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 ENDED - AUGUST 31, 2009





OR





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





FOR
THE TRANSITION PERIOD FROM ______ TO ______





COMMISSION
FILE NUMBER 000-27629





SHEERVISION
INC.


(Name of
small business issuer in its charter)





Delaware
              (State
      or other jurisdiction of incorporation or organization)
            23-2426437
              (I.R.S.
      Employer Identification No.)4030
      Palos Verdes Drive North
              Suite
      104
              Rolling
      Hills Estates, California
              (Address
      of principal executive offices)
            90274
              (Zip
      Code)




Issuer’s
      telephone number:
              (310)
      265-8918Securities
      registered pursuant to Section 12(b) of the Act:
              None




Name
      of Exchange on which registered:Securities
      registered pursuant to Section 12(g) of the Act:
            Common
      Stock, par value $0.001 per shareName
      of exchange on which registered:
            OTCBB





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





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o
Nox





Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that issuer was required to file
such reports) and (2) has been subject to such filing requirements for at least
the past 90 days. Yes x  Noo





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, 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.





Large
      accelerated filer o
                Accelerated
      filer o
                Non-accelerated
      filer o
                Smaller reporting company x





Indicate
by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of
the Act). Yes o
Nox





As of
February 27, 2009, the aggregate market value of the voting and non-voting
common equity held by non-affiliates (3,520,220 shares) was approximately
$211,213 (based upon the closing price of $.06 per share of common stock on
February 27, 2009).





As of
October 31, 2009, the registrant had 12,756,023 outstanding shares of common
stock, par value $0.001 per share.








Table
of Contents





Form 10-K
Index





Item
      1. Description of Business
                3Item
      1A. Risk Factors
                8Item
      2. Description of Property
                13Item
      3. Legal Proceedings
                13Item
      4. Submission of Matters to a Vote of Security Holders
                13Item
      5. Market for Registrant's Common Equity and Related Stockholder
      Matters
                13Item
      6. Selected Financial Data
                14Item
      7. Management’s Discussion and Analysis of Financial Condition and Results
      of Operation
                14Item
      7A. Quantitative and Qualitative Disclosures about Market
    Risk
                20Item
      8. Financial Statements and Supplementary Data
                20Item
      9. Changes in and Disagreements with Accountants on Accounting And
      Financial Disclosure
                20Item
      9A (T). Controls and Procedures
                20Item
      9B. Other Information
                21Item
      10. Directors, Executive Officers and Corporate Governance
                21Item
      11. Executive Compensation
                24Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
                27Item
      13. Certain Relationships and Related Transactions
                28Item
      14. Principal Accountant Fees and Services
                28Item
      15. Exhibits, Financial Statement Schedules
                29


2





PART I





SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS





This
Annual Report on Form 10-K (including the section regarding Management's
Discussion and Analysis of Financial Condition and Results of Operations)
contains forward-looking statements regarding our business, financial condition,
results of operations and prospects. Words such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not deemed to represent an all-inclusive means of identifying
forward-looking statements as denoted in this Annual Report on Form 10-K.
Additionally, statements concerning future matters are forward-looking
statements.





Although
forward-looking statements in this Annual Report on Form 10-K reflect the good
faith judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the heading “Risks Related to Our
Business” below, as well as those discussed elsewhere in this Annual
Report on Form 10-K. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K. We file reports with the Securities and Exchange Commission
(the “SEC” or “Commission”). We make
available on our website under “Investors/Financial Info/SEC Filings,” free of
charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports as soon as reasonably
practicable after we electronically file such materials with or furnish them to
the SEC. Our website address is www.sheervision.com. You can also read and copy
any materials we file with the SEC at the SEC's Public Reference Room at 450
Fifth Street, NW, Washington, DC 20549. You can obtain additional information
about the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an internet site (www.sec.gov)
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including
us.





We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-K. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this Annual Report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and
prospects.





As used
in this Annual Report, the terms “we”, “us”, “our”, and “SheerVision” mean
SheerVision, Inc., a Delaware corporation and our subsidiary SheerVision, Inc.,
a California corporation, unless otherwise indicated.





All
dollar amounts refer to US dollars, unless otherwise indicated.





ITEM
1. DESCRIPTION OF BUSINESS





General





We
design, manufacture, market, and sell proprietary surgical loupes and headlight
systems to the dental, medical, and veterinary markets throughout the world.
Through our exclusive arrangements with component manufacturers based in Asia
and, in combination with our U.S. assembly and testing facilities, we can
provide top quality loupes and headlight systems through alliances with sales
partners and directly to end-users with significant advantages over our
competitors. We are now recognized as one of the leading brand-names within our
core markets, and we believe we offer a solution to the end-user
better than or equal to our competitors.





Since our
inception in 1999, we have rapidly established a significant base of operations
characterized by an entrepreneurial spirit the deployment of a top-notch
dedicated sales force, the implementation of a strategic branding program, the
initiation of an aggressive web presence through the introduction of an
e-commerce online storefront and a continued focus on new product development
efforts. While the sudden economic downturn adversely affected sales in fiscal
year 2009, we believe that we are poised for accelerated growth due to the
launch of several new product lines during 2009 and through the development of
several strategic sales alliances. By offering a choice of flip-up or
through-the-lens surgical loupes, class-leading headlights, or a package of
both, we are able to sell to a greater proportion of the market, and to also
offer a better and more complete solution to our customers.





We pride
ourselves on listening to customer needs within our core markets, and then being
responsive and aggressive in the development of new product designs. This
interactive process has established us as a trailblazer in a previously stagnant
industry. With our Infinity UltraTM LED and Original FireFlyTM LED portable head
light systems, SheerVision is now recognized as the “first to market” leader in
the dental illumination industry. We continue to raise the bar, placing our
competitors in the undesirable position of imitation as opposed to
innovation.


3





Growth
Strategy




In fiscal
year 2008 we initiated a partial shift in our marketing strategy, focusing more
effort on development of indirect domestic and international sales. As we enter
2010, we intend to commit resources to direct sales and marketing to complement
our indirect sales efforts. Our
objective is to become the leading provider and global marketer of high quality
loupes, light systems and related products and services for the dental, medical,
and veterinary markets. In order to achieve this objective, we have developed
and continue to pursue the following strategies:





·
            Launch an
      Aggressive Initiative to Develop Strong Domestic Sales
      Alliances





During
the last fiscal year we launched a domestic sales alliance that has allowed us
to grow our sales by leveraging the dedicated sales forces of a major dental
firm. Going forward we plan on continuing to build new alliances in domestic
markets with a major portion of our resources dedicated towards this goal. The
introduction of our lnfinity Ultra brand of headlights has boosted our sales and
therefore provided us with an additional advantage to pursue strategic alliances
within the United States as these systems are able to mount on any of our
competitors’ loupes currently sold in the US dental and surgical
markets.





·
            Build Upon
      Sales Momentum in OEM
Markets





A benefit
of our research and development efforts has been the creation of innovative
products which benefit customers in complementary markets as either stand-alone
products or as part of larger systems. These products would be sold under our
customers’ brand names in each of these applications as either unaltered or
customized designs. With the sophisticated design and engineering teams
currently available to us, we have the ability to extend our design,
engineering, and manufacturing capabilities to other companies seeking
assistance in their new product development efforts. We anticipate a major focus
of our efforts will be to seek and form relationships with new OEM partners in
both domestic and international markets that can benefit from the technologies
we have developed.





·
            Continue to
      Foster Direct to End-User
Sales





We expect
to continue to build upon the direct relationships that we have built up with
our core group of end users, along with the growth through direct marketing,
online marketing, and direct sales efforts. We also expect tradeshows will
continue to be a key driver of direct sales in several key market segments. We
also benefit by receiving direct feedback from our end-user customer base at
these shows that is used for our new product development efforts. We expect
to also be using targeted direct-mail efforts to sell directly to specific user
groups. The eCommerce-powered web store has also provided us with a
cost-effective platform to sell products and to communicate with prospective and
current customers. We also anticipate that online revenues will continue to be a
significant portion of our direct sales, as marketing and technical initiatives
are implemented in order to increase site visitor traffic and to encourage
online purchases.





·
            Expansion
      of Market Share in International
Markets





We have
experienced significant acceptance of our branded products in the international
marketplace. International distributors are being attracted to us and we are in
a position to offer a wide assortment of innovative products which can be resold
at strong margins while still offering the end-user a competitive price.
Strategic sales alliances with international partners provide us with a method
that has the potential to grow rapidly in a highly cost-effective
manner.





We have
developed a program to rapidly qualify and support international distribution
partners who will sell SheerVision-branded products, using a turnkey approach
referred to as the International Distributor Program (“IDP”). The IDP provides
sales, marketing, and training tools to enable us to expand our distributor base
worldwide. We believe that our innovative new products align well with the needs
of many international markets that we do not currently directly or indirectly
service.  In fiscal 2009 we hired our first International Sales Manager to
create more momentum for international sales. As the fiscal year closed, our
international sales were beginning a much stronger growth rate in terms of both
units sold and revenue partly as a result of favorable exchange rates that
benefit products sold in U.S. dollars worldwide. We also participate in
international dental trade shows, which provide us a forum to both solicit new
strategic alliances and introduce new products to existing sales
partners.





·
            Expansion
      of our Product Lines to Achieve our Goal of Becoming a Full Service
      Optical and Illumination
Company





In 2009,
we substantially invested in our light products with the introduction of the
Infinity Ultra, a new light-weight, LED light that is the next step in
battery-powered, cordless headlights and projects an intense, pure white beam
rated at over 8,000 foot candles. We also have managed to dramatically improve
the performance of our headlight batteries, that now consistently last over six
hours per charge, and which utilize state-of-the-art lithium polymer technology.
The light was again rated by a dental association that reviews dental products
as one of the top models available, including winning in the judging category
for “most illumination.” Further innovation in headlight products is anticipated
in upcoming years.


4





In the
loupe market we have introduced our most popular sports frame yet that can be
utilized with both flip-up and TTL loupes. The modern look comes in a variety of
colors and is flexible enough to customize the fit of the sports frame around
the nose and ears.





We
continue to invest in the development of new loupe designs in order to create
industry leadership in this key market segment. With the continued market
acceptance of these products and the addition of new products currently in our
pipeline, management is encouraged with our progress towards the goal of
reaching profitability.





Our
Product Offering





Surgical
& Dental Loupes





Although
dental offices have used some form of magnification for decades, the need for
surgical loupes and light sources in the regular practice of everyday dentistry
is rapidly becoming the standard of practice for all dental professionals,
including dental hygienists. The visual aspects of magnification may appear to
be the primary benefit, but there are significant ergonomic benefits to the use
of surgical loupes. Many medical careers have been cut short due to the effects
of chronic neck and back pain, a condition that can be minimized or eliminated
through the use of surgical loupes. In addition, there are many medical/surgical
health care providers who are realizing the value of loupes and headlights in
the operating room, or even in performing routine examinations where it is
important to see the detail.





Regular
magnifying glasses create a larger but flatter image and therefore do not give
the user any depth of field. To solve this problem, medical professionals use
special “loupes” that provide a three-dimensional image. These loupes are either
Galilean (compound) loupes, which range in price from $800 to $1,200 or
Panoramic (prism) loupes, which generally cost $1,200 to $1,800 a
pair.





We offer
2.5x, 3.0x, 3.5x, 4.0x and 5.0x magnification surgical loupes, as well as two
ultra-lightweight models (2.5xx and 3.0xx) for added all-day comfort. The
ultra-light loupes are available in either a Flip-Up or “through-the-lens” (TTL)
design. All loupes can be mounted on either a light-weight titanium frame or a
fashionable “Del Rey” sports frame available in six vibrant colors. Additional
designer carrying cases for the loupes are also available.





Light
Systems





As
surgical loupes allow the area under view greater magnification, they tend to
require additional light or illumination. Illumination can be added to surgical
loupes via our head mount (headband), or direct mount to the frame of the loupe.
One of the key benefits of this type of illumination is to provide clinicians
with shadow-free images. With the introduction of a superior quality portable
LED light sources, SheerVision is able to provide a modern generation of
illumination products to practitioners that currently use magnification that is
extremely bright and completely portable. SheerVision offers two portable head
light systems that are of great benefit to the user: the Original FireFlyTM LED,
and the Infinity UltraTM LED. Through our offering of loupes and headlight
systems, we are often able to sell a package of both to provide a complete and
cost effective solution to the user.





The
Advantages of Our Products and Services





SheerVision
surgical loupes are being used in private dental practices, clinical settings,
college campuses, and medical institutions throughout the United States. Our
surgical loupes are also endorsed by an independent non-profit dental education
and product testing foundation and were featured in the foundation's 2005
Buyer's Guide. Our surgical loupes were also featured in “Dental Lab Products”
2005 Buyer's Guide “Best of the Best” Offering as well as being listed in the
2006 edition of Dentistry Today’s Top 100 Products. Our Original FireFlyTM LED
head light was endorsed as one of the Best Products for 2007 by an independent
non-profit dental education and product testing foundation.





Our
Through-the-Lens (TTL) technology has opened new markets where customers prefer
this type of loupe design. Estimated market preference for TTL loupes is 70%
compared with 30% for the Flip-Up type loupes that we had traditionally offered.
We can offer this state of the art TTL technology mounted in either our fashion
sports frame or our designer titanium frame. With the introduction of our
proprietary SureFit TTLTM alignment system, customers are now able to order our
TTL loupes through our online store or by telephone, providing us with a
significant competitive advantage because an on-site sales call is not required
to complete the transaction.





Our
recently introduced Signature Prism Loupes are assisting us in opening new
markets with R&D efforts that began during the third and fourth
quarters of fiscal year 2007. This new product line has greatly expanded our
offering to the surgery marketplace beyond what we previously had in place. This
introduction has helped us bring our distinctive business model to this large,
established market.


5





The
SheerVision Del Rey Frame provides a product advantage when compared with some
of our competitors who currently do not provide a similar alternative for their
loupe optics. This is a product for the young, fashion conscious user, as it
features a wrap-around design that is available in six vibrant colors and
accommodating both the Flip-Up and TTL loupes. All of our light systems fit to
this frame. The new 3.5x TTL gives us renewed ability to sell to medical and
dental practitioners who require additional magnification with barrels that are
embedded in either a prescription or clear lens.





We
believe that the key selling points of SheerVision surgical loupes are brand
name and reputation, high quality, competitive price, and attentive customer
service. In addition, we offer an unlimited lifetime warranty against defects in
materials and workmanship on all working parts of our loupes, a program
unmatched by any major surgical loupe supplier.





Our
FireFly line of light systems offers the latest in LED light projection
technologies designed as a completely portable product coupled with value
pricing. The new Infinity Ultra has over 8,000 foot candles of illumination
power. Our latest battery version of our lithium polymer battery is the best
ever and consistently lasts over 6 hours providing cordless illumination with
market-leading brightness and intensity





Sales
and Marketing





We
believe sales and marketing will continue to be important functions in order
to accelerate our sales growth with both domestic and international
customers.





As part
of our previous branding and marketing initiatives we believe that the
SheerVision brand is positioned among the top tier brands within the industry.
The SheerVision brand name has been reinforced by the publicity received by
becoming a publicly traded company, and through its direct mail and advertising
initiatives. On June 20, 2006 we were granted federal registration of the
trademark SheerVision® by the United States Patent and Trademark
Office.





We plan
to continue the select, targeted use of direct mail, SEM, and trade advertising
campaigns to accelerate growth to our base of end-users that purchase directly
from us. We have also increased our library of marketing materials to use in
future direct and indirect marketing and sales efforts. We also increased our
online marketing efforts in the areas of SEM and online advertising. We believe
that our online marketing program will allow us to extend our reach into new
markets beyond our traditional medical, dental, and veterinary marketplaces in
the United States.





The new
international sales manager position is accelerating the growth strategy of our
International Distributor Program (IDP) to expand our network of distributors
operating in specific international markets. The prospect of a continuing
favorable exchange rate environment is encouraging us to move as rapidly as we
can. This has encouraged us to begin developing a new direct sales market
targeted at doctors and other medical providers outside of the dental field as
well as adding new outside sales resources to the dental market. We believe that
qualified, high-performance direct sales efforts do have a role to play in
expanding SheerVision’s brand name and consequently, its sales.





OEM
Operations





In
addition to manufacturing and offering surgical loupes and head light systems
under our own brand name, we offer our products for major OEMs. During fiscal
year 2008, we added a significant new client in the medical market, and are in
negotiations with several other major companies for OEM versions of our product
designs. We believe that offering our products on an OEM basis will help
SheerVision enter markets that it did not have previous access to, as well as
the distribution of sunk R&D costs for those new product
designs.





Manufacturing





Our
contract manufacturers supply proprietary company-designed surgical loupe and
light system components on an exclusive basis. An inventory of loupes and light
systems is maintained at our offices in order to ensure rapid order processing
and fulfillment. Production capacity is adequate to support a level of sales
approximately twice the current level, and there are alternate sources of supply
of the raw materials needed to produce surgical loupes and light systems. We
believe that the quality of our products is a principal driver of purchasing
decisions, and our third party manufacturers are required to conduct rigorous
quality testing on a regular basis. We currently own and operate computer
controlled assembly equipment to build customized loupe/headlight products and
have key personnel assigned to perform production staging, final unit assembly,
quality control, and shipping procedures.





Competition





The
surgical loupe and portable headlight market is characterized by a number of
participants, each dominant in one or more market segments. In each market
segment, we compete with established manufacturers of surgical loupes and other
specialty optical products, including Designs for Vision, Orascoptic (part of
Danaher), and Surgitel. Due to our strategic investments in product development
and branding, we are now recognized as one of the leading brands in the market.
This was demonstrated as several major competitors appear to have been forced
into launching sports-type frame designs during fiscal year 2007 after the
introduction of our first sport frame design for loupes. Overall, we believe
that competition is principally based upon the following three key
areas:


6





·
            Company





·
            Brand
      reputation and loyalty;





·
            Product
      quality, support, and durability;





·
            Product
      pricing;





·
            Surgical & Dental Loupes
      Product Attributes
Including:





·
            Magnification/Clarity.
      Top quality optics are critical in this
regard;





·
            Field-of-View. A wide
      field of vision is better than a smaller
one;





·
            Depth-of-Field. An
      extended depth of field is preferable;
and





·
            Weight. Lighter loupes
      are generally preferable to heavier
loupes.





·
            Portable Headlight System
      Product Attributes
Including:





·
            Portability. A portable
      light system allows for maximum movement and flexibility. End users are no
      longer tethered to a light box;





·
            LED. A portable light
      source with an LED bulb is the brightest, whitest light on the market. It
      is also economical in that it eliminates bulb replacement common with
      fiber optic light sources;





·
            Lightweight. A good
      portable light should have a small, lightweight battery pack and the
      headlight should be sleek and worn seamlessly;





·
            Value. Price combined
      with quality is a driver of brand choice in the marketplace;
      and





·
            Mounting Options. The
      light source should mount on either a headband or directly to the loupes.
      The unit should be able to be mounted onto loupes from all major competing
      manufacturers to appeal to the widest possible user
  base.





Research
and Development





We are
committed to an ongoing program of research and development to maintain our
reputation for cutting-edge products that meet the evolving needs of the market.
We conduct research and development activities to design and develop products
that will enhance our competitive marketing position. Our newly developed
products include a fully portable LED light system, a lithium-polymer battery
source, a non-curing flip filter, a through-the-lens loupe, a high-magnification
prism loupe, a wrap around sports frame, and fashionable loupe accessories. The
Original FireFlyTM LED and Infinity UltraTM LED light systems contributed
significantly to our rapid expansion into that market niche.





During
fiscal year ended 2009, we spent $15,281 on research and development and during
fiscal year ended 2008, we spent $99,276 on research and
development.





Government Regulation





Our
products are classified as Class I Non-Invasive Medical Devices and, as such,
there is no requirement to obtain FDA approval. We have nonetheless registered
with the FDA on a voluntary basis and have CE certifications for international
sales.





Employees





As of
October 31, 2009, SheerVision employed 14 individuals and engaged the services
of several consultants. Of our employees, 5 were engaged in sales and marketing,
3 in customer service/inside sales, 3 in quality control and production, 2 in
accounting and finance, and 1 employee in executive management.


