##### Table of Contents

As filed with the Securities and Exchange Commission on March 30, 2004

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United States

Securities and Exchange Commission

Washington, DC 20549



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Form 10-KSB



|x |  | Annual Report Pursuant to Section 13 or 15(d)
|- |  | ---------------------------------------------

Of the Securities Exchange Act of 1934



For
the fiscal year ended December 31, 2003



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 Small Business Issuer as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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



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



Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x



Issuers revenues for the fiscal year ended December 31, 2003 were $5,180,779. 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 $1,368,856 as of March 4, 2004. As of March 4, 2004, the issuer had outstanding 11,700,473 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 22, 2004.



Transitional Small Business Disclosure Format
(Check one): Yes ̈; No x.



www.ourpets.com



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##### Table of Contents

OURPETS COMPANY



FORM 10-KSB



For The Fiscal Year Ended December 31, 2003



INDEX



|         |  |                                                                                                                |  |     
|-------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                |  | Page
|PART I   |  |                                                                                                                |  |     
|         |  |                                                                                                               
|Item 1.  |  | Description of Business                                                                                        |  | 3   
|Item 2.  |  | Description of Property                                                                                        |  | 8   
|Item 3.  |  | Legal Proceedings                                                                                              |  | 8   
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                            |  | 9   
|         |  |                                                                                                               
|PART II  |  |                                                                                                                |  |     
|         |  |                                                                                                               
|Item 5.  |  | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities |  | 10  
|Item 6.  |  | Managements Discussion and Analysis or Plan of Operations                                                     |  | 11  
|Item 7.  |  | Financial Statements                                                                                           |  | 15  
|Item 8.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                           |  | 32  
|Item 8A. |  | Controls and Procedures                                                                                        |  | 32  
|         |  |                                                                                                               
|PART III |  |                                                                                                                |  |     
|         |  |                                                                                                               
|Item 9.  |  | Directors and Executive Officers of the Registrant                                                             |  | 32  
|Item 10. |  | Executive Compensation                                                                                         |  | 32  
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                 |  | 32  
|Item 12. |  | Certain Relationships and Related Transactions                                                                 |  | 33  
|Item 13. |  | Exhibits, Lists and Reports on Form 8-K                                                                        |  | 33  
|Item 14. |  | Principal Accountant Fees and Services                                                                         |  | 35  
|         |  | Signatures                                                                                                     |  | 36  
|         |  | Certifications                                                                                                 |  | 42  



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##### Table of Contents

This report on the Form 10-KSB (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 1. Description of Business  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, (OurPets,
we, us and our) 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. |  | Description of 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.



Virtu develops and markets products for
improving the health, safety, comfort and enjoyment of pets. The products sold have increased from the initial Big Dog Feeder to approximately 100 products for dogs, cats, birds and other small animals. All are marketed under the
OurPets label to customers, both domestic and foreign. The manufacturing of these products is subcontracted to other entities, both domestic and foreign, based upon price and quality.



According to the 2003/2004 APPMA National Pet Owners Survey, published by the
American Pet Products Manufacturers Association, Inc®, approximately 64.2 million U.S. households (62% of all households) currently own a pet, with approximately 46% of those households owning more than one pet. The most popular pets are dogs (39% of all households) and
cats (34% of all households). The above survey estimates that there are approximately 378 million pets in the United States.



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##### Table of Contents

We sell our products in the following market segments:



|                                                                                                                                                                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|mass retailerseg. Wal-Mart, Kmart, Target pet store chainseg. PetsMart, Petco pet catalogueseg. Drs. Foster & Smith, Pet Edge general catalogueseg. Hammacher Schlemmer, Solutions clubseg. Costco, BJs grocery chainseg. Stop-N-Shop, Safeway pet food makerseg. Friskies, Ralston Purina pet distributors/pet dealerseg. Wolverton, Central Garden & Pet



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
200 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 200 customers for the year ended December 31, 2003, 45.5% of our revenue was derived from two major customers. Revenue generated from each of these customers amounted to $1,597,638 and $761,966, respectively, which represents 30.8% and
14.7% of total revenue.



We currently market products such as
dog and cat feeders, dog and cat toys, cat litter, and natural and nutritional pet supplements and treats. We conduct our marketing and sales activities through 6 in-house officers and/or employees, 46 general merchandise independent sales agents,
12 specialty market independent sales agents and 2 catalog market independent sales agents. Domestic independent sales agents are paid commissions, which range from 3% to 15% 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 small 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 is both domestic and foreign companies, many of whom manufacture their products in low cost areas such as Mexico and the Far East. Our
competition in the premium cat litter market is mainly larger domestic companies.



We have been granted fifteen United States patents for dog and cat feeders and have twenty-five United States 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 fourteen additional trademark registrations and applied for ten trademark registrations, which are still pending.



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##### Table of Contents

The patents issued and granted to us are:



|           |  |                   |  |                                                  
|---------- |  | ----------------- |  | -------------------------------------------------
|Patent No. |  | Issue Date        |  | Title                                            
|5,509,376  |  | April 23, 1996    |  | Animal Feeder Assembly                           
|5,730,081  |  | March 24, 1998    |  | Animal Feeder Assembly                           
|D393,107   |  | March 31, 1998    |  | Small Animal Feeder                              
|6,032,615  |  | March 7, 2000     |  | Amusement Device for Household Pets, such as Cats
|6,158,390  |  | December 12, 2000 |  | Pet Ball                                         
|6,237,538  |  | May 29,2001       |  | Pet Toy Ball Feeder                              
|6,371,053  |  | April 16, 2002    |  | Simulated Mouse Toy with                         
|           |  |                   |  | Pre-Recorded Sound Chip                          
|D456,570   |  | April 30, 2002    |  | Pet Toy and Exerciser                            
|6,467,428  |  | October 22, 2002  |  | Filtered Water and Feeding System                
|D467,045   |  | December 10, 2002 |  | Stackable Pet Feeder                             
|6,550,426  |  | April 22, 2003    |  | Pet Toy                                          
|6,568,433  |  | May 27, 2003      |  | Portable Fluid Delivery Device                   
|6,571,742  |  | May 27, 2003      |  | Interactive Pet Toy                              
|D486,274   |  | February 3, 2004  |  | Adjustable Height Pet Feeder                     
|D486,273   |  | February 3, 2004  |  | Adjustable Height Pet Feeder                     



Patent applications that are pending
are:



|           |  |                   |  |                                           
|---------- |  | ----------------- |  | ------------------------------------------
|Serial No. |  | File Date         |  | Title                                     
|09/813746  |  | March 21, 2001    |  | Cover for Pet Food and Water Bowls        
|09/590815  |  | June 9, 2000      |  | Food and Treat Dispenser                  
|09/778543  |  | February 7, 2001  |  | Vocal Training and Companionship          
|29/152806  |  | December 27, 2001 |  | Pet Feeder Top                            
|10/179117  |  | June 25, 2002     |  | Pet Food Product                          
|10/264223  |  | October 3, 2002   |  | Improved Cat Litter                       
|10/325019  |  | December 20, 2002 |  | Toxic Material Exposure Indicator         
|29/180,189 |  | April 21, 2003    |  | Adjustable Height Pet Feeder              
|10/423,706 |  | April 28, 2003    |  | Gourmet Spray                             
|10/434,734 |  | May 12, 2003      |  | Adjustable Height Pet Feeder              
|10/444,163 |  | May 23, 2003      |  | Portable Fluid Delivery Device            
|10/456,919 |  | June 9, 2003      |  | Vocal Training and Companionship Apparatus
|10/611,821 |  | July 1, 2003      |  | Nutrient and Anti-Microbial Pet Bone      
|10/616,282 |  | July 10, 2003     |  | Cover for Pet Bowls                       
|10/679,029 |  | October 3, 2003   |  | Pet Food and Water Bowl                   
|60/508,916 |  | October 7, 2003   |  | Rawhide Biscuit                           
|Pending    |  | October 14, 2003  |  | Apparatus for Scooping Cat Litter         
|10/688,672 |  | October 20, 2003  |  | Food and Treat Dispenser                  
|60/528,968 |  | December 12, 2003 |  | Meaty Bone                                
|60/528,963 |  | December 12, 2003 |  | Chew-N-Squeak                             
|60/528,818 |  | December 12, 2003 |  | Savor-Sphere                              
|60/528,819 |  | December 12, 2003 |  | Bouncy Bone                               
|60/528,972 |  | December 12, 2003 |  | Drumcicle                                 
|60/528,820 |  | December 12, 2003 |  | Doggie Pop                                
|10/755,160 |  | January 12, 2004  |  | Pet Chew Toy For Holding Consumable Treats



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##### Table of Contents

Our trademark registrations obtained are:



|                 |  |                   |  |               
|---------------- |  | ----------------- |  | --------------
|Registration No. |  | Date Registered   |  | Name          
|2,048,003        |  | March 25, 1997    |  | OurPets      
|2,016,545        |  | November 12, 1996 |  | Flexo-Feeder  
|2,219,049        |  | January 19, 1999  |  | Push-N-Roll   
|2,220,580        |  | January 26, 1999  |  | Triple Track  
|2,221,776        |  | February 2, 1999  |  | Zig-N-Zag     
|2,226,341        |  | February 23, 1999 |  | Play-N-Treat  
|2,498,759        |  | October 16, 2001  |  | Play-N-Squeak 
|2,447,094        |  | April 24, 2001    |  | Molecuball    
|2,563,464        |  | April 23, 2002    |  | Delidome      
|2,577,849        |  | June 11, 2002     |  | OurPets      
|2,574,795        |  | June 4, 2002      |  | Wufer Ball    
|2,664,532        |  | December 17, 2002 |  | Speed-E-Drink 
|2,688,515        |  | February 18, 2003 |  | Mouse-N-Cheese
|2,749,682        |  | August 12, 2003   |  | IcePudding    
|2,792,219        |  | December 9, 2003  |  | Speed-E-Treat 



The following trademark registration
applications are pending:



|           |  |                  |  |                       
|---------- |  | ---------------- |  | ----------------------
|Serial No. |  | Dated Filed      |  | Name                  
|76/395,679 |  | April 15, 2002   |  | Dog-E-Licious         
|76/395,681 |  | April 15, 2002   |  | Cat-E-Licious         
|76/435,630 |  | July 29, 2002    |  | OurPets Choice Litter
|76/462,949 |  | October 22, 2002 |  | Butterfly Ball        
|76/503,265 |  | March 27, 2003   |  | Roller Mouse          
|76/503,264 |  | March 27, 2003   |  | Bubble Mouse          
|76/514,644 |  | April 7, 2003    |  | Natures Scoop        
|76/514,643 |  | June 10, 2003    |  | Natures Litter       
|76/540,628 |  | July 28, 2003    |  | Gourmet Rawhide Bones 
|76/572,227 |  | January 26, 2004 |  | Groovy Stick          



As of March 4, 2004,
we had 11 full-time employees consisting of 4 officers, 3 other employees in sales and marketing, 1 employee in finance and administration and 3 employees in warehousing and shipping. We do not have any employees in manufacturing since that
operation is subcontracted to outside vendors. 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 $44,196 for the year ended December 31, 2003 and $47,487 for the year ended
December 31, 2002.



