The following discussion and analysis should be read in conjunction with our audited financial statements for each of the two years ended August 31, 2008 and 2007, 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 fundamental shift in our marketing strategy, focusing primarily on indirect domestic and international sales. In fiscal year 2008, we launched two domestic alliances, allowing us to grow sales by effectively leveraging the dedicated sales forces of these two large dental companies. In addition to the expected effect this change has had on our business, we believe that it has minimized our exposure to, and impact of, the current economic challenges currently facing other companies and industries.

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. In fiscal year 2008, we entered into a sales partnership agreement with a global detailer of quality dental and medical products, and continue to be approached by a number of international distributors. 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 in a targeted, more complimentary manner. 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 FireFly Infinity Ultra™ 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 company's product development.

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.

SheerVision loupes and our FireFly light system have also received an endorsement by a highly acclaimed and prestigious leading independent non-profit dental education and product testing foundation. Our Firefly light system is the only LED light system to receive the coveted "Highly Rated" designation.

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 realizability 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 Equuivalents

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

Cost of Goods Sold

Cost of goods sold consists of costs of raw materials and finished goods purchased from several manufacturers. Factors affecting our cost of goods sold include, but are not limited to, currency fluctuations as they relate to our foreign manufacturers and inflationary price increases.

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.

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.

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.

Income Taxes

We account for income taxes using the liability method as prescribed by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. 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.

Concentration of Credit Risk

We maintain cash balances with various financial institutions, which at times may exceed the Federal Deposit Insurance Corporation limit. We have not experienced any losses to date as a result of this policy and management believes that there is little risk of loss.

Basic and Diluted Loss Per Share

In accordance with the Financial Accounting Standards Board's ("FASB") SFAS No. 128, 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. Diluted loss per common share reflects the potential dilution that could occur if all potential common shares had been issued and if the additional common shares were dilutive.

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.

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.

Stock-Based Compensation

In conjunction with the adoption of our stock option plans on January 25, 2007, we began accounting for stock options under the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment ("SFAS 123R"). SFAS 123R requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The fair value of stock options is estimated using a Black-Scholes option valuation model. This model requires the input of subjective assumptions, including expected stock price volatility, estimated life and estimated forfeitures of each award. The fair value of equity-based awards is amortized over the vesting period of the award, and we have elected to use the straight-line method.

Recently Issued Accounting Pronouncements Not Yet Effective

The following accounting pronouncements have been issued but were not effective for fiscal year ended August 31, 2008:

Statements of Financial Accounting Standards (SFAS):

SFAS 141 (R), Business Combinations- retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination

SFAS 157, Fair Value Measurements- defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements

SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115- permits entities to choose to measure many financial instruments and certain other items at fair value

SFAS 160, Noncontrolling Interests in Consolidated Financial Statements- changes the way the consolidated income statement is presented

FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133- enhances required disclosures regarding derivatives and hedging activities

SFAS 163, Accounting for Financial Guarantee Insurance Contracts - clarifies how FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities

FASB Staff Positions (FSP):

FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)

FSP FAS 117-1, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds

FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161- amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities

FSP FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions- amends FASB Statement 140

FSP FAS 142-3, Determination of the Useful Life of Intangible Assets- amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets

FSP FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13- amends FASB Statement No. 157, Fair Value Measurements

FSP FAS 157-2, Effective Date of FASB Statement No. 157- delays the effective date of FASB Statement No. 157, Fair Value Measurements

FSP FIN 46(R)-7, Application of FASB Interpretation No. 46(R) to Investment Companies

FSP SOP 94-3-1 and AAG HCO-1, Omnibus Changes to Consolidation and Equity Method Guidance for Not-for-Profit Organizations

FSP SOP 07-1-1, - indefinitely delays the effective date of AICPA Statement of Position 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies

FSP EITF 03-6-1, - Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

EITF Consensuses (EITF):

EITF Issue No. 07-1, Accounting for Collaborative Arrangements

EITF Issue No. 07-4, Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships

EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock

EITF Issue No. 08-3, Accounting by Lessees for Maintenance Deposits

EITF Issue No. 08-5, Issuer's Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement

EITF Issue No. 08-6, Equity Method Investment Accounting Considerations

EITF Issue No. 08-7, Accounting for Defensive Intangible Assets

EITF Issue No. 08-8, Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity's Consolidated Subsidiary

AICPA Statements of Position (SOP):

SOP 07-01, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies

We do not believe that adoption of any of the above pronouncements that may apply will have a material impact on our financial position or results of operations.

