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As filed with the Securities and
Exchange Commission on March 31, 2010

United States

Securities and Exchange Commission

Washington, DC
20549





Form 10-K

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

Of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2009

OR

 ̈ Transition Report Pursuant to Section 13 or 15(d)

of the
Securities Exchange Act of 1934

Commission file number: 000-31279

OurPets Company

(Exact Name of Registrant as Specified in Its Charter)







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



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

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

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

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





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

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

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

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

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

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



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



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

Registrants revenues for the fiscal year ended
December 31, 2009 were $14,251,786. 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 $4,085,524 as of March 15, 2010. As of
March 15, 2010, the registrant had outstanding 15,393,667 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 21, 2010.

www.ourpets.com









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OURPETS COMPANY

FORM 10-K

For The Fiscal Year Ended December 31, 2009

INDEX



|            |  |                                                                                                              |  |     
|----------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|            |  |                                                                                                              |  | Page
|PART I      |  |                                                                                                              |  |     
|            |  |                                                                                                             
|Item 1.     |  | Business                                                                                                     |  | 3   
|            |  |                                                                                                             
|Item 1A.    |  | Risk Factors                                                                                                 |  | 4   
|            |  |                                                                                                             
|Item 2.     |  | Properties                                                                                                   |  | 6   
|            |  |                                                                                                             
|Item 3.     |  | Legal Proceedings                                                                                            |  | 6   
|            |  |                                                                                                             
|Item 4.     |  | Submission of Matters to a Vote of Security Holders                                                          |  | 7   
|            |  |                                                                                                             
|PART II     |  |                                                                                                              |  |     
|            |  |                                                                                                             
|Item 5.     |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 7   
|            |  |                                                                                                             
|Item 6      |  | Selected Financial Data                                                                                      |  | 8   
|            |  |                                                                                                             
|Item 7.     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 8   
|            |  |                                                                                                             
|Item 8.     |  | Financial Statements and Supplementary Data                                                                  |  | 13  
|            |  |                                                                                                             
|Item 9.     |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 13  
|            |  |                                                                                                             
|Item 9A(T). |  | Controls and Procedures                                                                                      |  | 13  
|            |  |                                                                                                             
|Item 9B.    |  | Other Information                                                                                            |  | 14  
|            |  |                                                                                                             
|PART III    |  |                                                                                                              |  |     
|            |  |                                                                                                             
|Item 10.    |  | Directors, Executive Officers and Corporate Governance                                                       |  | 14  
|            |  |                                                                                                             
|Item 11.    |  | Executive Compensation                                                                                       |  | 14  
|            |  |                                                                                                             
|Item 12.    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 14  
|            |  |                                                                                                             
|Item 13.    |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 14  
|            |  |                                                                                                             
|Item 14.    |  | Principal Accountant Fees and Services                                                                       |  | 14  
|            |  |                                                                                                             
|PART IV     |  |                                                                                                              |  |     
|            |  |                                                                                                             
|Item 15.    |  | Exhibits and Financial Statement Schedules                                                                   |  | 14  
|            |  |                                                                                                             
|            |  | Signatures                                                                                                   |  | 18  
|            |  |                                                                                                             
|            |  | Certifications                                                                                               |  | 41  



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

Introductory Note

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

PART I

Item 1.Business.

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

We develop and market products for improving the health, safety, comfort and enjoyment
of pets. The products sold have increased from the initial Big Dog Feeder to approximately 400 products for dogs, cats, domestic and wild birds. Products are marketed under the OurPets, Flappy®, Pet Zone®, SmartScoop®, Ecopure
Naturals ®, Play-N-Squeak®, Durapet®, Go! Cat Go®, and DockDogs® labels to customers, both domestic and foreign. The manufacturing of these products is subcontracted to other entities, both domestic and foreign, based upon price,
delivery and quality.

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

We sell our products in the following market segments:

Mass
retailerseg. Wal-Mart, Kmart

Pet superstoreseg. PetsMart, Petco

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

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



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Clubseg. Costco, Sams Club

Military Exchange chainseg. AAFES, NEXCOM

Grocery chainseg., Publix, Meijers, Krogers

Pet food manufacturerseg., Ralston Purina

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

International customerseg. Zellers, Underworld, Pets at Home

The companies listed above are intended to serve as examples solely for illustrative purposes. As a standard industry practice, price lists
are provided to distributors, who in turn place products with retailers. Larger retailers with a national presence will generally order product directly from us pursuant to the price list and subject to negotiated additional terms, if any. With the
exception of a written price list, many of the arrangements with retailers or distributors are verbal and written contracts often do not exist. Customers submit their own standard purchase orders based on our current price list. Even the larger
retailers, which might have written contracts with us, are under no obligation to purchase specific product from us. While all of the above companies may currently buy product from OurPets, none of these customers are under any contractual
obligation to purchase a specific volume of product nor to continue making any purchases in the future. We currently have approximately 340 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 340 customers for the year ended December 31, 2009, 42.9% of our revenue was derived from PetsMart and
Wal-mart. Revenue generated from each of these customers amounted to $3,076,073 and $2,921,058, respectively, which represents 22.0% and 20.9% of total revenue.

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

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

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

Most of our products
are proprietary and we have been granted or assigned 56 United States and international patents for dog and cat feeders and have 51 United States and international patents pending for cat and dog toys, dog feeders and natural and nutritional pet
supplements and treats. We registered our logo, OurPets, as a registered trademark. To protect our trade names we obtained 34 additional trademark registrations and applied for 19 trademark registrations, which are still pending.

As of March 15, 2010, we had 30 full-time employees consisting of four officers, nine other employees in sales and
marketing, one employee in engineering, two employees in quality assurance, four employees in finance and administration, one employee in IT, five employees in operations and four 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 $259,328 for the year ended December 31, 2009 and $141,111 for the year ended December 31, 2008.

Item 1A.Risk Factors.

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

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



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Additional financing may not be available when required by us.

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

The loss of key personnel could adversely affect our operations.

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

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

Our success will depend, in part, on our ability to maintain protection for our products
under United States patent laws, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We have 56 U.S. and international patents issued or assigned and 51 U.S. and international patent applications
pending. Patent applications may not successfully result in an issued patent. Issued patents are still subject to challenges and infringements. Furthermore, others may independently develop similar products or otherwise circumvent our patent
protection. Should we fail to obtain and protect our patents, our competitive advantage will be harmed.

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

We are currently
defending litigation filed against us by a competitor that alleges that we infringed upon certain patents for self-cleaning litter boxes. If we are not successful in defending this litigation we would not be able to sell our SmartScoop
self-scooping cat litter box and we could incur costs for damages paid to our competitor and for the write-off of our product development and tooling costs for our product.

The costs of defending the alleged patent infringement actions against us may not be recouped even if we are successful in our defense, and could harm our profitability.

While we have been successful thus far in defending certain patent litigation filed against us by a competitor, the cost of our defense has
had a negative impact on our profitability. We do not know how long the litigation (including appeals) may continue. Even if we continue to be successful in defending this litigation, our legal expenses could be signficant.

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

We currently have 15,393,667 shares of Common Stock outstanding which could be diluted by the following potential issuances of Common Stock.
As of March 15, 2010, we had outstanding 189,816 shares of Convertible Preferred Stock (Preferred Stock) convertible into 1,896,160 shares of Common Stock at conversion rates of $1.00 per share for 66,000 shares of Preferred Stock
and $.70 per share for 123,616 shares of Preferred Stock. Also as of March 15, 2010, we had outstanding 4,717,887 warrants to purchase an aggregate of 4,717,887 shares of Common Stock at exercise prices ranging from $0.283 to $1.438 per share
and options to purchase an aggregate of 1,575,500 shares of Common Stock at exercise prices ranging from $0.20 to $1.55 per share. We have reserved an aggregate of 1,991,500 shares of Common Stock for issuance under the 1999 Stock Option Plan and
the 2008 Stock Option Plan as of the date of this Report. In addition, the exercise of such warrants and options could have a material adverse effect on the future market price of, and liquidity in the market for, shares of Common Stock trading in
the over-the-counter market. Further, while these warrants and options are outstanding, our ability to obtain additional financing on favorable terms may be adversely affected.

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

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



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

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

Possible Volatility of Market Price of Common Stock.

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

Item 2.Properties.

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

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.

On October 12, 2007, Applica Consumer Products, Inc.
(Applica) filed an action in the U.S. District Court, Eastern District of Texas, against the Company alleging patent infringement of certain of its patents. Applica has alleged that the Companys SmartScoop self-scooping cat
litter box infringes upon patents Applica controls for self-cleaning litter boxes. Applica is seeking damages and a permanent injunction prohibiting the Company from further infringement of Applicas patents. The case is currently partially
stayed in view of the U.S. International Trade Commission (ITC) investigation discussed below. Certain activity regarding the patent suit is continuing and is in the discovery stage.

On or about December 2, 2007, Applica filed a complaint with the ITC in Washington D.C. whereby Applica sought an
order that permanently excludes the Company from importing products that allegedly infringe on Applicas patents. The ITC held a hearing on the matter in August and the Initial Determination was issued in December by the Administrative Law
Judge with the ITC on the action filed against us by Applica and found in our favor on all but one claim. On April 7, 2009 the ITC issued a ruling upholding the Initial Determination by the ITC Administrative Law Judge. On April 21, 2009, we
certified to the U.S. Customs that our new revised products are non-infringing so that we could continue to import the products and on May 28, 2009, U.S. Customs ruled in our favor that the new model SmartScoopTMcan be freely imported into the United States. Applica appealed the
ITCs April 7, 2009 ruling in our favor and the appeal is currently pending in the Court of Appeals for the Federal Circuit. We separately appealed the ITC decision finding infringement under the one claim because we believe it was decided on
incorrect facts. A ruling on our and Applicas appeals is expected in April.

Applica also sought a restraining order
against a retailer carrying OurPets SmartScoop litterbox, which was denied by the court. Applicas legal action against the retailer has since been consolidated with our patent infringement litigation in the U.S. District Court.
Pursuant to our agreement with the retailer we will indemnify a portion of the costs of its defense against Applica. We believe that Applicas lawsuit against us and its legal actions against the retailer are without merit and aimed at
discouraging competition, a belief we feel is supported by our recent success in obtaining a U.S. patent for the SmartScoop litter box in December 2009.



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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 2009.