7





Background





We were
incorporated as “Escalator, Inc.” on April 17, 1986. On June 3, 1986, Lone Pine
Resources, Inc. was merged with us through a reverse merger whereby the
shareholders of Lone Pine Resources, Inc. received an equal number of shares in
Escalator, Inc. Lone Pine Resources, Inc. was incorporated under the laws of
Utah on June 23, 1983.





In the
past, we conducted operations through three wholly-owned subsidiaries, Escalator
Securities, Inc., Escalator Investments, Inc., and Frank Communications Corp.,
each a Pennsylvania corporation. Escalator Investments, Inc. was incorporated in
the State of Pennsylvania on August 15, 1984 and conducted financial planning
activities through approximately 1992 as a Registered Investment Advisor under
the Investment Advisors Act of 1940. Since 1992, Escalator Investments, Inc. has
had no operations. Escalator Securities, Inc. was incorporated in the State of
Pennsylvania on August 22, 1985, and conducted business as a registered
broker-dealer under the Securities Exchange Act of 1934, as amended, and the
Pennsylvania Securities Act of 1972 until 1997. On December 31, 1997, Escalator
Securities, Inc. was closed by the NASD. In July 1990, we acquired Frank
Communications Corp., a Pennsylvania corporation incorporated on May 30, 1989,
which was in the business of financial public relations. In consideration of
this acquisition, we paid $1,000. Frank Communications Corp. has no operations.
On June 30, 1997, we transferred our holdings in Escalator Securities, Inc. to
Escalator Investments, Inc. pursuant to the terms of an Agreement and Plan of
Spinoff. The shareholders of Escalator, Inc. received all of the outstanding
stock of Escalator Investments, Inc. and Escalator Securities, Inc., which then
ceased being our wholly-owned subsidiaries.





On April
22, 1998, we changed our name to Nu Electric Corporation. On June 30, 1999, we
acquired Clean Water Technologies, Inc. (“Clean Water”), a Florida
corporation, through an agreement and plan of merger whereby all of the
outstanding and issued shares of Clean Water were exchanged for shares of Nu
Electric. Pursuant to this agreement, we acquired all of the assets of the
business of Clean Water. On September 21, 2000, we acquired Zorax, Inc. (“Zorax”), a Florida
corporation, through an agreement and plan of merger whereby all of the issued
and outstanding shares of Zorax were exchanged for shares of Nu Electric.
Pursuant to this agreement, we acquired all of the assets of Zorax. On April 4,
2005, we eliminated our Zorax subsidiary. On April 2, 2002, we changed our
name to Clean Water Technologies, Inc.





On March
27, 2006, we entered into a Share Exchange and Reorganization Agreement (the
“Exchange Agreement”)
with SheerVision, Inc., a California corporation (including its predecessor,
“Sheervision-CA”) and
Suzanne Lewsadder and Jeffrey Lewsadder, our Chief Executive Officer and former
President, respectively, and the beneficial holders of all of the outstanding
capital stock of SheerVision-CA, which set forth the terms and conditions of our
business combination with SheerVision-CA in which all shareholders of
SheerVision-CA exchanged all of the outstanding and issued capital stock of
SheerVision-CA for an aggregate of 9,525,137 shares of our common stock,
representing 95% of the outstanding common stock immediately after giving effect
to such transaction. As a result of this transaction, SheerVision-CA became our
wholly-owned subsidiary and the shareholders of SheerVision-CA became our
controlling stockholders. On June 15, 2006, we changed our name to SheerVision,
Inc.





We have
not been a party to any bankruptcy, receivership or similar proceeding. Since
such date, except as described herein, we have not been involved in any material
reclassification, merger, consolidation, purchase or sale of a significant
amount of assets not in the ordinary course of business.





ITEM
1A. RISK FACTORS





Our
business, prospects, financial condition, and results of operations may be
materially and adversely affected due to any of the following risks. The trading
of our common stock could decline due to any of these risks. Some of the
statements in “Risk Factors” are forward looking statements. See “Special Note Regarding Forward
Looking Statements.”





Risks
Related To Our Business





Our
accountants have raised substantial doubt with respect to our ability to
continue as a going concern.





We had
positive cash flow from operations of $27,103, negative working capital of
$728,819 and an accumulated deficit of $5,592,201 at August 31, 2009, and
recurring losses from operations. The audit report of Berman & Co. P.A. for
the fiscal year ended August 31, 2009 contained a paragraph that emphasizes the
substantial doubt as to our continuance as a going concern. This is a
significant risk to investors who purchase shares of our common stock because
there is an increased risk that we may not be able to generate and/or raise
enough resources to remain operational for an indefinite period of
time.





If
we are unable to generate significant revenues from our operations, our business
will fail.





As we
pursue our business plan, we are incurring significant expenses. We incurred
operating expenses for the year ended August 31, 2009 in the amount of
$2,331,635 and had gross profit of $2,175,909 on sales of $3,499,407 for the
same period. We incurred operating expenses for the year ended August 31, 2008
in the amount of $2,975,796 and had gross profit of $2,753,786 on sales of
$4,417,887 for such period. The success and viability of our business is
contingent upon generating significant revenues from the sale of our surgical
loupes and related products such that we are able to pay our operating expenses
and operate our business at a profit. It is not possible at this time for us to
predict with assurance the outcome of these matters. In the event that we remain
unable to generate significant revenues to pay our operating expenses, we will
not be able to achieve profitability or continue operations.


8





Current
worldwide economic conditions have and may continue to adversely affect our
business, operating results and financial condition.





General
worldwide economic conditions have experienced a significant downturn due to the
effects of the subprime lending crisis, general credit market crisis, collateral
effects on the finance and banking industries, concerns about inflation, slower
economic activity, decreased consumer confidence, reduced corporate profits and
capital spending, adverse business conditions and liquidity concerns.  Our
business has not been immune.  In fiscal 2009, our business was negatively
impacted by the weak global economy, which resulted in a challenging environment
for selling our products. If such uncertainty and economic weakness continues,
the market for surgical loupes and light products could further contract and, as
a result, our business, prospects, financial condition and results of operations
for our current fiscal year will be materially adversely affected.





Our
ability to continue as a going concern may be dependent on raising additional
capital, which we may not be able to do on favorable terms, or at
all.





We may
need to raise additional capital to support our current operations and fund our
sales and marketing and research and development programs. We can provide no
assurance that additional funding will be available on a timely basis, on terms
acceptable to us, or at all. If we are unsuccessful raising additional funding,
our business may not continue as a going concern. Even if we do find additional
funding sources, we may be required to issue securities with greater rights than
those currently possessed by holders of our common stock. We may also be
required to take other actions that may lessen the value of our common stock or
dilute our common stockholders, including borrowing money on terms that are not
favorable to us or issuing additional equity securities. If we experience
difficulties raising money in the future, our business and liquidity will be
materially adversely affected.





Because
we have a relatively short operating history and have implemented a shift in our
business model, it is difficult to evaluate our future prospects and this
increases the risk of your investment.





Although
we were incorporated in April 1986, our operating subsidiary SheerVision-CA
commenced operations in 1999. SheerVision-CA has not been profitable since it
became our operating subsidiary in 2006. In addition, during fiscal year ended
2008, we shifted the focus of our business to generating most of our revenues
from OEMs, third parties and international distributors. While management
remains cautiously optimistic about its prospects, the results of this shift
require further evaluation. Accordingly, you have a limited opportunity to
evaluate our business and future prospects because we have a limited operating
history under our current business model. There is no certainty that future
operations will be profitable. There is a risk that we will be unable to develop
a broad enough customer base to conduct enough volume to pay our operating
costs. A limited operating history requires frequent evaluation to improve
operations and/or remedy unforeseen difficulties that may occur. If we are
unable to remedy unforeseen difficulties that materialize, our ability to
achieve profitable operations could be impaired. An investor should consider the
risks, expenses and uncertainties of a company like ours that has a limited
operating history. If we are unsuccessful in addressing these risks, we will
likely be required to discontinue operations.





Our
financial results may fluctuate from period to period as a result of several
factors which could adversely affect our stock price.





Our operating results
may fluctuate significantly in the future as a result of a variety of factors,
many of which are outside our control. Factors that will affect our financial
results include:





·
            success in implementing our shift
      in our business model;





·
            acceptance of our products and
      market penetration;





·
            the amount and timing of capital
      expenditures and other costs relating to the implementation of our
      business plan, including acquisitions of, and investments in, competing or
      complementary technologies;





·
            the introduction of new products
      by our competitors;





·
            pricing changes in the surgical
      loupe and light systems manufacturing or assembly
      industries;





·
            technical difficulties with
      respect to the use of our
products;





·
            regulatory changes;
      and


9





·
            general economic conditions and
      economic conditions specific to our
  industry.





As a
strategic response to changes in the competitive environment, we may from time
to time make certain pricing, service, or marketing decisions or acquisitions
that could have a material adverse effect on our business, prospects, financial
condition, and results of operations.





We
are dependent upon third party suppliers of our raw materials.





We are
dependent on outside vendors for our supplies of raw materials. While we believe
that there are numerous sources of supply available, if the third party
suppliers were to cease production or otherwise fail to supply us with quality
raw materials in sufficient quantities on a timely basis and we were unable to
contract on acceptable terms for these services with alternative suppliers, our
ability to produce our products would be materially adversely
affected.





We
have limited manufacturing facilities and are largely dependent upon third
parties to manufacture our products.





We have
limited manufacturing facilities and expertise and have entered into
manufacturing arrangements with third parties to manufacture our products.
Accordingly, our ability to commercialize our products is partially dependent on
our relationships with our third party contract manufacturers and their ability
to manufacture our products on a timely basis in accordance with our
specifications. While we believe that there are numerous other third party
manufacturers capable of manufacturing our products, should we not be able to
continue to obtain contract manufacturing on commercially reasonable terms with
our current suppliers, we may experience difficulty obtaining inventory rapidly
when needed. Any of such events may materially, adversely affect our business,
prospects, financial condition, and results of operations.





We
are dependent on key members of management.





Our
performance is substantially dependent on our Chief Executive Officer, Suzanne
Lewsadder, for sales and marketing, research and development, manufacturing, and
intellectual property protection and licensing. Although this officer is a
major stockholder, there can be no assurance she will continue to serve as an
officer or director. The inability to retain and continue to attract and retain
qualified management and staff could significantly delay and may prevent the
achievement of our research, development and business objectives, and could have
a material adverse effect on our business, prospects, financial conditions, and
results of operations.





The
industry in which we operate is highly competitive.





Numerous
well-known companies, which have substantially greater capital, research and
development capabilities and experience than we have, are presently engaged in
the surgical loupe market. By virtue of having or introducing competitive
products on the market before us, these entities may gain a competitive
advantage. Future technological developments may render some or all of our
current or future products noncompetitive or obsolete, and we may not be able to
make the enhancements to our products necessary to compete successfully with
newly emerging technologies. If we are unable to successfully compete in our
chosen markets, our business, prospects, financial condition, and results of
operations would be materially adversely affected.





We
may, in the ordinary course of business, be subject to claims of infringement of
third party intellectual property rights and we could suffer significant
litigation costs, licensing expenses or be prevented from selling our
products.





Intellectual
property rights are uncertain and involve complex legal and factual questions.
We may be unknowingly infringing upon the intellectual property rights of others
and may be liable for that infringement, which could result in significant
liability for us. If we do infringe upon the intellectual property rights of
others, we could be forced to either seek a license to those intellectual
property rights or alter our products so that they no longer infringe. A license
could be very expensive to obtain or may not be available at all. Similarly,
changing our products or processes to avoid infringing upon the rights of others
may be costly or impractical. Litigation or other proceedings could require us
to spend significant time and money and could otherwise adversely affect our
business.





Our
failure to protect our intellectual property could have an adverse affect on
us.





We rely
on trademark and trade secrets to protect our intellectual property. We cannot
be sure that these intellectual property rights can be successfully asserted in
the future or will not be invalidated, circumvented, or challenged. Our failure
to protect our proprietary information and any successful intellectual property
challenges or infringement proceedings against us could have a material adverse
effect on our business, prospects, financial condition and results of
operations.


10





Our
failure to maintain and develop our brand names could adversely affect our
revenues.





We
believe that maintaining and developing our brand names, including the trademark
“SheerVision®”, are
critical to our success. The importance of our name recognition may increase as
our products gain market acceptance and as we enter additional markets. If our
brand building strategy is unsuccessful, we may be unable to increase our future
revenues or expand our products and services. Such events would have a material
adverse effect on our business, prospects, financial condition and results of
operations.





Any
inability by us to respond to changes in consumer demands in a timely manner
could materially adversely affect our business, prospects, financial condition,
and results of operations.





Our
success depends on our ability to identify, originate and define product trends
in our markets, as well as to anticipate, gauge and react to changing consumer
demands in a timely manner. Our products must appeal to a broad range of
consumers whose preferences cannot be predicted with certainty and are subject
to periodic change. We may not be able to meet changing consumer demands in the
future. If we misjudge the market for our products, we may be faced with
significant excess inventories for some products and missed opportunities for
other products. Either of such events could have a material adverse effect on
our business, prospects, financial condition, and results of
operations.





Risks
Related To Our Common Stock





Our
stock price may be volatile, which could result in substantial losses
for investors.





The price
of our common stock is quoted on the OTCBB and fluctuates significantly. As a
result of these fluctuations, it may make it difficult for you to sell your
shares of common stock when you want or at prices you find attractive. These
fluctuations may result from a variety of factors, many of which are beyond our
control. These factors include:





·
            quarterly
      variations in our operating
results;





·
            operating
      results that vary from the expectations of management, securities analysts
      and investors;





·
            changes
      in expectations as to our business, prospects, financial condition, and
      results of operations;





·
            announcements
      by us, our partners or our competitors regarding material
      developments;





·
            the
      operating and securities price performance of other companies that
      investors believe are comparable to
us;





·
            future
      sales of our equity or equity-related
  securities;





·
            changes
      in general conditions in our industry and in the economy, the financial
      markets and the domestic or international political
    situation;





·
            fluctuations
      in oil and gas prices;





·
            departures
      of key personnel; and





·
            regulatory
      considerations.





In
addition, the stock market in general has recently experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the market
price of securities issued by many companies for reasons often unrelated to
their operating performance. These broad market fluctuations may adversely
affect our stock price, regardless of our operating results.





Future
sales of common stock or the issuance of securities senior to our common stock
or convertible into, or exchangeable or exercisable for, common stock could
adversely affect the trading price of our common stock and our ability to raise
funds in new equity offerings.





Future
sales of substantial amounts of our common stock or other equity-related
securities in the public market or privately, or the perception that such sales
could occur, could adversely affect prevailing trading prices of our common
stock and could impair our ability to raise capital through future offerings of
equity or other equity-related securities. We can make no prediction as to the
effect, if any, that future sales of shares of common stock or equity-related
securities, or the availability of shares of common stock for future sale, will
have on the trading price of our common stock.





Our
common stock is deemed a “penny stock,” which may make it more difficult for
investors to sell their shares due to suitability requirements.





The SEC
has adopted regulations that generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share, subject to
specific exemptions. The market price of our common stock is currently less
than $5.00 per share and therefore is a “penny stock” according to SEC rules.
This designation requires any broker or dealer selling these securities to
disclose certain information concerning the transaction, obtain a written
agreement from the purchaser and determine that the purchaser is reasonably
suitable to purchase the securities. These rules may restrict the ability of
brokers or dealers to sell our common stock and may affect the ability of
investors to sell their shares.


11





As
the ownership of our voting securities is concentrated in our founders, such
individuals control us.





As of
October 31, 2009, Suzanne Lewsadder, our Chief Executive Officer and director
and Jeffrey Lewsadder former President and director, each beneficially own
approximately 72.3% of our outstanding common stock. Accordingly, these
individuals may be able to elect our directors and control the outcome of
virtually all important stockholder decisions and may make such decisions in
their own interest, which may not be in the best interests of other
stockholders.





We
do not expect to pay cash dividends on our common stock in the foreseeable
future.





We have
not declared or paid any cash dividends on our common stock and do not expect to
do so in the foreseeable future. As a result, investors may have to sell their
shares of our common stock to realize their investment. We currently intend to
retain all future earnings for use in the operation of our business and to fund
future growth. In addition, the terms of our Series A Preferred Stock limit our
ability to pay dividends. If this prohibition were to be waived, our ability to
pay future cash dividends on our common stock would depend upon our results of
operations, financial condition, cash requirements, the availability of a
surplus and other factors.





We
are subject to anti-takeover provisions that could affect the price of our
common stock.





Some
provisions of our Second Amended and Restated Certificate of Incorporation, as
amended, our by-laws, and laws of the State of Delaware could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders.





We are
subject to the provisions of Section 203 of the Delaware General Corporation Law
(“Section 203”).
Section 203 provides, with certain exceptions, that a Delaware corporation may
not engage in any of a broad range of business combinations with a person or an
affiliate, or an associate of such person, who is an “interested stockholder”
for a period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquired 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
such person an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and the shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66-2/3% of the
corporations outstanding voting stock at an annual or special meeting, excluding
the shares owned by the interested stockholder. Under Section 203, an
“interested stockholder” is defined as any person who is: (i) the owner of 15%
or more of the outstanding voting stock of the corporation or (ii) an affiliate
or associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.





A
corporation may, at its option, exclude itself from coverage of Section 203 by
amending its certificate of incorporation or bylaws, by action of its
stockholders, to exempt itself from coverage, provided that such certificate of
incorporation amendment or bylaw shall not become effective until 12 months
after the date it is adopted. We have not adopted such an amendment to our
Second Amended and Restated Certificate of Incorporation, as amended, or our
By-Laws.





In
addition, our Second Amended and Restated Certificate of Incorporation, as
amended, authorizes our board of directors to issue up to 10,000,000 shares of
preferred stock, which may be issued in one or more series, the terms of which
may be determined at the time of issuance by the board without further action by
stockholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and liquidation,
conversion and redemption rights and sinking fund provisions. The issuance of
any such preferred stock could materially adversely affect the rights of holders
of shares of our common stock and, therefore, could reduce the price of our
common stock. In addition, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with, or sell our
assets to, a third party. The ability of our board of directors to issue
preferred stock could have the effect of rendering more difficult, delaying,
discouraging, preventing, or rendering more costly an acquisition or a change in
control of us thereby preserving control of by the current controlling
stockholders.





ITEM
1B. UNRESOLVED STAFF COMMENTS





We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this
item.


12





ITEM 2. DESCRIPTION OF PROPERTY





Our corporate office, customer service and shipping operations
are located at 4030 Palos Verdes Drive North, Suite 104 Rolling Hills Estates,
California, and we lease approximately 3090 square feet.. We added approximately
1,000 square feet to this lease in June of 2009 in anticipation of future
growth. We lease this facility from an unaffiliated third party, pursuant to a
newly executed lease which expires June 14, 2014. Satellite operations are
currently in the states of Arizona, California, and Texas. If we should require
additional or alternative facilities, we believe that such facilities can be
obtained on short notice at competitive rates.





ITEM
3. LEGAL PROCEEDINGS





From time to time we may become subject to litigation incidental
to our business.  We are not currently a party to any material legal
proceedings.





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





No
matters were submitted to a vote of our shareholders during the fourth quarter
of the fiscal year 2009.





PART II





ITEM
5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS





Market
Information





Our
common stock is quoted on the OTC Bulletin Board (the "OTCBB") under the symbol
“SVSO.OB” The quarterly high and low reported sales prices for our common stock
as quoted on the OTCBB for the periods indicated are as follows:





2009
                
                
                2008Fiscal
      Year Ended August 31
                
                High
                
                
                Low
                
                
                High
                
                
                LowFirst
      Quarter
                
                $
                0.18
                
                
                $
                0.04
                
                
                $
                0.52
                
                
                $
                0.12Second
      Quarter
                
                
                0.18
                
                
                
                0.04
                
                
                
                0.74
                
                
                
                0.12Third
      Quarter
                
                
                0.16
                
                
                
                0.06
                
                
                
                0.40
                
                
                
                0.15Fourth
      Quarter
                
                
                0.11
                
                
                
                0.02
                
                
                
                0.44
                
                
                
                0.18





The
foregoing quotations were provided by Yahoo finance and the quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.