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##### Table of Contents

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 small companies in the pet product
market with no measurable percentage of that market. We are still attempting to build our market presence as we compete with both domestic and foreign companies, many of whom manufacture their products in low cost areas such as Mexico 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 effect our sales, if this trend continues or these
retailers are unable to emerge from bankruptcy protection.



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 if 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; Heather L. Novak, Vice President of Marketing; and John G. Murchie, Vice President,
Treasurer and Controller. 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 fifteen U.S. patents issued and twenty-five U.S. 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 exercise of too many warrants and stock options would dilute the value of the Common Stock, and stockholder voting power.



We currently have 11,700,473 shares of Common Stock outstanding which could be diluted by the following potential issuances
of Common Stock. As of March 4, 2004, we had outstanding 71,000 shares of Convertible Preferred Stock (Preferred Stock) convertible into 710,000 shares of Common Stock at a conversion rate of $1.00 per share. Also as of March 4, 2004, we
had outstanding 2,473,291 warrants to purchase an aggregate of 2,473,291 shares of Common Stock at exercise prices ranging from $0.407 to $1.454 per share and options to purchase an aggregate of 741,249 shares of Common Stock at exercise prices
ranging from $0.10 to $0.625 per share. We have reserved an aggregate of 1,350,000 shares of Common Stock for issuance under the 1999 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.



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##### Table of Contents

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 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, and expect to continue experiencing limited trading volume in our Common Stock.



|Item 2. |  | Description of Property.
|------- |  | ------------------------



We lease a 28,000 square foot production, warehouse and office facility in Fairport Harbor, Ohio from a related entity, Senk Properties. 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. The current monthly rental is $11,690 plus real estate taxes with annual
increases based upon the change in the indicated consumer price index in the preceding year. The initial lease term was five years ending on May 31, 1998. The lease was extended for two additional five year terms ending on May 31,2008, with the
possibility of three additional term extensions of five years each. We believe that this facility will provide adequate warehouse and office space to meet our needs for the immediate future. Any longer-range future growth can be accommodated by
expanding that facility or leasing nearby space.



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 December, 2000, our former intellectual property counsel informed us that one of its associates had missed a number of deadlines for filings with the
Patent and Trademark Office, resulting in the loss of patent and trademark rights for several products. We filed a suit for professional negligence against our intellectual property counsel in the Summit County Court of Common Pleas on January 18,
2001. That lawsuit was voluntarily dismissed and re-filed on June 5, 2002, in Cuyahoga County Court of Common Pleas under the caption OurPets Company, et al. vs.Oldham & Oldham LPA, et. al.On December 12, 2003, an agreement was
finalized in which we reached a global settlement of all litigation in this case. In exchange for full and final releases of all claims between and among the parties, we received $879,410 after deductions for contingent and unpaid legal fees.



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As a result of the negligence of our intellectual property counsel, Jack Lemkin, owner and operator of
Sinitron Corp., was able to file for and obtain a patent on various aspects of one of our products. We commenced suit against Lemkin personally on June 6, 2002 in the United States District Court, Northern District of Ohio seeking, among other
things, a declaration that Lemkins patent either belongs to us, or is invalid due to Lemkins failure to disclose our role in developing the product in his application for the patent. The case is captioned OurPets et. al. vs.Jack
Lemkin et. al. The Federal Court issued a temporary restraining order against Lemkin in November 2003, and that litigation is currently pending. Subsequent to the issuance of the restraining order, Mr. Lemkin filed suit against us on December 4,
2003 in the United States District Court, Southern District of Ohio alleging violations of the United States Patent Act and breach of good faith and fair dealings pertaining to one of our patents. We have filed with the court a motion to dismiss Mr.
Lemkins suit and we are waiting for the court to rule on our motion. We cannot predict the outcome of this matter, but intend to prosecute it vigorously.



We filed action against Sinitron Corp. on December 26, 2002 under the caption OurPets Company and Virtu Company vs Sinitron Corp., in the
Common Pleas Court located in Summit County, Ohio. The complaint alleges four counts; breach of contract, negligence, fraud and breach of third party beneficiary rights. We subsequently transferred the case to the Common Pleas Court located in
Franklin County, Ohio being the county where Sinitron is located. Sinitron filed a counterclaim against OurPets alleging tortious interference with contract and damage to business reputation and damages for unpaid invoices. The counterclaim
for unpaid invoices is a negligible amount and we believe the remaining allegations made by Sinitron are tenuous. While we believe our case against Sinitron is strong, we cannot predict the outcome of the action at this stage in the proceeding. In
the unlikely event occurs that any damages are upheld for Sinitron, they would be offset by our claims against Sinitron and therefore would result in little, if any, financial exposure to OurPets. Currently the case is proceeding through
discovery with a tentative trial date set for November 1, 2004.



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 us 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.
In September 2000, Akon breached the asset purchase agreement and in October 2000, we filed suit in the Court of Common Pleas, Summit County, Ohio for damages, including non-payment of loans, resulting from Akons breach of the asset purchase
agreement. In December 2001, Harman filed a Third-Party Complaint against us alleging intentional infliction of emotional distress seeking compensatory and punitive damages against us and the individual guarantors. Both actions were dismissed
without prejudice in March 2003. On June 5, 2003, we re-filed the action against Akon, the directors of Akon, and Harman in the Court of Common Pleas of Lake County, Ohio where it is currently pending. While we believe that our case against Akon,
its directors, and Harman is strong, we cannot predict the likely outcome of this action.



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.



|Item 4. |  | Submission of Matters to a Vote of Security Holders.
|------- |  | ----------------------------------------------------



No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2003.



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##### Table of Contents

PART II



|Item 5. |  | Market For Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.
|------- |  | ---------------------------------------------------------------------------------------------------------------



Our Common Stock has been quoted on the Nasdaq
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, 2002     |  | 1.00 |  | 0.15
|June 30, 2002      |  | 0.26 |  | 0.14
|September 30, 2002 |  | 0.22 |  | 0.13
|December 31, 2002  |  | 0.18 |  | 0.10
|March 31, 2003     |  | 0.21 |  | 0.09
|June 30, 2003      |  | 0.21 |  | 0.16
|September 30, 2003 |  | 0.41 |  | 0.19
|December 31, 2003  |  | 0.38 |  | 0.23



As of March 4, 2004,
we had approximately 185 holders of record of 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 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 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.



During 2003, we have sold the following securities without registering them under the Securities Act of 1933, as amended (the Securities Act).



In September 2003, we originally issued 12,500 warrants which
expire on September 4, 2006, at an exercise price of $0.41 per share to Joseph T. Aveni, director and shareholder, in consideration of a loan made to us. Subsequent to their issuances the number of warrants and exercise price changed in accordance
with the warrants anti-dilution provision to 12,592 exercisable at $0.407 per share. These warrants were issued in reliance upon Section 4(2) of the Securities Act as they were not issued as part of a public offering. The warrants were issued
by us pursuant to private transactions involving the loan of funds to us. No general advertisement or solicitation was conducted. We believe the terms we received from the loan are at least as favorable as the terms we could have obtained from
unaffiliated third parties.



In December 2003, we issued
367,647 shares of Common Stock to Joseph T. Aveni, director and shareholder, and trusts for his children, and 73,529 shares of Common Stock to grandchildren of Steven Tsengas, director, officer and shareholder, in conversion of $150,000 in debt owed
by us to them. These shares of Common Stock were issued in reliance upon Section 4(2) of the Securities Act as they were not issued as part of a public offering. The Common Stock was issued by us pursuant to a private transaction involving the
conversion of debt. No general advertisement or solicitation was conducted. We believe the terms we received from the conversion are at least as favorable as the terms we could have obtained from unaffiliated third parties.



10



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##### Table of Contents

|Item 6. |  | Managements Discussion and Analysis or Plan of Operations.
|------- |  | -----------------------------------------------------------



Overview



OurPets develops, designs, produces and markets a broad line of innovative, high-quality accessory and consumable pet products. These
products include healthy feeding systems to improve the health and comfort of pets, interactive toys that provide fun, rewarding mental and physical challenges for pets, innovative maintenance to enhance the required maintenance needs of pets, and
healthy consumable products for achieving and maintaining high mental, physical and immune levels of pets. Examples of products in each of these categories include the following.



|                        |  |   |  |                                                                                                    
|----------------------- |  | - |  | ---------------------------------------------------------------------------------------------------
|                        |  |  
|Healthy Feeding Systems |  |  |  | Pet Diners Stainless Steel Bowls
Automatic Feed and Water Dispensers Portable Dog
Products         
|                        |  |  
|Interactive Toys        |  |  |  | Cat Toys Plush Toys Food Delivery Toys Bird Mirrors                                                
|                        |  |  
|Innovative Maintenance  |  |  |  | Premium Cat Litter                                                                                 
|                        |  |  
|Healthy Consumables     |  |  |  | Nutritional Supplements Ice Cream
Alternatives Gourmet Gravies Gourmet Sprays Gourmet Rawhide Bones



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. According to the 2003/2004 APPMA National Pet Owners Survey approximately 64.2 million U.S.
households currently own a pet with an estimated pet population of 65.0 million dogs, 77.7 million cats and 17.3 million birds.



As discussed below and in Liquidity and Capital Resources on Pages 13, 14 and 15, we have funded our operations principally from net cash provided by
operating activities during 2003 and with bank borrowings in 2002.



In April of 2002, we entered into a promissory note agreement with our bank under which we could borrow up to $200,000 for working capital purposes. The note was payable in monthly payments of $3,334 plus interest at prime plus 2% beginning
in May of 2002. During 2002 we borrowed a total of $106,000 under this agreement and repaid $26,672. During 2003 we borrowed a total of $60,000 under the agreement and repaid the entire balance due of $139,328.



Also during 2002 we had net borrowings of $55,347 and during 2003 we had a
net repayment of $200,000 under our line of credit facility with our bank under which we can borrow up to $1,500,000 based on the level of qualifying accounts receivable and inventories. At December 31, 2003 we had a balance of $650,000 under the
line of credit with the bank at an interest rate of prime plus 1%.



In December of 2003, we issued 367,647 shares of Common Stock to Joseph T. Aveni, director and shareholder, and trusts for his children, and 73,529 shares of Common Stock to grandchildren of Steven Tsengas, director, officer and
shareholder, at a price of $0.34 per share for conversion of debt of $150,000 owed to them as consideration for the Common Stock.



11



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##### Table of Contents

Results of Operations



Year Ended December 31, 2003 Compared to Year Ended December 31, 2002



In the following discussion all references to 2003 are for the year ended December 31, 2003 and all references to 2002 are
for the year ended December 31, 2002.



