was recorded for the years ended December 31,
2008 and 2007, respectively.





F-16





NOTE 5 -
INTANGIBLES





Schedule
of Intangible Assets at December 31:








2008Gross
      Carrying Amount
                                                                                                                                                    
                                                                                                                                                    Impairment
                                                                                                                                                    
                                                                                                                                                    Accumulated
      Amortization
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    Net
      Carrying Amount at December 31, 2008Intangible assets subject to
      amortization:Trademarks
                                                                                                                                                    $
                                                                                                                                                    404,235
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    59,455
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    344,780Non-compete
                                                                                                                                                    
                                                                                                                                                    315,361
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    544
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    90,069
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    224,748Customer
      lists
                                                                                                                                                    
                                                                                                                                                    438,667
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    398,667
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    9,389
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    30,611Intellectual
      property and related patents
                                                                                                                                                    
                                                                                                                                                    678,916
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    272,666
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    64,826
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    341,424Other
                                                                                                                                                    
                                                                                                                                                    24,684
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    817
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    23,867Totals
                                                                                                                                                    $
                                                                                                                                                    1,861,863
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    671,877
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    224,556
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    965,430








2007Gross
      Carrying Amount
                                                
                                                
                                                Impairment
                                                
                                                Accumulated
      Amortization
                                                
                                                
                                                Net
      Carrying Amount at December 31, 2007Intangible assets subject to
      amortization:Trademarks
                                                $
                                                109,234
                                                
                                                
                                                $
                                                -
                                                
                                                $
                                                13,873
                                                
                                                
                                                $
                                                95,361Non-compete
                                                
                                                206,420
                                                
                                                
                                                
                                                -
                                                
                                                
                                                28,080
                                                
                                                
                                                
                                                178,340Customer
      lists
                                                
                                                540,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                27,333
                                                
                                                
                                                
                                                512,667Intellectual
      property and related patents
                                                
                                                319,865
                                                
                                                
                                                
                                                -
                                                
                                                
                                                51,332
                                                
                                                
                                                
                                                268,533Other
                                                
                                                2,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                155
                                                
                                                
                                                
                                                1,845Totals
                                                $
                                                1,177,519
                                                
                                                
                                                $
                                                -
                                                
                                                $
                                                120,773
                                                
                                                
                                                $
                                                1,056,746





F-17





Future
estimated amortization for the next five years and thereafter ending after
December 31, 2008 are as follows:




AmountYear
      ending December 31:2009
                  
                  $
                  185,8282010
                  
                  
                  180,3762011
                  
                  
                  147,4322012
                  
                  
                  110,2322013
                  
                  
                  59,278Thereafter
                  
                  
                  282,284Total
                  
                  $
                  965,430





Amortization
expense was $292,449 and $78,857 for the years ended December 31, 2008 and 2007,
respectively.





In
accordance with the requirements of SFAS No. 144, the Company carried out its
annual fair value based impairment test on the intangible
assets.  This resulted in the Company recording a non-cash impairment
charge of $671,877 in the fourth quarter of fiscal 2008.  There was no
impairment recorded for the year ended December 31, 2007.




NOTE 6 –
RELATED PARTY NOTES PAYABLE AND WARRANTS





Board of Director Member
Note Payable





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 was unsecured and had an interest rate of 15% (55.8% effective
rate by including fair value of warrants amortized over a three month term).
Interest was payable on the first day of each month, commencing on December 1,
2007. The entire principal and accrued interest was payable upon demand anytime
after January 19, 2008. In connection with the loan, the Company issued warrants
to the Director 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 the 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, was being amortized over the life of the debenture using
the straight-line method.  Amortization expense on the original issue
discount was $20,841 and $81,169 for the years ended December 31, 2008 and 2007,
respectively, and is included in interest expense.