On
November 20, 2009, the last reported sale price per share of common stock as
quoted on the OTCBB was $0.02. Based on information available from our registrar
and transfer agent, we estimate that we had approximately 183 stockholders of
record on October 31, 2009.





Dividends





Although
we have accrued dividends related to our Preferred Stock, we have not paid any
dividends to date and do not anticipate paying dividends in the foreseeable
future. Our board of directors will review our dividend policy from time to time
to determine the desirability and feasibility of paying dividends after giving
consideration to our earnings, financial condition, capital requirements and
such other factors as the Board may deem relevant.


13





Purchases
of Equity Securities by the Issuer and Affiliated Purchasers





We did
not purchase any of our shares of common stock or other securities during the
year ended August 31, 2009.





ITEM
6. SELECTED FINANCIAL DATA





We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item.





ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS





The
following discussion and analysis should be read in conjunction with our audited
financial statements for each of the two years ended August 31, 2009 and 2008,
and the notes thereto, all of which financial statements are included elsewhere
in this Form 10-K. In addition to historical information, the following
discussion and other parts of this Form 10-K contain forward looking information
that involves risks and uncertainties. Actual results could differ materially
from those anticipated by such forward-looking information due to factors
discussed under “Description of Business” and elsewhere in this Form
10-K.





Overview





SheerVision
designs and sells proprietary surgical loupes and light systems for the dental,
medical, and veterinary markets. Since our inception in 1999, we have rapidly
established a significant base of operations through our dedicated sales force,
strategic marketing programs, aggressive web presence, expansion into global
markets, and commitment to new product development. Worldwide sales are achieved
by sales into direct and indirect sales channels, and by strategic alliances
with dental and medical partners. Exclusive partnerships with Asian component
manufacturers and domestic assembly and testing facilities, allow us to provide
superior quality loupes and light systems at competitive prices.





In 2006,
we launched an aggressive marketing campaign with the objective of expanding
direct sales and promoting name brand recognition in the dental market. This
campaign established SheerVision as one of the premier magnification and
illumination providers in the country. In 2007, with our new position in the
marketplace, we identified third-party and OEM relationships as a necessary
component of an overall strategy to continued realization of our aggressive
sales and profitability goals. This revised strategy resulted in our
introduction of a number of new product designs to a wider audience in a rapid,
cost effective manner.





Our first
major strategic alliance was with a large, international Japanese dental
company. With momentum from sales generated from this effort, we
initiated a partial shift in our marketing strategy, focusing more effort on
development of indirect domestic and international sales through OEM and
third party relationships. In fiscal year 2008, we launched a new domestic
alliance, allowing us to grow sales by effectively leveraging the dedicated
sales forces of a large dental company.





We have
also looked to develop new distributor relationships through the launch of our
International Distributor Program, and have increased our reach by successfully
expanding our international distribution network in several countries. We
believe our attraction is our breadth of innovative products which can be resold
at strong margins, while maintaining a highly competitive end-user price
point.





We intend
to continue to commit resources to direct sales and marketing to complement our
indirect sales efforts. This includes participation in trade shows emphasizing
the dental, veterinary, and medical markets, and growing our e-commerce powered
web store, which has provided us with a cost-effective platform to sell products
directly to the end user.





We also
continue to develop new products that not only enhance the SheerVision product
portfolio, but also add greater value for our third party clients. In fiscal
year 2008, we introduced our upgraded Infinity UltraTM LED head light system,
featuring our new Lithium Polymer battery pack. This revolutionary light system,
which we believe employs the most advanced battery technology available for this
application, has been rated a top performer by one of the most prestigious
non-profit, independent dental labs in the country. The development and launch
of our Signature Flip-Up Prism (high magnification) Loupe product line expanded
our penetration into horizontal and vertical market segments where we have
historically had only limited success. Additionally, in August 2008, we
introduced a new sports frame, to appeal to the younger, more fashionable
demographic of the dental market. Continued success of these products, and
future success of products currently in our pipeline, validates and ensures
continued support of R&D efforts.





We are
always evaluating small medical devices, in an ongoing effort to increase and
enhance our private label product line-up. With the sophisticated design and
engineering teams currently available to us, we have the ability to not only
modify and incorporate SheerVision products into other company’s offerings, but
to also extend our design, engineering, and manufacturing capabilities to other
companies’ product development.


14





Throughout
our recent history we have earned a reputation for leadership and value in
optical and lighting technology, supporting dentists, dental hygienists, and
doctors throughout the world. Our Ultra-Light Loupes have received the “Best of
the Best” award by Dental Lab Products’ Buyers Guide - 2006 Edition and named a
Dentistry Today top 100 product for 2006. Our new Infinity Ultra headlight
recently won an award from a leading dental research association for “best
illumination.”





Critical
Accounting Policies





Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The preparation of our financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, expenses and related
disclosures. We base our estimates on historical experience and 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. Below is a brief description of
our critical accounting policies:





Use
of Estimates





The
preparation of financial statements in conformity with accounting principals
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates and assumptions relate to estimates of
collectability of accounts receivable, the realization of deferred tax assets
and the adequacy of inventory reserves. Management bases its estimates and
assumptions on historical experience and on various other assumptions that it
believes are reasonable under the circumstances. Actual results could differ
from those estimates.





Cash
and Cash Equivalents





We
consider highly liquid investments with an original maturity of three months or
less to be cash equivalents.





Accounts
Receivable





Accounts
receivable are reported net of any write-off for uncollectible accounts.
Accounts are written off when significantly past due after exhaustive efforts at
collection.





Inventory





Inventory
is stated at the lower of cost (first-in, first-out method) or market and
consists of raw materials and finished goods. Materials associated with the
manufacturing of our product lines are readily available within the US and
international markets with relatively short ordering cycles and therefore
inventory on hand normally represents a two to three month selling cycle.
Inventory valuations depend on quantities on hand, sales history and expected
near term sales prospects. On a regular basis, we evaluate inventory balances
for excess quantities and obsolescence by analyzing estimated demand, inventory
on hand, sales levels and other information. Based on these evaluations,
inventory balances are reduced, if necessary.





Long
Lived Assets





Our
management evaluates the recoverability of our long-lived assets whenever events
or changes in circumstances indicate that their carrying amounts may not be
recoverable. Any impairment of value will be recognized as an expense in the
statement of operations.





Warrants
or Derivative Liabilities





The
Company assesses classification of our common stock purchase warrants and other
freestanding derivatives at each reporting date to determine whether a change in
classification between assets and liabilities is required. The value of any
expired warrants are expensed and recorded as an adjustment to
Additional  Paid in Capital as required.





Fair
Value of Financial Instruments





The
estimated fair values for financial instruments under SFAS No. 107,Disclosures about
Fair Value of Financial Instruments, are determined at
discrete points in time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision. For certain of
our financial instruments, including certain assets, accounts payable and
accrued liabilities, the carrying amounts approximate fair value due to their
short term nature.


15





Revenue
Recognition





Our
surgical loupes and lighting products need no installation and are ready for use
upon receipt by the customer. Products sold are delivered by shipments made
through common carrier and revenue is recognized upon shipment to the customer.
Discounts and sales incentives are recognized as a reduction of revenue at the
time of sale. We offer an unconditional satisfaction guarantee for a 30-day
period and permit product returns within 30 days of purchase, at which time
returns are accepted and refunds are made. Shipping charges and special orders
are nonrefundable. Allowances for returns are provided for based upon an
analysis of our historical patterns of product returns. To date, there have been
no significant product returns and such returns have been within our
estimates.





Cost
of Sales





Cost of
Sales represents costs directly related to the production and sale of the
Company’s products. Primary costs include finished goods, production labor, and
supplies.





Share
Based Payments
  Generally,
all forms of share-based payments, including stock option grants, restricted
stock grants and stock appreciation rights, are measured at their fair value on
the awards’ grant date, and based on the estimated number of awards that are
ultimately expected to vest. Share-based payment awards issued to nonemployees
for services rendered are recorded at either the fair value of the services
rendered or the fair value of the share-based payment, whichever is more readily
determinable. The expense resulting from share-based payments are recorded as a
component of general and administrative expense.


Income
Taxes





We
account for income taxes using the liability method. Deferred income taxes
reflect temporary differences in reporting assets and liabilities for income tax
and financial accounting purposes. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.





Earnings
Per Share





The basic
loss per common share, which excludes dilution, is computed by dividing the net
loss available to common shareholders by the weighted average number of common
shares outstanding.





Recent
Accounting Pronouncements





In
September 2009, the FASB issued Update No. 2009-13, “Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU
2009-13). It updates the existing multiple-element revenue arrangements guidance
currently included under ASC 605-25, which originated primarily from the
guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (EITF 00-21). The revised guidance primarily provides two
significant changes: 1) eliminates the need for objective and reliable evidence
of the fair value for the undelivered element in order for a delivered item to
be treated as a separate unit of accounting, and 2) eliminates the residual
method to allocate the arrangement consideration. In addition, the guidance also
expands the disclosure requirements for revenue recognition. ASU 2009-13 will be
effective for the first annual reporting period beginning on or after
June 15, 2010, with early adoption permitted provided that the revised
guidance is retroactively applied to the beginning of the year of adoption. The
Company is currently assessing the future impact of this new accounting update
to its financial statements.





Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting
Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards
Codification(the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with U.S.
GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants.
All guidance contained in the Codification carries an equal level of authority.
The Codification superseded all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature not
included in the Codification is non-authoritative. The FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASUs”). The FASB will not consider ASUs as authoritative in their own right.
ASUs will serve only to update the Codification, provide background information
about the guidance and provide the bases for conclusions on the change(s) in the
Codification. References made to FASB guidance throughout this document have
been updated for the Codification.





Effective
July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments
to ASC 820-10, Fair Value
Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. ASU 2009-05 provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using certain techniques. ASU
2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in
an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are required are
Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material
impact on the Company’s results of operations or financial
condition.


16





Effective
June 30, 2009, the Company adopted three accounting standard updates which
were intended to provide additional application guidance and enhanced
disclosures regarding fair value measurements and impairments of securities.
They also provide additional guidelines for estimating fair value in accordance
with fair value accounting. The first update, as codified in ASC 820-10-65,
provides additional guidelines for estimating fair value in accordance with fair
value accounting. The second accounting update, as codified in ASC 320-10-65,
changes accounting requirements for other-than-temporary-impairment
(OTTI) for debt securities by replacing the current requirement that a
holder have the positive intent and ability to hold an impaired security to
recovery in order to conclude an impairment was temporary with a requirement
that an entity conclude it does not intend to sell an impaired security and it
will not be required to sell the security before the recovery of its amortized
cost basis. The third accounting update, as codified in ASC 825-10-65, increases
the frequency of fair value disclosures. These updates were effective for fiscal
years and interim periods ended after June 15, 2009. The adoption of these
accounting updates did not have a material impact on the Company’s financial
statements.





Effective
June 30, 2009, the Company adopted a new accounting standard for subsequent
events, as codified in ASC 855-10. The update modifies the names of the two
types of subsequent events either as recognized subsequent events (previously
referred to in practice as Type I subsequent events) or non-recognized
subsequent events (previously referred to in practice as Type II subsequent
events). In addition, the standard modifies the definition of subsequent events
to refer to events or transactions that occur after the balance sheet date, but
before the financial statements are issued (for public entities) or available to
be issued (for nonpublic entities). It also requires the disclosure of the date
through which subsequent events have been evaluated. The update did not result
in significant changes in the practice of subsequent event disclosures, and
therefore the adoption did not have a material impact on the Company’s financial
statements.





Effective
January 1, 2009, the Company adopted an accounting standard update
regarding the determination of the useful life of intangible assets. As codified
in ASC 350-30-35, this update amends the factors considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under intangibles accounting. It also requires a
consistent approach between the useful life of a recognized intangible asset
under prior business combination accounting and the period of expected cash
flows used to measure the fair value of an asset under the new business
combinations accounting (as currently codified under ASC 850). The update also
requires enhanced disclosures when an intangible asset’s expected future cash
flows are affected by an entity’s intent and/or ability to renew or extend the
arrangement. The adoption did not have a material impact on the Company’s
financial statements.





Effective
January 1, 2009, the Company adopted a new accounting standard update
regarding business combinations. As codified under ASC 805, this update requires
an entity to recognize the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair value on the
acquisition date. It further requires that acquisition-related costs be
recognized separately from the acquisition and expensed as incurred; that
restructuring costs generally be expensed in periods subsequent to the
acquisition date; and that changes in accounting for deferred tax asset
valuation allowances and acquired income tax uncertainties after the measurement
period be recognized as a component of provision for taxes. The adoption did not
have a material impact on the Company’s financial statements.




In
February 2008, the FASB issued an accounting standard update that delayed
the effective date of fair value measurements accounting for all non-financial
assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), until the beginning of the first quarter of fiscal 2009. These
include goodwill and other non-amortizable intangible assets. The Company
adopted this accounting standard update effective January 1, 2009. The
adoption of this update to non-financial assets and liabilities, as codified in
ASC 820-10, did not have a material impact on the Company’s financial
statements.


17


Results
of Operations





The
following table sets forth selected financial information related to operations
for the periods indicated expressed in dollars as well as a percentage of
sales:





TWELVE MONTHS ENDED AUGUST 31,2009
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  2008(in thousands)Net
      Sales
                                                                  
                                                                  $
                                                                  3,499
                                                                  
                                                                  
                                                                  
                                                                  100.0
                                                                  %
                                                                  
                                                                  $
                                                                  4,418
                                                                  
                                                                  
                                                                  
                                                                  100.0
                                                                  %Cost
      of Goods Sold
                                                                  
                                                                  
                                                                  1,323
                                                                  
                                                                  
                                                                  
                                                                  37.8
                                                                  
                                                                  
                                                                  
                                                                  1,664
                                                                  
                                                                  
                                                                  
                                                                  37.6Gross
      Profit
                                                                  
                                                                  
                                                                  2,176
                                                                  
                                                                  
                                                                  
                                                                  62.2
                                                                  
                                                                  
                                                                  
                                                                  2,754
                                                                  
                                                                  
                                                                  
                                                                  62.3Operating
      ExpensesSelling
      Expenses
                                                                  
                                                                  
                                                                  905
                                                                  
                                                                  
                                                                  
                                                                  25.9
                                                                  
                                                                  
                                                                  
                                                                  1,081
                                                                  
                                                                  
                                                                  
                                                                  24.5General
      & Administrative Exp
                                                                  
                                                                  
                                                                  1,427
                                                                  
                                                                  
                                                                  
                                                                  40.8
                                                                  
                                                                  
                                                                  
                                                                  1,894
                                                                  
                                                                  
                                                                  
                                                                  54.1Total
      Operating Expenses
                                                                  
                                                                  
                                                                  2,332
                                                                  
                                                                  
                                                                  
                                                                  66.6
                                                                  
                                                                  
                                                                  
                                                                  2,976
                                                                  
                                                                  
                                                                  
                                                                  85.1Loss
      from Operations
                                                                  
                                                                  
                                                                  (156
                                                                  )
                                                                  
                                                                  
                                                                  (4.5
                                                                  )
                                                                  
                                                                  
                                                                  (222
                                                                  )
                                                                  
                                                                  
                                                                  (5.0
                                                                  )Other
      (Income)/Expense
                                                                  
                                                                  
                                                                  85
                                                                  
                                                                  
                                                                  
                                                                  2.5
                                                                  
                                                                  
                                                                  
                                                                  (2
                                                                  )
                                                                  
                                                                  
                                                                  -Net
      Loss
                                                                  
                                                                  $
                                                                  (71
                                                                  )
                                                                  
                                                                  
                                                                  (2.0
                                                                  )
                                                                  
                                                                  $
                                                                  (224
                                                                  )
                                                                  
                                                                  
                                                                  (5.0
                                                                  )%





Year
Ended August 31, 2009 Compared to the Year Ended August 31, 2008





Net
Sales





Net sales
decreased by $918,480, or 20.8%, from $4,417,887 for the year ended August 31,
2008 to $3,499,407 for the year ended August 31, 2009. This decline in year over
year sales growth is mainly attributable to a combination of two factors. First,
the impact of the general economic downturn resulted in, among other things, a
reduction in purchase orders from our largest distributor (which reduced its
inventory levels for items that were not selling as well as originally
projected) and the discounting of products to drive sales in a more
price-conscious market. Second, our strategic shift from selling almost
exclusively to end users to an expansion of our indirect sales through
international distributors, OEM and third party relationships resulted in lower
average sales price per unit when compared to the average sales price per unit
for direct sales even though we experienced an increase in the number of units
sold. We are now in the process of building a direct sales force aimed at the
dental and surgery markets to complement our indirect sales
efforts.





Gross
Profit





Gross
profit decreased by $577,877 or 21% from $2,753,786 for the year ended August
31, 2008 to $2,175,909 for the year ended August 31, 2009. The decrease in gross
profit was mainly due to a reduction in average unit sales prices resulting from
our strategic shift from selling directly to end users to selling indirectly
through international distributors, OEM and third party relationships as well as
the price discounting to help drive sales. In addition, with the release of our
new Lithium Polymer battery pack in 2008, all customers who purchased the
predecessor battery pack from us were eligible for an upgrade at substantial
discount. As most customers did upgrade to the new model, this resulted in a
decrease in sales for this product, reducing overall gross profit.





The gross
margin was 62.2% of net sales for the year ended August 31, 2009 compared to
62.3% of net sales for the year ended August 31, 2008. This slight improvement
in gross margins was due to the change in the mix between loupe sales and
headlight sales, with light sales now accounting for almost half of all our
sales before sales discounts.





Operating
Expenses





Operating
expenses, which include selling and marketing expenses and general and
administrative expenses decreased by $644,161, or 21.6%, to $2,331,635 for the
year ended August 31, 2009 as compared to $2,975,796 for the year ended August
31, 2008.





Selling
and marketing expenses were $904,655 for the year ended August 31, 2009 a
decrease of $176,770 or 16.3% from $1,081,425 for the previous year ended August
31, 2008. This decrease is mainly related to our enhanced channel sales efforts
where we decreased our direct sales, marketing, advertising and direct mail
campaigns. We also realized decreased travel costs related to our redirected and
refocused sales efforts.





General
and administrative expenses were $1,426,980 for the year ended August 31, 2009 a
decrease of $467,391 or 24.7% over previous year end total of $1,894,371. This
decrease is mainly attributable to two factors. First, the decline in legal
costs during fiscal year 2009 as a result of the settlement of two competitor
lawsuits during fiscal year 2008. Second, an approximate $300,000 decrease in
salaries resulting from the departure of former officers.


18





Loss
from Operations





Operating
loss for the year ended August 31, 2009 decreased by $66,284 or 29% to $155,726
as compared to $222,010 for the year ended August 31, 2008. The reduction in
loss from operations is related to the continuing refinement of our business
model to reflect the changing distribution channel strategy and the one-time
impact of the settlement of legal actions. These efforts have led to significant
cost savings related to shipping, marketing, sales and customer service labor,
and travel expenses.





Interest
Income (Expense)





Net
interest expense for the year ended August 31, 2009 of $8,784 is mainly related
to a line of credit we obtained in 2008, compared to $5,918 in 2008. Interest
income for 2009 was $458, as compared to $4,320 in 2008, a decrease of $3,862.
The decrease was attributable to less cash being available for investment in our
money market variable interest account during fiscal year 2009.





Income
Taxes





During
the year ended August 31, 2009, there was a $2,400 provision for minimum state
income taxes due to our net loss, and a valuation allowance on the resulting
deferred tax asset. For the twelve months ended August 31, 2008, we recorded an
income tax provision of $800.





Net
Loss





Net loss
for the year ended August 31, 2008 was $71,376 as compared to $223,608 for the
year ended August 31, 2008. Loss per common share was $0.02 and $0.04 for the
years ended August 31, 2009 and 2008, respectively.





Liquidity
and Capital Resources





We assess
our liquidity by our ability to generate cash to fund operations. Significant
factors in the management of liquidity are: funds generated by operations;
levels of accounts receivable, inventories, accounts payable and capital
expenditures; adequate lines of credit; and financial flexibility to attract
long-term capital on satisfactory terms. As of August 31, 2009, we had cash and
cash equivalents of $17,651.





