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As filed with the Securities and Exchange
Commission on March 31, 2009

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, 2008

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

(Name of Small Business Issuer 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

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   ̈  Yes    x  No

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

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

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

Issuers revenues for the fiscal year ended December 31, 2008 were $12,410,135. The aggregate market value of the common stock of the registrant, no par value per share (the Common Stock), held
by non-affiliates of registrant was $1,088,059 as of March 23, 2009. As of March 23, 2009, the issuer had outstanding 15,312,984 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 15, 2009.

www.ourpets.com









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OURPETS COMPANY

FORM 10-K

For The Fiscal Year Ended December 31, 2008

INDEX



|            |  |                                                                                                              |  |     
|----------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|            |  |                                                                                                              |  | Page
|PART I      |  |                                                                                                              |  |     
|            |  |                                                                                                             
|Item 1.     |  | Description of Business                                                                                      |  | 3   
|            |  |                                                                                                             
|Item 1A.    |  | Risk Factors                                                                                                 |  | 5   
|            |  |                                                                                                             
|Item 2.     |  | Properties                                                                                                   |  | 6   
|            |  |                                                                                                             
|Item 3.     |  | Legal Proceedings                                                                                            |  | 7   
|            |  |                                                                                                             
|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 |  | 8   
|            |  |                                                                                                             
|Item 6.     |  | Select Financial Data                                                                                        |  | 8   
|            |  |                                                                                                             
|Item 7.     |  | Managements Discussion and Analysis of Financial Condition and Results of Operation                         |  | 9   
|            |  |                                                                                                             
|Item 8.     |  | Financial Statements and Supplementary Data                                                                  |  | 14  
|            |  |                                                                                                             
|Item 9.     |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 15  
|            |  |                                                                                                             
|Item 9A(T). |  | Controls and Procedures                                                                                      |  | 15  
|            |  |                                                                                                             
|Item 9B.    |  | Other Information                                                                                            |  | 15  
|            |  |                                                                                                             
|PART III    |  |                                                                                                              |  |     
|            |  |                                                                                                             
|Item 10.    |  | Directors, Executive Officers and Corporate Governance                                                       |  | 16  
|            |  |                                                                                                             
|Item 11.    |  | Executive Compensation                                                                                       |  | 16  
|            |  |                                                                                                             
|Item 12.    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 16  
|            |  |                                                                                                             
|Item 13.    |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 16  
|            |  |                                                                                                             
|Item 14.    |  | Principal Accountant Fees and Services                                                                       |  | 16  
|            |  |                                                                                                             
|PART IV     |  |                                                                                                              |  |     
|            |  |                                                                                                             
|Item 15.    |  | Exhibits and Financial Statement Schedules                                                                   |  | 17  
|            |  |                                                                                                             
|            |  | Signatures                                                                                                   |  | 20  
|            |  |                                                                                                             
|            |  | Certifications                                                                                               |  | 40  



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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.Description of Business.

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

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 280 products for dogs, cats, domestic and wild birds and other small animals. Products are marketed under the OurPets,
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 and quality.

According to the 2007/2008 APPMA National Pet Owners Survey,
published by the American Pet Products Manufacturers Association, Inc®, approximately 71.1 million U.S. households currently own a pet, with an estimated pet population of
74.8 million dogs, 88.3 million cats and 16.0 million birds.



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We sell our products in the following market segments:

mass retailerseg. Wal-Mart, Kmart

pet superstoreseg. PetsMart, Petco

pet catalogueseg. Drs. Foster &
Smith, Care-A-Lot

general catalogueseg. Solutions

clubseg. Costco, Sams Club

grocery chainseg. Ahold, Safeway, Publix

pet food makerseg. Friskies, Ralston
Purina

pet distributors/pet dealerseg. Wolverton, Central Garden & Pet

The companies listed above are intended to serve as examples solely for illustrative purposes. As a standard industry practice, price lists are provided
to distributors, who in turn place products with retailers. Larger retailers with a national presence will generally order product directly from us pursuant to the price list and subject to negotiated additional terms, if any. With the exception of
a written price list, many of the arrangements with retailers or distributors are verbal and written contracts often do not exist. Customers submit their own standard purchase orders based on our current price list. Even the larger retailers, which
might have written contracts with us, are under no obligation to purchase specific product from us. While all of the above companies may currently buy product from OurPets, none of these customers are under any contractual obligation to
purchase a specific volume of product nor to continue making any purchases in the future. We currently have approximately 260 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 260 customers for the year ended December 31, 2008, 42.5% of our revenue was derived from Wal-Mart and PetsMart.
Revenue generated from each of these customers amounted to $2,798,485 and $2,472,099, respectively, which represents 22.6% and 19.9% 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 in-house officers and/or employees and 80 independent sales agents. Domestic independent sales agents are paid commissions, which range from 3% to 15% of net sales to customers.

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

We are one of many small companies in the
accessory and consumable pet products market with no measurable percentage of that market. Our competition in the healthy feeding systems, interactive toys and healthy consumable products markets 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 52 United States patents for dog and cat feeders and have 54 United States patents pending for cat and dog toys, dog feeders and natural and nutritional pet supplements and treats. We registered our logo,
OurPets, as a registered trademark. To protect our trade names we obtained 31 additional trademark registrations and applied for 4 trademark registrations, which are still pending.

As of March 23, 2009, we had 26 full-time employees consisting of four officers, seven other employees in sales and marketing, two employees in
engineering, five employees in finance and administration, two employees in operations and six 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.



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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 $141,111 for the year ended December 31, 2008 and $153,184 for the year ended December 31, 2007.

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

Additional financing may not be available when required by us.

We may need additional financing for new product launches, warehouse equipment, working capital, research and development of new products, strategic acquisitions, and molds and tooling to produce new products. If the
financial resources are not available 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 52 U.S. patents issued or assigned and 54 U.S. patent applications pending. Patent applications may not successfully result in an issued patent. Issued patents are
still subject to challenges and infringements. Furthermore, others may independently develop similar products or otherwise circumvent our patent protection. Should we fail to obtain and protect our patents, our competitive advantage will be harmed.

The 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 would incur costs for damages paid to our competitor and for the write-off of our product development
and tooling costs for our product.



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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 15,312,984 shares of Common Stock outstanding which could be diluted by the following
potential issuances of Common Stock. As of March 23, 2009, we had outstanding 66,000 shares of Convertible Preferred Stock (Preferred Stock) convertible into 660,000 shares of Common Stock at a conversion rate of $1.00 per share.
Also as of March 23, 2009, we had outstanding 4,363,817 warrants to purchase an aggregate of 4,363,817 shares of Common Stock at exercise prices ranging from $0.283 to $1.438 per share and options to purchase an aggregate of 1,520,000 shares of
Common Stock at exercise prices ranging from $0.20 to $1.55 per share. We have reserved an aggregate of 2,350,000 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 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 $26,667 plus real estate taxes. Senk Properties is a general partnership comprised of
Dr. Steven Tsengas, Konstantine S. Tsengas, Nicholas S. Tsengas and



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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 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.

