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As filed with the Securities and
Exchange Commission on March 31, 2011

United States

Securities and Exchange Commission

Washington, DC 20549





Form 10-K

xAnnual Report Pursuant to Section 13 or 15(d)

Of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2010

OR

 ̈Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Commission file number: 000-31279

OurPets Company

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Colorado                                                       |  | 34-1480558                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|1300 East Street, Fairport Harbor, OH    |  | 44077     
|(Address of principal executive offices) |  | (Zip code)

Issuers telephone number: (440) 354-6500

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value





Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   ̈  Yes    x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange
Act.   ̈  Yes    x  No

Indicate by check mark if the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to such filing requirements for past 90 days.  x  Yes     ̈  No

Indicate by check mark whether the registrant has submitted
electronically and posted on its Corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).   ̈  Yes     ̈  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained
herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any 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. (Check
One):



|                           |  |  |  |                              |  | 
|-------------------------- |  |  |  | ---------------------------- |  | 
|Large Accelerated Filer   ̈ |  |  |  | Accelerated Filer   ̈         |  | 
|                           |  |  | 
|Non-Accelerated Filer   ̈   |  |  |  | Smaller Reporting Company  x |  | 



Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act)   ̈  Yes    x  No

Registrants revenues for the fiscal year ended December 31, 2010 were $17,091,741. The aggregate market value of the common stock of the registrant, no par value per share (the Common
Stock), held by non-affiliates of registrant was $5,205,123 as of March 15, 2011. As of March 15, 2011, the registrant had outstanding 15,731,141 shares of Common Stock.

Documents Incorporated by Reference

Part III  Portions of the registrants definitive proxy statement to be issued in conjunction with registrants annual meeting to be held on May 20, 2011.

www.ourpets.com









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OURPETS COMPANY

FORM 10-K

For The Fiscal Year Ended December 31, 2010

INDEX



|            |  |                                                                                                              |  |      |    | 
|----------- |  | ------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|            |  |                                                                                                              |  | Page |   
|PART I      |  |                                                                                                              |  |      |    | 
|            |  |                                                                                                             
|Item 1.     |  | Business                                                                                                     |  |      | 3  | 
|            |  |                                                                                                             
|Item 1A.    |  | Risk Factors                                                                                                 |  |      | 4  | 
|            |  |                                                                                                             
|Item 2.     |  | Properties                                                                                                   |  |      | 6  | 
|            |  |                                                                                                             
|Item 3.     |  | Legal Proceedings                                                                                            |  |      | 6  | 
|            |  |                                                                                                             
|PART II     |  |                                                                                                              |  |      |    | 
|            |  |                                                                                                             
|Item 5.     |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  |      | 7  | 
|            |  |                                                                                                             
|Item 6      |  | Selected Financial Data                                                                                      |  |      | 8  | 
|            |  |                                                                                                             
|Item 7.     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  |      | 8  | 
|            |  |                                                                                                             
|Item 8.     |  | Financial Statements and Supplementary Data                                                                  |  |      | 14 | 
|            |  |                                                                                                             
|Item 9.     |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  |      | 15 | 
|            |  |                                                                                                             
|Item 9A(T). |  | Controls and Procedures                                                                                      |  |      | 15 | 
|            |  |                                                                                                             
|Item 9B.    |  | Other Information                                                                                            |  |      | 15 | 
|            |  |                                                                                                             
|PART III    |  |                                                                                                              |  |      |    | 
|            |  |                                                                                                             
|Item 10.    |  | Directors, Executive Officers and Corporate Governance                                                       |  |      | 15 | 
|            |  |                                                                                                             
|Item 11.    |  | Executive Compensation                                                                                       |  |      | 15 | 
|            |  |                                                                                                             
|Item 12.    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  |      | 16 | 
|            |  |                                                                                                             
|Item 13.    |  | Certain Relationships and Related Transactions, and Director Independence                                    |  |      | 16 | 
|            |  |                                                                                                             
|Item 14.    |  | Principal Accountant Fees and Services                                                                       |  |      | 16 | 
|            |  |                                                                                                             
|PART IV     |  |                                                                                                              |  |      |    | 
|            |  |                                                                                                             
|Item 15.    |  | Exhibits and Financial Statement Schedules                                                                   |  |      | 16 | 
|            |  |                                                                                                             
|            |  | Signatures                                                                                                   |  |      | 21 | 
|            |  |                                                                                                             
|            |  | Certifications                                                                                               |  |      | 44 | 



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This report on the Form 10-K (this Report) contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), including, without limitation, statements regarding our cash needs and ability to fund our requirements, building of
our market presence and ability to succeed as planned and our ability to successfully obtain and protect our patents. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company or industry results to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. See Item 1A. Risk Factors
for a discussion of these risks. When used in this Report, statements that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words anticipates, plans,
intends, expects and similar expressions are intended to identify such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this
Report. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Introductory Note

OurPets Company, a Colorado corporation, is engaged in developing, manufacturing and marketing various proprietary products for the retail pet business. As used herein, the terms
OurPets, we, us and our include each of our subsidiaries, unless the context otherwise requires.

PART I

Item 1.Business.

Our management originally founded Napro, Inc.
(Napro), an Ohio corporation, in 1985 as an enterprise for launching new ventures and acquiring companies in various lines of business. In 1996, Napro formed a wholly owned Ohio subsidiary, Virtu Company (Virtu), to market
proprietary products to the retail pet business under the OurPets® label. Napro then changed its name to
OurPets Company effective March 19, 1998. On July 16, 1998, Manticus, Inc. (Manticus), a Colorado corporation, obtained all of the outstanding shares of OurPets/Napro in exchange for 8,000,000 shares of Manticus
common stock. After the transaction, the former holders of OurPets/Napro shares owned approximately 89% of Manticus shares. Effective August 10, 1998, OurPets/Napro was merged into Manticus and ceased to exist. Prior to this
merger no affiliation or other relationship existed between Manticus and us or our shareholders. As operations for the newly merged entity were, and continue to be, conducted in Ohio, Manticus proceeded to become licensed in the State of Ohio as a
foreign corporation, known as OurPets Company. Effective October 12, 1998, Manticus Articles of Incorporation was amended in the State of Colorado to reflect its new name as OurPets Company. After the merger, management of the
former OurPets/Napro assumed management of the surviving company.

We develop and market products
for improving the health, safety, comfort and enjoyment of pets. The products sold have increased from the initial Big Dog Feeder to approximately 500 products for dogs, cats, domestic and wild birds. Products are marketed under the
OurPets®, Flappy®, Pet Zone®, SmartScoop®, Ecopure Naturals ®, Play-N-Squeak®, Durapet®, Clipnosis® , Go! Cat!Go!®, and Cosmic
Pet® labels to customers, both domestic and foreign. The manufacturing of these products is subcontracted to
other entities, both domestic and foreign, based upon price, delivery and quality.

According to the most
recent 2009/2010 APPMA National Pet Owners Survey, published by the American Pet Products Manufacturers Association,
Inc®, approximately 71.4 million U.S. households reported owning a pet in 2008, with an estimated pet
population of 77.5 million dogs, 93.6 million cats and 15.9 million birds.

We sell our products in the
following market segments:

Mass retailerseg. Wal-Mart, Kmart

Pet superstoreseg. PetsMart, Petco

Regional Pet Chainseg. Pet Supplies Plus, Pet Supermarket

Pet catalogueseg. Drs. Foster & Smith, Care-A-Lot, J-B Wholesale

InternetAmazon.com



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Clubseg. Costco, Sams Club

Military Exchange chainseg. AAFES, NEXCOM

Grocery chainseg., Publix, Meijers, Krogers

Pet food manufacturerseg., Ralston Purina

Pet distributorseg. Bradley Caldwell, Wolverton, Central Garden & Pet

International customerseg. Zellers, Freedom Pet Supplies, James Steele, Pet Care, Pets at Home

The companies listed above are intended to serve as examples solely for illustrative purposes. As a standard industry practice, price
lists are provided to distributors, who in turn place products with retailers. Larger retailers with a national presence will generally order product directly from us pursuant to the price list and subject to negotiated additional terms, if any.
With the exception of a written price list, many of the arrangements with retailers or distributors are verbal and written contracts often do not exist. Customers submit their own standard purchase orders based on our current price list. Even the
larger retailers, which might have written contracts with us, are under no obligation to purchase specific product from us. While all of the above companies may currently buy product from OurPets, none of these customers are under any
contractual obligation to purchase a specific volume of product nor to continue making any purchases in the future. We currently have approximately 400 customers to whom we sell products, with the total number and identity of our customers changing
from time to time. With the exceptions of PetsMart and Wal-Mart none of our customers account for 10% or more of our sales. While we had approximately 400 customers for the year ended December 31, 2010, 31.0% of our revenue was derived from
Walmart and PetsMart. Revenue generated from each of these customers amounted to $2,713,663 and $2,574,402, respectively, which represents 15.90% and 15.19% of total revenue.

We currently market products such as dog, cat and bird feeders, dog and cat toys, cat and dog waste management products, catnip products, and natural and nutritional pet supplements and topical products.
We conduct our marketing and sales activities through 13 employees and 80 independent sales agents. Domestic independent sales agents are paid commissions, which range from 2% to 6% of net sales to customers.

Our marketing strategies include, among others, trade shows, customer visitation, telemarketing, direct mail, trade journal advertising,
product sampling programs and customer support programs, such as advertising and promotional allowances.

We are one of many
companies in the accessory and consumable pet products market with no measurable percentage of that market. Our competition in the healthy feeding systems, interactive toys and healthy consumable products markets are both domestic and foreign
companies, many of whom manufacture their products in low cost areas such as Mexico and the Far East.

Most of our products
are proprietary and we have been granted or assigned 62 United States and international patents for dog and cat feeders and have 58 United States and international patents pending for cat and dog toys, dog feeders and natural and nutritional pet
supplements and treats. We registered our logo, OurPets, as a registered trademark. To protect our trade names we obtained 55 additional trademark registrations and applied for 15 trademark registrations, which are still pending.

As of March 15, 2011, we had 53 employees consisting of 4 officers, 12 employees in sales and marketing, 1 employee in
engineering, 2 employees in quality assurance, 4 employees in finance and administration, 1 employee in IT, 9 employees in operations and 6 employees in warehousing and shipping and 14 employees at our Hagerstown facility. Most of our manufacturing
is subcontracted out to outside vendors. However, we do perform some light manufacturing at our Hagerstown, Maryland facility for the production of catnip products. None of our employees are subject to a collective bargaining agreement and we have
not experienced any work stoppages, nor to our knowledge, are any threatened.

We conduct our own research and development
activities and also use outside sources to perform specific projects such as engineering drawings and prototype models. Research and development costs are charged to expenses as incurred, and totaled $183,252 for the year ended December 31,
2010 and $259,328 for the year ended December 31, 2009.

Item 1A.Risk
Factors.

We are still building our market presence and are subject to substantial competition that could
inhibit our ability to succeed as planned.

We are one of many companies in the pet product market with no measurable
percentage of that market. We are still building our market presence as we compete with domestic and foreign companies, who also manufacture their products in low cost areas such as Mexico, India and the Far East. Any reputation that we may
successfully gain with retailers for quality product does not necessarily translate into name recognition or increased market share with the end consumer. Our products may not be well received by the pet owners, or other companies may surpass us in
product innovations. Certain retailers have been adversely impacted by economic conditions causing them to file for bankruptcy protection. This could adversely affect our sales, if this trend continues or these retailers are unable to emerge from
bankruptcy protection.



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Additional financing may not be available when required by us.

We may need additional financing for new product launches, warehouse equipment, working capital, research and development of new products,
strategic acquisitions, and molds and tooling to produce new products. If the financial resources are not available when needed, or are not available on affordable terms, then our ability to increase our sales and profits will be hampered, which in
turn harms our financial performance.

The loss of key personnel could adversely affect our operations.

We are and will continue to be dependent on our key management personnel: Dr. Steven Tsengas, Chairman, President and Chief Executive
Officer; Konstantine S. Tsengas, Vice President of Operations and Secretary; Scott T. Fitzhugh, Vice President of Sales and Marketing, and Scott R. Mendes, Chief Financial Officer. The loss of one or more of these individuals could have a material
adverse effect on our business and operations. In addition, we will need to attract and retain other qualified individuals to satisfy our personnel needs. We do not have employee contracts with our key personnel and may not succeed in retaining our
key management personnel or in attracting and retaining new employees.

The inability to successfully obtain or protect our patents could
harm our competitive advantage.

Our success will depend, in part, on our ability to maintain protection for our products
under United States patent laws, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We have 62 U.S. and international patents issued or assigned and 58 U.S. and international patent applications
pending. Patent applications may not successfully result in an issued patent. Issued patents are still subject to challenges and infringements. Furthermore, others may independently develop similar products or otherwise circumvent our patent
protection. Should we fail to obtain and protect our patents, our competitive advantage will be harmed.

The inability to successfully
defend alleged patent infringement actions against us would result in loss of business and expense.

On February 16,
2011 we settled a litigation filed against us by a competitor that alleged we infringed upon certain patents for self-cleaning litter boxes. Had we not been successful in defending this litigation and settling it, we would not have been able to sell
our SmartScoop self-scooping cat litter box, we could have incurred costs for damages paid to our competitor and for the write-off of our product development and tooling costs for our product. Furthermore, while we were successful in defending
against this litigation, the cost of our defense has had a negative impact on our profitability. While we are not aware of any other significant patent infringement allegations, it is possible that future alleged patent infringement actions may have
the same impact on our profitability and could have significant legal expenses associated with them.

The exercise of too many warrants and
stock options would dilute the value of the Common Stock, and stockholder voting power.

We currently have 15,731,141
shares of Common Stock outstanding which could be diluted by the following potential issuances of Common Stock. As of March 15, 2011, we had outstanding 189,816 shares of Convertible Preferred Stock (Preferred Stock) convertible
into 1,896,160 shares of Common Stock at conversion rates of $1.00 per share for 66,000 shares of Preferred Stock and $.70 per share for 123,616 shares of Preferred Stock. Also as of March 15, 2011, we had outstanding 4,961,876 warrants to
purchase an aggregate of 4,961,876 shares of Common Stock at exercise prices ranging from $0.281 to $1.426 per share and options to purchase an aggregate of 1,700,516 shares of Common Stock at exercise prices ranging from $0.20 to $1.55 per share.
We have reserved an aggregate of 1,921,500 shares of Common Stock for issuance under the 1999 Stock Option Plan and the 2008 Stock Option Plan as of the date of this report. In addition, the exercise of such warrants and options could have a
material adverse effect on the future market price of, and liquidity in the market for, shares of Common Stock trading in the over-the-counter market. Further, while these warrants and options are outstanding, our ability to obtain additional
financing on favorable terms may be adversely affected.

Resale of our securities are and will continue to be subject to restrictions.

Our securities are subject to Rule 15g-9 under the Exchange Act, which imposes additional sales practice requirements on
broker-dealers that sell securities to persons other than established customers and accredited investors (generally, individuals with a net worth in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000 together with
their spouse). For transactions covered by such rule, a broker-dealer must make a special suitability determination for the purchaser and receive the



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purchasers written consent to the transaction prior to the sale. Consequently, this rule may adversely
affect the ability of broker-dealers to sell our securities and may adversely affect the ability of the holders of our securities to sell such securities in the secondary market.

SEC regulations define a penny stock to be any non-NASDAQ equity security that has a market price (as therein defined) of
less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. Prior to any transaction involving a penny stock, unless exempt, SEC rules require delivery of a disclosure schedule prepared by the
broker-dealer relating to the penny stock market. Disclosure is also required to be made about commissions payable to both the broker-dealer and the registered representative and about current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

Possible Volatility of Market Price of Common Stock.

The market price of
our securities, like that of many other emerging companies, has been highly volatile, experiencing wide fluctuations not necessarily related to the operating performance of such companies. Factors such as our operating results, announcements by us
or our competitors concerning innovations and new products or systems may have a significant impact on the market price of our securities. In addition, we have experienced, and expect to continue experiencing limited trading volume in our Common
Stock.

Item 2.Properties.

We lease a 64,000 square foot production, warehouse and office facility in Fairport Harbor, Ohio from a related entity, Senk Properties,
at a current monthly rental of $28,417 plus real estate taxes. Senk Properties is a general partnership comprised of Dr. Steven Tsengas, Konstantine S. Tsengas, Nicholas S. Tsengas and Evangelia S. Tsengas. Dr. Tsengas is our Chairman,
President, Chief Executive Officer, a director and a major stockholder of the Company. Konstantine Tsengas is our Vice President and Secretary, as well as being a stockholder. Nicholas Tsengas and Evangelia Tsengas are both stockholders of
OurPets. We have entered into a ten year lease with Senk Properties which was effective upon completion of the 36,000 square foot warehouse expansion on June 1, 2007. The monthly rental is $26,667 for the first two years, $28,417 for the
next two years, $30,167 for the next three years, $32,000 for the next two years, and $33,750 for the last year, all plus real estate taxes. We have the option to extend the lease for an additional ten years at a rent amount to be mutually agreed
upon. We believe that this facility will provide adequate warehouse and office space to meet our needs for the foreseeable future. Any longer-range future growth can be accommodated by expanding that facility or leasing nearby space.