On July
8, 2008, the Company amended the terms and replaced the original demand note
issued to the member of its Board of Directors on October 19,
2007.  The amended demand note is held by the same member of the
Company’s Board of Directors.  The demand promissory note is unsecured
and bears an interest rate of 15% (20% effective rate including new warrants
issued to the Director and amortized over a two year term).  Interest
is payable on the first day of each month commencing on August 1,
2008.  The entire principal and interest is payable upon demand
anytime after June 30, 2010.  In connection with the new loan, the
Company issued additional warrants to the Director to purchase 100,000 shares of
common stock at an exercise price of $1.31.  The warrants are
exercisable from July 8, 2008 to June 30, 2013.  The fair value of the
warrants was calculated at $100,300 using the Black Scholes
model.  The following assumptions were used to calculate the value of
the warrants: (i) dividend yield of 0%, risk free interest of 3.34%, expected
life of 5 years, and volatility of 103%.  The resulting original issue
discount, the fair value of the warrants, will be amortized over the life of the
debenture using the straight-line method.  Amortization expense on the
original issue discount was $25,076 for the year ended December 31, 2008 and is
included in interest expense.





Chief Executive
OfficerNote
Payable





On
October 27, 2008, the Company borrowed $700,000 from its Chief Executive Officer
(CEO) in order to meet its short-term cash flow requirements. This promissory
note was unsecured and had an interest rate of 15% (39.9% effective rate by
including fair value of warrants amortized over a two month term). The entire
principal and accrued interest was payable on January 1, 2009.  In
connection with the loan, the Company issued warrants to the CEO to purchase
50,555 shares of common stock at an exercise price of $.90. The warrants are
exercisable from October 28, 2008 through October 27, 2010. The fair value of
the warrants was calculated at $31,071 using the Black Scholes model. The
following assumptions were used to calculate the value of the warrants: dividend
yield of 0%, risk free interest of 1.49%, expected life to two years, and
volatility of 140%. The resulting original issue discount, the fair value of the
warrants, was amortized over the life of the debenture using the straight-line
method.  Amortization expense on the original issue discount was
$31,071 for the year ended December 31, 2008 and is included in interest
expense.  The Company is currently in default on the remaining
$450,000 of the note and is in negotiations with its CEO to extend the remaining
$450,000 principal balance.





F-18





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 for up to a maximum amount of
$6,000,000.  Interest is payable monthly at the greater of one month
LIBOR plus 3.75% or 5.25% (5.25% at December 31, 2008).  The line of
credit is collateralized by accounts receivable, inventories, property and
equipment, intangible assets and other assets of the Company.  The
facility is based on the following borrowing base restrictions, 75% of eligible
accounts receivable and 50% of eligible inventories. Effective from August 1,
2008 through October 31, 2008 the Company received an over advance amount of
$600,000 in order to assist the Company with meeting it’s short term cash flow
requirements. 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 balance outstanding on the line of credit was $3,084,956 and
$2,537,835 at December 31, 2008 and 2007, respectively.  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
covenants outlined by the bank.  The agreement required the Company to
be in compliance with the following affirmative covenants as of December 31,
2008:  minimum net worth (including subordinated debt) of $5,500,000
and minimum tangible net worth of $2,200,000 and annual capital expenditures not
to exceed $500,000.   The Company did not meet the minimum net
worth and capital expenditure covenants as of December 31, 2008, but has
received a noncompliance waiver from M&I Bank as of December 31,
2008.  The waiver does not entitle the Company to any future
waiver.





NOTE 8 -
LONG-TERM DEBT




Long-term
debt consisted of the following at:




December 31,
                      2008
                    
                    
                    December 31,
                      2007Unsecured
      Promissory Note – Cass Creek – monthly installments of approximately
      $11,000  from September 2008 through March 2010, then annual
      installments ranging from $108,000 to $124,000 beginning September 2010
      through September 2012, all payments include interest at 8% , guaranteed
      by the CEO of the Company.
                    
                    $
                    493,932
                    
                    
                    $
                    500,000Unsecured
      Note Payable – Fish Hawk -  annual installments of $33,333 plus
      interest at 8% from July 2008 through July 2010
                    
                    
                    66,667
                    
                    
                    
                    100,000Demand
      Term Note – M&I Business Credit, LLC - Paid in full on April 7, 2008
      in connection with the sale of the building.
                    