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 International Trade Commission (ITC) investigation discussed
below. Certain activity regarding the patent is continuing and is in the discovery stage.

On or about December 2, 2007, Applica filed
a complaint with the U.S. ITC in Washington D.C. whereby Applica is seeking 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. We believe that the one claim on which we lost was decided on
incorrect facts, and we have appealed the determination on that claim and expect a ruling on the appeal in early April. The Company continues to believe these actions to be without merit and is vigorously defending against them.

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 2008.



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PART II

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

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



|                   |  |      |  |     
|------------------ |  | ---- |  | ----
|Quarter Ended      |  | High |  | Low 
|March 31, 2007     |  | 1.15 |  | 0.74
|June 30, 2007      |  | 1.85 |  | 0.81
|September 30, 2007 |  | 1.73 |  | 1.07
|December 31, 2007  |  | 1.35 |  | 0.65
|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

As of March 23, 2009, we had approximately 135 holders of record of Common Stock.

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

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

Item 6.Select Financial Data.

Not applicable.



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

Overview

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



|                        |  |   |  |                                    
|----------------------- |  | - |  | -----------------------------------
|Healthy Feeding Systems |  | - |  | Pet Diners                         
|                        |  |   |  | Stainless Steel Bowls              
|                        |  |   |  | Automatic Feed and Water Dispensers
|                        |  |   |  | Portable Dog Products              
|                        |  |   |  | Domestic and Wild Bird Feeders     
|                        |  |  
|Interactive Toys        |  | - |  | Dog and Cat Toys                   
|                        |  |   |  | Plush Toys                         
|                        |  |   |  | Food Delivery Toys                 
|                        |  |   |  | Talking Bird Mirrors               
|                        |  |  
|Innovative Maintenance  |  | - |  | Self-Scooping Cat Litter Boxes     
|                        |  |   |  | Waste Management Products          
|                        |  |   |  | Premium Cat Litter                 
|                        |  |  
|Healthy Consumables     |  | - |  | Nutritional Supplements            
|                        |  |   |  | Ice Cream Alternatives             
|                        |  |   |  | Gourmet Gravies                    
|                        |  |   |  | Gourmet Sprays                     

These products are manufactured by domestic and foreign subcontractors and then sold by us to
retailers and distributors who sell the products to the end consumer. According to the 2007/2008 APPMA National Pet Owners Survey approximately 71.1 million U.S. households currently own a pet with an estimated pet population of
74.8 million dogs, 88.3 million cats and 16.0 million birds.

As discussed below and in Liquidity and Capital Resources on
Pages 12 and 13, we have funded our operations principally from net cash provided by operating activities and with bank borrowings during 2007 and from borrowings during 2008.

During 2008 we had a net borrowing of $100,000 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, 2008 and December 31, 2007 we had balances of $1,800,000 and $1,700,000, respectively, under the line of credit with the bank at an interest rate of prime plus .75%.

In February of 2008, we entered into contribution agreements with six contributors, all of which are affiliated with the Company, pursuant
to which each contributor loaned certain funds to us totaling $600,000. These funds were used by us for expenses related to litigation on certain of its SmartScoop products 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.



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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. These funds were used for additional expenses related to the litigation on certain of our SmartScoop Products. 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 440,512 warrants exercisable at $0.498 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 the
Company, pursuant to which each contributor loaned certain funds to us totaling $125,000. These funds were used for expenses related to the litigation on certain of our SmartScoop products. 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 12,550 and 50,251 warrants exercisable at $0.498 and $0.398 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 with the Company, pursuant to which each contributor loaned certain funds to us totaling $350,000. These funds were used for expenses related to the litigation on certain of our SmartScoop
products. In consideration for these loans we (a) executed promissory notes due in three years for $50,000 and due in four years for $300,000 both with interest compounding quarterly at prime plus 2%, (b) issued warrants for the purchase
of 25,000 shares and 300,000 shares of our Common Stock at option prices of $0.40 and $0.37 per share respectively, and (c) entered into piggyback registration agreements with the contributors. Subsequent to their issuance the 25,000 warrants
exercisable at $0.40 per share were adjusted to 25,126 warrants exercisable at $0.398 per share in accordance with the warrant anti-dilution provisions.

Results of Operations

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

In the following discussion all references to 2008 are for the year ended December 31, 2008 and all references to 2007 are for the year ended December 31, 2007.

Net revenue for 2008 was $12,410,135, an increase of 17.5% in revenue from $10,561,204 in 2007, consisting of sales of proprietary
products for the retail pet business. This increase of $1,848,931 was accomplished despite a reduction of approximately $124,000 in sales to our two largest customers due to soft retail sales and inventory adjustments. This sales decrease was more
than offset by an increase of approximately $1,973,000 in sales to other customers including both sales of new products and sales to new customers. Total sales to all customers of new products in 2008 that were not sold in 2007, including the new
Play-N-Squeak products, ecoPure products, new Durapet Bowl products, and new CatMat products, were approximately $1,302,000. Our sales to foreign customers increased by approximately $279,000, or 57.4%, from 2007 mainly due to increased sales to
customers in Canada, Israel and Hong Kong.

While net revenue increased by 17.5% in 2008, cost of goods sold also increased by 15.1%, from
$7,743,553 in 2007 to $8,911,274 in 2008. This increase of $1,167,721 was as a result of an increase of 15.5% in the cost of purchased products sold and freight due to the increased volume of products sold and higher freight costs as a result of
increased fuel surcharges by our freight carriers. Our variable and fixed warehouse and



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##### Table of Contents

overhead costs increased by 13.2% from 2007 due to the increased costs for salaries, wages, and payroll taxes of approximately $52,000 for additional
employees in warehouse operations to make displays for customer promotions and the increased level of shipments. Also, costs increased for rent on our new warehouse of approximately $40,000 which started in June 2007 to store our increased inventory
and increased level of shipments and the increased cost of warranty replacement and rework of approximately $55,000 mainly due to defective SmartScoop cat litter boxes.

The net revenue increased by 17.5% and the cost of goods sold increased by 15.1% , which resulted in our gross profit on sales increasing by 24.2%, or
$681,210, from $2,817,651 in 2007 to $3,489,861 in 2008.

Selling, general and administrative expenses in 2008 were $2,712,303, an increase
of $428,718, or 18.8%, from $2,283,585 in 2007. The significant increases were in (i) increased salaries, wages, and payroll taxes of approximately $208,000 due to three additional employees in sales and marketing and the increased accruals for
employee profit sharing and managers bonus, (ii) increased sales and marketing expenses of approximately $115,000 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 $59,000 mainly due to increased sales in 2008, and accruals for stock-based compensation expense of approximately $32,000 mainly due to the number of stock
purchase warrants issued in 2008.

Litigation expenses were $2,322,983 for 2008 an increase of $2,140,602 from $182,381 for legal fees and
expenses as a result of us defending patent infringement actions filed against us in 2007 by a competitor alleging that our SmartScoop self-scooping cat litter box infringes on their patents.

Income (loss) from operations decreased by $1,888,110, from income of $351,685 in 2007 to a loss of $1,536,425 in 2008. This was the result of the
increases in litigation expenses of $2,140,602 and in selling, general and administrative expenses of $428,718, which were more than the increase in our gross profit on sales of $681,210.