We also lease a 20,000 square foot production, warehouse and office facility in Hagerstown, Maryland from Leon Seidman, the former owner
of Cosmic Pet Products at a current monthly rental of $10,018 plus real estate taxes. The lease term is two years from August 1, 2010 through July 31, 2012. We believe this facility will provide adequate production, warehouse and office
space to meet our needs with respect to Cosmic Pet Products through July 31, 2012.

In the opinion of our management, all
of the properties described here are adequately covered by insurance and such coverage is in accordance with the requirements contained in our various debt agreements.

Item 3.Legal Proceedings.

In 2007, Applica Consumer Products, the manufacturer of the LitterMaid Automatic Cat Litter Box, filed two lawsuits alleging that OurPets SmartScoop® Self-Scooping Litter Box infringed multiple claims of U.S. Patent No. RE 36,847 and U.S. Patent
No. 6,082,302. The SmartScoop® is a patented automated self-cleaning cat litter box that offers a
unique modular design for easy cleaning and maintenance using any type of clumping litter. As previously announced, in October 2010, in one of the lawsuits, the United States Court of Appeals for the Federal Circuit (Court) agreed with
OurPets legal position that the asserted patent claims were either not violated by the SmartScoop design and operation or were invalid. The Federal Circuits decision was not appealed by Applica and was therefore finally resolved in
OurPets favor as of January 4, 2011.

On February 4, 2011, the Company settled the
remaining patent infringement accusations in the second lawsuit related to the SmartScoop® Self Scooping Litter
Box. That lawsuit was dismissed on February 16, 2011.

In addition to the above matters and in the normal course of
conducting its business, we may become involved in various other litigation, including, but not limited to, preference claims by debtors in bankruptcy proceedings. We are not a party to any litigation or governmental proceeding which our management
or legal representatives believe could result in any judgments or fines against us that would have a material adverse effect or impact in our financial position, liquidity or results of operation.



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PART II

Item 5.Market For Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Our Common Stock has been quoted on the Over-The-Counter Bulletin Board Market under the symbol OPCO since December 13,
2001. The following table sets forth, for each of the quarters indicated, the high and low bid quotations per share of Common Stock in the over-the-counter market (source, the Nasdaq Stock Chart). The bid quotations in the over-the-counter market
represent prices between securities dealers, do not include retail markups, markdowns or commissions and may not represent actual transactions.



|                   |  |      |      |  |     |  |      | 
|------------------ |  | ---- | ---- |  | --- |  | ---- | 
|Quarter Ended      |  | High |      |  | Low | 
|March 31, 2009     |  |      | 0.35 |  |     |  | 0.19 | 
|June 30, 2009      |  |      | 0.35 |  |     |  | 0.20 | 
|September 30, 2009 |  |      | 0.51 |  |     |  | 0.27 | 
|December 31, 2009  |  |      | 0.63 |  |     |  | 0.43 | 
|March 31, 2010     |  |      | 0.85 |  |     |  | 0.45 | 
|June 30, 2010      |  |      | 0.92 |  |     |  | 0.74 | 
|September 30, 2010 |  |      | 0.92 |  |     |  | 0.75 | 
|December 31, 2010  |  |      | 1.06 |  |     |  | 0.83 | 

As of March 15,
2011, we had approximately 139 holders of record of our Common Stock.

Each share of Common Stock has an equal right to
receive dividends when and if the Board of Directors decides to declare a dividend after payment of any accrued dividends on the Preferred Stock. We have never paid any cash dividends nor do we intend, in the foreseeable future, to make any cash
distributions to our common stockholders as dividends. We cannot currently distribute cash dividends to common stockholders without violating our loan agreement with our bank.

There are no conversion rights or redemption or sinking fund provisions with respect to the Common Stock. All of the outstanding shares of Common Stock are fully paid and non-assessable.

On January 28, 2010 and February 1, 2010, OurPets sold an aggregate of 123,616 shares of its Series
2009 Preferred Stock in a private placement to a total of 15 accredited investors. All shares in the private placement were sold at a price of $7.00 a share for a total of $865,312. Payment for the shares comprised of $595,000 in cash and $270,312
in converted debt (including accrued interest). All were previously reported in Form 8-K filed February 2, 2010 except for 6,572 shares totaling $46,004 purchased by two additional accredited investors on February 1, 2010. All shares are
convertible at any time into Common Stock shares at a conversion price of $.70/common share, subject to adjustment for stock splits, combinations and similar transactions. All shares receive a 6% ($.42) cash dividend payable on
December 1stof each year provided that payment may
be deferred if necessary for our compliance with our loan covenants. We have the limited right to convert the shares into Common Stock at any time after the trading price of our Common Stock reaches $1.50 per share for twenty (20) consecutive
days. In accordance with the above provisions, in December 2010 the Company paid $51,919 in cash dividends to holders of this Series 2009 Preferred Stock.

The shares sold were not registered under the Securities Act of 1933, as amended (the Act), in reliance on the private offering exemption from registration provided by Section 4(2) of the
Act and Rule 506 of Regulation D of the rules promulgated under the Act. We did not utilize an underwriter or placement agent in connection with the private placement.



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Item 6.Selected Financial Data.

Not applicable.

Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations.

Overview

OurPets develops, designs, produces and markets a broad line of consumer brands containing innovative, high-quality accessory and consumable pet products. These products form our portfolio of
brands, including Play-N-Squeak® www.playnsqueak.com, SmartScoop® www.smartscoop.com, ecoPure Naturals® www.ecopurenaturals.com,
Flappy® Dog Toys www.flappydogtoys.com, Go! Cat Go®! cat toys, Cosmic Pet® cat
products, Durapet® premium stainless steel bowls, Pet Zone® dog waste management product, wild bird feeders, and dog houses, and a variety of raised feeders. These products are manufactured by domestic and foreign
subcontractors and then sold by us to retailers and distributors who then sell the products to the end consumer.

On
July 29, 2010, the Company entered into an Asset Purchase Agreement (the Purchase Agreement) with Cosmic Pet Products, Inc. (Cosmic) pursuant to which the company purchased certain assets and assumed certain liabilities.
The results of Cosmic operations have been included in the consolidated financial statements since that date. Cosmic Pet Products designs, manufactures and distributes pet supply products for cats. Their products include catnip toys, containers of
catnip, cat scratchers, cat treats and cat toys. Cosmic markets their products to pet specialty stores, distributors, mass retailers, grocery chains and independent retailers. The complementary strength of each company should allow significant
product and distribution synergies to be realized with each companys product sales being expanded to the others market segments and customers. OurPets will gain entry into such new product categories as catnip toys, catnip products
and cat treats utilizing the Cosmic Pet brand name.

As discussed below and in Liquidity and Capital Resources on Pages 11-14,
we have funded our operations during 2010 principally from financing and borrowing activities and from net cash provided by operating activities during 2009.

During 2010, we had a net increase of $1,679,000 in borrowings from our line of credit facilities with our bank under which we can borrow up to $2,800,000 based on the level of qualifying accounts
receivable and inventories. At December 31, 2010 and December 31, 2009 we had balances of $2,528,000 and $849,000, respectively, under the line of credit with our bank at an interest rate of prime plus .5% which had prior to
October 2, 2009 had an interest rate of prime plus .75%

On October 2, 2009, we obtained a new $800,000 term loan
from our bank. The $800,000 term loan was the second of two credit facilities extended to us by our bank on September 17, 2009, the other being a renewal of our existing $2,000,000 line of credit through June 30, 2010. The term loan was
used to pay down the line of credit by $800,000 from $1,800,000 to $1,000,000. The term loan has a fixed interest rate of 4.61% and is payable monthly over a 3 year period in equal installments of $23,859 that include interest. Effective
October 2, 2009 the line of credits interest rate was reduced to Prime + .5% from Prime + .75%. Both loans are secured by accounts receivable, inventory, equipment, trademarks, patents and the personal guarantee of certain
stockholders. At December 31, 2010, this loan had an outstanding principal balance of $478,540 versus $735,952 at December 31, 2009.

On January 28, 2010 and February 1, 2010, OurPets sold an aggregate of 123,616 shares of its Series 2009 Preferred Stock in a private placement to a total of 15 accredited investors. All
shares in the private placement were sold at a price of $7.00 a share for a total of $865,312. Payment for the shares comprised of $595,000 in cash and $270,312 in converted debt (including accrued interest). All were previously reported in our Form
8-K filed February 2, 2010 except for 6,572 shares totaling $46,004 purchased by two additional accredited investors on February 1, 2010. All shares are convertible at any time into shares of common stock at a conversion price of
$.70/common share, subject to adjustment for stock splits, combinations and similar transactions. All shares receive a 6% ($0.42) cash dividend payable on December 1stof each year provided that payment may be deferred if necessary for our compliance with our loan covenants. We have
the limited right to convert the shares into common stock at any time after the trading price of our common stock reaches $1.50 per share for twenty consecutive days.

The shares sold were not registered under the Securities Act of 1933, as amended (the Act), in reliance on the private offering exemption from registration provided by Section 4(2) of the
Act and Rule 506 of Regulation D of the rules promulgated under the Act. We did not utilize an underwriter or placement agent in connection with the private placement.

On July 16, 2010, we obtained a new $500,000 term loan from our bank. $400,000 of that loan was used to pay off a debt obligation of Cosmic Pet Products, Inc. with the $100,000 balance used to
purchase certain Cosmic Pet assets included in our July 29, 2010 asset purchase of Cosmic Pet. The Loan is payable in equal monthly installments of $14,817 over a three year term at a fixed interest rate of 4.18%. This loan was secured by our
accounts receivable, inventory, equipment, trademarks and patents. Steven Tsengas, OurPets President and Chief Executive Officer and his wife provided an unlimited guarantee of the loan and for that guarantee were granted 62,500 warrants
exercisable at $.86/share for the right to purchase OurPets common stock. Subsequent to their issuance the warrants were adjusted to 62,763 warrants exercisable at $.85/share in accordance with the warrant antidilution provisions.



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On October 18, 2010, we obtained a $500,000 increase in our line of credit from
$2,000,000 to $2,500,000. The increase was used to meet working capital requirements. This increase was secured by our accounts receivable, inventory, equipment, trademarks and patents. Steven Tsengas, OurPets President and Chief Executive
Officer and his wife have provided an unlimited guarantee of the Loan and for that guarantee were granted 62,500 warrants at $.86/share for the right to purchase OurPets common stock. Subsequent to their issuance the warrants were adjusted to
62,763 warrants exercisable at $.85/share in accordance with the warrant anti-dilution provisions.

On November 30, 2010,
we obtained a $300,000 short term loan from our bank to fund specific working capital requirements for business growth. The Note matures on May 1, 2011 and provides for interest payments on the principal balance beginning January 1, 2011.
This loan is secured by our accounts receivable, inventory, equipment, trademarks and patents. The interest rate is the same variable rate based on our banks prime rate plus .50% with the initial prime rate set at 3.25%. The principal amount
outstanding at December 31, 2010 was $90,000.

On January 19, 2011, we obtained a $450,000 short term loan from our
bank to fund specific working capital requirements related to business growth. The Note matures on July 31, 2011 and provides for interest payments on the principal balance beginning March 1, 2011. This loan is also secured by our accounts
receivable, inventory, equipment, trademarks and patents. The interest rate is a variable rate based on our Banks prime rate plus .50% with the initial prime rate set at 3.25%.

On January 24, 2011 we obtained permission from our bank to use both the $300,000 and $450,000 notes for general working capital
requirements bringing the total Line of Credit facility up to $3,250,000.

In February of 2008, we entered into contribution
agreements with six contributors, all of which are affiliated with OurPets, pursuant to which each contributor loaned certain funds to us totaling $600,000. We used these funds for expenses related to litigation on certain of our
SmartScoop products (the SmartScoop Litigation) and for expenses related to new product development. In consideration for these loans we (a) executed promissory notes due in two years with interest accruing at prime plus
2%, (b) issued warrants for the purchase of 300,000 shares of our Common Stock at an option price of $0.825 per share and (c) entered into piggyback registration rights agreements with the contributors. Subsequent to their issuance the
warrants were adjusted to 303,784 warrants exercisable at $0.815 per share in accordance with the warrant anti-dilution provisions.

In June and July of 2008, we entered into additional contribution agreements with the same six contributors pursuant to which each contributor loaned certain funds to us totaling an additional $292,500.
We used the funds for additional expenses related to the SmartScoop Litigation. In consideration for these loans we (a) executed promissory notes due in three years with interest compounding quarterly at prime plus 2%, (b) issued
warrants for the purchase of 146,250 shares of our Common Stock at an option price of $0.50 per share, (c) issued warrants for the purchase of 292,500 shares of our Common Stock at an option price of $0.50 per share, which replaced 292,500 of
the warrants issued in February of 2008 and (d) entered into piggyback registration rights agreements with the contributors. Subsequent to their issuance the warrants were adjusted to 451,876 warrants exercisable at $0.494 per share in
accordance with the warrant anti-dilution provisions.

In July and August of 2008, we entered into additional contribution
agreements with two other contributors, neither of which are affiliated with OurPets, pursuant to which each contributor loaned certain funds to us totaling $125,000. We also used these funds for expenses related to the SmartScoop
Litigation. In consideration for these loans we (a) executed promissory notes due in three years with interest compounding quarterly at prime plus 2%, (b) issued warrants for the purchase of 12,500 shares and 50,000 shares of our Common
Stock at option prices of $0.50 and $0.40 per share respectively, and (c) entered into piggyback registration agreements with the contributors. Subsequent to their issuance the warrants were adjusted to 12,657 and 50,680 warrants exercisable at
$0.494 and $0.395 per share respectively, in accordance with the warrant anti-dilution provisions.

In October and November of
2008, we entered into additional contribution agreements with two other contributors, neither of which are affiliated OurPets, pursuant to which each contributor loaned certain funds to us totaling $350,000. We also used these funds for
expenses related to the SmartScoopLitigation. In consideration for these loans we (a) executed promissory notes due in three years for $50,000 and due in four years for $300,000 both with interest compounding quarterly at prime plus 2%,
(b) issued warrants for the purchase of 25,000 shares and 300,000 shares of our Common Stock at option prices of $0.40 and $0.37 per share respectively, and (c) entered into piggyback registration agreements with the contributors.
Subsequent to their issuance the 25,000 warrants exercisable at $0.40 per share were adjusted to 25,340 warrants exercisable at $0.395 per share and the 300,000 warrants exercisable at $0.37 per share were adjusted to 302,563 warrants exercisable at
$0.367 per share in accordance with the warrant anti-dilution provisions.



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Results of Operations

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

In the
following discussion all references to 2010 are for the year ended December 31, 2010 and all references to 2009 are for the year ended December 31, 2009. All references to Consolidated include OurPets and Cosmic Pets. All references
to OurPets refer to OurPets excluding Cosmic Pet. All references to Cosmic Pet include Cosmic Pet only.

Consolidated net revenue for 2010 was $17,091,741, an increase of approximately 19.9% in revenue from $14,251,786 in 2009, consisting of
sales of proprietary products for the retail pet business. Of this $2,839,955 increase, approximately $738,000 came from our Cosmic Pet Product divisions revenues over the last five months of 2010. Other significant components to the revenue
increase were approximately $785,000 in pet specialty store revenues, increased sales to distributors of approximately $643,000, approximately $569,000 increased sales from club store customers, sales to promotional customers of approximately
$435,000 and approximately $158,000 increased sales from .com customers. The remaining approximately $221,000 increased sales were to both new and existing customers. Offsetting these sales increases were declines in revenues from our two largest
customers of approximately $709,000.

Total sales to all customers for new products in 2010 that were not
sold in 2009 including the new Play N Squeak® products, new Durapet Bowl products, new Go Cat Go products,
new Flappy products, private label sales, new ecoPure products were approximately $3,788,000 of which $3,050,000 were OurPets products and $738,000 were Cosmic Pet Products.

Consolidated sales to foreign customers were $1,629,791, an increase of approximately $700,000, or 75.3%, from foreign sales of $929,363
in 2009. This increase was mainly due to increased sales to customers in Canada, Sweden, Hong Kong, Netherlands and Taiwan which were offset by decreases in sales to customers in England and Finland. Cosmic Pets international sales for the
five months of August through December 2010 were approximately $155,000.

While net revenue increased by 19.9% in 2010, cost
of goods sold increased by 23.3%, from $9,971,696 in 2009 to $12,292,259 in 2010. This increase of approximately $2,321,000 was the result of the cost of purchased products sold increasing 20.9%, or approximately $1,729,000, due to (i) Cosmic
Pets $263,000 cost of purchased products and (ii) the increased amount of purchased products and increased freight costs needed for the higher volume sales in 2010. Approximately $355,000 of the increase in cost of goods sold came from
increased salaries, wages, payroll taxes, bonus/profit sharing and benefits due to additional staffing and associated benefits costs of approximately $170,000 for Cosmic Pet, and the remaining increase coming from OurPets research &
development and quality assurance, project management and indirect operations personnel. Our variable and fixed warehouse and overhead costs increased by 49.7% from the comparable twelve months in 2009 due to (i) Cosmic Pets approximately
$360,000 variable and fixed overhead costs and (ii) approximately $606,000 from OurPets increased costs for salaries, wages, and payroll taxes in quality assurance and research and development departments along with increased accruals for
operations employee bonus/ profit sharing costs and casual labor.