PART II

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

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



|                   |  |      |  |     
|------------------ |  | ---- |  | ----
|Quarter Ended      |  | High |  | Low 
|March 31, 2008     |  | 1.00 |  | 0.56
|June 30, 2008      |  | 1.01 |  | 0.38
|September 30, 2008 |  | 0.54 |  | 0.27
|December 31, 2008  |  | 0.43 |  | 0.15
|March 31, 2009     |  | 0.35 |  | 0.19
|June 30, 2009      |  | 0.35 |  | 0.20
|September 30, 2009 |  | 0.51 |  | 0.27
|December 31, 2009  |  | 0.63 |  | 0.43

As of March 15,
2010 , we had approximately 135 holders of record of our Common Stock.

Each share of Common Stock has an equal right to
receive dividends when and if the Board of Directors decides to declare a dividend after payment of any accrued dividends on 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.

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

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



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Item 6.Selected Financial Data.

Not applicable.

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

Overview

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

As discussed below and in Liquidity and Capital Resources on Pages 11-13, we have funded our operations during 2009 principally from net
cash provided by operating activities and from borrowings during 2008.

During 2009 we had a net reduction of $951,000 in
borrowings from our line of credit facility with our bank under which we can borrow up to $2,000,000 based on the level of qualifying accounts receivable and inventories. At December 31, 2009 and December 31, 2008 we had balances of
$849,000 and $1,800,000, respectively, under the line of credit with our bank at an interest rate of prime plus .5% versus an interest rate of prime plus .75% during all of 2008.

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

In February of 2008, we entered into contribution agreements with six contributors, all of which are affiliated
with OurPets, pursuant to which each contributor loaned certain funds to us totaling $600,000. We used these funds for expenses related to litigation on certain of our SmartScoop products (the SmartScoopLitigation) and
for expenses related to new product development. In consideration for these loans we (a) executed promissory notes due in two years with interest accruing at prime plus 2%, (b) issued warrants for the purchase of 300,000 shares of our
Common Stock at an option price of $0.825 per share and (c) entered into piggyback registration rights agreements with the contributors. Subsequent to their issuance the warrants were adjusted to 301,212 warrants exercisable at $0.821 per share
in accordance with the warrant anti-dilution provisions.

In June and July of 2008, we entered into additional contribution
agreements with the same six contributors pursuant to which each contributor loaned certain funds to us totaling an additional $292,500. We used the funds for additional expenses related to the SmartScoopLitigation. In consideration for these
loans we (a) executed promissory notes due in three years with interest compounding quarterly at prime plus 2%, (b) issued warrants for the purchase of 146,250 shares of our Common Stock at an option price of $0.50 per share,
(c) issued warrants for the purchase of 292,500 shares of our Common Stock at an option price of $0.50 per share, which replaced 292,500 of the warrants issued in February of 2008 and (d) entered into piggyback registration rights
agreements with the contributors. Subsequent to their issuance the warrants were adjusted to 442,412 warrants exercisable at $0.496 per share in accordance with the warrant anti-dilution provisions.

In July and August of 2008, we entered into additional contribution agreements with two other contributors, neither of which are affiliated
with OurPets, pursuant to which each contributor loaned certain funds to us totaling $125,000. We also used these funds for expenses related to the SmartScoopLitigation. In consideration for these loans we (a) executed promissory
notes due in three years with interest compounding quarterly at prime plus 2%, (b) issued warrants for the purchase of 12,500 shares and 50,000 shares of our Common Stock at option prices of $0.50 and $0.40 per share respectively, and
(c) entered into piggyback registration agreements with the contributors. Subsequent to their issuance the warrants were adjusted to 12,604 and 50,468 warrants exercisable at $0.496 and $0.397 per share respectively, in accordance with the
warrant anti-dilution provisions.

In October and November of 2008, we entered into additional contribution agreements with
two other contributors, neither of which are affiliated OurPets, pursuant to which each contributor loaned certain funds to us totaling $350,000. We also used these funds for expenses related to the SmartScoopLitigation. In consideration
for these loans we (a) executed promissory notes due in three years for $50,000 and due in four years for $300,000 both with interest compounding quarterly at prime plus



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2%, (b) issued warrants for the purchase of 25,000 shares and 300,000 shares of our Common Stock at option prices of $0.40 and $0.37 per share respectively, and (c) entered into
piggyback registration agreements with the contributors. Subsequent to their issuance the 25,000 warrants exercisable at $0.40 per share were adjusted to 25,234 warrants exercisable at $0.397 per share and the 300,000 warrants exercisable at $0.37
per share were adjusted to 301,293 warrants exercisable at $0.368 per share in accordance with the warrant anti-dilution provisions.

Results of Operations

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

In the following discussion all references to 2009 are for the year ended December 31, 2009 and all references to 2008 are for the year ended
December 31, 2008.

Net revenue for 2009 was $14,251,786, an increase of 14.8% in revenue from $12,410,135 in 2008,
consisting of sales of proprietary products for the retail pet business. Of this $1,841,651 increase, approximately $896,000 came from our two largest customers primarily due to new product introductions and new packaging roll out. The remaining
increase of approximately $945,000 came from increased International sales of $270,000 and increased sales to new customers and distributors of $ 675,000. Total sales to all customers of new products in 2009 that were not sold in 2008, including the
new Flappy products, Play-N-Squeak products, new Durapet Bowl products, new Go Cat Go products, private label sales and ecoPure products were approximately $1,879,000. Our sales to foreign customers increased by approximately $270,000, or 35.7, from
2008 mainly due to increased sales to customers in England, Finland and Sweden.

While net revenue increased by 14.8% in 2009,
cost of goods sold increased by 11.9%, from $8,911,274 in 2008 to $9,971,696 in 2009. This increase of $1,060,422 was due primarily to the increase in sales volume driving a 13.7% ($965,000) increase in the cost of purchased products sold and a
21.0 % ($95,000) increase in operations labor costs as we added one new indirect employee, had significant increases in health insurance costs as well as increased accruals for bonus and profit sharing. Research and development costs are
included in cost of goods sold and increased 92.7% ($120,000) as we hired a full time engineering manager for new product development and incurred additional R&D expenses related to new product prototyping and samples. Our freight out costs
dropped 25.8% ($80,000) due to improved logistics management. Depreciation expenses decreased 10.3% ($40,000) as molds and tooling assets with three year lives became fully depreciated. Customer back charges and warranty costs decreased 52.4%
($73,000) due to improved quality control and decreased Smart Scoop litter box shipments. Personal Property /Ohio Commercial activity Tax adjustments resulted in approximately $30,000 of increased expense. Warehouse rent increased approximately
$11,000 due to escalations in our lease agreement. Operations travel expense increased approximately $6,000 due to our visiting overseas vendors. Overall, our variable and fixed warehouse and overhead costs increased by 5.2% ($96,000) from 2008.

Net revenue increased by 14.8% and the cost of goods sold increased by 11.9%, which resulted in our gross profit on sales
increasing by 22.3%, or $781,229, from $3,498,861 in 2008 to $4,280,090 in 2009.

Selling, general and administrative expenses
in 2009 were $3,114,960, an increase of $408,732, or 15.1%, from $2,706,228 in 2008. The significant increases were in (i) increased salaries, wages, payroll taxes and benefits of approximately $235,000 due to the hiring of two additional
employees, one in sales, one in IT, overlap transition costs related to our CFO transition, overall increased health insurance costs and the increased accruals for employee profit sharing and managers bonuses, (ii) increased sales and
marketing expenses of approximately $99,000 mainly due to promotional and incentive expenses by our customers and higher costs incurred for trade shows, (iii) accruals for commissions due to our sales representatives of approximately $39,000
mainly due to increased sales in 2009 and (iv) consulting services of approximately $17,000 for Sarbanes Oxley compliance.

Litigation expenses were $373,608 for 2009, a decrease of $1,949,375 from $2,322,983 due to the decreased costs and activities related to our defense of a competitors 2007 lawsuit against us for alleged patent infringement in
connection with our SmartScoop self-scooping cat litter box .

Income (loss) from operations increased by $2,321,872,
from a loss of $1,530,350 in 2008 to income of $ 791,522 in 2009. This was the result of increases in our gross profit on sales of $781,229 and decreases in litigation expenses of $1,949,375 which more than offset the increases in selling, general
and administrative expenses of $408,732.

Interest expense for 2009 was $178,902, a decrease of 7.5%, or $14,448, from
$193,350 in 2008. This decrease was primarily due to a $39,000 decrease in our line of credit interest expense which more than offset the $18,000 increase in contributor notes interest expense and a $13,000 supplier financing charge. The line of
credit interest expense decrease was primarily due to the average interest rate reduction to 3.95% in 2009 from 5.86% in 2008. Also, the line of credit average outstanding balance in 2009 decreased from $1,738,000 in 2008 to $1,539,000 in 2009. The
increase in interest expense related to contributor notes was primarily due to 2009 being the first complete year of interest being charged vs. the partial 2008 year during which the notes were executed throughout that year. The supplier financing
charges are no longer being incurred since we obtained the additional financing in September of 2009.



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Other income for 2009 was $38,153 compared to $1,577 in 2008. The approximate $37,000
increase was due to a settlement received in connection with our lawsuit against Akon Plastic Enterprises, Inc.

Income tax
expense was a benefit of $124,994 in 2009 compared to an expense of $6,075 in 2008. The change of approximately $131,000 was primarily due to an approximately $125,000 deferred tax benefit.

The net income for 2009 was $775,767 as compared to a net loss 2008 of $1,728,198 or an increase in profitability of $2,503,965. This
increase was as a result of the following changes from 2008 to 2009:



|                                                                |  |   |            |  
|--------------------------------------------------------------- |  | - | ---------- | -
|Net revenue increase of 14.8%                                   |  | $ | 1,841,651  |  
|Cost of goods sold increase of 11.9%                            |  |   | (1,060,422 | )
|                                                                |  |   |            |  
|Gross profit on sales increase of 22.3%                         |  |   | 781,229    |  
|Selling, general and administrative expenses increase of 15.1 % |  |   | (408,732   | )
|Litigation expense                                              |  |   | 1,949,375  |  
|Other income and expense                                        |  |   | 36,576     |  
|Interest expense decrease of 7.5%                               |  |   | 14,448     |  
|Income tax benefit                                              |  |   | 131,069    |  
|                                                                |  |   |            |  
|Increase in Profitability                                       |  | $ | 2,503,965  |  
|                                                                |  |   |            |  

Liquidity and Capital Resources

Our operating activities provide cash from the sale of our products to customers with the principal use of cash being for the payments to suppliers that manufacture our products and for freight charges
for shipments to our warehouse and to our customers. Our investing activities use cash mostly for the acquisition of equipment such as tooling, computers and software. Our financing activities provide cash, if needed, under our line of credit with
our bank that had approximately $1,351,000 in available funds at December 31, 2009 based upon the balance of accounts receivable and inventories at that date.