Net revenue for 2003 was
$5,180,779, an increase of 10.4 percent in revenue from $4,693,222 in 2002, consisting of sales of proprietary products for the retail pet business. This increase of $487,557 was primarily the result of an increase in sales of approximately $426,000
to our two major customers due to promotions of existing products and sales of new products. The balance of the increase was from sales to other customers which increased by approximately $62,000 including both sales of new products and sales to new
customers. Total sales to all customers of new products in 2003 was approximately $423,000. Our sales to foreign customers decreased by approximately $53,000, or 14.8 percent, from 2002 mainly due to decreased sales to customers in Canada and Japan.



While net revenue increased by 10.4 percent in 2003, cost of
goods sold also increased by 12.0 percent, from $3,510,184 in 2002 to $3,932,208 in 2003. This increase of $422,024 was as a result of the cost of purchased products sold and freight increasing by 15.3 percent due to the higher percentage cost for
two of our new purchased products compared to the other purchased products. Our variable and fixed warehouse and overhead costs decreased by 0.3 percent from 2002 due to decreased packaging design costs and foreign warehouse expenses.



As a result of the cost of goods sold increasing by more than the net
revenue, our gross profit on sales increased by 5.5 percent, or $65,533, from $1,183,038 in 2002 to $1,248,571 in 2003.



Selling, general and administrative expenses in 2003 were $1,370,734, an increase of $33,297, or 2.5 percent, from $1,337,437 in 2002. The significant
increases were in (i) advertising and marketing promotions of approximately $77,000 due to increased promotional and display costs for customers and advertising for new products, (ii) cash discounts allowed and incentive rebates given to customers
of approximately $25,000 as a result of the increase in sales to customers which are allowed cash discounts and incentive rebates, and (iii) salaries and wages of approximately $38,000 due to the cost of upgrading two sales and marketing positions.
These increases were partially offset by decreases in (i) stockholder and investor relations of approximately $30,000 due to reduced expenditures for public relations, travel and meetings, (ii) accruals for our export consultant of approximately
$12,000 in 2002 that were not incurred in 2003, and (iii) accruals for legal services which decreased by approximately $67,000 mainly due to legal fees and expenses that were included in the extraordinary item in 2003.



The loss from operations decreased by 20.9 percent, or $32,236, from a
$154,399 loss in 2002 to a $122,163 loss in 2003 as a result of our gross profit on sales increasing by $65,533, or 5.5 percent, which was more than the increase in selling, general and administrative expenses of $33,297, or 2.5 percent.



The loss from other income and expense increased by $180,166 as a result
of a loss of $176,212 in 2003 compared to income of $3,954 in 2002. The loss in 2003 includes (i) the loss on disposal of excess inventory of one of our products of approximately $40,000, (ii) the write-off of undepreciated tooling costs for
discontinued products of approximately $71,000, and (iii) the write-off of the inventory of components for discontinued products of approximately $55,000.



Interest expense for 2003 was $109,605, a decrease of 8.5 percent, or $10,208, from $119,813 in 2002. This decrease was primarily due to the effective
interest rate paid on the bank borrowings declining from 5.9 percent in 2002 to 5.3 percent in 2003 on an average borrowing that increased by approximately a $7,000. In addition, the interest paid to vendors in 2003 was reduced from the amount paid
in 2002 by approximately $6,700.



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The extraordinary item in 2003 was from the gain on the settlement of our litigation against our former
intellectual property counsel and fiduciaries. We received $879,410 after deductions for contingent and unpaid legal fees and after deducting other legal fees and expenses incurred with the litigation, we recognized a gain of $848,166.



The net income for 2003 was $440,186 as compared to a net loss in 2002 of
$270,258 or an improvement of $710,444. This was the result of the extraordinary item of $848,166, the net revenue percentage increasing by 10.4 percent while the cost of goods sold percentage increased by 12.0 percent causing the gross profit on
sales to increase by $65,533, or 5.5 percent, and interest expense decreased by $10,208 resulting in total increases to income of $923,907. These increases were partially offset by increases in selling, general and administrative expenses of $33,297
and in other income and expense of $180,166 resulting in the improvement of $710,444.



Liquidity and Capital Resources



Our
operating activities provide cash by 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 line of credit with our bank that had approximately $289,000 in available
funds at December 31, 2003 based upon the balance of accounts receivable and inventories at that date.



As of December 31, 2003, we had $923,433 in principal amount of indebtedness (excluding $3,890 borrowed under capital lease obligations), consisting of:



|                                                 |  |                 |  |   |        
|------------------------------------------------ |  | --------------- |  | - | -------
|Bank line of credit                              |  | Prime plus 1%   |  | $ | 650,000
|Small Business Administration (SBA) term loans |  | 5.244% & 6.999% |  |   | 110,784
|Installment notes payable                        |  | 7.022% & 7.517% |  |   | 62,649 
|Other notes payable                              |  | 10%             |  |   | 100,000



The bank line of
credit borrowing of $650,000 is under our line of credit agreement with our bank under which we can borrow up to $1,500,000 based on the level of qualifying accounts receivable and inventories. The line of credit agreement is renewable annually by
the bank and therefore is classified as a current liability on our balance sheet. Currently the agreement has been renewed by the bank through June 30, 2005. Under our agreement with the bank we are required to maintain a debt service coverage ratio
of 1.15, a tangible net worth of $1,300,000 through December 30, 2004 and $1,500,000 at December 31, 2004 and thereafter, and obtain permission from the bank to incur additional indebtedness, enter additional leases which would require total lease
payments exceeding $190,280 in any fiscal year, make any expenditures for property and equipment in excess of $300,000 in any fiscal year, and pay cash dividends or redeem any of our capital stock.



The term loans with the SBA are payable in monthly installments of $5,300
including interest through October 2006. The installment notes payable for the purchase of warehouse equipment are due in monthly payments of $1,374 including interest through June 2008. The other notes payable are due in the amount of $75,000 on
August 1, 2004, to Beachcraft L.P. and $25,000 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 and $75,000 was repaid in 2003. This note, which was originally due February 1, 2001, was extended six times for six months each and the remaining
balance was due with accrued interest on February 1, 2004. In consideration for the first three of these extensions we issued warrants each time for the purchase of 37,500 shares of Common Stock to Beachcraft L.P. at an



13



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##### Table of Contents

exercise price of $1.25 per share with an expiration date of July 31, 2004. Subsequent to their issuance the warrants were adjusted to 76,718 warrants
exercisable at $1.222 per share and 37,987 warrants exercisable at $1.234 a share in accordance with the warrant anti-dilution provisions. 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 February 1, 2006 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, 2007.



Our short-term and long-term liquidity will depend on our ability to achieve cash-flow break even on our operations and to increase sales of our products. We recorded a profit of approximately $440,000 for the year ended 2003 but recorded a
loss of approximately $270,000 for the year ended 2002 and therefore relied on cash from our financing activities to fund our operations. At year end 2001 we closed on a new bank line of credit facility for an increased line of credit. As a result,
absent a failure to maintain the required debt service coverage ratio and the tangible net worth, we should be able to fund our operating cash requirements for 2004.



Our capital lease payments were approximately $12,300 for 2003 and are estimated to be approximately $4,100 for the year
ending December 31, 2004 under current commitments. We have no other material commitments for capital expenditures.



A schedule of our contractual obligations as of December 31, 2003 is as follows:



|                                   |  |                        |           |   |                 |   |         |           |  |   |           |   |  |              |         |   |  |   |    |  
|---------------------------------- |  | ---------------------- | --------- | - | --------------- | - | ------- | --------- |  | - | --------- | - |  | ------------ | ------- | - |  | - | -- | -
|                                   |  | Payments Due By Period |          
|Contractual Obligation             |  | Total                  |           |   | Less than1 year |   |         | 1-3 years |  |   | 4-5 years |   |  | After5 years |        
|Long-Term Debt                     |  | $                      | 923,433   |   |                 | $ | 820,480 |           |  | $ | 80,110    |   |  | $            | 22,843  |   |  | $ | -0 | -
|Capital Lease Obligations          |  |                        | 4,114     |   |                 |   | 4,114   |           |  |   | -0        | - |  |              | -0      | - |  |   | -0 | -
|Purchase Obligations               |  |                        | -0        | - |                 |   | -0      | -         |  |   | -0        | - |  |              | -0      | - |  |   | -0 | -
|Other Long Term Liabilities        |  |                        | -0        | - |                 |   | -0      | -         |  |   | -0        | - |  |              | -0      | - |  |   | -0 | -
|Operating Leases                   |  |                        | 685,061   |   |                 |   | 152,743 |           |  |   | 307,759   |   |  |              | 224,559 |   |  |   | -0 | -
|                                   |  |                        |           |   |                 |   |         |           |  |   |           |   |  |              |         |   |  |   |    |  
|Total Contractual Cash Obligations |  | $                      | 1,612,608 |   |                 | $ | 977,337 |           |  | $ | 387,869   |   |  | $            | 247,402 |   |  | $ | -0 | -
|                                   |  |                        |           |   |                 |   |         |           |  |   |           |   |  |              |         |   |  |   |    |  



Net cash provided by
operating activities for the year ended December 31, 2003 was $649,450. Cash was provided by the net income for the year of $753,161, which is net of the non-cash charges for depreciation of $235,387, amortization of $6,562 and the loss on disposal
of property and equipment of $71,026. Cash was used for the net change of $103,711 in our operating assets and liabilities. These changes consisted of increases in prepaid expenses of $117,238 and decreases in accounts payable of $61,723 and accrued
expenses of $46,743, which were partially offset by decreases in accounts receivable of $30,915, inventories of $75,847, patent costs of $13,230 and domain name and other assets of $2,001.



Net cash used in investing activities for the year ended December 31, 2003
was $162,222, which was used for the acquisition of property and equipment. Net cash used in financing activities for the year was $487,070. Cash was provided by the $100,000 borrowed under the note payable to a shareholder, the $60,000 borrowed
under the bank term loan agreement and the $68,882 borrowed under the equipment purchase notes. Cash was used for $200,000 net repayment under the line of credit agreement with the bank, $204,471 was used for the principal payments on long-term
debt, $11,481 was used for the principal payments on capital lease obligations and $300,000 was used for the payments of notes payable to shareholders.



Net cash used in operating activities for the year ended December 31, 2002 was $58,025. Cash was used for the net loss for the year of $37,382, which is
net of the non-cash charges for depreciation of $215,438, amortization of $10,302 and the loss on disposal of property and equipment of $7,136. Cash was also used for the net change of $20,643 in our operating assets and liabilities. These changes
consisted of increases in accounts receivable of $51,395, patent costs of $11,462 and in domain name and other assets of $11,951 and a decrease in



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##### Table of Contents

accounts payable of $126,046, which were partially offset by decreases in inventories of $117,761 and in prepaid expenses of $43,582 and an increase in
accrued expenses of $18,868.