Net revenue increased by 19.9% and the cost of goods sold
increased by 23.3%, which resulted in our gross profit on sales increasing by 12.1%, or $519,392, from $4,280,090 in 2009 to $4,799,482 in 2010. Approximately $194,000 of the gross profit increase came from Cosmic Pet with the balance of gross
profit coming from OurPets. Gross profit margin declined to 28.1% in 2010 from 30.0% in 2009. This decrease was primarily due to costs related to the integration of the Cosmic Pet operations as well as higher than anticipated warehouse,
freight, labor and overhead costs.

Selling, general and administrative expenses in 2010 were $3,704,994, an increase of
18.9%, or $590,034, from $3,114,960 in 2009. This increase was primarily a result of (i) an increase in salaries and wages, payroll taxes and employee benefits of approximately $236,000 due to additional employees in sales, marketing, and
administration and an increase in accruals for managers bonus and employee profit sharing, (ii) an increase in sales and marketing expenses of approximately $198,000 mainly due to increased commissions, travel, promotional and marketing
expenses, and (iii) an increase in professional expenses of approximately $111,000 mainly from higher investor relations costs, intellectual property protection costs, accounting and IT costs. Cosmic Pet Products selling, general and
administrative costs were approximately $71,000.

Litigation expenses were $112,861 for 2010, a decrease
of $260,747 or 69.8% from $373,608 for 2009. These expenses were for (i) legal fees and expenses related to our defense of patent infringement actions filed against us in late 2007 by a competitor alleging that our SmartScoop® self scooping cat litter box infringes on their patents, and (ii) patent infringement suits we filed against
several other competitors for their infringement on our Durapet® and Play N Squeak® patents. The primary reason for the significant decrease in litigation expenses was due to the reduced SmartScoop® case activity.

The Company recognized a onetime $240,623 gain on the purchase of certain intangible assets from Cosmic Pet. This gain was comprised of the net excess in asset value OurPets received from the Cosmic
Pet asset purchase over the consideration OurPets paid and assumed in obligations. The Company had an independent third party perform a valuation of such assets which concluded their



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value to be $461,000 with most of the value attributed to the Cosmic Pet brand name. The asset purchase and gain are discussed further in the Notes to Consolidated Financial statements.

Consolidated income from our operations improved by $430,728 from $791,522 in 2009 to $1,222,250 in 2010 as a result of
(i) our gross profit on sales increasing by $519,392 or 12.1% , (ii) the decrease in litigation expenses of $260,747 and (iii) the onetime $240,623 gain from intangible asset valuation of which were partially offset by an 18.9%
increase in selling, general and administrative expenses of $590,034. OurPets income from operations was $1,099,461 while Cosmic Pets contributed $122,789 to income from operations.

Interest expense for 2010 was $136,162, a decrease of $42,740, from $178,902 in 2009. This decrease was due to (i) a decrease in
interest expense for our bank line of credit of approximately $15,000, a result of the decrease in our average balance to approximately $1,247,000 in 2010 from $1,539,000 in 2009 combined with a rate decrease to 3.750% in 2010 from 4.00% for most of
2009, (ii) a decrease in interest expense of approximately $30,700 related to outstanding balances on contributor notes which were reduced from $1,367,500 to $767,500 through a combination of payments and conversion of some of the notes into
Preferred Stock, (iii) a decrease of supplier financing charges of approximately $14,700 from the same period in 2009 and (iv) a decrease in our interest expense for our older bank term notes of approximately $10,500 due to the reduced
principal balances from the monthly payments. These decreases were partially offset by an increase in interest expense of approximately $28,100 related to our three year $800,000 bank term loan obtained in September 2009 and our three year $500,000
bank term loan obtained in September 2010.

Other income and expense net for 2010 was $1, a decrease from the $38,153 in other
income recorded in 2009. This decrease was primarily due to the receipt in April 2009 of $37,659 in final settlement proceeds from an action we had filed against Akon Plastic Enterprises, Inc. and certain parties related to it.

Income tax expense net for 2010 was $99,555, an increase of $224,549 from the $124,994 net income tax benefit recognized in 2009. This
increase was primarily due to (i) federal income tax expense of approximately $75,800 recognized from the adjustment of our Deferred Tax Asset to account for our anticipated utilization of tax loss carry forwards, (ii) $15,500 in estimated
2010 federal income tax expense, (iii) $6,100 in estimated local income tax expense for 2010 and (iv) a reduction of 2010 state income taxes of approximately $1,600 and v) the $125,370 reduction in income tax expense resultant from the 2009
Deferred Tax Asset estimate.

Net income for 2010 was $986,534 as compared to net income in 2009 of $775,767 or an increase in
profitability of $210,767. This increase was as a result of the following changes from 2009 to 2010:



|                                                                |  |   |            |  
|--------------------------------------------------------------- |  | - | ---------- | -
|Net revenue increase of 19.9%                                   |  | $ | 2,839,955  |  
|Cost of goods sold increase of 23.3%                            |  |   | (2,320,563 | )
|                                                                |  |   |            |  
|Gross profit on sales increase of 22.3%                         |  |   | 519,392    |  
|Selling, general and administrative expenses increase of 18.9 % |  |   | (590,034   | )
|Litigation expense decrease                                     |  |   | 260,747    |  
|Gain on Asset Purchase                                          |  |   | 240,623    |  
|Interest expense decrease of 23.9%                              |  |   | 42,740     |  
|Other Income decrease                                           |  |   | (38,152    | )
|Income tax expense increase                                     |  |   | (224,549   | )
|                                                                |  |   |            |  
|Increase in Profitability                                       |  | $ | 210,767    |  
|                                                                |  |   |            |  

Liquidity and Capital Resources

Our operating activities provide cash from the sale of our products to customers with the principal use of cash being for the payments to suppliers that manufacture our products and for freight charges
for shipments to our warehouse and to our customers. Our investing activities use cash mostly for the acquisition of equipment such as tooling, computers and software. Our financing activities provide cash, if needed, under our lines of credit with
our bank that had approximately $272,000 in available funds at December 31, 2010 based upon the balance of accounts receivable and inventories at that date.

As of December 31, 2010, we had $4,371,820 in principal amount of indebtedness consisting of:



|                                                         |  |                |  |   |           | 
|-------------------------------------------------------- |  | -------------- |  | - | --------- | 
|Bank line of credit - $2,500,000                         |  | Prime plus .5% |  | $ | 2,438,000 | 
|Bank line of credit-short term note ($300,000 available) |  | Prime plus .5% |  |   | 90,000    | 
|Bank term note ($800,000 original balance)               |  | 4.61%          |  |   | 478,540   | 
|Bank term note ($500,000 original balance)               |  | 4.18%          |  |   | 434,334   | 
|Contributor notes payable                                |  | Prime plus 2%  |  |   | 767,500   | 
|Capitalized Leases                                       |  | Various        |  |   | 55,433    | 



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|                         |  |                     |  |  |         | 
|------------------------ |  | ------------------- |  |  | ------- | 
|Installment note payable |  | 7.3%                |  |  | 8,013   | 
|Other notes payable      |  | Prime plus 3% & 10% |  |  | 100,000 | 

On October 18,
2010, the Company and its bank, First Merit N.A., entered into an agreement to increase the Companys line of credit facility to $2,500,000 from $2,000,000. At December 31, 2010, that bank line of credit had indebtedness of $2,438,000.
Borrowings are based on the level of qualifying accounts receivable and inventories. The line of credit is renewable annually by the bank and therefore is classified as a current liability on our balance sheet. Currently the line of credit has been
renewed by the bank through June 30, 2011. Under our agreement with the bank we are presently required to: (i) maintain a debt service coverage ratio of at least 1.15; (ii) maintain a tangible net worth of no less than $3,000,000; and
(iii) obtain the banks permission to incur additional indebtedness, make any expenditures for property and equipment in excess of $500,000 in any fiscal year, redeem any of our capital stock, or pay cash dividends other than dividends on
our preferred stock (subject to meeting the debt service coverage ratio). At December 31, 2010 we were in compliance with the covenants and default provisions under our agreement with the bank and had a debt service coverage ratio of 1.32 and a
tangible net worth of $5,071,796.

On November 30, 2010, we obtained a $300,000 short term loan from our bank to fund
specific working capital requirements for business growth. The Note matures on May 1, 2011 and provides for interest payments on the principal balance beginning January 1, 2011. This loan is secured by our accounts receivable, inventory,
equipment, trademarks andpatents. The interest rate is the same variable rate based on our banks prime rate plus .50% with the initial prime rate set at 3.25%. The principal amount outstanding at December 31, 2010 was $90,000.

On October 2, 2009, we obtained an $800,000 term loan from our bank. The term loan has a fixed interest rate of 4.61% and is payable
monthly over a three year period in equal installments of $23,859 that include interest. The loan is secured by our accounts receivable, inventory, equipment, trademarks, patents and the personal guarantee of certain stockholders. At
December 31, 2010, this loan had a principal balance outstanding of $478,540.

On July 16, 2010, we obtained a new
$500,000 term loan from our bank. $400,000 of that loan was used to pay off a debt obligation of Cosmic Pet Products, Inc. with the $100,000 balance used to purchase certain Cosmic Pet assets included in our July 29, 2010 asset purchase of
Cosmic Pet. The Loan is payable in equal monthly installments of $14,817 over a three year term at a fixed interest rate of 4.18%. This loan was secured by accounts receivable, inventory, equipment, trademarks, patents and the personal guarantee of
certain stockholders. At December 31, 2010, this loan had a principal balance outstanding of $434,334.

Contributor notes
totaling $1,367,500 were issued in 2008 to fund patent litigation expenses related to a lawsuit filed against us by a competitor. In February 2010, $600,000 of the notes were retired through a cash payment of $329,988 and conversion of $270,012 of
the notes to preferred stock. Of the remaining $767,500 in outstanding contributor notes, $265,000 is due June 20, 2011, $27,500 is due July 30, 2011, $25,000 is due July 24, 2011, $100,000 is due August 13, 2011, $50,000 is due
on October 7, 2011 and $300,000 is due on October 31, 2012.

On July 29, 2010 the Company assumed two
capitalized leases for equipment purchased from Cosmic Pets. The capital leases are payable in monthly payments of $2,424 through September 2011 and $1,527 through October 2012. At December 31, 2010, the remaining balances on the capitalized
leases totaled $55,433.

The installment notes payable are for warehouse equipment and due in monthly payments of $560
including interest, through March 2012. At December 31, 2010, this note had a principal balance outstanding of $8,013.

The other notes payable are due in the amount of $75,000 on December 1, 2011, to Beachcraft L.P. and $25,000 on November 1,
2011 to Over the Hill Ltd., plus accrued interest. Our indebtedness, which is secured by liens on our assets, was used to finance our equipment and working capital requirements. The agreements related to such indebtedness contain the customary
covenants and default provisions.

The note payable to Beachcraft L.P. was originally for $150,000, $75,000 of which was
repaid in 2003. As of February 1, 2004, a new note payable to Beachcraft L.P. was issued to replace the $75,000 remaining balance. The replacement note is due on December, 2011 with interest payable quarterly at prime plus 3%. In consideration
for this refinancing we issued warrants for the purchase of 56,250 shares of Common Stock to Beachcraft L.P. at an exercise price of $0.30 per share with an expiration date of February 1, 2010. Subsequent to their issuance the warrants were
adjusted to 57,204 warrants exercisable at $0.295 per share in accordance with the anti-dilution provisions of the warrants. These warrants were exercised in 2007.

Our short-term and long-term liquidity will continue to depend on our ability to achieve cash-flow break even on our operations and to increase sales of our products. For the year ended 2008, we recorded
a loss of approximately $1,728,000 due to approximately $2,323,000 of litigation expenses and therefore had to rely on our financing activities to fund operations. For the year ended



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December 31, 2009, litigation expenses were significantly lower, we recorded a profit of approximately $776,000 and were able to rely on cash from our operating activities to fund our
operations. In 2010, despite operating income of approximately $982,000 (excluding the $240,623 gain from intangible asset valuation) we again relied on our financing activities to fund operations as inventories increased by approximately $2,592,000
due to increased sales, increased safety stock and the Cosmic Pet asset purchase. In 2011, we anticipate exceeding the required debt service coverage ratio and the tangible net worth required by our bank to maintain our line of credit and therefore
we should be able to fund our operating cash requirements for 2011. We have no material commitments for capital expenditures.

A schedule of our contractual obligations as of December 31, 2010 is as follows:



|                                   |  |                        |           |  |                 |   |           |          |  |   |           |  |  |              |         |  |  |   |         | 
|---------------------------------- |  | ---------------------- | --------- |  | --------------- | - | --------- | -------- |  | - | --------- |  |  | ------------ | ------- |  |  | - | ------- | 
|                                   |  | Payments Due By Period |          
|Contractual Obligation             |  | Total                  |           |  | Less than 1year |   |           | 2-3years |  |   | 4-5years  |  |  | After 5years |        
|Short and Long Term Debt           |  | $                      | 4,316,387 |  |                 | $ | 3,534,063 |          |  | $ | 782,324   |  |  | $            | -0-     |  |  | $ | -0-     | 
|Capital Lease Obligations          |  |                        | 55,433    |  |                 |   | 40,153    |          |  |   | 15,280    |  |  |              | -0-     |  |  |   | -0-     | 
|Purchase Obligations               |  |                        | -0-       |  |                 |   | -0-       |          |  |   | -0-       |  |  |              | -0-     |  |  |   | -0-     | 
|Other Long Term Liabilities        |  |                        | -0-       |  |                 |   | -0-       |          |  |   | -0-       |  |  |              | -0-     |  |  |   | -0-     | 
|Operating Leases                   |  |                        | 2,964,932 |  |                 |   | 526,268   |          |  |   | 896,846   |  |  |              | 871,825 |  |  |   | 669,993 | 
|                                   |  |                        |           |  |                 |   |           |          |  |   |           |  |  |              |         |  |  |   |         | 
|Total Contractual Cash Obligations |  | $                      | 7,336,752 |  |                 | $ | 4,100,484 |          |  | $ | 1,694,450 |  |  | $            | 871,825 |  |  | $ | 669,933 | 
|                                   |  |                        |           |  |                 |   |           |          |  |   |           |  |  |              |         |  |  |   |         | 

Net cash used in operating activities for the year ended December 31, 2010 was $824,984. Cash was
provided by the net operating income for the year of $986,534, as well as the non-cash charges for depreciation of $451,671, amortization of $35,015, stock option expense of $24,000, warrant expense of $25,004 less the gain from Comic Pet asset
purchase of $240,623. Cash was reduced by $2,106,585 due to the following changes in our operating assets and liabilities:





|                                       |  |   |             | 
|-------------------------------------- |  | - | ----------- | 
|Accounts receivable increase           |  | $ | ( 776,686 ) | 
|Inventories increase                   |  |   | (2,155,225) | 
|Prepaid expenses increase              |  |   | (117,210)   | 
|Patent cost increase                   |  |   | (44,736)    | 
|Deferred Tax Benefit decrease          |  |   | 70,254      | 
|Domain names and other assets increase |  |   | (50,685)    | 
|Accounts payable increase              |  |   | 880,398     | 
|Accrued expenses increase              |  |   | 87,305      | 
|                                       |  |   |             | 
|Net change                             |  | $ | (2,106,585) | 
|                                       |  |   |             | 

The increase in accounts receivable from December 31, 2009 to December 31, 2010 was caused
principally by the increase in net sales from October 2010 to December 2010 of approximately $967,000 of which approximately $495,000 in the quarters increased sales came from Cosmic Pet. Our inventory increase from December 31, 2009 to
December 31, 2010 was the result of increased sales overall, increased safety stocks and lower sales than forecasted for certain products. The increase in other assets of approximately $51,000 from December 31, 2009 to December 31,
2010 was due to increased inventory deposits required by new overseas vendors. Our increase in accounts payable of approximately $880,000 from December 31, 2009 to December 31, 2010 was primarily due to the increase in inventories. Our
accrued expenses increased from December 31, 2009 to December 31, 2010 by approximately $87,000 primarily as a result of increased accrued legal expenses, salaries and bonus/profit sharing expenses.

Net cash used in investing activities for the year ended December 31, 2010 was $1,136,569 of which $600,000 was used for the asset
purchase of Cosmic Pet and $536,569 was used for the acquisition of property and equipment.

Net cash provided by financing
activities for the year was $1,955,672. The Companys $865,000 issuance of its Series 2009 Preferred Stock provided $ 595,000 in cash and converted approximately $270,000 of debt. Net borrowings on the bank lines of credit provided $1,679,000
comprised of $1,589,000 against the line of credit and $90,000 against the new $300,000 note obtained in November 2010. Stock options exercised provided $10,401. Approximately $777,000 was used for principal payments of debt which were offset by the
new $500,000 note obtained in July 2010 used to finance the Cosmic Pet asset purchase. The Company also paid approximately $52,000 in cash dividends to holders of its Series 2009 Preferred Stock.