As of December 31, 2009, we had $3,159,669 in principal amount of indebtedness consisting of:



|                                |  |                     |  |   |          
|------------------------------- |  | ------------------- |  | - | ---------
|Bank line of credit             |  | Prime plus .5%      |  | $ | 849,000  
|Bank term note 1                |  | 7.60%               |  |   | 55,443   
|Bank term note 2                |  | 4.61%               |  |   | 735,952  
|Contributor notes payable       |  | Prime plus 2%       |  |   | 1,367,500
|Pet Zone Products Ltd term loan |  | 7.75%               |  |   | 37,842   
|Installment note payable        |  | 7.3%                |  |   | 13,932   
|Other notes payable             |  | Prime plus 3% & 10% |  |   | 100,000  

The bank line of
credit indebtedness of $849,000 is from a line of credit with our bank under which we can borrow up to $2,000,000 based on the level of qualifying accounts receivable and inventories. The line of credit is renewable annually by the bank and
therefore is classified as a current liability on our balance sheet. Currently the line of credit has been renewed by the bank through June 30, 2010. Under our agreement with the bank we are currently required to: (i) maintain a debt
service coverage ratio of at least 1.15; (ii) maintain a tangible net worth of no less than $3,000,000; and (iii) obtain the banks permission to incur additional indebtedness, make any expenditures for property and equipment in
excess of $500,000 in any fiscal year, redeem any of our capital stock, or pay cash dividends other than dividends on our Preferred Stock (subject to meeting the debt service coverage ratio). At December 31, 2009 we were in compliance with the
covenants and default provisions under our agreement with the bank and had a debt service coverage ratio of 3.57 and a tangible net worth of $4,130,761.

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



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The installment notes payable are paid in monthly payments of $560 including interest
through March 2012. The other notes payable are due in the amount of $75,000 on December 1, 2010 to Beachcraft L.P. and $25,000 on November 30, 2010 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 customary covenants and default provisions.

The note payable to Beachcraft L.P. was originally for $150,000, $75,000 of which was repaid in 2003. As of February 1, 2004, a new
note payable to Beachcraft L.P. was issued to replace the $75,000 remaining balance. The replacement note is due on December 31, 2010 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 at an exercise price of $0.30 per share. Subsequent to their issuance the warrants were adjusted to 57,204 warrants exercisable at $0.295 per share in accordance with the warrant anti-dilution
provisions. The warrants were exercised in 2007.

Our short-term and long-term liquidity will continue to depend on our
ability to achieve cash-flow break even on our operations and to increase sales of our products. For the year ended 2008, we recorded a loss of approximately $1,728,000 due to approximately $2,323,000 of litigation expenses and therefore had to rely
on our financing activities to fund operations. However, for the year ended 2009, litigation expenses were significantly lower. We recorded a profit of approximately $776,000 and were able to rely on cash from our operating activities to fund our
operations. In 2010, we anticipate exceeding the required debt service coverage ratio and the tangible net worth required by our bank to maintain our line of credit and therefore we should be able to fund our operating cash requirements for 2010. We
have no material commitments for capital expenditures.

A schedule of our contractual obligations as of December 31, 2009
is as follows:



|                                   |  |                        |           |                 |   |           |  |          |           |              |   |         |  |   |          
|---------------------------------- |  | ---------------------- | --------- | --------------- | - | --------- |  | -------- | --------- | ------------ | - | ------- |  | - | ---------
|                                   |  | Payments Due By Period
|Contractual Obligation             |  | Total                  |           | Less than 1year |   | 2-3years  |  | 4-5years |           | After 5years
|Long-Term Debt                     |  | $                      | 3,159,669 |                 | $ | 1,905,589 |  | $        | 1,254,080 |              | $ | -0-     |  | $ | -0-      
|Capital Lease Obligations          |  |                        | -0-       |                 |   | -0-       |  |          | -0-       |              |   | -0-     |  |   | -0-      
|Purchase Obligations               |  |                        | -0-       |                 |   | -0-       |  |          | -0-       |              |   | -0-     |  |   | -0-      
|Other Long Term Liabilities        |  |                        | -0-       |                 |   | -0-       |  |          | -0-       |              |   | -0-     |  |   | -0-      
|Operating Leases                   |  |                        | 3,119,080 |                 |   | 377,989   |  |          | 788,038   |              |   | 844,351 |  |   | 1,108,702
|                                   |  |                        |           |                 |   |           |  |          |           |              |   |         |  |   |          
|Total Contractual Cash Obligations |  | $                      | 6,278,749 |                 | $ | 2,283,578 |  | $        | 2,042,118 |              | $ | 844,351 |  | $ | 1,108,702
|                                   |  |                        |           |                 |   |           |  |          |           |              |   |         |  |   |          

Net cash provided by operating activities for the year
ended December 31, 2009 was $353,012. Cash was provided by the net operating income for the year of $1,246,303, including the non-cash charges for depreciation of $394,827, amortization of $30,654, stock option expense of $21,025, and warrant
expense of $24,030. Cash was reduced by $893,291 due to the following changes in our operating assets and liabilities:



|                              |  |   |          |  
|----------------------------- |  | - | -------- | -
|Accounts receivable increase  |  | $ | (460,295 | )
|Inventories decrease          |  |   | 319,582  |  
|Prepaid expenses increase     |  |   | (19,135  | )
|Patent cost increase          |  |   | (50,867  | )
|Deferred Tax Benefit increase |  |   | (125,370 | )
|Other assets increase         |  |   | (116,088 | )
|Accounts payable decrease     |  |   | (192,266 | )
|Accrued expenses decrease     |  |   | (248,852 | )
|                              |  |   |          |  
|Net change                    |  | $ | (893,291 | )
|                              |  |   |          |  

The increase in accounts receivable from December 31, 2008 to December 31, 2009 was caused
principally by the increase in gross sales from October 2009 to December 2009 of approximately $583,000. Our inventory decrease from December 31, 2008 to December 31, 2009 was the result of improved inventory management. The increase in
other assets of approximately $116,000 from December 31, 2008 to December 31, 2009 was due to increased inventory deposits required by new overseas vendors. Our reduction in accounts payable of approximately $192,000 from December 31,
2008 to December 31, 2009 was due to improved cash flow from operating activities allowing us to take discounts. Our accrued expenses decreased from December 31, 2008 to December 31, 2009 by approximately $249,000 primarily as a
result of our paying down deferred legal fees of approximately $368,000 which were offset by an increase of accrued interest of approximately $77,000 and an increase in accrued bonus/profit sharing of approximately $64,000.



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Net cash used in investing activities for the year ended December 31, 2009 was
$273,082, which was used for the acquisition of property and equipment. Net cash used in financing activities for the year was $358,948.

Cash of $207,948 was used for the principal repayment of long term debt. Cash of $951,000 was used to decrease net borrowings under the line of credit with our bank. $800,000 was provided by a new three
year term note.

Net cash used in operating activities for the year ended December 31, 2008 was $692,764. Cash was used
in the net operating loss for the year of $1,202,472, including the non-cash charges for depreciation of $441,219, amortization of $27,767, stock option expense of $19,356, and warrant expense of $37,384. Cash was provided by the net change of
$509,708 in our operating assets and liabilities. These changes consisted of increases in accounts receivable of $181,474, patent costs of $33,638 and decreases in inventory of $91,895, prepaid expenses of $17,074 and other assets of $4,471 and
increases in accounts payable of $68,142 and accrued expenses of $543,238.

Net cash used in investing activities for the year
ended December 31, 2008 was $208,240, which was used for the acquisition of property and equipment. Net cash provided by financing activities for the year was $1,235,734. Cash of $100,000 was provided by the net borrowing under our line of
credit with the bank, $1,367,500 was provided by the issuance of long-term debt and $629 was provided by the exercise of stock options. Cash of $232,395 was used for the principal payments on long-term debt.

Subsequent to December 31, 2009, on February 1, 2010, the Company completed a private placement of Preferred Stock totaling
$865,312. Payment for the Preferred Stock was comprised of cash in the aggregate amount of $595,000, the conversion of contributor debt in the aggregate amount of $270,012 and the conversion of $300 in accrued interest on the contributor notes. The
debt conversion reduced the amount of contributor notes payable in February 2010 from $600,000 to $329,988.

Critical Accounting
Policies/Estimates

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

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

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

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

Off-Balance Sheet Arrangements

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



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Item 8.Financial Statements and Supplementary Data.

The financial statements of OurPets Company as of December 31, 2009 and 2008, and for the years then ended
together with the Report of Independent Registered Public Accounting Firm are included in this Form 10-K on the pages indicated below.



|                                                        |  |         
|------------------------------------------------------- |  | --------
|                                                        |  | Page No.
|Report of Independent Registered Public Accounting Firm |  | 19      
|Consolidated Balance Sheets                             |  | 20-21   
|Consolidated Statements of Operations                   |  | 22      
|Consolidated Statements of Stockholders Equity         |  | 23      
|Consolidated Statements of Cash Flows                   |  | 24      
|Notes to Consolidated Financial Statements              |  | 25-39   

Item 9.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 9A(T).Controls and Procedures.

Evaluation of Controls and Procedures

As of December 31, 2009, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer along with our Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, our President and
Chief Executive Officer and our Chief Financial Officer each concluded that our disclosure controls and procedures were effective as of December 31, 2009.

Managements Report on Internal Control Over Financial Reporting

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

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

We carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and
chief financial officer, of the effectiveness of our internal control over financial reporting. In making this evaluation, management used the criteria set forth in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission. Based on this evaluation, management has concluded that the internal control over financial reporting was effective as of December 31, 2009.

Changes in Internal Control over Financial Reporting

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

Attestation Report of Independent Registered Public Accounting Firm

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



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##### Table of Contents

Item 9B.Other Information.

None.

PART III

Item 10.Directors, Executive Officers and Corporate Governance.

The information required by this Item is incorporated by reference from the information provided under the headings Board of
Directors, and Executive Officers, contained in our Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our Annual Meeting of Shareholders to be held on
May 21, 2010.

Item 11.Executive Compensation.

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

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

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

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

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

Item 14.Principal Accountant Fees and Services.

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

PART IV

Item 15.Exhibits and Financial Statement Schedules.