To date,
we have financed operations principally through internally generated funds, a
private line of credit, and equity capital. Our ability to generate positive
operational cash flow is dependent upon increasing revenues through the sales of
existing product lines. We are also expanding our revenue base beyond our retail
operations into both domestic and international distributor relationships and
aggressively signing up new international distributors through our IDP
program.





We may
require substantial additional financing to support our current operations, for
sales and marketing and research and development programs, including significant
requirements for operating expenses and for intellectual property protection and
enforcement. As we raise additional funds through the issuance of equity
securities and equity securities equivalents, the percentage ownership of our
existing stockholders will be reduced. If we are unable to raise sufficient
funds on acceptable terms, then we may not succeed in executing our business
plan and achieving our business objectives. In particular, we could be forced to
limit our product development and marketing activities, forego business
opportunities, and we may lose the ability to respond to competitive pressures.
There can be no assurance that any funding will be available on a timely basis
on terms acceptable to us or at all, nor can any assurance be made that our
business operations will prove to be profitable or that we can remain in
business as a going concern.





The
accompanying consolidated financial statements have been prepared assuming we
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the ordinary course of
business. As of August 31, 2009, we had an accumulated deficit of $5,592,201 and
recurring losses from operations. We also had negative working capital of
$728,819 as of August 31, 2009. For the
year ended August 31, 2009, we had net cash provided by operating activities;
however we do not have history of financial stability or sources of cash that
can be relied upon to sustain operations for current and expected future growth.
We also accrued dividends; however there is insufficient cash available to pay
holders of the Series A preferred stock.





Net
cash provided by operating activities was $27,103 for the year ended
August 31, 2009 as compared with net cash used in operating activities of
$245,569 for the year ended August 31, 2008.  The improvement in
operating cash flows was a direct result of our strategic shift from selling
directly to end users to indirectly through international distributors, OEM and
third party relationships. Utilization of our partner resources to market and
sell our products allowed for the reduction in internal sales and marketing
expenditures.


19


Net cash
used in investing activities during the years ended August 31, 2009 and 2008 was
$46,339 and $57,806, respectively. These expenditures were mainly related to the
purchase of capital equipment.





Net cash
used in financing activities during the year ended August 31, 2009 was $75,000
as compared with net cash provided by financing activities during the
year ended August 31, 2008 of $150,000. The cash inflow in 2008 resulted from
the proceeds from a line of credit with an unaffiliated
shareholder of the Company, entered into on March 25, 2008 carrying an
interest rate of 9% per annum. During fiscal year 2009, we repaid $75,000 of
principal of the line of credit plus then accrued interest of $9,986. As of
August 31, 2009, the outstanding balance of the line of credit was
$79,716.





We also
owe accrued dividends on Series A Preferred Stock in the amount of $804,813,
which is not anticipated to be paid within the next 12 months.





Contractual
Obligations





We signed
a five-year lease on 3,399 rentable square feet effective June 15, 2009. The
location remains at 4030 Palos Verdes Drive, North in Rolling Hills Estates,
California but we have added 1,309 square feet to the leased office space. The
lease obligation based on monthly rent is $77,497 for each of the next five
years with annual adjustments based on inflation.





Off
Balance Sheet Arrangements





We have
no off-balance sheet arrangements.





ITEM 7A.
QUANTITIVATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We are
exposed to certain financial market risks, including changes in interest rates.
All of our revenue, expenses and capital spending are transacted in U.S.
dollars. Our exposure to market risk for changes in interest rates relates
primarily to our cash and cash equivalent balances. The majority of our
investments are in short-term instruments and subject to fluctuations in US
interest rates. Due to the nature of our short-term investments, we believe that
there is no material risk exposure.





ITEM
8. FINANCIAL STATEMENTS





Attached
hereto and filed as a part of this Annual Report on Form 10-K are our
Consolidated Financial Statements, beginning on page F-1.





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





None.





ITEM 9A(T). CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of our disclosure controls
and procedures (as such term is 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 on
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is (i) recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms; and (ii) accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.





Management's
Report on Internal Control over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control over financial reporting has been
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the United States of
America.


20





Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of our assets; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America, that receipts and expenditures are being made
only in accordance with authorization of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Management
assessed the effectiveness of our internal control over financial reporting at
August 31, 2009. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control—Integrated Framework. Based on that assessment under those
criteria, management has determined that, at August 31, 2009, our internal
control over financial reporting was effective.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by
our registered public accounting firm pursuant to temporary rules of the SEC
that permit us to provide only management's report in this annual
report.





Changes
in Internal Control over Financial Reporting





There
have been no changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fourth quarter of fiscal year 2009 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.





ITEM
9B. OTHER INFORMATION





None.





PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT





Directors,
Executive Officers and Significant Employees





Set forth
below is certain information with respect to the individuals who are our
directors, executive officers and significant employees.





Name
                  
                  Age
                  
                  PositionSuzanne
      Lewsadder
                  
                  63
                  
                  Chief
      Executive Officer, Director and TreasurerPatrick
      Adams
                  
                  52
                  
                  Chief
      Financial OfficerShemiran
      Hart
                  
                  51
                  
                  DirectorSharon
      Biddle
                  
                  57
                  
                  DirectorDavid
      Frankel
                  
                  61
                  
                  DirectorJeffrey
      Lewsadder
                  
                  53
                  
                  DirectorTerri
      Wiest
                  
                  62
                  
                  National
      Sales Director, Dental HygieneMartin
      Chaput
                  
                  41
                  
                  Online
      Marketing Manager





Suzanne
Lewsadder has served as our Chief Executive Officer, Treasurer and a director
since November 30, 2005. Ms. Lewsadder has also served as SheerVision-CA's Chief
Executive Officer since co-founding the company in 1999. Ms. Lewsadder has over
twenty-five years experience starting and building enterprises, with a focus on
operational management and strategic business development. As our Chief
Executive Officer, Ms. Lewsadder runs day-to-day operations, oversees strategic
alliances and develops marketing strategies. Ms. Lewsadder holds a B.A. degree
in Organization Communications, Cum Laude, from California State University.
Suzanne Lewsadder is the wife of Jeffrey Lewsadder.


21





Patrick
Adams has served as our Chief Financial Officer since April 14, 2009. Mr. Adams
was previously Chief Financial Officer for Dualstar Entertainment Group, Inc.
from 2007 until 2008 and for Performance Publishing Group, Inc. from 1994 until
2007. He has over 25 years of experience in operational finance and accounting
positions. Prior to his position at Performance Publishing Group, Inc. he held
management positions in large, publicly held companies including Northwest
Natural Gas Company (NYSE), The Times Mirror Company (NYSE), and Knott’s Berry
Farm. He holds a Master of Business Administration degree from American
University in Washington, D.C. and a Bachelor of Arts degree from Duke
University in Durham, North Carolina.





Shemiran
Hart has served as one of our directors since March 16, 2006. Ms. Hart is Vice
President and General Manager of Veeco Slider Process Equipment of semiconductor
manufacturer Veeco Instruments, Inc., where she has served in that capacity
since July 2007.  Other positions held with Veeco include Division
Controller and Senior Director of Operations since joining Veeco in 2005. 
Previously, Ms. Hart was Division Controller of Teradyne, Inc., an S&P 500
corporation, from 1999 to 2005. She brings over fifteen years experience in
public company financial management to her role as a member of our board. Ms.
Hart holds a B.S. in Business Administration, Magna Cum Laude, from the
University of Southern California.





Sharon
Biddle has served as one of our directors since March 16, 2006. Ms. Biddle is
President and Publisher of The Real Estate Book for San Luis Obispo County,
California, where she has served in that capacity since 2000. She brings over
twenty-five years experience in corporate marketing and public relations to her
role as a member of our board. Previously, Ms. Biddle served as the Vice
President of Marketing for Jazzercise, Inc. Ms. Biddle holds a B.A. in
Journalism and Marketing from Long Beach State University.





David
Frankel has served as one of our directors since March 16, 2006. Mr. Frankel is
a CPA/ABV and a principal in the accounting firm of David Frankel, an
accountancy corporation. Prior to July 1, 2006 Mr. Frankel was a partner for
thirteen years in the accounting firm of Frankel and Kohn. He brings over
twenty-five years experience in financial consulting to his role as a member of
our board. Mr. Frankel has been a financial and tax consultant to SheerVision-CA
since its inception in 1999 and briefly served as its interim CFO during 2005.
Mr. Frankel holds a B.S. in Business Administration and is ABV
accredited.





Jeffrey
Lewsadder has served as one of our directors since November 30, 2005. Mr.
Lewsadder also served as our President and Secretary from November 30, 2005
until July 9, 2009 and as SheerVision-CA's President since co-founding the
company in 1999 until July 9, 2009. Jeffrey Lewsadder is the husband of Suzanne
Lewsadder.





Terri
Wiest has served as our National Sales Director, Dental Hygiene Division since
July 2003. In this capacity, Ms. Wiest is responsible for the sales and
marketing activities of the Dental Hygiene market, overseeing a dedicated sales
force covering 280 schools, as well as dental meetings, in the U.S. &
Canada. Ms. Wiest was President of the Arizona State Dental Hygienists’
Association from 2003 to 2004. A licensed dental hygienist in Arizona and
California, Ms. Wiest practiced clinical dental hygiene for over 20 years prior
to joining us after completing her professional education at Phoenix
College.





Martin
Chaput has served as our Online Marketing Manager since June 2006. In this
capacity, Mr. Chaput is responsible for the design and implementation of
SheerVision’s online marketing programs, as well as the technology that supports
these transactions. Prior to joining us, Mr. Chaput was Product Marketing
Manager for Louis and Company from 2002 to 2006. Mr. Chaput holds an MBA in
Marketing and IT Management/E-Commerce from the Merage School of Business,
University of California, Irvine.





Directors
and Officers





Each
director is elected for a period of one year at our annual meeting of
stockholders and serves until the next such meeting and until his or her
successor is duly elected and qualified. The board of directors may also appoint
additional directors up to the maximum number permitted by our By-Laws. A
director so chosen or appointed will hold office until the next annual meeting
of stockholders.





Each of
our executive officers serves at the discretion of our board of directors and
holds office until his or her successor is elected or until his or her earlier
resignation or removal in accordance with our Second Amended and Restated
Certificate of Incorporation and By-Laws.





Meetings
and Committees of the Board





During
the year ended August 31, 2009, our board of directors held one meeting and took
actions by written consent on three occasions.





On April 21, 2006, we established an audit committee and a
compensation committee, which are responsible, respectively, for the matters
described below.





Audit
Committee





The audit
committee is responsible for the following:





·
            reviewing
      the results of the audit engagement with the independent
      auditors;


22





·
            identifying
      irregularities in the management of our business in consultation with our
      independent accountants, and suggesting appropriate courses of
      action;





·
            reviewing
      the adequacy, scope, and results of the internal accounting controls and
      procedures;





·
            reviewing
      the degree of independence of the auditors, as well as the nature and
      scope of our relationship with our independent
  auditors;





·
            reviewing
      the auditors' fees; and





·
            recommending
      the engagement of auditors to the full board of
  directors.





A charter
has been adopted to govern the audit committee. The members of the audit
committee are Sharon Biddle and Shemiran Hart. At the date hereof, each member
is deemed an audit committee financial expert and is considered an independent
directorunder Rule 4200(a)(15) of the Nasdaq Marketplace
Rules, even though such definition does not currently apply to us because we are
not listed on Nasdaq.





Compensation
Committee





The
compensation committee determines the salaries and incentive compensation of our
officers and provides recommendations for the salaries and incentive
compensation of our other employees and consultants. The members of the
compensation committee are David Frankel and Sharon Biddle.





The
compensation of our executive officers is generally determined by the
compensation committee of the board of directors, subject to applicable
employment agreements. Our compensation programs are intended to enable the
attraction, motivation, reward, and retention of the management talent required
to achieve corporate objectives and thereby increase stockholder value. Our
policy has been to provide incentives to our senior management to achieve both
short-term and long-term objectives and to reward exceptional performance and
contributions to the development of our business. To achieve these objectives,
the executive compensation program may include a competitive base salary, cash
incentive bonuses, and stock-based compensation.





The
compensation committee establishes, subject to the approval of our board of
directors and any applicable employment agreements, the salaries that will be
paid to our executive officers. In setting salaries, the compensation committee
intends to take into account several factors, including the
following:





·
            competitive
      compensation data;





·
            the
      extent to which an individual may participate in the stock plans which may
      be maintained by us; and





·
            qualitative
      factors bearing on an individual's experience, responsibilities,
      management and leadership abilities, and job
  performance.





Nominating
Committee





Each
member of our board of directors participates in the consideration of director
nominees. Stockholders may submit in writing to our Secretary at our address set
forth elsewhere in this Annual Report on Form 10-K the names and five year
backgrounds for the board of directors' consideration in its selection of
nominees for directors. Currently, our share ownership is relatively
concentrated in Suzanne Lewsadder, our Chief Executive Officer and Jeffrey
Lewsadder, a director; as such, it is improbable that any board nominee found to
be unqualified or unacceptable by the majority stockholders could be selected as
a member of the board of directors. Accordingly, there is no nominating
committee and we do not rely on pre-approval policies and procedures for our
nomination process. We intend to implement the necessary formation of a
nominating committee and will establish proper policies and procedures upon such
time as our share ownership is more diversified.





Involvement
in Certain Legal Proceedings





None of
our directors, executive officers, promoters or control persons have been
involved in any of the following events during the past five years:





·
            any
      bankruptcy petition filed by or against any business of which such person
      was a general partner or executive officer either at the time of the
      bankruptcy or within two years prior to that
  time;





·
            any
      conviction in a criminal proceeding or being subject to a pending criminal
      proceeding (excluding traffic violations and other minor
      offences);





·
            being
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring, suspending or otherwise limiting his or
      her involvement in any type of business, securities or banking activities;
      or


23





·
            being
      found by a court of competent jurisdiction (in a civil action), the
      Commission or the Commodity Futures Trading Commission to have violated a
      federal or state securities or commodities law, and the judgment has not
      been reversed, suspended, or
vacated.





Code
of Ethics





We
adopted a Code of Ethics that applies to our officers, employees and directors,
including our principal executive officers, principal financial officers and
principal accounting officers. The code of ethics sets forth written standards
that are designed to deter wrongdoing and to promote:





·
            Honest
      and ethical conduct, including the ethical handling of actual or apparent
      conflicts of interest between personal and professional
      relationships;





·
            Full,
      fair, accurate, timely and understandable disclosure in reports and
      documents that we file with, or submit to, the SEC and in other public
      communications made by us;





·
            Compliance
      with applicable governmental laws, rules and
  regulations;





·
            The
      prompt internal reporting of violations of the code to an appropriate
      person or persons identified in the code of ethics;
  and





·
            Accountability
      for adherence to the code of
ethics.





We will
provide a copy of our Code of Ethics to any person without charge, upon request.
Requests can be made to: SheerVision, Inc., 4030 Palos Verdes Drive North, Suite
104 Rolling Hills Estates, California 90274.





Compliance
with Section 16(a) of the Exchange Act





Section
16(a) of the Exchange Act requires our directors and officers, and persons who
own more than 10% of a registered class of our equity securities, to file
reports of ownership and changes in ownership with the SEC. Officers, directors
and greater than 10% stockholders are required by SEC regulation to furnish us
with copies of all the Section 16(a) forms they file.





Based
solely upon a review of Forms 3, 4 and 5 furnished to us, we are not aware of
any person who, at any time during the fiscal year ended August 31, 2009, was a
director, officer, or beneficial owner of more than 10% of our common stock and
who failed to file on a timely basis reports required by Section 16(a) of the
Securities Exchange Act of 1934 during such fiscal year.





ITEM 11.  EXECUTIVE
COMPENSATION





The
following table sets forth the compensation earned during the years ended August
31, 2009 and 2008 by our Chief Executive Officer, former President and Chief
Financial Officer and our two most highly compensated non-executive officers. We
refer to such individuals as “named executive officers”:




Name and
                                              Principal Position
                                            
                                            Year
                                              (1)
                                            
                                            Salary
                                              ($)
                                            
                                            
                                            Bonus
                                              ($)
                                            
                                            
                                            Stock
                                              Awards
                                              ($)
                                            
                                            
                                            Option
                                              Awards
                                              ($)(2)
                                            
                                            
                                            Non-Equity
                                              Incentive Plan
                                              Compensation
                                              ($)
                                            
                                            
                                            Non-qualified
                                              Deferred
                                              Compensation
                                              ($)
                                            
                                            
                                            All Other
                                              Compensation
                                              ($) (3)
                                            
                                            
                                            Total
                                              ($)Suzanne
      Lewsadder
                                            
                                            2009
                                            
                                            
                                            175,000
                                            
                                            
                                            
                                            27,314
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            25,384
                                            
                                            
                                            
                                            227,698Chairman
      and ChiefExecutive
      Officer
                                            
                                            2008
                                            
                                            
                                            112,500
                                            
                                            
                                            
                                            27,686
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            28,028
                                            
                                            
                                            
                                            168,214Jeffrey
      Lewsadder
                                            
                                            2009
                                            
                                            
                                            142,324
                                            
                                            
                                            
                                            35,382
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            23,409
                                            
                                            
                                            
                                            201,115Former
      President andSecretary(4)
                                            
                                            2008
                                            
                                            
                                            112,500
                                            
                                            
                                            
                                            20,750
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            26,330
                                            
                                            
                                            
                                            159,580Patrick
      Adams
                                            
                                            2009
                                            
                                            
                                            37,500
                                            (5)
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            5,568
                                            
                                            
                                            
                                            43,068Chief
      Financial Officer
                                            
                                            2008
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Terri
      WiestNational
      Sales Director,
                                            
                                            2009
                                            
                                            
                                            84,988
                                            (6)
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            7,764
                                            
                                            
                                            
                                            92,752Dental
      Hygiene Division
                                            
                                            2008
                                            
                                            
                                            107,733
                                            (7)
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            15,734-
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            8,503
                                            
                                            
                                            
                                            131,970Martin
      Chaput
                                            
                                            2009
                                            
                                            
                                            80,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            16,070
                                            
                                            
                                            
                                            96,070Online
      Marketing
                                            
                                            2008
                                            
                                            
                                            80,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            7,867
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            12,276
                                            
                                            
                                            
                                            100,143Manager


24





(1)
              The
      information is provided for each fiscal year referenced beginning
      September 1 and ending August 31.


(2)
            The
      amounts reflect the compensation expense in accordance with FAS 123(R) of
      these option awards. The assumptions used to determine the fair value of
      the option awards for fiscal year ended August 31, 2009 are set forth in
      Note 9 of our audited consolidated financial statements included in our
      Form 10-K for fiscal year ended August 31, 2009. Our named executive
      officers will not realize the value of these awards in cash unless and
      until these awards are exercised and the underlying shares subsequently
      sold.


(3)
              See
      “All Other Compensation” table
below.


(4)
              On
      July 9, 2009, our Board of Directors terminated Mr. Lewsadder as our
      President and Secretary and ratified termination of Mr. Lewsadder’s
      employment effective June 26,
2009.


(5)
              The
      referenced individual is entitled to a salary of $100,000 per annum, and a
      guaranteed bonus of $25,000. The amount referenced reflects the amount
      earned during fiscal year
2009.


(6)
              Includes
      $14,988 in commission.


(7)
              Includes
      $44,400 in commission.