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Net cash provided by operating activities for the year ended December 31, 2009 was
$353,012. Cash was provided by the net income for the year of $775,767 as well as the non-cash charges for depreciation of $394,827, amortization of $30,654, stock option expense of $21,025, and warrant expense of $24,030. Cash was reduced by
$893,291 due to increases in accounts receivable of $460,295, decreases in inventory of $319,582, increases in prepaid expenses of $19,135, increases in patent costs of $50,867, increases in deferred tax assets of $125,370, increases in other assets
of $116,088, decreases in accounts payable of $192,266 and decreases in accrued expenses of $248,852.

Net cash used in
investing activities for the year ended December 31, 2009 was $273,082, which was used for the acquisition of property and equipment. Net cash used in financing activities for the year was $358,948. Cash of $207,948 was used for the principal
repayment of long term debt. Cash of $951,000 was used to decrease net borrowings under the line of credit with our bank. $800,000 was provided by a new three year term note with our bank.

Critical Accounting Policies/Estimates

We prepare our consolidated
financial statements in accordance with United States generally accepted accounting principles. We have identified the accounting policies below as critical to our business operations and understanding of our results of operations. For a detailed
discussion on the application of these and other accounting policies, see Summary of Significant Accounting Policies footnote to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The application of
these policies may require management to make judgments and estimates that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of
revenue and expenses during the reporting period. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

Inventories.Inventories are stated at the lower of cost or net realizable value. We estimate net realizable value
based on intended use, current market value and inventory aging analyses. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Impairment of Long-Lived Assets. We review long-lived assets for possible impairment by evaluating whether the carrying amount of
assets exceed its recoverable amount. Our judgment regarding the existence of impairment is based on legal factors, market conditions and operational performance of our assets. Future adverse changes in legal environment, market conditions or poor
operating results could result in losses or an inability to recover the carrying value of the long-lived assets, thereby possibly requiring an impairment charge in the future.

Research and Development Expenses.Research and development expenditures are charged to operations when incurred and are included in cost of goods sold. If funding is not available from operations
our ability to develop new and/or improved products could be adversely affected.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are likely to have a current or future effect on our financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 8.Financial Statements and Supplementary Data.

The financial statements of OurPets Company as of December 31, 2010 and 2009, and for the years then ended together with the
Report of Independent Registered Public Accounting Firm are included in this Form 10-K on the pages indicated below.



|                                                               |  |          |       | 
|-------------------------------------------------------------- |  | -------- | ----- | 
|                                                               |  | Page No. |      
|Report of Independent Registered Public Accounting Firm        |  |          | 23    | 
|Report of Former Independent Registered Public Accounting Firm |  |          | 24-25 | 
|Consolidated Balance Sheets                                    |  |          | 26-27 | 
|Consolidated Statements of Operations                          |  |          | 28    | 
|Consolidated Statements of Stockholders Equity                |  |          | 29    | 
|Consolidated Statements of Cash Flows                          |  |          | 30    | 
|Notes to Consolidated Financial Statements                     |  |          | 31-42 | 



14



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##### Table of Contents

Item 9.Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.

On April 16, 2010, we dismissed our independent accountant, S.R.
Snodgrass, A.C., because S.R. Snodgrass no longer has an office convenient to us, and effective that same date we engaged Neece, Malec, Seifert & Vitaz, Inc. as our new independent accountant. More information regarding our change in independent
accountant can be found in our Form 8-K filed with the Securities and Exchange Commission on April 22, 2010.

Item 9A(T).Controls and Procedures.

Evaluation of Controls and Procedures

As of December 31, 2010, we
carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer each concluded
that our disclosure controls and procedures were effective as of December 31, 2010.

Managements Report on Internal Control Over
Financial Reporting

Management of OurPets is responsible for establishing and maintaining an adequate system of
internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of our consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles defined in the Exchange Act.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with
respect to financial statement preparation and presentation. Also, 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.

We carried out an evaluation under the supervision and with the
participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our internal control over financial reporting. In making this evaluation, management used the criteria set forth in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this evaluation, management has concluded that the internal control over financial reporting was effective
as of December 31, 2010.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.

Attestation Report of Independent Registered
Public Accounting Firm

This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to the Securities and Exchange Commission rules that permit
the Company to provide only managements report in this annual report.

Item 9B.Other
Information.

None.

PART III

Item 10.Directors, Executive
Officers and Corporate Governance.

The information required by this Item is incorporated by reference from the
information provided under the headings Board of Directors, and Executive Officers, contained in our Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for
our Annual Meeting of Shareholders to be held on May 20, 2011.

Item 11.Executive
Compensation.

The information required by this Item is incorporated by reference from the information provided
under the headings Executive Compensation and Other Information and Board of DirectorsDirector Compensation contained in our Proxy Statement.



15



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##### Table of Contents

Item 12.Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.

Information required by this Item is incorporated herein by
reference from the information provided under the headings Executive Compensation and Other InformationEquity Compensation Plan Information and Principal Stockholders of our Proxy Statement.

Item 13.Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item is incorporated herein by reference from the information provided under the heading
Certain Relationships and Related Transactions, and Board of DirectorsDirector Independence of our Proxy Statement.

Item 14.Principal Accountant Fees and Services.

The information required by this Item is
incorporated by reference from the information provided under the heading Principal Accountant Firm Fees contained in our Proxy Statement.

PART IV

Item 15.Exhibits and Financial
Statement Schedules.

(a) Financial Statement Schedules

The following consolidated financial statements of the Company and its subsidiary are incorporated by reference from Item 8 in Part
II of this Form 10-K (see pages 30-49).

Report of Independent Registered Public Accounting Firm

Report of Former Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Stockholders Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

All other schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because of the
absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.

(b) Exhibits



|      |  |                                                                                                                                                                                                                                                                                                                                                   
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1   |  | Asset Purchase Agreement dated January 3, 2006, between the Company and Pet Zone Products Ltd.(5)                                                                                                                                                                                                                                                 
|      | 
|3.1   |  | Articles of Incorporation of the Company, dated May 23, 1996.(1)                                                                                                                                                                                                                                                                                  
|      | 
|3.1.1 |  | Articles of Amendment to the Articles of Incorporation of the Company, effective September 1, 1998.(1)                                                                                                                                                                                                                                            
|      | 
|3.1.2 |  | Articles of Amendment to the Articles of Incorporation of the Company, adopted July 20, 1999.(1)                                                                                                                                                                                                                                                  
|      | 
|3.1.3 |  | Articles of Amendment to the Articles of Incorporation of the Company effective January 21, 2010(16)                                                                                                                                                                                                                                              
|      | 
|3.2   |  | Bylaws of the Company.(1)                                                                                                                                                                                                                                                                                                                         
|      | 
|4.1   |  | Common Stock Certificate.(1)                                                                                                                                                                                                                                                                                                                      
|      | 
|4.2   |  | Preferred Stock Certificate.(1)                                                                                                                                                                                                                                                                                                                   
|      | 
|4.3   |  | Promissory Note dated September 1, 1999 for $200,000, made by the Company to Joseph T. Aveni.(1)                                                                                                                                                                                                                                                  
|      | 
|4.4   |  | Registration Rights Agreement dated January 3, 2006 among the Company, Pet Zone Products Ltd. and certain other
stockholders.(5)                                                                                                                                                                                                                  
|      | 
|4.5   |  | Voting Agreement dated January 3, 2006 among the Company, Steven Tsengas, Evangelia S. Tsengas, Konstantine S. Tsengas, Nicholas S. Tsengas, Senk Properties, Joseph T. Aveni, Carl
Fazio, Jr., John G. Murchie, Pet Zone Products Ltd., Capital One Partners, LLC, LJR Limited Partnership, Nottingham Ventures, Ltd. and Spirk Ventures, Ltd.(5)
|      | 
|10.1  |  | Asset Purchase Agreement, dated March 31, 2000, between Akon Plastic Enterprises, Inc. and Sanar Manufacturing Company, a wholly-owned subsidiary of OurPets Company.(1)                                                                                                                                                                         
|      | 
|10.2  |  | Lease Agreement dated March 17, 1993, with Addendums, between Senk Properties and GPI Division, Napro, Inc.(1)                                                                                                                                                                                                                                    



16



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|      |  |                                                                                                                                                                                                                                              
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5  |  | 1999 Stock Option Plan.(1)                                                                                                                                                                                                                   
|      | 
|10.6  |  | Standard Option Agreement.(1)                                                                                                                                                                                                                
|      | 
|10.7  |  | Standard Common Stock Purchase Warrant.(1)                                                                                                                                                                                                   
|      | 
|10.8  |  | Indemnity Agreement, dated March 31, 2000, between Akon Plastic Enterprises, Inc. and its President, David Herman, individually, and OurPets Company and Dr. Steven Tsengas,
Evangelia Tsengas, Nicholas Tsengas and Konstantine Tsengas.(1)
|      | 
|10.10 |  | Small Business Administration loan agreement dated March 10, 1995 with Napro, Inc.(1)                                                                                                                                                        
|      | 
|10.12 |  | Vendor Agreement between the Company and Wal-Mart Stores, Inc.(1)                                                                                                                                                                            
|      | 
|10.17 |  | PetsMart 2001 Vendor Purchasing Terms.(1)                                                                                                                                                                                                    
|      | 
|10.18 |  | Credit Agreement, Revolving Note and Security Agreements, dated December 31, 2001, between FirstMerit Bank, N.A., the Company, Virtu Company, Dr. Steven Tsengas and Evangelia S.
Tsengas.(2)                                                
|      | 
|10.19 |  | Promissory Note dated February 1, 2004 for $75,000, made by the Company to Beachcraft Limited Partnership.(4)                                                                                                                                
|      | 
|10.20 |  | Warrant issued to Pet Zone Products Ltd. to purchase 2,729,000 shares of the Companys Common Stock dated January 4, 2006.(5)                                                                                                                
|      | 
|10.21 |  | Warrant issued to Pet Zone Products Ltd. to purchase 125,000 shares of the Companys Common Stock dated January 4,
2006.(5)                                                                                                                  
|      | 
|10.22 |  | Subordinated Promissory Note dated January 4, 2006 from the Company to Pet Zone Products Ltd.(5)                                                                                                                                             
|      | 
|10.23 |  | Commercial Security Agreement by and between the Company and FirstMerit Bank, N.A.(6)                                                                                                                                                        
|      | 
|10.24 |  | Promissory Note executed by the Company in favor of FirstMerit Bank, N.A.(6)                                                                                                                                                                 
|      | 
|10.25 |  | Lease Agreement dated March 1, 2007 between Senk Properties and OurPets Company.(7)                                                                                                                                                         
|      | 
|10.26 |  | Amended Subordinated Promissory Note dated as of October 18, 2006, executed by OurPets Company in favor of Pet Zone Products Ltd.(8)                                                                                                        
|      | 
|10.27 |  | Cat Litter Device Development Agreement dated January 15, 2007 by and between Nottingham-Spirk Design Associates, Inc. and OurPets Company.(9)                                                                                              
|      | 
|10.28 |  | Form of Indemnification Agreement, by and between OurPets Company and each of its Directors.(9)                                                                                                                                             
|      | 
|10.29 |  | Amendment to Loan Agreement dated March 23, 2007 between FirstMerit Bank, N.A. and OurPets Company.(10)                                                                                                                                     
|      | 
|10.30 |  | Promissory Note dated March 23, 2007 executed by the Company in favor of FirstMerit Bank, N.A.(10)                                                                                                                                           
|      | 
|10.31 |  | Commercial Security Agreement dated March 23, 2007 by and between the Company and FirstMerit Bank, N.A.(10)                                                                                                                                  
|      | 
|10.32 |  | Contribution Agreement dated February 7, 2008 among OurPets Company, Capital One Partners LLC, Nottingham Ventures Ltd., Spirk Ventures Ltd. and LJR Limited
Partnership.(11)                                                               
|      | 
|10.33 |  | Contribution Agreement dated February 7, 2008 among OurPets Company, Senk Properties and Dr. William M.
Fraser.(11)                                                                                                                         
|      | 
|10.34 |  | Form of Promissory Note issued by OurPets to each Contributor.(11)                                                                                                                                                                          
|      | 
|10.35 |  | Form of Warrant issued by OurPets to each Contributor.(11)                                                                                                                                                                                  
|      | 
|10.36 |  | Form of Registration Rights Agreement among OurPets and the Contributors.(11)                                                                                                                                                               
|      | 
|10.37 |  | Contribution Agreement dated June 20, 2008 among OurPets Company, Capital One Partners LLC, Nottingham Ventures Ltd., Spirk Ventures Ltd. and LJR Limited Partnership.(12)                                                                  
|      | 
|10.38 |  | Contribution Agreement dated June 20, 2008 among OurPets Company, Senk Properties and Dr. William M. Fraser.(12)                                                                                                                            
|      | 
|10.39 |  | Form of Promissory Note issued by OurPets to each Contributor.(12)                                                                                                                                                                          
|      | 
|10.40 |  | Form of Warrant issued by OurPets to each Contributor.(12)                                                                                                                                                                                  
|      | 
|10.41 |  | Form of Registration Rights Agreement among OurPets and the Contributors.(12)                                                                                                                                                               



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|      |  |                                                                                                                                     
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.42 |  | Fee Agreement dated November 25, 2008 between OurPets and Nottingham-Spirk Design Associates, Inc.(13)                             
|      | 
|10.43 |  | 2008 Stock Option Plan(14)                                                                                                          
|      | 
|10.44 |  | First Amendment to the 2008 Stock Option Plan(15)                                                                                   
|      | 
|10.45 |  | Business Loan Agreement (Asset Based), dated September 17, 2009, between OurPets Company and FirstMerit Bank,
N.A.(17)             
|      | 
|10.46 |  | Amendment to Note, dated September 17, 2009, between OurPets Company and FirstMerit Bank, N.A.(17)                                 
|      | 
|10.47 |  | Promissory Note, dated September 17, 2009, executed by OurPets Company in favor of FirstMerit Bank, N.A.(17)                       
|      | 
|10.48 |  | Form of Warrant(17)                                                                                                                 
|      | 
|10.49 |  | Asset Purchase Agreement among Cosmic Pet Products, Inc., Confusion, Inc., Leon Seidman and OurPets Company dated June 28, 2010(18)
|      | 
|10.50 |  | Commercial Security Agreement, dated July 16, 2010, between OurPets Company and FirstMerit Bank, N.A.(19)                          
|      | 
|10.51 |  | Promissory Note, dated July 16, 2010, executed by OurPets Company in favor of FirstMerit Bank, N.A.(19)                            
|      | 
|10.52 |  | Amendment to Note executed by OurPets Company, and Steven and Evangelia Tsengas as Guarantors, on October 18, 2010(20)             
|      | 
|10.53 |  | Form of Warrant(20)                                                                                                                 
|      | 
|10.54 |  | Promissory Note, dated November 30, 2010, executed by OurPets Company in favor of FirstMerit Bank, N.A.(21)                        
|      | 
|10.55 |  | Commercial Security Agreement, dated November 30, 2010, between OurPets Company and FirstMerit Bank, N.A.(21)                      
|      | 
|10.56 |  | Promissory Note, dated January 19, 2011, executed by OurPets Company in favor of FirstMerit Bank, N.A.(22)                         
|      | 
|10.57 |  | Commercial Security Agreement, dated January 19, 2011, between OurPets Company and FirstMerit Bank, N.A.(22)                       
|      | 
|11    |  | Statement of computation of Net Income Per Share.                                                                                   
|      | 
|14    |  | OurPets Code of Ethics.(3)                                                                                                         



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##### Table of Contents

|     |  |                                                                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|21   |  | Subsidiaries of the Registrant.(1)                                                                                                                                  
|     | 
|31.1 |  | Certification of the Chief Executive Officer pursuant to 17 CFR Section 240.13a-14(a) of the Sarbanes-Oxley Act of 2002.                                            
|     | 
|31.2 |  | Certification of the Principal Financial Officer pursuant to 17 CFR Section 240.13a-14(a) of the Sarbanes-Oxley Act of 2002.                                        
|     | 
|32.1 |  | Certification of the President and 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 the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.          



|(1) | Incorporated by reference to the exhibits to the Companys Registration Statement on Form 10SB/A filed on May 31, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to the exhibits to the Companys Annual Report on Form 10-KSB filed on March 26, 2002.
|--- | ----------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to the exhibits to the Companys Annual Report on Form 10-KSB filed on March 26, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to the exhibits to the Companys Annual Report on Form 10-KSB filed on March 30, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on January 6, 2006.
|--- | ---------------------------------------------------------------------------------------------



|(6) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on August 18, 2006.
|--- | ---------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on August 25, 2006.
|--- | ---------------------------------------------------------------------------------------------



|(8) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on October 23, 2006.
|--- | ----------------------------------------------------------------------------------------------



|(9) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on January 19, 2006.
|--- | ----------------------------------------------------------------------------------------------



|(10) | Incorporated by reference to the exhibits to the Companys Annual Report of Form 10-KSB filed on March 28, 2007.
|---- | ----------------------------------------------------------------------------------------------------------------



|(11) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on February 12, 2008.
|---- | -----------------------------------------------------------------------------------------------



|(12) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on June 25, 2008.
|---- | -------------------------------------------------------------------------------------------



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##### Table of Contents

|(13) | Incorporated by reference to the Exhibits to the Companys Form 8-K filed on December 2, 2008.
|---- | ----------------------------------------------------------------------------------------------



|(14) | Incorporated by reference to Annex A to the Companys Proxy Statement filed on May 7, 2008.
|---- | -------------------------------------------------------------------------------------------



|(15) | Incorporated by reference to the exhibits to the Companys Annual Report on Form 10-K filed on March 31, 2009
|---- | -------------------------------------------------------------------------------------------------------------



|(16) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on January 27, 2010
|---- | ---------------------------------------------------------------------------------------------



|(17) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on September 23, 2009
|---- | -----------------------------------------------------------------------------------------------



|(18) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on July 1, 2010
|---- | -----------------------------------------------------------------------------------------



|(19) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on July 22, 2010
|---- | ------------------------------------------------------------------------------------------



|(20) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on October 22, 2010
|---- | ---------------------------------------------------------------------------------------------



|(21) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on December 2, 2010
|---- | ---------------------------------------------------------------------------------------------



|(22) | Incorporated by reference to the exhibits to the Companys Form 8-K filed on January 24, 2011
|---- | ---------------------------------------------------------------------------------------------

All other Exhibits filed herewith.