(a) Financial Statement Schedules

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

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Stockholders Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

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



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##### Table of Contents

(b) Exhibits



|      |  |                                                                                                                                                                                                                                                                                                                                                   
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1   |  | Asset Purchase Agreement dated January 3, 2006, between the Company and Pet Zone Products Ltd.(5)                                                                                                                                                                                                                                                 
|      | 
|3.1   |  | Articles of Incorporation of the Company, dated May 23, 1996.(1)                                                                                                                                                                                                                                                                                  
|      | 
|3.1.1 |  | Articles of Amendment to the Articles of Incorporation of the Company, effective September 1, 1998.(1)                                                                                                                                                                                                                                            
|      | 
|3.1.2 |  | Articles of Amendment to the Articles of Incorporation of the Company, adopted July 20, 1999.(1)                                                                                                                                                                                                                                                  
|      | 
|3.1.3 |  | Articles of Amendment to the Articles of Incorporation of the Company effective January 21, 2010(16)                                                                                                                                                                                                                                              
|      | 
|3.2   |  | Bylaws of the Company.(1)                                                                                                                                                                                                                                                                                                                         
|      | 
|4.1   |  | Common Stock Certificate.(1)                                                                                                                                                                                                                                                                                                                      
|      | 
|4.2   |  | Preferred Stock Certificate.(1)                                                                                                                                                                                                                                                                                                                   
|      | 
|4.3   |  | Promissory Note dated September 1, 1999 for $200,000, made by the Company to Joseph T. Aveni.(1)                                                                                                                                                                                                                                                  
|      | 
|4.4   |  | Registration Rights Agreement dated January 3, 2006 among the Company, Pet Zone Products Ltd. and certain other stockholders.(5)                                                                                                                                                                                                                  
|      | 
|4.5   |  | Voting Agreement dated January 3, 2006 among the Company, Steven Tsengas, Evangelia S. Tsengas, Konstantine S. Tsengas, Nicholas S. Tsengas, Senk Properties, Joseph T. Aveni, Carl
Fazio, Jr., John G. Murchie, Pet Zone Products Ltd., Capital One Partners, LLC, LJR Limited Partnership, Nottingham Ventures, Ltd. and Spirk Ventures, Ltd.(5)
|      | 
|10.1  |  | Asset Purchase Agreement, dated March 31, 2000, between Akon Plastic Enterprises, Inc. and Sanar Manufacturing Company, a wholly-owned subsidiary of OurPets
Company.(1)                                                                                                                                                                         
|      | 
|10.2  |  | Lease Agreement dated March 17, 1993, with Addendums, between Senk Properties and GPI Division, Napro, Inc.(1)                                                                                                                                                                                                                                    
|      | 
|10.5  |  | 1999 Stock Option Plan.(1)                                                                                                                                                                                                                                                                                                                        
|      | 
|10.6  |  | Standard Option Agreement.(1)                                                                                                                                                                                                                                                                                                                     
|      | 
|10.7  |  | Standard Common Stock Purchase Warrant.(1)                                                                                                                                                                                                                                                                                                        
|      | 
|10.8  |  | Indemnity Agreement, dated March 31, 2000, between Akon Plastic Enterprises, Inc. and its President, David Herman, individually, and OurPets Company and Dr. Steven Tsengas,
Evangelia Tsengas, Nicholas Tsengas and Konstantine Tsengas.(1)                                                                                                     
|      | 
|10.10 |  | Small Business Administration loan agreement dated March 10, 1995 with Napro, Inc.(1)                                                                                                                                                                                                                                                             
|      | 
|10.12 |  | Vendor Agreement between the Company and Wal-Mart Stores, Inc.(1)                                                                                                                                                                                                                                                                                 
|      | 
|10.17 |  | PetsMart 2001 Vendor Purchasing Terms.(1)                                                                                                                                                                                                                                                                                                         
|      | 
|10.18 |  | Credit Agreement, Revolving Note and Security Agreements, dated December 31, 2001, between FirstMerit Bank, N.A., the Company, Virtu Company, Dr. Steven Tsengas and Evangelia S.
Tsengas.(2)                                                                                                                                                     
|      | 
|10.19 |  | Promissory Note dated February 1, 2004 for $75,000, made by the Company to Beachcraft Limited Partnership.(4)                                                                                                                                                                                                                                     
|      | 
|10.20 |  | Warrant issued to Pet Zone Products Ltd. to purchase 2,729,000 shares of the Companys Common Stock dated January 4, 2006.(5)                                                                                                                                                                                                                     
|      | 
|10.21 |  | Warrant issued to Pet Zone Products Ltd. to purchase 125,000 shares of the Companys Common Stock dated January 4, 2006.(5)                                                                                                                                                                                                                       
|      | 
|10.22 |  | Subordinated Promissory Note dated January 4, 2006 from the Company to Pet Zone Products Ltd.(5)                                                                                                                                                                                                                                                  
|      | 
|10.23 |  | Commercial Security Agreement by and between the Company and FirstMerit Bank, N.A.(6)                                                                                                                                                                                                                                                             



15



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##### Table of Contents

|      |  |                                                                                                                                                                               
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.24 |  | Promissory Note executed by the Company in favor of FirstMerit Bank, N.A.(6)                                                                                                  
|      | 
|10.25 |  | Lease Agreement dated March 1, 2007 between Senk Properties and OurPets Company.(7)                                                                                          
|      | 
|10.26 |  | Amended Subordinated Promissory Note dated as of October 18, 2006, executed by OurPets Company in favor of Pet Zone Products Ltd.(8)                                         
|      | 
|10.27 |  | Cat Litter Device Development Agreement dated January 15, 2007 by and between Nottingham-Spirk Design Associates, Inc. and OurPets Company.(9)                               
|      | 
|10.28 |  | Form of Indemnification Agreement, by and between OurPets Company and each of its Directors.(9)                                                                              
|      | 
|10.29 |  | Amendment to Loan Agreement dated March 23, 2007 between FirstMerit Bank, N.A. and OurPets Company.(10)                                                                      
|      | 
|10.30 |  | Promissory Note dated March 23, 2007 executed by the Company in favor of FirstMerit Bank, N.A.(10)                                                                            
|      | 
|10.31 |  | Commercial Security Agreement dated March 23, 2007 by and between the Company and FirstMerit Bank, N.A.(10)                                                                   
|      | 
|10.32 |  | Contribution Agreement dated February 7, 2008 among OurPets Company, Capital One Partners LLC, Nottingham Ventures Ltd., Spirk Ventures Ltd. and LJR Limited
Partnership.(11)
|      | 
|10.33 |  | Contribution Agreement dated February 7, 2008 among OurPets Company, Senk Properties and Dr. William M. Fraser.(11)                                                          
|      | 
|10.34 |  | Form of Promissory Note issued by OurPets to each Contributor.(11)                                                                                                           
|      | 
|10.35 |  | Form of Warrant issued by OurPets to each Contributor.(11)                                                                                                                   
|      | 
|10.36 |  | Form of Registration Rights Agreement among OurPets and the Contributors.(11)                                                                                                
|      | 
|10.37 |  | Contribution Agreement dated June 20, 2008 among OurPets Company, Capital One Partners LLC, Nottingham Ventures Ltd., Spirk Ventures Ltd. and LJR Limited
Partnership.(12)   
|      | 
|10.38 |  | Contribution Agreement dated June 20, 2008 among OurPets Company, Senk Properties and Dr. William M. Fraser.(12)                                                             
|      | 
|10.39 |  | Form of Promissory Note issued by OurPets to each Contributor.(12)                                                                                                           
|      | 
|10.40 |  | Form of Warrant issued by OurPets to each Contributor.(12)                                                                                                                   
|      | 
|10.41 |  | Form of Registration Rights Agreement among OurPets and the Contributors.(12)                                                                                                
|      | 
|10.42 |  | Fee Agreement dated November 25, 2008 between OurPets and Nottingham-Spirk Design Associates, Inc.(13)                                                                       
|      | 
|10.43 |  | 2008 Stock Option Plan(14)                                                                                                                                                    
|      | 
|10.44 |  | First Amendment to the 2008 Stock Option Plan(15)                                                                                                                             
|      | 
|10.45 |  | Business Loan Agreement (Asset Based), dated September 17, 2009, between OurPets Company and FirstMerit Bank, N.A.(17)                                                       
|      | 
|10.46 |  | Amendment to Note, dated September 17, 2009, between OurPets Company and FirstMerit Bank, N.A.(17)                                                                           
|      | 
|10.47 |  | Promissory Note, dated September 17, 2009, executed by OurPets Company in favor of FirstMerit Bank, N.A.(17)                                                                 
|      | 
|10.48 |  | Form of Warrant(17)                                                                                                                                                           
|      | 
|11    |  | Statement of computation of Net Income Per Share.                                                                                                                             
|      | 
|14    |  | OurPets Code of Ethics.(3)                                                                                                                                                   



16



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##### Table of Contents

|     |  |                                                                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|21   |  | Subsidiaries of the Registrant.(1)                                                                                                                                  
|     | 
|31.1 |  | Certification of the Chief Executive Officer pursuant to 17 CFR Section 240.13a-14(a) of the Sarbanes-Oxley Act of 2002.                                            
|     | 
|31.2 |  | Certification of the Principal Financial Officer pursuant to 17 CFR Section 240.13a-14(a) of the Sarbanes-Oxley Act of 2002.                                        
|     | 
|32.1 |  | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.          



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

All other Exhibits filed herewith.



17



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##### Table of Contents

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

Dated: March 31, 2010



OURPETS COMPANYBy:

/S/    STEVEN
TSENGASSteven TsengasChairman, President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.



|                            |  |                                                                                        |  |               
|--------------------------- |  | -------------------------------------------------------------------------------------- |  | --------------
|Signature                   |  | Title                                                                                  |  | Date          
|                            |  |                                                                                       
|/S/    STEVEN
TSENGAS       |  | Chairman, President, Chief Executive Officer andDirector (principal executive officer) |  | March 31, 2010
|Steven Tsengas              |  |                                                                                        | 
|                            |  |                                                                                       
|/S/    SCOTT R.
MENDES      |  | Chief Financial Officer(principal accounting officer)                                  |  | March 31, 2010
|Scott R. Mendes             |  |                                                                                        | 
|                            |  |                                                                                       
|/S/    JOSEPH T.
AVENI      |  | Director                                                                               |  | March 31, 2010
|Joseph T. Aveni             |  |                                                                                        |  |               
|                            |  |                                                                                       
|/S/    WILLIAM M.
FRASER    |  | Director                                                                               |  | March 31, 2010
|William M. Fraser           |  |                                                                                        |  |               
|                            |  |                                                                                       
|/S/    JAMES D. IRELAND
III |  | Director                                                                               |  | March 31, 2010
|James D. Ireland III        |  |                                                                                        |  |               
|                            |  |                                                                                       
|/S/    JOHN
SPIRK           |  | Director                                                                               |  | March 31, 2010
|John Spirk                  |  |                                                                                        |  |               



18



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

OurPets Company and Subsidiaries

We have audited the accompanying
consolidated balance sheets of OurPets Company and Subsidiaries, a Colorado corporation, as of December 31, 2009 and December 31, 2008, 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our 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, 2009 and December 31, 2008, and the consolidated results of their operations and cash flows for the
years ended December 31, 2009 and December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to examine managements assertion about the effectiveness of OurPets Company and Subsidiaries internal control over financial reporting as of December 31, 2009,
which is included in Form 10-K and, accordingly, we do not express an opinion thereon.