Interest expense for 2008 was $193,350 an increase of 13.9%, or $23,610, from $169,740 in 2007. This increase was primarily due to the interest expense
of approximately $53,000 for the new promissory notes payable to the ten contributors executed in 2008. This was more than the decrease in interest expense for the bank line of credit of approximately $19,000 due to the decrease in our average rate
paid for the year from 8.73% in 2007 to 5.86% in 2008 which more than offset the increase in average principal balance outstanding from $1,390,000 in 2007 to $1,738,000 in 2008.

The net loss for 2008 was $1,728,198 as compared to net income in 2007 of $186,886 or a decrease in profitability of $1,915,084. This decrease was as a
result of the following changes from 2007 to 2008:



|                                                                |  |   |            |  
|--------------------------------------------------------------- |  | - | ---------- | -
|Net revenue increase of 17.5%                                   |  | $ | 1,848,931  |  
|Cost of goods sold increase of 15.1%                            |  |   | (1,167,721 | )
|                                                                |  |   |            |  
|Gross profit on sales increase of 24.2%                         |  |   | 681,210    |  
|Selling, general and administrative expenses increase of 18.8 % |  |   | (428,718   | )
|Litigation expense                                              |  |   | (2,140,602 | )
|Other income and expense                                        |  |   | (3,364     | )
|Interest expense increase of 13.9%                              |  |   | (23,610    | )
|                                                                |  |   |            |  
|Decrease in Profitability                                       |  | $ | (1,915,084 | )
|                                                                |  |   |            |  



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Liquidity and Capital Resources

Our operating activities provide cash by the sale of our products to customers with the principal use of cash being for the payments to suppliers that manufacture our products and for freight charges for
shipments to our warehouse and to our customers. Our investing activities use cash mostly for the acquisition of equipment such as tooling, computers and software. Our financing activities provide cash, if needed, under our line of credit with our
bank that had approximately $106,000 in available funds at December 31, 2008 based upon the balance of accounts receivable and inventories at that date.

As of December 31, 2008, we had $3,518,617 in principal amount of indebtedness consisting of:



|                                |  |                     |  |   |          
|------------------------------- |  | ------------------- |  | - | ---------
|Bank line of credit             |  | Prime plus .75%     |  | $ | 1,800,000
|Bank term note                  |  | 7.60%               |  |   | 159,110  
|Contributor notes payable       |  | Prime plus 2%       |  |   | 1,367,500
|Pet Zone Products Ltd term loan |  | 7.75%               |  |   | 72,560   
|Installment note payable        |  | 7.3%                |  |   | 19,447   
|Other notes payable             |  | Prime plus 3% & 10% |  |   | 100,000  

The bank line of credit borrowing of $1,800,000 is under a line of credit agreement 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 agreement is renewable annually by the bank and therefore is classified as a current liability on our balance sheet.
Currently the agreement has been renewed by the bank through June 30, 2009. Under our agreement with the bank we are currently required to: (i) maintain a debt service coverage ratio of 1.15; (ii) maintain a tangible net worth of
$3,000,000; and (iii) obtain permission from the bank to incur additional indebtedness, enter into additional leases that would cause total lease payments to exceed $190,280 in any fiscal year, make any expenditures for property and equipment
in excess of $300,000 in any fiscal year, or pay cash dividends other than dividends on our Preferred Stock subject to meeting the debt service coverage ratio or redeem any of our capital stock. At December 31, 2008 we were in compliance with
the covenants and default provisions under our agreement with the bank and had a debt service coverage ratio of 1.18 and a tangible net worth of $3,355,644.

The installment notes payable are due in monthly payments of $560 including interest through March 2012. The other notes payable are due in the amount of $75,000 on February 1, 2010 to Beachcraft L.P. and $25,000
on July 31, 2009 to Over the Hill Ltd., plus accrued interest. Our indebtedness, which is secured by liens on our assets, was used to finance our equipment and working capital requirements. The agreements related to such indebtedness contain
the customary covenants and default provisions.

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

Our short-term and long-term liquidity will depend on our ability to achieve cash-flow break even on our operations and to increase sales of our products. We recorded a profit of approximately $187,000 for the year
ended 2007 but recorded a loss of approximately $1,728,000 for the year ended 2008 and therefore relied on cash from our financing activities to fund our operations. The loss for 2008 included approximately $2,323,000 of litigation expenses which
adversely affected our liquidity and financial covenants. We expect to have significantly lower litigation expenses in 2009 resulting in a positive cash flow from operating activities for the year. Absent a failure to maintain the required debt
service coverage ratio and the tangible net worth required by our bank to maintain our line of credit, we should be able to fund our operating cash requirements for 2009. We have no material commitments for capital expenditures.



12



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##### Table of Contents

A schedule of our contractual obligations as of December 31, 2008 is as follows:



|                                   |  |                        |           |                 |   |           |  |          |           |              |   |           |  |   |          
|---------------------------------- |  | ---------------------- | --------- | --------------- | - | --------- |  | -------- | --------- | ------------ | - | --------- |  | - | ---------
|                                   |  | Payments Due By Period
|Contractual Obligation             |  | Total                  |           | Less than 1year |   | 1-3years  |  | 4-5years |           | After 5years
|Long-Term Debt                     |  | $                      | 3,518,617 |                 | $ | 2,044,581 |  | $        | 1,172,376 |              | $ | 301,660   |  | $ | -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                   |  |                        | 3,560,963 |                 |   | 372,421   |  |          | 779,012   |              |   | 833,403   |  |   | 1,576,127
|                                   |  |                        |           |                 |   |           |  |          |           |              |   |           |  |   |          
|Total Contractual Cash Obligations |  | $                      | 7,079,580 |                 | $ | 2,417,002 |  | $        | 1,951,388 |              | $ | 1,135,063 |  | $ | 1,576,127
|                                   |  |                        |           |                 |   |           |  |          |           |              |   |           |  |   |          

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 as follows:



|                             |  |   |          |  
|---------------------------- |  | - | -------- | -
|Accounts receivable increase |  | $ | (181,474 | )
|Inventories decrease         |  |   | 91,895   |  
|Prepaid expenses decrease    |  |   | 17,074   |  
|Patent cost increase         |  |   | (33,638  | )
|Other assets decrease        |  |   | 4,471    |  
|Accounts payable increase    |  |   | 68,142   |  
|Accrued expenses increase    |  |   | 543,238  |  
|                             |  |   |          |  
|Net change                   |  | $ | 509,708  |  
|                             |  |   |          |  

The increase in accounts receivable from December 31, 2007 to December 31, 2008 was
caused principally by the increase in gross sales from December 2007 to December 2008 of approximately $143,000. Our accrued expenses increased from December 31, 2007 to December 31, 2008 as a result of the deferred legal fees of
approximately $380,000 and the increase of accrued interest of approximately $66,000.

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 the line of
credit agreement with the bank, $1,367,500 was provided by the issuance of long-term debt and $629 was provided by issuance of Common Stock. Cash of $232,395 was used for the principal payments on long-term debt.