Net cash used in investing
activities for the year ended December 31, 2002 was $71,944, which was used for the acquisition of property and equipment. Net cash provided by financing activities for the year was $93,191. Cash was provided by the $55,347 borrowing under the bank
line of credit and the $106,000 borrowing under the bank promissory note agreement. Cash was used for $62,145 in principal payments on long-term debt and $6,011 in principal payments on capital lease obligations.



Critical Accounting Policies/Estimates



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make judgments, estimates and assumptions that affect reported amounts of assets and liabilities at the balance sheet date and the reported revenues and expenses for the
period. Our judgments and estimates are based on both historical experience and our expectations for the future. As a result, actual results may differ materially from current expectations.



We believe that the following is the only significant judgment and estimate
used the preparation of our financial statements. Tooling costs related to the design and manufacture of molds that are used to produce our products are capitalized and depreciated over useful lives of three to seven years. If one or more of our
products is discontinued, the write-off of the undepreciated tooling costs could be significant.



|Item 7. |  | Financial Statements
|------- |  | --------------------



The financial statements of OurPets Company as of December 31, 2003 and 2002, and for the years then ended together with the Report of Independent
Auditors are included in this Form 10-KSB on the pages indicated below.



|                                                |  |         
|----------------------------------------------- |  | --------
|                                                |  | Page No.
|Report of Independent Auditors                  |  | 16      
|Consolidated Balance Sheets                     |  | 17      
|Consolidated Statements of Operations           |  | 18      
|Consolidated Statements of Stockholders Equity |  | 19      
|Consolidated Statements of Cash Flows           |  | 20      
|Notes to Consolidated Financial Statements      |  | 21      



15



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##### Table of Contents

REPORT OF INDEPENDENT AUDITORS



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, 2003 and December 31, 2002, and the related consolidated statements of operations, stockholders equity
and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. 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 audits provide a reasonable basis for our opinion.



In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of
OurPets Company and Subsidiaries as of December 31, 2003 and December 31, 2002, and the consolidated results of their operations and cash flows for the years ended December 31, 2003 and December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.



S. R. SNODGRASS, A. C.

Certified Public Accountants



Mentor, Ohio

February 4, 2004



16



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                     |  | December 31, |           
|                                                                                                                                                                                                     |  | 2003         |            |   | 2002 |  
|ASSETS CURRENT ASSETS                                                                                                                                                                                |  |              |            |   |      |   |            |  
|Cash and cash equivalents                                                                                                                                                                            |  | $            | 36,592     |   |      | $ | 36,434     |  
|Accounts receivabletrade, less allowance for doubtful accounts of $ 12,460 and $ 17,351                                                                                                             |  |              | 629,299    |   |      |   | 660,214    |  
|Inventories                                                                                                                                                                                          |  |              | 1,627,000  |   |      |   | 1,702,847  |  
|Prepaid expenses                                                                                                                                                                                     |  |              | 147,244    |   |      |   | 30,006     |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total current assets                                                                                                                                                                                 |  |              | 2,440,135  |   |      |   | 2,429,501  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|PROPERTY AND EQUIPMENT                                                                                                                                                                               |  |              |            |   |      |   |            |  
|Computers and office equipment                                                                                                                                                                       |  |              | 116,557    |   |      |   | 112,782    |  
|Warehouse equipment                                                                                                                                                                                  |  |              | 106,389    |   |      |   | 31,233     |  
|Leasehold improvements                                                                                                                                                                               |  |              | 25,393     |   |      |   | 22,443     |  
|Tooling                                                                                                                                                                                              |  |              | 1,112,603  |   |      |   | 1,327,181  |  
|Construction in progress                                                                                                                                                                             |  |              | 39,384     |   |      |   | 40,429     |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total                                                                                                                                                                                                |  |              | 1,400,326  |   |      |   | 1,534,068  |  
|Less accumulated depreciation                                                                                                                                                                        |  |              | 738,463    |   |      |   | 728,014    |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Net property and equipment                                                                                                                                                                           |  |              | 661,863    |   |      |   | 806,054    |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|OTHER ASSETS                                                                                                                                                                                         |  |              |            |   |      |   |            |  
|Patents, less amortization of $35,731 and $29,169                                                                                                                                                    |  |              | 104,236    |   |      |   | 124,028    |  
|Domain name and other assets                                                                                                                                                                         |  |              | 10,095     |   |      |   | 12,096     |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total other assets                                                                                                                                                                                   |  |              | 114,331    |   |      |   | 136,124    |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total assets                                                                                                                                                                                         |  | $            | 3,216,329  |   |      | $ | 3,371,679  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|                                                                                                                                                                                                     |  |             
|LIABILITIES                                                                                                                                                                                          |  |              |            |   |      |   |            |  
|CURRENT LIABILITIES                                                                                                                                                                                  |  |              |            |   |      |   |            |  
|Notes payable                                                                                                                                                                                        |  | $            | 750,000    |   |      | $ | 1,300,000  |  
|Current maturities of long-term debt                                                                                                                                                                 |  |              | 70,480     |   |      |   | 98,918     |  
|Current portion of capital lease obligations                                                                                                                                                         |  |              | 3,890      |   |      |   | 11,481     |  
|Accounts payabletrade                                                                                                                                                                               |  |              | 545,736    |   |      |   | 607,459    |  
|Accrued expenses                                                                                                                                                                                     |  |              | 92,695     |   |      |   | 139,438    |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total current liabilities                                                                                                                                                                            |  |              | 1,462,801  |   |      |   | 2,157,296  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|LONG-TERM DEBT                                                                                                                                                                                       |  |              |            |   |      |   |            |  
|Long-term debtless current portion above                                                                                                                                                            |  |              | 102,953    |   |      |   | 150,104    |  
|Capital lease obligationsless current portion above                                                                                                                                                 |  |              |           |   |      |   | 3,890      |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total long-term debt                                                                                                                                                                                 |  |              | 102,953    |   |      |   | 153,994    |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total liabilities                                                                                                                                                                                    |  |              | 1,565,754  |   |      |   | 2,311,290  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|                                                                                                                                                                                                     |  |             
|STOCKHOLDERS EQUITY                                                                                                                                                                                 |  |              |            |   |      |   |            |  
|COMMON STOCK, no par value; authorized 50,000,000 shares, issued and outstanding 11,700,473 and 11,188,297 shares                                                                                    |  |              | 2,941,023  |   |      |   | 2,720,023  |  
|CONVERTIBLE PREFERRED STOCK, no par value; convertible into Common Stock at the rate of 10 common shares for each preferred share; authorized
5,000,000 shares, issued and outstanding 71,000 shares |  |              | 648,337    |   |      |   | 648,337    |  
|PAID-IN CAPITAL                                                                                                                                                                                      |  |              | 61,716     |   |      |   | 132,716    |  
|ACCUMULATED DEFICIT                                                                                                                                                                                  |  |              | (2,000,501 | ) |      |   | (2,440,687 | )
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total stockholders equity                                                                                                                                                                           |  |              | 1,650,575  |   |      |   | 1,060,389  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total liabilities and stockholders equity                                                                                                                                                           |  | $            | 3,216,329  |   |      | $ | 3,371,679  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  



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 Years Ended December 31, |           
|                                                                                                            |  | 2003                             |            |   | 2002 |  
|Net revenue                                                                                                 |  | $                                | 5,180,779  |   |      | $ | 4,693,222  |  
|Cost of goods sold                                                                                          |  |                                  | 3,932,208  |   |      |   | 3,510,184  |  
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Gross profit on sales                                                                                       |  |                                  | 1,248,571  |   |      |   | 1,183,038  |  
|Selling, general and administrative expenses                                                                |  |                                  | 1,370,734  |   |      |   | 1,337,437  |  
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Loss from operations                                                                                        |  |                                  | (122,163   | ) |      |   | (154,399   | )
|Other income and expense                                                                                    |  |                                  | (176,212   | ) |      |   | 3,954      |  
|Interest expense                                                                                            |  |                                  | (109,605   | ) |      |   | (119,813   | )
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Loss before extraordinary item                                                                              |  |                                  | (407,980   | ) |      |   | (270,258   | )
|Extraordinary itemgain on litigation settlement                                                            |  |                                  | 848,166    |   |      |   |           |  
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Net income (loss)                                                                                           |  | $                                | 440,186    |   |      | $ | (270,258   | )
|                                                                                                            |  |                                  |            |   |      |   |            |  
|                                                                                                            |  |                                 
|Basic and Diluted Earnings Per Common Share After Dividend Requirements For Preferred Stock:                |  |                                  |            |   |      |   |            |  
|Loss before extraordinary item                                                                              |  | $                                | (0.04      | ) |      | $ | (0.03      | )
|Extraordinary item                                                                                          |  |                                  | 0.07       |   |      |   |           |  
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Net income (loss)                                                                                           |  | $                                | 0.03       |   |      | $ | (0.03      | )
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Weighted average number of common shares outstanding used to calculate basic and diluted earnings per share |  |                                  | 11,202,580 |   |      |   | 11,060,861 |  
|                                                                                                            |  |                                  |            |   |      |   |            |  





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, 2003 and December 31,
2002



|                                                           |  |                 |   |  |              |          |   |                 |            |        |   |                |       |   |                    |   |  |                     |            |   |  |   |           |  
|---------------------------------------------------------- |  | --------------- | - |  | ------------ | -------- | - | --------------- | ---------- | ------ | - | -------------- | ----- | - | ------------------ | - |  | ------------------- | ---------- | - |  | - | --------- | -
|                                                           |  | Preferred Stock |   |  | Common Stock |          |   |                 |            |        |   |                | Total |  
|                                                           |  | Number ofShares |   |  | Amount       |          |   | Number ofShares |            | Amount |   | Paid-InCapital |       |   | AccumulatedDeficit |   |  | StockholdersEquity |           
|Balance at January 1, 2002                                 |  | 92,500          |   |  | $            | 844,664  |   |                 | 10,895,626 |        | $ | 2,452,696      |       | $ | 203,716            |   |  | $                   | (2,170,429 | ) |  | $ | 1,330,647 |  
|Common Stock issued in payment of Preferred Stock dividend |  |                |   |  |              |         |   |                 | 71,000     |        |   | 71,000         |       |   | (71,000            | ) |  |                     |           |   |  |   |          |  
|Preferred Stock converted into Common Stock                |  | (21,500         | ) |  |              | (196,327 | ) |                 | 215,000    |        |   | 196,327        |       |   |                   |   |  |                     |           |   |  |   |          |  
|Common Stock issuance                                      |  |                |   |  |              |         |   |                 | 6,671      |        |   |               |       |   |                   |   |  |                     |           |   |  |   |          |  
|Net loss for the year                                      |  |                |   |  |              |         |   |                 |           |        |   |               |       |   |                   |   |  |                     | (270,258   | ) |  |   | (270,258  | )
|                                                           |  |                 |   |  |              |          |   |                 |            |        |   |                |       |   |                    |   |  |                     |            |   |  |   |           |  
|Balance at December 31, 2002                               |  | 71,000          |   |  |              | 648,337  |   |                 | 11,188,297 |        |   | 2,720,023      |       |   | 132,716            |   |  |                     | (2,440,687 | ) |  |   | 1,060,389 |  
|Common Stock issued in payment of Preferred Stock dividend |  |                |   |  |              |         |   |                 | 71,000     |        |   | 71,000         |       |   | (71,000            | ) |  |                     |           |   |  |   |          |  
|Common Stock issued in exchange for cancellation of debt   |  |                |   |  |              |         |   |                 | 441,176    |        |   | 150,000        |       |   |                   |   |  |                     |           |   |  |   | 150,000   |  
|Net income for the year                                    |  |                |   |  |              |         |   |                 |           |        |   |               |       |   |                   |   |  |                     | 440,186    |   |  |   | 440,186   |  
|                                                           |  |                 |   |  |              |          |   |                 |            |        |   |                |       |   |                    |   |  |                     |            |   |  |   |           |  
|Balance at December 31, 2003                               |  | 71,000          |   |  | $            | 648,337  |   |                 | 11,700,473 |        | $ | 2,941,023      |       | $ | 61,716             |   |  | $                   | (2,000,501 | ) |  | $ | 1,650,575 |  
|                                                           |  |                 |   |  |              |          |   |                 |            |        |   |                |       |   |                    |   |  |                     |            |   |  |   |           |  