All
Other Compensation





All Other
Compensation amounts in the Summary Compensation Table consist of the
following:





Name
                                    
                                    Year
                                    
                                    Automobile
                                      Related Expenses
                                      ($)
                                    
                                    
                                    Medical
                                      Related Expenses
                                      ($)
                                    
                                    
                                    Insurance
                                      Premium
                                      ($)
                                    
                                    
                                    Total
                                      ($)Suzanne
                                    
                                    2009
                                    
                                    
                                    9,331
                                    
                                    
                                    
                                    15,151
                                    
                                    
                                    
                                    902
                                    
                                    
                                    
                                    25,384Lewsadder
                                    
                                    2008
                                    
                                    
                                    11,043
                                    
                                    
                                    
                                    16,082
                                    
                                    
                                    
                                    902
                                    
                                    
                                    
                                    28,058Jeffrey
                                    
                                    2009
                                    
                                    
                                    17,239
                                    
                                    
                                    
                                    5,743
                                    
                                    
                                    
                                    428
                                    
                                    
                                    
                                    23,410Lewsadder
                                    
                                    2008
                                    
                                    
                                    11,312
                                    
                                    
                                    
                                    14,447
                                    
                                    
                                    
                                    570
                                    
                                    
                                    
                                    26,330Patrick
                                    
                                    2009
                                    
                                    
                                    —
                                    
                                    
                                    
                                    5,430
                                    
                                    
                                    
                                    138
                                    
                                    
                                    
                                    5,568Adams
                                    
                                    2008
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Terri
                                    
                                    2009
                                    
                                    
                                    —
                                    
                                    
                                    
                                    7,173
                                    
                                    
                                    
                                    592
                                    
                                    
                                    
                                    7,765Wiest
                                    
                                    2008
                                    
                                    
                                    —
                                    
                                    
                                    
                                    7,957
                                    
                                    
                                    
                                    546
                                    
                                    
                                    
                                    8,503Martin
                                    
                                    2009
                                    
                                    
                                    —
                                    
                                    
                                    
                                    15,969
                                    
                                    
                                    
                                    101
                                    
                                    
                                    
                                    16,070Chaput
                                    
                                    2008
                                    
                                    
                                    —
                                    
                                    
                                    
                                    12,216
                                    
                                    
                                    
                                    60
                                    
                                    
                                    
                                    12,276


25





Outstanding
Equity Awards at Fiscal Year-End





The
following table sets forth information concerning stock options and stock awards
held by the named executive officers as of August 31, 2009.





Option Awards
                          
                          
                          Stock AwardsName
                          
                          Number of
                            Securities
                            Underlying
                            Unexercised
                            Options
                            (#)
                            Exercisable
                          
                          
                          Number of
                            Securities
                            Underlying
                            Unexercised
                            Options
                            (#)
                            Unexercisable
                          
                          
                          Equity
                            Incentive Plan
                            Awards
                            Number of
                            Securities
                            Underlying
                            Unexercised
                            Unearned
                            Options
                            (#)
                          
                          
                          Option
                            Exercise
                            Price
                            ($)
                          
                          
                          Option
                            Expiration
                            Date
                          
                          
                          Number of
                            Shares or
                            Units of
                            Stock Held
                            That Have
                            Not Vested
                            (#)
                          
                          
                          Market
                            Value of
                            Shares or
                            Units of
                            Stock Held
                            That Have
                            Not Vested
                            ($)
                          
                          
                          Equity
                            Incentive
                            Plan
                            Awards:
                            Number of
                            Unearned
                            Shares,
                            Units or
                            Other
                            Rights That
                            Have Not
                            Vested (#)
                          
                          
                          Equity
                            Incentive Plan
                            Awards:
                            Market
                            or
                            Payout Value
                            of Unearned
                            Shares, Units
                            or Other
                            Rights
                            That
                            Have Not
                            Vested ($)Suzanne
      Lewsadder, CEO and Treasurer
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Jeffrey
      LewsadderFormer
      President and Secretary
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Patrick
      AdamsChief
      Financial Officer(1)
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Terri
      Wiest;
                            National
      Sales Director,
                            Dental
      Hygiene Division
                          
                          
                          100,000
                          (1)
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          0.20
                          
                          
                          03/20/18
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Martin
      Chaput
                            Online
      Marketing Manager
                          
                          
                          50,000
                          (1)
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          0.20
                          
                          
                          03/20/18
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —





(1)
            These
      options were granted under our 2007 Stock Option Plan, the first half of
      which vested on March 20, 2008 and the second half of which vested on
      December 31, 2008.





Employment
Agreements





Currently,
we do not maintain employment agreements with our executive officers. We intend
to enter into an employment agreement with each executive officer prior to
September 1, 2010. We anticipate that these agreements will contain provisions
which will be comparable to those of similarly situated companies in our
industry with respect to confidentiality, non-competition and assignment of
intellectual property.





Stock Option Plans





2007
Stock Option Plan





On
January 25, 2007, our board of directors adopted, and on the same date, holders
of a majority of the voting power of the outstanding shares of our capital stock
approved, our 2007 Stock Option Plan (the “Plan”). The Plan authorizes
the grant of options and stock purchase rights with respect to up to an
aggregate of 3,000,000 shares of our common stock to our or our subsidiaries’
employees and directors and individuals, including consultants, performing
services for us or our subsidiaries. As of August 31, 2009, 386,000
options are outstanding under the Plan.





2007
Stock Option Plan for Independent and Non-Employee Directors





On
January 25, 2007, our board of directors adopted, and on the same date, holders
of a majority of the voting power of the outstanding shares of our capital stock
approved, the 2007 Stock Option Plan for Independent and Non-Employee Directors
(the “Directors Plan”)
for the purpose of promoting our interests and those of our stockholders by
increasing the proprietary and vested interest of such directors in our growth
and performance. The Directors Plan authorizes the grant of options with respect
to up to an aggregate of 200,000 shares of our common stock. As of August 31,
2009, no options are outstanding under the Directors
Plan.


26





The
Directors Plan provides that each newly elected independent or non-employee
director upon first election or appointment to the board will receive options to
purchase 2,000 shares of our common stock and, immediately following each annual
meeting of stockholders, each such director who has served in such capacity for
more than twelve months preceding such meeting will receive an option to
purchase an additional 3,000 shares of our common stock.





Compensation
of Directors





During
the fiscal year ended August 31, 2009, directors received no compensation for
their services as directors. Pursuant to our By-Laws, directors may receive such
compensation for their services and such reimbursement of expenses for attending
meetings as our board of directors may determine from time to time. Pursuant to
our 2007 Stock Option Plan for Independent and Non-Employee Directors, our
independent directors are entitled to a grant of options to purchase our common
stock. See “Executive
Compensation - Stock Option Plans” above.





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





The
following table sets forth, as of October 31, 2009 the beneficial ownership of
(i) each person known by us to beneficially own five percent (5%) or more of the
outstanding shares; (ii) our named executive officers; and (iii) our officers
and directors as a group.





As used
in the table below and elsewhere in this Annual Report on Form 10-K, the term
“beneficial ownership” with respect to a security consists of sole or shared
voting power, including the power to vote or direct the vote and/or sole or
shared investment power, including the power to dispose or direct the
disposition, with respect to the security through any contract, arrangement,
understanding, relationship, or otherwise, including a right to acquire such
power(s) during the next 60 days following the date hereof. Except as otherwise
indicated, the stockholders listed in the table have sole voting and investment
powers with respect to the shares indicated. The table below is based on
12,756,023 shares of our common stock outstanding as of October 31,
2009.





Except as
otherwise noted, the address of the referenced individual is c/o SheerVision,
Inc., 4030 Palos Verdes Drive North, Suite 104, Rolling Hills, California
90274.





Name and Address of
                        Beneficial Owner
                      
                      Shares of Common
                        Stock Beneficially
                        Owned
                      
                      
                      Percentage of Class
                        Beneficially OwnedSuzanne
      Lewsadder(1)(2)
                      
                      
                      9,219,137
                      (3)
                      
                      
                      72.3
                      %Jeffrey
      Lewsadder(1)
                      
                      
                      9,219,137
                      (3)
                      
                      
                      72.3
                      %Shemiran
      Hart(1)
                      
                      
                      0
                      
                      
                      
                      0
                      %Sharon
      Biddle(1)
                      
                      
                      29,166
                      (4)
                      
                      
                      *
                      %David
      Frankel(1)
                      
                      
                      29,166
                      (4)
                      
                      
                      *
                      %Patrick
      Adams(2)
                      
                      
                      0
                      
                      
                      
                      0
                      %Terri
      Wiest
                      
                      
                      100,000
                      (5)
                      
                      
                      *
                      %Martin
      Chaput
                      
                      
                      50,000
                      (5)
                      
                      
                      *
                      %All
      Current Executive Officers andDirectors
      as a Group (6 persons)
                      
                      
                      9,277,469
                      (6)
                      
                      
                      72.5
                      %


27





*
            Less
      than one percent


(1)
              Indicates
      Director.


(2)
              Indicates
      Officer.


(3)
              In
      the case of Suzanne Lewsadder, includes the shares of common stock
      beneficially owned by Jeffrey Lewsadder. In the case of Jeffrey Lewsadder,
      includes the shares of common stock beneficially owned by Suzanne
      Lewsadder.


(4)
              Includes
      20,833 shares of common stock issuable upon the conversion of Series A
      Preferred Stock.


(5)
              Represents
      shares of common stock issuable upon exercise of options within 60 days
      following October 31, 2009.


(6)
              Includes
      41,666 shares of common stock issuable upon the conversion of Series A
      Preferred Stock.





Equity
Compensation Plan Information





The
following table sets forth information with respect to our 2007 Stock Option
Plan and our 2007 Stock Option Plan for Independent and Non-Employee Directors
as of August 31, 2009:





Plan Category
                          
                          Number of securities to be issued
                            upon exercise of outstanding options,
                            warrants and rights
                            (a)
                          
                          
                          Weight-average exercise price
                            of outstanding options,
                            warrants and rights
                            (b)
                          
                          
                          Number of securities remaining
                            available for future issuance under
                            equity compensation plans (excluding
                            securities reflected in column (a))
                            (c)Equity
                            compensation
      plans
                            approved
      by
                            security
      holders
                          
                          
                          386,000
                          (1)
                          
                          
                          $0.20
                          
                          
                          
                          2,814,000
                          (2)Equity
                            compensation
      plans
                            not
      approved by
                            security
      holders
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Total
                          
                          
                          386,000
                          (1)
                          
                          
                          $0.20
                          
                          
                          
                          2,814,000
                          (2)








(1)
            Represents
      shares of our common stock issuable upon exercise of outstanding options
      under our 2007 Stock Option Plan.





(2)
            Represents
      up to 2,614,000 shares of our common stock authorized for issuance under
      our 2007 Stock Option Plan and up to 200,000 shares of our common stock
      authorized for issuance under our 2007 Stock Option Plan for Independent
      and Non-Employee Directors.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.





Our
policy is to enter into transactions with related parties on terms that, on the
whole, are more favorable, or no less favorable, than those available from
unaffiliated third parties. Based on our experience in the business sectors in
which we operate and the terms of our transactions with unaffiliated third
parties, we believe that all of the transactions described below met this policy
standard at the time they occurred.





Except as
otherwise indicated below, we have not been a party to any transaction, proposed
transaction, or series of transactions required to be disclosed pursuant to Item
404 of Regulation S-K.





ITEM
14: PRINCIPAL ACCOUNTANT FEES AND SERVICES





As of
August 31, 2009, aggregate fees billed to us by our independent registered
public accounting firms are as follows:





Summary:
                  
                  2009
                  
                  
                  2008Audit
      fees
                  
                  $
                  103,193
                  (1)
                  
                  $
                  83,152
                  (2)Audit
      related fees
                  
                  
                  -
                  
                  
                  
                  -Tax
      fees
                  
                  
                  -
                  
                  
                  
                  -Other
      fees
                  
                  
                  -
                  
                  
                  
                  -


28







(1)
            Amount
      represents $58,000 billed to us by Berman & Company P.A. and $45,193
      billed to us by Miller Ellin & Company
LLP.


(2)
            Amount
      represents fees billed to us by Miller Ellin & Company
      LLP.








ITEM 15. EXHIBITS AND INDEX OF EXHIBITS





The
Exhibits below are included as part of this Annual Report on Form
10-K.





Exhibit No.
            
            Description2.1
            
            Acquisition
      of Escalator, Inc. (incorporated by reference to Exhibit 2.1 to Current
      Report on Form 10-SB of SheerVision, Inc., a Delaware corporation
      (formerly Clean Water Technologies, Inc.), filed with the Securities and
      Exchange Commission on October 13, 1999).2.2
            
            Lone
      Pine Resources, Inc. Merger (incorporated by reference to Exhibit 2.2 to
      Current Report on Form 10-SB of SheerVision, Inc., a Delaware corporation
      (formerly Clean Water Technologies, Inc.), filed with the Securities and
      Exchange Commission on October 13, 1999).2.3
            
            Agreement
      and Plan of Spinoff (incorporated by reference to Exhibit 2.3 to Current
      Report on Form 10-SB of SheerVision, Inc., a Delaware corporation
      (formerly Clean Water Technologies, Inc.), filed with the Securities and
      Exchange Commission on October 13, 1999).2.4
            
            Acquisition
      of Clean Water Technologies, Inc. (incorporated by reference to Exhibit
      2.4 to Current Report on Form 10-SB of SheerVision, Inc., a Delaware
      corporation (formerly Clean Water Technologies, Inc.), filed with the
      Securities and Exchange Commission on October 13,
1999).2.5
            
            Acquisition
      of Zorax, Inc. (incorporated by reference to Exhibit 2.5 to Current Report
      on Form 10KSB of SheerVision, Inc., a Delaware corporation (formerly Clean
      Water Technologies, Inc.), filed with the Securities and Exchange
      Commission on August 16, 2001).3.1
            
            Second
      Amended and Restated Certificate of Incorporation of SheerVision, Inc.
      (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K of
      SheerVision, Inc., a Delaware corporation (formerly Clean Water
      Technologies, Inc.), filed with the Securities and Exchange Commission on
      June 20, 2006).3.2
            
            By-laws
      of SheerVision, Inc., a Delaware corporation (incorporated by reference to
      Exhibit 3.2 to Current Report on Form 10-QSB of SheerVision, Inc., a
      Delaware corporation), filed with the Securities and Exchange Commission
      on October 13, 1999).3.3
            
            Form
      of Common Stock Certificate (incorporated by reference to Exhibit 3.3 to
      Current Report on Form SB-2A of SheerVision Inc., a Delaware corporation,
      filed with the Securities and Exchange Commission on September 29,
      2006).3.4
            
            Articles
      of Incorporation of SheerVision, Inc., a California corporation
      (incorporated by reference to Exhibit 3.3 to Current Report on Form 8-K/A
      of SheerVision, Inc., a Delaware corporation (formerly Clean Water
      Technologies, Inc.), filed with the Securities and Exchange Commission on
      March 28, 2006).3.5
            
            Certificate
      of Amendment of Articles of Incorporation of SheerVision, Inc., a
      California corporation (incorporated by reference to Exhibit 3.4 to
      Current Report on Form 8-K/A of SheerVision, Inc., a Delaware corporation
      (formerly Clean Water Technologies, Inc.), filed with the Securities and
      Exchange Commission on March 28, 2006).3.6
            
            By-laws
      of SheerVision, Inc., a California corporation (incorporated by reference
      to Exhibit 3.5 to Current Report on Form 8-K/A of SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), filed with
      the Securities and Exchange Commission on March 28,
  2006).3.7
            
            Form
      of Certificate of Designations, Preferences, Rights, and Limitations
      of Series A Cumulative Convertible Preferred Stock as filed with the
      Secretary of State of Delaware (incorporated by reference to Exhibit 3.1
      to Current Report on Form 8-K of SheerVision, Inc., a Delaware corporation
      (formerly Clean Water Technologies, Inc.), filed with the Securities and
      Exchange Commission on May 11,
2006)


29





4.1
                  
                  Warrant,
      issued to Patricia Hall (Hallmark Capital), dated as of September 28, 2005
      (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K/A
      of SheerVision, Inc., a Delaware corporation (formerly Clean Water
      Technologies, Inc.), filed with the Securities and Exchange Commission on
      March 28, 2006).4.2
                  
                  Warrant,
      issued to Northeast Securities, dated as of September 19, 2005, in
      connection with the 2005 Private Placement (incorporated by reference to
      Exhibit 4.2 to Current Report on Form 8-K/A of SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), filed with
      the Securities and Exchange Commission on March 28,
  2006).4.3
                  
                  Form
      of Warrant issued to investors in the 2005 Private Placement (incorporated
      by reference to Exhibit 4.3 to Current Report on Form 8-K/A of
      SheerVision, Inc., a Delaware corporation (formerly Clean Water
      Technologies, Inc.), filed with the Securities and Exchange Commission on
      March 28, 2006).4.4
                  
                  Form
      of 12% Secured Promissory Note issued to investors in the 2005 Private
      Placement (incorporated by reference to Exhibit 10.15 to Current Report on
      Form 8-K/A of SheerVision, Inc., a Delaware corporation (formerly Clean
      Water Technologies, Inc.), filed with the Securities and Exchange
      Commission on March 28, 2006).4.5
                  
                  Form
      of Warrant issued to investors in the 2006 Private Placement (incorporated
      by reference to Exhibit 4.1 to Current Report on Form 8-K of SheerVision,
      Inc., a Delaware corporation (formerly Clean Water Technologies, Inc.),
      filed with the Securities and Exchange Commission on May 11,
      2006).4.6
                  
                  Form
      of Warrant, issued to Northeast Securities, dated as of April ____, 2006,
      in connection with the 2006 Private Placement (incorporated by reference
      to Exhibit 4.2 to Current Report on Form 8-K of SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), filed with
      the Securities and Exchange Commission on May 11,
2006).4.7
                  
                  Form
      of 9% Convertible Promissory Note issued to investors in the 2006 Private
      Placement (incorporated by reference to Exhibit 10.2 to Current Report on
      Form 8-K of SheerVision, Inc., a Delaware corporation (formerly Clean
      Water Technologies, Inc.), filed with the Securities and Exchange
      Commission on May 11, 2006).10.1
                  
                  Sublicense
      Agreement, effective as of October 22, 1999, between SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), and GSA
      Resources, Inc., an Arizona corporation (incorporated by reference to
      Exhibit 10 to Current Report on Form 10KSB of SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), filed with
      the Securities and Exchange Commission on September 26,
    2000).10.2
                  
                  Securities
      Purchase Agreement, dated as of November 30, 2005, among SheerVision,
      Inc., a California corporation, Laurie C. Scala and Howard A. Scala, and
      SheerVision, Inc., a Delaware corporation (formerly, Clean Water
      Technologies, Inc.) (Schedules intentionally omitted) (incorporated by
      reference to Exhibit 10.1 to Current Report on Form 8-K of SheerVision,
      Inc., a Delaware corporation (formerly Clean Water Technologies, Inc.),
      filed with the Securities and Exchange Commission on December 7,
      2005).10.3
                  
                  License
      Assignment Agreement, dated March 16, 2006, by and between SheerVision,
      Inc., a Delaware corporation (formerly, Clean Water Technologies, Inc.)
      and Water Technology Partners LLC, a Florida limited liability company
      (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K
      of SheerVision, Inc., a Delaware corporation (formerly Clean Water
      Technologies, Inc.), filed with the Securities and Exchange Commission on
      March 22, 2006).10.4
                  
                  Sublicense
      Assignment Agreement, dated March 16, 2006, by and between SheerVision,
      Inc., a Delaware corporation (formerly, Clean Water Technologies, Inc.)
      and Water Technology Partners LLC, a Florida limited liability company
      (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K
      of SheerVision, Inc., a Delaware corporation (formerly Clean Water
      Technologies, Inc.), filed with the Securities and Exchange Commission on
      March 22, 2006).10.5
                  
                  Commercial
      Real Estate Lease, by and among Academy Center LLC and Suzanne Lewsadder
      (d/b/a SheerVision, Inc.), dated as of August 26, 2005 (incorporated by
      reference to Exhibit 10.2 to Current Report on Form 8-K/A of SheerVision,
      Inc., a Delaware corporation (formerly Clean Water Technologies, Inc.),
      filed with the Securities and Exchange Commission on April 5,
      2006).10.6
                  
                  Letter
      of Engagement with Northeast Securities, dated as of August 3, 2005
      (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K/A
      of SheerVision, Inc., a Delaware corporation (formerly Clean Water
      Technologies, Inc.), filed with the Securities and Exchange Commission on
      March 28,
2006).