                    
                    -
                    
                    
                    
                    2,000,000Unsecured
      Note Payable – Castaic -  annual installments of $17,171,
      including interest at 8%, from January 2009 through January
      2011
                    
                    
                    44,250
                    
                    
                    
                    -Unsecured
      Note Payable – Castaic -  monthly installments of $1,175,
      including interest at 8%, from February 2008 through January
      2011
                    
                    
                    26,978
                    
                    
                    
                    -Unsecured
      Note Payable – monthly installments of $1,458, including interest at 7%,
      from August 2008 through July 2010
                    
                    
                    24,850
                    
                    
                    
                    -Unsecured
      Note Payable – Innovative Outdoors – monthly installments of $4,632,
      including interest at 7% from August 2008 through July
      2011
                    
                    
                    127,129
                    
                    
                    
                    -Totals
                    
                    
                    783,806
                    
                    
                    
                    2,600,000Less:
      Current portion
                    
                    
                    258,405
                    
                    
                    
                    2,133,333Net
      Long-Term Debt
                    
                    $
                    525,401
                    
                    
                    $
                    466,667





F-19





Future
maturities of long-term debt for years ending after December 31, 2008 are as
follows:




TotalYear
      ending December 31:2009
                        
                        $
                        258,4052010
                        
                        
                        277,8692011
                        
                        
                        147,9472012
                        
                        
                        99,5852013
      and forward
                        
                        
                        -Total
      Long-Term Debt
                        
                        $
                        783,806





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 260,000 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, 2006
                        
                        
                        190,458
                        
                        
                        $
                        3.26Granted
                        
                        
                        43,000
                        
                        
                        
                        2.13Expired
                        
                        
                        (36,802
                        )
                        
                        
                        4.95Exercised
                        
                        
                        (87,206
                        )
                        
                        
                        0.89Options
      Outstanding, December 31, 2007
                        
                        
                        109,450
                        
                        
                        
                        4.13Granted
                        
                        
                        40,000
                        
                        
                        
                        1.17Expired
                        
                        
                        (30,550
                        )
                        
                        
                        4.38Options
      Outstanding, December 31, 2008
                        
                        
                        118,900
                        
                        
                        $
                        3.07





The
weighted average contractual life of options outstanding at December 31, 2008
and 2007 was 3.17 and 3.29 years,
respectively.





F-20





Following
is a schedule of options outstanding and exercisable at December 31,
2008:




Options
Outstanding




Options
      Outstanding
                                                              
                                                              
                                                              Options
      ExercisableExercise
      Price
                                                              
                                                              Number
                                                                Outstanding
                                                              
                                                              
                                                              Remaining
                                                                Contractual
                                                                Life
                                                              
                                                              
                                                              Wgt-Ave
                                                                Exercise
                                                                Price
                                                              
                                                              
                                                              Number
                                                                Exercisable
                                                              
                                                              
                                                              Wgt-Ave
                                                                Exercise
                                                                Prices$
                                                              1.01
                                                              
                                                              
                                                              30,000
                                                              
                                                              
                                                              
                                                              4.73
                                                              
                                                              
                                                              $
                                                              1.01
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              $
                                                              -$
                                                              1.63
                                                              
                                                              
                                                              10,000
                                                              
                                                              
                                                              
                                                              4.06
                                                              
                                                              
                                                              
                                                              1.63
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -$
                                                              2.10
                                                              
                                                              
                                                              33,000
                                                              
                                                              
                                                              
                                                              4.72
                                                              
                                                              
                                                              
                                                              2.10
                                                              
                                                              
                                                              
                                                              33,000
                                                              
                                                              
                                                              
                                                              2.10$
                                                              5.43
                                                              
                                                              
                                                              45,900
                                                              
                                                              
                                                              
                                                              0.84
                                                              
                                                              
                                                              
                                                              5.43
                                                              
                                                              
                                                              
                                                              45,900
                                                              
                                                              
                                                              
                                                              5.43$$
                                                              1.01-$5.43
                                                              
                                                              
                                                              118,900
                                                              
                                                              
                                                              
                                                              3.17
                                                              
                                                              
                                                              $
                                                              3.07
                                                              
                                                              
                                                              
                                                              78,900
                                                              
                                                              
                                                              $
                                                              4.04




There was
no intrinsic value of the options outstanding and exercisable at December 31,
2008 and 2007. The intrinsic value of the options exercised during the year
ended December 31, 2007 was $242,433.  There were no options exercised
during the year ended December 31, 2008.





In
addition, the Company has 250,555 warrants outstanding at December 31, 2008 (see
Note 6).