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, |         
|                                                                                                   |  | 2003                             |          |   | 2002 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                               |  |                                  |          |   |      |   |          |  
|Net income (loss)                                                                                  |  | $                                | 440,186  |   |      | $ | (270,258 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                  |          |   |      |   |          |  
|Depreciation expense                                                                               |  |                                  | 235,387  |   |      |   | 215,438  |  
|Amortization expense                                                                               |  |                                  | 6,562    |   |      |   | 10,302   |  
|Loss on disposal of property and equipment                                                         |  |                                  | 71,026   |   |      |   | 7,136    |  
|(Increase) decrease in assets:                                                                     |  |                                  |          |   |      |   |          |  
|Accounts receivabletrade                                                                          |  |                                  | 30,915   |   |      |   | (51,395  | )
|Inventories                                                                                        |  |                                  | 75,847   |   |      |   | 117,761  |  
|Prepaid expenses                                                                                   |  |                                  | (117,238 | ) |      |   | 43,582   |  
|Patent costs                                                                                       |  |                                  | 13,230   |   |      |   | (11,462  | )
|Domain name and other assets                                                                       |  |                                  | 2,001    |   |      |   | (11,951  | )
|Increase (decrease) in liabilities:                                                                |  |                                  |          |   |      |   |          |  
|Accounts payabletrade                                                                             |  |                                  | (61,723  | ) |      |   | (126,046 | )
|Accrued expenses                                                                                   |  |                                  | (46,743  | ) |      |   | 18,868   |  
|                                                                                                   |  |                                  |          |   |      |   |          |  
|Net cash provided by (used in) operating activities                                                |  |                                  | 649,450  |   |      |   | (58,025  | )
|                                                                                                   |  |                                  |          |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                               |  |                                  |          |   |      |   |          |  
|Acquisition of property and equipment                                                              |  |                                  | (162,222 | ) |      |   | (71,944  | )
|                                                                                                   |  |                                  |          |   |      |   |          |  
|Net cash used in investing activities                                                              |  |                                  | (162,222 | ) |      |   | (71,944  | )
|                                                                                                   |  |                                  |          |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                               |  |                                  |          |   |      |   |          |  
|Principal payments on long-term debt                                                               |  |                                  | (204,471 | ) |      |   | (62,145  | )
|Issuance of note payable to shareholder                                                            |  |                                  | 100,000  |   |      |   |         |  
|Net (repayment) borrowing on bank line of credit                                                   |  |                                  | (200,000 | ) |      |   | 55,347   |  
|Issuance of long-term debt                                                                         |  |                                  | 128,882  |   |      |   | 106,000  |  
|Principal payments under capital lease obligations                                                 |  |                                  | (11,481  | ) |      |   | (6,011   | )
|Payment of notes payable to shareholders                                                           |  |                                  | (300,000 | ) |      |   |         |  
|                                                                                                   |  |                                  |          |   |      |   |          |  
|Net cash provided by (used in) financing activities                                                |  |                                  | (487,070 | ) |      |   | 93,191   |  
|                                                                                                   |  |                                  |          |   |      |   |          |  
|Net increase (decrease) in cash                                                                    |  |                                  | 158      |   |      |   | (36,778  | )
|CASH AT BEGINNING OF YEAR                                                                          |  |                                  | 36,434   |   |      |   | 73,212   |  
|                                                                                                   |  |                                  |          |   |      |   |          |  
|CASH AT END OF YEAR                                                                                |  | $                                | 36,592   |   |      | $ | 36,434   |  
|                                                                                                   |  |                                  |          |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                   |  |                                  |          |   |      |   |          |  
|Interest paid                                                                                      |  | $                                | 142,846  |   |      | $ | 112,974  |  
|                                                                                                   |  |                                  |          |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS                                                   |  |                                  |          |   |      |   |          |  
|Common Stock issued in payment of Preferred Stock dividend                                         |  | $                                | 71,000   |   |      | $ | 71,000   |  
|                                                                                                   |  |                                  |          |   |      |   |          |  
|Preferred Stock converted into Common Stock                                                        |  | $                                |         |   |      | $ | 196,327  |  
|                                                                                                   |  |                                  |          |   |      |   |          |  
|Notes payable converted into Common Stock                                                          |  | $                                | 150,000  |   |      | $ |         |  
|                                                                                                   |  |                                  |          |   |      |   |          |  



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



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##### Table of Contents

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. On July 16, 1998, Manticus, Inc. (Manticus) obtained all of the outstanding shares of OurPets Company in exchange for 8,000,000 shares of common stock of Manticus
in a transaction accounted for as a pooling of interests. After the transaction, the holders of the former OurPets shares owned approximately 89% of the shares of Manticus, resulting in a reverse takeover. On October 12, 1998, Manticus changed
its name to OurPets Company.



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



Use of EstimatesThe preparation of financial statements in conformity with 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.



InventoryInventories are carried at the lower of cost, first-in, first-out method or market. Inventories at
December 31, 2003 and December 31, 2002 consist of:



|                         |  |      |           |      |   |          
|------------------------ |  | ---- | --------- | ---- | - | ---------
|                         |  | 2003 |           | 2002
|Finished goods           |  | $    | 1,327,944 |      | $ | 1,409,667
|Components and packaging |  |      | 299,056   |      |   | 293,180  
|                         |  |      |           |      |   |          
|Total                    |  | $    | 1,627,000 |      | $ | 1,702,847
|                         |  |      |           |      |   |          



All inventories are
pledged as collateral for bank and small business administration 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 accelerated methods over the estimated useful lives of the assets. Amortization of assets under capital leases
and 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         |  | 39 years    
|Tooling                        |  | 3 to 7 years
|Warehouse equipment            |  | 5 to 7 years



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OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Summary of Significant Accounting Policies (Continued)



All property and equipment is pledged as collateral for bank and small business administration loans.
Total depreciation for the years ended December 31, 2003 and December 31, 2002 was $ 235,387 and $ 215,438, respectively.



Intangible AssetsThe Company has filed for patents and trademarks for its proprietary products. The costs incurred of $16,279 in the year
ended December 31, 2003 and $11,462 in the year ended December 31, 2002 have been capitalized and are being amortized over 15 years on a straight-line basis. In 2002 the Company purchased a domain name for its website for $10,000 which is not
subject to amortization. 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
loan.



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 brand name. Net revenue is comprised of
gross sales less discounts given to distributors and returns and allowances.



For the year ended December 31, 2003, 45.5% of the Companys revenue was derived from two major customers. Revenue generated from each of these customers amounted to $ 1,597,638 and $ 761,966, which represents
30.8% and 14.7% of total revenue, respectively.



For the year
ended December 31, 2002, 41.0% of the Companys revenue was derived from two major customers. Revenue generated from each of these customers amounted to $ 1,246,262 and $ 728,228, which represents 25.9% and 15.1% of total revenue, respectively.



At December 31, 2003, 58.2% of the Companys accounts
receivable was due from three major customers. Amounts due from each of these customers were $129,824, $129,364, and $114,227, which represents 20.2%, 20.2%, and 17.8% of total accounts receivable, respectively.



At December 31, 2002, 49.4% of the Companys accounts receivable was due
from three major customers. Amounts due from each of these customers were $125,276, $116,551, and $93,185, which represents 18.5%, 17.2%, and 13.7% of total accounts receivable, 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, 2003 and December 31, 2002 was $ 44,196 and $ 47,487, respectively.



Advertising CostsAdvertising costs are charged to operations
when the advertising first takes place. Advertising expense for the years ended December 31, 2003 and December 31, 2002 was $ 114,709 and $ 73,378, respectively.



Stock OptionsThe Company adopted Financial Accounting Standards Statement No. 123, Accounting for
Stock-Based Compensation. This statement encourages, but does not require, the Company to recognize compensation expense for all awards of equity instruments issued. The statement established a fair value based method of accounting for
stock-based compensation plans. The standard applies to all transactions in which an entity acquires goods or services by issuing equity instruments or by incurring liabilities in amounts based on the price of the entitys common stock or other
equity instruments. Statement No. 123 permits companies to continue



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OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Summary of Significant Accounting Policies (Continued)



to account for such transactions under Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, but
requires disclosure of pro forma net income and earnings per share as if the Company had applied the new method.



The Company has elected to follow APB No. 25, and related interpretations, in accounting for its employee stock options. Accordingly, no compensation
expense has been recognized with respect to the options granted to employees under the stock option plan. Had compensation expense been determined on the basis of fair value pursuant to Statement No. 123, the Company estimated the fair value of each
stock option at the date of grant by using the Black-Scholes option-pricing model with the following weighted-average assumptions: No dividend yield, an expected life of 5 years, an expected volatility of 50%, and a risk-free interest rate of 3.5%.