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##### Table of Contents

SIGNATURES

In accordance with 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: March 31, 2011



OURPETS COMPANYBy:

/S/    STEVEN
TSENGASSteven TsengasChairman, President and Chief
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 the Registrant and in the capacities and on the dates
indicated.



|                            |  |                                                                                        |  |               
|--------------------------- |  | -------------------------------------------------------------------------------------- |  | --------------
|Signature                   |  | Title                                                                                  |  | Date          
|                            |  |                                                                                       
|/S/    STEVEN
TSENGAS       |  | Chairman, President, Chief Executive Officer andDirector (principal executive officer) |  | March 31, 2011
|Steven Tsengas              |  |                                                                                        | 
|                            |  |                                                                                       
|/S/    SCOTT R.
MENDES      |  | Chief Financial Officer(principal accounting officer)                                  |  | March 31, 2011
|Scott R. Mendes             |  |                                                                                        | 
|                            |  |                                                                                       
|/S/    JOSEPH T.
AVENI      |  | Director                                                                               |  | March 31, 2011
|Joseph T. Aveni             |  |                                                                                        |  |               
|                            |  |                                                                                       
|/S/    WILLIAM M.
FRASER    |  | Director                                                                               |  | March 31, 2011
|William M. Fraser           |  |                                                                                        |  |               
|                            |  |                                                                                       
|/S/    JAMES D. IRELAND
III |  | Director                                                                               |  | March 31, 2011
|James D. Ireland III        |  |                                                                                        |  |               
|                            |  |                                                                                       
|/S/    JOHN
SPIRK           |  | Director                                                                               |  | March 31, 2011
|John Spirk                  |  |                                                                                        |  |               



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OURPETS COMPANY AND SUBSIDIARIES

FINANCIAL STATEMENTS



|                                                                                                            |  |            |       | 
|----------------------------------------------------------------------------------------------------------- |  | ---------- | ----- | 
|                                                                                                            |  | PageNumber |      
|                                                                                                            | 
|Report of Independent Registered Public Accounting Firm                                                     |  |            | 23    | 
|                                                                                                            | 
|Report of Former Independent Registered Public Accounting Firm                                              |  |            | 24-25 | 
|                                                                                                            | 
|Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009                                   |  |            | 26-27 | 
|                                                                                                            | 
|Consolidated Statements of Operations for the years ended December 31, 2010
 and December 31, 2009          |  |            | 28    | 
|                                                                                                            | 
|Consolidated Statements of Stockholders Equity for the years ended December
31, 2010 and December 31, 2009 |  |            | 29    | 
|                                                                                                            | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2010
 and December 31, 2009          |  |            | 30    | 
|                                                                                                            | 
|Notes to Consolidated Financial Statements                                                                  |  |            | 31-42 | 



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

OurPets Company and Subsidiaries

We have audited the accompanying
consolidated balance sheets of OurPets Company and Subsidiaries, a Colorado corporation, as of December 31, 2010, and the related consolidated statements of operations, stockholders equity and cash flows for the year 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 audit. The financial statements of OurPets
Company and Subsidiaries for the year ended December 31, 2009 were audited by other auditors whose report, dated March 31,2010, expressed an unqualified opinion on those 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 perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, 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 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 OurPets Company and Subsidiaries as of December 31, 2010, and the consolidated results of their operations, stockholders equity and cash flows for the year ended December 31, 2010 in conformity with
accounting principles generally accepted in the United States of America.



Neece, Malec, Seifert & Vitaz, Inc.Certified Public Accountants


Mentor, Ohio

March 31, 2011



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

OurPets Company and Subsidiaries

Fairport Harbor, Ohio

We have audited the accompanying consolidated balance sheet of OurPets Company and Subsidiaries as of December 31, 2009 and
the related consolidated statements of operations, stockholders equity and cash flows for the year then ended. These consolidated statements are the responsibility of the Companys management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit.

We have conducted our audit in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OurPets Company and Subsidiaries as of December 31,
2009 and the consolidated results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ S.R. Snodgrass, A.C.

Steubenville, Ohio

March 31, 2010



24



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##### Table of Contents

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

OurPets Company and Subsidiaries

Fairport Harbor, Ohio

We hereby consent to the incorporation by reference in
this Annual Report of OurPets Company and Subsidiaries on Form 10-K of our report, dated March 31, 2010, with respect to the consolidated balance sheet as of December 31, 2009 and the related consolidated statements of operations,
stockholders equity and cash flows for the year then ended, which appear in the 2010 Annual Report to Shareholders.

/s/ S.R. Snodgrass,
A.C.

Steubenville, Ohio

March 31,
2011



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                        |  |              |            |  |      |   |           | 
|--------------------------------------------------------------------------------------- |  | ------------ | ---------- |  | ---- | - | --------- | 
|                                                                                        |  | December 31, |           
|                                                                                        |  | 2010         |            |  | 2009 |  
|ASSETS                                                                                  |  |              |            |  |      |   |           | 
|CURRENT ASSETS                                                                          |  |              |            |  |      |   |           | 
|Cash and cash equivalents                                                               |  | $            | 78,673     |  |      | $ | 84,555    | 
|Accounts receivabletrade, less allowance for doubtful accounts of $47,475 and $ 21,116 |  |              | 2,657,865  |  |      |   | 1,881,179 | 
|Inventories                                                                             |  |              | 5,576,129  |  |      |   | 2,984,035 | 
|Prepaid expenses                                                                        |  |              | 210,340    |  |      |   | 93,130    | 
|Deferred Tax Asset less Valuation Allowance of $ -0- and $377,734                       |  |              | 55,116     |  |      |   | 125,370   | 
|                                                                                        |  |              |            |  |      |   |           | 
|Total current assets                                                                    |  |              | 8,578,123  |  |      |   | 5,168,269 | 
|                                                                                        |  |              |            |  |      |   |           | 
|PROPERTY AND EQUIPMENT                                                                  |  |              |            |  |      |   |           | 
|Computers and office equipment                                                          |  |              | 403,161    |  |      |   | 339,077   | 
|Warehouse equipment                                                                     |  |              | 493,277    |  |      |   | 254,811   | 
|Leasehold improvements                                                                  |  |              | 228,851    |  |      |   | 129,572   | 
|Tooling                                                                                 |  |              | 3,615,589  |  |      |   | 3,432,508 | 
|Construction in progress                                                                |  |              | 475,820    |  |      |   | 302,991   | 
|                                                                                        |  |              |            |  |      |   |           | 
|Total                                                                                   |  |              | 5,216,698  |  |      |   | 4,458,959 | 
|Less accumulated depreciation                                                           |  |              | 2,955,825  |  |      |   | 2,504,154 | 
|                                                                                        |  |              |            |  |      |   |           | 
|Net property and equipment                                                              |  |              | 2,260,873  |  |      |   | 1,954,805 | 
|                                                                                        |  |              |            |  |      |   |           | 
|OTHER ASSETS                                                                            |  |              |            |  |      |   |           | 
|Patents, less amortization of $205,877 and $170,863                                     |  |              | 289,441    |  |      |   | 279,719   | 
|Intangible Assets                                                                       |  |              | 461,000    |  |      |   |          | 
|Goodwill                                                                                |  |              | 67,511     |  |      |   | 67,511    | 
|Deposits and other assets                                                               |  |              | 179,123    |  |      |   | 128,438   | 
|                                                                                        |  |              |            |  |      |   |           | 
|Total other assets                                                                      |  |              | 997,075    |  |      |   | 475,668   | 
|                                                                                        |  |              |            |  |      |   |           | 
|Total assets                                                                            |  | $            | 11,836,071 |  |      | $ | 7,598,742 | 
|                                                                                        |  |              |            |  |      |   |           | 

The accompanying notes are an integral part of the consolidated financial statements.



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OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)



|                                                                                                                                                                                                        |  |              |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                        |  | December 31, |           
|                                                                                                                                                                                                        |  | 2010         |            |   | 2009 |  
|LIABILITIES                                                                                                                                                                                             |  |              |            |   |      |   |            |  
|CURRENT LIABILITIES                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Notes payable                                                                                                                                                                                           |  | $            | 2,628,000  |   |      | $ | 949,000    |  
|Current maturities of long-term debt                                                                                                                                                                    |  |              | 946,216    |   |      |   | 956,589    |  
|Accounts payabletrade                                                                                                                                                                                  |  |              | 1,926,499  |   |      |   | 1,046,101  |  
|Accrued expenses                                                                                                                                                                                        |  |              | 504,504    |   |      |   | 417,199    |  
|                                                                                                                                                                                                        |  |              |            |   |      |   |            |  
|Total current liabilities                                                                                                                                                                               |  |              | 6,005,219  |   |      |   | 3,368,889  |  
|                                                                                                                                                                                                        |  |              |            |   |      |   |            |  
|LONG-TERM DEBT                                                                                                                                                                                          |  |              |            |   |      |   |            |  
|Long-term debtless current portion above                                                                                                                                                               |  |              | 797,604    |   |      |   | 1,254,080  |  
|                                                                                                                                                                                                        |  |              |            |   |      |   |            |  
|Total liabilities                                                                                                                                                                                       |  |              | 6,802,823  |   |      |   | 4,622,969  |  
|                                                                                                                                                                                                        |  |              |            |   |      |   |            |  
|STOCKHOLDERS EQUITY                                                                                                                                                                                    |  |              |            |   |      |   |            |  
|COMMON STOCK,no par value; 50,000,000 shares authorized, 15,726,196 and 15,378,984 shares issuedand outstanding at
December 31, 2010 and December 31, 2009 respectively                                 |  |              | 4,514,267  |   |      |   | 4,235,093  |  
|CONVERTIBLE PREFERRED STOCK,no par value; convertible into Common Stock at the rate of 10 common shares for
eachpreferred share; 66,000 shares authorized, 66,000 shares issued and outstanding         |  |              | 602,679    |   |      |   | 602,679    |  
|Series 2009 no par value; convertible into Common Stock at the rate of 10 common
shares for each preferred share; 175,000 shares authorized, 123,616 shares
issued and outstanding at December 31, 2010 |  |              | 865,312    |   |      |   |           |  
|PAID-IN CAPITAL                                                                                                                                                                                         |  |              | 2,399      |   |      |   | 75,944     |  
|ACCUMULATED DEFICIT                                                                                                                                                                                     |  |              | (951,409   | ) |      |   | (1,937,943 | )
|                                                                                                                                                                                                        |  |              |            |   |      |   |            |  
|Total stockholders equity                                                                                                                                                                              |  |              | 5,033,248  |   |      |   | 2,975,773  |  
|                                                                                                                                                                                                        |  |              |            |   |      |   |            |  
|Total liabilities and stockholders equity                                                                                                                                                              |  | $            | 11,836,071 |   |      | $ | 7,598,742  |  
|                                                                                                                                                                                                        |  |              |            |   |      |   |            |  

The accompanying notes are an integral part of the consolidated financial statements.



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OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                             |  |                             |            |   |      |   |            | 
|-------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | 
|                                                                                             |  | For the YearEnded 
Dec. 31, |           
|                                                                                             |  | 2010                        |            |   | 2009 |  
|Net revenue                                                                                  |  | $                           | 17,091,741 |   |      | $ | 14,251,786 | 
|Cost of goods sold                                                                           |  |                             | 12,292,259 |   |      |   | 9,971,696  | 
|                                                                                             |  |                             |            |   |      |   |            | 
|Gross profit on sales                                                                        |  |                             | 4,799,482  |   |      |   | 4,280,090  | 
|Selling, general and administrative expenses                                                 |  |                             | 3,704,994  |   |      |   | 3,114,960  | 
|Litigation expense                                                                           |  |                             | 112,861    |   |      |   | 373,608    | 
|Gain on Asset Purchase                                                                       |  |                             | 240,623    |   |      |   |           | 
|                                                                                             |  |                             |            |   |      |   |            | 
|Income from operations                                                                       |  |                             | 1,222,250  |   |      |   | 791,522    | 
|Other income                                                                                 |  |                             | 1          |   |      |   | 38,153     | 
|Interest expense                                                                             |  |                             | 136,162    |   |      |   | 178,902    | 
|                                                                                             |  |                             |            |   |      |   |            | 
|Income before income taxes                                                                   |  |                             | 1,086,089  |   |      |   | 650,773    | 
|Income tax (expense) benefit                                                                 |  |                             | (99,555    | ) |      |   | 124,994    | 
|                                                                                             |  |                             |            |   |      |   |            | 
|Net income                                                                                   |  | $                           | 986,534    |   |      | $ | 775,767    | 
|                                                                                             |  |                             |            |   |      |   |            | 
|Basic and Diluted Earnings Per Common Share After Dividend Requirements For Preferred Stock: |  |                             |            |   |      |   |            | 
|Net Income                                                                                   |  | $                           | 0.05       |   |      | $ | 0.05       | 
|                                                                                             |  |                             |            |   |      |   |            | 
|Weighted average number of common and equivalent shares outstanding used to                  |  |                             | 19,102,046 |   |      |   | 15,523,288 | 
|                                                                                             |  |                             |            |   |      |   |            | 
|calculate basic and diluted earnings per share                                               |  |                             |            |   |      |   |            | 

The accompanying notes are an integral part of the consolidated financial statements.