Net cash provided by operating activities for the year ended December 31, 2007 was $73,299. Cash was provided by the net operating income for the
year of $667,498, including the non-cash charges for depreciation of $430,750, amortization of $25,439 and stock option expense of $24,423. Cash was used for the net change of $(594,199) in our operating assets and liabilities. These changes
consisted of increases in accounts receivable of $78,578, inventories of $546,532, prepaid expenses of $42,838, patent cost of $29,005 and other assets of $4,666, and a decrease in accrued expenses of $42,160, which were partially offset by an
increase in accounts payable of $149,580.

Net cash used in investing activities for the year ended December 31, 2007 was $632,078,
which was used for the acquisition of property and equipment. Net cash provided by financing activities for the year was $557,222. Cash of $400,000 was provided by the net borrowing under the line of credit agreement with the bank, $328,376 was
provided by the issuance of long-term debt, and $33,753 was provided by issuances of Common Stock. Cash of $204,907 was used for the principal payments on long-term debt.



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##### Table of Contents

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 ageing analyses. We write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.

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

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

Off-Balance Sheet Arrangements

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

Item 8.Financial Statements and Supplementary Data

The financial
statements of OurPets Company as of December 31, 2008 and 2007, 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 |  | 21      
|Consolidated Balance Sheets                             |  | 22-23   
|Consolidated Statements of Operations                   |  | 24      
|Consolidated Statements of Stockholders Equity         |  | 25      
|Consolidated Statements of Cash Flows                   |  | 26      
|Notes to Consolidated Financial Statements              |  | 27-38   



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##### Table of Contents

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.

As of December 31, 2008, we carried out an evaluation, under the
supervision and with the participation of our management, including our President and Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant
to Exchange Rule 13a-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, our President and Chief Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective as of
December 31, 2008.

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 Exchange Act Rule 13a-15(f). 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 assessment, management has concluded that the internal control over financial reporting was effective as of December 31, 2008.

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 on internal control over financial reporting
in this annual report.

Item 9B.Other Information.

None.



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##### Table of Contents

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 15, 2009.

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 headings 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.



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##### Table of Contents

PART IV

Item 15.Exhibits and 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 21-38).

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.

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)                                                                                                                                                                                                                                                  
|      | 
|3.2   |  | 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)                                                                                                     



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##### Table of Contents

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



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##### Table of Contents

|      |  |                                                                                                                                                                     
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|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. (filed herewith)                                                                                                     
|      | 
|11    |  | Statement of computation of Net Income Per Share.                                                                                                                   
|      | 
|14    |  | OurPets Code of Ethics.(3)                                                                                                                                         
|      | 
|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 of Form 10-KSB filed on March 26, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to the exhibits to the Companys Annual Report of 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.
|---- | -------------------------------------------------------------------------------------------

All other Exhibits filed herewith.



19



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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, 2009



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 Steven Tsengas             |  | Chairman, President, Chief Executive Officer and Director (principal executive officer) |  | March 31, 2009
|                                                 |  |                                                                                        
|/S/    SCOTT R.
MENDES Scott R. Mendes           |  | Chief Financial Officer(principal accounting officer)                                   |  | March 31, 2009
|                                                 |  |                                                                                        
|/S/    JOSEPH T.
AVENI Joseph T. Aveni           |  | Director                                                                                |  | March 31, 2009
|                                                 |  |                                                                                        
|/S/    WILLIAM M.
FRASER William M. Fraser       |  | Director                                                                                |  | March 31, 2009
|                                                 |  |                                                                                        
|/S/    JAMES D. IRELAND
III James D. Ireland III |  | Director                                                                                |  | March 31, 2009
|                                                 |  |                                                                                        
|/S/    JOHN
SPIRK John Spirk                     |  | Director                                                                                |  | March 31, 2009



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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, 2008 and December 31, 2007, 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, 2008 and December 31, 2007, and the consolidated results of their operations and cash flows for the years ended December 31, 2008 and December 31, 2007 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, 2008, 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 10, 2009



21



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                      |  |              |           |      |   |          
|------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                                                                      |  | December 31,
|                                                                                      |  | 2008         |           | 2007
|ASSETS                                                                                |  |              |           |      |   |          
|CURRENT ASSETS                                                                        |  |              |           |      |   |          
|Cash and cash equivalents                                                             |  | $            | 363,573   |      | $ | 28,843   
|Accounts receivabletrade, less allowance for doubtful accounts of $22,477and $22,216 |  |              | 1,420,884 |      |   | 1,239,410
|Inventories                                                                           |  |              | 3,303,617 |      |   | 3,395,512
|Prepaid expenses                                                                      |  |              | 73,995    |      |   | 91,069   
|                                                                                      |  |              |           |      |   |          
|Total current assets                                                                  |  |              | 5,162,069 |      |   | 4,754,834
|                                                                                      |  |              |           |      |   |          
|PROPERTY AND EQUIPMENT                                                                |  |              |           |      |   |          
|Computers and office equipment                                                        |  |              | 296,298   |      |   | 295,591  
|Warehouse equipment                                                                   |  |              | 254,176   |      |   | 228,542  
|Leasehold improvements                                                                |  |              | 120,705   |      |   | 120,705  
|Tooling                                                                               |  |              | 3,316,059 |      |   | 3,267,127
|Construction in progress                                                              |  |              | 199,386   |      |   | 145,011  
|                                                                                      |  |              |           |      |   |          
|Total                                                                                 |  |              | 4,186,624 |      |   | 4,056,976
|Less accumulated depreciation                                                         |  |              | 2,110,074 |      |   | 1,747,447
|                                                                                      |  |              |           |      |   |          
|Net property and equipment                                                            |  |              | 2,076,550 |      |   | 2,309,529
|                                                                                      |  |              |           |      |   |          
|OTHER ASSETS                                                                          |  |              |           |      |   |          
|Patents, less amortization of $140,209 and $112,442                                   |  |              | 259,506   |      |   | 253,635  
|Goodwill                                                                              |  |              | 67,511    |      |   | 67,511   
|Domain names and other assets                                                         |  |              | 12,350    |      |   | 16,821   
|                                                                                      |  |              |           |      |   |          
|Total other assets                                                                    |  |              | 339,367   |      |   | 337,967  
|                                                                                      |  |              |           |      |   |          
|Total assets                                                                          |  | $            | 7,577,986 |      | $ | 7,402,330
|                                                                                      |  |              |           |      |   |          