For purposes of pro forma disclosures, the estimated fair
value of the options granted in 2003, 2002, 2001, 2000 and 1999 is amortized to expense from the date of grant to the date of expiration. The weighted-average fair value of options granted during 2003, 2002, 2001, 2000 and 1999 were $0.10, $0.30,
$0.16, $0.28 and $0.26, respectively. The Companys pro forma information follows:



|                                              |  |                         |         |      |   |          |  
|--------------------------------------------- |  | ----------------------- | ------- | ---- | - | -------- | -
|                                              |  | Year Ended December 31, |        
|                                              |  | 2003                    |         | 2002 |  
|Net income (loss) applicable to Common Stock: |  |                         |         |      |   |          |  
|As reported                                   |  | $                       | 369,186 |      | $ | (341,258 | )
|Less pro forma expense related to options     |  |                         | 18,300  |      |   | 30,067   |  
|                                              |  |                         |         |      |   |          |  
|Pro forma                                     |  | $                       | 350,886 |      | $ | (371,325 | )
|                                              |  |                         |         |      |   |          |  
|Basic Net Income (Loss) per Common Share:     |  |                         |         |      |   |          |  
|As reported                                   |  |                         | 0.03    |      |   | (0.03    | )
|Pro forma                                     |  |                         | 0.03    |      |   | (0.03    | )
|Diluted Net Income (Loss) per Common Share:   |  |                         |         |      |   |          |  
|As reported                                   |  |                         | 0.03    |      |   | (0.03    | )
|Pro forma                                     |  |                         | 0.03    |      |   | (0.03    | )



Net Income (Loss)
Per Common ShareBasic net loss per Common Share is based on the net loss attributable to common stockholders after preferred stock dividend requirements for the year, divided by the weighted average number of common shares outstanding
during the year. Potential common shares have not been included since their effect would be antidilutive. As of December 31, 2003, common shares that could be potentially dilutive include 741,249 stock options at exercise prices from $0.100 to
$0.625 a share, 2,473,291 warrants to purchase Common Stock at exercise prices from $0.407 to $1.454 a share and 710,000 shares underlying the Preferred Stock at a conversion rate of $1.000 per share. As of December 31, 2002, common shares that
could be potentially dilutive include 669,250 stock options at exercise prices from $0.100 to $1.250 a share, 2,445,319 warrants to purchase Common Stock at exercise prices from $0.452 to $1.463 a share and 710,000 shares underlying the 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, 2003. The respective carrying value of certain on balance sheet
financial instruments approximated their fair values. 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



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OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Summary of Significant Accounting Policies (Continued)



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.



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.



Notes Payable and Long-term Debt



|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |              |         |      |   |          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | ---------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | December 31,
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | 2003         |         | 2002
|Revolving note payableBank, under line of credit facility of up to $ 1,500,000 with interest at prime plus 1% (5.00% at December 31,
2003 and 5.25% at December 31, 2002). The note is secured by accounts receivable, equipment, inventory, trademarks, patents and the personal guarantee of certain stockholders.                                                                                                                             |  | $            | 650,000 |      | $ | 850,000  
|Note payableSmall Business Administration $ 270,000 in 1993, due in monthly installments of $ 3,121 through February 1, 2005 including
interest at 5.244%. This note is secured by accounts receivable, inventory, property and equipment, and the personal guarantee of certain stockholders.                                                                                                                                                   |  |              | 42,497  |      |   | 76,826   
|Note payableSmall Business Administration, bridge note increased to $ 175,000 in 1995, due in monthly installments of $ 2,180 through
October 1, 2006 including interest at 6.999%. This note is secured by various equipment purchases, and the personal guarantee of certain stockholders.                                                                                                                                                     |  |              | 68,287  |      |   | 89,003   
|Note payableBank, loan of up to $200,000, borrowed $166,000 through December 31, 2003, due in 60 monthly payments of $3,334 plus
interest at prime rate plus 2% (6.00% at December 31, 2003 and 6.25% at December 31, 2002). The balance due on the note of $99,320 was repaid on December 30, 2003. This note was secured by accounts receivable, equipment, inventory, trademarks,
patents and the personal guarantee of certain stockholders. |  |              |        |      |   | 79,328   
|Note payabledirector, due on August 31, 2004, interest at 10% payable at maturity. The note was repaid on December 30, 2003. This note
was subordinated to the bank loans.                                                                                                                                                                                                                                                                       |  |              |        |      |   | 200,000  
|Note payabledirector and shareholder, due on February 1, 2004. Interest at 10% payable at maturity. A repayment of $75,000 was made on
December 30, 2003. This note is subordinated to the bank loans.                                                                                                                                                                                                                                           |  |              | 75,000  |      |   | 150,000  
|Notes payableofficer, directors, shareholders and investors, due on July 31, 2004. Interest is payable quarterly at 10%. Notes in the
amount of $75,000 were repaid on December 30, 2003. These notes are subordinated to the bank loans.                                                                                                                                                                                                        |  |              | 25,000  |      |   | 100,000  
|Installment notes payabledue in 60 monthly payments of $1,374 including interest through June 1, 2008.                                                                                                                                                                                                                                                                                                                                           |  |              | 62,649  |      |   | 3,865    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |              |         |      |   |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |              | 923,433 |      |   | 1,549,022
|Less current portion of long-term debt                                                                                                                                                                                                                                                                                                                                                                                                            |  |              | 820,480 |      |   | 1,398,918
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |              |         |      |   |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | $            | 102,953 |      | $ | 150,104  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |              |         |      |   |          



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OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Notes Payable and Long-term Debt (Continued)



Future maturities of long-term debt are as follows:



|                         |  |        |        
|------------------------ |  | ------ | -------
|Year Ending December 31, |  | Amount
|2004                     |  | $      | 820,480
|2005                     |  |        | 43,329 
|2006                     |  |        | 36,781 
|2007                     |  |        | 15,323 
|2008                     |  |        | 7,520  
|                         |  |        |        
|                         |  | $      | 923,433
|                         |  |        |        



The bank and small
business administration loan agreements contain various restrictive and customary covenants and default provisions under which the Company must obtain permission from its lenders to (i) purchase or retire any of its capital stock; (ii) pay dividends
in cash on any of its capital stock; (iii) exceed $300,000 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 $ 1,300,000.



On September 1, 1999, the Company borrowed $ 200,000 from a director and stockholder of the Company for working capital purposes at an annual interest
rate of 10% and was repaid on December 30, 2003 by $100,000 in cash and $100,000 by conversion into 294,118 shares of Common Stock.



In July and August of 2000, the Company borrowed a total of $ 275,000 from an officer, directors, stockholders and investor for working capital purposes
at an annual interest rate of 10%. A note for $ 75,000 is due with accrued interest on February 1, 2004 and the other note for $ 25,000 is due on July 31, 2004 with interest payable quarterly. In addition, the lenders received 167,394, 76,718 and
37,987 warrants for the purchase of Common Stock at $ 1.211, $ 1.222 and $1.234 per share, respectively. One of the notes for $ 25,000 and accrued interest and a cash payment totaling $ 6,250 was paid on November 15, 2001 by conversion into 25,468
shares of Common Stock upon the exercise of 25,468 warrants. Two of the notes for $75,000 were repaid on December 30, 2003 by $25,000 in cash and $50,000 by conversion into 147,058 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.



Intangible Assets



|                                          |  |                         |         |                         |   |        |  |              |         |  |   |       
|----------------------------------------- |  | ----------------------- | ------- | ----------------------- | - | ------ |  | ------------ | ------- |  | - | ------
|                                          |  | As of December 31, 2003 |         | As of December 31, 2002
|                                          |  | Cost                    |         | Amortization            |   | Cost   |  | Amortization
|Amortized intangible assets:              |  |                         |         |                         |   |        |  |              |         |  |   |       
|Patents and trademarks                    |  | $                       | 139,967 |                         | $ | 35,731 |  | $            | 153,197 |  | $ | 29,169
|Unamortized intangible assets:            |  |                         |         |                         |   |        |  |              |         |  |   |       
|Domain name                               |  | $                       | 10,000  |                         | $ |       |  | $            | 10,000  |  | $ |      
|Amortization expense for year ended 12/31 |  | $                       | 6,562   |                         |   |        |  | $            | 10,302  |  |   |       
|Estimated amortization expense:           |  |                         |         |                         |   |        |  |              |         |  |   |       
|For year ending 12/31/04                  |  | $                       | 9,707   |                         |   |        |  |              |         |  |   |       
|For year ending 12/31/05                  |  | $                       | 9,707   |                         |   |        |  |              |         |  |   |       
|For year ending 12/31/06                  |  | $                       | 9.707   |                         |   |        |  |              |         |  |   |       
|For year ending 12/31/07                  |  | $                       | 9,707   |                         |   |        |  |              |         |  |   |       
|For year ending 12/31/08                  |  | $                       | 9,707   |                         |   |        |  |              |         |  |   |       





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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Related Party Transactions



The Company leases warehouse and office facilities from a related entity, Senk Properties. Current monthly rentals are $
11,690 with annual increases each June in the monthly rental based upon the change in the indicated consumer price index in the preceding year plus real estate taxes. The initial term of the lease was for five years ending on May 31, 1998 and it has
been extended for two additional five year terms, with the possibility of three additional extensions of five years each. Lease expense for the year ended December 31, 2003 and the year ended December 31, 2002 was $ 147,560 and $ 143,845,
respectively.



Concentration of Credit Risk



The Company maintains cash balances at a bank. Accounts at the institution
are insured by the Federal Deposit Insurance Corporation up to $100,000. Bank balances, including outstanding checks, at December 31, 2003 and December 31, 2002 were $466,397 and $122,099, respectively, which results in uninsured balances of
$366,397 and $22,099, respectively.



Capital Stock



From July through November 1999, the Company sold in 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 shares at $ 10 per
share or convert each preferred share into ten common shares, at the option of the shareholder, at such time as the common shares are 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 are entitled to a 10% stock dividend paid annually in common shares 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. The Company paid brokers or dealers a cash sales commission of 8% and issued them warrants, which expire on October 31, 2005, to purchase 79,662 shares of Common Stock at an exercise price of $ 1.066
per share.



On December 30, 2003, the Company issued 441,176
shares of Common Stock at a price of $0.34 per share for cancellation of debt of $150,000 as consideration for the Common Stock. This transaction was with an officer and directors of the Company.