S. R. Snodgrass, A. C.Certified Public Accountants


Mentor, Ohio

March 31, 2010



19



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                       |  |              |            |   |      |   |            |  
|-------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                       |  | December 31, |           
|                                                                                       |  | 2009         |            |   | 2008 |  
|ASSETS                                                                                 |  |              |            |   |      |   |            |  
|CURRENT ASSETS                                                                         |  |              |            |   |      |   |            |  
|Cash and cash equivalents                                                              |  | $            | 84,555     |   |      | $ | 363,573    |  
|Accounts receivabletrade, less allowance for doubtful accounts of $21,116 and $22,477 |  |              | 1,881,179  |   |      |   | 1,420,884  |  
|Inventories                                                                            |  |              | 2,984,035  |   |      |   | 3,303,617  |  
|Prepaid expenses                                                                       |  |              | 93,130     |   |      |   | 73,995     |  
|Deferred Tax Asset less Valuation Allowance of $377,734 and $741,467                   |  |              | 125,370    |   |      |   |           |  
|                                                                                       |  |              |            |   |      |   |            |  
|Total current assets                                                                   |  |              | 5,168,269  |   |      |   | 5,162,069  |  
|                                                                                       |  |              |            |   |      |   |            |  
|PROPERTY AND EQUIPMENT                                                                 |  |              |            |   |      |   |            |  
|Computers and office equipment                                                         |  |              | 339,077    |   |      |   | 296,298    |  
|Warehouse equipment                                                                    |  |              | 254,811    |   |      |   | 254,176    |  
|Leasehold improvements                                                                 |  |              | 129,572    |   |      |   | 120,705    |  
|Tooling                                                                                |  |              | 3,432,508  |   |      |   | 3,316,059  |  
|Construction in progress                                                               |  |              | 302,991    |   |      |   | 199,386    |  
|                                                                                       |  |              |            |   |      |   |            |  
|Total                                                                                  |  |              | 4,458,959  |   |      |   | 4,186,624  |  
|Less accumulated depreciation                                                          |  |              | (2,504,154 | ) |      |   | (2,110,074 | )
|                                                                                       |  |              |            |   |      |   |            |  
|Net property and equipment                                                             |  |              | 1,954,805  |   |      |   | 2,076,550  |  
|                                                                                       |  |              |            |   |      |   |            |  
|OTHER ASSETS                                                                           |  |              |            |   |      |   |            |  
|Patents, less amortization of $170,863 and $140,209                                    |  |              | 279,719    |   |      |   | 259,506    |  
|Goodwill                                                                               |  |              | 67,511     |   |      |   | 67,511     |  
|Deposits and other assets                                                              |  |              | 128,438    |   |      |   | 12,350     |  
|                                                                                       |  |              |            |   |      |   |            |  
|Total other assets                                                                     |  |              | 475,668    |   |      |   | 339,367    |  
|                                                                                       |  |              |            |   |      |   |            |  
|Total assets                                                                           |  | $            | 7,598,742  |   |      | $ | 7,577,986  |  
|                                                                                       |  |              |            |   |      |   |            |  

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



20



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)



|                                                                                                                                                                                                    |  |              |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                    |  | December 31, |           
|                                                                                                                                                                                                    |  | 2009         |            |   | 2008 |  
|LIABILITIES                                                                                                                                                                                         |  |              |            |   |      |   |            |  
|CURRENT LIABILITIES                                                                                                                                                                                 |  |              |            |   |      |   |            |  
|Notes payable                                                                                                                                                                                       |  | $            | 949,000    |   |      | $ | 1,900,000  |  
|Current maturities of long-term debt                                                                                                                                                                |  |              | 956,589    |   |      |   | 144,581    |  
|Accounts payabletrade                                                                                                                                                                              |  |              | 1,046,101  |   |      |   | 1,238,367  |  
|Accrued expenses                                                                                                                                                                                    |  |              | 417,199    |   |      |   | 666,051    |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |            |  
|Total current liabilities                                                                                                                                                                           |  |              | 3,368,889  |   |      |   | 3,948,999  |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |            |  
|LONG-TERM DEBT                                                                                                                                                                                      |  |              |            |   |      |   |            |  
|Long-term debtless current portion above                                                                                                                                                           |  |              | 1,254,080  |   |      |   | 1,474,036  |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |            |  
|Total long-term debt                                                                                                                                                                                |  |              | 1,254,080  |   |      |   | 1,474,036  |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |            |  
|Total liabilities                                                                                                                                                                                   |  |              | 4,622,969  |   |      |   | 5,423,035  |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |            |  
|STOCKHOLDERS EQUITY                                                                                                                                                                                |  |              |            |   |      |   |            |  
|COMMON STOCK,no par value; authorized 50,000,000 shares, issued and outstanding 15,378,984 and 15,312,984
shares                                                                                    |  |              | 4,235,093  |   |      |   | 4,196,153  |  
|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 66,000 shares |  |              | 602,679    |   |      |   | 602,679    |  
|PAID-IN CAPITAL                                                                                                                                                                                     |  |              | 75,944     |   |      |   | 69,829     |  
|ACCUMULATED DEFICIT                                                                                                                                                                                 |  |              | (1,937,943 | ) |      |   | (2,713,710 | )
|                                                                                                                                                                                                    |  |              |            |   |      |   |            |  
|Total stockholders equity                                                                                                                                                                          |  |              | 2,975,773  |   |      |   | 2,154,951  |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |            |  
|Total liabilities and stockholders equity                                                                                                                                                          |  | $            | 7,598,742  |   |      | $ | 7,577,986  |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |            |  

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



21



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                                           |  |                                 |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                           |  | For the YearsEnded
December 31, |           
|                                                                                                                           |  | 2009                            |            |   | 2008 |  
|Net revenue                                                                                                                |  |                                 | 14,251,786 |   |      | $ | 12,410,135 |  
|Cost of goods sold                                                                                                         |  |                                 | 9,971,696  |   |      |   | 8,911,274  |  
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Gross profit on sales                                                                                                      |  |                                 | 4,280,090  |   |      |   | 3,498,861  |  
|Selling, general and administrative expenses                                                                               |  |                                 | (3,114,960 | ) |      |   | (2,706,228 | )
|Litigation expense                                                                                                         |  |                                 | (373,608   | ) |      |   | (2,322,983 | )
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Income (loss) from operations                                                                                              |  |                                 | 791,522    |   |      |   | (1,530,350 | )
|Other income and expense, net                                                                                              |  |                                 | 38,153     |   |      |   | 1,577      |  
|Interest expense                                                                                                           |  |                                 | (178,902   | ) |      |   | (193,350   | )
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Income (loss) before income taxes                                                                                          |  |                                 | 650,773    |   |      |   | (1,722,123 | )
|Income tax benefit (expense)                                                                                               |  |                                 | 124,994    |   |      |   | (6,075     | )
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Net income (loss)                                                                                                          |  | $                               | 775,767    |   |      | $ | (1,728,198 | )
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Basic and Diluted Earnings Per Common Share After Dividend Requirements For Preferred Stock:                               |  |                                 |            |   |      |   |            |  
|Net income (loss)                                                                                                          |  | $                               | 0.05       |   |      | $ | (0.12      | )
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Weighted average number of common and equivalent shares outstanding used to calculate basic and diluted earnings per
share |  |                                 | 15,523,288 |   |      |   | 15,257,050 |  
|                                                                                                                           |  |                                 |            |   |      |   |            |  

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



22



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OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2009 AND DECEMBER 31, 2008



|                                                           |  |                 |  |              |         |                 |            |        |   |                |  |                          |                    |   |  |   |            |   |  |   |            |  
|---------------------------------------------------------- |  | --------------- |  | ------------ | ------- | --------------- | ---------- | ------ | - | -------------- |  | ------------------------ | ------------------ | - |  | - | ---------- | - |  | - | ---------- | -
|                                                           |  | Preferred Stock |  | Common Stock |         |                 |            |        |   |                |  | TotalStockholdersEquity |                   
|                                                           |  | Number ofShares |  | Amount       |         | Number ofShares |            | Amount |   | Paid-InCapital |  |                          | AccumulatedDeficit |   | 
|Balance at January 1, 2008                                 |  | 66,000          |  | $            | 602,679 |                 | 15,243,984 |        | $ | 4,167,804      |  | $                        | 40,809             |   |  | $ | (985,512   | ) |  | $ | 3,825,780  |  
|Common Stock issued upon exercise of stock options         |  |                |  |              |        |                 | 3,000      |        |   | 629            |  |                          |                   |   |  |   |           |   |  |   | 629        |  
|Common Stock issued in payment of Preferred Stock dividend |  |                |  |              |        |                 | 66,000     |        |   | 27,720         |  |                          | (27,720            | ) |  |   |           |   |  |   |           |  
|Net (loss) for the year                                    |  |                |  |              |        |                 |           |        |   |               |  |                          |                   |   |  |   | (1,728,198 | ) |  |   | (1,728,198 | )
|Stock-based compensation expense                           |  |                |  |              |        |                 |           |        |   |               |  |                          | 56,740             |   |  |   |           |   |  |   | 56,740     |  
|                                                           |  |                 |  |              |         |                 |            |        |   |                |  |                          |                    |   |  |   |            |   |  |   |            |  
|Balance at December 31, 2008                               |  | 66,000          |  | $            | 602,679 |                 | 15,312,984 |        | $ | 4,196,153      |  | $                        | 69,829             |   |  | $ | (2,713,710 | ) |  | $ | 2,154,951  |  
|Common Stock issued in payment of Preferred Stock dividend |  |                |  |              |        |                 | 66,000     |        |   | 38,940         |  |                          | (38,940            | ) |  |   |           |   |  |   |           |  
|Net Income for the year                                    |  |                |  |              |        |                 |           |        |   |               |  |                          |                   |   |  |   | 775,767    |   |  |   | 775,767    |  
|Stock based compensation expense                           |  |                |  |              |        |                 |           |        |   |               |  |                          | 45,055             |   |  |   |           |   |  |   | 45,055     |  
|                                                           |  |                 |  |              |         |                 |            |        |   |                |  |                          |                    |   |  |   |            |   |  |   |            |  
|Balance at December 31, 2009                               |  | 66,000          |  | $            | 602,679 |                 | 15,378,984 |        | $ | 4,235,093      |  | $                        | 75,944             |   |  | $ | (1,937,943 | ) |  | $ | 2,975,773  |  
|                                                           |  |                 |  |              |         |                 |            |        |   |                |  |                          |                    |   |  |   |            |   |  |   |            |  