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



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)



|                                                                                                                                                                                                    |  |              |            |   |      |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | --------- | -
|                                                                                                                                                                                                    |  | December 31, |           
|                                                                                                                                                                                                    |  | 2008         |            |   | 2007 |  
|LIABILITIES                                                                                                                                                                                         |  |              |            |   |      |   |           |  
|CURRENT LIABILITIES                                                                                                                                                                                 |  |              |            |   |      |   |           |  
|Notes payable                                                                                                                                                                                       |  | $            | 1,900,000  |   |      | $ | 1,800,000 |  
|Current maturities of long-term debt                                                                                                                                                                |  |              | 144,581    |   |      |   | 232,857   |  
|Accounts payabletrade                                                                                                                                                                              |  |              | 1,238,367  |   |      |   | 1,170,225 |  
|Accrued expenses                                                                                                                                                                                    |  |              | 666,051    |   |      |   | 122,813   |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |           |  
|Total current liabilities                                                                                                                                                                           |  |              | 3,948,999  |   |      |   | 3,325,895 |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |           |  
|LONG-TERM DEBT                                                                                                                                                                                      |  |              |            |   |      |   |           |  
|Long-term debtless current portion above                                                                                                                                                           |  |              | 1,474,036  |   |      |   | 250,655   |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |           |  
|Total long-term debt                                                                                                                                                                                |  |              | 1,474,036  |   |      |   | 250,655   |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |           |  
|Total liabilities                                                                                                                                                                                   |  |              | 5,423,035  |   |      |   | 3,576,550 |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |           |  
|STOCKHOLDERS EQUITY                                                                                                                                                                                |  |              |            |   |      |   |           |  
|COMMON STOCK,no par value; authorized 50,000,000 shares, issued and outstanding 15,312,984 and 15,243,984 shares                                                                                    |  |              | 4,196,153  |   |      |   | 4,167,804 |  
|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                                                                                                                                                                                     |  |              | 69,829     |   |      |   | 40,809    |  
|                                                                                                                                                                                                    |  |             
|ACCUMULATED DEFICIT                                                                                                                                                                                 |  |              | (2,713,710 | ) |      |   | (985,512  | )
|                                                                                                                                                                                                    |  |              |            |   |      |   |           |  
|Total stockholders equity                                                                                                                                                                          |  |              | 2,154,951  |   |      |   | 3,825,780 |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                          |  | $            | 7,577,986  |   |      | $ | 7,402,330 |  
|                                                                                                                                                                                                    |  |              |            |   |      |   |           |  



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 OPERATIONS



|                                                                                                                           |  |                                 |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                           |  | For the YearsEnded December 31, |           
|                                                                                                                           |  | 2008                            |            |   | 2007 |  
|Net revenue                                                                                                                |  | $                               | 12,410,135 |   |      | $ | 10,561,204 |  
|Cost of goods sold                                                                                                         |  |                                 | 8,911,274  |   |      |   | 7,743,553  |  
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Gross profit on sales                                                                                                      |  |                                 | 3,498,861  |   |      |   | 2,817,651  |  
|Selling, general and administrative expenses                                                                               |  |                                 | (2,712,303 | ) |      |   | (2,283,585 | )
|Litigation expense                                                                                                         |  |                                 | (2,322,983 | ) |      |   | (182,381   | )
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Income (loss) from operations                                                                                              |  |                                 | (1,536,425 | ) |      |   | 351,685    |  
|Other income and expense, net                                                                                              |  |                                 | 1,577      |   |      |   | 4,941      |  
|Interest expense                                                                                                           |  |                                 | (193,350   | ) |      |   | (169,740   | )
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Income (loss) before income taxes                                                                                          |  |                                 | (1,728,198 | ) |      |   | 186,886    |  
|Income tax expense                                                                                                         |  |                                 |           |   |      |   |           |  
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Net income (loss)                                                                                                          |  | $                               | (1,728,198 | ) |      | $ | 186,886    |  
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Basic and Diluted Earnings Per Common Share After Dividend Requirements For Preferred Stock:                               |  |                                 |            |   |      |   |            |  
|Net income (loss)                                                                                                          |  | $                               | (0.12      | ) |      | $ | 0.01       |  
|                                                                                                                           |  |                                 |            |   |      |   |            |  
|Weighted average number of common and equivalent shares outstanding used to calculate basic and diluted earnings per share |  |                                 | 15,257,050 |   |      |   | 17,680,760 |  
|                                                                                                                           |  |                                 |            |   |      |   |            |  



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



24



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007



|                                                            |  |                 |  |              |         |                 |            |        |                    |           |  |                          |         |   |  |   |            |   |  |   |            |  
|----------------------------------------------------------- |  | --------------- |  | ------------ | ------- | --------------- | ---------- | ------ | ------------------ | --------- |  | ------------------------ | ------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                            |  | Preferred Stock |  | Common Stock |         | Paid-InCapital  |            |        | AccumulatedDeficit |           |  | TotalStockholdersEquity |        
|                                                            |  | Number ofShares |  | Amount       |         | Number ofShares |            | Amount |                    |           | 
|Balance at January 1, 2007                                  |  | 66,000          |  | $            | 602,679 |                 | 15,035,473 |        | $                  | 4,011,451 |  | $                        | 88,986  |   |  | $ | (1,172,398 | ) |  | $ | 3,530,718  |  
|Common Stock issued for payment of product development fees |  |                |  |              |        |                 | 50,454     |        |                    | 50,000    |  |                          |        |   |  |   |           |   |  |   | 50,000     |  
|Common Stock issued upon exercise of stock options          |  |                |  |              |        |                 | 13,333     |        |                    | 4,067     |  |                          |        |   |  |   |           |   |  |   | 4,067      |  
|Common Stock issued upon exercise of warrants               |  |                |  |              |        |                 | 78,724     |        |                    | 29,686    |  |                          |        |   |  |   |           |   |  |   | 29,686     |  
|Common Stock issued in payment of Preferred Stock dividend  |  |                |  |              |        |                 | 66,000     |        |                    | 72,600    |  |                          | (72,600 | ) |  |   |           |   |  |   |           |  
|Net income for the year                                     |  |                |  |              |        |                 |           |        |                    |          |  |                          |        |   |  |   | 186,886    |   |  |   | 186,886    |  
|Stock-based compensation expense                            |  |                |  |              |        |                 |           |        |                    |          |  |                          | 24,423  |   |  |   |           |   |  |   | 24,423     |  
|                                                            |  |                 |  |              |         |                 |            |        |                    |           |  |                          |         |   |  |   |            |   |  |   |            |  
|Balance at December 31, 2007                                |  | 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  |  
|                                                            |  |                 |  |              |         |                 |            |        |                    |           |  |                          |         |   |  |   |            |   |  |   |            |  