NOTE 10 -
INCOME TAXES




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







2008
                    
                    
                    2007Current
                    
                    $
                    -
                    
                    
                    $
                    -Deferred
                    
                    
                    428,274
                    
                    
                    
                    -Total
      Provision for (Benefit from) Income Taxes
                    
                    $
                    428,274
                    
                    
                    $
                    -





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:





2008
                            
                            
                            2007Federal
      statutory rate
                            
                            
                            (34.0
                            )%
                            
                            
                            (34.0
                            )%State
      tax, net of federal benefit
                            
                            
                            (3.3
                            )
                            
                            
                            (3.3
                            )Permanent
      differences and other including surtax exemption
                            
                            
                            0.1
                            
                            
                            
                            0.1Valuation
      allowance
                            
                            
                            49.2
                            
                            
                            
                            37.2Effective
      Tax Rate
                            
                            
                            12.0
                            %
                            
                            
                            -
                            %





F-21





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




2008
                  
                  
                  2007Deferred
      Tax AssetsNet
      operating loss carryforwards
                  
                  $
                  3,033,000
                  
                  
                  $
                  1,953,000Deferred
      compensation
                  
                  
                  181,000
                  
                  
                  
                  209,000Returns
      allowance
                  
                  
                  169,000
                  
                  
                  
                  112,000Inventory
      reserve
                  
                  
                  58,000
                  
                  
                  
                  73,000Bad
      debt reserve
                  
                  
                  14,000
                  
                  
                  
                  6,000Other
      allowances
                  
                  
                  30,000
                  
                  
                  
                  45,000Total
                  
                  
                  3,485,000
                  
                  
                  
                  2,398,000Less
      valuation allowances
                  
                  
                  (3,429,000
                  )
                  
                  
                  (1,280,454
                  )Deferred
      Tax Asset
                  
                  $
                  56,000
                  
                  
                  $
                  1,117,546Deferred
      Tax LiabilitiesDepreciation
      & amortization
                  
                  $
                  (56,000
                  )
                  
                  $
                  (95,000
                  )Net
      long-term deferred tax asset
                  
                  $
                  -
                  
                  
                  $
                  1,022,546





F-22





The
change in the valuation allowance was $2,148,546 and $1,005,200 for the years
ended December 31, 2008 and 2007, respectively.  The principal reason for
the change in the valuation allowance for the year ended December 31, 2008 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,
2008.  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 $8,000,000
and $4,900,000, 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 -
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 $483,214 and $557,871 at December 31, 2008 and
December 31, 2007, respectively.




NOTE 12 -
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.





The
Company entered into a five year employment agreement with an individual in the
Research and Development department in January 2008.  If the
individual is terminated prior to January 2013, the individual will be entitled
to a lump sum payment equal to the amount of base salary payable through the
expiration date.




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 on August 31, 2016.  The lease was
amended in May 2008 for additional space, a sprinkler system improvement
addition, and the term extension through August 31, 2018.  The monthly
base rent increases from $16,900 to $24,400 over the revised term of the
lease.  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 $249,209 and $210,798 for the years ended December 31, 2008 and
2007, respectively.





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





2009
              
              $
              212,4262010
              
              
              220,0182011
              
              
              228,5512012
              
              
              238,1662013
              
              
              247,781Thereafter
              
              
              1,282,264Total
              
              $
              2,429,206





F-23





Other
Commitments





On May 1,
2008, the Company entered into a research and development consulting agreement
with an entity that had common ownership with MarCum.  The agreement
requires the Company to pay the entity as follows:  (i) $525,000 in 36
monthly installments of $14,583 for research and development services beginning
June 1, 2008, (ii) $200,000 in 24 monthly installments of $8,333 for product
support services beginning June 1, 2008.  In addition, the Company
will pay this entity a royalty of 5% of net sales (for a period of three years
following the first sale) on any new product that meets certain requirements as
defined in the agreement.  The Company has recognized approximately
$183,000 of expense relating to this agreement for the year ended December 31,
2008, which is included in research and development and engineering
expense.