26



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Warrants



At December 31, 2003, the Company had the following Common Stock purchase warrants outstanding, all of which were exercisable:



|                                             |  |                 |  |               |       |                 |                  
|-------------------------------------------- |  | --------------- |  | ------------- | ----- | --------------- | -----------------
|                                             |  | Number ofShares |  | ExercisePrice |       | Expiration Date
|1998 Private Placement:                      |  |                 |  |               |       |                 |                  
|Subscribers                                  |  | 1,265,094       |  | $             | 1.454 |                 | October 31, 2004 
|Brokers or dealers                           |  | 116,892         |  |               | 0.799 |                 | October 31, 2004 
|Lenders financing                           |  | 131,715         |  |               | 0.726 |                 | October 31, 2004 
|Others                                       |  | 36,158          |  |               | 0.484 |                 | October 31, 2004 
|1999 Private Placement to brokers or dealers |  | 79,662          |  |               | 1.066 |                 | October 31, 2005 
|1999 Issuance to related parties             |  | 515,464         |  |               | 0.970 |                 | December 14, 2005
|2000 Notes payable to Directors and Officer  |  | 116,122         |  |               | 1.211 |                 | July 31, 2004    
|2000 Note payable to investor                |  | 25,804          |  |               | 1.211 |                 | August 28, 2004  
|2001 Note payable to director                |  | 76,718          |  |               | 1.222 |                 | July 31, 2004    
|2001 Directors for fees                      |  | 14,322          |  |               | 1.222 |                 | October 1, 2006  
|2001 Payment for services                    |  | 6,073           |  |               | 0.988 |                 | December 1, 2004 
|2002 Note payable to director                |  | 37,987          |  |               | 1.234 |                 | July 31, 2004    
|2002 Payment for services                    |  | 13,364          |  |               | 0.449 |                 | March 1, 2005    
|2002 Payment for services                    |  | 25,324          |  |               | 1.234 |                 | August 3, 2006   
|2003 Note payable to director                |  | 12,592          |  |               | 0.407 |                 | September 4, 2006
|                                             |  |                 |  |               |       |                 |                  
|Total                                        |  | 2,473,291       |  |               |       |                 |                  
|                                             |  |                 |  |               |       |                 |                  



The 1,265,094 warrants
issued to subscribers in the 1998 private placement may be redeemed by the Company on thirty days notice at a redemption price of $ 0.01 per warrant share, at such time as the common shares are trading on a public exchange at a closing bid price (or
the last sale price) of $ 3.00 or above for a period of ten consecutive business days. 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 in 2003, 2002, 2001 and 2000.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock Option Plan



On December 4, 1999, the Board of Directors approved the 1999 Stock Option Plan, which was approved by the shareholders on August 5, 2000. Stock options
may be granted at the discretion of the Board of Directors for which the Company has reserved 1,350,000 shares of its Common Stock for issuance upon the exercise of options granted under the 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. The following table
summarizes the activity in options under the Plan:



|                                 |  |                 |  |                               |    
|-------------------------------- |  | --------------- |  | ----------------------------- | ---
|                                 |  | Numberof Shares |  | WeightedAverageExercise Price
|Outstanding at January 1, 2002   |  | 669,500         |  | $                             | .91
|Granted                          |  | 20,500          |  |                               | .30
|Exercised                        |  |                |  |                               |   
|Forfeited                        |  | 20,750          |  |                               | .68
|                                 |  |                 |  |                               |    
|Outstanding at December 31, 2002 |  | 669,250         |  |                               | .90
|Granted                          |  | 122,750         |  |                               | .21
|Exercised                        |  |                |  |                               |   
|Forfeited                        |  | 50,751          |  |                               | .63
|                                 |  |                 |  |                               |    
|Outstanding at December 31, 2003 |  | 741,249         |  |                               | .40
|                                 |  |                 |  |                               |    



The following table
summarizes options outstanding at December 31, 2003:



|            |  |                    |  |                                |      |                                            |           |                   |         |                                 |   |     
|----------- |  | ------------------ |  | ------------------------------ | ---- | ------------------------------------------ | --------- | ----------------- | ------- | ------------------------------- | - | ----
|            |  |                    |  | Options Outstanding            |      | Options Exercisable                       
|Range       |  | Number Outstanding |  | Weighted AverageExercise Price |      | WeightedAverage Remaining Contractual Life |           | NumberExercisable |         | Weighted Average Exercise Price
|$0.38-$0.63 |  | 607,999            |  | $                              | 0.44 |                                            | 0.9 Years |                   | 556,997 |                                 | $ | 0.43
|$0.10-$0.21 |  | 133,250            |  | $                              | 0.21 |                                            | 4.4 Years |                   |        |                                 |   |    



There were 556,997 and
337,664 options exercisable at December 31, 2003 and December 31, 2002, respectively. The weighted average fair value of options granted in 2003 and 2002 was $0.10 and $0.30, respectively.



Capital Leases



The Company is the lessee of equipment under a capital lease expiring in 2004. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are amortized on a straight-line basis over the lesser of their related lease terms or their estimated productive lives.
Amortization of assets under capital leases is included in depreciation expense for the years ended December 31, 2003 and December 31, 2002 was $ 4,074 and $ 6,050, respectively.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Capital Leases (Continued)



A summary of property held under capital leases, included in property, plant and equipment, is as
follows as of December 31, 2003 and December 31, 2002:



|                               |  |      |         |   |      |   |         |  
|------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                               |  | 2003 |         |   | 2002 |  
|Office equipment               |  | $    | 17,077  |   |      | $ | 17,077  |  
|Warehouse equipment            |  |      |        |   |      |   | 18,443  |  
|                               |  |      |         |   |      |   |         |  
|                               |  |      | 17,077  |   |      |   | 35,520  |  
|Less: accumulated amortization |  |      | (13,946 | ) |      |   | (23,485 | )
|                               |  |      |         |   |      |   |         |  
|Total                          |  | $    | 3,131   |   |      | $ | 12,035  |  
|                               |  |      |         |   |      |   |         |  



Minimum future lease
payments under operating leases, together with the present value of the net minimum lease payments for capitalized leases as of December 31, 2003 are as follows:



|                                            |  |                    |       |   |                  |   |        
|------------------------------------------- |  | ------------------ | ----- | - | ---------------- | - | -------
|                                            |  | Capitalized Leases |       |   | Operating Leases
|2004                                        |  | $                  | 4,114 |   |                  | $ | 152,743
|2005                                        |  |                    |      |   |                  |   | 152,504
|2006                                        |  |                    |      |   |                  |   | 155,255
|2007                                        |  |                    |      |   |                  |   | 158,149
|2008                                        |  |                    |      |   |                  |   | 66,410 
|Thereafter                                  |  |                    |      |   |                  |   |       
|                                            |  |                    |       |   |                  |   |        
|Total minimum lease payments                |  |                    | 4,114 |   |                  | $ | 685,061
|                                            |  |                    |       |   |                  |   |        
|Less: Amount representing interest          |  |                    | (224  | ) |                  |   |        
|                                            |  |                    |       |   |                  |   |        
|Present value of net minimum lease payments |  | $                  | 3,890 |   |                  |   |        
|                                            |  |                    |       |   |                  |   |        



Interest rates on
capitalized leases vary from 9.7% to 11.9% and are imputed based on the lower of the Companys incremental borrowing rate at the inception of each lease or the lessors implicit rate of return.



Total rent expense of the Company for the years ended December 31, 2003 and
December 31, 2002 was $ 155,558 and $ 143,282, respectively.



Other
Income and Expense



Included in other income and expense
for the year ended December 31, 2003 is the write-off of tooling in the amount of $71,025 and of inventory in the amount of $54,800 related to discontinued products. Also included is the loss on disposal of $40,183 from the sale of excess inventory
of one of our products.



Extraordinary Item



On December 30, 2003, the Company received $879,410 after deductions for
contingent and unpaid legal fees as a settlement of a suit that was initiated against former intellectual property counsel and fiduciaries to the Company. After deducting other legal fees and expenses incurred in connection with the litigation, the
Company recognized an extraordinary gain of $848,166 during 2003.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Income Taxes



There was an income tax benefit of $150,885 from use of an operating loss carryforward by the Company for the year ended December 31, 2003. There was no
income tax expense for the Company for the year ended December 31, 2002.



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, 2003 and December 31, 2002:



|                                                      |  |      |          |   |      |   |         |  
|----------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|                                                      |  | 2003 |          |   | 2002 |  
|Income tax expense/benefit based on US statutory rate |  | $    | 150,885  |   |      | $ | (90,865 | )
|Current period change in the valuation allowance      |  |      | (150,885 | ) |      |   | 90,865  |  
|                                                      |  |      |          |   |      |   |         |  
|Provision for income taxes                            |  | $    |         |   |      | $ |        |  
|                                                      |  |      |          |   |      |   |         |  



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



|                                |  |              |          |   |      |   |          |  
|------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                |  | December 31, |         
|                                |  | 2003         |          |   | 2002 |  
|Deferred tax assets:            |  |              |          |   |      |   |          |  
|Net operating loss carryforward |  | $            | 528,400  |   |      | $ | 679,280  |  
|Valuation allowances            |  |              | (528,400 | ) |      |   | (679,280 | )
|                                |  |              |          |   |      |   |          |  
|Net deferred tax assets         |  | $            |         |   |      | $ |         |  
|                                |  |              |          |   |      |   |          |  



The Companys
valuation allowance decreased by approximately $150,900 for the year ended December 31, 2003, which represents the effect of net income. The Company has recorded a valuation allowance to record its deferred tax assets at estimated net realizable
value due to the uncertainty of realization of these assets through future taxable income.



The Company has available at December 31, 2003, 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
|1996         |  | $                                           | 92,557    |                             | 2011
|1997         |  |                                             | 464,680   |                             | 2012
|1998         |  |                                             | 150,362   |                             | 2018
|1999         |  |                                             | 438,086   |                             | 2019
|2000         |  |                                             | 141,177   |                             | 2020
|2002         |  |                                             | 267,255   |                             | 2022
|             |  |                                             |           |                             |     
|             |  | $                                           | 1,554,117 |                             |     
|             |  |                                             |           |                             |     



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Litigation



On July 19, 2000, the Company commenced litigation against Sinitron Corp. (a supplier of certain Company mold designs), Jack Lemkin, owner and operator of
Sinitron Corp., and others. The court established August 27, 2002 as the trial date. However, prior thereto, the Company dismissed its litigation against Defendents Sinitron and Jack Lemkin without prejudice and refilled the lawsuit against Sinitron
Corp. only on December 26, 2002. The complaint alleges four counts: breach of contract, negligence, fraud and breach of third party beneficiary rights. While the Company believes that its case against Sinitron Corp. is strong, it cannot predict the
likely outcome of this action at such an early stage in the proceeding.



The Company had previously commenced legal action against its former intellectual property counsel, their attorneys, and insurers relative to their negligence in handling the Companys intellectual property matters. In December 2003 a
settlement of this action was finalized whereby the Company received the net proceeds and recognized an extraordinary gain as described above under Extraordinary Gain.



As a result of the negligence of the Companys intellectual property counsel, Mr. Lemkin was able to file for and
obtain a patent on various aspects of one of the Companys products. Upon its voluntary dismissal without prejudice of the lawsuit against Sinitron Corp. and Mr. Lemkin, the Company commenced suit against Lemkin personally on June 6, 2002
seeking, amoung other things, a declaration that Lemkins patent either belongs to the Company, or is invalid due to Lemkins failure to disclose the Companys role in developing the product in his application for the patent. The
court issued a temporary restraining order against Lemkin, and that litigation is currently pending. Based upon the opinion of the Companys counsel, the suit could result in a settlement or award by the court in favor of the Company. At this
time, however, no estimate can be made as to the time or the amount, if any, of ultimate recovery.



Subsequent to the issuance of the restraining order, Mr. Lemkin filed suit against the Company alleging violations of the United States Patent Act and
breach of good faith and fair dealings pertaining to one of the Companys patents. The Company has filed with the court a motion to dismiss Mr. Lemkins suit.