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



25



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OURPETS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                                 |            |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | -------- | -
|                                                                                  |  | For the Years EndedDecember 31, |           
|                                                                                  |  | 2008                            |            |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                                 |            |   |      |   |          |  
|Net income (loss)                                                                 |  | $                               | (1,728,198 | ) |      | $ | 186,886  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |            |   |      |   |          |  
|Depreciation expense                                                              |  |                                 | 441,219    |   |      |   | 430,750  |  
|Amortization expense                                                              |  |                                 | 27,767     |   |      |   | 25,439   |  
|Stock option expense                                                              |  |                                 | 19,356     |   |      |   | 24,423   |  
|Warrant expense                                                                   |  |                                 | 37,384     |   |      |   |         |  
|(Increase) decrease in assets:                                                    |  |                                 |            |   |      |   |          |  
|Accounts receivabletrade                                                         |  |                                 | (181,474   | ) |      |   | (78,578  | )
|Inventories                                                                       |  |                                 | 91,895     |   |      |   | (546,532 | )
|Prepaid expenses                                                                  |  |                                 | 17,074     |   |      |   | (42,838  | )
|Patent costs                                                                      |  |                                 | (33,638    | ) |      |   | (29,005  | )
|Domain name and other assets                                                      |  |                                 | 4,471      |   |      |   | (4,666   | )
|Increase (decrease) in liabilities:                                               |  |                                 |            |   |      |   |          |  
|Accounts payabletrade                                                            |  |                                 | 68,142     |   |      |   | 149,580  |  
|Accrued expenses                                                                  |  |                                 | 543,238    |   |      |   | (42,160  | )
|                                                                                  |  |                                 |            |   |      |   |          |  
|Net cash (used in) provided by operating activities                               |  |                                 | (692,764   | ) |      |   | 73,299   |  
|                                                                                  |  |                                 |            |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                                 |            |   |      |   |          |  
|Acquisition of property and equipment                                             |  |                                 | (208,240   | ) |      |   | (632,078 | )
|                                                                                  |  |                                 |            |   |      |   |          |  
|Net cash used in investing activities                                             |  |                                 | (208,240   | ) |      |   | (632,078 | )
|                                                                                  |  |                                 |            |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                                 |            |   |      |   |          |  
|Principal payments on long-term debt                                              |  |                                 | (232,395   | ) |      |   | (204,907 | )
|Net borrowing on bank line of credit                                              |  |                                 | 100,000    |   |      |   | 400,000  |  
|Issuances of Common Stock                                                         |  |                                 | 629        |   |      |   | 33,753   |  
|Issuance of long-term debt                                                        |  |                                 | 1,367,500  |   |      |   | 328,376  |  
|                                                                                  |  |                                 |            |   |      |   |          |  
|Net cash provided by financing activities                                         |  |                                 | 1,235,734  |   |      |   | 557,222  |  
|                                                                                  |  |                                 |            |   |      |   |          |  
|Net increase (decrease) in cash                                                   |  |                                 | 334,730    |   |      |   | (1,557   | )
|CASH AT BEGINNING OF YEAR                                                         |  |                                 | 28,843     |   |      |   | 30,400   |  
|                                                                                  |  |                                 |            |   |      |   |          |  
|CASH AT END OF YEAR                                                               |  | $                               | 363,573    |   |      | $ | 28,843   |  
|                                                                                  |  |                                 |            |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                  |  |                                 |            |   |      |   |          |  
|Interest paid                                                                     |  | $                               | 138,535    |   |      | $ | 166,846  |  
|                                                                                  |  |                                 |            |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS                                  |  |                                 |            |   |      |   |          |  
|Common Stock issued in payment of Preferred Stock dividend                        |  | $                               | 27,720     |   |      | $ | 72,600   |  
|                                                                                  |  |                                 |            |   |      |   |          |  
|Common Stock issued in payment of product development fees                        |  | $                               |           |   |      | $ | 50,000   |  
|                                                                                  |  |                                 |            |   |      |   |          |  



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



26



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES

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

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, 2008 and 2007 in the amount of $22,477 and $22,216, respectively.

InventoryInventories are carried at the lower of cost, first-in, first-out method or market. Inventories at December 31, 2008 and
December 31, 2007 consist of:



|                         |  |      |           |      |   |          
|------------------------ |  | ---- | --------- | ---- | - | ---------
|                         |  | 2008 |           | 2007
|Finished goods           |  | $    | 2,425,396 |      | $ | 2,525,024
|Components and packaging |  |      | 878,221   |      |   | 870,488  
|                         |  |      |           |      |   |          
|Total                    |  | $    | 3,303,617 |      | $ | 3,395,512
|                         |  |      |           |      |   |          

All inventories are pledged as collateral for bank loans.

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

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



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



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



All property and equipment is pledged as collateral for bank loans. Total depreciation for the years
ended December 31, 2008 and December 31, 2007 was $441,219 and $430,750, respectively.

Intangible AssetsThe Company
adopted the provisions of FASB Statement 142 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 $33,638 in the year ended
December 31, 2008 and $29,005 in the year ended December 31, 2007 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, 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,
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.

For the year ended December 31, 2007, 51.1% of the Companys revenue was derived from two major customers. Revenue generated from each of these
customers amounted to $2,781,821 and $2,612,842, which represents 26.3% and 24.8% 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, 2008 and December 31, 2007 was $141,111 and
$153,184, respectively.

Advertising CostsAdvertising costs are charged to operations when the advertising first takes place.
Advertising expense for the years ended December 31, 2008 and December 31, 2007 was $32,513 and $32,852, respectively.

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

Stock OptionsIn December 2004, the FASB issued FAS No. 123R, Share-Based Payment, which revised FAS 123, Accounting for Stock-Based Compensation, and superseded ABP Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations. FAS 123R 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 adopted FAS 123R on January 1, 2006 and applied 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,



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



based upon the same estimated grant-date fair values and service periods used to prepare the FAS 123 pro-forma disclosures. The amount of compensation
expense recognized in 2008 and 2007 as a result of stock options was $19,356 and $24,423, respectively.

Net Income Per Common
ShareBasic and diluted net income per Common Share 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, 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. As of
December 31, 2007, common shares that are or could be potentially dilutive include 1,000,500 stock options at exercise prices from $0.210 to $1.550 a share, 3,986,509 warrants to purchase Common Stock at exercise prices from $0.284 to $1.444 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, 2008. 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.

Recently Issued Accounting PronouncementsIn
September 2006, the FASB issued FAS No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or
liabilities to be measured at fair value. The Standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. In February 2008, the FASB issued Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements
for Purposes of Lease Classification or Measurement under Statement 13, which removed leasing transactions accounted for under FAS No. 13 and related guidance from the scope of FAS No. 157. Also in February 2008, the FASB issued Staff
Position No. 157-2, Partial Deferral of the Effective Date of Statement 157, which deferred the effective date of FAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15,
2008. The adoption of this standard is not expected to have a material effect on the Companys results of operations or financial position.

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Liabilities  Including an amendment of FASB Statement No. 115, which provides all entities with an option to report
selected financial assets and liabilities at fair value. The objective of the FAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of
the beginning of an entitys first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the
provisions of FAS No. 157, Fair Value Measurements. The adoption of this standard is not expected to have a material effect on the Companys results of operations or financial position.

In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (FAS 141(R)), which establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the
Companys results of operations or financial position.

In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to clarify that instruments granted in share-based payment transactions can be participating securities prior to the requisite service
having been rendered. A basic principle of the FSP 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. The provisions of this FSP are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. 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 the provisions of the FSP. The adoption of this FSP is not expected to have a
material effect on the Companys results of operations or financial position.

In May 2008, the FASB issued FAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles. FAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities
that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). FAS 162 will become effective 60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect the adoption of FAS No. 162 to have a material effect on its results of operations and financial
position.

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets
(FSP 142-3). FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other
Intangible Assets. This standard is intended to improve the consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS
No. 141R and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The measurement provisions of this standard will apply only to intangible assets of the Company acquired
after the effective date.