On May 1,
2008, the Company entered into a research and development consulting agreement
with an entity that had common ownership with MarCum.  The agreement
requires the Company to pay the entity as follows:  (i) $180,000 in 36
monthly installments of $5,000 for research and development services beginning
June 1, 2008, (ii) $100,000 in 24 monthly installments of $4,166 for product
support services beginning June 1, 2008.  In addition, the Company
will pay this entity a royalty of 5% of net sales (for a period of three years
following the first sale) on any new product that meets certain requirements as
defined in the agreement.   The Company has recognized
approximately $73,000 of expense relating to this agreement for the year ended
December 31, 2008, which is included in research and development and engineering
expense.








NOTE 13 –
CONCENTRATIONS AND OTHER RISKS




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:





2008
                                        
                                        
                                        2007Sales
                                        
                                        
                                        Receivables
                                        
                                        
                                        Sales
                                        
                                        
                                        ReceivablesCustomer
      A
                                        
                                        $
                                        1,474,131
                                        
                                        
                                        $
                                        485,908
                                        
                                        
                                        $
                                        1,299,477
                                        
                                        
                                        $
                                        579,127Customer
      B
                                        
                                        
                                        *
                                        
                                        
                                        
                                        *
                                        
                                        
                                        
                                        1,187,032
                                        
                                        
                                        
                                        321,934Customer
      C
                                        
                                        
                                        *
                                        
                                        
                                        
                                        309,721
                                        
                                        
                                        
                                        *
                                        
                                        
                                        
                                        *Customer
      D
                                        
                                        
                                        *
                                        
                                        
                                        
                                        *
                                        
                                        
                                        
                                        *
                                        
                                        
                                        
                                        359,998




*Did not
represent more than 10% of the Company’s revenues or accounts receivable for the
period indicated.





Major
Suppliers




Purchases
for the year ended December 31, 2008 and 2007 include purchases from an offshore
manufacturer of outdoor recreation products that individually accounted for
approximately 30% and 46%, respectively, of the materials and supplies used by
the Company in its operations.  During the year ended December 31,
2008 a domestic supplier accounted for approximately 11% of the materials and
supplies used by the Company in its 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 there may be risk using
offshore manufacturing arrangements although there are other suppliers
available.





Foreign
Inventory





Included
in the consolidated balance sheets are international inventories related to
continuing operations of $351,690 and $196,154 at December 31, 2008 and December
31, 2007, respectively.  Foreign inventories consist of raw material
goods held in Asia and Mexico and used in the production of Nature Vision
products.





F-24





Foreign
Sales and Long-Lived Assets





The
following table presents net sales and long-lived assets by geographic area for
the years ended December 31:





Geographic
      Data
                                      
                                      2008
                                      
                                      
                                      2007Net
      SalesUnited
      States
                                      
                                      $
                                      9,699,376
                                      
                                      
                                      $
                                      7,051,844International
                                      
                                      
                                      2,355,507
                                      
                                      
                                      
                                      2,555,842Total
      net sales
                                      
                                      $
                                      12,054,883
                                      
                                      
                                      $
                                      9,607,686Long-Lived
      AssetsUnited
      States
                                      
                                      $
                                      1,023,517
                                      
                                      
                                      $
                                      843,795International
                                      
                                      
                                      878,133
                                      
                                      
                                      
                                      711,257Total
      long-lived assets
                                      
                                      $
                                      1,901,650
                                      
                                      
                                      $
                                      1,555,052







NOTE 14 -
DISCONTINUED OPERATIONS




Vaddio product line
sale





F-25





The sale
of Nature Vision’s Vaddio product line to New Vad, LLC (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 receives 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 $603,541 and
$48,474 were recorded during the years ended December 31, 2008 and 2007,
respectively.  Based on the past history of collections, the Company
elected to record the deferred sale proceeds as earned rather than
collected.  The Company has $236,927 included in current assets
retained relating to discontinued operations as of December 31, 2008 relating to
the deferred sales proceeds.  There is $97,885 remaining of the
deferred sale proceeds to be recorded at December 31, 2008.





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 purchased, 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 was
purchased.  The Company sold its entire inventory to New Vad in the
first quarter of fiscal 2008.





Gain on sale of
building





On April
7, 2008, the Company sold its facility located in New Hope, Minnesota. Under the
terms of the Agreement, the Buyer purchased from the Company the real property,
building, improvements and certain personal property for a purchase price of
approximately $2,400,000.  The Company recorded a gain of $998,950
($1,593,222 pretax gain less income taxes of $594,272) that is included in
discontinued operations.  The Company used $1,917,000 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.