30





10.7
                
                Confidentiality
      and Non-Disclosure Agreement, dated as of August 3, 2005, between
      SheerVision, Inc., a California corporation, and Northeastern Securities
      (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K
      of SheerVision, Inc., a Delaware corporation (formerly Clean Water
      Technologies, Inc.), filed with the Securities and Exchange Commission on
      March 28, 2006).10.8
                
                Letter
      of Engagement, dated as of December 14, 2004, between SheerVision, Inc., a
      California corporation, and Hallmark Capital Corp. (incorporated by
      reference to Exhibit 10.5 to Current Report on Form 8-K/A of SheerVision,
      Inc., a Delaware corporation (formerly Clean Water Technologies, Inc.),
      filed with the Securities and Exchange Commission on March 28,
      2006).10.9
                
                Letter
      of Engagement, dated as of October 1, 2005, between SheerVision, Inc., a
      California corporation, and Hallmark Capital Corp. (incorporated by
      reference to Exhibit 10.6 to Current Report on Form 8-K/A of SheerVision,
      Inc., a Delaware corporation (formerly Clean Water Technologies, Inc.),
      filed with the Securities and Exchange Commission on March 28,
      2006).10.10
                
                Letter
      Agreement, dated as of November 14, 2005, between SheerVision, Inc., a
      California corporation, and Javier Schmidt & Kalma, S.A, and addendum
      (incorporated by reference to Exhibit 10.7 to Current Report on Form 8-K/A
      of SheerVision, Inc., a Delaware corporation (formerly Clean Water
      Technologies, Inc.), filed with the Securities and Exchange Commission on
      March 28, 2006).10.11
                
                Promissory
      Note, dated as of December 7, 2005, issued by SheerVision, Inc. in favor
      of Vineyard Bank, in the principal amount of $300,000 (incorporated by
      reference to Exhibit 10.8 to Current Report on Form 8-K/A of SheerVision,
      Inc., a Delaware corporation (formerly Clean Water Technologies, Inc.),
      filed with the Securities and Exchange Commission on March 28,
      2006).10.12
                
                Commercial
      Security Agreement, dated as of December 7, 2005, between SheerVision,
      Inc., a California corporation, and Vineyard Bank (incorporated by
      reference to Exhibit 10.9 to Current Report on Form 8-K/A of SheerVision,
      Inc., a Delaware corporation (formerly Clean Water Technologies, Inc.),
      filed with the Securities and Exchange Commission on March 28,
      2006).10.13
                
                Business
      Loan Agreement, dated as of December 7, 2005, between SheerVision, Inc., a
      California corporation, and Vineyard Bank (incorporated by reference to
      Exhibit 10.10 to Current Report on Form 8-K/A of SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), filed with
      the Securities and Exchange Commission on March 28,
  2006).10.14
                
                Agreement
      to Provide Insurance, dated as of December 7, 2005, between SheerVision,
      Inc., a California corporation, and Vineyard Bank (incorporated by
      reference to Exhibit 10.11 to Current Report on Form 8-K/A of SheerVision,
      Inc., a Delaware corporation (formerly Clean Water Technologies, Inc.),
      filed with the Securities and Exchange Commission on March 28,
      2006).10.15
                
                Commercial
      Guaranty, dated as of December 7, 2005, by Suzanne Lewsadder, on behalf of
      SheerVision, Inc., a California corporation (incorporated by reference to
      Exhibit 10.12 to Current Report on Form 8-K/A of SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), filed with
      the Securities and Exchange Commission on March 28,
  2006).10.16
                
                Commercial
      Guaranty, dated as of December 7, 2005, by Jeffrey Lewsadder, on behalf of
      SheerVision, Inc., a California corporation (incorporated by reference to
      Exhibit 10.13 to Current Report on Form 8-K/A of SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), filed with
      the Securities and Exchange Commission on March 28,
  2006).10.17
                
                Change
      in Terms Agreement, dated as of January 5, 2006, between SheerVision,
      Inc., a California corporation, and Vineyard Bank and accompanying
      Disbursement Request and Authorization for the Variable Rate
      Nondisclosable Revolving Line of Credit (incorporated by reference to
      Exhibit 10.14 to Current Report on Form 8-K of SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), filed with
      the Securities and Exchange Commission on March 28,
  2006).10.18
                
                Form
      of Intercreditor Agreement, dated as of September 13, 2005, with
      SheerVision, Inc., a California corporation (incorporated by reference to
      Exhibit 10.17 to Current Report on Form 8-K/A of SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), filed with
      the Securities and Exchange Commission on March 28,
  2006).10.19
                
                Letter
      Agreement, dated as of April 6, 2003, and Addendum, dated as of April 5,
      2003 (filed in redacted form pursuant to a confidential treatment request)
      (incorporated by reference to Exhibit 10.19 to Current Report on Form 8-K
      of SheerVision, Inc., a Delaware corporation (formerly Clean Water
      Technologies, Inc.), filed with the Securities and Exchange Commission on
      April 5, 2006).


31





10.20
              
              Consulting
      Agreement, dated as of February 15, 2005, and Addendum, dated as of March
      6, 2005 (filed in redacted form pursuant to a confidential treatment
      request) (incorporated by reference to Exhibit 10.20 to Current Report on
      Form 8-K of SheerVision, Inc., a Delaware corporation (formerly Clean
      Water Technologies, Inc.), filed with the Securities and Exchange
      Commission on April 5, 2006).10.21
              
              Supply
      and License Agreement, dated as of April 7, 2003 (filed in redacted form
      pursuant to a confidential treatment request) (incorporated by reference
      to Exhibit 10.21 to Current Report on Form 8-K of SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), filed with
      the Securities and Exchange Commission on April 5,
  2006).10.22
              
              Form
      of Engagement Letter, dated April 11, 2006, between Northeast Securities
      and Clean Water Technologies, Inc. (incorporated by reference to Exhibit
      10.3 to Current Report on Form 8-K of SheerVision, Inc., a Delaware
      corporation (formerly Clean Water Technologies, Inc.), filed with the
      Securities and Exchange Commission on May 11, 2006).10.23
              
              Form
      of Side Letter, dated as of April 20, 2006, between Northeast Securities
      and Clean Water Technologies, Inc. (incorporated by reference to Exhibit
      10.4 to Current Report on Form 8-K of SheerVision, Inc., a Delaware
      corporation (formerly Clean Water Technologies, Inc.), filed with the
      Securities and Exchange Commission on May 11, 2006).10.24
              
              Form
      of Registration Rights Letter delivered by Clean Water Technologies, Inc.
      in connection with the 2006 Private Placement (incorporated by reference
      to Exhibit 10.5 to Current Report on Form 8-K of SheerVision, Inc., a
      Delaware corporation (formerly Clean Water Technologies, Inc.), filed with
      the Securities and Exchange Commission on May 11,
2006).10.25
              
              Form
      of Registration Rights Letter delivered by Clean Water Technologies, Inc.
      in connection with the 2005 Private Placement (incorporated by reference
      to Exhibit 10.25 to Form SB-2/A of SheerVision, Inc., a Delaware
      corporation (formerly Clean Water Technologies, Inc.), filed with the
      Securities and Exchange Commission on September 22,
      2006).10.26
              
              2007
      Stock Option Plan (incorporated by reference to Exhibit A to the
      Information Statement pursuant to Section 14C of the Securities and
      Exchange Act of 1934 on Form Def-14C filed with the Securities and
      Exchange Commission on March 13, 2007).10.27
              
              2007
      Stock Option Plan for Independent and Non-Employee Directors (incorporated
      by reference to Exhibit B to the Information Statement pursuant to Section
      14C of the Securities and Exchange Act of 1934 on Form Def-14C filed with
      the Securities and Exchange Commission on March 13,
  2007).10.28
              
              Investor
      and Public Relations Consulting Agreement dated April 18, 2007 between
      SheerVision, Inc, a Delaware corporation and Mark Taggatz (incorporated by
      reference to Exhibit 10.1 to Current Report on Form 8K of SheerVision,
      Inc. filed with the Securities and Exchange Commission on April 24,
      2007).10.29
              
              Form
      of Settlement and Release Agreement dated as of January 4, 2008 between
      General Scientific Corporation, SheerVision, Inc. and Asia Sourcing
      Corporation (incorporated by reference to Exhibit 10.1 to Current Report
      on Form 8K of SheerVision, Inc. filed with the Securities and Exchange
      Commission on January 18, 2008).10.30
              
              Form
      of Loan Agreement dated March 19, 2008 (incorporated by reference to
      Exhibit 10.1 to Current Report on Form 8K of SheerVision, Inc. filed with
      the Securities and Exchange Commission on March 19,
  2008).14.1
              
              Code
      of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1
      to Current Report on Form 8-K/A of SheerVision, Inc., a Delaware
      corporation (formerly Clean Water Technologies, Inc.), filed with the
      Securities and Exchange Commission on March 28, 2006).21.1
              
              Subsidiaries
      of SheerVision, Inc.*31.1
              
              Certification
      of Principal Executive Officer required by Rule 13a-14(a) or Rule
      15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
              
              Certification
      of Principal Financial Officer required by Rule 13a-14(a) or Rule
      15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
              
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.*32.2
              
              Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.*







* Filed
herewith


32




SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  Dated:
      December 15, 2009SHEERVISION
      INC.By:
                /s/
      Suzanne LewsadderSuzanne
      LewsadderChief
      Executive Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of registrant and in the
capacities and on the dates indicated.
 
 Title
                          
                          Date/s/
      Suzanne Lewsadder
                          
                          Chief
      Executive Officer
                          
                          December
      15, 2009Suzanne
      Lewsadder
                          
                          and
      Director(Principal
      Executive Officer)/s/
      Patrick Adams
                          
                          Chief
      Financial Officer
                          
                          December
      15, 2009Patrick
      Adams
                          
                          (Principal
      Financial andAccounting
      Officer)/s/
      Shemiran Hart
                          
                          Director
                          
                          December
      15, 2009Shemiran
      Hart/s/
      Sharon Biddle
                          
                          Director
                          
                          December
      15, 2009Sharon
      Biddle/s/
      David Frankel
                          
                          Director
                          
                          December
      15, 2009David
      Frankel
  33


SHEERVISION,
INC. AND SUBSIDIARY


CONSOLIDATED
FINANCIAL STATEMENTS


AUGUST
31, 2009 AND 2008


F-1


Page(s)Report
      of Independent Registered Public Accounting Firm
                    
                    F-3Financial
      Statements:Consolidated
      Balance Sheets as of August 31, 2009 and 2008
                    
                    F-5Consolidated
      Statements of Operations for the years endedAugust
      31, 2009 and 2008
                    
                    F-6Consolidated
      Statement of Changes in Stockholders’ Equity/ (Deficit)for
      the years ended August 31, 2009 and 2008
                    
                    F-7Consolidated
      Statements of Cash Flows for the years endedAugust
      31, 2009 and 2008
                    
                    F-8Notes
      to Consolidated Financial Statements
                    
                    F-9
      - F-27


F-2








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of:
 SheerVision,
Inc.
 
 We have
audited the accompanying consolidated balance sheets of SheerVision, Inc. and
Subsidiary as of August 31, 2009, and the related consolidated statements of
operations, changes in stockholders' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of SheerVision, Inc. and
Subsidiary as of August 31, 2008 were audited by other auditors whose report
dated November 21, 2008, expressed an unqualified opinion on those financial
statements.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and performthe
audit to obtain reasonable assurance about whether the 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 audit included consideration of 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 financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Sheer Vision, Inc. and Subsidiary
as of August 31, 2009, and the results of its operations and its cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed inNote 2 to the financial
statements, the Company has a net loss of $71,376 for the year ended August 31,
2009; and a working capital deficit of $728,819, an accumulated deficit of
$5,592,201 and a stockholders' deficit of $593,838 at August 31, 2009. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plan in regards to these matters is also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
  Berman &
Company, P.A.
    Boca
Raton, Florida
 December
11, 2009


F-3




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board of
Directors and Shareholders.
 SheerVision.
Inc. and Subsidiary
 
 We have
audited the accompanying consolidated balance sheet of SheerVision, Inc. (the
“Company”) and Subsidiary, as of August 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity (deficiency), 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 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 controls over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purposes of’ expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall 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 consolidated financial position of SheerVision,
Inc. as of August 31, 2008 and 2007 and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  The Company had
negative cash flow from operations of $245,569, negative working capital of
$411,318 and an accumulated deficit of $5,228,744 at August 31, 2008, and
recurring losses from operations.  These factors, among others, raise
doubt about the Company’s ability to continue as a going
concern.  Management’s plans regarding these matters are also
described in Note l.  The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 /s/
      Miller, Ellin & Company, LLPMILLER
      ELLIN & COMPANY, LLP
 
 New York,
New York
 November
21, 2008





F-4


SheerVision,
Inc. and Subsidiary


Consolidated Balance
Sheets





August 31, 2009
                    
                    
                    August 31, 2008AssetsAssets:Cash
                    
                    $
                    17,651
                    
                    
                    $
                    111,887Accounts
      receivable
                    
                    
                    257,616
                    
                    
                    
                    399,950Inventory
                    
                    
                    339,663
                    
                    
                    
                    254,052Prepaid
      expenses and other current assets
                    
                    
                    87,654
                    
                    
                    
                    45,387Total
      Current Assets
                    
                    
                    702,584
                    
                    
                    
                    811,276Property
      and equipment - net
                    
                    
                    134,981
                    
                    
                    
                    141,894Intangible
      assets - net
                    
                    
                    -
                    
                    
                    
                    7,520Total
      Assets
                    
                    $
                    837,565
                    
                    
                    $
                    960,690Liabilities and Stockholders'
      DeficitLiabilities:Accounts
      payable
                    
                    $
                    415,838
                    
                    
                    $
                    423,180Accrued
      expenses and other current liabilities
                    
                    
                    77,184
                    
                    
                    
                    84,269Line
      of credit
                    
                    
                    75,000
                    
                    
                    
                    150,000Accrued
      dividends - Series A convertible preferred stock
                    
                    
                    804,813
                    
                    
                    
                    565,145Derivative
      liabilities - warrants
                    
                    
                    58,568
                    
                    
                    
                    -Total
      Current Liabilities
                    
                    
                    1,431,403
                    
                    
                    
                    1,222,594Stockholders'
      Deficit:Preferred
      stock, Series A, 9% cumulative convertible, ($0.001 par
      value,  $10 per share stated value, liquidation preference of
      $3,449,023,  350,000 shares authorized, 264,421 and 266,296
      issued and outstanding)
                    
                    
                    264
                    
                    
                    
                    266Common
      stock, ($0.001 par value, 90,000,000 shares authorized, 12,756,023 and
      12,735,190 shares issued and outstanding)
                    
                    
                    12,756
                    
                    
                    
                    12,735Additional
      paid in capital
                    
                    
                    4,985,343
                    
                    
                    
                    4,953,839Accumulated
      deficit
                    
                    
                    (5,592,201
                    )
                    
                    
                    (5,228,744
                    )Total
      Stockholders' Deficit
                    
                    
                    (593,838
                    )
                    
                    
                    (261,904
                    )Total
      Liabilities and Stockholders' Deficit
                    
                    $
                    837,565
                    
                    
                    $
                    960,690




See
accompanying notes to financial statements


F-5


SheerVision,
Inc. and Subsidiary


Consolidated
Statements of Operations





For
      the Years Ended August 31,2009
                
                
                2008Sales
      - net
                
                $
                3,499,407
                
                
                $
                4,417,887Cost
      of sales
                
                
                1,323,498
                
                
                
                1,664,101Gross
      profit
                
                
                2,175,909
                
                
                
                2,753,786Operating
      expenses:General
      and administrative
                
                
                1,426,980
                
                
                
                1,894,371Selling
      and marketing
                
                
                904,655
                
                
                
                1,081,425Total
      operating expenses
                
                
                2,331,635
                
                
                
                2,975,796Loss
      from operations
                
                
                (155,726
                )
                
                
                (222,010
                )Other
      income (expense)Interest
      income
                
                
                458
                
                
                
                4,320Other
      income
                
                
                126,797
                
                
                
                -Interest
      expense
                
                
                (8,784
                )
                
                
                (5,918
                )Impairment
      loss
                
                
                (15,577
                )
                
                
                -Change
      in fair value of derivative liabilities - warrants
                
                
                (18,544
                )
                
                
                -Total
      other income - net
                
                
                84,350
                
                
                
                (1,598
                )Net
      loss
                
                $
                (71,376
                )
                
                $
                (223,608
                )Less:
      Preferred stock dividends - Series A convertible preferred
      stock
                
                
                (239,668
                )
                
                
                (240,774
                )Net
      loss applicable to common shareholders
                
                $
                (311,044
                )
                
                $
                (464,382
                )Net
      loss per common share - basic and diluted
                
                $
                (0.02
                )
                
                $
                (0.04
                )Weighted
      average number of common shares outstanding during the year - basic and
      diluted
                
                
                12,751,114
                
                
                
                12,721,720





See
accompanying notes to financial statements


F-6





SheerVision,
Inc. and Subsidiary


Consolidated
Statement of Changes in Stockholders' Equity/(Deficit)


For the Years Ended August
31, 2009 and 2008





Preferred
      Stock, $0.001 Par Value
                    
                    
                    Common
      Stock, $0.001 Par Value
                    
                    
                    Additional
                    
                    
                    Accumulated
                    
                    
                    Stockholders'Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Paid
      in Capital
                    
                    
                    Deficit
                    
                    
                    Equity/(Deficit)Balance,
      August 31, 2007
                    
                    
                    270,046
                    
                    
                    $
                    270
                    
                    
                    
                    12,693,523
                    
                    
                    $
                    12,694
                    
                    
                    $
                    4,857,051
                    
                    
                    $
                    (4,764,363
                    )
                    
                    $
                    105,652Conversion
      of preferred stock
                    
                    
                    (3,750
                    )
                    
                    
                    (4
                    )
                    
                    
                    41,667
                    
                    
                    
                    41
                    
                    
                    
                    (37
                    )
                    
                    
                    -
                    
                    
                    
                    -Share
      based payment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    96,825
                    
                    
                    
                    -
                    
                    
                    
                    96,825Dividends
      accrued on preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (240,774
                    )
                    
                    
                    (240,774
                    )Net
      loss, 2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (223,607
                    )
                    
                    
                    (223,607
                    )Balance,
      August 31, 2008
                    
                    
                    266,296
                    
                    
                    
                    266
                    
                    
                    
                    12,735,190
                    
                    
                    
                    12,735
                    
                    
                    
                    4,953,839
                    
                    
                    
                    (5,228,744
                    )
                    
                    
                    (261,904
                    )Conversion
      of preferred stock
                    
                    
                    (1,875
                    )
                    
                    
                    (2
                    )
                    
                    
                    20,833
                    
                    
                    
                    21
                    
                    
                    
                    (19
                    )
                    
                    
                    -
                    
                    
                    
                    -Share
      based payment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    19,134
                    
                    
                    
                    -
                    
                    
                    
                    19,134Reclassification
      of derivative liability at fair value in connection with expiration of
      warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,389
                    
                    
                    
                    -
                    
                    
                    
                    12,389Recognition
      of derivative liability related to adoption of FASB ASC
      815-40-15
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (52,413
                    )
                    
                    
                    (52,413
                    )Dividends
      accrued on preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (239,668
                    )
                    
                    
                    (239,668
                    )Net
      loss, 2009
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (71,376
                    )
                    
                    
                    (71,376
                    )Balance,
      August 31, 2009
                    
                    
                    264,421
                    
                    
                    $
                    264
                    
                    
                    
                    12,756,023
                    
                    
                    $
                    12,756
                    
                    
                    $
                    4,985,343
                    
                    
                    $
                    (5,592,201
                    )
                    
                    $
                    (593,838
                    )




See
accompanying notes to financial statements




F-7





SheerVision,
Inc. and Subsidiary


Consolidated Statements of
Cash Flows





For
      the Years Ended August 31,2009
                    
                    
                    2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss)
                    
                    $
                    (71,376
                    )
                    
                    $
                    (223,608
                    )Adjustments
      to reconcile net (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                    
                    
                    45,195
                    
                    
                    
                    34,346Stock
      based compensation
                    
                    
                    19,134
                    
                    
                    
                    96,825Impairment
      loss
                    
                    
                    15,577
                    
                    
                    
                    -Change
      in fair value of derivative liabilities - warrants
                    
                    
                    18,544
                    
                    
                    
                    -Changes
      in operating assets and liabilities:(Increase)
      Decrease in:Accounts
      receivable
                    
                    
                    142,334
                    
                    
                    
                    (349,553
                    )Inventory
                    
                    
                    (85,611
                    )
                    
                    
                    87,167Prepaid
      expenses and other current assets
                    
                    
                    (42,267
                    )
                    
                    
                    27,777Increase
      (Decrease) in:Accounts
      payable
                    
                    
                    (7,342
                    )
                    
                    
                    86,167Accrued
      expenses and other current liabilities
                    
                    
                    (7,085
                    )
                    
                    
                    (4,690
                    )Net
      Cash Provided by (Used in) Operating Activities
                    
                    
                    27,103
                    
                    
                    
                    (245,569
                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
                    
                    
                    (46,339
                    )
                    
                    
                    (57,806
                    )Net
      Cash Used in Investing Activities
                    
                    
                    (46,339
                    )
                    
                    
                    (57,806
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from line of credit
                    
                    
                    -
                    
                    
                    
                    150,000Repayment
      on line of credit
                    
                    
                    (75,000
                    )
                    
                    
                    -Net
      Cash Provided by (Used in) Financing Activities
                    
                    
                    (75,000
                    )
                    
                    
                    150,000Net
      Decrease in Cash
                    
                    
                    (94,236
                    )
                    
                    
                    (153,375
                    )Cash
      and Cash Equivalents - Beginning of Year
                    
                    
                    111,887
                    
                    
                    
                    265,262Cash
      and Cash Equivalents - End of Year
                    
                    $
                    17,651
                    
                    
                    $
                    111,887SUPPLEMENTARY CASH FLOW
      INFORMATION:Cash
      paid during the period for:Income
      taxes
                    
                    $
                    2,400
                    
                    
                    $
                    1,600Interest
                    
                    $
                    9,986
                    
                    
                    $
                    -SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND
      FINANCING ACTIVITIES:Accrued
      preferred stock dividends - Series A convertible preferred
      stock
                    
                    $
                    239,668
                    
                    
                    $
                    240,774Issuance
      of common stock in connection with conversion of Series A convertible
      preferred stock
                    
                    $
                    21
                    
                    
                    $
                    41Recognition
      of derivative liability related to adoption of FASB ASC
      815-40-15
                    
                    $
                    52,413
                    
                    
                    $
                    -Reclassification
      of derivative liability at fair value in connection with expiration of
      warrants
                    
                    $
                    12,389
                    
                    
                    $
                    -





See
accompanying notes to financial statements


F-8


SheerVision,
Inc. and Subsidiary


Notes
to Consolidated Financial Statements


August 31, 2009 and
2008





Note 1 Organization, Nature
of Operations and Summary of Significant Accounting Policies





SheerVision,
Inc. (the “Company”), a Delaware corporation, designs and sells surgical loupes,
light systems and related optical products for the dental, medical and
veterinary markets.