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 seeking damages, including non-payment of loans, resulting
from Akons breach in September 2000 of the asset purchase agreement. This case was previously filed in October 2000 and was subsequently dismissed without prejudice in March 2003.



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 its management believes could result in any judgments or
fines against it that would have a material adverse affect or impact in the Companys financial position, liquidity or results of operations.



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##### Table of Contents

Item 8.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.



During our two most recent calendar years or any later interim period, there have been no changes in, or disagreements with, our principal independent
accountant or a significant subsidiarys independent accountant.



Item 8A.Controls and Procedures.



As of December 31, 2003, 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 pursuant to Exchange Rule 13a-14. Based upon that evaluation, our President and Chief
Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including our consolidated subsidiaries) required
to be included in our periodic SEC filings. There have been no significant changes in our internal controls over financial reporting or in other factors which could significantly affect internal controls over financial reporting that occurred during
our most recent fiscal quarter.



PART III



Item 9.Directors and Executive Officers of the Registrant.



The information required by this Item with respect to the directors, executive officers, promoters, control persons and compliance with Section 16(a) of
the Securities and Exchange Act and our Code of Ethics is incorporated by reference from the information provided under the headings Election of Directors, Executive Compensation and Other Matters, respectively,
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 22, 2004.



Item 10.Executive Compensation.



The information required by this Item is incorporated by reference from the information provided under the headings Executive Compensation,
Compensation of Directors and Employment Contracts and Termination of Employment and Change-in-Control Arrangements, respectively, contained in our Proxy Statement.



Item 11.Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters.



Equity Compensation Plan Information



|                                                           |  |                                                                                         |  |                                                                          |       |                                                                                                                                         |        
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ----- | --------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                              |  | Number of Securitiesto be Issued UponExercise ofOutstanding Options,Warrants and Rights |  | Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights |       | Number of Securities RemainingAvailable for Future IssuanceUnder Equity CompensationPlans
(Excluding SecuritiesReflected in Column (a))
|                                                           |  | (a)                                                                                     |  | (b)                                                                      |       | (c)                                                                                                                                    
|Equity compensation plans approved by security holders     |  | 741,249                                                                                 |  | $                                                                        | 0.398 |                                                                                                                                         | 608,751
|Equity compensation plans not approved by security holders |  | 44,761                                                                                  |  | $                                                                        | 0.966 |                                                                                                                                         | -0-    
|                                                           |  |                                                                                         |  |                                                                          |       |                                                                                                                                         |        
|Total                                                      |  | 786,010                                                                                 |  | $                                                                        | 0.430 |                                                                                                                                         | 608,751
|                                                           |  |                                                                                         |  |                                                                          |       |                                                                                                                                         |        



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##### Table of Contents

The equity compensation plans not approved by security holders include the following issuances of
warrants to purchase Common Stock as partial payment for public relations services to an individual and payment in full for investor relations services to an unrelated firm:



Public relations in 2001 for 6,073 warrants at $0.988 per share which expire on December 1, 2004.



Public relations in 2002 for 13,364 warrants at $0.449 per share which
expire on March 1, 2005.



Investor relations in 2002 for
25,324 warrants at $1.234 per share which expire on August 3, 2006.



Other information required by this Item is incorporated herein by reference from the information provided under the heading Security Ownership of Certain Beneficial Owners and Management of our Proxy Statement.



Item 12.Certain Relationships and Related Transactions.



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



Item 13.Exhibits, Lists and Reports on Form 8-K.



|(a) |  | Exhibits
|--- |  | --------



Index to Exhibits.



| | (2) |  | Plan of Acquisition, Reorganization, Arrangement, Liquidation, or SuccessionNot Applicable
| | --- |  | -------------------------------------------------------------------------------------------

| | (3) |  | Charter and Bylaws
| | --- |  | ------------------

| | (4) |  | Instruments defining the rights of security holders
| | --- |  | ---------------------------------------------------

| | (9) |  | Voting Trust AgreementNot Applicable
| | --- |  | -------------------------------------

| | (10) |  | Material Contracts
| | ---- |  | ------------------

| | (11) |  | Statement of Computation of Net Income (Loss) Per Share
| | ---- |  | -------------------------------------------------------

| | (13) |  | Annual or Quarterly Reports, Form 10-QNot Applicable
| | ---- |  | -----------------------------------------------------

| | (14) |  | Code of Ethics
| | ---- |  | --------------

| | (16) |  | Letter on change in certifying accountantsNot Applicable
| | ---- |  | ---------------------------------------------------------

| | (18) |  | Letter on change in accounting principlesNot Applicable
| | ---- |  | --------------------------------------------------------

| | (20) |  | Other documents or statements to security holdersNot Applicable
| | ---- |  | ----------------------------------------------------------------

| | (21) |  | Subsidiaries of the Registrant
| | ---- |  | ------------------------------

| | (22) |  | Published report regarding matters submitted to voteNot Applicable
| | ---- |  | -------------------------------------------------------------------

| | (23) |  | Consent of experts and counselNot Applicable
| | ---- |  | ---------------------------------------------

| | (24) |  | Power of AttorneyNot Applicable
| | ---- |  | --------------------------------

| | (27) |  | Financial Data ScheduleNot Applicable
| | ---- |  | --------------------------------------

| | (31) |  | Rule 13a  14(a) Certifications
| | ---- |  | -------------------------------

| | (32) |  | Section 1350 Certifications
| | ---- |  | ---------------------------

| | (99) |  | Additional ExhibitsNot Applicable
| | ---- |  | ----------------------------------



Description of Exhibits.



|      |  |                                                                                                                                                                                   
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|3.1   |  | Articles of Incorporation of Manticus, Inc., dated May 23, 1996.*                                                                                                                 
|      | 
|3.1.1 |  | Articles of Amendment to the Articles of Incorporation of Manticus, Inc., changing the name of the corporation to OurPets
Company, effective September 1, 1998.*               
|      | 
|3.1.2 |  | Articles of Amendment to the Articles of Incorporation of Manticus, Inc., nka OurPets Company, reflecting changes to the
corporations capital structure, adopted July 20, 1999.*
|      | 
|3.2   |  | Bylaws of Manticus, Inc.*                                                                                                                                                         
|      | 
|4.1   |  | Common Stock Certificate.*                                                                                                                                                        
|      | 
|4.2   |  | Preferred Stock Certificate.*                                                                                                                                                     



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|      |  |                                                                                                                                                                                                                                             
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|4.3   |  | Promissory Note dated September 1, 1999 for $200,000, made by the Company to Joseph T. Aveni.*                                                                                                                                              
|      | 
|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.*                                                                     
|      | 
|10.2  |  | Lease Agreement dated March 17, 1993, with Addendums, between Senk Properties and GPI Division, NAPRO, Inc.*                                                                                                                                
|      | 
|10.3  |  | Letter dated February 14, 1998, to Anthony ORourke from Konstantine (Dean) Tsengas and Steve Tsengas regarding sales
commission, sales consulting and Board participation.*                                                              
|      | 
|10.4  |  | Letter from Company to Greg Johnson dated October 12, 1999 regarding consulting services.*                                                                                                                                                  
|      | 
|10.5  |  | 1999 Stock Option Plan.*                                                                                                                                                                                                                    
|      | 
|10.6  |  | Standard Option Agreement.*                                                                                                                                                                                                                 
|      | 
|10.7  |  | Standard Common Stock Purchase Warrant.*                                                                                                                                                                                                    
|      | 
|10.8  |  | Indemnity Agreement, dated March 31, 2000, between Akron Plastic Enterprises, Inc. and its President, David Herman, individually, and
OurPets Company and Dr. Steven Tsengas, Evangelia Tsengas, Nicholas Tsengas and Konstantine Tsengas.*
|      | 
|10.9  |  | Small Business Administration loan agreement dated July 8, 1993 with Napro, Inc.*                                                                                                                                                           
|      | 
|10.10 |  | Small Business Administration loan agreement dated March 10, 1995 with Napro, Inc.*                                                                                                                                                         
|      | 
|10.12 |  | Vendor Agreement between the Company and Wal-Mart Stores, Inc.*                                                                                                                                                                             
|      | 
|10.13 |  | Promissory Note dated July 21, 2000 for $50,000, made by the Company to Dr. Steven Tsengas.*                                                                                                                                                
|      | 
|10.14 |  | Promissory Note dated August 1, 2000 for $150,000, made by the Company to Beachcraft Limited Partnership.*                                                                                                                                  
|      | 
|10.15 |  | Promissory Note dated August 1, 2000 for $25,000, made by the Company to Joseph T. Aveni.*                                                                                                                                                  
|      | 
|10.16 |  | Demand Note dated October 20, 2000 for $40,000, between the Company and Dr. Steven Tsengas.*                                                                                                                                                
|      | 
|10.17 |  | PetsMart 2001 Vendor Purchasing Terms*                                                                                                                                                                                                      
|      | 
|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. **                                               
|      | 
|11    |  | Statement of Computation of Net Income (Loss) Per Share.                                                                                                                                                                                    
|      | 
|14    |  | OurPets Code of Ethics                                                                                                                                                                                                                     
|      | 
|21    |  | Subsidiaries of the Registrant.*                                                                                                                                                                                                            
|      | 
|31.1  |  | Certificate of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                         
|      | 
|31.2  |  | Certificate of the Chief Financial Officer pursuant to Section 302 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.                                                                                      



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

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



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All other Exhibits filed herewith.



|(b) |  | Form 8-K
|--- |  | --------



Form 8-K filed November 4, 2003 reporting that OurPets issued a press release and other financial information regarding our third quarter results on November 3, 2003.



Form 8-K filed December 17, 2003 reporting that OurPets reached a
settlement of all litigation with our former intellectual property counsel, their attorneys and insurers.



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 Fees and
Services contained in our Proxy Statement.



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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 30, 2004



OURPETS COMPANY



By:

/s/    STEVEN TSENGASSteven Tsengas Chairman, 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
TSENGASSteven
Tsengas         |  | Chairman, President, Chief Executive Officer and Director (principal executive officer) |  | March 30, 2004
|                                            |  |                                                                                        
|/s/    JOHN G. MURCHIEJohn G. Murchie       |  | Vice President, Treasurer and Controller (principal accounting officer)                 |  | March 30, 2004
|                                            |  |                                                                                        
|/s/    JOSEPH T. AVENIJoseph T. Aveni       |  | Director                                                                                |  | March 30, 2004
|                                            |  |                                                                                        
|/s/    JAMES W. MCCOURTJames W. McCourt     |  | Director                                                                                |  | March 30, 2004
|                                            |  |                                                                                        
|Patrick K. Stewart                          |  | Director                                                                                |  | March 30, 2004
|                                            |  |                                                                                        
|/s/    BENJAMIN D. SUAREZBenjamin D. Suarez |  | Director                                                                                |  | March 30, 2004



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