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



23



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OURPET'S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                                 |          |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | ---------- | -
|                                                                                  |  | For the Years EndedDecember 31, |         
|                                                                                  |  | 2009                            |          |   | 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                                 |          |   |      |   |            |  
|Net income (loss)                                                                 |  | $                               | 775,767  |   |      | $ | (1,728,198 | )
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |          |   |      |   |            |  
|Depreciation expense                                                              |  |                                 | 394,827  |   |      |   | 441,219    |  
|Amortization expense                                                              |  |                                 | 30,654   |   |      |   | 27,767     |  
|Stock option expense                                                              |  |                                 | 21,025   |   |      |   | 19,356     |  
|Warrant expense                                                                   |  |                                 | 24,030   |   |      |   | 37,384     |  
|(Increase) decrease in assets:                                                    |  |                                 |          |   |      |   |            |  
|Accounts receivabletrade                                                         |  |                                 | (460,295 | ) |      |   | (181,474   | )
|Inventories                                                                       |  |                                 | 319,582  |   |      |   | 91,895     |  
|Prepaid expenses                                                                  |  |                                 | (19,135  | ) |      |   | 17,074     |  
|Deferred Tax Asset                                                                |  |                                 | (125,370 | ) |      |   |           |  
|Patent costs                                                                      |  |                                 | (50,867  | ) |      |   | (33,638    | )
|Deposits and other assets                                                         |  |                                 | (116,088 | ) |      |   | 4,471      |  
|Increase (decrease) in liabilities:                                               |  |                                 |          |   |      |   |            |  
|Accounts payabletrade                                                            |  |                                 | (192,266 | ) |      |   | 68,142     |  
|Accrued expenses                                                                  |  |                                 | (248,852 | ) |      |   | 543,238    |  
|                                                                                  |  |                                 |          |   |      |   |            |  
|Net cash (used in) provided by operating activities                               |  |                                 | 353,012  |   |      |   | (692,764   | )
|                                                                                  |  |                                 |          |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                                 |          |   |      |   |            |  
|Acquisition of property and equipment                                             |  |                                 | (273,082 | ) |      |   | (208,240   | )
|                                                                                  |  |                                 |          |   |      |   |            |  
|Net cash used in investing activities                                             |  |                                 | (273,082 | ) |      |   | (208,240   | )
|                                                                                  |  |                                 |          |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                                 |          |   |      |   |            |  
|Principal payments on long-term debt                                              |  |                                 | (207,948 | ) |      |   | (232,395   | )
|Gross borrowing on bank line of credit                                            |  |                                 | (951,000 | ) |      |   | 100,000    |  
|Issuances of Common Stock                                                         |  |                                 |         |   |      |   | 629        |  
|Issuance of long-term debt                                                        |  |                                 | 800,000  |   |      |   | 1,367,500  |  
|                                                                                  |  |                                 |          |   |      |   |            |  
|Net cash (used in) provided by financing activities                               |  |                                 | (358,948 | ) |      |   | 1,235,734  |  
|                                                                                  |  |                                 |          |   |      |   |            |  
|Net increase (decrease) in cash                                                   |  |                                 | (279,018 | ) |      |   | 334,730    |  
|CASH AT BEGINNING OF YEAR                                                         |  |                                 | 363,573  |   |      |   | 28,843     |  
|                                                                                  |  |                                 |          |   |      |   |            |  
|CASH AT END OF YEAR                                                               |  | $                               | 84,555   |   |      | $ | 363,573    |  
|                                                                                  |  |                                 |          |   |      |   |            |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                  |  |                                 |          |   |      |   |            |  
|Interest paid                                                                     |  | $                               | 163,827  |   |      | $ | 138,535    |  
|                                                                                  |  |                                 |          |   |      |   |            |  
|SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS                                  |  |                                 |          |   |      |   |            |  
|Common Stock issued in payment of Preferred Stock dividend                        |  | $                               | 38,940   |   |      | $ | 27,720     |  
|                                                                                  |  |                                 |          |   |      |   |            |  

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



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Use of EstimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.

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

Accounts ReceivableAccounts receivable have been adjusted for all known uncollectible accounts. An allowance for possible bad
debts was established at December 31, 2009 and 2008 in the amount of $21,116 and $22,477, respectively.

InventoryInventories are carried at the lower of cost, first-in, first-out method or market. Inventories at December 31, 2009 and December 31, 2008 consist of:



|                         |  |      |           |      |   |          
|------------------------ |  | ---- | --------- | ---- | - | ---------
|                         |  | 2009 |           | 2008
|Finished goods           |  | $    | 2,163,787 |      | $ | 2,425,396
|Components and packaging |  |      | 820,248   |      |   | 878,221  
|                         |  |      |           |      |   |          
|Total                    |  | $    | 2,984,035 |      | $ | 3,303,617
|                         |  |      |           |      |   |          

All inventories are pledged as collateral for bank
loans.

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



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



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



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

All
property and equipment is pledged as collateral for bank loans. Total depreciation for the years ended December 31, 2009 and December 31, 2008 was $394,827 and $441,219, respectively.

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

The Company has filed for patents and trademarks for its proprietary products. The costs incurred of $50,640 in the year ended December 31, 2009 and $33,638 in the year ended December 31, 2008
have been capitalized and are being amortized over 15 years on a straight-line basis. In 2002 and 2006 the Company purchased domain names for its website for $11,000 which is not subject to amortization. The recoverability of the carrying value of
intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense. All intangible assets are pledged as collateral for the bank loans.

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

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

For the year ended December 31, 2008, 42.5% of the Companys revenue was derived from two major customers. Revenue generated from each of these customers amounted to $2,798,485 and $2,472,099,
which represents 22.6% and 19.9% of total revenue, respectively.

Research and Development CostsResearch and
development costs are charged to operations when incurred and are included in cost of goods sold. The amount charged for the years ended December 31, 2009 and December 31, 2008 was $259,328 and $141,111, respectively.

Advertising CostsAdvertising costs are charged to operations when the advertising first takes place. Advertising expense for
the years ended December 31, 2009 and December 31, 2008 was $67,897 and $32,513, respectively.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



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

Stock OptionsAccounting Standards requires the grant-date fair value of all share-based payment awards that are
expected to vest, including employee share options, to be recognized as employee compensation expense over the requisite service period. The Company is applying the modified prospective transition method. Under this transition method, the Company
(1) did not restate any prior periods and (2) is recognizing compensation expense for all share-based payment awards that were outstanding, but not yet vested, as of January 1, 2006, based upon the same estimated grant-date fair
values and service periods used to prepare the pro-forma disclosures. The amount of compensation expense recognized in 2009 and 2008 as a result of stock options was $21,025 and $19,356, respectively.

Net Income Per Common ShareBasic and diluted net income per share of Common Stock is based on the net income attributable to
common stockholders after preferred stock dividend requirements for the year, divided by the weighted average number of common and equivalent dilutive shares outstanding during the year. Potential common shares whose effect would be antidilutive
have not been included. As of December 31, 2009, common shares that are or could be potentially dilutive include 1,593,000 stock options at exercise prices from $0.200 to $1.550 a share, 4,717,887 warrants to purchase Common Stock at exercise
prices from $0.282 to $1.432 a share and 660,000 shares underlying the Preferred Stock at a conversion rate of $1.000 per share. As of December 31, 2008, common shares that are or could be potentially dilutive include 1,395,000 stock options at
exercise prices from $0.260 to $1.550 a share, 4,363,817 warrants to purchase Common Stock at exercise prices from $0.283 to $1.438 a share and 660,000 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, 2009. 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 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.



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Income Taxes (Continued)



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

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

As permitted by FASB ASC 740-10, the Company also adopted an accounting policy
to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision. Previously, the Companys policy was to classify interest and penalties as an operating expense in arriving at
pre-tax income. At December 31, 2009 and 2008, the Company does not have accrued interest and penalties related to any unrecognized tax benefits. The years subject to potential audit vary depending on the tax jurisdiction. Generally, the
Companys statutes of limitation for tax liabilities are open for tax years ended December 31, 2006 and forward. The Companys major taxing jurisdiction is the United States. Within the United States, only Ohio could give rise to
significant tax liabilities.

Subsequent EventsThe Company has performed an evaluation of
subsequent events. On January 28, 2010 and February 1, 2010, the Company sold an aggregate of 123,616 shares of its series 2009 preferred stock (the Preferred Shares), in a private placement to a total of 15 accredited
investors. All Preferred Shares in the private placement were sold at a price of $7.00 a share for a total of $865,312. All Preferred Shares are convertible at any time into shares of Common Stock at a conversion price of $.70/common share, subject
to adjustment for stock splits, combinations and similar transactions. All Preferred Shares receive a 6% ($.42) cash dividend payable on December 1stof each year provided that payment may be deferred if necessary in order for the Company to comply with its loan
covenants. The Company has the right to convert the Preferred Shares into Common Stock at any time after the trading price of its common stock reaches $1.50 per share for twenty (20) consecutive days.

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

This series of Preferred Shares was established by an amendment to the Companys articles of incorporation,
as amended, which amendment is described in the Companys current report filed with the Securities and Exchange Commission on January 27, 2010. Each Preferred Share is currently convertible into ten shares of the Companys Common
Stock, subject to adjustments as described in the amendment.



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Recently Issued Accounting PronouncementsIn June 2009, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) No. 2009-01, Topic 105 - Generally Accepted Accounting Principles - FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles.The Codification is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP). The Codification does not change current GAAP, but is intended to simplify user access to
all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC
registrants. The Company adopted this standard for the interim reporting period ending September 30, 2009.

In June 2008,
the FASB issued accounting guidance related to determining whether instruments granted in share-based payment transactions are participating securities, which is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. This guidance clarified that instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered. A basic
principle of this guidance is that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of EPS
pursuant to the two-class method. All prior-period EPS data presented (including interim financial statements, summaries of earnings, and selected financial data) are required to be adjusted retrospectively to conform with this guidance. This
accounting guidance was subsequently codified into ASC Topic 260, Earnings Per Share. The Company has presented the necessary disclosures in NoteStock Options herein.