Principles
of Consolidation





All
significant intercompany accounts and transactions have been eliminated in
consolidation.





Risks
and Uncertainties





The
Company operates in an industry that is subject to intense competition and rapid
technological change and is in a state of fluctuation as a result of the credit
crisis occurring in the United States.  The Company's operations are
subject to significant risk and uncertainties including financial, operational,
technological, and regulatory risks including the potential risk of business
failure.





Also, see
Note 2 regarding going concern matters.





Use
of Estimates





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires 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 revenues and expenses during the reporting
period.





Such
estimates and assumptions impact, among others, the following: the estimated
useful lives for property and equipment, the fair value of warrants granted in
connection with various financing transactions, share-based payments, and the
fair value of derivative liabilities.





Making
estimates requires management to exercise significant judgment. It is at least
reasonably possible that the estimate of the effect of a condition, situation or
set of circumstances that existed at the date of the financial statements, which
management considered in formulating its estimate could change in the near term
due to one or more future confirming events. Accordingly, the actual results
could differ significantly from estimates.


F-9


SheerVision,
Inc. and Subsidiary


Notes
to Consolidated Financial Statements


August 31, 2009 and
2008





Cash
and Cash Equivalents





The
Company considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents.  There were no cash
equivalents at August 31, 2009 or 2008, respectively.





The
Company minimizes its credit risk associated with cash by periodically
evaluating the credit quality of its primary financial institution. The balance
at times may exceed federally insured limits. At August 31, 2009 and 2008,
respectively, the balance did not exceed the federally insured
limit.





Accounts
Receivable and Allowance for Doubtful Accounts





Accounts
receivable represent balances due from customers for the sale of the Company’s
products. An allowance for doubtful accounts is provided for those accounts
receivable considered to be potentially uncollectible, based upon historical
experience and management’s evaluation of outstanding accounts receivable at
each reporting period. At August 31, 2009 and 2008, respectively, there was no
allowance required.





Inventory





Inventory is valued at the lower of
cost or market, determined on a first-in, first-out basis. At August 31, 2008,
inventory consisted of finished goods and raw materials. At August 31, 2009, the
Company only purchased inventory as finished goods and no longer carries raw
materials as inventory.  Because of the technical nature of the
products, the Company may be exposed to a number of factors that could result in
portions of its inventory becoming either obsolete or in excess of anticipated
usage. These factors include, but are not limited to, technological changes in
its markets, competitive pressures in products and prices, and the introduction
of new product lines. The Company regularly evaluates its ability to realize the
value of its inventory based on a combination of factors, including historical
usage rates, forecasted sales, product life cycles, and market acceptance of new
products. When inventory that is obsolete or in excess of anticipated usage is
identified, it is written down to its net realizable value or an inventory
valuation reserve is established.





For the
years ended August 31, 2009 and 2008, respectively, the Company did not record
any write-downs to net realizable value for obsolescence.




Property
and Equipment





Property
and equipment are stated at cost and are being depreciated using the
straight-line method over the estimated useful lives of the related
assets.


F-10


SheerVision,
Inc. and Subsidiary


Notes
to Consolidated Financial Statements


August 31, 2009 and
2008





Long
Lived Assets





The
Company carries long-lived assets at the lower of their carrying amount or their
fair value. The Company periodically review the carrying values of its
long-lived assets when events or changes in circumstances indicate that it is
more likely than not that their carrying values may exceed their fair values,
and record an impairment charge when considered necessary.





When
circumstances indicate that an impairment may have occurred, the Company tests
such assets for recoverability by comparing the estimated undiscounted future
cash flows expected to result from the use of such assets and their eventual
disposition to their carrying amounts. If the undiscounted future cash flows are
less than the carrying amount of the asset, an impairment loss, measured as the
excess of the carrying value of the asset over its estimated fair value, is
recognized. Fair value, for purposes of calculating impairment, is measured
based on estimated future cash flows, discounted at a market rate of
interest.





Warrants
and Derivative Liabilities





The
Company reviews any common stock purchase warrants and other freestanding
derivative financial instruments at each balance sheet date and will classify on
the balance sheet as:




a)
            Equity
      if they (i) require physical settlement or net-share settlement, or
      (ii) gives the Company a choice of net-cash settlement or
      settlement in its own shares (physical settlement or net-share
      settlement), or as




b)
            Assets
      or liabilities if they (i) require net-cash settlement (including a
      requirement to net cash settle the contract if an event occurs and if that
      event is outside the Company’s control),
      or (ii) give the counterparty a choice of net-cash settlement or
      settlement in shares (physical settlement or net-share
      settlement).




The
Company assesses classification of its common stock purchase warrants and
other freestanding derivatives at each reporting date to determine whether a
change in classification between assets and liabilities is
required.





Fair
Value of Financial Instruments





The
carrying amounts of the Company’s short-term financial instruments, including
the Company’s current assets (exclusive of cash) and current liabilities,
approximate fair value due to the relatively short period to maturity for these
instruments.


F-11


SheerVision,
Inc. and Subsidiary


Notes
to Consolidated Financial Statements


August 31, 2009 and
2008





Revenue
Recognition





The
Company’s surgical loupes and lighting products need no installation and are
ready for use upon receipt by the customer.





The
Company records revenue when all of the following have occurred: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred, (3) the sales
price to the customer is fixed or determinable, and (4) collectibility is
reasonably assured.  Products sold are delivered by shipments made through
common carrier and revenue is recognized upon shipment to the customer. 
Discounts and sales incentives are recognized as a reduction of revenue at the
time of sale.  The Company offers an unconditional satisfaction guarantee
for a 30 day period and permits product returns within 30 days of purchase, at
which time returns are accepted and refunds are made.  Historically,
returns have been minimal. The Company has determined that recognition of
revenue on the date of shipment is appropriate, given that no history or
material trends have developed associated with returns.  As a result,
management has determined that no reserve is required. Shipping charges and
special orders are nonrefundable.





Cost
of Sales





Cost of
sales represents costs directly related to the production and sale of the
Company’s products. Primary costs include direct labor, finished goods and
supplies.





Advertising





Costs
incurred for producing and communicating advertising of the Company are charged
to operations as incurred. Advertising expense has been included in the
statement of operations as a component of general and administrative expense.
Advertising expense for the years ended August 31, 2009 and 2008, were $12,639
and $77,495, respectively.





Income
Taxes





The
Company accounts for income taxes under the liability
method.  Deferred income tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.





The
Company uses a two-step approach to recognizing and measuring uncertain tax
positions. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates it is more likely than
not, that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step is to measure
the tax benefit as the largest amount, which is more than 50% likely of being
realized upon ultimate settlement. The Company considers many factors when
evaluating and estimating our tax positions and tax benefits, which may require
periodic adjustments.  At August 31, 2009 and 2008, respectively, the
Company did not record any liabilities for uncertain tax
positions.


F-12


SheerVision,
Inc. and Subsidiary


Notes
to Consolidated Financial Statements


August 31, 2009 and
2008





Earnings
per Share





Basic
earnings per share (“EPS”) is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the period, excluding the effects of any potentially dilutive securities.
Diluted EPS gives effect to all dilutive potential of shares of common stock
outstanding during the period including stock options or warrants, using the
treasury stock method (by using the average stock price for the period to
determine the number of shares assumed to be purchased from the exercise of
stock options or warrants), and convertible debt or convertible preferred stock,
using the if-converted method. Diluted EPS excludes all dilutive potential of
shares of common stock if their effect is anti-dilutive.




The
computation of basic and diluted loss per share for the years ended August 31,
2009 and 2008 excludes the following potentially dilutive securities because
their inclusion would be anti-dilutive due to the Company’s net loss during the
period:




August 31, 2009
                                
                                
                                August 31, 2008Convertible
      preferred stock
                                
                                
                                2,938,011
                                
                                
                                
                                2,958,844Stock
      options
                                
                                
                                386,000
                                
                                
                                
                                511,000Stock
      warrants
                                
                                
                                977,276
                                
                                
                                
                                1,488,989Total
      common stock equivalents
                                
                                
                                4,301,287
                                
                                
                                
                                4,958,833





Segment
Information





During
the fiscal years 2009 and 2008, respectively, the Company only operated in one
segment; therefore, segment information has not been presented.





Share
Based Payments





Generally,
all forms of share-based payments, including stock option grants, restricted
stock grants and stock appreciation rights, are measured at their fair value on
the awards’ grant date, and based on the estimated number of awards that are
ultimately expected to vest. Share-based payment awards issued to non-employees
for services rendered are recorded at either the fair value of the services
rendered or the fair value of the share-based payment, whichever is more readily
determinable. The expense resulting from share-based payments are recorded as a
component of general and administrative expense.


F-13


SheerVision,
Inc. and Subsidiary


Notes
to Consolidated Financial Statements


August 31, 2009 and
2008


Recent
Accounting Pronouncements
 
 In
September 2009, the FASB issued Update No. 2009-13, “Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU
2009-13). It updates the existing multiple-element revenue arrangements guidance
currently included under ASC 605-25, which originated primarily from the
guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (EITF 00-21). The revised guidance primarily provides two
significant changes: 1) eliminates the need for objective and reliable evidence
of the fair value for the undelivered element in order for a delivered item to
be treated as a separate unit of accounting, and 2) eliminates the residual
method to allocate the arrangement consideration. In addition, the guidance also
expands the disclosure requirements for revenue recognition. ASU 2009-13 will be
effective for the first annual reporting period beginning on or after
June 15, 2010, with early adoption permitted provided that the revised
guidance is retroactively applied to the beginning of the year of adoption. The
Company is currently assessing the future impact of this new accounting update
to its financial statements.
 
 Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting
Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards
Codification(the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with U.S.
GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants.
All guidance contained in the Codification carries an equal level of authority.
The Codification superseded all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature not
included in the Codification is non-authoritative. The FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASUs”). The FASB will not consider ASUs as authoritative in their own right.
ASUs will serve only to update the Codification, provide background information
about the guidance and provide the bases for conclusions on the change(s) in the
Codification. References made to FASB guidance throughout this document have
been updated for the Codification.
 
 Effective
July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments
to ASC 820-10, Fair Value
Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. ASU 2009-05 provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using certain techniques. ASU
2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in
an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are required are
Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material
impact on the Company’s results of operations or financial
condition.
  F-14
 
 Effective
June 30, 2009, the Company adopted three accounting standard updates which
were intended to provide additional application guidance and enhanced
disclosures regarding fair value measurements and impairments of securities.
They also provide additional guidelines for estimating fair value in accordance
with fair value accounting. The first update, as codified in ASC 820-10-65,
provides additional guidelines for estimating fair value in accordance with fair
value accounting. The second accounting update, as codified in ASC 320-10-65,
changes accounting requirements for other-than-temporary-impairment
(OTTI) for debt securities by replacing the current requirement that a
holder have the positive intent and ability to hold an impaired security to
recovery in order to conclude an impairment was temporary with a requirement
that an entity conclude it does not intend to sell an impaired security and it
will not be required to sell the security before the recovery of its amortized
cost basis. The third accounting update, as codified in ASC 825-10-65, increases
the frequency of fair value disclosures. These updates were effective for fiscal
years and interim periods ended after June 15, 2009. The adoption of these
accounting updates did not have a material impact on the Company’s financial
statements.
 
 Effective
June 30, 2009, the Company adopted a new accounting standard for subsequent
events, as codified in ASC 855-10. The update modifies the names of the two
types of subsequent events either as recognized subsequent events (previously
referred to in practice as Type I subsequent events) or non-recognized
subsequent events (previously referred to in practice as Type II subsequent
events). In addition, the standard modifies the definition of subsequent events
to refer to events or transactions that occur after the balance sheet date, but
before the financial statements are issued (for public entities) or available to
be issued (for nonpublic entities). It also requires the disclosure of the date
through which subsequent events have been evaluated. The update did not result
in significant changes in the practice of subsequent event disclosures, and
therefore the adoption did not have a material impact on the Company’s financial
statements.
 
 Effective
January 1, 2009, the Company adopted an accounting standard update
regarding the determination of the useful life of intangible assets. As codified
in ASC 350-30-35, this update amends the factors considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under intangibles accounting. It also requires a
consistent approach between the useful life of a recognized intangible asset
under prior business combination accounting and the period of expected cash
flows used to measure the fair value of an asset under the new business
combinations accounting (as currently codified under ASC 850). The update also
requires enhanced disclosures when an intangible asset’s expected future cash
flows are affected by an entity’s intent and/or ability to renew or extend the
arrangement. The adoption did not have a material impact on the Company’s
financial statements.
 
 Effective
January 1, 2009, the Company adopted a new accounting standard update
regarding business combinations. As codified under ASC 805, this update requires
an entity to recognize the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair value on the
acquisition date. It further requires that acquisition-related costs be
recognized separately from the acquisition and expensed as incurred; that
restructuring costs generally be expensed in periods subsequent to the
acquisition date; and that changes in accounting for deferred tax asset
valuation allowances and acquired income tax uncertainties after the measurement
period be recognized as a component of provision for taxes. The adoption did not
have a material impact on the Company’s financial statements.
  In
February 2008, the FASB issued an accounting standard update that delayed
the effective date of fair value measurements accounting for all non-financial
assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), until the beginning of the first quarter of fiscal 2009. These
include goodwill and other non-amortizable intangible assets. The Company
adopted this accounting standard update effective January 1, 2009. The
adoption of this update to non-financial assets and liabilities, as codified in
ASC 820-10, did not have a material impact on the Company’s financial
statements.





Reclassifications





Certain
amounts in the fiscal year 2008 financial statements have been reclassified to
conform to the fiscal year 2009 presentation.  The results of these
reclassifications did not materially affect financial position, results of
operations or cash flows.


F-15


SheerVision,
Inc. and Subsidiary


Notes
to Consolidated Financial Statements


August 31, 2009 and
2008





Note 2 Going
Concern





As
reflected in the accompanying financial statements, the Company has a net loss
of $71,376 for the year ended August 31, 2009, a working capital deficit of
$728,819, an accumulated deficit of $5,592,201 and a stockholders’ deficit of
$593,838 at August 31, 2009.





For the
year ended August 31, 2009, the Company had net cash provided by operating
activities; however, the Company does not yet have history of financial
stability or sources of cash that can be relied upon to sustain operations for
current and expected future growth.  The Company also has accrued
dividends; however, there is insufficient cash available to pay these holders of
the Series A convertible preferred stock.





These
factors, among others, raise doubt about the Company’s ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments related to recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.





In
response to these problems, management has taken the following
actions:




·
            the
      Company is expanding its revenue base beyond direct sales to OEM, original
      equipment manufacturing, and third party sales in the international and
      medical/surgical markets;




·
            the
      Company is aggressively signing up new international
      distributors;




·
            the
      Company is seeking third party debt and/or equity
    financing;




·
            the
      Company is cutting operating costs;
and




·
            the
      Company is currently negotiating an extension on its line of
      credit.





Note 3 Fair
Value




The
Company has categorized its assets and liabilities recorded at fair value
based upon the fair value hierarchy specified by GAAP.




The
levels of fair value hierarchy are as follows:




·
            Level
      1 inputs utilize unadjusted quoted prices in active markets for identical
      assets or liabilities that the Company has the ability to
      access;




·
            Level
      2 inputs utilize other-than-quoted prices that are observable, either
      directly or indirectly. Level 2 inputs include quoted prices for similar
      assets and liabilities in active markets, and inputs such as interest
      rates and yield curves that are observable at commonly quoted intervals;
      and




·
            Level
      3 inputs are unobservable and are typically based on the
      Company’s own assumptions, including situations where there is
      little, if any, market
activity.


F-16


SheerVision,
Inc. and Subsidiary
 Notes
to Consolidated Financial Statements
 August 31, 2009 and
2008


In
certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, the Company categorizes such
financial asset or liability based on the lowest level input that is significant
to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and considers factors
specific to the asset or liability.




Both
observable and unobservable inputs may be used to determine the fair value of
positions that are classified within the Level 3 category. As a result, the
unrealized gains and losses for assets within the Level 3 category
presented in the tables below may include changes in fair value that were
attributable to both observable and unobservable inputs.




The
following are the major categories of liabilities measured at fair value on a
nonrecurring basis during the year ended August 31, 2009, using quoted prices in
active markets for identical liabilities (Level 1); significant other
observable inputs (Level 2); and significant unobservable inputs
(Level 3):




Level 1:
                  Quoted Prices in
                  Active Markets
                  for Identical
                  Liabilities
                
                
                Level 2:
                  Significant Other
                  Observable Inputs
                
                
                Level 3:
                  Significant
                  Unobservable
                  Inputs
                
                
                Total at August
                  31, 2009Derivative
      Liabilities
                
                $
                -
                
                
                $
                -
                
                
                $
                58,568
                
                
                $
                58,568Total
                
                $
                -
                
                
                $
                -
                
                
                $
                58,568
                
                
                $
                58,568





There
were no instruments requiring a fair value classification at August 31,
2008.