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OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010 AND DECEMBER 31, 2009



|                                                           |  |                 |        |  |                             |   |         |              |  |  |         |  |  |           |         |  |        |  |            |         |  |   |             |  |  |               |         |   |  |   |            |   |  |   |           |  
|---------------------------------------------------------- |  | --------------- | ------ |  | --------------------------- | - | ------- | ------------ |  |  | ------- |  |  | --------- | ------- |  | ------ |  | ---------- | ------- |  | - | ----------- |  |  | ------------- | ------- | - |  | - | ---------- | - |  | - | --------- | -
|                                                           |  | Preferred Stock |        |  | Series 2009 Preferred Stock |   |         | Common Stock |  |  |         |  |  |           |         |  | Total  | 
|                                                           |  | Number of       |        |  |                             |   |         | Number of    |  |  |         |  |  | Number of |         |  |        |  |            | Paid-In |  |   | Accumulated |  |  | Stockholders |        
|                                                           |  | Shares          |        |  | Amount                      |   |         | Shares       |  |  | Amount  |  |  | Shares    |         |  | Amount |  |            | Capital |  |   | Deficit     |  |  | Equity        |        
|Balance at January 1, 2009                                 |  |                 | 66,000 |  |                             | $ | 602,679 |              |  |  |        |  |  | $         |        |  |        |  | 15,312,984 |         |  | $ | 4,196,153   |  |  | $             | 69,829  |   |  | $ | (2,713,710 | ) |  | $ | 2,154,951 |  
|Common Stock issued in payment of Preferred Stock dividend |  |                 |       |  |                             |   |        |              |  |  |        |  |  |           |        |  |        |  | 66,000     |         |  |   | 38,940      |  |  |               | (38,940 | ) |  |   |           |   |  |   |          |  
|Net Income for year                                        |  |                 |       |  |                             |   |        |              |  |  |        |  |  |           |        |  |        |  |           |         |  |   |            |  |  |               |        |   |  |   | 775,767    |   |  |   | 775,767   |  
|Stock Based compensation expense                           |  |                 |       |  |                             |   |        |              |  |  |        |  |  |           |        |  |        |  |           |         |  |   |            |  |  |               | 45,055  |   |  |   |           |   |  |   | 45,055    |  
|                                                           |  |                 |        |  |                             |   |         |              |  |  |         |  |  |           |         |  |        |  |            |         |  |   |             |  |  |               |         |   |  |   |            |   |  |   |           |  
|Balance at December 31, 2009                               |  |                 | 66,000 |  |                             | $ | 602,679 |              |  |  |        |  |  | $         |        |  |        |  | 15,378,984 |         |  | $ | 4,235,093   |  |  | $             | 75,944  |   |  | $ | (1,937,943 | ) |  | $ | 2,975,773 |  
|Common Stock issued uponexercise of                        |  |                 |       |  |                             |   |        |              |  |  |        |  |  |           |        |  |        |  | 61,053     |         |  |   | 19,651      |  |  |               | (9,250  | ) |  |   |           |   |  |   | 10,401    |  
|stock options                                              |  |                 |        |  |                             |   |         |              |  |  |         |  |  |           |         |  |        |  |            |         |  |   |             |  |  |               |         |   |  |   |            |   |  |   |          |  
|Common Stock issued for asset purchase                     |  |                 |       |  |                             |   |        |              |  |  |        |  |  |           |        |  |        |  | 220,159    |         |  |   | 198,143     |  |  |               |        |   |  |   |           |   |  |   | 198,143   |  
|Common Stock issued in payment of Preferred Stock dividend |  |                 |       |  |                             |   |        |              |  |  |        |  |  |           |        |  |        |  | 66,000     |         |  |   | 61,380      |  |  |               | (61,380 | ) |  |   |           |   |  |   |          |  
|Preferred Stock issued                                     |  |                 |       |  |                             |   |        |              |  |  | 123,616 |  |  |           | 865,312 |  |        |  |           |         |  |   |            |  |  |               |        |   |  |   |           |   |  |   | 865,312   |  
|Cash Dividend paid on Preferred Stock                      |  |                 |       |  |                             |   |        |              |  |  |        |  |  |           |        |  |        |  |           |         |  |   |            |  |  |               | (51,919 | ) |  |   |           |   |  |   | (51,919   | )
|Net income                                                 |  |                 |       |  |                             |   |        |              |  |  |        |  |  |           |        |  |        |  |           |         |  |   |            |  |  |               |        |   |  |   | 986,534    |   |  |   | 986,534   |  
|Stock-Based compensation expense                           |  |                 |       |  |                             |   |        |              |  |  |        |  |  |           |        |  |        |  |           |         |  |   |            |  |  |               | 49,004  |   |  |   |           |   |  |   | 49,004    |  
|                                                           |  |                 |        |  |                             |   |         |              |  |  |         |  |  |           |         |  |        |  |            |         |  |   |             |  |  |               |         |   |  |   |            |   |  |   |           |  
|Balance at December 31, 2010                               |  |                 | 66,000 |  |                             | $ | 602,679 |              |  |  | 123,616 |  |  | $         | 865,312 |  |        |  | 15,726,196 |         |  | $ | 4,514,267   |  |  | $             | 2,399   |   |  | $ | (951,409   | ) |  | $ | 5,033,248 |  
|                                                           |  |                 |        |  |                             |   |         |              |  |  |         |  |  |           |         |  |        |  |            |         |  |   |             |  |  |               |         |   |  |   |            |   |  |   |           |  

The accompanying notes are an integral part of the consolidated financial statements.



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OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                     |            |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------- | ---------- | - | ---- | - | -------- | -
|                                                                                  |  | For the Years Ended |           
|                                                                                  |  | December 31,        |           
|                                                                                  |  | 2010                |            |   | 2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                     |            |   |      |   |          |  
|Net income                                                                        |  | $                   | 986,534    |   |      | $ | 775,767  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                     |            |   |      |   |          |  
|Depreciation expense                                                              |  |                     | 451,671    |   |      |   | 394,827  |  
|Amortization expense                                                              |  |                     | 35,014     |   |      |   | 30,654   |  
|Stock option expense                                                              |  |                     | 24,000     |   |      |   | 21,025   |  
|Warrant expense                                                                   |  |                     | 25,004     |   |      |   | 24,030   |  
|Gain on asset purchase                                                            |  |                     | (240,623   | ) |      |   |         |  
|(Increase) decrease in assets:                                                    |  |                     |            |   |      |   |          |  
|Accounts receivabletrade                                                         |  |                     | (776,686   | ) |      |   | (460,295 | )
|Inventories                                                                       |  |                     | (2,155,225 | ) |      |   | 319,582  |  
|Prepaid expenses                                                                  |  |                     | (117,210   | ) |      |   | (19,135  | )
|Deferred Tax Asset less Valuation Allowance                                       |  |                     | 70,254     |   |      |   | (125,370 | )
|Patent cost additions (net)                                                       |  |                     | (44,736    | ) |      |   | (50,867  | )
|Domain names and other assets                                                     |  |                     | (50,685    | ) |      |   | (116,088 | )
|Increase (decrease) in liabilities:                                               |  |                     |            |   |      |   |          |  
|Accounts payabletrade                                                            |  |                     | 880,398    |   |      |   | (192,266 | )
|Accrued expenses                                                                  |  |                     | 87,305     |   |      |   | (248,852 | )
|                                                                                  |  |                     |            |   |      |   |          |  
|Net cash (used in ) provided by operating activities                              |  |                     | (824,985   | ) |      |   | 353,012  |  
|                                                                                  |  |                     |            |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                     |            |   |      |   |          |  
|Acquisition of property and equipment                                             |  |                     | (536,569   | ) |      |   | (273,082 | )
|Acquisition of business                                                           |  |                     | (600,000   | ) |      |   |         |  
|                                                                                  |  |                     |            |   |      |   |          |  
|Net cash used in investing activities                                             |  |                     | (1,136,569 | ) |      |   | (273,082 | )
|                                                                                  |  |                     |            |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                     |            |   |      |   |          |  
|Principal payments on long-term debt                                              |  |                     | (776,810   | ) |      |   | (207,948 | )
|Gross borrowing on bank line of credit                                            |  |                     | 1,679,000  |   |      |   | (951,000 | )
|Issuances of long-term debt                                                       |  |                     | 500,000    |   |      |   | 800,000  |  
|Issuances of Common Stock                                                         |  |                     | 10,401     |   |      |   |         |  
|Issuances of Preferred Stock                                                      |  |                     | 595,000    |   |      |   |         |  
|Dividends paid on Preferred Stock                                                 |  |                     | (51,919    | ) |      |   |         |  
|                                                                                  |  |                     |            |   |      |   |          |  
|Net cash provided by (used in) financing activities                               |  |                     | 1,955,672  |   |      |   | (358,948 | )
|                                                                                  |  |                     |            |   |      |   |          |  
|Net decrease in cash                                                              |  |                     | (5,882     | ) |      |   | (279,018 | )
|CASH AT BEGINNING OF PERIOD                                                       |  |                     | 84,555     |   |      |   | 363,573  |  
|                                                                                  |  |                     |            |   |      |   |          |  
|CASH AT END OF PERIOD                                                             |  | $                   | 78,673     |   |      | $ | 84,555   |  
|                                                                                  |  |                     |            |   |      |   |          |  
|                                                                                  |  |                    
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                  |  |                     |            |   |      |   |          |  
|Interest paid                                                                     |  | $                   | 159,745    |   |      | $ | 163,827  |  
|Income taxes paid                                                                 |  | $                   | 19,505     |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS                                  |  |                     |            |   |      |   |          |  
|Non cash exercise of stock option                                                 |  | $                   | 19,483     |   |      | $ |         |  
|Common Stock issued in payment of Preferred Stock Dividend                        |  | $                   | 61,380     |   |      | $ | 38,940   |  
|Common Stock issued in payment for acquisition of business                        |  | $                   | 198,143    |   |      | $ |         |  

The accompanying notes
are an integral part of the consolidated financial statements.



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of
OperationsOurPets Company (the Company) management originally founded Napro, Inc. (Napro), an Ohio corporation, in 1985 as an enterprise for launching new ventures and acquiring companies in various lines of
business. In February 1996 Napro formed a wholly-owned Ohio subsidiary, Virtu Company (Virtu), to market proprietary products to the retail pet business under the OurPets label. Napro then changed its name to OurPets Company
effective March 19, 1998.

The accompanying consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles and include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

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. Actual results could differ from those estimates.

Policy of Cash
EquivalentsFor purposes of the financial statements, cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Accounts ReceivableAccounts receivable have been adjusted for all known uncollectible accounts. An allowance for possible
bad debts was established at December 31, 2010 and 2009 in the amount of $47,475 and $21,116, respectively. Management reviews accounts receivable on a regular basis, based on contracted terms and how recently payments have been received, to
determine if any such amounts will potentially be uncollected. After all attempts to collect a receivable have failed, the receivable is written off.

InventoryInventories are carried at the lower of cost, first-in, first-out method or market. Inventories at December 31, 2010 and December 31, 2009 consist of:



|                         |  |      |           |  |      |   |           | 
|------------------------ |  | ---- | --------- |  | ---- | - | --------- | 
|                         |  | 2010 |           |  | 2009 |  
|Finished goods           |  | $    | 3,949,340 |  |      | $ | 2,163,787 | 
|Components and packaging |  |      | 1,626,789 |  |      |   | 820,248   | 
|                         |  |      |           |  |      |   |           | 
|Total                    |  | $    | 5,576,129 |  |      | $ | 2,984,035 | 
|                         |  |      |           |  |      |   |           | 

All inventories are pledged as collateral for bank loans.

ImpairmentsAssets are evaluated for impairment when events change or change in circumstances indicates that the carrying
amounts of the assets may not be recoverable. When any such impairment exists, the related assets are written down to fair value.

Property and EquipmentProperty and equipment are reported at cost. Depreciation and amortization are provided by using the straight-line and units sold for certain tooling methods over the
estimated useful lives of the assets. Amortization of leasehold improvements is provided on a straight-line basis over the lesser of the useful lives of the related assets or the terms of the leases. The estimated useful lives of the assets are as
follows:



|                               |  |  |                | 
|------------------------------ |  |  | -------------- | 
|Computers and office equipment |  |  | 3 to 7 years   | 
|Leasehold improvements         |  |  | 20 to 39 years | 
|Tooling                        |  |  | 3 to 10 years  | 
|Warehouse equipment            |  |  | 5 to 7 years   | 

All property and
equipment is pledged as collateral for bank loans. Total amounts under capital lease were $130,000 for the year ended December 31, 2010. Total depreciation for the years ended December 31, 2010 and December 31, 2009 was $451,671 and
$394,827, respectively.

Intangible AssetsThe Company adopted the provisions of ASC Topic 350 Goodwill and
Other Intangible Assets which states that goodwill and other intangible assets that are subject to amortization are required to be tested for impairment at least annually.





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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



The Company has filed for patents and trademarks for its proprietary products. The costs
incurred of $45,817 in the year ended December 31, 2010 and $50,640 in the year ended December 31, 2009 have been capitalized and are being amortized over 15 years on a straight-line basis. In 2002 and 2006 the Company purchased domain
names for its website for $11,000 which is not subject to amortization.

Revenue Recognition and Major
CustomersWith respect to revenue from product sales, revenue is recognized only upon shipment of products to customers. The Company derives its revenues from the sale of proprietary pet products under the OurPets®, Pet Zone®, SmartScoop®, EcoPure
Naturals®, Play-N-Squeak®, Durapet®, Flappy ®Go! Cat! Go®!, Eat® , Smarter Toys®, Clipnosis® and Cosmic Pet® brand names.
Net revenue is comprised of gross sales less discounts given to distributors and returns and allowances.

For the year ended
December 31, 2010, 31.0% of the Companys revenue was derived from two major customers. Revenue generated from each of these customers amounted to $ $2,713,663 and $2,574,402, which represents 15.9% and 15.1% of total revenue,
respectively.

For the year ended December 31, 2009, 42.9% of the Companys revenue was derived from two major
customers. Revenue generated from each of these customers amounted to $3,076,073 and $2,921,058, which represents 22.0% and 20.9% of total revenue, respectively.

Research and Development CostsResearch and development costs are charged to operations when incurred and are included in cost of goods sold. The amount charged for the years ended
December 31, 2010 and December 31, 2009 was $183,252 and $259,328, respectively.

Advertising
CostsAdvertising costs are charged to operations when the advertising first takes place. Advertising expense for the years ended December 31, 2010 and December 31, 2009 was $64,310 and $67,897, respectively.

Shipping and Handling CostsShipping and handling costs for products sold are included in cost of goods sold when incurred.

Stock OptionsAccounting Standards requires the grant-date fair value of all share-based payment awards that are
expected to vest, including employee share options, to be recognized as employee compensation expense over the requisite service period. The Company is applying the modified prospective transition method. Under this transition method, the Company
(1) did not restate any prior periods and (2) is recognizing compensation expense for all share-based payment awards that were outstanding, but not yet vested, as of January 1, 2006, based upon the same estimated grant-date fair
values and service periods used to prepare the pro-forma disclosures. The amount of compensation expense recognized in 2010 and 2009 as a result of stock options was $24,000 and $21,025, respectively.

Net Income Per Common ShareBasic and diluted net income per share of Common Stock is based on the net income attributable to
common stockholders after preferred stock dividend requirements for the year, divided by the weighted average number of common and equivalent dilutive shares outstanding during the year. Potential common shares whose effect would be antidilutive
have not been included.

As of December 31, 2010, common shares that are or could be potentially dilutive include
1,655,516 stock options at exercise prices from $0.200 to $1.550 a share, 4,961,876 warrants to purchase Common Stock at exercise prices from $0.281 to $1.426 a share, 660,000 shares underlying Preferred Stock at a conversion rate of $1.000 per
share and 1,236,160 shares underlying a second series of Preferred Stock (2009) at a conversion rate of $.70/share.

As
of December 31, 2009, common shares that are or could be potentially dilutive include 1,593,000 stock options at exercise prices from $0.200 to $1.550 a share, 4,717,887 warrants to purchase Common Stock at exercise prices from $0.282 to $1.432
a share and 660,000 shares underlying Preferred Stock at a conversion rate of $1.000 per share.

Fair Value of Financial
InstrumentsFair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2010. The respective carrying value of certain balance sheet financial
instruments approximated their fair values and are all classified within level one of the fair value hierarchy. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. The fair value
of the Companys long-term debt is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying value approximates the fair
value of the debt.



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Income Taxes

Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.

In June 2006, the Financial Accounting
Standards Board (FASB) issued FASB ASC 740-10 (prior authoritative literature: Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) an interpretation of SFAS No. 109). FASB ASC 740-10
clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FASB ASC 740-10 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods and disclosure.

The Company adopted FASB
ASC 740-10 on January 1, 2007. Under FASB ASC 740-10, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount
of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed or to be claimed in tax returns that do not meet these measurement standards. The Companys adoption
of FASB ASC 740-10 did not have a material effect on the Companys financial statements as the Company believes they have no uncertain tax positions.

As permitted by FASB ASC 740-10, the Company also adopted an accounting policy to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax
provision. Previously, the Companys policy was to classify interest and penalties as an operating expense in arriving at pre-tax income. At December 31, 2010 and 2009, the Company does not have accrued interest and penalties related to
any unrecognized tax benefits. The years subject to potential audit vary depending on the tax jurisdiction. Generally, the Companys statutes of limitation for tax liabilities are open for tax years ended December 31, 2007 and forward. The
Companys major taxing jurisdiction is the United States. Within the United States, only Ohio and Maryland could give rise to significant tax liabilities.

Subsequent EventsThe Company has performed an evaluation of subsequent events. On January 19, 2011, the Company entered into a Commercial Security Agreement with FirstMerit Bank, N.A.
and executed a Promissory Note for the principal amount of $450,000. The Note matures on July 31, 2011 and provides for draws as needed with interest payments on the principal balance beginning March 1, 2011. The interest rate is a
variable rate based on FirstMerits prime rate plus .50%, with the initial prime rate set at 3.250%. The purpose of the short-term loan is to meet additional working capital needs of OurPets related to new business growth. Under the
Security Agreement FirstMerit was granted a blanket lien on OurPets assets consistent with the lien granted to FirstMerit under its other outstanding loans to OurPets. With this new Note, the total Line of Credit facility with First
Merit increased to $3,250,000 from $2,800,000. As of March 15, 2011, the balance drawn against this Note and outstanding was $150,000.

On February 4, 2011, the Company resolved all patent infringement accusations related to the SmartScoop® Self Scooping Litter Box. The
SmartScoop® is a patented automated self-cleaning cat litter box that offers a unique modular design for easy
cleaning and maintenance using any type of clumping litter. In 2007, Applica Consumer Products, the manufacturer of the LitterMaid Automatic Cat Litter Box, filed two lawsuits alleging that the SmartScoop® infringed multiple claims of U.S. Patent No. RE 36,847 and U.S. Patent No. 6,082,302. As previously announced
in October 2010, in one of the lawsuits, the United States Court of Appeals for the Federal Circuit (Court) agreed with OurPets legal position that the asserted patent claims were either not violated by the SmartScoop design and
operation or were invalid. The remaining patent infringement lawsuit has been resolved on satisfactory terms and was dismissed on February 16, 2011.