In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities, to clarify that



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered. A basic
principle of the FSP 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. The provisions of this FSP are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. 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 the provisions of the FSP. The adoption of this FSP is not expected to have a material effect on the Companys
results of operations or financial position.

In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset in not Active. This FSP clarifies the application of FAS Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP shall be effective upon issuance, including prior periods for which financial statements have not been issued.
Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate (FAS Statement No. 154, Accounting Changes and Error Corrections. The disclosure provisions of
Statement 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The adoption of this FSP is not expected to have a material effect on the Companys results of
operations or financial position.



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTES PAYABLE AND LONG-TERM DEBT



|                                                                                                                                                                                                                                                                                                                                                                 |  |              |           |      |   |          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                                                                                                                                                                                                                                                                                                                                                 |  | December 31,
|                                                                                                                                                                                                                                                                                                                                                                 |  | 2008         |           | 2007
|Revolving note payableBank, under line of credit facility of up to $2,000,000 with interest at prime plus .75% (4.00% at
December 31, 2008 and 8.00% at December 31, 2007). The note is secured by accounts receivable, equipment, inventory, trademarks, patents and the personal guarantee of certain stockholders.                                           |  | $            | 1,800,000 |      | $ | 1,700,000
|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.                                                                                                                            |  |              | 159,110   |      |   | 254,931  
|Note payableBank, loan of $300,000, due in 34 monthly installments of $9,870 including interest at 7.75% beginning February 1, 2006
and a payment of interest only on the principal balance on January 1, 2006. This note is secured by all inventory, chattel paper, accounts, equipment, general intangibles and the personal guarantee of certain directors. |  |              |          |      |   | 89,999   
|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.                                                                                                                                                                                  |  |              | 72,560    |      |   | 104,868  
|Note payableformer director and shareholder, due on February 1, 2010. Interest at prime plus 3% (6.25% at December 31, 2008
and 10.25% at December 31, 2007) payable quarterly. This note is subordinated to the bank loans.                                                                                                                                    |  |              | 75,000    |      |   | 75,000   
|Note payableshareholder and investor, due on July 31, 2009. 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, 2008). These notes are subordinated to the bank loans.                                                                                                                                            |  |              | 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%.                                                                                                                                                                                                |  |              | 19,447    |      |   | 33,714   
|                                                                                                                                                                                                                                                                                                                                                                 |  |              |           |      |   |          
|                                                                                                                                                                                                                                                                                                                                                                 |  |              | 3,518,617 |      |   | 2,283,512
|Less current portion of long-term debt                                                                                                                                                                                                                                                                                                                           |  |              | 2,044,581 |      |   | 2,032,857
|                                                                                                                                                                                                                                                                                                                                                                 |  |              |           |      |   |          
|                                                                                                                                                                                                                                                                                                                                                                 |  | $            | 1,474,036 |      | $ | 250,655  
|                                                                                                                                                                                                                                                                                                                                                                 |  |              |           |      |   |          

Future maturities of long-term debt are as follows:



|                         |  |        |          
|------------------------ |  | ------ | ---------
|Year Ending December 31, |  | Amount
|2009                     |  | $      | 2,044,581
|2010                     |  |        | 698,523  
|2011                     |  |        | 473,853  
|2012                     |  |        | 301,660  
|                         |  |        |          
|                         |  | $      | 3,518,617
|                         |  |        |          

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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTES PAYABLE AND LONG-TERM DEBT (continued)



meeting the debt service coverage ratio; (iii) exceed $300,000 annually for capital expenditures; and (iv) pay principal on subordinated notes due
to officers and directors. In addition, the Company must follow certain other requirements as to maintaining a minimum debt service coverage ratio of at least 1.15 to 1.00 and an adjusted tangible net worth of at least $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 July 31, 2009 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 February 1, 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 835,976
warrants exercisable at $0.370 to $0.821 per share in accordance with the warrant anti-dilution provisions.

INTANGIBLE ASSETS



|                                          |  |                         |         |                         |   |         |  |              |         |  |   |        
|----------------------------------------- |  | ----------------------- | ------- | ----------------------- | - | ------- |  | ------------ | ------- |  | - | -------
|                                          |  | As of December 31, 2008 |         | As of December 31, 2007
|                                          |  | Cost                    |         | Amortization            |   | Cost    |  | Amortization
|Amortized intangible assets:              |  |                         |         |                         |   |         |  |              |         |  |   |        
|Patents and trademarks                    |  | $                       | 399,715 |                         | $ | 140,209 |  | $            | 366,077 |  | $ | 112,442
|                                          |  |                         |         |                        
|Unamortized intangible assets:            |  |                         |         |                         |   |         |  |              |         |  |   |        
|Domain names                              |  | $                       | 11,000  |                         | $ |        |  | $            | 11,000  |  | $ |       
|                                          |  |                         |         |                        
|Amortization expense for year ended 12/31 |  | $                       | 27,767  |                         |   |         |  | $            | 25,439  |  |   |        
|                                          |  |                         |         |                        
|Estimated amortization expense:           |  |                         |         |                         |   |         |  |              |         |  |   |        
|For year ending 12/31/09                  |  | $                       | 28,665  |                         |   |         |  |              |         |  |   |        
|For year ending 12/31/10                  |  | $                       | 28,665  |                         |   |         |  |              |         |  |   |        
|For year ending 12/31/11                  |  | $                       | 28.665  |                         |   |         |  |              |         |  |   |        
|For year ending 12/31/12                  |  | $                       | 28,665  |                         |   |         |  |              |         |  |   |        
|For year ending 12/31/13                  |  | $                       | 28,665  |                         |   |         |  |              |         |  |   |        

RELATED PARTY TRANSACTIONS

The Company leases warehouse and office facilities from a related entity, Senk Properties at a current monthly rental of $26,667 plus real estate taxes. The Company entered into a new ten year lease with Senk



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OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

RELATED PARTY TRANSACTIONS (continued)



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, 2008 and the year ended December 31, 2007 was $341,213 and $273,286, 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, 2008, the Company has been invoiced
$780,130 by NSDA including $403,385 in deferred payments of which $50,000 was paid with 50,454 shares of the Companys Common Stock. The balance of the deferred payments is payable as a fee based upon sales of certain products beginning
January 1,2009.

CONCENTRATION OF CREDIT RISK

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.

At December 31, 2007, 41.8% of the Companys accounts
receivable was due from three major customers. Amounts due from each of these customers were $311,478, $113,049, and $103,379, which represents 24.7%, 8.9% and 8.2% of total accounts receivable, respectively.