Note 4
Inventory





Inventory
consisted of the following at August 31, 2009 and 2008:





August 31, 2009
                      
                      
                      August 31, 2008Finished
      goods
                      
                      $
                      339,663
                      
                      
                      $
                      249,802Raw
      materials
                      
                      
                      -
                      
                      
                      
                      4,250Total
                      
                      $
                      339,663
                      
                      
                      $
                      254,052





Note 5 Property and
Equipment





At August
31, 2009 and 2008, respectively, property and equipment consisted of the
following:


F-17


SheerVision,
Inc. and Subsidiary


Notes
to Consolidated Financial Statements


August 31, 2009 and
2008




Estimated
                            Useful
                            Lives
                          
                          August 31, 2009
                            (audited)
                          
                          
                          August 31. 2008
                            (audited)Manufacturing
      equipment
                          
                          7
      years
                          
                          $
                          183,491
                          
                          
                          $
                          148,640Office
      and computer equipment
                          
                          5
      years
                          
                          
                          43,218
                          
                          
                          
                          49,437Leasehold
      improvement
                          
                          15
      years
                          
                          
                          7,179
                          
                          
                          
                          7,179233,888
                          
                          
                          
                          205,256Less:
      accumulated depreciation
                          
                          
                          
                          
                          (98,907
                          )
                          
                          
                          (63,362
                          )Property
      and equipment - net
                          
                          
                          
                          $
                          134,981
                          
                          
                          $
                          141,894





Depreciation
expense for the years ended August 31, 2009 and 2008 amounted to $44,142 and
$34,346, respectively.





During
the years ended August 31, 2009 and 2008, the Company recorded an
impairment charge of $9,110 and $0, respectively.





Note 6 Intangible
Assets





During
the year ended August 31, 2007, the Company filed for patent protection with the
United States Patent and Trademark Office for certain developed technologies.
The Company used this patent to produce a product line for the Company. At
August 31, 2009, it was determined that a new design for the patented product
was working sufficiently well to end production of a previously patented
design.





Amortization
expense for the years ended August 31, 2009 and 2008 amounted to $1,053 and
$1,042, respectively.





During
the years ended August 31, 2009 and 2008, the Company recorded an
impairment charge of $6,467 and $0, respectively.





Note 7 Line of Credit
Payable





On March
25, 2008, the Company entered into an agreement with a third-party shareholder
of the Company providing for a line of credit to the Company of up to $300,000
with interest of 9%. The agreement provided that principal and interest on
amounts borrowed against the line of credit are due nine months from the date of
the execution of the agreement or earlier upon the occurrence of an event of
default. The maturity date of the line of credit has subsequently been extended
through October 19, 2009.  The line of credit is secured by a first
priority security interest in the Company’s inventory and accounts receivable.
Additionally, the agreement provided the lender with an option to receive a
warrant exercisable for up to 600,000 shares of the Company’s common stock
(depending on the amount loaned) at an exercise price of $0.075 per share and
subsequently the Company provided the lender with an additional option to
receive a warrant exercisable for 75,000 shares of the Company’s common stock at
an exercise price of $0.075 per share.


F-18


SheerVision,
Inc. and Subsidiary
 Notes
to Consolidated Financial Statements
 August 31, 2009 and
2008


In March
2008, the Company borrowed $150,000 under the line of credit.  On
December 19, 2008, the Company repaid $84,986 of principal and accrued interest
due under the Company’s line of credit, reducing the principal due to
$75,000.




As of
August 31, 2009, the outstanding balance on the line of credit was $79,716,
whichincludes accrued interest of $4,716. On September 19, 2009, the maturity
date was extended to October 19, 2009, pending the negotiation of a new
agreement. A new agreement has not been signed and the line of credit agreement
is in default. The Company is renegotiating the terms of the line of credit and
expects to resolve this situation during December 2009.




Note 8 Commitments and
Contingencies





(A)
Litigations, Claims and Assessments





From time
to time, the Company may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm its business.





In
December 2008, the Company received $126,797 from an insurance carrier for a
previously settled lawsuit, representing a reimbursement of legal
fees.





(B)
Operating Lease





The
Company leases office space under a non-cancelable operating lease, expiring in
June 2014.





Future
minimum annual rental payments are as follows:





Fiscal
      Year Ended August 31,2010
                  
                  $
                  77,4972011
                  
                  
                  77,4972012
                  
                  
                  77,4972013
                  
                  
                  77,4972014
                  
                  
                  64,581Total
      minimum lease payments
                  
                  $
                  374,569





Rent
expense for the years ended August 31, 2009 and 2008 was $58,792 and $52,464,
respectively.


F-19


SheerVision,
Inc. and Subsidiary
 Notes
to Consolidated Financial Statements
 August 31, 2009 and
2008


Note 9 Stockholders’
Deficit





(A)
Common Stock Issuances





During
the year ended August 31, 2008, 3,750 shares of preferred stock were converted
into 41,667 shares of common stock. The conversion price was determined by
taking the stated value of $10 per share and dividing by a conversion price of
$0.90 per share. The transaction was accounted for at par value with no
resulting gain or loss on conversion.





During
the year ended August 31, 2009, 1,875 shares of preferred stock were converted
into 20,833 shares of common stock. The conversion price was determined by
taking the stated value of $10 per share and dividing by a conversion price of
$0.90 per share. The transaction was accounted for at par value with no
resulting gain or loss on conversion.





(B)
Warrants and Derivative Liabilities





The
following is a summary of the Company’s warrant activity:





Warrants
                        
                        
                        Weighted Average Exercise PriceOutstanding
      – August 31, 2007
                        
                        
                        1,488,989
                        
                        
                        $
                        0.53Granted
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      – August 31, 2008
                        
                        
                        1,488,989
                        
                        
                        $
                        0.53Granted
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (511,713
                        )
                        
                        $
                        1.00Outstanding
      – August 31, 2009
                        
                        
                        977,276
                        
                        
                        $
                        0.28Exercisable
      –August 31, 2009
                        
                        
                        977,276
                        
                        
                        $
                        0.28





Warrants Outstanding
                          
                          
                          Warrants ExercisableRange of
                            exercise price
                          
                          
                          Number
                            Outstanding
                          
                          
                          Weighted
                            Average
                            Remaining
                            Contractual
                            Life (in years)
                          
                          
                          Weighted
                            Average
                            Exercise Price
                          
                          
                          Number
                            Exercisable
                          
                          
                          Weighted Average
                            Exercise Price$
                          0.28
                          
                          
                          
                          977,276
                          
                          
                          1.05
      years
                          
                          
                          $
                          0.28
                          
                          
                          
                          977,276
                          
                          
                          $
                          0.28





At August
31, 2009 and 2008, the total intrinsic value of warrants outstanding and
exercisable was $0 and $0, respectively.





The
Company issued warrants related to a debt offering in September 2005. The total
number of warrants issued was 977,276 inclusive of the 238,128 warrants paid to
a placement agent as a direct offering cost. The warrants have a five-year term.
The exercise price is $0.28.


F-20


SheerVision,
Inc. and Subsidiary
 Notes
to Consolidated Financial Statements
 August 31, 2009 and
2008


The
Company also issued 511,213 warrants related to a debt offering in April 2006.
These warrants expired on April 27, 2009 and May 7, 2009. As shown in the table
above, these warrants have been forfeited and are not exercisable.





In
connection with the adoption of EITF 07-05, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock,” (“EITF
07-05”) on January 1, 2009 (ASC 815-40-15), the Company determined that the
embedded conversion feature in the warrants (ratchet down of exercise price
based upon lower exercise price in future offerings) is not indexed to the
Company’s own stock and, therefore, is an embedded derivative financial
liability (the “Embedded Derivative”), which requires bifurcation and to be
separately accounted for pursuant to Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities (ASC
815-40-25).





The
Company measured the fair value of the outstanding September 2005 warrants using
a Black-Scholes valuation model based upon the effectiveness of EITF 07-5 (ASC
815-40-15), if effective, would have established a commitment date since these
warrants were not indexed to the Company’s own stock. As a result of the
application of ASC 815-40-15, the fair value of the 977,276 warrants was
determined to be $39,076 based upon the following management
assumptions:





Exercise
      price
                  
                  $
                  0.28Expected
      dividends
                  
                  
                  0
                  %Expected
      volatility
                  
                  
                  580.97
                  %Risk
      free interest rate
                  
                  
                  1.55
                  %Expected
      life of warrant in years
                  
                  
                  1.72Expected
      forfeitures
                  
                  
                  0
                  %





The fair
value of these warrants was charged to accumulated deficit on August 31, 2009 as
a cumulative adjustment due to a change in accounting principle.





The
Company measured the fair value of April 2006 warrants using a Black-Scholes
valuation model based upon the date in which EITF 07-5 (ASC 815-40-15), if
effective, would have established a commitment date since these warrants were
not indexed to the Company’s own stock. As a result of the application of ASC
815-40-15, the fair value of the 511,713 warrants was determined to be $13,337
based upon the following management assumptions:





Exercise
      price
                  
                  $
                  1.00Expected
      dividends
                  
                  
                  0
                  %Expected
      volatility
                  
                  
                  580.97
                  %Risk
      free interest rate
                  
                  
                  1.55
                  %Expected
      life of warrant in years
                  
                  
                  0.32
      – 0.35Expected
      forfeitures
                  
                  
                  0
                  %




F-21




SheerVision,
Inc. and Subsidiary
 Notes
to Consolidated Financial Statements
 August 31, 2009 and
2008
 The fair
value of these warrants was charged to accumulated deficit on August 31, 2009 as
a cumulative adjustment due to a change in accounting
principle.





Mark
to Market





At April
27, 2009 and May 7, 2009, the expiration dates of each tranche, the Company
remeasured the April 2006 warrants and recorded a fair value of $12,389 due to
these warrants expiring.  As a result of the remeasurement, the
Company recorded a change in fair value associated with these warrants as a gain
totaling $948 for the year ended August 31, 2009. The following management
assumptions were considered:





Exercise
      price
                  
                  $
                  1.00Expected
      dividends
                  
                  
                  0
                  %Expected
      volatility
                  
                  
                  641.28
      - 641.29
                  %Risk
      fee interest rate
                  
                  
                  1.87
      - 2.15
                  %Expected
      life of warrant in years
                  
                  
                  0Expected
      forfeitures
                  
                  
                  0
                  %





At August
31, 2009, the fair value of the April 2006 warrant derivative liability was
$12,389 and was reclassified to additional paid in capital due to the expiration
of the warrants in April and May 2009.





At August
31, 2009, the Company remeasured the September 2005 warrants and recorded a fair
value of $58,568.  As a result of the remeasurement, the Company
recorded a change in fair value associated with these warrants as a loss
totaling $19,492 for the year ended August 31, 2009. The following management
assumptions were considered:





Exercise
      price
                  
                  $
                  0.28Expected
      dividends
                  
                  
                  0
                  %Expected
      volatility
                  
                  
                  673.10
                  %Risk
      fee interest rate
                  
                  
                  2.39
                  %Expected
      life of warrant in years
                  
                  
                  1.07Expected
      forfeitures
                  
                  
                  0
                  %





(C)
Stock Options




The
Company maintains the SheerVision Inc. 2007 Stock Option Plan (the “Plan ”) and the SheerVision
Inc. 2007 Stock Option Plan for Independent and Non-Employee Directors (the
“Directors Plan ”).
The maximum number of shares reserved under the Plan and Directors Plan is
3,000,000 and 200,000 shares, respectively. Through August 31, 2009, the Company
has granted options for 661,000 shares and has had cancellations of 275,000
option shares under the Plan. As of August 31, 2009 and 2008, there were no
options outstanding under the Directors Plan.


F-22


SheerVision,
Inc. and Subsidiary
 Notes
to Consolidated Financial Statements
 August 31, 2009 and
2008





The
following is a summary of the Company’s stock option activity:





Options
                          
                          
                          Weighted Average Exercise PriceOutstanding
      – August 31, 2007
                          
                          
                          -
                          
                          
                          $
                          -Granted
                          
                          
                          661,000
                          
                          
                          
                          0.20Exercised
                          
                          
                          -
                          
                          
                          
                          -Forfeited
                          
                          
                          (150,000
                          )
                          
                          $
                          0.20Outstanding
      – August 31, 2008
                          
                          
                          511,000
                          
                          
                          $
                          0.20Granted
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          -
                          
                          
                          
                          -Forfeited
                          
                          
                          (125,000
                          )
                          
                          $
                          0.20Outstanding
      – August 31, 2009
                          
                          
                          386,000
                          
                          
                          $
                          0.20Exercisable
      – August 31, 2009
                          
                          
                          386,000
                          
                          
                          $
                          0.20Weighted
      average fair value of optionsgranted
      during the period endedAugust
      31, 2009
                          
                          
                          -
                          
                          
                          $
                          -Weighted
      average fair value of optionsexercisable
      at  August 31, 2009
                          
                          $
                          79,000
                          
                          
                          $
                          0.20





Options OutstandingRange of
                                exercise price
                              
                              
                              Number
                                Outstanding
                              
                              
                              Weighted
                                Average
                                Remaining
                                Contractual
                                Life (in years)
                              
                              
                              Weighted
                                Average
                                Exercise
                                Price$
                              0.20-$0.25
                              
                              
                              
                              386,000
                              
                              
                              8.58
      years
                              
                              
                              $
                              0.20





Options ExercisableRange of
                            exercise price
                          
                          
                          Number
                            Exercisable
                          
                          
                          Weighted
                            Average
                            Remaining
                            Contractual
                            Life (in years)
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price$
                          0.20-$0.25
                          
                          
                          
                          386,000
                          
                          
                          8.58
      years
                          
                          
                          $
                          0.20





At August
31, 2009 and 2008, the total intrinsic value of options outstanding and
exercisable was $0 and $0, respectively.


F-23


SheerVision,
Inc. and Subsidiary
 Notes
to Consolidated Financial Statements
 August 31, 2009 and
2008


The
following summarizes the activity of the Company’s stock options that have not
vested for the years ended August 31, 2009 and 2008:





Options
                            
                            
                            Weighted
                              Average
                              Grant Date
                              Fair ValueOutstanding
      – August 31, 2007
                            
                            
                            -
                            
                            
                            
                            -Granted
                            
                            
                            661,000
                            
                            
                            $
                            0.20Vested
                            
                            
                            (205,500
                            )
                            
                            
                            0.20Cancelled
      or forfeited
                            
                            
                            (150,000
                            )
                            
                            
                            0.20Outstanding
      – August 31, 2008
                            
                            
                            305,500
                            
                            
                            $
                            0.20Granted
                            
                            
                            -
                            
                            
                            
                            -Vested
                            
                            
                            (180,500
                            )
                            
                            
                            0.20Cancelled
      or forfeited
                            
                            
                            (125,000
                            )
                            
                            
                            0.20Outstanding
      –August 31, 2009
                            
                            
                            -
                            
                            
                            $
                            -





Total
share-based compensation cost expense for the years ended August 31, 2009
and 2008 for stock options granted amounted to $19,134 and $96,825,
respectively.  Total unrecognized share-based compensation expense
from non-vested stock options at August 31, 2009 and 2008 was $0 and $19,134,
respectively.





(D)
Convertible Preferred Stock





The
Company’s outstanding Series A, cumulative convertible preferred stock has the
following provisions, rights and preferences:





(1)
            Dividends


a.
            Dividends,
      at 9% per year, are payable on June 30 and September 30 each
      year.  If there are not sufficient funds to pay these dividends,
      the Company will continue to accrue until such funds are
      available.


b.
            Since
      inception, the Company has not had sufficient funds to pay the accrued
      dividends on the convertible preferred shares that were converted into
      common shares.  The accrued dividends remain as a current
      liability.


c.
            During
      the year ended August 31, 2009 and 2008, the Company accrued dividends on
      its preferred stock of $239,668 and $240,774, resulting in a cumulative
      balance of $804,813 and $565,145 in accrued
  dividends.


(2)
            Voting
      - voted with the common stock on an as converted basis based upon the
      number of shares of common stock into which the convertible preferred
      stock is convertible at the record date for any stockholder
      action.


(3)
            Stated
      value is $10 per share.


(4)
            Liquidation
      rights-convertible
      preferred stock holders are senior to any other classes of stock in
      liquidation. These will be paid equivalent to $10 per share
      plus accrued
      dividends.





F-24


SheerVision,
Inc. and Subsidiary
 Notes
to Consolidated Financial Statements
 August 31, 2009 and
2008





(5)
            Conversion
      rights


a.
            Series
      A Preferred Stock are convertible into shares of common stock at $0.90 per
      share, after giving effect to the stated value of $10 per share, subject
      to adjustment in certain anti-dilutive
events.


b.
            In
      the event that the closing price for the common shares shall equal or
      exceed 200% of the then effective conversion price for 15 of any 30
      immediately preceding consecutive trading days, the preferred stock shall
      convert automatically.




Note 10 Concentration of
Credit Risk





The
following tables represent the Company’s material concentrations:





(A)
            Accounts
      Receivable





Customer
                          
                          August 31, 2009
                          
                          August 31, 2008A
                          
                          59%
                          
                          86%





(B)
            Sales
      – net





Customer
                          
                          August 31, 2009
                          
                          August 31, 2008A
                          
                          38%
                          
                          21%





(C)
            Purchases


Vendor
                          
                          August 31, 2009
                          
                          August 31, 2008A
                          
                          19%
                          
                          18%B
                          
                          10%
                          
                          -





Note 11 Income
Taxes





The
Company recognized deferred tax assets and liabilities for both the expected
impact of differences between the financial statements and the tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax losses and tax credit carryforwards.  The Company will
establish a valuation allowance to reflect the likelihood of realization of
deferred tax assets.





The
Company has a net operating loss carryforward for tax purposes totaling
approximately $3,945,000 at August 31, 2009, expiring through 2029. There is a
limitation on the amount of taxable income that can be offset by carryforwards
after a change in control (generally greater than a 50% change in
ownership).  Temporary differences, which give rise to a net deferred
tax asset, are as follows:


F-25


SheerVision,
Inc. and Subsidiary
 Notes
to Consolidated Financial Statements
 August 31, 2009 and
2008
 Significant
deferred tax assets at August 31, 2009 and 2008 are as
follows:





2009
                      
                      
                      2008Gross
      deferred tax assets:Net
      operating loss carryforwards
                      
                      $
                      (1,549,000
                      )
                      
                      $
                      (1,537,000
                      )Total
      deferred tax assets
                      
                      
                      1,549,000
                      
                      
                      
                      1,537,000Less:
      valuation allowance
                      
                      
                      (1,549,000
                      )
                      
                      
                      (1,537,000
                      )Net
      deferred tax asset recorded
                      
                      $
                      -
                      
                      
                      $
                      -





The
valuation allowance at August 31, 2008 was approximately $1,537,000. The net
change in valuation allowance during the year ended August 31, 2009 was an
increase of approximately $12,000.  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 income tax assets will not be
realized.  The ultimate realization of deferred income 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 income tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment.   Based on consideration of these items, management
has determined that enough uncertainty exists relative to the realization of the
deferred income tax asset balances to warrant the application of a full
valuation allowance as of August 31, 2009.





The
actual tax benefit differs from the expected tax benefit for the years ended
August 31, 2009 and 2008 (computed by applying the U.S. Federal Corporate tax
rate of 34% to income before taxes and 8.8% for State income taxes, a blended
rate of 39.81%) as follows:





2009
                  
                  
                  2008Expected
      tax expense (benefit) – Federal
                  
                  $
                  (22,000
                  )
                  
                  $
                  (83,000
                  )Expected
      tax expense (benefit) – State
                  
                  
                  (6,000
                  )
                  
                  
                  (13,000
                  )Non-deductible
      stock compensation
                  
                  
                  8,000
                  
                  
                  
                  -Impairment
      loss
                  
                  
                  6,000
                  
                  
                  
                  -Meals
      and entertainment
                  
                  
                  2,000
                  
                  
                  
                  -Change
      in Valuation Allowance
                  
                  
                  12,000
                  
                  
                  
                  96,000Actual
      tax expense (benefit)
                  
                  $
                  -
                  
                  
                  $
                  -


F-26


SheerVision,
Inc. and Subsidiary
 Notes
to Consolidated Financial Statements
 August 31, 2009 and
2008


Note 12 Subsequent
Events





The
Company has evaluated for subsequent events between the balance sheet date of
August 31, 2009 and December 11, 2009, the date the financial statements were
issued and has
concluded that no recognized or non recognized subsequent events have
occurred.


F-27