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,
                                      2008                  2007
                                           (in thousands)

Net Sales                    $   4,418       100.0 % $ 4,352     100.0 %
Cost of Goods Sold               1,664        37.7     1,437      33.0
Gross Profit                     2,754        62.3     2,915      67.0
Operating Expenses
Shipping                           156         3.5       163       3.7
Selling and Marketing            1,081        24.4     1,881      43.2
General & Administrative         1,589        35.9     1,756      40.4
Product Development                 99         2.2        30       0.7
Total Operating Expenses         2,925        66.1     3,830      88.0
Loss from Operations              (171 )      (3.8 )    (915 )   (21.0 )
Other Income/(Expense)             (52 )      (1.2 )      13       0.3
Provision for Income Taxes           -           -        (3 )       -
Net Loss                     $    (224 )      (5.0 ) $  (905 )   (20.8 )%

Year Ended August 31, 2008 Compared to the Year Ended August 31, 2007

Net Sales

Net sales increased by $65,980, or 1.5%, from $4,351,907 for the year ended August 31, 2007 to $4,417,887 for the year ended August 31, 2008. This relatively flat year over year sales growth is mainly due to our strategic shift from selling directly to end users to indirectly through international distributors, OEM and third party relationships. Although we began to experience an increase in sales as a result of this shift, the increase in unit sales has been partially offset by a decrease in sales price. During the twelve-month period ended August 31, 2008, OEM and distributor sales represented 50% of total sales as compared to 30% during the twelve month period ended August 31, 2007.

Gross Profit

Gross profit decreased by $161,065, or 5.5% from $2,914,851 for the year ended August 31, 2007 to $2,753,786 for the year ended August 31, 2008. The decrease in gross profit was attributable to a reduction in average unit sales price. In addition, with the release of our new Lithium Polymer battery pack, 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 62.3% of net sales for the year ended August 31, 2008 compared to 67.0% of net sales for the year ended August 31, 2007.

Operating Expenses

Operating expenses, which include shipping expenses, selling and marketing expenses, general and administrative expenses and product development, decreased by $904,945, or 23.6%, to $2,924,996 for the year ended August 31, 2008 as compared to $3,829,941 for the year ended August 31, 2007.

Shipping expenses were $155,598 or 3.5% of net sales for the year ended August 31, 2008 as compared to $163,015 or 3.7% of net sales for the year ended August 31, 2007. This decrease of $7,417 was directly attributable to the increased international distributor, OEM and third party sales, which tend to require bulk shipping as opposed to the individual, end user shipments.

Selling and marketing expenses were $1,081,425 for the year ended August 31, 2008, a decrease of $799,817 or 42.5% from $1,881,242 for the previous year ended August 31, 2007. This decrease is mainly related to our enhanced channel sales efforts where we decreased our direct sales, marketing, advertising and direct mail campaigns resulting in savings of $588,961. We also realized $110,563 in decreased travel costs related to our redirected and refocused sales efforts.

General and administrative expenses were $1,588,697 for the year ended August 31, 2008, a decrease of $167,464 or 9.5% over the previous year ended August 31, 2007 of $1,756,161. This decrease was attributable to the cost containment efforts implemented in the areas of personnel, staff related and SEC related expenses as well as a reduction in our direct sales efforts. The efforts of expense reduction were partially offset by the legal expenses to defend two competitor lawsuits, alleging product copyright, trade dress and patent infringement on specific components of our surgical loupes, which have now been settled. In addition, the decrease was also partially offset by stock based compensation expense of $96,825 for stock option grants awarded to the Company's employees during the fiscal year 2008.

Product development costs increased by $69,753 or 236.3% from $29,523 for the year ended August 31, 2007 to $99,276 for the year ended August 31, 2008. This increase is a result of our engineering efforts within our optics and LED light product lines and in particular our Lithium Polymer battery pack which was released in May 2008. Product development costs are expected to increase in the future as we continue to expend resources to enhance our existing product lines as well as develop new products.

Loss from Operations

Loss from operations for the year ended August 31, 2008 decreased by $743,880 or 81.3% to $171,210 as compared to $915,090 for the year ended August 31, 2007. As mentioned previously, this reduction is mainly related to our strategic shift from selling directly to end users to indirectly through international distributors, OEM and third party relationships. These efforts have led to significant cost savings related to shipping, marketing, advertising and travel expenses. We expect this strategic shift to help achieve profitability as well as allow for additional resources for continued research and development.

Other Income (Expense)

Interest expense for the year ended August 31, 2008 was $5,918 as compared to $0 for the year ended August 31, 2007. This increase was related to the line of credit that we obtained in 2008. Interest income for the year ended August 31, 2008 was $4,320 as compared to $12,706 for the year ended August 31, 2007, a decrease of $8,386. The decrease was attributable to less cash being available to be invested in variable money market funds during the year ended August 31, 2008. In addition, in July 2008, we reached a settlement in a copyright and trade dress infringement case in which we were the defendant. We paid the plaintiff $50,000 which is rejected in other income and expenses in the accompanying financial statements.

Income Taxes

During the year ended August 31, 2008, there was an $800 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, 2007 we recorded a current income tax provision of $2,902.

Net Loss

Net loss for the year ended August 31, 2008 was $223,607 as compared to $905,286 for the year ended August 31, 2007. Loss per common share was $0.04 and $0.09 for the years ended August 31, 2008 and 2007, 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, 2008, we had cash and equivalents of $111,887.

To date, we have financed operations principally through lines 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. There can be no assurance that we will be successful in generating a positive operational cash flow.

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, 2008, we had an accumulated deficit of $5,228,744, recurring losses from operations and negative cash flows from operating activities of $245,569 for the year then ended. We also had a negative working capital of $411,318 as of August 31, 2008.

These factors, among others, raise doubt about our 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 we be unable to continue as a going concern.

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

· we are expanding our revenue base beyond direct sales to OEM and third party sales;

· we are aggressively signing up new international distributors through our IDP program; and

· we are seeking third party financing.

. . .