Recently Issued Accounting PronouncementsIn January 21, 2010, the FASB issued ASU No. 2010-6, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about
Fair Value Measurements. Effective December 15, 2009 the Company adopted the disclosure requirements requiring reporting entities to provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy
established by ASC 820, Fair Value Measurements. This adoption had no impact on these Consolidated Condensed Financial statements. Effective for fiscal years beginning after December 15, 2020, a reconciliation of purchases, sales,
issuance, and settlements of financial instruments valued with a Level 3 method, which is used to price the hardest to value instruments will be required. The Company currently believes the adoption related to Level 3 financial instruments will have
no impact on the Consolidated Financial Statements.





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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Recently Issued Accounting Pronouncements (Continued)



In February, 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic
855)Amendments to Certain Recognition and Disclosure requirements (ASU 2010-09). ASU 2010-09 reiterates that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued and
removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. The updated guidance was effective upon issuance and was adopted by the Company in the second quarter of fiscal 2010.

In April 2010, the FASB issued ASU No. 2010-13, Compensation-Stock Compensation (Topic 718): Effect of Denominating the
Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU No. 2010-13 clarifies that an employee share-based payment award with an exercise price denominated in the
currency of a market in which a substantial portion of the entitys equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such
an award as a liability if it otherwise qualifies as equity. The provisions of ASU No. 2010-13 will be effective for the Company on January 1, 2011. Early adoption is permitted. Adoption of the provisions of ASU No. 2010-13 is not
expected to have a material effect on the Companys consolidated financial position, results of operations or cash flows.

In December 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-28When to Perform Step 2 of the
Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This update provides amendments to ASC Topic 350Intangibles, Goodwill and Other that requires an entity to perform Step 2 impairment test even if a
reporting unit has zero or negative carrying amount. Step 1 tests whether the carrying amount of a reporting unit exceeds its fair value. Previously reporting units with zero or negative carrying value passed Step 1 because the fair value was
generally greater than zero. Step 2 requires impairment testing and impairment valuation be calculated in between annual tests if an event or circumstances indicate that it is more likely than not that goodwill has been impaired. ASU 2010-28 is
effective beginning January 1, 2011. As a result of this standard, goodwill impairments may be reported sooner than under current practice. The Company does not expect ASU 2010-28 to have a material impact on the financial statements.

In January 2010, the FASB issued ASU No. 2010-06Improving Disclosures about Fair Value Measurements. This
update provides amendments to ASC Topic 820Fair Value Measurements and Disclosures that requires additional disclosures about significant transfers into and out of Levels 1 and 2 in the fair value measurements, as well as reasons for the
transfers. It also clarifies existing disclosures related to the level of disaggregation in the disclosures as well as the required disclosures about inputs and valuation techniques. The adoption of this portion of the standard which was effective
January 1, 2010, has not had a material impact on our financial statements. See the Fair Value note for further discussion of this statement and its effect on the financial statements presented herein. Additionally a portion of this standard is
effective for interim and annual reporting periods beginning after December 15, 2010. This portion requires disclosure of purchases, sales, issuance and settlements in the reconciliation of Level 3 fair value measurements. This portion of the
standard is not expected to have a material impact on the Companys financial statements.

In December 2010, the
FASB issued an update to ASC 805, Business Combinations.This ASU addresses the disclosure of comparative financial statements and expands on the supplementary pro forma information for business combinations. The Company has adopted this ASU
for business combinations occurring on or after December 15, 2010.



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTES PAYABLE AND LONG-TERM DEBT



|                                                                                                                                                                                                                                                                                                                                                                                                                     |  |              |           |  |      |   |           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- |  | ---- | - | --------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                     |  | December 31, |          
|                                                                                                                                                                                                                                                                                                                                                                                                                     |  | 2010         |           |  | 2009 |  
|Revolving note payableBank, under line of credit facility of up to $2,500,000 at December 31, 2010 with interest at
prime plus .50% (3.75% at December 31, 2010) and up to $2,000,000 at December 31, 2009 with interest at prime plus .50% (3.75% at December 31, 2009). The note is secured by accounts receivable, equipment, inventory, trademarks,
patents and the personal guarantee of certain stockholders. |  | $            | 2,438,000 |  |      | $ | 849,000   | 
|Note payableBank, additional $300,000 line of credit facility due May 1, 2011 with interest at Prime plus .50% (3.75%
at December 31, 2010). The note is secured by accounts receivable, equipment, inventory, trademarks, patents and the personal guarantee of certain stockholders.                                                                                                                              |  |              | 90,000    |  |      |   | - 0 -     | 
|Note payableBank, loan of $300,000, due in 36 monthly installments of $9,362 including interest at 7.60% beginning
July 23, 2007. This note is secured by all inventory, chattel paper, accounts, equipment and general intangibles.                                                                                                                                                                                |  |              | - 0 -     |  |      |   | 55,443    | 
|Note payableBank, loan of $800,000, due in 36 monthly principal and interest installments of $23,859 at an interest rate of
4.61% beginning September 17, 2009. This note is secured by all inventory, chattel paper, accounts, equipment, general intangibles and the personal guarantee of certain directors.                                                                                                     |  |              | 478,540   |  |      |   | 735,952   | 
|Note payableBank, loan of $500,000, due in 36 monthly principal and interest installments of $14,817 at an interest rate of
4.18% beginning July 16, 2010 This note is secured by all inventory, chattel paper, accounts, equipment, general intangibles and the personal guarantee of certain directors.                                                                                                           |  |              | 434,334   |  |      |   | - 0 -     | 
|Note payablePet Zone Products Ltd, due in quarterly installments of $9,878 through December 31, 2010 including
interest at 7.75%. This note is subordinated to the bank loans.                                                                                                                                                                                                                                      |  |              | - 0 -     |  |      |   | 37,842    | 
|Note payableformer director and shareholder, due on December 1, 2011. Interest at prime plus 3% (6.25% at
December 31, 2010 and 6.25% at December 31, 2009) payable quarterly. This note is subordinated to the bank loans.                                                                                                                                                                                         |  |              | 75,000    |  |      |   | 75,000    | 
|Note payableshareholder and investor, due on November 30, 2011. Interest is payable quarterly at 10%. This note is
subordinated to the bank loans.                                                                                                                                                                                                                                                                  |  |              | 25,000    |  |      |   | 25,000    | 
|Notes payabledirectors, shareholders, and investors due beginning in 2010 through 2012. Interest calculated quarterly at
prime plus 2% (5.25% at December 31, 2010 and December 31, 2009). These notes are subordinated to the bank loans.                                                                                                                                                                          |  |              | 767,500   |  |      |   | 1,367,500 | 
|Installment notes payabledue in monthly payments decreasing from $3,554 to $560 including interest through March 27,
2012. Interest rates range from 7% to 7.5%.                                                                                                                                                                                                                                                    |  |              | 8,013     |  |      |   | 13,932    | 
|Capitalized Leasedue in monthly payments of $1,527 including taxes and interest of 8.18% through October 5, 2012.
Lease is secured by equipment.                                                                                                                                                                                                                                                                    |  |              | 33,615    |  |      |   | - 0 -     | 
|Capitalized Leasedue in monthly payments of $2,424 including interest of 5.29% through September 5, 2011. Lease is
secured by equipment.                                                                                                                                                                                                                                                                            |  |              | 21,818    |  |      |   | - 0 -     | 
|                                                                                                                                                                                                                                                                                                                                                                                                                     |  |              |           |  |      |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                     |  |              | 4,371,820 |  |      |   | 3,159,669 | 
|Less current portion of long-term debt                                                                                                                                                                                                                                                                                                                                                                               |  |              | 3,574,216 |  |      |   | 1,905,589 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                     |  |              |           |  |      |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                     |  | $            | 797,604   |  |      | $ | 1,254,080 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                     |  |              |           |  |      |   |           | 

Future maturities of notes payable and long-term debt are as follows:



|                         |  |        |           | 
|------------------------ |  | ------ | --------- | 
|Year Ending December 31, |  | Amount |          
|2011                     |  | $      | 3,574,216 | 
|2012                     |  |        | 695,332   | 
|2013                     |  |        | 102,272   | 
|                         |  |        |           | 
|                         |  | $      | 4,371,820 | 
|                         |  |        |           | 



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTES PAYABLE AND LONG-TERM DEBT (Continued)



The bank loan agreements contain various restrictive and customary covenants and default
provisions under which the Company must obtain permission from its lender to (i) purchase or retire any of its capital stock; (ii) pay dividends in cash on any of its capital stock other than dividends on our Preferred Stock subject to
meeting the debt service coverage ratio; (iii) exceed $500,000 annually for capital expenditures; and (iv) pay principal on subordinated notes due to officers and directors. In addition, the Company must follow certain other requirements
as to maintaining a minimum debt service coverage ratio of at least 1.15 to 1.00 and an adjusted tangible net worth of at least $3,000,000.

In July and August of 2000, the Company borrowed a total of $275,000 from an officer, directors, and stockholders for working capital purposes at an annual interest rate of 10%. A note for $25,000 is due
on November 30, 2011 with interest payable quarterly. Three of the notes totaling $100,000 were repaid in 2001 and 2003 by $31,250 in cash and conversion into 172,526 shares of Common Stock. Another of the notes for $150,000 was reduced to
$75,000 by a $75,000 cash payment on December 30, 2003. On February 1, 2004 the reduced note of $75,000 was extended (now due December 31, 2011) at an interest rate of prime plus 3% payable quarterly. In addition the lender received
57,204 warrants for the purchase of Common Stock at $0.295 per share as adjusted for the Common Stock issued in payment of the Preferred Stock dividends in 2006, 2005 and 2004. These warrants were exercised in 2007.

In February, June, July, August, October and November of 2008, the Company entered into contribution agreements with ten contributors
pursuant to which each contributor loaned certain funds to the Company totaling $1,367,500. These funds were used for expenses related to litigation on certain of our SmartScoop products. In consideration for these loans the Company
(a) executed promissory notes for $600,000 due and paid/retired in 2010, $467,500 due in 2011, and $300,000 due in 2012 all with interest calculated quarterly at prime plus 2%, (b) issued warrants for the purchase of 833,750 shares of the
Companys Common Stock at option prices from $0.370 to $0.825 per share and (c) entered into piggyback registration agreements with the contributors. Subsequent to their issuance the warrants were adjusted to 843,118 warrants exercisable
at $0.367 to $0.815 per share in accordance with the warrant anti-dilution provisions.

INTANGIBLE ASSETS



|                                          |  |                         |         |  |                         |   |         |      |  |   |              |  |  |   |         | 
|----------------------------------------- |  | ----------------------- | ------- |  | ----------------------- | - | ------- | ---- |  | - | ------------ |  |  | - | ------- | 
|                                          |  | As of December 31, 2010 |         |  | As of December 31, 2009 |  
|                                          |  | Cost                    |         |  | Amortization            |   |         | Cost |  |   | Amortization | 
|Amortized intangible assets:              |  |                         |         |  |                         |   |         |      |  |   |              |  |  |   |         | 
|Patents and trademarks                    |  | $                       | 495,318 |  |                         | $ | 205,877 |      |  | $ | 450,582      |  |  | $ | 170,863 | 
|                                          |  |                         |         | 
|Unamortized intangible assets:            |  |                         |         |  |                         |   |         |      |  |   |              |  |  |   |         | 
|Domain names                              |  | $                       | 11,000  |  |                         | $ |        |      |  | $ | 11,000       |  |  | $ |        | 
|Cosmic Pet assets                         |  | $                       | 461,000 |  |                         | $ |        |      |  | $ |             |  |  | $ |        | 
|Goodwill-PetZone                          |  | $                       | 67,511  |  |                         | $ |        |      |  | $ | 67,511       |  |  | $ |        | 
|                                          |  |                         |         | 
|Amortization expense for year ended 12/31 |  | $                       | 35,014  |  |                         |   |         |      |  | $ | 30,654       |  |  |   |         | 
|                                          |  |                         |         | 
|Estimated amortization expense:           |  |                         |         |  |                         |   |         |      |  |   |              |  |  |   |         | 
|For year ending 12/31/11                  |  | $                       | 36,958  |  |                         |   |         |      |  |   |              |  |  |   |         | 
|For year ending 12/31/12                  |  | $                       | 36,958  |  |                         |   |         |      |  |   |              |  |  |   |         | 
|For year ending 12/31/13                  |  | $                       | 36,958  |  |                         |   |         |      |  |   |              |  |  |   |         | 
|For year ending 12/31/14                  |  | $                       | 36,958  |  |                         |   |         |      |  |   |              |  |  |   |         | 
|For year ending 12/31/15                  |  | $                       | 36,958  |  |                         |   |         |      |  |   |              |  |  |   |         | 

RELATED PARTY TRANSACTIONS

The Company leases warehouse and office facilities from a related entity, Senk Properties at a current monthly rental of $28,417 plus real estate taxes. The Company entered into a new ten year lease with
Senk Properties which was effective upon completion of the 36,000 square foot warehouse expansion on June 1, 2007. The monthly rental is $26,667 for the first two years, $28,417 for the next two years, $30,167 for the next three years, $32,000
for the next two years, and $33,750 for the last year, all plus real estate taxes. The Company has the option to extend the lease for an additional ten years at a rental to be mutually agreed upon. Total lease expense for the year ended
December 31, 2010 and the year ended December 31, 2009 was $447,799 and $358,678, respectively. Related party lease expense for the same periods was $374,206 in 2010 and $357,286 in 2009.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



RELATED PARTY TRANSACTIONS (Continued)



On January 15, 2007 and November 25, 2008, the Company entered into agreements
with Nottingham-Spirk Design Associates, Inc. (NSDA), one of the principals of NSDA is John Spirk, a member of the Companys Board of Directors and a shareholder. Also, NSDA indirectly owns shares of the Company through its
ownership in Pet Zone Products, Ltd., a significant shareholder of the Company. The agreements address the invoicing and payment of NSDAs fees and expenses related to the development of certain products on behalf of the
Company.

Through December 31, 2010, the Company has been invoiced $781,061 by NSDA of which $415,496 has been paid in
cash, $50,000 paid with 50,454 shares of the Companys Common Stock and the remaining balance of $315,565 deferred. The balance of the deferred payments is payable as a fee based upon sales of certain products beginning January 1,
2009. As of December 31, 2010, the fee accrued to date was $10,565.

CONCENTRATION OF CREDIT RISK

At December 31, 2010, 27.9% of the Companys accounts receivable was due from four major customers. Amounts due from each of
these customers were $249,905, $217,853, $150,505, and $121,892, which represents 9.4%, 8.2%, 5.7%, and 4.6% of total accounts receivable, respectively.

At December 31, 2009, 40.6% of the Companys accounts receivable was due from four major customers. Amounts due from each of these customers were $344,632, $184,789, $148,854, and $94,168, which
represents 18.1%, 9.7%, 7.8%, and 5.0% of total accounts receivable, respectively.

CAPITAL STOCK

From July through November 1999, the Company sold through a private placement 100,000 shares of no par value non-voting convertible
Preferred Stock. Each share of the Preferred Stock is convertible into ten shares of Common Stock at a conversion rate of $1.00 per share. The Company may redeem the preferred stock at $10 per share or convert each share of Preferred Stock into ten
shares of Common Stock, at the option of the shareholder, at such time as the common stock is trading on a public exchange at a closing price of $4.00 or above for a period of ten consecutive business days. The holders of the Preferred Stock are
entitled to a 10% dividend paid annually in Common Stock beginning twelve months from the final close of the private placement. Under certain conditions, each preferred shareholder may elect to receive a cash dividend in lieu of the Common Stock
dividend.

On January 28, 2010 and February 1, 2010, the Company sold an aggregate of 123,616
shares of its Series 2009 Preferred Stock in a private placement to a total of 15 accredited investors. All shares in the private placement were sold at a price of $7.00 a share for a total of $865,312. Payment for the shares comprised of $595,000
in cash and $270,312 in converted debt (including accrued interest). All were previously reported in our Form 8-K filed February 2, 2010 except for 6,572 shares totaling $46,004 purchased by two additional accredited investors on
February 1, 2010. All shares are convertible at any time into shares of common stock at a conversion price of $.70/common share, subject to adjustment for stock splits, combinations and similar transactions. All shares receive a 6% ($0.42) cash
dividend payable on December 1stof each year
provided that payment may be deferred if necessary for our compliance with our loan covenants. The Company has the limited right to convert the shares into common stock at any time after the trading price of our common stock reaches $1.50 per share
for twenty consecutive days. The shares sold were not registered under the Securities Act of 1933, as amended (the Act), in reliance on the private offering exemption from registration provided by Section 4(2) of the Act and
Rule 506 of Regulation D of the rules promulgated under the Act. The Company did not utilize an underwriter or placement agent in connection with the private placement.