The
following are condensed statements of the discontinued operations (Vaddio and
gain on sale of building) for the years ended December 31:





2008
                  
                  
                  2007Sales,
      Net
                  
                  $
                  -
                  
                  
                  $
                  736,802Cost
      of goods sold
                  
                  
                  -
                  
                  
                  
                  710,152Gross
      profit
                  
                  
                  -
                  
                  
                  
                  26,650Selling,
      general, and administrative
                  
                  
                  45,491
                  
                  
                  
                  391,391Income
      (loss) from operations
                  
                  
                  (45,491
                  )
                  
                  
                  (364,741
                  )Other
      income (expense)
                  
                  
                  -
                  
                  
                  
                  60,000Gain
      on sale of building
                  
                  
                  1,593,222Gain
      on sale of equipment
                  
                  
                  -
                  
                  
                  
                  163,689Gain
      on sale of Vaddio product line
                  
                  
                  585,209
                  
                  
                  
                  236,965Income
      and gain from discontinued operations before income
      taxes
                  
                  
                  2,132,940
                  
                  
                  
                  95,913Provision
      for income taxes
                  
                  
                  594,272
                  
                  
                  
                  -Gain
      from discontinued operations
                  
                  $
                  1,538,668
                  
                  
                  $
                  95,913





F-26





Assets
and liabilities retained relating to the discontinued operations (Vaddio)
consisted of the following at December 31, 2008 and December 31,
2007:


2008
                  
                  
                  2007Current
      assets retained relating to discontinued operations:Accounts
      receivable
                  
                  $
                  -
                  
                  
                  $
                  44,999Other
      Receivables
                  
                  
                  236,927
                  
                  
                  
                  -Inventory
                  
                  
                  -
                  
                  
                  
                  298,414Total
                  
                  $
                  236,927
                  
                  
                  $
                  343,413Current
      liabilities retained relating to discontinued
      operations:Accrued
      transaction costs
                  
                  
                  -
                  
                  
                  
                  25,952Total
                  
                  $
                  -
                  
                  
                  $
                  25,952






NOTE 15 -
SUPPLEMENTAL CASH FLOWS




2008
                      
                      
                      2007Supplemental
      Cash Flow DisclosuresCash
      paid for interest
                      
                      $
                      502,485
                      
                      
                      $
                      337,148Cash
      paid for income taxes
                      
                      
                      -
                      
                      
                      
                      5,000Noncash
      investing and financing activitiesFair
      value of stock options issued in exchange for guarantee of
      debt
                      
                      $
                      
                      
                      
                      $
                      50,256Transaction
      costs related to sale of segment included in current liabilities retained
      related to discontinued operations
                      
                      $
                      -
                      
                      
                      $
                      25,952Supplemental
      cash flow information regarding the Company’s acquisition of assets
      associated with Innovative OutdoorsFair
      value of assets acquired
                      
                      $
                      193,325Less
      liabilities assumed
                      
                      
                      -Net
      assets acquired
                      
                      
                      193,325Less
      note payable issued
                      
                      
                      (182,572
                      )Less
      cash acquired
                      
                      
                      -Net
                      
                      $
                      10,753Supplemental
      cash flow information regarding the Company’s acquisition of assets
      associated with MarCum TechnologiesFair
      value of assets acquired
                      
                      $
                      759,521Less
      liabilities assumed
                      
                      
                      -Net
      assets acquired
                      
                      
                      759,521Less
      note payable issued
                      
                      
                      -Less
      cash acquired
                      
                      
                      -Net
                      
                      $
                      759,521Supplemental
      cash flow information regarding the Company’s acquisition of assets
      associated with Castaic Softbait brandFair
      value of assets acquired
                      
                      $
                      505,251Less
      liabilities assumed
                      
                      
                      (82,860
                      )Net
      assets acquired
                      
                      
                      422,391Less
      note payable issued
                      
                      
                      (81,750
                      )Less
      cash acquired
                      
                      
                      -Net
                      
                      $
                      340,641Supplemental
      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-27




NOTE 16 -
RETIREMENT PLAN




The
Company has a 401(K) Employee Retirement Plan. Company contributions made to the
Plan for the years ended December 31, 2008 and 2007 were $30,235 and $26,280,
respectively.






F-28