In April 2009, the FASB issued new guidance impacting ASC Topic 820, Fair Value Measurements and Disclosures. This ASC provides
additional guidance in determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in
determining fair values when markets have become inactive. The adoption of this new guidance did not have a material effect on the Companys results of operations or financial position.

In September 2006, the FASB issued an accounting standard related to fair value measurements, which was effective for the Company on
January 1, 2008. This standard defined fair value, established a framework for measuring fair value, and expanded disclosure requirements about fair value measurements. On January 1, 2008, the provisions of this accounting
standard became effective for the Companys financial assets and financial liabilities and on January 1, 2009 for nonfinancial assets and nonfinancial liabilities. This accounting standard was subsequently codified into ASC Topic 820,
Fair Value Measurements and Disclosures. See Note Fair Value of Financial Instruments for the necessary disclosures.

In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820)  Measuring Liabilities at Fair Value. This ASU provides amendments for fair value measurements of
liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU
2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the
liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009. The adoption of this new guidance did not have a material impact on the Companys
financial position or results of operations.



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Recently Issued Accounting Pronouncements  (Continued)



In April 2009, the FASB issued new guidance impacting ASC 825-10-50, Financial Instruments, which relates to fair value disclosures
for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. This guidance amended existing GAAP to require disclosures about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of this new guidance did not have a material impact on the Companys
financial position or results of operations.

In April 2009, the FASB issued new guidance impacting ASC 320-10, Investments
 Debt and Equity Securities, which provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. This guidance is effective for interim and annual periods
ending after June 15, 2009. The adoption of this new guidance did not have a material impact on the Companys financial position or results of operations.

In December 2007, the FASB issued an accounting standard related to non-controlling interests in consolidated financial statements, which is effective for fiscal years beginning on or after
December 15, 2008. This standard establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary,
which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated
net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net
income attributable to the parent and to the non-controlling interest. This accounting standard was subsequently codified into ASC 810-10, Consolidation. The adoption of this standard did not have a material effect on the Companys
financial statements.



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Recently Issued Accounting Pronouncements  (Continued)



In June 2009, the FASB issued new authoritative accounting guidance under ASC Topic 810, Consolidation, which amends prior
guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity
is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. The new authoritative accounting guidance
requires additional disclosures about the reporting entitys involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entitys financial statements. The
new authoritative accounting guidance under ASC Topic 810 will be effective January 1, 2010 and is not expected to have a significant impact on the Companys financial statements.

The FASB issued new authoritative accounting guidance under ASC Topic 855, Subsequent Events, which establishes general
standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC Topic 855 defines (i) the period after the balance sheet date during
which a reporting entitys management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The new authoritative accounting guidance
under ASC Topic 855 is effective for periods ending after June 15, 2009. The required disclosures are provided in Note Subsequent Events.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTES PAYABLE AND LONG-TERM DEBT



|                                                                                                                                                                                                                                                                                                                       |  |              |           |      |   |          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                                                                                                                                                                                                                                                                                                       |  | December 31,
|                                                                                                                                                                                                                                                                                                                       |  | 2009         |           | 2008
|Revolving note payableBank, under line of credit facility of up to $2,000,000 with interest at prime plus .50% (3.75% at
December 31, 2009 and 4.00% at December 31, 2008). The note is secured by accounts receivable, equipment, inventory, trademarks, patents and the personal guarantee of certain stockholders. |  | $            | 849,000   |      | $ | 1,800,000
|Note payableBank, loan of $300,000, due in 36 monthly installments of $9,362 including interest at 7.60% beginning
July 23, 2007. This note is secured by all inventory, chattel paper, accounts, equipment and general intangibles.                                                                                  |  |              | 55,443    |      |   | 159,110  
|Note payableBank, loan of $800,000, due in 36 monthly principal and interest installments of $23,859 at an interest rate of
4.61% beginning September 17, 2009 This note is secured by all inventory, chattel paper, accounts, equipment, general intangibles and the personal guarantee of certain directors.        |  |              | 735,952   |      |   | - 0 -    
|Note payablePet Zone Products Ltd, due in quarterly installments of $9,878 through December 31, 2010 including
interest at 7.75%. This note is subordinated to the bank loans.                                                                                                                                        |  |              | 37,842    |      |   | 72,560   
|Note payableformer director and shareholder, due on December 1, 2010. Interest at prime plus 3% (6.25% at
December 31, 2009 and 6.25% at December 31, 2008) payable quarterly. This note is subordinated to the bank loans.                                                                                           |  |              | 75,000    |      |   | 75,000   
|Note payableshareholder and investor, due on November 30, 2010. Interest is payable quarterly at 10%. This note is
subordinated to the bank loans.                                                                                                                                                                    |  |              | 25,000    |      |   | 25,000   
|Notes payabledirectors, shareholders, and investors due beginning in 2010 through 2012. Interest calculated quarterly at
prime plus 2% (5.25% at December 31, 2009 and December 31, 2008). These notes are subordinated to the bank loans.                                                                            |  |              | 1,367,500 |      |   | 1,367,500
|Installment notes payabledue in monthly payments decreasing from $3,554 to $560 including interest through March 27,
2012. Interest rates range from 7% to 7.5%.                                                                                                                                                      |  |              | 13,932    |      |   | 19,447   
|                                                                                                                                                                                                                                                                                                                       |  |              |           |      |   |          
|                                                                                                                                                                                                                                                                                                                       |  |              | 3,159,669 |      |   | 3,518,617
|Less current portion of long-term debt                                                                                                                                                                                                                                                                                 |  |              | 1,905,589 |      |   | 2,044,581
|                                                                                                                                                                                                                                                                                                                       |  |              |           |      |   |          
|                                                                                                                                                                                                                                                                                                                       |  | $            | 1,254,080 |      | $ | 1,474,036
|                                                                                                                                                                                                                                                                                                                       |  |              |           |      |   |          



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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
|2010                     |  | $      | 1,905,589
|2011                     |  |        | 743,528  
|2012                     |  |        | 510,552  
|                         |  |        |          
|                         |  | $      | 3,159,669
|                         |  |        |          

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

In July and August of 2000, the Company borrowed a total of $275,000 from an officer, directors, and stockholders for working capital
purposes at an annual interest rate of 10%. A note for $25,000 is due on November 30, 2010 with interest payable quarterly. Three of the notes totaling $100,000 were repaid in 2001 and 2003 by $31,250 in cash and conversion into 172,526 shares
of Common Stock. Another of the notes for $150,000 was reduced to $75,000 by a $75,000 cash payment on December 30, 2003. On February 1, 2004 the reduced note of $75,000 was extended (now due December 31, 2010) at an interest rate of
prime plus 3% payable quarterly. In addition the lender received 57,204 warrants for the purchase of Common Stock at $0.295 per share as adjusted for the Common Stock issued in payment of the Preferred Stock dividends in 2006, 2005 and 2004. These
warrants were exercised in 2007.

In February, June, July, August, October and November of 2008, the Company entered into
contribution agreements with ten contributors pursuant to which each contributor loaned certain funds to the Company totaling $1,367,500. These funds were used for expenses related to litigation on certain of our SmartScoop products. In
consideration for these loans the Company (a) executed promissory notes due in two years for $600,000, due in three years for $467,500, and due in four years for $300,000 all with interest calculated quarterly at prime plus 2%, (b) issued
warrants for the purchase of 833,750 shares of the Companys Common Stock at option prices from $0.370 to $0.825 per share and (c) entered into piggyback registration agreements with the contributors. Subsequent to their issuance the
warrants were adjusted to 839,580 warrants exercisable at $0.368 to $0.818 per share in accordance with the warrant anti-dilution provisions.



33



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



INTANGIBLE ASSETS



|                                          |  |                         |         |                         |   |         |  |              |         |  |   |        
|----------------------------------------- |  | ----------------------- | ------- | ----------------------- | - | ------- |  | ------------ | ------- |  | - | -------
|                                          |  | As of December 31, 2009 |         | As of December 31, 2008
|                                          |  | Cost                    |         | Amortization            |   | Cost    |  | Amortization
|Amortized intangible assets:              |  |                         |         |                         |   |         |  |              |         |  |   |        
|Patents and trademarks                    |  | $                       | 450,582 |                         | $ | 170,863 |  | $            | 399,715 |  | $ | 140,209
|                                          |  |                         |         |                        
|Unamortized intangible assets:            |  |                         |         |                         |   |         |  |              |         |  |   |        
|Domain names                              |  | $                       | 11,000  |                         | $ |        |  | $            | 11,000  |  | $ |       
|                                          |  |                         |         |                        
|Amortization expense for year ended 12/31 |  | $                       | 30,654  |                         |   |         |  | $            | 27,767  |  |   |        
|                                          |  |                         |         |                        
|Estimated amortization expense:           |  |                         |         |                         |   |         |  |              |         |  |   |        
|For year ending 12/31/10                  |  | $                       | 33,072  |                         |   |         |  |              |         |  |   |        
|For year ending 12/31/11                  |  | $                       | 33,072  |                         |   |         |  |              |         |  |   |        
|For year ending 12/31/12                  |  | $                       | 33,072  |                         |   |         |  |              |         |  |   |        
|For year ending 12/31/13                  |  | $                       | 33,072  |                         |   |         |  |              |         |  |   |        
|For year ending 12/31/14                  |  | $                       | 33,072  |                         |   |         |  |              |         |  |   |        

RELATED PARTY TRANSACTIONS

The Company leases warehouse and office facilities from a related entity, Senk Properties at a current monthly rental of $28,417 plus real estate taxes. The Company entered into a new ten year lease with
Senk Properties which was effective upon completion of the 36,000 square foot warehouse expansion on June 1, 2007. The monthly rental is $26,667 for the first two years, $28,417 for the next two years, $30,167 for the next three years, $32,000
for the next two years, and $33,750 for the last year, all plus real estate taxes. The Company has the option to extend the lease for an additional ten years at a rental to be mutually agreed upon. Lease expense for the year ended December 31,
2009 and the year ended December 31, 2008 was $358,678 and $341,213, respectively.

On January 15, 2007 and
November 25, 2008, the Company entered into agreements with Nottingham-Spirk Design Associates, Inc. (NSDA), one of the principals of NSDA is John Spirk, a member of the Companys Board of Directors and a
shareholder. Also, NSDA indirectly owns shares of the Company through its ownership in Pet Zone Products, Ltd., a significant shareholder of the Company. The agreements address the invoicing and payment of NSDAs fees and expenses
related to the development of certain products on behalf of the Company. Through December 31, 2009, the Company has been invoiced $781,061 by NSDA of which $410,496 has been paid in cash, $50,000 paid with 50,454 shares of the
Companys Common Stock and the remaining balance of $320,565 deferred. The balance of the deferred payments is payable as a fee based upon sales of certain products beginning January 1, 2009. As of December 31, 2009, the fee
accrued to date was $8,748.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



CONCENTRATION OF CREDIT RISK

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

At December 31, 2008, 47.6% of the
Companys accounts receivable was due from four major customers. Amounts due from each of these customers were $328,642, $165,218, $97,535, and $95,123, which represents 22.8%, 11.4%, 6.8%, and 6.6% of total accounts receivable, respectively.