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



WARRANTS

At December 31, 2010, the Company had the following Common Stock purchase warrants outstanding, all of which were exercisable:



|                                   |  |                 |           |  |               |  |       |                 |  |                   
|---------------------------------- |  | --------------- | --------- |  | ------------- |  | ----- | --------------- |  | ------------------
|                                   |  | Number ofShares |           |  | ExercisePrice |  |       | Expiration Date
|2004 Directors for fees            |  |                 | 57,875    |  |               |  | 0.281 |                 |  | October 1, 2012   
|2005 Directors for guarantees      |  |                 | 153,422   |  |               |  | 0.420 |                 |  | November 14, 2012 
|2006 Acquisition of business       |  |                 | 2,794,227 |  |               |  | 0.587 |                 |  | January 2, 2013   
|2006 Note payable to stockholder   |  |                 | 127,206   |  |               |  | 0.329 |                 |  | January 3, 2013   
|2006 Payment for services          |  |                 | 20,416    |  |               |  | 0.490 |                 |  | April 20, 2013    
|2006 Director for guarantee        |  |                 | 255,419   |  |               |  | 0.685 |                 |  | August 2, 2013    
|2007 Directors for fees            |  |                 | 52,203    |  |               |  | 1.426 |                 |  | August 17, 2012   
|2008 Payment for services          |  |                 | 50,640    |  |               |  | 0.938 |                 |  | January 11, 2013  
|2008 Note payable to contributor   |  |                 | 7,601     |  |               |  | 0.815 |                 |  | February 8, 2013  
|2008 Notes payable to contributors |  |                 | 296,184   |  |               |  | 0.494 |                 |  | February 8, 2013  
|2008 Notes payable to contributors |  |                 | 134,168   |  |               |  | 0.494 |                 |  | June 20, 2013     
|2008 Note payable to contributor   |  |                 | 12,657    |  |               |  | 0.494 |                 |  | July 24, 2013     
|2008 Note payable to contributor   |  |                 | 13,923    |  |               |  | 0.494 |                 |  | July 30, 2013     
|2008 Note payable to contributor   |  |                 | 50,680    |  |               |  | 0.395 |                 |  | August 13, 2013   
|2008 Note payable to contributor   |  |                 | 25,341    |  |               |  | 0.395 |                 |  | October 7, 2013   
|2008 Note payable to contributor   |  |                 | 302,563   |  |               |  | 0.367 |                 |  | November 7, 2013  
|2009 Director for guarantee        |  |                 | 352,990   |  |               |  | 0.449 |                 |  | September 17, 2012
|2009 Payment for services          |  |                 | 30,256    |  |               |  | 0.480 |                 |  | October 15, 2014  
|2010 Director for guarantee        |  |                 | 28,244    |  |               |  | 0.807 |                 |  | June 28, 2015     
|2010 Director for guarantee        |  |                 | 62,763    |  |               |  | 0.852 |                 |  | July 16, 2015     
|2010 Acquisition of business       |  |                 | 55,272    |  |               |  | 0.863 |                 |  | July 30, 2015     
|2010 Payment for services          |  |                 | 15,063    |  |               |  | 0.996 |                 |  | October 15, 2015  
|2010 Director for guarantee        |  |                 | 62,763    |  |               |  | 0.976 |                 |  | October, 18, 2015 
|                                   |  |                 |           |  |               |  |       |                 |  |                   
|Total                              |  |                 | 4,961,876 |  |               |  |       |                 |  |                   
|                                   |  |                 |           |  |               |  |       |                 |  |                   

The exercise price for the common shares issuable under the warrants to purchase 2,782,500 shares
is $0.587 per share if exercised on or before January 2, 2011 or $0.660 per share if exercised on or after January 3, 2011 and on or before January 2, 2012 or $0.735 per share if exercised on or after January 3, 2012 and on or
before the expiration of the warrants on January 2, 2013.

The exercise price and number of warrant shares are subject to
adjustment in the event of a Common Stock dividend or distribution, a stock split or reverse stock split, or reorganization of the Company. The financial statements reflect the adjustments for the Common Stock issued in payment of the Preferred
Stock dividends.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



STOCK OPTION PLANS

On December 4, 1999, the Board of Directors approved the 1999 Stock Option Plan, which was approved by the shareholders on August 5, 2000. On May 2, 2008, the Board of Directors approved
the 2008 Stock Option Plan, which was approved by the shareholders on May 30, 2008. The 2008 Plan supersedes the 1999 Plan and no further options will be granted under the 1999 Plan. Stock options may be granted at the discretion of the Board
of Directors for which the Company has reserved 1,000,000 shares of its Common Stock for issuance upon the exercise of options granted under the 2008 Plan. The options vest one-third on each of the second, third and fourth anniversaries of the date
of grant and expire on the fifth anniversary of the date of grant. The Company grants stock options at exercise prices equal to or greater than the fair market value of the Companys Common Stock on the date of grant. On May 8, 2003, the
Board of Directors approved the adjustment of the exercise price of unexercised stock options to the higher of 50% of the existing exercise price or the current market price on May 8, 2003. On February 11, 2009, the Board of Directors
approved the adjustment of the expiration date for all options expiring in 2009 for an additional five years from the original expiration date. The following table summarizes activity in options under the Plans:



|                                 |  |           |           |  |                  |  |     | 
|-------------------------------- |  | --------- | --------- |  | ---------------- |  | --- | 
|                                 |  | Number of |           |  | Weighted Average | 
|                                 |  | Shares    |           |  | Exercise Price   | 
|Outstanding at January 1, 2009   |  |           | 1,395,000 |  |                  |  | .42 | 
|Granted                          |  |           | 203,000   |  |                  |  | .25 | 
|Exercised                        |  |           |          |  |                  |  |    | 
|Forfeited                        |  |           | 5,000     |  |                  |  | .31 | 
|Expired                          |  |           |          |  |                  |  |    | 
|                                 |  |           |           |  |                  |  |     | 
|Outstanding at December 31, 2009 |  |           | 1,593,000 |  |                  |  | .40 | 
|Granted                          |  |           | 153,016   |  |                  |  | .81 | 
|Exercised                        |  |           | 83,333    |  |                  |  | .33 | 
|Forfeited                        |  |           | 7,167     |  |                  |  | .57 | 
|Expired                          |  |           |          |  |                  |  |    | 
|                                 |  |           |           |  |                  |  |     | 
|Outstanding at December 31, 2010 |  |           | 1,655,516 |  |                  |  | .44 | 
|                                 |  |           |           |  |                  |  |     | 

The following table summarizes options outstanding at December 31, 2010:



|            |  |                   |         |  |                              |   |      |                                          |  |  |                   |  |  |                              |         |  |  |   |      | 
|----------- |  | ----------------- | ------- |  | ---------------------------- | - | ---- | ---------------------------------------- |  |  | ----------------- |  |  | ---------------------------- | ------- |  |  | - | ---- | 
|            |  |                   |         |  | Options Outstanding          |   |      | Options Exercisable                      | 
|Range       |  | NumberOutstanding |         |  | WeightedAverageExercisePrice |   |      | WeightedAverageRemainingContractual Life |  |  | NumberExercisable |  |  | WeightedAverageExercisePrice |        
|$0.75-$1.55 |  |                   | 201,016 |  |                              | $ | 0.90 |                                          |  |  | 3.7 Years         |  |  |                              | 34,000  |  |  | $ | 1.12 | 
|$0.45-$0.69 |  |                   | 531,000 |  |                              | $ | 0.50 |                                          |  |  | 2.1 Years         |  |  |                              | 254,333 |  |  | $ | 0.50 | 
|$0.20-$0.35 |  |                   | 923,500 |  |                              | $ | 0.30 |                                          |  |  | 3.5 Years         |  |  |                              | 772,167 |  |  | $ | 0.31 | 

There were 1,060,500
and 904,166 options exercisable at December 31, 2010 and December 31, 2009, respectively. The weighted average exercise price of options granted in 2010 and 2009 was $0.81 and $0.25, respectively. The weighted average exercise price of
options exercised in 2010 was $.33. There were no options exercised in 2009.

OPERATING LEASES

Minimum future lease payments under operating leases as of December 31, 2010 are as follows:



|                             |  |   |           | 
|---------------------------- |  | - | --------- | 
|2011                         |  | $ | 526,268   | 
|2012                         |  |   | 477,723   | 
|2013                         |  |   | 419,123   | 
|2014                         |  |   | 432,128   | 
|2015                         |  |   | 439,697   | 
|Thereafter                   |  |   | 669,993   | 
|                             |  |   |           | 
|Total minimum lease payments |  | $ | 2,964,932 | 
|                             |  |   |           | 

Total rent expense of the Company for the years ended December 31, 2010 and December 31, 2009 was
$447,799 and $358,678, respectively.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



INCOME TAXES

At December 31, 2010, the Company did not have any unrecognized tax benefits. The year subject to potential audit varies depending on the tax jurisdiction. Generally, the Companys statutes are
open for tax years ended December 31, 2007 and forward. The Companys major taxing jurisdictions include the United States, Ohio, Maryland.

For the year ended December 31, 2010 there was a provision for income tax expense of $99,555 which came from i) utilization of approximately $70,000 of Deferred Tax Assets, ii) approximately $24,500
of federal alternative minimum income tax expense and iii) approximately $4,800 of state and local income tax expense.

For
the year ended December 31, 2009 there was an income tax benefit of $124,994 from the use of operating loss carry forwards by the Company.

Following is a reconciliation of the expected income tax expense/benefit to the amount based on the U.S. statutory rate of 34% for the years ended December 31, 2010 and December 31, 2009.



|                                                      |  |      |          |   |      |   |          |  
|----------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                      |  | 2010 |          |   | 2009 |  
|Income tax expense/benefit based on US statutory rate |  | $    | 369,270  |   |      | $ | 221,263  |  
|Current period change in the valuation allowance      |  |      | (377,734 | ) |      |   | (363,733 | )
|Deferred Tax asset change                             |  |      | 407,675  |   |      |   | 17,476   |  
|Utilization of net operating loss                     |  |      | (328,959 | ) |      |   |         |  
|State/Local income tax                                |  |      | 4,795    |   |      |   |         |  
|Alternative Minimum Tax                               |  |      | 24,508   |   |      |   |         |  
|                                                      |  |      |          |   |      |   |          |  
|Provision for Income Taxes                            |  | $    | 99,555   |   |      | $ | (124,994 | )
|                                                      |  |      |          |   |      |   |          |  

The significant components of the Companys deferred tax assets and liabilities are as follows:



|                                 |  |              |        |  |      |   |          |  
|-------------------------------- |  | ------------ | ------ |  | ---- | - | -------- | -
|                                 |  | December 31, |       
|                                 |  | 2010         |        |  | 2009 |  
|Deferred tax assets:             |  |              |        |  |      |   |          |  
|Net operating loss carry forward |  | $            | 55,116 |  |      | $ | 503,104  |  
|Valuation allowances             |  |              | -0-    |  |      |   | (377,734 | )
|                                 |  |              |        |  |      |   |          |  
|Net deferred tax assets          |  | $            | 55,116 |  |      | $ | 125,370  |  
|                                 |  |              |        |  |      |   |          |  



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



INCOME TAXES (Continued)



The Companys valuation allowance decreased by approximately $377,700 for the year
ended December 31, 2010, which represents the effect of the current years net income and the current years calculation of the net deferred tax asset. The Company adjusted its valuation allowance in 2010 to record its deferred tax
assets at estimated net realizable value based on its assessment of the realization of these assets through future taxable income being more likely than not.

The Companys valuation allowance decreased by approximately $363,700 for the year ended December 31, 2009, which represents the effect of the current years net income and the current
years calculation of the net deferred tax asset.

The Company has available at December 31, 2010, unused operating
loss carryforwards that may be applied against future taxable income and that expire as follows:



|             |  |                                             |         |  |                             |  |      | 
|------------ |  | ------------------------------------------- | ------- |  | --------------------------- |  | ---- | 
|Year Of Loss |  | Amount of UnusedOperating LossCarryforwards |         |  | ExpirationDuring YearEnding | 
|2008         |  | $                                           | 162,106 |  |                             |  | 2028 | 

LITIGATION

On March 31, 2000, SMP Company, Incorporated (formerly known as Sanar Manufacturing, Inc.) (SMP), a wholly-owned
subsidiary of the Company, entered into an asset purchase agreement with Akon Plastic Enterprises, Inc. (Akon) whereby Akon agreed to purchase substantially all of the assets used by SMP in molding plastics. Further, as part of the sale,
Akon and its President, David F. Harman (Harman), entered into an Indemnity Agreement whereby Akon and Harman, jointly and severally, agreed to indemnify the Company and the individual guarantors of the Small Business Administration
loans to SMP against any liability for such loans, which were assumed as a part of the asset purchase by Akon. On June 5, 2003, the Company filed an action against Akon, the directors of Akon, and Harman in the Court of Common Pleas of Lake
County, Ohio for damages, including non-payment of loans, due to Akons breach of the asset purchase agreement. On March 3, 2009, the parties agreed to settle and dismiss the pending action and the settlement agreement and mutual release
were executed as of March 27, 2009. Under the agreement the Company received approximately $37,000 after deductions for contingent legal fees and expenses.

In 2007, Applica Consumer Products, the manufacturer of the LitterMaid Automatic Cat Litter Box, filed two
lawsuits alleging that the SmartScoop® infringed multiple claims of U.S. Patent No. RE 36,847 and U.S. Patent
No. 6,082,302. The SmartScoop® is a patented automated self-cleaning cat litter box that offers a
unique modular design for easy cleaning and maintenance using any type of clumping litter. As previously announced, in October 2010, in one of the lawsuits, the United States Court of Appeals for the Federal Circuit (Court) agreed with
OurPets legal position that the asserted patent claims were either not violated by the SmartScoop design and operation or were invalid. The Federal Circuits decision was not appealed by Applica and was therefore final resolved in
OurPets favor as of January 4, 2011. On February 4, 2011, the Company settled the remaining patent infringement accusations in the second lawsuit related to the SmartScoop® Self Scooping Litter Box. That lawsuit was dismissed on February 16, 2011.

In addition to the above matters and in the normal course of conducting its business, the Company may become involved in various other litigation, including, but not limited to, preference claims by
debtors in bankruptcy proceedings. The Company is not a party to any litigation or governmental proceeding which management or legal representatives believe could result in any judgments or fines against the Company that would have a material
adverse effect or impact in the Companys financial position, liquidity or results of operation.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



PURCHASE OF BUSINESS

On July 29, 2010, the Company entered into an Asset Purchase Agreement (the Purchase Agreement) with Cosmic Pet Products, Inc. (Cosmic) pursuant to which the company purchased
certain assets and assumed certain liabilities. The results of Cosmic operations have been included in the consolidated financial statements since that date. Cosmic Pet Products designs, manufactures and distributes pet supply products for cats.
Their products include catnip toys, containers of catnip, cat scratchers, cat treats and cat toys. Cosmic markets their products to pet specialty stores, distributors, mass retailers, grocery chains, independent retailers. The complementary strength
of each company should allow significant product and distribution synergies to be realized with each companys product sales being expanded to the others market segments and customers. OurPets will gain entry into such new product
categories as catnip toys, catnip products and cat treats utilizing the Cosmic Pet brand name.

The purchase price for Cosmic
consisted of i) $600,000 in cash (of which $400,000 was used to retire Cosmics secured line of credit), ii) $198,143 provided through the issuance of approximately 220,000 shares of OurPets common stock at an issuance price of
$.8665/share and iii) and a warrant to purchase approximately 55,000 shares of common stock(1 warrant for every 4 shares of common stock), subsequently adjusted to 55,272 shares in accordance with the warrant anti-dilutions provisions.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition.

At July 29, 2010:



|                               |  |   |           |  
|------------------------------ |  | - | --------- | -
|ASSET ACQUIRED                 |  |   |           |  
|Inventories                    |  | $ | 436,869   |  
|Equipment                      |  |   | 201,950   |  
|Office Furniture and computers |  |   | 19,220    |  
|Intangible Assets              |  |   | 461,000   |  
|                               |  |   |           |  
|Total assets acquired          |  |   | 1,119,039 |  
|                               |  |   |           |  
|                               | 
|LIABILITIES ASSUMED            |  |   |           |  
|Capital Leases assumed         |  |   | (80,273   | )
|Total Liabilities assumed      |  |   | (80,273   | )
|                               |  |   |           |  
|Net assets acquired            |  | $ | 1,038,766 |  
|                               |  |   |           |  

On July 29, 2010, the Company purchased certain assets of Cosmic Pet Products. During the fourth
quarter of 2010, the Company had an independent third party Certified Appraiser perform a valuation of Cosmic Pets intangible assets. The appraisal was performed in accordance with general accepted accounting principles including but not
limited to FASB ASC 820, Fair Value Measurements and Disclosures and FASB ASC 805 Business Combinations. As a result of that appraisal, the Company recognized $461,000 in intangible assets mostly related to the brand/trade names Cosmic
Cat and Cosmic Pet. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense. All intangible assets are pledged as collateral
for the bank loans.

Cosmics revenues and earnings since the acquisition date and included in the Companys
consolidated financial statements were $738,144 and $122,789 respectively.

The Company has determined we are unable to supply
supplemental pro forma information for either the quarterly or the year to date reporting periods ending December 31, 2010 as financial statements for Cosmic Pet Products have not been prepared for any reporting period after December 31,
2009. We believe that after making every reasonable effort to do so, we have deemed it impracticable to apply the requirements of ASC 805-10-50 which requires the revenues and earnings of the combined entity for the current year to date reporting be
reported as though the asset purchase had been completed as of the beginning of the annual reporting period and the prior period.



42