CAPITAL STOCK

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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



WARRANTS



At December 31, 2008, the Company had the following Common Stock purchase warrants outstanding,
all of which were exercisable:



|                                   |  |                 |  |               |  |                  
|---------------------------------- |  | --------------- |  | ------------- |  | -----------------
|                                   |  | Number ofShares |  | ExercisePrice |  | Expiration Date  
|2001 Directors for fees            |  | 7,335           |  | 1.193         |  | October 1, 2009  
|2002 Payment for services          |  | 25,932          |  | 1.205         |  | August 3, 2009   
|2003 Note payable to director      |  | 12,909          |  | 0.397         |  | September 4, 2009
|2004 Directors for fees            |  | 57,385          |  | 0.283         |  | October 1, 2012  
|2005 Directors for guarantees      |  | 152,122         |  | 0.424         |  | November 14, 2012
|2006 Acquisition of business       |  | 2,770,559       |  | 0.591         |  | January 2, 2013  
|2006 Note payable to stockholder   |  | 126,129         |  | 0.332         |  | January 3, 2013  
|2006 Payment for services          |  | 20,243          |  | 0.494         |  | April 20, 2013   
|2006 Director for guarantee        |  | 253,256         |  | 0.691         |  | August 2, 2013   
|2007 Directors for fees            |  | 51,760          |  | 1.438         |  | August 17, 2012  
|2008 Payment for services          |  | 50,211          |  | 0.946         |  | January 11, 2013 
|2008 Note payable to contributor   |  | 7,537           |  | 0.821         |  | February 8, 2013 
|2008 Notes payable to contributors |  | 293,675         |  | 0.498         |  | February 8, 2013 
|2008 Notes payable to contributors |  | 133,032         |  | 0.498         |  | June 20, 2013    
|2008 Note payable to contributor   |  | 12,550          |  | 0.498         |  | July 24, 2013    
|2008 Note payable to contributor   |  | 13,805          |  | 0.498         |  | July 30, 2013    
|2008 Note payable to contributor   |  | 50,251          |  | 0.398         |  | August 13, 2013  
|2008 Note payable to contributor   |  | 25,126          |  | 0.398         |  | October 7, 2013  
|2008 Note payable to contributor   |  | 300,000         |  | 0.370         |  | November 7, 2013 
|                                   |  |                 |  |               |  |                  
|Total                              |  | 4,363,817       |  |               |  |                  
|                                   |  |                 |  |               |  |                  

The exercise price for the common shares issuable under the warrants to purchase 2,770,559 shares
is $0.591 per share if exercised on or before January 2, 2011 or $0.666 per share if exercised on or after January 3, 2011 and on or before January 2, 2012 or $0.741 per share if exercised on or after January 3, 2012 and on or
before the expiration of the warrants on January 2, 2013.

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



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



STOCK OPTION PLANS



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



|                                 |  |                 |  |                                |     
|-------------------------------- |  | --------------- |  | ------------------------------ | ----
|                                 |  | Number ofShares |  | Weighted AverageExercise Price
|Outstanding at January 1, 2007   |  | 994,500         |  | $                              | .34 
|Granted                          |  | 46,000          |  |                                | 1.13
|Exercised                        |  | 13,333          |  |                                | .31 
|Forfeited                        |  | 26,667          |  |                                | .37 
|Expired                          |  |                |  |                                |    
|                                 |  |                 |  |                                |     
|Outstanding at December 31, 2007 |  | 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 
|                                 |  |                 |  |                                |     

The following table summarizes options outstanding at December 31, 2008:



|            |  |                   |  |                              |      |                                          |           |                   |         |                              |   |     
|----------- |  | ----------------- |  | ---------------------------- | ---- | ---------------------------------------- | --------- | ----------------- | ------- | ---------------------------- | - | ----
|            |  |                   |  | Options Outstanding          |      | Options Exercisable                     
|Range       |  | NumberOutstanding |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractual Life |           | NumberExercisable |         | WeightedAverageExercisePrice
|$0.85-$1.55 |  | 56,000            |  | $                            | 1.10 |                                          | 3.4 Years |                   |        |                              | $ |    
|$0.45-$0.65 |  | 548,500           |  | $                            | 0.50 |                                          | 4.0 Years |                   | 51,164  |                              | $ | 0.50
|$0.26-$0.35 |  | 790,500           |  | $                            | 0.31 |                                          | 0.6 Years |                   | 770,498 |                              | $ | 0.31

There were 821,662 and 528,165 options exercisable at December 31, 2008 and December 31,
2007, respectively. The weighted average exercise price of options granted in 2008 and 2007 was $0.51 and $1.13, respectively.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



OPERATING LEASES



Minimum future lease payments under operating leases as of December 31, 2008 are as follows:



|                             |  |   |          
|---------------------------- |  | - | ---------
|2009                         |  | $ | 372,421  
|2010                         |  |   | 382,625  
|2011                         |  |   | 396,387  
|2012                         |  |   | 403,835  
|2013                         |  |   | 429,568  
|Thereafter                   |  |   | 1,576,127
|                             |  |   |          
|Total minimum lease payments |  | $ | 3,560,963
|                             |  |   |          

Total rent expense of the Company for the years ended December 31, 2008 and December 31,
2007 was $341,217 and $295,172, respectively.

INCOME TAXES

There was an income tax benefit of $65,634 from use of operating loss carryforwards by the Company for the year ended December 31, 2007. There was no income tax benefit for the Company for the year ended
December 31, 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, 2007:



|                                                      |  |      |         |  
|----------------------------------------------------- |  | ---- | ------- | -
|                                                      |  | 2007 |        
|Income tax expense/benefit based on US statutory rate |  | $    | 65,634  |  
|Current period change in the valuation allowance      |  |      | (65,634 | )
|                                                      |  |      |         |  
|Provision for income taxes                            |  | $    |        |  
|                                                      |  |      |         |  

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



|                                |  |              |          |   |      |   |          |  
|------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                |  | December 31, |         
|                                |  | 2008         |          |   | 2007 |  
|Deferred tax assets:            |  |              |          |   |      |   |          |  
|Net operating loss carryforward |  | $            | 741,467  |   |      | $ | 177,338  |  
|Valuation allowances            |  |              | (741,467 | ) |      |   | (177,338 | )
|                                |  |              |          |   |      |   |          |  
|Net deferred tax assets         |  | $            |         |   |      | $ |         |  
|                                |  |              |          |   |      |   |          |  

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s valuation allowance decreased by approximately $65,600 for the year ended December 31, 2007, which represents the effect of net income. The
Company has recorded a valuation allowance to record its deferred tax assets at estimated net realizable value due to the uncertainty of realization of these assets through future taxable income.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



INCOME TAXES (continued)



The Company has available at December 31, 2008, 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
|1999         |  | $                                           | 99,530    |                             | 2019
|2000         |  |                                             | 141,177   |                             | 2020
|2002         |  |                                             | 267,255   |                             | 2022
|2008         |  |                                             | 1,672,824 |                             | 2028
|             |  |                                             |           |                             |     
|             |  | $                                           | 2,180,786 |                             |     
|             |  |                                             |           |                             |     

LITIGATION

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

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 International Trade Commission (ITC) investigation discussed
below. Certain activity regarding the patent is continuing and is in the discovery stage.

On or about December 2, 2007, Applicia
filed a complaint with the U.S. ITC in Washington D.C. whereby Applica is seeking an order that permanently excludes the Company from importing products that allegedly infringe on one of 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 the Company by Applica and found in the Companys favor on all but one claim. The Company believes that the
one claim which was lost was decided on incorrect facts, and have appealed the determination on that claim and expect a ruling on the appeal in early April. The Company continues to believe both these actions to be without merit and is vigorously
defending against them.

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



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