CAPITAL STOCK

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

WARRANTS

At December 31, 2009, the Company had the following Common Stock purchase warrants outstanding,
all of which were exercisable:



|                                   |  |                 |  |               |  |                   
|---------------------------------- |  | --------------- |  | ------------- |  | ------------------
|                                   |  | Number ofShares |  | ExercisePrice |  | Expiration Date   
|2004 Directors for fees            |  | 57,632          |  | 0.282         |  | October 1, 2012   
|2005 Directors for guarantees      |  | 152,778         |  | 0.422         |  | November 14, 2012 
|2006 Acquisition of business       |  | 2,782,500       |  | 0.589         |  | January 2, 2013   
|2006 Note payable to stockholder   |  | 126,673         |  | 0.330         |  | January 3, 2013   
|2006 Payment for services          |  | 20,330          |  | 0.492         |  | April 20, 2013    
|2006 Director for guarantee        |  | 254,348         |  | 0.688         |  | August 2, 2013    
|2007 Directors for fees            |  | 51,983          |  | 1.432         |  | August 17, 2012   
|2008 Payment for services          |  | 50,427          |  | 0.942         |  | January 11, 2013  
|2008 Note payable to contributor   |  | 7,569           |  | 0.818         |  | February 8, 2013  
|2008 Notes payable to contributors |  | 294,941         |  | 0.496         |  | February 8, 2013  
|2008 Notes payable to contributors |  | 133,606         |  | 0.496         |  | June 20, 2013     
|2008 Note payable to contributor   |  | 12,604          |  | 0.496         |  | July 24, 2013     
|2008 Note payable to contributor   |  | 13,865          |  | 0.496         |  | July 30, 2013     
|2008 Note payable to contributor   |  | 50,468          |  | 0.397         |  | August 13, 2013   
|2008 Note payable to contributor   |  | 25,234          |  | 0.397         |  | October 7, 2013   
|2008 Note payable to contributor   |  | 301,293         |  | 0.368         |  | November 7, 2013  
|2009 Director for guarantee        |  | 351,507         |  | 0.451         |  | September 17, 2012
|2009 Payment for services          |  | 30,129          |  | 0.482         |  | October 15, 2014  
|                                   |  |                 |  |               |  |                   
|Total                              |  | 4,717,887       |  |               |  |                   
|                                   |  |                 |  |               |  |                   



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

WARRANTS (Continued)



The exercise price for the common shares issuable under the warrants to purchase 2,782,500 shares is $0.589 per share if exercised on or before January 2, 2011 or $0.663 per share if exercised on or
after January 3, 2011 and on or before January 2, 2012 or $0.738 per share if exercised on or after January 3, 2012 and on or before the expiration of the warrants on January 2, 2013.

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

STOCK OPTION PLANS

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



|                                 |  |                 |  |                               
|-------------------------------- |  | --------------- |  | ------------------------------
|                                 |  | Number ofShares |  | Weighted AverageExercise Price
|Outstanding at January 1, 2008   |  | 1,000,500       |  | .38                           
|Granted                          |  | 413,000         |  | .51                           
|Exercised                        |  | 3,000           |  | .21                           
|Forfeited                        |  |                |  |                              
|Expired                          |  | 15,500          |  | .21                           
|                                 |  |                 |  |                               
|Outstanding at December 31, 2008 |  | 1,395,000       |  | .42                           
|Granted                          |  | 203,000         |  | .25                           
|Exercised                        |  |                |  |                              
|Forfeited                        |  | 5,000           |  | .31                           
|Expired                          |  |                |  |                              
|                                 |  |                 |  |                               
|Outstanding at December 31, 2009 |  | 1,593,000       |  | .40                           
|                                 |  |                 |  |                               



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

STOCK OPTION PLANS (Continued)



The following table summarizes options outstanding at December 31, 2009:



|            |  |                              |  |                                          |      |                     |           |                              |         |  |   |     
|----------- |  | ---------------------------- |  | ---------------------------------------- | ---- | ------------------- | --------- | ---------------------------- | ------- |  | - | ----
|Range       |  | NumberOutstanding            |  | Options Outstanding                      |      | Options Exercisable
|            |  | WeightedAverageExercisePrice |  | WeightedAverageRemainingContractual Life |      | NumberExercisable   |           | WeightedAverageExercisePrice
|$0.85-$1.55 |  | 56,000                       |  | $                                        | 1.10 |                     | 2.4 Years |                              | 15,333  |  | $ | 1.13
|$0.45-$0.65 |  | 553,500                      |  | $                                        | 0.50 |                     | 3.0 Years |                              | 98,333  |  | $ | 0.50
|$0.20-$0.35 |  | 983,500                      |  | $                                        | 0.30 |                     | 4.2 Years |                              | 790,500 |  | $ | 0.31

There were 904,166 and
821,662 options exercisable at December 31, 2009 and December 31, 2008, respectively. The weighted average exercise price of options granted in 2009 and 2008 was $0.25 and $0.51, respectively.

OPERATING LEASES

Minimum
future lease payments under operating leases as of December 31, 2009 are as follows:



|                             |  |   |          
|---------------------------- |  | - | ---------
|2010                         |  | $ | 377,989  
|2011                         |  |   | 390,902  
|2012                         |  |   | 397,136  
|2013                         |  |   | 415,228  
|2014                         |  |   | 429,123  
|Thereafter                   |  |   | 1,108,702
|                             |  |   |          
|Total minimum lease payments |  | $ | 3,119,080
|                             |  |   |          

Total rent expense of the Company for the years ended
December 31, 2009 and December 31, 2008 was $358,678 and $341,217, respectively.

INCOME TAXES

At December 31, 2009, the Company did not have any unrecognized tax benefits. The year subject to potential audit varies depending on
the tax jurisdiction. Generally, the Companys statutes are open for tax years ended December 31, 2006 and forward. The Companys major taxing jurisdictions include the United States and Ohio.

There was an income tax benefit for 2009 of $124,994 and income tax expense of $6,075 for 2008.

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 year
ended December 31, 2009.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INCOME TAXES (Continued)



|                                                      |  |      |          |   |      |   |          |  
|----------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                      |  | 2009 |          |   | 2008 |  
|Income tax expense/benefit based on US statutory rate |  | $    | 238,739  |   |      | $ | (558,054 | )
|Current period change in the valuation allowance      |  | $    | (363,733 | ) |      | $ | 564,129  |  
|                                                      |  |      |          |   |      |   |          |  
|Provision for Income Taxes                            |  | $    | (124,994 | ) |      | $ | 6,075    |  
|                                                      |  |      |          |   |      |   |          |  

The Company

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



|                                 |  |              |          |   |      |   |          |  
|-------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                 |  | December 31, |         
|                                 |  | 2009         |          |   | 2008 |  
|Deferred tax assets:             |  |              |          |   |      |   |          |  
|Net operating loss carry forward |  | $            | 503,104  |   |      | $ | 741,467  |  
|Valuation allowances             |  | $            | (377,734 | ) |      | $ | (741,467 | )
|                                 |  |              |          |   |      |   |          |  
|Net deferred tax assets          |  | $            | 125,370  |   |      | $ | -0-      |  
|                                 |  |              |          |   |      |   |          |  

The Companys valuation allowance decreased by approximately $363,700 for the year ended
December 31, 2009, which represents the effect of the current years net income and the current years calculation of the net deferred tax asset. The Companys valuation allowance increased by approximately $564,000 for the year
ended December 31, 2008 which represents the effect of the net operating loss. The Company has recorded a valuation allowance in 2009 to record its deferred tax assets at estimated net realizable value based on its assessment of the realization
of these assets through future taxable income being more likely than not. For the year ended 12-31-08 the Company recorded a valuation allowance equal to its deferred tax assets due to the uncertainty of realization of these assets
through future taxable income.

The Company has available at December 31, 2009, unused operating loss carryforwards that
may be applied against future taxable income and that expire as follows:



|             |  |                                             |           |                             |     
|------------ |  | ------------------------------------------- | --------- | --------------------------- | ----
|Year Of Loss |  | Amount of UnusedOperating LossCarryforwards |           | ExpirationDuring YearEnding
|2008         |  | $                                           | 1,479,718 |                             | 2028

LITIGATION

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



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

LITIGATION (Continued)



On October 12, 2007, Applica Consumer Products, Inc. (Applica) filed an action in the U.S. District Court, Eastern District of Texas, against the Company alleging patent infringement of
certain of its patents. Applica has alleged that the Companys SmartScoop self-scooping cat litter box infringes upon patents Applica controls for self-cleaning litter boxes. Applica is seeking damages and a permanent injunction
prohibiting the Company from further infringement of Applicas patents. The case is currently partially stayed in view of the U.S. International Trade Commission (ITC) investigation discussed below. Certain activity regarding the
patent suit is continuing and is in the discovery stage.

On or about December 2, 2007, Applica filed
a complaint with the ITC in Washington D.C. whereby Applica sought an order that permanently excludes the Company from importing products that allegedly infringe on Applicas patents. The ITC held a hearing on the matter in August and the
Initial Determination was issued in December by the Administrative Law Judge with the ITC on the action filed against us by Applica and found in our favor on all but one claim. On April 7, 2009 the ITC issued a ruling upholding the Initial
Determination by the ITC Administrative Law Judge. On April 21, 2009 we certified to the U.S. Customs that our new revised products are non-infringing so that we could continue to import the products and on May 28, 2009 U.S. Customs ruled
in our favor that the new model SmartScoop® can be freely imported into the United States. Applica appealed the
ITCs April 7, 2009 ruling in our favor and the appeal is currently pending in the Court of Appeals for the Federal Circuit. We separately appealed the ITC decision finding infringement under the one claim because we believe it was decided
on incorrect facts. A ruling on our and Applicas appeals is expected in April.

Applica also sought a restraining order
against a retailer carrying OurPets SmartScoop litterbox. Pursuant to our agreement with the retailer we will indemnify a portion of the costs of its defense against Applica. We believe that Applicas lawsuit against us and its
legal actions against a retailer are without merit and aimed at discouraging competition, a belief we feel is supported by our recent success in obtaining a U.S. patent for the SmartScoop litter box in December 2009.

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.



39